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Newpark Resources Inc (NR) Q4 2018 Earnings Conference Call Transcript

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Newpark Resources Inc  (NYSE: NR)

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Q4 2018 Earnings Conference Call
Feb. 08, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Newpark Resources Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ken Dennard, Dennard-Lascar Investor Relations. Thank you. You may begin.

Ken Dennard -- Chief Executive Officer and Managing Partner

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Newpark Resources conference call and webcast to review fourth quarter and full year 2018 results. With me today are Paul Howes, Newpark's President and Chief Executive Officer; Gregg Piontek, Chief Financial Officer; and Matthew Lanigan, President of Mats business. Following my remarks, management will provide a high-level commentary on the financial details of the fourth quarter and outlook before opening the call for Q&A.

Before I turn the call over to management, I have a few housekeeping details to run through. There will be a replay of today's call and it will be available by webcast on the Company's website at newpark.com. There will also be a recorded replay available until February 22, 2019 and that information is included in yesterday's release. Please note that information reported on this call speaks only as of February 8, 2019, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of Newpark's management. However, various risks, uncertainties and contingencies could cause Newpark's actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to read the annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K to understand certain of those risks, uncertainties and contingencies.

The comments today may also include certain non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP measures are included in the quarterly press release, which can be found on the Newpark's website.

And with that behind me, I'd like to turn the call over to Newpark's President and CEO, Mr. Paul Howes. Paul?

Paul L. Howes -- President and Chief Executive Officer

Thank you, Ken, and good morning, everyone. Before I cover the specifics of the fourth quarter, I'd like to begin by reflecting on the achievements in the recently completed year starting first with the review of our safety performance. Here at Newpark, employee safety is of critical importance to our leadership team and the companies that we serve. 2018 provided a unique challenge to us as we expanded our North American workforce and integrated the largest acquisition in our Company's history. Although, we saw a modest increase in our total recordable incident rate, which came in at 0.62 for the year, I would, nevertheless, like to thank all of our employees for their unwavering commitment to working safely.

Turning to the year-end financial results, we're very pleased with the improvements in both segments in 2018, but also recognized that there is more work to be done to improve our returns on invested capital, particularly in Fluids. Revenues for the full year 2018 improved by 27% year-over-year to $947 million while EBITDA improved by 56% to $108 million. Beyond the improvements in our financial performance, we also continue to take meaningful steps in the Fusion at our long-term strategy.

In Fluids, our full-year 2018 revenues were $716 million, reflecting a 16% year-over-year increase while operating income improved by 46%. Meanwhile, we remain focused on our total fluids solution strategy, expanding our product offerings, further penetrating key IOCs around the world and becoming a recognized global leader in fluids chemistry.

A primary objective, as we entered 2018, was to break into the deepwater Gulf of Mexico market with our Kronos system. The risk profile in deepwater requires countless hours of effort to qualify every aspect of our technology, systems and facilities and we successfully broke through in 2018 with Shell Oil drilling multiple wells. As you may recall, our relationship with Shell began a few years ago when we were awarded technically challenging contract in Albania, and in 2018, our relationship expanded into the deepwater Gulf of Mexico.

So how are we doing with Shell? While I'm extremely proud to say that I just returned from a trip to the Netherlands where earlier this week Newpark team members from our North American and European operations accepted Shell Oil's award for global Service Supplier of the Year for 2018, for service companies under 100,000 operating hours. It goes without saying that we are extremely proud of the recognition from a highly regarded international oil company, like Shell Oil. We believe it speaks volume to the unique value that we are providing to our customers worldwide. I would like to thank the many members of the Newpark team that contributed to this great accomplishment.

In addition to our successes with Shell, we're also making progress with other IOCs and NOCs around the world. In Australia, we are very pleased with the success of the Woodside offshore drilling campaign where we've partnered with Baker Hughes on their integrated service offering. Also we've been successful with our two key NOC contracts in the EMEA region. As discussed last quarter, we received a new three-year contract with Sonatrach in Algeria, valued at roughly $125 million. With the new contract now finalized, transition from the previous contract is currently under way.

