Oil States International Inc (OIS) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Oil States International first-quarter earnings 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. Welcome to the Oil States fourth-quarter 2009 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 that our remarks today contain information other than historical information, we are relying on the Safe Harbor protections afforded by federal law. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K and our other SEC filings.

I will now turn it over to Cindy.

Thank you, Bradley, and thanks to all of you for joining us on our call this morning. For the fourth quarter of 2009, Oil States reported sequentially stronger results in most of our businesses. Consolidated revenues and EBITDA grew sequentially by 16% and 31%, respectively.

Our Well Site Services segment delivered sequential revenue and EBITDA growth of 23% and 45%, respectively, driven largely by strong earnings from our Canadian Oil Sands Accommodations business and higher activity levels driven by the 14% sequential improvement in US drilling activity.

Our Offshore Products segment contributed slightly higher margins on a modest decrease in sequential revenues. However, our backlog continued to decline to $206 million, as new project awards continued to be delayed.

For the fourth quarter of 2009, Oil States generated revenues of $528.7 million, EBITDA of $90.1 million and earnings of $0.78 per diluted share. We generated free cash flow during the quarter and paid off the balance of our revolving credit facility.

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. Throughout this call, we will be excluding from our discussion of EBITDA the goodwill impairments taken in the second quarter of 2009 and the fourth quarter of 2008.

During the fourth quarter of 2009, we reported operating income of $58.5 million on revenues of $528.7 million. Our net income for the fourth quarter of 2009 totaled $39.9 million, or $0.78 per diluted share. The comparable fourth-quarter 2008 results were $135.5 million of adjusted operating income on revenues of $901.1 million. The year-over-year decreases in profitability were primarily due to the 42% year-over-year quarterly decline in US drilling activity.

Depreciation and amortization in the fourth quarter of 2009 totaled $31.2 million compared to $26.9 million in the fourth quarter of 2008. This increase was due to the capital expenditures made over the past 12 months. D&A is expected to be $31.7 million in the first quarter of 2010.

Net interest expense totaled $3.5 million in the current quarter and $4.4 million in the fourth quarter of 2008. Net interest expense is expected to be $3.2 million in the first quarter of 2010.

The effective tax rate in the quarter was 27.9% compared to 34.8% in the fourth quarter of 2008. The effective tax rate in the fourth 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 currently estimate our effective tax rate to be 28.5% for 2010.

During the fourth quarter, we reported cash flow from operations of approximately $101 million and spent approximately $46 million on capital expenditures. As a result, our net debt at the end of the fourth quarter was $75 million compared to $132 million at September 30, 2009.

As of December 31, 2009 , our debt-to-cap ratio was 11% and our total debt to EBITDA was less than 1 time. As of December 31, 2009, the Company had approximately $480 million of availability under our credit facility.

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

Thank you, Bradley. I will start our discussion with Well Site Services. Our Well Site Services segment generated revenues of $222.6 million and EBITDA of $66.4 million in the fourth quarter of 2009 compared to $180.4 million and $45.7 million, respectively, in the third quarter of 2009. The sequential improvement in revenues and EBITDA was primarily due to increased contributions from our Canadian Oil Sands Accommodations and our Rental Tool operations.

We continued to enjoy strong utilization levels in our major Oil Sands Lodge facilities. During the fourth quarter of 2009, Accommodations revenues and EBITDA were up 49% and 44%, respectively, from the fourth quarter of 2008. Our current-quarter results benefited from Camp manufacturing revenues to third parties totaling $22.1 million and minimum contract guarantees of $10.4 million compared to $1.5 million of Camp manufacturing revenues and $8.3 million of minimum contract guarantees in the fourth quarter of 2008.

Our Rental Tools business generated $57 million of revenues and $11.7 million of EBITDA in the fourth quarter of 2009 compared to $51.7 million of revenue and $6.5 million of EBITDA generated in the third quarter of 2009. Our Rental Tool revenues were positively impacted by $2.6 million in state gross receipts tax refunds and a favorable patent lawsuit settlement, both of which occur infrequently. Excluding these benefits, EBITDA margins in the fourth quarter would have been approximately 16% for our Rental Tool operations.

