The Daily Magic Formula Stock for 11/08/2008 is Superior Energy Services Inc. According to the Magic Formula Investing Web Site, the ebit yield is 23% and the EBIT ROIC is 25-50 %.
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Item 1. Business
We are a leading, highly diversified provider of specialized oilfield services and equipment. We focus on serving the drilling-related needs of oil and gas companies primarily through our rental tools segment, and the production-related needs of oil and gas companies through our well intervention, rental tools and marine segments. We believe that we are one of the few companies capable of providing the services, tools and liftboats necessary to maintain, enhance and extend the life of offshore producing wells, as well as plug and abandonment services at the end of their life cycle. We also own and operate mature oil and gas properties in the Gulf of Mexico. We believe that our ability to provide our customers with multiple services and to coordinate and integrate their delivery allows us to maximize efficiency, reduce lead time and provide cost effective solutions for our customers. We have expanded geographically so that we now have a significant presence in both select domestic land and international markets.
Our operations are organized into the following four business segments:
Well Intervention Services . We provide well intervention services that stimulate oil and gas production. Our well intervention services include coiled tubing, electric line, pumping and stimulation, gas lift, well control, snubbing, recompletion, engineering and well evaluation, offshore oil and gas cleaning, decommissioning, plug and abandonment and mechanical wireline. We believe we are the leading provider of mechanical wireline services in the Gulf of Mexico with approximately 174 offshore wireline and electric line units, 97 land wireline and electric line units, 33 coiled tubing units and 10 dedicated liftboats configured specifically for wireline services. We also believe we are a leading provider of rigless plug and abandonment services in the Gulf of Mexico. We completed construction of an 880-ton derrick barge which was deployed off the coast of Malaysia under a charter that is scheduled to run through March 2008, after which time, this derrick barge will be brought into the Gulf of Mexico. We are also constructing a second 880- ton derrick barge with an expected delivery date in the third quarter of 2008. We also manufacture and sell specialized drilling rig instrumentation equipment.
Rental Tools . We are a leading provider of rental tools. We manufacture, sell and rent specialized equipment for use with offshore and onshore oil and gas well drilling, completion, production and workover activities. Through internal growth and acquisitions, we have increased the size and breadth of our rental tool inventory and geographic scope of operations so that we now conduct operations offshore in the Gulf of Mexico, onshore in the United States and in select international market areas. We currently have locations in all of the major staging points in Louisiana and Texas for oil and gas activities in the Gulf of Mexico and in North Louisiana, Arkansas, Oklahoma, Colorado and Wyoming. Our rental tools segment also conducts operations in Venezuela, Trinidad, Mexico, Colombia, Brazil, Eastern Canada, the United Kingdom, Continental Europe, the Middle East, West Africa and the Asia Pacific region. Our rental tools include pressure control equipment, specialty tubular goods including drill pipe and landing strings, connecting iron, handling tools, stabilizers, drill collars and on-site accommodations.
Marine Services . We own and operate a fleet of liftboats that we believe is highly complementary to our well intervention services. A liftboat is a self-propelled, self-elevating work platform with legs, cranes and living accommodations. Our fleet consists of 37 liftboats, including 10 liftboats configured specifically for wireline services (included in our well intervention segment) and 27 in our rental fleet with leg-lengths ranging from 145 feet to 250 feet. Our liftboat fleet has leg-lengths and deck spaces that are suited to deliver our production-related bundled services and support customers in their construction, maintenance and other production enhancement projects. All of our liftboats are currently located in the Gulf of Mexico, but we may reposition some of our larger liftboats to international market areas if opportunities arise. We have contracted to construct two 175 foot liftboats, one of which was delivered in February 2008 and the other is scheduled to be delivered in June 2008.
Oil and Gas Operations . Through our subsidiary, SPN Resources, LLC (â€śSPN Resourcesâ€ť), we acquire mature oil and gas properties in the Gulf of Mexico to provide our customers a cost-effective alternative to the plugging, abandoning and decommissioning process. Owning oil and gas properties provides additional opportunities for our well intervention, decommissioning and platform management services, particularly during periods when demand from our traditional customers is weak due to cyclical or seasonal factors. Once properties are acquired, we utilize our production-related assets and services to maintain, enhance and extend existing production of these properties. At the end of a propertyâ€™s economic life, we plug and abandon the wells and decommission and abandon the facilities. As of December 31, 2007, we had interests in 31 offshore blocks containing 79 structures and approximately 149 producing wells. As of December 31, 2007, we had reserves of approximately 13.7 million barrels of oil equivalent (mmboe) with a PV-10 (future net revenue discounted at 10%) of $496.7 million and approximately 90% of our reserves were classified as proved developed. The oil and natural gas information contained herein does not include the properties or reserves owned by our equity-method investee, Beryl Oil and Gas, L.P., formerly known as Coldren Resources LP.
In February 2008, we entered into a purchase agreement to sell 75% of our interest in SPN Resources for approximately $165 million in cash, subject to certain conditions. The transaction is expected to close during the first quarter of 2008. We will retain the preferential rights on all service work and have agreed to perform, on a fixed price basis, the decommissioning work associated with oil and gas properties owned and operated by SPN Resources at closing.
For additional industry segment financial information, see note 15 to our consolidated financial statements included in Item 8 of this
Our customers have primarily been the major and independent oil and gas companies. Sales to Shell accounted for approximately 11%, 12% and 10% of our total revenue in 2007, 2006 and 2005, respectively. We do not believe that the loss of any one customer would have a material adverse effect on our revenues. However, our inability to continue to perform services for a number of our large existing customers, if not offset by sales to new or other existing customers, could have a material adverse effect on our business and operations.
We operate in highly competitive areas of the oilfield services industry. The products and services of each of our principal operating segments are sold in highly competitive markets, and our revenues and earnings can be affected by the following factors:
â€˘ changes in competitive prices;
â€˘ oil and gas prices and industry perceptions of future prices;
â€˘ fluctuations in the level of activity by oil and gas producers;
â€˘ changes in the number of liftboats operating in the Gulf of Mexico;
â€˘ the ability of oil and gas producers to generate capital;
â€˘ general economic conditions; and
â€˘ governmental regulation.
We compete with the oil and gas industryâ€™s largest integrated oilfield service providers in the production-related services provided by our well intervention segment. The rental tools divisions of these companies, as well as several smaller companies that are single source providers of rental tools, are our competitors in the rental tools market. In the marine services segment, we compete with other companies that provide liftboat services in the Gulf of Mexico. We also compete with other companies for the acquisition of mature oil and gas properties in the Gulf of Mexico. We believe that the principal competitive factors in the market areas that we serve are price, product and service quality, safety record, equipment availability and technical proficiency.
