Oil States International Inc (OIS) 2007 Q3 法說會逐字稿

Good morning, Ladies and Gentlemen, and welcome to the Third Quarter 2007 Oil States International Earnings Conference Call. My name is Mike and I'll be your Operator today. At this time, all participants are in a listen only mode, and we will be taking questions at the conclusion of today's presentation. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Bradley Dodson, VP and CFO. Please proceed, sir.

Thank you, Mike. Good morning. Welcome to the Oil States International Third Quarter 2007 earnings Conference Call. Our call today will be led by Cindy Taylor, Oil States President and Chief Executive Officer. Before we begin, we 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 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 10K and other SEC filings. I will now turn the call over to Cindy.

Thank you, Bradley, and thanks to all of you for dialing into our call this morning. We're going to follow the same format that we have in prior conference calls and I'm going to lead off with some introductory comments. Despite some softness in the quarter in selected North American markets, Oil States posted third quarter results at the mid point of our previous guidance range led by continued strengthen our Offshore Products and our oil sands driven accommodations businesses. Our reported earnings of $.97 per diluted share operationally came in at the low end of our guidance range due primarily to softness in the Permian Basin in which negatively impacted our drilling and rental tool operations serving that market. We also reported an increased share count due to our convertible notes offset by a lower effective tax rate. For the third quarter of 2007, Oil States reported record revenue of $527.4 million, EBITDA of $94.6 million and net income of $50.5 million or $0.97 per diluted share. Our revenues and EBITDA were up 6% and 11% sequentially excluding the second quarter gain on the sale of Boots & Coots Common Stock.

Our Offshore Products business continued to benefit from robust demand for deepwater capital equipment and our accommodations operations were strong with increased activity in the Canadian oil sands region. The strength of these businesses coupled with contributions from the two rental tool acquisitions completed in the quarter mitigated significantly weaker year-over-year Canadian drilling and completion activity and softer Tubular Services margins. During the quarter we completed the Well Testing and Schooner acquisitions for total consideration of approximately $112 million. These acquisitions compliment our existing rental tool operations and follow our strategy of expanding our completion and production services capabilities. Bradley is going to take over and go through details of our consolidated resulting and then I will return to the line and go through and detail our individual business lines as well as give you some outlook support and comments.

Thank you, Cindy. For the third quarter of 2007, we reported operating income of $74.8 million, revenues of $527.4 million, and EBITDA of $ 94.6 million. Our net income for the third quarter of 2007 totaled $50.5 million or $0.97 per diluted share. The comparable third quarter 2006 results were $75.5 million of operating income on revenues of $479.5 million with EBITDA totaling $93.9 million. The third quarter 2007 results represented 10% year-over-year increase in revenues, however EBITDA was only up slightly year-over-year due to the 29% decline in Canadian drilling activity and a $7.1 million year-over-year decline in Tubular Services EBITDA due to lower margins.

Depreciation and amortization in the third quarter of 2007 totaled $18.8 million compared to $13.9 million in the third quarter of 2006. This increase was due to the acquisitions in capital expenditures made over the past 12 months. D & A is expected to total $20.9 million in the fourth quarter. Net interest expense in the quarter totaled $3.3 million compared to $4.1 million in the third quarter of 2006. Fourth quarter 2007 net interest expense is expected to be $ 4.1 million. The effective tax rate in the quarter was 30.3% and is projected to be 34% in the fourth quarter of 2007. Our total debt at the end of the quarter was $433 million , up from $344 million at the end of the second quarter due to 7$2 million of CapEx spent in the quarter, $112 million spent on two acquisitions completed in the quarter with the spending partially offset by operating cash flow. Our debt-to-capitalization ratio was 29% as of September 30, 2007. At this time I'd like to turn the call over to Cindy Taylor who will review the activities of each of our business

