NPK International Inc. (NPKI) Q3 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Newpark Resources Third Quarter Earnings 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's now my pleasure to introduce your host, Ken Dennard. Thank you, Mr. Dennard, you may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Newpark Resources conference call and webcast to review third quarter 2018 results. With me today are Paul Howes, Newpark's President and Chief Executive Officer; Gregg Piontek, Chief Financial Officer; Phil Vollands, President of the Fluids business; and Matthew Lanigan, President of Mats business. Following my remarks, management will provide a high-level commentary on the financial details of the second quarter and outlook before opening the call for Q&A. Before I turn the call to management, I have the normal housekeeping details to run through. There will be a replay of today's call. It will be available on the webcast on the Company's website that's newpark.com. There will also be a recorded replay available until November 9, 2018 and that information is included in yesterday's release. Please note that the information reported on this call speaks only as of today, October 26, 2018, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of Newpark's management. However, various risks, uncertainties and contingencies could cause Newpark's actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and current reports on Form 8-K to understand certain of those risks, uncertainties and contingencies. The comments today may also include certain non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in the quarterly press release which can be found on the Newpark website. Additionally, you may have received an email invitation from me in the past week or so for Newpark's 2018 Analyst Day to be held on Thursday, November 29, 2018 just outside Lafayette, Louisiana. If you have any questions or did not receive your invitation, please contact me by email or by phone. The space is limited, so please RSVP as soon as possible. And now with that behind me, I'd like to turn the call over to Newpark's President and CEO, Mr. Paul Howes.

Thank you, Ken, and good morning to everyone. We're pleased to report that both segments are continuing to make meaningful strides in the execution of our long-term strategy, although our Fluids Systems segment experienced some softness in the quarter. Consolidated revenues were $235 million for the third quarter, relatively flat with Q2. In Fluids, third quarter revenues for the segment came in at $181 million, a 1% sequential increase. North American revenues improved by 7% sequentially, as improvement in the North American land markets were partially offset by a reduction in Gulf of Mexico. We successfully completed our second Kronos deepwater project with Shell Oil during the quarter and I'm pleased to report that we have since been awarded two additional wells which are scheduled to be drilled over the next two quarters. However, we did experience some project delays with other offshore customers, which negatively impacted the Gulf of Mexico revenues for the quarter. Eastern Hemisphere revenues declined by $5 million sequentially from the near-record level achieved last quarter, primarily reflecting the anticipated pull back in Romania, Kuwait and Australia. Following the strong margin improvement in the prior quarter, our Fluids operating margin declined to 5% in the third quarter, reflecting the impact of the $2.5 million of charges as identified in yesterday's press release. In addition, the quarter's result was also impacted by the timing of certain expenses including elevated bad debt charges primarily related to our foreign operation. Meanwhile, as we've talked about in previous quarters, we're continuing to make organizational investments in order to support our strategic expansion into new markets include the deepwater Gulf of Mexico, both in drilling and completion fluid, as well as the North American stimulation chemicals market. We are seeing tangible progress on multiple fronts as we execute our total Fluids strategy including our recent successes with Shell, as well as our first sale of completion fluid in the Gulf of Mexico during the most recent quarter. As I touched on in yesterday's press release, we're making solid progress in upgrading and converting a legacy drilling fluid site into our completion fluids facility in the Port of Fourchon, which will complement our primary deepwater shore base in support for the Gulf of Mexico market. Our goal is to have the facility operational before the end of the year. While there are tangible signs of progress, I think it's important to highlight that these investments in our total Fluid strategy provides a modest headwind to our current operating margin. These investments are important to expand our total addressable market and improve our long-term Fluid segment profitability. Turning to the Mats business, we continue to see the benefits from our market diversification strategy, which provides meaningful growth opportunity and added stability as reflected by the balanced contribution across both E&P and non-E&P market. Third quarter Mats revenues were $54 million, modestly ahead of our expectation. While the seasonal decline in the utility transmission rental market played out as being anticipated, the impact was somewhat offset by the continued market penetration in pressure pumping applications, where we believe our system provides a superior work surface for gravity-fed sand system. With the increasing momentum more broadly across E&P and non-E&P markets, as well as weather-driven demand in the southern U.S, we feel confident that fourth quarter revenues for the Mats segment will expand beyond the levels achieved in recent quarters. Before turning the call over to Greg, I'd like to take a moment to provide update on our Fluids contract with key IOCs and NOCs and around the world. First, as noted in yesterday's press release, with Petrobras activity levels beginning to wind down under current contract, we are in the process of reducing our work force in-country. While Petrobras has delayed their decision on the award of the next three year contract, we've been informed that they awarded a short-term contract for fluids to another supplier when our contract expires in December. While the Petrobras work has provided meaningful revenue to Newpark and provided us with the initial opportunities to demonstrate our deepwater capability, this contract has continually provided a headwind to our Fluid operating margin. With the end of the current Petrobras contract, we plan to reduce our footprint in Brazil, but it's important to note that we'll maintain key infrastructure and personnel in the market. It's our current view that IOC deepwater activity in Brazil will increase over the next two to three years, and with an expanding resume of technical and operational success in the Gulf of Mexico, we remain well positioned to capitalize on the IOC opportunities in Brazil in the coming years. To that point, we've now demonstrated our capabilities drilling eight offshore wells using the Kronos technology this year, including two successful deepwater projects with Shell Oil in the Gulf of Mexico. While this is still a small sample size, there results have provided a catalyst to expand our discussions with other IOCs regarding deepwater technical challenges and opportunities around the world. Furthermore, as our Fourchon completion facility becomes operational, we are expanding our addressable market in the Gulf. Internationally, I'm pleased to report that we recently secured several new contract awards which will help offset impact from the upcoming transition to the new Sonatrach contract that we discussed last quarter. In Australia, we received a new three year award with Origin Energy to provide fluid and related services for their onshore drilling program. While still subject to final contract execution, we estimate this work to provide to revenues of approximately $10 million over the contract terms. In addition, we received a smaller award for another operator to drill one to two wells offshore Western Australia. In Italy, we received a new multi-year contract with Total to provide both drilling and completion fluid in support of their land drilling program. This contract is expected to provide approximately $15 million of revenue over the next two years. All these contracts are expected to start in early 2019. These awards are representative of the general increase in tendering activity that we are seeing across the international market. And with that, I'd like to turn the call over to Greg to discuss the detailed financials of the quarter. Greg?

