Tetra Technologies Inc (TTI) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the TETRA Technologies, Inc. first quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Geoff Hertel, Chief Executive Officer of TETRA Technologies, Inc. Thank you, Mr. Hertel. You may begin.

Good morning and welcome to the TETRA Technologies first quarter 2007 earnings conference call. Joe Abell, our Chief Financial Officer, Stuart Brightman, our Chief Operating Officer, and Ben Chambers, our Controller, are here with me this morning and will be available to help answer any of your questions. Joe will give a short review of our first-quarter financial results. He and I will be making short presentations that will be followed then 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. These statements are based on certain assumptions and analysis 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. Joe, will you begin with the financial review?

TETRA set record revenues and earnings for a first quarter this past quarter with revenue of $247.7 million, 63.7% above the first quarter of 2006. Gross profit was $58.6 million, 9.6% above the prior year's first quarter. General and administrative expenses were up 12% quarter-over-quarter to $24 million, as our businesses have grown, though as a percentage of revenue, G&A expenses dropped 9.7% from 14.2%. Net income before discontinued operations for the quarter was $20.8 million, or $0.28 a share fully diluted, compared to $19.5 million, or $0.26 a share fully diluted in the same period last year, an increase of 6.5%. Net income including discontinued operations was also $0.28 a share fully diluted.

Looking at performance by division, revenues in the Fluids Division for the quarter were up 34.4% compared to last year's first quarter, but profit before tax was $7.9 million, down 40.9% over last year's first quarter, for reasons previously discussed that Geoff will elaborate on.

Revenue in the Well Abandonment and Decommissioning Services segment was up 167% quarter-over-quarter, and profit before tax was $11.0 million, up 712% compared to last year's first quarter.

Revenue in Maritech Resources, Inc. was up 30% quarter-over-quarter, but profit before tax was $11.1 million, down 37.7% compared to the first quarter of 2006. Geoff will also discuss this matter as well.

Revenue in Production Enhancement was up 33.2% quarter-over-quarter, and profit before tax was $12.2 million, an increase of 35% versus the prior year's comparable quarter.

We had approximately $56.3 million of cash capital expenditures in the quarter. Our debt decreased by $20.6 million during the quarter to $315.8 million. Debt to total capital decreased over the quarter from 44.5% to 41.7%.

With that I will turn the discussion back to Geoff.

Thanks, Joe. I think it's safe to say that our first quarter was one of, if not the most, schizophrenic periods that I've ever encountered in my corporate life. It was both exhilarating and frustrating, and it was happening simultaneously. Much of this craziness occurred because of the unprecedented growth that we're experiencing.

We had to build infrastructure in front of the next tranche growth, and for a time during the quarter, it was touch and go whether any of the associated revenues would offset these growing costs. Fortunately, during March we began to see some of the fruits of our labor. As a final comment on this issue, for those of you who are new to TETRA, this was all occurring during our seasonally weakest quarter.

Now let's talk specifics regarding the quarter and how it sets up for the rest of the year. As we've discussed numerous times before, we have a significant amount of moving parts in 2007. Three areas in particular need to be understood by everybody. They are fluids, Well Abandonment and Decommissioning Services, and Maritech.

In Fluids, we have previously announced the construction of a new fluids plant in Arkansas and the signing of agreements with Chemtura. These two items will significantly reduce our cost of goods for our primary completion fluids. The benefits of these items should start in 2008 and be fully effective in 2010 to maybe 2011, and then for decades thereafter.

In order to help implement these changes, TETRA purchased large inventories of products in 2005 and early 2006. Also, TETRA is currently in the process of implementing termination of its previous supply agreement for a portion of these products. These purchases carry very high costs to TETRA. This entire process generated some inventory gains in 2006 and also materially increases costs for 2007. The combined effect is the estimated 30 million of reduced pre-tax earnings alluded to in the press release. The earnings for Fluids in the first quarter are consistent with our assumptions regarding these factors, and they correspond to the annual earnings guidance that we gave you in January.

The performance of WAD Services in the first quarter was very heartening. This performance was in spite of normal seasonal weakness and the dramatic increase in costs associated with our anticipated increase in activity. Since these costs were being experienced for most of the quarter, it was especially encouraging to begin to obtain offsetting revenues late in the quarter. For the second quarter we should see activity and margins improve from first quarter levels for WAD Services.

