Tetra Technologies Inc (TTI) 2004 Q1 法說會逐字稿

Good morning and welcome to the TETRA Technologies first-quarter 2004 earnings conference call. With me, as usual, is Joe Abell, our CFO. As is our policy, both Joe and I will be making a short presentation, which will then be followed by your questions.

I must remind you that this conference call may contain statements that are or may be deemed to be forward-looking statements . These statements are based on certain assumptions and analyses made by TETRA based on a number of factors. The statements are subject to a number of risks and uncertainties, many of which are beyond the control of the Company. You are cautioned that any such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward-looking statements.

Now that my chief counsel is comfortable, I'm going to turn this over to Joe to give you a brief financial review and then I'll be back to discuss some other factors.

TETRA's revenues in the first quarter of 2004 were up 8.5 percent to $70 million, compared to the first quarter of 2003. Gross profit was up 10.4 percent to 14.8 million, the highest first-quarter level since the record first quarter in 2001. Gross profit as a percentage of revenue was 21.2 percent for the first quarter of '04, compared to 20.9 percent in the prior year.

General and administrative expense, however, was up 19.3 percent to $11.9 million, mainly due to increased salary, incentive and employee benefit costs, as we continued to expand our infrastructure in anticipation of market growth opportunities, as well as increased expenses for Sarbanes-Oxley compliance and insurance costs.

In addition, Other Income and Expense decreased by $0.6 million due primarily to gains on the sale of assets in the first quarter of last year.

On the other hand, interest expense -- net interest expense was $0.3 million lower in the first quarter of 2004 than the comparable period last year, due to the elimination of debt and the presence of a modest amount of interest income from a significant cash balance. Therefore, income before discontinued operations in the first quarter of 2004 was $1.9 million, or 8 cents a share fully diluted, compared to income before discontinued operations and the cumulative effect of a change in accounting principle in the first quarter of 2003 of $2.5 million, or 11 cents a share. Income decreased 22.8 percent year-over-year.

Revenues in the fFluids division for the quarter were up 20.2 percent, compared to the prior year, and profit before tax was $3.9 million, up 15.6 percent. Despite weakness in the Gulf of Mexico and certain international markets, TETRA has been awarded several new contracts that have helped offset the weak market conditions in the Gulf of Mexico.

On the other hand, revenues in the well abandonment and decomissioning division were down 10.2 percent and profit before tax was $0.4 million, down 82 percent compared to the first quarter of '03. Though the future continues to look promising for the abandonment and decommissioning market, relatively high oil and gas prices are extending the life of mature fields, equating to less near-term decommissioning work. In addition, mature properties are not changing hands as quickly as expected, once again largely as a result of relatively high commodity prices.

Revenues in the Testing and Services division were up 19 percent and profit before tax was $2.2 million, an increase of 28.8 percent versus the first quarter of '03. This increase is due primarily to increased onshore drilling activity. We added $20.3 million of cash to the balance sheet since the beginning of the year. Debt remains essentially zero.

Geoff?

Before I address the remainder of 2004, I'd like to recap the first quarter. We all would have liked to have seen more earnings, but the reported earnings level reflects a number of factors that unfolded for us during the first quarter. Most of these factors, interestingly enough, have long-term positive implications for TETRA. Unfortunately, to enjoy the long-term positives required some short-term costs, and I'll list a number of those here.

In Fluids, we began the renovation and expansion of facilities that will accommodate the new business that we were awarded in the Gulf of Mexico.

In Testing and Services, we upgraded our equipment to attempt to differentiate ourselves from our competition and to accommodate a growing market. Some of these costs were expensed and not capitalized. Also, because of the buildup of activity early on during the quarter, we were somewhat inefficient with our labor costs in our testing operation because of the growth that we were seeing and the lack of crews that we had at the time.

In Well Abandonment & Decommissioning, we began to experience an improving market earlier than we had expected in our inland water business. That improvement began in April. This meant that we had to rehire crews and do any incremental training and get them ready to perform their services. This process cost us monies, particularly in March.