My comments will focus on our sequential performance comparing our third quarter 2007 results to our second quarter 2007 results. In order to provide a more meaningful comparison of our operating results I ame excluding the $12.8 million pre-tax gain that we recognized in the second quarter of 2007 related to the sale of a portion of our investment in Boots & Coots. Our Well Site Services segment was up 20% in revenues and 24 % in EBITDA sequentially when you exclude the Boots & Coots gain. The sequential increase was primarily due to increased contributions from our oil sands assets and contributions from the two rental tool acquisitions completed in the quarter, partially offset by weak conventional Canadian drilling and completion activity and softness in our West Texas operations. Our accommodations revenue increased 7% sequentially and our EBITDA increased $4.2 million or 23% due to contributions from our oil sands accommodations and a stronger Canadian Dollar. EBITDA margins improved sequentially due to increased weighting from our oil sands operations coupled with seasonal improvements coming out of Spring breakup in Canada. Revenues and EBITDA from our oil sands accommodations increased sequentially by 42% and 75% respectively due to increased capacity in our three major oil sands lodges in addition to improved utilization of our mobile fleet.

Our expansion plans for our Beaver River and Athabasca Lodges are now essentially complete and we remain at full effective utilization levels. Our Wapasu Creek lodge continues to progress on budget and on schedule with an estimated completion date in February 2008. It too has been at full utilization. On a sequential basis, our rental tool revenues increased 45% and EBITDA increased $7.1 million or 37% due primarily to contributions from Schooner and Well Testing which as we mentioned were closed during the third quarter of 2007, coupled with sequential improvements in our base businesses. Both of these acquired operations carry lower EBITDA percentages due to the service-oriented nature of their operations. Without this mix change, our rental tool EBITDA margins were flat sequentially.

Our drilling revenues and EBITDA were up 9% and 8% on a sequential basis, as the Rockies operations improved due to added capacity on long term contracts coupled with seasonal activity improvement; however, these sequential improvements were less than we expected at the time of our last call due to weakness that developed in our West Texas operations. Our utilization was 87% compared to our projection of 90% at the time of our second quarter conference call. Our average daily revenues were up $100 per day on a sequential basis, but our cash margins were $100 per day lower due primarily to variable costs associated with rig moves and repair and maintenance activities.

If we switch gears and discuss our Offshore Products segment, in this segment, revenues and EBITDA remain strong during the quarter. Our EBITDA margins were 19% in the quarter, exceeding our earlier expectations and were down only slightly from the 20% reported in the second quarter of 2007. Strong revenues and margins during the third quarter of 2007 were primarily driven by bearing and connector product work and drilling equipment projects. Our backlog remained at near record levels totaling $396 million compared to $402 million of backlog reported at June 30, 2007. Our Tubular Services revenues were flat sequentially; however, our tonnage shipped actually increased by 6% but was partially offset by 5% lower revenue per ton. Sequentially gross margins were down slightly to 6% from 6.4 % realized in the Second Quarter of 2007. We continue to successfully reduce our inventory which was down by 6% during the quarter in our continued effort to improve our term rates and there for our return on invested capital. OCTG industry inventories also improved during the quarter with much supply on the ground moving to 4.7 months based again upon OCTG situation report estimates.

Now, what I'd like to do is just give you some outlook comments for each business segment. In our Well Site Services segment, we still continue to see growth opportunities for our accommodations business in the oil sands region. As you know, the recent discussions and announcements regarding the Alberta Royalty Changes have created significant market uncertainty. We are continuing to assess the impact of the announced changes with our customers to determine the impact, if any, on their oil sands development plan; however, at this time, we do not expect that the royalty changes, if enacted, as recently discussed, will materially impact any of the existing development in progress. As a result, we have not changed any of our current capital expansion plans, the majority of which relate to the completion of our Wapasu Creek Lodge.

Our rental tool contributions should remain strong in the United States at current activity levels and will be augmented by our two recent acquisitions. We expect this strength to be modestly offset by continued weakness in Canada as it relates to conventional oil and gas drilling activities. Land drilling utilization is expected to remain mixed. We have seen strong activity in the Rockies despite weak spot natural gas prices during the summer. These operations will be aided by the commencement of two new rigs operating under term contracts in the region; however, activity and pricing in the Permian Basin remained very competitive.

