Tetra Technologies Inc (TTI) 2003 Q3 法說會逐字稿

Good morning. And welcome to the Tetra Technologies third quarter conference call. My name is Deshanta, and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question via the phone at that time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. This show also features streaming audio, which allows you to listen to the show through your PC speakers. For those of you on the web, please notice the tool bar on the right of your screen. The features on this tool bar allow you to interact with the other show participants and choose show viewing options.

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At this time I would like to turn the show over to CEO Geoffrey Hertel. You may begin your conference.

Thank you.

On behalf of Tetra Technologies, I'd like to welcome you to our third quarter 2003 conference call. This call will include statements that are deemed to be forward-looking and are based on certain assumptions and analyses made by Tetra. You are cautioned that these are not guarantees of future performance.

Joseph Abell, or CFO, is with me today and will assist me during this conference call. As is customary in Tetra's quarterly calls, there will be a prepared statement followed by your questions. I'll now ask Joe to review for you the financial results for the third quarter and the nine months of 2003.

Joe?

Net income in the third quarter of 2003 was $10.7 million or .46 per share, including a $3.6 million net gain on the sale of our subsidiary less the write down of our Norway process serve plant. For comparative purposes, income before the net gain was a record $7.2 million or .31 a share fully diluted compared to .05 a share in the third quarter of last year.

Consolidated earnings before the net gain increased 587% year-over-year. Prior to this quarter our previous record net income before gains on the sale of assets was 6.85 million or .31 a share earned in the third quarter of 2001. Damp-rid, a consumer products company that makes moisture-absorbing products used using Tetra's calcium chloride was sold for approximately $19.4 million in cash, including a working capital adjustment. We recognized an after tax gain on the sale of about $4.9 million. This was a profitable but non-strategic business for us.

Also in the quarter, after considering our options, we decided to exit the drill cuttings and drilling mud processing business in Norway, recognizing an after tax loss on the discontinued operations of $1.3 million. Tetra's revenues for the third quarter were up 66% to $91.1 million compared to the third quarter of last year.

For the first nine months of the year, net income was $17.4 million. Net income before the $1.46 million FAS 143 cumulative effect adjustment at the beginning of this year and before the net gain on the disposal of discontinued operations was $15.3 million or .67 per share fully diluted. On this basis earnings for the first nine months were up 83% compared to the comparable period last year while revenues were up 40%.

Profit before tax in the fluids division for the quarter were down by 7.4% versus last year's comparable period. On the other hand, well abandonment and decommissioning division reported a 1,245% increase in profit before tax and the testing and service division reported an increase in profit before tax of 102% versus last year. Over the quarter we reduced debt by $22.1 million, ending the quarter with no bank debt, less than $300,000 of capital lease obligations, and more than $15 million of cash on the balance sheet. We have reduced debt by $37.2 million since the beginning of the year.

With that, I'll turn the discussion back to Geoff.

During the third quarter we participated in three significant and really to some extent unique transactions. Therefore, before we address our core businesses, I think we probably need to review these transactions in a little more detail. As Joe mentioned, we sold Damp-rid.

Damp-rid is a dessicant marketer. Its primary product is calcium chloride-based. Probably your first question ought to be what are we doing in that business. Basically, we we determined we need today backward our fluid operations in order to prosper, we found that to be efficient we need today build a larger calcium chloride plant at Lake Charles, Louisiana than we could justify at the time. We needed additional baseload demand to justify building the plant to an economic size.

The acquisition of Damp-Rid gave us that internal demand for product. Over the years as we have continued to build our energy demands for calcium chloride products, Damp-rid became much less core. In fact, became non-core. During the third quarter, as Joe pointed out, we sold it for the gain that he mentioned and this $19.4 million in cash. We also secured a long-term contract to supply the new owner with calcium chloride.

The second item that occurred during the quarter that was unique was the TPS Norway. During the quarter we placed our assets at TPS Norway in discontinued operation format. These were the same operations that we've been commenting to you about for over a year. We had been cleaning up sludges and drill cuttings and muds at this facility. The significant losses we'd been experiencing under the rather onerous contract had pretty much been eliminated. However, the question persisted as to whether this Norwegian operation was a core long-term business for Tetra and whether we wanted to expand it. After reviewing all alternatives, we chose to discontinue the operation.