Thanks Paul and good morning everyone. I'll begin by discussing the details of our operating segment or finishing with our consolidated results. The Fluid System segment generated total revenue of $181 million for the third quarter of 2018, reflecting a 1% sequential increase from the second quarter and a 9% improvement year-over-year. In the U.S. revenues were $107 million, up 3% sequentially outpacing the 1% increase in U.S. rig count. As Paul touched on, although we continue to benefit from market share gains in the U.S. land our offshore Gulf of Mexico revenue remains somewhat inconsistent driven by the timing of individual projects as we penetrate this market. On a year-over-year basis, U.S. revenues had increased 10% from Q3 of 2017, roughly in-line with the 11% improvement in average rig counts. In Canada, revenues were $17 million for the third quarter, reflecting a 50% sequential improvement and achieving our second strongest Q3 performance for this business unit. On a year-over-year basis, revenues improved by 24% despite a relatively flat market rig count over the same period largely driven by elevated mud losses. Turning to our international regions, revenues in the Eastern Hemisphere were $51 million in the third quarter, reflecting an 8% decline from the near record level achieved in Q2. The sequential comparison primarily reflects the expected decline in Romania and Australia as well as Kuwait. The decline with KOC is primarily driven by limitation on a current envelope as we approach the end of the contract. These reductions were partially offset by an increase in revenues from Shell contract in Albania. On a year-over-year basis, revenues from the Eastern Hemisphere improved by 8%, benefitting from a higher contribution from Albania and the Baker Hughes integrated services project in Australia, which was somewhat offset by declines in Algeria. In Latin America, third quarter revenues came in at $6 million, primarily consisting of the Petrobras contract in Brazil. Brazil revenues declined by 20% sequentially, reflecting the impact of the local currency deflation as well as the anticipated reduction in Petrobras activity. As we approach the end of the Petrobras contract, we are continuing to reduce our workforce in-country and have reported a $1.1 million charge in Q3 primarily reflecting cost associated with planned workforce reduction in the fourth quarter. Through the first three quarters of the year, our Brazil operation has generated revenues of $19 million and an operating loss of $1.3 million, which is largely driven by the Q3 severance charge. Operating income for the consolidated Fluid segment decreased by $5 million sequentially in the third quarter, which includes $2.5 million of charges as highlighted in yesterday's press release. In addition to these charges, the remaining sequential decline was primarily driven by a softer revenue mix and the timing of certain expenses. As Paul mentioned, the third quarter results included elevated bad debt charges, substantially all associated with international revenues generated in previous years. Also, as Pau touched on, we are continuing to build out our organization associated with the strategic growth areas we've identified, including the deepwater Gulf of Mexico, both in drilling and completion fluid as well as North American stimulation chemicals. With that point, we continue to carry ongoing expenses attributable to these growth areas that serve to reduce our Fluid segment margin of nearly 100 basis points. Turning to the Mats business, total segment revenues were $54 million for the quarter, representing a modest sequential decline from the anticipated seasonal softness in utility T&D market. Specifically, rental and service revenues were impacted as customers in the southern utility T&D market reduced their maintenance activities during periods of peak demand driven by the summer heat. Overall, rental and service revenues came in at $43 million, reflecting a 5% decline from prior quarter. Meanwhile Mats sale demand continues to remain strong with revenues from Mats sales coming in at $11 million for the third quarter, consistent with prior quarter. Comparing to the third quarter of last year, Mats segment revenues increased by 56% primarily reflecting the impact of our Q4 2017 acquisitions, along with our continuing expansion in the pressure pumping and utility T&D markets. With the seasonal pullback in revenue from prior quarter, the Mats segment operating margin declined modestly 24% for the third quarter compared to 26% for the second quarter and 31% for the third quarter of last year. The sequential decline is largely attributable to the lower rental revenues along with the non-recurring benefit in the prior quarter, related to the favorable resolution of patent enforcement action. The year-over-year change in operating margin is largely the result of a revenue mix shift to services associated with the late 2017 position. Now turning to our consolidated results, third quarter 2018 revenues were $235 million, flat to prior quarter results, but representing a 17% increase year-over-year. SG&A cost were $30 million in the third quarter, which compares to $29 million last quarter and $27 million in the third quarter of last year. Third quarter SG&A includes a $1.8 million charge associated with the retirement and transition of our General Counsel. Adjusting for the