RPC Inc (RES) 2011 Q2 法說會逐字稿

Good morning and thank you for joining us for RPC Inc. 's second-quarter 2011 earnings conference call. Today's call will be hosted by Rick Hubbell, President and CEO; and Ben Palmer, Chief Financial Officer. Also present is Jim Landers, Vice President of Corporate Finance. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. I would like to advise everyone that this conference call is being recorded. Jim will get us started by reading the forward-looking disclaimer.

Thank you, Nicole, and good morning, everybody. Before we begin our call today, I need to remind you that in order to talk about company, we are going to mention a few things that are not historical facts. Some of the statements that will be made on this call could be forward-looking in nature, and reflect a number of known and unknown risks. I'd like to refer you to our press release issued today, along with our 2010 10-K, and other public filings that outline those risks, all of which can be found on our RPC's website at www.rpc.net. In today's Earnings Release and conference call, we will be referring to EBITDA., which is a non-GAAP measure of operating performance. We used EBITDA as a measure of operating performance because it allows us to compare our performance consistently over various periods without regard to changes in our capital structure. We are also required to use EBITDA to report compliance with financial covenants under our revolving credit facility.

Our Press Release today and our website provide a reconciliation of EBITDA to net income, which is the nearest GAAP financial measure. Please review that disclosure if you're interested in seeing how it's calculated. If you have not received our Press Release, please call us at (404) 321-2140, and we will provide one to you immediately. Now I' going to turn the call over to our President and CEO, Rick Hubbell.

Thanks, Jim. This morning we issued our earnings Press Release for RPC's second quarter, ended June 30, 2011. Following my comments, Ben Palmer will discuss our financial results in more detail. I am pleased to report to our shareholders that RPC once again generated record revenues, profits and EBITDA. Our second-quarter achievements are the direct result of our strategic initiatives put in place since 2005 to expand significantly into service lines that would benefit from the tremendous growth in horizontal drilling. Our pressure-pumping, coil-tubing, down-hole tools in nitrogen service lines all experienced outstanding sequential improvement. I'm also pleased to announce that RPC's Board of Directors, in a show of confidence in the company's future performance, increased the quarterly dividend to our shareholders from $0.07 to $0.08, a 14% increase. With that overview, Ben Palmer, our CFO, will provide some financial details.

Thanks, Rick. For the quarter ended June 30, 2011, revenues increased to $443 million, a 75.2% increase compared to the prior year. These higher revenues resulted from increasing work in unconventional formations, together with capacity increases, improved pricing and better utilization. EBITDA for the second quarter was $164.2 million, compared to $85.2 million the same period last year, and operating profit for the quarter was $119.3 million, compared to $52.1 million in 2010. A net income during the quarter was $73.2 million, or $0.50 diluted earnings per share. Cost of revenues increased from $139.5 million in the prior year to $243 million in the current year. This increase in cost resulted from the higher business activity levels and associated costs, including materials and supplies, total employment costs and maintenance and repairs.

Cost of revenues for the second quarter as a percentage of revenues decreased from 55.2% in the prior year to 54.8% due to improved operational leverage resulting from higher revenues. Selling, general and administrative expenses during the quarter were $36 million, an increase of 22% in the prior year of $29.5 million; however, because of our ability to leverage these fixed costs over higher revenues, SG&A costs as a percentage of revenues decreased from 11.7% last year to 8.1% this year.

Depreciation and amortization were $44.9 million for the second quarter, an increase of $11.5 million over the prior year. This increase is a result of higher capital expenditures to meet customer demand. Our technical services segment revenues increased 80.3% due to improved utilization of a larger fleet of equipment and improved pricing. Operating profit was $109.5 million, compared to $46.3 million in the prior year. This improvement was due to higher revenues and the associated leverage of fixed costs. Revenues in our support services segment, which is comprised mainly of our rental tool service line, increased by 32.7%. This segment generated an operating profit of $13.2 million, compared to $6.6 million last year, primarily due to higher pricing and utilization of our rental tools.

