Oil States International Inc (OIS) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2006 Oil States International earnings conference call. My name is Shanique and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Bradley Dodson, Vice President and Chief Financial Officer. Please proceed.

Thank you. Good morning. Welcome to the Oil States second quarter 2006 earnings conference call. Our call today will be led by Douglas Swanson, Oil States' Chief Executive Officer, and Cindy Taylor, Oil States' President and Chief Operating Officer.

Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that 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 now turn it over to Doug.

Good morning and welcome to our conference call. We are pleased to announce that Oil States International completed the second quarter of 2006 with outstanding results led by strength in our offshore products group and our Canadian oil sands activities. In addition, our business lines that are driven by North American drilling activity all performed very well, benefiting from the high activity levels during the quarter.

Net income was $0.88 per share, an increase of 80% compared to the 49% per share reported in the second quarter of 2005. Included in current quarter results was a benefit of $3.8 million of net standby revenues and minimum guarantees on facilities in Canada, or approximately $0.05 per share, and a $0.05 per share tax benefit from statutory rate changes in Canada.

We significantly outperformed our previous guidance range, due largely to contributions from our Canadian accommodation activities and the tax rate adjustments.

All of our business segments reported significantly improved year-over-year operating results and were up sequentially as well, except for tubular services, where we had approximately an 8% sequential reduction volume sold and a 5% reduction in EBITDA. Our offshore products segment was up sequentially in revenues 19.7% and EBITDA 40%. Our offshore products EBITDA margins increased significantly to a record 19.1% for the quarter, benefiting from high margin service and installation work in addition to increased product sales.

The mix of OCTG product shift during the quarter continued to have a greater percentage of carbon versus alloy due to the strengthening land-based business activity, in addition to the lingering effects of last year's hurricanes in the Gulf of Mexico activity, which resulted in reduced demand for large OD seamless alloy tubulars. Carbon grade OCTG accounted for approximately 29% of total OCTG revenue, up from 25% in the first quarter.

Our well site services segment was down sequentially in revenues 19.3% and EBITDA 30.3%, due primarily to seasonality in our Canadian operations, both our accommodations and rental equipment activity.

At this time, I'll turn the conference call over to Bradley Dodson, who will review our financial results.

Thank you, Doug. For the second quarter of 2006 we reported operating income of $70 million on revenues of $463.4 million. Our EBITDA in the second quarter was $84.1 million. These results compare favorably to the $42 million of operating income on revenues of $358.5 million for the second quarter of 2005. The second quarter 2005 EBITDA totaled $53.6 million.

Our current quarter performance represents a 29.3% year-over-year increase in revenues and a 56.7% improvement in EBITDA.

Primarily due to the seasonality in our Canadian operations, our revenues were down 6.6% sequentially, while EBITDA decreased 19.6%.

Our net income for the second quarter totaled $45.3 million, or $0.88 per diluted share. As Doug mentioned, both were up roughly 80% from the second quarter of 2005.

As Doug also mentioned, our current quarter results reflect the benefits of improved offshore products activity and margins, strong results in Canada despite breakup, and continued strong North American drilling and completion activity.

Key contributors to Well tech services growth were the acquisition of Stinger, expansion of our drilling rig fleet, pricing gains in most of our business lines and strong activity in Canada.

Our Tubular Services segment did very well during the quarter, due to continued strong demand for OCTG and the impact of the Phillips acquisition which we closed on June 2, 2005.

Offshore Products revenues in EBITDA increased due to high activity levels and increased cost absorption.

Stock-based compensation expense reported during the quarter totaled $2.5 million, or $0.03 per diluted share, which was reported in SG&A expense.

Our effective tax rate for the quarter was 32.2%, which benefited from the statutory rate changes primarily in Canada. We expect our rate to approximate 36% for the balance of 2006, resulting in an annual effective rate also of approximately 36%.

Total debt at the end of the second quarter was $395.9 million, a $13.6 million reduction from Q1 levels, as cash flow from operations more than funded our capital spending.

Our total debt-to-cap ratio totaled 34.3% at June 30, 2006.

Capital expenditures during the second quarter of 2006 totaled $30.5 million and we repurchased $3 million in stock during the quarter.

