Oil States International Inc (OIS) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the quarter four 2004 Oil States International earnings conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's call, Mr. Bradley Dodson.

Welcome to the Oil States fourth-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 I would like to caution listeners regarding forward-looking statements.

To the extent the remarks today contain information other than historical information, we are relying on the Safe Harbor provisions afforded by federal law. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks discussed in our Form 10-K and our other SEC filings. Doug?

Thank you, Bradley, and thank you for joining us this morning. We're pleased to announce that Oil States International completed the fourth quarter of 2004 with strong operating and financial results in our Well Site Services and Tubular Services Segments, led by continued strength in Canadian operations, North American land drilling activity, and the impact of acquisitions that were completed during 2003 and early 2004.

Our Well Site Services Segment was up sequentially in revenues 11.5 percent, and EBITDA rose 4.2 percent, largely due to growth in our drill tool activity and the Canadian operations.

Our Tubular Service Segment was up sequentially in revenue 23.1 percent due to the strong OCTG market and the impact of the Hunting acquisition, which closed in May of this last year. However, EBITDA declined 11.4 percent due to sequentially lower margins which were forecasted.

Our Offshore Product Segment was up 9.8 percent in revenue, but EBITDA was flat on a sequential basis. Our Offshore Products margin remain weak due to the mix of products, lack of full cost absorption in several of our product lines, and costs associated with the consolidation of two of our major manufacturing facilities.

Our Offshore backlog increased 11.7 percent to 97.5 million during the quarter from the third-quarter 2004 levels. Backlog is also significant from the year end 2003 by 56 percent. However, the mix of products in backlog is still similar to the mix that we experienced at the end of the third quarter.

Net income for the quarter was 31 cents compared to 19 cents reported in the fourth quarter of 2003.

I will turn the agenda over to Cindy Taylor, who will go through our financial results.

For the fourth quarter of 2004, we reported operating income of $26.5 million on revenues of 293.1 million. Our EBITDA totaled 36 million for the current quarter. These results compare to 12.9 million of operating income on revenues of 197.4 million for the fourth quarter last year. The fourth-quarter 2003 EBITDA totaled $21 million for comparison. Our fourth quarter performance represents a 49 percent year-over-year increase in revenues, and a 72 percent improvement in our EBITDA. Sequentially our revenues were up 17 percent, but our EBITDA was slightly lower, again, as Doug mentioned, due to stronger volumes in our Tubular Services Segment, but sequentially weaker margins, again as we had indicated were likely. Our net income totaled $15.5 million or 31 cents per diluted share for the fourth quarter of 2004. Our fourth quarter tax rate decreased modestly to 36.4 percent and was just below our earlier guidance.

As Doug mentioned, our fourth-quarter results reflect benefits of improved North American drilling activity, contributions from the acquisitions that we completed in 2003 and early 2004 which led to year-over-year growth in our Well Site Services EBITDA of $7.7 million, or 56.9 percent. In addition, our Tubular Services Segment did very well during the quarter due to the impact of increasing pricing for our oil country tubular goods, strong demand from our customers, and the impact of the Hunting acquisition which we closed in May of this year. Tubular Services EBITDA was up $10.6 million or 495 percent year-over-year. Growth from these two segments, Tubular Services and Well Site Services, was reduced by reduced year-over-year contributions in our Offshore Products Segment where EBITDA was down $1.9 million or 28.4 percent. We will go into more details in each of those segments as we go through our outlook going forward.

If we look at the highlights of our balance sheet, it remains very strong with a debt to capitalization ratio of 24.7 percent at December 31, 2004. During the quarter our total debt decreased by 17.4 million despite making capital expenditures of 21.9 million during the period. If we look it capital spending, in our last 10-Q we had estimated that we've spent about 55 to $60 million, and we closed the year with total spending of 60 million, which is evidence of the growth opportunities that we have in our various business lines, in particular our Well Site Services Segment.

