Oil States International Inc (OIS) 2011 Q2 法說會逐字稿

Welcome to the Oil States International conference call. My name is Monica and I will be your operator for today's conference. 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 would like to turn the call over to Patricia Gill. Ms Gill, you may begin.

Thank you, Monica.

Welcome to Oil States' second quarter 2011 earnings conference call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; and Bradley Dodson, Senior Vice President, Chief Financial Officer and Treasurer.

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 the call over to Cindy.

Thank you Patricia, and thanks to all of you for joining our call this morning.

Our businesses provide a strong result for the second quarter of 2011 with notable contributions coming from our growing Accommodations segment due to organic room-count expansion and last year's acquisitions of The Mac and Mountain West. Activity for our well site services and tubular services segments remained robust, as horizontal drilling and completion activity continued to increase in the oil shale regions in the United States which tend to favor our high end and proprietary equipment.

On the heels of a 17% increase in the first quarter of 2011, backlog in our offshore products segment increased 25% during the second quarter to reach a new record level of $519 million as of June 30, 2011. During the second quarter of 2011, Oil States generated earnings of $1.34 per diluted share on $74 million of net income, $161 million of EBITDA and over $800 million in revenue.

At this time, Bradley Dodson will take you through 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 will give you our thoughts as to the current market outlook.

Thank you, Cindy.

During the second quarter of 2011 we reported operating income of $115 million on revenues of $820 million. Our net income for the second quarter of 2011 totaled $74 million or $1.34 per diluted share. The comparable second quarter 2010 results were $58 million of operating income on revenues of $595 million. Second quarter 2010 net income totals $37 million or $0.71 per diluted share.

The year-over-year increases in profitability were broad-based including higher contributions from each of our business segments along with the contributions from the three acquisitions closed in the fourth quarter of 2010.

During the second quarter of 2011, we completed a $600 million high yield offering and used those net proceeds to repay outstanding borrowings under our US and Canadian revolving credit facilities, as well as for general corporate purposes. The notes were issue at par yielding 6.5% with an eight-year maturity. The quarterly interest expense will be approximately $18 million going forward with the additional interest expense from these notes. This quarterly interest expense forecast is expected to continue through the end of 2012.

We recently also increased our Australian loan facility to AUD150 million on substantially the same terms and conditions. We plan to use the added borrowing capacity to fund announced expansions of our Australian Accommodations business.

In terms of third quarter 2011 expectations we forecast depreciation and amortization to be approximately $47 million and net interest expense, as I mentioned, to approximate $18 million, due to the full quarter interest expense associated with high yield notes. Diluted shares are expected to total 55 million shares in the third quarter of 2011. We currently estimate our effective tax rate for the third quarter of 2011 to be flat to slightly down when compared to the second quarter of 2011.

During the second quarter 2011 we reported cash flow from operations of $60 million offset by working capital increases of $70 million, and capital expenditures of $138 million. Our net debt at the end of the second quarter total $954 million and our debt to cap ratio is approximately 37%. As of June 30, 2011, the company had $808 million of combined availability under our credit facilities and a cash balance totaling $123 million. We currently expect to spend approximately $650 million in capital expenditures in 2011.

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

Thank you, Bradley.

I like to lead off with our Accommodations segment. Our major oil sands lodges in Australian villages enjoyed strong occupancy levels during the second quarter of 2011. Accommodations revenues increased 66% year-over-year, and EBITDA increased 102% year-over-year. On a sequential basis revenues and average available rooms for our major lodges and villages both increased 8% while total revenue per available room was slightly lower quarter-over-quarter due to seasonal occupancy declines in Canada associated with Spring break up.

In our offshore products segment we generated $132 million of revenues and $22 million of EBITDA in the second quarter of 2011, compared to $128 million of revenue and $20 million of EBITDA in the first quarter of 2011. This sequential improvement in revenues was due to higher production and sub-sea activity partially offset by lower rig equipment revenues. We booked $236 million of new orders during the second quarter of 2011, resulting in a sequential backlog increase of 25%, to a new record level of $519 million as of June 30, 2011.