Our operations may be adversely affected if our current competitors or new market entrants introduce new products or services with better features, performance, prices or other characteristics than our products and services, or if they would offer to pay more for mature oil and gas properties. Further, if our competitors construct additional liftboats for the Gulf of Mexico market area, it could affect vessel utilization and resulting day rates. Competitive pressures or other factors also may result in significant price competition that could reduce our operating cash flow and earnings. In addition, competition among oilfield service and equipment providers is affected by each providerâ€™s reputation for safety and quality. Although we believe that our reputation for safety and quality service is good, we cannot assure that we will be able to maintain our competitive position.
Potential Liabilities and Insurance
Our operations involve a high degree of operational risk, particularly of personal injury, damage or loss of equipment and environmental accidents. Failure or loss of our equipment could result in property damages, personal injury, environmental pollution and other damages for which we could be liable. Litigation arising from the sinking of a liftboat or a catastrophic occurrence, such as a fire, explosion or well blowout, at one of our offshore production facilities or a location where our equipment and services are used may result in large claims for damages in the future. We maintain insurance against risks that we believe is consistent in types and amounts with industry standards and is required by our customers. Changes in the insurance industry in the past few years have led to higher insurance costs and deductibles as well as lower coverage limits, causing us to rely on self-insurance against many risks associated with our business. The availability of insurance covering risks we and our competitors typically insure against may continue to decrease forcing us to self-insure against more business risks, including the risks associated with hurricanes. The insurance that we are able to obtain may have higher deductibles, higher premiums, lower limits and more restrictive policy terms.
Health, Safety and Environmental Assurance
We have established health, safety and environmental performance as a corporate priority. Our goal is to be an industry leader in this area by focusing on the belief that all safety and environmental incidents are preventable and an injury-free workplace is achievable by emphasizing correct behavior. We have a company-wide effort to enhance our behavioral safety process and training program and make safety a constant focus of awareness through open communication with all of our offshore and yard employees. In addition, we investigate all incidents with a priority of identifying and implementing the corrective measures necessary to reduce the chance of reoccurrence.
Our business is significantly affected by the following:
â€˘ Federal and state laws and other regulations relating to the oil and gas industry;
â€˘ changes in such laws and regulations; and
â€˘ the level of enforcement thereof.
We cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings in the future. A decrease in the level of industry compliance with or enforcement of these laws and regulations in the future may adversely affect the demand for our services. We also cannot predict whether additional laws and regulations will be adopted, or the effect such changes may have on us, our businesses or our financial condition. The demand for our services from the oil and gas industry would be affected by changes in applicable laws and regulations. The adoption of new laws and regulations curtailing drilling for oil and gas in our operating areas for economic, environmental or other policy reasons could also adversely affect our operations by limiting demand for our services.
Regulation of Oil and Gas Production
The oil and gas industry is subject to various types of regulation at federal and state levels. This regulation includes requiring permits to drill wells, maintaining bonding requirements to drill or operate wells and regulating the location of wells, the method of drilling and casing wells, stringent engineering and construction standards, and the plugging and abandoning of wells and removal of production facilities. The oil and gas industry is also subject to various federal and state conservation laws and regulations. These include regulations establishing maximum rates of production from oil and natural gas wells, generally prohibiting the venting or flaring of natural gas and imposing certain requirements regarding the ratability of production.
All of our oil and gas operations are located on federal oil and gas leases, which are administered by the U.S. Department of Interior, Minerals Management Service, or MMS, pursuant to the Outer Continental Shelf Lands Act, or OCSLA. These leases contain standardized terms that require compliance with detailed MMS regulations and orders that are subject to interpretation and change by MMS. Under some circumstances, MMS may require operations on federal leases to be suspended or terminated.
To cover the various obligations of lessees on the Outer Continental Shelf, MMS generally requires that lessees have substantial net worth or post bonds or other acceptable assurances that such obligations will be met. The cost of these bonds or assurances can be substantial, and there is no assurance that they can be obtained in all cases. We currently have bonded our offshore leases, as required by MMS, consisting of a $3.0 million Area-Wide Bond plus a $300,000 Pipeline Right-of-Way Bond. Currently, we are exempt from supplemental bonding.
MMS also administers the collection of royalties under the terms of the OCSLA and the oil and gas leases issued under the act. The amount of royalties due is based upon the terms of the oil and gas leases as well as the regulations promulgated by MMS. These regulations are amended from time to time, and the amendments can affect the amount of royalties that we are obligated to pay to MMS. However, we do not believe that these regulations or any future amendments will affect us in a way that materially differs from the way it affects other oil and gas producers.
These regulations impact our customersâ€™ needs for our services, as well as limit the amounts of oil and natural gas we can produce from our wells. Because these statutes, rules and regulations undergo constant review and often are amended, expanded and reinterpreted, we are unable to predict the future cost or impact of regulatory compliance. The regulatory burden on the oil and gas industry increases its cost of doing business and, consequently, affects our profitability.
Natural Gas Marketing, Gathering and Transportation
Historically, the transportation and sales of natural gas in interstate commerce have been regulated pursuant to the various laws administered by the Federal Energy Regulatory Commission, or FERC. Currently, the price for all â€śfirst salesâ€ť of natural gas is not regulated by FERC. Accordingly, all of our natural gas sales may be made at market prices, subject to applicable contract provisions. Sales of natural gas are affected by the availability, terms and cost of pipeline transportation. FERC has also implemented regulations intended to make natural gas transportation more accessible to gas buyers and sellers on an open-access, non-discriminatory basis.
Certain of our pipeline systems are regulated for safety compliance by the U.S. Department of Transportation, or DOT. Pursuant to the Pipeline Safety Improvement Act of 2002, DOT has implemented regulations intended to increase pipeline operating safety. Among other provisions, the regulations require that pipeline operators
implement a pipeline integrity management program that must at a minimum include an inspection of gas transmission pipeline facilities within the next ten years, and at least every seven years thereafter.
We cannot predict what new or different regulations FERC, DOT and other regulatory agencies may adopt, or what effect subsequent regulations may have on our activities. Similarly, it is impossible to predict what proposals, if any, that affect the oil and natural gas industry might actually be enacted by Congress or the various state legislatures and what effect, if any, such proposals might have on us. Also, despite the recent trend toward federal deregulation of the natural gas industry, we cannot predict whether or to what extent that trend will continue, or what the ultimate effect will be on our sales of gas.
