Oil States International Inc (OIS) 2015 Q3 法說會逐字稿

Welcome to the Oil States International, Inc. third quarter 2015 earnings conference call.

(Operator Instructions)

Please note this conference is being recorded. I will now turn the call over to Patricia Gil, Investor Relations. Patricia Gil, you may begin.

Thank you, Adrian. Welcome to Oil States' third-quarter 2015 earnings conference call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; Lloyd Hajdik, Senior Vice President and Chief Financial Officer; and we are also joined by Chris Cragg, Senior Vice President Operations.

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 thank you for joining us today for our third quarter earnings conference call.

We reported earnings per share of $0.11 after adjusting for tax valuation allowances and severance recorded in the third quarter of 2015. While we managed our operations well during the quarter, our business segments continued to be negatively impacted by the low commodity price environment which was particularly acute in our North American Well Site Services segment.

The price of WTI crude oil decreased 24% per barrel in the third quarter when compared to the closing price on June 30, 2015, which eliminated any hope for a commodity price recovery that looked possible at the end of the second quarter. Although the rate of decline in the US rig count showed some stabilization during the quarter, our Completion Services business continued to be negatively impacted by low drilling and completion activity in North America coupled with persistent pricing pressure from our customers.

In our Offshore Products segment, we realized positive data points including an average EBITDA margin for the quarter that exceeded the high-end of our guidance range, orders booked that increased 50% sequentially and only a 4% quarter-over-quarter decline in our September 30 ending backlog position. Our book-to-bill ratio for the third quarter totaled 0.98 times bringing us to a year-to-date book-to-bill ratio of 0.87 times.

At this time, Lloyd will take you through more details of our consolidated results and provide highlights of our financial position. I will follow with more details by segment and provide you additional comments on our market outlook.

Thanks, Cindy.

During the third quarter we generated revenues of $259 million and reported adjusted net income of $5.6 million or $0.11 per diluted share. Third quarter adjusted EPS excluded a $3.2 million tax valuation allowance recorded against certain of the Company's deferred tax assets and $700,000 for severance related costs. EBITDA adjusted for severance cost totaled $39.5 million.

Our consolidated third quarter adjusted EBITDA margin of 15.3% was only slightly lower than the 16% adjusted EBITDA margin we achieved in the second quarter of 2015. A testament to our attention to our cost structure in this challenging environment that we're operating in. We continue to focus on our balance sheet and our debt capital structure. We ended the quarter with total liquidity of $492.4 million which is comprised of $406.7 million available under our revolving credit facility plus cash on hand of $85.7 million.

Our liquidity position remained relatively flat compared with the second quarter as we used our free cash flow to fund CapEx and to repurchase stock. Our financial position remains healthy with our gross and net debt levels at September 30 totaling $160 million and $74 million respectively. Our net debt-to-book capitalization ratio approximated 6% at September 30, and our leverage ratio using trailing 12-months adjusted EBITDA was approximately 0.6 times. Further, we have no significant debt maturities until 2019 when our credit facility is set to mature.

During the quarter, we invested $23.6 million in capital expenditures. Capital spending during the quarter related to ongoing facility expansions in our Offshore Products segment, primarily in the UK, along with maintenance capital spent in our Completion Services business. In the full-year 2015, we expect to spend approximately $125 million to $130 million in capital expenditures. Our top priority is to complete our new Offshore Products facility in the UK, which we are currently in the early stages of commissioning.

During the third quarter, we repurchased 483,000 shares under our authorized share repurchase program at an average price of $27.30 per share. Amounts remaining available under our current repurchase authorization total $136.8 million which is scheduled to expire on July 29, 2016. In terms of our fourth quarter 2015 consolidated guidance, we expect depreciation and amortization expense to approximate $31.6 million, net interest expense to approximate $1.5 million and corporate cost to approximate $11.7 million.

Our 2015 consolidated effective tax rate is expected to average 43% for the full-year given the valuation allowances recorded in the current quarter. This equates to an effective tax rate of approximately 25% for the fourth quarter. At this time, I would like to turn the call back over to Cindy who will take you through our business segments.

Thank you, Lloyd. In our Offshore Products segment, we generated revenues of $176 million during the third quarter of 2015, compared to $183 million recorded in the second quarter of 2015. Our top line results were below our third quarter guided range as a portion of our connector product and crane revenue slipped into the fourth quarter.