The preponderance of the financial effects of this decision are reflected in the third quarter results. Essentially what isn't reflected is cash that we may receive for the sale of some of these assets.

The Miratech property write-off. As most of you know, Miratech, which is our exploitation and production subsidiary and is part of our well abandonment and decommissioning division, accounts for its operations using the conservative, successful efforts method of accounting. This method looks at the value of each property separately and determines any writedowns by property regardless of the aggregate value of our reserves. During the quarter we wrote down our curing value in a single property. This write down amounted to a per share after tax loss of .05.

Now, normally that would be the end of our discussion and we'd mark the write-off as a typical cost of doing business under successful efforts accounting because we will over time continue to have these kind of write downs periodically. However, unlike normal circumstances, we didn't incur the write-off to terminate our interest in the property but to establish a more economic position in the property.

Early in the quarter we relinquished our ownership in the lease to the MMS. Then in the August 2003 lease sale, we were the high bidder for the same track. In other words, attempting to reacquire the track. The total royalty costs under the new lease when issued will be substantially less onerous than under the old lease thus making existing production more profitable and new exploration more compelling. In essence what we did is we enhanced our long-term position at the expense of short term earnings. And it was clearly a decision that we pondered over for an extended period, knowing that .05 a share is significant to any particular quarter. However, we thought the economics were so compelling we determined to do it.

Now I'll discuss our three core business areas. In fluids, as can be seen from both revenues and profits, our fluids business is essentially flat versus last year both for the quarter and the nine months. Some international activity improvement has been offset by slowdowns due to political unrest in Venezuela and Nigeria during 2003.

Also, with 85% of our domestic CBF market centered in the Gulf of Mexico, we have experienced a flat to down domestic market. We believe that Gulf of Mexico market should begin to improve once the majority of property sales that are currently being offered have occurred. And you'll note that a number of those occurred over the last 60 days and we expect a number of others to occur between now and the end of the year. This means we see only modest improvement in our domestic market for fluids through the end of the year. In testing after the typical time lag our testing business is beginning to improve as indicated with the numbers that you've recently seen. This is being driven by the increase in rigs drilling for natural gas, with recent contract awards also boweding well for activity to us in late 2003 and into 2004. We're continuing to look for ways to increase our position in the production testing markets, both internally or externally through acquisitions.

In well abandonment and decommissioning, obviously this division has been the driver tore Tetra's 2003 earnings improvement. Our integrated service offering has found favor among our customers and we continue to believe that the overall market for well abandonment and decommissioning services particularly along the Gulf Coast is a growing market. There are a number of reasons for this growth, which we have previously enumerated in other conference calls.

However, on August 15th the MMS promulgated new rules that could cause platforms to be abandoned earlier than they would have been under previous regulations, obviously helping our business if that is to be the case. Essentially these rules require all platforms five years old or older to undergo an assessment to determine whether the platform should be modified to qualify for continuing operations. It may become difficult for operators to produce nominal flow rates from older platforms without extensive capital or maintenance costs because of this new rule. We believe that this rule will make far-reaching implications for us regarding older platforms. The impact on our business should begin to be felt in 2004 and escalate through 2006. So, this is essentially another driver in the continuing growth of this business.

As is always the case, much of the following year's activity in well abandonment and decommissioning can be estimated after contracts are let and properties are sold during the December through February time period. This year the prodigious amount of properties that are for sale in the Gulf of Mexico makes for a confusing, very short-term environment, but makes us very optimistic regarding our future in this business .

Now I'd like to briefly discuss our balance sheet position. Obviously Joe gave you some of this. We did reach a milestone during the third quarter. And I'll say it a little differently than Joe did. We're out of debt. Which for a company is fairly significant. Excluding these couple of hundred thousand of capital leases we paid off all of our remaining long-term debt in September, and now we're in the process of building cash. And as Joe reported to you, that exceeds 15 million at the end of the quarter.

