Oil States International, Inc. (OIS) Q4 2015 Earnings Report, Transcript and Summary

Welcome to the Oil States International Fourth Quarter 2015 Earnings Conference Call. My name is Hilda, and I’ll be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I’ll now turn the call over to Ms. Patricia Gil, Investor Relations. Ms. Gil, you may begin.

Thank you, Hilda, and welcome to Oil States’ fourth quarter 2015 earnings conference call. Our call today will be led by Cindy Taylor, Oil States’ President and Chief Executive Officer; Lloyd Hajdik, Senior Vice President and Chief Financial Officer; and we are also joined by Chris Cragg, Senior Vice President, Operations. Before we begin, we would like to you caution listeners regarding forward-looking statements to the extent that our remarks today contain information other than historical information, please note that we are relying on the Safe Harbor protections afforded by federal law. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K and other SEC filings. I will now turn the call over to Cindy.

Thank you, Patricia. Good morning to all of you and thanks for joining us today for our earnings conference call. We reported fourth quarter 2015 earnings per share of $0.13 after adjusting for significant items highlighted in our press release. The severe industry downturn has had a pronounced negative effect on our well site services segment, given rig count declines of 70% since activity take in 2014. Our customers are under significant pressure with commodity prices at levels that do not currently support profitable operations, forcing many to pace drilling and completion of operations in the fourth quarter all together. The price of WTI crude oil averaged $42.02 a barrel in the fourth quarter, down 10% sequentially and the average U.S. rig count deteriorated an additional 13%. Our well site services segment experienced a 15% decline in completion services job tickets, and average utilization for our land rig fell to 22%. In our offshore product segment, revenue held up fairly well, only declining 3% sequentially. We recognized a new record average EBITDA margin of 30% for the quarter, exceeding the high end of guidance range. Our book-to-bill ratio for the fourth quarter totaled 0.7 times, bringing us through a full year book-to-bill ratio of 0.8 times, which in the current environment is considered quite an achievement. Despite reaching our book-to-bill expectations for the year, backlog declined 14% sequentially to total $340 million at December 31, 2015, and customers continue to preserve liquidity and defer major project sanctioning. At this time, Lloyd will take you through more details of our consolidated results, and provide highlights of our financial position. I’ll follow with more details by segment and provide additional comments on our market outlook.

Thanks, Cindy. During the fourth quarter we generated revenues of $234 million and reported adjusted net income of $6.4 million or $0.13 per diluted share. Our fourth quarter adjusted EPS excluded pre-tax charges of $1.9 million for severance and downsizing costs, our pre-tax charge of $3.4million for a lease termination provision and $1.8 million of deferred tax asset adjustment. EBITDA adjusted for severance costs totaled $42.5 million during the quarter. Our consolidated fourth quarter adjusted EBITDA margin of 18.1% was an improvement over the 15.3% adjusted EBITDA margin we achieved in the third quarter of 2015. We continue to focus on our balance sheet and our liquidity. We ended the fourth quarter with total liquidity of $475 million which is comprised of $439 million available under our revolving credit facility, plus cash on hand of $36 million. Our liquidity position is likely to decline throughout 2016 from the December 31 level as a result of lower expected levels of EBITDA on a trailing 12 months or TTM basis, which is expected to restrict our full access to amounts available under our revolving credit facility. Our financial position remains healthy with our gross and net debt levels at December 31, totaling $129 million and $93 million respectively. In the current operating environment we’re preserving liquidity as critical for long-term success. We generated $3 million of cash flow from operations and utilized cash from our balance sheet to pay down $31 million of debt. Our net debt to book capitalization ratio was 6.9% at December 31, and our leverage ratio using TTM adjusted EBITDA was 0.6 times, well below our maximum level of 3.25 times provided for in our credit agreement. Further, we have no significant debt maturities until 2019 when our credit agreement is set to mature. During the quarter we invested $22 million in capital expenditures. Capital spending during the quarter related to ongoing facility expansion in the offshore products segment, primarily in UK, along with maintenance CapEx for our completion services equipment. For the full year 2016 we expect to spend approximately $50 million to $55 million in capital expenditures. However, our level of plan CapEx is highly variable and can be adjusted upward or downward depending on the prevailing market conditions. In terms of our first quarter 2016 consolidated guidance, we expect depreciation and amortization expense to total $30.8 million, net interest expense to total $1.5 million, and corporate cost to total $12.3 million. Our 2016 consolidated effective tax rate is expected to average 38% for the full year. At this time I would like to turn the call back over to Cindy, who will take you through our business segments.

