OIL STATES INTERNATIONAL, INC - Quarter Report: 2009 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-16337

OIL STATES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware		76-0476605
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
Three Allen Center, 333 Clay Street, Suite 4620, Houston, Texas		77002 (Zip Code)
(Address of principal executive offices)

(713) 652-0582
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ       NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)

YES o       NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o       NO þ

The Registrant had 49,770,334 shares of common stock outstanding and 3,232,118 shares of treasury stock as of October 30, 2009.

 

 

OIL STATES INTERNATIONAL, INC.

INDEX

		Page No.
Part I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Statements of Income for the Three and Nine Month Periods Ended September 30, 2009 and 2008			3
Unaudited Consolidated Balance Sheets — September 30, 2009 and December 31, 2008			4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008			5
Notes to Unaudited Condensed Consolidated Financial Statements			6 - 15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16 - 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
Item 4. Controls and Procedures			27
Part II — OTHER INFORMATION
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Purchases of Equity Securities			28
Item 3. Defaults Upon Senior Securities			28
Item 4. Submission of Matters to a Vote of Security Holders			28
Item 5. Other Information			29
Item 6. Exhibits			29
(a) Index of Exhibits			29
Signature Page			30
EX-31.1
EX-31.2
EX-32.1
EX-32.2

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2009				2008				2009				2008
						AS ADJUSTED								AS ADJUSTED
						(NOTE 11)								(NOTE 11)
Revenues		$	456,103			$	814,790			$	1,579,536			$	2,047,401
Costs and expenses:
Cost of sales and services			353,845				609,354				1,235,747				1,532,874
Selling, general and administrative expenses			33,964				37,494				102,377				105,577
Depreciation and amortization expense			30,193				27,325				86,863				75,741
Impairment of goodwill			—				—				94,528				—
Other operating income			(439	)			(893	)			(181	)			(659	)
			417,563				673,280				1,519,334				1,713,533
Operating income			38,540				141,510				60,202				333,868
Interest expense			(3,613	)			(5,656	)			(11,714	)			(18,416	)
Interest income			27				940				350				2,756
Equity in earnings of unconsolidated affiliates			250				431				1,184				3,167
Gain on sale of investment			—				3,452				—				6,160
Other income/(expense)			91				(458	)			193				(264	)
Income before income taxes			35,295				140,219				50,215				327,271
Income tax expense			(8,594	)			(52,040	)			(30,637	)			(114,125	)
Net income			26,701				88,179				19,578				213,146
Less: Net income attributable to noncontrolling interest			122				98				357				327
Net income attributable to Oil States International, Inc.		$	26,579			$	88,081			$	19,221			$	212,819
Net income per share attributable to Oil States International, Inc. common stockholders
Basic		$	0.54			$	1.77			$	0.39			$	4.29
Diluted		$	0.53			$	1.68			$	0.39			$	4.10
Weighted average number of common shares outstanding:
Basic			49,653				49,811				49,584				49,622
Diluted			50,153				52,322				49,886				51,949

The accompanying notes are an integral part of
these financial statements.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS
(In Thousands)

		SEPTEMBER 30,				DECEMBER 31,
		2009				2008
						AS ADJUSTED
						(NOTE 11)
ASSETS
Current assets:
Cash and cash equivalents		$	61,281			$	30,199
Accounts receivable, net			361,549				575,982
Inventories, net			485,304				612,488
Prepaid expenses and other current assets			13,730				18,815
Total current assets			921,864				1,237,484
Property, plant, and equipment, net			726,877				695,338
Goodwill, net			217,627				305,441
Investments in unconsolidated affiliates			4,893				5,899
Other non-current assets			35,335				54,356
Total assets		$	1,906,596			$	2,298,518
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	190,385			$	371,789
Income taxes			10,555				52,546
Current portion of long-term debt			446				4,943
Deferred revenue			117,872				105,640
Other current liabilities			850				1,587
Total current liabilities			320,108				536,505
Long-term debt			192,657				449,058
Deferred income taxes			55,691				64,780
Other noncurrent liabilities			12,445				12,634
Total liabilities			580,901				1,062,977
Stockholders’ equity:
Oil States International, Inc. stockholders’ equity:
Common stock			530				526
Additional paid-in capital			463,920				453,733
Retained earnings			920,222				901,001
Accumulated other comprehensive income/(loss)			32,403				(28,409	)
Treasury stock			(92,341	)			(91,831	)
Total Oil States International, Inc. stockholders’ equity			1,324,734				1,235,020
Noncontrolling interest			961				521
Total stockholders’ equity			1,325,695				1,235,541
Total liabilities and stockholders’ equity		$	1,906,596			$	2,298,518

The accompanying notes are an integral part of
these financial statements.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

		NINE MONTHS
		ENDED SEPTEMBER 30,
		2009				2008
						AS ADJUSTED
						(NOTE 11)
Cash flows from operating activities:
Net Income		$	19,578			$	213,146
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			86,863				75,741
Deferred income tax provision (benefit)			(12,774	)			10,910
Excess tax benefits from share-based payment arrangements			—				(3,367	)
Loss on impairment of goodwill			94,528				—
Equity in earnings of unconsolidated subsidiaries, net of dividends			(1,184	)			(2,914	)
Non-cash compensation charge			8,614				7,968
Accretion of debt discount			5,016				4,670
Gains on sale of investment and disposals of assets			(439	)			(6,602	)
Other, net			2,526				1,946
Changes in working capital			149,547				4,476
Net cash flows provided by operating activities			352,275				305,974
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired			18				(29,835	)
Capital expenditures			(78,164	)			(206,731	)
Proceeds from note receivable			21,166				—
Proceeds from sale of investment			—				27,381
Other, net			(1,778	)			3,103
Net cash flows used in investing activities			(58,758	)			(206,082	)
Cash flows from financing activities:
Revolving credit repayments			(264,528	)			(73,188	)
Debt repayments			(4,839	)			(4,816	)
Issuance of common stock			2,237				8,628
Purchase of treasury stock			—				(4,026	)
Excess tax benefits from share-based payment arrangements			—				3,367
Other, net			(505	)			(1,120	)
Net cash flows used in financing activities			(267,635	)			(71,155	)
Effect of exchange rate changes on cash			5,333				(3,664	)
Net increase in cash and cash equivalents from continuing operations			31,215				25,073
Net cash used in discontinued operations — operating activities			(133	)			(44	)
Cash and cash equivalents, beginning of period			30,199				30,592
Cash and cash equivalents, end of period		$	61,281			$	55,621
Non-cash investing and financing activities:
Building capital lease		$	—			$	8,304
Non-cash financing activities:
Reclassification of 2 3/8% contingent convertible senior notes to current liabilities			—				147,497