Federal Regulation of Petroleum
Our sales of oil and gas are not regulated and are at market prices. The price received from the sale of these products is affected by the cost of transporting the products to market. Much of that transportation is through interstate common carrier pipelines. FERC has implemented regulations approving interstate transportation rates and establishing an indexing system for those rates by which adjustments are made annually based on the rate of inflation, subject to certain conditions and limitations. These regulations may tend to increase the cost of transporting oil and natural gas by interstate pipeline, although the annual adjustments may result in decreased rates in a given year.
General . Our operations are subject to extensive federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. Permits are required for the conduct of our business and operation of our various marine vessels and offshore production facilities. These permits can be revoked, modified or renewed by issuing authorities. Governmental authorities enforce compliance with their regulations through administrative or civil penalties, corrective action orders, injunctions or criminal prosecution. Government regulations can increase the cost of planning, designing, installing and operating our oil and gas properties. Although we believe that compliance with environmental regulations will not have a material adverse effect on us, risks of substantial costs and liabilities related to environmental compliance issues are part of oil and gas production operations. No assurance can be given that significant costs and liabilities will not be incurred. Also, it is possible that other developments, such as stricter environmental laws and regulations, and claims for damages to property or persons resulting from oil and gas production could result in substantial costs and liabilities to us.
Federal laws and regulations applicable to our operations include those controlling the discharge of materials into the environment, requiring removal and cleanup of materials that may harm the environment, requiring consistency with applicable coastal zone management plans, or otherwise relating to the protection of the environment.
Our insurance policies provide liability coverage for sudden and accidental occurrences of pollution or clean-up and containment in amounts that we believe are comparable to policy limits carried by others in our industry.
Outer Continental Shelf Lands Act. OCSLA and regulations promulgated pursuant thereto impose a variety of regulations relating to safety and environmental protection applicable to lessees, permits and other parties operating on the Outer Continental Shelf. Specific design and operational standards may apply to Outer Continental Shelf vessels, rigs, platforms, vehicles and structures. Violations of lease conditions or regulations issued pursuant to OCSLA can result in substantial civil and criminal penalties as well as potential court injunctions curtailing operations and the cancellation of leases. Enforcement liabilities under OCSLA can result from either governmental or citizen prosecution. We believe that we substantially comply with OCSLA and its regulations.
Solid and Hazardous Waste . We currently lease numerous properties that have been used in connection with the production of oil and gas for many years. Although we believe we utilized operating and disposal practices that were standard in the industry at the time, it is possible that hydrocarbons or other solid wastes may have been disposed of or released on or under the properties currently leased by us. Federal and state laws applicable to oil and gas wastes and properties continue to be stricter over time. Under these increasingly stringent requirements, we could be required to remove or remediate previously disposed wastes (including wastes disposed or released by prior owners and operators) or clean up property contamination (including groundwater contamination by prior owners or operators) or to perform plugging operations to prevent future contamination. We generate some hazardous wastes that are already subject to the Federal Resource Conservation and Recovery Act, or RCRA, and comparable state statutes. The Environmental Protection Agency, or EPA, has limited the disposal options for certain hazardous wastes. It is possible that certain wastes currently exempt from treatment as hazardous wastes may in the future be designated as hazardous wastes under RCRA or other applicable statutes. We could, therefore, be subject to more rigorous and costly disposal requirements in the future than we encounter today.
Superfund. The Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, also known as the â€śSuperfundâ€ť law, imposes liability, without regard to fault or the legality of the original conduct, on certain persons with respect to the release of hazardous substances into the environment. These persons include the owner and operator of a site and any party that disposed of or arranged for the disposal of hazardous substances found at a site. CERCLA also authorizes the EPA, and in some cases, private parties, to undertake actions to clean up such hazardous substances, or to recover the costs of such actions from the responsible parties. In the course of business, we have generated and will continue to generate wastes that may fall within CERCLAâ€™s definition of hazardous substances. We may also be an owner or operator of sites on which hazardous substances have been released. As a result, we may be responsible under CERCLA for all or part of the costs to clean up sites where such wastes have been disposed.
Oil Pollution Act . The federal Oil Pollution Act of 1990, or OPA, and resulting regulations impose a variety of obligations on responsible parties related to the prevention of oil spills and liability for damages resulting from such spills in waters of the United States. The term â€śwaters of the United Statesâ€ť has been broadly defined to include inland water bodies, including wetlands and intermittent streams. OPA assigns liability to each responsible party for oil removal costs and a variety of public and private damages. We believe that we substantially comply with OPA and related federal regulations.
Clean Water Act . The Federal Water Pollution Control Act, or Clean Water Act, and resulting regulations, which are implemented through a system of permits, also govern the discharge of certain contaminants into waters of the United States. Sanctions for failure to comply strictly with the Clean Water Act are generally resolved by payment of fines and correction of any identified deficiencies. However, regulatory agencies could require us to cease operation of our marine vessels or offshore production facilities that are the source of water discharges. We believe that we substantially comply with the Clean Water Act and related federal and state regulations.
Clean Air Act . Our operations are subject to local, state and federal laws and regulations to control emissions from sources of air pollution. Payment of fines and correction of any identified deficiencies generally resolve penalties for failure to comply strictly with air regulations or permits. Regulatory agencies could also require us to cease operation of certain marine vessels or offshore production facilities that are air emission sources. We believe that we substantially comply with the emission standards under local, state, and federal laws and regulations.
MANAGEMENT DISCUSSION FROM LATEST 10K
We are a leading provider of oilfield services and equipment focused on serving the drilling-related needs of oil and gas companies primarily through our rental tools segment, and the production-related needs of oil and gas companies through our well intervention, rental tools and marine segments. In recent years, we have expanded geographically into select domestic land and international market areas. We also own and operate, through our subsidiary SPN Resources, LLC, mature oil and gas properties in the Gulf of Mexico.
The financial performance of our various products and services are reported in four different segments â€“ well intervention, rental tools, marine and oil and gas.
In February 2008, we entered into a purchase agreement to sell 75% of our interest in SPN Resources for approximately $165 million in cash, subject to certain conditions. The transaction is expected to close during the first quarter of 2008. We will retain the preferential rights on all service work and have agreed to perform, on a fixed price basis, the decommissioning work associated with oil and gas properties owned and operated by SPN Resources at closing.
Overview of our business segments
The well intervention segment consists of specialized down-hole services, which are both labor and equipment intensive. We offer a wide variety of services used to maintain, enhance and extend oil and gas production from mature wells. Four services â€“ coiled tubing, electric line, hydraulic workover/snubbing and well control â€“ each account for more than 10% of this segmentâ€™s revenue. While our gross margin percentage tends to be fairly consistent, special projects such as well control can directly increase the gross margin.
