TETRA Technologies, Inc.
Q3 2008 Earnings Call Transcript

Published: 7 Nov 2008

[Operator:]

Greetings and welcome to the TETRA Technologies, Inc. third quarter 2008 results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) It is now my pleasure to introduce your host, Mr. Geoff Hertel, CEO for TETRA Technologies. Thank you, sir. You may begin.

[Geoff Hertel:]

Thank you. And welcome to the TETRA Technologies third quarter 2008 earnings conference call. Joe Abell, our Chief Financial Officer, and Stu Brightman, our Chief Operating Officer, are in attendance this morning and will be available to help address any of your questions. Joe is going to give a short review of our third quarter financial results and I will then follow with a short presentation, which in turn will be followed by your questions. I must first remind you that this conference call may contain statements that are or may be deemed to be forward-looking statements. These statements are based on certain assumptions and analyses made by TETRA and are based on a number of factors. These statements are subject to a number of risks and uncertainties, many of which are beyond the control of the company. You are cautioned that any such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward-looking statements. Additional information on some of these risk factors may be found in our Annual Report on Form 10-K. Joe, would you begin with the financial review?

[Joe Abell:]

Revenue in the hurricane impacted third quarter was $249.1 million, 4.3% above the third quarter of 2007, but 18.2% below our record quarter and the previous quarter, the second quarter of ’08. Gross profit was $43.7 million, 22.83 above the prior year’s third quarter, but down 43.6% sequentially. Gross profit as a percentage of revenue was 17.6% for the quarter just ended compared to 14.9% for the prior year’s period and 25.4% in the previous quarter. General and administrative expenses were down 1.9% compared to last year’s comparable quarter to $25.6 million. As a percentage of revenue, G&A expenses decreased to 10.3% from 10.9% year-over-year. G&A was down 8.5% sequentially. Net income before discontinued operations for the quarter was $12.1 million, or $0.16 a share fully diluted compared to $3 million, or $0.04 a share fully diluted in the same period last year, an increase of almost 300%. Net income before discontinued operations was down 59.8% sequentially, adding back approximately $10 million or $0.09 a share of non-routine charges mainly related to hurricane impairments, but partially offset by a gain we recorded for oil and gas hedges to the $0.16 a share we’ve reported resulting in $0.25 a share compared to a consensus of $0.23. Year-to-date revenues were $778.6 million and net income before discontinued operations was $49.6 million, or $0.65 a share fully diluted. Looking at quarterly performance by division, revenues in the Fluids division were up 7.8% compared to last year’s third quarter. Profit before tax was $1.9 million, up over last year’s third quarter but down 88% sequentially, due largely to hurricanes Gustav and Ike shutting down fluid sales in the Gulf of Mexico for several weeks. Revenue in the Well Abandonment and Decommissioning Services segment was down 3.2% quarter-over-quarter. Profit before tax was $9.8 million, up over last year’s third quarter but down 15.4% sequentially due to the hurricanes. We have had strong demand for diving services following the hurricane. Revenue in our E&P unit, Maritech, was down year-over-year and down sequentially. Profit before tax was $1.8 million, up compared to the third quarter of last year, but down 89.7% sequentially due to the hurricanes. We currently have about 60% of our production shut in, which will take time to restore. The Production Enhancement segment revenue was up quarter-over-quarter, but down sequentially. And profit before tax was $16.2 million, an increase of 19.4% versus the prior year’s comparable quarter but down 5.1% sequentially for the first time in seven quarters. We had $73 million of cash capital expenditures in the quarter. Our debt decreased by $9.7 million for the quarter to $380.6 million. Debt-to-total-capital was 42.3% at the end of the quarter. With that, I will turn the discussion back to Geoff.

