Tetra Technologies Inc (TTI) 2006 Q3 法說會逐字稿

Good morning. My name is Jennifer and I will be your conference operator today. At this time I would like to welcome everyone to the third quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]

Mr. Hertel, you may begin your conference.

Thank you, Jennifer. Good morning and welcome to the TETRA Technologies third quarter 2006 earnings conference call. Joe Abell, our CFO, and Stuart Brightman, our Chief Operating Officer, are here with me this morning and will be able to help answer any of your questions. Joe will also give a short review of our third quarter financial results. We'll be making a couple of presentations which will be followed by your questions. I must first remind you that this conference call may contain statements that are or may be deemed to be forward-looking statements. The 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're cautioned that any such statements are not guarantees of future performance and that the actual results may differ materially from those projected in the forward-looking statements. I also want you to be aware that many of our statements today will refer to data that was included in today's press release. Therefore, neither Joe or I intend to go and reiterate all of that data unless responses to your questions require it.

Joe, will you begin with the financial review?

The third quarter of 2006 marked another record quarter, slightly eclipsing the second quarter just past. TETRA's revenues for the third quarter were $217.8 million, up 78% above the hurricane-impacted third quarter of 2005. Gross profit was $71.7 million, 178% above the prior-year's third quarter. General and administrative expenses were up 40% quarter-over-quarter to $23.4 million, as our businesses have grown, so as G&A expenses dropped to 10.7% were 13.7%. Net income for the quarter was $29.4 million or $0.39 per share fully diluted compared to $6.2 million or $0.09 a share fully diluted in the same period last year, an increase of 375%.

Looking at performance by division, revenues in the Fluids division for the quarter were up 28.5% compared to last year's third quarter, and profit before tax was $15.7 million, up 152%. Revenues in the Well Abandonment and Decommissioning Service segment were up 182% and profit before tax was $19.1 million, up 344% compared to last year's third quarter. Revenues in Maritech were up 192% quarter-over-quarter and profit before tax was $12.0 million versus a loss of $1.7 million in the hurricane-impacted third quarter of last year. Revenues in Production Enhancement were up 47% quarter-over-quarter and profit before tax was $12.1 million, an increase of 71% versus the prior year's quarter. We had approximately $55 million of investing activity in the quarter. Our debt, therefore, increased by $29 million during the quarter to $297 million. Debt to total capital decreased slightly over the quarter from 43.1% to 43.0%.

Geoff?

Anyone who has followed the oil and gas industry or the oil and gas service industry knows that they're cyclical. For the Service group, this cyclicality is almost always a reflection of increasing or decreasing expenditures by the oil and gas industry. Historically, the magnitude of these expenditures have been driven by oil and gas prices. With commodity prices fluctuating significantly, I have been getting a lot of questions, and I know Joe has, regarding the short-term impact of these fluctuations on our businesses. I'll try to answer these questions first and then I'll talk to you a little more about our business segments.

First of all, I am unaware of any slowdown in any of our businesses because of commodity prices at the current $58 a barrel and say $7.5 an Mcf in natural gas. There's two generic reasons for this. First of all, a lot of our customer's budgets reflected lower prices than this to start with. And secondly, many of the projects that we are involved with take years to come to fruition and, therefore, short-term commodity price swings have little impact. But let's be specific. I'll go through our five primary business units.

In Fluids, our Gulf of Mexico domestic onshoring international business is growing, not declining. Deep water Gulf of Mexico projects are more than offsetting our Gulf of Mexico shelf reduction in activity that's been going on the last couple of years and, as you know, these deep water projects take years to come to fruition. Domestic onshore revenues and the international activity are both growing. The longer maturation periods for many of these projects, therefore, mean that short-term prices are not all that important to us. In Testing, our domestic business is continuing to grow, with activity stronger today than it was earlier in the year when gas and oil prices were higher. The international business is generally stronger than it was throughout all of 2005. In Compressco, when we bought Compressco in 2004, we predicated the purchase on the premise that the market for this service was many-fold larger than the existing supply of equipment. These assumptions were based on a $3.50 an Mcf natural gas price. We certainly anticipate continued growth in Compressco at $7.50 or $6.50 or $5.50 or even $4.50 per Mcf for natural gas production.

