Oil States International Inc (OIS) 2018 Q1 法說會逐字稿

Welcome to the Oil States International First Quarter 2018 Earnings Conference Call. My name is Christine, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Patricia Gil, Investor Relations. You may begin.

Thank you, Christine, and good morning, and welcome to Oil States' First Quarter 2018 Earnings Conference call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; and Lloyd Hajdik, Oil States' Executive 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 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 first quarter 2018 earnings conference call.

As you can appreciate, the past few months have been incredibly active here at Oil States. We successfully closed 2 strategic acquisitions during the quarter. Operating results from these acquisitions are included in our financials from their respective closing dates. The most significant acquisition was GEODynamics, which is now reported as a third business segment called Downhole Technologies. We also acquired Falcon Flowback Services, which is a flowback and well testing services company that is reported as a component of our completion services business.

We issued $200 million of convertible senior notes and amended and extended our credit agreement in connection with funding these acquisitions. Today, on our call, we will review details of our first quarter 2018 results and provide guidance commentary for the second quarter of 2018.

During the first quarter, average WTI prices increased 22% year-over-year and 14% sequentially, averaging $62.91 per barrel, which is the highest quarterly average attained since 2014. Higher commodity prices are driving growth in the U.S. rig count, which is leading to an increase in the number of well completions.

Our first quarter 2018 operating results improved meaningfully. On a year-over-year and sequential basis, as we grew in scale as a company, benefited in part by the partial quarter contributions from our 2 acquisitions.

In our Well Site Services segment, our U.S. land completion services revenue increased 28% sequentially continuing the trend of strong completions related activity in the Lower 48 as our E&P customers continue to focus on complex unconventional completions to increase their oil and gas production. We also benefited from 1 month of contribution from Falcon.

Our new Downhole Technologies segment contributed significantly to our results during the quarter and generated EBITDA margins that exceeded the upper end of our guided range.

In our Offshore/Manufactured Products segment, results improved sequentially due to higher connector product sales along with strong short cycle product contributions. Bookings in the quarter related primarily to smaller project orders and for consumables and services. Our first quarter book-to-bill ratio averaged 0.92x, resulting in a backlog decline of 7% sequentially.

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

Thank you, Cindy, and good morning, everyone. Our first quarter results included partial quarter contributions from our 2 recent acquisitions of GEODynamics and Falcon Flowback.

During the first quarter, we generated revenues of $254 million, while reporting an adjusted net loss of $0.8 million or $0.01 per share, which excluded transaction related and severance charges totaling $0.05 per share.

Our first quarter adjusted EBITDA totaled $32.3 million with a margin percentage of 12.7%. As Cindy mentioned previously, we had a very busy first quarter. On January 12, we closed the acquisition of GEODynamics, which was funded with a combination of $295 million of cash, which was 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 the closing and the issuance of a $25 million unsecured promissory note payable to the sellers for total acquisition consideration of $615 million.

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

In conjunction with the issuance of the convertible senior notes, our credit agreement was further amended and the maturity date extended to January 30, 2022. Lender commitments under the amended revolving credit facility now totaled $350 million with up to $50 million of the facility available for standby letters of credit.

Under our amended credit agreement, we must comply with customary financial covenants, including a total net leverage ratio and a senior secured leverage ratio. As of March 31, our total net leverage ratio was 2.8x and our senior secured leverage ratio was 1.5x, well below the maximum ratios of 4.0x and 2.25x, respectively.

Our total liquidity at the end of the first quarter was approximately $126 million, which was comprised of $101 million available under our revolving credit facility, plus cash on hand of $25 million. On February 28, we acquired Falcon, a full-service provider of flowback and well testing services for the separation and recovery of fluids, solid debris and proppant used during fracking operations.

Falcon provides additional scale and diversity to our completion services operations in key shale plays in The United States with 7 service locations with over 400 employees. The acquisition price was $84 million net of cash acquired. The acquisition was funded by borrowings under our amended revolving credit facility. We invested $14 million in capital expenditures during the first quarter and expect full year to range between $75 million and $80 million.

In terms of our second quarter 2018 consolidated guidance, we expect depreciation and amortization expense to total approximately $31 million. We expect net interest expense to total $5.1 million, which includes $1.8 million of noncash interest expense associated with a convertible senior notes and amortization of debt issuance costs.

