Oil States International Inc (OIS) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2005 third-quarter Oil States International earnings conference call. My name is (indiscernible) and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr. Bradley Dodson. Sir, you may proceed.

Good morning and welcome to Oil States' third-quarter 2005 earnings conference call. Our call today will be led by Douglas Swanson, Oil States' President and Chief Executive Officer, and a Cindy Taylor, Oil States' Senior Vice President and Chief Financial Officer.

Before we begin, we'd 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 protections afforded by federal law. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K and our other SEC filings. I will turn it over to Doug.

Thank you for joining us this morning. We are pleased to announce that Oil States International completed the third quarter with record results, led by continued strength in North American land drilling activity, growth in the Canadian Oil Sands region and the impact of acquisitions completed during 2004 and the first half of 2005.

Although difficult to quantify, Gulf of Mexico disruptions caused by hurricanes were estimated to negatively impact our operating results by 2 to $0.04 per share. This is primarily due to revenue deferrals and reduced cost absorption associated with downtime from some of our Louisiana facilities. Despite these disruptions, we significantly outperformed our previous guidance range, due largely to contributions from our Tubular Services and Well Site Services segments.

All of our business segments reported significantly improved year-over-year operating results and were up sequentially as well. The Tubular Service Segment was up sequentially in revenues 12.2% and EBITDA 10.8% due to improved volumes and the impact at the Phillips acquisition, which closed on June 2, 2005. Our Well Site Service segment was up sequentially in revenues, 11.6%, and EBITDA 27.9%.

Offshore Products segment was up sequentially in revenues just 1% and EBITDA up 5.4%, despite some delayed shipments and reduced cost absorption associated with the hurricanes. Our Offshore Products EBITDA margin improved sequentially from 12.4 to 13%. Our Offshore Products backlog increased to 119.4 million from the second-quarter level of 113.5. Net income for the quarter was $0.60 per share compared to $0.31 per share reported in the third quarter of 2004.

At this time, I will turn over the meeting to Cindy Taylor, who will review our financial results.

Thank you, Doug. I'm going to just take you through some highlights of our consolidated results. For the third quarter 2005, we reported operating income of 51.3 million on revenues of 394.1 million. Our EBITDA totaled 64.1 million for the quarter. These results compare to 27.9 million of operating income on revenues of $251.5 million for the third quarter of 2004. Our third-quarter 2004 EBITDA totaled $37.6 million for comparison purposes.

Our current quarter performance represents a 56.7% year-over-year increase in revenues and a 70.5% improvement in EBITDA. On a sequential basis, our revenues were up 10%, while our EBITDA increased by 19.4%. Our net income totaled $30.3 million for the current quarter, or $0.60 per diluted share.

As Doug mentioned, our current quarter results reflect the benefits of improved North American drilling activities, growth in the Oil Sands region of Canada, as well as contributions from acquisitions completed in 2004 and earlier this year, which in particular resulted in year-over-year growth in our Well Site Services and our Tubular Services segments.

Our Well Site Services EBITDA was up $18 million or 87.7% year-over-year. In addition, our Tubular Services segment did very well during the quarter due to the impact of slightly increasing prices, continued strong demand and the impact of the Phillips Casing and Tubing acquisition, which as you recall, we closed on June 2nd of 2005. Our Tubular Services EBITDA was up $6.1 million or 42.3% year-over-year.

Our Offshore Products segment contributed EBITDA growth of 3.4 million or 67.2% year-over-year, due primarily to increased activity levels and margins as a result of cost absorption.

Just from a few highlights on our balance sheet, our debt to capitalization ratio totaled 40.8% at September 30th, 2005. Our total debt increased by 51.9 million during the quarter, due to fairly significant working capital investments made, primarily in inventory and our Tubular Services segment. And also we had accounts receivable increases, which were largely associated with hurricane disruptions. At September 30th, 2005, however, we continue to have strong availability under our bank credit facility, totaling $90.4 million.

At this time, I will turn the discussion back over to Doug. He's going to take you through activities on a summary basis in each of our business segments, and then we will conclude with some thoughts as to the market outlook and our guidance going forward.

