Oil States International Inc (OIS) 2010 Q2 法說會逐字稿

Welcome to the Oil States International second quarter earnings call. My name is John, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. (Operator Instructions). 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 John. Welcome to the Oil States second quarter 2010 earnings conference call. Our call today will be led by Cindy Taylor, Oil State's President and Chief Executive Officer. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent the remarks today contain information other than historical information, we are relying on the Safe Harbor protections afforded by Federal law. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 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. Our North American-based operations were strong contributors to sequential growth in the second quarter of 2010, with Tubular and Rental Tool revenues increasing 36% and 17% respectively. With oil prices in the mid to upper $70 per barrel during the quarter, coupled with increasing spending plans from our customers, North American activity continued to improve despite the moratorium on offshore drilling in the deepwater Gulf of Mexico, and uncertainty regarding the economic recovery. The market was characterized by improving US land drilling and completion activity, which fueled significant year-over-year increases in our Well Site Services and Tubular Services segment, particularly from activity in the shale plays.

For the second quarter of 2010, Oil States generated $594.5 million of revenues, $88.1 million of EBITDA, and earnings of $0.71 per diluted share. Our Well Site Services segment delivered sequential revenue and EBITDA growth of 16% and 28% respectively, well ahead of the 12% sequential improvement in the US rig count. Higher revenues and margins in our Offshore Products segment contributed to 22% sequential growth in EBITDA. Our Accommodation segment was down sequentially due to normal seasonal declines in activity due to the impact of breakup.

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 give you our current market outlook

Thank you, Cindy. Please note that all second quarter 2009 results mentioned today exclude the impact of the goodwill impairment taken in the second quarter of 2009. During the second quarter of 2010, we reported operating income of $57.8 million on revenues of $594.5 million. Our net income for the second quarter of 2010 totalled $37.5 million, or $0.71 per diluted share. The comparable second quarter 2009 results were $31.3 million of operating income on revenues of $456.3 million.

Second quarter 2009 net income totalled $21 million, or $0.42 per diluted share. The 78% year-over-year increase in net income was primarily due to stronger earnings from our Well Site Services business, as well as growth in Accommodations, which was associated with expanded capacity to satisfy the needs arising from our contract with Imperial Oil.

Depreciation and amortization in the second quarter of 2010 totalled $30.6 million, compared to $28.6 million in the second quarter of 2009. Depreciation increased year-over-year due to capital expenditures spent over the last 12 months. D&A is expected to be $31.6 million in the third quarter of 2010. Net interest expense totalled $3.4 million in the quarter current, down from $3.9 million in the second quarter of 2009. Net interest expense is expected to be flat sequentially in the third quarter of 2010.

The effective tax rate in the quarter was 30.6%, compared to 24% in the second quarter of 2009. The actual second quarter tax rate was higher than we previously guided, due to higher proportion of domestic earnings, which are taxed at higher statutory rates. We are currently estimating that our effective tax rate will approximate 30.4% for the remainder of 2010.

During the second quarter, we reported cash flow from operations of $72.6 million, and we spent approximately $39 million on capital expenditures. As a result, our net debt at the end of the second quarter decreased to $65 million from $96 million at March 31st, 2010. As of June 30th, 2010, our debt to cap ratio was 10.3%, and our total debt to LTM EBITDA remained less than 1 time.

As of June 30th, 2010, the Company had approximately $477 million of availability under our credit facility. We are currently expected to spend $219 million in CapEx for the full year 2010, which is down from our previous estimate of $270 million. This decrease is primarily due to overall cost reductions and some deferral of discretionary projects in our oil sands accommodations. These deferrals are not related to the announced expansions of our major oil sands lodges.

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.

Thanks, Bradley. I will lead off with our Accommodations business. Our Accommodations generated second-quarter revenues and EBITDA of $122 million and $41.5 million respectively, compared to $88.4 million and $34.8 million respectively in the second quarter of 2009.

Year-over-year Accommodations revenues and EBITDA were up 38% and 19% respectively. Strong occupancy levels, coupled with increased room capacity and a stronger Canadian dollar, were partially offset by lower minimum guaranteed payments year-over-year, in addition to lower manufacturing sales. Revenues from our major oil sands lodges were up approximately 54% year-over-year. Sequentially, Accommodations results were down due to the effects of Canadian breakup, coupled with the completion of the Vancouver Olympics contract that benefited our first-quarter 2010 results. These declines were partially offset by sequentially higher room capacity at our Wapasu Creek Lodge.