[Geoff Hertel:]

Thank you. In looking at our businesses, there are two factors that did not exist three months ago. Those being the effects from the hurricanes and the substantially reduced commodity prices. As I indicated, over the last three months there have been a number of changes, particularly from the hurricanes and the substantially reduced commodity prices. Both of these factors do, in fact, impact TETRA and I’m going to go through those effects here right now. First, the hurricanes. Since almost all of our Well Abandonment Services and Maritech operations are in the Gulf of Mexico, we obviously experienced operational shutdowns for much of September. Additionally, our largest fluids market is also the Gulf. Fluids operations were similarly affected particularly in September. However, the longer term impact from the storms is appreciably different for each of these three business segments. For Well Abandonment & Decommissioning Services, the storms should bring increased business, first for assessment services, then for platform, pipeline and well repairs, and finally for well abandonment and decommissioning activities. In particular, our heavy lift, cutting, and diving activities have each seen an uptick in the utilization since the storms. We would expect to continue to see an improve market for these services well into 2009 and possibly beyond. Now, most of Maritech shut-in or damage production facilities should be back on stream by late March. And in fact, most of them should be back on stream by late January. However, production from our 50% owned East Cameron 328 facilities is not now scheduled to begin until 2010 after the replacement of a platform A that went down in the storm and the re-drilling of the associated wells. While our Gulf of Mexico fluids operations were curtailed during the storms in their cleanup, we don’t feel that the storms have significantly impacted demand for our completion fluids for 2009. They certainly impacted the third quarter and will to some extent in the fourth. Much of our growth in these products was and is predicated on growing international deepwater and ultra deepwater applications. The timing of which we do not believe was materially impacted by any of the storms in 2009. Commodity price moves for oil and gas impact TETRA in two ways. First, any unhedged Maritech production is subject to the fluctuating prices. The impacts here are both earnings and cash flow, although we mitigate a portion of this with our hedge program. Also, some of our services businesses are impacted if the fluctuating prices increase or decrease drilling activity. While some of our business segments are not driven by drilling activity, most particularly Well Abandonment & Decommissioning Services, our domestic testing and onshore Fluids business are impacted by changes in this statistic. Should oil and gas prices remain at or below current levels, we would expect to see a drop in domestic drilling. Clearly many production companies are signaling that they are trimming their 2009 CapEx budgets. Although we’ve really seen very little slowdown in our domestic testing operations to date, it would seem prudent to expect business in this area to begin this often if commodity prices stay at current levels and domestic drilling activity declines. Fortunately for us, most of our anticipated 2009 growth in testing relates to new or expanded international contracts. This growing international presence should help mitigate the financial impact of a declining US market. We will also expect that our domestic onshore fluids and fluid services businesses would be negatively impacted by the declining rig count. So when you view all of the services businesses – and here I differentiated from the production business with Maritech. So if you look at all of the services businesses in the aggregate, we do not look materially different than we did prior to the storms and the declining commodity prices. The major positive impact in this time period has been on the well abandonment and decommissioning services. And the major negative impact has been on domestic testing and onshore fluids. The hurricanes, declining commodity prices and the financial market meltdown did significantly change our anticipated 2009 capital program. Originally we expected to couple large outlays for longer term ongoing projects like the new Arkansas plant with the very aggressive Maritech exploitation budget. However, with the deferred East Cameron 328 production and the lower commodity prices, Maritech’s projected cash flow should be less than we anticipated 90 days ago. While we have adequate capacity under our bank lines to allow for the original aggressive CapEx program, we do not feel that that would be a prudent use of debt in this environment. Therefore, we have dramatically reduced Maritech’s anticipated 2009 exploitation budget basically to conserve cash. Fortuitously we don’t believe we will lose many, if any, of our exploitation opportunities by deferring the expenditures to 2010 or later. Another reason to consider waiting is the dramatically higher commodity hedges that we have in place for 2010. We would expect that the loss of East Cameron 328 production in 2009 coupled with the reduction in exploitation CapEx will significantly reduce the production and the associated earnings for Maritech versus the levels attained during the second quarter of 2008. I’m certainly not talking about versus the current quarter. Before I turn the conference call over to your questions, I might mention a couple of other items. First, during the third quarter, we were awarded new completion fluids contracts for deepwater and ultra deepwater projects in the Gulf of Mexico. Second, our new Arkansas plant is slightly ahead of schedule with startup now anticipated sometime in the third quarter of 2009. And finally, this past week, EPIC Diving set an all time record for diver utilization. This broke the record that they set the previous week, which in turn broke the record set in mid October. Ryan, I’m now going to open this up for questions.

