Oil States International Inc (OIS) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Oil States International third quarter earnings call. Welcome to the Oil States International third quarter earnings call. At this time all participants are in 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. Welcome, everyone, to the Oil States third quarter 2009 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 rely 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 other SEC filings. I'll now turn it over to Cindy.

Thank you, Bradley, and thanks to all of you for joining us on our call this morning. During the quarter, the combined strength of our accommodations and offshore products contributed positively to our results in the third quarter given their long-term contracts and backlog in support of multi-year oil-related projects. These two businesses comprised over 78% of our segmental EBITDA and collectively delivered year-over-year growth partially offsetting a difficult quarter for our North American natural gas leveraged businesses. After a precipitous decline, North American drilling and completion activities stabilized in the third quarter of 2009 with the rig count increasing 4% sequentially.

This market stabilization coupled with strong cost controls enabled us to report sequential EBITDA improvement in our drilling, rental tools and tubular services business lines. Oil States generated revenues at $456.1 million, EBITDA of $69 million and earnings per share of $0.53 for the third quarter of 2009. We improved our financial position in the third quarter and paid down approximately $48 million on our revolving credit facility. As a result, our total debt to capitalization ratio declined from 16% at June 30, 2009, to 13% at September 30, 2009. Throughout the remainder of this call, we will update you on our financial results and market outlook. At this time Bradley will take you through more details of our consolidated results and financial position and then I will conclude our prepared remarks with a discussion of each of our segments and close with our market outlook.

Thank you, Cindy. Please note throughout this call we will be excluding from our discussion of EBITDA the $94.5 million goodwill impairment charge taken in the second quarter of 2009. During the third quarter of 2009, we reported operating income of $38.5 million on revenues of 450 -- $456.1 million. Our net income for the third quarter of 2009 totaled $26.6 million or $0.53 per diluted share. The comparable third quarter 2008 results were $141.5 million of operating income on revenues of $814.8 million.

The year-over-year decreases in profitability are primarily due to the 52% year-over-year quarterly decline in North American drilling activity. Depreciation and amortization in the third quarter of 2009 totaled $30.2 million compared to $27.3 million in the third quarter of 2008. This increase was due to the capital expenditures made over the last 12 months. G&A is expected to total $31 million in the fourth quarter of 2009. Net interest expense totaled $3.6 million in the current quarter compared to $4.7 million in the third quarter of 2008. Fourth quarter net interest expense is expected to be $3.6 million in the fourth quarter.

The effective tax rate in the quarter was 24.3%, compared to 37.1% in the third quarter of 2008. The effective tax rate in the third quarter of 2009 benefited from a greater proportion of foreign sourced income which is taxed at lower statutory rates coupled with domestic tax benefits from estimated losses. We expect the effective tax rate for the fourth quarter of 2009 to be approximately 26%. During the third quarter we reported cash flow from operations of approximately $81 million and spent approximately $25 million on capital expenditures. As a result, our net debt at the end of the third quarter was $132 million, compared to $188 million at June 30, 2009. As of September 30, 2009, our debt to capitalization ratio was 13% and our total debt to LPN EBITDA was less than one time. As of September 30, 2009, the Company had $450 million of availability under our credit facility. Our current CapEx forecast for 2009 is $170 million, which is down 31% from the $247 million spent in 2008.

At this time I'd like to turn the discussion back over to Cindy who will review the activities in each of our business segments.

Thank you, Bradley. I'll start with our Well Site Services segment. In that segment, we generated revenues of $180.4 million and EBITDA of $45.7 million in the third quarter of 2009, compared to $152.9 million and $40.7 million respectively in the second quarter of 2009. This sequential improvement in revenues and EBITDA was primarily due to increased contributions from our Canadian oil sands accommodations and west Texas drilling operations. We continued to enjoy strong utilization levels in our major oil sands lodge facility.