At this time, I would like to turn the discussion over to Cindy Taylor, who will review each of our business segments.

Thank you, Bradley. I'll start with our Well Site Services segment. In this segment we were sequentially down in revenues in EBITDA as expected, due to seasonality in our Canadian-based operations and also due to the gain that we reported in the first quarter of 2006 from the sale of our work-over services business.

Both our accommodations business and our rental tool operations were subject to normal seasonal declines in Canada during the current quarter.

On a quarterly year-over-year basis our revenues on well site services were up $27.2 million, or 21%, and our EBITDA increased $24.2 million, or 81%.

Within this segment, the accommodations business represented 36% of our segmental EBITDA during the quarter, the majority of which was generated in Canada. Although sequentially down due to seasonality, our accommodations revenues increased 15% year-over-year and our EBITDA increased $10.2 million, or 107%.

The current quarter benefited from approximately $3.8 million of net standby revenues and minimum guarantees that were recorded in the second quarter once collection was assured.

Our rental tool business line represented 34% of our Well Site services segmental EBITDA during the quarter. On a year-over-year basis, rental tools revenue increased 50% and EBITDA increased $6.8 million, or 59%.

These increases compare favorably to the 22.5% year-over-year increase in North American rig count, due to a full quarter contribution from the Stinger acquisition, coupled with capacity expansion and price increases in our other rental tools.

Our land drilling operations represented 28% of our Well Site Services segmental EBITDA during the quarter. On a year-over-year basis, land drilling revenue increased 63% and EBITDA increased $9.4 million, or 159%.

Sequentially, our drilling revenues and EBITDA increased 15% generating incremental EBITDA margins of 46.3%. Our average daily revenues were up $1,000 per day on a sequential basis and our daily cash margin per rig was up $500 a day. Of our 28 rigs that are operating, the majority are currently drilling for oil.

Now, if we can shift to the Offshore Products segment, here our offshore products revenues increased 20% sequentially, while EBITDA increased $5.1 million, or 40%. The revenue increase resulted from high activity levels in all of our manufacturing facilities. Our EBITDA margins reached record levels at 19.1% during the quarter, compared to 16.3% realized in the first quarter of 2006.

Equally promising was the backlog increase of 27% in the quarter, bringing our total backlog to $280.6 million from our prior record backlog of $220.8 million reported in the first quarter of 2006.

The sequential backlog increase was primarily attributable to the receipt of the [Shinzee] connector products award, which totaled about $27.6 million. Additional connector orders for Neptune, conductors for projects in Azerbaijan, as well as increases at our pipeline products and other drilling equipment, particularly BOP stack integration work.

Key contributors to revenue during the quarter included work on Noble, [Clyde Boudreaux] and [EVA1] winch orders, strong drilling rise or flex joint activity, installation work on the [Ovang Atume] order, as well as strong activity in our pipeline products and other drilling and marine equipment.

Now, if we can go to the final segment, which is our Tubular Services segment, I'll take you through some highlights of our activity there. Our Tubular Services revenue decreased 5% sequentially due to a 7.8% reduction in tonnage shipped. EBITDA was down $800,000, or 4.5% sequentially. However, we did realize year-over-year improvements in volumes due to strong customer demand and benefits of the Phillips acquisition.

Our volumes were up 16% year-over-year. Our order books strengthened 19% during the quarter, primarily due to the award of program work, and our current quoting activity does remain high.

Our inventory increased by $4 million during the quarter due to a slight volume increase. Our tonnage and inventory at June 30th totaled 174,537 tons, which was up about 2% from where we closed the first quarter at March 31st.

Our average price per ton in inventory declined only modestly during the quarter, simply due to product mix. We closed the quarter with an average inventory value of $1,541 per ton, compared to $1,552 per ton at March 31, 2006.

Approximately 65% of our OCTG inventory were committed to customer orders at the end of this current quarter.

OCTG industry inventory were fairly flat during the quarter on a months of supply basis, although total inventory tons did increase. Average inventory on the ground remained at approximately 5.2 months of supply, based upon OCTG situation report estimates.

I'm going to turn the call back over to Doug. He's going to give you some of our summary comments and close with our outlook.

