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Q4 2008 Allis-Chalmers Energy Inc. Earnings Conference Call - Final.

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OPERATOR: Good morning, ladies and gentlemen, and welcome to the Allis-Chalmers Energy fourth quarter 2008 earnings conference call. (Operator Instructions). Please note that this conference is being recorded. I will now turn the call over to Mr. Vic Perez.

VIC PEREZ, CFO, ALLIS-CHALMERS ENERGY INC.: Good morning and welcome to our fourth quarter and fiscal 2008 conference call. First of all, let me just make the usual statements about forward-looking statements. and that is that our press release, as well as statements that we make here this morning regarding our business or financial condition and results of operations and our prospects, these are words that are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements.

They reflect the good-faith judgment of our management. Such statements can only be based on facts and factors that our management currently knows. Consequently forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may vary significantly and materially from the results and outcomes discussed in the forward-looking statements.

Factors that could cause or contribute to such differences in results and outcomes include, but are not limited to, demand for oil natural gas drilling services in the areas and markets in which we operate, competition, obsolescence of products and services, the ability to obtain financing to support operations, environmental and other casualty risks and the effect of government regulation.

Therefore, you should consult for further information about the risks and uncertainties that may affect our business. You should consult with the SEC filings, such as the Form 10-K and other publicly available documents.

So we urge you not to place undue reliance on these forward-looking statements. At this time I would like to turn the call over to our CEO, Micki Hidayatallah.

MICKI HIDAYATALLAH, CHAIRMAN, CEO, ALLIS-CHALMERS ENERGY INC.: Good morning. In its September 29 issue, Fortune Magazine rated Allis-Chalmers Energy Inc. as the third fastest growing company in the United States. This was based on three years revenue growth, return on investment, and net income growth.

The Company in October and November of 2008 had cumulative earnings per share of nearly $0.26. And November specifically represented the highest monthly EBITDA for the year.

In December the collapse in our Oilfield Services division reflected far more than the annual vacation or [US] budget slowdown by our customers. This trend in the deterioration of the rig count domestically in the United States has continued at an accelerated rate through the first quarter of 2009.

But it is important to emphasize that the Company's fundamentals remain strong in our international business and operations, our access to liquidity, and in our ability for continued compliance with bank covenants.

Allis-Chalmers Inc. in 2008 had revenue growth of approximately 18.4% from $571 million in 2007 to revenues of $675 million in 2008. Adjusted EBITDA, excluding a gain of sale of assets in 2007, was $176 million. In 2008 if you will exclude nonroutine and goodwill impairment charges, EBITDA -- adjusted EBITDA was nearly $182 million.

This growth in both revenue and profitability was also reflected in the Oilfield Services segment, where revenues grew from $234 million in 2007 to approximately $280 million in 2008. Adjusted EBITDA, once again excluding impairment of assets and nonroutine charges in 2008 and excluding the gain on sale of assets in 2007, grew from approximately $61 million to $73.2 million in 2008. This reflected revenue and EBITDA growth of nearly 20%.

In our Drilling & Completion segment revenues increased from $250 million to $291 million in 2008 over 2007. EBITDA grew from $50 million in 2007 to $55 million in 2008.

When we look at our Rental segment, revenues and EBITDA did decline because of the continued reduction in the rig count in the US Gulf of Mexico. Revenues declined from $121 million to $103 million, and EBITDA from $75 million to approximately $64 million, when you exclude impairment and nonroutine charges.

The Company has taken remedial measures in 2009 to meet the challenges of the worldwide economic meltdown, the deterioration in commodity prices, and the continued reduction in the domestic rig count. We have reduced our operating expenses, as previously announced, by approximately $22 million in January. Subsequently in February we took further action and reduced the annualized costs by an additional $10 million. We will continue to examine cost adjustments, depending on the rig count.

We do not believe that these cuts will affect either our productivity or efficiency in our service operations.

In our Rental segment we will continue to defend revenues with the three-pronged strategic initiative we undertook in the beginning of 2008. Number one, to increase international revenues. Secondly, to increase market share in the land shale plays. And third, to reduce our reliance on the shallow water US Gulf of Mexico drilling activity.

Over the last two years we believe we have mitigated the cyclical volatility in the US Oilfield Services market by investing nearly $300 million in our Drilling & Completion operations in Brazil and Argentina, and in our Rental Tools and Casing & Tubing operations in Mexico and Colombia. We will continue to take advantage of the low volatility in the international markets so that we may maintain a stable source of cash flow.

In 2009 adjusted EBITDA from our international operations will sustain both cash flow and liquidity. I want to make it clear that we have no restrictions in remaining excess cash flow from Argentina without a withholding tax. In Brazil we continue to generate approximately 50% of our revenues outside the country as rental income for rigs.

The Company received approximately $9 million in cash from Mexico in 2008, and this was after payment of a 10% withholding tax.

As stated in our written earnings release, we have working capital of $83 million and access to cash and lines of credit of approximately $70 million. Vic Perez is going to speak in detail about liquidity and compliance with bank covenants in 2009.

The Company intends to continue to execute its strategic initiatives in 2009 and to maintain growth in both revenues and EBITDA from the international markets and face the challenges of the deterioration in the domestic rig count. We will do this by increasing our customer base, increasing market share, and operating yards in proximity to increased drilling activity in the various shale plays.

Prior to all nonroutine charges, including the impairment of goodwill, the Company had net income of $0.28 in the fourth quarter. In the first quarter of 2009 we will see...

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