The rental tools segment is capital intensive with high margins as a result of relatively low operating costs. The largest fixed cost is depreciation as there is little labor associated with our rental tools businesses. The financial performance primarily is a function of changes in volume rather than pricing. Three rental products and their ancillary equipment â€“ accommodations, drill pipe and stabilization tools â€“ each account for more than 20% of this segmentâ€™s revenue.
The marine segment is comprised of our 27 rental liftboats. Operating costs of our liftboats are relatively fixed, and therefore, gross margin percentages vary significantly from quarter-to-quarter and year-to-year based on changes in dayrates and utilization levels. As an indication of this segmentâ€™s performance, gross margin for 2007 was 53% as compared to 60% in 2006 primarily due to decreases in dayrates and utilization across several of our liftboat classes.
Through our subsidiary SPN Resources, LLC, we acquire, manage and decommission mature properties on the Outer Continental Shelf of the Gulf of Mexico. As of December 31, 2007, we had interests in 31 offshore blocks containing 79 structures and approximately 149 producing wells. The main objective of this business segment is to provide additional opportunities for our products and services in the Gulf of Mexico, especially during cyclical and seasonal slower periods. Because of the fixed cost nature of our well intervention services, the incremental cost to work on mature properties is far less than it would be for traditional energy producers. This segment provides work for our Gulf of Mexico-based services, thereby increasing utilization of our own assets by deploying services on our own properties during periods of downtime.
The lease operating expenses for these types of properties are typically high because of the amount of well intervention service work required to enhance, maintain and extend production for mature properties. The gross margin is also a function of the age of these oil and gas properties.
Market drivers and conditions
The oil and gas industry remains highly cyclical and seasonal. Activity levels in our well intervention, marine and rental tools segments are driven primarily by traditional energy industry activity indicators, which include current and expected commodity prices, drilling rig counts, well completions and workover activity, geological characteristics of producing wells which determine the number of services required per well, oil and gas production levels, and customersâ€™ spending allocated for drilling and production work, which is reflected in our customersâ€™ operating expenses or capital expenditures.
Factors impacting our 2007 financial performance
Several factors contributed to our financial performance in 2007. First, we continued to execute our long-term growth strategy of expanding geographically in an effort to reduce our dependency on a single geographic region, especially the Gulf of Mexico. As evidence of our successful execution of the diversification strategy, our non-Gulf of Mexico revenue was a record approximate $803 million, or 51% of our 2007 total revenue, as compared to approximately $439 million, or 40% of 2006 total revenue. Second, we experienced a significant increase in revenue from our domestic land markets, primarily due to acquisitions and capital expenditures. Third, average oil and natural gas prices increased over 2006 averages, which positively impacted customer spending as well as our financial performance in our oil and gas segment. Fourth, the average number of rigs drilling for oil and natural gas in domestic and international market areas increased 8% over 2006, which directly impacts demand for most of our rental tools and serves as a proxy for customer spending and activity levels on well intervention services. Fifth, we experienced a decrease in demand for liftboats and certain well intervention services in the Gulf of Mexico as construction, plug and abandonment, and other well intervention activity returned to more normal levels following a period of unprecedented demand in the aftermath of Hurricanes Katrina and Rita, which caused significant damage to oil and gas infrastructure in the Gulf of Mexico during the third quarter of 2005. Although significant work remains to remove downed and damaged platforms, the immediate needs of the industry to restore production have been largely met.
Geographically, our largest increase in revenue was from domestic land markets, which was approximately $504 million, or 32% of total revenue, as compared to approximately $270 million, or 25% of our total revenue in 2006. The two primary factors leading to this growth were acquisitions and capital expenditures. Starting with our acquisition of Warrior Energy Services, Inc. in December 2006, we made four acquisitions through December 31, 2007 of businesses with significant exposure to certain domestic land market areas. Warrior Energy Services, which was the largest of these acquisitions, continued an aggressive growth strategy in which it spent approximately $74 million to purchase coiled tubing spreads and electric line spreads. These acquisitions and subsequent capital expenditures contributed approximately $180 million in domestic land revenue in 2007.
International revenue was approximately $299 million, or 19% of total revenue, as compared to approximately $169 million, or 15% of total revenue in 2006. The primary reasons for the increase were an approximate $69 million increase in international revenue from our rental tools segment as a result of an increase in the international drilling rig count and our capital expenditures. In addition, international revenue from our well intervention segment increased from approximately $73 million to approximately $135 million in 2007 due primarily to our derrick barge charter and construction contracts and additional revenue from two of our core businesses â€” well control and hydraulic workover / snubbing.
Gulf of Mexico revenue was approximately $769 million or 49% of total revenue, as compared to $655 million, or 60% of total revenue in 2006. Gulf of Mexico revenue from our well intervention, rental tools and oil and gas segments increased approximately $125 million, which offset an approximate decrease of $11 million from the marine segment. Well intervention revenue from the Gulf of Mexico increased approximately $37 million, or 14% to approximately $303 million, primarily related to increases in hydraulic workover, snubbing and well control activity. Rental tools revenue from the Gulf of Mexico increased approximately $15 million, or 11% to approximately $152 million, as a result of increases in deepwater drilling activity, which lead to increases in drill pipe rentals. In addition, rentals of stabilizers, drill collars and connecting iron also increased.
Oil and gas revenue increased approximately $65 million, or 51% due to a 32% increase in barrels of oil and gas equivalent (boe) produced as well as a 7% increase in average realized prices. In 2006, shut-in production resulting from damage caused by the 2005 hurricane season did not fully return until the second quarter of 2006.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 1 to our consolidated financial statements contains a description of the accounting policies used in the preparation of our financial statements. We evaluate our estimates on an ongoing basis, including those related to long-lived assets and goodwill, income taxes, allowance for doubtful accounts, self-insurance and oil and gas properties. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual amounts could differ significantly from these estimates under different assumptions and conditions.
We define a critical accounting policy or estimate as one that is both important to our financial condition and results of operations and requires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain. We believe that the following are the critical accounting policies and estimates used in the preparation of our consolidated financial statements. In addition, there are other items within our consolidated financial statements that require estimates but are not deemed critical as defined in this paragraph.
Long-Lived Assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. We record impairment losses on long-lived assets, including oil and gas properties, used in operations when the estimated cash flows to be generated by those assets are less than the carrying amount of those items. Our cash flow estimates are based upon, among other things, historical results adjusted to reflect our best estimate of future market rates, utilization levels, operating performance, and with respect to our oil and gas properties, future oil and natural gas sales prices, an estimate of the ultimate amount of recoverable oil and natural gas reserves that will be produced from a field, the timing of this future production, future costs to produce the oil and natural gas and other factors. Our estimates of cash flows may differ from actual cash flows due to, among other things, changes in economic conditions or changes in an assetâ€™s operating performance. If the sum of the cash flows is less than the carrying value, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. The net carrying value of assets not fully recoverable is reduced to fair value. Our estimate of fair value represents our best estimate based on industry trends and reference to market transactions and is subject to variability. The oil and gas industry is cyclical and our estimates of the period over which future cash flows will be generated, as well as the predictability of these cash flows, can have significant impact on the carrying value of these assets and, in periods of prolonged down cycles, may result in impairment charges.
