Oil States International Inc (OIS) 2004 Q3 法說會逐字稿

Welcome to the Oil States International third quarter 2004 earnings conference call. Our call today will be led by Douglas Swanson, Oil States President and Chief Executive Officer and Cindy Taylor, Oil States’ Senior Vice President and Chief Financial Officer. Before we begin we would like to caution those scenarios regarding forward looking statements to the extent the remarks of the day contain information other than historical information, we are relying on the safe harbor protection supported by federal law. Any such remarks should be weighed in the context of the many factors that affect our business, including those we have disclosed in our form 10K and our other SEC filing. I’ll turn it over to you Doug.

Thank you Bradley and thank you for joining us on our third quarter earnings conference call. Oil States International completed the third quarter 2004 with strong operating and financial results in our Well Site, the services and Tubular services segments lead by continued strength and our Canadian operations, North American line rowing activity and the impact of acquisitions completed varying 2003 and 2004. Our Well Sites Services segment was up sequentially in revenues 9% and EBITDA 21% despite some negative impact from hurricanes and tropical storms during the third quarter which impacted our rental tool and work over operations. Our Tubular Service segment was up sequentially in revenue 16.4% and EBITDA 33.2% due to the strong OCTG market and the impact of the Hunting acquisition closed in May of this year. The price environment for our Tubular service segment was robust during the quarter due to continued high pricing for scrap steel and our Well Site Services segment also saw pricing improvements in certain business lines as well.

Our Offshore Products segment remained down on a year-over-year basis, due primarily to reduced levels of activity created by timing delays and major project construction. These low level activities, low activity levels continued to result in a lack of cost absorption in several of our product lines. However, the segment improved on a sequential basis, and backlog although down from the second quarter is at a level that suggests that these low activity levels are temporary. Our Offshore products backlog decreased 11.6% to $87.3 million during the quarter from the second quarter 2004 levels, however backlog is still up significantly from year end 2003 and we feel confident that they will increase by year end. Net income was 31 cents per share compared to 23% reported in the third quarter of 2003 despite a higher tax rate in period. At this time I’d like to turn over the agenda to, Cindy Taylor will go through our detailed financial results.

Thank you Doug. For the third quarter of 2004, we reported operating income of $27.9 million on revenues of $251.5 million. Our EBITDA totaled $37.6 million for the quarter. These results compare to $16.7 million of operating income on revenues of $177.2 million for the third quarter of 2003. The third-quarter 2003 EBITDA totaled $23.9 million. Our current quarter performance represents a 42% year-over-year increase in revenues and a 57.1% improvement in EBITDA. Sequentially, our revenues were up 13.2%, and our EBITDA was up 22.4% given strength in our Tubular Services and Well Sites Services operations. Our net income totaled $15.5m or 31 cents per diluted share during the third quarter of 2004. Our third quarter tax rate did increase to 41.4%, which is slightly higher than our guidance that we gave you last quarter and that was largely due to the mix and impact of foreign taxes in our overall provisions. As Doug mentioned, our third quarter results reflected the benefits of improved North American drilling activity as well as contributions from acquisitions that we completed in 2003 and early 2004, which resulted in year over year growth and Well Site Services EBITDA of $8m or 64.2%.

In addition, our Tubular Services segment did very well during the quarter with record results due to the impact of increasing pricing for all country tubular goods, improved demand as well as the impact of the Hunting acquisition, which we closed during May of this year. Tubular Services EBITDA was up $12.4m or 637% on a year over year basis growth from these two segments was offset by reduced year over year contributions from our offshore products segment where revenues and EBITDA were down 6.8% and 54.4% respectively. However, the results in our offshore product segment did improve sequentially. We’ll go into more details on the segmental results later.

Our balance sheet does remain strong today with a debt to capitalization ratio at the end of the quarter of 27.5%. Our debt only increased a total of $7.8m during the third quarter despite making capital expenditures of 17.3 million. In our last form 10-Q, we estimated that we would spend a total of approximately $55-60 million during 2004 on capital expenditures giving growth opportunities that we have seen in our various business line. That projection remains a good estimate at this time for the balance of the year. At this time I would like to turn the discussion back over to Doug, he is going to go through highlights of activities in each of our business segments and then we’ll close with some thoughts as to our outlook on the market as we move forward.

