Tetra Technologies Inc (TTI) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the TETRA Technology Incorporated second quarter financial results 2007 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (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 for TETRA Technologies Incorporated. Thank you, Mr. Hertel, you may now begin.

Thank you. Welcome to the TETRA Technologies second quarter 2007 earnings conference call. With me today are Joe Abell, our CFO, and Stu Brightman, our Chief Operating Officer and they'll be available to help answer any of your questions following the short presentation that will be given by Joe first on our financial results, and then by me relating to what I would expect to be some of your questions. I must first remind you that this conference call may contain statements that are or maybe deemed to be forward-looking statements. These statements are based on certain assumptions and analyses made by TETRA and are 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 actual results may differ materially than those projected in the forward-looking statements. Joe, will you begin with the financial review?

TETRA had revenues of $258.1 million in the second quarter, 24.6% above the second quarter of 2006. However, for reasons that Geoff will discuss, while earnings exceeded the previous quarter, they did not meet expectations. Gross profit was $61.9 million, 10.1% below the prior year's second quarter. General and administrative expenses were up 5.4% quarter over quarter, as our businesses have grown, though as a percentage of revenue, G&A expenses dropped to 9.8% from 11.5%. Net income before discontinued operations for the quarter was $22.7 million or $0.30 per share fully diluted, compared to $29.4 million or $0.39 a share fully diluted in the same period last year, a decrease of 22.8%. Net income including discontinued operations was also $0.30 a share, fully diluted. Looking at performance by division, revenue in the Fluids Division for the quarter was up 14.5% compared to last year's second quarter, but profit before tax was $10.3 million, down 43.9% over last year's second quarter for reasons previously discussed that Jeff will further elaborate on.

Revenue in the Well Abandonment & Decommissioning Services segment was up 19.3% quarter over quarter, but profit before tax was $12.7 million, down 24% compared to last year. Revenue in Maritech Resources was up 35%, profit before tax was $8.6 million, down 24% compared to the second quarter. Revenue in the Production Enhancement Division was up 22% quarter over quarter and profit before tax was $13 million, an increase of 9.5% versus the prior year's comparable quarter. We had approximately $50 million of capital expenditures in the quarter. Our debt increased by $17.8 million during the quarter to $333.5 million. Debt-total-capital was 40.8% at the end of the quarter. With that I'll turn the conversation back to Geoff.

Thanks, Joe. I've been involved with the energy business for almost 40 years and I'm not sure if I've ever witnessed an uglier quarter, particularly in the month of June, for a healthy company in a strong energy market that be I just witnessed with TETRA. A number of events combined to turn what should have been a very strong quarter into a very mediocre one.

The most important question for me and probably for you really to answer is whether these events are endemic to our businesses or whether they were a unique happenstance. And I'm going to address each of these issues and give you the background and where we are today. First of all, as Joe indicated, our 2007 Fluids inventory costs are obviously a lot higher than they were last year. This isn't anything new. This is something that we've really talked to you about a number of times. We'd projected as much as a $30 million reduced pretax earnings from this situation this year. The effects to date have been as material as initially expected, if not somewhat more severe.

However, the sooner we run through our high-cost inventory, the sooner we begin to utilize product from our new Chemtura agreement. We now expect to see some positive agreement from Chemtura agreement as early as the fourth quarter of this year, which was earlier than we anticipated initially. Therefore, unlike 2007, when we have to operate with these higher cost inventories, and 2008, we should work further into the lower-cost Chemtura product. We will have gone from lower-costed product in 2006 to the high-costed product in 2007 to the lower-costed product again in 2008 and beyond. The division's profits in 2008 should experience a tailwind instead of a headwind that we've been having this year.

Again, that is not new data, but because it is such a material negative, it does have impact when you have other businesses that don't make as much as they should have. It's a significant item that we have to be aware of. Secondly in weather, there's a consistent problem with operations in the Gulf of Mexico and while weather did affect some of our Gulf heavy lift operations in the quarter, the really interesting and unfortunate item that occurred to us was the weather onshore, particularly in June. This is not an area that we normally have any issues with, and we don't budget for weather downtime onshore. Both our onshore Fluid Services and our testing operations were adversely affected by the rains and more particularly associated flooding that stymied some work in Texas and southern Oklahoma where a large portion of our testing operations and almost all of our onshore Fluids operations are.

This flooding was relatively unprecedented and we had a significant amount of our crews affected. Even though we continue to have some periodic showers, it's more seasonal now and both the onshore businesses are already experiencing improved utilization. We historically have not seen these weather problems persist and we don't believe that the weather pattern has changed materially enough to change our estimates for what these businesses will do throughout the remainder of the year.

Well abandonment service margins and profitability, the third item. The escalation of activity in this business unit was exciting but caused great trepidation. We attempted to efficiently expand this area with now equipment and personnel. A number of issues surfaced particularly late in the quarter: . There were four significant items that negatively impacted the well abandonment services business unit. First, as we have worked on more and more downed structures, we have become more efficient. This meant that we accomplished parts of one our projects sooner than anticipated, because we were that efficient. We were not experienced enough to take this increased efficiency into account, and we therefore missed timed equipment needs, which meant that we left one of our spreads inactive for the latter part of the quarter.

The problem here is that even if you have additional work to go to, the lead time necessary to move it someplace is such that it's not really practical to do so and consequently we ate the costs of this. Next, one of our three DSVs experienced start-up problems and had to ultimately be brought into a shipyard and have some modifications made. This is the second time this vessel has had that. It's expected to return to work in mid-August. We also had an issue in our offshore P&A, which is a strong market. However, three of our customers, three of our good customers indicated that they wanted our people, we scheduled our people and their platforms were not ready for our crews, so much of this work was postponed from the second half, particularly the latter part of the second quarter until right now. In fact, they're working on the projects now. Finally, we finished work on the last of our older fixed price heavy lift contracts. This work is negatively affected by weather delays, which we did experience in the second quarter.