For eight consecutive quarters, RPC has generated improved revenues, operating profits and EBITDA. This will be some sequential comments here. RPC's consolidated revenues increased from $381.8 million in the first quarter of 2011 to $443 million in the second quarter, which is a 16% increase, which exceeds the average [rid count] increase of 6.6%. Revenues increased from higher activity levels, additional equipment and, to a lesser extent, improved pricing. Second-quarter cost of revenues as a percentage of revenues increased from 52.7% in the first quarter to 54.8% in the second quarter. As we previously stated, our operating leverage and margins are being impacted by the increased prices of materials and supplies and higher maintenance and repairs, offset by the leverage of total employment costs over higher revenues. Looking forward, we will have the ability to benefit from improved pricing on upcoming contracts, a pass-through of certain cost increases under existing contracts, and decreasing discounts on spot work.

SG&A expenses as a percentage of revenues decreased from 9.4% to 8.1%. Our SG&A as a percentage of revenue has continued to improve from leverage over higher revenues. RPC's sequential EBITDA increased 12.3%, from $146.2 million in the first quarter to $164.2 million in the second quarter, while our EBITDA margin did decrease slightly, to 37.1%. Our technical services segment revenues increased 16.4%, to $406.7 million, and generated an operating profit of $109.5 million, compared to an operating profit of $99.9 million in the prior quarter. While most of our service lines within this segment experienced continued utilization and pricing improvements, our pressure-pumping business was the largest contributor to the revenue increase, while coil tubing experienced the largest percentage increase. Despite the second quarter strong results, we were negatively impacted by, among other things, a decision by one of our contract customers to delay operations during the quarter,and by a fire which destroyed a portion of one pressure pumping fleet.

Also during the second quarter, RPC experienced an increase in the market prices of certain raw materials used in pressure-pumping jobs, and a job mix change at one of our large pressure-pumping locations. This combination of factors is a result of servicing large pressure-pumping customers in an environment of fluctuating raw material prices, due to increasing demand, together with changing job requirements. We continue to work with our customers to improve our mutual profitability, and we will benefit from continued improvements in our pricing. Our support services segment experienced a 12.2% sequential revenue increase, primarily due to improved demand in our rental tools business. Support services operating profits were $13.2 million, compared to $9.9 million in the first quarter.

Also during the second quarter, RPC's in-service pressure-pumping fleet increased from 465,000 hydraulic horsepower to 495,000 hydraulic horsepower. All of this equipment went into service under a new, committed customer relationship, as planned late in the quarter. We expect to place in service an additional 90,000 hydraulic horsepower before the end of the calendar year 2011, and an additional 55,000 hydraulic horsepower during the first quarter of 2012. This will result in total horsepower of approximately 640,000 at the end of the first quarter of 2012. Most of the incremental equipment is already under contract or committed to our [E&P] partners. Of the 640,000-horsepower, approximately 40,000 hydraulic horsepower will be used as rotational equipment to ensure we have the capability to maintain our entire fleet in optimal operating condition while meeting our customers' needs.

Second-quarter 2011 capital expenditures were $111.4 million, and we anticipate spending approximately $400 million for the full year 2011. RPC's outstanding debt under its credit facility at the end of the second quarter was $173.1 million. Our ratio of long-term debt to total capitalization was 21.3% at the end of the second quarter. Also, toward the end of the second quarter, we successfully modified our credit facility to reduce our interest rate spread by 50 basis points. With that, I will now turn it back over to Rick for our closing remark.

Thank you, Ben. Our goal at RPC is to achieve outstanding returns on invested capital. We accept the fact that the percentage margins we earned under contracts may be lower than those earned under spot work; however, over time we are willing to trade the volatility of spot work for the improved predictability of contract work. While the second quarter presented some operational challenges, our experience provided us the framework to deal with these issues and limit their impact going forward. The second quarter is another record quarter, and we are very encouraged by our current position in today's market, and future business opportunities. I'd like to thank you for joining us for the conference call this morning and at this time we will be open to any questions you may have.

(Operator Instructions)

Neal Dingmann, SunTrust

Good quarter. Just two questions. One, I understand that most of the equipment is under contract, maybe give us an idea of, kind of, percentage, if you could, and how long these contracts are?

This is Jim. A little over 50% of the equipment is under contract at the present time. We added some during the quarter, as Ben mentioned, and that went under contract as well, so call it 54%. The duration of the contracts is multi-year, typically 2 years.

Okay, then Jim, or, Rick, my follow-up, you did have the 1 major delay and there was some cost creep, and the contracts you've had, or the new ones going forward, did you have inflation adjusters in there and do you have any clauses that if somebody doesn't take some of these contracts at a certain point that they incur any costs. Just wondering what kind of covenants are in some of these contracts?