Our Well Site Services segment generated revenues of $113.3 million and EBITDA of $26 million in the second quarter of 2010, compared to $97.9 million and $20.3 million respectively in the first quarter of 2010. Our Rental Tools accounted for the majority of the sequential improvement in our Well Site Services segment. Revenues and EBITDA from our Rental Tools increased sequentially by $11.6 million and $5.9 million, or 17% and 40% respectively, when compared to the first quarter of 2010.

These sequential improvements were primarily due to increases in US completion activity, particularly in support of horizontal drilling in the shale plays, coupled with better cost absorption and some pricing improvements. Our drilling revenues increased sequentially by $3.7 million, and our overall drilling rig utilization increased to 73% during the second quarter of 2010. The increase in utilization was offset by labor and equipment inefficiencies, which kept daily cash margins sequentially flat.

Our Offshore Products segment generated $106 million of revenues and $18.9 million of EBITDA in the second quarter of 2010, compared to $103 million of revenues and $15.5 million of EBITDA in the first quarter of 2010. Offshore Products EBITDA increased $3.4 million sequentially and EBITDA margins improved to 17.8% from 15%, primarily due to a favorable product mix in the quarter.

Backlog totalled $215.7 million at June 30th, 2010, down only 2% from March 31st, 2010. Tubular Services generated revenues of $253.3 million, which were up 36.3% sequentially. EBITDA totalled $9.7 million, compared to $6.6 million in the first quarter of 2010, a sequential increase of 47.3%. Tubular Services OCTG shipments increased 33% sequentially to 134,900 tons from 101,200 tons in the first quarter of 2010, outpacing the 12% sequential improvement in US drilling activity.

Gross margins as a percent of revenues in the second quarter were flat with first quarter levels, as modestly higher OCTG pricing was offset by our continued efforts to work through some remaining higher-priced inventory already on the ground. The Company's OCTG inventory totalled $310.4 million at June 30th, 2010.

Now I would like to give you some of our thoughts as to our outlook as we go into the latter half of the year. Our Accommodations business continues to be primarily driven by activity in spending in the Canadian oil sands region. Our outlook for future oil sands accommodations continues to improve, with recently announced investments in the region by several major and international oil companies. Primarily in support of our contract with Imperial, we plan to continue to expand our oil sands lodge capacity in the second half of 2010. Accordingly, we expect Accommodations revenues to range from $120 million to $130 million in the third quarter of 2010, with EBITDA margins in the 34% to 36% range.

In our Offshore Products segment, strong operational execution in the second quarter of 2010, coupled with a favorable product mix, led to sequential EBITDA margin improvement of 280 basis points. We continue to focus on bidding activity, new project awards, and rebuilding our backlog. The tragic incident that occurred on the Macondo well on April, 20th and the resulting suspension of drilling in the deepwater Gulf of Mexico, we believe will usher in heightened regulatory climate, and will have a profound impact on how deepwater drilling is performed. It remains unclear as to what impact the Gulf of Mexico moratorium will have on the timing of key Gulf of Mexico production infrastructure projects, which we are bidding on currently, such as Big Foot, Jack/St. Malo, and Mars B.

However, on a positive front, Chevron has recently announced that they will proceed with the Big Foot and Jack/St. Malo projects in the US Gulf of Mexico, because appraisal drilling has already been completed. We continue to see strong international bidding activity, and believe that we can build our backlog in the second half of 2010. We expect third quarter revenues to range from $105 million to $115 million in the segment, with EBITDA margins ranging from 14% to 16%.

Activity for our Rental Tools business is primarily tied to completion and production services activity in North America, and will generally track movements in shale drilling and the horizontal rig count. We estimate that approximately 5% of our Rental Tools revenues have historically come from Gulf of Mexico activity. We have generally been able to redirect our offshore rental tools to the US land market, therefore we expect that the pickup in US land activity will offset near term losses of offshore work. As a result, our Rental Tools revenue is expected to be modestly higher in the third quarter of 2010, with slightly improved margins.