retirement charges, SG&A cost declined modestly as compared to prior quarter. Total corporate office expenses were $11.2 million in the third quarter which includes the $1.8 million GC retirement charge compared to $9 million in both the prior quarter and the third quarter of last year. Interest expense remained relatively unchanged at $3.7 million for the third quarter. Consistent with prior quarters, the third quarter interest expenses includes approximately $1.4 million non-cash expense primarily associated with our convertible bond. The provision for income taxes for the third quarter of 2018 was $2.8 million reflecting an effective tax rate of 44% which brings our year-to-date effective tax rate to 32%. The higher rate is primarily the result of the reduction in expected full-year earnings in low-tax rate jurisdiction including the U.S. Net income for the third quarter was $0.04 per diluted share compared to $0.12 per diluted share in the previous quarter and $0.03 per diluted share in the third quarter of last year. The charges identified in yesterday's press release contributed a $0.04 per diluted share reducing to the third quarter EPS. Turning to cash flow, cash generated from operations in the third quarter was fully offset by a $20 million increase in working capital including $15 million increase in receivables largely associated with increases in Canada and Algeria, as well as $4 million of insurance receivables associated with the Q3 facility fire. In addition, inventory increased by $13 million in the quarter impacted by the timing of barite ore receipts and an increase in Mats inventory ahead of the historically strong fourth quarter. Capital expenditures used $8 million of cash in the quarter, the majority of which was used to fund investments in the Mats business. Cash used in financing activities totaled $11 million, largely reflecting the $14 million reduction on our bank facility. As discussed on last quarter's call, in light of U.S tax reform, we began repatriating excess foreign cash back to the U.S. in the third quarter, which facilitated the reduction in debt. We ended the third quarter with a total debt balance of $188 million and a cash balance of $52 million resulting in a total debt to capital ratio of 25% and a net debt to capital ratio of 20%. Substantially all of our cash on hand remains within our foreign subsidiaries where we are continuing to work through the administrative processes within several targeted foreign jurisdiction to facilitate repatriation of cash which we intend to use to reduce our bank facility balance. Now turning to our near term outlook. In the Fluids business, while there remains some level of uncertainty regarding customers exhausting their current year budget as we head toward the end of the year, we currently expect Q4 revenues to modestly strengthen from Q3 level, largely driven by improvement in North America including the seasonal improvements in Canada. We expect the improvements in North America will be somewhat offset by a modest pullback internationally driven by the wind down in Brazil, contract transitions in Kuwait and Algeria as well as the timing of customer projects in Albania and other markets. From an operating income perspective, we expect segment income to rebound from Q3 levels largely due to the $2.5 million of charges and elevated expenses in Q3, which we do not expect to recur. Looking beyond the next quarter, while the anticipated reduction in Petrobras work is expected to reflect favorably on the overall segment margin, the sustainability of margin improvement will remain heavily dependent upon achieving a consistent revenue stream from targeted expansion into the deepwater Gulf of Mexico as well as North American stimulation chemicals market. In the Mats business, as Paul touched on earlier, we expect Q4 revenues to surpass the levels achieved in recent quarters, benefiting from the seasonal rebound in the utility segment, elevated weather-driven demand across the Southern U.S., as well as an increase in direct sales where we typically see strength near year end. The Northeast U.S. provides some uncertainty in the near term driven by the potential slowdown in activity as E&P customers exhaust their 2018 budget. Overall, we expect the strength in the utilities market should more than offset any potential softening in E&P, leading our fourth quarter revenues higher which should drive segment operating margin back above the mid 20s mark. We expect corporate office expenses will remain relatively stable in the near-term, after adjusting for the third quarter charges associated the retirement of our General Counsel. With regard to capital expenditures, we continue to expect full year CapEx of approximately $40 million. Roughly half of our full year capital expenditures will reflect growth investments, the majority of which consists of Mats rental fleet expansion. We expect our fourth quarter effective tax rate to be in the mid to upper 30s, which is in a similar range to the year-to-date rate after adjusting for a few tax benefits which we do not expect to recur. Despite the lower federal tax rate following U.S. tax reform, our profitability is expected to remain heavily weighted to foreign operations in the near term, which serves to increase our overall effective tax rate. And with that, I'd like to turn the call back over to Paul for his concluding remarks.

