Oil States International Inc (OIS) 2008 Q3 法說會逐字稿

Good morning, ladies and gentleman, and welcome to the Oil States International Third Quarter 2008 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Bradley Dodson. Mr. Dodson, you may begin.

Thank you, and thank you everyone for joining us. Welcome to the Oil States third quarter 2008 earnings conference call. Today our call 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 that are disclosed in our Form 10-k and our other SEC filings. I'll now turn it over to Cindy.

Thank you, Bradley, and thanks to all of you for dialing in to our call this morning. Oil States posted record earnings in the third quarter of 2008, which were significantly above first call estimates and our previous guidance range. We benefited from improved results from our tubular services segment, as continued mill price increases and tight supplies for oil country tubular goods led to sequential improvements in both tonnage shipped and gross margins.

Our other North American businesses demonstrated improved revenues and margins which benefited from higher levels of drilling and completion activity, and the recovery from spring break-up in Canada. Our accommodations operations continued to grow with expanded capacity in the oil stands region. Offshore Products had a good quarter despite experiencing some downtime and an inefficiency associated with the two Gulf Coast hurricanes in the quarter. Overall, I'm very pleased with our performance.

As we indicated in the press release, we sold the final portion of our Boots & Coots common stock during the quarter and recognized a $3.5 million gain. Excluding this gain, Oil States reported revenues of $814.8 million and EBITDA of $168.7 million. Our revenues and EBITDA were up 55% and 78% year-over-year, excluding these stock sale gains. Our very strong third quarter results have been overshadowed by the crisis in the credit markets, lower commodity prices and the climbing stock prices. Given this environment, we will spend a bit more time on the call today discussing our balance sheets, our liquidity picture, our outlook and capital allocation alternatives.

At this time, Bradley will take you through more details of our consolidated results and financial position and then I will come back on the line and conclude our prepared remarks with a discussion of each of our segments and close with our market outlook.

Thank you, Cindy. Throughout this call, we will be excluding from our discussion from EBITDA the $3.5 million gain in the third quarter of 2008 and the $2.7 million gain in the second quarter in 2008 related to the sales of portions of our investment in Boots & Coots. For the third quarter of 2008 we reported an operating income of $141.5 million on revenues of $814.8 million. Our net income for the third quarter of 2008 totaled $89.1 million or $1.70 per diluted share. The comparable third quarter 2007 results were $74.8 million of operating income on revenues of $527.4 million. The third quarter of 2008 represents a 55% year-over-year increase in revenues and 89% year-over-year increase in operating income, and record quarterly EPS for the company. These increases were primarily due to improved earnings from our Tubular Service segment and improved earnings from Canadian oil sands accommodations.

Depreciation and amortization in the third quarter of 2008 totaled $27.3 million compared to $18.8 million in the third quarter of 2007. This increase was due to acquisitions and capital expenditures made over the past 12 months. G&A is expected to total $26.3 million in the fourth quarter of 2008. Net interest expense totaled $3.2 million in the current quarter and $3.3 million in the third quarter of 2007. Fourth quarter net interest expense is expected to be between $3.3 and $3.7 million. Effective tax rate in the quarter was 37.1% compared to 30.3% in the third quarter of 2007. The higher tax rate was due to increased income in the US overall and higher US accommodations income. We expect the effective tax rate in the fourth quarter to be between 33% and 34%.

During the third quarter, we generated $118 million of cash flow from operations and spent approximately $71 million on capital expenditures. As a result our net debt at the end of the third quarter was $361 million down from $423 million at the end of the second quarter of 2008. As of September 30, 2008, we had a debt to cap ratio of 25% and our total debt to LTM EBITDA was less than one time.

Given the market events in the past couple months, we thought it would be more appropriate to more fully explain our liquidity position. We currently have two tranches of debt. A$500 million revolving bank credit facility and $175 million of convertible notes. The $500 million bank credit facility matures in 2011 and it's supported by 11 syndicate members.

With our strong cash flow from operations during the third quarter, we reduced our volumes under that facility, thereby increasing our availability from $209 million on June 30, 2008 to $258 million as of September 30, 2008. To date we have not experienced any funding delays or other borrowing issues under that facility.