What conclusions should we draw from all of this? It's nice to list all these, but that doesn't tell you anything. First, in a business that has the capacity and market to grow appreciably, we need to account for start-up issues for longer than one quarter. I did not do that in making earnings estimates, that's my mistake. Secondly. In a business as complicated as the well abandonment decommissioning services, there are always going to be operational and contract issues. While I had believed we had put in a cushion for these problems in our estimates, they were not enough.

Finally, in an attempt to lay out the business, so that it would be easier for everyone to understand, I tried to describe the impact of each new bit of business or contract. Instead, I should have discussed financial data in a more aggregated fashion. This would have allowed for both positive and negative items to be combined. That's the reason I've given you quarterly earnings ranges now in the press release today as they relate to Well Abandonment & Decommissioning Services. To give you a better aggregate number for profits and it won't allow us to get lost in the minutia.

You'll note that the annualized profit run rate shown in today's press release for that segment is less than shown in the original earnings guidance. Until we can work the kinks out and become even more efficient, I believe the current run rate to be the more realistic.

Fourth, Maritech production. We indicated in our, I believe it was May 9 or May 7 press release for the first quarter, that we had two major platforms that were not going to produce as early as we had anticipated last November. Because of this, this deferred production would affect the second quarter, and it would also affect the full-year volumes. We indicated that we were going to try to escalate some of Maritech's late 2007 and early 2008 exploitation CapEx in an attempt to make up some or all of that production shortfall.

So where are we today? First. Both of the platforms are in the process of beginning sustained production. Our average 57.2 million cubic feet a day equivalent of production for the second quarter should approach 73 million in the next few days. While this will certainly improve operations in the last half of the year, it doesn't make up for the earlier deferred production, in other words, the loss production in the second quarter that won't come until later. However, Maritech has moved a number of projects forward as we'd attempted to do. It also is using a couple of rigs in one field instead of the planned single rig to escalate forward some of the operations. These items are all intended to bring new production on faster than originally scheduled.

This should cut into our production deficit. So the company, Maritech, has actually done what they've set out to do in trying to get these moneys moved forward and the production moved forward and hopefully the associated earnings moved forward for the latter part of the year on top of the increased production that I just announced. During the quarter, Maritech took a write-off related to insurance proceeds for the 2005 hurricanes. Since this amount is in dispute with the insurance carrier, the conservative action was to write it off. Maritech continues to believe that its position regarding the collection of these proceeds will prevail. If it collects these moneys, they will flow into income in the quarter they're received and obviously we will let you know that they've flowed in.

Finally, international testing. As many of you know, one major goal of TETRA during the last few years has been the diversification of our operations internationally. Our production testing business was an integral component of of that strategy. When we did our budget in November of 2006, we hoped to dramatically expand our testing operations internationally by the late spring of 2007. We did not benefit from this expansion during the recent quarter. However, within the last ten days, we have finally added a Middle Eastern country and a Latin American country to our portfolio of international testing locations, coupled with our continuing growth in Mexico and a return to relatively normal weather conditions in the onshore domestic market, we believe these new international contracts will propel testing to a new profit level.

As should be evident from my proceeding comments, many of the issues that affected our second quarter have been dealt with as of early August. This certainly does not excuse the mediocre quarter, but it does give us confidence that we will see improvement as we go forward. During the last eight years, we've grown TETRA dramatically. We've laid the groundwork to further grow it. This means that we are going to continue to periodically experience some of these growth pains that we've saw in the second quarter. Our ability to mitigate their affects will help to define us as a management team on a go-forward basis. With that I'll open it up to your questions.

(OPERATOR INSTRUCTIONS). Our first question is from Jim Rollyson from Raymond James Financial Incorporated. Please state your question.

Good morning Geoff, Joe, Stu?

Good morning.

Geoff, if you look at how the second quarter played out and how your guidance has been adjusted, relative to what you were looking at in the past and even what you talked about on the first quarter, it seems like the Fluids issues with the contract speeding up the old contract to get to the better priced contract, that was more or less known before for the most part. I think last quarter you talked about some delays on starting up contracts with the well testing -- international well testing contracts. So just from my end, and correct me if I'm wrong, it seems like the best business shortfall for you, short term is the WA&D business. Is that accurate?

Said a different way, we had two items that created a hole in our earnings, which are well documented, the $30 million from Fluids, and the $20 million from the natural gas price differentials, where the hedges were. So you had $50 million to work with. To get to the growth that we needed to get to to get to the numbers that we first gave you, there were three areas that needed to really blow and go, so to speak, and obviously well abandonment was one of those items and it was the largest of those items. But you also had your testing operations and your onshore Fluids operations that had to perform very well to be able to make up those differences and have the growth that we experienced, and expected to experience during at least the first three quarters of the year. And the issue that we had in the second quarter was you still had those negatives that we talked about, so, yes, those hadn't changed.

What was different was all three of those areas that had to perform really at the top of their game all had issues. And yes, well abandonment certainly had issues in terms of the things we went through, but on a proportionate basis, although I'm not exactly sure, Joe, you might comment, I think our testing operations were probably down percentage-wise as much as our well abandonment was versus budget. And a lot of that was related to the weather that we talked about, and yes some of the international operations weren't there as early as we thought.