Thanks Greg. As we move into the fourth quarter, we remain optimistic about our outlook and strategic direction in both of our segment. The larger oilfield service companies that noted some near-term headwind in specific parts of their U.S. portfolio, we expect to see these market trends to have a fairly limited impact on our business over the coming months. Our strategy has been consistent over the years, and I believe it is useful to provide a recap for those of you who are new to our story as well as for those who have been with us for years. Our primary focus has been to improve the stability of our revenues and profitability by expanding our geographical footprint in the Gulf of Mexico and international market, extending our fluids business offering into adjacent chemistry and diversifying our Mats business into non-E&P market. With that said, here is where we stand in both of our business. In our Mats business, we're coming up on the one-year anniversary of the acquisition of the Well Service Group, the largest acquisition that the Company has made in the last decade. I'm proud to say that the team has done an outstanding job of integrating this acquisition into our business, which is never an easy undertaking. The addition of the Wells Service Group is enabling us to drive operational efficiencies for our existing customers, deliver further advancement of our industry-leading composite matting system, accelerate our penetration of targeted end-user market and create additional value for our shareholders. Now, it's time to take that focus and energy to further expand the business into our key market. And to that point, throughout 2018, we've continued building out the team in the Mats division to manage the industry verticals we've created in oil and gas, utility, transmission and distribution and pipeline. We believe that providing the necessary focus to each of these industry verticals, we will be better positioned to understand the varying customer requirement, align our product development process, deliver superior value through product innovation and enhance service, and drive increased revenues and market share. As Ken touched on earlier, we are excited to host the Analyst Day on November 29, at our Mats manufacturing and technology center located just outside Lafayette, Louisiana. Have you not received your invitation, please reach out to Ken Dennard and his team at Dennard-Lascar. In our Fluids business, I think it's important to highlight that while the third quarter reflected a modest margin pullback from our improvements in Q2, our longer-term outlook, strategic direction and expectations for the business remains strong. Similar to our Mats business, we've been adding resources in advance of anticipated sales in the Gulf of Mexico, both for drilling and completion fluid as well as our expansion in the stimulation chemistry in the U.S. While this requires some level of pre-investment in infrastructure and organizational capabilities, we believe that these are organic investments represent a prudent way to expand our addressable market and ultimately generating superior return for our shareholders. Internationally, we are seeing evidence of improving market conditions across several regions. As discussed last quarter, we signed a new three-year contract with Sonatrach in Algeria during the third quarter and we expect the transition to begin within the next few month. Meanwhile in Kuwait, we recently submitted our proposal for the next multi-year contract and we expect contracts to be awarded sometime in the fourth quarter. While there is no assurance of success with any customer tender, the strong relationship that we've developed with a valued customer provides us with optimism regarding the opportunity. Also, we're very pleased with winning a contract with Total in Europe in the quarter and the expected execution in the coming weeks of a new contract with Origin Energy in Australia. Lastly, I'd like to speak briefly about the significance of our Kronos product line and how it is validating our strategy of being a recognized technology leader in our industry. As I mentioned in my opening remarks, we have now successfully drilled eight offshore wells of which two were in the deepwater Gulf of Mexico. And with the recent award of two additional wells with Shell Oil in the Gulf of Mexico, it's clear from our perspective that Kronos is providing unique value above and beyond the offering in the large integrated service company. Shell's award speaks volumes about Newpark being recognized as a technology leader in one of the most technically challenging market. With continued acceptance of our Kronos technology, it's our belief that new doors will open up for us and other major ILC. And with our completion fluids facility expected to become operational at the end of the fourth quarter, our plan is to start bundling drilling and completion fluid in 2019. With that, I'd like to close the call with thanking our employees for their hard work and dedication in Newpark, as well as their continued focus on safety. We'll now take your questions. Operator?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Praveen Nara with Raymond James. You may proceed with your question.