In our Well Abandonment and Decommissioning Services, the market for these services was dramatically increased because of the hurricanes Katrina and Rita. Not only are there numerous destroyed platforms, but noncommercial standing platforms are also being decommissioned. We see no impact on this business unit from lower oil and gas prices, and in point in fact, to some degree, it creates more business. In Maritech, obviously lower oil and gas prices affect Maritech's earnings. However, our hedging strategy has insulated us significantly from price swings this year. While we still have hedges in place for next year, we have less of our production hedged than we had in 2006. We are currently using a budget number of about $7.50 in Mcf for our gas volumes in 2007, which is less than what we could get if we chose to hedge the production today. Given all of my previous comments, I see little negative impact on our existing businesses from oil and gas prices at their current levels.

Now, I'll talk more about each of our business units. Our Fluids profits for the third quarter far surpassed profits in 2005's third quarter. While this outcome would seem to be intuitive, given the downtime created by last year's hurricanes, some operators this year actually postponed completion activities until after the primary 2006 hurricane season. This meant that portions of this year's anticipated third quarter work are now being done in the fourth quarter. So we didn't lose anything. We just pushed some into this quarter. This moderated our third quarter results. On a sequential basis, Fluids profits were down versus the second quarter. This was consistent with our earlier estimates because of two primary reasons.

First, the second quarter is, by far, the most profitable for our TCE assets; that's our assets in Europe that we acquired a couple of years ago. Secondly, price hikes for CBFs in 2005 and early 2006 allowed us to generate inventory profits. This positive impact to earnings was expected to moderate in the second half of '06 and be completely eliminated for all of 2007. This was expected to lower our Fluids profits in 2007 prior to the initiation of product coming from our new magnolia, Arkansas, plant in late 2008, which would obviously make up that difference, we hope, and more. However, recent announced price hikes for bromine by one of the major producers may indicate that brominated CBF prices will once again rise in late 2006 or early 2007. If this were to happen, the reduction in Fluids profits for 2007 would be partially mitigated. We continue to see many opportunities to increase our domestic onshore Fluids business with both internal growth and through acquisitions. The ability to add on accoutremental services like those associated with our recent Arrowhead Oilfield Services acquisition should help build our onshore Fluids business, and we expect to continue to do things like that over the next few years.

We expect to see continued growth in our Production Enhancement division in the fourth quarter and throughout '07. The assimilation of the Beacon acquisition into TETRA is creating many opportunities for growth and for more optimal use of equipment and personnel. We also are enjoying increasing success in securing international contracts for our testing services. Compressco continues its growth as it has since we've acquired it. As it expands its operations domestically and internationally, we see no reason to believe that 2007 won't be another record year for this business unit. Our Well Abandonment and Decommissioning Service segment is also positioned for continued growth into next year. The additions of the Orion and Achiever "spreads" of Gulf of Mexico well abandonment and decommissioning equipment and the three newly-renovated dive support vessels will bode well for increased revenues and profits in next year. Although all these components won't work for all of the fourth quarter of '06, we should also see some impact during this quarter from this equipment and personnel.

The lack of hurricanes in 2006 has been beneficial for Maritech. It was able to place most of its damaged platforms back on production, some very recently. Also, its ability to add value to its portfolio properties through workovers and drillings is instrumental in establishing the increased production growth described in our press release. When we started Maritech less than seven years ago, it was almost exclusively a mechanism to internally backlog a portfolio of well abandonment and decommissioning work for our WA&D Services group. We intended to exploit increased production opportunities; however, we did not believe that these opportunities offered significant upsides. We were wrong. While Maritech remains our single largest perspective customer for WA&D Services, excluding destroyed platform work, it has been able to build a Company capable of sustaining and even growing production from what were previously considered sunset properties. This production has generated significant cash flow, which has been used to exploit other producing properties and very importantly, to reinvest in our other business units. Because of this, we continue to believe that a healthy, growing, Maritech subsidiary is integral to the ongoing superior performance of TETRA.

As can be garnered from my comments, we're very optimistic regarding TETRA's growth potential in 2007 and beyond. This will be on top of what we believe will be record-setting earnings this year. Much of this can be directly related to our strategy of building for the future. Sometimes the strategy requires us to fund projects, like our Magnolia expansion, that won't bear fruit for a couple of years. Other times, as in the cases of Epic Divers and Beacon, the results are almost instantaneous. Regardless of the immediacy of impact, we expect to continue to build for the future, primarily because we believe in the vibrancy of our markets and our relative position within those markets.

I'll now open the conference call up to your questions.

