Oil States International Inc (OIS) 2017 Q4 法說會逐字稿

Welcome to Oil States International Fourth Quarter 2017 Earnings Conference Call. My name is Victoria and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

And I would now turn the call over to Patricia Gil, Investor Relations for Oil States. Patricia, you may begin.

Thank you, Victoria. Good morning, and welcome to Oil States' Fourth Quarter 2017 Earnings Conference Call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; Lloyd Hajdik, Oil States' Executive Vice President and Chief Financial Officer; and we are joined by Chris Cragg, Oil States' Executive 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 along with 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 fourth quarter 2017 earnings conference call.

We've had an incredibly active couple of months here at Oil States. On this call, we plan to review details of our fourth quarter 2017 results and provide guidance comments for the first quarter of 2018, but we'll also discuss events that occurred subsequent to December 31, 2017.

Our fourth quarter 2017 operating results improved nicely on a sequential basis driven by top line growth from both of our segments. Our fourth quarter earnings per share also grew sequentially after adjusting for onetime items, the most significant of which related to the impact of U.S. tax reform which Lloyd will discuss in more detail.

Our offshore/manufactured products segment results improved nicely as project-driven product sales increased quarter-over-quarter, benefiting from higher connector product sales while sales of our short cycle and other products and services remained strong. Despite reduced bookings in the quarter, our full year book-to-bill ratio averaged 0.95x.

In our well site services segment, our U.S. land completion services revenues increased 9% sequentially, continuing the trend of strong completions-related activity in the Lower 48.

With both segments strengthening sequentially, we reported higher absolute EBITDA and a better EBITDA margin percentage.

In December, we announced the acquisition of GEODynamics which will be reported as a third segment named Downhole Technologies starting with the first quarter of 2018. The acquisition closed on January 12, 2018. And accordingly, their results of operations will be picked up by Oil States from that date forward.

GEODynamics offers our company meaningful growth potential that combines technology with downhole consumable completion solutions. Their product innovation and collaborative relationships with E&P operators will further augment their research and development efforts and should lead to enhancements in our consumable product offerings in the growing markets for technology-backed products using complex well completion.

GEODynamics brings with them a robust growth pipeline with initiatives to expand their existing product offerings and geographic footprint. Collectively, we will be able to offer our customers more customized downhole completion solutions while assisting with their increasingly complex completion designs.

As further described in our recent press releases, we issued $200 million principal amount of convertible senior notes and amended and extended our revolving credit facility to provide a longer-term financing structure for the company. We initially utilized borrowings under our revolving credit facility to fund the cash portion of the GEODynamics acquisition.

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

Thanks, Cindy, and good morning, everyone.

During the fourth quarter, we generated revenues of $184 million while reporting an adjusted net loss of $8.8 million or $0.18 per share, which excluded $0.02 per share due to transaction-related costs and $0.56 per share for a onetime noncash income tax charge resulting from the recently enacted tax reform legislation in the U.S.

Our fourth quarter adjusted EBITDA totaled $12.9 million and our adjusted EBITDA margin was 7%. We generated $19 million of cash flow from operations during the fourth quarter and invested $15 million in capital expenditures.

For the full year 2017, we invested $35 million in CapEx and we estimate that our 2018 capital expenditures will range between $60 million and $70 million, which is inclusive of investments expected to be made to fund GEODynamics' growth.

We utilized our fourth quarter free cash flow, which is active CapEx, to pay down all amounts remaining outstanding under our revolving credit facility at December 31. Having no debt outstanding under our revolving credit facility put us in a very strong position to fund the cash portion of the GEODynamics acquisition.

For the full year of 2017, we generated a total of $60 million of free cash flow, utilizing $13 million for M&A activities, $16 million for share repurchases and $42 million for revolving credit facility repayments, net of borrowings.

And as Cindy mentioned previously, on January 12, we closed the acquisition of GEODynamics. This acquisition was funded with a combination of $295 million of cash, which is net of cash acquired, the issuance of 8.66 million shares of our common stock valued at approximately $295 million based on Oil States' share price at closing and the issuance of a $25 million unsecured promissory note payable to the sellers for total acquisition consideration of approximately $615 million.