As it relates to our convertible notes, they have a cash coupon rate of 2.75% and have an initial call date of July 2012. Under certain circumstances which are generally measured quarterly, holders of the notes have the right to convert prior to 2012. During the fourth quarter of 2008, the holders have that right to convert, based on the higher trading prices of OIS common stock at the end of the third quarter. As a result of this conversion feature, the full par value of our convertible bonds is classified as a short-term liability on our balance sheet as of September 30, 2008.

The amount payable upon conversion is dependent on the trading price of our common stock, and would be settled into cash up to a maximum of par value of each bond. The implied conversion value based on yesterday's closing stock price would be $593 per note. The notes have continued to trade at a premium of 15% to 30% above their implied conversion value in the secondary market over the past 30 days and we have not received any conversion requests to date.

We continue to have a strong balance sheet and remain focused on enhancing liquidity. As such, we're reviewing all capital expenditures, both in light of the current credit crisis and our expectations about business activity going forward. We expect to spend approximately $70 million in capital expenditures in the fourth quarter and we are currently evaluating our needs for 2009. At this time I'd like to turn the discussion back over to Cindy who will review the activities of each business segment.

Our Well Site Services segment generated revenues of $249.2 million and EBITDA of $84.1 million in the third quarter 2008 compared to $209.9 million and $67.6 million respectively in the second quarter of 2008. The sequential increases in revenue and EBITDA were primarily due to continued growth in our oil sands accommodations and improved results in both our rental tools and drilling operations as US drilling and completion activity improved in the third quarters and Canadian activity recovered from spring break-up.

We remain at full effective utilization levels in three of our four major lodges but experience typical seasonally reduced demand for our mobile camp assets. During the third quarter of 2008 we generated $65.8 million in revenues and $32 million in EBITDA from our oil sands accommodations operations. The expansion to Wapasu Creek Lodge which now has over 2300 rooms and the initial construction of the Fort Hills Lodge remain on schedule.

Our rental tools generated $91.7 million of revenues and $30 million of EBITDA in the third quarter of 2008, compared to revenue of $84.6 million and EBITDA of $25.2 million in the second quarter of 2008. Our rental tool results benefited from a 6% sequential increase in US drilling and completion activity and the seasonal recovery of spring break-up in Canada.

These improvements were partially offset by down time, minor facility damage and operational inefficiencies caused by the two Gulf Coast hurricanes which negatively impacted our rental tool revenues and EBITDAs by approximately $1.7 million and $1.4 million respectively.

Our drilling revenues and EBITDA were $52.1 million and $20.1 million respectively compared to $44.4 million of revenues and $15.6 million of EBITDA generated in the second quarter of 2008. This sequential improvement in revenues and EBITDA was primarily the result of improved utilization in our Ohio and Rockies operations. Our overall utilization increased to 92% from 84% in the second quarter of 2008. Our average daily revenues were up $800 per day sequentially and our cash margin per day actually increased $900 per day.

In our Offshore Products segment, we reported revenues of $120 million and EBITDA of $22.9 million compared to revenues of $139.9 million and EBITDA of $27.8 million reported in the second quarter of 2008. Revenues were down $19.8 million, due to timing of project revenue recognition and approximately $7 million of revenue slippage caused by downtime related to hurricanes Gustav and Ike. We sustained some minor facility damage, lost power and therefore production capacities for 10 to 15 days at our two Houston facilities and our Houma facility. We are currently back to 100% functional capacity at each of these facilities. Our backlog grew to a record level of $420.5 at September 30, 2008, up from $385.8 million at June 30, primarily due to deck equipment and crane orders at our Houma manufacturing facility.

Our Tubular Services segment generated record quarterly revenues and EBITDA of $445.6 million and $68.8 million respectively in the third quarter of 2008, compared to revenues of $281.6 million and EBITDA of $29.2 million in the second quarter of 2008. Revenue increased 58% sequentially due to mill price increases during the quarter, coupled with a 15% increase in tonnage shipped during the quarter. Our gross margins improved to 16.6% in the third quarter, up from 11.6% in the second quarter of 2008.