We also expect modest activity improvements in our drilling operations during the third quarter of 2010, with total utilization estimated at 75%. Cash margins are expected to improve somewhat sequentially. The US OCTG market continued to improve in the second quarter of 2010. Domestic OCTG mill shipments increased approximately 33% from the first quarter of 2010. In addition, imports of OCTG accelerated during the quarter.

With the rising US land rig count, we believe the OCTG market remains fairly well in balance, but we intend to watch the supply/demand dynamics closely. Overall, industry OCTG inventories are fairly steady at 6 to 7 months supply on the ground. Our OCTG sales generally follow trends in the US rig count, with premium grades in high demand currently, due to shale play development. We estimate that approximately 5% to 7% of our Tubular Services revenues have historically come from Gulf of Mexico activity. Our gross margins are not expected to expand significantly in the third quarter, given the market supply/demand balance, increasing imports, and the effect of the deepwater drilling moratorium. As a result, we expect Tubular Services gross margins to remain in the 5% to 6% range during the third quarter of 2010.

Overall, we remain in a very strong financial position, with ample liquidity to take advantage of investment opportunities which may arise. That concludes our prepared comments this morning. John, would you open up the call for questions and answers, please?

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question comes from John Daniel from Simmons & Company. Please go ahead.

Hi guys, good quarter. Good morning. First question, can you guys just add a little more color to the reduction in the discretionary CapEx, in terms of what was the money going to be spent for on the Accommodations side?

It is more for projects that will help with some of our insourcing efforts, and our efforts to insource and then reduce our operating costs, primarily on the water treatment and wastewater treatment side. In addition, it was due to savings and, in some part, cancellations of part of what we had expected to spend on other projects. But it is not going to change our guidance in terms of the number of rooms we will have available or up there working by year-end.

Got it. Okay.

John, some of that is associated with timing of obtaining permits for the water treatment facilities and things like that. I view part of this as just timing, not our intent to actually execute the project.

Fair enough. Now when I look at the year-over-year improvement in revenue in Accommodations in Q2, it was up 35%, 40%. Why wouldn't we see similar growth rates in Q3, given that just the room capacity is higher?

I am sorry. Would you repeat that, John?

I was just trying to look at the guidance in terms of the revenues for Accommodations. I think you mentioned 120 to 130. When I look at how strong the performance was on a year-over-year basis versus last year, it would seem to me that the Q3 revs probably could be higher, given the continued buildout of the lodges. Is that reasonable?

If you are looking year-over-year, Q3 2009 to Q3 2010, if that is correct what you are asking about, the key you have to pull out of the third quarter 2009 was the manufacturing sale that we had back then. It was fairly significant. And I apologize for not having that number at my disposal. I am pretty sure we disclosed it last year.

Okay. I will go back and look.

Once you back that out, I think you should see decent growth.

Okay. Great. I will turn it over to others. Thanks, guys

Thank you, John.

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

Thank you. Good morning, guys. First one just on the land drilling side. I just wonder if you could talk about the margin progression there, what you are seeing from a people or cost standpoint. And also just wanted to ask if you guys had any plans on adding any additional rigs in the near term?

Yes. I will try to take those, generally speaking. Our costs, I would say in general, we are not seeing significant inflation. There is probably a little bit. Part of our issues were our mix of turnkey footage and day work drilling, and some inefficiencies that we experienced particularly on some of those turnkey and footage contracts.

So I look at that as more operational efficiencies that we need to focus on, more so than pure inflationary type cost increases, which as I mentioned, we'll be able to improve our contribution in the third quarter. Part of that is the expectation that we can perform a little bit better from an efficiency standpoint on costs. As it relates to our drilling rigs, we don't have current plans to expand that fleet. You have followed this, Victor, a very long time and you know we have had some rigs in Ohio, which is kind of a very flattish, uninspiring market, or has been for us. So we are going relocate some of that equipment.

But other than that, I would say it is pretty much status quo for our drilling operations, with concentration largely in the Permian Basin tied to crude oil drilling. We will have rigs in the Rocky Mountain region, which are a bit more tied to natural gas drilling activity. We are seeing some possibility of some modest day rate improvement. So again, I am looking for day rate improvements and some cost efficiencies as we move forward. But no real plans to expand the fleet.