On January 30, we completed offering of $200 million principal amount of 1.5% convertible senior notes due in 2023. We utilized the net proceeds from the offering to pay down a portion of the outstanding borrowings under our revolving credit facility which were drawn in January to fund the cash portion of the GEODynamics acquisition.

In conjunction with the issuance of the convertible senior notes, our revolving credit facility was further amended and the maturity date extended. Lender commitments under the amended revolving credit facility now totaled $350 million, and the maturity date was extended to January 30, 2022.

In terms of our first quarter 2018 consolidated guidance, we expect depreciation and amortization expense to total $31 million to $32 million. I'm giving a little bit of a range for DD&A as we're in the process of refining our purchase price allocation for GEODynamics, particularly as it relates to amortizable intangible assets. We expect net interest expense to total $4 million which includes approximately $1 million of noncash accretion expense associated with the convertible senior notes and amortization of debt issue costs.

Corporate expense is projected to total $12.5 million.

We do not expect to record much income tax expense or benefit in the first quarter of 2018. The benefit of projected operating losses is expected to be offset by nondeductible items in the quarter. In other words, the normal tax benefit you'd expect to book with a pretax loss is largely expected to be offset.

Longer term, we should move toward the lower U.S. corporate tax rate of 21% as our U.S. operations return to profitability. However, the nondeductible items will initially keep our effective rate in a higher range.

At this time, I'd like to turn the call back over to Cindy, who will take you through the details for each of our business segments.

Thank you, Lloyd.

In the following segment comments, the term adjusted EBITDA excludes severance and other downsizing charges.

In our well site services segment, we generated another quarter of sequentially improved results with revenues up 6% totaling $82 million and adjusted segment EBITDA of 46% quarter-over-quarter totaling $11 million, which exceeded the high end of our guided range. These sequential improvements were driven by a 7% increase in the number of completion services jobs performed, a 2% increase in revenue per completion services job and steady utilization for our land drilling rigs, which average 31% for the quarter.

Despite the flat to down U.S. average rig count during the fourth quarter and the increase in drilled but uncompleted wells, our completion services business benefited from increased well completion activity and well intensity across the active U.S. basins, particularly in the Permian and Mid-Continent basins, coupled with sequentially improved international and Gulf of Mexico results.

Our completion services incremental adjusted EBITDA margins averaged 54% in the fourth quarter while our incrementals for the full year 2017 averaged 43%.

U.S. land-based complex well completion activities continues to improve and demand for our equipment and personnel is tightening. Accordingly, we are beginning to see prudent price increases on our completion services job. We estimate that first quarter revenues for our well site services segment should range between $83 million and $88 million with segment EBITDA margins of 11% to 13%. A portion of our 2018 activity will be negatively impacted by extreme weather which is expected to moderate our sequential growth a bit.

In our offshore/manufactured products segment, we generated revenues of $102 million, adjusted EBITDA of $16 million and an adjusted EBITDA margin percentage of 16% during the fourth quarter of 2017. The 17% sequential increase in segment revenues was driven predominantly by an increase in sales of our standard connector products which is tied to exploratory and development drilling activities.

Sales of our shorter cycle products, which are largely driven by U.S. land-based activities, remained steady during the fourth quarter and comprise 36% of the segment's quarterly revenue.

Orders booked for the fourth quarter were a bit disappointing and totaled $80 million, resulting in a book-to-bill ratio of 0.79x for the quarter and 0.95x for the full year. Backlog declined 15% sequentially to total $168 million at December 31. There were no major project awards booked into backlog in the fourth quarter as a couple of projects bid by Oil States slipped into 2018 or were deferred until later in the year.

We continue to believe that our backlog is at or very near trough levels, and dialogue with our customers leads us to expect to receive selected awards associated with major project sanctions in 2018. Demand for our shorter cycle products is expected to remain strong given the outlook for customer spending on U.S. land completions activity in 2018. Major project revenues are expected to vary quarter-to-quarter and be driven by our standard connector products, claims and pipeline-related equipment in the near term. Improved bookings and additional project FIDs will be needed before we see a recovery in our products used in field production infrastructure.