Thank you, Cindy. I'll go through each of our business segments.

In Well Site Services, our year-over-year results in Canada were very strong during the quarter due to continued high activity levels in the region, despite breakup in the benefit of collecting the standby revenue and minimum guarantees. The outlook remains very bright due to the opportunities for the oil sands related accommodation, given the construction activity in that area.

Land drilling utilization and pricing remains strong and should continue throughout the remainder of 2006. Our incremental margin growth will be moderated by cost increases. Our 29th rig will be working in August of this year.

Rental tool contributions should remain strong due to planned activity additions, improvements in the capacity of our equipment and benefits of price increases.

In our Offshore Products segment, second quarter revenues and EBITDA increased sequentially, evidencing improved activity levels and cost absorption. Our backlog position was up significantly from prior levels attained at March 31st. Quoting activity remains very high. Key project potential in the markets include conductor work for other production facilities and additional mooring system upgrades on other rigs, including the remaining Noble work. The outlook for the remainder of 2006 and 2007 is robust.

In Tubular Service, our sales mix continues to be weighted to a greater mix of carbon grade products, due to the strong U.S. land rig count, coupled with lingering effects of the 2005 hurricanes on Gulf of Mexico activity. Our margins were flat with the first quarter due to relatively static mill pricing. However, the mills have generally announced price increases in the range of $50 to $110 a ton, which are beginning to take effect.

We expect to continue to realize strong shipments in revenues during 2006 with current activity levels. However, the third quarter margins are likely to be flat to slightly down until alloy inventories on the ground decrease.

Looking at our guidance for the third quarter, our guidance range for the third quarter is estimated at $0.82 to $0.87 per diluted share. Our depreciation and amortization should total $15 million in the third quarter. Our effective tax rate is estimated to be 36% for the balance of the year. And lastly, our capital spending for 2006 is expected to total $132 million.

At this time, we'd be more than pleased to answer any questions you might have.

[Operator instructions] Our first question comes from the line of Bill Herbert with Simmons. Please proceed.

Hi guys, that was close.

Hi, Bill.

Nicely done, first of all, with respect to your results. Secondly, $0.82 to $0.87 for the third quarter, can you frame the assumptions that went into arriving at that guidance?

I'd be happy to. I mean, if you take our current quarter, it was obviously extremely strong. We did mention that we had a couple of-- I'll call them somewhat unusual activities in that we had the Canadian tax rate change, which we mentioned in the press release and the significant level of standby revenue and minimum guarantees in there.

So, we kind of factor that down in our thinking and our guidance range obviously encompasses a recovery in Canada. It's somewhat of a recovery from Q2 as everybody knows. As we go forward on the tubular side, we're looking for modest volume increases, modest price increases. And, as Doug mentioned, the likelihood of flat to slightly down margins as we go into the third quarter, given the overall environment, which I think has been framed very well by prior companies who have released earnings.

All of the other U.S.-based Well Site services business we think do very well. As Doug mentioned, we're continuing to see some price escalation on the drilling rig side and that will be moderated somewhat by price and cost pressures, particularly at the wage level. Again, it's a very dominant theme, I think, this quarter and we're seeing the same thing.

In our offshore products, we obviously have an outstanding quarter. We hit higher revenues and higher margins on a percentage basis, quite frankly, a little bit ahead of where we thought we would be. The mix in the quarter was good in the sense that we had high service and installation work. I mentioned the [Ovang Atume] installation, which was a large TLC installation contributor in our U.K. business. And we also had a continuation of high service activity in the Gulf of Mexico with recovery efforts there.

We expect that segment to do exceedingly well, not only in the forward quarters, but into 2007 and beyond. The timing and mix is always a bit of a question there. So, we haven't assumed too much in terms of revenue growth. Our margin appreciation at this stage is simply because of a favorable mix in the second quarter and, obviously, real good through-put through our facilities. There's absolutely nothing negative there, but it will be impacted by timing of shipments and mix. But, this business is doing the best that obviously we've ever seen. And I think you know that.

And I guess the way that I looked at it is that, ex the benefits of the tax rate here, I think you had a clean sort of $0.83 number. Because at this stage in the cycle, wouldn't you view the standby revenues as more of a recurring operational item?