[OPERATOR INSTRUCTIONS] Your first question is from James West with Lehman Brothers.

Good morning, guys.

Morning.

Geoff, I wonder if you could comment on the potential to add additional "spreads" as we look out into 2007. I know you have six up and running now, but I wanted to see if there was potential we could see more added to your fleet, I guess, here next year?

You have to really split those up. We have "spreads" that are working standing platforms and we have "spreads" working down platforms. The "spreads" that are working on down platforms, I think there's a lot of opportunities out there that haven't even begun to be allocated to service providers yet. And we will continue to try to add those types of "spreads". The standing "spreads", however, are contingent on timing and really weather-related issues. Historically, all of the weather costs have fallen to the service provider. Because of the storms, that's changed to a great degree from that historic precedent to where the customer is taking the risks of weather. That hasn't totally happened on standing platform work yet.

So, while we expect to see continued growth in the down platforms, the ability to increase year-around work on standing platforms is going to be a function of the customer ending up at least sharing some of the risk of weather. So, I know where you're going with the question, but I want to make sure people understand that your historic second and third quarter standing platform work is libel to have more platforms being worked on. More "spreads" from our position and all of our competitors than what you would find probably in the first and fourth quarters. The down platform work I think is going to continue to grow. What could we handle? You saw our press release in terms of the amount of people we've had to be able to satisfy the needs of what we're doing now. I'd like to just take what we've got and make sure that we can work it efficiently. Once we've done that and we've got all of them out and working, then we'll turn around and look at the weather situation, the seasonal situation and whether we can add additional personnel. I think we can get the equipment. The question's going to be whether we can get the personnel.

Okay. And then are you seeing any change in the competitive dynamics in the decommissioning space. A marine contractor yesterday made the comment that they were negotiating with three or four different companies about the use of one of their derrick barges for long-term P&A work next year. Have you seen new entrants in the market?

There's no question that you're going to have to have a tremendous increase in the amount of activity out there to handle these platforms. We've said that all along. The question is if you can put together a complete "spread" of equipment, you can go to work. The problem is that when you have a derrick barge and you don't have diving or you don't have abandonment or you don't have the cutting technologies, who's going to be this general contractor to put all of that together? And you're clearly going to have it done. The problem is going to be in putting it all together and getting an efficient operation out of it and we think we're in the forefront of doing that. But there's got to be plenty more people out there working this, or you're not going to get rid of the problem in a three, four, five year time horizon.

Fair enough. And then one last follow-up. If we were to exclude the cost that were incurred in the quarter for adding people and equipment on assets or "spreads" that we're not generating revenue, where do you think the margins would have been for the business? For that segment?

Other than higher, I don't know that I can give you a good number. They're clearly below the level that we think we have bid these jobs on. And on that basis, I would love to see a ten point improvement in that over a year time period. But whether you get that kind of a margin improvement near-term or not will depend on how all of this fits together. You've got so many moving parts coming in here. You've got two "spreads" of equipment that you didn't have, for all practical purposes, during the quarter. In fact, you didn't have them for the quarter. You've got three dive support vessels that will be coming on during the fourth quarter that you didn't have. Those are going to skew those results to start with. If we can get a base let's say out two quarters to look at, then I think I can be more specific with you. But I would be disappointed if we can't improve that gross margin 5% to 10% over an extended period of time.

Ok, great. Thanks, Geoff.

Your next question is from Ray Kramer with First Analysis.

Good morning, Geoff and Joe. Couple of questions. You know, on the -- I guess starting, you talked about your capacity or what you're looking at in terms of adding more WA&D "spreads." Can you comment at all on the potential and what you'd look at in terms of adding more dive support vessels?

You know, the problem with that is that it's not the vessel itself that's an issue right now. It is a problem that worldwide there's a shortage of divers. You've got to be able to man these vessels even if you could secure them. And therefore, you know, we're trying to man these three vessels. I've got our Chief Operating Officer here, but I'm going to throw a number out and ask him to respond. But I think since we've acquired Epic, that to be able to man these vessels, and with the growth we've had in place, it is something like a 50% increase. Is that right?

That's correct.