Our Drilling revenues and EBITDA increased sequentially by $6.3 million and $1.1 million, respectively, compared to the third quarter of 2009. The sequential improvement in revenues and EBITDA was primarily the result of increased utilization of our rigs operating in West Texas as stronger oil prices buoyed activity in the area. Our drilling rig utilization increased to 53% during the fourth quarter of 2009, up from 40% in the third quarter of 2009.

In our Offshore Products segment, we generated $127.1 million of revenues and $24.5 million of EBITDA in the fourth quarter of 2009 compared to $131.8 million of revenues and $23.3 million of EBITDA in the third quarter of 2009. The modest sequential decline in revenues was primarily due to lower connector revenue. This reduced revenue was offset by improved margins on subsea pipeline and rig equipment to generate the sequential improvement in EBITDA.

Backlog totaled $206.3 million at December 31, 2009, down from $252.7 million at September 30, 2009. The decline in our backlog was primarily due to continued delays in project awards, as our customers have rebid many projects following the global economic crisis of 2009.

In our Tubular Services segment during the fourth quarter of 2009, we generated revenues of $179 million and EBITDA of $6.9 million compared to revenues and EBITDA of $143.9 million and $7.2 million, respectively, in the third quarter of 2009.

Tubular Services OCTG shipments increased 31% sequentially to 88,500 tons from 67,500 tons in the third quarter of 2009. Gross margins in the fourth quarter decreased to 5.2% from 7% in the third quarter of 2009, as our revenue per ton declined 5%. The Company's OCTG inventory decreased to $265.7 million from $289.4 million at September 30, 2009. Industry inventories have fallen to approximately nine months' supply on the ground as per the OCTG Situation Report.

Now I would like to leave you with our thoughts on the market outlook for our businesses. Activity in our Drilling operations continued to improve in the first quarter of 2010 due to higher utilization of our West Texas rigs, which are exposed to oil drilling activity. We expect utilization to average approximately 65% for our total rig fleet in the first quarter of 2010 compared to 53% realized in the fourth quarter of 2009, as strong oil drilling activity continues in the Permian Basin. Cash margins are expected to be relatively flat sequentially.

Activity for our Rental Tools business is primarily tied to completion and production services activity in North America and will generally track movements in the gas rig count. Rental Tool activities should expand with growth in the US rig count in the first quarter of 2010, but will continue to be negatively impacted by a competitive pricing environment. As a result, sequential revenue improvements in Rental Tools will likely be modest in the first quarter of 2010.

Likewise, shipments of oil country tubular goods from our Tubular Services segment should follow trends in the US rig count. Typically, volumes are lower in the first quarter of the year due to the seasonal buying patterns of our customers. Industry OCTG inventories have declined to approximately nine months' supply on the ground. Domestic mills continue to constrain production based upon demand, and imports remain at muted levels following the ITC's approval of duties levied against Chinese OCTG imports.

Margins are not expected to expand in the first quarter, as the market continues to unwind the oversupply of oil country tubular goods. As a result, we expect Tubular Services gross margins to remain in the 4% to 6% range during the first quarter of 2010.

On December 15, we announced the award of a three-year contract with Imperial Oil to support their Kearl Phase I development. This contract, along with the extension of contracts with Suncor in support of their Firebag project will provide Our accommodations business with stability of revenues and profit in 2010.

As a reminder, our first-quarter 2009 results benefited from third-party Camp sales, which provided approximately $36 million of revenue and $10 million of EBITDA. Considering the high level of manufacturing contribution in the first quarter of 2009, we currently expect first-quarter 2010 revenues from Accommodations to be in the range of $140 million to $150 million.