Okay. You made it pretty clear, some of what happened in well abandonment on the service side of things in terms of operational efficiencies and scheduling and the fact you guys actually did a better job and wound up sitting there idle for some of the time, but it sounds like you completed most of the work you were looking to complete. As I look at the revenues for that quarter, you were down sequentially and normally you would expect seasonally you would be up and you would also expect as you're bringing in more equipment that that number would get bigger. Were there some issues aside from the vessel that you mentioned the dive support vessel that had to go back to the shipyard? Is there a reason why revenues didn't shoot up like we all expected?

You had three big issues there and then I'll ask Stu to tell you where we are in relation to what's working and what isn't right now. The three biggest issues are, for revenues, is one you did not have a full quarter for one of these spreads. That was a very material item to have worked that very efficiently and unfortunately on a day basis, once you finished, you couldn't move it to the next part of the job. Secondly, you had down time due to weather on your heavy lift. Remember, you've got two of these vessels doing heavy lift work and with weather, you get hammered. Not only do you experience the cost, but you don't get the revenues. Thirdly, obviously, these DSVs are almost as important in terms of revenues as your spreads and to have it down, that was material as well. And then, as the fourth item that we mentioned, there were a number of our crews that could not work on offshore P&A because of these three customers postponing their work. Obviously, when you add all that up, that was a large amount of revenue, as well as earnings. Stu, do you want to explain where we are right now?

Yes. I think, as you said, Geoff, all four of those had major impacts. When you have the weather we had offshore in second quarter, you get hit several ways. One, on the heavy lift, we had some fixed price contracts that by definition keep the revenue down as you continue to take longer to execute those under the poor weather. The offshore P&A just got delayed. The good news is those jobs are running as we speak, so we're seeing that improvement. Overall, at the moment, as we enter into the third quarter, the traditional structures we're working on with our barges, we're doing well, we've got a good mix of that, we're past the old contracts and we expect that to continue through the quarter. The offshore P&A jobs have started. We still have a very strong response to our three DSVs. We've got work for all three, two of them are working, one of them is still under repair, Geoff said we expect that to be back in mid-August. The demand is there for the key assets, it's now getting the vessel up and running and continuing to take advantage of the favorable mix we have on the barges.

Understood. Last question for me, Geoff, if you look forward through the rest of this year, particularly into next year. It sounds like the production issues you're working on and hope to get back to -- at or maybe even above the exit rate you were expecting for the year, hopefully all your asset woes will be resolved and you'll at least get those all back in service by the end of the year and it sounds like from what Stu said, the demand is there, your testing, you've got the weather getting better and some of those international contracts finally starting up. Obviously, this year or this quarter, the outlook changed quite a bit, but has your thoughts on what your outlook is for next year, and i recognize you haven't given any guidance, but has that changed at all given what's going on?

I guess going through the businesses and you'll note that we're not discussing one business for reasons that as obvious,given what we've announced previously, so we're in a more or less quiet period, so I'm not allowed to discuss that, but excluding that business and obviously you can look at the history of that and determine for yourself what's going on, testing is actually better than what we had thought. There's a number of areas internationally that we think by year end that we will be involved in that we did not have scheduled for this year. So from our perspective, looking at testing internationally, I think there's no question in our mind that that business may be better as an exit rate than what we had anticipated. One of the reasons for that is, obviously, that we had jobs to do early in the year that were postponed until recently, so that's going to push into '08, more revenues than we would have anticipated under the older contracts.

The question in testing will be the domestic component. You saw margins deteriorate, but that was because of utilization and that was because of weather to a great degree. You've had cost increases, you've had some price increases. I'll leave domestic testing kind of alone for a moment minute. I'm not sure it's any better or worse than we would have estimated for '08, but the international is better. If you look at Fluids, again, I think it's conceivable given where we are that we're going to have somewhat more of the benefit of the Chemtura agreements, but that's going to be a function of the volumes we take over the next five to six months. But looking forward, I don't think we're expecting to see the year to year differential any less than we would have expected before. And obviously, we had told people to anticipate that '08 would be better than '07 in Fluids for all the reasons that we talked about for about a year so that hadn't changed. If anything, maybe it's a little better.

We look at well abandonment. The well abandonment question was going to be, are you plateauing, are you getting new work, are you expanding? We've made the comparison year to year a lot easier, but unfortunately that's a very painful way to do it. We're not performing at the levels we thought we were going to this year. However, we have also modify what had we did and I'm relatively sure our profitability ought to be looking a lot more consistent and better as we get into next year than it was early this year. The real question will be how good are we going to do in the last six months of this year and then what will happen for next year.

Again, we haven't scheduled anything and we haven't budgeted, so it's hard for me to give you an exact indication, but I don't think that's a down number, necessarily. If you then look out at everything else, you got Fluids up, you've got testing up, you've got, in Maritech's case, a real interesting situation. You're correct in your exit rate. We had given, I believe, $70 million a day as an average for the year in our original budget. I may be off a little bit, but that was close. The problem we have in making that is that in the second quarter, instead of having about $70 million a day of production, which was the budgeted amount, you had 57. So to catch up and make an average of 70, you've got to really blow the top out of the back end. What we've told you is that we are going to make up part of that difference, which means your exit rate by definition should be higher than what you would have anticipated.

How much higher, though, I don't know, but that thought ought to be positive for '08 and also in '08, remember, we've hedged our gas prices somewhat higher for the amount that we've hedged than what we had done in '07. So that's a long answer to your question, but there are a lot of positives going into the second half of this year that are going to carry over and expand into '08. Therefore, I guess I would have to say that I haven't changed my position appreciably about what would happen in '08. The problem is I'm not sure exactly what that '08 number is supposed to be yet.

Very well. Thank you.

Our next question is from James West with Lehman Brothers. Please state your question.

