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| CPX > SEC Filings for CPX > Form 10-Q on 31-Oct-2008 | All Recent SEC Filings |
31-Oct-2008
Quarterly Report
• Downhole and Wellsite Services. Our downhole and wellsite services include electric-line, slickline, production optimization, production testing, rental and fishing services. We also offer several proprietary services and products that we believe create significant value for our customers.
• Fluid Handling. We provide a variety of services to help our customers obtain, move, store and dispose of fluids that are involved in the development and production of their reservoirs. Through our fleet of specialized trucks, frac tanks and other assets, we provide fluid transportation, heating, pumping and disposal services for our customers.
Drilling Services. Through our drilling services segment, we provide services
and equipment that initiate or stimulate oil and gas production by providing
land drilling, specialized rig logistics and site preparation throughout our
service area. Our drilling rigs primarily operate in and around the Barnett
Shale region of north Texas.
Product Sales. We provide oilfield service equipment and refurbishment of
used equipment through our Southeast Asia business, and we provide repair work
and fabrication services for our customers at a business located in Gainesville,
Texas.
Substantially all service and rental revenue we earn is based upon a charge
for a period of time (an hour, a day, a week) for the actual period of time the
service or rental is provided to our customer. Product sales are recorded when
the actual sale occurs and title or ownership passes to the customer.
General
The primary factor influencing demand for our services and products is the
level of drilling, completion and maintenance activity of our customers, which
in turn, depends on current and anticipated future oil and gas prices,
production depletion rates and the resultant levels of cash flows generated and
allocated by our customers to their drilling, completion and maintenance
budgets. As a result, demand for our services and products is cyclical,
substantially depends on activity levels in the North American oil and gas
industry and is highly sensitive to current and expected oil and natural gas
prices.
We believe there is a correlation between the number of active drilling rigs
and the level of spending for exploration and development of new and existing
hydrocarbon reserves by our customers in the oil and gas industry. These
spending levels are a primary driver of our business, and we believe that our
customers tend to invest more in these activities when oil and gas prices are at
higher levels or are increasing. The following tables summarize average North
American drilling and well service rig activity, as measured by Baker Hughes
Incorporated ("BHI") and the Weatherford/AESC Service Rig Count for "Active
Rigs," respectively.
AVERAGE RIG COUNTS
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
9/30/08 9/30/07 9/30/08 9/30/07
BHI Rotary Rig Count:
U.S. Land 1,910 1,717 1,806 1,683
U.S. Offshore 69 72 64 77
Total U.S 1,979 1,789 1,870 1,760
Canada 433 347 372 338
Total North America 2,412 2,136 2,242 2,098
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Source: BHI (www.BakerHughes.com.)
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
9/30/08 9/30/07 9/30/08 9/30/07
Weatherford/AESC Service Rig Count
(Active Rigs):
United States 2,597 2,395 2,531 2,382
Canada 738 533 695 593
Total North America 3,335 2,928 3,226 2,975
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Source: Weatherford/AESC Service Rig Count for "Active Rigs."
Outlook
Our growth strategy includes a focus on internal growth in the basins in
which we currently operate and we seek to maximize our equipment utilization,
add additional like-kind equipment and expand service and product offerings. In
addition, we identify new basins in which to replicate this approach. We also
augment our internal growth through strategic acquisitions.
Strategic acquisitions are an integral part of our growth strategy. We
consider acquisitions that will add to our service offerings in a current
operating area or that will expand our geographical footprint into a targeted
basin. We invested $9.5 million to acquire a fishing, rental and foam unit
services business in February 2008, and $62.4 million, net of cash acquired, to
acquire a pressure pumping business in north Texas in April 2008. In
October 2008, we invested $58.0 million to acquire a well service and heavy haul
business based in Arkansas, and an additional $49.3 million in cash to acquire a
pressure pumping and e-line business in Pennsylvania, as well as issuing shares
of our common stock as additional consideration (see "-Acquisitions").