Significant awards during the quarter included a contract for FlexJoint Steel Catenary Riser terminations and receptacle assemblies for the Guara and Lula projects offshore Brazil along with additional content on Jack St. Malo and various deck equipment orders. Our Well Site Services segment generated revenues of $154 million, and EBITDA of $47 million in the second quarter of 2011. Improved performance in our drilling business created the large majority of the sequential increases in EBITDA.

Revenues from our Rental Tool segment increased 5% when compared to the first quarter of 2011, and EBITDA increased 4%. These sequential improvements were attributable to the continued increases in US completion activity in support of horizontal drilling and complex completions in the shale plays which led to improvements in pricing and service mix. These sequential gains were partially offset by weather delays in the Bakken as well as some customer permitting issues in the Haynesville.

Revenues in EBITDA from our Drilling segment increased 24% and 57% respectively on a sequential basis due to higher rig utilization attributable to seasonal improvements in the Rockies during the second quarter along with rising improvements. Day rates increased by 8% while cash margins increased 31%.

In our Tubular Services segment during the second quarter of 2011, we generated revenues of $332 million and EBITDA of $18 million, compared to revenues in EBITDA of $294 million and $14 million respectively in the first quarter of 2011. Tubular Services OCTG shipments increased 12% sequentially to 173,300 tons, from 154,400 tons shipped in the first quarter of 2011.

Gross margin as a percent of revenues improved to 6.5% during the quarter primarily due to strong demand and modest mill price increases over the past 12 months. The Company's OCTG inventory increased 7% to $378 million at June 30, 2011, in response to increasing customer orders for drilling programs in the second half of 2011.

I like to transition and give you some comments as to our outlook for the -- as we go into the third quarter of 2011. Starting with our Accommodations business, customer demand for our remote side accommodations and all of our major markets remain strong. We expect our average available rooms to grow from 14,020 rooms available in the second quarter of 2011, to approximately 15,500 average rooms available in the third quarter of 2011 which represents an 11% expected sequential growth rate. Accommodations revenues should total $210 million to $220 million in the third quarter of 2011 with sequentially flat EBITDA margin.

In our Offshore Product segment, we booked an impressive $236 million in orders in the second quarter and reached a new record backlog level. The orders that we currently have in backlog provide us with good visibility for a strong second half of this year as well as good positioning for 2012. We project third quarter revenues to total $150 million to $155 million, with EBITDA margins ranging from 17% to 18%.

As it relates to Well Site Services, our Rental Tool business is closely tied to US completion and production services activity, with particular leverage to high-end multistage completions, and will generally track movements in shale drilling and the horizontal rig count. We expect to see continued sequential improvement in our Rental Tool business as additional equipment purchased through this year's expansionary CapEx program goes to work in the field. We should see further improvements in our drilling business during the third quarter of 2011 as we expect our fleet utilization to increase and our cost structure to benefit from incremental cost absorption. Accordingly, Well Site services revenues should approximate $155 million to $160 million in the third quarter of 2011.

The OCTG market has been very active and the supply/demand balance has tightened with approximately 4.8 month supply of inventory on the ground. Imported product has increased recently and represents approximately 50% of the market. Our OCTG sales generally follow trends in the US rig count with premium grades and high demand due to strong activity in the US shale plays.

Recently we have begun to see signs of increased activity offshore from both deep water and shelf areas and we hope to benefit from our customer's requirements to use heavier and more complex strains of pipe. We expect our gross margins to remain in the 6% to 6.5% range and anticipate Tubular Services to generate revenues of between $365 million and $370 million in the third quarter of 2011.

In conclusion, the first six months of 2011 have produced record results for a number of our business segments due, in part, to our acquisitions that closed during the fourth quarter of 2010, coupled with strong operational execution in a supportive macro-economic environment. Current oil prices remain at levels sufficient to incentivize our customer's spending plan and we were optimistic about further growth in each of our business segments.

That concludes our prepared comments. Monica, would you open up the call for questions and answers at this time, please?

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Victor Marchon of RBC Capital Markets.