Similarly, in offshore well-abandonment, we are currently personnel-constrained. We've called back crews, starting in early March, and are continuing to attempt to expand crews as we speak. This buildup cost us monies again in March.

Also, in Maritech, we initiated a number of reworks on properties in the first quarter to increase reserves and production. As was seen in our year-end data, we have historically been very successful in this endeavor. Unfortunately, many times it costs you short-term earnings, especially under successful efforts accounting, to enhance longer-term production. We experienced some of these costs in the first quarter.

Now, individually, none of these aforementioned costs would be deemed material. However, when aggregated, they materially did affect the seasonally weak first quarter. With the benefit of hindsight, we would spend all of these monies again, as they enhance the future profitability of TETRA.

Now, to the future. We believe that the March/April time period has been an inflection point for TETRA's earnings. A number of factors leads us to that conclusion.

In Fluids, we have entered into a number of new Gulf of Mexico contracts, as Joe indicated. These contracts should begin to enhance profitability in the second quarter and probably build throughout the year. We've also begun to raise prices for certain products and services in our Fluids division.

In Testing and Services, activity is continuing to build. We've instituted price hikes in certain areas, and we should be more efficient in utilizing our labor force as we go forward.

In Well Abandonment & Decommissioning, increased inland water crew costs that we mentioned earlier should be more than offset with the associated revenues in the second quarter. Similarly, increased offshore well-abandonment crew costs should be more than offset with the associated revenues in the second quarter.

We also believe that Maritech should be awarded a number of properties within the next two weeks. These properties will help us during the year.

Many properties in the Gulf have been held up and off the market, as we have discussed previously and as Joe just mentioned -- the size of the deals, the need for the infrastructure, the higher commodity prices to name a few reasons. However, we believe this to be of relatively short term as a phenomenon. By that, we are really looking out into 2005 and trying to decide what's going to happen. Many of you have asked whether this would bode poorly for 2005, given what we saw in 2004, and will this create a problem in 2005? We believe that there may be a significant problem in 2005, but the problem is not a lack of work; it is a problem just the opposite; by sliding some of 2004's decommissioning into an already expanded 2005, the question is whether our industry can accommodate the workload.

TETRA, for one, intends to commit to both personnel and equipment increases in 2004 so that we can efficiently handle our anticipated customer needs in 2005. So, we're going to put our money where our mouth is; at least we're going to attempt to do so to show you that we believe that that market is going to grow dramatically.

The lack of activity in 2004, then, centers on the decommissioning. With less decommissioning, many companies are spending their Well Abandonment & Decommissioning budgets on well abandonment. Therefore, we expect less decommissioning but more well-abandonment than originally budgeted in 2004.

As most of you know, we didn't originally set up our Exploitation and Production subsidiary, Maritech, to be a significant profit center. Its original and current primary function was, and is, to baseload our Well Abandonment & Decommissioning division with work. However, the Maritech personnel have found ways to enhance the values of properties they acquire, as reflected in our most recent 10-k. The near-term effect of enhancing the property values acquired by Maritech is to extend their lives and increase their value over time. This has meant that substantial Maritech abandonment work has been pushed into later years but the overall profit to TETRA, both the Maritech and the well abandonment when you combined (sic), has been increased. This means a number of the Maritech well abandonment and decomissioning projects will be postponed until positive cash flow for production is eliminated. However, that should be a very significant positive to the rate of return on all of these projects.

Four and a third years ago, when this management team took over control of TETRA, we vowed to get the Company into a position of financial flexibility. In the seasonally strong second and third quarters of last year, you saw that, where we generated surplus funds, we reflected the strong preference for cash flow, and in turn began to yield the financial flexibility that this company should have had.

The question is, could the seasonally slow first quarter that we just experienced, with all of the items mentioned above, still reflect this propensity toward cash generation? The answer is obviously yes, given what Joe just reflected to you. We added over $20 million of cash to this company in a very slow quarter.