The accompanying notes are an integral part of these
financial statements.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements of Oil States International, Inc. and its wholly-owned subsidiaries (referred to in this report as we or the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial information. Certain information in footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to these rules and regulations. The unaudited financial statements included in this report reflect all the adjustments, consisting of normal recurring adjustments, which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and for the financial condition of the Company at the date of the interim balance sheet. Results for the interim periods are not necessarily indicative of results for the full year.

     Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosed amounts of contingent assets and liabilities and the reported amounts of revenues and expenses. If the underlying estimates and assumptions, upon which the financial statements are based, change in future periods, actual amounts may differ from those included in the accompanying condensed consolidated financial statements.

     From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the FASB), which are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.

     The financial statements included in this report should be read in conjunction with the Company’s audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2008. Further, in connection with preparation of the consolidated financial statements and in accordance with current accounting standards, the Company evaluated subsequent events after the balance sheet date of September 30, 2009 through the time of filing on November 4, 2009. There were no material subsequent events requiring additional disclosure in or amendment to the quarterly financial statements as of November 4, 2009.

2. RECENT ACCOUNTING PRONOUNCEMENTS

     From time to time, new accounting pronouncements are issued by the FASB that are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.

     In September 2006, the FASB issued a new accounting standard on fair value measurements, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. This accounting standard does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. It is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued an accounting standards update deferring the effective date of the fair value accounting standard for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Earlier adoption was permitted, provided the company had not yet issued financial statements, including for interim periods, for that fiscal year. We adopted those provisions of this accounting standard that were unaffected by the delay in the first quarter of 2008. In the first quarter of 2009, we adopted the remaining provisions of this accounting standard. Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Such adoption did not have a material effect on our consolidated statements of financial position, results of operations or cash flows.

     In September 2009, the FASB issued an accounting standards update effective for this and future reporting periods on measuring the fair value of liabilities. Implementation is not expected to have a material impact on the Company’s financial condition, results of operation or disclosures contained in our notes to the condensed consolidated financial statements.

     In December 2007, the FASB issued a new accounting standard on business combinations. The new accounting standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The accounting standard also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. The accounting standard applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and interim periods within those fiscal years. The accounting standard was effective beginning January 1, 2009; accordingly, any business combinations we engage in after this date will be recorded and disclosed in accordance with this accounting standard. No business combination transactions occurred during the nine months ended September 30, 2009.

     In December 2007, the FASB also issued a new accounting standard on noncontrolling interests in consolidated financial statements. This accounting standard requires that accounting and reporting for minority interests be recharacterized as noncontrolling interests and classified as a component of equity. It also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This accounting standard applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. The new accounting standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. This accounting standard applies prospectively, except for presentation and disclosure requirements, which are applied retrospectively. Effective January 1, 2009, we have presented our noncontrolling interests in accordance with this standard.

     In May 2008, the FASB issued a new accounting standard on the accounting for convertible debt instruments that can be settled in cash upon conversion (including partial cash settlement), which changed the accounting for our Contingent Convertible Senior Subordinated 2 3/8% Notes (2 3/8% Notes). Under the new rules, for convertible debt instruments that can be settled entirely or partially in cash upon conversion, an entity is required to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The difference between bond cash proceeds and the estimated fair value is recorded as a debt discount and accreted to interest expense over the expected life of the bond. Although this accounting standard has no impact on the Company’s actual past or future cash flows, it requires the Company to record a material increase in non-cash interest expense as the debt discount is amortized. The accounting standard became effective for the Company beginning January 1, 2009 and is applied retrospectively to all periods presented. See Note 11 to the Unaudited Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q.

     In May 2009, the FASB issued a new accounting standard on subsequent events, which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Under the new accounting standard, as under current practice, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date. This accounting standard is effective for fiscal years, and interim periods within those fiscal years, ending after June 15, 2009. The adoption of this accounting standard did not have a material impact on the Company’s financial condition, results of operation or disclosures contained in our notes to the condensed consolidated financial statements.

     In June 2009, the FASB issued a new accounting standard, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” This new accounting standard established the “FASB Accounting Standards Codification,” or FASB ASC, as the source of authoritative GAAP recognized by the FASB for non-governmental entities. All existing accounting standards have been superseded and accounting literature not included in the FASB ASC is considered non-authoritative. Subsequent issuances of new standards will be in the

form of Accounting Standards Updates, or ASU, that will be included in the ASC. Generally, the FASB ASC is not expected to change GAAP. Pursuant to the adoption of this new accounting standard, we have adjusted references to authoritative accounting literature in our financial statements. Adoption of this standard had no effect on our financial condition, results of operations or cash flows.

     In October 2009, the FASB issued an accounting standards update that modified the accounting and disclosures for revenue recognition in a multiple-element arrangement. These amendments, effective for fiscal years beginning on or after June 15, 2010 (early adoption is permitted), modify the criteria for recognizing revenue in multiple- element arrangements and the scope of what constitutes a non-software deliverable. The Company is currently assessing the impact of these amendments on its financial condition and results of operations.

3. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS

     Additional information regarding selected balance sheet accounts is presented below (in thousands):

		SEPTEMBER 30,				DECEMBER 31,
		2009				2008
Accounts receivable, net:
Trade		$	261,906			$	456,975
Unbilled revenue			102,951				119,907
Other			1,895				3,268
Total accounts receivable			366,752				580,150
Allowance for doubtful accounts			(5,203	)			(4,168	)
		$	361,549			$	575,982

		SEPTEMBER 30,				DECEMBER 31,
		2009				2008
Inventories, net:
Tubular goods		$	289,447			$	396,462
Other finished goods and purchased products			73,588				88,848
Work in process			63,153				65,009
Raw materials			67,923				68,881
Total inventories			494,111				619,200
Inventory reserves			(8,807	)			(6,712	)
		$	485,304			$	612,488

		ESTIMATED				SEPTEMBER 30,				DECEMBER 31,
		USEFUL LIFE				2009				2008
Property, plant and equipment, net:
Land						$	19,240			$	18,298
Buildings and leasehold improvements		3-50 years					160,615				135,080
Machinery and equipment		2-29 years					286,895				270,434
Accommodations assets		10-15 years					369,046				300,765
Rental tools		4-10 years					152,307				141,644
Office furniture and equipment		1-10 years					29,523				26,506
Vehicles		2-10 years					71,774				68,645
Construction in progress							50,518				49,915
Total property, plant and equipment							1,139,918				1,011,287
Less: Accumulated depreciation							(413,041	)			(315,949	)
						$	726,877			$	695,338

		SEPTEMBER 30,				DECEMBER 31,
		2009				2008
Accounts payable and accrued liabilities:
Trade accounts payable		$	124,190			$	307,132
Accrued compensation			34,680				35,864
Accrued insurance			8,559				7,551
Accrued taxes, other than income taxes			9,274				7,257
Reserves related to discontinued operations			2,412				2,544
Other			11,270				11,441
		$	190,385			$	371,789

4. EARNINGS PER SHARE

     The calculation of earnings per share attributable to Oil States International, Inc. is presented below (in thousands, except per share amounts):

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30								SEPTEMBER 30,
		2009				2008				2009				2008
						AS ADJUSTED								AS ADJUSTED
						(NOTE 11)								(NOTE 11)
Basic earnings per share:
Net income attributable to Oil States International, Inc.		$	26,579			$	88,081			$	19,221			$	212,819
Weighted average number of shares outstanding			49,653				49,811				49,584				49,622
Basic earnings per share		$	0.54			$	1.77			$	0.39			$	4.29
Diluted earnings per share:
Net income attributable to Oil States International, Inc.		$	26,579			$	88,081			$	19,221			$	212,819
Weighted average number of shares outstanding			49,653				49,811				49,584				49,622
Effect of dilutive securities:
Options on common stock			338				490				213				509
2 3/8% Convertible Senior Subordinated Notes			51				1,900				17				1,694
Restricted stock awards and other			111				121				72				124
Total shares and dilutive securities			50,153				52,322				49,886				51,949
Diluted earnings per share		$	0.53			$	1.68			$	0.39			$	4.10

     Our calculation of diluted earnings per share for the three and nine months ended September 30, 2009 excludes 1,190,149 shares and 1,826,143 shares, respectively, issuable pursuant to outstanding stock options and restricted stock awards, due to their antidilutive effect. Our calculation of diluted earnings per share for the three and nine months ended September 30, 2008 excludes anti-dilutive shares of 266,063 and 378,605, respectively.

5. BUSINESS ACQUISITIONS AND GOODWILL

     On February 1, 2008, we purchased all of the equity of Christina Lake Enterprises Ltd., an accommodations lodge (Christina Lake Lodge) in the Conklin area of Alberta, Canada. Christina Lake Lodge provides lodging and catering in the southern area of the oil sands region. Consideration for the lodge consisted of $6.9 million in cash, net of cash acquired, including transaction costs, funded from borrowings under the Company’s existing credit facility, and the assumption of certain liabilities. The Christina Lake Lodge has been included in the accommodations business within the well site services segment since the date of acquisition.

     On February 15, 2008, we acquired a waterfront facility on the Houston ship channel for use in our offshore products segment. This waterfront facility expanded our ability to manufacture, assemble, test and load out larger subsea production and drilling rig equipment thereby expanding our capabilities. Consideration paid for the facility was approximately $22.9 million in cash, including transaction costs, funded from borrowings under the Company’s existing credit facility.

     In June 2009, we acquired the 51% majority interest in a venture we had previously accounted for under the equity method. The business acquired supplies accommodations and other services to mining operations in Canada. Consideration paid for the business was $2.3 million in cash and estimated contingent consideration of $0.3 million.

     Changes in the carrying amount of goodwill for the nine month period ended September 30, 2009 are as follows (in thousands):

		Balance as of				Acquisitions				Foreign currency								Balance as of
		January 1,				and				translation and				Goodwill				September 30,
		2009				adjustments				other changes				impairment				2009
Offshore Products		$	85,074			$	—			$	464			$	—			$	85,538
Well Site Services			220,367				337				5,913				(94,528	)			132,089
Total		$	305,441			$	337			$	6,377			$	(94,528	)		$	217,627

     Based on a combination of factors (including the current global economic environment, the Company’s outlook for U.S. drilling activity and pricing and the current market capitalization for the Company and comparable oilfield service companies), and consistent with methodologies utilized by the Company in the past as described in its Annual Report on Form 10-K for the year ended December 31, 2008, the Company concluded that the goodwill amounts previously recorded in its rental tools reporting unit were partially impaired as of June 30, 2009. The total goodwill impairment charge recognized was $94.5 million before taxes and $82.7 million after-tax. This non-cash charge did not impact the Company’s liquidity position, its debt covenants or cash flows. The fair value measurements used for our goodwill impairment testing use significant unobservable Level 3 inputs which reflect our own assumptions about the assumptions that market participants would use in measuring fair value including assumptions about risk.