EBITDA totaled $40 million for the segment in the third quarter of 2015, compared to $41 million reported in the second quarter. Our EBITDA margin percentage was favorable to our guidance and averaged 22.5% for the current quarter. Orders booked during the third quarter increased 50% sequentially to total $173 million, yielding a relatively modest backlog decline of 4% quarter-over-quarter after some backlog cancellations and scope changes.

Our third quarter book-to-bill ratio was 0.98 times before these scope changes and cancellations totaling approximately $9 million, bringing our year-to-date 2015 gross book-to-bill ratio to 0.87 times. Major backlog additions during the third quarter included a multi-year US military products order, a large crane order and several pipeline products orders.

Expanding on Lloyd's earlier comments, I would now like to provide you with an update on our new UK manufacturing facility. Construction of this new facility is nearing completion and we have begun the relocation process to consolidate our other locations in the UK, mainly Aberdeen, to this new facility in the Heartlands area.

This facility is state-of-the-art and sits on a 28-acre tract of land in close proximity to Edinburgh and Glasgow, Scotland. The complex of buildings covers nearly 213,000 square feet and should provide many efficiency benefits for decades to come. We will continue to maintain a sales, projects and engineering presence in Aberdeen.

As we progress into the fourth quarter, we believe that revenue in our Offshore Products segment will increase marginally and range between $180 million and $190 million. This projected revenue increase is due to greater connector and subsea product contributions, partially offset by reductions in revenues in our shorter cycle, and consumable products and services as our customers remain focused on cash flow preservation.

We expect to incur approximately $2.5 million of facility relocation costs in the UK during the fourth quarter. Excluding these costs, our EBITDA margin guidance for the fourth quarter is forecasted to remain within our guided range of 19% to 21%.

In our Well Site Services segment, results were in line with our projections and the guidance ranges that we provided in connection with our second quarter 2015 earnings conference call. Our third quarter results continue to be impacted by the extremely low levels of activity in the US land drilling and completion markets. For the third quarter, our Well Site Services segment revenues totaled $83 million, which represented a 3% sequential decrease.

The sequential decline in revenues was attributable to an 8% decrease in the number of completion services jobs performed and low utilization of our land drilling rigs, which was partially offset by a 4% increase in revenue per completion services ticket due to a slightly more favorable product mix in the US, offset by customer pricing concessions in our international market. EBITDA decreased 1% sequentially to total $11 million and EBITDA margins averaged 13.1% for the third quarter.

Land rig utilization persisted at low levels in the third quarter, averaging 33%, essentially flat with the second quarter. Activity is already slowing in the vertical rig market as we move through the fourth quarter. We currently have only seven rigs out of our total fleet of 34 land drilling rigs working.

We are now one-third of the way through the fourth quarter with a high degree of uncertainty surrounding land-based North American drilling and completion activity from today through the end of the year. With market expectations suggesting significant seasonal holiday downtime and customer budget exhaustion in the fourth quarter, we are forecasting the utilization of our land drilling fleet to approximate 15% to 20%.

In addition, we expect our Completion Services revenues to decline from mid-November through the Christmas holidays. Given all of these variables, we estimate that fourth quarter revenues for our Well Site Services segment will decline sequentially and range between $60 million and $70 million with EBITDA margins averaging 5% to 10%.

In conclusion, the fourth quarter is expected to be very challenging in the North American onshore services market that we support. Customer budget exhaustion, seasonality and holiday downtime, coupled with already depressed levels of drilling and completion activity, is likely to negatively impact our Well Site Services segment in the fourth quarter. However, our Offshore Products business should hold up relatively well.

Further, Oil States is in an enviable position with a strong balance sheet characterized by low levels of leverage and nearly $500 million of liquidity at the end of the third quarter. As always, we will remain focused on operational efficiencies and customer service while we are seeking opportunities to invest for long-term growth.

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

(Operator Instructions)

Marshall Adkins, Raymond James.

Good morning, guys. Cindy, you guys have maintained a remarkably strong book-to-bill relative to most oil service manufacturers. Walk us through how the FIDs flow through your system from a timing perspective. I am trying to understand what's different about you to where things have been so strong. Is it timing or what? Just help us get our arms around that.

Well, part of it I think is having a good product line diversification. Let's start with that. If you look at some of the nature of the awards throughout the year, that's number one. I think number two is a focus on production infrastructure. And I hit that thought as I reflect on Q4, Q1 bookings very much weighted to subsea pipeline infrastructure, as an example. If you'll recall, Q2 was light on any major projects and then if you look at Q3, we had everything from subsea pipeline work, to cranes, to a military order. So, there's a lot going on there.