What are we going to do with this growing hoard of cash? We can continue to accumulate it, obviously. We can pay dividends, we can buy back stock or we can reinvest in our existing markets or in new niche oil and gas service markets. At least for the present, we anticipate spending substantial monies growing our existing markets and investing in new markets. We think there is significant growth potential for TETRA, both within our existing business lines and in some new areas. However, one of our best uses of cash may be in buying back our own stock. We are currently doing so.

With that, I would like to open this up to any questions.

Monica?

(OPERATOR INSTRUCTIONS). Jim Rollyson of Raymond James.

Good morning, guys. Geoff, you talked about, first off, the well-abandonment in the first quarter, some of the property transitions or selling from majors to other guys being held back because of high commodity prices. I guess you indicated your thought is that things are going to start, you know, get pushed off until next year. What is your outlook if commodity prices -- what if gas stays at the $5, $6 range and oil stays in the mid-$30 range? Does that mean these guys continue to push off property sales or do you guys have some insight that leads you to believe next year is the year?

Well, two things are happening. First of all, there is an inflection point in there whereby it doesn't matter what gas prices or oil prices are, you're just not producing enough. With the decline rate that you have on some of these older properties, they drop off to where they are not commercial. So I don't think you can assume that you could hold a property for three or four years with very nominal profits, especially if you're looking at any kind of problems that you might have under the MMS regs as you go forward.

Probably just as important as that is that you're looking at companies today that had large packages of properties that they have either pulled or haven't sold that are now breaking these properties up, meaning they are making smaller packages out of it. I think what you're going to see and we are seeing right now is a company that might have had everything they had in the Gulf in one package now breaking it into the smaller, let's say more chewable parts. I would expect to see a lot of those kinds of deals be done in the next six months.

The only reason, by the way, I'm saying that these don't get done this year, I'm speaking from our perspective this year. We are going to get deals done. As I mentioned, we will have another one done we think within the next two weeks. It's just a question of how soon are you going to get them done? Can you go do the well-abandonment on the platforms and still fall within the time period to do the decommissioning, which is the second and third quarters? That's a seasonal time. I think it's logical to say that we're probably not going to do as much as we budgeted for, which we've already told everybody over the last month, that part of the business would be weaker.

So basically, for the year, you are going to have probably a better well-abandonment market but a worse decommissioning market. Does that mean higher revenues and lower margins, or lower revenues and higher margins?

Probably about the same in terms of the two businesses have similar-type margins but what will happen is the revenues in the aggregate will probably go down because you're not getting the pass-through revenues of a heavy lift side. Therefore, you're going to be at the low end of the range; we've already said that, in terms of earnings. But your revenues will go down out of that business as well. But the margins are about comparable between the two businesses.

So still averaging for the year somewhere in the low to mid 20 percent gross margin kind of number?

I would hope to we could do at least that.

Sure. Revenue-wise, I think your old guidance was 185 to 230, so it just sounds like you're expecting something below the 185?

Possibly, yes. I wouldn't go way down below it. Again, we're trying to caution you on something that could change in the next 30 days, if we were to get a couple of these transactions done. But I think, rationally, I would rather leave it at the conservative part of this and move on, as we see what we've got.

Right. Then on the Fluids side, obviously you've got some new business and you mentioned kind of ramping up capacity to meet the new business. I guess, with a soft market, the first question that would come to mind is, did you buy the business? But I guess, since you are raising prices, the answer to that is no. What are you kind of expecting from margins there, once you get your new capacity up and running and start working on the new contracts?

I would bet that the margins that we experience in the second quarter would probably move up as we go through the year. What those margins in the second quarter versus the first are is going to be real difficult, because we didn't have the large Gulf of Mexico business that we currently have in the first quarter. Therefore, you had a lot of international exposure that you won't have as a proportion in the second, third and fourth quarters. So, you may even have lower margins in the second quarter than the first, but those should grow then in the third and fourth as these contracts fully are reflected in the earnings statement.

Okay. Then just kind of -- SG&A, I think you guys had guidance before; it came in a little bit lower than the run-rate there at just under 12 million. What kind of number are you looking for for the year?