Accordingly, revenues for this segment are expected to decrease sequentially due to timing of major project sales and should range between $94 million and $100 million while EBITDA margins are expected to average 15% to 16%.

Our newly created Downhole Technology segment will report the activities of our GEODynamics acquisition going forward. Technology advancements and the adoption of modern completion techniques are driving strong demand for their consumable completion products. Longer lateral links, increased frac stages and more perforation clusters are providing customers with improved unconventional well productivity. We will pick up GEODynamics results of operations beginning on January 12, 2018, the date of the acquisition's closing.

For the portion of the first quarter of 2018 that we own GEODynamics, we estimate that revenues will range between $42 million and $47 million with EBITDA margins averaging 23% to 25%.

To conclude, we are seeing continued activity improvements in the U.S. well completions market which supports ongoing demand for our completion services and for our short cycle manufactured products.

Having completed a key strategic growth initiative, our results will be bolstered by our recent acquisition of GEODynamics which sets Oil States up well for a more productive year in 2018. We are excited to have completed such a key acquisition and look forward to the expanded technology offering that we can now make available to our customers.

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

(Operator Instructions) And it looks like our first question comes from Marshall Adkins from Raymond James.

Cindy, your margins and completions were up a lot more than we were thinking. You mentioned part of that obviously was pricing continue to drift higher but seems like there's more there. Was it mix, cost control? What's -- why were margins up so much quarter-to-quarter?

I could joke and say good management but I won't. Really, what it is, obviously, we talked about getting the benefit of both activity which we're seeing, but importantly, we did see a mix shift more weighted towards our isolation tools and our higher-pressure wireline equipment during the quarter. It's hard to focus much in terms of absolute pricing in the quarter. Although, on a job -- one-off job basis, I'm sure we saw some but I would attribute the larger impact due to mix in the quarter and, of course, we had good cost controls as well. I think those elements all combined just for some pretty strong incrementals.

Okay. Labor, we've been hearing about labor issues with some people. Are you -- is that becoming an impediment for you at this stage? Or are you working through it without too much disruption?

Well, it's an issue for everybody. We've been through such a horrific down cycle and it has had impact on our workers in the field, without question. We are very focused on that.

I would say that last year, we had a very high priority around hiring. It's, obviously, important that we not only have an adequate number of people but they have the right experience to support our customers in the field.

I would say early in 2017, it was a frustrating exercise where we almost had turnover equivalent to the amount that we hired. We have done better in the latter part of 2017. And we -- I would say, we're entering 2018 with a little more headcount which we really didn't need.

As it relates to costs, which is another element of concern, we have raised wages a little bit last year. We've generally been successful in passing that on to customers. I think our customers recognize the issue of kind of base wages and pay in the field and they do put a higher priority on having experienced field hands doing their -- particularly these highly complex completions. It will continue to be a focus for us in order to have quality trained personnel out on the rig site. We do think that we're going to see additional cost increases and hope to be able to pass that through on the top line.

Our next question comes from Sean Meakim from JPMorgan.

So I guess, on GEODynamics, thank you for some of the incremental information as far as what you expect for the quarter. Is there anything else you can give us with respect to rate of change or how we can think about how that business is evolving given we have a little bit less history than we do with obviously the rest of your segments?

Yes, I will give you one bit of information. We -- the audit firm that they have used has completed their audit. As soon as we file our 10-K, I'd say hopefully at the end of this week or Monday, the 10-K -- oh, Monday is a holiday, Lloyd is telling me. Excuse me. We'll be filing a 10-K followed by an 8-K which includes the full 2017 historic results of GEODynamics. So that will help you significantly in terms of having kind of a comparative information to look toward as it relates to GEODynamics.

I will add that one thing you're going to see, of course, is that they were very successful and high growth in 2017 relative to 2016, part of the reason we were so attracted to them and you're going to see continued good growth in 2018.