Thank you, Cindy. What I'd like to do is go through each of our three business segments and focus on some key operating and financial statistics.

First of all, we will go through Well Site Services. Revenues were 141.5 million in the third quarter, up 11.6%. EBITDA was 38.4 million, up 27.9%; and more importantly, our margin was 27.2% in the third quarter compared to the second-quarter margin of 23.7%.

The sequential increase in revenues and EBITDA occurred primarily due to the impact of acquisitions in this segment, predominately the Stinger acquisition, coupled with the strength in our land drilling and a combination support business for Canadian Oil Sands drilling. EBITDA from Oil Sands grew over 6.3 million on a year-over-year basis.

Our land operations were very strong sequentially in both revenues and EBITDA due to strong utilization and improved pricing. Our average daily revenues were up $400 on a sequential basis; they were up to $10,800 a day versus 10,400 in the second quarter. And our daily cash margins increased by $800 a day to $4200 a day from 3400 in the second quarter. As you will recall in our second quarter, we had a troubled turnkey job that cost us approximately $800,000, or about $422 a day, in that quarter.

Looking at Offshore Products, our revenue was basically flat on a sequential basis. However, EBITDA was 8.3 million, up 5.4% from the second quarter. Our margin did increase to 13% versus the 12.4% in the second quarter. These margin increases were up significantly due to stronger activity levels and improved cost absorption.

Our backlog at the end of the quarter was 119.4 million compared to 113.5 million at the end of the second quarter and 87.3 million one year ago.

In Tubular Services, our revenue increased 12.2% to 188.3 million; EBITDA increased 10.8% to 20.4 million; our gross margin declined to 12.3% from 12.7%, reflecting a full quarter's revenue in margins from Phillips; and our EBITDA margin was 10.8% compared to 11%.

Year-over-year, our tons shipped was 104,100 compared to 100,600 in the second quarter. Year-over-year improvement in volumes were due to improved demand, increased OCTG prices and the benefits of the Phillips acquisition. Our order book remained strong during the quarter, with the order book being 300.7 million compared to 295.1 million in the second quarter of 2005. Our inventory increased by 51.8 million during the quarter due to increased volumes.

Our prices increased slightly on our purchases during the quarter due to mill price increases; this was an increase of about 2.5%. Approximately 71% of our OCTG inventories were committed to customer orders at the end of the quarter. OCTG industry inventories increased significantly during the quarter due to hurricane-related issues. However, supply on the ground remained reasonable at the current rig count. We estimate about a 5.5 month supply on the ground.

To summarize our outlook for the balance of 2005, looking first at Well Site Services. Our year-over-year results in Canada were much improved due to the impact of Oil Sands construction activity in this region. This trend will continue for several years. Our land drilling utilization and pricing is strong and should continue throughout 2005. Our 27th rig spudded its first well on August 21st in the third quarter.

Rental contribution should continue to increase due to acquisitions completed, rig count improvements and improvements in the capacity of our equipment. The fourth quarter should be moderated by Gulf of Mexico weaknesses due to hurricane-related damage.

Overall, we expect continued strength in activity in the Well Site Services led by land drilling activity, the acquisitions that were completed, the impact of price increases and strong contributions from our Canadian operations

In Offshore Products, third-quarter revenues were basically flat; EBITDA increased 5.4% sequentially, evidencing improved activity levels and cost absorption. Our backlog improved from June 30th. Our mix of products is also improving, with higher margin products in our backlog. As a result, our Offshore Products segment operating results should continue to improve, given increased backlog, improve product mix and the impact of the facility consolidations done last year.

In Tubular Services, our sales mix is heavily weighted to alloy grades. Price increased slightly during the third quarter for alloy grades, as mills implemented additional price increases. We expect the mills to increase price for alloy products in the fourth quarter by approximately $100 per ton.

Carbon grade pricing held up during the quarter. Our margins remained very strong in the third quarter due to customer demand and the level of pricing. We expect to continue to realize strong revenues during 2005, with current activity levels, realization of price increases and the benefits from the Phillips acquisition.