Thank you. Good morning, guys. Congrats on the quarter. First question on offshore products, and obviously a big jump in the backlog there. Wanted to see if deliveries were lengthening that you were seeing the order book filling out for further out in the future than what you typically see, or is this just an indication of the increased capacity that you guys have put in place over the last six to 12 months?

Bradley's going to do the actual math, we have this scheduled out in terms of our backlog terms. My generic answer to that right now of course is that we are getting a lot of high-end equipment orders that is geared more toward our semi-proprietary equipment, i.e. our flex joints and our Merlin connectors, a lot of those are tied to either SPSO applications or TLT applications. So my sense is that the delivery time frames are comparable to what we seen in the past with roughly, say, 75% being delivered in the forward 12 months, and Bradley is nodding his head as confirmation to that based on our expected terms in the marketplace. So the mix is a favorable high-end mix. The terms are generally expected to turn on a percentage basis, if you will, in the same general timing is what we've seen in past periods.

That's right.

And from what you guys are seeing, from a bidding standpoint, is the mix similar to what's in your backlog?

On orders going forward, we still see it as the same overall drivers driving the inquiry market and going to continue to be production infrastructure related. We are seeing some drilling product, drilling rig, orders and interest, but I would say overall the outlook for inbound orders remains comparable to what we have got in backlog.

Thank you. And the second one I had was Tubular Services, and wanted to see what your guys' exposure pre-Macondo was to offshore and where you are today? And trying to get a sense as in to if activity continues to come back there what that could mean for your OCTG business?

We had estimated when Macondo happened that we had about 5% of Tubular revenues coming from offshore and I would say that right now we're clearly not back to those levels. If we were to see an improvement in the offshore market, there could be some upside. But I would say generally the team over there is doing a great job, the volumes have been very strong. I thought volumes were very strong the second quarter. I think our outlook for the third quarter is good as well. So that would be upside, but not necessary in order to drive what I would think are really good results for this market in 2011.

Great. That's all I had. I'll turn it back. Thank you.

John Daniel of Simmons & Company.

Hey, guys, good quarter. My question focuses on land drilling for a moment. Can you share with us how many rigs are working today and how many are capable of going back to work?

We've got 34 marketed rigs right now. We took two out of service at the beginning of the year. I don't see us putting those two back to work. I would say that for modeling purposes 34 is what you should target.

At this point, given the rebound in the business, are you looking to participate in the new build frenzy? Or, and also can you update us on the contract status to the extent you've got any rigs with contracts beyond six months?

I'll just comment generally on that. We have only, as you know, a small number actually on term contracts with our customer base. However, we have multi-well-type commitments with some of the stronger customers even in the Permian albeit not contractual commitment. The ones that are actually on term contracts are about three. I would say 10% of that marketed rig [plate], but again, we've got fairly continuous work with several of the other rigs in the basins that we are in. We are seeing a tightening in the drilling business. That probably won't surprise anybody on this call and a lot of our customer conversations right now surround some new build, you are correct on that, as well as upgrades of existing rigs to make them more suitable for the activities that is being undertaken in these basins that we were in. We are evaluating all of those depending on the facts and circumstances which are of course the upgrade costs and the pay-back time frames that we're looking at with our customers. Certainly we have the wherewithal to do that if it makes financial sense at this point in time. But more importantly, we definitely want to support the customers that have been so loyal to us over the last several years and help them meet their needs and if we need to commit some capital for upgrades to do that we are certainly willing to do that.

Fair enough. I will turn it back over for others. Thanks, guys. Good quarter.

John Lawrence of Tudor Pickering.

Good morning, guys, congrats on a great quarter. Question on accommodations margins, nice uptick quarter-over-quarter here. Can you talk about the outlook going forward? It sounds like that 40% plus is sustainable.

Yes. As Cindy made the comment in the prepared remarks we think that margins in this 40% range -- EBITDA margins of 40% range, are sustainable for the third quarter. Really where we saw the upside on the margins versus guidance was quite frankly the team's execution. We saw good occupancy gains in Australia, which coming out of the flooding that we experienced in Q1. Canada I thought did a very good job. This is usually the seasonally down quarter in Canada with break-up. We basically had good occupancy levels on a seasonally adjusted basis in the lodges. We also had some benefit from firefighting camps supporting the Alberta firefighters as they were fighting the forest fires there in the second quarter which helped offset the spring break-up from the Mobile camp business. The US business and accommodations continued to do well, basically on the back of good base results as well as the pick up from Mountain West.