We have spent a lot of time with them. I do think that they need some capacity expansions and we expect to augment our CapEx plan. And again, Lloyd gave you guidance in terms of the total with some expansionary capital to help them continue their strong growth track record.

Got it. That's very helpful. And I guess within completion services, are there any shifting competitive dynamics cycle around wellhead isolation? Just thinking about competing products, substitutive type of products out there. Just can you maybe give us a sense of how your mix within the rental side has been evolving? And just is there anything that maybe you would say surprised you in terms of kind of what you see in the market today versus -- and customer behavior versus what you would have thought a year, 1.5 years ago?

No. If anything, we've oftentimes seen a migration towards isolation tools when the market moves towards more complex type completions. I'd say if there's a surprise, it might be that we haven't really seen that shift a little bit sooner than what we have. But there's nothing here that's surprising to me. Like I said, if anything, it's come a little bit later because particularly the Permian, where so much of the rig count is centered. It's just a very, very competitive basin. And there are alternatives, of course, to isolation tools. It can be higher pressure wellheads, frac heads, et cetera. So there are different frac customer preferences as an example. But I think the migration as one expected, if anything, it came a little later than what we had hoped.

Our next question comes from Jud Bailey from Wells Fargo.

Question. Cindy, could you comment on offshore products and kind of expectations for orders maybe the first half of the year, for the full year in terms of just thinking about book-to-bill. Do you think we could be above 1? And can you talk through some of the projects that you see maybe out there and level of confidence in some order starting to hit in the first half of the year?

Yes, I'll do the best that I can. Most of what we saw last year in terms of project FIDs were on the smaller side. A lot of those were focused more in smaller subsea tiebacks. I don't think anything is shocking in that comment. We had hoped that a couple of projects would materialize in the fourth quarter. I'd say that one had flipped, and in our comments, one has been deferred 6 months so it creates a little more uncertainty around that.

What we are looking at, I would say, in terms of whether it's first quarter or first half, I think we're going to have a book-to-bill in the 0.9x to 1x with more likely a bit of improvement in the back half.

I would want to point out, of course, the whole mix of our business has changed in offshore products through this downturn. And if you went back 3, 4, 5 years ago, beginning backlog was a much more significant indicator of the forward years revenue. In fact, I was looking at it this morning, roughly, beginning backlog was about 70% of my forward year revenues and that has just changed dramatically to where it's 50% or less now because of this weighting towards short cycle. And even what we're calling major project backlog, is not generally our big project FPSOs, PLP, subsea i.e. production infrastructure, it's more weighted towards our large OD conductor casing connectors used in exploratory and kind of development drilling activities. And kind of an interesting for me, if I looked at the bookings that I did have in Q4, roughly $80 million, only about 20% were major project related.

So I'm not alarmed by the fact that my backlog is at a decade low. I wish it were different. But I think I look at it now as more of an in-and-out business in the near term and focused on short cycle services and our kind of other products. And to some degree, I look at the return of major project, FID and production infrastructure as upside for the business from here.

Our team has done, I think, an exceedingly good job in managing cost and margins through an incredibly difficult market for deepwater projects. So while I don't like my backlog, I also don't think there is much downside from here in terms of our results because of the weighting towards short cycle services and some kind of other content outside of our major production infrastructure.

Okay. And if I could follow up on that, just to make sure I interpret the answer correctly. So for the type of book-to-bill you're talking about in the first half, it sounds like you're not contemplating any type of award from TLP or SPAR, some of the bigger production items. It's more from the other items that you mentioned. I just want to make sure I hear you correctly.

Yes, that's exactly right and that's what we had in our prepared comments.

Yes, okay. And if I could just ask a quick question on GEODynamics with the margin guidance that you gave for 1Q. Cindy, does not contemplate any type of seasonality for that business? Is that a sequential decline in margin accounting for some seasonality like you're accounting for in completion services?