6. DEBT

     As of September 30, 2009 and December 31, 2008, long-term debt consisted of the following (in thousands):

		September 30,				December 31,
		2009				2008
		(Unaudited)				As Adjusted
						(Note 11)
U.S. revolving credit facility which matures on December 5, 2011, with available commitments up to $325 million and with an average interest rate of 1.4% for the nine month period ended September 30, 2009		$	28,000			$	226,000
Canadian revolving credit facility which matures on December 5, 2011, with available commitments up to $175 million and with an average interest rate of 1.9% for the nine month period ended September 30, 2009			—				61,244
2 3/8% contingent convertible senior subordinated notes, net — due 2025			154,126				149,110
Subordinated unsecured notes payable to sellers of businesses, interest rate of 6%, matured in 2009			—				4,500
Capital lease obligations and other debt			10,977				13,147
Total debt			193,103				454,001
Less: current maturities			(446	)			(4,943	)
Total long-term debt		$	192,657			$	449,058

     As of September 30, 2009, we have classified the $175.0 million principal amount of our 2 3/8% Notes, net of unamortized discount, as a noncurrent liability because certain contingent conversion thresholds based on the Company’s stock price were not met at that date and, as a result, note holders could not present their notes for conversion during the quarter following the September 30, 2009 measurement date. The future convertibility and resultant balance sheet classification of this liability will be monitored at each quarterly reporting date and will be analyzed dependent upon market prices of the Company’s common stock during the prescribed measurement periods.

     In May 2008, the FASB issued a new accounting standard on the accounting for convertible debt instruments that can be settled in cash upon conversion (including partial cash settlement), which changed the accounting for our 2 3/8% Notes. Under the new rules, for convertible debt instruments that can be settled entirely or partially in cash upon conversion, an entity is required to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. This accounting standard became effective for the Company beginning January 1, 2009, and is applied retrospectively to all periods presented. See Note 11 to the Unaudited Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q.

     As of September 30, 2009, the Company had approximately $61.3 million of cash and cash equivalents and $450.3 million of the Company’s $500 million U.S. and Canadian revolving credit facility was available for future financing needs.

     The Company’s financial instruments consist of cash and cash equivalents, investments, receivables, notes receivable, payables, and debt instruments. The Company believes that the carrying values of these instruments, other than our fixed rate contingent convertible senior notes, on the accompanying consolidated balance sheets approximate their fair values.

     The fair value of our 2 3/8% contingent convertible senior notes is estimated based on prices quoted from third-party financial institutions. The carrying and fair values of these notes are as follows (in thousands):

						September 30, 2009								December 31, 2008
		Interest				Carrying				Fair				Carrying				Fair
		Rate				Value				Value				Value				Value
Principal amount due 2025			2 3/8	%		$	175,000			$	222,766			$	175,000			$	133,613
Less: Unamortized discount							(20,874	)			—				(25,890	)			—
Net value						$	154,126			$	222,766			$	149,110			$	133,613

     As of September 30, 2009, the estimated fair value of the Company’s debt outstanding under its revolving credit facility is estimated to be lower than carrying value since the terms of this facility are more favorable than those that might be expected to be available in the current credit and lending environment. We are unable to estimate the fair value of the Company’s bank debt due to the potential variability of expected outstanding balances under the facility.

7. COMPREHENSIVE INCOME AND CHANGES IN COMMON STOCK OUTSTANDING:

     Comprehensive income for the three and nine months ended September 30, 2009 and 2008 was as follows (dollars in thousands):

		THREE MONTHS								NINE MONTHS
		ENDED SEPTEMBER 30,								ENDED SEPTEMBER 30,
		2009				2008				2009				2008
						As Adjusted								As Adjusted
						(Note 11)								(Note 11)
Net income		$	26,701			$	88,179			$	19,578			$	213,146
Other comprehensive income:
Cumulative translation adjustment			28,957				(26,722	)			60,812				(35,182	)
Unrealized gain on marketable securities, net of tax			—				365				—				2,170
Reclassification adjustment, net of tax			—				(2,170	)			—				(2,170	)
Total other comprehensive income			28,957				(28,527	)			60,812				(35,182	)
Comprehensive income			55,658				59,652				80,390				177,964
Comprehensive income attributable to noncontrolling interest			(122	)			(98	)			(357	)			(327	)
Comprehensive income attributable to Oil States International, Inc.		$	55,536			$	59,554			$	80,033			$	177,637

Shares of common stock outstanding — January 1, 2009			49,500,708
Shares issued upon exercise of stock options and vesting of stock awards			273,734
Shares withheld for taxes on vesting of restricted stock awards and transferred to treasury			(25,473	)
Shares of common stock outstanding — September 30, 2009			49,748,969

8. STOCK BASED COMPENSATION

     During the first nine months of 2009, we granted restricted stock awards totaling 191,772 shares valued at $3.6 million. A total of 121,500 of these awards vest in four equal annual installments, 25,500 awards vest in their entirety only after three years of service, 43,328 awards made to directors vest after one year and the remaining 1,444 awards vested immediately as part of compensation paid to the chairman of the Company’s board of directors. A total of 768,650 stock options were awarded in the nine months ended September 30, 2009 with an average exercise price of $17.20 and a six-year term. A total of 714,450 of these options vest in annual 25% increments over the next four years and the remaining 54,200 options vest in their entirety only after three years of service.

     Stock based compensation pre-tax expense recognized in the nine month period ended September 30, 2009 totaled $8.6 million, or $0.12 per diluted share after tax (excluding the impact on the Company’s effective tax rate of the goodwill impairment recognized during the period.) Stock based compensation pre-tax expense recognized in

the nine month period ended September 30, 2008 totaled $8.0 million, or $0.10 per diluted share after tax. Stock based compensation pre-tax expense recognized in the three month period ended September 30, 2009 totaled $2.8 million, or $0.04 per diluted share after tax (excluding the impact on the Company’s effective tax rate of the goodwill impairment.) Stock based compensation pre-tax expense recognized in the three month period ended September 30, 2008 totaled $2.8 million, or $0.03 per diluted share after tax. The total fair value of restricted stock awards that vested during the nine months ended September 30, 2009 was $2.7 million. At September 30, 2009, $18.6 million of compensation cost related to unvested stock options and restricted stock awards attributable to future performance had not yet been recognized.