Thanks, Lloyd. In our offshore products segment, we generated revenues of $170 million during the fourth quarter of 2015, down 3% sequentially. Fourth quarter EBITDA totaled $51 million for this segment, compared to $40 million reported in the third quarter of 2015. Our EBITDA margin percentage exceeded our guidance and averaged a record 30% for the current quarter. We experienced somewhat of a perfect storm during the quarter with strong project execution on several job completed during the quarter combined with favorable percentage of completion project adjustments. We had also been very attentive to our overall cost structure. Orders book for the quarter totaled $121 million and backlog at December 31 with $340 million, net of $3 million of backlog cancelation. Our fourth quarter book-to-bill ratio was 0.7 times, bringing our full year 2015 growth book-to-bill ratio to 0.8 times in line with our expectations for the year. Again, against the economic backdrop in which we are operating, we were quite pleased with our 2015 bookings. Major backlog additions during the fourth quarter included orders for pipeline and connector products destined for various global markets and replacement equipment on a Gulf of Mexico production facility. As we progress into the first quarter of 2016, we believe that revenue in our offshore products segment will decline with lower backlog level and range between $140 million and $150 million as we expect further reductions in revenues from our shorter cycle and consumable products, and services as our customers remained acutely focused on cash flow preservation. EBITDA margin guidance for the first quarter is forecasted to range between 19% and 21%. In our well site services segment results were generally in line with our projection and the guidance ranges that we provided in connection with our third quarter 2015 earnings conference call. Our fourth quarter results continue to be impacted by the extremely depressed levels of activity in the U.S. land drilling and completion market with several operators in the U.S. suspending drilling and completion operations all together during the quarter and into 2016. In the fourth quarter, our well site services segment revenues totalled $65 million, which represented a 22% sequential decrease, caused by 15% decrease in the number of completion services jobs performed, and 5% decrease in revenue for our completion services ticket and low utilization of our land drilling rigs. EBITDA decreased 90% sequentially to total just over a $1 million, but debt remained positive. Excluding the severance we paid during the quarter and other costs we incurred to right size the segment, our EBITDA margins would have been 3.4%. Land rig utilization persisted at low levels in the fourth quarter, averaging 22%, and has essentially collapsed in the first quarter of 2015. Activity remains low in the vertical rig market and we currently have only two rigs out of our total fleet of 34 land drilling rigs working today. We are now midway through the first quarter and the outlook surrounding land-based North American drilling and completion activity still remains at terribly depressed level. Customers are slashing their capital spending budgets for 2016 for the second consecutive year. With two successive years of capital expenditure decline, which is not occurred since 1986/1987 downturn, we are forecasting a very weak first half of 2016 in our North American land-based operations. Given all of these variables, it is extremely challenging to forecast activity and result for our well site services segment. Visibility is needed at best, but we remain confident in our ability to value this cycle. We estimate that first quarter revenues for our well site services segment will again decline in range between $45 million and $50 million with EBITDA at or slightly below break even. In conclusion, 2016 is expected to be another very challenging year for both North American onshore services market that we support and the offshore deepwater capital equipment industry generally. We are facing another year of customer budget reductions coupled with already depressed levels of the drilling and completion activity and lower backlog levels resulting from major project deferrals and selected cancellations. Although visibility in this market is limited, Oil States remains in an enviable position with a strong balance sheet characterized by low levels of leverage and $475 million that’s currently available liquidity at the end of the fourth quarter. We remain committed to optimizing our liquidity, maintaining very low levels of debt and managing operational efficiencies, while carefully monitoring our customers’ credit quality. The actions that we have taken in the past quarters and continue to proactively pursue will put us in a better position once the industry recovery begin. That completes our prepared comments. Hilda, would you open the call up for questions and answers at this time please?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a question from Marshall Adkins from Raymond James.