Thank You Cindy. What I’d like to do is to focus my comments on sequential comparison basis for our significant items in each of the business segments. All of the key operating and financial data is available in our press release.

In our Well Site Services segment revenues were $79.4 million up 9% EBITDA was 20.5 million up 20.1% and our EBITDA margin increased to 25.8% from 23.4% in the second quarter. The sequential increase in revenues in EBITDA occurred primarily due to the impacts of growth in the oil sand region in Canada and the impact of pricing improvements in our land drilling operations. Our accommodations increase was $3.2 million of the $3.4 million increase on EBITDA on a quarter over quarter basis. Our contributions from the rental tools completed in the last six months generated significant growth year over year for that segment, however our sequential results were fairly flat due to the impact of the storms in the Gulf of Mexico. Our land drilling operations were strong sequentially in both revenues and EBITDA and our daily cash margin per rig was $3100 a day up from $2300 a day in the second quarter of the year.

In our offshore products group, our revenues were $55.3 million up 12.9% from the previous quarter. EBITDA was 5 million up 5.4% from the previous quarter and our EBITDA margin was 9% compared to 9.7% in the second quarter of 2004. Our backlog was 87.3 million down from 98.7 million at the end of the second quarter of 2004. The revenue in EBITDA increased sequentially evidencing a recovery in our business. The third quarter results include a $1m accrual relating to potential warranty claim associated with international pipeline, an international sub-sea project installed in the year 2000. Including this accrual, EBITDA increased 28% in the third quarter and EBITDA margin was 10.9% up from the 9.7% reported in the second quarter. So we see a clear improvement in results in this business segment. Our backlog of 87.3 million was down approximately 12% from the 98.7 million at June but up 14.6 million from the September 30th 2003 backlog level.

In Tubular Services, our revenues were $116.9 million up 16.4%. Our EBITDA for the quarter was $14.3 million up 33.2% from the second quarter. Our gross margin was 14.4% up from 13% in the previous quarter and our EBITDA margin was 12.3% up from 10.7. Our inventory at the end of the quarter was 116.8 million up from 111.6 million at the end of the second quarter. Should be noted that our actual tonnage was 97.5 million at the end of the third quarter compared to 102.3 tons at the end of the second quarter, so we had a decrease in tonnage but increase in value due to higher pricing. Our turn over was 3.6 times in the third quarter compared to 3.8 three times in the second quarter. Our tons shipped increased to 90.1 million from 84.6 million a 6.5% increase from the second quarter and our sales price per ton was $1299 compared to $1187 a ton, a 9.4% increase.

Our order book remains strong during the quarter due to spot market orders and the impact of the Hunting Acquisition. Our order book at the end of the third quarter was 134.6 million and that compares to 117.9 million at the end of the second quarter, a significant build up. Our purchase prices increased during the quarter due to (inaudible) price increases and surcharges. Our average price per ton in inventory at the end of the quarter was $1074 a ton compared to $966 a tone at June 30th an increase of 11.2%. We are currently holding approximately 3 months supply of inventory based upon current sales level. Approximately 65% of our inventory is committed to customer orders at the end of the quarter.

Industry inventory as levels increase during the third quarter of 2004 with no shipment to out stripping consumption, however supplying the ground remain reasonable at the current rig count. We estimate 4.3 months supply of inventory on the ground. To summarize the outlook for the fourth quarter again the key drivers to our company are North American Natural Gas drilling activity, and Deep Water infrastructure development. Within our Well Sites Services group, our year over year results in Canada were much improved due to the impact of the oil sands developments which grow construction activity in that region. This is a strong trend and we think we’ll continue for several years. Our land regularization is strong and should continue through the remainder of 2004. Backlog visibility remains strong in both Texas and Ohio with commitments extending well into 2005. We are realizing price increases if these rigs come off their current commitments. Rental tool contribution should continue to increase due to acquisitions completed. Some rig count improvement and the improvements in the capacity of our equipment. We will continue to spend additional capital in this segment to grow both our business lines both through capital expenditures and acquisitions.