I mean, we've had to increase Epic in the four months that we've owned them by something like 50%, just to satisfy what we've got in a market that is essentially utilizing every one that is available. So, again, I'm not sure -- it's kind of like the question on your "spreads". If we can get the personnel, we can look to expand that business. But the first thing that we're going to do is try to efficiently utilize these vessels, get them out, get them working and start getting the return that we expect on our money. At that point in time, if we can find additional divers, we're certainly going to go and look at growing Epic, because it is a great business. It is a business that's not only tied to our WA&D Services but it is tied, obviously, to their historic customer base, which is screaming for additional work. So, on that basis, we would definitely go out and try to build it. The problem's going to be people.

Okay. And then I guess turning to the Fluids, could you give us just a quick summary, I guess, of the Arrowhead acquisition and what sort of -- the potential is from that business? I know it is fairly small but just a little insight there.

Well, actually, moving Fluids around onshore is a fairly good business. We've been in it for a number of years. We continue to expand it. It is kind of an offset to having Fluids, which we do onshore. There are a lot of geographic areas, though, that we're not in. And it seemed logical that, when you have the ability to move men and equipment around and be much more efficient, that we ought to continue to try to grow that business. Very similar in many respects to the acquisition we made of Beacon. And as we've explained to you, we've done a lot better with that acquisition, being able to optimize our testing business. So, just because we spent $6.5 million doesn't mean we don't spend another $20 million on that type of acquisitions. And if we found another business that was a $50 million acquisition, we'd buy that. Unfortunately, most of these are relatively small entities, and you have to kind of assimilate them into your operations one at a time.

And then, you know, not withstanding the acquisition, can you comment on if you've seen any sort of a shift in your market share in Fluids, especially with this plant coming on in a couple years?

Well, we would certainly hope that, when we bring on the plant that is dedicated to CBFs, that our customers are going to not only stay with us, but new customers are going to come to us. And we have some reason to believe that that may occur. But you know, we're two years away from that. So, I can't really address our market share, other than to say we think we're going to have somewhat higher market share than we have today when that plant is on. And that's one of the reasons that we're doing the plant in the first place.

Okay. And then just lastly, and maybe as a hint of the conference call in a couple months, it sounds like relative to the last call, you're probably slightly more optimistic about '07 now, based on some of the stuff on the press release and stuff I've heard so far. Is that fair?

We've been real optimistic about '07 for quite a while. As you know, we do not historically give you estimates of '07 until we've finished our budgeting process and work with our board on a budget. And then we give you a lot of data, by division, probably more than most of our people would prefer. But we think it's important that you get an idea of what we're thinking about so you can look at what we've done throughout the year, and it has been quite successful at giving you some insight as to where we're at. I wouldn't suggest, at this point in time, we're any more or less optimistic than we've been in the past. We're very optimistic about '07 and have been for 12 months.

That's good to hear. Thanks a lot.

Your next question is from Bill Sanchez with Howard Weil.

Morning.

Hello, Bill.

Geoff, to circle back on the Fluids business, you talked about your overall gross profits being down in the quarter. However your margins were up 500 basis-points -- your gross margins were up 500 basis-points sequentially. Revenue is down 20% sequentially in that business. You talked about the postponement. Can you give us a sense in terms of sequential, maybe revenue growth expectations in the fourth quarter?. And then also, you know, do we still expect to see some sort of margin declines here, just maybe less of an impact than what you had expected due to mix -- some of the deferrals coming to fruition, and as also as you work off -- continue to look off some of this lower cost inventory?

Well, there's a whole bunch of things working in there, but the two that really are salient to looking forward and to look at the quarter. We did not do all of the work in the third quarter that we would have liked to have done for the reason that I outlined, meaning that a couple of our primary customers chose to continue to drill during the quarter with the rigs they had under contract, but did not want to compete with other rigs because of the costs associated with standing by for weather in the hurricane season. What that's meant is that you've pushed some of this business into the fourth quarter. So, first of all, I would think our revenues might be up in the fourth quarter versus the third. Because you've got inventory gains in all of this, if you have less activity, it's conceivable that your margins are actually going to be higher in the third quarter than the fourth quarter, because you've got less revenues and still have substantial gains involved. As the fourth quarter business accelerates, one would assume that the margins might even go down. However, your total profits would probably be similar. If not maybe a little higher.

Ok. So, at the absolute gross profit dollar amount similar to the fourth quarter perhaps to the third, but margins down a bit?

I would expect that the margin -- the percentage would be down.