Hi, Marshall.

Hi, Cindy. First of all I want to thank you for your very bright uplifting comments there.

I get up busy every morning. How about you?

I hear you. It’s pretty ugly out there. So quick question on the book-to-bill for offshore products, it seems like I ask this every time, but most of the people that we would call your peers in that arena, are putting up book-to-bills like half or a third of you. Help us to understand why that part of your business seems to be holding up a lot better than everyone else out there?

Well, again I think we commented before, we’ve done a little more of a diversified product offerings, some of which are just tied to routine kind of development drilling activity, our larger conductor casing connectors are an example of that. We’ve had some good additions in our subsea side on the subsea pipeline side. A lot of that has come from Brazil, albeit a lot of that activity has slowed as an example. But I think the exposure to production infrastructure in addition to that clearly has helped our backlog overall. And those have been kind of drivers in terms of what even impacted our fourth quarter. There haven’t been a lot of FID that are out there. However we do generally have some content on most [indiscernible] as an example of one, but it’s just kind of a combination and we did acknowledge that part of our bookings in Q4 related to Gulf of Mexico replacement equipment as well.

Right. Are you – I know the challenge in the offshore arena in general is to get cost down with very different dynamic cost drivers than on land. How far long are we in that process? Do you have any sense of how well the offshore arena is going to able to get costs down to compete with U.S. land?

I would say every basin and every operator kind of have the different experience, but without doubt a lot of the major initial declines have come from reductions in deepwater rig rates and vessel rates, but in addition to that whether you are looking at existing feed type work and engineering work, are concentrated effort to getting those costs down as well. But we’re also seeing of course some reengineering work and kind of redesigns of fields all of which are bring that down. I don’t think I could generalize that’s in commentary that on certain fields, certain operators going from kind of break even economics around 70% down to its lowest 40%, but it’s hard to generalize, but we do know that the cost are coming down across the board. Deepwater is always a bit of conundrum in the sense that there is more to be done, there’s high profile projects that are still out there. It should be – if you believe in the industry at all, there going to be economic over the long-term. It really comes down to what is the cash flow profile, the operator, number one, and their partners, number two. All of which as you can expect that cause significant delay in getting some of these FID done. Much different than land, it’s because of the timing of bringing on those reserves, but I do absolutely believe that substantial cost has been reduced at this point in time and efficiencies gained. And again, not all of that has come out of the supply chain, part of that is just going back to more standard equipment, standard approaches, engineering design that have been in the field for a while.

All right, all right. Well thank you for the guidance. It’s helpful, I appreciate it, guys.

Thank you

We have a question from Jim Wicklund from Credit Suisse.

Good morning.

Hey, Jim.

Hey, Jim.

And congratulations on this [indiscernible] joining your board. Cindy, you mentioned, when you’re talking about liquidity that you have a current availability on these revolver. Can you talk to us about what you expect more here on horror stories about banks dealing with companies that didn't even have positive EBITDA right now? Can you give us some color on your qualification there on liquidity?

Yes, I will and be very, very clear, this is all we’re talking about is availability under the credit facility. We are way, way beneath our covenant levels on our two metrics, one is which is the debt-to-EBITDA metric, there is a limit there, 3.25. I want to have Lloyd gave you the specifics of where we are at the end of the year in terms of that and then a interest coverage ratio that we’re not even close to…

That’s correct.

But being intellectually honest, everything that 3.25 leverage is based on the TTM EBITDA. And if you look at our quarterly performance, Q1 2105 to Q4 2015, as well as going into 2016, obviously there is a downward slope there. Just I want everybody to think about when you think about opportunities to deploy cash in 2016 being fully transparent, even though we had that availability under the facility, plus cash in a order of magnitude of $474 million. That does erode somewhat. And just again, opportunities to deploy cash, we at this point have no concerns about any type of credit metrics whatsoever under our facility. But I want Lloyd to give you some specific data points on that.