Overall we are expecting utilization to decline to 79% during the fourth quarter of 2007, and that is based on our current indications and some expectations of holiday down time, similar to what we saw last year. In our offshore product segment, the outlook here remains very robust. Our backlog position remains at high levels, product mix and margins within our backlog remain consistent with what we've seen over the last quarters and the most recent quarter. We do typically have lower EBITDA margins in this segment in the fourth quarter due to holiday down time which results in reduced overhead absorption; however, this would be temporary if it does occur. To be conservative, we are forecasting fourth quarter EBITDA margins in the rage of 15-17% for this segment to account for this holiday down time and its impact on absorption, again, consistent with prior fourth quarter events.

Tubular Services, again the industry inventory levels have continued to decrease on a month supply basis, but pricing still remains competitive. As a result, we expect gross margins to remain flat in the Fourth Quarter. We do continue to believe that the industry consolidation at the mill level will lead to a stronger environment longer term. Considering all of these factors our earnings guidance range which we published yesterday for the Fourth Quarter 2007 is estimated at $.92-$.98 per diluted share. We remain very positive about our Company and our prospects long term despite our rate of growth moderating in the fourth quarter of this year. This does conclude our prepared comments. Mike, if you would, please open up the call for questions and answers.

Yes, ma'am. (OPERATOR INSTRUCTIONS). The first question comes from the line of Stephen Gengaro with Jeffries & Company. Please proceed.

Thanks, good morning.

Good morning, Stephen.

I guess two things. One, and can you give us a sense on the Well Site Services division, particularly on the rental tools side, are you seeing, how is pricing now versus the third quarter? Any trends that we should focus on?

Stephen, I'm glad you asked the question because I got, there was some mixed signals there but our rental tool margins in total for the second quarter of 2007 were about 38%. Our rental tool EBITDA, and these are EBITDA margins for the third quarter were 36%; however all of this variance is really related to the addition of the two acquired businesses that we've put in. The mix is a little different there in particular one that carries a higher service personnel content with the delivery of the equipment. When we bought them, we knew those margins were lower than our mix of business and margins so on balance, everything was flat sequentially as it it relates to margins for the base business. What we have seen in the marketplace is very good growth in many activity regions and stable pricing. I won't say it's increasing but it's stable pricing and with capacity being added. Unfortunately, we have had offset in this quarter, it started kind of in early August I would say and you never know if it's temporary or what's going on but the Permian Basin has had activity reductions that affected really our drilling rigs and it affected not only our rental tools but one of the acquired businesses as well so it's very regional at this stage and obviously it seems to be somewhat just level of customer activity right now which it's hard to say whether this is temporary or longer term on that market. We've seen a little bit of firming and activity increases but again, it's just hard to say given the short nature of what we've seen, whether there's something greater going on in that market.

Okay, that's helpful, and then my second question, if you could talk about a little bit, have you seen any change in the opportunities out there, as you look at acquisitions and are some of these smaller operators more willing sellers now or do you think that that hasn't changed much from what you see coming across your desk?

The activity in terms of acquisition opportunities remains pretty consistent. The willingness to sell has stayed pretty consistent. I don't think there's been a significant change in entrepreneur/seller expectations in that regard.

Okay, that's helpful. Thank you.

Thanks, Stephen.

And the next question comes from the line of Jeff Tillery with Tudor Pickering. Please proceed.

Hi, good morning.

Good morning, Jeff.

In the rental tools segment, so margins in the base businesses were flat sequentially. I would have thought Canada activity on a sequential basis would have been up, so that should have been a little bit aiding margins. Did the Permian essentially offset the Canadian increase or did you guys not experience any sort of Canadian increase sequentially?