During the third quarter of 2009, accommodations, revenues and EBITDA were up 5% and 7% respectively from the third quarter of 2008. Our current quarter results benefited from higher utilization of our mobile, large camp fleet and improved occupancy levels at our oil sands lodges when compared to the third quarter of 2008, partially offset by the weaker Canadian dollar. Our rental tools business generated $51.7 million of revenues and $6.5 million of EBITDA in the third quarter of 2009, compared to $53.6 million of revenue and $5.7 million of EBITDA generated in the second quarter of '09.

Our rental tools revenues were negatively impacted by the 6% sequential decline in US natural gas drilling activity and associated pricing pressure. However, our EBITDA grew sequentially due to diligent cost control efforts. Our drilling revenues and EBITDA grew $7.5 million and $2.7 million respectively, compared to the second quarter of 2009. The sequential improvement in revenues and EBITDA was primarily the result of increased utilization of our rigs operating in west Texas due to higher oil prices.

In our offshore products segment, revenues increased 8% sequentially due primarily to increased pipeline shipments and higher drilling and connector product sales. EBITDA margins were sequentially flat with the second quarter of 2009. Our backlog at September 30, 2009, declined 17% sequentially to $253 million as net new orders received during the quarter were $83 million down from $108 million of net orders received in the second quarter of 2009. In the tubular business, year to date industry OCTG consumption was down over 40% from the same period a year ago. However, industry prime pipe inventories have fallen approximately 500,000 tons over the last quarter given US mill production curtailments and lower import volumes. Although improving, industry inventory still remain at approximately 11 month supply on the ground, which is continuing to put pressure on pricing and margins.

For the third quarter of 2009, our Tubular Services segment reported revenues of $143.9 million and EBITDA of $7.2 million. Revenues decreased 20% sequentially due primarily to lower overall OCTG pricing and our customer's use of owned inventory. Our gross margins were 7% compared to 5.3% in the second quarter of 2009. As we mentioned in our earnings press release, the third quarter 2009 Tubular Services gross margins benefited approximately 70 basis points from a $1 million adjustment from prior periods.

Now if we can just go to our summary comments and give you our outlook going forward. Starting with our North American natural gas drill -- driven businesses. The reduction in US drilling and completion activity should reduce US onshore production of natural gas over time. However, the North American natural gas market will likely need another six to nine months of lower activity to reduce the expanded commodity inventory level. As a result, we expect fourth quarter North American activity to continue at current levels, potentially exacerbated by extended holiday shutdowns.

Activity in our drilling operations improved in the third quarter driven primarily by improvements in our west Texas rig operations which are exposed to oil drilling activity. The key for near term North American activity will be the extent of drilling and completion activity shutdowns over the Thanksgiving and year end holidays, which we think could be fairly significant. As a result, we expect utilization of our land rigs to approximate 40% in the fourth quarter of 2009 despite our exiting the third quarter with September utilization of 51%.

Activity for our rental tools business is primarily tied to completion and production services activities in North America and will generally track movements in the gas rig count. As a result, we expect rental tool revenues to remain flat in the fourth quarter in line with our third quarter actuals. Likewise, shipments of oil country tubular goods from our Tubular Services segment should follow trends in the US rig count. Industry OCTG inventories are gradually declining, but continue to remain at an historically high level of roughly 11 month supply on the ground. Domestic mills continue to significantly constrain production and imports have declined. Third quarter imports were estimated at 88,000 tons, down over 70% from the second quarter of 2009.

Given the continuing overhang of pipe inventory on the ground, we expect the OCTG distribution market to remain very competitive throughout the balance of 2009. As a result, we continue to project our gross margins in Tubular Services to be approximately 4 to 6% in the fourth quarter of 2009.

Shifting gears to our accommodations business, we continue to work diligently on negotiations with Imperial on the Curl accommodations contract with good progress being made since our last call. We are operating under short-term contracts with Imperial which extend into March 2010 and we are now supporting approximately 1900 Curl workers at our existing lodge facilities. We believe these short-term commitments are likely to expand in terms of head count as Imperial continues to ramp up their activity levels. These short-term commitments will be replaced by longer term contracts if we're successful in our negotiations.