In addition, I'm extremely proud to announce that we were successful in the latest tender with KOC in Kuwait, receiving awards valued at approximately $165 million covering drilling and completion fluids along with related services for a five-year term. These new contract awards expand our presence with KOC and includes drilling in some of the more technically challenging areas in Northern Kuwait. The awards remain subject to final contract execution, which is expected to be completed in the first quarter.

Building upon our historical success with independent operators around the world, our recent expansion of share with targeted IOCs and NOCs is now serving to provide greater balance in our customer mix, now accounting for nearly one-third of our total Fluids revenue. We've also made meaningful progress this year in the execution of what we call our total fluids solution strategy, expanding our technology and expertise across the full offering of drilling, completion and stimulation chemistries.

And as we highlighted in our November Analyst Day, 2018 was a year focused on developing all aspects of our business plans for US completion fluids and stimulation chemicals, including market studies, product line development, branding, manufacturing and logistics planning, as well as a modest level of facility investment. And with the majority of the business plans completed, we are excited to focus our energy in growing these important product lines, but nothing happens overnight.

I expect our commercialization efforts will take some time to bear a fruit. However, we are optimistic that our customers are looking for new and creative solutions that drive unique value, which we believe is a hallmark of our Fluids business.

Now turning our attention to the Mats business, we are extremely pleased with the segment's financial performance in 2018, posting $230 million in revenue and a 26% operating margin. In addition to the strong financial results, we've also made significant progress on many strategic fronts. During the first half of the year, we completed the integration of the Well Services Group, which is our largest acquisition to-date. I'd like to thank the many members of our cross-functional team as they did an outstanding job integrating this important acquisition.

Also, as highlighted in our recent Analyst Day presentation, throughout 2018, we've continued building out our organization in the Mats division aligning around the industry verticals we've created in oil and gas, utility transmission and distribution and pipeline. We believe that providing the necessary focus to each of these industry verticals will better position us to understand the customer requirement, align our product development process and deliver superior value through product innovation and enhanced service.

We believe that success across these areas will accelerate our penetration of these targeted end-user markets and create additional value for our customers and shareholders. And to that point, I'm very pleased to report that our market diversification efforts are gaining traction with 2018 Mats segment revenues evenly split between E&P and non-E&P markets. Benefiting from the exceptionally strong Mats sales, total non-E&P revenues were approximately $115 million for the year, representing a growth rate in excess of 30% over 2017.

We've also been very active on the innovation front. In 2018, we increased our organizational investments in R&D and expanded our portfolio of intellectual property as we develop next-generation products to meet more of our customers' site access needs in an efficient, safe and environmentally sensitive manner.

Our latest product launch was highlighted at our recent Analyst Day, a modular above-ground storage tank utilizing our DURA-BASE matting system. This innovation system was developed to solve our customers' needs for safe and cost-effective onsite water storage, which we offer in capacity configurations up to 80,000 barrels.

And finally, I'd like to touch on our balance sheet. As we've consistently stated throughout the years, we believe that protecting our balance sheet remains paramount. To that point, I'm pleased to report that we've maintained a modest debt burden through 2018, ending the year with a leverage ratio of less than 1.5 times EBITDA.

Now turning to the specifics of the fourth quarter. We're extremely pleased with the performance of our Mats segment in the quarter, while in Fluids, we are seeing meaningful progress in the execution of long-term strategy, which we believe is setting the course for improvements going forward. Consolidated revenues were $248 million for the fourth quarter, representing a 5% improvement from Q3 and our strongest revenue quarter since 2014.

In Fluids, fourth quarter revenues with segment came in at $178 million, a 2% sequential decrease, driven primarily by the slowdown in Canada and the delay of the Shell projects in the deepwater Gulf of Mexico, as the projects moved into the first quarter. Internationally, revenues were relatively flat to prior quarter as anticipated declines in Kuwait, Albania and Brazil were offset by broad-based improvements across other markets. Despite the modestly softer revenues, our Fluids operating income remained in line with prior quarter. As highlighted in yesterday's press release, similar to the third quarter, the fourth quarter also include the impact of $2.5 million of charges, primarily attributable to severance and other charges related to cost optimization efforts.