One of the major reasons it came in under budget is the fact that we have bonuses in this company that reflect being on-budget. Since the first quarter wasn't-on budget, the bonuses aren't on-budget. So, if we get back to where we are on-budget on earnings, then you'll see an increase in the SG&A because you will see a bonus component in there. If we don't get back to it, then you'll continue to see it at a run-rate similar to what it's been at.

So, low case is 12 million-ish, high case is 13.5, 14 million?

Yes, 14 is probably high, something in the 13 million-plus, yes.

Then the same thing on DD&A I guess part of that being pushed off with Maritech but you came in a bit below I think what your run-rate guidance was there. What are you looking for, going forward?

Two things impacted that, both were Ameritech. One, we were expecting to acquire at least our first larger package early in the year; it now looks like it's going to be in April/May that we get that, so you didn't have some of the DD&A we had anticipated. Secondly, we took some of these properties down to do some rework, so you weren't producing for part of that time either. Therefore, your DD&A was lower.

I would suggest that, in the aggregate, you are probably a little high with the generation in well-abandonment that we were looking at in DD&A. You probably want to bring that down a little bit.

Okay, so something probably closer to 8.5, 9 million, going forward, depending on the timing of the properties?

Yes, that's close. I would have to look at it, Jim, a little closer than that to give you an exact number but yes, maybe 9, 9.5.

Neal Mcatee of Morgan Keegan.

Good morning, guys. Listen, I was just following up on these Fluids margins, you know, at that revenue level, just looking back historically, I would've thought maybe the margins would have been in the upper 20 percent instead of the lower 20 percent. Is that just demonstrating what you're saying, that you were building, ramping up costs and that's sort of what cost you on the margin?

Well, that's one of the problems but obviously, with the very weak Gulf of Mexico, you haved a lot of competition out there for whatever business existed at the time. You need to grow the mass of business that you're doing to be able to spread some costs that are in the gross margins. That's where I'm saying to you that as this business picks up, you're going to begin to see some improvement from wherever the second-quarter level is.

In the first quarter, you had relatively good margins in certain areas but in the Gulf of Mexico, because it was so weak, that has been a poor area for margins for the last 18 months.

Right. Well, what about -- year-over-year was pretty decent growth in the Fluids business. Was that primarily international?

You had international; you had calcium chloride that we were selling maybe to third parties, in some cases, our competitors. If we didn't have the business, they did, and if they needed to buy the product, it's conceivable they were buying some of that from us. So being an integrated supplier has a lot of benefits, and it's the reason that we are profitable in that business line continuously. But to really get the margin improvement and the profit improvement, we have to have the "retail business", and that's what we've now acquired.

Okay, good. What about on the offshore abandonment, you see a short people (sic). Can you talk in terms of how many crews maybe you had working in February or whatever the low point was, and how many crews you've got now, just to give us a feel of really how much that business has picked up in, say, the last 60 days?

I don't know if I want to give you the exact numbers for a number of reasons, mostly competitive, but let me give you an idea. Last year, we had a couple of crews working in January and we got up to 12, to 14, to 15 crews during the high time. I would say that this year is comparable.

Okay, and they are working on the abandonment, not necessarily decommissioning, right?

They are working abandonment; that's the point that I'd made earlier. Our abandonment work is very strong, in some cases because companies are wanting to use their budgets, so they are abandoning properties but because they may want for deeper drilling to utilize the infrastructure, including the platform, they're leaving the platform there, so the decommissioning isn't getting done but the abandonment is. What that's likely to do is to push out abandonment work into maybe the fourth quarter, giving us a lot more revenues in abandonment than we're used to getting in the fourth quarter. Without the decommissioning at the same levels as we've had in our budget, you're going to see less second and third-quarter revenues from that but more revenues from well-abandonment in the fourth quarter, so it will have a tendency to flatten those quarters out somewhat.

Then a question on Testing -- you say you were trying to differentiate yourselves with equipment, which I assume would show up in better pricing. Is that successful, do you think, or does it look like it's going to be?

I would be very surprised if the price hikes that we've initiated in certain areas don't hold.