We have been recently chosen for a new downed platform set of work. This work should begin on or about May 15th. Additionally, we are continuing to try to secure more downed platform work as well as conventional Heavy Lift abandonment work for 2007.

All three of our larger EPIC DSVs currently have jobs lined out. We're now attempting to coordinate their usage among TETRA projects, prospective new projects, and backlogged third-party work. We're very encouraged by the receptivity of the market regarding these DSVs.

Maritech's first-quarter earnings versus year ago levels had to overcome two factors, both of which were included in our 2007 guidance estimates. First was the significant reduction in commodity gas prices from our 2006 hedge position to the lower prices in 2007. This was particularly relevant during January and February, prior to Maritech's new 2007 gas hedges. This hedge is at prices that are above our 2007 guidance, although still well below 2006 levels. Therefore, as the year goes on, we believe our average gas price should equal and then exceed our projected guidance price.

Also in the quarter, Maritech had $4 million of increased insurance premiums versus the previous year's costs. In quarters two through four, the insurance premiums in 2007 and 2006 should be much closer in cost. And this is because the costs began to escalate for Maritech in April of last year. Both the reduced natural gas prices and the increased insurance premiums had previously been accounted for in our guidance, as I mentioned earlier.

Oil and gas volumes increased dramatically over year-ago levels in the first quarter. However, two fields that were expected to begin production in the quarter are now not expected to begin production until late in June. Consequently, unless an offset could be found, our 2007 estimated volumes from our guidance would have to be reduced. Fortunately, Maritech has a backlog of exploitation projects. We have recently moved a number of these projects forward in the year in an attempt to derive some 2007 production from them. If we can accomplish this additional exploitation in a timely manner, we may offset the production shortfall from the two previously mentioned fields. And when I say production shortfall, I want to make sure you understand; this is not volumetric shortfall that we're talking about; it's timing shortfall. During the last few months, Maritech has sought to reduce the effects of significant swings in commodity prices. It has added a number of gas and oil hedges, some for 2009. This Maritech policy of hedging material quantities of production is consistent with our desire to reduce earnings volatility due to price, and to lock in earnings.

Our Production Enhancement Division had another stellar performance in the first quarter, with revenues up 33% and pre-tax earnings up 35%. This business unit used to be our smallest by quite a margin. It's interesting to note that in the quarter, this division's PBT actually exceeded Fluids, or Well Abandonment Decommissioning Services, or Maritech. While some of our business units may catch or exceed the Production Enhancement Division in other quarters this year, the continuing growth in Production Enhancement shouldn't be overlooked by anyone evaluating TETRA. Drivers for this growth are the continually expanding market for Compressco services and Testing services, both domestically and internationally.

I was somewhat amazed by one statistic from our first quarter that Joe has previously alluded to. With all of the embedded costs and with the aggressive build for the future CapEx spending, I was surprised that during the seasonally-weak first quarter, we were still capable of generating surplus cash. We actually reduced our debt by about $21 million versus year-end 2006. With our recent acquisition and the escalation of Maritech's exploitation expenditures, a near-term repeat of this cash generation will be difficult. However, it reinforces one very important strength of TETRA -- its ability to generate cash. If conditions ever warranted it, TETRA could slow its build for the future CapEx strategy, and it could generate significant free cash. This type of a liquidity position is generally a luxury for any company, but most particularly for a growth company.

With that, I will turn the meeting over to you for your questions.

(OPERATOR INSTRUCTIONS). James West, Lehman Brothers, Inc.

Geoff, in the decommissioning business, as this market has evolved over the last six to 12 months, I think, you have been trying to drive the market more towards a scenario where you do a lot of the project management work and take over for the oil and gas companies on their decommissioning plans. Has this evolution occurred, or are you seeing a lot of hesitancy on the part of the gas companies to keep or control some of the costs, and really piecemeal out more of these contracts?

You're actually getting both. Some of the companies wish to have a general contractor who will essentially bring all of these services together. Other companies wish to piecemeal it out, as you indicate. One of the reasons for that is these are such huge costs that some of these companies are reluctant to give that to a third party.

How does your utilization vary between the two types of contracts?

If you're asking do we have general contracts for work -- yes. If you're asking does EPIC work on certain projects where we don't have all the rest of it, or where our well abandonment crews work, or where, let's say, our wireline crew may work, where one of our Heavy Lift vessels may work, the answer is that it's both types. We have tried to give us a mix of both so that we can increase the utilization of our equipment. Is that the question you were asking?