In our offshore products segment, our operational execution has been good throughout 2009 with strong revenues and margins. However, we are conscious of our backlog which declined another 17% from the second quarter of 2009, primarily due to delays in project awards. As a result we expect fourth quarter revenues to decline to a range of 115 million to $125 million. On an overall basis in the near term, our oil sands and deep water exposed businesses will continue to drive our profitability and capital allocation decisions. Overall, we are in good financial position with a strong balance sheet and remain ready to expand our operations when opportunities arise.

That concludes our prepared comments. Would you open the call up for questions and answers, please?

(Operator Instructions) Our first question comes from Arun Jayaram from Credit Suisse.

Hey, guys, how are you?

Good morning, Arun.

Great, thanks, Arun.

Cindy or Brad -- Bradley, pardon me, could you comment a little bit about the margins on the accommodations side? I know they're down sequentially, but just comment on that. They were flat year-over-year, but just talk about that margin.

Yes. As you'll recall in the second quarter, we had a couple items that were more one time related that improved the margins in accommodations for the second quarter of 2009. We had some minimum guarantee revenues and margins that came through related to longer term contracts where customers commit to us over the longer term for a set number of guaranteed man days, if you will, or staying in our lodges and if they don't meet those, then we recognize that -- that minimum guarantee as we move through the contract. In addition, we had some carry on work that -- from the Fort Hills settlement with Petro Canada which flowed through the third quarter with fairly good margins. Pulling those out of second quarter results, I believe the margin was 34 to 35% EBITDA range for the second quarter, so I felt like these were fairly comparable.

In the third quarter results for accommodations, we did have a camp -- a third-party camp sale, which is what we've done historically where we -- our manufacturing capacity is used to build camps for customers that they buy and then own directly and some of that manufacturing work is historically at lower margins which did impact the third quarter EBITDA margin.

Fair enough. You did mention, Cindy, that it looks like 1900 of -- people in terms of -- in terms of Curl. Are you at full capacity now at Wapasu Creek and if so, where are you settling those additional people?

We are pushing full capacity at this stage and we've had a combination of two things. We've had some movement from people out of Wapasu into our other facilities and we've also had some projects with other customers that are winding down, so it's kind of had a natural shift of head count moving to a higher proportion of Curl workers in those facilities. But we did see improved utilization, as I mentioned in the prepared comments in most of our facilities with those two things occurring.

Okay. And, Cindy, what are your thoughts on oil sands accommodations as we move into 2010? Assuming Curl gets signed.

Of course, we're very optimistic and we made good progress over the course of the last month or so with that, but our view and, when we talk about our capital commitments, we are moving forward assuming growth in that business line. A lot of that will be driven by Curl. There are other activities and projects that have gotten a breath of fresh air, so to speak, that seem to have given a pretty good foundation for some other companies increasing their activities as well. So our overall outlook is positive.

I will say, we have a concentration of customers up there and so there will be a tendency, I think, for us to secure a bit more in the way of term contract is my guess to ensure our customers that they will have availability for the facilities that we have in place and we have obviously seen some pricing pressures as customers want to extend the duration of those contracts. We've also been able to counter some of that or mitigate some of that with cost reduction efforts of our own that I think that is the big picture in terms of what we're going to see in the accommodations business going forward.

Okay. My last question, you did raise, I believe, your Tubular Services margins to 4 to 6% from 3 to 5% previously. Can you just comment on the increase there?

Well, we -- of course, part of it is what we realized in the third quarter. We reported 7% gross margins, but net of that $1 million adjustment, I think there's about 6.3% gross margin, so there's a favorable trend there. What we try to do is project what we think are string by string sales into Q4 and we come up with a range of 4 to 6%. That is very variable because it's based on daily sales and ten of our customers to take delivery of those pipe. But we think that's a reasonable range based on what we're projecting will move in the fourth quarter.

Okay. Thanks a lot.

Thank you.

Thank you.

Our next question comes from John Daniel from Simmons & Company. Please go ahead.