Turning to the Mats business, fourth quarter revenues achieved a record of $70 million, which included $24 million of revenues from direct sales. Consistent with our experience in recent years, the fourth quarter direct sales benefited from strong year end demand from the utility sector. In addition, we saw the heavy rain rainfalls, as discussed on our October call, continued through the quarter, which benefited rental and service demand. With the exceptionally strong top-line performance, the segment's operating margins improved to 30%.

And with that, I'd like to turn the call over to Greg to discuss the financial details of the quarter. Gregg?

Gregg S. Piontek -- Senior Vice President and Chief Financial Officer

Thanks, Paul, and good morning, everyone. I'll begin by discussing the details of our operating segments before finishing with our consolidated results.

The Fluids Systems segment generated total revenues of $178 million for the fourth quarter of 2018, reflecting a 2% sequential decrease from the third quarter and a 9% improvement year-over-year. In the US, revenues were $107 million, flat sequentially and relatively in line with the 2% increase in US rig count. As Paul touched on, although we continue to make meaningful progress penetrating the deepwater Gulf of Mexico market, we experienced a sequential pullback in Q4, as the start of the Shell projects were delayed into the first quarter of 2019.

On a year-over-year basis, US revenues have increased 19% from Q4 of 2017, roughly in line with the 17% improvement in average rig count. In Canada, revenues were $15 million for the fourth quarter, reflecting an 11% sequential decline relatively in line with a 14% reduction in average rig count. Despite the challenging market conditions, Canada's year-over-year comparison reflects the benefit of our expanding market share as revenues improved 11% year-over-year meaningfully outperforming the industry rig count, which declined 12% over this period.

Turning to our international regions, revenues in the Eastern Hemisphere were $50 million in the fourth quarter, relatively flat to prior quarter levels. The sequential comparison primarily reflects the anticipated impact from the wind down of the current contract in Kuwait and project timing in Albania. These expected declines were largely offset by broad-based improvement across other markets in the region, most notably Algeria and Australia.

On a year-over-year basis, revenues from the Eastern Hemisphere improved by 4% with the benefit of the Baker Hughes Integrated Services project in Australia and growth in Germany, somewhat offset by declines in Kuwait, Romania and Algeria. In Latin America, fourth quarter revenues came in at $6 million, primarily consisting of the Petrobras contract in Brazil, which concluded in December. On a year-over-year basis, revenues from the region declined by $5 million, primarily attributable to lower Petrobras activity.

Operating income for the consolidated Fluids segment was $8.2 million for the fourth quarter, relatively unchanged sequentially from the third quarter. As highlighted in yesterday's press release, the fourth quarter includes $2.5 million of charges, primarily reflecting employee severance and related costs. As we discussed in last quarter's call, the third quarter also included $2.5 million of charges, primarily related to Brazil restructuring and the fire at our Kenedy, Texas facility.

As a reminder, we continue to carry additional costs in the Fluids business related to investments in our total fluids solutions strategy, which provide a modest headwind to our current operating margins. We believe these investments, however, are necessary to expand our total addressable market and improve our long-term Fluids segment profitability.

Turning to the Mats business, as Paul touched on, total segment revenues were $70 million for the quarter, representing a record quarter for the segment and a 29% sequential improvement. The sequential improvement was primarily driven by strong direct mat sales, which more than doubled sequentially to $24 million in the fourth quarter. The exceptionally strong result was driven in part by year-end demand from utility customers, as well as timing of large sales into other industries.

Meanwhile, rental and service revenues also strengthened sequentially reflecting increasing demand from the utility T&D market, which benefited from heavy rainfalls throughout the Southern US. Overall, rental and service revenues came in at $46 million for the fourth quarter, reflecting an 8% sequential improvement.

Comparing to the fourth quarter of last year, Mats segment revenues increased by 67%, primarily reflecting the impact of the stronger mat sales, as well as our continuing expansion in the pressure pumping and utility T&D markets. The Mat's segment operating margin improved to 30% for the fourth quarter compared to 24% for the third quarter and 28% for the fourth quarter of last year. The improved margin is largely attributable to the strength in mat sales, as well as robust demand in rental and services, which included the strong, weather-related activity.