Corporate expenses are projected to total $13.7 million. For the second quarter, our reported income tax expense or benefit will primarily be dependent upon the level of pretax income or loss realized compared to the level of nondeductible items under the recently enacted U.S. Tax Reform legislation, which could cause skewed effective tax rates until we generate more taxable income to offset the impact of these nondeductible items. Longer-term, we should move towards the lower U.S. corporate tax rate of 21% as our U.S. operations return to profitability.

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. In the following segment comments, the term adjusted EBITDA excludes severance and other downsizing charges and transaction-related expenses where appropriate and applicable.

In our Well Site Services segment, we generated sequentially improved results with revenues up 22% and EBITDA up 23% quarter-over-quarter. These results reflect organic growth in our base business, coupled with one month's revenue contribution from the acquisition of Falcon. These sequential improvements were driven by 15% increase in the number of completion services jobs performed and 8% increase in revenue per our completion services job and steady utilization of our land drilling rigs, which average 31% during the quarter.

Our completion services business benefited from increased activity and well intensity across the active U.S. basins, particularly in the Permian basin, coupled with sequentially improved international and Gulf of Mexico results. During the quarter, we recorded a $1.8 million bad debt reserve related to a customer who declared bankruptcy, which negatively impacted segment EBITDA and related margins. Excluding the bad debt provision of $1.8 million, first quarter 2018 segment EBITDA margins would have averaged 15% and our completion services incremental adjusted EBITDA margins would have averaged 24%.

U.S. land-based complex well completion activity continues to expand and demand for our equipment and personnel is tightening. Accordingly, we continue to see prudent price increases on our completion services jobs. We estimate that second quarter revenues for our Well Site Services segment should range between $123 million and $130 million, which will include a full quarter's contribution from our Falcon acquisition.

Segment EBITDA margins are expected to average 15% to 17%. In our newly reported Downhole Technologies segment, we have included GEODynamics results of operations from the date of acquisition on January 12, 2018 through March 31. Results for this segment exceeded our prior guidance with revenues totaling $46 million, adjusted segment EBITDA of $12 million and adjusted EBITDA margins of 26.5%.

Technology advancements and the adoption of modern completion techniques are driving strong demand for our Downhole Technologies consumable completion products. Longer lateral length, increased frac stages and a greater number of perforation clusters are providing customers with improved unconventional well productivity.

For the second quarter, we estimate that revenues for our Downhole Technologies segment will range between $52 million and $58 million with EBITDA margins averaging 25% to 26%.

In our Offshore/Manufactured Products segment, we generated revenues of $107 million, adjusted EBITDA of $19 million and an adjusted EBITDA margin percentage of 17.8%, which exceeded the upper end of our guidance. The 6% 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 activity.

Sales of our shorter cycle products, which are largely driven by U.S. land completion activities remain strong during the first quarter and comprised 38% of the segment's quarterly revenue.

Orders booked totaled $98 million, resulting in a book-to-bill ratio of 0.92x for the quarter. Backlog declined 7% sequentially and totaled $157 million at March 31. There were no major project awards booked into backlog in the quarter. We continue to believe that our backlog is at or very near trough levels and dialogue with our customers is constructive regarding selected project sanctions in the second half of 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 in the near term. Improved bookings and additional project FIDs will be needed before we see a recovery in sales of our products used in field production infrastructure. Revenues for this segment are expected to range between $100 million and $110 million during the second quarter of 2018, while EBITDA margins are expected to average 15% to 17%.

To conclude, activity supporting U.S. well completions is steadily improving. Demand for our consumable completion products, along with higher end equipment and services is strengthening as a result. We believe that our product and service offerings bolstered by our recent acquisitions puts us in an excellent position to capitalize on growth opportunities both in the U.S. and abroad.

Oil States' is long focused on technology as a differentiator and we believe we have positioned ourselves as a technology focused provider of premium services in consumable products for the oil and gas industry.

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

(Operator Instructions) And our first question is from Praveen Narra of Raymond James.

I guess, if we could start on GEODynamics, I guess, it would be helpful to hear how you're outlook has changed. You've owned the business and stepped into the business for a bit longer. If you could, it seems pretty clear your customers are increasing the lateral lengths this year, but any color on your outlook from conversations with customers on cluster spacing would be very helpful.