Good morning, Cindy and Bradley.

Good morning.

Hi, John.

Hey. I just have two questions for you today. I think you mentioned that Q4 revs within offshore products would be 115 million to $125 million?

Correct.

Okay. Presumably 2010 revs will be down year-over-year given where the backlog is. Any sense as to what a year-over-year decline could be at this point?

We really -- we're going through our budgeting process right now, so I'd be hesitant to give you that number at this stage, but your broader observation is, of course, correct and one that we've been guiding you to the last couple of quarters. In fact, I would have expected that we'd start seeing that trend down by the Q3, but we had a very favorable third quarter, which is operational success as much as anything else. But I think the bigger picture, the whole industry, and we've not been immune to that, has had a period of void in terms of project activity moving forward in offshore and deep water environments. The big picture, of course, we continue to believe and think our customers are committed to developments in deep water, but with this lag, it's inevitable that our revenues are going to come down because it is a backlog driven business.

Right.

I think the key for me is the timing of seeing that recovery in backlog which right now, as we've said before, we think is kind of first half 2010 and I would stick by that at this stage. We think we'll continue to have a fourth quarter be somewhat of a weak quarter in terms of order and project awards based on our knowledge of the products -- projects that are out there and active discussions with the customers.

Okay. Well, then, final question for you and I'll turn it back over to others is as I recall you recently amended your credit agreement to provide more flexibility for international acquisitions. Can you walk us through what opportunities you're seeing at this point?

We did. We revised some of the language that allowed us to do foreign acquisitions and give us a lot more flexibility. Right now, we continue to look for opportunities both for offshore products group and for our accommodations group. We think those opportunities are likely international. Where we'd be looking would be to expand our product line really to improve the breadth of what we can provide on these larger subsea projects and production platform projects for offshore products and then there's several markets in the accommodations business where you've got large customers doing billion dollar multi-year projects, whether that's directly oil and gas related, it could be mining related, but they're very similar to what we're doing for our oil sands customers. We have experienced doing things internationally. We'd like to have a broader foot hold and some -- several different markets for our accommodations business to diversify their activity.

Okay. Okay. Fair enough. Thanks, guys.

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

Thank you. Good morning.

Good morning, Victor.

First one was just a -- Cindy, just regarding your comments on other projects in the oil sands possibly moving forward for next year, would they be filled with new facilities or would that be existing -- existing lodges that would support, you know, those projects?

It's likely a combination of both, to be honest. We're in discussions with various customers up there currently, but there are going to be a little bit of both in my view, both mobile camp and lodge facilities.

Okay. And just, on a comment on backlog recovery in the first half of next year for offshore products, anything you can say as it relates to product lines where you're seeing the inquiry levels or what regions you are seeing it in?

It's pretty broad based, but I'd say it's a weighting more towards TLP activity right now and FCSO activity, which is obviously very good for us because our FlexJoints and our tendon connectors are some of our key projects there that are on those types of facilities. So we're optimistic about it, but that's not to say that the subsea activity has slowed either because there's some pretty good bid can activity there that we're working on as well. Clearly less, though, in the activity on major drilling rig components at this stage, but that's been the case for the last couple of quarters.

Okay. And have you guys gotten any sense of visibility or activity levels on a year on year basis for Canada for this winter season relative to last year?

I will say we've had a lot of customer specific feedback, but certainly there's publications out there that suggest it's going to be pretty awful conventional drilling activity, particularly in Alberta. If you'll recall, we had virtually no contribution from that activity last year or very little. The majority was all from our oil sands accommodations, largely both on the mobile camp side and on the lodge facilities and so you're coming off a very weak year to start with. But this season looks to be a little bit worse.

That's all I had. Thank you, guys.

Thanks, Victor.

Thanks, Victor.

Our next question comes from Stephen Gengaro from Jefferies & Company. Please go ahead. Stephen, your line is now open.

I had mute on, Cindy and Brad, I'm sorry. Good morning.

Good morning.

Good morning, how are you?