Goodwill. In assessing the recoverability of goodwill, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions adversely change in the future, we may be required to record material impairment charges for these assets not previously recorded. We test goodwill for impairment in accordance with Statement of Financial Accounting Standards No. 142 (FAS No. 142), â€śGoodwill and Other Intangible Assets.â€ť FAS No. 142 requires that goodwill as well as other intangible assets with indefinite lives no longer be amortized, but instead tested annually for impairment. Our annual testing of goodwill is based on our fair value and carrying value at December 31. We estimate the fair value of each of our reporting units (which are consistent with our reportable segments) using various cash flow and earnings projections. We then compare these fair value estimates to the carrying value of our reporting units. If the fair value of the reporting units exceeds the carrying amount, no impairment loss is recognized. Our estimates of the fair value of these reporting units represent our best estimates based on industry trends and reference to market transactions. A significant amount of judgment is involved in performing these evaluations since the results are based on estimated future events.
Income Taxes. We provide for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (FAS No. 109), â€śAccounting for Income Taxes.â€ť This standard takes into account the differences between financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Our deferred tax calculation requires us to make certain estimates about our future operations. Changes in state, federal and foreign tax laws, as well as changes in our financial condition or the carrying value of existing assets and liabilities, could affect these estimates. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of some of our customers to make required payments. These estimated allowances are periodically reviewed, on a case by case basis, analyzing the customerâ€™s payment history and information regarding customerâ€™s creditworthiness known to us. In addition, we record a reserve based on the size and age of all receivable balances against which we do not have specific reserves. If the financial condition of our customers was to deteriorate, resulting in their inability to make payments, additional allowances may be required.
Revenue Recognition. Our products and services are generally sold based upon purchase orders or contracts with customers that include fixed or determinable prices. We recognize revenue when services or equipment are provided and collectibility is reasonably assured. We contract for marine, well intervention and environmental projects either on a day rate or turnkey basis, with a majority of our projects conducted on a day rate basis. Our rental tools are rented on a day rate basis, and revenue from the sale of equipment is recognized when the equipment is shipped. We are using the percentage-of-completion method for recognizing our revenues and related costs on our contract to construct a derrick barge for a third party. We are estimating the percentage complete utilizing engineering estimates and construction progress. We recognize oil and gas revenue from our interests in producing wells as the commodities are delivered, and the revenue is recorded net of royalties and hedge payments due or inclusive of hedge payments receivable.
Self-Insurance. We self-insure, through deductibles and retentions, up to certain levels for losses related to workersâ€™ compensation, third party liability insurances, property damage, and group medical. With the growth of the Company, we have elected to retain more risk by increasing our self-insurance. We accrue for these liabilities based on estimates of the ultimate cost of claims incurred as of the balance sheet date. We regularly review our estimates of reported and unreported claims and provide for losses through reserves. We also have actuarial reviews our estimates for losses related to workersâ€™ compensation and group medical on an annual basis. While we believe these estimates are reasonable based on the information available, our financial results could be impacted if litigation trends, claims settlement patterns and future inflation rates are different from our estimates. Although we believe adequate reserves have been provided for expected liabilities arising from our self-insured obligations, and we believe that we maintain adequate insurance coverage, we cannot assure that such coverage will adequately protect us against liability from all potential consequences.
Oil and Gas Properties. Our subsidiary, SPN Resources, LLC, acquires mature oil and gas properties and assumes the related well abandonment and decommissioning liabilities. We follow the successful efforts method of accounting for our investment in oil and natural gas properties. Under the successful efforts method, the costs of successful exploratory wells and leases containing productive reserves are capitalized. Costs incurred to drill and equip developmental wells, including unsuccessful development wells, are capitalized. Other costs such as geological and geophysical costs and the drilling costs of unsuccessful exploratory wells are expensed. SPN Resourcesâ€™ property purchases are recorded at the value exchanged at closing, combined with an estimate of its proportionate share of the decommissioning liability assumed in the purchase. All capitalized costs are accumulated and recorded separately for each field and allocated to leasehold costs and well costs. Leasehold costs are depleted on a units-of-production basis based on the estimated remaining equivalent proved oil and gas reserves of each field. Well costs are depleted on a units-of-production basis based on the estimated remaining equivalent proved developed oil and gas reserves of each field.
We estimate the third party market price to plug and abandon wells, abandon the pipelines, decommission and remove the platforms and clear the sites, and use that estimate to record our proportionate share of the decommissioning liability. In estimating the decommissioning liabilities, we perform detailed estimating procedures, analysis and engineering studies. Whenever practical, we will utilize the services of our subsidiaries to perform well abandonment and decommissioning work. When these services are performed by our subsidiaries, all recorded intercompany revenues and expenses are eliminated in the consolidated financial statements. The recorded decommissioning liability associated with a specific property is fully extinguished when the property is completely abandoned. The liability is first reduced by all cash expenses incurred to abandon and decommission the property. If the liability exceeds (or is less than) our incurred costs, the difference is reported as income (or loss) in the period in which the work is performed. We review the adequacy of our decommissioning liability whenever indicators suggest that the estimated cash flows underlying the liability have changed materially. The timing and amounts of these cash flows are subject to changes in the energy industry environment and may result in additional liabilities recorded, which in turn would increase the carrying values of the related properties.
Oil and gas properties are assessed for impairment in value on a field-by-field basis whenever indicators become evident. We use our current estimate of future revenues and operating expenses to test the capitalized costs for impairment. In the event net undiscounted cash flows are less than the carrying value, an impairment loss is recorded based on the present value of expected future net cash flows over the economic lives of the reserves.
Proved Reserve Estimates. Our reserve information is prepared by independent reserve engineers in accordance with guidelines established by the Securities and Exchange Commission. There are a number of uncertainties inherent in estimating quantities of proved reserves, including many factors beyond our control such as commodity pricing. Reserve engineering is a subjective process of estimating underground accumulations of crude oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. In accordance with the Securities and Exchange Commissionâ€™s guidelines, we use prices and costs determined on the date of the actual estimate and a 10% discount rate to determine the present value of future net cash flow. Actual prices and costs may vary significantly, and the discount rate may or may not be appropriate based on outside economic conditions.