Now turning to our consolidated results. Fourth quarter 2018 revenues were $248 million, representing a 5% increase from prior quarter and a 21% improvement year-over-year. SG&A costs were $30 million in the fourth quarter, relatively in line with both last quarter and the fourth quarter of last year. Fourth quarter SG&A includes approximately $1.5 million of severance charges while the third quarter included $1.8 million of costs associated with the September retirement of our General Counsel.

Total corporate office expenses were $8.5 million in the fourth quarter compared to $11.2 million in the third quarter and $9.3 million in the fourth quarter of last year. The prior quarter included the $1.8 million GC retirement charge. Interest expense was $4.2 million for the fourth quarter compared to $3.7 million for the third quarter and $3 million in the fourth quarter of last year. The sequential increase in interest is attributable to the $500,000 payment of additional interest on our convertible bond as described in our recent Form 8-K filings. Consistent with prior quarters, the fourth quarter interest expense includes approximately $1.4 million of non-cash expense, primarily associated with our convertible bond. The provision for income tax for the fourth quarter was $4.9 million reflecting an effective tax rate 32%. Net income from continuing operations for the fourth quarter was $0.11 per diluted share, compared to $0.04 in the previous quarter and $0.09 in the fourth quarter of last year.

Turning to cash flow, cash generated from operating activities was $43 million in the fourth quarter, which included $26 million of cash from operations, along with $17 million net decrease in working capital. Capital expenditures used $12 million in the quarter, the majority of which was used to fund investments in the Mats business. In addition, the fourth quarter CapEx included $2 million of infrastructure investments, including the Port Fourchon completion fluids facility and the blending facility in Saudi Arabia. Cash used in financing activities totaled $28 million, largely reflecting the $27 million net reduction in bank facility borrowings. We ended the year with a total debt balance of $162 million and a cash balance of $56 million, resulting in a total debt to capital ratio of 22% and a net debt to capital ratio of 16%. Substantially, all of our cash on hand remains within our foreign subsidiaries.

As announced last quarter, our Board of Directors expanded our share repurchase authorization to $100 million, which provides us added flexibility to use excess cash and optimize our capital structure. While there were no purchases under this plan during the fourth quarter, we completed $5 million of share repurchases subsequent to year-end under a 10b5-1 trading plan purchasing 656,000 shares.

Now turning to our near-term outlook. In the Fluids business, although we see a general strengthening as we progress through 2019, we expect revenues will be modestly softer in the near term, primarily driven by transitory declines in the international units. From an operating income perspective, we expect that margins will remain in similar territory as Q4, as the impact of the lower revenues should be largely offset by the benefit from the $2.5 million of Q4 charges, which we do not expect to recur.

Looking more closely at the revenues by region, we expect North America to remain fairly stable in Q1. The Canadian market continues to be impacted by takeaway issues, which is severely limiting the seasonal strength typically seen in Q1. Meanwhile, in the US, we expect to start of the two Shell deepwater projects, will largely offset the impact of the modestly lower land revenues, which we expect to track with overall rig counts.

Internationally, while we continue see a general broad-based strengthening across markets, the near-term outlook is unfavorably impacted by temporary project delays driven in part by the recent volatility in oil prices, as well as our contract transitions. Specifically, we expect declines in Algeria this quarter as the new contract is now under way, while we also expect to see continued delays in certain activities in Kuwait as we begin the transition to the new awards.

Although it will take some time for the new Kuwait awards to hit full run rate, based on the plans currently in place, we expect the revenue run rate will ultimately surpass the levels achieved on the previous contract. Also, with the recent completion of the Petrobras contract, we expect revenues from Brazil to decline although we are maintaining key infrastructure and personnel in the Brazil market to support IOC deepwater opportunities going forward.