Good morning guys. I guess I just want to start on the Mats side, obviously there is a lot of hurricane relief efforts going on now similar a bit to last year. So I guess could you kind of help us quantify or give us some sort of guide in terms of what we should expect from an impact of that? And then at the same time it seems like the Mats business is more diversified than just hurricane relief efforts on the utility side. So could you talk about the geographical distribution of your Mats business on the utility side?

Praveen, its Mathew. I'll take that one for you. I think it's fair to say at this point related to the hurricane, it is still somewhat early days as people are going in and assessing the damage. We are not seeing a material uptick yet on the rental and service side. I think as people are getting themselves organized on the project relief if you will. On the Mats sales side, we have seen a modest bump from customers in that area requiring some matting projects specifically. I think the Q4 is going to be more of a combination of that and also the seasonal weather that we've had down here on the Texas, Louisiana, Gulf of Coast really requiring a heavy load. Beyond that, I think we are seeing broad-based demand throughout our network. I wouldn't call at any specific location.

Right, perfect. And I guess for my follow-up, a lot of growth opportunities out there. I am curious on the levels of investment needed to actually access those. You talked about the bundling of fluids in 2019. There is likely a growth in the mat. So can you talk about the capital needs and capital growth opportunities for 2019? And what we should be expecting in terms of how much we should spend year-over-year?

Sure. This is Gregg. I'll take that one. With regard to our capital needs in the business, I think it's going to be a similar theme to what we saw in 2018. Maintenance CapEx continues to run about $20 million for the business. The Fluids needs are not real significant as we expand into targeted areas, you know similar to what we are doing with the completion fluids expansion in Fourchon. We will have investments here and there that tend to be in the $3 million to $5 million range for each one of those. So, that's fairly limited. On the Mats side, it's really going to be more driven by the rental growth overall. And just as we've done this year, we will continue to feed that rental fleet as the revenue growth warrants and you calibrate that accordingly.

