| Company OverviewNewpark Resources, Inc.(“NR” or 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, East 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, and has been the fastest growing business segment at a five-year compound annual growth rate (CAGR) of 26% based on an annualized 2008 run rate. 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 15% domestic share and 7% global share.1 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 has grown at a more modest rate of 5% CAGR from 2003 through an annualized 2008, but recent initiatives to diversify from the Gulf Coast area to the Rocky Mountains and abroad are expected to improve operating margins. This business is largely comprised of the rental and sale of interlocking composite and wooden mat systems to facilitate work in unstable soil conditions at 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 has broadened the geographic reach of Mats beyond its core Gulf Coast market into the northern Louisiana site construction business. Consistent with this strategic goal was the purchase of SEM Construction in August of 2007, which expanded the Company into well site management and equipment rentals in Western Colorado. The Company further diversified its geographic reach when it redeployed 2,000 composite mats in the 2008 third quarter from Mexico to the United Kingdom to improve asset utilization and returns.Growing Presence in International & Deepwater Markets Oil and gas drilling is expected to 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 expanding presence in the Mediterranean and northern Africa (collectively referred to as the Mediterranean) has been pivotal in driving international growth. In North Africa, the Company was awarded a contract for offshore work in Libya for a national oil company and has been cleared to bid on projects in Egypt after completing well tests. Since 2004, Mediterranean revenues have experienced an annualized 29% 5-year CAGR and have risen to $92 million for the nine months ended September 30, 2008. Going forward, Eastern Eu rope is also expected to contribute a greater share of revenues. International expansion is also a part of Newpark’s deepwater strategy. For instance, since its entry into the Brazilian land market in late 2007, the Company has broadened into the offshore market. Progress toward this strategy is evidenced by both a deepwater drilling fluids contract with a super-major oil company as well as the recent award of a 350 million Brazilian Real offshore contract with Petrobras. To support these contracts and future business in the region, Newpark constructed a fluids facility in Rio de Janeiro that became fully operational in September 2008. While margins over recent quarters have been pressured due to ramp-up costs associated with this facility, they are expected to improve going forward as these costs moderate. It is anticipated that margins will also benefit from Newpark’s active domestic deepwater activities, in which it is operating under a three-year deepwater Gulf of Mexico contract with Eni through 2010.Paring Assets to Fuel Operations and Growth A cornerstone of the Company’s strategy is its planned exit from the Environmental Services business, which was no longer strategic to its long-term plans. Although an agreement was reached to sell the business to CCS Inc. for $85 million in cash, the transaction was formally contested by the Federal Trade Commission on the belief that the sale was anti-competitive. A resolution is not expected until early 2009.Exhibiting Strength in a Challenging Market In the 2008 third quarter, NR reported record revenues of $212 million, up 38% from a year ago. Improvements were due to higher activity levels in certain regions as well as market share gains and higher pricing. Fluids revenues rose 45% YOY due to domestic market share gains and higher activity levels combined with solid gains internationally. While Mats revenues were down 5%, there are signs of improvement in Louisiana rig activity and business in Colorado has been accretive. |