We did have a little bit of Canadian lift and the Permian did basically offset that and realize that again, the Canadian portion and the activity levels in both Q2 and Q3 are not terribly strong anyway, but you're absolutely right. We did have sequential improvements from the portion of Canada. It was offset by the weakness in the Permian broadly speaking.

And the Permian weakness, is that in oil directed activity, gas activity? Just trying to understand kind of the drivers and what we should look for there?

Rental tools are generally more oriented towards gas but it's both, as it relates to our drilling rigs that is predominantly well based and it's been a mystery to me all year long as to why the activity levels in that market for drilling for oil has been off at these pricing. There is clearly some of it that in my opinion is kind of customer specific issues. There are some of our customers that have been going fairly significant, changes at their own corporate level so again, it's just been a little bit hard to get your arms around. It's just been a little bit of a more sloppier market and we do have some competitors out think that have been a little more aggressive at reducing prices than we have been.

My second question relates to kind of the acquisition impact in the third quarter. Bradley, could you help us with kind of the order of magnitude of revenue and EBITDA impact from the Schooner and Well Test acquisitions as what you'd expect in a that active it environment increment to be in Q4?

We had said the acquisition impact in the quarter was $18.8 million of revenue and $5.2 million of EBITDA.

But realizing that one of those acquisitions we had for 2/3 of a quarter, so it will be obviously just modestly up. One acquisition we had for the full quarter, one we acquired August 1st. But that should give you a pretty good barometer to measure Q4 also.

And my last question relates to the oil sands activity and kind of your plans for expansion. I know you guys have been exploring additional capacity there potentially in the Southern part of the oil sands region. Does the change in royalties put a pause on that? Does that change anything that you guys are doing in terms of pursuing those plans?

Right now, the near term activities of course are pretty well laid out. As I mentioned on the call, Athabasca and Beaver River are essentially done. They're contracted. The visibility, a lot of that work is actually contracted work that goes through mid 2008 and in some cases, 2009, so those look to be in very good shape. The demand for Wapasu right now is far in excess of the rooms that we have available, and that will be a step that we're going to have to evaluate. Right now what I want to do is more commentary and on the margin, the discussion on the royalties has been negatively. Two of our analysts did immediate down grades on our stock just because of its passage but really we don't believe this is as negative on the oil sands as maybe the first reaction might indicate; however we're talking to every individual customer about individual projects that would be supported by lodges in the various regions that we're talking about. We've gotten early indications, public indications that Petro Canada as an example has already stated they will move forward with the Fort Hills project and the McKay River Expansion and a Imperial Oil has come out and said they are still assessing the impact but that is the type of analysis we really need to do over the next 30 days but my view remains this is going to be a positive environment for investment over time. I think if anything, this may cause some moderation of the inflationary pressures that have been created in the environment. It may also give more of an impetus to our customers to outsource accommodations as opposed to building their own for every single one of these projects which as you know, if you've followed us has kind of been our primary indirect competition for growth in this business, but we remain very positive at this stage, but we will absolutely do our due diligence on a project specific basis before we would recommend significant capital expenditures going forward.

Okay, thank you very much.

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

Good morning, Cindy.

Hi, Ken.

Wanted to try to look out a little bit. I know we've got a pretty good view of what's going on in Q4 , but you're running pretty high rates in the Offshore Products business. There have been issues of are we at capacity there or can that number kind of creep up as we move through 08? Do you have any comments on

We're still working on several initiatives there. Our goal has been to obviously be able to increase capacity. The near term objective would be in the 5-10% range on the revenue line item. We still have some work to do to get there, but we're very focused on it as a management team to try to do that, but I know a lot of people sometimes don't even understand the holiday down time but a lot of our engineers have been working mandatory 60-70 hour weeks for an extended period of time. We will allow them to take off for Thanksgiving and Christmas as well as people in the facility so we're doing the best that we can to satisfy the timing demands of our customers, the environment here looks very strong and looks long term and we are doing everything we can to help de-bottleneck and be able to produce more obviously, so far I think we've done an excellent job in growing this business and we're focused on it but I can't give you anymore tangible things other than what we've talked about on prior calls as it relates to outsourcing relationships and some capacity expansions in our Houston operation.