At this time we're going to go, and I will turn the discussion back over to Doug who is going to go through some of the key activity highlights on the quarter on a business line basis, and then we will close with some market thoughts going forward.

What we will do is go through each of our business segments and compare them on a sequential basis with our results with the third quarter of 2004.

In our Well Site Services our revenues were up 11.5 percent. EBITDA was 21.3 million, up 800,000 from the 20.5 or 4.2 percent increase. Our margins in the fourth quarter were 24.1 percent compared to 25.8 percent in the third quarter.

The sequential increase in revenues and EBITDA occurred primarily due to the impact of growth in the oil sands region in Canada and improved operation contributions from our rental tool operations. Contributions from the rental tool acquisitions completed in the first six months of 2004 generated significant growth year-over-year for the segment.

Our land drilling operations were weak sequentially in both revenues and EBITDA due to reduced utilization resulting from weather conditions -- 16 days total downtime for weather; we had holiday shutdowns in excess of normal; and 1 rig was actually down for 19 days for repairs.

Our average daily revenues were essentially flat on a sequential basis, but our cash margin per share was down $500 to $2600 per day versus the $3100 in the third quarter. Again, this is due to the fact that we had lower utilization. Our costs in these situations are not variable, and we kept our crews on until we had higher cost absorption, which reduced our margins. Our (indiscernible) day rates remained relatively flat.

In Offshore Products our revenue increased to 60.7 million from 55.3, a 9.8 percent increase. Our EBITDA was basically flat with the fourth quarter. Revenues were up this 9.8 percent sequentially, but revenues -- but EBITDA remained flat. This was due to the continuing product mix issues experienced in 2004 which we've discussed. In addition, we experienced increased costs and challenges associated with the consolidating efforts in two of our major manufacturing locations. Our backlog of 97.5 million was up approximately 11.7 percent from the end of the third quarter and up 34.9 million from the 62.6 million one year ago.

In Tubular Services we had a significant increase in revenue, up 23.1 percent. Our EBITDA was down to 12.7 million from 14.3 million in the third quarter. This was due to lower gross margins. Our gross margins in the quarter were 10.4 percent compared to 14.4 percent in the third quarter of 2004. These year-over-year improvements in volumes and gross margins were due to improved demand, increasing OCTG prices and the benefits of the Hunting acquisition.

Our order book remains very strong at end of the quarter. Our order book was 146 million at the end of the fourth quarter compared to 134.6 million at the end of the third quarter and 61.8 million one year ago.

Our inventory increased by $6.8 million during the quarter due to price increases. Purchase prices increased during the quarter due to mill price increases. Our average cost per ton was $1,192 a ton. This compares to $1,074 a ton at September 30, 2004, an increase of 11 percent. We're currently holding three to four months inventory based upon current levels. Approximately 60 percent of our inventory is committed to customer orders at the end of the quarter. Industry inventories remained fairly flat during the quarter with mill shipments slightly outstripping consumption. However, supply on the ground remains reasonable at the current rig count. We're estimating about 4.1 months supply of inventory.

To summarize, as we look forward to 2005, again the key drivers for our Company will be North American drilling activity and deepwater infrastructure development. Our year-over-year results in Canada were much improved due to the impact of the oil sands development; construction activity in that region. We think this trend will continue for several years to come. Land drilling utilization is strong and should continue throughout 2005. Backlog visibility remains strong in both Texas, Ohio and in the Rockies with commitments extending into midyear 2005 and beyond.

We are realizing price increases on the rigs as they roll off current contracts. We constructed a new rig that actually spudded its first well on December 17th. We're in the process of building one additional rig. It should commence operations by the third quarter of 2005. We're presently undecided exactly where it will work. We initially intended to have it work in Texas. However, we are bidding on work in the Rockies for that particular rig.

Rental tool contribution should continue to increase due to the acquisitions completed, rig count improvements on land and in the Gulf of Mexico, and improvements in the capacity of our equipment.