Good. I'm glad you can hear me now. The -- I guess two things following up on the accommodations side. You mention the -- sort of the call out or short-term work you're doing around the Curl project. Is that -- is that impacting the margin either positively or negatively as it would -- as we would expect it to going forward if you do win the project?

No, I don't think so. I mean 1900 workers is a substantial amount and it is pursuant to contract. In other words, it's not what you'd call spot market type activity. That's a huge work force that's up there and they're there housed under existing short-term contracts. So I don't view that as skewing our margins one way or another.

Thank you. And then do you have a break out on EBITDA and revenues of traditional versus oil sands?

They remain fairly consistent. I don't have it right in front of me, but the oil sands work remains the overwhelming majority of the revenues and profitability of our accommodations business.

Thanks. And then two others. One on the drilling rig side, your implied rate was up nicely quarter over quarter. Is that utilization driven? Are you seeing anything on price there in the oil areas?

It's definitely utilization driven. If you'll recall in Q2, we got down to close to 20% utilization. So there's a pretty significant impact in terms of leveraging those fixed costs in the business just with the utilization improvement that we've seen. But it's -- until you get a sounder level of utilization across the board for the industry, it's going to be difficult for prices to move forward. Now, my caveat for that is I don't foresee that prices will go lower at this stage either.

Great. And then just a final question on the tubular side. Is it -- obviously there's a lot of inventory still on the ground and you mentioned sort of the dynamics of imports. Are you -- did you have a sense as it pertains to both industry wide, but also your inventories, is there -- are there -- is there product inventory that's in low demand because of sort of the change in the make up of the domestic rig count and the types of pipe people are consuming versus what's laying around in inventory?

Well, there's clearly some of that. Obviously a lot of the higher moving stuff is in the shale plays on the land activity. Now, as you know, offshore activity has been virtually nonexistent this year, so there is a bit of the larger OD alloy product that just isn't moving and we do have some of that in our inventory. Now, just visited with my team very recently and it sounds like some of that OD material is beginning to thin out for the industry as a whole. So we feel like that's going to move and there have been some hints anyway, it's hard to say there's a sustained trend, but some hints that we might see some improvement in offshore activity which will help. I mean it won't take a lot for -- to work through that excess inventory, but, yes, we do have a little bit of that in our product mix that's been slow to move this year and that's true for the industry as a whole.

Okay. Great. Thank you.

Thanks.

Our next question comes from Jeff Tillery from Tudor Pickering Holt, please go ahead.

Good morning.

Good morning, Jeff.

On Wapasu, do you have some expansion dollars baked into your capital budget for this year? And can you talk more broadly about if coal plays out as you expect, how much you think you will end up spending to expand Wapasu?

Well, Jeff, you're very correct. You caught that. But we did up our CapEx number from the last quarter and it does, I guess, evidence our confidence that we're going to move forward on Curl at this stage and we do have some CapEx built in to facilitate an expansion of the Wapasu Creek facility. That's part of what we're looking at. We've not publicly given out the expected capital spending on the total project if that's what you're asking. What we intend to do when we finalize our budget in connection with the next conference call is just give you our planned total capital spending which encompasses Wapasu and other accommodations, projections and plans.

That's fair. I mean if you talked about a number of rooms to be added to the facility, 1500 or so, is that a reasonable assumption?

That's right.

And when would those rooms be available? If you started work, say, December, is that middle of next year?

Well, we have a plan schedule that coincides with the needs of our customer that would be ramping throughout 2010 with full capacity expected in first quarter of 2011.

And my last question just qualitatively as you look at Q4 versus Q3, offshore products really the only thing that would be down sequentially other than potential holiday impacts come November, December in the various North American businesses. Anything positive lumpy in Q3 results other than the $1 million power period production in the tubular business?