Comparison of the Results of Operations for the Years Ended December 31, 2007 and 2006
For the year ended December 31, 2007, our revenues were $1,572.5 million, resulting in net income of $281.1 million or $3.41 diluted earnings per share. Our net income includes a pre-tax gain of $7.5 million from the sale of a non-core rental tool business. For the year ended December 31, 2006, revenues were $1,093.8 million, and net income was $188.2 million or $2.32 diluted earnings per share. Net income for the year ended December 31, 2006 includes a pre-tax loss on early extinguishment of debt of $12.6 million. Revenue and gross margin were higher in the well intervention and rental tools segments as a result of increased production-related projects and drilling activity worldwide, recent acquisitions and continued expansion of our rental tool business. Both revenue and gross margin decreased in our marine segment due to lower utilization. Both revenue and gross margin in our oil and gas segment were significantly higher due to higher commodity prices and higher production as a portion of 2006 production was impacted by shut-in production due to Hurricanes Katrina and Rita.
Well Intervention Segment
Revenue for our well intervention segment was $761.0 million for the year ended December 31, 2007, as compared to $469.1 million for 2006. This segmentâ€™s gross margin percentage increased to 45% in 2007 from 43% in 2006. We experienced higher revenue for most of our production-related services. Approximately 60% of our increase in revenue is attributable to acquisition and disposition activities occurring late in 2006 and throughout 2007. An additional 20% of the increase in revenue is from a full year of activity related to the charter of a derrick barge as well as a contract to construct a derrick barge to be sold to a third party for approximately $53 million. The balance of the increase in revenue is attributable to increased well control and hydraulic workover services as production-related activity improved.
Rental Tools Segment
Revenue for our rental tools segment for 2007 was $496.3 million, a 34% increase over 2006. The gross margin percentage remained relatively constant at 68% in 2007 as compared to 69% in 2006. In 2007, we sold the assets of a non-core rental business. We experienced significant increases in revenue from our stabilizers, on-site accommodations, drill pipe and accessories, and drill collars. The increases are a result of recent acquisitions, expansion of rental products through capital expenditures, and increased activity worldwide. Our international revenue for the rental tools segment has increased 73% to approximately $163 million in 2007 over 2006. Our largest improvements were in the North Sea, South America and Africa market areas.
Our marine segment revenue for the year ended December 31, 2007 decreased 9% from 2006 to $127.9 million. Likewise, gross margin for 2007 experienced a decrease of 20% from 2006 due to lower utilization. Due to the high fixed costs associated with this segment, gross margin decreases at an accelerated rate when revenue declines. The fleetâ€™s average utilization decreased to approximately 71% in 2007 from 82% in 2006 due to increased idle days resulting from lower demand, inspections, maintenance and poor weather conditions in the Gulf of Mexico which prevent our liftboats from mobilizing in high seas. The fleetâ€™s average dayrate increased approximately 4% to approximately $17,300 in 2007 from $16,600 in 2006.
Oil and Gas Segment
Oil and gas revenues were $192.7 million in the year ended December 31, 2007, as compared to $127.7 million in 2006. In 2007, production was approximately 3,305,000 boe, as compared to approximately 2,505,000 boe in 2006. The gross margin percentage increased to 65% in 2007 from 45% in 2006 due to increased production and commodity prices. In 2006, shut-in production resulting from damage caused by the 2005 hurricane season did not fully return until the second quarter of 2006.
Depreciation, Depletion, Amortization and Accretion
Depreciation, depletion, amortization and accretion increased to $187.8 million in the year ended December 31, 2007 from $111.0 million in 2006. Approximately 40% of our increase in depreciation and amortization expense is attributable to acquisitions occurring late in 2006 and throughout 2007. An additional 36% increase in depletion and accretion is directly attributable to increased oil and gas production and capital expenditures in our oil and gas segment. The balance of the increase results from the depreciation associated with our 2007 and 2006 capital expenditures, primarily in the well intervention and rental tools segment.
General and Administrative Expenses
General and administrative expenses increased to $228.1 million for the year ended December 31, 2007 from $168.4 million in 2006. Approximately 50% of our increase in general and administrative expenses is attributable to acquisitions occurring late in 2006 and throughout 2007. The remainder of this increase was primarily attributable to increased expense related to our continued growth through expanding our geographic area of operations and acquisitions as well as increased incentive compensation expense due to our strong operating results. General and administrative expenses decreased to 14.5% of revenue for 2007 from 15.4% in 2006.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Comparison of the Results of Operations for the Three Months Ended June 30, 2008 and 2007
For the three months ended June 30, 2008, our revenues were $457.7 million, resulting in net income of $73.9 million, or $0.89 diluted earnings per share. Included in the $7.8 million loss from equity-method investments is a $19.9 million, pre-tax, loss associated with mark-to-market changes in the value of outstanding derivative contracts put in place by SPN Resources. The results also included a pre-tax gain of $3.1 million associated with post closing adjustments on the sale of our 75% interest in SPN Resources that occurred on March 14, 2008. For the three months ended June 30, 2007, revenues were $396.8 million and net income was $70.1 million, or $0.85 diluted earnings per share. Revenue was higher in the well intervention and rental tools segments as a result of increased production-related projects and drilling activities worldwide, recent acquisitions, work related to a large-scale decommissioning project, and continued expansion of our rental tool business. Revenue decreased significantly in our marine segment due to lower utilization as a result of market conditions resulting in less work in the Gulf of Mexico. Cost of services increased significantly in our marine segment due to an increase in liftboat maintenance expenses and higher direct costs. No activity was recorded in our oil and gas segment for the three months ended June 30, 2008 as we sold 75% of our interest in SPN Resources on March 14, 2008.
The following table compares our operating results for the three months ended June 30, 2008 and 2007. Cost of services, rentals and sales exclude depreciation, depletion, amortization and accretion for each of our four business segments. Oil and gas eliminations represent products and services provided to the oil and gas segment by our three other segments.
The following provides a discussion of our results on a segment basis.
Well Intervention Segment
Revenue for our well intervention segment was $296.9 million for the three months ended June 30, 2008, as compared to $190.5 million for the same period in 2007. Cost of services decreased to 54% of segment revenue for the three months ended June 30, 2008 from 57% for the same period in 2007. Our increase in revenue and profitability is primarily attributable to project management and marine engineering services associated with a large scale decommissioning project. We also saw an increase in our coiled tubing and electric line services. Our international revenue for the well intervention segment increased 5% to approximately $38.8 million for the quarter ended June 30, 2008 over the same period of 2007 primarily due to acquisitions.