But again I think the real key for us is significant focus on either well consumables, meaning they're not life of field type investments. And then, a lot of our other key products that are more life of field investments have a production infrastructure focus which I've said all along, there will be budget cuts. A lot of that will start, as it always does, with exploratory drilling activities and the later to cut is of course development drilling activities.

Once you have a field that is already discovered and being delineated, there is no common sense to not developing that and get your revenue stream on, particularly for these long cycle deepwater projects. I think it's a little bit of all those things that have helped basically mitigate some of the pressures that are ongoing in the capital equipment cycle.

Good. That helps. I'm going to switch gears on my follow-up here to the margin side. I appreciate the help on Q4 margins, but given the lack of visibility we're all wrestling with next year's margins. That guidance you gave on EBITDA for Offshore, 19% to 21% for Q4, where do we think the bottom is for next year? Should we be thinking 15%? And I know it's early but just help us get our arms. Is it 10%, 15% or the 18% or 19% where we bottom next year?

Just to be clear, we will not give guidance yet for 2016. However, in the context of your question, what we look to right now is the low EBITDA margin that we witnessed in the last five years as kind of indicative of what we might expect it to be. Again, without giving guidance for 2016, I will say that looking back historically, that low EBITDA margin percentage was 17%.

Okay. It's been remarkable how well you've been able to manage costs in the downturn. That's why I'm asking that question. Thank you.

Thank you, Marshall.

Jim Wicklund, Credit Suisse.

Good morning, guys. So the timing of the recovery has obviously been pushed back, where we were back in May filled with optimism about the rest of the year, and that's gotten crushed. Has the M&A market, is the activity we expected to see in M&A, which was going to be fourth quarter/first quarter a while back, has that now been pushed to Q2 and Q3 next year? And so, are we going to have to wait longer to see a heated up M&A market?

It depends on whether you're talking about things coming to market or closing. I wanted to be clear to my Board, we're not sitting around waiting for books to arrive. We're trying to be proactive, anticipate these things, not only troubled situations, but strategic things that we might want to look at. And so we are beating the bushes heavily around here to try to find ways to grow the top line.

I am talking to everybody in town, particularly anybody that has a workout practice, to get the same answers you're looking for which are when are these things going to come to market. What I am hearing is coming to market late first quarter, we will see more. That does not mean closing, obviously. So it depends on the framework you looking for there. We've only seen a handful of what I would call troubled or companies that are really under pressure coming to market.

And as you would expect, most of those are weighted to North American activity. Unfortunately, they have debt and they are cash breakeven or worse, bleeding cash right now. Even though they're going to come to market, valuations I think are going to be challenged getting two people to agree on what that forward earnings outlook and cash flow outlook looks like.

Until you start to see some kind of recovery, you can't start to discount the recovery. And you're buying back stock in the quarter and since we're at the bottom of the cycle, if you buy out somebody it's going to be more than likely have to be stock and cash. Are you cool with that and does that have anything to do with why you're reducing your share count at these levels?

It very much depends on the size. We only bought back I think $13 million roughly worth of stock in the third quarter. It's amazing though when we put our new authorization in place at these depressed stock price levels, you can actually buy back a lot of stock with not much money.

And so, we continue to want to do that when we think number one, the overall price makes sense in the context of the long-term outlook for the Company. And two, particularly if we feel like we're trading out of sync with the market. But I think to maybe answer what I anticipate your question to be, we are really, really focused on trying to grow the top line. I've said it before at your conference, I'll say it again, you can't cut your way into success and profitability.

We've got to grow the top line. And a lot of people overnight had questions on how does M&A compare to share repurchases. Certainly, we want to grow the top line and that can be market share gains being recovered and it can be M&A. So whether it's stock -- we're willing to use our stock if we can make it work obviously, in the context of a transaction. But if it's a smaller deal, I do think that our balance sheet affords us the flexibility to use cash.

Again, as long as our visibility is good about the cash flow profile of the Company. Because even though Q4 is going to be painful, partially market, partially just holiday impact, I do think we'll be cash flow breakeven or slightly better, which not everybody is going to be in that position. And so it's not as if we're bleeding cash or building debt through ongoing operations. And again, it forces a little bit of flexibility.

Okay, guys. Thanks and good job on the marine part. That was good.

Thanks, Jim.

Stephen Gengaro, Sterne Agee.