Bill, in the past, we've billed these standby revenues and these minimum guarantees and have been unable to collect them. But, I think you're correct in your assumption. What we've seen is that the supply and demand situation with respect to Canadian activities, the oil sands activities, the other E&T activities, regarding accommodations is such that we believe that we will be able to collect these standby revenues in the future.

And so accordingly, I just thought it was a little bit unusual, given the $0.83, that there was a prospect-- and I think it's remote-- that you guys have an $0.82 quarter, which is the lower end of your guidance and I just wanted to clarify that.

Yes, the only comments I'll add to that is that the strength of those minimum guarantees and the standby revenues really come, obviously, in the first quarter, when you're all out at the highest demand. We do have them throughout other quarters and it's very unclear until you exit the winter season what the total amount is and what the collectability will be of that. So, to a certain extent, you've got a tail coming into the second quarter that was really due to strong activity in the first quarter.

As you go through breakup and into the third quarter, the utilization levels on traditional drilling businesses don't put you in that position. We will have some, obviously, in the oil sands pieces of the business, but they're more likely to be prevalent, obviously, kind of late December, as typical, and early first quarter due to the severe tightness. And again, outlook is outstanding, but you've really got to question what are you going to see in the third quarter, given that there's plenty of equipment when you're coming out of breakup.

The point we're making is we believe that they can be recurring going forward, but as Cindy pointed out, there's a seasonality to those and those will be recognized probably in the first or second quarter of next year.

All right. That's fair. And last one here is, I was struck by the fact that the tonnage shipped was lower quarter-on-quarter, yet you're also sort of-- you made it quite clear that the outlook is for higher volumes on a sequential basis, if I understood you correctly. So, then really the question is, in light of that as a backdrop, have you witnessed and are you witnessing any particular weakness, hesitation, softness, wavering on the part of your clients in light of what was a much less certain nat gas environment rallied a little bit here, in fact quite a lot, on weather. And so, E&P sentiment psychology is better. But, notwithstanding that sort of fluctuation in mindset, any particular weaknesses that you guys are seeing in terms of less fervent spending on the part of your customers or less of a sense of urgency?

We measure the bidding activity and our bidding activity has not diminished whatsoever. We do have margin issues that were flat quarter-to-quarter, but the margin is driven by the inventory on the ground and other factors. But as far as the demand standpoint, in the number of bids that we've received, we've seen no reduction in that at all. As a matter of fact, it's very strong.

Can I add maybe two more company-specific comments, if you will. In the first quarter, we had some deep water large awards that did ship. One of them [Tech Media]. I'm kind of at a miss as to what the other one was. And we'll always have issues like that where you have kind of an abnormally large type order go through, or a couple of orders go through.

So, to some degree our first quarter volumes supported that, particularly on the high end alloy large OD side range. If we talk about our carbon grade shipments, they were actually up sequentially. That was more than mitigated by an alloy decline, which again we talked about the sluggishness that has existed in the Gulf of Mexico.

But, as we go forward, it's not unreasonable at all to think that the volumes increase. And again, it's largely going to be driven by land-based work, in our opinion right now, until we kind of work through this situation in the Gulf of Mexico. But we don't see that getting any less demand there. I mean, if anything, the alloy situation from the large OD side has improved. So, overall we feel very confident about the outlook. Again, we keep talking about the Phillips acquisition, it was an extremely well-timed, well-valued acquisition. They are doing exceedingly well and their volumes are growing.

Thank you very much.

My next question comes from the line of Jeff Tilery with Pickering Energy Partners. Please proceed.

Good morning. Staying on the Tubular Services business for a second. With pricing from the revenue per ton up sequentially and carbon grade shipments up sequentially. I'm just trying to understand that a little bit better. Is that just reflecting ongoing pricing increases? Or what attributes to that growth in revenue per ton on a sequential basis?

Well, as you will recall, the mills did announce price increases kind of in the May timeframe, which we do believe are sticking in the marketplace. They were in the range of $50 to $100 per ton. We do think we'll get more benefit in the third quarter than obviously what we saw in the second. But, if you kind of look at our pricing-- I'd have to go back to my detailed notes-- but I think it was up just modestly, about 3%. If you factor that, it was somewhere in the range of about $50 per ton. And mix issues do have impacts for us as well. So, it's hard to give you absolute. But those are the trends that we saw.