Yes. That’s exactly right. Thanks, Cindy. So Jim, if you just – if our EBITDA levels moved down during 2016, the maximum leverage that we have is just that the assumed level EBITDA times, 3.25 times. So that’s max leverage and we adjust that for standby levels of credit that we assume in our model. And the expected level of debt outstanding at 12/31, again, I think our lowest point in liquidity as you can appreciate would be TTM 12/31/2016. So it’s not Q1, not Q2, it’s really Q4 of 2016. And then we just…

Okay, that’s great. That’s very helpful, I appreciate it. My follow-up if I could, you note in the press release excellent education – execution and catch up on a percentage of completion contract. Of course that just means that your historical earnings were a bit understated, the way the percentage of completion works I guess. But can you tell us how big that was? I mean I know you had record EBITDA in the segment. Can you tell us how much of it was related to this percentage completion contract? And how much of it is more short cycle work?

Yes, and I’ll ask you not to kind of give that color because what we had is multiple projects underway throughout the year that some of these are higher margin projects to start with. Percentage of completion means you are recognizing revenue and profit based on your best estimates as you progress through that project, many of which are 12 months to 18 months in duration. Several of those came to closure in the fourth quarter and when we did the final analysis we had some better performance, which is really a – it’s not a – these are not things that should’ve been booked in 2014, booked in 2015. I won’t be very clear about that. But we have – what you have was previously bid backlog at good margins, it was a high-quality mix for us, we’ve been very proactive reducing headcount other cost aggressively working with our suppliers on pricing and obviously executing well. So just through the progression of that job the closure led to some just better results. I mean, I’m not going to discount the fact that we’ve made 30% EBITDA margins, this is fantastic performance. I just don’t – as I call it kind of a perfect storm of things coming together prospectively. I’m actually pleased that in the near-term we’re going to continue to guide to our historical margins of 19% to 21% particularly given the backlog erosion that we and everybody else in this industry have witnessed, but it’s in the context of us adjusting our cost as we progress through this cycle we’re in.

Okay. Thank you very much, impressive numbers. Thanks, Cindy.

Thank you.

We have a question from Blake Hutchinson from Howard Weil.

Good morning.

Hey, how are you?

Very well, very well. Just a question regarding how offshore products full year might tend to unfold here, and a bit lower backlog levels than we’ve entered the last several years. Typically you’re pointed towards a kind of a burn of backlog or a throughput of 90% of what we see as stated backlog and maybe we just gross up for the services and consumable work. Is there any impact, I mean, especially the way you’ve executed, it looks like you’ve been turning faster in the back half of the year. Should we consider that maybe order flow bid in the first quarter or the full first half of the year? Actually moves it a little more quickly or is that really more contingent upon on customer demands for timing of delivery?

I want to be sure, I address the question the why that you ask it, but we believe our backlog turn into revenues is comparable to what it’s been in the past, and the range of that kind of 80% of backlog turning into sales in the forward 12 months plus or minus, a little bit bigger. From that, what we have our ongoing service work which we think is going to be fairly resilient from exit rate on 2015 in our short cycle products that typically don’t carry a lot of backlog. And so, if I’m addressing your question in the way you ask it, I think will be a little more weighted at these lower revenue levels to service and short cycle work than backlog work. But I’m still caveat, you can’t just do the math and add in service and short cycling side, you got it in the bag, we’ve got to get some bookings throughout the year to sustain the estimates that are out there. And we’re well aware of that. That’s a bigger picture, and you’ve seen that in the charts that we always put in our Investor Relations depending on the mix of work that you have that service and short cycle work can add and flow as a percentage of the total, just depending on where you are in the cycle.

Sure. And I guess the heart of my question was given the lower level backlog and the fact that it looks like you’re executing a greater pace at least in the back half of the year. Would that tend to suggest that orders that do come in in 1Q and maybe even 2Q that in the last several years due to just where you were capacity wise wouldn’t make it through in 2016, actually make it through in 2016 or just not think about that any differently really?

Yes, I mean, I think my comments are in line with that. We’re probably going to see more repair replacement work, shorter cycle work, in my mind anyway. We’ve got a whole list of the larger projects FID, but it’s kind of hard for me to see right now that much of those come into backlog in the first half of the year. And so, I think that’s going to be the scenario that we see.