And looking at the fourth quarter, fourth-quarter earnings should be up sequentially in virtually all of our business segments. Fourth-quarter results will likely be muted somewhat by slow recovery of activity in the Gulf of Mexico. However, we should see some benefit in our Offshore Products segment from repair-related activities.

In addition, fourth-quarter results in our Well Site Services segment will be impacted by normal holiday downtime. This will concur (ph) in our drilling, rental tool and our Oil Sands areas. Despite these potential delays, fourth-quarter 2005 or earnings should grow sequentially and be in the range of 60 to $0.65 per diluted share.

In addition, we plan to adopt stock option accounting in the first quarter of 2006. We expect the impact of the adoption to approximate approximately five to $0.07 per diluted share on an annual basis.

We'd be pleased to answer any questions you might have.

(OPERATOR INSTRUCTIONS) Bill Herbert of Simmons.

Good morning. First question is in relation to the backlog for Offshore Products. On the one hand, a relatively anemic build from the June quarter; on the other hand, I've got to believe that the order flow or at least the dialogue with respect to the upgrade of these mooring systems for some of these deepwater rigs has got to be encouraging, and that perhaps the order flow and the potential for backlog build is better than what the third-quarter numbers indicated. Is that a fair statement?

Bill, that is a correct statement. What you had was that during August and September, which was all the hurricanes, all activities slowed down, including the bidding and the engineering and the fitting out of these projects. So we saw a deferral of activity in the last part of the August and September with respect to activities we were bidding on and negotiating contracts.

So the bidding is increasing and we expect the awards to be coming down the road at a more rapid pace.

Can you specify in terms of what kind of bidding is unfolding and what kind of dialogue you're engaged in with customers, and give us some specificity with respect to what is going on on the mooring front with respect to upgrading mooring systems for deepwater rigs in the Gulf of Mexico? If you don't mind.

Let me give you an overview and I'll let Cindy discuss the mooring system situation. We're seeing increased bidding for mooring systems, but in addition for deepwater production facilities, TLPs, FPSOs. And also we're seeing increased activity for our pipeline products and especially our pipeline repair products. So we're seeing increased interest and requests for proposals in all of these areas.

With respect to the mooring systems, Cindy can update us on that.

And just (indiscernible) to be a little more specific when we talk about kind of the activity on the TLPs and FPSOs, I mean, obviously some of the key work that is out there, we are anxious to participate in. We've gotten a little backlog off Neptune at this point and there is some more potential there.

Shinsey (ph) and Akpo are two key projects that we are actively working on that are yet to go into our backlog. And then that's really on, again the production infrastructure, which is key in terms of volume. It is also key in terms of mix, which we've talked about in the past.

And then on the other points, there's been a lot of press, even at the end of the second quarter but certainly with the most recent storms, with respect to the potential for mooring system upgrades. And I guess the key obviously there is we do expect that to come and to affect rigs active in the Gulf of Mexico.

You did mention Noble. Of course, they came out on their conference call and announced plans to upgrade those mooring systems and they gave a pretty broad range in terms of work. We have been very active with Noble in the past and hope to continue to do their work for them prospectively. We think we do have an advantage as long as we do a good job and bid appropriately, because we have content on their rigs already.

In their conference call, they kind of gave a very broad range in terms of the cost and scope of those upgrades, and it ranged from, as our recall on their call, 15 to 55 million. And we believe that the higher end of that range is associated really with a new system, as opposed to upgrading, say, from 9-point system to a 12-point system, which is what we would expect to receive. So kind of order of magnitude in terms of our content on an upgrade is probably in the range of 8 to 10 million, depending upon which rigs that they do and what the ultimate scope of work is at the end of the day for them.

One thing, that is good for us, even though it's not huge in terms of size. We expect them to do about 5 rigs that will span a period of probably two do three years. But that is work that we have just been void from in past years, and it's very key to fixed cost absorption in one of our major facilities, which is based in Houma, Louisiana. So having that base of business would be very good for that operation.

And you said that the revenue content on a per-rig basis was likely to be 8 to $10 million per upgrade?

Per upgrade for us, that is correct. Pardon me?