Okay. Okay. That's helpful. And then also, just in terms of personnel here, you noted in the press release that you guys have increased your head count by 50% since the start of the year. You know, if we don't think about further acquisitions here adding to your employee base, where do you think you are in terms of additional personnel going forward here and how much of that do you think on a percentage basis is still tied to the WA&D business here?

Well, we've got growth going in Compressco. We've got growth going in Testing. We clearly have had growth in our Maritech subsidiary. So, in a sense, you've got an underlying current of growth. However, obviously, with the diving acquisition and then the expansion of that subsidiary and with all of these new "spreads" that we've been adding, a lot of that growth has been in the Well Abandonment Services component of our business. I would expect that the absolute amount of people, much less the percentage increase, would decline '07 over '06 versus '06 over '05. For one reason, we have a larger base to start with. And the second reason is that we have done a real good job in a few of these businesses, like Maritech, in building it dramatically over the last year. And I would not expect to see the same type of an increase year-over-year in that business. But when you look at a couple of these, like Testing, like Compressco operations, they're generically going to be adding personnel. But I would not expect it anywhere near the rate of increase that we've experienced in the first nine months.

Thanks, Geoff.

Your next question is from Michael Weisberg with ING Investments.

Hey, Geoff, how are you?

Good morning. Doing good.

Good. Hey, a couple of questions. I don't know if Matt's there to talk, but you certainly can talk for him. Maybe give us your thoughts about hedging net gas for '07, do you have any thoughts about what you might do there

Matt is here. I'm hesitant to put him on because I'll have 15 people asking about Maritech. But I'll answer that for him, and then if he wants to answer it himself, he can. We've had a history of hedging. We have high costs in terms of DD&A, by definition, because of the way we acquire sunset properties, and it makes sense to have a hedged position. As you saw, we increased our oil hedges because we increased our production significantly. We would like to have half of our production essentially hedged on a go-forward basis. We've just not found the opportunities to do it the way we want to. The other thing that has been going on in his business is that he's been trying to get his arms around exactly what his production's going to be since it has been growing fairly significantly. And it has been somewhat difficult to decide what it is that you wanted to hedge. That doesn't mean you couldn't have hedged part of it, and we probably would have if we thought that the prices would at the levels we wanted. But in order of magnitude, you'd think that we would probably want to hedge something similar to what we did this year, which was about 20 million cubic feet a day. You want to say anything, Matt? Come on.

All right. Our hedging on oil is just pretty much in place for next year. We've got about 40% to 50% of our volumes hedged. It's at very attractive prices on oil. We're not hedged at all currently on gas and are watching the market closely to pick a point that we want to lock some volumes in.

Okay. That's great. Thanks a lot for that. Hey, Geiff, when you were talking about increasing Epic since you bought them, were you talking about 50% increase in equipment or people? I didn't catch that.

Well, it was in head count, but in point in fact, those three DSVs that have been either renovated, acquired or really built are more than doubling that quality of piece of equipment that the Company has.

I got it. Okay. When you were talking about increasing margins -- gross margins on the WA&D business, you know, out a few years, were you talking -- did I hear five to 10 percentage points in gross margins? You thought that was the opportunity?

That's the number I gave, but I hope to [expletive] that isn't out a few years. I hope it is sooner than a few years.

That's great.

-- about a few quarters.

That's great. And then just in terms of the Fluids, one last thing. My understanding is that you have -- you have the necessary inventory bought ahead to handle '07 in Fluids, but you just -- at much higher prices, so you wouldn't get the same inventory profits that you did in '06. That was the situation prior to this last increase. Is that right?

What we did in Fluids, as you know, we announced early this year that we were going to build this plant. That's a bromine plant and it's dedicated into the CBF business, but it is a bromine plant. And you've a group of companies in bromine that we were concerned, if we announced that, that they may be somewhat militant toward our positioning, even though we did not intend to go into the bromine business. We intended to remain in our CBF business. Therefore, we secured a lot of inventories going into this year that would be able to supply us through '07 at least -- '06 and '07. When prices rose, that gave us a gain. It also meant that we have been carrying substantially more inventories in that business. If you look at our balance sheet, we've got some 40 odd million dollars of insurance receivables and an extra -- I'm looking at Stu here, $50 million of Fluids?

Yes.

$40 million?

40 to 50.

So we've got an extra $40 to $50 million of Fluids inventories that we're still carrying. We're obviously taking them down. But we have enough to go through '07. And we have protected ourselves in it other methods through '08, so we're very comfortable that we would not have a disruption for our customers should there be an issue. However, I think most of the bromine companies have looked at what we're doing and don't feel threatened that we're entering their business. They see it as integrating our own business, and I would expect that that is going to be a nonevent.