Thank you for that. The follow-up I had related to Tubular Services. Just wanted to ask you about the higher-priced inventory that you guys have on the ground, and looking forward to the next three to six, nine months, as it relates to revenue per ton and the impact on margins? Meaning that, are you guys pretty much in third, fourth quarter going to work off the higher-priced inventory where we will see more of a positive inflection point on your revenue per ton and margins as we enter 2011?

We do think we will be substantially worked through that higher-priced inventory certainly by the fourth quarter. You mentioned third and fourth. We have been continually working through that, which is just residual obviously from some of the material price declines that occurred throughout 2009. Obviously if we do that, we do think our margins could improve. It won't impact revenue per ton, which I think you mentioned. But obviously if you are selling some product at low to no margins, or slight losses, the elimination of those would improve the overall result.

Thank you guys. That is all I had. Nice quarter.

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

Good morning. Could you talk about the visibility these guys have on the oil sands side, just in terms of either contracted rooms or to what degree you have got in second half of 2010 and first half of 2011 visibility on the occupation of the rooms?

Well, I would say first of all, Wapasu is pretty easy. They are fully occupied and fully contracted through the end of the first quarter of 2013. So that one is easy. Typically Athabasca and Beaver River have pretty good visibility where we will have solid utilization in most cases, not 100% booked up, but usually solid utilization looking out about 12 months, kind of on a rolling basis.

Conklin is still kind of in a developmental area in that southern region, and it is also fairly seasonal, so as a result we typically have maybe three to six months of outlook, although given the level of activity in that in-situ play down in that southern region, we have confidence that there will be good utilization down there, but it doesn't have the contract coverage that some of the other lodges do.

And other than Wapasu, there has been this gradual expansion in the facilities, whereas Wapasu has been kind of exponential over the last few years. This time next year we will be sitting here listening to you talk about the existing lodges with additional room capacity? Is it going to be a new lodge? I am just trying to think about how to anticipate growth for that business.

Well, we are certainly looking at all of those opportunities. It is hard to pinpoint today what we will come up with by next year. But there are certainly sites that we are looking at for new lodges, which I think is one of your questions. And there is also the ability to further expand the facilities that we have on the ground.

A key there is going to be the overall demand environment, which we have our own projections and estimates now. We believe we have announced expansions sufficient to cover that increasing demand. But it is very dynamic up there. There is a lot of interest in the play. And there is certainly the potential that some of that activity actually increases over the long term, if there is a migration away from dollars being spent in the deepwater Gulf of Mexico.

Next question just on the Rental Tools business, with the substantial step up in margins there. Are you at the point now where you are willing to spend anything above maintenance CapEx, or is it still the returns in that business still look relatively skinny, and so you are holding just to maintenance capital?

No. We are definitely willing to spend capital in that business. We have committed to some. The market, clearly the rig count is self-evident of the improvement. Although the rig count improved 12% overall sequentially in the US, there was an 18% increase in the horizontal rig count, which is really what drives the demand for our rental equipment and related services.

Particular markets have shortages. Certainly the Marcellus, the Bakken, and the Eagle Ford have offered good growth opportunities for us. I think they will continue to do so. Equipment is changing. Not all the equipment that was on the ground, there have been modest enhancements to that. We want to be on the forefront, and lead all of these basins, and lead our customer base with the right equipment and the best service.

My last question, your balance sheet is as lightly levered as I think it has ever been. Can you update us how you see the acquisition opportunities, as well as your view on share repurchases?

I will kick that out and let Bradley fill in the gaps where he thinks appropriate. But clearly, the acquisition market has historically been part of our strategic plan. It remains so. At the beginning of the year, we had quite an extensive list of potential targets that we have been and continue to work on. Not all of those have worked out. Largely because of price discussions, which I think is always kind of where the rubber meets the road on a transaction like this.

But we continue to have a portfolio of opportunities that we do look at. And that will be evaluated and compared to the benefits and opportunities associated with share repurchases. So clearly it is something that we have done in the past and will evaluate going forward. If we look at our acquisition track record, in terms of successful integration and getting the contributions we expected, we generally do better than we planned for, and so these are obviously very good avenues. But the challenge is going to be whether we can hit the right price point with the people that we are talking to.

