Oil States International Inc (OIS) 2013 Q2 法說會逐字稿

Welcome to the Oil States International Inc. second quarter 2013 earnings conference call. My name is John and I will be operator for today's 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 Ms. Patricia Gil, Investor Relations. Ms. Gil, you may begin.

Thank you, John. Welcome to Oil States second quarter 2013 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 and Chief Financial 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, please note that 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 other SEC filings. I will now turn the call over to Cindy.

Thank you, Patricia. Good morning to all of you and thanks for joining our earnings conference call today. We entered the second quarter of 2013 with continued global economic uncertainty along with cautious optimism of an improving US economy. These market conditions led to mixed results for our Company this quarter with revenues up sequentially in all segments except Accommodations. Our Accommodations segment reported sequentially lower results primarily due to the impact of spring break up in Canada which was exacerbated by flooding in Alberta and in the Bakken along with lower contractual rates. Our Accommodations results were also negatively impacted by weaker Canadian and Australian foreign exchange rates. The Aussie dollar in particular weakened considerably late in the quarter and has tumbled 11% since May.

Rig count expansions have slowed during 2013 given these global economic conditions. However, we recently announced the construction of a new camp facility in the Permian Basin along with the opening of a new Canadian Lodge in southern Saskatchewan and appear to be on track to meet our 2013 room count growth guidance. In contrast, we posted strong results from our offshore products business during the quarter and enjoyed increased demand for our proprietary completion services and equipment. Offshore products posted a book-to-bill ratio of one-time allowing us to maintain solid backlog levels totaling $561 million at the end of the quarter. EBITDA margins in the offshore products segment for the quarter totaled 20%. In our well site services business revenue in EBITDA were sequentially up 5% and 6% respectively, largely due to contributions from the Tempress acquisition and improved pricing on a per ticket basis in completion services, coupled with improved drilling rig utilization and margins.

At this time Bradley will take you through more details of our consolidated results and financial position and then I will provide a detailed discussion of each of our segments and will give you our thoughts on the current market outlook. Lastly, I will conclude our prepared remarks with an update on our strategic assessment of the Accommodations business.

Thank you, Cindy. During the second quarter of 2013 we reported operating income of $127 million on revenues of $1 billion. Our net income for the second quarter of 2013 totaled $77 million or $1.38 per share which included $0.12 per diluted share of nonrecurring items detailed in the press release. Excluding these nonrecurring items, second-quarter results would have been $1 billion of revenues, $135 million of operating income, $204 million of EBITDA, $83 million of net income or $1.50 per diluted share. The comparable second-quarter 2012 results were $169 million of operating income on revenues of $1.1 billion. Net income for the second quarter of 2012 totaled $111 million or $2.01 per diluted share which included a pretax gain of $2.5 million or $0.03 per diluted share after-tax related to insurance proceeds received during the second quarter in excess of net book value for a land drilling rig that was lost in a fire in the first quarter of 2012.

The year-over-year decrease in profitability was a result of lower contracted room rates in the Canadian Accommodations business, lower OCTG prices and margins, lower occupancy levels at certain Australian villages and increased US drilling and completion -- reduced US drilling and completion activity, partially offset by contributions from the Piper Valves and Tempress acquisitions. During the second quarter of 2013 we reported strong cash flow from operations of $140 million and we invested $133 million in capital expenditures. Primarily related to the ongoing expansion of our Accommodations business.

During the second quarter of 2013 the Company repurchased $1.5 million or 20,000 shares of its common stock under its authorized share repurchase program at an average purchase price of $74.27 per share. Our net debt at the end of the second quarter totaled $941 million, our debt to cap ratio was 32% and our trailing leverage ratio was 1.4 times. As of June 30, 2013, we had liquidity of approximately $988 million under our credit facilities and $226 million in cash.

In terms of our third quarter 2013 guidance, we expect depreciation amortization expense to total $69 million and net interest expense to approximate $18 million. Diluted shares are expected to total $55.7 million in the third quarter of 2013 and we expect our 2013 effective tax rate to approximate 28.2%. The Company currently plans to spend approximately $550 million to $600 million in capital expenditures during 2013. This guidance range is down from the prior quarter as we now expect some of our offshore products CapEx to ultimately be spent in 2014. At this time I'd like to turn the discussion back over to Cindy who will review the activities in each of our business segments, providing outlook and guidance for the third quarter of 2013.