Geoff, the execution issues in the well decommissioning business, they've been going on for a couple of quarters here and I understand that some of this is growing pains, some of its weather, some of its project delays, but we've been consistently surprised related to the downside about execution. My real question is, what are you and your management team doing now to get these problems resolved? Do you need to get your hands dirty and get involved, do some people need to be changed out, what needs to happen? Or is it something that will just resolve itself?

The latter answer is incorrect, it's not going to resolve itself. And Stu has been put in the middle of this to make sure that it is a much more efficiently-run operation and I'll allow him to make any comments he wishes, but Stu has been put in there to make sure that all of these units are coordinated and working in a much more efficient fashion. Unfortunately, part of the benefit of that was that we did have a very efficient operation during the quarter, but we didn't have it scheduled right. We've got a lot of things to learn. I'm not making jokes of it at all. It's a very complicated business, it did need some additional people, we are adding some additional people, but more importantly, I've got my Chief Operating Officer overseeing that operation right now.

And I'll talk to a couple of specifics. On the issue, there's two or three variables. One is we're continuing to accelerate the integration of the dive company into well abandonment, which we bought last year. We've got most of that done. We're finalizing that. We clearly are adding some additional resources into the group in the areas we feel that we need to supplement. The majority of that has been done. There's still another piece of that that's taking place as we speak. I'm spending the majority of my time in that group, getting those tasks done. There's start-up issues with getting the vessels going, two of three have come out and met and exceeded our expectations. The third one we're confident we'll have that resolved this month and overall I think those are the major items that will allow us to continue to improve this and get some of this execution decision behind us.

Okay. Stu or Geoff, could you comment on what the margins are for the projects that have gone well? When you're working, you don't have delays or execution issues, are you achieving the margins that you thought you would have achieved when you were originally bidding these projects?

On the projects we've done, we are right at the margins that we expected on those. Having them -- the duration, a couple we finished faster than we expected, which is great for the customers, affects us internally in terms of the gaps between jobs. On the dive drops, we've gone out with the vessels. We're hitting the cost targets in executing them on the field. The field execution is going very well on those contracts.

The last question, if I may, across all your businesses, focus on the decommissioning business first, but talking about each of the segments, are you seeing any areas of demand weakness?

In the demand side, other than the areas that Geoff referred to, that were weather impacted, that are abnormal, the normal market activity continues to be very close to what we expected. Again, we talked about the offshore P&A where there were some delays. I think some of that activity commencing has been slower than we expected. The good news is we're seeing an increase in that for the moment. Overall, all of our businesses, the market activity, excluding weather, continues to be very close to what we expected.

Stu, is it safe to say that the demand side is at or above what we thought? Pricing has probably leveled out in a lot of these businesses, but that was something we had budgeted for. We'd anticipated that happening, but we're not seeing the price increases at the same level. There are some, but not at the same kind of growth that we'd experienced over the last two years. Is that a safe statement?

A high level summary is that the market activity is about where we expected and the price levels have stabilized, not increasing at the rates we've seen in the past, which is kind of what we expected.

So all the issues are execution?

All the issues in well abandonment were execution. You clearly had some issues in these other areas that I went over that were a mixed bag, but all of those are being dealt with or have been dealt with already.

Okay, understood. Thanks, guys.

Our next question is from Mike Harrison from First Analysis Securities. Please state your question.

Hi. Good morning, everyone. Not to beat a dead horse on WA&D, but the issues that you saw in this quarter, do they kind of make you think twice about bringing in any additional resources into the mix in terms of another spread or some more vessels, or do you sort of wait until that business is quote/unquote fixed before you start adding to it again?

I think if we went back to the last conference call, the question relating to well abandonment and what was going to go on, I said the number one, two, and three issues were execution. We have got to get all of these execution issues behind us before we try expanding again. We've expanded once last year and again this year. We need to do well what we're doing and make the money that we can make out of it before we try doing anything more in this area, in my opinion.

Then maybe switching gears to Maritech, can you remind me how much of your production there is not hedged? And then maybe talk about the magnitude of the benefit that you could see in the second half from selling that unhedged production at higher prices?

Joe, do you have that in front of you?

I don't have it in front of me, but the majority of the volumes, probably just roughly two-thirds is hedged. We'll try to look that up as the conversation goes on, but roughly, that amount is hedged. That's kind of our target. We don't want to hedge 100% because volumes can decline or increase over time. So there's always some unhedged volume.

One of the problems in making that answer is that our oil production and our gas production has just jumped up significantly. Looking at the volumes we were doing in the second quarter, we had 80% of our gas volumes hedged. Looking at the volumes you're going to have this week, you're going to have a lot less than 80% hedged. The same thing would be applicable in your oil side. We have historically tried to do 50%-plus in oil because a lot of that production is in three fields and because of that concentration, you don't want to hedge more than 50 to 60%.

We're bringing on a substantial amount of production here right now, and that will throw us into a different category and one of the things we're looking at, when you've got plus $70 oil is hedging out into '08 and '09 and '10 additional production. I doubt we would hedge anything more in '07. We'd take advantage of the higher prices there. Our gas price hedge , on the other hand, is above what we had budgeted for, but the current gas prices are actually below what we budgeted for. So incremental gas volumes will get less price than what we'd estimated.

Okay, thanks. I appreciate the additional color there. Then a couple of questions on Fluids. Do the sales need to be significantly above your budgeted levels in order to burn through that higher cost inventory by the fourth quarter, or do you think you can burn through it even if sales are sort of tracking where you expected or where you were for the first half?