The Offshore Products, fourth-quarter revenues increased, but EBITDA was flat. Our backlog improved significantly, up to the second highest level ever in our history. Based on the bidding activity we see today, we expect our backlog and mix of business to improve in 2005.

As we indicated, we're in the process of reorganizing our Houston and Houma manufacturing facilities in an effort to enhance manufacturing efficiencies and project execution. Various cost reductions have been initiated and will be finalized in 2004.

Tubular Services, prices continued to increase during the fourth quarter as mills implemented additional price increases. However, the rate of increase has slowed. Our OCTG inventories are still at low levels given our backlog position at the end of the year. We expect to continue to realize strong revenues during 2005, with current activities levels through realization of the price increases we've seen and the benefit from the Hunting acquisition. Our margins remained strong in the fourth quarter. However, some contraction did occur, which was consistent with our expectations.

On a consolidated basis we expect continued strength in activity in Tubular Services and Well Site Services Segments, led by the land drilling activity, acquisitions completed, and the most recent one in particular, and the impact of price increases in certain business lines. We expect strong contributions from Canadian operations given expanded activity in the oil sands region. Our Offshore Products Group should improve year-over-year given the increased backlog and the impact of the facility consolidations and the cost reduction initiatives implemented this year.

On a guidance basis, we see year-over-year growth in our Well Site Services and Offshore Products Segments that will be partially offset by reductions in our Tubular Service Segment as margins return to more traditional levels. Our DD&A for 2005 is projected at approximately 40 million. We expect to be taxed at an estimate rate of 36 to 37 percent in 2005. We intend to adopt stock option accounting in the third quarter of 2005. The impact in 2005 is estimated to be 2 to 3 cents per share. First-quarter earnings should be in the range of 38 to 43 cents per diluted share. Our annual earnings for 2005 should be in the range of $1.15 to $1.40 per diluted share. Again, the key variables affecting this range will be margins achieved in our Tubular Services Segment and the extent of margin improvement in our Offshore Products Segment.

We would be pleased to answer any questions you might have.

(OPERATOR INSTRUCTIONS) Terry Darling, Goldman Sachs.

I wanted to try to understand the variables influencing as wide a range on guidance as we've seen I think in the oil patch. Obviously you've got some businesses with a lot more volatility, so that's understandable. But I wonder if you can help us on the Tubular Services margin assumption, sort of high-end and low end. You mentioned in your sort of color commentary you are expecting that to come back to more normal levels, which I think of as kind of closer to the 3, 4 percent range. But we've got US steel putting in aggregate $220 a ton worth of price increases on seamless through in the first quarter, so it would seem to be a fair bit of upside there. Can you talk about what ranges surround that business?

I'll tell you what we've assumed in that guidance range, and that again Doug mentioned that's the highest area volatility within that range. But I'm speaking to gross margins right now, and low end of the range assumes about 7.5 percent margins; the high-end of the range assumes about 10 percent gross margins. That counts for close to 15 cents of the volatility of the range, just to put that in perspective. Again, those are gross margins, not EBITDA margins.

And you're correct in US Steel's moves in the first quarter. They did put through price increases in January, and they've announced increases in March as well. Our understanding is more in the $100 per ton range in each of those increases that they're putting forth. So that is a positive for us. And thus far -- again, we've only gotten through one month of activity in the quarter, but margins have held up pretty well thus far in the first quarter.

So that's clearly -- even on the lower end of the guidance range, we've assumed that we stay into pretty strong margins in the first half of the year. The real uncertainty develops in the last half of the year.

Can you also, Cindy, on the Tubular business help us with the volume assumptions that you're making on that business?

We've assumed pretty strong volumes, fairly consistent with fourth-quarter levels, continuing throughout 2005.

The general expectations for the rig count overall are 5 percent, but I think we've got 15 to 20 percent more deepwater rigs coming into the market. And my sense is that your focus is more on the seamless side, which may be more levered to that deepwater pickup. Is that pick up in deepwater assumed in your numbers?