Okay, excellent. And just to be clear on the benefits to offshore product margin this quarter, with the UK facility transfer specifically positive? I was under the impression that might be kind of more a later year phenomenon if there was a benefit to margin.

It’s actually 20, we haven’t – we’re in fact we’re just now working through our final certificate of occupancy with these significant projects that we had ongoing and underway even throughout the fourth quarter, it would have been very disruptive to move while these projects were going on. So that move is actually going to occur this year. So you are right.

Okay, great. And then just a technical one, so we’re keeping track correctly. I guess my impression was that in terms of percentage of the offshore products segment that was under POC accounting and it was something more in the 10% to 20% range, is that a misnomer?

No offshore products is about 35% POC revenue.

Okay, okay. Excellent. Great, this is just what I was looking for. Thanks.

Thanks, Blake.

We have a question from George O’Leary from Tudor, Pickering, Holt. George O’Leary: Good morning, guys.

Good morning. George O’Leary: Just wanted to get a little color on the revenue mix in backlogs for the offshore products business, and any color you could provide and how that might have shifted as we progress through 2015 with respect to what geographies kind of comprise that backlog today?

Yes, I think I can do that we don’t – we’re not terribly expose drilling related equipment. And so, if I look at that it’s trying to – plus or minus 5% of backlog that’s probably not a surprise to anybody on the phone or more SCR and TLP products are about 16% pipeline products, 26% our standard connectors in the range of 12% and then we kind of have all others in that backlog. So again I have been saying this all along, we’re going to see more production infrastructure subsea related type both revenue generation and backlog, we are not as heavily exposed to drilling rig equipment even previously certainly not now with the state of the industry what it is, but then we have other kind of fixed platform cranes, winches et cetera that kind of balance out. And a little bit, we always had a little bit of military exposures as well. George O’Leary: Okay, that’s very helpful. And then could you frame the outlook maybe sticking with that offshore products business as we look into 2016 comparing the geographic. Which regions are really driving the revenue in 2016 versus which regions drove the revenue 2014 and 2015? Is there a shift going on at all?

Not really, if you think about recent project FIDs in the last two years and again that’s in our investor presentation major awards for the last 18 months or 24 months. But what you’ll see is, there’s Gulf of Mexico exposure, Brazil exposure, those are probably the larger two, but that – then we also have the North Sea, Southeast Asia, West Africa as well. I don’t say it’s balanced, because if you just look at the major FIDs that are out there, you’re going to – we’ve had significant pipeline awards over the past 12 months to 18 months out of Brazil that are in process. And then Gulf of Mexico project, many of which you’re familiar with. And I would say that what we’re seeing right now is, what are active bids and it’s a bit of a question mark whether these are ongoing or not, some of which we’ve been working on for 12 months to 18 months, but we have some content, probably maybe a little more visible actually in Southeast Asia, Australia, and to plus or minus couple of question mark around Brazil with a little bit ongoing in the Gulf of Mexico, but we always see geographic shifts there. But that’s more what we’re seeing to-date.

All right, great, thanks guys. That’s it from me.

Thank you.

Thanks, George.

We have a question from Chase Mulvehill from SunTrust.

Hey, good morning or early afternoon.

Yes.

So, I guess I’m going to stay on offshore products for a minute. So I’m going to – if you think about and assume that 4Q margins were, clean margins were 23% to 24%, which seems to kind of be the historical run rate over the past four or five quarters. This kind of assumed about $10 million to $13 million of percentage of completion benefit in the fourth quarter? And if you spread that over four or five quarters that implies that margins were understated, call it 100 bids to 150 bids over the past few quarters. So help me – so that assumes 24%-ish margin for offshore products over the past four or five quarters if we adjust for that, but your…

Let’s get off this commentary at this point. We don’t feel like there’s anything that it’s not been recognized in prior quarters, and I don’t know what numbers you’re putting out there, they’re not ours. And so, maybe why don’t you address your comments more generally for me.

Okay. So, I guess then I’m just trying to understand, because when you continue to guide to 19% to 21% margins, and so, I’m just trying to understand, you continue to beat that. So, maybe help us understand, on the margin side what drives the beat every quarter?