All right. Thanks, guys. Good luck.

Ray Kramer of First Analysis.

Hi, guys, a question on those costs you outlined at the beginning of the call, Geoff, in the three sections. If we sort of put them together in aggregate, what's sort of the swing factor in profitability there going Q1 to Q2, or are those costs even still ongoing in Q2?

You've got some of those costs ongoing. The difference is that you've got revenues offsetting them, in particular in inland water and in offshore well-abandonment, where you were eating costs of people as you were building up without the associated revenues. You are going to have the associated revenues in the second quarter, so that's a very significant swing in those two areas. So, it's not just the costs; you're not going to just cover costs. Hopefully, you are going to make a profit in some of these areas.

Can you quantify the impact at all in terms of the first quarter?

I guess what you're trying to get to is what does it look like in the second quarter? We'd be very unhappy if the second quarter wasn't multiples of the first quarter, if that's your question. I don't want to be more specific than that.

Okay. Just going forward, then, in Fluids, how do you see profitability unfold in both -- obviously from -- in terms of getting the higher price, as well as the marketshare? Is that going to sort of be a step function? Is it going to be more continuous? Have you seen the price increases -- are they going through already, or are they going to sort of step in, going forward?

First of all, we have contracts in that business and in some cases, we can't pass those increases along until the contracts expire; in some cases, they can go on immediately. So, I would expect that you will see price hikes through the next twelve months, meaning more and more impact as you go further and further along.

Secondly, it would surprise me if we didn't see improvement in margins under these new contracts as we go throughout the year. In other words, as we build the activity level, I would expect that the margins, as we become more efficient then, are also going to be improved. So, I think what you'll end up seeing is, from whatever level you have in the first going to the second quarter, you ought to see an improvement from that second quarter as you go to the third and go to the fourth, I would expect.

You don't think that the price increases will have any impact on your gain of marketshare?

The contracts that we have signed are in place. I doubt that anything would change those. Obviously, since we just got those, whatever we price them at, we are unable to change those prices materially, immediately. But then again, you don't know where we price those -- (LAUGHTER) -- so you don't know whether they are better or worse than what we had before.

Lewis Kreps of Aperion Group.

Good morning, Geoff and Joe. Geoff, Well Abandonment & Decommissioning, you've ramped up overhead in Maritech, and that's because you're seeing more packages. Can you kind of quantify that for us?

One of the things that we had expected to happen over the last nine months was that some of these larger packages would change hands. Once they changed hands, there were properties in those packages -- because a lot of the junk got thrown in with the good stuff -- that were going to have to come out soon. So we had anticipated seeing a pickup of business because of the package exchange. We weren't going to look at those, though, in their data rooms in any great detail because it would be foolish for us to go in if there's 150 tracks out there, a lot of which were very positive. We're not going to buy something for $500 million positive, obviously, so we were expecting to see these broken-up pieces as early as November/December.

Once we started to see the companies breaking these packages up before they sold them, then we had to get into the data room to start looking at these individual properties. That's what's going on right now and has actually been going on for the last three or four months. You're seeing smaller packages, which are the types we like to look at. Unfortunately, we are having to select which customers we want to go to, given their history with us and given what we expect in terms of their ability to sell or not sell. We're having to be quite selective as to how we do that.

Geoff, how much do you think the Well Abandonment & Decommissioning market is growing, at what rate, or can you put a number to that?

We've publicly said that we think our market, as we defined it, this Gulf Coast market, in the aggregate was $300 million in 2002 and was about 430 million in 2003. We've told you we had difficulty guessing at 2004 because of just the things we're talking about and that we thought that market in 2005 should be 600 million-plus. We haven't changed that at all.

Are you seeing more competition today than you were a year ago?

Well, you have one integrated company operating against us that is a very good competitor, which is Superior, that has now its own entity to be able to do to some degree what we do with Maritech. They were not really functioning a year ago.

Outside of that, I'm unaware of any other companies that are offering a full package. Even in Superior's case, they are offering a slightly different package than we are.