I was really trying to get more towards the efficiency of the jobs, if you feel like there's better profitability from you being the project manager versus the contracts being piecemealed out.

I don't know at this stage of the game whether we would be willing to guess which of those two are more profitable. I would venture that both of them are a lot more profitable when you're working with higher utilization then what we have been during the fourth and first quarter. But which of those two give us a higher profit? You want to answer that, Stu?

I don't think it's good, Geoff -- I think it's hard to respond to which one gives us a higher profit, because the other variable that's in there as well as the project oversight is with our DSVs being operational at the end of the first quarter; that now plays into the mix (inaudible). So we get higher utilization overall. With the DSVs, we get to utilize them more. So, it's a tough question. There's a lot of variables, and I think the DSVs make it even more complicated to answer.

Fair enough. One follow-up. Do you guys get the sense at all, really, that the oil and gas companies are dragging their feet on some of this hurricane-related work?

I don't. I'll ask Stu to respond to this as well, but I think the companies are trying to figure out what they have and trying to go about doing their work in the most efficient manner possible, remembering that there was a lack of capacity out there to do this work, and they had to get their production on first as their first priority. So, if you put all that together, I don't see the companies dragging their feet at all.

I agree. And I think we now have over a year of experience in the industry, so that knowledge, in conjunction with production coming back; I think there's a big effort, and I don't think anybody's dragging their feet. And it continues to evolve.

Stephen Gengaro, Jefferies & Company.

To start with, can you help us understand on the Well Abandonment and Decommissioning side, when you look at particularly the services side, and you look at the revenue performance, sort of first quarter versus fourth quarter, can you kind of help us understand the moving pieces there, and how we get to sort of the sequential growth kind of? I think, more importantly, which assets are -- are all six spreads and the three DSVs now all operational? What kind of utilization level should we expect going forward? I'm just trying to get a sense for how I should look specifically at the revenue line in that business.

What we have indicated to you is that we have two spreads that are going to be doing downed platform work, two that will be doing standing platform work. This excludes how we're going to do any Maritech work. And we've indicated that we will be attempting to add to both of those quantities during this quarter. So, depending on the mix, you can be from four to five or six.

One of the imponderables that you now have to work with that we're working with internally is that some of this work can be done with a DSV. And we're beginning to integrate our DSVs into this so that we can get better utilization for all of our existing equipment, which, as you can imagine, is much more profitable than, say, taking a spread and working it for seven months on standing work and having to pay for it for 12. So what we have been trying to do is refine our ability to increase the utilization of our existing assets, so that you can probably get a pretty good feel for the direction of the revenues by what we're telling you is the amount of spreads and the amount of DSVs working.

So when you look at the sort of customer willingness to take on some of the weather issues -- and I think that is one of -- certainly was one of our concerns going into the first quarter, the extent you could get paid for weather downtime on the spreads working on the standing platforms. How has the customer's view of that evolved over the past three months? Can you give us an update on their thinking, and how that might impact particularly the fourth quarter?

I'm going to let Stu answer this question as well. But what we've seen in the last couple of months is the customer base basically going nuts trying to get work done during the summertime. Everything that I'm aware of is chockablock full working, and therefore, you're going to start to have to bleed off into the later stages of the year if you want to get this work done. But I'm going to let Stu answer that as well.

We are real comfortable with that weather risk piece, based on our existing backlog, through the third quarter and into the beginning of the fourth quarter. Over the next few months, we'll continue to see what the fourth quarter and winter looks like. But at the moment, we are really fully loaded and busy, with the weather risk the way we want, out through the third quarter. But it's evolving slowly in the direction we anticipated.

Just a final. When you look at the -- with four of six spreads kind of basically accounted for right now, and you said the other two may be doing Maritech work, maybe not -- are those other two -- how should I read the fact that they're not working? Because it seems like the demand is there. Is it just -- are they between jobs? Are you -- what's sort of the status of those other two crews right now?