Yes, in general, each of the contracts are different, there are similarities, but each of them are different. And yes, as I alluded to, there are provisions in the contracts to pass along certain cost increases. Again, it varies by contract. The timing of the ability to pass those along varies somewhat, as well. They're certainly not concurrent, they're not monthly. Typically they are once or twice a year-- we're able to sit down with the customer and demonstrate where we are incurring cost increases and apply the contract terms and adjust the pricing accordingly. So some of the creep that we experienced here in the second quarter will be recouped going forward.

John Daniel, Simmons & Company

Quickly on the horsepower, the 495 that you have at quarter end -- I think that's what you said -- does that include the fleet that was involved in the fire? Was that scrapped, rebuilt, what's the plan there?

That -- the number that we -- We ended the second quarter and we have eliminated that, since those pumps are not available to work. We will -- I don't know about directly replacing them, but, clearly we have other additions coming on board. They were pretty well destroyed.

Through-tube installations seems pretty impressive, and getting traction internationally, do you anticipate that business unit pulling through other products in to the international market? Particularly the frack and quo?

John, I think there is that capability, yes, they have a very, very strong reputation -- services are clearly in high demand and speak directly to the horizontal completions so yes, I think there is that opportunity. That is a big commitment and it's much easier to take a few tools and an experienced hand and go overseas than it is to take an entire fleet of pressure pumping equipment; so it will be a longer-term situation or opportunity but yes, I clearly see that could be an eventual outcome.

Last one for me, it's just a quick one. The 2012 CapEx, at this point do you expect it to be in line with what you are spending in 2011? Any thoughts?

Maybe. At this point in time I would say we are always looking forward and planning ahead. Right now, based on what we have directly before us, it will probably be somewhat less than this year but that is all subject to opportunities and our evaluation as we move forward; but clearly, we are still taking delivery of, as we indicated, 55,000-horsepower early next year. We are taking delivery of a few coil units early next year, so it will still be a healthy number. I don't see any significant ramp from here, but I could see it being somewhere close; but right now I think the over-under would be under rather than over.

Luke Lemoine, Capital One Southcoast

On the 90,000 more horsepower being delivered this year, just trying to get a sense of the split between Q3 and Q4?

Great question. Jim, do you want to?

This is Jim, it's just about evenly split between Q3 and Q4, although its a little more weighted to Q3 deliveries.

And then, last quick one. What were the percent of revs from pressure pumping and coil tubing in the quarter?

Pressure pumping was 54% of revenue and coil tubing was 12% of revenue.

Andrea Sharkey, Gabelli and Co.

I was wondering if you could talk about the 40,000 new horsepower you are going to get delivered -- I guess the first quarter of 2012 -- was that incremental to what you've ordered, or was it stuff that you'd ordered getting pushed forward, lead times lengthening, things like that. Maybe give us a sense if you are changing or increasing your expansion of your pressure pumping fleet?

Andrea, we actually said 55,000 horsepower in early next year, and I think that number is up some what. I apologize, I don't have it in front of me; but what we talked about before -- We have added a few, here and there, some of it is -- either directly or indirectly -- because of the fire that happened during the second quarter. So all things being equal, that was added back and there are some slight increases. We have planned, and I talked about the rotational pumps -- we have anticipated that for quite some time. We have -- even some of our existing fleet is allocated to rotational -- but we are at a higher percentage -- not a high percentage -- of what is being added over the next 12 to 18 months will be the rotational pumps. But most of it's going to be incremental adding to revenue, but I think it is a reality of this business you have to have that backup pumps. We realize that and plan for it.

Andrea, this is Jim -- in reference to the last time we had a conference call, we are now quoting that our hydraulic horsepower at the end of the year is going to be a tiny bit lower than what it was going to be before, like on the order of about 15,000 hydraulic horsepower. So that's just the nature of slippage -- with all this ordering we're doing, that's not a big slippage, so that's just to amend Ben's comment with just a little more color on the fourth quarter at year end.

Okay, thanks. That's helpful. The sequential increase in your cost of revenues, I understand commodity costs creeping up and then the delay with 1 of your customers, I was wondering if you could give us a high-level sense of maybe on a percentage basis -- 50% of it was commodities, or a 25% was commodities, and then maybe refresh our memory on what, exactly, the commodity costs are that are hurting you guys?