9. INCOME TAXES

     Income tax expense for interim periods is based on estimates of the effective tax rate for the entire fiscal year. The Company’s income tax provision for the three months ended September 30, 2009 totaled $8.6 million, or 24.3% of pretax income, compared to $52.0 million, or 37.1% of pretax income, for the three months ended September 30, 2008. The decrease in the effective tax rate from the prior year was largely the result of proportionately higher foreign sourced income in 2009 compared to 2008 which is taxed at lower statutory rates, coupled with domestic benefits derived from estimated tax losses. The Company’s income tax provision for the nine months ended September 30, 2009 totaled $30.6 million, or 61.0% of pretax income, compared to $114.1 million, or 34.9% of pretax income, for the nine months ended September 30, 2008. The effective tax rate for the nine months ended September 30, 2009 was negatively impacted by a significant amount of the goodwill impairment charges that were non-deductible for tax purposes. Excluding the goodwill impairment, the effective tax rate for the nine months ended September 30, 2009 would have approximated 29.3%. The decrease in the effective tax rate (excluding the goodwill impairment) from the prior year is largely the result of proportionately higher foreign sourced income in 2009 compared to 2008, which is taxed at lower statutory rates, coupled with domestic benefits derived from estimated tax losses.

10. SEGMENT AND RELATED INFORMATION

     In accordance with current accounting standards regarding disclosures about segments of an enterprise and related information, the Company has identified the following reportable segments: well site services, offshore products and tubular services. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Most of the businesses were initially acquired as a unit, and the management at the time of the acquisition was retained. Subsequent acquisitions have been direct extensions to our business segments. The separate business lines within the well site services segment have been disclosed to provide additional detail for that segment. Results of a portion of our Canadian business related to the provision of work force accommodations, catering and logistics services are somewhat seasonal with increased activity occurring in the winter drilling season.

     Financial information by business segment for each of the three and nine months ended September 30, 2009 and 2008 is summarized in the following table (in thousands):

		Revenues from				Depreciation
		unaffiliated				and				Operating				Capital
		customers				amortization				income (loss)				expenditures				Total assets
Three months ended September 30, 2009
Well Site Services -
Accommodations		$	110,299			$	9,842			$	26,575			$	12,866			$	553,059
Rental tools			51,721				10,526				(4,030	)			7,482				339,200
Drilling and other			18,380				6,585				(3,697	)			1,505				119,870
Total Well Site Services			180,400				26,953				18,848				21,853				1,012,129
Offshore Products			131,761				2,734				20,553				3,245				513,452
Tubular Services			143,942				344				6,580				118				366,305
Corporate and Eliminations			—				162				(7,441	)			164				14,710
Total		$	456,103			$	30,193			$	38,540			$	25,380			$	1,906,596

		Revenues from				Depreciation
		unaffiliated				and				Operating				Capital
		customers				amortization				income (loss)				expenditures				Total assets
Three months ended September 30, 2008
Well Site Services -
Accommodations		$	105,380			$	9,686			$	23,695			$	29,233			$	525,780
Rental tools			91,699				8,921				21,003				22,931				467,983
Drilling and other (1)			52,086				5,272				14,833				14,005				200,161
Total Well Site Services			249,165				23,879				59,531				66,169				1,193,924
Offshore Products			120,008				3,033				20,273				2,749				499,239
Tubular Services			445,617				340				68,261				1,022				513,520
Corporate and Eliminations			—				73				(6,555	)			1,085				13,492
Total		$	814,790			$	27,325			$	141,510			$	71,025			$	2,220,175

		Revenues from				Depreciation
		unaffiliated				and				Operating				Capital
		customers				amortization				income (loss)				expenditures				Total assets
Nine months ended September 30, 2009
Well Site Services -
Accommodations		$	340,531			$	27,332			$	100,588			$	34,470			$	553,059
Rental tools			177,075				30,342				(98,997	)			24,252				339,200
Drilling and other			46,525				19,501				(13,504	)			8,746				119,870
Total Well Site Services			564,131				77,175				(11,913	)			67,468				1,012,129
Offshore Products			382,271				8,171				59,287				9,143				513,452
Tubular Services			633,134				1,097				35,458				314				366,305
Corporate and Eliminations			—				420				(22,630	)			1,239				14,710
Total		$	1,579,536			$	86,863			$	60,202			$	78,164			$	1,906,596

		Revenues from				Depreciation
		unaffiliated				and				Operating				Capital
		customers				amortization				income (loss)				expenditures				Total assets
Nine months ended September 30, 2008
Well Site Services -
Accommodations		$	332,518			$	26,075			$	93,761			$	98,602			$	525,780
Rental tools			258,767				25,793				54,926				57,882				467,983
Drilling and other (1)			133,316				14,119				31,679				34,429				200,161
Total Well Site Services			724,601				65,987				180,366				190,913				1,193,924
Offshore Products			386,780				8,545				66,656				12,629				499,239
Tubular Services			936,020				1,004				106,533				1,941				513,520
Corporate and Eliminations			—				205				(19,687	)			1,248				13,492
Total		$	2,047,401			$	75,741			$	333,868			$	206,731			$	2,220,175

11. ADOPTION OF NEW ACCOUNTING STANDARD ON ACCOUNTING FOR CONVERTIBLE DEBT

     Effective January 1, 2009, we adopted the new accounting standard on accounting for convertible debt instruments that can be settled in cash upon conversion (including partial cash settlement). Under the new rules, for convertible debt instruments that can be settled entirely or partially in cash upon conversion, an entity is required to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. This accounting standard requires retrospective restatement of all periods presented back to the date of issuance with the cumulative effect of the change in accounting principle on prior periods being recognized as of the beginning of the first period. The adoption of this new accounting standard affects the accounting, both retrospectively and prospectively, for our 2 3/8% Notes issued in June 2005. Although the accounting standard has no impact on the Company’s actual past or future cash flows, it requires the Company to record a material increase in non-cash interest expense as the debt discount is amortized.