That's helpful. Your inventories in that segment have been relatively flat over the past three quarters. We've heard mixed indications from some of the connections providers this quarter in terms of what some of the distributors are doing in terms of their ordering patterns. And as you look out over the next couple of quarters, do you think your inventories are flat from here, down or up?

A lot of it kind of depends on individual size, weights and grades for us in our inventory. We're guessing in the flattest range, but we will time that according to what we see in the marketplace, obviously. But we really don't see a need at this stage to increase our inventories and I think we did a very good job of holding our inventories, quite frankly. We didn't see the kind of buildups that maybe a couple of either the mills and/or premium end finish companies might have mentioned. But we obviously control our inventory with extreme diligence.

And the other thing that, when you have a mix shift, typically the carbon grade products move a bit quicker than some of the longer lead time, premium large OD alloys. So, that probably has some company-specific issues to us in terms of holding an inventory fairly flat.

All right. My last question, working capital investment seems to be tapering off. I mean, you guys paid down some debts in the quarter, bought a little bit of stock back. Can you just kind of touch on how you see spending some of the free cash generating over the next six to nine months and how you view the current M&A market for Oil States.

Well, we did pay down some, about $13 million of debt, during the quarter. We do have obviously more than half of our capital budget coming in the second half of the year, with a lot of that right now being planned on being spent in the third quarter. So, I would think that for the next quarter we should see some small pay down in debt in the third quarter and then probably more in the fourth quarter, absent any new capital expenditure opportunities that we see and then also obviously absent the closing of acquisitions.

On the acquisition activity side, there are plenty of sellers out there, so we've been busy in looking at acquisitions. But I think, as we've mentioned before, the pricing right now can be a little bit outside of where we're comfortable or continuing the diligence of searching for them and evaluating them. And so, we'll continue to discipline, but we're not going to go outside of our evaluation range that you've seen from us in terms of the closed deals that we've done in the past.

All right. Well, thank you, guys.

Our next question comes from the line of Ken Sill with Credit Suisse. Please proceed.

Yes, good morning.

Doug Swanson and Cindy Taylor: Good morning, Ken.

It was a very pleasant press release to read after all of the drilling guys missed yesterday. So, thank you for that.

You picked a bad day.

Maybe somebody will recognize it with stock today.

I don't know. I've got a soda bet on that. I think you did pretty well and somebody else is like, ah, they'll get ignored in all the drilling bad news. But, you guys will win out over the end, as always happens.

In the drilling business, day rates were up nicely. What is the status of your contracts and how much more margin expansion can we expect over the next couple of quarters? Is that going to start flattening out because you've locked down some contracts?

We have very few of our rigs on term contracts, just a handful, Ken. And some of them have been renegotiated in the last two or three months. And we've been able to get, continue to get terms and get increases on those. We've had good increases in the last quarter. We think we can see increases going forward in all of our areas.

However, they are going to moderated as we pointed out by cost increases. We're seeing higher labor costs throughout each of the three geographical areas we operate in that will mitigate some of the increases we have going forward. But, we're still able to get day rate increases as we roll over these contracts.

Well, you've got $500 a day on a $1,000 day rate increase in Q2. But would we expect that to turn into maybe a $200 or $300 a day gross margin expansion?

I think it would be more in that range than the $500.

Okay. I was mistaken. Most of your rigs are working for oil and they've got long term relationships, but they're not long term contracts.

No. In the Permian Basin where we have 17 rigs today, they're all working on oil. They're on a committed basis. We committed for anywhere from 5 to 50 wells and will commit at a specific day rate. When these commitments roll over, we are able to pass on increases.

Okay. And then, going back to guidance. So, essentially, you take the $0.88, back out the nickel for taxes, back out the nickel for the seasonality and the better contract terms and accommodations. So, your guidance is still pretty conservative. Do you guys have any-- I mean, are you guiding for kind of a typical hurricane season? Or, if we get a few hurricanes, is that something that's going to mean the numbers have to come down?