Well, we've got that in our investor presentation that kind of demonstrates the massive growth in clusters. We kind of have that out there kind of an average well in the Permian in 2014 compared to '17, but what you get is a kind of multiplier effect that we're seeing. And I would just generally say we had confidence in that type of activity ramp based on the research that we did, not only lateral length frac stages cluster count. And I think the key for us, longer term, is going to be reception of our customers to new technology introductions, but our outlook has always been pretty sound for this company to have growth. And we think we can augment that growth clearly with expanded locations and service personnel in the Lower 48, coupled with again, longer term, the international footprint that we have to help facilitate growth in that business line. So again, we've had the business. We are working very closely with the team. They are very talented. We have owned them since January 12. And so at a minimum, I would say at this point, things are confirmatory of our expectations, that we are optimistic about some of their new product introductions. We'll talk about those as time progresses and we get a better feel for customer reception of that. We spent a lot of time with their team, particularly the 2 sales forces and meeting our collective customer base to really better understand what their needs and objectives are. Because at the end of the day, our goal is to help them facilitate improved results as well. And so, just to summarize, I would say so far so good.

Okay. Perfect. And I guess, on the well site completion services side, it did seem like we've got -- and you mentioned we are starting to see pricing in that segment. But as we think about the increases in rev per ticket, should we still think of the growth so far as being more mix shift driven? Or are we starting to see that pricing really take hold to a bigger degree?

I think it is a little of both, but we have told you guys that we expected as the markets firmed up to see a reversion back to what we would call higher end completions, more proprietary equipment. We've clearly seeing that. But we've also needed push pricing a little bit, particularly in areas where our personnel are particularly tied. And so, I don't think we are pushing pricing at an aggressive rate at this point, but we are trying to manage our profitability for our shareholders at the same time. So a little of both, but the positive note on activity, I think everybody expected to see some lift in Lower 48 with the caveat that a lot of the companies in the space right now had some logistical challenges, but our activity was up sequentially, but it was also up Gulf of Mexico and international. So really all of our levers were working in a favorable direction this quarter. And we don't see that changing.

Okay. Perfect. I guess, in terms of level of magnitude, pricing down from the peak, at this point, would you kind of -- how far below the prior peak pricing are we today, generically?

Yes. I'll be honest with you, it varies by product line and if we had just one service line out in the market, I could answer that more readily. I think my answer, just gut instincts would be something around probably 15%, it could be 10% to 20%. It depends on the product line and quite frankly, the basin that we are in and the competitive landscape that we operate in.

Our next question is from George O'Leary of Tudor, Pickering, Holt.

So I guess, starting off you guys have historically done a really good job of generating free cash flow. We've seen one large transaction and one smaller transaction from you guys in the last, call it 6 months. I guess, from a capital allocation perspective, where do your priorities sit today with regards to cash flow generation? And what is that M&A landscape look like moving forward?

Well, we are believers that through the downturn, there is quite clear evidence that a lot of companies have, one, shrunk in size. We've taken a lot of small companies public. So there is a landscape that is fairly fragmented, particularly as it relates to support of our customers in the Lower 48. So given that, I do think with the progression of time, people are going to find that scale is needed particularly to return companies back to healthy returns, i.e., that old caveat of returns on invested capital should appear, right? And I think we've been challenged to do that fairly organically just because we had such difficult headwinds with the market downturn over the last 3 years. So M&A is going to continue to be a focus. We have always throughout our history been able to find organic growth. And so there is no reason to think that changes and that's always our first capital allocation priority. I believe our CapEx guidance, I'm looking at Lloyd, is $75 million to $80 million for the year. If the market continues to expand, we might lever -- that would be the first thing that we would kind of lever upward, if there is reason and economic results from doing so. We always say, M&A is in our DNA, so to speak. I think number one, we do it well. We know how to value transactions, close them, integrate them and get the results that we are looking for. That being said, we're digesting what we have. We're making sure that we do that efficiently and smoothly and get the intended results from those 2 acquisitions. We did take on some debt in connection with those acquisitions, but a lot of that centers in the convert that we issued. And we did that intentionally to allow some pre-payable debt under our revolving credit facility. So it is my expectation that without M&A, we'll be dedicating that free cash flow to debt repayment in the near term. And again, continue to be opportunistic and see what we can do to enhance the returns to our shareholders.