Okay. That's good color. Thanks. And as far as 2012 capacity as I realize '11 is a big year but do you think in '12 could you add another 3000 to 4000 rooms on top of what you have announced?

What we've said is that we think that there are -- while not specifically identified, there will be at least 1500 rooms of available growth in both Canada and Australia in 2012. Australia I think they are going to be -- there are some big opportunities for larger villages. Those are primarily LNG and iron ore driven in [Carifta] and Gladstone areas, but then there also is going to be some nice tack-on expansion opportunities to the existing Bowen basin villages. I think 1500 rooms in that market is achievable with potentially some upside from there. In Canada, there are bigger opportunities. They tend to be a little bit lumpier. We'll continue to expand the facilities -- the lodges that we have and look for additional opportunities. I think 1500 rooms there is also achievable.

That's great. Thanks a lot and congrats again.

Arun Jayaram of Credit Suisse.

Good morning. Bradley, I wanted a little follow-up. As you know there's a pretty large pipeline of new oil sands projects and in particular the one I want to talk about some of the Suncor projects; Fort Hills, Joslin, Voyageur. Have any of those projects moved to the point where they are asking operators such as yourself to bid and I wondered if you could provide color around some of these key Suncor projects.

I can just a little bit, Arun, but I still think it's a little bit early. We are in dialogue -- constant dialogue with Suncor and others, but I won't say that they have really defined their approach on each of these projects sufficient to say that you've got an RFQ in place. It's more broad base dialogue about overall needs and they are material and significant. I think we will see this evolve over the next six to 12 months in terms of bidding activity and I will call it refinement of what their needs are and how they are going to approach these projects. But to say that they have really an outline concrete plan at this stage they don't quite yet, I would say, but we're in active dialogue and discussions with them.

Fair enough. Cindy, what do you think your room capacity is in terms of constructing new units in Canada and Australia?

We've got two manufacturing facilities in Canada, and just to update you, we are going to have two running in Australia as well. Generally speaking we are going to put out probably 1500 to 2000 rooms in each of these markets. However, there is certainly we can outsource to other third parties if there is available capacity in the market and we have done that so we have been able to ebb and flow that base line manufacturing, again, depending upon the demand environment and also whether we are just building rooms or some of the more complex infrastructure needs such as kitchens, rec rooms, workout facilities and all of the installation work that goes around that. Generally speaking, they look to that level of about 1500 to 2000 in each market.

Fair enough. And last question. You guys -- or the Mac services group submitted a development application at I believe it's [wheras] Creek, to service I guess the coal industry. Can you give us perhaps if you do get approval for that what the timing of that lodge could be and how quickly could you ramp to 1500 rooms there?

That's for the Gunnedah basin and that's something that is really not going to impact us until 2012. So I would say I would look for us to have roughly 200 rooms plus or minus as a starting point. As we enter into the market, that the announcement for wheras Creek is quite frankly consistent with our strategy and the Mac strategy before we owned them which is land banking. Trying to get the necessary approvals in place, secure the land in areas that we think over the long term will have good demand for accommodations so that we can be very responsive to customer needs and have that first mover advantage. Because oftentimes customer needs materialize faster than development approvals and rooms can materialize. We think that this is consistent with our strategy. It's the right move forward, but I don't think it's a 2011 story, it's more of a 2012.

Agreed.

Thank you very much.

Marshall Adkins of Raymond James.

Good morning. You guys just about across the board beat what we thought you would do and your guidance next quarter looks to be better. The only exception this quarter was the rental tool business, so of course that's what I'm going to ask about. The margins were not as high as we thought. Give us a little more color on what -- it sounds like the Bakken weather got you a little bit, maybe some other stuff in Haynesville from what you said in the comments. Give us a little more color on what's going there, what we should expect going forward.

