Allis-Chalmers announced that due to the decrease in the active rig count in the United States, it has taken several steps to reduce costs.
The principal steps are summarized as follows:
It is estimated that these actions will reduce costs by approximately $21.7 million on an annual basis. Most of these actions were implemented in mid-January with the full benefit being realized in mid-February. Allis-Chalmers will continue to look at its cost structure and make further adjustments as necessary dependent on business conditions.
Allis-Chalmers added that the deteriorating rig count domestically began to impact its Oilfield Services segment in December 2008. In addition to cost reductions, the strategy is to focus marketing efforts on the most active shale plays and continue to diversify its customer base with competitive pricing and with its complement of new equipment and technology acquired over the past two years. The Oilfield Services segment continues to benefit from its business in Mexico through its Tubular Services division. Activity in Mexico is expected to grow in 2009 due to the expected growth of offshore drilling activity.
Allis-Chalmers' Rental Services segment, which is a premier provider of rental drill pipe, tubing and blow-out prevention equipment, implemented a strategy in the beginning of 2008 to diversify from the offshore Gulf of Mexico shelf by concentrating on the international market, and land shale plays, such as the Haynesville and Marcellus, where rig activity is believed to be the most sustainable, and maintaining its significant Gulf of Mexico deep water business. In the past twelve months capital expenditures for this segment have focused on adding inventory of premium drill pipe, which we believe is in high demand in these markets. This strategy implemented one year ago has been successful although pricing remains very competitive. Allis-Chalmers will be aggressive in defending its position in this rental market through competitive pricing policies, by offering premium equipment, and by "following" the rigs where activity is expected to be the most promising.
Internationally, Allis-Chalmers' Drilling and Completion segment which currently has 29 drilling and 47 service rigs, has the benefit of long term contractual arrangements for a significant amount of its revenues in Argentina, Brazil and Bolivia. Allis-Chalmers expects significant growth in this segment in 2009, due to the addition of 16 service rigs and two drilling rigs in Argentina, which were delivered in stages throughout 2008, the commencement of two new contracts in Bolivia (the first since 2007) and the acquisition, at the end of 2008, of BCH in Brazil, which operates seven drilling rigs and one service rig under contract to Petrobras. The first Bolivian rig began operating in December 2008, while the second rig in Bolivia began its contract in February 2009. Allis-Chalmers expects some pricing pressure in Argentina, but anticipates being able to maintain high rates of rig utilization of close to 90%. The Brazilian market also provides opportunities for Allis-Chalmers' rigs located in Argentina.
Micki Hidayatallah, Chairman and Chief Executive Officer of Allis-Chalmers stated, "It is unfortunate and difficult to layoff personnel who have contributed to our success. As we have implemented these actions we have been careful to ensure we can be responsive to our customers and provide them with the highest quality of service and equipment. The cost cutting actions we have implemented follow our previously announced plans to limit capital expenditures to critical replacement and maintenance expenditures in order to maintain our financial flexibility during these times."
Mr. Hidayatallah continued, "Our strategy from the beginning has been to try to mitigate the impact of cyclical risk by diversifying into the international markets where larger multinationals or state companies operate and long-term contracts are generally available. We believe our Rental Services segment provides attractive cash margins and relatively fixed overhead costs. We intend to be opportunistic and aggressive both domestically and internationally to defend and increase our market share in the rental market. During 2008 our Rental Services segment began generating revenues from Libya and Colombia, in addition to our existing business in Mexico. We expect to lead with our rental equipment in the recently announced joint venture in Saudi Arabia."
Mr. Hidayatallah concluded, "Although we have limited visibility on drilling activity in the U.S. in the second half of 2009, we believe we will see growth in our international business. We continue to believe that the cost cutting actions and strategic initiatives we have taken will allow us to reduce our borrowings under the revolving line of credit by the end of 2009."
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