It really is not. We've been hesitant to assume too much recovery at this stage. There are clear signs that we're moving that way, but there's definite upside should we get a strong level of offshore activity either in deepwater or in the shelf.

So there's not implicit here a strategic decision on your part to try to work inventories down relative to where market activity is as you head into '06?

Are you suggesting we're working inventories down?

No, I'm saying that your statement that there is upside from deepwater to me implies that you're not making a strategic decision regardless of what goes on in the market to work those inventories down as you move into '06.

That's correct.

No, absolutely not.

On the Canadian accommodations business, can you tell us what you're assuming for growth there both for the first quarter and for the full year?

If you will bear with me just a moment I will try to put my finger on that right quick. If I look -- I have to kind of go year-over-year for Canada for you obviously because the peak seasonal impact that we get from traditional drilling activities. But that growth on revenues and EBITDA -- again, this is a mix of traditional drilling activity and the impact on the oil sands -- but we're looking in the range of 30 percent-type growth on both revenues and EBITDA coming out of Canada in the first quarter. If I look at my year-type impact coming out of Canada, it's somewhere in the range of, say, 20, 25 percent.

Doug, your commentary on the land business suggests we ought to see margins come back to third-quarter levels, at least excluding whatever impact from acquisitions we have layered in here.

Yes, that's correct. What we had was we had a situation where we had one rig that had a minor repair, and we kept it in to do extensive repairs on it, and it was out for 19 days. We had wet weather conditions at all the contractors (indiscernible) a lot of people say wet weather happens all the time, but normally it doesn't happen in West Texas. And we did have -- because of the short nature of our jobs that runs from 4 to 6, 7, 8 days, we had situations where the operators elected not to spud wells during the holiday period in order not to be on location during that time.

So we think this was an anomaly. We're getting increases when we roll over our contracts. We do contract long in the sense that we will get contracts from 10 to 50 wells at a time from an operator. So we can only turn those rates at the time we renew, but we're consistently doing that. And as we said, we've added one rig in December. We will have one more at the beginning of the third quarter. And we're excited about the opportunities in Wyoming. Again, the rig that's under construction, we're debating whether to put it in Texas or to take it in Wyoming. We're trying to evaluate which would provide the greatest return on our investment.

The impact of the acquisition ought to do what to your average daily revenue per rig?

It will increase it. There's higher dayrates up there, significantly higher dayrates. And the margin percentage is about the same as we have, but higher dayrates.

And a little bit lower utilization at this point?

Lower utilization, primarily due to the weather conditions up there and permitting.

Lastly, on the hydraulic workover business, that was in a loss position at -- I forget which level, the EBITDA level or EBIT level. What is going on in that business? And what are we thinking about in terms of improved performance going forward?

Well, we think we have -- we're working to improve operations there. One of the significant things that happened at the end of the year is we that obtain a contract to utilize two units in Egypt. They have not commenced operations. They should commence operations in the next several weeks. We think that will benefit us. Our fourth quarter was impacted by slow activity levels. We were particularly slow in Venezuela and the Middle East. And we incurred some additional charges that were unanticipated in the fourth quarter that resulted in those negative results.

If you have got two more units going back to work, we ought to see utilization on sort of an ongoing basis move up a fair bit, no?

We think that utilization will improve going forward.

Stephen Gengaro, Jefferies.

Two questions. The first, when you look at the offshore products business and you look at the margins, can you give us a sense for what you're expecting as we go through '05 based on the bidding activity you're seeing and the backlog you booked going into year end?

Our margins have been as high as 17 percent in that business. Our goal is to get it up to 15 percent. We thought 15 was the peak. We did (ph) get 17 percent. This last year obviously was not a good result for us. But we expect to have margins in the 10 to 11 percent range for the year.

That's what's incorporated in our guidance right now. And obviously what we're trying to do is get these two facilities consolidations behind us and start enhancing margins there. We talked about our backlog, which has grown fairly significant over the years. We're still not in an optimal mix. We need some more of these big awards to come in. But things are definitely turning with respect to margin improvement. But in the guidance range we have put out we do have roughly 11 percent EBITDA margins assumed in that range. And they start out at the lower end, somewhere around 8.5 percent in Q1, and then escalate as we get these facilities consolidations behind us.