But the good thing is, there are opportunities out there. We will just have to see what we come up with. But clearly, we recognize that our balance sheet is becoming low levered, if not underlevered, and we are paid to deploy that capital in ways that benefit our shareholders. And so we will clearly be focused on that.

I would only tag onto that to say that we are focused on the business lines where we think we have a competitive advantage, a long-term competitive advantage. And those are obviously Offshore Products, Accommodations, and to a certain extent the Rental Tools business. It is where we have generated the best returns. It is where I think we have got a strong business position and can grow it. I think it is, as we mentioned, we don't see expanding the drilling rig business. I think Tubulars, there are more organic ways to grow that business through mill relationships and organic growth, than it is in share, taking share than it is really an acquisition story.

Okay. Thank you very much.

Thank you, Jeff.

Our next question comes from Jeff Spittel, Madison Williams, please go ahead.

Thanks, good morning guys. I guess to touch on Offshore products given the margin guidance for the third quarter. You said I guess you benefited from a favorable mix shift in the second quarter. Are we seeing a continuation of that, or are we also starting to see some of the lower margin product roll out of the backlog? Maybe some of that stuff has started to run its course?

I would say we had, I would characterize second-quarter margins as being good, partially because of mix, and partially because we executed fairly well on a couple of key projects. We use percentage of completion accounting, and as you finish up projects, if we have executed them better than we have been estimating all long and you get a little pick-up. We had some of that this quarter and then some completed contracts that we did better on.

So I would say that third-quarter margin guidance was 14% to 16%, and it is a little bit of mix. It is a little bit of what is going to mix being what is going to ship in the next three months, or be recognized in the next three months. Backlog mix still looks pretty good, given the levels that we're at, overall levels need to move up a little bit. We would like them to move up. We hope and expect that they will. Generally we are pretty positive on what is out there in terms of bidding, because it plays to our strengths.

What is out there is a lot of production platform work, which hasn't been prevalent over the last 18 or 24 months. That is typically where our proprietary technology is. That is where we have better margins because it is proprietary. Better execution between bid and actual. And better success rate in hitting those bids. So we are fairly positive on that. We just need to see some of these projects move forward. And part of those contracts that are out there, are being let to other operators, other equipment suppliers, not in competition with us, but certainly shows that the E&P customers are committing the capital to these projects. Then hopefully our content will be following here shortly thereafter.

Okay, great. Very helpful. Switching over to the Rental Tools business, with the migration to more liquids directed drilling, is there anything you need to do in terms of repositioning yourselves from a geographic standpoint, or are there certain shale plays that are on the wish list where you think you need to grow capacity?

I think we have done a pretty good job of leading in those markets with our customers, as they have migrated into those markets. But as I mentioned, some of the areas of growth are, not surprisingly, the Marcellus, the Bakken, and the Eagle Ford. There are some emerging shale plays that leaseholds are being secured by our customers, and we are already focused on those.

We don't really see a significant difference between dry gas and liquids rich plays with our equipment. It is generally the multi-stage completions that really drives our activity, our revenue and our profitability and pressures accordingly. We tend to have the higher end pressure control equipment that works very well in these types of plays, as well as the isolation equipment.

Great. Thanks very much, guys. Great quarter.

Our next question comes from Stephen Gengaro from Jefferies. Please go ahead.

Thank you. Good morning.

Morning, Stephen.

Just going back to the CapEx question. Is there a change, I think you said it doesn't change the outlook for beds by year-end. Does it change any sort of 2011 sort of availability numbers, or is it more just kind of noise in the numbers?

No. It really as I mentioned, it was one, our team is doing a better job of managing the costs. So obviously you have got some contingency as you move through things. Also as you have got these bigger projects, the needs that you planned on aren't always what you expect. So you have a little bit of what I would call savings in there.

The other piece of it is, and maybe deferrals wasn't the right term, but really more timing issues on some of these other projects which don't affect capacity, but are really more focused on our continued efforts to improve the operations there, like the laundry facility we put in at Beaver River last year. These are things that it is not terribly sexy, but it is blocking and tackling, it is the right thing to do. It does improve the operations.

Okay. Thank you. The second one, and this is a little bit granular. But the depreciation in the land drilling business went down a lot sequentially I think, if my numbers are right. Is there something there that was an oddity?