That's very helpful. Then maybe following on the downhole business I believe and correct me if I'm wrong, but you guys are outsourcing some work in that business because things are going so well and some of the capital expenditures you guys have slated for this year are going to capacity expansion. I guess; one, how much if you could kind of ballpark it, how much of the revenue stream is being outsourced today? And then two, are there any margin tailwinds that would come from rolling that outsourced portion of the work in-house through time as you bring that capacity expansion on?

Well, GEODynamics has been very high growth over the last 3 years plus. And so, I think, everybody in the space have some kind of strategic combination of in-house capacity and outsourced capacity and we actually like that flexibility. When we talk about expansions, what we're really talking about is meeting expected demand. The only comment there, it's a more comfortable investment when you can flex between in-house capacity and outsource i.e., in terms of ensuring your returns on that capital employed. And so very, very comfortable with that. But at this point in time, we think these capacity expansion first of all, we're investing this year, we won't reap benefits till next year. But we do believe that is meeting expanded overall market demand as opposed to any type of replacement for currently outsourced product.

Our next question is from Ian MacPherson of Simmons.

Cindy, I suppose, if you wanted to, you would have, but I wanted to probe anyway if you could maybe shed a little more light on Falcon's contribution for Q1? Or even if you want to airbrush a little bit, what its implied contribution to completion services in the Q2 guidance looks like. It obviously looks like a very good cash generative business. I just want to have a better idea of the scope of it.

Yes. And just obviously, we don't just reiterate it, we only had the results for 1 month in the first quarter and so we will get a multiplying effect in Q2. You're right. We're intentionally not providing breakout information largely because in the first week, as Chris would say, we had [blue] equipment sitting in New York. And what that means is, if they had market position strength in excess of ours in selected basins where we had idled equipment, we are going to send that equipment over and put it. So it's already getting integrated. Sales force had been customer basis, personnel moving between locations. And so, it's very murky to say there is a stand-alone there. So I ask your patience and allow us to report a full quarter and then you get a better baseline of activity moving forward.

Fair enough. If you -- if flowback commands more growth capital from you in the future, could you now do it organically? Or is there an opportunity to roll that business up a little bit more inorganically?

Well, I think, that's always the question and it's so easy to look at an individual piece of equipment and say, wow, that pays out in short order, without thought to all the nonrevenue producing infrastructure, both capital and human capital like. And so, once we get critical mass, particularly with that employee base that we found so attractive, my guess is that we'll orient more towards organic CapEx. But a lot of that again, I go back -- I don't want to beat the drum too hard to here. Personnel in this business are tightening very, very quickly. And while we can all spend capital to get equipment, you better be able to efficiently put it in the field. And so that's why I would say I would be more focused on an acquisition that had highly talented, qualified service personnel, more so than the physical equipment that goes with it.

Well, that make sense. Then lastly, the outlook for offshore manufactured products for the first half of this year, it's been better for Q1 and Q2 then we would have thought. And it's up -- first half of this year is up probably 10% or more over the first half of last year. Do you see an inflection in the second half or maybe by the fourth quarter based on the offshore projects you are ramping up? Or do you think that the liftoff of that business is probably going to be more weighted towards next year?

So I guess, I have generally characterized that business as hitting trough backlog. We've been saying that a quarters. It's much more weighted to, as I said, more of our speciality connector products that are not major FID dependent, meaning they are an exploratory drilling profiles that are often times multiyear in nature. So you get somewhat of repeat nature there. We do book it in major project work. But I would characterize that as a bit different i.e., we're not waiting on (inaudible) announcement in other words on completely new field. That's what is going drive my production infrastructure and that's what I was trying to convey in my comment. In the meantime, we've got this great baseline of work around my standard connectors, short cycle products and services that are allowing us to report fairly resilient revenues and operating margins. So I call the backlog improvement and the project FID that will come kind of as an option on a much broader recovery in deepwater. We are fine in the meantime. I hope you can look at our recent quarters and say, thumbs up. The operation has done very well in a difficult environment. We streamlined our cost. We got what used to be historically average margins in the business without some of our lead products, more proprietary products, having a consequence anyway contributing to this overall margins. So I look at this year as kind of steady state from here, both in terms of revenue generation and bookings. Again, if I look at my quarter-by-quarter projections, I think, there is a small number, but some major project awards that could improve and that could bolster a better outlook in 2019, if that addresses your question.