I would say that sums it up and I'm -- probably the only other thing is spring break-up in Canada. If you think about those three elements a little bit of below margin expectations, it's not surprising there. Now, clearly the Bakken is incredibly strong. We're still seeing some delays in -- and realize we all work for different customers in this marketplace. This may be more specific to a handful of our more significant customers in the Haynesville. I don't know if you heard that elsewhere. We are beginning to see some recovery there, but it's not off the charts in terms of the activity in the Haynesville. Clearly right now the Permian, the Eagle Ford, the Pennsylvania area are doing exceedingly well. It's all going to be a mix, but the way I look at it, we're through Canadian break-up, weather issues in the Bakken have cleared, we're still a little slow in some of the permitting in the Haynesville. It feels pretty good going in. It's a very active market as you know, so I wouldn't take anything necessarily from these minor tweaks if you will in the second quarter.

Right. Okay. That sounds like more one time stuff. Second question, on CapEx, you bumped it up a little bit. Give me, if you could, a rough break down of where you are focusing that spending in, number one. And number two, early look at '12 with what you see right now, do we equal that CapEx next year as well?

The current 2011 guidance is towards the top end of our adjusted range where you are in a 625 to 650 range, given some of the announcements post first quarter. And about $95 million of that is in well site services with majority of that going to rental tools. So that's fairly consistent quarter over quarter. We had a slight increase to top end of the range in accommodations, so for 2011 we are expecting CapEx and accommodations of roughly $500 million. Majority of that going to the Canadian business but also a fairly significant, actually record, expansionary CapEx for the Mac as well. Then the rest, there's about $8 million in tubulars and then about $50 million in offshore products.

Okay. And obviously you guys don't have a real clear view on the '12. What you know right now kind of the same break down next year and same magnitude?

I would say generally in that range. My initial number is around $600 million, plus or minus, maybe $625. I think as we talked about we will have growth opportunities in the accommodations business if the US rig count stays where it is, we'll need to add equipment and rental tools. Offshore products. We had a fair amount of capital allocated this year to facility expansions both in Singapore and the UK. I don't know that they will be that high next year, but there'll probably be other opportunities, particularly in markets like Brazil. I would say generally in that level plus or minus, but I think the earnings and the cash flow will support that level of spending.

And we have heard, there's a lot of drill pipe moving out. You guys aren't -- refresh me on what your big rental tool items are.

We really are not heavily exposed to the drilling site at all in the rental equipment business, very much on the completion production services side. Wire line support equipment, well head isolation equipment, high pressure flow back and well testing are probably the larger elements, tubing support equipment, but really think about completions through flow back through production testing.

Great color. Thank you.

Blake Hutchinson of Howard Weil.

Good morning. Just a couple of questions around the OCTG business here. The volumes have picked up noticeably here and if we go back and compare it to prior periods, I like to talk a little bit on what's missing to help you get margin increases along with the volume increases here. Is it simply a more frenzied pricing environment? Is it you take a little bit more risk with inventory committed, or is it simply getting on new programs for the back half? How do those three drive your margin thoughts from here?

Well, you hit on a lot of the major points there. Always a starting point is going to be inventory on the ground. As you see, even though we're at high levels of absolute inventories, given the expansion and the rig count, the month supply at the ground at 4.8 is a decent improvement from where we exited the first quarter. So that's always the starting point.

Once you get into a tighter supply environment, then that leads to pricing increases. We have characterized what we've seen over the last 12 months as modest price increases there really hasn't been any significant movement upwards and you say why is that? And I'd say generally speaking you got the US mills at fairly high levels of productivity compared to where they were in 2010, and in addition to that, the imports have picked up to a level that they're filling that void such that we call it just-in-time inventory as being supplied in the field. It's a very healthy environment but it's not a rapidly increasing price environment. We always told you and disclosed in our public filings that our margins do tend to benefit in a rising price environment, particularly in a strongly ascending market like we saw in the first half of 2008.

So you say what is missing? I'd say we're getting there. You've seen our margins expand generally over the last 12 to 18 months as we come out of that excess supply environment coming out of the global financial crisis to where we are today. Any tightening we are seeing now we're still not projecting a significant ramp in price largely because of the new capacity that's going to come on into the market in the United States, particularly later this year. So again I think we see a strong market, very high volume level of activity, some farmer pricing for the mill, but not off-the-chart-type pricing increases.