Okay. Moving to the Fluids business, marketshare percentage-wise, do you care to put a number on that too? From where you were to where you're going?

We have said, I believe, in written data, that we were some 22, 3, 4, 5, 6 percent of the domestic market. I'm not sure what that number exactly was, but something like that -- and more than that internationally. I've also stated that once you get up near 35, 40 percent, you have a tendency to be eliminated from some bidding on certain properties. I think we are probably up towards the higher end of that range right now.

Okay. Price increases, both in Fluids and Testing, are these single digit or double-digit increases? I know you don't want to say exactly for competition-wise, but --.

You answered my question (LAUGHTER)! I don't but I will say this -- that some of the discounting that had been going on, that isn't going on. Then when you compound it with a price hike, these are significant. But no, I don't want to give you exact numbers for competitive reasons, obviously.

Okay. Capital expenditures this quarter and your outlook for '04 total?

We are getting you that right now for the quarter. The year is going to be pushed towards the back because we have got a lot of things in Well Abandonment & Decommissioning but also in Testing, where we are building a bunch of units to go into the Eastern Hemisphere. Those didn't really hit in the first quarter to any great degree. They will begin to hit in the second and third quarters, but they will hedge up.

Lewis, the CapEx for the first quarter was about $4.6 million, so on a run-rate, we're lower than what we had mentioned in our guidance. We probably would ramp that up a bit over the year, but I can't project through year-end for you.

Okay, last question -- Geoff, in your -- (multiple speakers).

I just want to add something to that. Remember that our CapEx budget does not include any kind of acquisitions, nor does it include large equipment acquisitions, and both of those kinds of things we are looking at. So when Joe says that we may be a little less, he is correct on our normal I guess I'll call it budget, but there's some other things that we are looking at and would hope to do and expect to do over the next year.

Okay, last question -- Geoff, during your prepared comments, you talked about what all you can do with the cash that you already have and the cash that you are going to generate, but it sounded to me from your tone that you were leaning more towards internal growth or -- other than looking for another fourth leg to the stool here.

That's an incorrect assumption on your part, and if I said that, I did not mean to infer it. We are expecting to utilize a substantial amount of cash internally because we've got growth potential in all three of our markets, but we are actively looking at a fourth or fifth leg because we believe that our existing business probably can't grow much beyond 550 to $600 million. If we intend to be the size we want to be, we are going to have to pick up a couple of other niche markets.

Will Foley of Sidoti & Company.

Good morning, guys. Let me just first of all clarify. Did you say that your domestic Fluids marketshare has gone from 26, 27 percent to 35, 40 percent? Did I hear that correctly?

What I said was that the percentage that we had indicated was the low 20s to a little above 25 percent was where we had been at and that the question was where had it gone? What I'm suggesting to you is it's gone up materially from that level.

The price hikes in your Fluids -- I guess I'm a little curious. Given the weakness in the Gulf, how are you able to push through the price increases, I guess given that you are primarily in the Gulf market?

No matter how weak markets are, at some point in time, you reach a chokepoint. Given our integrated nature, we feel more confident that we can handle lower prices than maybe our competitors. I would guess that, in general, everybody has reached a chokepoint. If you look at increases in prices that you have seen across the board for most services in the oil and gas area, you have not seen them in completion fluids; in fact, you had them at a low ebb in January. I think everybody has decided that that is not a plausible place to be in.

Also remember that this is a derived price and should you see bromine prices going up, that forces the competitors to either buy from us or buy from companies that have cost escalations going into effect. So, there is a driver there for part of this that is external to the oil and gas area. There's also a driver internally to the oil and gas area that you don't like to see red ink when you see a market that's improving. That's what some of these companies were showing.

Okay. Previously, you had given guidance for Fluids of 120 to 130 million. With these new contracts in place, could you venture a guess on what that range has kind of shifted to? Is it maybe plus 5, plus 10 million?

You know, honestly, we haven't sat down and done that. That's a good guess. What we've told you is that we think we may be outside the range of profitability above it that we gave you, but we haven't really discussed the revenue part of it. But your guess is probably, over a magnitude, right.