Well I'm glad you're not going to be Scrooge, but on the 5-10% near term is that something we should expect in first or Second quarter next year or can it gradually over the course of next year?

I would say probably gradually over the course of next year.

Okay. And then in the rental tool business, is the Gulf of Mexico being so weak have much impact on your rental business ?

It did have some impact but we have over the last five years really moved a lot of equipment out of the Gulf Coast market. The offshore rig count as you know has been a steady hard decline since 2002, so I won't say it had a great impact. I'm sure it had some. Where I think it had more impact in the quarter and again I do think it's somewhat temporary, the Gulf has been bad but it was extraordinarily bad in the third quarter was in our tubular business and again, the mix of high strength alloy versus the more carbon grade typically used in the resource plays, our pricing was softer particularly on alloy product during the quarter which to me translates into lack of offshore demand in the quarter. Our volumes were up and again strong demand on land in these Resource plays, so sometimes you have to put two and two together because we don't always know the destination of the pipe but that seems to me what's occurred during the quarter.

So that might actually see some uptick as we bring some more deepwater rigs and things into the Gulf over next year?

I can't imagine that it doesn't. I've actually been stunned, the industry inventory on the ground has declined steadily all year. We were at 5.5 month supply and last quarter we're at 4.7 now and these have historically been price inflection points to the positive, yet we still continue to see soft pricing and I've tried my best to understand it more fully but I really think it's been a lack of offshore drilling is one thing but part of it is because there's less lead times involved for the pipe, the mill consolidation coupled with the type of drilling we've gone to more of a just in time inventory. Our inventory is down which I am very happy about, but we're not losing customers by having that reduced inventory. All we're doing is cash flowing money to the company and improving our returns on capital. As you see those mixed shifts and if we have any further reduction of inventory on the ground, again, I've got to think that pricing firms. it has really surprised me that it hasn't already.

That kind of makes sense though but the Gulf like you said inventories are down, lead times are down, activities not going up, so everybody seems kind of hesitant about the fourth quarter right now. Final question, looking at well site accommodations which seems to be the kind of wildcard going in next year, if you could talk about two things. One, where you tend to do these mobile camps up in Canada, are these regions going to be as impacted by the weakness in gas prices, the strength of the Canadian Dollar as much as the Alberta shallow gas is going to be and what kind of early indications you're getting for activity levels on the mobile camp side versus last year?

Yeah, there's really three pieces of the business there, two that relate to mobile camp. One is the large mobile camps which is you'll recall we had a very good winter last year. Those were really tied toward the oil sands development of what we call 49 man dorms. We have good indications that that equipment will be very fully utilized throughout the winter. That will start in the fourth quarter and part of if you go through the commentary, that's one of the positives in the fourth quarter is the start of some of the mobilization of those 49 man dorms. My own view and what is baked into our fourth quarter forecast is that Canadian drilling activity as it relates to conventional oil and natural gas is going to be rough and there's not likely to be any material activity in the fourth quarter, we don't believe, as it relates to the traditional side by side camp. Every day, I wake up there seems to be another piece of news that I have to digest about drilling activity and it's generally negative, and I think that the Alberta Royalty discussions have greater impact there in my view than it does on the oil sands activity, so we're not betting a whole lot obviously in the fourth quarter on the drilling related mobilizations, very little, and the real question mark that I've got to firm up over the next quarter is what the winter will look like for that portion of the business. Again, realizing last year wasn't terribly good either.

I mean, but normally, don't the people start giving you an indication of what they're going to need for kind of January-February about this time of year? I mean, any interest levels kind of similar to last year or are they worse than last year, better?

I would say that anything ahead of November 1st is early and it would be a high demand environment. There is nobody that I will tell you as it relates to traditional drilling activity that is worried about securing rigs, nor are they worried about securing camps. As it relates to the 49 man, we've got very good visibility and indications there.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Our next question comes from the line of Matt McGeary with Sentinel Asset Management. Please proceed.