[Operator:]

Thank you. (Operator instructions) Our first question comes from the line of James West with Barclays Capital.

[James West:]

Hi, good morning, guys.

[Geoff Hertel:]

Good morning, James.

[James West:]

Geoff or Stu, I think after the hurricanes in 2005, pretty quickly you had several of your larger customers come to you and say, look, we want TETRA do the vast majority of our platform removal work given the extent of the damage. Has this occurred yet this time? Are we still in more of a wait and see how much the extent of the damages before we let our contracts?

[Stu Brightman:]

It’s somewhere in between, James. There is a lot of discussion going on with several customers that are evaluating and looking at alternatives. So we’ve spent a lot of time laying out some suggestions and alternatives. I would expect some of those decisions will come pretty quickly and then a lot of them will come in the springtime. And again, as Geoff said earlier, already some of the initial stages with the inspection and cutting, we’ve done very well with that, but in our cutting business and in our barges going out and doing some debris removal. So I think it’s a little bit of both scenarios.

[Geoff Hertel:]

Yes, I might add a little bit to that. There is a big difference between the storms of ’05 and ’08 as it relates to the perception of what’s going on. As you remember, in ’05, that was such an unprecedented damage that really nobody knew what was happening. I mean, that’s both from the service provider and the oil companies. And while they all wanted to go and get work done quickly, because that’s how they had historically done it, they found that that was not something that could be done easily and it was going to cost inordinately more than they thought it was going to cost. And as you’ve seen, a lot of this has been stretched out with business in some cases starting last summer. There are still projects that haven’t been let from ’05. So I would characterize a big difference that in ’05 everybody was naïve as to what needed to be done. In the ’08 storms, people have already understood because of the ’05 storms what is entailed in the process and I actually think we are further along today in looking at new projects than we were in ‘05. However, in ’05, we didn’t know we weren’t far along because it was such a new event. So I think it’s going to happen quicker. I think we’re seeing that with our customers that are talking to us. They know what the costs are going to be. They know what’s entailed with it. And I think we’ll probably move pretty fast on some of this.

[James West:]

And do you think at this time that given that you have EPIC now, you have the cutting tools, you have more services, do you think you are better suited to provide a broader package of services, or do you think it will play out like last time where a majority of the companies wanted to control the project management within the oil companies and just kind of piecemeal it out in discreet services?

[Stu Brightman:]

Yes. Again, in answer to the first part of the question, I think we are a lot better prepared as we go into this cycle than we were three years ago. We owned EPIC 2.5 years. They are fully integrated into the company. We’ve owned cutting business for over a year now. Same thing; they’re fully integrated. So I think getting out of the gate with those key services with us, the package is broader, the overall management of those individual pieces is stronger. So I feel very good about that. How they are going to contract? Second part of your question, I think it will be a combination like we’ve eventually saw last time where the larger players will probably manage it on their own and dole out the pieces. And we’ll be prepared to playing that just like we did last time with more services this time. I think some of the smaller companies will be looking to companies like TETRA to do a lot of good project management role. And again I think we’ll be capable of doing that and we’ll be marketing both approaches.

[Geoff Hertel:]

I will add one thing. There is a caveat to what he just said. In ’05, we held back various amounts of each service so that we could offer a full package. I think it’s safe to say that in the current environment, while we will certainly do full packages, we are not going to sit on our hands with the demand for, say, diving and hold back 30% of our fleet so that we can package it. We are going to go out and fully utilize each one of our services individually, and if we can put the package together for the customer, great. And if we have to add some third-party service instead of our own, we’ll do that as well.

[James West:]

Okay, that makes sense. And then just one last question for Joe. Looking at the capital budget for 2009, I know you spoke qualitatively about that in your comments. I think you guys were spending about $300 million this year given that Maritech is going to be down significantly. What’s your initial thoughts on total CapEx for next year?

[Joe Abell:]

I think it’s premature to throw out a number, James. I think Geoff accurately portrayed the qualitative picture of conserving capital. I think we will use it judiciously. There will be opportunities to deploy the capital and high value lays that we will seize as the opportunities present themselves.