Just on well abandonment, you have cited a number of factors I guess as causing '04 perhaps to come in a little bit below prior expectations, you know, properties changing hands, keeping platforms for deep drilling, commodity prices. You know, how would you -- of those factors, which are the most important, or what are the key issues really that are holding this market back relative to prior expectations?

There's really two. One, these packages didn't sell. For whatever reason you want, they didn't get sold in the way that they had been put on the market a year ago, meaning in large tracks, large amounts of tracks, everything on the shelf, however, didn't get sold that way in many cases. Therefore, they're having to break them down to sell them; that's one item.

Then the other item is, your commodity prices have been higher so that you ratchet up something that was losing money and you then turn it around and it's making you positive cash flow. You're going to try to milk that for the time period that you can. The earlier question was, can you do that forever? The answer is no. You're going to be losing money again regardless of the pricing in the not-too-distant future in a lot of these because of the decline.

These packages that didn't get sold, what timeline would you put on these packages actually getting sold, or what is your best guess there?

Well, we're seeing a lot of them that are now being broken up. In particular, one of the majors that had everything on the shelf in one package has now got a number of properties broken down. Our understanding is some of those have sold. So I would guess, in the next probably three to six months, you're going to see a lot of these packages turn over, which will be positive, obviously, for us and for maybe the drilling market. Again, it's not just the abandonment market that's been suffering; you've had a large chunk of the Gulf -- I don't know what that percentage is but 15, 20 percent of the Gulf properties that are already acquired, meaning owned, that had been up for sale. Therefore, they've been held off the market for drilling.

One of the reasons your drill count has been as low as it has been is that the guys that are selling it sure aren't going to drill it and the guys that are buying it can't drill it until they own it, so you've had kind of a double whammy in the Gulf. That's not to say that you are going back to 171 rigs as soon as you get all of these properties turned over but you are probably not going to be at 89 either.

Okay, last question -- could you just talk about how you see the EPS progression through the year? I think you kind of alluded to it in your press release. Obviously, you look for a good improvement in the second quarter but less seasonality than we've seen in the past. Can you just give us some flavor of how you see that working out?

Seasonally if you look at it, the first is usually the worst, the second worst, and then the second and third are far and away the best quarters, given the decommissioning and abandonment work that you do. If you are pushing abandonment through the second and third and into the fourth, meaning that that you are getting it in all three quarters but you're not getting as much decommissioning -- and let me make sure everybody understands, we are not saying we're not going to do decommissioning work; we are just saying that the levels we were looking at may be somewhat high. You're going to push some of that into next year, then your second and third quarter aren't going to be as high in that. So the spikes may be out of the second and third quarters, but you're going to make up some of that in the fourth quarter.

How does that exactly reflect, given the fact that I've suggested that your Fluids business and maybe your testing business will improve as we go throughout the year? If all of that comes to pass, the fourth quarter might be comparable to the second and third, but all three of those things are going to have to happen to make that occur. That would be unique, the fourth quarter then would be a lot higher than what we had projected but the second and third should be below that. Yes, you'd have a big increase between the first and second and then whether the second, third or fourth quarter is your peak, historically you would assume it would be your third quarter. Probably, if I had to guess, I would say the second quarter would be up significantly and the third would be over the second and the fourth would be under the third. But we really don't project quarter-to-quarter and I'm not about to try to get into that game.

That's very helpful. Thank you.

Stephen Gengaro of Jefferies & Company.

Thank you. Good morning, gentlemen. Two quick questions -- you've covered a lot here. The first, you mentioned the share buyback. Could you give us any details on sort of what you've done, at what levels, and if you can put any parameters on your sensitivity to price?

We haven't been particularly sensitive to price. What we've been doing is going into the market on days when you've had a lot of volume but then slow periods, and we're trying to be an acquirer in those environments. With the new rules, as you know, don't allow you to buy more than your average (sic) and then one block a week as opposed to historically you could buy a number of blocks.