Good morning.

Hi, Matt.

You mentioned improving returns on invested capital in your OCTG business. Have you talked about what those returns are and maybe you don't want to give an exact number, maybe just what returns are in that business relative to the rest of your business?

Of course we're speaking on returns on invested capital and we have threshold returns that we try to manage off of which as relates to managing the businesses we have as well as doing acquisitions which are about 12% after-tax returns being that threshold type. Our returns in the tubular business were very strong in '04,'05, kind of of '06 time frame as the margins obviously were good. They have come back but they are still above that threshold level. Now, realizing they were down, they were worse in the first quarter because we're carrying more inventory in the second and further improved in the third quarter and we are highly focused on that and part of the segmental goals and objectives even in sometimes market circumstances prevent you from making the revenue and EBITDA generation but you can absolutely manage a return on invested capital and we have a mix there that incentivizes them to stay very focused on efficient management of that inventory.

Thanks. How much maybe in terms of revenue or profits, whatever, you want to disclose, how much of your business now is in Canada , if you exclude the oil sands accommodation part of the

I think Bradley, a lot of people have asked that. I think he has it if you'll bear with us.

Yeah, we've got about on an LTM basis on September 30, 2007, traditional Canadian activity both in rental tools and in accomodations including the third party manufacturing of accommodations was about 5%.

It is obviously been a little bit higher than that but with the weak activity that we've seen, it's at a lower level now.

Okay. And just lastly, balance sheet is in pretty good shape. Do you guys have a buyback program and if not, how do you think about that in terms of your general capital allocation strategy?

We have a total program of $100 million that's been approved by the board. We have about $43 million remaining on that program. We did not purchase any shares during the third quarter.

Okay, thank you.

Our next question comes from the line of [Carthik Chunevasin]with Giovine Capital. Please proceed.

Good morning. I had a question just on the Canadian revenues and any kind of translation impact that we might see in the financial statements. Are all of the revenues and costs related to your Canadian business and denominated Canadian dollars?

That's exactly right. That is pretty all-inclusive Canadian Dollar based province so there was benefit, we mentioned that in the conference call notes. I honestly, we've drafted the 10-Q and we've put the sequential improvement in the Canadian exchange rate. I think it was 4 or 5% but don't hold me to that, but there is some benefit as you translate obviously the revenues over the cost that comes from that Canadian exchange rate.

My second question is on the sands accommodation business in particular given the demand for the services that you provide. What opportunities do you have to raise pricing after contracts been signed with the customer?

Really what we have done particularly with these large lodges that we have, a lot of our customers come in and negotiate take or pay type commitments. When they do that they're going to get the better end of the rate but there's a whole lot of third party engineering and construction companies and the like that come into those facilities, just on a periodic basis, and those are charges spot market type rates, based on demand. So it's a mix of firm, contractual commitments and spot dayrates if you will.

Great. Thank you.

Our next question is a follow-up from the line of Ken Sill with Credit Suisse. Please proceed.

Figure if we got the availability I'll ask some more. On the share buyback, Cindy, do you guys have a philosophy on that? Is it just trying to do it opportunistically or do you guys see that more as a return to shareholders or is it more of a, if it looks like the returns on buying stock are good we'll do that rather than buying other companies?

That's exactly it. We call it opportunistically but we've always measured the cash investment benefits of either doing organic investments which is obviously first choice, doing the type of acquisitions or I'm not going to buy an acquisition and pay a multiple in excess of what I'm trading at so in those time frames, we're going to clearly want to be buying the stock back.

Okay, and then I heard Bradley say that you really haven't seen much change in I guess the bid ask spreads from private companies for more consolidation in North America?