As you know, works very well, we do have as an example, our rental tools business that's exposed in the Gulf down a bit sequentially to provide for hurricane down time, which is a typical phenomenon. So, we don't feel like we would have an adverse correction to the negative. If we do have it, now we have to have a disaster-type scenario, all bets are off. But, the Gulf of Mexico business is one where, even if you have threats of hurricanes, a lot of times operators just won't call out the equipment and the work. So, it has a normal disruptive effect that we have factored into our estimates there.

The rest of our businesses are not so much exposed to that. We do have manufacturing operations in Houma, but those operations should be insulated from any type of threats. And again, unless there's some unexpected disaster-type of occurrence that we would not factor into our guidance.

Just to add to that, Ken, our exposure there has been reduced. We used to have HWC, the hydraulic work-over unit that had exposure to the Gulf. We don't have that exposure. Cindy pointed out we do have that rental tool exposure that, if the hurricanes are there, that equipment is not rented. But we do have some upside to the hurricanes that we experienced last year in our Offshore Products group, generated significant revenue and margins on the repair side.

And then looking at accommodations, you guys had really great growth last year on a year-over-year basis. I guess that was the tar sands. Little bit slower this quarter. Is that kind of a year-over-year growth from the accommodations business going to continue to kind of slow down a little bit? Or are there some other things coming that could push that back up?

Conversely, we think it's going to increase. We had strong activity in the oil sands a year ago due to major capital improvements by [sin crew] we provided a lot of people. Our capital expenditures this year, we're spending about $60 million in the oil sands area to expand our capacity and we see that as our fastest growing area going forward.

And, Ken, just to elaborate. We're somewhat-- this year is somewhat a transitional year with some of our significant facilities there which we talked about. We have talked previously about our PPI lodge which is basically an open facility, meaning it houses a multitude of customers that we are working with Shell to-- in fact, we've taken that facility completely down. It is modular, so it will be available for future work. And we have taken, basically, housed their employees in other facilities as best we can.

We're also, as you know, under construction on two major facilities, Beaver River Executive Lodge and [Attabasca] Lodge, both of which are beginning to accommodate workers in the region, but will not be fully up and running until probably the September-October timeframe. So, those are some transitional type matters that are flowing through our results. But, as Doug mentioned, and as you know just from the news, the long term potential to service workers in that region is really as good an opportunity as we, I think, or anybody else has.

Ken, to put it into perspective, we indicated that capital expenditures this year would be about $132 million, of which $60 million is-- approximately $50 million-- is for Canadian oil sands facilities expansion. So, it's certainly where we see the growth in the future and what we have there is we've got good visibility going forward for the next five to ten years.

Okay, well that gets most of my questions answered. Thanks.

Thank you, Ken.

Our next question comes from the line of Dan [Boyd] with Goldman Sachs. Please proceed.

Sticking with the Canadian oil sands business. Last year you mentioned that about 80% of the Canadian EBITDA was from the oil sands. Was that a similar level this year?

I think that's a missed percentage. I don't have the fixed amount last year, but we've been more in the range of 30% to 35% contribution from the oil sands. But, we would have to go back in time now to figure out. I don't have it at my fingertips. But, it's never been 80%.

Now, it could have been, I guess, in an isolated quarter, second quarter, just because you're down so hard in breakup and, as Doug mentioned, [sin crew] was doing their [UE1] turnaround, so we were just all out in the [Mildred Lake] village facility that they own and our PTI lodge ancillary camp. So, I won't doubt you on that, now that I think through it. But that's kind of an anomaly.

If you look across a year's timeframe, and consider seasonality in the base business, we've been running at 35% to 40% contribution from the oil sands and we think that will increase, but, you know, we had such a strong first quarter in traditional drilling operations that really all the businesses are doing well.

But that's kind of, maybe the muted sense that you're seeing on a year-over-year basis simply because of that UE1 turnaround last year.

Dan?

Hello?

Can you hear me?

Cindy Taylor. Yeah, okay. I thought we lost the call for a second.

Having--

We're having a problem with your connection.