Well, I would love to tell you we could do that every quarter, but I tried to explain to you, we’ve got a strong backlog, we had a good mix. These are very complicated multi-quarter type projects that – I would say that’s easy, anybody could do it, but we’ve been managing our headcount throughout all of this, and having to adjusted with movement in our backlog on a facility by facility basis, we like everybody else, our working with our customers, trying to gain efficiencies or shifting things that we outsource previously to bring those in-house. There’s no one silver bullet here that I can answer to that. We’ve got less rejects in terms of welding success. If there is a lot of projects you getting close to done and you go through all of your acceptance, definitely have issues. We had left fewer issues here. And so again these are highly, highly complexed multi-million dollar projects to spend long periods of time that we are constantly working on to enhance efficiency throughout all of our operations. So I really – that’s the best answer that I can give you.

Okay.

And as you recognized profitability, your initial estimates as you progress are based on pretty much bid margin until you are able to realize true savings either your facility work, your headcount, your labor cost, the materials as I comment et cetera.

Okay. And on the material side remind us how much of cost of goods sold is related to materials for offshore products?

And again it is very depending on what type of project I’m talking out whether it’s a TLC project or a subsea project or a repair, but if you average that it’s plus or minus 60%.

Okay. All right. Any help – just with modeling on 2015 for the book and turn business, how much that was down? And the aftermarket business, how much that was down in 2015 as well?

Yes. I afraid I actually don’t have that in my fingertip. So we disclosed service cost and so I think you will be able to pick that up. But, Lloyd is flipping pages, if he can give you something, quickly he will.

In a second.

Okay, while he’s flipping I will ask one more real fast on the completion services. How much – in the fourth quarter, how much of your cost in completion services was fixed versus variable? And if we think about the fixed portion as we move forward, how much can you continue to take that down?

I would really, we’ve got that as the 10-K is being filed I think tomorrow, so very quickly. It’s what you call fixed in this environment, I’ll be honest with you, but I took a look to SG&A, we’ll call it semi-fixed, but the reality is as draconian as this market is, there’s almost nothing to be fixed anymore. But historically we generally said that for this operation as a whole about 60% to 65% is people, its labor in the field. We’re a service operation, we are the guys that are in the field, running the equipment and supporting our customers every day. So, I think that’s a good estimate for you to think about.

Okay, all right. Lloyd, did you have a chance to look at book and turn?

I’m right now. So, it’s somewhere between 30% and 40%.

Okay, that’s – both of them are down 30% to 40%?

Yes.

Okay, all right. I’ll turn back.

Our service is less than that, which is book and turn like your elastomer products, your oil products, the shorter cycle product business is 30% to 40%.

Okay, thank you.

Thank you.

We have a question from John Daniel from Simmons and Company.

Good morning.

Good morning, John.

No modeling questions from me, just a couple of big picture ones here. But Cindy, as you guys think about potential acquisitions, which are the segments are you being shown or do you think you’re going to see the most opportunities? And then how much of your time is spent simply managing the downturn right now versus trying to step back and think strategically about growth when the cycle does turn?

Those are – as always John fabulous question. So we are – and even me specifically, I’d just call, beating the bushes, because I think this is the – these are the kind of cycle that create opportunity to better the company and get some sustained growth wins, high period sometimes don’t offer those possibilities. And I’m going to put this conversation in three buckets. One is, the smaller tuck-in acquisitions for cash, and we’re seeing both completion services and offshore products in that vein. I’ll say that most of the North American land-based things that we are seeing are challenged. They’re really, really challenge, and they typically are carrying debt and they’ve got negativity EBITDA. So, very, very hard optically to wade through those and get compelled and enthusiastic about getting them done, quite frankly. And so, that’s my perspective. Anyway, I think everybody though maybe a little bit different, but that’s what we’ve seen in offshore products. Much like to us performance is held up, particularly if you got global platform, operations have held up reasonably well, if you had a good backlog. So, we see opportunities there, we’re having some discussions, but nobody feels compelled to do anything for cash, and so, yet a lower point in the market. And so, again, I just say a lot of – I’d like to fish, a lot of hooks in the water, I don’t know where that goes. And that other two buckets, we’re very much focused on working with some of the private equity players, who really not see any near-term liquidity options to them and certainly don’t really want it for cash. But I think there’s a possibility where you might have a sponsor company merge with a public company for example, get access to a high quality stock. We’re also looking at bigger stock for stock combinations that could make sense in this market, but it all with the caveat that – I was reading some – firstly, we celebrated our 15th year as a public company last week and our offshore products business has been here for over 70 years and I only say that we got that same power, we got a very strong balance sheet, we’re in an enviable position in a lot of respect with our global platform and our technology. And so we’re not going to do anything to damage that profile. What that means is that if you look at the type of accommodations we’re talking about we want high quality, high technology, low leverage company that may or may not be interested in that. So even though I think most people on this call would be saying where is the M&A? Why aren’t we seeing it? I think, I’ve enunciated a lot of reasons for that. Your latest question which was a fantastic one, you know Doug, he always said, we work 10 times as hard in a bad market as you do in a good market when you get all the glory, and I think that’s absolutely true. But we are absolutely trying to be very, very strategic right now because these type of cycles do create opportunities.

