Patricia Gil - IR, Manager Cindy Taylor - President, CEO & Director Lloyd Hajdik - CFO, Treasurer & SVP.

Jim Wicklund - Credit Suisse Marshall Adkins - Raymond James Dan Boyd - BMO Capital Markets John Daniel - Simmons & Company Jeff Spittel - Clarkson Capital Securities Welcome to the Oil States International First Quarter 2015 Earnings Conference Call. My name is John and I'll be your operator for today's call. [Operator Instructions].

I will now turn the call over to Patricia Gil..

Thank you, John and welcome to Oil States' first 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're also joined by Chris Cragg, Senior Vice President of Operation.

Before we begin, we would like to you caution listeners regarding forward-looking statements to the extent that our remarks today contain forward information other than historical information, please note that we're 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 and thank you for joining our earnings conference call today. Our first quarter 2015 results were negatively impacted by the precipitous drop in crude oil prices which has led to dramatic declines in North American land drilling and completion-related activity.

Our first quarter 2015 revenues and adjusted EBITDA declined 30% and 45% respectively, representing detrimental margins of 38%. While the slowdown in activity impacted our offshore product segment, there was a much more pronounced negative impact on our well site services segment.

Our offshore products results for the quarter came in within our guided ranges and backlog held up well. We reported a book to bill ratio of 0.98 times as bidding and quoting activity for our offshore products and services continued during the quarter, albeit it at a slower pace.

We successfully booked a significant subsea project during the quarter which helped our overall backlog position. North American land activity was extremely weak during the quarter, with the rig countdown 27%, sequentially. Completion activity was even worse, due to many customers who elected to drill wells but not complete them.

During the first quarter, we recorded a $2.1 million charge for severance and other downsizing initiatives including headcount reductions and the closure of certain underperforming completion services facilities. We also made adjustments to variable field pay structures.

We're very focused on controlling discretionary spending levels and are being prudent in our allocation of capital. We will continue to monitor and evaluate our cost structure to react proactively during this cyclical downturn. None of this is new news for the energy services sector.

I will go into more detail by segment a bit later and focus additional comments on our market outlook. At this time, Lloyd will take you through more details of our consolidated results and financial position..

Thanks, Cindy. During the first quarter, we generated revenues of $337 million and reported adjusted net income of $23.1 million or $0.45 per diluted share.

Which excluded pre-tax charges of $2.1 million for severance and other downsizing and cost reduction initiatives and a higher effective tax rate driven by a $2.3 million deferred tax adjustment for certain non-deductible items. Adjusted EBITDA for the first quarter ended March 31 was $69 million.

Focusing on our balance sheet and on our debt capital structure, we had total liquidity of $428.5 million which is comprised of $356.5 million available under our revolving credit facility, plus cash on hand of $72 million.

Our gross and net debt levels at March 31, 2015 totaled $206 million and $134 million, respectively, our net debt to book capitalization ratio approximated 10%. At March 31, our leverage ratio, using trailing 12 months adjusted EBITDA was approximately 0.5 times.

During the first quarter of 2015, we invested $38.3 million in capital expenditures, the majority of which carried over from 2014. Capital spending during the quarter related primarily to the addition of completion services equipment, deployed to service the U.S. shale plays along with ongoing facility expansions in the offshore product segment.

In light of current market conditions, we continue to critically review all capital expenditures. For the full year 2015, we expect to spend approximately $160 to $180 million in capital expenditures. Our priorities are to complete our new Offshore Products facility in the UK and our two locations in Brazil.

On January 2, we required Montgomery Machine company or MMC for $39 million net of cash acquired. MMC combines machining and proprietary cladding technology and services to the manufacturer of high-spec components for the offshore capital equipment industry on a global basis.

The operations of MMC have been included in our offshore products segment since the date of acquisition. During the first quarter we repurchased 1.83 million shares for approximately 3.5% of our shares outstanding under our authorized share repurchase program at an average price of $42.78 per share.

Amounts remaining available under the company's current share repurchase authorization total $71.5 million which is scheduled to expire on September 1, 2015.

In terms of our second quarter 2015 consolidated guidance, we expect depreciation and amortization expense to approximate $34 million, net interest expense to proximate $1.5 million and corporate costs to approximate $13 million.