We're about a month into working with the company. But what the margins we've guided to do are the best estimates they have today and they are consistent with late 2017 margins. We're not upping those margins yet. I think it would be imprudent to do so. So we're just using history as an indicator of the future at this point in time.

And our next question comes from Stephen Gengaro from Loop Capital.

Following a little bit on -- following up a little on what Jud asked. When you think about well site services and obviously, it seems like the first quarter has got some issues, you mentioned extreme weather. Based on what you're seeing, would you expect an acceleration back to more normalized incrementals in the second quarter? It sounds like you're getting price, I would assume yes. But I want to maybe get a little color on the 1Q impact and then how we think about going from there.

Well, first of all, we're planning for sequential growth despite having some extreme weather days in areas that we didn't expect it, quite frankly. You expect it in kind of the Bakken and kind of Rockies region, sometimes in the Northeast. You don't really expect it in Texas, Oklahoma, New Mexico, et cetera. So -- but despite that, we're still going to have sequential growth and good incremental margins.

I'm going to have to -- I may be missing your question, but I think you're asking me if those incrementals are going to accelerate. I view them as exceedingly strong in Q4, and I think they'll probably moderate more into our 40% to 45% range, just given the ebb and flow of both activity and costs along the way.

No, no, fourth quarter was obviously really, really strong. I was just thinking in terms of as you went into the second quarter beyond that, you'd go back to a more normalized level, I guess, is a better way to say it.

Well, and I think that is our guidance. We had guided last year to 40% to 45% incrementals. We achieved 43%. And so if we're going to move outside that band, I'm just going to generally tell you we probably need pricing on top of activity to do that. And so it's a little early to make that call.

Our next question comes from Blake Hutchinson from Howard Weil.

Just understanding from the commentary so far that offshore becomes a little bit more of what you see is what you get business in terms of order flow and output. You did also say that there would be some periods where some project deliveries would be sporadic. Is it the first quarter represent the high delivery point just so we're all getting kind of a prudent baseline for your kind of more what you see is what you get business when -- I guess I'm just saying, is there a high level of deliveries that's putting an undue influence on the first quarter guide?

I'm not sure I'm getting your question. But what we had -- let me just elaborate what we had in Q4 were more shipments of our large OD conductor connectors. These are not things that you have every single month every quarter. So it tends to be a little lumpier on the connector side, both in terms of bookings and in terms of revenue. So we were -- we exceeded Q4 guidance and forecasts largely because of timing of those connectors. The guidance we gave you to Q1 is back to what we can call a little more normalized level. Nothing to be concerned about. I think the point there is those connector orders can be a little bit lumpy. So the guidance we gave for bookings has suggested no major project FIDs of huge consequence likely coming into backlog until the second half.

Now that's exactly what I was looking for. And then I guess as we reset the start of the year, can you just make a comment regarding the Gulf of Mexico and international portions of completion services? Sorry if I missed it. In terms of potential growth profile there, do we need to be thinking that's kind of just flatter or does that offer resistance or potential benefit as well?

Yes. I would say kind of flattish from here. But the one thing I can always think about the Gulf of Mexico, there's so few projects going on at any point in time that those can ebb and flow. But it's hard to say, if you think about rigs working in the Gulf that you're going to get a big inflection up, you can have some timing issues just depending on the equipment that's out on the rigs, but steady as she goes is probably a good way to look at that. International looks like it's getting some more positive grounding than maybe where we were in early 2017, but I don't think anybody is projecting a significant ramp there either. So my best feel for that would kind of be steady as she goes from here.

And our next question comes from George O'Leary from Tudor, Pickering.

On the GEODynamics side, I guess, as you guys progress through 2018, looking at the 3 subsegments of that and I guess it will be downhole tool now business, which area is it on the perforation side? Is it frac plug side? Which area do you see kind of the biggest ramp in demand as we progress through the year? I guess, how are customers changing their well design and how do you think that affects that downhole tools business?

Well, I would just say, generally speaking, the growth -- immediate growth that we're looking at is in their core products there, engineer perforating solutions as well as their completion equipment. And I'd say they're almost equivalent.