It's just because you said that's not very large, and I would think that that is actually quite large. But that is --

I just meant it's the lower end of the range that Noble put out on their call of 15 to 55. But it's very significant for us, you know.

Right. And then the second subject, if you will, is I was struck by the fact that you mentioned that carbon pricing was holding up. Because what we gleaned from the OCTG participants on the third-quarter conference calls was that carbon pricing had declined on average by about 6% quarter-on-quarter.

So do you still expect carbon pricing on average to hang in there going forward or what is your perspective on that?

Well, we are just closely watching the inventory situation. There was a pretty significant slip. We think a lot of that is due to timing delays associated with the hurricanes. But we just are assessing it. We just got the OCTG situation report in a couple of days ago, and were trying to assess that. And obviously, that's going to be the key -- I think supply is the key to prices holding up. And when we said they hold up, a pricing within 4 or 5%, we didn't see much deterioration with our products and our customers.

The outlook we still are pretty bullish about for OCTG products generally. We see the activity that we've seen in the quarter. And again, historically, we have been heavily oriented towards alloy grade. We still are, but the Phillips mix altered that a bit, and I kind of did the math before I walked in here. Just for the quarter, the Phillips acquisition itself represented about 20% of our tonnage sold in the third quarter, and that could really speak for the sequential margin decline pretty much that occurred during the quarter.

So really from our standpoint, the Phillips acquisition -- yes, it is carbon based and there are more issues there -- it's a very good acquisition for us. It's in a market that we wanted to be in. And clearly, the alloy grades have shown more strength than the carbon grades, but we haven't seen any fundamental weakness or deterioration in those carbon grades on a relative basis.

What is your carbon alloy mix now as a percentage of tubular goods sold?

Again, I haven't redone the math on that. We had it for last year and I think we were about 80% alloy. Instinctively, just with the mix of business towards land and the Phillips acquisition, I'm going to say it's likely to be in the kind of 65 to 70% range. But again, we haven't asked the group to kind of redo that at this stage.

All right. That is all I have. Thank you.

Terry Darling of Goldman Sachs.

Thanks. I wanted to understand some of the things in the Tubular Services segment as well. I guess first off, Cindy, the contribution on the tonnage sold from the acquisition, if you back that out, you had a pretty sharp decline in your base business, which the increase in the backlog between Q1 and Q2 would not have led me to expect. Presumably there was some hurricane impact there. Wondering if you can help us with what that might have been.

There absolutely was hurricane impact. And you see that in our numbers and I think that's what you see in the industry inventory numbers as well. I did a pro forma second Q analysis, assuming that Phillips was in there for the full quarter at the rate that it was in there at June, and I think that is to your point. That would have implied a second-quarter volume of approximately 115,000 tons.

But as you point out, it was just in excess of 104,000 tons. So if you assumed everything was thought on an equal basis, which of course it is not, that does imply a pretty sharp decline.

And that is why we said in our notes, it's hard to quantify exactly what is storm related and what is not. But clearly, there is a tonnage differential there and we know intuitively, instinctively in our offshore locations that those sales were delayed as a result of the storm.

That is one point. You see an inventory build in our inventory. Same thing with the inventory. We believe that largely to be storm related again. And our backlog, you aptly put up, is increasing also. That is, again, very I think consistent with the theory that a lot of this was storm-related deferrals.

Okay. And then sort of the same question in terms of hurricane impact on the margins, beyond just the pure tonnage impact. What other extraneous costs might have hit the margin there as a result of the hurricane?

Well, there is really none in our Tubular division, because, you know, our facilities and the casing in this production tubing is unharmed. So there is no ancillary cost. I wouldn't look to that margin -- I think the margin deterioration was sequentially from 12.7 to 12.3 -- am I right on that? I've got to pick up my (multiple speakers).

Close.

-- on a gross margin basis. So it was not that significant, and and when you factor in the higher percentage mix coming from Phillips, I personally think our margins held up pretty consistently with the second quarter.

Terry, we have yards that store our pipe in South Louisiana. We were affected there in that there was flooding, we couldn't get to the pipe; the pipe wasn't damaged. But that reflects in our sales volume not being as high as it might have been if we did not have the hurricanes.