Thanks, good morning. I just wanted to follow up a little bit. You mentioned just a little bit in the prepared commentary about the uptick in revenue per job ticket. What color can you give us around that and how to think about that going forward given pricing and mix?

Well, I would hate to ascribe too much to it, quite frankly. There's certainly some mix orientation in there. We had a lot of [loop currents] in the Gulf of Mexico. You may have a one-off job that can alter that. A customer that uses isolation that didn't use it last quarter. So I don't think I'd make too much honestly to that. I wish I could say that's indicative of a bottoming but we don't believe that that is the case.

Okay. Thank you. As we think about just the pricing backdrop onto the Well Site Services, particularly on the proprietary side of the business, how is that holding up?

I'm sorry, would you ask that again? I missed the --

Pricing concessions.

Well, we made some incremental pricing concessions in Q3. I think that's probably evident with most every company out there, particularly in the small to mid cap space. Obviously cost reductions are taking hold so that we were able to stabilize margins despite that. But we have not been leading price on the way down.

We feel like we got great people, and great assets, great technology and being cutthroat on pricing just doesn't really make a lot of sense. So we have to be responsive because as you know, in a fairly draconian market like this, low price wins. And I think if we're being objective, we probably would say we lost a little market share but those jobs are going at cash flow losses and that's just not our mentality.

So is there more from here? I think there may be customers doing it but along the way, we're seeing more and more facility closures, regional consolidations, product lines, equipment stacking. So it is my belief and my thesis that the strength of our people and the strength of our operations will regain some market share as these people that are bidding fairly ridiculous pricing realize that they can't do this forever. And so there should be, I don't know if it takes six months, nine months, but there should be some market share recovery once some of these smaller players go by the wayside just a little bit.

Thank you. And then if I could just slip a quick one in for Lloyd? The tax rate, what would you suggest for next year?

We haven't done the budget yet, Stephen, for next year.

We need to get that figured out. But the macro, I noticed another analyst's comment, the macro is like everyone knows, you hear it every time we hear a political debate, US tax rates are the highest in the world. So what's happening, we're getting crushed in US operations which is lowering or eliminating any US taxable income. So it has that, that mix has the tendency to lower your overall effective tax rate. And what Lloyd is saying, we need to line out our plans going into next year and we will firm that up for you going forward.

It's going to be the mix of the foreign operations and the effective rates in the foreign operations. And until we do the budget on that, Stephen, we'd be hesitant to say at this point.

Okay. Great. Thank you.

Thank you, Stephen.

Bill Herbert, Simmons & Company.

Good morning. I'm going to ask you a couple questions which have already been asked but dance around it in a slightly different vein. And that is with respect to the Offshore Product order outlook. I understand your advantaged mix component and the diversity within your Offshore Products complex that led in part to the nice uptick in orders in Q4. But notwithstanding that just given the really grim austerity outlook for 2016 on the part of IOCs which is being imparted on this Q3 earnings season and the dislocations amongst deepwater NOCs, I'm just curious as to what you think is a reasonable sort of conceptual expectation for orders in 2016, likely lower, or flat, or even higher?

So let me try, I think you used the word dance around it, I'll try to do that again. No, I'm kidding. Let me -- first, let's talk about Q4, which we have an obviously a little more clearer visibility and nobody's yet asked that. We have gone through our notebook and our book and we do at this point believe that we can hold a 0.8 book-to-bill in Q4 based on what we believe comes into backlog during that time. That implies a 0.85 gross book-to-bill for the year.

So we here would view that as an incredible success relative to the soft goals and objectives we set in connection with our fourth quarter earning conference call coming into this year. Those are very specific oriented projects and jobs that are out there that everybody knows about plus some pipeline products and other orders that are fairly routine to us. We will continue to look at the longer-term, which for us is going to take us into 2016. And without naming specific projects, I could say, unfortunately it could go either way depending on how these play out.

I have a stable bookings year, lower or higher, but we've got bids outstanding on riser systems, floating LNG, water uptake risers, cranes, standard connectors, pipeline systems, there's the named projects, Mad Dog Phase 2 and others out there. Whether and when these come to market is just elusive at this point in time. So we give you quarterly guidance for a reason. That's about as good as visibility. The projects are still there, the certainty on timing we just don't know at this point in time.

But there's some big bids outstanding, some of which have been delayed for months already. So do those come to market or not? I can't even handicap it. The customers are saying they will. But nonetheless we've seen the delays. So it's impossible to give you a better read at this point in time.