Thanks, Bradley. I'd like to lead off with our Accommodations business. On a sequential basis our Accommodations segment revenues decreased 18% to $244 million and EBITDA decreased 29% quarter-over-quarter to $96 million, primarily due to the effects of spring break up in Canada and its impact on the mobile camp business, the nonrecurrence of a $4 million earn out accrual adjustment in the first quarter of 2013, and lower contracted pricing. Our lodge and village revenue was down 7% sequentially as a result of a breakup in Canada, continuing softer occupancy levels at certain villages in Australia, and the stronger US dollar which served as a drag on foreign derived profits upon translation.

During the second quarter we announced the construction of a new facility in the Permian Basin in Pecos, Texas that will support oil and gas operations and related services in the region. The Accommodations facility opened for occupancy at the beginning of June 2013 with the room count expected to increase to a total capacity of 310 rooms by the third quarter of 2013. We also announced the opening of a new Canadian Lodge in southern Saskatchewan that will support power and infrastructure construction projects in the Estevan, Saskatchewan region and the surrounding Bakken oil and gas shale area. The Accommodations facility opened for occupancy in mid-June 2013 with expected total capacity of 348 rooms.

During the second quarter of 2013 our average available rooms totaled 20,201 rooms, a sequential increase of 192 rooms with a RevPAR of 108 in line with our guidance. The expect average lodge and village rooms to increase another 2% in the third quarter. Accommodations revenues are expected to range between $255 million and $265 million as a result of better utilization of our Canadian mobile camps as operations begin to recover from the effects of breakup. At this point we are not forecasting any material improvements in our Canadian lodge and Australian village occupancy levels, nor for our US Accommodations utilization. In addition, a stronger US dollar will continue to negatively impact the translation of our foreign derived profits. As a result, EBITDA margins are expected to range from 39% to 40% in the third quarter while full-year margins are expected to be within our long-term margin guidance of 41% to 43%.

In our offshore products segment we generated $204 million of revenues and $42 million of EBITDA during the second quarter. Sequentially, revenues and EBITDA increased 2% and 16% respectively and EBITDA margins came in at 20%, a 260 basis point improvement quarter-over-quarter. During the quarter we experienced high levels of manufacturing and service activity and we enjoyed a favorable revenue mix favoring our subsea equipment and drilling related products. We booked $280 million in new orders during the quarter and reported backlog of $561 million at June 30, 2013, with a book-to-bill ratio of one time.

Noteworthy backlog additions in the second quarter included deck equipment and connector product orders for China and Russia respectively. For the third quarter of drilling and production equipment sales are expected to accelerate and we anticipate a higher level of service work to be performed such that revenues are projected to increase to $230 million to $240 million. EBITDA margins will depend upon our revenue mix and project execution but are projected to be in the range of 18% to 19%.

Our well site services segment generated revenues of $186 million in the second quarter of 2013 compared to $178 million in the first quarter of 2013. EBITDA during the second quarter of 2013 was $57 million compared to $54 million in the first quarter. Results for the second quarter of 2013 included a charge of $3 million related to an increase in an acquisition related contingent liability and a $1.6 million out of period revenue accrual reversal. Excluding these nonrecurring items, EBITDA increased 15% quarter-over-quarter and EBITDA margins for this segment improved to 34%. Despite the flat sequential US rig count, this segment grew revenues and profits primarily due to greater service intensity in the active shale basin, particularly in the Permian Basin, South Texas and the Northeast, along with greater contributions from the Tempress acquisition and higher drilling rig utilization and margins, partially offset by spring breakup in Canada.

In our completion service business the number of tickets issued during the second quarter increased 1% sequentially and revenue per ticket improved 4% when compared with the first quarter of 2013. We continue to see signs of improved activity in certain basins that should help our completion services business contribute to sequential growth in the third quarter. As of today, a total of seven of our drilling rigs remain stacked, primarily in the Permian Basin. We estimate that third quarter revenues for our well site services segment will range between $185 million and $195 million with EBITDA margins of 32% to 33%.

During the second quarter of 2013 tubular services generated revenues of $406 million compared to $394 million in the first quarter of 2013. Tons shipped were 6% higher sequentially and gross margin as a percent of revenues was flat at 5.1%. Industry inventory levels as measured by the OCTG situation report now stand at approximately 4.7 months supply. While the OCTG market has been impacted by higher levels of industry inventory, strong import volumes and increasing US mill capacity, the recent trade suit filed against nine OCTG producing countries could possibly change the domestic OCTG industry dynamics, although it is too soon to quantify the timing or extent of the potential impact. The Company's OCTG inventory increased by $17 million on a sequential basis totaling $439 million as of June 30, 2013. As of June 30, 2013, approximately 90% of our tubular inventory was committed to customer orders. We expect our tubular services segment to generate revenues of between $400 million and $410 million in the third quarter of 2013 with gross margins ranging from 5% to 5.5%.