Our next question is from Sean Meakim of JP Morgan.

Cindy, I guess, staying with the OMP business, I guess, given the shorter cycle nature of what you are seeing near term, I was just curious, how does that impact working capital in thinking about collections on receivables, inventory demands, just thinking about how are working capital metrics impacted by that mix shift? How should we think about that as an impact on cash?

Well, that's a fantastic question. And we had a -- what I call a temporary working capital build this quarter for really 2 reasons. Number one, a lot of incentive comp is paid in the first quarter, almost every company in the space had a decline and receivables because you build those through the year, you liquidate after audited results. So that portion of the payable reduction kind of normalizes from this quarter forward. We had a receivable build, but that's the good news. It means that the business is growing. But is interesting that despite the receivable bills, our DSOs came down materially from an excess of 100 days to I think roughly 82 days. I don't have the exact numbers. What that is reflective of is the mix shift that you are speaking to where a lot of Lower 48 activity is shorter cycle in nature, those receivables turn quicker. And so that mix shift actually reduces our investment in working capital compared to a multi-month or multiyear large project in our Offshore/Manufactured Products segment or even in our completion services, international receivables are generally slower to collect. And so, again, while you'll focus on potentially a receivable bill, again very positive thing, it is the revenue growth that's driving that while our DSOs are actually coming down.

Got it. That makes a lot of sense. And so then on Downhole Technology, any anecdote you can share early days, I guess, in terms of cross-selling opportunities where you found some success? And I guess, that would be great. I know you've had a little more time to look under the hood, how you characterize the margin trajectory for that business?

So we've had a very positive 3 or 4 months with the management team. We've been very diligent about bringing together our sales forces so that each group better understands the product and service capabilities of the other. I would say that probably the near term focus right now even -- and we've met with a lot of customers too, certainly, services at the well site and how we can integrate that better with the products -- the downhole products offered by GEO in terms of more complete packages, delivered to the well site is another focus that we are on and I would say, generally, our customers are looking at opportunities where our extended reach technology can benefit kind of the collective company as a whole. Those are probably the more near term things. The leader, David, of our GEODynamics operation, has already made an international tour and visited our facilities, our people and are looking where we think there might be international opportunities as well. So I'll say, it's early days, but certainly focused on those opportunities.

Our next question is from Stephen Gengaro of Stifel.

I guess, 2 things, if you don't mind, and one is to kind of continue on the Downhole tool side. When you think about that business and sort of the price/incremental margin dynamics, how should we think about that playing over the next sort of 2 to 4 quarters? And if you don't want to talk specifically about prices, maybe on incrementals and how it should react relative to well site?

Well, you got 2 drivers there on incrementals. The first one is just the product incrementals, which are very strong, north of 40% generally. It depends on whether these are kind of proprietary charges, highly engineered charges, more commodity. So again, there is always going to be some mix element there, but the gross margins on pure products are good. However, we're also growing our R&D efforts in our engineering talent and efforts which will have future benefit. And so, I just kind of look to normalized margins. They are going to vary a bit quarter-by-quarter, but it's generally going to be related to human capital investments for the longer-term.

Okay. And then just, in that business on the technology side, we -- I know when you made the acquisition, we heard some several folks that it was an extremely high end business. Are you seeing anything on the competitive front there changing over the next couple of quarters?

I mean, we're on it every day. And I think what our customers are looking for is the type of technology that does multiple things, but importantly, helps their ultimate reservoir recovery, helps get productivity all the way to the toe of the well, eliminate some of the sand blockages that occur on flow, artificial lift, I mean, I can go on and on. But the customers, as I've seen, are very willing to assess and look at and run field trials around new technology that helps achieve that goal. They are looking for reduced drill out times and plug and perf operations, reduce water usage. So there is a quite a number of things that we are focused on again in an effort to help our customers develop better wells, more productive wells at the end of the day.

Our next question is from Vaib Vaishnav of Cowen.

Cindy, it sounds like you have not booked any -- you have not booked (inaudible) project. Just wanted to sue if you can provide any color around what your thoughts are?

I'm sorry, which project?

Is it (inaudible)

Yes, CRDM.