Let me maybe answer it another way. I think it's important -- we talked about the operational delays and the fire, we don't like to make excuses; but I think it's important to recognize that we estimate that there was approximately $20 million of missed revenue due to those 2 incidences, number one. Number two, we had to write off the net book value of the equipment that was lost in that fire, and that was about $3.9 million, so that is reflected in the numbers in the second quarter as well. In terms of the cost increases themselves, it is more of creep, it hasn't that been tremendous. It's something that we focus on, continue to focus on, we talked about -- quite a while, there are certain commodities that are increasing faster than others. Luckily those are not the largest of our critical supplies; but there are some costs that are increasing pretty rapidly. But again, we have the opportunity, prospectively, under our contracts, to pass at least some of those costs on.

Okay, that's helpful. And then, maybe, if you could just comment --

Moving on to our next question. John Lawrence, Tudor, Pickering.

Just backing out the numbers, would it be reasonable to assume that margins would be flattish, say, excluding the fires and operational delays in technical services? Quarter over quarter?

Would have been?

Yes.

It clearly would have been better. I don't know that we spent a whole time trying to decide exactly what it would have been. But it would have been better -- It would have approximated, yes, sure.

On the pressure-pumping side as well, a lot of your stuff is non-24-hour work. I realize Chesapeake is a big customer but is there any way to get more capacity on 24-hour work?

John, this is Jim. You are right in your characterization of our pressure-pumping capacity being on 24 hour work. It is about 15% of our capacity, being on 24-hour work, at this point. Our understanding, as you know, we are in the Bakken, but we're not there with pressure pumping yet. Our understanding is that market is characterized by a lot of 24-hour work, so if and when we get in the Bakken for pressure pumping, that is 1 catalyst for increasing the percentage of work that we do with 24 hours. The others -- it depends on the customer and their requirements and that sort of thing. It's very hard to predict, with that 1 exception.

And Ms. Sharkey, I apologize -- if you wouldn't mind getting back in the queue to ask your follow-up questions.

Yes, thanks Nicole - we want to hear back from Andrea.

William Conroy, Prichard Capital Partners

Good morning. Maybe a quick follow-up to maybe nail down a little bit of the impact of the delays and the fire and, really, this is a follow-on, I think, to John's question. You mentioned you maybe had $20 million of missed revenue. Was that not replaced, number one, and the second part of this -- is the $3.9 million equipment write-off, is that in the costs?

The $3.9 million is in the gain/loss on asset disposal.

Okay.

And was the revenue replaced? No. It's not replaced. It was missed, but we have -- we are back to work with that particular customer. In that respect, I guess, it's being replaced going forward.

This is Jim, to add onto that, the missed revenue that wasn't replaced, by the nature of the contract, we were committed to being with the customer and not moving our equipment elsewhere, and working with them to get going again. So that is why we didn't have the opportunity to go somewhere else with that equipment.

That is the nature of that contract work and we respect the customer wanting to study the situation. It lasted longer than we would have preferred, but we are back to work now, and that's behind us.

Right, and I think you just clarified -- it wasn't just $20 million, to the extent it was missed revenue with that contracted customer -- you didn't have the opportunity to redeploy the assets and maybe pick up some spot jobs.

That is correct. We're saying that this was the direct impact on our revenue of that situation.

Got it. 90 days ago on the call you mentioned you thought you could potentially breach prior peak margins. We've got a couple of moving parts now, obviously, that come through Q2. How do you feel about that statement, any stronger or do you feel, is it less likely or more likely? How do you feel about that?

As Rick indicated, we are mostly focused on our returns on capital and those are -- we're doing extremely well. We measure returns over time. We celebrate our returns in the short-term but realize we have to generate those returns year after year. There's a lot of water that will be going under the bridge over the next 3 to 5 years, and we'll look back and see how we did. We have done very well historically, and currently, depending on what time frame you measure, if you measured it on the last 12 months, or '11 calendar year, our returns are higher than they've ever been. So, we are very pleased with that and we are going to continue to work on those. With respect to the P&L margins, that is one way we measure ourselves. We manage to that, on more of a short-term basis than a long-term basis -- we're not as concerned about getting back to peak margins. We do try to maximize our margins but again, returns are what we really focus on. Now, to answer your question directly, I still think there is an opportunity to get -- our peak was just under 30% a few years ago -- I think there's an opportunity to get there and I think I'm more encouraged today, even, than I was before -- in part because of how well coil tubing performed. It was phenomenal in the quarter. If you extrapolate the change in the total revenue of coil tubing from the first quarter to the second-quarter you will, too, see that it had a phenomenal quarter. We are adding additional capacity in coil tubing -- as we've indicated before; and are real excited about the prospects for that service line; and the margins on coil tubing right now and for the foreseeable future are certainly north of what they are in pressure pumping.