During the nine months ended September 30, 2008 and 2007, we invested
$193.2 million and $274.8 million, respectively, in equipment additions and
other capital expenditures. We originally planned to spend approximately
$150.0 million on capital expenditures for 2008 compared to actual capital
expenditures in 2007 of $372.6 million. This decrease in planned capital
expenditures for 2008 was due to concerns of potential equipment over-capacity
in the oil and gas industry in the markets in which we serve. During recent
months, we increased our projected capital expenditures budget to $250.0 million
for fiscal 2008 particularly to expand into basins which we believe to have
future growth potential, including the Haynesville Shale of Louisiana, the
Bakken Shale area of North Dakota and the Marcellus Shale in the Appalachian
region. During the third quarter of 2008, the U.S. financial markets were
impacted by the collapse of several large banks and financial institutions which
continues to restrict the availability of funds for loans amongst banks and for
commercial investment. Although we currently have positive cash flow and
sufficient available borrowing capacity under our existing long-term credit
facilities, we cannot estimate the impact that this downturn in the U.S.
financial markets will have on activity levels or our customers, our operations
and our future need and ability to continue to make investments in capital
expenditures and acquisitions. Our capital expenditures for the twelve months
ended September 30, 2008 were $291.0 million, the majority of which was spent
for growth capital, and we expect to invest approximately $150.0 million in
capital expenditures during fiscal 2009. We further expect to continue to
benefit from equipment placed into service during the past twelve months,
assuming that utilization of our equipment remains at current levels or higher.
However, our future results remain subject to the risks described in our Annual
Report on Form 10-K for the year ended December 31, 2007.
Our customers are directly impacted by the volatility of commodity prices in
the oil and gas industry, which affects their spending levels, and directly
impacts the use of oilfield service providers. As we have evaluated our business
environment, we believe the following trends have emerged: (1) our customers
have begun to curtail investment in capital projects as a response to the U.S.
financial markets decline, a decrease in available credit financing and lower
commodity prices; (2) our competitors have placed additional equipment into
service in the markets in which we operate; (3) we have experienced pricing
pressure in certain geographic areas for certain business lines due to
competitive market forces; (4) oilfield activity has been steady and rig counts
trends were favorable throughout the first three quarters of 2008, but have
begun to fall in recent weeks; (5) labor costs have risen and inflationary
forces may continue to increase our operating costs; and (6) our customers are
investing in unconventional resource plays, which may require service companies
to provide newer, more complex equipment and to possess more technical expertise
to assist the customer to explore and develop these resource plays.
We, and many of our competitors, have invested in new equipment over the past
several years, some of which requires long lead times to manufacture. As more of
this equipment is placed into service or moved to emerging basins due to lower
utilization in more established basins, there could be excess capacity in the
industry and, in particular, in the markets we serve, which we believe may
negatively impact our utilization rates and pricing for certain service
offerings. In addition, as new equipment enters the market, we must compete for
employees to crew the equipment, which puts inflationary pressure on labor
costs. Our equipment fleet is relatively new, as we made significant investments
in new equipment over the past three
years and expect to continue to invest in new equipment and maintenance of
existing assets. We continue to monitor our equipment utilization and poll our
customers to assess demand levels. As more equipment enters the marketplace, we
believe our customers will increasingly rely upon service providers with local
knowledge and expertise, which we believe we have and which constitutes a
fundamental aspect of our strategic acquisition growth strategy.
We continue to believe that the overall long-term outlook for our business
remains favorable from an activity perspective, particularly in the basins in
which we operate and in the basins in which we intend to make additional
investments, including the Haynesville Shale area of Louisiana, the Bakken Shale
area of North Dakota and the Marcellus Shale in the Appalachian region. Although
we expect a short-term downturn in the oil and gas industry due to the decline
in the U.S. economy, weakness of the U.S. financial markets, and lower oil and
gas commodity prices, we believe that the fundamentals in the markets which we
serve are good. We believe that pricing for our products and services will be
less favorable for some product lines and in some geographic regions in the
short-term. We believe we are well positioned to pursue our growth strategy
because of our position in the markets we serve and our overall capital
structure.
Acquisitions
During the period from January 1, 2008 through October 4, 2008, we acquired
substantially all the assets of four oilfield service companies for
$179.2 million in cash, net of cash acquired, and we issued 588,292 unregistered
shares of our common stock. These acquisitions are subject to final working
capital adjustments.
• On February 29, 2008, we acquired substantially all the assets of KR Fishing
& Rental, Inc., for $9.5 million in cash, resulting in goodwill of
$6.4 million. KR Fishing & Rental, Inc. is a provider of fishing, rental and
foam unit services in the Piceance Basin and the Raton Basin, and is based
in Rangely, Colorado. We believe this acquisition complements our completion
and production services business in the Rocky Mountain region.