Our 2015 consolidated effective tax rate is expected average approximately 36.1% for the full year which equates to an effective tax rate of approximately 33.5% for the next three quarters. At this time I would like to turn the call back over to Cindy who will take you through the business segments..

Thank you, Lloyd. Starting with our offshore products segment, here we felt we're in line with our expectations and the guidance ranges that we provided in connection to our fourth quarter 2014 earnings conference call. We generated revenues of $196 million during the first quarter of 2015, compared to $252 million in the fourth quarter of 2014.

EBITDA totaled $43 million in the first quarter, compared to $62 million in the fourth quarter of 2014. Our EBITDA margin percentage averaged 21.8% for the first quarter of 2015, a decrease from the record 24.6% margins reported in the fourth quarter of 2014.

The first quarter of 2015 was impacted by a decreased backlog coming into the year, along with sequentially lower shorter cycle products and services and the impact of $1 million of severance cost. Orders booked during the first quarter totaled $193 million which resulted in a modest sequential backlog decline of 3%, to $474 million at March 31.

Our first quarter book-to-bill ratio was 0.98 times as bidding and quoting activity continued during the first quarter of 2015, albeit at a slower pace due to delays in award timing and prolonged contract negotiations. In the first quarter, we booked a large project consistent of pipeline connectors for a subsea project offshore Brazil.

As we progress into the second quarter, we believe that revenue in our offshore products segment will decline modestly, but still range between $180 and $190 million.

While we still expect good contributions from subsea products and production facility equipment, in the second quarter, we do expect to see further reductions in revenues from our shorter cycle and consumable products as our customers continue to cut spending to preserve cash flow.

However, we still believe that projects focused on production infrastructure will ultimately be sanctioned, but the timing is not without risk of further project deferrals. EBITDA margins for the second quarter are expected to range between 19% and 21% due to the forecasted product mix and cost absorption levels.

In our well site services segment, our first quarter results were impacted by the precipitous drop in the U.S. land drilling rig count and certain customers electing to drill wells but not complete them, coupled with pricing pressure from our customers. The U.S. land rig count was down 27% sequentially and the vertical rig count declined 38%.

For the first quarter, we reported a 39% sequential decrease in our well site services revenues which totaled $142 million.

The sequential decline in revenues was attributable to a 23% decrease in revenue per completion services ticket, a 16% decrease in the number of completion services jobs performed and significantly lower utilization for our land drilling rigs.

EBITDA decreased 51% sequentially to $37 million and EBITDA margins averaged 25.8% for the first quarter, compared to 32.4% for the prior quarter. We managed the business to detrimental margins of 43% in this segment due to cost-cutting initiatives.

Land rig utilization levels continued their decline in the first quarter and averaged 44%, down from 86% in the prior quarter. Today, we have 22 of our total fleet of 34 land drilling rigs stacked, equating to approximately 35% utilization which we assume continues in the second quarter.

Field conditions deteriorated three the first quarter, with land rig declines accelerating in February and March of 2015. Although the pace of rig count declines in North America has begun to abate, the lower absolute level of U.S. drilling and completions activity will continue to weigh on our well site services results in the second quarter.

With the current rig count now down 49%, from January 2, 2015, we estimate that second quarter revenues for our sell site services segment will range between $110 million and $120 million, with EBITDA margins averaging 19% to 21%.

In conclusion, we're dealing with a very challenged market currently and are working diligently to maintain our market share during this downturn. We're also closely monitoring our cost structure, controlling discretionary spending, critically reviewing all capital expenditure requests and negotiating price decreases where possible with our vendors.

Oil States remains well positioned, both operationally with our higher end product and service offerings and financially, with nearly $429 million of liquidity to support our businesses. Our financial strength will allow us to be opportunistic should investment opportunities present themselves. That completes our prepared comments.

John, would you open up the call for questions and answers at this time?.

[Operator Instructions]. And our first question is from Jim Wicklund from Credit Suisse..

Cindy, you talk about maintaining market share. And so far, I think everybody who has reported has talked about maintaining market share.

When you've already told us you're giving up price, maintaining market share -- you've already made the big step -- but if everybody is trying to maintain market share, doesn't that really make for a much more drastic earning -- pricing drop and a slowing price recovery?.

Well, a lot of people are working with our major customers on price. We're not just doing completely broad-based price discounts at irrational level. I would say that some of the smaller competitors have probably been doing that. In our case, there are ways to do it, based on volume, ways to tie it to crude oil pricing.