Let me just give you a little commentary there. Actually, our North American operations we think will kind of be flattish sequentially at this stage. Obviously the rig count is improved a little bit from what the average was for the third quarter. We think that's going to be mitigated or moderated a bit by holiday shutdowns and, again, we're talking to our customers who are running the drilling rigs, running our rental pools and we're getting mixed feedback as to the extent of those holiday shutdowns, but as you know, it can be kind of a messy quarter because of that. But again, on the bright side, rig count is up a bit, both oil and gas. On the negative side, there's likely to be some holiday shutdown, so we're kind of just staying neutral on that.

Offshore products we're guiding you down because our backlog is down fairly significantly at this stage and that's really the message there. And then on tubulars, you made it sound like that would be flat. If you use a 4 to 6% gross margin, that's going to be down just a bit as well, given that we reported 7% gross margins in Q3 and acknowledge that 1 million of that was out of period for a net kind of 6.3% gross margin. But depending on where we're coming in on that range, tubulars could be down a bit in Q4, also.

That color is very helpful. That's all the questions I had.

Okay. Thanks, Jeff.

Thanks, Jeff.

Our next question comes from David Griffiths from Copia Capital. Please go ahead.

Good morning.

Good morning, David.

I was hoping you could touch on a couple of items for me. Can you talk about kind of from the end of last year to now how much working capital you've taken out of the balance sheet and, if you think there's any more (inaudible) on that side?

Yes, I have us taking out approximately -- let's call it $130 million of working capital.

Okay.

Year to date.

Year to date. And then what do you expect going forward?

Well, seasonally, Canada usually has an increase in working capital going into the fourth quarter and into the first quarter, so that will be going the other direction. I hope that we'll continue and expect to continue to work down our inventory at Tubular Services, but I think most of that -- a majority of that working capital reduction is behind us. And I -- most of it is behind us at the rental tool -- or the other North American businesses. So I would say we've got maybe $15 million, maybe, in total reduction in the fourth quarter net.

Okay. Can you also talk about rental tool margin? Came in probably a little bit better than I expected. Certainly, I guess, you look at some of the results of peers than you might have expected from that. Can you just talk about, what to expect going forward with rental tool margins and, why kind of the positive deviation from my thoughts this quarter?

Well, David, as I mentioned, if you look -- sequentially is the way to look at that, obviously. There's a couple of things to note, but first of all, our revenues were down sequentially. It was modest, but down just a bit. But I think like so many companies these days, what you're seeing is the impact of cost control and cost mitigation efforts that we've put in place and this particularly for us is a business line that has grown significantly both organically and through acquisition and we have had opportunities to enhance our operations through facility consolidation and we initiated those efforts in 2008. We've got some great facilities up and running now in the key resource play that is really lending to some efficiencies across the board on the cost side. So again, the success there is largely cost driven in Q3.

I think going forward, as we begin to leverage the revenue with the expansion in the rig count we'll see better contribution overall, but I think we did have a good quarter in light of overall activity and what we're seeing in the competitive landscape, I think that we have at a minimum held market share, if not expanded market share through this downturn. So although it's been a painful process for the rental tool group, I think overall have held up fairly well. And again, the nuances that will be out there in Q4, kind of one time in my view and they're a bit unpredictable depending on what our customers do over the Thanksgiving and Christmas holidays, but that's not a trend. So I feel like in that business we are finding a floor. I should knock on wood, at least in terms of what the signs we're seeing right now in the rig count and our customers relative level of optimism, quite frankly and we're seeing some customers that not necessarily on the rental tools side, but on drilling rigs and tubulars that are finally talking now about some longer term commitments and/or program work in the tubulars and I think the message there, the sense is that they're optimistic about their plans for 2010 and they think costs are about as low as they're going to go and are looking to lock some of that in. And so that's -- that to me is one of the more favorable trends that we've seen. But again, it's been an environment that obviously had a substantial correction over the last 9 to 12 months.

Great. And then one last question on the tubular side. Can you just sort of talk about -- I guess we've sort of talked about this the last couple of quarters, is what you're expecting on a revenue per ton basis going forward over the next couple of quarters and can you talk about the basket of OCTG that you sell kind of what the leading edge is versus what you're selling it for in the last quarter and just talk about, if we should continue to expect the price per ton to trend down over the next couple of quarters or do you think that's going to go the other way?