I may have missed it if you said it earlier. Did you or can you quantify at all the impact in the quarter on the margins from the noise?

It's a little bit hard to do. Kind of the obvious unabsorbed costs the stand out are maybe $0.5 million. But clearly we had excess overtime, lack of machining and assembly type absorption that rolls into your margins that is more difficult to pick out. But that kind gives you a feel for it possibly.

And the consolidation of facilities, moving equipment from one manufacturing and one to another facility resulted in a lot of inefficiencies that you really can't quantify. We feel that's behind us.

And then a final question. As you look at -- I lost my train of thought. When you look at the business in general, and you look at the Well Site side, is the oil sands exposure and potential bidding activity there, how is that progressing and does that help the seasonality at all? Should we see less of a decline in the second quarter, or at least maybe a higher level of base business from that?

Yes. The oil sands activity is year-round activity. It's consistent based upon the level of manpower up in the oil sands facilities. So it does mitigate the seasonality that we have in that business unit.

We have expanded our operations up there significantly. Cindy went through some of the assumptions on growth for 2005. What we can tell you -- what we've done up there is we were in the process the end of this year -- beginning of this year of adding a new 500 man facility for Syncrude. We've expanded our PTI lodge (ph) by approximately 400 beds. We've added additional capacity in the fourth quarter for Suncor. We're in the process of manufacturing a 1500 man facility for a CNRL that should be put in service in the last half of the year.

This is just an indication of the activity that we have incurred and have experienced through contracts we've been awarded. But we think this is only the beginning of what's happening up there. We see a lot more activity on the forefront as the continued construction of these new facilities has gone on. But this gives you some sampling of what's happening, what really is driving this increase in results that Cindy is projecting.

One final question. You mentioned earlier the Tubular margin range which you are using the amount of the guidance range that it is responsible for. Can you -- is there a sense for the volume of Tubulars versus the price of Tubulars, and how that impacts that 7.5 to 10 percent guidance range? I guess sort of getting at it, if we expect high volumes, but lower prices are we closer to the top or the bottom of that range. Does that make sense?

I'm not sure I understand what you're asking.

If we were to expect your Tubular volumes to be at or above current levels but pricing to pull back, which one of those two factors is affecting the gross margin range more?

I won't say that we're -- we're not expecting pricing to pull back clearly. What we said, that just the rate of increase will slow or flatten at this point in time. But we're not expecting a degradation of pricing. Demand is too strong, inventories on the ground are low, so there's nothing to suggest that --

Our margins are -- that increase in our margins are sort of driven, are driven, by the rate of increase in steel prices. In effect it's sort like a replacement type pricing.

Exactly.

So what we're seeing now in this first quarter, there's still 100 to $120 a ton increases in January and March. This will help us maintain higher margins. But we saw in the fourth quarter is the rate of increase in steel prices, OCTG prices, declined slightly, and we had a contraction in our margin, which we had warned the Street we were expecting. This pricing increase in January and March favorably affect us with respect to margins going forward in the first quarter and potentially in the second quarter.

That helps.

Ken Sill, Credit Suisse First Boston.

Most of the questions on margins have been asked. I was a little bit curious on the Offshore Products. You guys are talking about consolidating the Houma and Houston manufacturing facilities. That should be done in the first half, I guess. How much improvement in costs or margins -- or how much costs do you expect to go away in the second half once that consolidation effort is completed?

When we looked at the facility consolidations we were looking for a range of about the $2 million of cost savings in each of the two locations. So if we can implement that kind of midyear and get fully running, we should be saving about a couple of million dollars in the last half of the year.

So you've got 2 million at each facility, 4 million on an annual basis, but you'll get about 2 million of that in the second half?