This financial position gives us great latitude to pursue a growth strategy either through internal expansion or by taking advantage of attractively priced external acquisitions . However, we do not feel compelled to hurry to buy something just because we have the capability to do so. We will wait for the right opportunities. As for our earnings estimate for 2003, we haven't modified the .87 to $1.07 range which is effective for the 3 for 2 split. Since we introduced it last January, we're very happy that we have not had to change this. As can be seen by the numerous atypical items in the third quarter, many specific items of change for the aggregate earnings numbers have remained the same.

We intend to introduce our 2004 aggregate as well as divisional profit estimates following our Board of Directors meeting in late December . Until we have finalized our budget for that meeting, I do not have enough data to confidently make any predictions other than to say we enter 2004 in a very admirable position. Our cyclical businesses should be improving. Our growth market in well abandonment and decommissioning should begin to evolve. And because of our cash flow and balance sheet we have the financial where withal to pursue growth wherever it lies.

With that, I'll open up the conference call to your questions.

At this time I would like to remind everyone in order to ask a question please press star 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from Jim Rawlerson from Raymond James.

If I, I guess, heard what you said, you did in your press release -- you announced .31 operating earnings and then you suggested that you've got this write down for a property that you had let go of and got back. So, you still have effectively .05. So, you add that together, you've got basically about a .36 kind of apples to apples number. Is that right?

That's a fair way to look at it from our perspective. We're going to continue to have write-offs into the future for our Ameritech property, but in this case since we essentially were in the same position we were at the beginning of the quarter, I would certainly consider adding back that .05 when you look at an apples to apples comparison, yes.

So, obviously that means you guys made or beat consensus here. On your testing side, you sold Damp-Rid during the quarter, which you had to put in discontinued operations, and you shut down TPS, which you had to put in discontinued operations, which aggregated to a number after tax of about $700,000. That all came out of us testing refuses which on the surface looked like they were down a lot from last quarter. What kind of add-back revenues on that would you get for an apples to apples? Are we talking $3, $4 million or a million dollars or what kind of magnitude with you guess just looking at that apples to apples?

Jim, the ref noose combined for those two discontinued operations on an annual basis are on the order of $15 million .

Okay. So, almost $4 million. You're actually up slightly on the testing and services business apples to apples last quarter, it sounds like.

Yes.

Well abandonment and decommissioning margins, your revenue number looks like the highest number you guys have ever seen or reported. Your margins came in this quarter a bit below what they were at last quarter. I kind of had you just under 19% gross margins. Does that also include the write-down from the Ameritech property that brings that down a little bit? Or if not, what happened with the margin there?

There was one point almost $8 million of write down on that property that went right through that division. So, yes, it's in there. So, if you add that back, obviously you get back to something more indicative probably of what you were carrying.

And that's probably what we expect going forward, just back through the kinds of lower, mid to high 20s-type margins?

We would certainly hope that we could attain at least those kind of margins on an annual basis for that business, yes.

Okay. If you look at your well abandonment decommissioning backlog, I know you said you're not quite through your budgeting process for next year, but if you look at your property transactions as kinds of your backlog, if you will, of work there now versus where you were at this time last year, you know, where are you?

Well, I think we're probably up versus last year. But remember, last year we announced to you in January that we had just signed three transactions, which to a large extent are the annual type of business that you pick up in that time period. So, from a November or October number, I think we're well ahead. What we need to see is what we pick up between now and the end of February, which then would correlate to what we went into last season with. And until we get those done, I really don't know what that number's gonna be.

Right. Historically you've been running kind of more and more people to try and process these transactions. Are you still pretty busy on that fronts?

There are some very, very large transactions, as you're probably aware, out there that include a substantial amount of properties. Now, you're not going to find Tetra in all likelihood going out and plopping down $200 million in cash to buy a bunch of properties by themselves. So, that isn't a likely scenario. But you might find Tetra involved in buying a portion of the properties in these large packages to try to assist the seller in optimizing the value of their properties by selling off the junk, the old stuff, to us, and then selling the better properties to other place. Players. So, because of that we're in a large amount of data rooms as we speak. So, the answer's yes.

