OREANDA-NEWS. December 20, 2007. Integra Group (LSE: INTE), a leading Russian oilfield service provider, released its preliminary unaudited financial and operating highlights for the nine month period ended 30 September 2007. The financial data is based on interim management assessment only and has not been reviewed by external auditors.
 
9M 2007 Financial Highlights: 
 
•  Sales increased by 147.2% to US$ 803.0 million (vs. US$ 324.9 million during 9M 2006) 

• Adjusted  EBITDA  rose by 137.8% to US$ 129.6 million (vs. US$ 54.5 million during 9М 2006) 
   Adjusted EBITDA margin was 16.1% (vs. 16.8% during 9M 2006)

 Adjusted EBITDA margin by segment  was :

•  Drilling, Workover, IPM and Technology Services segment : 21.0% (vs. 21.1% during 9M 2006)
•  Formation Evaluation segment: 27.9% (vs. 21.0% during 9M 2006)
•  Equipment Manufacturing segment: 16.4% (vs. 27.2% during 9M 2006)
•  Capital expenditures for the first nine months of 2007 were US$ 115.1 million (vs. US 91.5 million in 9M 2006) 
• Gearing  was 21.6% at the end of 9M 2007 (vs. 61.6% at the end of 9M 2006)
 
9M 2007 Operating Highlights: 
 
•  347,000 meters drilled (vs. 342,883 meters during 9M 2006) 
•  Average revenue of US $525 per meter drilled (vs. US $422 per meter drilled during 9M 2006)
•  163 wells completed (vs. 123 wells during 9M 2006) 
•  727 workover operations conducted (vs. 718 workover operations during 9M 2006)
•  Revenue of US $171 per workover crew hour (vs. US $131 per workover crew hour in 9M 2006)
•  15.1 thousand km of two-dimensional (2D) seismic surveys carried out (vs. 15.2 thousand km of 2D seismic surveys during 9M 2006)
•  5.3 thousand sq. km of three-dimensional (3D) seismic surveys carried out (vs. 5.1 thousand sq. km of 3D seismic surveys during 9M 2006) 
•  13.8 thousand logging operations conducted (vs. 16.8 thousand during 9M 2006)
•  Number of heavy drilling rigs in production increased to 21 rigs (vs. 9 in production at the end of 9M 2006)
                                              
Felix Lubashevsky, Integra's Chief Executive Officer, commented,
"Our nine month and third quarter 2007 results demonstrate substantial growth in our business. We are pleased to see that nearly half of our incremental EBITDA in the nine months is now coming from organic expansion which was achieved by capturing lucrative market opportunities, investing proactively and delivering new product lines, specifically in our Technology Services operations. "We saw a substantial pick-up in activity in the third quarter of 2007, in line with seasonal trends of this industry, and we will continue to take advantage of this seasonal trend in the fourth quarter, historically the strongest in the year. The pick-up in activity was coupled with a healthy increase in the Group's EBITDA margin in the third quarter (17.2%) relative to the first half of 2007 (15.4%). Our focus going forward will be to demonstrate a material improvement in profitability relative to 2006. "We already see positive developments in the outlook for 2008, as our order book is being filled at a faster pace than at this time in 2006. We are also pleased to see the share of long-term contracts in our order book steadily increase. "Demonstrated organic growth and opportunities, which we see emerging from new acquisitions and the execution of our restructuring programs, give us confidence in a much stronger performance going forward."

Market update
 
Integra continues to benefit from favorable market conditions. In particular we have been supported by a strong upward trend in the capital expenditure budgets of our key customers - oil and gas companies - which is coupled with a shortage of quality oilfield services on offer. As a result, we have experienced substantial growth in pricing and volumes across all of our business divisions. There were no material changes to pricing trends in the third quarter relative to the first six months of the year but all of our segments continue to enjoy double digit increases in prices relative to the same period in 2006. These increases are primarily driven by strong demand for drilling and seismic capacity as well as higher value-added services such as IPM and technology services (i.e. directional drilling, packer and drill bit services, coring and well completions). We also see a continuous trend towards longer-term contracts whichbecame more visible during the third quarter of 2007, as our major customers commenced their 2008 tendering campaigns.
 
Discussion of Group's Financial Performance
 
Consolidated sales during 9M 2007 increased by 147.2% to US$ 803.0 million compared to US$ 324.9 million during 9M 2006. Of the total increase in our sales of US$ 478.1 million, the share of organic growth was US$ 317.2 million, or 66%, while the non-organic contribution to growth in sales was US$ 160.9 million, or 34%. Management estimates that nearly 65% of the expected 2007 order book had been delivered to the customer as products and services during 9M 2007, in 2006 some 59% of the full year revenue was earned in the 9M 2006. This indicates that the largest part of our revenue is generated in the last quarter of the year and that execution of the order book in 2007 is in line with seasonal patterns.
 
Adjusted EBITDA increased US$ 75.1 million, of which organic growth represented US$ 38.3 million, or 51% and the non-organic component was US$ 36.8 million, or 49%. For the 9M 2007, the year-on-year organic increase in adjusted EBITDA was 41.9%. This organic growth was primarily attributable to favorable pricing conditions, higher capacity utilization and resulting increases in volumes of services offered. Adjusted EBITDA margin declined immaterially to 16.1% in 9M 2007 from 16.8% in 9M 2006. Reduced margins in the manufacturing segment due to increased levels of outsourcing, increased overhead in the corporate center related to the public status of the company and transitional costs in our drilling operations due to restructuring process, have prevented the Group’s consolidated EBITDA margin from exceeding last year’s level.
 