Okay. That's fair. And then on a topic which has been discussed but I'll ask it differently here with regard to your balance sheet strength and M&A optionality. Trying to not so much with regard to smaller tuck-in deals which you refer to in terms of timing of early part of next year, a bigger stream of opportunities coming. But really what I'm thinking about are redefining transformational deals for Oil States and we've got these Halliburton divestitures looming on the horizon here. And I'm curious as to whether you're feeling opportunistic with regard to larger deals and pushing the balance sheet or are you feeling cautious?

Well, I guess I would say, I'm probably one of the more positive people around so I'm going to say opportunistic but with recognition that those larger deals are challenged. Meaning that anything larger, I think it was Jim, I don't remember who, made the comment it will require stock component. And the problem in a market like this, you almost have to have an exactly like for like company whose stock has traded in very, very similar patterns to get comfortable with an exchange ratio. But when I say optimistic, I'm just saying we're going to look at everything.

I think this is the time that larger transformational deals can and should get done. And so the optimism is around the willingness to work through the process but also a recognition that once you get into it, stock-for-stock deals have some issues to get over and quite frankly, everything we hear, there is no capital financing market available to energy services right now. And even a company like us with an incredibly good track record and strong balance sheet, if we could borrow, it would be in the double-digit yield range. So the market is kind of closed right now.

There's just some fundamental challenges that are lying ahead of us in terms of getting deals done. But I think that really speaks to the overall lack of market visibility. When that starts firming up and when deals come to market potentially in the second and third quarter, if people just have a better feeling for what the outlook is, I think things improve just a little bit from where we are right now.

So even with the quality of your balance sheet and the ample balance sheet capacity that you have, the cost of capital with regard to debt financing is just too high?

That's if it's available at all.

Bill, if it's available at all. If you think about the high-yield market, it's nonexistent right now for energy.

Got it. All right. Thanks very much.

Thanks, Bill.

Blake Hutchinson, Howard Weil.

Good morning. Cindy, can you just address for us the cancellation and scope changes? I ask this, I understand that they were small in nature and historically, you have had little experience with that. But as we see some of the peers report, it's apparent that maybe the rules are a little different this time through the cycle. So just your thoughts on that and what your customer feedback is in that regard at this point as well?

We don't view -- ours was roughly $9 million. There was nothing significant in there. I've got whole list of smaller things from some connectors to cranes but also just scope changes, where we might have been doing some connection that they exit when you do the final engineering drawings, might've been doing testing that they took that out. So there's really nothing to take away from that.

I think from our standpoint, I don't know that there's a market norm in terms of how you calculate book-to-bill so we always try to be transparent and make sure that you understand the ins and outs. And I think historically [had this scope], we had some cancellations on quote/unquote drilling equipment in either Q4 or Q1, I don't recall which one. We've always disclosed that. I don't think there's any takeaway. Certainly nothing negative from the scope changes we have that are here. And this is very, very heavily weighted to scope changes and our project [caps] cancellations.

Excellent. And just keeping with what we've seen from some peers line of questioning, this is more technical. I guess I look at your Offshore Products segment and I assume that most of that revenue base is US dollar denominated, if not close to all of it, and I don't recall you ever having any real currency impact on your backlog figure. The risks are minimal in that regard as well?

It's been fairly negligible. The bulk -- and realize particularly right now, a lot of what we're bidding and quoting is being manufactured in our US operations, UK Singapore operations. And in the case particularly of Singapore, that's functional currency is the US dollar. But a lot of these are dollar denominated. When we have what I call cross-currency bids, particularly one that involves multiple facilities in multiple operations, we will typically put hedges in place where possible to neutralize that just from a margin impact where you've got cross currency exposure. Historically, it's -- I'm not going to tell you everything we bid is US dollars, but historically, it's been fairly small impact.

Great, and just one more quick one just to see where you are strategically heading into the new year. I take it the Completion Services guidance and putting a more extreme bottom to that range, part of the thinking is you're disinclined at this point to break the organization down anymore cost-wise for Q4 and it's sized right now for how you want to address the market for 2016?

Yes. I said earlier, at some point you don't cut your way into prosperity. When we talk about this is absolutely a service-oriented business, you've got to keep your quality hands, your experienced employees, if you think you want to be in the business long-term. Clearly we do. And so, I'm not saying we're not going to be attentive to our cost because of course we are, but to think that we have always been a lean operation and to think that there is a whole lot more excess sitting around; it's just not the case.