When we went into this -- and again, we were learning like everybody else was, take a year ago -- we believed that we could bring a spread on, and the spread could do effectively the work that was necessary, pretty much regardless of what we were looking at. What's evolved is that, obviously, when you have a lot of debris damage, it's difficult to use a ship that has anchor systems. So you may need a DP ship. If it is not in a debris field, the stability of an anchor vessel is more important. If you're in deep water for these projects, it depends on how you want to attack it. In most cases you may need a DP ship. Some of these need more heavy lift capacity than others. What we've tried to do as we've moved forward is to utilize equipment that's efficient for our customer and for us. And the reason that you're not using the other two vessels is that we don't quite know with these additional contracts which ones are going to fall. And if they fall in deep water, we'll need one type of vessel and won't need another. And conversely, if they're in shallower water away from debris, then we may use a different type of vessel entirely. So what we don't want to do is plug a vessel in that isn't efficient.

Okay. That's helpful. I was just trying to get a read for sort of how I should sort of model this thing out going forward, and kind of the utilization levels we should expect on a quarterly basis from the six spreads and the three DSVs. So anything -- if you have any additional comments that help clarify that, that's helpful.

I think we've indicated that we're going to give you a really good view of how this is laying out in the next conference call. That will be the first time we've actually had most of this stuff working, and it's going to be new to us as well. So, I think we can give you a lot better insight in the second-quarter conference call, because we'll actually have these things in the water and they've been working for a while, and we'll be able to give you a lot better feel for the type of margin and utilization that we're getting on them.

That's very helpful. Thank you.

Jim Rollyson, Raymond James and Associates.

Trying to bring this whole topic back to the 30,000-foot view, you -- obviously, seasonally this quarter, activity wasn't what it will be in the summer. And margin-wise, you talked about the money you spent trying to get ramped up to start going to work, which you have done since. I think margins were a little under 17%. Your kind of guidance, which I know you'll give us an update next quarter, was in the low to mid-20% range. Can you kind of give us an idea of what -- I think you mentioned most of the profits came in March. Can you kind of talk about how margins trended in March and maybe even into April? Are you moving back up to those levels that you were targeting for the year, or just some sense of that?

First of all, from 30,000 feet, let me go back and reiterate what I believe I said in my opening statement. If you look at the profitability for the division in Fluids for the first quarter, that profitability was in line with what we had expected and with what we had given you in terms of the year guidance for that business.

Actually, I was specifically talking about WAD.

Okay. I understand. And I was going to say, as well as Production Enhancement was in line, or at least close to what we had given in terms of our guidance there -- although we have some international contracts we're trying to escalate forward there as well to help us -- but in general, those areas were as expected. In the case of our Well Abandonment, really, with the majority of the earnings expected in the second and third quarter, and with costs escalated into the fourth quarter, then again even higher into the first, you would have a tendency to draw those margins down significantly. Consequently, as you get into the second and third quarter, and begin to get associated revenues, those margins should improve dramatically. You said into the low 20s --

That's your average for the year.

I would expect that they're going to get higher than your 20 -- I think you said 21 -- by the time you're in the third quarter, easily, if what we see is appropriate. Again, it's hard for us to guess at all of that until we see the work that we're doing associated with the revenues. The problem is that when you only have the cost side and you're trying to guess at what your revenue margins are going to be, it's somewhat difficult. But I don't see it inconsistent with what we've given you for the year.

The only area, really, that we're looking at right now and saying we have to do something to get back to the levels that we indicated is Maritech, and I think we're doing that in terms of trying to escalate some of this forward. That, again, is not an issue of them doing any worse or better than we said; it's just a function of being three or four months out of sync with some of their production. And if we can escalate some of their exploitation activities that would have gone on late in the year and given us production in '08 into the middle of the year, giving us production in late '07, we can conceivably make up that difference.

Perfect, because that brings up my second question, which is -- you had some issues, delays, weather, and particularly, it sounds like, availability of equipment to get some completion work done. And maybe it's that and the weather. What's your limitation? What do you see out there going on now with getting your stuff hooked up? And more importantly, if you were to want to accelerate some of your activity earlier in the year, what's your limitations there on equipment?

Clearly, as anybody that follows the Gulf knows, the availability of drilling rigs in the Gulf is better today than it was a year ago. So we're not really talking about drilling rig availability. Our position was that we had these two fields, one of which was going to be completed with the rig that drilled it, and our drilling contractor took the rig to Saudi Arabia. Paid us a penalty. However, that penalty doesn't flow into income; it just goes to reduce the cost of the rig. By the time we got another rig on and did the completion work, which is going on, we're four to six months behind time on that platform.