Let me try that and then if anybody else wants to throw an answer in, they can. This is not as straight forward an answer as you would probably like. We have three sets of inventory, if you want to think of it that way. We have the inventory that was the old inventory that got revalued at the higher levels that we have to eat through, we have the inventory that we are buying under our purchase agreement that we're terminating that is high cost that continues to go on, and then we have inventory that comes in through the agreement that we signed with Chemtura. I think when you look at this you can't say when is the date the first two are gone, because by fact each of our locations is looked upon separately.

It may turn out that one of our locations is out of everything but Chemtura and will have very high margins and one of our locations will have the product that we're buying under our purchase agreement and our old product, and it will have very high costs. So it's not a time period finite that you can say, okay, it's all gone. What will happen, though, is the more that you take this year, the more that you will be draining off those two high-cost amounts and you will get more of the impact into next year. So it will be a gradual process, but it will be one that should be escalated if you can increase, say, sales by 10 or 15% over budget, that would be a big number because it would cut into some of what '08 would be negatively impacted by. So there's a rolling type of number here, but it's not a date finite that we can say, okay, all that's gone, let's look at the new profit.

Having said all that, Geoff, we do believe that the fourth quarter at the activity levels that we're seeing now moving into the fourth quarter, as you said earlier, we'll start to see some of the benefit. It's a complicated model, but all indications are we'll start to see some of that.

In terms of the onshore Fluids business, kind of absent the impact of weather that you saw in the second half of the quarter, how were things progressing with that business?

That has been a growth business for us and a business that we had anticipated would help offset some of the negatives that you had seen in the offshore part or the Fluids part for sales. I think we indicated in our original budget a $30 million shortfall, and yet our budget only showed, I believe, 15 or $16 million shortfall for the division, which meant somebody had to be growing during the year and a large portion of that growth was centered in the onshore fluid services business, and it was growing at a very nice clip in the early part of the year and we anticipate it will continue to grow throughout the remainder of the year.

Thanks very much, guys.

Our next question is from Tom Escott from Pritchard Capital Partners. Please state your questions.

Just two clarifying points on items that have already been discussed on the call. One is just touching on this Fluids issue you just mentioned a minute ago, I know it's a complicated model, but is it a fair characterization to say that because you now think that you'll be seeing some of these Chemtura benefits by fourth quarter instead of into '08, does that means that the volumes -- total Fluids volumes overall for '07 now appear to be greater now than you had thought six months ago?

I don't know that they're greater, but the mix of what we are going to sell will be possibly more important to us than what we had thought previously.

I think the specific, actual mix that we've seen and expect leads us to believe that we'll see that happening in the fourth quarter and that overall the volumes are consistent in aggregate with what we expected.

Okay, thank you. Then the second clarifying point was on I would say the well abandonment, a huge amount of questions and uncertainty about that. Are you seeing any indications that there's any real, structural customer slowdown in spending and activity and willingness to do jobs? Are the customers dragging their feet about doing these WAD jobs? Would they really want to defer this for some time for whatever extraneous set of reasons, or is this just simply it was some weather or the inability to move equipment or as someone had said earlier, execution issues. My concern is not so much with the execution issues which you talked about,, but more, real structural change and slowdown and a willingness of customers to do that work?

I'll answer it and then I'll let Stu answer it. I don't think there's any change in the customer's willingness to go ahead and do this work. I think we've said all along that this is a long-term project to get all of these platforms taken off and cleaned off the bottom in particular and that a lot of customers are taking their time trying to figure out how to do this, what's the most efficient way to do it, and because of that, it's going to extend over many, many years. Maybe another three to five years from now.

And we're a couple years into the process already. I don't think any of that has changed. I don't think customers are more or less inclined to do the work than they were two years ago. I think they're being very cautious because it's such a large amount of capital in trying to do it the most efficient manner that they can. Stu, do you want to comment?

I definitely agree with that. I think they're being cautious, they're looking at it, but overall I don't think it's changed from what we've been describing.

So then the problem for you, I guess, or the two problems for you is that number one, you've ramped up your capacity and your fixed costs dramatically and that requires significant asset utilization, which the customers have been dragging their feet on on doing, is that kind of what's happening?

I'd say it a little differently. Joe -- I'm sorry, Stu, has told you that the margins on this business when you do it is pretty much as anticipated. So that's not an issue. The issue for us is efficiently being able to operate these jobs sequentially, keeping utilization high and make sure that you've done them in a fashion that's workmanlike. And that's -- that all wraps into the term execution. Frankly, we've done a crappy job of it up until recently and now some of the execution we were so conservative with is going so well that it's causing us to have downtime and now we've got to think it in the other direction, which is kind of a sad commentary, got hit on both sides, but we did.

Well. Thank you for being so candid about that. That's all I had.

Our next question is from Rick D'Auteuil from Columbia Management. Please state your question.

I want to try to better understand the guidance. If I sort of dissect the miss in the quarter, consensus was around $0.52, even including the $0.05, $0.22 shortfall to the midpoint of your guidance, there's a $0.50 reduction to your new guidance from where the Street was. That implies there is $0.28 out there that is second half. As you've walked through the issues very methodically here, most of the things I'm hearing are -- were short-term issues and for the most part solved, whether it was weather, whether it was a vessel in a shipyard, whether it was delays, and I heard a lot of this is beginning in Q3. If I go back to the shortfall of $0.22, $0.05 was nonrecurring. There's a $0.17 impact in the quarter. You're saying $0.14 on average for the next two quarters. That sort of implies that things are, as you quoted, ugly going forward too. And I'm not hearing that in the detail. Maybe you can help me better understand where the $0.28 reduction's coming in the second half?