But, if the price increases hold, then that would be reflected in just more inventory profits for you in Fluids in '07, is that right?

Assuming the end prices to the retail customer, however you want to do --

Right, okay.

-- you would then get some of the benefit of that price hike in '07. That's what we have been trying to say to you, yes.

I got it. Great job as always. Keep it up.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question is from [Bill Duell] with [Reinger Asset Management].

Good morning. Could you give us some feel for the Fluids business about how much of it was a gain? Is it 10%? Is it 50%?

It's a significant part but it's not half the business, no.

So, something less than half.

Yes, you've got in Fluids, remember, not only the part that relates -- and this is domestic -- as it flows through, but you've got all of the other components of the Fluids business in there. So, it is a relevant number, yes.

The non-U.S. side doesn't have this issue? In other words, all the inventory's being sold in the U.S.?

Yes, to a much lesser extent. There is a small piece of it outside the U.S. because we went through a similar process, but much smaller.

And then, on the "spreads" for down platforms, has -- is there any interest from you or in customers in longer term contracts on those, or have any been signed?

Generally, what has been going on is the customer is looking at some provider of services to work through the entire elimination of the problem. So, you're getting contracts typically for a platform. They're not coming in and saying, okay, TETRA, I have 14 down platforms and here is your contract for 14 down platforms. They're saying here's this platform and you have a contract for that. And the reason for that is that it takes a tremendous effort to do the engineering to determine exactly what you're going to do on these. And in many cases, you haven't even done the assessment of what needs to be accomplished on a lot of these platforms, so it is difficult to give a contract for it. It is generally being done on either a certain process that they want handled or it is on a down platform, one at a time. Although there are a couple of contracts that have been more generic.

So, how much -- how many platforms right now are those six "spreads" dedicated to?

We have two or three of those working the downed platforms at any point in time. You may have as many as four by next year. You've got, on average, an ability, we've said, to do maybe two and a half per "spread," which would say that four of them could do ten. However, we've also said that we have one of those dedicated to a platform that was announced by one of our customers a year ago in which, if you divided day rates into the amount of time, it would take 15 months to get the project done. So, they vary all over the lot. But on average, I think that's a pretty good number. For the kind of things we're going after, that's a pretty good number.

Two and a half platforms per "spread" per year?

That would be an average.

Okay. Thanks, guys.

your next question is from Jim Rollyson with Raymond James.

Good morning, guys.

Good morning, Jim.

Geoff, just to circle back to the Well Abandonment business, you had, you know, a lot of stuff come in at the end of the quarter and starting up this quarter and ramping up with the DSVs through the quarter. Can you give us a sense -- your revenues took off quite a bit in the last quarter versus the second quarter. Any thoughts as to kind of magnitude of fourth quarter revenues over third quarter? And to add on to that, when everything is out and working in the kind of pricing environment you're in today, what do you think your realistic quarterly revenue run rate is with all the equipment you have today, once it is working?

Well, the last question is the hardest, so let's start at the beginning. The fourth quarter should have increased revenues over the third quarter for all of the reasons that I outlined. The problem with the fourth quarter in giving you a real good number is you still have, for instance, those three DSVs that none of which are out yet. All of which have slid over the last six months a couple of months, so I'm going to presume they're going to be out timely, as we've announced to you. If they are, those are going to be incremental. The problem with the two "spreads" we've announced is even though they would be out and working, remember that the profitability from one of those, for at least half of its period, is tied to Maritech's recovery through insurance. We're not allowed to do what we do when we work for a third party. When you work for a third party on a day rate basis, you're able to take that profit and accrue it throughout the quarter and report it.

As it relates to work when you're doing Maritech, you don't report the profitability on that -- whether you report the revenues or not, you don't report the profitability on it until you're paid by the insurance company. So, there is a lag period. If we get paid by December 31st for the work that we will have done in the first half of this quarter for Maritech, then you will see no difference in the number. But if you don't, you're going to be eliminating part of the revenues and all of the earnings from that work until the first quarter of next year.

