| Company OverviewNewpark Resources, Inc.(the “Company”) is a worldwide provider of proprietary drilling fluids, temporary access roads for oilfield and other commercial markets, and well site construction, management and equipment rentals. The Company operates in the U.S. Gulf Coast, West Texas, the U.S. Mid-continent, the U.S. Rocky Mountains, Canada, Mexico, Brazil and areas of Europe and North Africa surrounding the Mediterranean Sea.Fluids: Newpark’s Foundation and Platform for Growth Drilling fluids represent the core of Newpark’s business, accounting for over 80% of total Company revenues. It has been Newpark’s fastest growing business segment, with a 25% compound annual growth rate (CAGR) over the last four years. Drilling fluids serve a fundamental and critical function in oil and gas drilling as part of a rig’s “circulation system,” and different drilling conditions call for fluids of varying density, viscosity and weight. Fluids perform multiple functions, e.g., removing well cuttings, cleaning and cooling the drill bit, and well pressure control, under a host of conditions. Thus, fluids can be deceptively technological, and superior product performance can yield substantial benefits. Here, Newpark has excelled by providing versatile water-based drilling solutions, such as its DeepDrill® and FlexDrill™ systems, which not only effectively address multiple performance applications, but are also environmentally friendly. Newpark ranks fourth in both domestic and global drilling fluids market share, with a 13% domestic share and 7% global share. Long term, Newpark plans to leverage its strength in fluids to grow both organically and via targeted acquisitions worldwide.Expanding Scope of Mats & Integrated Services Newpark’s Mats & Integrated Services segment is the other platform on which the Company’s growth story will be built. Revenues in this segment have grown at a 6% CAGR over the last four years. This business is largely comprised of the rental and sale of interlocking composite and wooden mat systems to facilitate work in unstable soil conditions common around remote drilling worksites. Such services can also be used in other commercial applications. Because its services are fundamental to well site preparation, Newpark is often one of the first service providers on a worksite and can leverage this position to offer a broader array of services to its E&P customers. Newpark is broadening the geographic reach of Mats beyond its core Gulf Coast market, evidenced by its push into the northern Louisiana site construction business. Consistent with this strategic goal was the purchase of SEM Construction, which expanded the Company into well site management as well as equipment rentals in Western Colorado.Growing Presence in International & Deepwater Markets Oil and gas drilling will continue to move towards more challenging environments in less-explored areas of the globe. Newpark has targeted foreign markets as a major growth initiative, and its Mediterranean efforts have been pivotal in driving international growth. North Africa has been particularly noteworthy as the Company was awarded a contract for offshore work in Libya and has been cleared to bid on projects in Egypt after completing well tests. Since 2004, Mediterranean revenues have experienced a healthy 37% CAGR to approximately $87 million for 2007, and have already exceeded $59 million for 1H08. Going forward, Eastern Europe should also contribute a greater share of revenues. International expansion is also a part of Newpark’s deepwater strategy. For instance, since first attaining revenues in the Brazilian land market in 4Q07, the Company has broadened into the country’s offshore market. Progress toward this strategy is evidenced by a deepwater drilling fluids contract that it was awarded earlier this year by a super-major oil company. To support this contract and future business in the region, Newpark is constructing a new fluids facility in Rio de Janeiro that should become fully operational in September. However, as Newpark has incurred upfront costs in preparation for this market, operating margins have come under pressure. Although fluids margins should improve going forward, operational investments in Brazil will continue. Margins should also benefit from Newpark’s active domestic deepwater activities, under which it is operating under a three-year deepwater Gulf of Mexico contract with Eni through 2010.Executing on the Strategic Plan In March 2007, Newpark’s new management team, led by CEO Paul Howes, rolled out a new strategic plan that focused on growing and improving profitability within the Fluids and Mats & Integrated Services segments, the divestiture of non-core and poor performing assets, and a reduction of debt. 2007 was a transitional year as these initiatives were implemented. Newpark appears well on its way toward achieving these goals as evidenced in the 2008 second quarter results: Revenue was up 9% sequentially and 29% from last year to $194 million, while income from continuing operations was up 41% from last year. U.S. fluids were up 22% from a year ago to $132 million due to share gains. A cornerstone of this refocused strategy is the Company’s exit from environmental services, which was no longer strategic. During the recent quarter, management announced an agreement to sell its Environmental Services business to CCS Inc. for $85 million in cash, which is expected to close in the fourth quarter of 2008. Also during the quarter, the Company reduced debt by about $20 million bringing its debt/cap ratio to 30.9%. The cash proceeds from the sale combined with a well-capitalized financial profile should position Newpark to pursue growth opportunities in its core businesses. |