I think you will and that's kind of baked into my comments telling you we still need another probably six to nine months to work through all of this as an industry because we still have sales that are being made on a committed basis that are at higher margins than probably would be realized on the stock market basis. All of those things obviously get a little better if the US mills continue to constrain production, if imports continue at the low levels that they are and the rig count stays flat or expands, we will work through that. So we're predicating all those comments kind of on the situation that we see, but, at these levels of activity, again, one of the comments our consumption is down probably 40% year on year, so that's got to work through the system and this slug of inventory, fortunately we don't have an 11-month supply in our own inventory, but it is out there and until we work through that and get an enhanced position, I think it's -- it's a little premature to think that we've found a floor on pricing.

Great. Thank you very much.

Thanks, David.

Our next question comes from [Dmitry Dan] from Goldman Sachs. Please go ahead.

Good morning, guys.

Good morning, how are you, guys?

Good. You referenced earlier in the call customer owned tubular inventory and how that is being worked down before customers will be back to working with distributors. Do you have a sense of where we are kind of in a sense of ratcheting down customer owned inventory?

Well, I won't say it quite as strongly as you put it, but in the mass of inventory on the ground, there is some remaining customer owned inventory. I'll be honest, I've kind of forgotten. The OCTG situation report has tracked that in prior reports and I hate to give you a number, but I think it got as high as maybe 17% that was customer owned and that's working through. That's not to say they're not taking pipe from distributors because they clearly are and it's not the large percentage of what inventory's on the ground, but if they have taken pipe and have not run it down whole, whether that's sitting in a distributor's yard or in their own third-party facilities, there's a tendency to use some of that and also to take incremental product from distributors, so it's a bit of an allocation process. What I can tell you is I do believe those customer-owned inventories have gone down throughout the course of this year from where we began earlier in this year. But I don't have a hard fact I can point to other than, that's just what I believe to be the case based on the discussions with the team that we work with.

And on -- in terms of pricing, if I can follow up on that, pipe logic is actually reporting that the last couple of months we've seen price increases in certain grades. Are you seeing any of that at all?

I would say it's a mix basis as much as anything, but there's probably very modest improvement for high demand items. That's obviously a question the mills could probably answer better than we could. But I would say we see it, but it's on isolated strains where -- it's not the inventory situation that we're dealing with, but the more rapidly moving product is still priced very competitively.

Got it. And my final question is, last quarter you commented that about 79% of your inventory is committed, backed by purchase orders. Can you update us on what it is this quarter?

71%.

Perfect. Thanks very much.

Thank you.

Our next question comes from Joe Gibney from Capital One. Please do ahead.

Hey, good morning.

Good morning, Joe.

Just wan to follow up on a couple of minor items. Bradley this question on the working capital side, you guys have been pretty vigorous on your debt paydown here over the last couple of quarters. Not much room to go here, but just kind of curious, expectations there, how should we be thinking about further debt pay downs into the fourth quarter and 2010?

Well, it will really depends on how much CapEx gets spent in the fourth quarter is part of it. I suspect that we will draw down -- assuming we're successful on the Pearl project, assuming we move forward with beginning manufacturing of expansion of Wapasu, I imagine we will draw down more in Canada than we have been. I see us paying down a little bit more in the US. I think that's where the working capital reduction left to be done will be. I have us maybe reducing it slight -- it's -- I don't think the debt reduction will be significant in the fourth quarter.

Okay. And your total -- remind us again, what your total revolver availability is now?

$450 million.

$450 million. Okay. Relative to the CapEx spend here in the fourth quarter and presumably on the uptick on the accommodation side, is there anything built in there on Conklin. I know you guys had discussed maybe considering an expansion here? Is that more a TBA at this point in 2010?