There are a number of things that you try to do so that it -- and again, these types of concessions you make are temporary. They have to be at this point in time. And you notice in our commentary, we had some price impact this quarter.

I would say that is both mix and some pricing reductions, meaning when you get into this type of environment, people start substituting lower cost alternatives to i.e. isolation equipment as an example. One of the great things we do is save time and money we well site for our customers.

But if everything else gets so cheap, it's kind of hard to make the argument to upgrade the equipment on location..

Yes..

And so there is a little bit of all of that, that's going on in the -- you've been in this business as long as I have or longer and you have to work with your key customers in order to help them through a downturn obviously, but not destroy your own business in the process..

Have we gotten to the point where you've got -- you've given up most of what you're going to have to give up and you've gotten from your suppliers most of what you can get? So pricing isn't that big of a tailwind from here and we're just more concerned about activity and when we get price back?.

I think that is generally true. And part of what I'm trying to convey on the call which everybody, I think, has, has just been the dramatic rate of decline that occurred from the beginning of the first quarter to the end of the first quarter, such that exit rate activity and exit rate pricing is what we're dealing with.

But I absolutely do agree, it feels like that rate of decline has certainly abated. It's hard to say that it's over. My own two cents -- and these are gut instincts, not necessarily facts -- feels like that we're bottoming kind of late in this second quarter or early in the third quarter and bottoming can be a combination of both activity and price.

I don't know that we have fully benefited from all cost reduction initiatives with our vendors and internally at this stage. It is a continual process as we adjust every week to what's going on in the market..

Last, if I could, your book-to-bill at 0.98 which everybody else who's in the deep water equipment business to shame..

Well, thank you!.

No, thank you. Thank you.

How much longer can this continue? Do you expect to be close to one to one through the year or was this the last gasp of a desperate man?.

It's not the last gasp of a desperate man or man I'll actually so -- or woman for that matter..

There you go..

But our bidding and quoting activity actually feels pretty good. Coming into the year, I had a much greater uncertainty which I tried to be very transparent about on the last quarter call and in individual meetings, but it's not knowing if these projects that we were bidding, working on contract terms were going to materialize or not.

And again, one of the two that we talked about on the last quarter call did come into backlog. I will tell you that I think that obviously with the slowdown in shorter cycle activity, consumable activity, we're more relying on project awards. However, I feel pretty good about our quoting activity. We seem to be seeing some good projects out there.

They feel real. There are a lot of geographies involved, such that we're not just dependent on one customer, one market which deep water is, of course, concentrated to a lot of the large NOCs and IOCs. The question is one of timing.

I think, again, coming into the year, I set my -- not a guidance but an internal goal for the year was a 0.8 book-to-bill. I feel a lot better about that after the first quarter. So I would say, if anything, my outlook has improved a little..

Our next question is from Marshall Adkins from Raymond James..

Cindy, I just want to drill down on the last response from Jim's question. It sounded as if on the pricing front you thought, at least on an exit rate basis, we're kind of near the bottom on what we might see on pricing.

Did I hear that right or not?.

That is what we feel like at this point in time..

Okay. Talk a little bit about the cost-cutting initiatives you mentioned in your commentary. But give us a little more color, if you could, on, if you will -- what inning we're in. You still have more cost reductions probably coming through from vendors.

How far along are we in that process? And likewise for SG&A, any guidance as a percent of revenue on what we can look for on that cost item, going forward?.

A lot of questions there. Let me see if I can get them all correct. The first one, it's kind of like exit rate basis if pricing hit a trough. Again, my sense is kind of late second quarter the best guidance I have at this point in time. And we're, of course, trying to put a floor on our EBITDA margin performance as we've guided to.

That's a combination of top line and cost activities. And so it is a continual process. In the service business, the worst thing you can do is cut costs which unfortunately we're talking about humans here. I call it death by a thousand cuts.

So we're trying to get that done as quickly as possible so that the people can focus on their day-to-day jobs and serve our customers effectively. We will have to continue to respond as the market dynamics present themselves. But again, Q2 feels like we're getting most of that through the system, if that's fair.