In our Offshore Products segment, our operational executions have been good throughout 2009, with strong revenues and margins despite a lower backlog, which declined another 18% in the fourth quarter of 2009, primarily due to delays in project awards. As a result, we expect first-quarter revenues to decline to $90 million to $100 million, with EBITDA margins averaging 11% to 13%.

As we reported in our press release, we generated good cash flow in the fourth quarter, fully paid off our revolving credit facility and had $90 million of cash on hand at year-end. We enter 2010 well-positioned to take advantage of investment opportunities which may arise.

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

(Operator Instructions) Jeff Tillery, Tudor, Pickering, Holt.

Cindy, could you talk about your comfort level around the outlook for Offshore Products orders, kind of when you would expect to see that start to increase, and just to what degree do you have visibility around that at this time?

It is always hard to pinpoint a quarter, but we have projected it would be about midyear when our book-to-bill ratio should go back to 1 or better. That is based on specific projects that we are bidding and indications from those customers.

But clearly, I think we and many other service companies in this space are looking for kind of the latter half of 2010 being more favorable from a project awards standpoint.

That's helpful. Thank you. And then just on Accommodations, could you talk about kind of the progress in expanding Wapasu, kind of where you are today and the pace of room adds that you would expect over the course of 2010?

Sure. We are on time thus far with expanding the rooms at Wapasu. If you will recall, we had approximately, I think it was around 400 rooms at Wapasu that were temporary. We [demoped] so we could then use that space for more permanent rooms, to bring it all the way up to the total capacity of 5000 rooms by the end of the first quarter of 2011, of which 4500 will be rentable to customers; the other 500 will be for our employees and contractors.

We are on pace for that right now. I believe we had a little over 2600 rooms last time I checked available at Wapasu. So we are making progress.

The net result is since we take kind of one step back and two steps forward, the average available rooms at Wapasu year-over-year will increase on the order of magnitude 5%, because we will be taking those rooms down and then building up. But obviously, our exit rate will be much higher. I think we exit around 3600, 3700 rooms.

Then just last question around activity here in the first quarter. How disruptive has weather been to the operations so far? And if so, could you help us out, just quantifying that way -- what you can tell at this point?

You're talking about Canada or (multiple speakers) -- I'm sorry?

In the US.

In the United States. It has had some impact, clearly. A lot of the weather patterns were across the MidCon and those activity levels have been a little bit lower. But I wouldn't say there is a material impact. But part of probably our guidance going from Q4 to Q1, i.e. the sequential improvement being fairly modest in our Rental Tool business, has something to do with some of the seasonality we see.

And we guided to -- I forget the percentage on our rig count utilization. Part of that strength in West Texas is clearly offset by seasonal patterns in the Rockies, just to put it in perspective. So we have factored that in, to answer your question, into the guidance in our opinion.

Okay. Thank you very much.

Victor Marchon, RBC Capital Markets.

Thank you. Good morning. The first question I have was just on the Oil Sands or the Accommodations on the manufacturing side. Obviously, very strong quarter, and understanding that the business can be lumpy, I just wanted to see if that was a sort of anything that we should be keeping an eye out for, whether that is going to be elevated or more elevated level going forward, or if it is just, again, the lumpiness of the business.

It is really just lumpiness of the business. There was very little construction in 2009 generally, whether for third parties or for internal use at all. So we were very pleased to have -- we had one sale in the third quarter, not quite as big, and one sale in the fourth quarter. But that was about it for the full year.

Trending forward, of course, as Bradley has reviewed with you, we are committing a lot of our capacity to our internal expansion at our Wapasu Creek facility. But it is lumpy, and just -- that is why we wanted to remind you that our first-quarter 2009 had a fairly significant contribution from manufacturing, but it is heavily dependent upon the expansionary plans of our customers and the internal building plans that we have for our own use, as well.

Thank you. The second was just on Offshore Products' margins. When you look at -- if we do see that upturn in orders midyear to second half of the year, and given what you guys have in backlog, what is your sense as into the bottom in margins? And the bottom in margins, like the first-half event, just give us some sort of trendline if you can on that.