In our offshore products group, third quarter revenues and EBITDA increased sequentially showing signs that the segment is beginning to recover. Our backlog position declined somewhat down 11.6% from June but up 39.5% from year end 2003. Based on bidding activity, we expect our backlog and more importantly our mix of business to improve in the fourth quarter. We have implemented various cost reduction initiatives in Homer Louisiana and our Huston Texas operations and they should be fully implemented by the end of the year and should receive the benefit of that in 2005. In summary, the year 2005 looks very promising for our offshore products group. In tubular services prices continue to increase during the quarter as mills implemented price increases and surcharges. Our OCTG inventory levels are still at low levels given our backlog position at the end of the quarter. We expect to realize strong revenues during the fourth quarter with current activity levels, the realization of price increases and the impact of the Huntington acquisition. Our margins remain strong in the fourth quarter, however some contractions could occur. To consolidate we expect to continue strong activity in the tubular services and well site services segments. This will be led by land drawing activity acquisitions and the impact of price increases. We expect strong contributions from our Canadian operations given expanded activity in the oil sands area and our shore product groups will be down year over but is recovering from the drop from the first quarter.

With respect to guidance for the balance of the year, the year 2004 results will reflect its strength in our base operation as well as the impact from the acquisitions. Revenue should be up over 2003 levels by approximately 25% – 30% and EBITDA should increase approximately 35% – 40 % as well on an annual basis. Our DDNA totaled $9.2m for the quarter and that is a bout the level we expect in the fourth quarter. We expect to be fully taxed at 40% rate in the fourth quarter bringing our annual effective tax rate to approximately 34.5% and our annual 2004 earnings should in the range of $1.18 - $1.21 per diluted share. We’d be pleased to answer any questions you might have. Do we have any questions?

ladies and gentlemen if wish to ask a question please press star followed by one on your touch tone telephone. If your question has been answered or you wish to withdraw please press star followed by 2. Questions will be taken in the order received. Please press, star one to begin. Your first question comes from Bill Herbert from Simmonds and Company. Please proceed sir.

Morning.

Morning Bill.

About the impact associated with the Gulf of Mexico storms, the negative impact that is on earnings per share, could you quantify what that impact was?

Hi Bill, this is Cindy, we’ve kind of done a mental check more for the purpose of looking at the individual business lines, where we suffered obviously and we spoke to are in our work over operations and our rental tool operations. However, there were some offset because we actually used some of our vital holes Gulf of Mexico accommodations units in support of disaster relief services in Florida such that imbalance there was no material impact to us, we suffer these things every third quarter and we haven’t specifically put a number on it but those are the impacts that it had on our individual business lines and we just don’t think of it as terribly material, maybe a penny or less.

Okay and was there any negative impact associated with the very wet weather in Canada?

There was some impact but again typically we support camps in the northern remote regions and most of your summer rig count activity is in the southern areas that are not as big of a supplier for us so clearly the conditions were wet but it’s kind of a nominal impact for us in the summer months because that’s not our primary area of operation.

Okay and then second line of questioning here is with respect to the margin outlook for sooner, the possibility for margins, I think tracking in the fourth quarter, I guess that certainly is a possibility but what I’m trying to get is the likelihood and what would cause margins to go down Q4 versus Q3, simply cost inflation outstripping price? Gains that you are getting or walking through that line of thinking?

Well first of all it could happen as we indicated in our press release. However we have not seen any deterioration in margins through the month of October going forward but there is always that possibility that would happen. We been cautioning you about that possibility going forward but no -- we don’t see it at this time. There’s strong demand for our products and we see no resistance in that and as we have indicated we have our substantial order book. Cindy do you want to add something?

The only thing I might add, we obviously were a bit cautious when we came out in the second quarter given the strength of our margin. We didn’t realizes obviously any contraction in the third quarter, in fact our gross margins were up but when we do look at Q4 we have factored in a reduction throughout the quarter. Again we know October is already behind us, we know those margins have held up consistent with levels that we saw in the second and third quarter but in the guidance range that we did give you we did factor in some margin contraction in November and December. We obviously don’t know for sure what those will come out to be but when you go through your numbers that to get that 30 – 33 cents a share that we gave you for fourth quarter guidance we factored in a little bit of the basis point reduction in gross margins there.