Just in terms of the bundling with the completion and drilling fluid in the Gulf of Mexico, we had an existing facility that had not been used a lot. It was kind of an oil-based mud plant that was for inland marsh drilling, and so very limited revenue coming out of that facility. That's the one we are converting over to our completion fluids facility. So, really minimal capital to do that, but well our hope is that that facility will go operational at the end of this year and that we can start bundling both drilling and completion fluids with deepwater in 2019.

Perfect. Thank you very much guys.

Our next question is from James West with Evercore ISI. Please proceed with your question.

Good morning guys.

Good morning.

Good morning.

Paul, obviously the clear success here with Kronos and eight wells already completed, we get two additional wells coming. Can you remind us the financial impact of a Kronos well versus some of your more normal technologies? What the differentiating factor is there and kind of how we should think about the acceleration of uptake here going forward?

I mean if you look at it in terms of the mix of our other product lines, it's relatively in the same level in terms of profitability, maybe slightly higher incremental margins. But the real value from our perspective is the differentiation of value is providing to our customer. That's why we're getting what I think is a significant fraction and repeat business with Shell Oil is what we are doing from them or doing for them from an operational perspective. Phil, would you like that?

Sure. James, from a technical point of view, the Kronos product is Flat Rheology systems that it performs at a high level across a range of temperatures. It's very valuable to the customer and also has a very low ECD or equivalent circulating density. And those are the critical parameters that customers are appreciating.

And it's interesting, too. I mean, certainly we are very proud of the technology that the Kronos is bringing, but also our service quality that we are delivering as well. I think one thing that we are doing an exceptionally good job on it is interfacing like with the petrophysics department at the IOCs, and understanding issues they're having down hole and challenges, and that I think is provided some unique value as well.

Okay. Got it. That's great to hear. And then Paul, on Brazil obviously Petrobras rolling off here, but I mean just an enormous amount of interest in the Brazilian market from the IOCs. Now admittedly, we have an election over the weekend that can change that pretty quickly, but it seems to me that if all things go well, that market starts to really explode. And so, how are you thinking about your position there, the marketing to the IOCs which of course include one of your key customer Shell? And assuming, we don't have a hick up here with the political situation. How do you see the outlook for that as we go through the coming and probably about the quarters in probably coming years?

Hey, James. This is Phil here. We see an uptick coming in next year – late next year and into 2020. And our strategy there we're winding down currently at a sizeable proportion of our population down there. What we will retain are the key elements to maintain and support and win new business down there. Over the years, we've actually developed quite a history – quite a resume of deepwater drilling and drilling so many wells there, the Petrobras and IOC down in the area. And infrastructure is very well located and our technologies are very applicable to the need down there.

James, it's interesting too from my perspective is that the fact that we're now driving Kronos into the deepwater Gulf of Mexico. Historically, we have not drilled Kronos in Brazil. So we're already having some discussions with IOC in Brazil about the Kronos technology. And so that's one of the exciting things in my perspective is the ability to reverse leverage that developing success in the Gulf of Mexico with IOCs into that Brazilian market. And we are going to maintain an operational presence there, the facilities, as business comes we'll be ready to serve it.

Great. And is the Kronos, is there anything about the geology in Brazil that makes Kronos more applicable than the Gulf of Mexico or is it about the same?

I would say it's roughly the same. The pre-salt – you have some different challenges obviously than you do, but I would say it's roughly equivalent. But once we get in and we've not drilled a well there with Kronos, but that would be my thoughts.

And our high performing water-based technology has also been successful down there today.

Okay, got it. Okay, great. Thanks guys.

Our next question is from George O'Leary with Tudor Pickering, Holt & Company. Please proceed with your question.

Good morning, guys.

Good morning.