I know I'm giving you kind of a sideways answer, but the answer I'm comfortable with is that we think that the revenues will be going up. But you've got all of these fluky things working for you under GAAP reporting that makes it somewhat difficult to give you a clear and concise answer. In terms of the go forward business, you know, we've indicated we thought that the Well Abandonment business into the future is a $500, $600 million revenue generator on an annual basis. And I see no reason to believe that's not an accurate number down the road. Whether you get to that level in it 2007, I'm not willing to give you yet. We're going to do that, obviously, at the end of December or early January, when we break out the quarterly -- excuse me, the divisional profitability.

Fair enough. On the Maritech side, production this quarter, 43 a day, roughly. You said it was trending to 50 right now, or a little over, and heading to 60 by the end of the year. Is that a sustainable number in '07? I know you're going to go through the whole '07 guidance later, but do you think it is a sustainable number or do you think you still have, with all of the things you guys have going on, growth above and beyond that?

We haven't given guidance for that, so, I'm going to have to be somewhat cautious as to what I'm saying here. I think the statement I made at the end about liking what we're seeing and believing that we've got surplus cash flow, I would be very disappointed if the rate at the end of the year weren't surpassed next year. I'll leave it at that.

Very good. And then the last question is just you talked about head count and how much that's gone up and kind of where the relative changes are. In conjunction with that, your G&A has been ramping up most quarters over the past couple of years, adding in with all of this equipment and people you've added. It stayed relatively flat this quarter. What do you think kind of the trend is going forward?

I can guarantee you if you don't reduce head count that G&A is going to go up, so that's a given. However, we've had to increase our infrastructure significantly over the last four years. I mean really significantly. We've had a lot of changes, a lot of things that had to be put in place for a Company of $1 billion in revenues instead of a Company of $300 million in revenues. So, the bottom line of all of that is that we have had the same kind of cost increases corporately that we had divisionally. And as you have built this out, one, the percentage has gone down, as Joe indicated to you, from 13% to 10%. I would expect that to continue with revenues going up. However, I would expect to see some increase in corporate costs, but not probably at the percentage increase that you've experienced over the last couple of years.

Very good. Thank you, guys.

Again, all of that assumes you don't have a large acquisition and then all bets are off.

Sure. The trend had been ramping up and then it kind of flattened out a little bit. And I presume it still goes up, but maybe at a little bit less of a pace.

That's a good assumption.

Great. Nice quarter.

Thank you.

your next question is from [Tad Beta] with Stifel Nicholas.

Good morning. Of the implied sort of $0.12 spread in your guidance for the fourth quarter, can you parse that between timing on the DSVs, the insurance issue and then anything else? In other words, how do you get to the low end versus the high end?

The low end of that would assume that we would not recover anything to speak of out of work that we were doing in the first half of this quarter for Maritech. It would also assume that we do not get our DSVs out in a timely fashion and under contract and working. It also would assume some slowdown that we have not seen to date in some of our other businesses, just as a precaution. It does not have any significant, obviously, hurricane exposure, but we do have weather exposure. And if anybody's followed us, the first and fourth quarters are actually more weather-related in the Gulf of Mexico than the second and third. So, we have put in a weather factor in the lower end of that, as well. And we have experienced some weather. But on an ongoing basis, hopefully that not going to be a big issue. If all of those work to our favor, then you'd be toward the higher end of that range. I'm not comfortable at the higher end. I certainly hope we exceed the lower end.

Okay, that's helpful. Just one more, if I could. Could you give us an idea of the split of revenues onshore versus offshore, domestic and then sort of worldwide in the Fluids business? Thanks.

Your next question --

No, no. I'm -- we've still got a question there. We were looking at each other trying to figure out what that answer was.

Tad, just in analyzing the domestic numbers, less than 10% of our domestic numbers are onshore. And that's principally made up of our production testing -- or production enhancement business, Testing and Compressco. Mo --

He was asking Fluids though. Of the Fluids --

The Fluids --

If I had to guess off the top, 15%, 20%. I'm being -- everybody is looking here and they're taking straw vote. 20%.

Domestically.

Domestic Fluids.

Probably a smaller percentage, if you include all of the international.

Tad's line has already been closed. If you could please press star 1 again, sir.

Who are you asking to do that?

Tad Beta. Mr. Beta, your line is open.

I'm sorry. I was finished. That's great. Thank you.

Your next question is from Stephen Gengaro with Jefferies & Co.