• On April 15, 2008, we acquired all the outstanding common stock of Frac Source Services, Inc., a provider of pressure pumping services to customers in the Barnett Shale of north Texas, for $62.4 million in cash, net of cash acquired, which includes a working capital adjustment of $1.6 million, and recorded goodwill of $15.4 million. Upon closing this transaction, we entered into a contract with one of our major customers to provide pressure pumping services in the Barnett Shale utilizing three frac fleets under a contract with a term that extends up to three years from the date each fleet is placed into service. We spent an additional $20.0 million in 2008 on capital equipment related to these contracted frac fleets. Thus, our total investment in this operation was approximately $82.4 million. The initial purchase price allocation associated with this acquisition has not yet been finalized. We believe this acquisition expands our pressure pumping business in north Texas and that the related contract provides a stable revenue stream from which to expand our pressure pumping business outside of this region.
• On October 3, 2008, we acquired all of the membership interests of TSWS Well Services, LLC, a limited liability corporation which held substantially all of the well servicing and heavy haul assets of TSWS, Inc., a company based in Magnolia, Arkansas, which provides well servicing and heavy haul services to customers in northern Louisiana, east Texas and southern Arkansas. As consideration, we paid $57.0 million in cash, and prepaid an additional $1.0 million related to an employee retention bonus pool. The purchase price allocation associated with this acquisition has not been completed, but we expect to record goodwill related to this acquisition of approximately $27.5 million in October 2008. We believe this acquisition extends our geographic reach into the Haynesville Shale area.
• On October 4, 2008, we acquired substantially all of the assets of Appalachian Well Services, Inc. and its wholly-owned subsidiary, each of which is based in Shelocta, Pennsylvania. This business provides pressure pumping, e-line and coiled tubing services in the Appalachian region, and includes a service area which extends through portions of Pennsylvania, West Virginia, Ohio and New York. As consideration for the purchase, we paid $49.3 million in cash and issued 588,292 unregistered shares of our common stock, valued at $15.04 per share. We expect to invest an additional $6.5 million to complete a frac fleet at this location, and have an option to purchase other real property for approximately $0.6 million. In addition, we have entered into an agreement under which we may be required to pay up to an additional $5.0 million in cash consideration during the earn-out period which extends through 2010, based upon the results of operations of various service lines acquired. The purchase price allocation associated with this acquisition has not yet been finalized, but we expect to record goodwill of approximately $29.0 million in October 2008. We believe this acquisition creates a platform for future growth for our pressure pumping and other completion and production service lines in the Marcellus Basin.
We accounted for these acquisitions using the purchase method of accounting,
whereby the purchase price was allocated to the fair value of net assets
acquired, including intangibles and property, plant and equipment at depreciated
replacement costs, with the excess recorded as goodwill. Results for each of
these acquisitions have been included in our accounts and results of operations
since the date of acquisition, and goodwill associated with these acquisitions
was allocated entirely to the completion and production services business
segment.
In May 2008, our Board of Directors authorized and committed to a plan to
sell certain operations in the Barnett Shale region of north Texas, consisting
primarily of our supply store business, as well as certain non-strategic
drilling logistics assets and other completion and production services assets.
On May 19, 2008, we sold these operations to Select Energy Services, L.L.C., a
company owned by a former officer of one of our subsidiaries, for which we
received proceeds of $50.2 million in cash and assets with a fair market value
of $8.0 million. The carrying value of the net assets sold was approximately
$51.4 million, excluding $11.1 million of allocated goodwill associated with the
combination that formed Complete Production Services, Inc. in September 2005. We
recorded a loss on the sale of this disposal group totaling approximately $6.9
million, which included $2.6 million related to income taxes. In accordance with
the sales agreement, we agreed to sublet office space to Select Energy Services,
L.L.C. and to provide certain administrative services for an initial term of one
year, at an agreed-upon rate.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with
U.S. GAAP requires the use of estimates and assumptions that affect the reported
amount of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable under
the circumstances, and provide a basis for making judgments about the carrying
value of assets and liabilities that are not readily available through open
market quotes. Estimates and assumptions are reviewed periodically, and actual
results may differ from those estimates under different assumptions or
conditions. We must use our judgment related to uncertainties in order to make
these estimates and assumptions.