It's to be determined in 2010. That's exactly right. Scaterwal is one of the more active customers in that region, they have fortunately taken some incremental capacity, so they got better utilization in the existing facility, but we're still evaluating what the longer term opportunities might be and we'll announce that in connection with finalization of our plan in the fourth quarter call.

Okay. And just an update on utilization at Beaver River. I know previously this had been hovering around 50%, maybe a little bit below, but it sort of hadn't reached a point yet where it was hurting margins. Is that still the case today? Just kind of what's the stance currently on Beaver River? You indicated on the call maybe shifting some of the personnel around relative to Curl. Just what's the status there?

Well, it has improved. I don't have -- I get this weekly and I'll be honest, I didn't look the last time, but I don't know whether it's 75% utilization or 80. It's probably in that range, order of magnitude. So we've seen some improvement, but in reality, we were able to actually hold our margins up pretty well even when utilization went down to 50% just by closing down some of the capacity, i.e. closing down wings and not supporting -- if you don't have anybody there, you're able to cut your variable costs and there aren't many fixed costs on a facility by facility basis, it's more of the corporate overhead that you deal with. So our margins held up rather well even at 50%. But I can't give you the exact percentage. I can tell you that it has improved, though, since our last -- we last talked about it.

Okay. That's helpful. And then just one last item, Bradley, as I think about tax in the next year, I know you're formulating initial plans, but for modeling purposes revert more back to the historical norm in the low to mid-30s?

Yes, I think that is right. I think we guided previously 29 to 30% tax rate next year and that's kind of presuming that foreign sourced income, particularly Canada, continues to drive things where we've got lower statutory rates and some improvement in the domestic earnings relative to this year, but it should be primarily driven by the foreign rates.

Yes. Our foreign rates have been averaging on a blended basis somewhere around 28%.

That's right.

And then, of course, the US rates with all the fully loaded taxes are about 36.5. So it's highly dependent upon that mix, but I think the kind of low 30s that Bradley spoke to is likely.

Okay. Thanks, guys. I appreciate it. I'll turn it back.

Thanks, Joe.

Thank you.

(Operator Instructions) We do have a question from Thad Vayda from Stifel Nicolaus. Please go ahead.

Good morning, everyone.

Hi, Thad.

A quick question about negotiating a long term contract in the accommodations world now versus a couple of years ago. You're contemplating an expansion here and it looks, based upon utilization that you should be able to achieve this. You also indicated the presence of some pricing pressure. So I guess the first question is how much of an accommodation do you have to make here to maintain some minimum returns on these and, second, how do you cut costs in these facilities to accomplish that?

Well, we don't have to make a lot of accommodations to get good returns on the investment, if that's what you're asking. If you'll look at our numbers, as you know, we've had strong return, but any customer that's willing to give you a long-term contract is going to expect some preferential or favorable pricing in return for that extended contract and our customers in Canada are no different than that. But our returns continue to be very good, very adequate for the investments that we're making. I can assure you of that and, of course, that gives the ability to fairly well lock them in once we have long-term contracts in place.

In terms of cost cutting, we have a significant procurement group out there, as many do, that, obviously, with the global environment what it is, we are able to effect cost savings to offset some of the revenue concessions that are made and that's materials based. I mean we're a logistics food services provider, as an example, and so we just try to negotiate better deals, labor was extremely challenged because it was so tight over the last three to four years prior to this economic downturn, so labor has been more favorable, but it's a bit stickier. You don't get a much immediate reductions there overall. So -- and there's other things that we're doing where we previously outsourced services and we're insourcing those services that have affected cost savings as well.

But we're in an extremely remote, difficult operating environment up there. In many cases we don't have power, we don't have running water, so there's a lot of things that as the facilities and operations mature and you bring in power lines as an example, waste water treatment, water facilities, you can effect long-term changes to the cost structure, which I think helps our customers in the long run and the viability of the projects in the long run.

Thank you very much for the color.

Thank you.

We have no further questions at this time.

Well, I want to thank all of you. I know it's a very busy week and a busy day and I appreciate your joining us on the call today and we look forward to the next quarter with you early next year. Thanks.

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