That's extremely helpful and I appreciate all of the perspective. Thanks, guys.

Dimitry Dayen, Goldman Sachs

Good morning. Can you give us a little bit more color on the cost inflation that we saw in the quarter? Which components of the cost structures saw the most -- and was it primarily in your spot business where you saw cost inflation creep up, or more so on the contract side of the business?

This is Jim, first of all, costs are costs whether they are in the spot market or the contract market, and there are ways to adjust for those, but there are different dynamics, as you know. So, the cost creep was not segregated between one or the other. You've heard people in the industry have talking about guar, the guar bean -- that has gone up -- that component of our cost has gone up a lot in the past number of months, even on the 100% order of magnitude. Personnel expenses have gone up; but we are still getting leverage on that, on personnel expenses. But with that in mind, we are having to do a lot in terms of stay bonuses and things like that to that to retain people. Sand, you know, there's many different kinds of sand you use, and different kinds of proppant, and so it's hard to make a blanket statement about sand, or proppant. But certain kinds of proppant have been going up, as well, some of which you get to markup pretty healthily and some that you don't. It is kind of a mixed bag but that is basically the answer. Diesel fuel has been high as well, and we kind of neglect that; but we use a lot of diesel.

Have these cost increases, have they been mitigated entirely in the second quarter through price increases/pass-through on your contracts? Or are we going to see some spill effect in the third and fourth quarter as you work through adjusting for those?

Under the terms of the contract we are not able to monthly, or immediately pass through cost increases -- it varies somewhat by contract. With spot work, we can adjust our discounts to some extent. On the contract work, the contracts have provisions that we will sit down with the customer periodically -- usually that's once or twice a year -- and review where prices are, how much they have changed; and we then have provisions in the contract to be able increase the pricing. So that is a -- the latter, about the contracts -- that is a prospective adjustment, not a current second-quarter adjustment. I would say prices did probably increased a bit more in the second quarter than in the first. That being said, under these contractual terms, third and fourth quarter will be where we will see the benefit of those price increases.

Doug Garber, Dahlman Rose.

Good morning. Can you talk about the pricing environment within various markets, the oil vs gas markets, specifically are you moving equipment to the Eagleford from the Haynesville? And if you do that, is the price in constant, or are you taking a discount to move it out of the Haynesville?

Doug, this is Jim. Yes, we have moved some pressure pumping equipment from the Haynesville to the Eagleford. We did that with the customer and we did that probably 1 year or more ago, as I recall, it's been about 12 months. It's hard to make a blanket comment about pricing because of our contractual work. The spot market in West Texas is probably the most dynamic -- i.e. positive -- spot market for us. That's oil, obviously. There's a lot of good work and some nice pricing in the Bakken; but just to remind you and everybody, we aren't doing pressure pumping work there yet. The contracts are, as you know, fixed prices, other than for changes you can make for costs and other provisions -- volume, things like that. But as Ben, I think, mentioned earlier, the pricing discussions that we are having for contractual work are better than the existing contracts we have. So, overall qualitative comment for you there.

That's helpful. Just a quick follow-up, you said the contracting work is higher, how is the contract work pricing compared to the spot market pricing?

It varies -- understand the question. Typically, the volume of revenue under the contract work is significantly higher than spot work because you are working constantly day after day. To say it another way -- we do very little multi-well package spot work. Spot work is normally the old traditional -- you are at a job site for a day or 2, as opposed to, under contract, its on these horizontal plays, where you are parked for a week or 2 at a time. So the utilization and the amount of revenue and cash flow and everything else generated on the contract work is higher than it is on the spot work. So the margins may be lower, i.e. pricing may not be as good, quote unquote, but the returns are very good. As again, as we - Rick commented in his remarks, that the revenues are less volatile than they would be under spot work. So, we like that trade-off.

Scott Burk, Cannaccord.

I wanted to ask about the rotational fleet you were talking about. How do you manage that geographically? Do you have 1 particular area that has easy access to that extra equipment? Do you split up between geographies? How do you manage that?