Well, part of it I think maybe the type, we're still seeing a lot of opportunities and the types of companies that we're talking about. We obviously just closed two rental acquisitions that I thought were at favorable multiples, particularly compared to what we saw last year, so it's in that environment that we're talking about but we're looking at ways to expand some of our higher end businesses, Offshore Products business and accommodations business if there's any way to do that. So there's always going to be a range of expectations in that environment. If you're saying, I mean we're seeing a whole host of things that we're just probably not interested but any North American levered business I think will get easier to buy if it's something we want to buy as long as there's this cloud of uncertainty going on in terms of activity.

Okay, and I'll try to put Bradley on the spot a little bit. Do you guys have a first cut for next year on the magnitude of increase in depreciation and any idea where CapEx might shake out versus this year?

The depreciation for next year should trend upward, I think we're going to exit the fourth quarter with a run rate of about $80 million of D&A, that's a good place to start. The CapEx for next year will be driven primarily by the opportunities in the oil sands. If you'll recall we'll spend about $130-$140 million in the oil sands this year. Some of that will spill over into next year and right now, we're thinking about $75 million for accommodations next year in terms of CapEx, which in a flat U.S. environment, I think we would put us probably around 125-$140 million worth of CapEx next year in total.

Those are obviously very preliminary an we're going through a lot of detailed analysis of budgeting process with our divisions but the key variable for us is going to be growth opportunities in the oil sands from an organic investment standpoint, similar to what we've seen the last couple of years.

Okay, thank you.

And our next question is a follow-up from the line of Carthik Chunevasin with Giovine Capital. Please proceed,

Hi, I had a follow-up question on the Offshore Products business given that you are capacity constrained. I'm just curious as to the analysis that you're taking in terms of growing that business organically versus potentially acquiring a competitor to boost your capacity in that area.

I had a little tough time hearing that but I think are you saying, maybe just repeat it.

Sure, I'm sorry about that, can you hear me better now?

Yeah.

Okay, I had a question on the Offshore Products business just in terms of understanding the analysis we're going through in terms of expanding organically versus acquiring a competitor and in particular what the lead time would be to expand your capacity in that area organically.

Well, that is a very good question. We've commented on quite a lot of past calls what we've done over the course of the last year to probably 18 months is doing exactly that in terms of machining upgrades, facility layouts, just a little bit low hanging fruit where you've got bottlenecks and delays trying to de bottleneck those throughout the various facilities, we have multiple facilities in place. We have good demand as an example now in our drilling rig equipment operations both in home and Houston and we have sufficient demand for some of our sub-sea BOP stack up integration work that we're adding a second high base which will allow us to work on two stacks at a time as opposed to one, and further expanding our Houston operations. We've also entered outsourcing arrangements both in the United States and overseas to further allow increased input although that does obviously create reliance on added third parties in doing so. We do look for acquisitions and we are trying our best to find them. The sheer fact of the matter is, our competitors land stake is very significant with F&C and Cameron an others being very sizeable obviously in this marketplace so there are fewer opportunities but there are some that are out there that we're trying to pursue. If that's helpful.

No, that's helpful. I also had a follow-up question just potential on stock buyback, just given what appears to be a very attractive evaluation year. How often does the board meet to make a decision on whether or not to increase the authorization and expand the buyback program?

We meet routinely with our board and obviously, if we get close to eating through that buyback, we will rediscuss that and likely increase it.

Thank you.

At this time, there are no other questions. I'll turn it back to the presenters for closing remarks.

Thank you all for dialing in today. I appreciate your time and forbearance with us. Again, we continue to be very optimistic about a lot of our markets. We're not prepared to give any guidance on 2008, but we do think we've got great opportunities continuing in the oil sands and I think that will settle out and over time, we will get incremental benefits from the two acquisitions that we've made which will really augment our rental tool operations and will evaluate our organic expansion plans obviously if we move forward throughout the fourth quarter, and again thanks to all of you for your support and we look forward to visiting with you again at the end of the fourth quarter.

Ladies and Gentlemen, this does conclude today's presentation. You may now disconnect, thank you very much.