Well, we obviously had overestimated what we could do with these three businesses to offset the two $50 million combined holes that we created for ourselves. I think shame on us once for doing it, but shame on us twice, really, if we go out here and give you a number that's too high again. So we're trying to be relatively conservative. We're trying to say we've got execution issues in well abandonment that we think we're addressing, but we haven't seen July data yet, so it's kind of hard for us to determine whether we've actually improved dramatically what we're doing in well abandonment or not. Obviously, from a structural position, it sounds like we have to us, but we haven't seen that data and I think it's going to take, July, August, and September for us to make sure that that area has improved. And I think judiciously, we've decided to be conservative at this point in time and not try to stretch for anything, because obviously we were too high in the first place. I don't want to be there again.

So it's well abandonment that we can contribute that whole $0.28 to?

No, no. You've got some testing in the domestic testing part of this has got to get back up and running. And in July that the same bad weather that you had in June. I'm assuming you're going to have some impact in the third quarter in domestic testing as you would with onshore Fluids from that same problem of getting locations made ready for our people and so forth. I don't know that, I'm just presuming that. So we've kind of dumped a bunch of these things in the second half on our basis of trying to be somewhat conservative. If this third quarter proves to be appreciably better than what we thought, then we'll change it again.

Just to comment, what kind of delays, or I guess, how dynamic is your financial reporting and -- it's hard to react to something if you don't know what's going on. When will you know the July data, that is one --?

I didn't want to complicate matters, but Joe may want to respond to this, but we have just changed over our entire IT system in the last nine months and the first live month is July. So I don't know that I can answer that question. Joe, do you want to give a shot at it?

Well, we certainly have no problem closing the book with or without a new ERP implementation, so I want to make that clear and the implementation has gone incredibly smoothly and successfully. We certainly look at activity on an ongoing basis and we're not blindsided by events at the end of the month, but at the end of the month, there are always a number of issues such as the insurance issue that we deal with, and that's not an operational issue. Those are issues you just analyze looking at the cold, hard facts at the end of the month and make an adjustment. Geoff, rightly so, doesn't want to stick his neck out when there are issues that -- not that issues come up every month or even every quarter, but you don't want to stick your neck out prematurely and speak about a quarter or a month prematurely.

I might point out that the multimillion dollar changeover that we just went through was primarily to give us data earlier than what we've been able to do under our other systems so that we can operate our businesses more efficiently. That was the whole reason we went through this birthing process over the last nine months.

Okay. I guess specific to the well abandonment business and coming up the learning curve and becoming more efficient, how does your scheduling time going forward factor that in and are you expecting more issues on mistimed starts and stops?

I'm going to give you Stu, since he's overseeing that business right now. Stu, would you address that?

I think we've got a pretty good handle on what the schedule looks like for the next several months based on the backlog and based on the ways the jobs are scheduled. There's one project that's subject to changes, most of them driven by the customer that we need to respond to. Schedule-wise, the backlog that we have we've got lined up pretty tight for a few months.

Lastly -- if I already said lastly, I apologize. The high fixed-cost business, customers can wreak havoc with you if they defer some things a couple of weeks or even days, I would guess. Is there anything you can do to tighten up their commitment so that you don't experience these high fixed-cost down times that are really customer driven?

Well, probably the best thing that we've done to mitigate and doing on an ongoing basis on a couple of these big projects, we've got big strong engineers that are working with the schedule and we're getting that information on a daily basis, so we've got a pretty good window to react, respond, influence, but again even saying that, if they decide they want to delay for a period of time, we're going to be subject to that. The best way you mitigate is you have people in the office and you have a backlog of projects that things change materially, you can move them around. That's the risk of that business. You manage the fixed cost as tight as young and you deal with that and we've dealt wit in some of these units as the market has dictated.

Okay. That's all I have. Thanks.

Our next question is from Steven Gengaro from Jefferies and Company. Please state your question.

Thank you. Good morning. A couple things, first, and of course it's back to the well abandonment basis, but is the business model appropriate? Is there another way to attack this business? Because it seems like there's been constant inefficiencies and I'm just trying to get a handle on, maybe address that, but also can you give us more details on what's going on to ensure smoother execution? It seems like the work is there, it's just that the profits are not. I'm trying to get my arms around how to look at this business going forward?

Stu, do you want to --

I think from the initial question on the overall structure, I'm comfortable with the strategy and the structure and the way we're managing that segment. I think we've had areas where we continue to look at the management in the group and make the improvements as necessary. I think the overall model has worked, the integration is -- we continue to work individual services and integrated services and I think having the strategy and organization to support both has worked. I'm comfortable that that's appropriate. I think a big part of it also, under the umbrella of execution, I include how you contract as part of that as well.

And as we have talked about in this call and a couple of previous ones, we continue to move the way we contract that where less of the weather risk is on us, and that continues to be the trend and I think as we move into the third quarter and beyond, that's a significant change that we'll see the bigger impact going forward. So again, execution covers a lot of issues, but contracting is an area we've clearly improved and as Geoff said, executing on the field, a couple of jobs we finished early, which is an execution point of view and manage the fixed costs during that gap period. But I'm very confident the overall strategy and structure is correct.

Is the competitive environment, how is the competitive environment? Can you maybe give us more details on how your competitors are handling things as far as contracting for work? Is there something there that you can learn from, or is it simply just a matter of better execution?

I think we all are challenged with both the execution in the field aspect and the way you do the contracting. We're pretty cognizant of what's going on in the market, what others are doing. I think we've taken the appropriate response.

Okay. Switching gears a bit, when we look at the next couple of quarters and I guess, the extent we can talk a little bit about 2008, I guess there's two parts, one, is the MMS pushing hard on the customers anymore than they've been? That's follow-up to the prior question. As we look at the pluses and minuses going forward, obviously Fluids should be a big positive. What else should we look for as far as debits and credits to your earnings going forward, so we can get a handle on the progression over the next couple of quarters?