Looking at sort of the run rate and the oil sands business from reoccurring [inaudible - technical difficulty] construction. Are we still with the $26 to $30 million level or is that improving?

That's about right, Dan.

Okay. Jumping over to the Offshore Products, really strong quarter there, with 20% sequential growth. And I understand that the revenue tends to be lumpy. Can you quantify some of the larger items in the quarter?

Are you talking about in terms of the revenue generation on an individual project job? No, I don't have that in front of me, but I gave you the character, if you will, of the work that we had. Again, the [Ovang Atume] installation. Maybe not so much on revenues, but the service and installation work is really [Inaudible - technical difficulty] has a lot of rental equipment that goes with it.

Noble.

The Noble mooring system work that we had in our shop. The activities were predominantly on [EVA1] and Noble supply [Boudreaux] systems. And that, again, is a significant piece of work, Nobel's business we're very appreciative of having. And it really has helped us fill our facility and get the through put and cost absorption that we want there. And that's our home [inaudible - technical difficulty] and our system base facility. We generally support pipeline products and kind of other drilling and marine equipment. And again, we're getting strong demand on all of those product lines.

But there's no one project that I would say that makes a tremendous difference in the quarter. And also recall that we do percentage of completion accounting for the major projects, which we define as a certain size and a certain duration.

So, we don't have some of the issues of needing to wait to ship a project. And when I was talking about timing, we do have some that are subject to shifts, some that are subject to POC, but we are facing what everybody else is in terms of longer lead times for forgings and castings and where we have outsourced work, either to engineering groups or other machining, that can subject us to timing delays from what we anticipate, even if we're using POC accounting.

But, again, I can't think of one thing that is negative there. We're doing everything we can to make the most efficient operations there to continue a trend of strong earnings and cash flow from that business.

That's helpful. So you see this level somewhat sustainable over the next few quarters.

Yes.

Great. And then, one last question, looking at the margin and backlog. It sounds like with the demand situation out there that the margins would be improving in backlog. Can you maybe compare them relative to margins generated during this quarter?

Generated in what quarter?

In the previous quarter, 2Q.

Our margins in backlog had improved in Q1 and they are at least as good, maybe slightly better. We had [inaudible - technical difficulty]. But overall it's up fairly significantly on a year-over-year basis. The absolute value is up, the margin potential is good. And, I'd say importantly, I don't want to have one strong year and be done and we're already beginning to build backlog for future years beyond 2006, which I'm very pleased about. About 45% of our backlog that we currently have booked will extend beyond 2006. So, that further substantiates that this is an on-going strong level of business activity, which we have obviously spoken about in the past.

And so, again, the margins are strong. We do have some lower margin work. We mentioned some of the conductors that are targeted for Azerbaijan. BP's got a huge project there with [Bacoo] and [Claire] and other developments. And those are some lower margin work for us, but it's extremely good work for our facilities. But those are some examples of the issues that we have with our backlog. But, again, we feel very good about our overall position.

Thanks. Good quarter.

[Operator instructions] Our next question comes from the line of Ken Sill with Credit Suisse. Please proceed.

I just had one follow up question on the work over services. You're getting some operating income out of that. I'm assuming that's the equity interest that you're reporting. But, I noticed that there's a differential between kind of the operating income and the EBITDA number. Is that a depreciation or amortization that's coming through that piece of the business?

Well, we have the difference would be some trailing adjustments from the sale process and then there was an adjustment in the gain that we recognized from the first quarter.

Long, over time, you'll essentially just have the equity pickup going forward once the sales process-- a few adjustments from the sales process I think is what you're seeing there. But going forward, you wouldn't expect to see that. It should be just a straight equity pickup.

Is that what you're reporting in that EBITDA line in work over services?

Yes.

Ken Sill. Yes. So the difference between that and the $147,000 of operating income is just adjustments to the gain in the purchase prices.

Right. Just a carry over (inaudible) like SG&A type costs that trails closing the transaction.

Okay, so that wouldn't end up in depreciation. Okay. Great. Thanks.

There are no additional questions at this time. I would now like to turn the presentation back over to your hosts.

Well, again, thank you for joining us and we are looking forward to a good third quarter and we'll be visiting with you next quarter. Thanks so much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.