[James West:]

Okay. I guess then, what will be the maintenance CapEx across the business? And then what's already committed with things like the Arkansas plant?

[Geoff Hertel:]

Let me try your answer. And the reason we are equivocating is we’ve gone back each one of our divisions just in the last month and a half, and said, okay, guys, you see what’s going on in the capital markets. We want to be in a position to take advantage of things as they come to us. So we want you to go rescrub all your capital. So we’re kind of jumping at numbers. I would say we’ve got a $40 million to $50 million minimum CapEx that you’re going to have to do. We’ve got probably $50 million to $70 million that we won’t do in Maritech, something in that order of magnitude that wasn’t what we’ve had as a preliminary budget. I don’t know what will drop out of other areas. Clearly we’re going to have large capital as we finish out our plant in Arkansas. That isn't going to change. In the aggregate, it will be down appreciably, but I don’t know that I’m comfortable giving you a hard number. That’s the best I think we can give you at this point in time.

[James West:]

Okay. That’s fine. Thanks, guys.

[Operator:]

Our next question comes from the line of Steven Gengaro from Jefferies.

[Steven Gengaro:]

Thank you. Good morning, gentlemen. Looking at the Maritech side of the business, can you give us any indications on what kind of volumes we should be looking at over the next couple of quarters?

[Geoff Hertel:]

You're around 30. It's been vacillating between 25 and 31 million equivalence, as we bring it on. We have, as I indicated in the press release, production coming on at the end of January. We’ve got production coming on in December. By the end of January and then the one piece in March, we should be back to that level that I pointed out, $50 million to $55 million. How that comes on? Unfortunately, you’ve got C-Robin [ph] and a few other pipelines out there that are currently down in various places, and we are trying to put production into those lines. So we may be ready, but they may not. So that’s why I’m being a little conservative with you. It’s possible that we get to those $50 million, $55 million level. It’s a little earlier than the end of January to mid February, late February. But right now – what did I say?

[Joe Abell:]

Dollars.

[Geoff Hertel:]

Dollars, I’m sorry, million cubic feet a day equivalent, maybe earlier than that, but that’s our conservative estimate at this point in time.

[Steven Gengaro:]

Thank you. And then look at the Well Abandonment & Decommissioning Services side, you mentioned in your remarks how strong I guess EPIC has been for the last couple quarters in the diving side. Can you give us a sense for the quarterly or annual rate for the diving piece of well abandonment?

[Geoff Hertel:]

Well, first of all, I don’t think we said that it has been strong for a couple of quarters. It’s been fine for a couple of quarters, but it’s been much stronger since the storms. That’s what we said. I don’t know that we’ve ever broken that out, but we bought that based on an original revenue base – I’m looking at Stu – 40 million to 50 million. We doubled the capacity of the operations. So one would assume that it’s a run rate in good times well north of 100 million.

[Steven Gengaro:]

Okay, that’s helpful. No, I meant to say the last two weeks, not last two quarters. You mentioned the strength there. And then just finally, when we look at the fluid side, are we – where we stand as far as your inventory levels and your sort of margin expansion off your lower cost raw materials? Are we hitting the sweet spot of that yet? Are we still a couple of quarters away?

[Geoff Hertel:]

No, actually the one thing that was a negative on fluids that we are offsetting with the fact that we think we’ve got more business in ’09, especially late in the year than we projected because of these new contracts. The negative is that because our customers were interested in, A, evacuating their platforms and then, B, bringing their production back on. There was very little completion work done in September or October for that matter. The net effect of that is that we haven’t been able to reduce our inventories the way we wanted. So we’ll go into next year with higher inventories than we had. Which mean, A, we are using more cash, but that’s not he big issue. Big issue is you want to get rid of that higher cost inventories sooner. During the year, you may run through it the way you had intended, but you would probably go into the year with a higher amount of inventory than you wanted. Stu wants to make a comment.

[Stu Brightman:]

Yes. And I’d also add to that, as we had indicated in our last call that we have started to see the benefit of that during this year, certainly came through during the second quarter. And all this does is it just slows down that process because our volumes in the third and fourth quarter will be less than we anticipated.