For the most part it is retained to 1 place. We always say the equipment has wheels. And this rotational -- we're not talking about a pump goes down today so we roll in a replacement pump. These are planned rotation of the equipment. Equipment has been operating for a set number of hours and it's had a particular point where we say, now is the time to send it in to be rebuilt so we will bring in a rotational pump. It is much more planned or staged if you will.

I think it's kind of new to us and the industry because these pumps are being used in a different fashion and certainly for longer periods than they have in the past so we're feeling our way along on when they have to be replaced or when they have to be completely rebuilt. I think the important thing to keep in mind is we recognize that's going to have to happen, and we've made allowances for it.

I think also to note on that, we believe we have been conservative in setting up our existing fleets and we always have backup pumps on job sites as well so that isn't a necessary component of executing a job and being able to not have -- if a pump were to go down, you've got a backup pump to come in immediately and typically that downed pump is only a temporary shutdown. Rotational pumps are there for when we decide we need to completely rebuild a piece of equipment.

Okay, terrific. Could you repeat the amount of horsepower delivered in the second quarter and what the total is right now?

The total right now we said was 495,000 horsepower. We said there would be 90,000 horsepower delivered in the last 2 quarters and Jim said it was about -- split 50/50, maybe a little bit more coming in the third quarter than the fourth quarter.

Okay. So the rotational would be just under 7% or 8% of the fleet, and it would be used for maintenance. Thanks for that. One other question, how much of your pressure pumping capacity is on contract versus spot, what is that split and how long are the terms of the contract generally?

Right now, and I think I misspoke earlier, Scott, I was saying in the mid- 50% range. 60% is on contract at this point and those contracts have an average duration of around 2 years.

The new capacity coming online is actually all on contract -- about 100% on contract?

Yes, with the exception of the rotational equipment that we've been talking about.

So that percentage should trend up over time?

Slightly, yes.

Rob MacKenzie, FBR & Co.

I wanted to come back to some of the questions about the contracts versus spot work and while it has been broadly known that contract pricing is lower than spot work, I was under the impression that the incremental utilization and lead time for planning of product delivery and the like -- by signing those contracts -- more than outweighed that hit in pricing in terms of increased operational efficiency, is that not the case or what am I misunderstanding?

Rob, this is Jim, we do believe that's the case, and still believe that's the case. We had some operational hiccups in the second quarter in our contract work which made this quarter a bad example of that. The other thing -- just to keep reminding everyone -- is that yes, there is the ability to change pricing because of cost changes and things of that nature, but those changes are not simultaneous with regard to the expense, it's not like we change every invoice. We go back to the customer every quarter, every 6 months, every year, and say these things have happened, these changes have taken place, and we need to talk about pricing adjustments. So, nothing that happened the second quarter has diminished our belief that these committed contractual relationships for a long period of time are the way to go.

I may have alluded -- saying the margins are lower or whatever. The percentage margins may in fact be lower. The industry as a whole and us included has only been at this for a while. I think over time we will get more and more efficient. We work with our customers to try to squeeze out every efficiency. They're interested in that, we're interested in that. I hate to be wishy-washy about it, but I don't think there are significant differences. I don't think it's even clear right now to say that yes, spot work is definitely, by far, much larger than contract work or vice versa. I think up to this point and given the events in the second-quarter I would say that the contract work was maybe a little bit less than spot, but they are both very, very attractive. Returns on capital are extremely high for both, and we like to have a mix of both spot and contract. Don't know whether that's responsive, but that is the way we view it. We do think there is opportunities to plan and deliver materials and supplies and all those other things; but there's always lots of quote-unquote operational challenges and things that we have to deal with and we will get better at it and we like where we are.

Great. That was helpful. My related follow-up is coming back to the $20 million of deferred revenue you talked about and not being able to deploy those assets working elsewhere during that period. Was there something there vis a vis the contract structure that tied you in without the flexibility? And if so, is that something you guys may have risks of in other contracts? Or, put another way -- how are you thinking about changing how you bid your contracts going forward based on your experience with this deferred revenue?

Rob, the incident with the deferred revenue hasn't changed anything. We are thinking about contracts right now. The operational issue with the customer -- we were hoping, and hope is not a strategy, we were also strategizing and planning to go back to work a lot of time during the quarter. Even without any contractual provisions that made us stay there, we would have stayed there because we were hoping to go back to work next week or whatever so we needed to be there. And didn't have the chance to pull off and go anywhere else as much for our mutual business interests as what might have been in the contract.