First of all, let me answer your first question, that was the MMS. There have been in the last probably month, five to ten phone calls from people who have suggested that the MMS has all of a sudden dropped a dime on these companies and they're going to have to now operate much more efficiently. I don't think that's an accurate statement. I think the MMS has been very forthright since the storms in going to the companies and saying, you are going to have to get these things taken care of. However, we understand there's not enough capacity. We understand there's a tremendous lead time for the engineering, we understand all of these issues, so we're not going to be holding you to the typical time frame that you would have if this was just a conventional problem.

On the other hand, they are making companies come in at least quarterly and give them a running assessment of where they are, who they're using, what type of equipment they're using, when it's going to be available and to the degree companies had kind of been pushing this off and not worrying about it, and there were some, but not many, that's come as a shock. Because the MMS is requiring data, specific data as to what they're doing on their plan to get this problem eradicated. But for the normal operator that's efficient out there, I don't think there's any change at all in the MMS other than their requiring you to continue to move forward with this whole process.

Now, your second question related to 2008, and I think earlier we talked about the various business segments, and I enumerated the items that were going to be better in the second half going into '08 than they were in 2007, and the only area that you don't know the order of magnitude on because we need to get to what the order of magnitude is this year is the well abandonment. We need to get that to a level that we're comfortable with and then we can kind of judge where we're going to be in 2008 and how much better that you could make that business, but without knowing exactly what you're doing in 2007, that's a little difficult to come up with, but I don't think you heard in any of the other business areas that we talked about any indication that they would be less than they were in '07, and they would probably be better than they were running in the latter stages of '07, and the latter stages of '07 should be a lot better than the first half of '07.

Okay, and then just one final question, and that is, if I looked at, just for arguments' sake, the midpoint of your guidance for '07, it suggests about $0.83 in the second half. When I think about it, I think about seasonality in the fourth quarter and well abandonment, but I also think about the ramp in Maritech and Fluids maybe getting a little bit of benefit from Chemtura. Should I think about that being kind of equally weighted over the next two quarters?

I think when you look at the quarters, we historically have said the first and fourth were very close and the second and third would be very close. I think this year what you're going to find is that the fourth quarter will be better than its normal seasonal business for a number of reasons. In testing, obviously, you've got all of these international contracts that are going to be benefiting you that didn't benefit you earlier in the year. So the fourth quarter ought to be one of our better quarters in testing. Maritech, obviously, if we've escalated the production forward, the fourth quarter ought to be a very good quarter for Maritech and you ought not to be see a big drop-off.

As you get into fluids, we've already mentioned that we may be benefited in fluids in the fourth quarter, so there's a business that should be better in the fourth quarter in parts of it. Remember, seasonally you have some issues there. Maritech -- excuse me, well abandonment seasonally will be off no matter what versus the third quarter, based on just the way business is done in that business. So that's what usually swings us to a weaker fourth quarter. But when you add all these other business components up it seems obvious that our fourth quarter is going to benefit more than normal does. That mean it's equal to third quarter? I don't know that we go there. But it certainly is going to be better than what it normally would be on a seasonal factor basis, third versus fourth.

Okay. That's helpful. Thank you.

Our next question is from Byron Pope from Pickering Energy Partners. Please state your question.

Hey, guys. You've touched on the fact that demand is still there, kind of on a multiyear basis more than well abandonment and decommissioning work, and that you think the model works, so I guess I'd like to press a little bit on PVT margin expectations. The original guidance was roughly 21%. PVT margins for that segment, and then 12% in Q1, 15%-ish in Q2. Once we get behind the execution issues, do we ever get to the point where you get to those type of margins for that business or is that optimistic?

I think that the way we're approaching this business now is for the bottom line, which means that we're going to be looking at the jobs and the execution of those jobs that we expect will give us a yield very close to what you're talking about. What it may mean is that you don't have as many of those if we can't do them efficiently simultaneously, so it may mean your revenues are less than what you thought they were going to be. However, the margins ought to be better, because you're doing what you're doing more efficiently. If you can then turn around and do that level efficiently, you can step up the revenue side and hopefully attain those kind of margins again. I think we would shoot toward the margin side first and give up part of the revenue side to make sure that we're getting toward those levels. Stu, do you want to comment?

Clearly we have expectations to get the margins beyond what we've done the last two quarters and towards the 21, and that's kind of the approach we're taking from a bid strategy and number of assets that we have in place. So I agree with Geoff.

My next question just relates to the fluids business. Given the growth you're seeing on shore in the U.S., can you -- Joe, can you help us frame kind of how big the onshore piece may be? Or maybe how big it was in Q1 versus kind of offshore Gulf of Mexico and international, and is there any way to kind of quantify the weather impacts that you saw in the fluid business in Texas and Oklahoma in the quarter?

I can't rapidly break those numbers out for you, Byron. Historically, the -- in the domestic Gulf of Mexico -- in the domestic fluids business, the Gulf of Mexico has been, say, 85% of the revenues, and the on shore business has grown significantly. It's grown from a small base. So the numbers don't move from 85% dramatically, but maybe it's more like 80/20, or slightly faster growth in the fluids than on shore than that. Just to give you a ballpark.

So the weather issues in the Mid-Continent, they had to have been pretty severe for it to have -- just leave it at. That they had to have been pretty severe.

They were pretty severe.

All right, thanks.

Our next question is from [Sid Donda from Wells Capital Market]. Please state your question.

My questions have been answered. Thank you.