The second one was just a simple case of getting a completion rig put on the platform and getting it set up and ready to do the development. And we ended up doing two reworks on that instead of one, so we actually had four completions instead of three, and that's taken us a little longer. Again, hopefully that will help us in the production side when it comes on. But it was really not a question, when you go back and cut into it, of availability of equipment; it was some fairly unique circumstances that occurred in both of those, and we don't think we'll have any problem in 2007 in the drilling rig or completion rig arena.

Which I guess implies that if you're able to accelerate anything, your exit rate of production should be pretty strong?

That's exactly right. And actually, we're going to be getting incremental production out of these two fields fairly soon as well. It's just that we had planned when we gave you the, I believe, 70 million average for the year, that we would have those on in February and, I believe, early March. And point in fact, they're not going to be on until the end of Jane.

Last little question. This fluid delivery services acquisition you bought adds about 6% to revenues, roughly, on your guidance, based on what they did last year. Can you kind of give us a sense of what margins look like there relative to your current Fluids business?

We're going to be integrating that to some degree into what we do. The margins will be very adequate this year. They'll be better next year. If you, again, give us maybe three to six months to see how it fits with what we're doing, we can give you some indication. It's a very accretive acquisition that adds nice earnings to us in 2008, and it will be accretive in 2007; I'm just not willing to step out yet and tell you how accretive until I see how the integration goes.

Mike Harrison, First Analysis Securities Corp.

I was wondering, on the Fluids side, could you comment broadly on the recent price and volume trends you've seen there? And specifically, could you talk about some of your recent pricing activities in Fluids and whether we might see any price increases coming soon?

Our volumes for the quarter were just about as anticipated. It's kind of funny when you look at that business, because you get very large jobs periodically, and you roll that into your average. So our month-to-month volumes vary all over the place. But we feel very comfortable right now with the volumes that we got in the first quarter and the volumes we were looking at for the year.

The pricing was an issue that we brought up early in the year when we were giving our guidance. What we had indicated to you was that there had been a price increase for bromine, which is the base for two of these products -- I believe it was about 18% -- late in the year, and that we were not projecting that the companies would go along in the fluids side and increase prices proportionately. If they did, we could conceivably have some inventory gains. And to date, we have seen no price increases in that part of the business.

On the WAD side, could you give us an idea, or maybe an update on the DSVs that we're doing inspections on downed platforms? Have you made any progress there? And maybe your expectations for getting contracts for those downed platforms in the rest of the year.

On the DSVs, as Geoff mentioned, all three are hitting the market strong and going to work. And we're optimistic that will continue to accelerate, and we're integrating that into our downed structure strategy. Geoff referenced we've got another contract that will start over the next couple of weeks on the downed structures. And we continue to look at opportunities, and optimistic that will continue to be a strong market for us.

Martin Malloy, Southcoast Capital.

I had a couple of questions on Compressco. Can you give us an approximate size of that business now and the growth rate that you're seeing now? Has it changed at all from -- I think it was around 30% growth, something like that, when you first acquired it.

We have looked at Compressco's market very recently to try to evaluate whether it has changed, and with three years, almost, of history in the business, whether it's different than what we anticipated it was when we acquired the company. If you remember when we acquired the company, we indicated that we thought the market was multiple sizes larger than what was being serviced by all competitors. I think after reviewing what we have done, and recognizing that there is applicability in coal bed methane, and to some degree even in shales, we believe the market's at least as large as we thought it was three years ago, if not larger. And that's domestically. Internationally, we've been very successful in placing these units in a number of areas. And that is something we had not anticipated early on in our acquisition of the company.

So first of all, in terms of the market size, we believe it's at least as large as we thought, probably larger. Secondarily, we've been growing at a pretty consistent 30% rate since we've owned it. We have done some things to try to put us in a position to even consider growing somewhat faster, which would be to increase the capacity of our manufacturing operation, which we have done. However, this is a service provider, not a leasing company as such. And consequently, you need very much to have an infrastructure of people in the field to be able to adequately control what you're doing. And that's really one of the difficult things we've had in growing much faster than 30% a year.

But the answer is, its growing at effectively those type rates. I think if you took the company's revenues that were indicated when it was a quasi-public company before we acquired it, and if you compound it at the rates that we've talked about, that you'd have a company between 80 and 85 million in sales this year. We don't break it out selectively; I'm just using a 30% compounded on the revenues they had when we acquired it.