Rental Tools Segment
Revenue for our rental tools segment for the three months ended June 30, 2008 was $134.8 million, a 9% increase over the same period in 2007. Cost of rentals and sales percentage decreased slightly to 31% for the three months ended June 30, 2008 from 32% for the same period of 2007. We experienced significant increases in revenue from rentals of our stabilizers and drill pipe. The increases are a result of expansion of rental products through capital expenditures and increased activity in the Gulf of Mexico. Our Gulf of Mexico revenue for the rental tools segment increased 17% to approximately $49.2 million for the quarter ended June 30, 2008 over the same period of 2007.
Our marine segment revenue for the three months ended June 30, 2008 decreased 26% to $26.0 million over the same period in 2007. Conversely, our cost of service percentage increased by 26% for the three months ended June 30, 2008 from the same period in 2007 due to lower utilization, increased liftboat maintenance costs and direct expenses. We use periods of lower utilization as an opportunity to perform required maintenance to our liftboat fleet. Due to the high fixed costs, other than maintenance, associated with this segment, cost of services does not fluctuate proportionately with revenue. The fleetâ€™s average utilization decreased to approximately 57% for the second quarter of 2008 from 77% in the same period in 2007. The fleetâ€™s average dayrate decreased 6% to approximately $16,300 in the second quarter of 2008 from $17,300 in the second quarter of 2007 in spite of higher operating costs.
Oil and Gas Segment
On March 14, 2008, we sold 75% of our interest in SPN Resources for approximately $165 million, subject to certain post-closing adjustments. During the three months ended June 30, 2008, we received an additional $3.1 million associated with post-closing adjustments and recorded a pre-tax gain on sale of business for the same amount. SPN Resources represented substantially all of our operating oil and gas segment. Subsequent to March 14, 2008, we have accounted for our remaining interest in SPN Resources using the equity-method within the oil and gas segment. Additionally, we retained preferential rights on certain service work and have a turnkey contract to perform well abandonment and decommissioning work associated with oil and gas properties owned and operated by SPN Resources on March 14, 2008.
Depreciation and Amortization
Depreciation and amortization decreased to $42.0 million in the three months ended June 30, 2008 from $45.2 million in the same period in 2007. Depreciation and amortization expense related to our well intervention and rental segments for the three months ended June 30, 2008 increased $11.7 million, or 42%, for the same period in 2007. The increase in depreciation and amortization expense for these segments is primarily attributable to our 2008 and 2007 capital expenditures. Depreciation expense related to the marine segment remained essentially constant. As we sold 75% of our interest in SPN Resources on March 14, 2008 and subsequently accounted for our remaining interest using the equity-method within the oil and gas segment, we did not record any depreciation, depletion and accretion for our oil and gas segment for the three months ended June 30, 2008.
General and Administrative Expenses
General and administrative expenses increased to $66.4 million for the three months ended June 30, 2008 from $53.8 million for the same period in 2007. General and administrative expense related to our well intervention and rental segments for the three months ended June 30, 2008 increased $14.3 million, or 29%, from the same period in 2007. The increase in general and administrative expense is primarily related to increased expenses associated with our geographic expansion, acquisitions, increased bonus and compensation expenses due to our improved performance and additional infrastructure to enhance our growth. General and administrative expenses increased to 15% of revenue for the three months ended June 30, 2008 from 14% for the same period in 2007.
Greg Rosenstein - Vice President of Investor Relations
All right. Good morning and thank you for joining todayâ€™s conference call. Joining me today are Chairman and CEO, Terry Hall; President and Chief Operating Officer, Ken Blanchard; and our Chief Financial Officer, Robert Taylor.
Before I turn it over to Terry, let me remind everyone that during the call management may make forward-looking statements regarding future expectations about the companyâ€™s business, managementâ€™s plans for future operations of similar matters. The companyâ€™s actual results could differ materially due to several important factors including those described in the companyâ€™s fillings with the Securities and Exchange Commission. Also during the calls, management will refer to EBITDA, which is a non-GAAP financial measure and in accordance with Regulation G, the company provides a reconciliation between net income and EBITDA on itâ€™s website.
With that I will now turn the call over to Terry Hall.
Terry Hall - Chairman and Chief Executive Officer
Good morning, everyone. Thanks for your attention. Before I get into this quarter, I would like to reflect a moment on a little bit of history. The Q that we filed in connection with the current quarter is the 50th that we have filed as a public company. That calls me to go back and look and see what things look like 50 Qs ago or for the quarter ended March 31, 1996.
In that period of time, we recorded and reported revenues of $4.6 million, net income of $720,000, earnings per share of $0.04 with a weighted average share outstanding of 17 million. The stock closed at $2.50. So, we had a market gap of about $42 million 50 quarters ago.
Compared to that to today where quarterly revenue was $457 million, EBITDA was $164 million, net income of $73.9 million or $0.89 diluted earnings per share, net income of $84.7 million or $1.02 diluted earnings per share when you exclude the gain from losses we mentioned in our press release.
From an overall operating perspective, I am pleased to report that we have successfully replaced volume and earnings from the oil and gas business with revenue and earnings from our traditional products and services lines, activity improvement in several areas and we expect further growth going forward.
Also, when you exclude SPN Resources and the gains and losses that impacted both the first and second quarters, you will see that our overall margins improved in the second quarter primarily due to the higher volumes of work and utilization.
Looking to some of the factors that led to this performance, first, we had a full quarter of activity from work on the wreck removal project. Progress continues to be on track. We are executing very well. I have no significant changes to report on the status or scope of the project.
[inaudible] increases in Gulf of Mexico activity across all segments. Compared to the first quarter, well intervention revenue in the Gulf of Mexico was 63% higher. In rental tools, it was 9% better and in the marine segment, Gulf of Mexico revenue increased 13%.
Third, international revenue increased 13% compared to the first quarter to a record high of $86 million. International well intervention revenue was up 19% due in part to well control project in the Middle East. International rental tools revenue increased 6% due to higher demand for stabilizers and drill pipe.
Revenue increases in those geographic regions were partially offset by a 9% decrease in domestic land revenue with well intervention down a 11% and rental tools down 5%. However, there was some one-off projects in the first quarter that skewed the numbers a bit. For instance, in well intervention we had a 30% decrease in well control activity and in rentals we had a 9% decrease due to the fact that we completed the sale of accommodations in the first quarter as part of the accommodation [ph] project in the Rockies. The well control this year is [inaudible], we had a large well control project in the first quarter. We didnâ€™t have one in the second quarter.
Though several products and services has shown sequential growth, 1 million and well intervention coiled tubing revenue grew 12%, pumping and stimulation increased 3% and electric line services increased 2% and in rental tools, stabilizer rentals increased 5%.