So we had -- first of all (inaudible) is a shallow water development. So we have lower content opportunity there to start with. We did have some selective work on (inaudible), it just didn't raise to the level to separately split out as a major project award. Some of that was underway which will be paid for. But unlike some of the people in the space, it wasn't so material that is a headline mover one way or another.

Got it. Okay. Offshore the short cycle business helped, we saw the third quarter and fourth quarter last year, it was -- the revenue was down sequentially. Was is made up in first quarter? Or should we expect the current pace to continue for next -- for the near term at least?

Yes, Vaibs, on the short cycle business for offshore products, we expect it to be pretty strong for the rest of this year. I mean, there are some blips last year in third and fourth quarter to your earlier comment, but it should remain strong for the balance of this year.

There is always timing because these are things that run in the field routinely and you will have adjustments up and down in terms of the desired inventory levels by the service company that are running that in the field, but the trend line is clearly positive.

Clearly positive and also included in the short cycle are our valve products which -- those orders kind of vary quarter-by-quarter.

Got it. And one last question, if I may, just on Well Site. If you -- can you help just think about how the Gulf of Mexico and international business progress in 1Q. How should we think about going forward? And how much, if you could help us just think about how much Falcon helped in first quarter?

I'll just generally say a couple -- first of all, the latter question has already been answered, so I'll talk about the former. And just remind everybody on the call that pre-Falcon, Gulf of Mexico and International represented about 25% of total completion services business line, not the segment, the business line. That will be a smaller percentage in theory with the addition of Falcon, so I want everybody to put that in perspective. Gulf of Mexico can vary quarter-by-quarter largely just because there's just not that much opportunity out there. So and a lot of this equipment will stay on kind of the life of the field almost. And so, depending on what we got going on in the Gulf, that can be a contributor again. It was up sequentially. International, we're a smaller player internationally and we have a concentration of work in the Middle East. I would say that's generally going to be kind of flat from here. It's my best guess right now.

(Operator Instructions) And our next question is from Chase Mulvehill of Wolfe Research.

I guess, if we want to stick with Falcon a little bit, but just overall, broad strokes about how you're thinking about M&A going forward. Is it just still kind of small tuck-ins and still kind of looking at things that make sense? Or do you want to take the -- hit the pause button for a little while?

As we said earlier, we really plan to focus on integration and achieving the results for the 2 acquisitions that we have. We look at a lot of acquisitions. We think it's important in this market to create scale. Obviously, those need to be both accretive and generate returns on the capital that we invest. So we'll continue to look, but there is nothing immediate on the radar screen at this point. And again, we're going to focus on integration of the 2 we have. We're going to focus on organic CapEx investments, which have generally always generated the best returns. In the near term, we set up the balance sheet efficiently so that we have the ability to pay down a portion of the debt i.e., the bank debt in the interim, until better market opportunities present themselves and/or future M&A.

Okay. And on the rigs, I can't remember, did you -- do you have any rigs that you could upgraded to kind of super spec quality or are these kind of more lower spec rigs?

You know, we've already upgraded a handful of the rigs, but they really had mostly vertical capabilities. There are some that have, what I call light horizontal capabilities. And if there is a reason to upgrade, it's more for a preeminent customer that really wants to do surface drilling for the horizontal plans and our goal there is just optimize the assets. We are not trying to grow into a drilling company.

Okay. I know you talked about divesting the rigs, is that getting any closer given that the market is getting better?

I had not talked about plans to divest the rigs. So it might be another company.

Sorry. Okay. And then last one on capacity expansion, potentially in GEO. Are you bumping up on capacity limits there? And what are the expansion plans from a manufacturing standpoint?

Well, I mean, a high growth business starts hitting issues there. The good thing is we have been able to kind of stay ahead of that. But as I said on earlier calls, we plan to invest capital to grow their engineered perforating solutions business there on the Millsap campus. We plan to try to get that done this year, but it will have a more benefit in 2019 forward. We also have plans to expand their capabilities in the Midland-Odessa region to support Permian operations as well. So those are our most immediate CapEx plans.

We have no further questions. I'll now turn the call back over to the company for closing remarks.

Okay, Christine, thank you so much. I know this is a busy day for everybody. I appreciate all of you that dialed in. And we are just so pleased to have positive results and obviously realizing the intended benefits of the acquisition, which give us greater scale and greater return potential. So we look forward to catching up with all of you over the next few months and hope you have a great day and a great earnings season. Thank you.

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