We clearly think it is a first-half event. And if you will recall, we do POC accounting for our more significant, long-duration contracts. So as long as we get the order and are able to get materials and start to work, we will start having revenue contribution from that that we are guiding to fairly significantly lower margins. We've been doing that for a quarter or two, simply because of the backlog erosion that we have witnessed.

Again, our performance during 2009 was very good, and our fourth-quarter margins reflected some of the winding up of a couple of projects at good margins as well.

But going forward, that 11% to 13%, we are hopeful that will represent the floor, and again, we will start getting order activity about midyear, particularly for some very good projects that have good revenue content. And it is some of our higher-margin technology content as well.

So we have every reason to think that it will turn and that our results will improve. But in the short term, we have to be responsible and tell you that this backlog decline does have some impact on our revenue contribution and our EBITDA margins.

And the last one, if I may -- and I apologize if you had said this -- is CapEx for 2010.

It will be in the range of $230 million. If you noticed, we had -- on our last call had projected what -- if you backed into it, about $90 million worth of CapEx in the fourth quarter of 2009. We didn't get all that spent, so we had about $30 million roll over. So we had been kind of guiding people to around $200 million previously. And once we kind of closed the books and saw where final spending was in '09, we had about $30 million roll over. So we are right at about $232 million.

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

Arun Jayaram, Credit Suisse.

Good morning, team. Nice results. Cindy, I wanted to get your sense of where you think you could see the inflection point in terms of the Tubular segment. Would you expect if the rig count was to hold flat or go up a little bit that we could start seeing some margin improvement by the second quarter or could it take long longer than that?

It is clearly possible, and we are seeing some positive signs. The only caveat there is we still have -- and we may be better than nine months' supply on the ground. That is just the latest published report that is out there.

There are some indications of areas where it is getting a bit tighter, of course, and overall. But in general, we are moving in the right direction. We are not exactly where we want to be in terms of months of supply. And so until we and others really move forward and reduce that supply on the ground, it is still going to be a bit competitive from a price standpoint.

We have seen some price improvements in various grades, and the mills have announced a certain degree of price increases. So again, there is a lot of favorable signs. It is just really a matter of when we work through this residual amount of inventory and start really rebooking at some of the improved levels going forward.

But it could be a little sooner. We've predicted second quarter for our business now for quite some time with you guys on the Street. And I think, if anything, it is trending towards a modest improvement or a shorter period of time to get in a better balance again, assuming all these metrics stay as they are currently. But that is kind of our overview, and I don't know if it is early second quarter, mid or late, but I do feel fairly good that we are working into a better supply-demand situation currently.

And would you anticipate the improvement to be consistent with previous historical kind of patterns -- in terms of an improvement?

I think -- I will lead off here and let Cindy chime in -- but I would say that we are currently guiding to the 4% to 6% gross margin range. That is on the lower end of the spectrum of where this industry has been. I would say in a balanced market, you expect it to go to more of that 6% to 7% gross margin range. We have been higher than that in the past.

But you really -- to start moving north of 8% gross margins, you have to expect that what is happening is the mills are pushing pricing, and that is really what drives our margins towards the upper single digits and into the double digits on a gross margin basis. Is that helpful?

That is very helpful. Cindy, last time we talked, you were -- in Offshore Products were in the process of bidding on several TLP and FPSO opportunities. Do you expect to hear any results in the first quarter, or could it be more back-end loaded?

I still think it is more back-end loaded. I think we may hear on certain projects by second quarter. Again, it is very hard to pinpoint a quarter. But I got pretty good dialogue and input from all of my operations folks. And again, it could be second quarter, it could be second half. But I think in totality, the greater weighting is going to be second half at this stage.

Okay, a couple others. Cindy, you've -- obviously, you and Bradley have assembled a very nice balance sheet. And you continue to look at acquisitions. Owing to industry consolidation, there may be some product lines which are available -- directional drilling, rotary steerables. Can you comment on, broadly, your interest in directional drilling or rotary steerables, how it would fit with your current product lines?