In summary, our second-quarter results were mixed but did decline on a sequential basis due in part to seasonality, wet weather and a soft global economic environment. Our results in the third quarter of 2013 should grow sequentially as operations begin to recover from the effects of breakup. In addition, we are looking for an acceleration of drilling and production equipment sales within the offshore products segment which will benefit from continued secular growth in deep water spending. Demand for our proprietary completion services equipment continues to track or outpace the US rig count and we remain optimistic that activity will improve as the year progresses. As always, we remain disciplined in our allocation of capital and are focused on achieving the best return on investment for our shareholders.

Before we open the call up for questions relative to our earnings, I'd like to comment on the press release we issued yesterday regarding the potential spinoff of our Accommodations business. Many of you have followed our Company for several years. When I look back on a 3-year, 5-year and 10-year historical basis, Oil States' stock price performance has clearly been outstanding. In our opinion, despite delivering strong relative stock price growth, Oil States trades at a conglomerate discount and has to varying degrees for years. Accordingly, we believe there is the potential to unlock value in Oil States' stock over time through a separation of the Accommodations business into a standalone publicly traded Corporation via a tax respend to the Company's shareholders.

As we outlined in an additional press release the separation strategy we have proposed would be executed through a tax-free spinoff to Oil States' shareholders which is expected to be completed during or before the summer of 2014. The separation would result in two standalone companies, Oil States International and the Accommodations business which will be renamed upon separation. Oil States would be comprised of the offshore products segment, the well site services segment and the tubular services segment. The standalone Accommodations business would continue to be a leading integrated provider of remote site accommodations and services for temporary and permanent work forces, offering customers a turnkey solution for their workforce accommodations needs, food services, facility management, and water and wastewater services. As a standalone entity the Accommodations business would focus on continued growth through contracted room expansions in its existing Canadian Oil Sands, Australian mining, and US shale play markets, as well as potentially expand into new regions and markets around the world.

To facilitate the proposed separation, work has already begun to determine the detailed allocation of assets and liabilities, the management and governance of the companies, the mechanics of completing the transaction, among other matters. While we still have a considerable amount of work to do in this regard, we have structured the proposed plan so that both companies will be well-positioned upon separation with strong balance sheets and experienced management teams to continue to invest and deliver value to shareholders. I'd also like to note that we cannot provide any assurances that a separation transaction will ultimately occur, or if one does occur, speak to its terms or timing.

Additionally, if the proposed separation does take place there can be no assurance that the ongoing evaluation process with respect to the Accommodations business will lead to a REIT conversion or any other transaction, but the REIT valuation is ongoing. As discussed in the release, any separation will be subject to market conditions, customary regulatory approvals, the receipt of an affirmative IRS ruling or independent tax opinion, the execution of separation and inter company agreements and final Board approval. The spinoff will not be subject to a shareholder vote. We firmly believe that both entities will have a solid growth profile and will be well-positioned to compete effectively and efficiently in their respective markets. We will continue to provide updates on our progress as milestones towards this planned separation are achieved.

Before we open up the call for questions, I'd like to remind everyone that we are here to discuss our second-quarter earnings. We'd appreciate it if you could please focus your questions more towards earnings. Going forward, we plan to continue to update the market on the potential separation as it is prudent to do so. That does complete our prepared comments. John, would you please open up the call for questions and answers?

(Operator Instructions)

Stephen Gengaro from Sterne, Agee.

Hi, thanks, good morning. Two questions. The first on the completion services business the rental tickets and if the price per ticket, they seem to defy gravity over the last year and a half. Can you give us some color on what's behind that, and I know some of its the technology, but what's behind that strength and how should we think about that going forward?

I'm resisting the temptation to stay good management because Chris is sitting across from me. But I really think you hit on -- In our, embedded in our strategy has always been to focus on not only current technology but emerging technology. And we have tended to shy away from what I will call more commoditized services. I've been in this business a long time and typically when activity increases and strengthens you get a lot of capacity in the more commoditized business lines and creates a lot of volatility in terms of your operations and your earnings.

Again, we talk about intensity at the well sites and that really does play into our more proprietary equipment and that mix shift is obviously very favorable in terms of price per ticket. We have some variability among the basins without question, but particularly as basins like the Bakken, the Eagle Ford and the Permian shift more and more to horizontal work, complex completions, extended reach laterals, that really does help our mix. That is the best answer I can really give you.