Well, we have taken two rigs out of service in the last 12 months, that is part of it. I am just flipping to see if I can confirm your number there. But other than that, I don't know that there is any other oddity there other than things are starting to roll off the depreciation schedule.

Okay. That is helpful. Thank you.

Thank you, Stephen.

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

Hey, David. Good morning.

I just had a question about the mix of orders on Offshore Products, were there any major awards or projects that you put into backlog this quarter?

Most of this was just kind of our routine work in connecter products, fixed platform drilling. I look back and there is no one order that stands out as particularly significant, which is kind of good because we basically kept backlog flat with decent sales levels, without having any of these major kind of shots in the arm from a backlog perspective. There wasn't anything particularly stand out in terms of a project award during the quarter.

Okay. And then can you just give me some sort of sense that, well, give me a sense about the magnitude of awards that you are kind of expecting in the back half of the year, if you land some of the bigger projects that you are looking at?

As you know, these projects are individually significant for us. Depending on whether the type of floating production facility that we are talking about, whether it is an FPSO or a TLP, again we are bidding quite a lot on a global basis in this vein, but a concentration in the Gulf of Mexico, as I mentioned in our prepared comments. I will just give you BC-10 as an example without giving you bidding information or price information that is a patch project. Those can range anywhere from say $15 million to $20 million on a large TLP, where we have incremental content. It could be $40 million plus.

Great. That was it for me.

In a single order.

Great.

And again, that comes on the backdrop of this quarter. I don't recall any single award in excess of $3 million. So these again, relative to our norm would be very significant.

Thank you very much.

Thanks, David.

Thank you, David.

Our next question comes from Arun Jayaram, Credit Suisse, please go ahead.

Good morning.

Good morning, Arun.

Bradley, I just wanted to maybe see if on the CapEx side, if you could give us a little bit more granularity between maybe the segments? I know you are reducing CapEx but maybe if you X-ed out Accommodations, or just give us a sense from a broad product line basis what you are doing with CapEx?

Sure. Drilling CapEx for the full year is remaining fairly consistent with our previous forecast. It is about $10 million or $11 million. Rental Tools is likely to move up from here, but right now in that $219 million number is about $40 million let's call it. The Accommodations business is right at 140. Offshore Products is a little over $20 million, $22 million, $23 million. Tubulars is actually having a heavy CapEx year at about $6 million. That's primarily with our opening of a Marcellus pipeyard, which opened up here in the month of July. So that is about $6 million in CapEx. So hopefully that gets you to about $219 million.

Okay. So you are planning to increase your Rental Tools CapEx? Is that fair? I am just trying to see if you guys are being opportunistic enough given what looks to be pretty good cyclical fundamentals?

We believe that we are. Clearly, the second quarter rig count inquiries certainly gets us excited and wanting to invest some capital in the business. But more importantly, we would always do that. We have got a very adequate balance sheet to do a number of things. It is very much area and customer specific. Again, we try to lead the charge rather than follow.

Okay. Fair enough. Cindy, on the Rental Tool side, can you give us a sense of how the revenues shape up on a monthly basis, and perhaps what your run rate is so I have a pretty good gauge of July as how things are progressing, versus what you did in Q2?

I don't have my month by month in front of me, but intuitively with the rig count, that there was a progression throughout the month. I think at one point we kind of looked at June. But importantly, July has come in strong and our outlook for August is also strong which suggests sequentially-improved performance for that business. I can't think of any real anomalies that would have made second quarter unusually higher.

No. June was particularly strong. And July has been strong thus far.

And the outlook for August is good.

Yes. With limited work offshore, typically third quarter in Rental Tools can have a little bit of a down tick because of hurricane season. But since there is very little work out there, that is not really an issue this time.

Okay. Cindy, the Marcellus, Bakken, Eagle Ford, these are relatively immature if you are thinking about some of the shale development. Can you comment on the competitive landscape in Rental Tools? Where do you think you sit on a competitive basis? And perhaps some of your opportunity sets going forward?

It is like everything. We enjoy stronger market share in certain businesses than in others. Our wellhead isolation equipment, again, we have got some proprietary technology there that helps us enjoy very strong market share in that business. And I think we have maintained that. There is some alternative equipment that can be used. But again, if you are talking about the isolation equipment business, very strong market share. We are heavy in pressure control equipment that supports wireline and slickline operations and enjoy strong market share as well. There are other areas where we have good products and good services. Our market share might be in the 10% to 20% range along those lines.