And lastly Cindy, what is a good working assumption for EBITDA margins for offshore products? I know that historically we’ve targeted 15% mix has been an issue, we had the accrual, you’re closer to 11% for the third quarter I think. Should we continue to witness an improvement in fourth quarter, sounds like we should, (indiscernible)?

Right. What we’ve seen every quarter we’re kind of working our way out of a profit started in Q1, which again was evidenced by backlog reduction throughout the year really in 2003. Our margins are responding but albeit at kind of a slow pace. I will tell you, our backlog mix is very comparable to what we had at the end of the second quarter on a margin basin so the mix has not really shifted in our favor so our fourth quarter are likely to be comparable to what you saw in the third quarter simply because the mix is similar. We do see and Doug mentioned on the call based on the activity that’s out there, close (indiscernible). We expect that, that mix will improve in the near term.

Okay and I recognize that certainly, but looking in to ’05 you’re expecting the backlog to be up at the end of Q4 versus Q3 at least that’s what I understood visibility improving. From all the assumptions should we assume kind of a 15% margin?

Right now in our internal assessment, we are assuming more mid point between 2004 and that 15% that’s somewhere more in the neighborhood of kind of a 13% at this time but we will update that as we get through the fourth quarter because you know our backlog tends to turn fairly quickly relative to some of our competitors. We’ll give you the update to that at that point but as of today, Tom we’re not assuming we get back to that 15% level yet.

Thank you very much.

Your next question comes from Stephen Gengaro from Jefferies & Co. please proceed sir.

Thank, good morning everybody. Two questions, that for the tubular side, when you talk about, just to clarify the committed inventories of 65% are they committed at a price?

Yes

Okay.

I want to also clarify some misconception that’s out in the street with respect to our inventory practices. Were are not on FIFO or LIFO, we are on Specific Cost and we identify the cost with each particular joint of casing or tubing and that’s our cost basis so we don’t have the LIFO and FIFO situation that some of the manufacturers have.

So your margin gains are simply just coming from the fact that pricings are moving higher so quickly?

Yes, I mean basically we’re selling at replacement levels of price but realize what Doug’s saying, we’re not…. It’s not one or the other, it’s not the first in first out, last in price, if you move it you want to pipe in East Texas or wherever it is, it’s moved at that cost for that pipe and it could be pipes that you just bought in the last mill run or it could be what you’ve had in inventory for two months. It’s really a blend of maybe what you see elsewhere.

Our sales, we know that our sales revenue in tubular services, it’s a blend of pipes that’s sold from our inventory with the cost basis we had when we acquired that inventory and also sales that are shipments that leave from the mills in that particular, which are done at the cost basis from the month that they are shipped. So we don’t have situations where it’s FIFO, First in First Out where we have a low cost to all of our inventories at low cost so we are realizing significant gains because of that.

So do you think it’s fair from our perspective not knowing obviously the particulars to sort of look at it kind of as a blended average cost?

That’s why we give you our blended average cost.

Okay great. When you look at your average price in the quarter $10.74 is the purchase price, is it a little higher than that right now I would assume?

Yes, there have been increases since then.

And then finally and I know that this is probably not easy to pinpoint but when you look at the current environment on the OCTG (indiscernible) demand and pricing, if you stripped out the noise and sort of saw some kind of activity level sustainable at these current levels would you guess what the EBITDA margins or gross margins would look like?

Well as Cindy indicated we see strong demand and we had good pricing and margins, we see the same situation through the month of October. Internally we’re forecasting a contraction in margins because of the high level that we are at. It’s just on a conservative basis, it’s something that we have done for internal purposes and for our estimate for the fourth quarter.

Okay, very good.

Stephen can I just peg in, I was going through my notes, just to supplement what Doug was talking about with you. We talked about the average cost per ton of our inventory and for the third quarter at average $1,055 per ton which is what Doug mentioned but you were asking about current, I’ll give you my September purchase cost per ton was $1,204 for comparison purposes. That shows you the spread that we’ve seen during the quarter.

Okay that’s helpful and I guess as a follow-up while we are on this topic. When you look at your -- and obviously you guys have your strategy and approach to this business but have you seen a desire from a -- in general from the distributive stand point to keep inventories as lean as possible because of the price hikes?