(indiscernible) if we get them both running and realize the cost savings that we anticipated when we decided to do them, yes.

So about 1 million a quarter is what it is going to come out?

Correct.

And then on the acquisition of Elenburg in Wyoming, I guess, Doug, you said the revenues are higher on a dayrate basis but margins were a little bit lower. What is the seasonality impact to --?

Our margins are about the same. (multiple speakers) gross margins are the same. EBITDA margins are about the same.

So it's a higher dayrate, a little bit higher cost, a little bit lower utilization. But I'm assuming there's a little bit of seasonality in that business too.

Yes, and the seasonality is reflected in the margins. In other words, on say 100 percent utilization, they would have much higher margins than we experience in our Texas and Ohio operations.

So as you look at it, I guess what, you guys have got relatively fixed cost basis, utilization would go up. Does that go up I guess maybe April, May and run pretty high through the fall, and then it tail up (ph) over the winter?

Yes, that's correct.

And you guys had said the announcement, so 3 cents a share accretive, but I would assume that most of that will be over the summer then.

We've assumed in our own internal projections that we don't get really any accretion in the first quarter, and that we pick up the announced kind of 3 cents per share accretion in the out quarters.

The rental business seems to be getting better. You said that you really haven't included any kind of pick up offshore in your guidance on the rental side.

That's right. The rig count has basically been flat in the Gulf of Mexico for a long time (indiscernible) two or three quarter rig count. That doesn't have a material impact on us. But if there were a significant increase in the Gulf of Mexico, that would have a meaningful result to that operation, because it would -- there's still excess capacity and it would allow us, one, to get more equipment to work, and it would also benefit pricing.

It looks like there's not that many rigs that you can put back to work out there anymore. So assuming you don't get a lot of increase in the rig count, but some of this deepwater stuff comes on, would you expect to see kind of further steady improvement out of the rental business, but nothing really dramatic? Or will it flatten out here?

I think it was pretty dramatic. If you look at it on a year-over-year basis, we basically doubled in size in that business. We see continued growth even with the slight increase in rig count that's projected. I think that's due to, one, the capital equipment we've added. We have brought a lot of new equipment that we think will commence operations, and this equipment was primarily designed for some of the deepwater production platforms. We think that will go to work. We expanded our operations into the Rockies and we saw significant growth there. We'll see additional growth there. In addition, one of our goals this last year has been to consolidate the operations of the facilities of our rental tool business, and we're doing that. So we think we will do a better job of marketing and a lot better cost control going forward.

I was very pleased with the improvement year-over-year. So are you just expecting to keep continuing getting better, and then if we get some bump in the rig count that's just gravy?

Of our 23 -- we completed 23 acquisitions since our IPO four years ago today for 202 million and 15 of those acquisitions were in the rental tool business. So this is an area we see a great growth. And we're still looking at additional acquisitions in this area.

Thank your much.

Will Foley, Sidoti & Co.

You've covered a lot. I had just one or two remaining questions. 2005, what is the expectation for SG&A?

Hang on. Bear with me one second. It looks like on kind of a year-over-year basis it is going to be up in the range of 6 to 8 percent.

And then Offshore Products, I guess you talked about the margin. What kind of the topline growth expectation there as it's kind of factored into your guidance?

We didn't hear your question.

The Offshore Products, what is the topline growth that you're anticipating in your guidance in '05 for Offshore Products?

Somewhere in the range of 10 to 13 percent.

And then, you did mention I think earlier what you were anticipating from the accommodations business in the March quarter. I missed that. I just wondered if you could give that to me again please.

Topline growth and EBITDA growth in the neighborhood of 30 percent.

That's year-over-year?

Yes.

Perhaps just lastly if you could just give us your thoughts on the acquisition environment at the moment, the deal flow and what your thoughts are going forward on acquisitions.