Fair enough. I wanted to end my questions regarding Offshore Products. Obviously you guys have a very dominant position on the TLP side. Cindy, how do you think about 2011? Is this going to be a big growth year given what is going on internationally, or is this going to be more a bridge year? I know between 2007 and 2009, you guys have generated roughly $500 million or more in revenues at 20% type EBITDA margins. Could we look for something like that if things play out as you expect in 2011?

I think as we said, and actually the year has played out pretty well as we thought that it would. We had predicted that our revenue and actually we have done better than we expected. But our revenue and our EBITDA generation, we view this as a bridge year because of the weaker backlog that we had coming into the year. However we have guided to backlog improvement during this year, with it being back-end loaded, and clearly we are seeing that. And we have seen some delays in these Gulf of Mexico awards from what we have expected. They are not significant yet. As I mentioned, we have gotten some positive news that some of the major projects are moving forward.

So bridging year in terms of revenue and EBITDA generation, growing year in terms of backlog. If that plays out like we think that it will, we will enter 2011 with a strong backlog that is a favorable mix for us. Assuming that all plays out, I think 2011 bodes to be a good year for us. And we talked about Gulf of Mexico projects because there are a lot and there is a timing we are bidding on currently. But we are also bidding on quite a lot in a huge variety of work in Brazil and West Africa as well. And so it is not just limited to these specific projects in the Gulf.

Alright. Thanks a lot. Congratulations on another strong quarter.

Thank you.

Thank you so much.

Our next question comes from Bo McKenzie from Global Hunter, please go ahead.

Another congratulations. Couple questions following on from that last one. If you were to look at what you guys have seen in terms of quote or bid activity and stuff in the Offshore Products, can you characterize how that, quotes outstanding or whatever might have progressed during the course of the year? Are enough things moving on the FPSO and TLP fronts that the visibility of work is increasing quite dramatically for you?

Well, like I said, the quoting and bidding activity has been high. It is tangible projects that we think are moving forward. And it is one of timing in my view, not whether they move forward. Not only is the volume significant in the markets that I spoke about. But again, our opportunity is significant because of the mix being very favorable in terms of our historical ability to one, secure the award, and then, importantly, to execute on it once we get it. And so we are very optimistic. We just like, I would like to be talking about backlogs and prospective backlogs hopefully by next quarter.

The question I was trying to ask, I apologize if you said something, it is hard for me to write and listen at the same time. Were the bids picking up, I guess is what I was trying to get to versus where you were earlier in the year?

I am not going to say that they are picking up because lot of these we've been bidding on for an extended period of time, even late 2009, mid-2009 they have been rebid and left. So it is hard to say that the volume is necessarily ticking up. But what is happening is like water rising on a dam. Sooner or later you get more and more just because what you have been bidding on hasn't been let yet. Then you are getting incremental work, if that makes sense.

Yes. Alright. I know this is kind of, hopefully far thinking. If you look at some of the new regulations that might come out in the Gulf as a result of the Deepwater Horizon incident, are there opportunities out there for some of the BOP handling equipment if you assume that BOPs end up have to get outfitted with another set of rams, or something like that, that may be -- might be arising out of this mess?

Well, I am an optimistic person, and so I see some things that I could be optimistic about, and some things I could be pessimistic about, depending on how everything works out. But on the favorable front, I do think that long-established, high-quality suppliers such as ourselves, will do well in the environment going forward, because of the higher standards and inspection, repair work. I think it will be very difficult for new players to try to enter the market prospectively. So at a minimum, I think it secures our position.

You spoke specifically about BOP work. Just to be clear for everybody on the call, we don't manufacture BOPs. We have some components, our flex joint attaches to the top of the BOP and the bottom of the riser, and it is integral to the system. From that we have developed a business of doing integration and final testing, load-out work on subsea BOPs, and we also do inspection and repair services, or have in the past, on a global basis.