Okay. Thank you. And then moving to the Accommodations side.

When you, I guess there's two parts to the question, but one on the Australian side, that's where there are seemingly -- the fundamental seem the sloppiest right now. How do the contracts look there, and what's their contract coverage as we look out to the rest of this year and 2014?

I will take a first stab at that Stephen. The Australian business really I would say albeit is having a much more difficult year than it has the past couple. I think it is performing quite admirably given the economic backdrop.

Relative to our expectations coming into this year which as you know our budgeting process are set kind of in the fall and end of the year of the prior year, we are tracking fairly closely. Which given the deterioration in met coal prices and really not an uptick in the economy as a whole. I think is quite laudable. So really we've got good contract coverage.

We are serving some of the top tier met coal minds and companies in the Bowen basin. As we've noted really starting probably third quarter of last year we had one customer's mine closed that impacted a couple locations and that hasn't changed. We have really between contracts briefly really in the second quarter at Calliope, but beyond that, really the occupancy levels, or the contracted room levels are quite good.

Specific to your question about the contract terms, the major contracts that we have extend into 2015, 2016 and 2017 and so really I feel pretty good about the contract coverage. These are take or pay contracts that we have -- have been tested in other periods of softer activity and feel very good about our legal position as it relates to the take or pay nature of them.

Great. Thank you. The other quick one on Accommodations was, how is it going in the US land? I know it is a different type of market, but how do the economics in the Permian look versus the villages in Canada and Australia?

I think in the US we've -- not to rehash history too much but the US Accommodations business until the advent really of the Bakken and really now the Permian and the Eagle Ford, it really wasn't terribly exciting. Just because you think about the activity a few years ago, the Haynesville and the Barnett are near major city centers, and there isn't a need for remote housing because the infrastructure was in place closer to where the workforce needed to be.

What we're, as we've entered the US market or extended our presence in the US market, we are providing a different value proposition than what people had experienced historically. If you've toured the areas you see a bunch of trailers and fifth wheels and campers and tents even, but what we are competing against is a live out allowance. And what we are trying to do, and we think that economically our value proposition does provide some value to the customer. But at the end of the day we are competing against a live out allowance and whether or not people want to stay in one location or just get a live out allowance and figure it out on their own.

There is going to have to be a shift in the way people address the US market. I believe in our value proposition but it has been slow going in terms of changing that mentality.

Great. That's helpful color, thank you.

David Einhorn from Greenlight Capital.

Hey, good morning, Cindy and Brad. First of all, I want to thank you and congratulate you for going through the strategic review in such a timely fashion and getting advisors and coming to the decisions today. This to me this seems to be a very good development.

I was hoping I could get you to comment a little bit further in terms of what your current philosophy is toward a possible REIT conversion of the Accommodations business? By which I mean, and you can pick another option, but is it more like there's nothing to do -- we cannot decide to actually convert until January of 2015. The work has been done but you don't know how things are going to change. Congress could change the tax laws, the IRS could do something, REIT values could go down, so there's just no reason to commit to a decision right now, but if things stayed the way they were, it is a matter of time of getting in that direction.

Or alternatively just to just to take the diametrically opposed view is, well we are going to spinoff the Company into a C-Corporation. We don't know who the management is going to be, we don't know who the Board is going to be, we don't know what the strategy is going to be at that point. Maybe we need to get those things in line and figure out lots of other things that will come into play. And then this will be sort of a fresh evaluation for those people or whoever, or new people, or whoever it is who turns out to be sort of in charge there to take up in the later part of 2014 post spend?

David, I will add a little color to that but I think you laid out a lot of our thought process quite frankly, in your thinking. Obviously, given the complexity of what we are doing in assessing there's no way to make a REIT election by the first == January 1 of next year and so it would be in fact yes, January 1, 2015. We've had a deeply embedded strategic plan in this Company for many, many years and it has always over the last I want to say six or seven years contemplated a simplification of this business, largely led by a spinoff of Accommodations.

And again, for benefit of the rest of the people on the call, with the passage of the time and quite frankly, a very successful growth track record in our Accommodations business, over time we've moved a bit away from core what I will call energy services model. And in fact we employee a lot of hotel expertise and experts, it's becoming a bit different business line. And in our view it has great growth potential, not only within the energy and mining sectors, but I would say outside energy and mining.