[Geoff Hertel:]

Yes. I hope you didn’t think that I meant that it wasn't helping us. It is helping us. But I thought the gist of your question was, when would we get the full effect of it. I was just saying that we’re pushing that off a little.

[Steven Gengaro:]

Okay. And just a quick follow-up. The second quarter margin that we saw there, is that an achievable margin as an average for ’09?

[Geoff Hertel:]

Well, remember, the second quarter is a very bad quarter to make analogous to any year because TCE, Tetra Europe is predominantly a second quarter event and froze off your margin calculation for the whole business, for the whole year. So that’s just not a good number to use to calculate anything in any year.

[Steven Gengaro:]

Okay. Thank you.

[Operator:]

Our next question comes from the line of Michael Harrison with First Analysis.

[Michael Harrison:]

Hi, good morning. Question first for Joe, looking at the P&L that large other income item, presumably that’s the hedging gain?

[Joe Abell:]

Yes, we had a gain on our hedges and then in addition, the sale of some assets, some E&P assets sold in the quarter.

[Michael Harrison:]

Right. And is that also related to the reason that Maritech’s gross profit was negative, but then pretax profit was positive?

[Joe Abell:]

Yes, it is.

[Michael Harrison:]

Okay. In terms of the Maritech exploitation project that you’re going to be shelving here, is it fair to assume that if you guys see improvement in oil and gas prices that you would be able to proceed with the projects that are ready? You suggested in the release that about 25% of those projects were sort of ready to go. Is that pretty simple math for you guys to do?

[Joe Abell:]

Yes. No. First of all, part of those are going to be done anyway. And we’re not shutting off all the exploitation dollars to the company. And they fully expect to go ahead and do exploitation. In fact, they are beginning, I think, a well next week. So part of those are going to get done anyway. You’re just not going to do the preponderance of them. Remember that TETRA is not an E&P company. And we typically with a few exceptions do not go out and drill these a 100%. We try to bring in partners, get promoted interests, develop them that way, and that’s why we’ve had such a good history of how we’ve been able to exploit these properties. You’re going to have to have your partners come along with you. So that’s something I can’t address because I don’t know where they would be. But in most cases of the deals that we had really ready to go early in the year, all of those partners have indicated they would go ahead and do them if we wish to go ahead and do them. It’s TETRA that is becoming a little more conservative than everyone else at this point in time. So, the answer is yes. We’re ready to develop in terms of going ahead. Actually you probably be better off because you are looking at a somewhat weaker rig market. So you’d be able to get the rigs more expeditiously. But I think in our case we just need to make sure we get our partners on board and go ahead and do it. It would mean probably a 90-day lag from the time we felt we had extra cash that we would probably go and do some more of these.

[Michael Harrison:]

All right. And then turning to the fluid side, does it relates to ultra deepwater activity that you were expecting for 2009? Do you have any sense of how much of a setback the hurricanes were in terms of when you expect to start seeing some ultra deepwater completion activity?

[Geoff Hertel:]

We are already starting to get some awards in – our position is this is not going to have a significant effect on the timing or the volumes of those projects for 2009.

[Michael Harrison:]

Okay. And in terms of fluids pricing, kind of broadly, what are you seeing there?

[Geoff Hertel:]

No major change.

[Michael Harrison:]

All right. And then last question, on the testing business, any international contracts that you are pursuing right now that you think could make a contribution in 2009 that we haven’t already heard about?

[Geoff Hertel:]

I think the areas where we continue to feel comfortable that we’re going to grow internationally, predominantly those locations we’re already at and just building on the existing customer base. And we’re now entering in addition to that one new region that during the next few months within the Middle East. So I think you will continue to see that expansion, where we are and slowly location at a time. But we see that being positive and do not see any impact on those opportunities with everything else going on, and continuing to invest in those areas.

[Michael Harrison:]

All right. Thanks very much.

[Operator:]

Our next question comes from the line of Joe Gibney with Capital One Southcoast.

[Joe Gibney:]

Thanks. Good morning, everybody.