For a description of our critical accounting policies and estimates as well
as certain sensitivity disclosures related to those estimates, see our Annual
Report on Form 10-K for the year ended December 31, 2007. Our critical
accounting policies and estimates have not changed materially during the nine
months ended September 30, 2008.
Results of Operations (Continuing Operations)
Percent
Quarter Quarter Change Change
Ended Ended 2008/ 2008/
9/30/08 9/30/07 2007 2007
(unaudited, in thousands)
Revenue:
Completion and production services $ 417,788 $ 312,020 $ 105,768 34 %
Drilling services 62,208 52,880 9,328 18 %
Product sales 13,237 8,505 4,732 56 %
Total $ 493,233 $ 373,405 $ 119,828 32 %
EBITDA:
Completion and production services $ 133,229 $ 95,493 $ 37,736 40 %
Drilling services 17,005 14,211 2,794 20 %
Product sales 3,387 2,235 1,152 52 %
Corporate (9,885 ) (5,580 ) (4,305 ) 77 %
Total $ 143,736 $ 106,359 $ 37,377 35 %
Percent
Nine Months Nine Months Change Change
Ended Ended 2008/ 2008/
9/30/08 9/30/07 2007 2007
(unaudited, in thousands)
Revenue:
Completion and production services $ 1,138,096 $ 917,146 $ 220,950 24 %
Drilling services 172,711 158,101 14,610 9 %
Product sales 40,689 31,194 9,495 30 %
Total $ 1,351,496 $ 1,106,441 $ 245,055 22 %
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EBITDA: Completion and production services $ 352,940 $ 297,619 $ 55,321 19 % Drilling services 44,733 47,050 (2,317 ) (5 %) Product sales 10,209 7,215 2,994 41 % Corporate (26,241 ) (20,064 ) (6,177 ) 31 % Total $ 381,641 $ 331,820 $ 49,821 15 % |
"Corporate" includes
amounts related to
corporate personnel
costs, other general
expenses and
stock-based
compensation charges.
"EBITDA" consists of net income (loss) from continuing operations before net
interest expense, taxes, depreciation and amortization, minority interest and
impairment loss. EBITDA is a non-GAAP measure of performance. We use EBITDA as
the primary internal management measure for evaluating performance and
allocating additional resources. The following table reconciles EBITDA for the
quarters and nine months ended September 30, 2008 and 2007 to the most
comparable U.S. GAAP measure, operating income (loss).
Reconciliation of EBITDA to Most Comparable U.S. GAAP Measure-Operating Income
Completion
and
Production Drilling Product
Services Services Sales Corporate Total
(unaudited, in thousands)
Quarter Ended September 30, 2008
EBITDA, as defined $ 133,229 $ 17,005 $ 3,387 $ (9,885 ) $ 143,736
Depreciation and amortization $ 41,169 $ 5,223 $ 657 $ 646 $ 47,695
Operating income (loss) $ 92,060 $ 11,782 $ 2,730 $ (10,531 ) $ 96,041
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Completion
and
Production Drilling Product
Services Services Sales Corporate Total
(unaudited, in thousands)
Quarter Ended September 30, 2007
EBITDA, as defined $ 95,493 $ 14,211 $ 2,235 $ (5,580 ) $ 106,359
Depreciation and amortization $ 29,475 $ 3,933 $ 577 $ 200 $ 34,185
Operating income (loss) $ 66,018 $ 10,278 $ 1,658 $ (5,780 ) $ 72,174
Nine Months Ended September 30, 2008
EBITDA, as defined $ 352,940 $ 44,733 $ 10,209 $ (26,241 ) $ 381,641
Depreciation and amortization $ 111,897 $ 14,527 $ 1,762 $ 1,797 $ 129,983
Operating income (loss) $ 241,043 $ 30,206 $ 8,447 $ (28,038 ) $ 251,658
Nine Months Ended September 30, 2007
EBITDA, as defined $ 297,619 $ 47,050 $ 7,215 $ (20,064 ) $ 331,820
Depreciation and amortization $ 81,307 $ 10,460 $ 1,535 $ 1,212 $ 94,514
Operating income (loss) $ 216,312 $ 36,590 $ 5,680 $ (21,276 ) $ 237,306
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Below is a detailed discussion of our operating results by segment for these periods. . . .
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