And so we are really excited about the potential capabilities of this business lines on a standalone basis. The is the fastest and the most expedient movement in our view to proceed down this path with standalone audits, those audits are commencing I think immediately, if they've not already. They will pick up 2013 in the three-year period, such that we would be in a position to start drafting a Form 10 hopefully get that filed somewhere early in the year 2014.

And as you say, we are very focused on leadership. I think it is critical to our long-term success in both companies. But I will also tell you I think we have a very deep and talented leadership team that we hope to offer growth potential and have a lot of their culture transferred to the spun off Company and also remain with the residual Company. We will bolster that with needed expertise down the road.

But we don't foresee wholesale changes to the way that we manage business and look at our strategies going forward. And I would think that would add some level of confidence to the shareholders. And again, it is a spinoff to shareholders so we are committed to the success of both of these entities going forward.

Specific to a REIT, we said that process is ongoing. I think we can say at this stage we think it is doable. But to your point, it doesn't do a lot of good to make a call today when the election will have to be filed next year and it will be dependent upon many things in the United States. But particularly potential movements in the tax laws.

Obviously if we didn't think that there were potential viability of the structure we would comment on that today and we continue to think it is possible. But we have to assess the facts and circumstances that exist when it comes time to make that election. I hope that addresses your question.

Very well. Thank you guys so much.

Thanks, David.

Thank you.

Collin Gerry from Raymond James.

Good morning and I will echo that. Thanks for the very thorough explanation regarding the prior question. I will stick to the quarterly stuff.

I want to start, kind of a little bit of an interesting development on the foreign currency stuff. Normally we don't see you guys call out foreign currency, I guess there was a lot of movement. And in the guidance that seemed to be something that hamstrung -- is hamstringing your Accommodations guidance.

Could you talk to us a little bit more about how the Company as a whole, and particularly Accommodations, how it is set up from a foreign currency perspective? What should we'd be watching for and be cautious of in the foreign currency market?

Sure. Thank you, Collin, for the question. I'll tackle it and let Cindy chime in.

Our Canadian operations and Australian operations have local -- are local functional currencies. That means that they have Canadian dollar costs, Canadian dollar revenues, Canadian dollar borrowings. And when the Canadian dollar fluctuates against the US dollar, that ultimately creates a change in how those earnings and that balance sheet of the Canadian operations are translated back for the Oil States International consolidated financial statements.

Likewise in Australia it is the same identical situation. The reason we called it out in the press release, and last night I got a question about it, not as much that it is really nonrecurring. But relative to the fact that as we were making our second quarter guidance disclosure on the first quarter call, the exchange rates were at a certain point, and to Cindy's comments on the call, the Australian dollar in particular is down 11% in the last few weeks.

So it was more to alert everyone that really late in the quarter both currencies weakened against the US dollar. And when their earnings in Canadian dollars and Australian dollars respectively were translated back to our consolidated earnings, that did have an impact. Right now, looking at the forward estimates for the third quarter, their roughly, although the Australian dollar this morning is having a rough morning, they are roughly in line with where we were yesterday. And so I think that it is just to alert everyone that if you see a significant movement in a quarter of the Canadian dollar or the Australian dollar, that will have an impact on the US dollar equivalent earnings of our Accommodations business.

I might add one further comment to that. You see the side in the short-term obviously in terms of the stronger US dollar and the impact on translated earnings. Over the long-term, there's almost a buckling impact in the sense that devalued Aussie dollar will lead to higher profitability of our customer base, and in theory help them recover from some lower met coal prices over time.

So you have to balance that short-term long-term. All we are trying to do is highlight the issues that we face and give you a good idea of some of the variabilities you need to factor into your earnings forecast.

That totally makes sense. That's great color.

The other one I had was, we've heard so far, we're a little bit through earnings season, and some of the North American service companies have been a little snakebitten by weather, whether it was in the Bakken and so forth. But to your point regarding the non-commoditized nature of your completion services, business seems to be holding up very well for you guys. To the end, I would expect -- I'm a little surprised maybe the guidance isn't a little bit higher for next quarter based on everything we hear regarding completions activity, pad drilling and then just weather should be better. Maybe I'm off base, but maybe could you talk to the specifics there a little bit more?

I will add a comment and we did have weather impact, predominantly in Canada. Just realize are base in Canada is fairly small relative to the total operations that we have. And there was some wet weather in the Bakken but I think that was maybe a smaller impact than what obviously went on in Canada. So part of it just maybe the way that we are structured and where our operations are.