The following tables present the effect of our adoption of this new accounting standard on our condensed consolidated statements of income for the three and nine months ended September 30, 2008 and our condensed consolidated balance sheet as of December 31, 2008, applied retrospectively (in thousands, except per share data):

		Three months ended September 30, 2008												Nine months ended September 30, 2008
		Prior to				Effect of				As				Prior to				Effect of				As
		Adoption				adoption				adjusted				adoption				adoption				adjusted
Interest expense		$	4,129			$	1,527			$	5,656			$	13,917			$	4,499			$	18,416
Income before income taxes (a)			141,746				(1,527	)			140,219				331,770				(4,499	)			327,271
Net income (a)			89,153				(974	)			88,179				216,012				(2,866	)			213,146
Net income attributable to Oil States International, Inc. (a)		$	89,055			$	(974	)		$	88,081			$	215,685			$	(2,866	)		$	212,819
Net income per share attributable to Oil States International common stockholders:
Basic		$	1.79			$	(0.02	)		$	1.77			$	4.35			$	(0.06	)		$	4.29
Diluted		$	1.70			$	(0.02	)		$	1.68			$	4.15			$	(0.05	)		$	4.10

		December 31, 2008
		Prior to				Effect of
		Adoption				adoption				As adjusted
Other non-current assets		$	55,085			$	(729	)		$	54,356
Total assets			2,299,247				(729	)			2,298,518
Long-term debt		$	474,948			$	(25,890	)		$	449,058
Deferred income taxes			55,646				9,134				64,780
Total liabilities			1,079,733				(16,756	)			1,062,977
Additional paid-in capital			425,284				28,449				453,733
Retained earnings			913,423				(12,422	)			901,001
Total Oil States International, Inc. stockholders’ equity (a)			1,218,993				16,027				1,235,020
Total stockholders’ equity (a)			1,219,514				16,027				1,235,541
Total liabilities and stockholders’ equity		$	2,299,247			$	(729	)		$	2,298,518

     Debt issue costs at December 31, 2008, recorded in other noncurrent assets, decreased $0.7 million as a result of the adoption of this new accounting standard, representing the cumulative adjustment caused by the reclassification of a portion of debt issue costs to additional paid-in capital as required by the accounting standard.

     The cumulative effect of the change on retained earnings as of January 1, 2008, is $8.6 million due to the retrospective increase in interest expense for the years 2005, 2006 and 2007.

     The following table presents the carrying amount of our 2 3/8% Notes in our condensed consolidated balance sheets (in thousands):

		September 30, 2009				December 31, 2008
Carrying amount of the equity component in additional paid-in capital		$	28,449			$	28,449
Principal amount of the liability component		$	175,000			$	175,000
Less: Unamortized discount			(20,874	)			(25,890	)
Net carrying amount of the liability component		$	154,126			$	149,110

     Following our adoption of the new accounting standard, the effective interest rate was 7.17% for our 2 3/8% Notes. Interest expense, excluding amortization of debt issue costs, was as follows (in thousands):

		Three months ended September 30,								Nine months ended September 30,
		2009				2008				2009				2008
Interest expense		$	2,741			$	2,624			$	8,133			$	7,787

		September 30, 2009
Remaining period over which discount will be amortized		2.8 years
Conversion price		$	31.75
Number of shares to be delivered upon conversion			530,303
Conversion value in excess of principal amount (in thousands)		$	18,630
Derivative transactions entered into in connection with the convertible notes		None

12. COMMITMENTS AND CONTINGENCIES

     The Company is a party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning its commercial operations, products, employees and other matters, including warranty and product liability claims and occasional claims by individuals alleging exposure to hazardous materials as a result of its products or operations. Some of these claims relate to matters occurring prior to its acquisition of businesses, and some relate to businesses it has sold. In certain cases, the Company is entitled to indemnification from the sellers of businesses, and in other cases, it has indemnified the buyers of businesses from it. Although the Company can give no assurance about the outcome of pending legal and administrative proceedings and the effect such outcomes may have on it, management believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on its consolidated financial position, results of operations or liquidity.

This quarterly report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Some of the information in the quarterly report may contain “forward-looking statements.” The “forward-looking statements” can be identified by the use of forward-looking terminology including “may,” “expect,” “anticipate,” “estimate,” “continue,” “believe,” or other similar words. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors. For a discussion of important factors that could affect our results, please refer to Item “Part I, Item 1.A. Risk Factors” and the financial statement line item discussions set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on February 20, 2009. Should one or more of these risks or uncertainties materialize, or should the assumptions prove incorrect, actual results may differ materially from those expected, estimated or projected. Our management believes these forward-looking statements are reasonable. However, you should not place undue reliance on these forward-looking statements, which are based only on our current expectations and are not guarantees of future performance. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in the entirety by the foregoing. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise any of them in light of new information, future events or otherwise.

In addition, in certain places in this quarterly report, we refer to reports published by third parties that purport to describe trends or developments in the energy industry. The Company does so for the convenience of our stockholders and in an effort to provide information available in the market that will assist the Company’s investors in a better understanding of the market environment in which the Company operates. However, the Company specifically disclaims any responsibility for the accuracy and completeness of such information and undertakes no obligation to update such information.

ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

     You should read the following discussion and analysis together with our consolidated financial statements and the notes to those statements included elsewhere in this quarterly report on Form 10-Q.