Okay. Well, nice quarter.

Thank you. We're very happy to have gone through a quarter like this in an environment like this, especially with our fluids business and have a record quarter.

Your next question comes from Tracy Marhbanks from First Analysis.

Hi. This is actually Ray Kramer filling in for Tracy. First, congratulation on a strong quarter, guys.

Thank you very much.

Looking at well abandonment, even if I put back in the $1.8 million from Ameritech, your margins sequentially still look a little thinner with revenue up. Can you comment on that or tell me kind of what was involved in that dynamic?

What you have in well abandonment is -- pardon me -- outside the Ameritech portion of that are two component parts, a well abandonment and a decommissioning part. And those businesses by definition are like an insurance business, life insurance business in particular, whereby the more you do, the better the average margins are going to be. These jobs fluctuate from losses to very high gains. They are risk-type businesses that if you are a company out doing one or two of these, you're gonna have a wonderful quarter or you're gonna have a disaster because they just inherently have a lot of risk to doing them.

We have picked up enough business now, especially first of all in well abandonment whereby we can afford to have a disaster on a few wells because we do so darn many of them that the average, just like life insurance, you get a very nice rate of return. The abandonment side of the business, we are now so large that that also occurs. However, that abandonment profitability within any given quarter can swing fairly significantly just with one job. And as happened in the third quarter, we happened to have one job that was not very profitable; where as in the second quarter we didn't have any problems in any of those jobs.

That's why I made a statement a minute ago that the return that Jim was asking us about was very reasonable on an annualized basis. On a quarterly basis you ought not see us have huge losses in any quarter because we ends up doing enough of these that we ought to mitigate that effect. But until we get to a level of, say, 250, 300 million on an annual basis, you're still going to have some fluctuations by quarter in March gins. And as it so happened, one of the of these jobs in the third quarter bit us a little bit.

Is that just a third quarter event, or is that -- would that be ongoing, that one particular job?

No, that job's done. It was done in, I think, August.

Okay. In terms of weather, you commented in the press release that it was a little worse, I think, than you had expected. Can you quantify that or give me a day's loss or any sort of number like that.

Yeah. Actually, we were running right on budget right up to the ends of September. I don't know if you have other companies that have gulf co-operations, but -- Gulf of Mexico operations, but we lost the last three days of September to a storm that was out there that wasn't even a named storm. It just was so high in terms of wave action that we were unable to work. So, we lost the last 10% of the month. And actually, because we had a number of spreads out working, it cost us, I don't know, a penny, penny and a half of earnings. Not a big number. I mean, this is not like most of your oil field peer group that talked about certain storms really hurt their quarter. We'd already budgeted into our quarter and in our budget so many storm days. And that's about what we experienced until that last three days. I hate using weather as excuse on an annual basis. On a quarterly basis you do get a little impact from that. And point in fact what you'll probably get is most of those last three days will now fall into October less mob and demob costs. And we maybe have a little better weather in October than we thought we were gonna have.

Okay. And then finally, with all the property swapping going on in the Gulf, I know you talked about that previously before, can you just kind of maybe summarize the current situation and take us through how you think that's gonna impact you and how you're gonna play into that?

Well, first of all, the two companies that have been the most active to date in acquiring these properties are Apache and Forest, as you've seen over the last six months. We have done work in abandonment for both of those companies. So, one would presume if they have acquired some crap with the good stuff, that we would be in a position to do some of that work.

I think more importantly there are very large packages from a number of other majors that are currently on the streets, so to speak. And once they have turned to the buyer, a couple of things are gonna happen. Number 1, the buyer is going going to evaluate fairly quickly whether they have additional potential to do drilling. As in the case of Apache, they announced they were doubling the amount of rigs they had in the gulf after they spent six to nine months evaluating the properties.

So, we would anticipate that for our fluids business, if most of these properties are sold by the end of the year, that by the middle of next year you're gonna have an uptick in activity only because with a quarter to a third of the shelf being available for sale, until that's sold, the seller isn't likely to drill it. And clearly the buyer can't drill it until it owns it. So, I think you're going to see an activity build-up for fluids mid-year next year.