And we highlighted some of the markets where we are having strength right now, and it's the Eagle Ford, the Permian, the Northeast market in the United States. So those specific areas really wouldn't have had the weather impact overall. It is always a tough call, in what we will call this flattish rig count environment in terms of how you are going to go quarter-to-quarter. However, we are forecasting some sequential improvement in Q3, but don't see a real reason to be a hero on this one in light of the market that we are in.

Yes, I think there's some -- we gave guidance as it relates to well site services segment as a whole to get a little more color on the two businesses within that. I think the drilling business may be slightly down on a top line basis sequentially in the third quarter from the second quarter, just a little softer utilization, primarily in the Permian. Which is being offset by the fact that the completion services business is expected to be up a little bit on a sequential basis. That's really some additional color there.

That makes a lot of sense. All right, perfect. I will turn it back.

Blake Hutchinson from Howard Weil.

Good morning. Just following up on the, sorry to harp on this, but the currency issue with regard to as it pertains to your forward-looking Accommodations margin guidance. I guess from the previous conversation I didn't necessarily gather that there should be any undue effect on a percentage basis. So the margin guidance you leave us with for 3Q is really kind of reflective of what the business has to offer now rather than the currency impact on itself, or am I looking at that incorrectly?

Materially, the change in the FX rates will not affect the -- well, let me back up. As it relates to the Canadian earnings in US dollars the change in the FX rate does not impact the percentage EBITDA margins, because it is the whole income statement that's being translated back. Same thing for Australia.

To the extent that we have lower translated US dollar earnings coming out of Canada and Australia which puts an increased weighting on the US business which has lower margins, it could have a margin impact. So that's how I would answer that question. But generally, the FX rate is not the issue other than translating back Canada and Australia on that margin guidance.

Okay, that's helpful. And then just a smaller question within the completion services business. I guess for the last couple quarters, if I followed the Tempress commentary and the strip out that you guys give of that versus that base business, I understand it is a very small acquisition. But it would make it seem as if that business is sitting on margins a bit.

Is that the case? And is there something going on with the business that might provide a little relief as the year unfolds?

Tempress is additive to margins so that shouldn't be an issue. I believe that it does have a slightly smaller revenue per ticket versus the composite completion services business, but it is additive to margins.

Okay, so it is wrong to think that is translating into margins. Okay. I appreciate it and I will turn it back.

Thanks, Blake.

Jeff Tillery from Tudor Pickering.

Hi, good morning. When I look at the CapEx guidance for this year, what would you guys need to see or what would need to happen for you to get to that high-end of the range to spend $600 million this year?

Right now we've moderated our CapEx guidance back just a bit as we've talked about and that's really not a permanent reduction. It is going to be shifting in our view and it is actually timing more of some of our facility expansions in offshore products.

To get to the high end, we still have embedded in that forecast some Accommodations growth, I would say particularly in Canada, and we are pretty committed to those. But we need to see a reasonably robust market in Canada I would say to get the high end of the that.

Are those new lodges or expansion of lodges, it's basically projects you have --

It is a little of both, new, expansions and ancillary equipment. It's some of the projects that we can do to get direct benefit by way of reduced operating cost, so there's quite a variety of things that are out there.

Okay, and then for offshore products, the order intake has kind of been flat over the last three or so quarters, anything you see over the next couple of quarters that's going to change that run rate one way or the other?

There are some sizable bids that we have that if we were to be successful we would be above a one-time book-to-bill ratio, yes. And my best guess for that is fourth-quarterish.

All right and then last question I have, just around Accommodations margins as we step forward. It would seem the biggest factor that would get you guys back to the, we're talking on the margin really, but a couple hundred basis points higher back to the low 40%s is really the absorption and utilization in Australia. Is that the biggest factor would you say?

Yes, -- I don't think the word absorption is necessarily right but improved utilization in Australia would certainly be helpful. And I'd say the US market too. We had some pretty big contributions in the US in 2012 on some of the mobile camp assets.

And we have a lot of competitions come into the play with the heated environment that we had, and of course, now that that we've gone into a flat rig count we have got over capacity in the US. So I would say, twofold focus on Australia and the US to have some margin improvement there.

That makes sense, we could look back at the acquisitions you guys did, that makes sense. Those are additive to the margins. Okay, thank you.

Thanks.

Kurt Hallead from RBC.

Hey, good morning. So you gave a lot of detail here and thought processes on how you see the market evolving, especially for the Accommodations business, and I think that's all great and useful insight.