We were very pleased with the Elenburg acquisition that we announced last week. We still have a number of acquisitions in the pipeline. We think, again, they will be concentrated in the Well Site Services Group primarily. And we think that there are still going the attractive acquisition prices. They're harder to come by, but we're still getting them. Again, as I mentioned earlier, we've done 23 acquisitions during the last 4 years for 202 million. I think all but about three or four those acquisitions were generated internally without brokers. And that's our continuing source of new opportunities, is our operating people source these for us and bring them to our attention.

Thank you very much.

(OPERATOR INSTRUCTIONS) Thiru Ramakrishnan, Simmons.

Hold on one second. First question is on the -- you guys apparently raised your debt level at the beginning of this year, and it looks like there could be some lowering of your average interest rate. Could you give us order of magnitude on that?

Again, the only increase in the debt level to speak of at this time is more related to the acquisition of Elenberg 22 million. So we were running around 27.5 percent (technical difficulty) ratio. I think at the end of the year we were 24.7. With the acquisition we kind of get back up to that kind of 27.5 range.

We will have some builds in Canada, which is typical, but no big deal. We did increase -- amend our facility. We got 75 million of expanded availability under the facility and we extended it for a five-year term. So it goes into the first quarter of 2010. And we've got some covenant easing in the process and across -- most companies like us have a pricing grid based upon leverage ratios, and we got a 75 basis point across the grid reduction in pricing, which should help compensate for rising interest rates this year.

Cindy, it's Bill Herbert. I just walked in. I noticed in reading your press release that the guidance for the tax rate was relatively unchanged relative to what prevailed in 2004.

Yes, we're looking at a range of around 36 to 37 percent right now.

Is there any prospects for structurally lowering that tax rate significantly in the foreseeable future?

We are looking at our options there. Clearly there's a few more remaining NOLs, but we're really working through those. But since we have had NOLs, obviously what we've been doing is deducting foreign taxes as opposed to taking credit for them, because you have to use your NOL first. We're also looking at our workover operations where we do have some adverse international taxes because they are revenue based taxes. And we're going to be working to do some possible restructuring in our international operations to lower that rate this year.

So were you to in fact get a favorable ruling with respect to restructuring your -- or sort of structurally lowering your tax rate, just give us a sense as to what the possibilities could be with respect to what the tax rate might likely go to relative to guidance that you are providing today.

I couldn't answer that with any level of accuracy right now. But clearly we're more North American based. A lot of our operations comes from Canada and the US. So the federal rates there are what they are. We're profitable. We have eaten through a large majority of the NOLs because we are profitable. So the prospect of having a significantly lower tax rate than the federal statutory rate is not realistic. We've got a 35 percent rate in the US obviously, and Canada is just below that. And then you've got state taxes on top of that. So unless you've got some carryover of a dramatic number of amount of NOLs, the reality is that's what the rate is going normalize at.

Okay great. Go ahead.

That's all the questions I had.

Terry Darling, Goldman Sachs.

I am trying to understand the guidance on the top line expectation for Offshore Products. If we just take the fourth quarter and annualize, you would be up 17 percent. Your backlog was up 11 percent sequentially, 56 percent year-over-year. How do you get growth that's only 10 to 13 percent given those parameters?

I'm using what the division has fed me basically in those numbers, but it would have to be the assumptions on backlog replacement at this point in time. We haven't chosen to be very aggressive on that segment simply because we're coming out of a weaker year this year.

Do you have any information that would tell us what percentage of the backlog would not be expected to be booked until '06?

What percentage of our backlog goes through '06?

That would not be booked until '06. We have seen the backlog rise, but perhaps it's longer-dated backlog.

I have a schedule in this heavy stack of stuff that will give me that. So if you don't mind, if you will bear with me just a moment.

It's about --

It's 11 percent.

11 percent.

Is that kind of a normal level or is that jumped up relative to where it's been in the past?

I think it's pretty normal.

Thanks much.

Steve Pluns (ph), Houston Energy Partners.

One of the recurring themes we've heard on a lot of calls is the cost of Sarbanes-Oxley. I was just wondering if you have worked your way through that process and those costs are behind you or where you stand in the whole process.