Ultimately trying to head towards a better understanding of what your margin expectation for Tubular Services for the fourth quarter. Can you step us through what you are thinking there?

We are obviously reluctant to put out a specific number, just because we are one month into a three-month quarter. But the month of October has been strong for us. When we put out that guidance range, as you know us to be, we were very conservative on two points. The issue that concerns us is going to be mix, depending upon Gulf of Mexico recovery more than anything else. And I think that is kind of a key item, is the mix that's coming out right now.

So we have obviously, if you do the math, you look at that fourth-quarter guidance range, we are anticipating the possibility that those margins are sequentially down. I will tell you October looks very good so far.

What we've seen is the pent-up demand that resulted from the hurricanes is affecting our month of October, and we expect it to continue into November.

Let me just understand what you really mean there. So you --

We're seeing high activity levels reflecting the slowness that we experienced in September and August due to the hurricanes.

Okay. Let me just back up to Cindy's earlier point. So you are anticipating down sequentially because of mix and you are talking about the acquisition mix there?

Well, right now, with all the damage in the Gulf of Mexico, obviously the number of rigs working are down.

Okay. So the onshore side, right?

Yes. And as you know, that offshore mix is more oriented to the higher grade alloy product. So the mix could go against us. We may be too conservative in that guides range, but we want to be sure that everybody considers that as a possibility.

Okay. But October was higher -- or so far or what have you. The comment you made is higher than the average we have seen in the third quarter reported?

It's higher than what we assumed in our projection range.

Okay. And then just to shift gears and ask for some perspective on how you're thinking about acquisitions going forward. Do you see a number of opportunities and are optimistic or is the bid (indiscernible) spread widening there?

You know, we been so active all along, it's almost a matter of course with us. And a lot of it depends on management time and attention to the process. But we're continually looking at opportunities. But the first path is obviously the strategic fit and the opportunities that they have for us.

We still have a portfolio. We quite frankly have been in the process of rebuilding that. We were just so busy in the first half of the year closing the acquisitions that we had on our target, doing the convertible debt and many other things, that we have had to kind of rebuild that portfolio to look at.

But we don't see that our pattern of activity will change and normal our (ph) pricing criteria and our acquisition criteria. We have passed on, say, one or two deals that were pricing related. We might have had those issues despite the strong market. But I see that the pattern of activity will continue as it has in the past. But there's nothing imminent at this stage.

Thank you for that. And last question, in your guidance, the assumed sequential pickup in Canadian accommodations business, can you sure that assumption with us?

We had not assumed too much sequential activity. The timing of the winter is always going to be the key determination there. And we had a reasonably good Q3 on a relative basis with the pickup and rig count, although not all of the increase in rig count was in campable areas.

We have several factors at work there, Terry. If we have an early freeze, we get to go to work early, but we have the startup expenses associated with that that might mitigate the benefit, since we expense those move-in costs.

And the second time is we've changed our emphasis, so we're more dependent upon the Canadian Oil Sands accommodations' revenue and logistics revenue and catering revenue. And these operations generally shut down for the holiday periods, Christmas and New Year's. So that will temper down also. And this results in, as Cindy indicated, that the projections for accommodations don't show a significant uplift.

Thanks very much.

Will Foley of Sidoti & Company.

Good morning. Cindy, first question is for you. I'm just trying to get a sense of what you think is a reasonable run rate for SG&A and appreciation over the next few quarters.

Bear with me just a second. On our depreciation, right now -- obviously, you've followed our activities and our quarterly announcements. And I won't say we've refocused more toward organic spending, but we've had lots of opportunities that are created, particularly in the Oil Sands region. And so you've seen a ramping up of our depreciation. But again, in our most recent Q, we had estimated about $88 million of capital, which is up from, say, 43 million that we budgeted at the beginning of the year.

Our depreciation for the fourth quarter is estimated at about 12.5 million, considering amortization as well, the combination of the two. And we will give you updates at the fourth quarter with respect to 2006 once we finalize our CapEx budget for the year at that stage.

Our SG&A at Q3, again, that encompasses a decent amount of acquisitions between the Phillips, Stinger, Noble, Elenberg. So yes, you have seen that ramp up throughout the year. But I think the level that you see in Q3 right now is considered run rate at this point in time.