And I think we had about roughly 45 to 50 operating locations and completion services. Some of those you set up in a high market. You need to be near the customers, near your work activity, but in a declining market they become fairly uneconomical. And we've rationalized, I think, about 15 of those locations to date -- 15% of them, I'm sorry.

Chris corrected me on that. 15%, certainly not 15 locations. And again, we feel like we've gotten most of that behind us. I do think that negotiations with vendors is ongoing and it varies by product. Again, about 65% of my offshore product cost structure is material, on average. It is a much lesser component in sell site services.

It's more labor intensive. So the dynamics are different there between the segments. But it's an ongoing process and we're just very focused on getting through this, supporting our customers very well, as I said, maintaining market share.

But keeping a healthy business and a healthy company, I always use the comment -- safety, quality and technology comes at a cost. When price becomes the greatest priority in the marketplace, I always feel like it's non-sustainable.

Again, if we keep doing the quality operations that we always have, we'll be fine when we start coming out of this thing which again our best guess is second half. And I'm really speaking about sell site services. We haven't seen the kind of major impact in offshore products..

Right, yes. That was mainly what I was referring to. So doing the back of the envelope math, the pricing is near bottom and you're going to get more of your costs improvements through in this second quarter and activity is likely going to bottom here pretty soon. I think we all are looking at that.

Then second half margins should at least hold up, maybe improve a little bit or am I reading too much into that?.

No, you're not. I mean, in our internal forecast, based on everything we know today, that is what we're projecting..

Our next question is from Dan Boyd from BMO Capital Markets..

So Cindy, you and Jim have obviously been through more cycles than I have, but it doesn't seem that this cycle is much different from the few that I have been through.

So can you maybe help me compare and contrast what you're seeing differently, either on the pricing side, the competitive dynamic or even on the cost-cutting? And then your thoughts on -- so we look to a recovery, is there anything structural in nature that's changing or different today that will make the recovery any different than we've seen in the past?.

Well, we've all been through cycles, some supply-driven, some demand-driven. I was kind of reflecting back and I think it's five or six cycles in kind of my working career at this point in time. But I do think that there are always going to be nuances here in the rate of decline in north America. But I kind of go back.

We really weren't as a world increasing production at $100 a barrel anywhere but the United States and it's absolutely a shale play phenomenon that was spawned first out of natural gas and then it moved into crude oil. So this, again, is the first area to cut.

So, again, I think North America's taking the brunt because that's where the production increases came from in the first place and that's why we're seeing the rate of declines. The other differences are just the differences in shale play. These are different reservoirs. The decline curves are very, very significant.

We're hyper-focused on trying to see production rollover. I read a note this morning that it -- we know we clearly see evidence that it's rolling over in the Bakken but they added California and Alaska. The exceptions are, of course, Texas, largely because of the Eagle Ford and the Permian which are newer basins.

But they too will follow the same trend. It's just lagged a few months. So the market is clearly watching that. That's why crude oil is now approaching $60 a barrel, because everybody that's been in this business knows that in the macro we're not going to be able to sustain at $50 a barrel.

And so it's just a matter of when do you get the relief? And I think, again, there is a lot of -- maybe they're green shoots, maybe they're positive data points, but we're beginning to see some of those trend line changes.

The other phenomenon that feels more different this time, although we saw some in 2009, it would be the extent of drilled and uncompleted wells. But, again, shale plays are completely different. Back in the '80s and the '90s, completion costs both onshore and offshore represented 10% to maybe to 20% of well costs. Now they are 60% to 65% of well costs.

I always say you have two camps here. You had some smaller companies that are over levered that are trying to preserve every dollar they can from a CapEx standpoint. But interestingly we have some very healthy large caps that are also holding uncompleted well inventory. But they're doing so, saying -- hey, I've got one key asset in the ground.

I don't really want to produce 70% of it at $45 to $55 a barrel i.e. being opportunistic that prices will improve and get better. So I would say the real difference here is shale plays and how that is impacting activity levels.

And again, the very rapid nature of the decline in activity, but it's really focused on, to me, my way of thinking, North America because, again, that's where all of our significant production increases have come. Some obviously come from Canada as well. But those are about the two basins that contributed to that..

Actually, our data shows that some of the other production, non-shale production, fell off pretty sharply in the first quarter, upwards of, like, 12%.