The same impact will be for our abandonment. Once they've determined that they're gonna shoot some of these in the head, we would fully expect to get packages from the buyers to go out and abandon in 2004 and beyond, depending on when the transaction takes place. So, I think we have a double-edged sword both of which are positive for us relative to these sales and hoping that they transpire as advertised.

All right. Thanks a lot, guys. And congratulations again.

Thank you very much.

Your next question comes from Louis Krebbs from Hyperion group.

Well, Geoff congratulations, and most of all because you paid off that debt over the last couple of years. Geoff, since you have gotten debt-free, can you talk strategy wise about where we go from here? Are we going to add to the divisions you have, or are we gonna look for another leg on the stool?

Probably all of the above, Louis. I think it's safe to say in general that companies today that are under at least 500 million and maybe under $750 million have a disproportionate amount of costs associated with them under the new environment, whether it's Sarbanes-Oxley, or just the way public companies have to perform.

So, it would be foolish of us not to look toward growth. We have a lot of growth potential in our existing businesses. We have a lot of opportunities outside of our existing businesses. Because of our balance sheet we think that we're in a position that we can take advantage of both, and we will continue to view that growth as something that makes sense for us to do. Obviously if you look long-term and you look as a shareholder, you probably don't want to see us sitting with $50 or a $100 million of cash on our balance sheet because you're not making much of a return on it. Long-term my ideal position for the company would be 25 or 30% debt so that we leverage the equity holder in terms of some of these businesses that we're in and some of the businesses that we're looking at. So, I guess succinctly put, we're looking at a gross scenario where we don't feel compelled to have to run out and do it tomorrow because we've got a lot of growth in our existing businesses. But to get to the kind of levels that I just mentioned, it's probable that we will be adding things over time.

And I might point out that as the gulf has remained weak over the last six to nine months and weaker than a lot of people projected, including ourselves a year ago, if this were to continue to be the case and people continued to underperform by having assets in the gulf, given our international exposure and what we could do with some of these assets, it might not be all bad for us if that gulf area remained weak for another six months because it might give us opportunities to look for other things to acquire.

Okay. No stock buyback on the horizon, then, since we're going to go out and grow the company's assets?

Oh, we have a lot of alternatives, Louis. I mean, when you have extra cash, you have alternatives of buybacks, you have alternatives of dividends. I know it's facetious to talk at this point in time there, but we're throwing this year and probably next year at least a dollar a share-plus of surplus cash. So, you know, you could sit out there today and have a 5% dividends-yielding non-debt company in the oil service business. I would think that would be kinds of a unique grouping with our peer group. I don't think anybody's opposed, but I don't know that that's the best use of our capital. I'm not going to preclude anything. If this stock falls in any form that we think is ridiculous given our future, you've seen us in the past buy it back. And I certainly would have no hesitation to do so if I thought it was the best interest of we, the shareholders.

Well, congratulations again. And I'll let somebody else get on. Thanks, Geoff.

Your next question comes from Will Soley from Sadody and Company.

Good morning, guys.

Good morning, Will.

First question on your G&A. It looks like it came down quite a bit from the last quarter. What was the reason for that and whata's your kind of sense going forward for G&A?

There's a number of things ha will lend to that. I think last quarter we told you that one of the major factors relates to the bonuses that we pay throughout the company. In the second quarter we had a quarter that required us to escalate those accruals to associate the bonus with the level of profitability that we had incurred. The third quarter was more or less on budget. Therefore, when you look at the total costs that we had to incur in the third quarter versus the second for that one item in particular, they were substantially less. So, one of the items was just your accruals. There are a number of other items in there, but I would think owe a go forward basis that if you took the average of the first three quarters and assumed that that was more or less what you'd be looking at on a go forward basis, that's probably accurate.

Okay. And just to clarify in terms of the fluids division, if through the end of the year the Gulf of Mexico kind of stays flat with where it is today, is it fair to assume that our business will kind of perform much like the third quarter, or is there anything out there internationally that might help it to improve a little more?