Okay. Well, thank you for that color. Just one final one from me, kind of goes back to the comment you made in and your answer to me, but just given the strength of the balance sheet, how do you juggle making potentially further significant cost cuts, making deeper cuts in the muscles versus just leveraging that balance sheet to keep you better prepared maybe eat more cost just keep to you better prepared versus peers when the market recovers.

That’s the hardest thing about what we’re going through now, and been going through for 15 months, and I’ll just generally say, it is the overall lack of visibility. I think everybody in this industry and on this call knows that we are sustainably – non-sustainable levels of crude oil pricing right now. And that doesn’t mean that the strip is changing now. And so what we need and I keep thinking early in the third quarter things will begin to some semblance of a recovery here, it only make common sense that they will, that gives you more confidence in saying, I’m going to take the actions you talk about. It’s hard not to be responsive to well site services operations going to essentially just above break even in Q4 and likely at our below break even as I guided you to in Q1 and not really responsive to that, we have to be. But that your point is, how much further do you go and have you really hurt the operations ability to pick up. But we shouldn’t be – if we don’t think there’s a pickup coming at some point, we’d all be doing something else. And in this industry all my working life, and I’m still optimistic and positive about it. But we have to be prudent in the meantime, and letting a business go to net negative cash flow and EBITDA for any extended period i.e., leveraging to do that, does not feel right to me.

Okay, fair enough. Thank you for your time.

Thanks, John.

We have a question Kurt Hallead from RBC Capital Markets.

Hi, good morning.

Hey, Kurt.

How’s everybody doing?

Good.

Hanging in there, right?

Yes. You?

Indeed, indeed, no doubt. Yes, I just had just a couple of follow-ups. You guys covered a lot of territory in the Q&A on the call and everything else. So, just kind of curious on – I know you’re thinking about the CapEx progression for the year, and how you’re going to delineating between continued growth opportunities if there are some vis-à-vis existing maintenance?

Well, we got into a range of CapEx of $50 million to $55 million. And obviously, that’s fairly up, call it low levels of maintenance CapEx in our well site services segment. When we’ve got back to equipment all over the place, all we need to do is maintain the equipment that we’re running in the field, I was very little, virtually none, likely dedicated to drilling operations with the current outlook there. Offshore products will still carry, what I’ll call kind of a normal average in their plans in the kind of $25 million, maybe $30 million range, but even in there we have some expansionary CapEx that we will evaluate as we move forward. So, but it’s only, I’m going to say, maybe $15 million in offshore products that would be deemed expansionary at this point in time. So everything else think along the lines of it being maintenance capital.

Got it. That’s helpful. And I know you went through great pains to explain how resilient your offshore products business is, tell us that everything that we’ve heard about the offshore business. Just kind of curious, though if you be willing to kind of throw out a soft booking target for offshore products for the year?

Not ready for the year. What I will tell you is, I think the first half is challenge and likely to be lower than the second half. But, there’s been so many projects that are shifted to the right that I believe it’s done. I don’t think anybody in the industry has good visibility about when they’re going to actually obtain FID not to value anyway.