We have the ability to buy up to $20 million under our buyback. Obviously, we haven't come close to that number yet, but we are in the market and will continue to be in the market at these kinds of levels. As long as they want to give it to us here, we will take it.

Okay, thank you. The second question, a follow-up on the CapEx question, you talked about investing a bit more in people and equipment to sort of set yourself up for '05. Do you have any concerns about sort of getting equipment in place and then any upwards sort of higher cost structure than you may expect late this year in anticipation of that?

That's an excellent question. Those that have followed us for a long time know that's been a big issue with us. Which is first, the chicken or the egg? I guess what I would say to you is that, if we felt that this market was real questionable on a go-forward basis, we would not be investing in equipment and/or personnel; we would only be investing in those areas if we felt that the demand that we saw on the horizon was such that we might be limited in our ability to perform.

Remember that where we don't own things, we have to control them, either by acquiring them or by taking a long-term contract. As an example, last year in the summertime, we were using three heavy-lift vessels simultaneously; we only owned one. If we thought that market was going to be up with four heavy-lift vessels at the same time, that's probably an area we would want to control a little more than we control today.

On the other hand, if we thought that market was only going to be two, then we wouldn't be in the market. I don't know if that gives you direction, but that's the thinking process that we're trying to go through right now. As we see our backlog begin to build into next year, remember you have Maritech properties that we've been milking now that I believe in the 10-k we showed as much as $131 million worth of work on those properties, prospectively. As you begin to get into those properties, then compound it with a market that's growing, then compound it with a market that may have pushed some things out of this year into next year, and our concern is more how aggressive that market is going to be as opposed to whether the market is going to be there. We just need to be able to lock in our cost structure so that we don't get whipsawed by the same cyclicality that has historically been there in the Gulf.

That's very helpful. Just a final follow-up there, is the CapEx guidance that you alluded to, that excludes this type of purchase, right?

Yes.

(OPERATOR INSTRUCTIONS). Richard Walton (ph) of Scarborough (ph) Investment Management.

Good morning. I had just two quick questions pursuing the same line of thinking about Maritech. I wondered how you are going to pay for the new acquisitions. Also, you talked about additional reserve increases. Could you tell us how much of that came from basically finding better unit volume versus higher prices on the commodities currently?

Yes. In fact, I'll have them look at that. In our 10-k though, it does break down last year where we went up to -- I think we had a book value of 23 million and our pretax cash flow was some 82 or 83 million. Of that, only a small amount was from price hikes. Just a second; I'm looking right here. Yes, it was 86 million. Of the increase, changes in price -- let's see -- changes in price was $2 million. We increased the values under the standard measures by $30 million. To give you some idea, purchases of reserves in place was 32; extensions of discoveries was 16; changes in the quantity of existing properties was 11 million. We obviously sold $19 million worth of properties, or production.

So I guess the answer to your question is very little of the value that you see in terms of enhancement has come through prices. That's weird for most people until they understand that when we buy these properties, we try to hedge a large portion of it so that we're not subject to commodity risk. Obviously, had you owned these without risking them by hedging them, you would have done a lot better last year. But we're not in the oil and gas business to be in the oil and gas business; we are in the oil and gas business to baseload our well-abandonment, so we tend to go out and hedge. Therefore, you are going to see some but not a lot of the improvement coming from pricing, certainly not comparable to anybody else -- a lot smaller.

Okay, thank you. Then the second question was just how you expect to pay for this current group of wells you are looking at, Geoff.

Historically, the abandonment has been greater than the amount of reserves that you have acquired. Therefore, in point and fact, we haven't put money out; we actually get money in. But there will be properties that we will look at that could be positive. For us to write a check for $15 million in cash to tie up 80, 90, $100 million of well-abandonment would be something we would consider. So don't use history as being a guide. We might spend some money, but with a 90 million-plus line of credit -- actually about 85 that's not used, if you look at our current position, and some 35 million in cash -- we can clearly do a lot of this pretty simply and at very low-cost.

At this time, there are no further questions.

All right, thank you very much for participating and we will talk to you at the second quarter.

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