Have we seen a desire by the distributors?

are people in your business on the sooner side or short of afraid to build any meaningful inventories with fear that the prices will pull back?

There’s nobody else that has public information our on a distributor basis but generally speaking, supply is very tight right now demand is outstripping supply to a certain degree. We maybe becoming imbalanced but I think that what’s really important in this market is having the mill allocation and the available supply. I don’t know that any distributor is out there resistant to holding inventory…

Yes, I can’t imagine any distributor out there holding inventory to support pricing. In this business, because of the cyclical nature of it, you sell as quickly as you can. That’s the secret to success.

Okay very good that’s very helpful thank you.

Your next question comes from Terry Darling from Goldman Sachs. Please proceed

Just have a couple follow-ups on some earlier points, the first one is Doug can you talk about how much cost savings you think that you took out of the actual offshore business to benefit the results moving into ’05?

That’s been a process we’ve been working on for quite a number of months and we’re starting to realize some of those benefits now but I think in balance it should be $1.5m to maybe $2.5m on an annual basis but some of that we’ve already realized.

Okay and in terms of your expectations for the backlog being up offshore products in the fourth quarter, what are magnitude there?

I really can’t give you an order of magnitude but what we’ve seen at the inquiry level has improved significantly. It was indicated that we’ve gotten some orders for pipeline repair equipment as a result of the storm, which will benefit the fourth quarter. Those orders will be fulfilled and delivered and sold in the quarter, plus we’re seeing also some major projects would have been on the back burner come up to the situation well they maybe leapt during the quarter, we think will help us and will also more importantly, because they’re major projects that will use our high-end products could improve our product mix, which has been a problem in the last four quarters.

Okay and in terms of the deep water landscape generally, we’re hearing more about continued delays in the big projects than with things moving forward you obviously mentioned that activity related to the storms in the gulf has being a driver of that pickup and inquiries but if we assume that your backlog improves modestly instead of significantly, do you need another round of cost cutting at this point to get to the margin levels you’d like to be at in 2005 or do you think that your sized properly so to speak to this point? ////////////////////////////////////////

I think that we will not see another round of cost cutting in 2005. I think that we’ll right size in our homeland and Huston operations. I think the big driver for improved operation will be the mix of our backlog, more of the high end highly engineer connector products and flex joints and these are driven by the deep water major projects the TLPs and the spars. And I think because of the supply and demand fundamentals the high price of oil the increase in the rig count in deep water activity that we’ll see more deep water activity and we’ll see actually, the like of contracts for the development of these facilities. So I think the fundamentals are still very strong for off shore products because of the pricing environment that we have there and the supply and demand situation in respect to oil and gas.

Okay I want to turn to the rental business and I understand that there was some impact there from the gulf hurricane situation but they’re taking a stab at stripping that away it still looks to me given where the acquisition focus has been that maybe the performance could have been expected to be a little bit better there despite the weather issue. Could you talk of pricing in that market? And other competitive pressures that may be impacting that business or any other key reasons why that business maybe isn’t getting a little bit better?

I think if you look the year-over-year basis we’ve done very well there and it’s driven by the acquisitions from the capital expenditures. What you have in the rental tool business is we have not been able to – the pricing is still very competitive and the reason that is is because a significant portion of our equipment are used in the Gulf of Mexico. And the Gulf of Mexico activity has basically a little flat over the last year or so. And so you have excess capacity there that doesn’t allow you to drive up pricing. In addition another one of the areas that we’re very active in the rental tool area and very active area for all drillers in rental tools company is South Texas. (technical difficulty) When you see the dramatic shift there and that El Paso has you know obviously curtailed their activity which reduced the demand for the rental equipment plus you have the sale of some small independent down there to majors that have not ramped up yet. So these factors have affected the pricing somewhat in that area and that we haven’t been able to increase pricing. And also the activity level, if there is -- some project an increase in activity in the Gulf of Mexico it will have a dramatic affect on our rental tool business.

Okay if were to assume that – I mean is that your outlook or if we assume that activity is flat which I think is more what you’re hearing from the jack up operation we’re seeing I would say some incremental on the deep water side. But do we need additional acquisitions? Do we need another rental cost cuts here to drive margins higher or do you feel that the activity will pick up to sort of till the whole situation takes care of it’s self?