And everything -- all those acquisitions are now in there for a full quarter, whereas you had partial quarters in Q2. So I would look at Q3 as run rate at this point.

Do you have a sense of what the tax rate is likely to be in 2006?

We're estimating a tax rate at around 37%. And I would leave that unchanged at this stage.

Okay. And then just one other question on acquisitions. Given where your debt level is currently, do you see any constraints in terms of acquisitions, just in terms of taking your debt any higher?

Right now, our debt to cap is higher than it has been at about 40%. But we know that when we closed the level of acquisitions that we did. We do generate extremely strong free cash flow and would pay that down rather quickly absent making those acquisitions. As I mentioned in my commentary, we did have some quarterly bills and working capital. A lot of that was associated with the storm, both in terms of our Tubular Services inventory and receivables. So I see that slipping some -- I don't know how much -- in the fourth quarter. It's obviously activity dependent.

But we're not concerned about the debt level at this particular stage that we're at. And we've preserved pretty good availability under our bank credit facility with the issuance of the convertible bonds that we closed in June and July.

So we feel pretty good about it and we're obviously responsible managers, I would say, of our balance sheet. And we wouldn't overlever the Company if we didn't feel pretty comfortable with the timing of those cash flows coming back.

Okay, that is all I had. Thank you.

Jeff Tillery of Pickering Energy Partners.

Good morning. Just wanted to get your thoughts on the mix of business and the combination segment going forward in terms of rental versus sales and what your take is on margins going forward?

Obviously, you've seen very strong growth in levels of activity, largely associated with our Canadian activities in this segment on the revenue line item. And the EBITDA contributions have been growing at a significant level as well, albeit if you look on a year-over-year basis at reduced EBITDA margins, we hope we have been clear on that in the sense that the Oil Sands work, which is our key area of growth, is changing that mix more toward manufacturing revenues and towards facility management type activities as opposed to rental of owned equipment fleet, where there are higher margins. But the flip side of that is they are higher capital employed. So clearly, we look at our activities on a return on invested capital basis.

But if you look on the trendline just year-over-year, almost every quarter, you can see that the margins were anywhere from, say, 3 to 4 percentage points on an EBITDA margin basis down year-over-year. That is mix issues. And right now, with the level of growth in activity in the Oil Sands, we would see the EBITDA margin type level that you see in '05 continuing into '06 because of mix. And again, the mix will continue to be weighted more toward Oil Sands activities than the traditional drilling camp rentals of what you've seen.

So I think at this stage that the margins you have seen are a good proxy for activity in '06. Obviously, Q1 the margins will be up similar to what you saw this year and what you have seen each and every year, because that is what we do on a relative basis -- put out the higher percentage of our drilling camps, which are higher EBITDA and gross margin type activities.

That is helpful. Can you talk a little bit about the Gulf of Mexico impact on the rental tool segment, specifically? Was that 1 million plus EBITDA impact in the quarter, do you think?

It was -- I'm trying to pull through my notes. We ask each of our business segments, obviously, to estimate the impact from the storm activities. And we always see that in our rental tool business, and they did a very thorough analysis, and it is 1 million plus impact on the rental tool business, based on the estimate that they've come up with.

And again, we had a number of store locations and a lot of those are offshore locations where the predominance of their work comes from that (indiscernible) activity, particularly in Houma and Broussard for us.

And then we also have some activities in our (indiscernible) tubing that were down. So again, you can't always say that just because quotations are down it's 100 related to storms. But in reality, we do expect that that impact was in the range of, say, 1.5 million for our rental tool operations -- on a pretax basis.

All right. IN my last question is, we've seen recently the Chesapeake acquisition in Appalachia. What are your current thoughts on building additional mix for cap start (ph) for deployment in that region?

We're aware of this activity, and we're exploring the opportunities to add rigs in that area. We have 4 rigs in Appalachia right now. We have another rig that is under construction that we've dedicated to the Texas market. However, we can reposition that to Appalachia if there was a strong market there. Plus we feel that we can drive up our construction activity, put out more rigs, if there is a market that will sustain that (indiscernible) operations for us.