So then looking at your guidance for 2Q, your revenue declined faster or greater than the rig count decline in 1Q but in 2Q you're guiding to something that's much less than the rig count decline or at least what the rig count decline looks like it's going to be which is project around 30%.

Can you help us understand are you seeing, then, a levelling-out in terms of your revenue? Are you gaining market share here in your second quarter?.

We feel like we're levelling out and we're pretty much modeling off of exit rate out of Q1. We think April will be a tough month. But there are certain completions that we believe are lining up for June and that we think kind of balance out to where you stay at exit, right but again we're expecting April to be lower than June in our analysis..

Our next question is from John Daniel from Simmons & Company..

Cindy, there's more fairly broad consensus that we're hitting the bottom and other future rates.

So if that's right, is there any urgency to do deals just with respect to M&A sooner rather than later, just given that sellers might not want to sell if they see the business potentially picking up?.

You know, I sense that the market feels an urgency. I don't disagree with that. And our preference would clearly to get some M&A done this year, for all the reasons that you talk about. You know, it's hard to project where the mindset of executive teams are. And it's not all about feeling pressure to sell.

I'd say there's almost a drag in the sense of people saying -- I don't want to sell off the bottom. And so while you can say on the one hand you've got to hurry up, on the other hand there's going to be a natural reluctance on the part of sellers to market a company off the bottom. So I just think of it as a process, we're very focused on it.

But I'll also tell you that I can't walk around town. I can just tell you there's going to be a lot of competition for any deals that are out there and it's coming from a multitude of sources..

Right.

Do you have a preference on consolidation versus product line extension?.

We want to do product line extensions all the time. And we have got a great financial wherewithal and financial help to invest in R&D and support for our customers. So best I would say that's just a given.

We've got a great free cash flow profile that allows us the flexibility to kind of alter between M&A opportunities and share repurchase opportunities, depending upon facts and circumstances. We like M&A because it supports us over the long term and it grows the top line.

I don't always think -- I'm not relying upon M&A, though, to get the technology in-house. Sometimes we do get that. We had examples of that. And it fills in the gaps for us. So it's really a dual approach, both organically developed. But again, we've got the financial profile that that's not what we're going to cut.

And then it comes down to -- I'd say my gut instincts are -- get some M&A done right now. I don't feel pressured to do, it but I'd sure like to..

Okay. Sure. Just one last one for me, we've heard a number of distress situations in segments such as pressure pumping, coil tubing, well servicing, etcetera. But really nothing of any consequence on completion tool businesses and maybe that's just because I haven't paid close enough attention.

So just to that point, are you seeing any distressed opportunities there within some of your core product lines?.

We see some of the smaller competitors acting fairly irrationally. And so I can't say that I've seen deal sheets and deal terms that have come floating across my desk. But intuitively I know that they're working at levels that are non-sustainable. So perhaps that will come in the next few months..

[Operator Instructions]. We do have a question from Chase Mulvehill from SunTrust. Please go ahead..

This is Josh for Chase. I had a follow-up question to the M&A.

Is there any preference for onshore versus offshore?.

We're trying to grow both platforms and we're equally focused on both, I would say. It's just dependent upon what opportunities present themselves..

And then on the offshore backlog, should we think of the margin profile similar to what you guide on the 19% to 21% or is there anything different there?.

What was your question?.

In backlog..

Well, yes, backlog translates into our guidance, so backlog's just fine in terms of what we're booking, if that's the question..

Our next question is from Marshall Adkins from Raymond James..

Yes. It's a slow day here, guys. So I figured I might as well keep you on the line a little longer..

Yes.

There is just, what, 50 calls today?.

Yes..

Thanks, Marshall. Well, I've got your call. So you've got to do it for me..

Good..

Was there some foreign exchange in there? Help us on what we should model there?.

I think -- you cut out for a second. But I think there was a question maybe on that other income line and they were about--.

Right, correct. Correct..

There are three different elements included there. And I would say greater than 50% was exchange rate gain. But there's about three different things in there. It's not just the exchange rate gains. I would just generally say in no given quarter, post spin-off of Civeo have we had exchange rate gains or losses..

Correct..

How about guidance on that? Help me, from a modelling perspective? What should we plug in there?.

I'd keep it neutral. We don't model it ourselves, Marshall. It's just never historically been that big..

Marshall, we just model at zero, quite frankly..

Yes..