Now, we'll transition a little bit and talk about our outlook going forward. Within our well site services segment, we continued to receive opportunities to expand our accommodations in the oil sands regions. We plan to continue to execute our announced growth plan for the Wapasu Creek lodge and the Fort Hills lodge over the next 12 months and will closely evaluate other growth opportunities.

As it relates to Canada, there has been a significant weakening of the Canadian dollar relative to the US dollar which will negatively impact the translation of our Canadian earnings into our reported results in US dollars during the fourth quarter. We expect that credit crisis to impact the liquidity of several of the most active E&P companies in the US which will be exacerbated by normal holiday downtime. As a result, we expect our rental tool revenues and EBITDAs to be down sequentially in a range of 5% to 9% respectively with the assumption that US drilling and completion activity flows in this market environment.

Likewise, land drilling utilization is forecast to be lower in the fourth quarter as we expect to experience holiday downtime in Texas and the Rockies, in addition we expect some customers to reduce drilling activity to conserve or improve their own liquidity. Overall, we are forecasting utilization of approximately 82% in the fourth quarter.

In our Offshore Products segment, our backlog is currently at record levels with continued good products mix and margins. In our guidance range, we continue to forecast strong quarterly revenues and EBITDA margins, some were in the mid-teens although we do expect some normal holiday downtime resulting in lower cost absorption in the fourth quarter. Our backlog position will be a significant asset to us as we move forward into 2009.

As it relates to Tubular Services, industry oil country tubular goods inventories remain at historically low levels with approximately four months supply on the ground. However global steel prices are under pressure and the demand outlook globally is beginning to flow, which over time could have some impact on the oil country tubular goods business.

Overall, we expect revenues to be slightly up in the fourth quarter with strong but slightly lower margins, as we expect mill price increases to flatten out. Historically, our company has fared relatively well during cycle corrections such as that experienced in 2002 given the diversity of our operations. We believe that our exposure to deep water activities and to oil sands development will mitigate some of the near term expected North American cyclicality given their long term projects, horizons, and economics.

Given all of the above factors, our earnings guidance range for the fourth quarter 2008 is estimated at $1.45 to $1.55 per diluted share. While our forecast does decline sequentially, our fourth quarter estimate is well above current FirstCall estimates.

That concludes our prepared comments, and we're ready to open up the call for questions and answers.

Thank you. We will now begin the question and answer session.

(Operator Instructions).

Our first question comes from Kevin Pollard. Please go ahead.

Thanks, good morning.

Hello, Kevin, how are you?

Good, thanks. I know you gave it already, could you repeat the revenue and EBITDA from the oil sands, I missed it.

Sure, it was revenue of $65.8 million and EBITDA of $32 million.

Okay, thanks. And just, along the lines of oil sands, with crude prices coming in we've seen a couple of the big Canadian oil sands operators talk about maybe not cutting back, but slowing growth and slowing expansion up there. And with that in mind, can you talk about how committed your facilities are in terms of contracts and such and how confident you are you can maintain the utilization in a $70 to $75 oil environment?

There's been a lot of recent press, Kevin, out about all of the economic analysis in the oil sands projects. Some are more favorable than others. I'd like to focus maybe initially on what is very significant to our results in the next 12 months if you will. And as I mentioned on the call, there are two things that, the Wapasu Creek expansion, as an example, is tied to several operations, but a lot of the growth right now is coming from Suncor Firebag Project and they've recently come out that they are maintaining sending and construction timelines that are in place for both the third and fourth stages of that operation and, so I feel very good about our outlook there with the additional rooms that we are adding at Wapasu. We do also have a significant amount of that contract that I don't' have at the tip of my fingers the percentage for you. But obviously people are still concerned about having places for their people to stay, and therefore willing to let contracts for that.

The other key one hasn't been in the news a lot. It's Petro Canada Fort Hills project. And if you'll recall, I don't remember if it's been two or three months ago, but we announced a new contract with Petro Canada for that project which is really the initial phase one of that development and I think the key there, and again as I noted we will be proceeding with that, that is backed by a three year contract with Petro Canada.