Okay, it’s all fair enough. Appreciate it. Thank you.

Thanks, Kurt.

Thanks, Kurt.

We have a question from Darren Gacicia from KLR Group.

Hey, thank you. I wanted to ask on the completion services business, you guys put a pretty good chart in all of your decks on what’s in the offering and what products are involved. I wanted to get a – I hopefully get a little bit of sense of what’s happening incrementally now with pricing kind of and mix amongst products. Just to get a sense of how that business regarding to this – clearly margins have come in and I’m just trying to get a sense of that we’ve kind of bottomed on that on the margin side or and just what are the moving parts you already thinking about?

Well, I think that – made in my comments, the rig count in the U.S. is down 70% from when it paged I think third quarter of 2014. So I don’t think there is a massive change in mix of assets, Chris as always said, the work that getting done in the field is typically high end work, multi-well pads tons and tons of stages. I heard one the other day in the North East, it’s mind-boggling. Three well pad that had over, I think 347 stages completed. So it’s our type of equipment that’s desired, but it’s in the environment of 70% reduction in activity coupled with massive pricing pressure. So that’s what we’re dealing with. But in terms of – is there any product line being abandoned or no, not at all, but there are certain of them, we like to way ourselves towards a more proprietary product line, but even they are subject to huge activity declines and pricing pressures. There have been different things that have made even more impact than others, and some of them, the more competitive product lines have had greater pricing pressure than others. I don’t know if that responsive to your question, but with the huge umbrella of massive activity decline, this is what happened, I don’t care how good you are.

No, sure, Cindy, I appreciate that. And just I guess I’m trying to understand, are we kind of done with the pricing pressure given were margins would kind of drive that because we are – I think everybody understands that and everybody is going into pressure on that side. But did it flush through or is there more kind of it to come that flow throughout the pricing side as well?

Well, I don’t – I’ll tell you what my answer is, we don’t bid job to lose cash, we don’t. But we have in the past same company that have bid job that will lose cash. And we don’t think that last very long. Those doors get closed. We’ve been tracking regional facility closures now for about 12 months. And so it’s never over till its over – could get a competitor out there that might be – poor decisions, but we’re not going to do that, and we don’t have to. Again, I’ll go back to John Daniel’s comment. You could always take on a little more leverage and keep your quality people and your quality assets. The same bidding in cash negative margins just makes no sense.

Got you. Thank you, that’s helpful. Just last one on drilling rigs, is there any – I mean you 34 from what I understand, is there any chance you may be retiring some of the those given in the kind environment or is there any change in our outlook and how do we think about that business?

Well, our headcount in that small and we’ve realized prevailing cost very, very small segment of our operation to start with. Our headcounts down 90%, and so, even as upset, we are working two rigs, we’re not burning cash or money up. There’s no reason to scrap the rigs, they’re great quality assets. And historically, we’ve always either niche assets that works very well, the vertical market has generally been about 15% of the overall market, concentrated of course in the Permian. But overtime these assets actually perform very well, and earn a reasonable return. I don’t think we’re going to stay at this level forever, would be a different outlook if I did. We’ve seen it before in 2008/2009 downturn, we got down to three rigs working for those of you there followed us and remember that, so we’ve been here before. But my overall view of those assets has not changed today.

Thanks, I appreciate your time.

Thanks.

At this moment, we show no further questions. I would like to turn the call back over to our speakers for any final remarks.

Well, thanks to everybody, whether we’re at or near the bottom this year, we can all pray for that. I appreciate your support there all the way. I did want to make one comment, there was an earlier question or comment, congratulating Mark Papa for joining our board. And I just want you to be clear, he’s actually been on our board since our RPO given us very, very valued insights and commentary. Our viewing is one of the greatest industry icons around. And this is just a normal succession plan where seed well through, quite frankly has been on our public company board and the predecessor private company board for 20 years. He just decided to transition out of the chairman role. So I thank them both, I credit them both, but Mark’s been with us for long time. So, with that, I hope you all have a good rest of the earnings season and week, and we’ll talk to you in upcoming conferences. Thanks so much.

Thank you. Ladies and gentlemen this concludes today’s conference. Thank you for participating. You may now disconnect.