Picking up the incremental wells of Shell is certainly encouraging and speaks to the performance there. My understanding is there are other partners on that well. I just wonder what the process is there. And I understand you have to get qualified with each of the kind of main operators of these projects. Would the processes and any line of sight to winning work with some of those other offshore players via the experience with this Shell Kronos as well – handle the Shell Kronos as well?

Hi George, this is Phil here again. Primary partners with the IOCs, I mean we are in a position now where there is just a very broad-based awareness of Kronos. And the technical folks in the other IOCs as we leverage the success from Shell is the other major IOC. We are getting beyond general qualifications with them into more project specific testing and qualifying. To answer your questions, there is a broad-based awareness now increasingly with the Shell successes.

A lot more discussions with the IOCs, and obviously a much shorter qualification process than we had with Shell. We hope to have another IOC in 2019 absolutely.

Got it. That's very helpful. And then, I know you guys recently in your last investor deck or two, there is some good color on the opportunity on the Mats side. I wonder if you could just one step back in and on the call frame for us the opportunity you see in that non-oil and gas portions of mats from a total market opportunity and the Newpark opportunity set within that. And then also kind of where you sit today, so how much running room is left? And then long winded question, but also on the pressure pumping side, how big are you in that business today and how much running room is there for Newpark on the Mats side in pressure pumping?

George, it's Matthew. I'll take that. Look, I think the way we frame up the – we've always play to some extent outside of the E&P markets in the transmission and distribution and pipeline size. But as we saw in those markets up, we view them as multiple times the size of the E&P, so from that perspective we consider there is considerable run room and we are only just beginning that journey as we formalize the verticals that Paul has touched on earlier in the call. So we are quite confident that there is a healthy run room in those particular industries. On the pressure pumping application, that's a largely driven. I know there is some pressure there from about some slowdown in that market, but what we are seeing is the technology ship, the gravity-fed systems from the pneumatic systems is heavily favoring our matting technology. And so with that, relative growth in that market where we're continuing to see a healthy outlook in that space.

And in terms of the overall size of the well, well that has been the key area of growth within the E&P components of the mats revenue and it still remains a smaller piece of that overall portion.

Got it. And then I sneak in one more if I could. You guys have also been attacking those non-oil and gas markets like with increased vigor and focus. And I am just curious if you could kind of provide some more color for us on the strategy there and how you guys are trying to push your mats into these markets where other forms of mats be that wooden or steel-based. If you look over in the U.K, tend to have the lion's share in the market today? What kind of that the strategy is to get into those markets to get further penetration in those markets?

Look I think, I mean I think the Mats in some ways speaks for itself. A lot of the advantages that we're seeing from a transportation, from a longevity, from an environmental impact, from the service quality that we have as a business unit really played to those spaces as well as they do in areas where we've had historical success. So it's generally just resourcing ourselves up to be able to go in there and have a presence that's more meaningful than we've had in the past and then beyond that. As I said, I think our service in the Mats side, credibility speaks for itself.

Great. Thanks for the color guys.

Our next question is from Jacob Lundberg with Credit Suisse. Please proceed with your question.

Good morning guys.

Good morning.

I guess first to start on Gulf of Mexico couple ones. The incremental wells that you're doing with Shell, are those following the same rig or is that on a different rig? And then in the press release and in your prepared remarks today your reference some offshore delays. Could we get some color on the magnitude of that impact topline operating income in the quarter? And is that just gets shifted into 4Q or how should we think about the impact there?

Thanks, Jacob. It's Phil here. In terms of the Shell rig, actually it's a different rig. It's a new award on the Ursa TLP deepwater tension like platform. Beyond that, we continue to bid additional projects and also being introducing our new completions product line to show and other IOCs.

And in terms of the revenue contribution from the Gulf, obviously there is always some level of shifting that goes on with these larger scale projects. But ultimately that area we saw a few million pullback from Q2 to Q3 with the current projects that we have in the works, we are expecting that to rebound here in the fourth quarter.

Got it. So the 4Q guidance or so commentary around revenue takes into account some sort of snap back there?

That is correct.

Okay, cool. And then follow-up just on some of the other fluids that you guys have been talking about. Can you just kind of provide some color on the opportunity to generate revenues from completion fluids as well as stimulation chemicals in 2019? Should that be a meaningful impact next year is that something we should expect to kind of see show up in the numbers?