Thank you. Good morning, gentlemen. I may have missed this, so I apologize. Did you -- a couple of the Gulf of Mexico construction companies talked about some of their work going back more a lump sum basis versus a day rate basis. I know one of the things you've talked about on your end was you saw more and more work being done on a day rate basis. Can you talk about any of those trends on your end?

I am unaware of any down platform work in the Gulf of Mexico that's done on a lump sum basis. It is all day rate to the best of my knowledge, because you don't know what you're getting into. There has been historically, and we have done a lot of lump sum or turnkey work for standing platform work in the Gulf of Mexico. We continue to do that type of work either on a lump sum or a turnkey, as well as a day rate. So, when you're talking to construction companies, when they're talking about putting in platforms and doing that type of work, a lot of that's done on a lump sum basis, but that's a lot different than the work that we're doing on down platforms.

I just wanted to be sure. That's helpful. And then the other thing is to the extent you did not address it -- if you did, I'm going to read the transcript -- but pricing on the Well Abandonment side, is there any trends there or -- I know it's strong. but anything -- any color you can add there?

The problem with pricing is to talk about the total project cost, you've got so many component parts. We haven't seen a lot of increases in the last, say, three months over what you had previously. However, it's a little difficult to really flow that through, because each one of these projects are so unique and have a different component of services that to say one project A and project C have seen a price increase, you'd have to make them comparable, and unfortunately, that's an impossibility. But if what you're trying to get at is what is the direction of price increases, I think most people would indicate that the price increase has slowed from what it was a year ago and probably from where it was six months ago. But that was only because you were just beginning to do some of this work and you were kind of trying to figure out where the prices should be. I haven't seen any weakness, if that's your question.

That's very helpful. Thank you.

Your next question is from [Mike Hutzler] with ING.

Good morning, guys. On the Well Abandonment business, downed platforms, can you discuss qualitatively if you're seeing more of the potential customers shifting from evaluating what their needs are to actually putting together the plans and getting ready to actually start hiring yourself for your competitors?

I don't think there's any question. I think a lot of the companies for a number of reasons took a long time to make their initial assessments. The primary reason for that was that there was a lack of divers and that these divers were working on damaged platforms, trying to get production back on and producing. A lot of that work has been done, as I pointed out. In our Maritech case a lot of that work has been done, the repair work. Now you've been able to go back and begin the work of assessing these platforms and beginning to determine where you're going to go with them. And we are seeing new customers in the market that have now just begun the assessment process. They now understand what it is they have to do and they're looking for service providers. So, there has been a distinct improvement in the -- I won't call it bidding, but the review of projects, just in the last, probably, three months.

How far out are projects being scheduled for at this point?

Well, again, one of the problems that you have, you're not getting a company in general to come in and say you've got ten platforms, it's going to take two and a half years. They're saying okay, we're going to give you this platform and we'll give you this platform, and let's get that done. And these platforms can take, if they're very small, single well template or something of that nature, a month. Or they can take a year and a half. So, you're not getting people to give you work three years out, but they're not giving anybody else that work either. So, what you're probably going to see is a continual rolling of this throughout the next few years. As you get done with project A, you then get awarded project B and so forth.

How about from your perspective though, when they come to you? Are you saying to them we can get you in three months or we can't get you until six months from now? How much --

Obviously, what we would like to do, optimally, is we would like to have a finite amount of "spreads" and we'd like to have five years of work for it. The problem is that they're coming in with their first job and they're saying, we'd like to get it done next summer. We can't afford to go out and have 15 "spreads" of equipment and work for six months and then try to get rid of all of those people and equipment. So we're trying to base load, if you will, as far out in front as possible and yet, trying to satisfy our customer demands when they come in and say, we've got to have something done in this time period. And it requires a tremendous amount of juggling, obviously. Now, the one good thing we have is, remember, we have a large base load of business through Maritech. They're damaged platforms. We obviously have to work on to the degree they need something done. But beyond that, we had a little bit of latitude of moving around activity that's being done for Maritech on platforms where there is not a necessity to take them out today. Or conversely if you have a slowdown, you may be in a position to be able to take and work some equipment that wouldn't be working were it not for your own base load. So, there is not the historic, let's say, five year backlog of work that would be awarded to you because that's not how they're doing the awarding of the contracts, and it's a juggling process.

Okay. Thank you.

At this time, there are no further questions.

All right. Well, we thank you for being involved in the third quarter. We will have a 2007 forward-looking conference call before we report our fourth quarter, so, I'll look forward to having you on that call. Thank you.

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