Obviously from an internal perspective we are effectively done or essentially done. Ernst & Young is our independent accountant, and they are significantly done as well. So we feel good about where we stand with results (ph) to the process. We do think there was a lot of inefficiencies in the first year. We are a Small Cap company, but because we have grown through operations and have a diversity of product lines, it is more complicated to go through the process that we went through without a doubt. And I won't say we're any different than anyone else and the audit firm we use is no different. We all went through a huge learning process this year. So it's clearly less efficient that it will be next year. And we think it's part of what the world is today, and we're going to comply. But we think do it in a more efficient and less costly fashion next year.

As we pointed out in the press release, the SG&A in the fourth quarter was increased by about $1 million due to primarily the high costs associated with Sarbanes-Oxley, which was one of the factors that impacted our earnings being 31 cents versus a higher number.

Thank you.

Kyle Cavanaugh, Palisade Capital.

I have two questions and they are somewhat related. The first one is, is it fair to characterize your kind of outlook a little bit? It seems like margins in both the Tubular business and the Offshore business will affect your outlook considerably, and those are two items that -- it seems like you're implying that they are out of your control. And the second part is, all else being equal, if margins in the business stay the same, will profitability and returns increase?

I don't think we intended to say that our margins were out of our control in those segments. We don't have much variability within our range from offshore products. We have given fairly conservative guidance I think on that basis. Tubular Services is very much of spot-based business. We don't carry contractual-type commitments or sales, and so there is certainly a significant impact of change that can occur as we progress through the year.

If you did progress through the year and margins are going in the wrong direction, what is the strategy to kind of combat that kind of movement?

On the Tubular Services side, we've been in this business since the 1930s. The key is understanding the needs of your customers obviously, and carrying the appropriate level of inventory, both volumes and price, to respond to that. We have a significant amount of our inventory that's committed already, and it's a strategic move in terms of how much we commit versus how much we carry in a spot market. But it comes with knowing your customers and lots of years of experience. We carry what we call terant (ph) backlog in this business, meaning we know what commitments are out there. It's not firm enough to report in public filings, but it's certainly a trend line indicator that we manage the business off of.

Is the price movement still a factor now that -- since prices have increased? Is that completely -- will that have an impact relative to what your own inventory was? Or is that completely smoothed out right now?

As we indicated earlier, the price increases do have a favorable impact on the environment for our business for our pricing. We were able to do basically replacement-type pricing. When the market price for the OCTG goes up, obviously the value of pipe that's in inventory or on the ground that's available, it has an increase.

Negatively affecting your margins though, right?

Not necessarily, because you will have higher margins on pipe that's uncommitted in inventory.

And I guess back to the second part of my original question was if margins in both these businesses stay the same year-over-year for '05, I guess would -- I guess are your plans in place to improve the profitability of these businesses, all else being equal?

If they remain the same in Tubular Products, that would have a favorable impact on us. In our projections we're projecting a decline, so the favorable -- the maintenance of high margins there would help us. Our Offshore Product margin are more controllable. We bid our jobs. We know what our gross margins are. Our problems with the lower margins have been due to the mix of business, but also due to the inefficiencies that we have had and the consolidation costs. So I think they are more controllable in the Offshore Products area.

We have a strong backlog in Offshore Products. The outlook for deepwater development is getting stronger each day as the major oil companies make long-term commitments at significant increase in costs for drilling rigs. So we see on the longer-term perspective the Offshore Products Group has significant growth potential.

We think that the actions we took this last year, the year that we had strong financial results, will bear long-term benefit. We decided to take them this year, because we feel that they will benefit the longer-term growth of the Company. But again, the margins in that business are more controllable than they would be in the Tubular Services that is driven to a great degree by demand and the price of steel.

Thank you.

(OPERATOR INSTRUCTIONS) Mr. Dodson, you have no further questions at this time.

Thank you for calling in on our conference call, and we look forward to next quarter's conference call. Thank you.

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