There's some international business that might help us. The other thing that you always have to take into consideration is that while the gulf is flat, it depends on what our customers are doing. It's not inconceivable we could be somewhat better than we were in the third quarter. Right now I would just say what I said before. And that is that we don't see a major improvement through the end of the year. I would expect it to be flat to somewhat up depending on what our customers end up doing for the quarter.

Okay. And then a similar question on testing. Obviously you had the items that have been sold and discontinued that have come out of it. Again for the fourth quarter is what we saw in the third quarter kind of a good indication in terms of flat activity where we would be, or is the pickup in gas drilling domestically likely to help you.

I indicated that in the relatively past we've seen a fairly significant pickup. I would be surprised if the third quarter run rate wasn't exceeded in the fourth quarter given the market today and the procession of profits that we saw throughout the seconds and third quarters. So, I would anticipate that would be an area that would be up fairly significantly quarter to quarter.

Great. Okay. Thank you very much.

Next question comes from Marshall Atkins of Raymond James.

Hey, guys. A couple of quick ones here. First of all, on that last question, were you talk about the abandonment division or the testing division?

Testing. I thought that was the question.

Yeah. I just --

Answering testing.

Right. I missed that part. That was going to be one of my questions. It seems like we are seeing a bump in the rig count here, particularly gas kind of as we enter the year in. And I was wondering if you guys were seeing it in your field operations.

Absolutely. We are seeing activity build-up, we're seeing some of our specific customer problems where we had a couple of customers that for various reasons that didn't relate to the overall market that were not very active in second quarter, began to pick up at the end of the third quarter. In addition to that, we have secured some contracts that will bin begin to impact us in the fourth quarter. So, when you add all that up, we expect to see a lot better profitability out of that division on a go forward basis.

Is your sense that's more specific to your set of customers, or is this more of an industry-type pickup?

The industry has picked up unquestionably. Remember when I talk about industry, I'm talking about the testing business.

Right, of course.

These a lag in between drilling because you gotta drill them first before you test them. So, you do get somewhat of a lag. But that lag is now gone. You've had a number of months where you're had pickups. So, the industry itself is better for testing, particularly in the United States because of the gas drilling. And then secondly, specific to us a couple of our customers had been not active in the second quarter and they've now become quite active, especially in south Texas. And then thirdly, because of new contracts, that's specific to us, as well. So, there's really three drivers for us, but there's a driver for everybody.

Perfect. And just to retouch, SG&A, I want to make sure I heard you correctly. Take the first three quarters, average that out, and that's probably a good run rate for next quarter?

Yeah. I think that's the best guesstimate I could give you at this point. Again, remember this company does have accruals, especially relating to bonuses and to some extent they depend on how your profitability is at year-end. Last year, as a for instance, we did not hit our budget and get very close. And the executive officers received know bonuses. So, if you'd accrued anything, they would roll back in. I'm hoping hopeful that some of us will receive bonuses this year because I think we're doing quite well. But that is an issue that is fairly significant in terms of dollar amount when you get toward the end of the year.

I would imagine you are hopeful on that. Last question. The DD&A did bounce up somewhat. I assume that's some property stuff going on there. Can you help me with where we are to model that going forward.

One thing that's extraordinary there, Marshall, the million, 7, 8 write-off falls into DD&A because it's a noncash charge. So, you do have an additional million seven or eight in the quarter that I would take out on a go forward basis.

Kind of a run rate more like we saw last quarter or -- I'm sorry -- two quarters ago?

The answer would be yes except for the fact that we have brought on a number of properties that we have worked on that we acquired early this year. And we've done abandonment on some, but some of the rest of them we've brought on new production. And because of that you're going to see a higher DD&A, but also hopefully we're going to have a little more income out of those properties, as well. So, to probably quantify it, I'd take out the million 7, 8, and maybe I'd escalate it fourth quarter versus third, oh, maybe 15% something like that.

Okay. That's very helpful, guys. Good job.