Fair enough. Thank you.

Matt Beeby, Global Hunter Securities

Good morning. With respect to the labor force, can you remind us the lead time required to staff up; and are you seeing that dynamic change -- have you seen that change in the last quarter or so?

The time to staff up is a constant process so at this point we are not really viewing it as how long does it take to add a fleet; we just are adding people almost as quickly as we can. And you end up -- at moments in time that you are a little over-staffed and you're a little understaffed -- it's a constant process that we go through. I would say for us, I think we have had some good momentum in hiring people here recently. I don't know that that's any industry trend per se, I think some of that's just good execution or whatever; but not really seeing lots of additional employee pools with commercial licenses, I haven't really heard or seen any particular large trends in that regard -- if that is your question.

And I think we are getting better at recruiting. The more we're doing this, and everything, I think we are just doing a better job.

Matt, this is Jim, another follow-up answer to that is that these contractual relationships we talk about so much, they require a certain percentage of employees who can be green hats and that percentage is low. But what we've been doing is we've been recruiting certain markets and sending those green hats to other locations for a rotational of period so they can get the experience they need so when they come back we can meet our contractual obligation. So that's a little bit of a different wrinkle, operationally for us. I think I would also say that -- we all -- everybody knows about North Dakota and how difficult it is to find good people. I guess the silver lining to our national employment picture is that a lot of people are now starting to plan to move to get a job in the oil field. We had an employment fair in North Dakota and we had people coming from as far west as Spokane, Washington and as far east as North Carolina. So, that doesn't say great things about our national economy, but that is a bright spot that I would not have anticipated 6 months ago.

That's very helpful. One more quick one, Jim or Ben, can you outline the coil tubing addition -- I believe there were some additions this quarter -- and then maybe a little bit more specifics on the 2012 -- maybe the number and timing -- I assume its 1Q -- but could you clarify that a little bit?

Yes, I will try to elaborate that a bit. At the end of the first quarter we had about 39 coil tubing units. We added 2 in the second quarter. We have approximately 5 coming in the next 6 months, and another 4 in the first 6 months of 2012.

That's helpful. Thank you.

All of those, of course, are the larger diameter units.

Thanks.

William Conroy, Prichard Capital Partners

Good morning, following up on the rotational capacity, how should we think of the economics of that? I guess the simple question is, do you get paid for it? If we are thinking in terms of pumping revenue per horsepower, does it just increase the denominator, and are there other costs associated with it besides just having the equipment?

It's a rotational fleet for our company in total so we don't directly get paid for it. We did anticipate it, this is nothing new, we did know this was going to happen, it is something we'd planned for -- we already have a few pumps that you could call rotational that are in the fleet. The way we look at it is, we don't play around with the numbers. Our total available fleet is whatever the hell our total available fleet is, so we don't try to reduce the number and try to calculate statistics off of a lower number. We believe we need that many pumps in total to service the customers we have. Even if we are 100% utilized, we need to have those rotational pumps available because there are going to be pumps that are pulled out of service for a period of time. So we're not going to adjust the number up and down when equipment is being rebuilt. We have whatever capacity we have, and that's the way it is. So, again, we don't bill for it directly. We did consider it in pricing our contracts over the last couple of years. We did know it was a necessary cost and it would be coming, and so it's not a surprise to us. And somebody indicated earlier about 6% or 7% -- that's really right. If you look at it as 40 on 640 would be something around 5% or 6% -- I think that's what we anticipate that we will need to have. 5% or 6% of the working fleet will need to be available to support equipment that might be down. So, in other words, 5% to 10% of our fleet at any given time over the next 12 months is going to be down for repair.

That helps. Thanks.

John Daniel, Simmons & Company International

Thanks for putting me back in. I don't mean to beat you up on this, but a follow-up on the contract -- if you see the cost increases like you did in Q2, you then go visit with your customers to try to adjust pricing on a go-forward basis, are you able to quantify to your customers what the cost increase was in the prior periods and do you get any pickup like a one-time payment for those cost increases? Or is it just a benefit going forward when the prices are re-negotiated higher?

In general, it is a go forward. There are some provisions that do provide a pickup; but in general what we are talking about with the cost creep we're referring to here is more of a go-forward.

But the answer to the first part of the question is yes, we can quantify it.