I do want to say, I think that I'm finished with some of these fairly draconian cuts that have had to be made responsive to the market, but we'll see how long this persists. I think everybody is trying to get your arms around what is the duration of this and I've wracked my brain. I manage, I look at production statistics just like everybody else, I look at past cycles just like everybody else, and it's feeling a lot more like the 1997 to 1999 cycle that we all, or a lot of us on this call lived through anyway. That kind of puts us midyear to August before we come out of the bottom of this. But I think our cost structure right now can handle that. Our balance sheet can certainly handle that and that is just the view we're taking right now.

Great. Thanks for that and thanks for the rundown today. Appreciate it.

Thanks, Mike.

Sean Meakim, JPMorgan.

Hey, good morning. I was hoping to follow up a little bit more on completions and the margins that you put up. Have you seen any -- have the substitution trends that we've talked about away from higher margin, the wellhead isolation rentals, has that moderated at all as activity hits these lower levels? I'm curious how much cost cutting you think helped you in the quarter Q3 versus Q2?

We acknowledged we made some further, or incremental price concessions in the third quarter and the costs basically managed to stabilize margins. So it means that those cuts, if you want to call them that, are taking hold. Our focus on costs are taking hold to where we've stabilized operations in a fairly weak market overall. There is always going to be substitution but when you have high-priced equipment out there that one of the major selling points are job efficiencies and saving on other third-party costs, that gets mitigated as everything -- as price collapses all around you.

So we've had some element of this in Q3 and in Q2, quite frankly. And it can even be a customer that just says I'm going to shut down operations for the rest of the year that have historically used isolation equipment. All of a sudden that mix shifts a little bit to the negative. And so, I'm not going to say there's a trend anywhere. And the good thing is we provide alternative completion techniques to the customer base so if they choose not to use as an example, the isolation tool, we are happy to work with them and supply frac heads or other alternatives to the marketplace.

That's fair. Thank you for that. And switching over to Offshore, I just thought it would be interesting to talk a little bit more about some of the shorter cycle parts of the business and how they've held up in terms of activity? You noted in Q4, we're going to see a drop as budgets get exhausted but if we think about that business, typically the consumables pieces, just curious how you think that performs as inventories are all down in a more protracted downturn?

I feel like the inventories have drawn down considerably and what we speak to there is a little bit of a mix in service and the consumables. A lot of it is valve products that are consumed globally, probably both land and offshore, quite frankly. And you've got elastomer products that with the rig count weighting, it's weighting a little bit towards land. Then welding services, crane inspection services, et cetera, all of which have been under pressure throughout the year.

I do feel like we kind of hit a baseline or a floor on those activities and it's not all inventory drawdowns but there have been that for valves, for elastomer products as an example. But I think we're all trying to get our minds around what are the budget, what is the budget going to look like? Everybody's speaking to maybe next year the macro being down 20% to 25%.

With the strength of activity in the first quarter and the decline throughout the year, I'm not sure that that means much of a negative off of run rate. But again, we've got to process all of this as it comes together from our customers' budget announcements just like everybody else. Speaking specifically to those short cycle product lines, unless I'm missing it, we're pretty much at a close to a [4%] already, it feels like.

That's very helpful. Thanks, Cindy. I appreciate it.

Thanks.

Jeff Spittel, Clarkson.

Thanks, good morning, everybody. Maybe if we could start off with Offshore Products, Cindy? It sounds like the pipeline is reasonably robust and with the understanding that timing is a little uncertain around a lot of the projects. The news certainly hasn't been too good out of Brazil and I know that's an important market too. Have you seen anything particularly disconcerting about any of the projects that are in the bid pipeline there?

We're still bidding on projects in Brazil. We still have backlog that is tied to Brazil that we're obviously working off. A lot of the awards that we got in Q4, Q1, were subsea pipeline oriented bids and we are continuing to see similar bids out of Brazil but also some other equipment that we are working on. With all that has gone on with really reassessing their budget, and I'll call it reassessing their focus, there has clearly been delays in awards for bids that we have had outstanding for months now. So that's probably not going to be a surprise.

But where that puts us today is a bit less exposure to Brazil in our backlog than what we had earlier this year. I would say that Brazil is still a very, very prolific deepwater market. We think there's a lot of potential there. Petrobras has been a good customer to us and we have bids outstanding. The key question for everybody is going to be what is the likelihood and what is the timing of those materializing? I feel like with -- and these delays didn't just start this year quite frankly, they have been ongoing. I do feel like that come 2016, if not before, we should start seeing some of these bids come to market.