And right now just broadly speaking kind of beyond that activity does remain strong, however people are looking now at what the internal rates of return would be for these projects at oil that ranges anywhere from say $60 to $100 per barrel, so there is uncertainty in terms of what that long term price deck might look like. What that is causing our customer base to do is really reassess the capital costs that are involved in the project and look for ways to manage that in the event that we face a lower long-term price for activities up there, and most of the ones thus far are looking at the cost of upgrading capacities which they're looking for alternatives to process the bitumen as opposed to cutting the initial mining or in situ operations surrounding that.

Again, the majority looks to be very economic at a long-term price deck of $60 a barrel, but I do believe and am confident they will find ways to reduce costs in a lower price deck environment and maintain activities. Again as we've always said, projects that are already sanctioned and underway, it's very unlikely that they stop. They've got a lot of front costs, and therefore their incremental analysis is much different than a new project that might be scheduled to have commenced say in 2009 or 2010. So, again we feel good about our near term activities, particularly on the construction side, the new capacity we're bringing on and don't see any reason to be concerned with that right now.

Okay, thanks. That's helpful. So just as to sort of summarize, would it be fair to say that you feel fairly confident that everything that you planned or are going forward with, as well as your existing capacity, will be utilized to the levels you expected? What's maybe is a little uncertain here is the growth opportunity above and beyond your current facility expansion.

That's exactly right, and just to put that into more tangible type thinking, what it means for me is we're pretty comfortable, if not very comfortable obviously for Q4 and the balance of 2009 feels very comfortable as well. Then you've got to say, what about the expansion phases of these existing projects. Our customer are really talking 2011 and on at this stage, not the near term, say 15 months, which right now with all the uncertainty in the market I think makes me feel pretty good in terms of where we stand, and we can reassess what the market looks like a year from now on the other activities.

Okay and you're still expecting to have strong utilization of your smaller camps in the winter season in Q1?

We are looking. There's never a sign that the winter will be a fairly decent winter for drilling activity as is typical with Canada. People then begin to question what happens during and following breakup, but it does look like our conventional drilling fleet will be fairly well utilized. Again we've been more heavily focused on the large mobile camp fleet which a lot of that really works inside the drilling support operations in the oil stand anyway so --.

Right, that was the part I was actually referring to for the larger camps.

Yes, we do definitely believe there will be strong demand in the winter.

Okay. If I could shift over real quick, a question on Tubular Services. Your shipment volume has been growing quite a bit faster the last couple of quarters than the rig count. I guess I would assume that you've been taking some share. My question is if we start to see a fairly sharp decline in the rig count I think like most of us are expecting, does that reverse out a little bit or would you expect to sort of maintain the current share?

Well, I'm glad that you observed that, and we clearly think we have been taking market share in this environment. We're a very strong company with a good balance sheet and have a broad network with our customer operations. And we do think the mill consolidation helped stabilize and support the market overall and to a stronger market. I can't say its necessarily less volatile, it'll always be somewhat cyclical. It's hard to say what happens when you go, when you have a material rig count correction instead of having four months supply on the ground.

That will obviously move up very quickly. And people, particularly some of the smaller, private distributors will just look to start unloading some of that investment that they have, but overall there is no reason to think that other than short-term aberrations that we would not hold the market share of gains that we have earned throughout both weaker periods and strong periods of equipment this year.

Okay, so, just longer over the course of a full year, the 12 or 18 month period, you wouldn't expect a drop in shipment volumes to be materially worse than the drop in drilling activity? You know, allowing for some one-off aberrations as the smaller distributors dump inventory.

No, we don't see any reason to think that.

Okay, thanks a lot. I appreciate it.

Thank you, Kevin.

Our next question comes from Victor Marchon with RBC Capital Markets. Please, go ahead.

Thank you, good morning.

Good morning, Victor.

First question I just had was on CapEx for next year. I know Bradley, you had mentioned that you are guys currently evaluating but I wanted to see if you had a rough estimate as to what you have on the books today for next year as it relates to the oil sands and anything else from a growth CapEx standpoint.