What I have learned is because of the significant growth they had in 2017, they do need some expansionary capital. We're going to jump on that quickly, and that's probably going to cause their revenues and their EBITDA to ramp throughout the year as we bring on some incremental capacity in their core products.

One of the things that we loved about them is that they are so attentive to the needs of their customers and responsive to the issues that they are seeing in the field that they have quite a few products under development to help customers address their completion designs and the issues that they're seeing in the field that there is the potential, obviously, for growth outside of their core products depending upon field trials and market acceptance of those products. And we'll just keep you apprised of that as we progress and get more data based upon results of those field trials.

Very helpful. And then for that business as well, are there any weather impacts that are hitting Q1 given that's mostly completions-oriented and you've cited some weather impacts in the completion services business?

That's really a manufacturing business. And so the answer to that would be any direct impacts, no. Could there be indirect impacts because of customer activities in the field? Yes, but we don't think there's anything significant there from a weather perspective.

Our next question comes from Vance (sic) [Vebs] Vaishnav from Cowen and Company.

Just, I guess, on the last question on the weather. Have you guys, like -- how should I think about the impact from weather in first quarter?

Well, our comments are -- well, if we probably lost in the range of maybe 4 to 5 days, something like that. So the question is how much do you catch up on that activity or is it kind of pushed into Q2? But the reality is we've guided to sequential improvement despite that. And so I feel like we're in decent shape kind of in the totality. It could have been a better quarter, obviously, if we hadn't lost those days.

Got it. Okay. If I think about GEODynamics top line growth, should -- is it fair to think that grows in line with your completions product line? And if you can comment on what you are seeing in terms of pricing for GEODynamics products. It seems like you're already getting pricing for completions.

Well, that is a great question, and I appreciate actually that you ask it. When we think about our completion services, personnel, equipment at the rig site, we think of well count as the real driver there. Not necessarily rig count but well count because we've got generally equipment that is used, isolation tools, frac heads, wireline support equipment, flowback well testing, et cetera, but well count is the driver.

One of the things, again, we love about GEODynamics outside of the technology attractiveness of it and the barriers to entry really is the fact that they have that volumetric lift. If you think about an individual well, but then you multiply the lateral link, you multiply the number of stages and you multiply the cluster count, you get that exponential growth that is, quite frankly, a better opportunity set than our completion services really has. Again, that business being more tied to well count.

Got it. Okay, okay. And if I think about the offshore segment and I think about the 3 different subsegments, if you will, in that business, your backlog is down, call it, 15% year-over-year. Normally, I would think the projects driven products follow that path year-over-year. Short cycle, obviously, you said it's more driven by NAM, so it should be pretty good. And other product lines, I'm not sure how to think about it, but if you can comment on the 3 pieces of the business? Just any help you can give.

Yes. We have that in our investor presentation and you can see that mix shift becoming more and more evident every day, but particularly just look at 2015 and '16 compared to 2017. We feel positive about the fact that we have exposure to the short cycle products as well as services and other when you go through the kind of downturn that we have been in. And again, I think I commented on my bookings in Q4, only about 20% of that went into major product -- projects category.

Services, short cycle and other products, we have a pretty positive outlook because we have a positive outlook for land-based activity. Services has generally over many, many years been steady for us and ranged kind of in the 20% to 25% of contribution to this segment. So -- and we're seeing a little bit of an uplift in services. But as we go into '18, we think services, other products, short cycle do expand, which helps compensate for the fact that we have so very little backlog around major project work.

The other good thing is if you're a glass half-full, as I always am, my short cycle and service revenues are generally higher margin contributors. And I think that has helped us keep our margins at acceptable levels through this downturn.

Our next question comes from Ken Sill from SunTrust Robinson.

I'm going to follow up on the GEODynamics. I'm going to have to get used to calling it something else here, but time will help.

So clearly, you're going to have 13% more days in Q2 than you had in Q1, so that, I'm assuming, would be kind of the baseline growth for revenues. And then you're talking about it follows completions. So the way I'd look at that, the rig count goes up, but completions because of footage per rig and wells per rig and all that are just going up maybe twice as fast as the rig count right now. So is this something where you could see kind of high-single to low-double digits sequential growth outside of just adding 13% of revenue days to Q2?