Okay, that's encouraging. And Lloyd, this one's probably for you and I know you're going through the budgeting process or maybe just starting it. But as we think conceptually about preserving cash flow and keeping some firepower on the balance sheet, how are you guys thinking about a barebones maintenance CapEx number on a go forward basis?

I'd say the barebones maintenance CapEx in a normalized market has trended towards probably $150 million in a normal market, Jeff. Barebones is probably sub $100 million. I'd say $75 million to $90 million.

All right. Pretty commendable job this quarter. Thanks, guys.

Thanks, Jeff.

Michael LaMotte, Guggenheim.

Thanks, you all and also, let me echo my congratulations on a job well done in a tough quarter. If I can maybe start with a couple of nit questions? First on services work for Offshore, Cindy, that was called out in the press release. I'm wondering if that work is tied more to projects or more of a maintenance? I guess maybe the main question is, is it lumpy or more consistent of an annuity?

Okay. I think I try to recall what was in the press release.

I think the reference, this is Chris, I think the reference in Cindy's comments related to the loop currents and the impact we had on some of the timing.

Well, he's talking about Offshore Products. Let me address the question as I think you're asking it. Most of the service work specifically tied to new project development or is it recurring type service work? And you're going to love the answer, but it's a little of both. When we have a large install base of cranes and winches as a perfect example, you're going to have ongoing levels of service where inspection repair, service work and the parts that go along with that. And so that is one element.

The other element is, as an example, welding technology, that is new project development or installation service work associated with installing risers, as an example. That's really -- the latter is really the only piece that tends to be lumpy. And since you haven't heard us announce much in the way of PLPs or FPSOs of late, that is not the kind of service content that we have right now. I'd say where we're at is the kind of baseline level comes into more ongoing type service work. Historically however, the rough percentage has been about 20% dedicated to service that seems to be fairly consistent through the cycle in terms of that level of contribution.

20% of total Offshore Products.

Yes, thank you for that clarification. Total Offshore Projects revenue.

Okay, great. And then switching to completions, I'm curious about CapEx as it relates to equipment in the field. Recognizing that there's a replacement element there, is that replacement CapEx part of a maintenance and even a barebones maintenance figure? And then secondly, is there a next generation technology with respect to that completions equipment? I'm thinking specifically of Halliburton with the Q10 pump for example, that could create some better operating leverage, more efficiency as we emerge from this downturn?

Well we do invest in capital equipment and you're right, there is a maintenance element. I think that's what Lloyd is leading you to with his barebones CapEx number that he was asked to give, a $75 million to $90 million. A lot of that is going to be dedicated towards just wear and tear maintenance of existing equipment.

What we do is high-pressure high-temperature, every piece of equipment that comes out of the field has to be reinspected, retested, recertified before we'll put it out on another job. So there's clearly a maintenance CapEx element to the business. But we obviously are looking at new technology. We've introduced various things from ball drop systems to extended reach technology. Some of our [temporise] investments and again have the luxury to continue to invest in that.

But typically, those are not huge CapEx dollars. Day one, it's just as you bring them to market that you start having a little more CapEx associated with it. I don't know if your question is, is there disruptive technology being developed? Right now I would say, what we're doing is on the margin with efficiency improvements for the customers as opposed to game-changing disruptive technology.

Okay, that is what I was getting at. Thank you for clarifying that. And then lastly, Cindy, as you think about M&A, I know we've talked about maintaining exposure to shales and deepwater, that that diversity is important. But you also have an opportunity to take a big step out in terms of product and service lines. So I'm wondering if you are approaching this M&A cycle more as an opportunity to pick up more bolt-on types of businesses or if you would actually do something more scaled, more size in a new product and service line as long as it fit the criteria of end market?

Well, we're willing to do all of them but if I were to rank those things, I would say the bolt-on first, and those are financable for us and we have a long history of not only doing them, but doing them very, very effectively. Both identifying going through due diligence, integrating and bringing successful operations. So first priority there.

I think market consolidation of size would be a second priority. There's clear indications that, particularly in the small to mid cap space, that if our customers are going to have more than three service companies to work for, there ought to be some consolidation at the lower levels, right? So we are focused on that. I don't know how easy it is going to be getting anything done, but I think that should be a key focus for us.