All right. Thank you, guys.

Ken Sill of Credit Suisse First Boston.

Good morning. On the Tubular Services, to beat a dead horse just a little bit more, I guess to summarize it, the revenue loss was maybe 5 to 10% from the hurricanes? So you're saying your run rate would've been about 114 million maybe?

I just said if you looked -- that specifically that was a tonnage comment.

Yes, okay.

And you are absolutely correct. If you look at that, that is kind of a 10% number. How much of that is storm related and how much of that is just customer buying activity is that (ph) debate. So we are sensitive to that. But we do think that somewhere between, say, 5 and 7% may be hurricane related and the balance is more related to just typical customer buying patterns.

Okay. And some of that is going to come back this quarter, based on the comments on the orders being pretty good.

Based on what we see in October, we would think that is the case.

Okay. Now, the margins there have held up very, very well. And I remember a couple of years ago, you guys were thinking maybe 4 to 5% sustainable. And then with the Hunting acquisition and Phillips, that looks like that has kind of moved up. Does your guidance assume kind of maintaining double-digit margins in the Tubular Services business for the next quarter or two?

Yes.

Okay.

As we mentioned to Terry, we still conservatively saying they are likely to be sequentially down. We will see (multiple speakers) November and December. But nonetheless, yes, double-digit margins.

Yes, not much down. And then you did say on the Offshore Products that the backlog should build a little bit better as people come in and order for the hurricane repairs. How fast will that start showing up in revenue in terms of some of the repair and spare parts and things that will have to go into repairs?

Based on last year's experience, we expect some impact in the fourth quarter, but what we found that there was also a significant impact in the first quarter of '05 due to the hurricanes in '04. So I would expect that will have some impact -- a smaller impact in the fourth quarter but a larger impact in the first quarter of next year.

And then on the drilling segment, how far out are you guys locked in on price for the drilling rigs?

Well, we actually have changed our position on pricing in Texas. In the past we've been primarily footage there. And under a footage contract, as you know, we are responsible for not only all the rig costs but also for the bits and mud and fuel and things like that. We switched over to a day work basis for substantially all of our rigs in Texas. And this helped us get higher margins and higher effective day rates.

And we will be experiencing some benefit from that in the fourth quarter going forward. But our contracts, again, are multiwell contracts, anywhere from 3 to 5 to 15 to 20 wells.

Okay, thank you very much.

(indiscernible)

Good morning. Can you just focus on the land rig workover side for just a moment? Tell us what type of day rates you are getting in Texas today. And if you could, provide some EBITDA guidance for fourth quarter just on that unit.

We don't do land workovers, so I'm not sure if you're speaking --

No, no. On the land rigs.

On the land drilling rigs.

Yes.

We do have all of the history of our day rate information that we put as an attachment to all of our press releases. The day rate or the implied day rate for the current quarter was 10,800 a day. That compared to 10,400 a day in the second quarter.

And what are you seeing today?

As I indicated earlier, we are pushing our rates. We switched to a day work contract from a footage contract and we are seeing increased rates going forward.

Okay. And would you ever consider spinning off that unit?

No.

Okay, thanks very much.

Thad Vayda of First Albany Capital.

Good morning. Just one clarification -- I didn't catch it. What percentage of -- in the OCTG division, what percentage of your inventory is committed to customers in the quarter?

71%.

71%, thanks. And this applies mostly to Offshore Products, I suspect. You suggested that orders for mooring equipment would do an awful lot to help your cost absorption in one of your manufacturing facilities. I was wondering, could you just give me a sense of what other types of products, what other orders would have the greatest effect on increasing your utilization and cost absorption across your offering spectrum?

Boy, I tell you, if I look at -- there's different elements. The key, I'd say, mix items, meaning gross margins and backlog, not necessarily absorption, are TLPs, FPSOs, etc. When we talk about just pure cost absorption, we've got three primary facilities. One is in the UK and it's heavily oriented towards TLP type activity, deepwater production infrastructure. And it has historically had pretty good utilization levels, so it's not so much of an issue.