In terms of completion fluids, we did actually have some early wins in the quarter, in Q3 little shy from $1 million, but it was a smaller independent. In terms of next year, we're already bidding some integrated work and bundled work, both drilling and completions fluid it. And so, we would expect something material.

I would expect there as we progressed through 2019, we would begin this year a more meaningful impact from those two growth targets.

One thing about that completion fluid is that the qualification period there is very short because you are selling more of a molecule with calcium bromide. So there is not a lot of qualification on the chemistry itself, it's more about have you stood up a facility that's operational and that's where we've been adding people that provide some modest headwinds to the margin. So going into 2019 the completion fluids, we think there is a really unique opportunity to then bundle our drilling fluid with Kronos technology with completion with IOCs and we are always trying to bid on tenders.

All right. Appreciate the colors. Thanks guys.

Our next question is from Ken Sill with SunTrust Robinson Humphrey. Please proceed with your question.

I was curious on the weather related boost to Q4, I know I've been hearing that the flooding in Central Texas, there been some issues out in the Eagle Ford. We've obviously had a lot of rain in the Houston. Where you guys seeing the biggest impact on the weather related? Is it in Texas or is it across Texas, Louisiana and into – all the way into Florida?

Ken, it's Mathew. I think we touched on a little earlier is that the Texas, Louisiana, Gulf Coast there is – as a broad geographies as where we thing the most uptick at this point.

So not much in Central Texas?

Not at this point.

Okay. And then I want to see if you can give us a little bit more color. One of the things you guys cited in the quarter was Gulf of Mexico projects being delayed. Are those coming in Q4, Q1 and kind of are they bigger than a bread box? How big were the projects that were delayed?

This is Gregg. This is kind of as we touched on a little big ago, you've got two different projects that have been moving around. Some of that has been delayed from Q3 to Q4, and yet another element that kind of pushed into next year. But again, as you take a step back and you look at the overall expectation here that that area saw a few million pull back here in Q3 and were we currently expect that to rebound in Q4.

Okay. That clears that up. And the my last question, as you guys start ramping up the completions fluid business, is that going – are you going kind of provide the detail on what's coming from completion's fluids or will it all just be bundled into the drilling – into the fluids business as one product?

I would expect, well we'll definitely get color in terms of how much it's driving on overall growth. It will be reported as a fundamental element of our fluids business. And it's worth noting today that in the international market, there is a number of markets where we have completion fluids today. It's just naturally bundled with drilling fluids in certain regions.

Our next question is from Bill Dezellem with Tieton Capital Management. Please proceed with your question.

I actually want to continue down the delayed Fluids business, how many different customers were those delays with?

Two.

And were those Shell and someone else, or two new customers?

No. Not, Shell, they were other customers.

And so that would imply two new customers, is that correct, or am I reading that wrong?

They've been ongoing offshore customers, one deepwater, one shelf.

But this would be their first time using the Kronos technology

Thank you. Especially that additional insight. And then secondarily how are you thinking about acquisitions today?

I mean obviously we're always looking for opportunities to add on to our product line where there are synergistic opportunities. And as you know, we're really at this point trying to build out those concentric rings of chemistry around our total fluids strategy from an organic perspective, but we're always searching and I typically don't comment on.

And the only thing I would add is our history shows that we've very selecting in terms of finding the right opportunities. It has to be an opportunity that is clearly synergistic and fits within to our overall strategy.

Thank you and really what I was trying to drive at is do you see more opportunities in the current environment than you have in the past or would you consider this a typical timeline – timeframe?

I would say in terms of the opportunity set that's out there, there is probably a higher volume of opportunities out here, but again you know we're very careful and thoughtful on how we screen these and look at you know the fit in our strategy and the ability of any acquisition to advance our – or accelerate our strategy execution.

Ladies and gentlemen, we have reached the end of our question and answer session. I would like to turn the call back over to management for closing comments.

Alright, I'd like to thank you once again for joining us on the call and for you interest in Newpark. We look forward to seeing many of you at our November Analyst Day and also talking to you again next quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.