I want to tag in and add one comment and then I’ll let Doug address that. One thing that we’re obviously doing there are some markets that are very good right now. And what we’re trying to do is relocate our key people and equipment into more profitable areas, East Texas are on that shelf, Wyoming or to name a few and of course this equipment can be moved from location to location. So we would have a more negative impact given the Gulf of Mexico weakness and South Texas weakness – not having strength on these other markets. So that has supported some of our operations and we think it will have good growth going forward in certain markets for now. We will continue to look at acquisitions as we have always done because we think this market needs consolidation we think that we’ve benefited overall from making the acquisitions that we have here to fore. We do anticipate as I think several of our competitors do and customer do, some recovery in the Gulf of Mexico I don’t know how but it’s going to be dramatic. But when we look at our forecasting for 2005 we are assuming that we get a slightly better market than what we’ve had this year.

And I think Cindy is pointing out what is some – we’ve moved equipment to new geographical areas that have helped us. The Gulf of Mexico being flat where it has provided no growth for us but one of the things that we have done and we’ll see in the fourth quarter and in 2005 is we have added a significant amount of equipment that we’ve purchased that’s used for deep water gravel pack operations and we’ve been successful in obtaining contracts to provide this equipment on major deep water production facilities. It’s one of our goals to grow this business and we think we’ll begin to realize some of the returns on that investment in the fourth quarter and especially in 2005. And to get back to your point you say no growth if you look on a year-over-year basis our EBITDA is up and rental tools is up 60% on a year-over-year basis. On a sequentially basis it’s up slightly but again what we have is the third quarter for the rental tool business because of the Gulf of Mexico contribution and the impact of storms in the Gulf of Mexico it normally is not one of our strongest quarters.

My mistake if I’d said no growth I was talking about the outlook for the shell order gulf for next year you’d implied on the profit line. And on the gravel pack is that a sale or is that still part of rental – is that a rental on the deep-water gulf gravel pack? That’s --.

It’s a rental item.

Okay.

It’s a rental item it’s just that we have good contractual – in other words it wasn’t done on step basis. We had the contractual support for those investments that we’ve made. That’s part of it again I go back to we increase our capital spending budget from it’s original roughly $35m level to about 55 to $60m. The deep-water gravel pack is just a small piece of that increase.

Okay that makes sense, thanks very much.

Your next question comes from Ken Sill from CSFB, please proceed sir.

Good morning every body.

Hi Ken.

I noticed that Shell is delayed repairing the Mars (ph) platform I guess to try to keep the oil production up to the fourth quarter into the first quarter. Is that going to have any impact on the revenues that the off shore products I think they said they were going to sell the flex rates in Q1 instead of this quarter.

No.

No, a single flex joint top order doesn’t have that huge of an impact.

I thought they were going to replace all the flex joints in that one?

We don’t have any first hand knowledge in respect of that.

Okay and then I was wondering if you shine a little bit more depth on this the warranty accrual on those international subsidy pipe line? Is this kind of a unique event or there other -- could this be something that might pop up again?

We think it’s a unique advantage particular product has been in the market for 25 years and we’ve never had any type of (indiscernible) incline against it. We view it as a one-time occurrence.

Okay and then with the storms in the Gulf of Mexico I’m assuming you’ve seen some orders for the like maybe the anchors and chain and wire or stuff – it’s jagged or is have an impact on that business for Q4?

We’re seeing an increase in our orders for parts and after market type activity and service in that area it shouldn’t be significant – it wont be a significant think but it will help. More importantly in the offshore products group we have the pipeline repair products and we’re seeing a lot of inquires and we’ve had sales that can be attributed to that particular activity. So I think we’ll benefit in that respect and a lot of this equipment is on the shelf inventory we’ve have so we should turn an impact the fourth quarter.

Okay and then finally on the drilling side you guys are adding a couple of land rigs I guess over the next 2 or 3 quarters, I guess what’s the timing on that and the impact on depreciation?

We are building a new rig right now it will be the 18th rig. We expect to have it in operation in January of this year. The capital expenditure on that rig is approximately --.