I think I'm still grappling just trying to get my hands around what's going on in Australia. Whether this is a short term business dynamic, whether or not it is something that from you guys sit you started to map out a different dynamic for Australia over the next two, three, four years. I just wonder if you can give us just a little bit more, maybe your inner thoughts on how things have been changing there and what you are thinking maybe a little bit longer out?

Well, obviously we have a lot of faith and optimism I would say in Australia over the long-term. It is a good market. There are some clear headwinds right now.

But there is a macro factor to be considered, which is China right now, and that's a significant demand driver for the commodities that are exported out of Australia, and it is no secret that their growth rate has slowed dramatically. However, just this morning there are pieces out about them trying to do some easing, if you will, to infuse some growth back into the market and ultimately, I'm no economist, but you're going to come back to a call on China.

They are trying to strengthen and diversify their economy and enhance the middle class, and in doing so they will create a more stable long-term environment. That' s pretty critical to a lot of people's business. It's certainly laser focused on Australia right now.

Australia faces not only the met coal headwinds, again driven by high production coming out of Australia and weaker demand coming out of China, but in addition to that, their costs have been high. And so this currency correction, as I pointed out a little bit earlier, will tend to moderate some of those impacts. But we are just in a period right now where a lot of our customers' cash flows are -- to say they are getting hurt is probably an understatement at this point. But I think long-term if you have a believe in a global economic recovery and you have belief in the strength of China, it will get better. The question is when.

And most people thought by the latter half of this year we would see improvements. I think that's premature and I think it will probably be 2014. But still do believe that because of the quality of the commodities that are in place in the country and the transportation advantages that they have over other global markets that things will improve over time.

Right. Great. You guys provided a lot of detail already, I will just keep it there and do some follow-up after. Thanks a lot.

Thanks, Kurt.

John Allison from BB&T Capital Markets.

Hi, good morning. In regards to the spinoff could you give us a little color on the potential costs to Oil States over the next year or so? And do you expect these to be material? And also will these restructuring costs be paid for under the Oil States name or under the spun off Accommodation segment?

We are not going to comment on a lot of specificity on that, but clearly there will be transaction costs that are pretty normal levels of transaction costs, and obviously the combined entity is affecting the spinoff. It all depends on how you spin it at the end of the day and where the debt is residual at the spinoff date. However, we don't think the cost to be too terribly significant related to the transaction itself. There will be breakage costs, but clearly we're going to look at a cost benefit analysis and if you are going to spend a certain amount of money but yet create potentially $2 billion of value then we would want to do that.

Okay, got you. And lastly, in regards to pricing in the OCTG market, do you expect that we will continue to see a decline here or should we see a bottom in the near future?

Well, I think that right now we saw our revenue per ton come down in second-quarter. At this point I think we will hesitantly say we are cautiously optimistic that we will see a stabilization in the third quarter, but that's yet to be seen.

Okay. Thank you so much.

Daniel Burke from Johnson Rice.

Good morning all Bradley, can you remind me within the CapEx budget for this year how it splits, non-Accommodations versus Accommodations?

Yes. It has been running and I'm just flipping to my number, that Accommodations was about 60%, 65% of the total CapEx. And based on current guidance I believe that still holds, but let me just double check. That's right, 60% to 65% still be focused on Accommodations.

We have a fairly, at least relative to their historical levels, higher CapEx level at offshore products, for these facility expansions Cindy mentioned. And then I would say a fairly normal level of CapEx for well site services relative to the last couple years.

Okay. And so I guess my follow-up would be first of all, any detail on anything behind the slight delays you are seeing in terms of I believe that would be South America expansion or Brazil expansion at offshore products?

And then I guess the second question would be can you give a read for what a view of normalized CapEx is across the US and offshore products business? Is D&A a good proxy once you get beyond the current elevated spend at offshore?

I will answer the latter, the answer is yes. D&A will be -- depreciation would be a reasonable basis for normalized CapEx for those businesses. As it relates to overall it will depend entirely on how much growth CapEx is in Accommodations.

Okay, helpful. Anything going on in Brazil regarding expansion plans?

Things are moving forward there. We started initial efforts with a service facility near [Mock] A to expand our service capabilities in the region and the second facility will be more geared towards higher-end machining and fabrication. There have been a little bit of permitting delays that quite frankly has worked out just fine because Brazil has had to, probably of necessity, moderate a little bit of their local country content requirements. And it has not stopped us getting our proportionate percentage of awards into backlog from Brazil, we are just going to be able to do more in the US for little bit longer period.