[Geoff Hertel:]

Good morning, Joe.

[Joe Gibney:]

Geoff, just I was curious if you could give us an update on the fluid side relative to PBR and as you’ve got any other international fluids initiatives on the board that you are looking at?

[Geoff Hertel:]

I’m a little lost. PBR –

[Joe Gibney:]

Petrobras.

[Geoff Hertel:]

Oh, I’m sorry. You can go ahead, Stu.

[Stu Brightman:]

We are counting on with expanding our plant, getting our inventory positioned, and believe we’ll begin doing those first wells very early in the first quarter. So that’s going as planned. No major change since our last update. Still confident those are all going on as we discussed previously.

[Joe Gibney:]

Okay. And relative to the two new bookings that you indicated on the deepwater side and the Gulf of Mexico, and Geoff, did you say that those are still targeted to start late ’09, like fourth quarter? Is that the general ballpark?

[Geoff Hertel:]

Yes. In fact, a lot of our deepwater work is the second half of next year just because of the timing of most of these companies. The two awards are fourth quarter awards, could be third quarter I guess in one case, but we’re projecting the fourth quarter. And then they would carry over hopefully through the next two or three years thereafter.

[Joe Gibney:]

Okay. Stu, relative to record EPIC Diving utilization, kind of where you are on some of your heavy lift vessels here, just could you help calibrate that a little bit, kind of where we are from a 2Q utilization standpoint versus what that record number is now?

[Stu Brightman:]

Yes. If you look at the diving, again, you get – the second quarter, as you recall, you almost have to split in two pieces because it really didn’t start to get busy due to weather till mid-May. We’re certainly running probably 10% plus utilization more than we were at the peak of the end of the second quarter. And we’ve got every – all the assets, all the people, pretty much going and have been over the last month and anticipate that carrying on for a period of time. On the heavy lift side, we’ve got our two big barges. We had very – again as you recall, same story. First half of the second quarter, the weather was bad. The second half of the second quarter, we had very good utilization, very good execution. So at the moment, as we get into October, November, those two barges are probably utilization-wise running above very high similar to what we saw at the end of the second quarter. That’s about as good as you’re going to get with those. They're running every day and executing well.

[Geoff Hertel:]

I might make sure that for those of you who aren’t aware of the seasonality of this business, the reason that this is relevant is typically at this point in the year, you are shutting down to a great degree. Some of you diving and some of you heavy lift as you go in into November and then you carry that for four or five months. It’s a slow period. What Stu is telling you is that we are getting activity bookings for the time of the year that you typically aren’t working. That is a very strong positive for our operations. This is not the second – third quarter, which is typically strong. This is the fourth and to some extent first quarter. The only thing that will relate into the first quarter, one of our two barges has to go in for inspection purposes and will be down for 90 to 120 days. But that’s been scheduled for a while and we’ll do that in the first quarter so that it won’t impact a good, strong part of the year. However, it looks like right now it’s going to have business right up to the date we bring it in, which is really very positive and much different than the typical seasonal pattern.

[Joe Gibney:]

All right. Helpful. In that sense, you’re getting indications now from customers that they are going to be willing to take on whatever risk as we get into December to go ahead and get some of these inspections, repairs, cutting, diving, et cetera done. That's still a fair assessment?

[Stu Brightman:]

Right now, we have been able to get those terms going into December, which is typically much later than normal. And we’ll see – we think some of that will continue past. We’re still not certain what the duration of the winter is going to be. My guess would be a shorter winter than we typically see for all the reasons we mentioned. But right now we're out until December, pretty solid with those assets.

[Joe Gibney:]

Okay, that’s helpful. And just shifting to the production enhancement side, relative to your domestic testing exposure, what kind of percentage of total production enhancement does that encompass? Obviously you’ve got the Compressco side in there, and you’ve got the international side. But just help us calibrate a little bit there, your exposure on domestic testing as a portion of production enhancement?

[Stu Brightman:]

I’d say domestic testing as a percentage production enhancement, you probably have about – 40% of the activity is domestic testing out of that entire segment.