Overview

     We provide a broad range of products and services to the oil and gas industry through our offshore products, tubular services and well site services business segments. Demand for our products and services is cyclical and substantially dependent upon activity levels in the oil and gas industry, particularly our customers’ willingness to spend capital on the exploration for and development of oil and gas reserves. Demand for our products and services by our customers is highly sensitive to current and expected oil and natural gas prices. Generally, our tubular services and well site services segments respond more rapidly to shorter-term movements in oil and natural gas prices except for our accommodations activities supporting oil sands developments which we believe are more tied to the long-term outlook for crude oil prices. Our offshore products segment provides highly engineered and technically designed products for offshore oil and gas development and production systems and facilities. Sales of our offshore products and services depend upon the development of offshore production systems and subsea pipelines, repairs and upgrades of existing offshore drilling rigs and construction of new offshore drilling rigs and vessels. In this segment, we are particularly influenced by global deepwater drilling and production activities, which are driven largely by our customers’ longer-term outlook for oil and natural gas prices. Through our tubular services segment, we distribute a broad range of casing and tubing. Sales and gross margins of our tubular services segment depend upon the overall level of drilling activity, the types of wells being drilled, and the overall industry level of OCTG inventory and pricing. Historically, tubular services’ gross margin expands during periods of rising OCTG prices and contracts during periods of decreasing OCTG prices. In our well site services business segment, we provide land drilling services, work force accommodations and associated services and rental tools. Demand for our drilling services is driven by land drilling activity in our primary drilling markets in West Texas, Ohio and in the Rocky Mountains area in the U.S. Our rental tools and services depend primarily upon the level of drilling, completion and workover activity in North America. Our accommodations business is conducted principally in Canada and its activity levels are currently being driven primarily by oil sands development activities in northern Alberta.

     We have a diversified product and service offering which has exposure to activities conducted throughout the oil and gas cycle. Demand for our tubular services, land drilling and rental tool businesses is highly correlated to changes in the drilling rig count in the United States and Canada. The table below sets forth a summary of North American rig activity, as measured by Baker Hughes Incorporated, for the periods indicated.

		Average Drilling Rig Count for
		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2009				2008				2009				2008
U.S. Land			940				1,909				1,031				1,806
U.S. Offshore			33				69				47				65
Total U.S			973				1,978				1,078				1,871
Canada			187				432				202				369
Total North America			1,160				2,410				1,280				2,240

     The average North American rig count for the three months ended September 30, 2009 decreased by 1,250 rigs, or 51.9%, compared to the three months ended September 30, 2008. As of October 30, 2009, the North American rig count has increased to 1,318 rigs.

     Beginning in late 2008 and into 2009, we saw unprecedented declines in the global economic outlook that were initially fueled by the housing and credit crises. These market conditions to reduced growth, and in some instances, decreased overall output. We believe there are now some early signs that economic improvement is underway; however, the pace of improvement has been slow and it is yet to be determined if there will be sustained long-term growth. Although energy prices have recently increased compared to the declines witnessed in the first half of 2009, our businesses have been and we expect will continue to be negatively impacted by excess equipment and service capacity given reduced activity levels. Given our customers’ decreased cash flows caused by comparatively lower energy prices as well as shrinking credit availability affecting some of them, funds available for exploration and development have been reduced substantially when compared to 2008. This has led to material declines in the drilling rig count, particularly in North America. Assessing the current situation is challenging given the tenuous state of the global economy and the financial and commodity markets. Although we believe our Company remains financially strong with significant undrawn revolver capacity and cash on hand, certain of our operations have been materially adversely affected by the reduced rig count in the North American energy sector as well as the uncertainty about the level of future oil and natural gas prices. We experienced a significant decline in the utilization of our land drilling rigs beginning in late 2008 and continuing through the first half of 2009, with rig utilization improving somewhat in the third quarter of 2009. In addition, in many instances our customers have delayed or cancelled exploration and development plans and have sought pricing concessions from us.

     An additional important factor in our business, particularly in our land based North American businesses, has been the successful development of several natural gas shale discoveries which we support through our rental tool and OCTG businesses. Much of the continuing exploration and development activity has focused in these shale areas leading us and many of our competitors to relocate equipment to and also concentrate on these areas. This has led to increased competition and lower pricing. Domestic U.S. natural gas prices have decreased from a peak of approximately $13.00 per Mcf in July 2008 to recent levels of approximately $3.90 to $4.80 per Mcf. Many analysts are expecting continued weakness in natural gas prices unless reduced drilling activity and/or forced production shut-ins reverse gas supply excesses or demand for the commodity increases. There is also the risk that, as a result of the success of exploration and development activities in the shale areas coupled with the availability of increasing amounts of LNG, the supply of gas will offset or mitigate the impact of gas shut-ins or demand increases resulting from improved economic conditions. The rig count is not currently expected to recover to levels reached during peak activity levels in 2008.

     During 2009, we markedly reduced our expectations for the level of North American drilling activity, which is the primary driver of our rental tools utilization and pricing. We considered the factors driving these diminished expectations, among others, in assessing goodwill for potential impairment. As a result of our assessment, we wrote off a total of $94.5 million, or $82.7 million after tax, of goodwill in our rental tools reporting unit in the second

quarter of 2009. See Note 5 to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Should conditions related to our rental tools reporting unit deteriorate further, we could potentially write off all or part of that reporting unit’s remaining goodwill balance of $74.5 million.

     Crude oil prices fell to approximately $30 to $35 per barrel during the quarter ended March 31, 2009; however, oil prices have recovered somewhat since then. As of mid-October 2009, crude oil was trading in a range of $73 to $80 per barrel which, though significantly improved, remains far below its all time high closing price of $147 per barrel reached in July 2008. The current crude oil prices have led to a partial recovery of drilling activity in the oil related rig count in the United States and the sanctioning of some oil sands development projects in Canada. However, it is unknown whether crude oil prices will stabilize at levels that will continue to support significant levels of exploration and production because crude oil market demand fundamentals remain weak and inventories for the resource are oversupplied.

     For the first nine months of 2009, the Canadian dollar was valued at an average exchange rate of U.S. $0.86 compared to U.S. $0.98 for the first nine months of 2008, a decrease of 12%. This weakening of the Canadian dollar had a significant negative impact on the translation of earnings generated from our Canadian subsidiaries.