I'm sure you can quantify it; but I shouldn't update -- and sometimes you can get pickups -- go back and retroactively increase prices. Separately, and this is a quickie -- do you have crews today for the 90,000-horsepower that comes in the second half, or are you in the recruiting process still?

We are not fully staffed for that 90,000 today.

John, I think we have -- I don't want to say the number -- but we've got some folks in rotational training right now that, just off the top of my head, would probably staff a third of that 90,000 coming in.

Fair enough. Thanks.

Jason Dailey, Citadel

Thanks. I want to make sure I'm thinking about this properly. On technical services, you had the $3.9 million write down which would obviously be added right back to the operating income, which gets me kind of the 28% margins. In addition to that, I want to be sure I'm thinking about this right -- you guys lost the $20 million of revenue as it relates to the fire and the delays, which I'm assuming you guys have all the costs associated with that. Just trying to back into some math here. It looks to me like operating income margins and technical services would've been 30% plus. Does that seem reasonable from a math perspective?

Jason, this is Jim. You get an A in math but a B-minus in geography. The loss that we talked about -- the write off that we talked about -- is actually not an operating profit. It's down in the gain/loss--

Well, it is an operating profit but it's not in the operating profit of technical services.

Okay.

We do not allocate gains or losses to specific segments, if that makes sense.

So where does it show up on the income statement? How about that?

If you look in our press release, back on page 3, we have revenues by technical support, then operating profit, technical services support, our corporate expenses, then gain or loss on disposition of assets.

That is showing $78,000.

Right. So, in there is a write off -- so in that number is a write off of $3.9 million. Just as a net number. That specific $3.9 million relates to technical services or can be related to technical services.

So you had a gain elsewhere there then?

Yes.

Okay. Thinking about next year from a CapEx perspective and John Daniel asked about this; but your already going to have 55,000 horsepower in the first quarter. You've added well over I think 200,000 horsepower -- or will have added 200,000 horsepower this year. Is it fair to think you will at least 200,000 horsepower in total next year of pressure pumping horsepower? Is that reasonable?

No plans for that right now.

I'd say with what we know now, no, we don't plan to add that much.

Thank you very much.

Brad Handler, Credit Suisse

Similar to a couple of the questions about capital spending, I guess; but I want to approach it a little bit differently. Without trying to put you on the spot too much, in early '12, how much do expect pressure pumping to be, as a percentage of your revenues? Is it similar to where it is today or is it growing or is it declining?

Were not going to give you a revenue number but the math works out on capacity. If you work it through -- between now and the middle of 2012, I expect our capacity for pressure pumping will be somewhere around, effectively, 30% higher than it is today.

Right, so the conclusion I think we are all reaching is your proportion is going up?

Pressure pumping capacity is growing faster than other pieces.

Other capacity - so, okay. So, I guess I'm curious, with that as a backdrop -- I guess I'm curious, do you all have a view as to how much you want pressure pumping to be as a portion of your business? Maybe over the medium term? Acknowledging your exploiting opportunities today; but 2 years from now, do you have a view as to how much rental should be, or coil tubing should be, or do you not -- are you agnostic -- does it not matter?

Well, it matters to us a little bit; but I don't think we believe we're smart enough to actually know what it's going to be. We'll try to put -- place assets wherever we can get the best return. So it's a moving target. We are pleased with the way we have executed to this point. We think 1 year from now we will also be pleased.

And we do like diversification. If you said, again, if we said we want to get to 90% pressure pumping or whatever, I think we would say no, we want to be diversified; and so, with that being said I think it's a growing percentage and we will have to see. We are going to react to the market. Obviously there are long lead times on equipment so you can't react overnight, but as Rick said, we will allocate to what we believe are the current and future highest return opportunities.

We have added a whole new level of complexity to our company and what were trying to execute every day. I think from a general point of view we would rather stop and take a breath and do a better job in executing rather than to grow for the sake of growing.

That makes sense. You mentioned -- coil tubing is higher returns today? -- or just better margins? That is better returns in your view?

Margins and returns today.

Okay, thanks.

(Operator Instructions) It appears we have no further questions. I would like to turn the call back over to Mr. Jim Landers.

Thank you. We appreciate everybody calling in this morning, and all the questions and the discussion. I hope everybody has a good day and we will talk to you soon. Bye bye.

That concludes today's conference. As a reminder, the recording will be on the website within 2 hour following the completion of the call. Thank you. Have a nice day.