Okay, well right now this is preliminary and subject to board approval and we'll firm that up when we have our fourth quarter call. But right now, $200 million to $250 million of CapEx for 2009. The majority of that, or right about 45% or 50% of that, is accommodations related. We've got some expansion efforts and Offshore Products that will carry over into 2009, particularly our expansion in Singapore that we're currently executing, and then I think the rest of the capital expenditures will be very pendent. We'll look at all of them and evaluate them both as we get into budgeting season and also as we execute them as to activity levels in North America and whether or not those expenditures are warranted.

Okay. Thank you. The second one I had was just regarding the hurricane sort of the post-hurricane period. Are you guys seeing any meaningful pickup in activity, whether it's the pipeline repair or anything post the hurricanes that would be meaningful over next couple quarters?

We are getting some of it but it won't be as mover at overall total company activities, Victor. There was obviously damage in the Gulf, but it is not nearly as significant as what we saw with Katrina and Rita, but you're right. And most of our activity is on the sub-sea pipeline repair side and we have gotten some orders in the range of maybe $3 million to $5 million it looks like for repair equipment. But that's kind of the order of magnitude that we're looking at.

Okay. And the last is just on the ship channel facility. I just wanted to see if you could update us as to where things stand there from taking on backlog, becoming somewhat of a -- probably not terming it correctly, but a revenue generator as a standalone?

Well, it is a revenue generator generally in that it's kind of hard to glom onto and say it's got a separate operating backlog at this stage. But we've got a lot of work over there right now, and we've held backlogs. If you think about it, if you've got two facilities turning out revenue and you're holding backlog, that's an indication that that facility is garnering work in and of itself.

So I'd say we're getting there. There's some things that we need to do. We were certainly interrupted right in the heart of where a lot of the hurricane damage came through, so certainly interrupted a bit during the hurricane and the follow-up impact. However, we have recovered from it and we'll have a little bit of facility repairs to make, but nothing of significance. I'd say it's on track and that's one of the focus areas for us need to be our CapEx is to continue to bring that up to a fully functional standalone facility.

Great. That's all I had, and congratulations on the quarter.

Thank you Victor.

Thanks, Victor.

Our next question comes from Jeff Tillery with Tudor Pickering. Please go ahead.

Hello, good morning.

Hello Jeff.

Hello Jeff.

Bradley I just want to make sure I understand the math on the convert. If all of those notes converted at the $593 conversion price, that's basically $100 million. Is that right?

I believe that's right. Hold on one second. Yes, $104 million, approximately.

I just wanted to make sure I was doing the math right. On the OCTG business, no pricing increase until early October. You talked about thinking margins might decline a little bit. Do you think that low pricing increase holds? Is that an indication of how you're thinking about pricing in that business?

Yes, and I'll -- Let me speak to that, Jeff. That's a tricky one and it's tricky to give guidance. I know every company out here feels that way because October was a very strong month with virtually no activity indicators whatsoever for us and probably many of our competitors. However, we'd be sticking our heads in the sand if we didn't think that the forward view had some impact and so we are assuming that it will. And typically impacts initially are our Tubular Services and our drilling operations, and as it relates to Tubular, we have price increases that took effect October 1.

And there's no indication today that those price increases are not sticking. And again realize that inventory on the ground is still very high, it remains at four months supply. We don't see anything today that suggests anything specific to OCTG however, again, if we look into the months of November and December we think it's obviously unlikely to see further price increases if our E&P customers do in fact lay some rigs down and that inventory should build to a more comfortable level that we think at a minimum pricing flattens.

We have to watch it, as we will, so I think the message there is there's nothing today in terms of activity, either tonnage, or pricing, that concerns us. But again if we're just watching the global impact on overall steel prices we would have to think that, oh for some period of time that could have some impact on OCTG pricing, but certainly not now.

If we fast-forwarded that for a couple of quarters and OCTG pricing was back at $1700 or $1800 a ton, has anything structurally changed in the business where your margins would be any different than the last time OCTG pricing was up at that level?