Tom Escott, Pritchard Capital.

Just a couple of follow-ups from stuff that's been talked about. You said you don't really specifically break out Compressco and detail that. But have you stepped up the CapEx devoted to that segment of the business, let's say, over the last year or currently?

If you're going to compound at 30% and start at a lower rate, if you took those numbers, you were down at near 30 million of sales to get up to that 80 or 85 million of sales. To do that, you're going to be adding additional CapEx. And we have been doing that consistently since we acquired the company, and we would do it into the future consistently if we're able to grow it even faster.

I know you've been doing that, but I guess the question really is has this been accelerating more than expected because the growth has been so strong?

It's been accelerating at a rate that was higher than what we had when we budgeted the acquisition, if that's your question. We are looking at this as a continued growth area. And if possible, we would like to increase it even more. And if that were the case, we would be putting more capital into it, yes.

It was a complex question, but yes; that helps me. Secondly, it looks like everybody is beating WAD to death pretty well. But -- and again, to help us look at this, is it fair to say, broadly speaking, that the cost structure -- the cost of operating all the DSVs and then all the various spreads -- that cost is roughly fixed month in and month out, whether all that stuff is working or not, and regardless of price? It's pretty much a -- is it basically a fixed cost business?

It's fixed to a great degree, because you don't want to give up your crews and you pay insurance and all the rest. But the costs are higher when it's operating than when it's sitting at the beach, but a large portion of the costs are embedded in it at all times. You want to answer that, Stu?

It's highly fixed, but there are variable elements that we take up and down with activity. But it is a very highly fixed business.

And then, I'll follow up on another one related to WAD and customers taking weather risks later in the year. Is it -- would it be accurate to assume that if the hurricane season is more active this year and more destructive than we have seen lately, that it could create a greater sense of urgency for the customers to go ahead and book up this equipment and work it through the winter months, or is that a stretch?

You can argue that both ways. You could argue that because of the risks that they see because of the activity of hurricanes in the season that they're going to escalate. On the other hand, if you have a lot of damage, those companies are probably going to go back to try to fix their existing production first to get their cash flow going before they do downed structure work. So you postpone some of that, as we saw with the activity starting this year at a much greater rate than it was in 2006.

So I guess what I would say to you is I know you would increase your backlog; whether in fact it would represent itself in revenues as early as the fourth quarter, I don't know. However, obviously, for things like our diving activity, if you had damage to existing production and wanted to get it back on, EPIC would be very busy, I would be assuming, as would all of their DSVs and that type of work. But I think it's a mixed bag to try to presume that a hurricane season that's strong this year actually impacts the fourth quarter.

I can tell you that what we're seeing in some of our areas, even this year -- we mentioned that standing work is now booked. There are a lot of companies that want to get rid of their existing platforms. I can tell you that our Well Abandonment crews -- these are the rigless packages that go out on standing platforms before you take the platforms down -- are a lot busier than they have been in the past. And I can tell you that Maritech is in more data rooms looking at sale potential than they have been in in years. All of those would be indicative of companies that are already in a position that they want to reduce their risk from hurricane damage. And I don't know if you saw Berkshire Hathaway's announcement this morning, but they indicated that because of global warming, they're talking about increasing premiums on a go-forward basis for insurance because of that issue. All of those things are stimulating people to want to get these platforms out of the Gulf of Mexico if they are not being productive.

Jason Podraza, Howard Weil, Inc.

Just circling back to Production Enhancement for a moment, Geoff, on the margin front it's, obviously, been a nice steady grower for you guys. I think implied in the guidance is kind of a gross margin percentage comfortably above 40% and turning towards 45, particularly at the high-end of the guidance range. And just -- certainly you hit the low 40s last year in 2Q and 3Q; down at around 38% here in the first quarter. Just wondering what your confidence level is in the profile of the margins in that business relative to the guidance that you guys have given.

First of all, I think that Compressco is within a percent of its margin that we have indicated, and probably will be for the year. So the swing year to year between '06 and '07 that we were looking for was in Testing, not in Compressco. And Testing's margins would be enhanced, one, because of some pricing issues that were beneficial early this year that will carry through the rest of the year, and secondly, probably most importantly, because of some international contracts that we anticipate revenues and earnings from later in the year. We had indicated those may start in May and go through October. We're probably talking June or July through October time period. But those contracts, one would expect, given the historic margin difference between domestic and international activities would be higher, and they would tend to draw the entire complex up.