On a consecutive basis, there was an expected pick-up in margin in 3Q 2007 to 17.2% compared to 15.4% in 1H 2007. Management expects this positive trend in profitability to continue into 4Q 2007, historically the strongest quarter of the year. Our positive outlook for 2008 is driven by Management’s better visibility and predictability of the business, reduced build-up of corporate overhead and margin
expansion, specifically in our drilling operations as a result of the conclusion of our restructuring program. 

•  In the Drilling, Workover, IPM and Technology Services segment, the 9M 2007 and 3Q 2007 results show substantial growth in revenue, while the adjusted EBITDA margin was generally flat year-on-year. Growth in segment profitability was challenged by ongoing restructuring and integration, specifically in our drilling operations. Our restructuring efforts, rationalization of our rig fleet, and personnel reassignments, exposed our drilling operations to one-time expenses as well as an increase in down time during the transition period. These factors squeezed the margins of our drilling operations in the 3Q 2007. The weakness in drilling margins was offset by a very encouraging result from our IPM, Technology Services and Drilling Tools operations, which continue to demonstrate substantial growth in revenue and robust profitability expansion. Management maintains a positive outlook on the segment’s margins going forward and believes these transitional issues mask the strong upside that should emerge once we are past the peak of the restructuring process. The results also underpin Management’s strategy of diversification within the segment in favour of higher value-added services.
 
•  Our Formation Evaluation segment showed significant growth in the 9M 2007, both an absolute increase in cash earnings and in terms of margin expansion. This was driven by stronger pricing trends, gains in operational efficiency and a continued commitment to invest in upgrading our seismic equipment. Our Kazakhstan operations experienced encouraging results by posting a healthy pickup
in profitability which was one of the key contributors to the efficiency improvement for the whole segment. With further investment in technology and continued restructuring of our Russian operations, Management sees further upside potential in the segment. 
 
•  In the Manufacturing segment, the significant increase in sales reflects our landmark contracts with Gazprom and Rosneft.  In 9M 2007 we saw an expected decline in margins versus last year specifically driven by our continuous need to out-source more production related to the Gazprom contract due to constraints on our in-house production capacity. Management expects that the push to expand the in-house capacity and focus on creating state-of-the-art engineering capability, along with improved procurement capabilities for critical components such as top drives, will provide upside opportunities in this segment. On a consecutive basis, segment margins in 3Q  2007 improved to 19.3% compared to 12.9% in 1H 2007, as full-scale production was launched on the Gazprom contract. Management expects to maintain this level of profitability going forward.

Operational update
 
During the first nine months of 2007, all of our segments demonstrated good organic performance, which was reflected in our operational results. Our Drilling, Workover, IPM and Technology Services segment drilled 347,000 meters  (vs. 342,883 meters during 9M 2006). A total of 163 wells (vs. 123 wells during 9M 2006) were constructed, and 727 workover operations conducted (vs. 718 workover operations during 9M 2006). The overall increase in volumes was mainly attributable to a higher capacity utilization of our drilling and workover assets. A relatively low absolute increase in meters drilled is explained by a continuous shift in drilling volumes from lower-priced vertical drilling towards horizontal and deviated drilling, which translated into 24% increase in the average price per drilled meter. Our Formation Evaluation segment carried out 15.1 thousand km of two-dimensional (2D) seismic surveys (vs. 15.2 thousand km  of surveys during 9M 2006) and 5.3 thousand sq. km of three-dimensional (3D) seismic surveys (vs. 5.1 thousand sq. km of surveys during 9M 2006). Volumes of 2D seismic were roughly in line with the previous years whilst primary focus was to enhance our 3D seismic activities. Our well geophysics units carried out 13.8 thousand logging operations (16.8 thousand operations during 9M 2006), the decline in volumes was primarily at our associates. During the first nine months of 2007, our Equipment Manufacturing segment significantly increased the number of heavy drilling rigs in production to 21 rigs (vs. 9 rigs in production at the end of 9M 2006). 
 
M&A Update
 
In August 2007 we acquired Geotechsystem, a leading provider of geological and geophysical data processing and interpretation services. Combining unique technological solutions in seismic data processing and interpretation of Geotechsytem with the scale of our existing operations, provides a powerful platform for margin expansion in this line of services. We believe this acquisition will contribute
over US$ 2 million of additional adjusted EBITDA in FY2008.  In October 2007, we completed the acquisition of Obnefteremont (ONR), a company specializing in well workovers. The total consideration for the transaction was US$ 80 million.  Management anticipates the ONR acquisition will lead to additional adjusted EBITDA of  approximately US$ 9.0 million in FY2008 due to increasing the number of working hours per rig, higher average prices charged per crew hour, and improving overall workover productivity.

Outlook for 4Q2007 and 2008
 
The outlook for the remainder of 2007 remains positive, as fourth quarter is historically the strongest quarter in the year contributing 30-40% of the annual result. Management expects the positive profitability trend demonstrated in 3Q 2007 to be maintained in 4Q 2007 and onwards. 
 
As of December 18, 2007, Integra Group had signed contracts for over US$ 1,058 million in revenue for services and equipment to be delivered to customers in 2007. 
 
The contracting period for 2008 has been launched, and we have materially better visibility and predictability of the business relative to the same period a year ago.
 
As of December 18, 2007, Integra Group had signed contracts for about US$ 416 million in revenue for services and equipment to be delivered to customers in 2008.