So again the plans are not by any means eliminated, they've just been pushed back a little bit in terms of actual dollars being spent. But everything is moving forward.

Yes, and I think we've been pretty clear for some time that of all of our CapEx, while we put in into plan because it has been approved and it has been in the guidance that it was going to be difficult for them to spend all that money this year.

Understood. Thank you all.

Thanks, Daniel.

John Daniel.

Good morning. Just a question first on Accommodations on the RevPAR room, $108 for Q2. Bradley, as you try to look out beyond in 2014 is there any reason that the RevPAR room in 2014 should average less than $108?

Well we haven't given any RevPAR guidance specifically for 2014 at this point. But I would say that in that $108 range could be reasonable on a full-year basis.

Okay. And then Q4 seasonality, some have talked about, some have not, at this point do you see any indications that well site services or tubulars would see a drop off for Q4?

I'm sorry, John, which business lines?

I'm sorry, well site services and/or tubulars

On tubulars I think let us know what the rig count is in fourth-quarter and we will tell you what activity levels are -- .

However, tubulars usually have a strong fourth quarter, it's not normally a seasonally weak quarter and we are not really focused on Q4 at this time. But my comment would generally say that depending on the strength of the rig count and what our operators are doing, that typically there is some downtime around Thanksgiving and into Christmas and I presume that's kind of what you're hearing about.

Impossible for me to make that call right now. I don't get too hung up on about it when people are just taking off for the holidays. That's nothing that impacts your long-term business, but I think if you were to ask me, yes I would have to say there will probably be some holiday downtime.

Yes, I would agree with all that obviously. I just didn't know if you'd had any discussions with customers at this point where they say hey, we are slowing down in November and just a heads up. That' s where I was going.

No, we have not.

Okay. Fair enough. And then the last one for me Bradley, I don't know if you can share this or not, but the number of work tickets that you typically get through Tempress, just try to reconcile with that added from a ticket standpoint?

I don't know off the top of my head.

Okay. All right, thanks, guys.

Thanks, John.

Jim Wicklund from Credit Suisse.

Mr. Einhorn helped out, and so have all the other questions. I will pull, everything has been answered.

Okay, thanks, Jim. Good talking to you.

Thanks, Jim.

Cole Sullivan from ISI Group.

Yes. I think I may have missed -- you may have said something on this earlier, but on the offshore products revenue guidance for 3Q, it was a nice uplift from the 2Q level, it looks like some of that's going be mixed on the service side. How much of that do you think will continue to flow through into 4Q?

Part of it is it is pretty good uplift sequentially and part of it is a major project that is shipping in Q3. So it is not all going to flow into Q4 by any means. There is an additive amount of service work that could of course have carryover benefit into Q4, but I would tell you there's a pretty reasonable sized project that will ship in Q3.

Okay. That's all I had. Thanks.

Thanks, Cole.

Stephen Carpel from Credit Suisse.

Good morning. Maybe first on the operational side, trying to understand the lower CapEx in offshore versus some of the activity you are seeing on the service side. And how the two correspond and what that will ultimately mean for margins and how the service side margins impact?

What happens in the offshore products business as you have a greater built out installed base and a broader geographic footprint, you have good service capabilities, it is not dependent upon CapEx or new facilities. It is generally more dependent upon the installed base and the number of service technicians. So you shouldn't draw necessarily a correlation from one to the other there.

Okay. And then one for -- I guess for Brad. In terms of the spinoff, will it necessitate the need to take out the, to do a tender or take out a consent for the high yield bonds, or will this be -- can the transaction be done with the current indenture, or indentures I guess?

Well, ultimately, the indentures will govern what happens to the bonds. 2019 bonds are callable next year, so in the timeline we're talking about, they will be callable.

As it relates for the 2023 bonds, based on the size of the transaction, and ultimately what the indenture will govern what happens to those bonds. But under the size of this transaction it doesn't fit in the RP basket, and so there would have to be some sort of make whole with those bonds.

So when you referred to breakage costs you referred to a T plus 50 make whole on those bonds as part of the transaction is what you were referring to?

There are many costs to it but that would be one.

Okay. Thank you.

We have no further questions at this time.

Well, thanks, everybody. It is been a little bit longer conference call.

Certainly understand that, and I appreciate your interest in our earnings and certainly the interest in the future split off of the Accommodations business. I will just reiterate that we are positive about it. We are excited about it. There's a lot of work to be done, but I think it is going to be very value creating for our shareholders and hope that you will stay with us through the balance of the period needed.

Appreciate it. Thanks.

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