Question-and-Answer Session
Operator
(Operator Instructions) The first question comes from Bill Herbert - Simmons and Company.
Bill Herbert - Simmons and Company
With regard to your processes of the U.S. rig count being down about 200 rigs from the recent peak by the end of Q4, we think that is on track and likely you will see more unrest unfold in the first half of 2009. Difficult question to answer, but at this stage could you give us some sort of parameters and even hazard a guess or hypothesis with regard to impact on margins? I realize lower. How much lower?
Chad Deaton
I think the way to look at it, at the beginning of the year we were down 200 rigs from the peak. We saw this activity come on at the end of the first quarter with 200 rigs coming on. We started to get tight on services. Really, I think at the end of Q2 and Q3 we are at an inflection point where we were starting to see price move from many of our product lines and move positively. So if we drop 200 rigs in a quarter I think we kind of have to look at we are back to where we were in the first quarter.
Now pricing wasn’t bad in the first quarter. Margins were good in the first quarter. So I think if it goes down 200 rigs we are going to have to tighten up. It will be a question of how much additional capacity everybody has added during the year which will take pressure out. But I think we will be fairly decent on a 200 rig drop. The next 200 rigs are the ones that are going to hurt a little bit more.
Peter Ragauss
The paradox of this is we are currently to date very, very busy. We are still turning down business in North America. I think it is a question of the pace of the drop and if it is slower than that then you won’t see any effect.
Bill Herbert - Simmons and Company
You have this dislocation between current prosperity and expected woe and you sort of indicated as to conceptually what you might do. But as you look forward into this sort of chasm or down draft what specifically do you plan on doing? Largely retaining your cost structure in anticipation of a relatively quick recovery? Do we pare back fairly significantly? Freeze headcount? Chop heads? Capital spending plans, etc.? If you could kind of walk us through some of the components of the game plan in the event of a 200-400 rig count drop.
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