Well, we are very active. We've got broad-based exposure to a lot of markets. And so we tend to look at quite a lot and assess the strategic merits. I would say where we have been lately is heavily focused on technology advancement and geographic expansion in Offshore Products, and also international expansion in our Accommodations business.

North America, we are looking at various opportunities. I think we are just -- I don't want to use the word cautious there, because I don't think that's the case -- but we are definitely value-sensitive and we are really trying to get our arms around the sustainability of this improvement, particularly in the gas rig count, before we would commit to acquisitions in North America at significant premiums. And I think that is an indirect answer to your question.

We could possibly look at some of these types of items, but we are also very careful not to compete with our customer base. So we would have to look at all of these individually on both fronts, i.e. the sustainability of the business, the value paid and whether we feel like that might be a step towards our customers' activities.

Okay. And last question, as you think about trying to think of other opportunities for Accommodations, there are some interesting project in Australia, Papua, New Guinea. Can you frame perhaps, Cindy, some of the opportunities for Accommodations outside of Canada?

We have had an international platform over the years. It just tends to ebb and flow with project-driven work. We've worked in various markets across the globe, and we are really looking for increased international opportunities. You name a couple of areas that are obviously interesting to us that we are exploring at this stage. But it will be project dependent.

But the type of capacity and capabilities is very transferable across the globe, and we feel like there are certain markets that are very much like what we do in Canada, and we feel like we could be a significant player there if we can get the right contract opportunities. But generally speaking, even in the Canadian Oil Sands, these are generally mining-oriented type platforms and so the markets you mentioned are very comparable to that.

Okay. Fair enough. Thanks a lot, Cindy, Bradley.

Joe Gibney, Capital One.

Just want to follow up on the [TOP] line of questioning. You guys have been pretty open about the bidding activity picking up, and just following Arun's question there, given the projects that are certainly out there and identifiable, whether it is Jack-Saint Malo or [Morris B], Pony, (inaudible). They are all seemingly lining up with a little bit more pace.

Just curious as we look to sort of back half mix and into 2011, even in your subsea mix, is it certainly going to be more [tending] connector oriented, subsea pipeline equipment oriented, and kind of moving away from mooring systems and BOP integration work? Just curious to get some thoughts on mix within subsea and Offshore Products.

I think you said a lot of things that are very accurate there. We are suggesting that we'll have a greater weighting towards production infrastructure by floating, i.e. TLPs and FPSOs, in subsea.

We'll continue to do the service-oriented work on riser repair, BOP riser repair work, and that is very good work for us. It is really new construction of drilling rigs and vessels that we think, over the course of two or three years, will be waning. And so we have expected that, as you point out, the wench work, whether that is for drilling rigs or for both in some of the subsea BOP stack-up and integration work will decline over the next two or three years. We are hopeful that with the expansion in the activity on the production infrastructure side, that we will not only be able to replace some of that lost bookings work, if you will, but also do so at improved margins. This is some of our higher margin work.

Okay. That's helpful. And just following up on Victor's question on the Camp manufacturing side, I know it is lumpy; you guys have alluded to that.

But what was the sequential change, like third-quarter Camp manufacturing revs? You gave the year-over-year, but what was the third-quarter number?

Just a sec. I think I've got that for you.

Bradley is going to try to pull that up and see if he's got it.

Okay.

It was -- we had -- between manufacturing and the contract guarantees, we had about $30 million in revenues at comparable margins.

Okay. That's helpful.

In Q3?

Improvement in Q4 from Q3.

Okay. And last one, just on the rental side, just mix there. You see revenues trending up commensurate with the rig count -- it's a positive uptick. Just curious if there is any particular subsegment of that mix that is showing a little bit more traction as rig count has trended higher? Is it wellhead isolation, or are you seeing a little bit more in the stinger side with flowback and well testing? Just curious if anything is getting a little bit more traction in pickup and utilization.