     The major U.S. steel mills increased OCTG prices during 2008 because of high product demand, overall tight supplies and in response to raw material and other cost increases. However, steel prices on a global basis have declined precipitously during 2009 and industry inventories have increased materially as the rig count has declined. The OCTG Situation Report suggests that industry OCTG inventory levels peaked in the first quarter of 2009 at approximately twenty months’ supply on the ground and have trended down to approximately eleven months’ supply as the U.S. mills have materially reduced output, imports of OCTG have declined and drilling activity has increased. These trends have had a material detrimental impact on OCTG pricing and, accordingly, on our revenues and margins realized during the second and third quarters of 2009 in our tubular services segment. These trends, if continued for an extended period, could also negatively impact the valuation of our OCTG inventory, potentially resulting in lower of cost or market write-downs in the future.

     We continue to monitor the effect of the financial crisis on the global economy, the demand for crude oil and natural gas, and the resulting impact on the capital spending budgets of exploration and production companies in order to estimate the effect on our Company. We have reduced our capital spending significantly in 2009 compared to 2008. We currently expect that 2009 capital expenditures will total approximately $170 million compared to 2008 capital expenditures of $247.4 million. Our 2009 capital expenditures include funding to complete projects in progress at December 31, 2008, including (i) expansion of our Wapasu Creek accommodations facility in the Canadian oil sands, (ii) international expansion at offshore products and (iii) ongoing maintenance capital requirements. In our well site services segment, we continue to monitor industry capacity additions and make future capital expenditure decisions based on a careful evaluation of both the market outlook and industry fundamentals. In our tubular services segment, we remain focused on industry inventory levels, future drilling and completion activity and OCTG prices. In response to industry conditions and our corresponding decreased revenues, we have implemented a variety of cost saving measures throughout our businesses, including headcount reductions and a decrease in overhead costs.

     There are several potential energy policy changes in Washington D.C. that will likely change how energy in the United States is produced and consumed. Some of the major proposed policy changes (which will not likely take effect or have a material impact in the near-term) focus on creating energy standards and efficiencies, provide financing for clean energy generation, and emphasize greater renewable energy usage. Other proposed policy changes focus on eliminating some of the drilling tax incentives available to exploration and production companies, which would likely increase the cost of drilling and, in turn, could negatively affect development plans of exploration and production companies and/or increase the cost of energy to consumers. The company’s management will not be in a position to assess the full impact that the proposed policy changes will have on the energy industry until the policies are adopted.

Consolidated Results of Operations (in millions)

		THREE MONTHS ENDED																NINE MONTHS ENDED
		SEPTEMBER 30,																SEPTEMBER 30,
										Variance																Variance
										2009 vs. 2008																2009 vs. 2008
		2009				2008				$				%				2009				2008				$				%
Revenues
Well Site Services -
Accommodations		$	110.3			$	105.4			$	4.9				5	%		$	340.5			$	332.5			$	8.0				2	%
Rental Tools			51.7				91.7				(40.0	)			(44	%)			177.1				258.8				(81.7	)			(32	%)
Drilling and Other			18.4				52.1				(33.7	)			(65	%)			46.5				133.3				(86.8	)			(65	%)
Total Well Site Services			180.4				249.2				(68.8	)			(28	%)			564.1				724.6				(160.5	)			(22	%)
Offshore Products			131.8				120.0				11.8				10	%			382.3				386.8				(4.5	)			(1	%)
Tubular Services			143.9				445.6				(301.7	)			(68	%)			633.1				936.0				(302.9	)			(32	%)
Total		$	456.1			$	814.8			$	(358.7	)			(44	%)		$	1,579.5			$	2,047.4			$	(467.9	)			(23	%)
Product costs; Service and other costs (“Cost of sales and service”)
Well Site Services -
Accommodations		$	67.8			$	65.3			$	2.5				4	%		$	196.6			$	193.4			$	3.2				2	%
Rental Tools			38.6				52.8				(14.2	)			(27	%)			128.7				151.2				(22.5	)			(15	%)
Drilling and Other			14.8				31.2				(16.4	)			(53	%)			38.4				85.2				(46.8	)			(55	%)
Total Well Site Services			121.2				149.3				(28.1	)			(19	%)			363.7				429.8				(66.1	)			(15	%)
Offshore Products			98.7				88.5				10.2				12	%			285.2				286.6				(1.4	)			(0	%)
Tubular Services			133.9				371.6				(237.7	)			(64	%)			586.8				816.5				(229.7	)			(28	%)
Total		$	353.8			$	609.4			$	(255.6	)			(42	%)		$	1,235.7			$	1,532.9			$	(297.2	)			(19	%)
Gross margin
Well Site Services -
Accommodations		$	42.5			$	40.1			$	2.4				6	%		$	143.9			$	139.1			$	4.8				3	%
Rental Tools			13.1				38.9				(25.8	)			(66	%)			48.4				107.6				(59.2	)			(55	%)
Drilling and Other			3.6				20.9				(17.3	)			(83	%)			8.1				48.1				(40.0	)			(83	%)
Total Well Site Services			59.2				99.9				(40.7	)			(41	%)			200.4				294.8				(94.4	)			(32	%)
Offshore Products			33.1				31.5				1.6				5	%			97.1				100.2				(3.1	)			(3	%)
Tubular Services			10.0				74.0				(64.0	)			(86	%)			46.3				119.5				(73.2	)			(61	%)
Total		$	102.3			$	205.4			$	(103.1	)			(50	%)		$	343.8			$	514.5			$	(170.7	)			(33	%)
Gross margin as a percentage of revenues
Well Site Services -
Accommodations			39	%			38	%											42	%			42	%
Rental Tools			25	%			42	%											27	%			42	%
Drilling and Other			20	%			40	%											17	%			36	%
Total Well Site Services			33	%			40	%											36	%			41	%
Offshore Products			25	%			26	%											25	%			26	%
Tubular Services			7	%			17	%											7	%			13	%
Total			22	%			25	%											22	%			25	%