Looking at the Well Intervention segment, revenue was $296 million, income from ops was $78.2 million, which represents growth of 27% and 54% respectively as compared to the first quarter. We benefited from the higher activities in the Gulf of Mexico for electric line, pumping and stimulation, hydraulic workover/snubbing, and plug and abandonment services, and a full quarter of wreck removal contract.
Internationally we saw more activity for hydraulic workover and snubbing services in Continental Europe and Venezuela in addition to the well control increases I mentioned earlier.
On the domestic land side, several of our core services experienced higher activity and better results, including coil tubing, electric line, and pumping and stimulation. The improvement in those businesses is largely utilization driven in some of the unconventional resource plays.
Costs such as fuel and labor have increased and with the rising costs we have fuel surcharges in place in some markets and we have also passed some third-party charges to customers where it is possible.
We do expect our rates to increase in the second half of the year as activity ramps up, especially in some of the unconventional resource plays. Weâ€™ve already started to experience this in a couple of areas as demand increases and people and equipment become more difficult to find. We did raise rates 10% for services such as mechanical wireline and plug and abandonment in the Gulf of Mexico, but those increases are largely offset by rising fuel and labor cost.
In our Rental Tool segment, revenues was $134.8 million, income from ops was $47.5 million, a 3% increase in revenue and 4% increase in income from ops. Demand for stabilization equipment, which is one of our leading indicators of future activity levels, increased in all three major market areas, Gulf, domestic land and international as the rig count grew, especially for horizontal land directional drilling.
We also experienced an increase in drill pipe rentals and specialty tubular product rentals in the Gulf of Mexico and internationally in Colombia and Venezuela. Activity increases in the Gulf also led to higher demand for our connecting iron, accommodations and mechanical cutting tools.
In the back half, the first quarter gain on sale of the business was $3.3 million, the operating margin increased to 35% from 32.5%. Again, this is primarily a function of volume. We did see some small price increases, maybe as much as 5% in some of the land international markets for high-end specialty items like tubulars and stabilizers. The international customers have generally more of a separate price increases than domestic customers.
I think price increases going forward will also [inaudible] higher steel cost, which is the largest cost to drill pipe and stabilizers. Steel price has flattened in the second half of â€™07 and early â€™08, but they are clearly on a fairly dramatic rise again.
From an activity standpoint, we think the Latin American markets offer the greatest opportunities for near-term growth, especially for drill pipe rentals in Venezuela, Colombia, Brazil and Trinidad. We also expect Eastern Canada and Alaska to be strong markets during the second half of the year. Domestically the new resource plays represented excellent opportunity for stabilization, drill pipe and accommodations.
In the Marine segment, revenue was $26 million, income from ops was $1.4 million. Revenue was up 13% and our income from ops declined significantly due to higher operating costs, some of which are one-time in nature. Our maintenance cost early in the quarter were extremely high and utilization was extremely low.
On the activity side, utilization increased to 57% from 49% in the first quarter. Utilization increased each month during the quarter. In June, our utilization was 69%, but more importantly utilization for June for our large liftboats, 200-foot leg or greater, was 92%. Also in July, our utilization was up to 80% across the entire fleet. So, we are seeing some strong activity levels for liftboats.
From a day rate standpoint, there has been a lot of time and energy ensuring that we can maintain high rates for the larger boats. We have been successful in doing that. Larger liftboats are seeing day rates at the peak â€™07 levels and we feel strong that the day rates for the 200-foot class and larger boats will increase over the remainder of the year. Raising rates on smaller boats remains a challenge given the number of small boats in the fleet.
In the second quarter, our cost of services increased 22% due to a sharp increase in maintenance expense as well as higher labor cost. Labor increased as we had to staff up to prepare to take the levy of our second 175-foot class new build and move onto the 265-foot class liftboats that we expect to be delivered later this year. As new vessels are delivered and go to work, the incremental labor cost will be absorbed.
In late June, we took delivery of the 175 class new build. So, we will have a full quarter of performance from it in Q3. We now have 29 liftboats in the rental fleet. We think the increase in boat maintenance expense is largely behind us as we had some significant hull repairs to make in the second quarter. Based on our July performance the Marine margins are improving.
SPN Resources and Beryl Oil and Gas, this was our first full quarter where we accounted for our remaining interests in SPN Resources as an equity method investment. That line item includes our remaining 25% interest in SPN Resources and our 40% interest in Beryl Oil and Gas. Excluding the non-cash unrealized hedge loss of $19.9 million, we would have had earnings from equity method investments of $12.1 million. The $19.9 million non-cash unrealized losses are share losses associated with the mark-to-market changes in the value of outstanding hedging contracts put in place by SPN Resources.
The loss was due to significant increases in natural gas and oil prices during the second quarter. After we sold our 75% of our interest in SPN, the majority put in hedge is locking in about 45% of production at $97.13 per oil and $9.49 [ph] for natural gas.
The hedge volumes decreased over time and hedging contracts expire in 2012. So, if we continue to see dramatic swings to commodity prices there is a potential to experience these non-cash losses or gains going forward. The contracts are revalued after each month. For example, in July, we worked out a gain of about $10 million as commodity prices decreased through the month. From an operating standpoint, both SPN Resources and Beryl Oil and Gas had excellent results in the quarter.
Net to our interest, daily production at SPN Resources averaged 2,512 Boe while daily production of barrel averaged 33.69 Boe. In addition, subsequent to the quarter end, we received $17 million in capital distributions from SPN Resources.
On the CapEx front, expenditures during the second quarter were $120.1 million. Expansion in CapEx represented about 90% of these expenditures and includes our previously announced investment in 265-foot class new build boats of about $30 million. We expect CapEx in the third quarter to be about $120 million to $130 million.
The G&A side, during the second quarter, G&A was in line with our expectations.
We expect third quarter G&A to be in the range of $66 million to $68 million. We believe DD&A of $43 million to $45 million is a good run rate for the third quarter due to higher liftboat utilization and CapEx.
Looking at the balance sheet, at the end of the quarter, we had approximately $715 million in debt. The breakdown is as follows. $400 million in convertible notes, $300 in senior notes, $15 in Myriad. Debt to EBITDA at the end of the second quarter was 1.07, debt to total cap is 38%.
As you can probably tell from our commentary regarding each segment, we are very positive on the outlook for the remainder of the year. To summarize, we have seen activity increases across all segments. In Well Intervention, we expect to see opportunities for some price increases in certain domestic land markets. In Rental Tools, international pricing should continue to get better with domestic pricing improving for certain high-end products. And in Marine segment, utilization is already significantly higher than June and we expect price increases for our large liftboats while maintaining rates on our smaller boats.
Thatâ€™s all I have. We will open it up for questions now.