By the way, I'd like to make one comment on what was just said. Joe's comment is exactly correct in terms of the magnitude of the revenues associated with that business, but the facts of life are, as it it's budgeted right now, the on shore part of our business will make the largest component of earnings in the domestic part by quite a wide range. So while revenue-wise, he's accurate, this year, due to what we've talked about previously, the preponderance of the profits are actually on shore.

Our next question is from [Bill Doyle from Wenger,] please state your question.

Looking at the guidance that was out at the beginning of the year, how is production enhancement stepping up against -- I mean, test, is the biggest impact the slow start to international testing? I know we need to be careful on Compressco, but how do you look against expectations at the beginning of the year?

What I can say is that almost all of the difference in production enhancement is testing. And the largest component of that is international but domestic has obviously been a shortfall, given what we've talked about as well. Domestic is the largest component of that business today by far, so any kind of a hiccup there is going to have a significant impact, even compared to international, because you're growing international. But both of those are the reasons that you see that division below expectations.

And then on domestic side, the only variable off of original expectations was the weather?

Yes, margins are lower. I mean, when you say "weather," you've got to combine the fact that you've got pricing in there, you've got costs in there, and if you are not at the utilization levels that you want to be at, then you've created your worst enemy, which is what you had there for a period of time. So the biggest component of that is the margin erosion which is a function of utilization not being what we wanted, and then you combine that with the pricing and the costs, you've got a problem. The pricing and costs, however, are not appreciably different. I think we thought we might get a little better pricing in that area, but I don't believe it's material.

And your comments were then -- that was directed at the domestic?

Domestic.

So that domestic, there's no change -- there's no change to competitive dynamics as far as share change? Does that domestic utilization come down to the weather, or is it customers slowing down against gas?

We haven't seen, other than the weather, you know, significant change on the domestic testing demand.

One thing we're doing in domestic testing, though, that we were not really looking at, at the beginning of the year, is that we've added to that, and we are looking at various areas around the country as to the most efficient place to have our equipment. I think it's safe to say that we've moved equipment to markets that we think are growing faster and giving us an opportunity to grow faster. So we've had a little of that in the first six months as well, but I would not use that as a reason for the earnings not to be there, although I actually -- that causes your utilization to be lower again while you're moving equipment and restructuring territories. But that kind of goes with the growth market anyway.

Utilization in July so far then has bumped up?

I don't know that we want to go too far into that, but I think it's safe to say that early July's weather was the same as June what. We did say, I believe is that currently in August we're seeing increased utilization both in testing and our on shore fluids business. Beyond that, I hesitate because I haven't seen any financial numbers for July. We usually don't see numbers for about 20 days after the end of the month.

But you said better utilization second half of July?

Right.

Thanks.

Our next question is from Shawn Boyd from Westcliff Capital Management. Please state your question.

Hi. It's been a long call so I'll keep it very quick. I want to go back to the visibility and scheduling within the WA&D business. Stu, you mentioned the comment that the next few months the schedule is pretty tight. Can you elaborate more on that? What are you guys generally looking for here in terms of the length of contracts in hand and how far out can we think about your visibility?

Yes, I'll keep my comments similar to what I made previously. Typically, two to three months out at this time of the year is consistent with what we would have and expect. We feel very good about that. Beyond that, we're -- as you might imagine, given the tenor of the discussion the last hour, we're very focused on the third quarter, execution. Beyond that we've got stuff we're working on, but our division's primary focus is executing the third quarter, and we feel the visibility for the next 60 to 90 days is very good.

Okay. And within the work that you're trying to execute over the next quarter and the quarter thereafter, what percentage of that book are still fixed price contracts?

Very little.

Sub-10%?

I'm not certain I want to give a specific percentage, but it's very little.

Okay. And last question for Stuart or Jeff. Relative to our discussions in the very beginning of this, a year, two years ago, what would you say is the kind of current backlog on the business? So not just the project you're working on over the next few months, but given the trouble that we're having here, to give investors a little bit of comfort, can you give us any better feel for quantifying this backlog?

Let me give you one thing that's going on right now, and it will give you maybe comfort or discomfort as to the answer to that. We're actually using a third-party vessel to do Maritech work right now because we do not have additional vessels that we want to go and take under lease, which says that we have more business right now than we have vessels. And on a go-forward basis, Maritech continues to have an awful lot of business to go and do, as you're aware. How you answer the question, are you better than you were a year ago in backlog, or worse, is -- I don't -- I just don't know how to answer that because I would have put all that work for Maritech in our backlog, and point in fact, we're doing it, again, with a third party because we just don't have the capacity, unless we add additional equipment, which would complicate again what we're doing. So the market is there.

It's a function of us being able to perform within it. And we're doing things like give that business to a third party to try to more efficiently do what we're doing. And that ought to augment well as we look into the future because you've got all of that work for Maritech on top of the work that you've got lined up on these other projects, but the bottom line of it is, what we've been harping on this entire time is not is there a market out there. It's that if you get the market, have you contracted for it correctly, do you have the right pieces of equipment, can you run it efficiently, and can you drop to the bottom line the numbers that we expect to, and if we can't, then we're going to have to revamp what we're doing. And that's what occurred late in the second quarter. We finally got to a frustration level that we determined that we needed to put our Chief Operating Officer in the middle of this to make sure that it was being done efficiently. And I'm very happy with the results we've seen over the last month and a half or so in terms of getting a lot of these issues resolved.

Fair enough. Thank you.

Our next question is from Steven -- follow-up from Steven Gengaro. Please state your question. Gentlemen, there are no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

Well, thank you for being on the call, and I'm looking forward to a much better third quarter conference call than the one we just experienced. We, as a management team, are dedicated to make this work, and we think we've got the opportunity to do so. So we're going to get to work now. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.