All right, more importantly, this is a bigger picture question. We've seen this bigger picture shift to U.S. shales, as you had mentioned earlier. Over the next couple of years one would assume some of that comes out of the offshore side.

When you're looking at your planning out two, three, four, maybe even five years, how do you see the company evolving? Is it more in the completion services side in the U.S., catering to the shales? Or are you sticking with offshore? Or is it just going to be whatever opportunities arise?.

Well, we would like to grow both markets. Now, I would draw one distinction here which is the sense that the quote unquote offshore deep water market is a truly global market.

You know, when I'm looking at the outstanding bids and quoting activity, I'd say there's probably a waiting long term in favor of Brazil and lower tertiary Gulf of Mexico but I've got this in Vietnam, China, Mozambique. It's all over the place.

I think the true question is will shale plays of magnitude develop outside of the United States? And so that may dictate more of the rate of growth in the segment more than anything else.

It's not about necessarily desire, but when we were at a peak rig count near 1900 rigs, we were adequately supplying the market in North America and technology will evolve. Technology will change. We can consolidate. But it's hard today to envision a significant rate of growth in the United States above and beyond where we're, without M&A.

So the question is what happens to international shale play development which has been slow to materialize?.

All right, obviously this quarter you said -- you mentioned you booked one big project in Brazil. Brazil's just been a mess. What's your take on that? Is it just your products that are doing better than average, but obviously everyone is struggling there. Give us some color on what you're seeing in Brazil specifically..

Well we put in our investor presentation major project awards on a trailing 18-month basis, so you can clearly get color. But there's been for us a significant weighting towards subsea production infrastructure. That clearly seems to be a focus of Petrobras. I would have done -- they done a lot of work in the presales area.

They need to bring these fields on production, get revenue coming on. That's the best way to enhance their free cash flow. The cuts that they have had have had less of an impact on our operations. We're committed to Brazil. You know, we're building -- expanding in [indiscernible].

We're building a new facility elsewhere, but staging that according to the demand. What I can say about Brazil, for us, i.e. the products and services we offer, is that bidding and quoting activity remains strong. I feel like we're probably gaining market share there. And they pay us and that's all I want from my customers. We monitor it.

We don't want to develop too much of a concentration with any one customer, but that is not the case right now..

And for the record, I'm positive Jim has been around much longer than you, Cindy..

Thank you for that. I was going to say. Whoever asked that question, don't comment on our age here..

Our next question is from Jeff Spittel from Clarkson Capital Securities..

I hope I didn't miss anything here. I've been juggling some calls like the rest of the colleagues. But Cindy, maybe could you walk us through the tenor of the discussion with the North American E&P clients right now, given that oil prices seem to be stabilizing a little bit.

Are you seeing any green shoots in terms of optimism and I'm sure they're taking pounds of flesh in terms of pricing and competitors aren't acting well.

But as they start to assess their portfolios later in the year, are they indicating in any way, shape or form that they might be looking to go get a little bit busier?.

We try to work with our customers and this is not all about pressuring the service base. I mean their top line was cut in half by the commodity. They're getting some relieve right now. Crude oil pricing and somewhere around. I haven't checked it today, $57, $58 today, so, a little over 30% from the floor. So that's helped.

It's not lost in most investors in the space that there have been debt and equity raises which have shoring up some balance sheets. That's not necessarily pervasive but it's certainly present. I know a lot particularly of the large companies; they realize that they've gotten material price concessions out of the service sector.

If you think about it, this is actually a real good time to invest, when you've stabilized your own cash flows and you're shoring up your balance sheet, you've got the service costs down to a fairly low level.

But I would just say we've got constructive dialog with our customer base and we were worried about a lot of our customers and their leverage profile coming in the year. That has eased, unequivocally. We're hearing comments about particularly the deferred completions. I would say the first one -- they'll start moving probably in the Bakken..

Yes..

That's where the concentration of the deferred completions are. And again, it feels like kind of late second quarter we're optimistic that we'll see a little bit of improvement in activity. But the dialog is sympathetic. It would be one thing if the service sector was making up same rates of return on their invested capital. We're not.

We weren't before; we're not now and our customers know that. And I go back to my earlier comment. You know, providing high-quality operations, investing in technology and safety, it does come at a cost. So we're trying to hit that equilibrium that works for our customers but allows us to offer quality services in the field..