As you've known, we've consolidated our Houma-based manufacturing operations and our Houston-based manufacturing operations. Those are two kind of key areas that are highly sensitive to activity levels. As it relates to Houma, the major product lines there are cranes and winch systems. And again, we've been almost virtually void of winch systems since the late '90s. We've had, I guess, one major upgrade in the shop in the last five years or so. So that would be very key and beneficial to have continuity of activity in that shop over an extended period.

In our Houston operations, we do a combination there, but the largest driver today is on subsea pipeline installation, new systems as well as repair products. We also offer a huge range of other subsea type products and drilling support products. But the weight in that facility today is on the subsea pipeline side. And again, that facility benefits from storm-related repair activity. The Houma facility benefits from the incremental work on the mooring systems bases.

And we have a fourth manufacturing facility also that does the flex joints, and that is operated at full capacity. So as Cindy indicated, the two areas that we're not operating at full capacity are Houma and Houston. Houma will benefit from the mooring system activity and crane activity and the pipeline activity will affect Houston, which should significantly help their operations.

Okay, great. Do you talk about aggregate levels of manufacturing utilization? I mean, for those two facilities, (indiscernible) would be greater than 60, 70% utilized doing other things or is it significantly lower than that?

They are not significantly lower than that. We don't have an accurate handle on that, but they are not lower than that.

Great. Thank you very much.

(OPERATOR INSTRUCTIONS) Mike Clark of Satellite Asset Management.

I apologize if you touched on this, but what was the tonnage inventory at period end?

Let me just grab my notes.

It was 164,000 tons.

Great. In the fourth quarter in the land drilling division, clearly you have the seasonal pickup in the Rockies and you have a lot more exposure there with the Elenberg acquisition. And with the new pricing in Texas, would it be unreasonable to assume that the sequential increase in daily cash margins is greater in the fourth quarter than it was in the third quarter?

Say that again.

You've got the Rockies stronger seasonally and you've got different pricing in Texas. Can we assume or is it unreasonable to assume that the daily cash (indiscernible) in the fourth quarter will increase more than they did in the third quarter? In the third quarter you were up 800. Is that a good bogey to start with in the fourth quarter?

Our cash margins were up 800 a day.

Yes.

Yes. Two caveats. On a true comparison basis, they are really up about 400 a day because of a problem well that we had in Q2. So plus or minus 400 a day. And normally, I would have said you will see a greater amount in Q4. It will be tempered by utilization levels due to the Thanksgiving holidays and the Christmas holidays. We've seen that most every year, where your operators -- it's not so much a decision that we make, but particularly when we're drilling a well every five to seven days, they may choose to obviously take a week off for the holidays, depending upon their level.

So I would say normally, yes, we'd expect it to be up sequentially, but it's going to be tempered a bit by the holidays.

Due to the changing nature of our contract situation, we would expect it to be up because we have switched over to day work contracts and we have gotten increases. But as Cindy said, because of utilization it may not end up a net positive on the fourth quarter (ph).

And I would point out to you too, there was a lot of pent-up demand in Wyoming, given the wet conditions in the second quarter, and our utilization rates this quarter in Wyoming were actually 88%, which was very strong.

Got it. Thanks, guys.

(OPERATOR INSTRUCTIONS) (indiscernible)

Hi, just a quick follow-up. What would you say your new builds on land rigs -- your capacity is there?

We'd been building one at a time, and it takes us, depending upon the delivery of the components, it will take anywhere from 4 to 6 months to build them. So I would say with the deliveries we have right now, we're looking at building -- with our present work force, we're looking at building probably two a year.

Okay. And do you believe if you had demand you could expand that and to what?

We could expand that if we could find the manpower to do it. It's our desire not to do that at this time. I think we're selectively building them and putting them into markets where we can get attractive rates. We're building them at our AFE amounts. We've had experience in the past where when you build up your activity significantly that you lose some of your cost control. We don't want to do that.

Okay. And what is the cost of a new build for you?

3.5 to 4 million, depending on how it's completely outfitted.

Okay, great. Thank you.

You have no further questions at this time.

Thank you very much for joining our conference call. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Everyone have a great day.