Your next question comes from Blake Hutchison from Howard Will.

Morning, guys. Just wanted to delve a little deeper into some you mentioned in your comments with regard to the new regulations being introduced by MMS here. Is this something -- again, maybe if you give more of an overview of it? And then, is this something that like a lot of what the MMS does is still in just preliminary stages, or is it something in stone and is there a date that they're actually going to start enforcing the regulations that you referred to?

Our understanding, and I'm looking at the document, is that the effective date of this was August 15th. The notice to leasees and all indicates that there's a three-step process here whereby by June of 2004 you're going to have to have your assessment done. By June of 2005 you're going to have to have some other design programs ready to go on these platforms. And by 2006 June you're either going to have to have these platforms in a position to go forward and produce or they may shut you down. And this would include in some cases having to raise platforms because they don't meet hundred-year storm requirements. This would be weight-bearing problems. This would be where they've deteriorated over the years, if they don't have capabilities of doing certain things. So, what this really is is an escalating program over a two and a half-year time period that they've put in place. And I believe it is a rule now effective. And therefore, most companies can't wait to the end to do this. Also, it's very important if you have production beyond June of 2006 to know whether these platforms are gonna have to have substantial renovations. I mean, it's very exhaustively expensive to pull a platform off a jacket and put cans in to elevate it another 10 feet. You're not going to do that for a lot of these producing properties.

I go back to a statement we made I think a couple of conference calls ago, and that is that by our estimate roughly 47% of the 4200 platforms in the Gulf of Mexico are marginally economic at best. They've been pushed forward over the last 30 years and burped where they produce a small amount of production, and if you have an operating cost loss of two or three thousand a month, it's probably not relevant to a two or three million dollar abandonment job. And companies have found that they really don't want to do that on a go forward basis for a number of other reasons that we've discussed. But clearly they're going to be up against it when they get to 2006. If there is anything that they need to do to that platform, it's going to make it totally uneconomic.

Sure. So, your feedback that you get from the MMS is to some extent giving teeth to previous regulations that weren't exactly pushing people to take care of their abandonment liabilities?

You could characterize it that way. I think the way I'd characterize it is that the MMS is attempting to monitor and take care of the issues that they have found over the last couple of hurricane seasons. And that is with minimal hurricanes going through the gulf there has been substantial damage to a lot of these older platforms. And they're extremely concerned what would happen if a category 5 rolled into the Gulf of Mexico and what it would do to all of these platforms and prospective spills and everything else associated with it. So, they are continuing a program to, you if will, force companies to make sure that their platforms meet certain specifications. And this is just an ongoing process. I'm sure there will be additional rules on a go forward basis. All that this really does for us is continue to tell you and to tell us that the escalation of taking these platforms out is continuing, and it's being driven by economics. It is not an environmental business. It is a flat economic certainty that if you have to go out and paint one of these platforms for three quarters of a million dollars just to produce at a loss, you're not going to go do that to protect the steel in these platforms. So, the net effect of all of this is it's just another nail in the coffin of the industry as it relates to these sunset properties and another reason why we think this is a heck of a growth business.

Sure. And my last question in the same vein, I know before the official implementation of FAS 143 a lot of your best customers were coming to you for advice on the issue or some feedback from you on the issue of how to approach it. Is there any -- any of the same yet with regard to these regulations?

It's beginning to float through the companies. They're just trying to understand it. Again, this is a-month-old, essentially. Well, not a-month-old. Two months old. And they're looking at what they have and what their ages are. I think what you're going to find, you are finding, these sales that are out there are throwing a whole bunch of these marginal properties in it and they're trying to get rid of that liability. That's the first thing they're trying to do. If they can sell it, then they don't have to worry about it. If they can't sell it, they're going to have to worry about it. Now, obviously the buyers are going to have to worry about it, and I can guarantee you that the buyers that are looking at these properties are taking these new rules into consideration.

Great. Thanks a lot. That's all I have.

At this time there are no further questions.

Well, we thank all of you for participating, and we look forward to the fourth quarter. Thank you.

This concludes today's conference call. You may now disconnects.