[Joe Gibney:]

Okay. All right, that’s helpful. I appreciate it. One last one if I may, relative to your oil and gas kind of mix here as we are looking at that 50 to 55 kind of run rate next year, Geoff, what is the split there, oil and gas, should we think about that given the shut-in and bringing stuff back on line?

[Geoff Hertel:]

I’ll give you an answer. And that is that we are very confident that we will cover our hedges, and our hedges are currently 2,500 barrels a day and 25 million cubic feet a day of gas. That would be 40 million. So we’re going to cover both of those. So you add some percentage to both to get up to that 50-plus.

[Joe Gibney:]

All right. Thanks, guys. I’ll turn it back. Appreciate it.

[Operator:]

Our next question comes from the line of Jim Rollyson with Raymond James.

[Jim Rollyson:]

Good morning, guys.

[Geoff Hertel:]

Good morning. I thought you are on vacation.

[Jim Rollyson:]

No. Going back to the well abandonment and decommissioning, you’ve talked about it a lot. But just if you look at the combination of the increased utilization, whatever you might be seeing in terms of enhanced pricing given the opportunities there and just service mix, how do you look at your margin opportunity on – maybe on an annual basis going into next year? I realize the seasonality, but I mean do you think margins start becoming enhanced? And now that you, maybe versus last time around, understand to deploy the assets in individual groups rather than, as you mentioned, holding them off for packages, I mean, just kind of how do you look at that margin opportunity?

[Geoff Hertel:]

Well, I’ll answer it and I’ll let either of the other guys answer. First of all, margins in that business are driven, number one, by utilization; number two, by utilization; number three, by utilization; and number four, by price. So price is relevant. You want to get prices up, they certainly help you. But there is such a high cost to break even and then a very good drop down to the bottom line after you hit that one rate that you gets you your money back, that we learned last year and the year before that if we can enhance the utilization even if it were at lower prices, you’re going to be better off. So right now, we are looking at prices that are better and utilization that is better. So, the answer is, we ought to have better gross margins, but we ought to have better operating margins if we can just keep this utilization at relatively high rates. Stu, do you want to –?

[Stu Brightman:]

Yes, I agree. The one thing I’d reiterate again, Jim, is – as Geoff said earlier, we’ve got a lot more diving assets that we put in post acquisition with EPIC. So the asset base is larger also as we go through this cycle.

[Jim Rollyson:]

Right. I guess maybe to frame this into numbers. ’06, you were in the low-20s in gross margins; last year mid-teens; this year with ups and down in hurricane stuff, mid-teen. Do you think you are back possibly in the low-20s, low-to-mid 20s again next year? Is that what you see, what we have?

[Stu Brightman:]

That would be a good target.

[Jim Rollyson:]

Okay. That’s very helpful. Geoff, I don’t know if you said this, but just to make sure I have the right number. What did you actually average for production levels in the third quarter?

[Geoff Hertel:]

I don’t know that I’ve even got that in front of time. One of you guys over here have our production for the third quarter? It was not much for September. We were probably running around 70 million in July. We had a couple of storms that were not hurricanes in August where we pulled people off that reduced that rate somewhat. And then it went down to – I don’t think we had more than a million or 2 million cubic feet a day equivalent there for a period of a week or ten days and then it began to build back. But I can get that number if you want it, but I don’t think we have it right here.

[Jim Rollyson:]

Yes. Whenever. That's fine. Last question for me, since you guys have talked a lot. Insurance, you talked – you obviously had problems in the last hurricane cycle of getting recoveries on some of the damaged stuff. And you kind of noted in your press release, haven’t paid the premiums or the deductibles, but maybe taking a conservative case on the outlook for recovering damages again this time. Do you expect to get recoveries here? And I guess if not, why do you keep paying the premiums?