It's interesting you said that. We had a conversation just yesterday of whether there are other or new product lines or bolt-on lines that we should explore. My thinking there is whatever we do is going to be in energy services at the end of the day. And whether that's a slightly different product line than what we have or not, I still think that where activity is going to be is in shale play and in deepwater. So I think we're in the right position, we're just in a bad market right now. I always say low crude oil prices have a tendency to cure themselves. There will be a brighter day down the road.

Well, look forward to seeing how you all emerge from this over the next 12 months. I think it's going to be an interesting year. Thank you.

Thank you.

Chase Mulvehill, SunTrust.

Thanks for squeezing me in. So I guess I wanted to ask real quick, will there be a big margin difference between the new UK facility and the Aberdeen facility?

We hope so. Time will tell. But first of all, the beauty of this facility, it can actually pay for itself based on rent savings alone. It's rare you make a long-term fifty-year investment decision that you can say you know what, we can pay for this. It may take 20 years but we can pay for it on that.

It was originally intended, this was a growth investment. We had a hard time growing given the facility designs that we had, the age of the facility and an inability to hire and attract talent, both engineers and shop workers. And we think all of that is alleviated. We've already seen evidence of that with the new facility that is specifically designed for our product line.

I do think we will absolutely have efficiencies. I think our labor costs will have a tendency to decrease. But importantly, one of two things, if and when the market recovers, we will be able to grow more. If and when we are able to consolidate the market, we've got a great facility to bring new product lines in. I don't hesitate to say that we are going to be pleased with that investment. The cost and the margin impact will be realized over time.

Okay. All right. And over time, do you think this is a 10 percentage points margin uplift?

We wouldn't be ready to go there at this point in time. A lot of our -- in fairness, that sounds -- I don't know if you're 10 percentage points, saying you're going to go from a EBITDA margin of 22% to 32%. I'm not -- Or 20% to 22%.

I was thinking 15% to 25%. I don't know how bad the Aberdeen facility was so I guess that was the question, right?

No, it's not that magnitude. Realize that in our projects, just to be clear, about 65% of our cost structure is materials. It's not the facility throughput and the labor. And so it will have impact, but not to the degree that you're hoping for.

Okay. And then what about pricing for large projects? Is that down? If so, how much?

Offshore?

Offshore, sorry.

It's impossible to answer the question because most of what is going on is scope changes, redefining how fields are being developed as opposed to, I can take the conductor casing product line last year and this year and there's a 10% discount. It's really not bad. These are all highly engineered fields that I think there's been a lot of rework and scope change in. Yes, there's been moving, beginning to be standardization of equipment but it's really hard to pinpoint an absolute lower price as it relates to manufactured equipment.

Clearly what is driving our customers' thinking, there are real savings on drilling rig costs, the spreads, the vessels, a lot of the down hole consumables, et cetera, that are going to lower that breakeven cost for our customers and enable them to start moving forward some of these projects. But as it relates to field development, it is very hard to define what has happened in pricing.

Okay. So at most, it sounds like a couple percentage points if you were kind of look at it?

Your guess is as good as mine.

Okay. All right. On the third quarter Offshore Products revenues, how much of a -- I know Michael kind of hit on this, but how much Offshore Product -- third quarter Offshore Product revenues regenerated for short cycle or aftermarket business?

Actually, we haven't broken that out. Hadn't disclosed it. In past periods, it has ranged anywhere from 10% to 20% of total Offshore Products revenue. I would put it probably to the lower to midpoint, meaning we're not at peak 20% contribution but I haven't done the math. Just that range of 10% to 20% should give you a feel.

Okay and then maybe if you could help us just frame in the context of how much of this short cycle aftermarket portion of Offshore Products is coming from US onshore and then how does that compare historically as US onshore comes back as we understand where that number could go?

The reality is we do not know. If you're talking about a frac plug, if you're talking about a valve, most of the time we don't even know where that product is going. Just intuitively, if you're serving an offshore market and a land market, we know where the rig count is and we know the sensitivity is there so I know a portion of it is dedicated to land. But it is not ordered that way by the customer. It's not tracked that way.

Okay. (Multiple Speakers). I had three questions that no one answered, but that's all right. Thank you, I'll turn it back over.

(Operator Instructions)

And we have no further --

Adrian, it sounds like everybody's done. It's a very, very busy time for earnings. I know yesterday was incredibly busy. So I thank all of you who were willing and able to call in today and appreciate working with you as we move forward going into 2016. Thanks and have a great weekend.

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