Yes. I mean, the key driver, if the market responds with extended -- continued extended laterals, obviously, stages and cluster count, that's the driver there and it has been expanding at a rate quite significant outside of kind of rig count or well count. I don't see today that, that trend would not continue at this point in time. And again, if you go back and look at -- when you read the 8-K, their performance in '17 was very, very strong on both the top line growth and the EBITDA growth. So we're looking to continue that.

Now we don't want to get ridiculous about expectations out there for them either, but we are planning on significant revenue growth year-over-year as well as incremental margins and EBITDA growth in '18.

Yes. And that was kind of where I was kind of going. I could take you to up 13%, plus I could take it up another 5% or 10%. And then Q3, if the rig count responds to the fact that oil price has been higher, I mean, you can get some pretty frothy numbers now. I do expect the increasing clusters and stages to maybe slow down in the gross side. I guess that's another question is, are you seeing -- you've kind of seen a lot of growth in stages in clusters, is that rate of change slowing or is it still pretty consistent?

We -- it's hard to say rate of change, but we don't see any reversing of that trend. But the rate of change, if you look at kind of a typical well in the Permian in 2014 to today, that rate of change has been significant. So I would just generally say, still positive trends, but let's not get too excited about that rate of change. That might imply that laterals move to 3 miles from 2 miles, so I think it's still an incredibly positive environment but it's probably going to level out a bit.

And our next question comes from Igor Levi from Morgan Stanley.

So you previously talked about the trend towards higher end equipment. So I was hoping you could talk a bit about the product lines that have been seeing the most traction and you think are going to be winners in 2018?

Are you speaking about completion services?

Yes, in the completion side.

Yes. I think what we mentioned specifically was migration towards our isolation tools which are more proprietary and our higher end, higher pressure wireline support equipment. That's what we saw in Q4. Now clearly, zipper manifolds as an example will be in demand. And I'll remind you about our extended reach technology that's branded Tempress. It does enjoy very good market share and it's a very effective tool, particularly given these extended laterals that we're on. So I think those would be kind of the near-term focus areas for us. But of course, I do expect frac stack work to expand as well.

Great. And then what drove the cash margin increase in the drilling segment? I remember you had some [mobe] revenue in the prior quarter, but I thought that would be more of a headwind, not a tailwind.

No. You actually hit on it. In Q3, we had atypical [mobe] revenue. So think of mobe revenue and mobe cost at a 0% margin, therefore, weighting down Q3 margins. And then you go back to a more normal quarter without that 0% margin impact, that helped. Obviously, we probably had some -- no surprises on the cost side either. But again, if you factor out kind of 0% revenue out of Q3, that gives you a more normal -- it would have given you a more normalized Q3 to compare Q4 against.

Right. And the total number's still a new high. So I was wondering, is there an actual increase in pricing for conventional land rigs?

Not really. What we need is stability of operation. We drill a well in 6 to 7 days, and we're looking for our new home and a new place. If we can get more customer consistency and predictability well-to-well, we can be much more efficient. When you're going up and down week-to-week from job to job, customer to customer, it's pretty hard to optimize your results in that environment.

There are no further questions at this time.

Okay. Great. Thanks to all of you who joined our call today. I know it's been an incredibly busy, if not hectic, earnings season. And we've kept ourselves and everybody else pretty busy with acquisitions and financing. So appreciate all the time and effort to follow our company, but we do think that we have made transformational changes to the company. We're gaining the scale that we've talked to our investors about so long as needed.

Again, the GEODynamics acquisition, as we said, will be accretive to our earnings, accretive to our margins. It gives us the scale that we're looking for. But importantly, it gives us some added, very strong technology to offer our customers.

So much more excited about 2018 post transaction, and we look forward to getting the incremental information out to you guys to help you model projections for the company.

Have a great day and we'll be talking to you soon. Thank you.

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