And so I think there is a window of opportunity with these regulations to step up that activity. But the jury is out for me as to whether the risk/reward balance is going to be there for us to be willing to do that. And that is the uncertainty that we face. I think we would be an optimal candidate to secure that work, but until more specificity comes out, in terms of the risk/reward scenario, I am not prepared really to comment as to whether we would be eager to participate in that.

Alright. I understand. One last one, if it is okay. On the OCT tonnage, obviously up real nicely relative to the first, with the rig count dead. Obviously the rig count is not really a great indicator with the amount of horizontal footage that is going on. But are you able to tell from talking to your customers, what you see, how much is going on as a result of the difference in footage mix versus are customer-owned inventories out there finally starting to wear off, and the rest of these inventories are held by the various distributors and stuff?

I do definitely think that the buildup of customer-owned inventory has waned. It is not eliminated. We know specific customers that still have some inventory out there. But we have gone from probably a peak at 20-month supply on the ground, to now 6 to 7 months. So a much better place. I think a lot of that worked out of customer inventories. I won't say all first, but clearly that was a focus everyone had generally is working through that. We tried to assist our customers in that effort.

We are very close on a customer-by-customer, basin-specific opportunity, and as you mentioned, an increase in the overall rig count, but importantly, a larger increase in the horizontal rig count which demands the premium products that we generally do distribute and carry in our inventory. So it plays well into our overall operations. Obviously our volumes were much higher than even that 18% increase. But I think that just speaks a lot to customer timing and preference, obviously, for the products that we carry.

One last one, if you don't mind. You talked about imports picking up. You are not seeing Chinese stuff coming back in the US are you, or is that stuff still tariffed out to the point that it is virtually impossible to bring it in?

We haven't seen hardly any Chinese product come into the market. There is still an overhang of some Chinese products that is residual from 2009. But the largest import sources have come from Canada, Korea, and to a lesser extent, Japan and a couple of other sources.

Right. Well, thanks again. Congratulations on a great quarter.

Thanks, Bo.

Our next question comes from Chuck Minervino from Susquehanna, please go ahead.

Hi, good morning. Most of my questions were answered, just on the Tubulars business, it is a big sequential revenue growth in the quarter, way outpacing the rig count growth. Can you kind of break that down a little bit? How much of that is maybe a mix of higher-priced inventory going out versus maybe the secular trend towards deeper, more pipe needed per well versus any sort of -- that the inventories that the companies have held has kind of worn off? Can you break any of that down? I don't know if you can specifically quantify it, but just your views.

General, just for our own Company most of our revenue increase was tied to volume increases. I think our overall revenue per ton was up maybe $40 a ton, or 2% range, yes. So it wasn't a huge contributor in terms of the revenue increase. It was activity-based and volume-based.

Clearly, there is more premium product, and more product being consumed with the long laterals that are out there. I haven't been able to collapse that down on a per ton, per rig basis, although I looked at it tons of inventory on the ground. It is up from historical norms. But you would expect that given the significant horizontal drilling activity.

I guess just taking that a step further, I don't think you guys provided revenue growth, revenue guidance for Tubulars in the third quarter, unless I missed it. Is it safe to assume that you are looking at least at 2Q levels and potentially higher than that?

I think that sounds reasonable at this stage, yes.

Great. Thanks.

Thank you.

Our next question comes from Dimitry Dayen from Goldman Sachs, please go ahead.

Good morning guys. Just coming back to the acquisitions for a moment. Considering how strong the US service market is, are there any product lines or businesses that you are not in, that you would like to be in over the next couple of quarters, couple of years?

We evaluate that. But what we like to do is find things that are integral to our existing operations or immediate step-outs from what we do. There are a lot of services that are performed in the completion phases of a well. And I think we would be interested in looking at those types of opportunities. We have done that historically and blended that very well into our Rental Tool products and services. We are much more of a service-oriented operator today than we were five years ago with just pure equipment rentals, more or less. That has come on, flow back work, isolation work, well testing work, as examples, that fit very well with our product offering, but nonetheless, were step-outs from our existing book of business several years ago.

That makes sense. And just one last question. On Rental Tools, as we move forward from here, do you think that margin expansion will be driven more by pricing or utilization increases?

I think it will be both.

Okay. Thank you very much.

Thank you.

We have no further questions at this time.

Okay. Thanks to all of you for joining our call today for the quarter. We appreciate your continued interest in Oil States. Thanks.

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