Yes, I would -- you hit the nail on the head. It is more on the wellhead isolation, again, tied towards these large pressure pumping, multistage completion type work. And we are seeing a little early traction more so there, and modest improvements in some of the other business lines as well. But I would say that is leading the recovery.

Okay, great. Nice quarter, as per usual. Appreciate it.

Bo McKenzie, Global Hunter.

Congratulations on a great quarter. Most of my questions have been asked, but going back to the OCTG business, I know that we've seen a handful of the mills announce some price increases recently. It seems to be, at least the consensus of some of my friends in the business here, that certain grades, small diameters, particular alloys, are in fairly tight supply, even though on a kind of a consolidated basis, there are still nine months of supply.

Where do you guys see some of the opportunities, particularly given the long horizontal sections that are going on right now, to possibly pass through maybe faster than the anticipated price increases in that business right now?

Well, it is our view, and we have always been more oriented towards alloy type grades, and those are really the type of product that is being consumed in these resource plays, to a large degree. So I think that plays pretty well in terms of our product offering over time. So we are definitely focused on the alloy grades, particularly seamless type product.

Some of the smaller grades, yes, but I would say your ranges up to 9 5/8 are beginning to show positive improvements in terms of supply on the ground. That is just kind of a macro view. Some of the larger OD stuff has lagged just a little bit because of the weakness in the offshore type activity.

However, I will say that just this morning, there has been some modest improvements in the offshore rig count, which should help us, I think.

Cindy, on that front at least historically, you guys are pretty good about whenever the mills increase their prices, you guys were able to mark those up fairly quickly to your inventory on the ground. There was a handful of price increases that came out late Q4, early Q1. Have you guys got a chance to price anything more through in your inventory?

We've really been trying to work through our inventory and get it more lean over the course of the last 12 months. There is no secret about that. And we had a very significant percentage of our inventory that was already committed to sales coming into 2009. That is really no different than where we are today, largely because of the industry situation; it has been kind of hard to want to go speculate and type inventory when there is this much is supply on the ground.

So simply put, with that much committed inventory, we are not really trying to mark up existing inventory. But again, it's a more favorable environment to us when the mills do increase their pricing.

Okay. Then back on the Offshore Products, I know you've talked about a number of things and what could be a lot better in the second half. Do you think that Q2, Q3, Q4 last year represents the bottom in the book-to-bill, or do you think there is still another leg down?

I don't remember where our book-to-bill floored. I think Q3 was 0.6 times, but I'm not positive about that, Bo. I don't see it getting -- again, we're coming off a lower base, but I don't see us flooring below that at this stage.

All right. Great. Well, thanks a lot.

John Tasdemir, Canaccord Adams.

The morning. I guess really the only thing left I could think of was on the Tubular side, I guess since the last down cycle and early up cycle, the mill ownership has changed hands a bit. And I'm wondering if you've got a sense of how quickly they are responding or slowly they are responding to the increase in tubular demand. Have you seen those guys do anything with their turns or their shipment levels or are they starting to increase their manufacturing? Any sense of what they are thinking?

Well, I definitely think the mills are responding, but they are responding prudently, i.e., they are not bringing on too much capacity too quick.

The utilization, as I recall, was somewhere in the 40% to 50% range last year, so very low levels of utilization in the US mills. And of course, with the import duties on Chinese product, there is some room there for possible market share expansion of the US mills. But they don't want to overproduce. And again, we've got nine months' supply on the ground, so I think the order book is building in areas where there is a little bit of tightness and also program work, which is generally left for six months kind of demand timeframe.

Now, the rig count is, of course, inflecting upwards, but I do think they are handling that very well at this stage. There are a couple of mills that are bringing on capacity, i.e. one that is expanding capacity and one new mill that is coming on in the summer. So I am not really concerned today about the mills not being able to supply the market at this particular stage.