And so if we look at inventories at the end of the period, what was your percent of committed for sale, if you have that?

It was a little less than 9%.

So that hasn't really changed much since say year end and I would assume that that stays in the same ballpark if you don't think pricing's moving. And it also puts you in a position where if price does move, you're not necessarily going to be in optimal position to capture the spot market moves? Is that correct? So even though volume's moving we shouldn't really be building too much in, in terms of gross margin improvement here?

I wouldn't think so. We basically have been somewhere in the 85% to the little over 90% committed range for the last, probably, two full years going back to the mid -- actually, three full years, mid-2008. So I would say that this is fairly comparable. What happened in '08 is really hard to imagine that it would happen again. We're certainly in a good supply and demand balance with less than five months supply on the ground. If you'll recall, the '08 situation was basically a four month supply on the ground with -- we have additional capacity -- or the market has additional capacity and there is more coming on. So I think that while pricing is firm, I don't see the rapid price increases possible at this point that we saw in '08, and that's what's really going to drive the margin, regardless of how much we have committed.

Okay. Great. Thanks so much for the color. I appreciate it.

Brian Fitzgibbon of Global Hunter Securities.

Good morning. Quick question. First, on rental tools, I think the guidance for $155 million to $160 million with Drilling Services up sequentially same as rental tools. It only looks to be up about $5 million quarter-on-quarter. Is there is something in July that kept rental tools I guess from following the rig count that would keep that guidance up just slightly sequentially?

I think what we are doing to a certain degree in rental tools is that we had a really nice uptick in the first quarter, particularly in earnings out of rental tools that makes it a tough comp going forward. I would say that when I look at revenue per active rig or other metrics, I don't see -- I see very strong levels. Right now I don't see any issues with the rental tools revenue mix.

Okay. Moving forward, does that exceed the growth on the rig count given its leverage to completions in your opinion?

Certainly has that potential but I think a lot of that has already shaken out.

Okay. And then, hopping over to offshore products. Another excellent quarter in orders. A lot of them seem to be smaller ticket items, maybe not $5 million to $10 million range. Is it reasonable to assume it's a run rate of $150 million in orders moving forward, based off these small ticket items that you guys continue to get?

I'm not sure of the mix of your questions there. If there is an inference that we only had small ticket orders in this quarter I wouldn't necessarily agree with that. We've made a separate announcement of the project in Brazil and that was in excess of $30 million. We point to some deck equipment orders that are fairly significant and then follow on work on Jack St. Malo as well. So we did have some significant orders in this quarter. This is a very difficult business to try to say there is a run rate level of awards that come in quarter by quarter. If you are saying, is there is a base line of 150 absent any of the larger awards, I'd say it's possible. These are very much project-oriented and we do have a lot of in and out every quarter as you say that the base line. So it's hard to answer the question specifically to be honest with you.

I do think that we will continue to maintain a book-to-bill over one for the rest of the year. I think Cindy is saying that basically the orders can be lumpy. I mean, and in a given quarter and we had some strong order levels having book-to-bills somewhere between 1.5 to 1.8 for the last two - three quarters. I don't know we can sustain that level of order intake but we should have a book-to-bill over one.

Okay. That's helpful. Then one last one on the US mobile camp side of the business. Any possibilities in expanding upon the Mountain West acquisition, the Bakken, as well as potentially going into the Eagle Ford by year end?

That's certainly the goal. It's a little early for us to say anything right now because those plans are in process. I would hope that by the year end we'd have something we could talk about.

Okay. All right.

That's certainly the goal and the intent. We need to execute on that. I guess the answer is yes, but we don't have anything that we can announce right now.

Okay, but stuff is in progress?

Yes.

Okay. Thank you.

Daniel Burke of Johnson Rice.

Thank you for taking my call. I want to stay with the topic just visited there and better understand a little bit about the composition of your inbounds. Could you talk about what you saw in the second quarter in the deck equipment side? Was it FPSO-related, and what's the outlook there of getting away from the highly proprietary Merlin flex joint side of the business?