And then maybe shifting gears, a big picture question as it pertains to the offshore market. There's been a lot of discussion about cost rationalization of subsea development.

And I'm not sure if it directly impacts you, but maybe could you talk us through, if this takes a couple of years for the subsea industry to sort of figure out a way to pull 20%, 30% capital costs out of a typical development after deep water field, how quickly do you think that's going to be impactful and I think help your bid pipeline in terms of projects that are largely linked to the host facilities?.

It's probably one of the hardest ones to answer. But fields that are already under development, I think we're the beneficiary of that because, first of all, there's not quite as many design elements yet to figure out.

Most of the time, once you've gone from field discovery to field delineation, you have pretty good idea of what type of production facilities that you need, what types of interfaces that we're looking at, what type of subsea -- and is it rigid risers, flexible risers, free-standing? Those field design elements are somewhat in the rearview mirror and a lot of interfaces.

So, again, that's why I feel better about subsea production infrastructure.

What you're really talking about in my view and all these -- you can call them JVs, you can call them alliances, but to my view they're largely designed at the early stage, to get on the front end engineering and design phase, work through interfaces between service delivery customers optimize the vessels that are going to be used so that you get it right the first time.

There isn't anybody that operates in this equipment space that doesn't understand that once you get into development and manufacturing, when you have to re-engineer and redesign, because of the installation issues you face, the interface issues, that's where cost overruns come into play.

And so all these are geared towards -- you know, you've got multiple service providers offering unique different technology. How can we work together at the front end to improve the cost delivery to our customer base? But that's, to me, is a very long-term focus proposition..

Our next question is from Jim Wicklund from Credit Suisse..

I'm older but I'm also better looking than Marshall. So that's okay. Cindy, everybody's talked about the change in oil company behaviors necessary for the thread -- a real change in the business. Schlumberger said it at Howard Weil on their conference call. Even if we go back to 90-odd we won't have fixed the problem.

It's been talked about both on subsea and onshore. There are different proposals that can be done.

What's your view on the change of oil company behavior and how they work with service companies over the next couple of years?.

That is a wide-open question and if there is a change in behavior, I think it has to come down to a focus on return on investment capital more so than it is a focus on production growth. And hard to tell, we've got so many customers, particularly in the United States, whether that truly materializes or not. There is a good news/bad news.

If in fact that's where we get -- and you see a lot of these coming together, whether they're JVs or alliances in the deep water space or whether we're talking about Halliburton Baker, but that model speaks to greater consolidation in the market, the need for greater consolidation and rationalization costs throughout the marketplace, such that our customers would become more dependent on a handful, a few large companies.

That might be good. That might not be good. Historically it's been a lot of smaller cap companies. Many of my customers will tell you this over and over who have really delivered a lot of the new technology in this space. They're willing to invest in and focus on smaller product lines.

So I think it's very healthy to have a broad and highly competitive service space. It's hard for me to predict where we go, but I think what's going to happen is you're going to see a greater rate of consolidation if in fact that picture develops where all we're worried about is service company costs..

Our next question is from John Daniel from Simmons & Company..

I figured I would keep this call running a little bit longer since the next calls start at 11. But I want to follow up on the question that Jeff had, if that's okay, about just outlook for activity.

Cindy, have any of your land drilling customers at this point indicated specific plans to add some rigs in the second half of '15?.

Are you talking about land drilling?.

Yes, I'm sorry. I'm sorry..

We're in narrow markets in the Permian and in the Rockies and we're currently about 35% utilization and I don't see a trend line change at this point in time.

We've got really a handful -- I could count them on one hand, the customers that are contracting the rigs that we have working which again -- you do the math -- that's 12 rigs working and the statistic, the total U.S. vertical working land fleet today is about 120..

Right..

So it's a pretty narrow market we're talking about. And right now I do not see a trend line change in that market..

[Operator Instructions]. And we have no further questions at this time..

I didn't think we did at this point in time. I want to thank everybody for joining our call. It's certainly a dynamic time in the market and we appreciate your continued interest and willingness to work with us in a fairly volatile time, to help us get the market understanding right. It's not lost on me that it's gorgeous outside.

Its OTC week next week, so I hope to see many of you out there. Take care..

Thank you, ladies and gentlemen. That concludes today's conference. Thank you for participating. You may now disconnect..