I think -- just listening to a lot of the questions and thinking through it myself, with China out and the mills at relatively low utilization and the rig count -- particularly horizontal rig count -- picking up, I got to think there is the positive -- there is a potential for kind of a positive move back half of the year if the rig count keeps going up.

We agree with you; not disagreeing with that at all.

All right, guys. That's all I had. Thanks a lot.

(Operator Instructions) Dimitry Dayen, Goldman Sachs.

I have just one question here. On Rental Tools, I understand the pricing environment remains very challenging. But considering that we are seeing higher rig count, high utilizations and your cost structure improving, can we maintain 20% plus EBITDA margins in this business for 2010?

I'm sorry, would you repeat your question?

Sorry. You alluded to a challenging price environment in Rental Tools. But considering that utilizations are going higher and rig count is going higher in the industry, could we maintain 20% plus EBITDA margins here as we go through 2010?

I think that we will be exiting at that rate. I'm not sure we will get to a full-year average that will be in that range. But I think -- we are kind of midteens right now. If the rig count continues to improve and we get some -- the markets to take some of the excess capacity out, we get the improvement in the areas that we need, which are the shale plays and, as you mentioned, the horizontal rig count, etc., then we could see those margins start to improve. And early expectation is that we would be on an exit rate in the 20% EBITDA margin range.

That is very helpful. Thank you.

Blake Hutchinson, Howard Weill.

Quick question, just a point of clarification on the Accommodations business guidance. Your revenue outlook does not include anything from manufacturing or these minimum guarantees, correct?

It does not include any significant manufacturing revenues or minimum contract guarantees. That's correct.

And so as we kind of work through the quarter, I would imagine manufacturing you probably would have in hand already, but is there potential that minimum guarantees could still be additive to that type of number? How should we think about that?

Well, for us, it would be dependent upon what we budget and forecast by facility. In other words, if we are budgeting say 80% utilization and we have minimum guarantees at the 70% level, that is not helpful, right? You see what I'm saying?

And what we've had under some past contracts is that these were long-term, i.e. the full term of the contract, so when a contract ends, it may be a 12-month, 15-month, 18-month contract, and you don't know what those minimum guarantees are until the end of that period.

Most of those we've converted to a quarterly measurement date to kind of moderate some of the quarterly swing associated with the minimum guarantee. So I think it will be less of an impact going forward.

Okay. So in essence, your best guess is in the budget, and then you (multiple speakers) true up?

Exactly.

Okay, great. And I hate to keep harping on this, because it has been asked several different ways, but you commented on the 11% to 13% kind of margin guidance range for Offshore Products being somewhat of a bottom. If we keep order rates pretty similar to what we've seen in the last couple quarters, do we feel like that 90 to 100 is probably also a good bottom? On the revenue side, excuse me.

At this point, I think our best idea is that that is the bottom. Not that it is going to have a hockey stick recovery here at all, but right now, my best guess is that is the bottom.

Sure. And Cindy, you mentioned that several of these larger projects, the repricing process is going on. If we do -- orders come in according to kind of your outlook and we start to get back to healthier revenue run rates next year, in the $110 million plus range, do we need to be thinking about pricing having -- a differential in pricing versus the end of last cycle having a couple hundred basis points' effect on margin, or how does that kind of unfold?

Well, you know, we have to look at every project individually. I think the positives are the mix outlook for us. It is a competitive rebid process in every case, so it's highly dependent on which products we are talking about in terms of it.

And there has been a lot of -- yes, we've had customers come back to us and want pricing concessions, but we've also gotten offsetting concessions from our suppliers, particularly on the materials side of the equation. So overall, I think we are going to be in a pretty good place, with good mix and at least kind of historical kind of margins.

Great. Thanks. That's good color. Appreciate it.

At this moment, we show no further questions in queue.

Okay. Thank you all very much. We appreciate your continued interest in the Company and your continued support, and we look forward to visiting with you throughout the next quarter. Thanks so much.

Thank you. Ladies and gentlemen, this concludes today's conference.