Jeff, it's anybody's guess, but I don't see -- it depends on what period or what cycle we're talking about. And let's just go back to what we've always said. In a period of strong and rising prices, our margins typically expand and it's certainly proved that could be the case during this year. In a period where inventories are building and prices are contracting, our margins go down a bit. We saw that in 2007. Again, the beauty of this business, our working capital adjusts downward materially. We generate a ton of cash and we make good money. Now, whether it goes down, I don't know what period we're saying is below, but they shouldn't move down into the high single-digit range would be my guess. And again, I go back to that overriding fundamental. We do believe that the mill consolidations and the discipline in terms of overall mill productivity have made a difference in this business. And certainly that seems to be proved out both in late 2007 and 2008.

That makes sense. My last question is just, the oil sands accommodations business, how do you think about the customer base. Do you think about it on a project basis or do you think about it kind of new construction versus ongoing maintenance plans? Just wanted to see if you could provide a little color on what the customer base typically consists of.

Well, it is both as you know. We've been involved to a certain degree in the oil sands really since the beginning and the 1989 type time frame, particularly with Syncrude and Suncor. Those are mature, ongoing operations. Syncrude has the large mining operation at its Mildred Lake Village facility. Of course a lot of the growth, you go into a more stable maintenance mode in those older operations that are ongoing and we expect that will continue to be ongoing. And then a lot of the growth has been with the new wave of investments that's come in. some are mining operations but a lot are the institute type operations.

And you've got people like CNRL with their Horizon Project, [Optinex] and Longlight, I could go on. Husky Sunrise and others that are there. So we are very much focused on those specific developments and the manpower needs behind those developments. The challenge we face is the projection five years from now in terms of the ultimate build out of those operations and new. And historically, we've got a very close communication with our customer base and it's really a pretty good indication, but we also have in this particular business contracts in place which really help us manage through and feel pretty good about the capital investments that we're making.

Okay. Thank you very much.

Thanks.

Our next question comes from Joe Gibney with Capital One Southcoast.

Good morning everybody.

Good morning Joe.

I just want to follow up on the electrical and on drilling. Cindy, you guys got the utilization of 82% in the fourth quarter, I'm just curious in your cash margin outlook here in the fourth quarter the potential for some rigs getting laid down.

You've followed this business a long time, and so what always happens is Thanksgiving and Christmas you're going to have, if you finish a well, those are going to go down for that holiday. What has happened in other markets where we see a projected softening of activity, they'll go down in Thanksgiving and some rigs just won't come back until the beginning of the year. And we think that is the environment that we're going to be faced with and therefore that's why we've guided to about 82% utilization. Again our utilization in October was very strong. There's no reason to see anything. But we also have been in this business a long time and have a pretty good understanding as what to expect. I know I don't have in front of you what that implies in terms of cash margin per rig, but typically all this will go down just because you don't have that revenue base to absorb your costs with. And I think we can go back, Bradley may work something out, I don't know.

Yes, I think you'd look for about a 500 basis points decline in margin percentages in that business.

Okay, that's helpful. I appreciate it. And on the (inaudible) side, the (inaudible) here 5% to 9% obviously. Just curious to dig in to the different components of that service line, are there other areas that are feeling it more than others? Any particular geographic regions? Obviously on the Rockies. Any color there would be helpful.

Well I've got to go back to what I'm trying to communicate. October was a very strong month and you don't see an activity decline today, but in talking to our customer base there are clear indications they're going to be taking some rigs out of the market. When you lose rigs you obviously lose some of the service content. It is our belief, based on conversations with our customer base, that some of the more traditional areas of activity in west Texas and south Texas as an example, there are customers that have acknowledged they'll be moving rigs out of the Barnett. Those are going to be a few of the markets that I think are going to soften a bit. We haven't seen it in the Rockies, but with the Rockies express essentially full, we've already seen dislocations because of stranded gas again, which nobody expected for a couple of years.

So, that market may have some issues to deal with. But we do also see growth in some of the newer plays such as the Haynesville, the Boston and the Marcellus. And again, a lot of these newer locations are very service-intensive with their operations and the drilling commitments need to be made on a lot of these new lease holds to hold them. So while we see some market softening we see other ones that are likely to move forward and do very well.