[Geoff Hertel:]

A little background for those of you who may not be totally aware. We had some $130 million give or take of damage in Katrina and Rita, and we were paid $90 million. The insurance providers at that time kept dragging their heels on the remaining amounts wanting to argue with us. We finally ended up suing them in the end of the year last year, which precipitated the necessity of writing those off. Under GAAP accounting, that would mean that that is not a probable outcome if you have to sue somebody according to GAAP. Therefore we wrote those off. We believe we will be paid for those. We are going to court in January, February on that and hope to recover from Katrina and Rita. As it relates to these, we have a different insurance provider. We rewrote the policies where there was any ambiguity. And we feel very confident that all of this will be recovered. However, if you look back to a year and a half ago, we had to continue to write off in quarters various insurance receivables as they were argued by the underwriter. We don’t believe that’s something we’re comfortable with. And given the fact that we haven’t been paid for certain types of these claims before, we thought it judicious and conservative and proper for us to write these off. And we did so. We fully expect to get paid for all of this.

[Jim Rollyson:]

Excellent answer.

[Geoff Hertel:]

Obviously, by the way, in either the Katrina, Rita, or in this case, those that are written off, if they are paid, it comes back to our income statement. We would obviously make you aware of that, not just drop $20 million or $30 million a quarter on there without letting you know why.

[Jim Rollyson:]

Thanks for the detail, Geoff.

[Operator:]

Our next question comes from the line of Bill Dezellem with Tieton Capital Management.

[Bill Dezellem:]

Thank you. It’s Tieton Capital Management. Couple of questions. First of all, the Gulf of Mexico deepwater fluid contracts that you have won, are either of those one that you had – one of the three that you had referenced here sometime ago that you were going after, and you won the Petrobras one. And I think there was still a couple that were outstanding.

[Geoff Hertel:]

Neither of those were the larger contracts. One of those other two is a very significant contract that is yet to be awarded and probably will not be until the first quarter of next year for initial work sometime next year. These were other contracts. I believe we have seven or eight contracts in this area already for awards, and we obviously would like to get both of those others, in particular, the one that is to be awarded in the first quarter of next year. We would hope to get a portion of that contract.

[Bill Dezellem:]

So these wins this quarter are incremental to prior discussions?

[Geoff Hertel:]

Yes.

[Bill Dezellem:]

Thank you. And then, I’d like to circle back to the CapEx and I know you made the comments that you did in response to an earlier question. However, if we look at the divisions that are not Maritech, would you be able to qualitatively address them individually, whether you expect each of those businesses own cash flow generation to cover their CapEx or whether you will require using your debt facility to fund some of those?

[Geoff Hertel:]

I’m thinking here for a minute. The only business unit where we might not cover would be Fluids because of the plant in Arkansas. I can’t believe that the others wouldn’t cover their cash. Stu is nodding yes. All the rest, the way they're set up at this point in time would cover with cash flow their CapEx for the year. Now again, the one thing we can’t discuss is as obvious is Compressco.

[Bill Dezellem:]

Fair enough. And thank you for that qualitative perspective. One additional question relative to the hurricanes, you’ve discussed the write-off that you took actually in some nice detail just a moment ago. But I don’t think on this call I have heard it quantified what the overall operational impact on net income, what you felt that was from the Ike, Gustav combination.

[Geoff Hertel:]

Well, what we’ve said – and I don’t know that we really have a hard number for you. What we said was that most of our businesses were doing as well as we were doing in the second quarter if you look at what the second quarter was. In the third quarter, in particular in July, and then began to have some impact in August. But August was not a bad month. It just wasn’t quite as good as it could have been because we had a couple of times during the quarter – or the month that you had to go down. So what I would probably say to you in aggregate, if you looked at our second quarter and looked at the operational profits, and then looked at our third quarter and what we reported and take into consideration the $10 million that we show as unique items, you’d probably come up with what that impact was, pretty close. I know that’s not a hard number, I apologize, but that’s how you could get to it.

[Bill Dezellem:]

That’s exactly what we were looking for and we appreciate the feedback. Thank you.

[Operator:]

(Operator instructions) Seeing as there are no further questions, I would like to turn the call back to management for concluding remarks.

[Geoff Hertel:]

Thank you. We appreciate your being with us today and we will talk to you in the fourth quarter. We will also have a conference call on our 2009 budget and that will be sometime at the end of December to early January, which would follow our Board meeting in December as we have done historically. So that should be the next conference call that we have. Thank you.

[Operator:]

This concludes today’s conference. Thank you all for your participation.