So at this point in time, it is only the Testing side that you need to look at. Since we don't break it down for you, you're going to have to ask the question each quarter, and we'll give you some indication of what it looks like. But most of that will be reflective of these international contracts.

Fair enough. Shifting gears a bit back to WA&D. When you a look at a contract award to a competitor in parts of your business, with the BP award to Oceaneering last week announced, what is your ability to carve into, say, the heavy lift piece of that business, or in future awards like that? Do you see additional big awards coming down the pipe such as that award as well?

I'll answer that and then I'll let Stu answer that. That award was for some of the work associated with BP utilizing work ROVs and not divers. So from the perspective, that was a contract that we would not be capable of being able to bid on that basis. However, there is a lot of other work associated with BP, and not the work ROV component, that we would, obviously, be available to do the work for. And that's again going back to the early question in this question-and-answer period, where somebody asked if you're doing all of the work as the general contractor, or if you're doing components of it, which of those have higher margins? Which are you trying to work with? And the answer was all of the above, because we can increase our utilization for diving or one of our Heavy Lift vessels if they get put into a mix where Oceaneering is using different types of equipment than we have available. So all of that that's in the market, I don't know that I look at that as a negative as much as I do opportunities for some of our other equipment. You want to answer that, Stu?

I agree with Geoff. I think the scope that was awarded was something that we don't particularly typically participate in. And in a contract of that magnitude, there will be other segments where we'll have services that we'll be going after. And again, was not a surprise to us, and it's kind of consistent with the way we view the segmentation of this.

Stephen Gengaro, Jefferies & Company.

Just a quick follow-up. Geoff, do you have any updates, or could you give us sort of the current thinking as far as the MMS is concerned on all the downed structures and the timing to basically fix the problem?

I think the MMS has been real consistent for a group of people that were overwhelmed the same way we were initially and the same way the industry was. I think they've been very consistent in saying we're not going to hold people to the time period that is required under the existing regs because we know it's impossible for you to get all of this material out of the Gulf within the time period that's set, which by the way is after six months of no production, you have a year to get it out. Obviously, that's not plausible. However, they have been with every operator, and they have benchmarks that they are giving to each operator for them to move ahead on their activity. And consequently, I think, they've been not only realistic, but they've been probably as professional as I've seen any government agency reacting to a crisis. I think they've done a very good job.

That's helpful. Thank you.

(OPERATOR INSTRUCTIONS). Thad Vayda, Stifel Nicolaus.

I just wanted to circle back to competition in general. We've heard that Superior, for example, has been fairly aggressive. And while certainly they don't have as many assets to bring to bear, could you just kind of comment on the environment overall? And then specifically when it comes to diving services, does the EPIC component of this business still represent the advantage that you thought it did early on, given that we've seen a little bit of -- I don't know -- a little bit more diving capacity come into the Gulf?

I'll answer the second question first. The answer is, from our perspective, EPIC is a huge advantage for us in getting all sorts of work associated with either downed platforms, standing platforms, subsea work -- all of the above. So, it's been everything we thought it would be and more.

In terms of competition, we've tried to indicate to everybody since we started that the competition that's going to come in here is going to be varied, that you're going to have essentially three types of competitors. People who are going to offer all of the services in a package, generally, as we have done. You're going to have people come in that are going to be -- I'll call them the general contractor, and they are going to supply pieces of this, and then bring in, hopefully, other pieces. In those cases, that might be the Wild Well type of situation with Superior. Oceaneering, obviously, has the ability to bring in substantial amounts of equipment, although they don't have other parts of equipment. And then the third part would be what was asked earlier, and that's where companies themselves, because of the magnitude, are trying to piecemeal this together themselves. And they act as the general contractor, and they then drag in services from all of the various suppliers.

So, all three of those are going to be essential if we're going to get this done in any kind of a timely fashion over the next three or four years. If we don't do it that way, then this is going to be a decade-long project. And I don't think anybody wants that to happen. So having additional competitors in these areas is not all bad. And particularly from our position, to the degree the companies decide to do it themselves and start piecing in various component parts, it helps us try to increase our utilization of some of our existing equipment.

Ladies and gentlemen, there are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

We thank you for being with us today. We will be back early in August with the second quarter, and I would expect that we will have a lot of things to talk about at that point in time. Thank you.