That's helpful. Bradley, you commented there on the weakening of the Canadian dollar and its impact on earnings in the fourth quarter. Can you land any kind of quantification to that or your expectations for how much that will impact your earnings here on the fourth Q on that?

Yes, I think it had about a $3 million or $4 million EBITDA impact versus if it stayed relatively flat.

Okay. That's helpful. I appreciate it. Great quarter.

Thank you very much.

Thank you very much.

Our next question comes from [Fred Handler] with Credit Suisse. Please go ahead.

Thanks, good morning.

Good morning, how are you?

Fine, thank you. I am pinch hitting here for Arun Jayaram so forgive me if the questions are a little bit basic in essence. But when you spoke about the oil sands accommodations and addressing the issue of risk you were talking only about expansion but maybe you could fill in a little bit with the nature. How much of it is contracted in your existing business and maybe help me understand a little about the nature of those contracts. For example, can you apply a take-or-pay logic to it? Is there a minimum level of utilization, that sort of thing?

Yes, the contracts that we do have in place do have take-or-pay type commitments to them. There's no doubt. There's kind of two areas of contribution. One is the room usage which is on take-or-pay type contracts. The other one is the foodservice element which obviously is dependent on the number of people that are actually there working in the facility and eating meals there. And we have some floors in our contract for some of that as well. So again, for the ongoing operations that are in process right now, which again I just have to say we feel very comfortable with, when we do our forecast for 2009 we look to those contracts and the take-or-pay nature of them in terms of our budgeting process. And so I am, yes, more focused on the incremental new rooms that I'm bringing on and just want to be sure that these projects survive and that they're going to move forward and we're going to enjoy the utilization levels that we expect before we make that capital commitment.

That's very helpful. So in terms of existing -- it sounds like existing on '09 it's a very high level of take-or-pay. Is there very little risk contractually or is it just that the projects themselves are ongoing operating and therefore presumably a very little kind of risk of --?

It is a little bit of both, but it's weighted towards the comfort level that is backed by contracts.

Okay. Okay, that helps. And I guess we are hearing about some projects which are not planable or were at least being challenged to some degree and again forgive me, I'm not as well versed on this as I could be. But there are some. So it sounds like it's more that you are aligned in terms of your ongoing expansion with specific ones that are proceeding as opposed to some of those that perhaps won't.

Absolutely. And we're going to be watching it very closely as we've indicated. But I would comment on that, too. Again what our customer base is looking to do is establish different ways to accomplish a lower cost environment, both capital and operating, in the event that again, the long-term view, 30 year view of crude oil pricing. There's a lot of subjectivity and uncertainty. And they're looking at ways to maybe share upgrading capacity transport to other locations as opposed to every one of these projects building their own. In fact, quite frankly, I think it helps us and helps our business models. Again, there has been a desire from some of our customers to build and own their own standalone facilities. We provide, I think, a very viable outsourced alternative that can be shared amongst many of these customers in many of these projects.

So to some degree I think this actually could favor our business model, if you will, but they're looking for many things that another key cause for a lot of the institute development is natural gas. And of course right now natural gas prices have come back a bit. They're looking at nuclear, as an example, for alternative. So it is my view that it remains a very attractive force of energy going forward long-term, but it may require a different view in a different way to ensure that the economics are sound.

That's helpful color as well. I guess one last one, please. Have Suncor or Petro Canada approached you with respect to a, can you help us here because we're really trying to tighten the belt on every aspect of the project in light of the current environments? Have there been any of that kind of discussion?

If you're asking me if they've asked us to renegotiate contracts for cut rates, no. They have not. They're still very concerned about how they're going to man and manage the specific phases that they planned to get underway. And they know that right now there is more demand than there is supply for these types of accommodation facilities. So to answer your question, no.

Thanks very much, I appreciate that.

Thank you.

(Operator Instructions).

At this time I am showing no further questions.

Okay, thank you so much and thanks to all of you for joining our call today. I know it's been a very busy day. A lot of people released earnings and I appreciate your support and look forward to the next quarter. Thanks.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.