$3m

$3m and the impact on depreciation will not be significant.

And we’re currently just evaluating another rig addition in 2005. We haven’t formally moved forward with that program.

Okay thank you very much.

Once again ladies and gentlemen if you wish to ask a question please press star followed by one on your touch tone telephone. Your next question comes from Will Fowley (ph) from Sodoti, please proceed sir.

Good morning just first of all just clarification on the accommodations business, the sequential and the nice year-over-year improvement you’ve seen there that was primarily oil stands related? Is that a fair characterization?

Yes that was the bigger driver there.

And can you just talk a little bit about what kind of sequential improvement you anticipate in terms of accommodations as we move into the fourth quarter?

Let us we have to pull the fore – our internal forecast right now. I mean we’re looking for a strong fourth quarter at this point but the key that would accelerate that obviously beyond what we’ve had in the third is timing of any type of winter freeze in Canada and that’s always a little bit of a question mark. I think for modeling purposes right now we’d probably assume somewhat flat Q3 to Q4. The one element that is another question mark we do support some Canadian military operations in the Middle East. We assume that will hold up through the fourth there is certainly no indication of that going down. So there are a few variables there, but obviously we could have an up side surprise to the sense that we get an early ground freeze in Canada. But that’s not something that we normally count on.

Will in that particular business and obviously it picks up in the fourth quarter because of the winter conditions and we can move our equipment in. It’s also impacted by sometimes our front end cost associated with that and the expense with the moving of equipment so that mitigates the increase of profit because of increased activity. In addition because part of our business is the catering business and repeating people the number of people working over the holidays season sometimes does decline and so that impacts it on terms of mandate (indiscernible). A lot of different factor working in the fourth quarter is that it’s sort of a swing quarter for that business as we gear up for winter activity.

Okay moving over to your land drilling business in general we’re seeing at least some of the operators that they are talking about you know continued upward movement in day rate. What are you guys anticipating in terms of improved day rates as we enter the fourth quarter?

Well we operate under generally long term type commitment where an operator will ask us to drill 25 to 50 wells. And our policy has been to obviously from an efficiency stand point having a significant back log that helps us to be the most efficient operator that we can possibly be. As these roll off we’re getting increases and again the increases are negotiated and they are dictated to a great degree by what’s happening in the market place. And we generally price under the prices of our key contributors in that area (indiscernible) on the day work basis. So we will push at what the market will bear. And still maintain a pricing that is probably less than a day work contractor would get. And as you know we got $8700 per day in the third quarter. And you know I’ve seen people saying they’re increasing by $500 per day. I don’t think we’ll be seeing $500 per day increase in our day rates going forward.

Okay lastly I guess again I’m trying to just get an understanding here of the sustainability of the margins on the tubular business. I guess assuming that the OCTG market remains as it enters as tight as it is currently – I mean what are the factors that could cause the your margins to kind of move back more toward a more I don’t know what’s normalized in this market any more, but to really come back fairly materially from where they are today?

Will I’ll answer that I mean it’s probably not going to be too shocking of an answer but what in theory will drive that is the flattening of the end product cost to our customer number one. The other one is if the mill continues to out strip produce at a level that out strip demand that creates an increase supply of inventory on the ground. Right now we haven’t seen that in fact the supply on the ground we use OCTG situation report that does not internally created stuff. But here with 4.7 month of industry inventory on the ground in the second quarter it actually came down according to their studies to 4.3 per month on the ground.

So I’m sure how quickly that that phenomenon could occur. We don’t really anticipate obviously in the comment that we’ve made any demand reduction or even a flattening. We’re looking for increases next year. So the only think that drives that phenomena down is a flattening of pricing which that would also be dependent up on level supply as available seal capacity obviously or again an increase of supply on the ground such that you know you’d give more of a supply demand balance than what we’re at today.

Alright that’s very helpful thank you.

Ladies and gentlemen if you wish to ask a question or you have a comment please press star followed by one on your touch-tone telephone. We have no further question I’ll turn it over to Mr. Swanson for closing remarks.

Thank you for joining us and we appreciate your interest in our company and have a good day.

Thank you.

Thank you for your participation in today’s conference. This concludes the presentation you may now disconnect. Every one have a wonderful day.