Well, we're still seeing a again a lot of demand for our flex joints and our Merlin connectors. But fortunately in addition to that in our Houma-based facility we manufacture mooring systems, deck equipment and cranes, and some of the orders that we have gotten related to the mooring systems has come from Chinese shipyards, associated with development in that market. But we enjoy those levels of activity as well because we don't manufacture flex joints and Merlins in all of our facilities, and the Houma products line we have enjoyed some increases in backlog in that facility during the quarter which will really help us overall from a through-put standpoint.

So presumably that will be -- while those might not be your highest margin products getting a through-put up at Houma should be accretive to your overall margin run rate within offshore products. Is that a way to think about it?

Yes, because of cost absorption, just to be more specific on that. We've got multiple manufacturing facilities around the globe, and to the extent that a given facility or two does not have sufficient backlog or through-put, they can provide a drain on the otherwise strong contributions from some of our other operations. So it's clearly something that we have been focused on and are pleased to see.

Great. And then one on the accommodations side. It looks like, based on the disclosures you provided on the performance of your fourth quarter ten acquisitions, as you alluded to the EBITDA margins at the Mac improved sequentially by a decent amount. Maybe Bradley if you could revisit and discuss. It looks like it was partly due to cost as well as improved revenue performance. Is it easier to see the weather impact now that we've got two quarters in the books this year?

The weather impact from the first quarter?

Correct, versus the second quarter.

We saw a nice uptick sequentially in RevPAR and Mac, and part of that was occupancy. I think part of it was the fact that in that market we did have some contracts roll over and did get some pricing improvement there. And then also I would say that generally, we were trying to be fairly conservative in our cost forecasting until we got a handle on the business in the second quarter. We started to see that's how we had a little bit more -- better performance in cost control than we thought.

Great. Thanks for the help.

(Operator Instructions) Doug Garver of Dahlman Rose.

Good morning, guys. My first question is on the land rigs upgrades you are doing. What equipment are you using for the upgrades and what are the lead times on that equipment?

I think what I mentioned on the call was that we are in discussions with our customers about potential upgrades as opposed to actively upgrading our fleet at this particular time, just to be clear. Generally speaking when we are doing those types of upgrades it might be taking any of the existing low sub rigs to high subs to where you got work on the rig itself and horsepower is an issue, possibly going from 500-horsepower to 750-horsepower pumps would be an issue. I would say lead times for upgrades of this type is in the six month range.

And are you also talking about new builds or are you just talking about upgrading the rigs. Is there a tradeoff there?

We are in discussions with customers on both fronts just to see what's in the marketplace and so there is some opportunities really for both but we're not announcing either at this particular point in time.

All right. Thank you.

Ashish Gupta of DB Capital.

I had a really quick question. If we look out beyond 2012, can you discuss at all how many rooms you have contracted, or any offshore backlog that extends beyond 2012?

We do have backlog that extends beyond 2012 in offshore products, and I have to look at where we were on the rooms. I haven't gone past 2012 to be honest.

If you go back to the earlier comments about 75% of our backlog turns in the forward 12 months which means 75% is eroded by June 30 of 2012. So even though some will fall beyond the year of 2012, it won't be a huge amount. We could certainly put our quantities around that. In our investor presentations we typically only go two years out in terms of our room commitments. However, as you know, we do have some longer term commitments particularly in Australia, that go five years on some of these villages. So there is contracted backlog that extends beyond 2012 there. And the major contract in the oil sands with one of our largest customers up there goes through March 31 of 2013 which -- and there are options beyond that. As we move throughout 2011 and into 2012, I think I can confidently say you will see incremental firming of both long-term contracts in both Canada and Australia for our accommodations going into 2013 and we will continue to build backlog accordingly. Historically that backlog has been, again, more of a 12 month to 18 month forward backlog.

Great. Thanks, guys.

(Operator Instructions) I'm showing no further questions in queue at this time.

Well, great. Thanks so much for joining our call this morning. We were very pleased with the quarter and look forward to sharing the next one with you and hope it's equally successful, and glad the earnings season's over, I know you are too. Thanks so much.

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