Turning to the Mats segment; following the extremely strong Q4 result, we expect Q1 revenues will return to the levels seen in previous quarters. The fourth quarter benefited from strong year end spending from a number of utility customers, as well as weather-related demand that drove both the timing of large orders from other direct sales customers, as well as strong demand in rental and services. With the resulting in record level of Mat sales in the fourth quarter, we expect direct sales to pull back significantly in Q1. We expect rental and services will show year-on-year growth, although we are continuing to monitor the extreme cold temperatures in the Northeast and the ongoing volatility and completions activity. All of this considered, we expect total segment revenues likely in the low-50s (ph) range. With revenues at this level, we'd expect segment operating margin to be in the low-20s (ph) range.

Corporate office expenses should remain relatively stable in the near term. With regard capital expenditures, we currently expect 2019 CapEx to be modestly lower than 2018. As we plan for 2019 investments, we believe the most significant variables will be the requirements to support Mats rental business, which we continue to flex based on utilization levels and near-term outlook, as well as the timing of capital investment to support our expansion in Northern Kuwait, where we expect to invest approximately $8 million to construct a second base of operations. Regarding tax rate, we expect our effective rate to be in the low to mid-30s (ph).

And with that, I'd like to turn the call back over to Paul for his concluding remarks.

Paul L. Howes -- President and Chief Executive Officer

Thanks, Gregg. As we look ahead to 2019, we are optimistic for our business. While some near-term headwinds remain, we continue to be focused on becoming the global technology leader in Fluids Systems, building on strong position in Mats and generating free cash flow for our shareholders.

In our Mats business, we continue to see the benefits of our diversification strategy. While we've experienced significant revenue growth for non-E&P markets in recent years, it's important to know that we're still in the early stages of penetrating those markets. We believe this provides us with a significant opportunity for growth in industries that have historically been less volatile than the oil and gas industry

In Fluids, I continued to be encouraged by the expanding opportunities, particularly with our deepening relationships with IOCs and NOCs. And to that point, I can't think of a better example of the traction we are developing than the recent recognition award as a Supplier of the Year with Shell Oil.

This award speaks volumes about our technology and service quality. We are honored to be considered for such an award, much less win it. Remember, when we are competing for work with IOCs, we are competing against some of the largest service companies in the world. As a large service companies try to commoditize the fluids space, our customers have a different plan. We are aligned with our customers and our shared belief that Fluids can and will be an integral part of driving efficiency and lowering total project cost whether they are drilling in scale or deepwater.

In speaking for a moment about technology, we firmly believe that as our success from the eight offshore wells we drilled in 2018 with the Kronos system builds, so will our reputation and relationship with other key operators. And to that point, it is worth noting that in addition to the two Shell projects scheduled this quarter, we've also been awarded deepwater well with Fieldwood Energy, which is anticipated to begin early in the second quarter.

And before I turn the call over to the operator for questions, I want to provide you with a quick update on total fluids solution strategy, specifically our progress in building out our completion fluids infrastructure for the Gulf of Mexico and commercializing our stimulation chemical business. As discussed earlier, with our deepwater completion fluids plant at the Port Fourchon operational, we now have the ability to supply our Gulf of Mexico customers with a full line of drilling and completion fluid system.

As far stimulation chemical business, last week, we successfully trialed our stimulation chemicals for a major operator in the US land business. This field trial was important for two reasons. First, it provided us with the opportunity to go head to head with an existing stimulation chemical provider to prove the efficacy of our products. And second, it validated our commercial strategy of leveraging our established brand identity in our drilling fluids business to gain access to customer personnel who were responsible for stimulation chemicals in their fracking operations. While we expect our entry into the stimulation chemical market will take some time to make a meaningful contribution, the successful trial on the frac spread with the leading independent operator is an important first step.

With that, I'd like to close the call as I always do by thanking our shareholders for investing in us and thanking our employees for their hard work and dedication Newpark, as well as their continued focus on safety. We'll now take your questions. Operator?

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Praveen Narra with Raymond James. Please proceed with your question.

Praveen Narra -- Raymond James -- Analyst

Great. Good morning, guys. Congrats on the strong -- very strong quarter.

Paul L. Howes -- President and Chief Executive Officer

Thank you.

Praveen Narra -- Raymond James -- Analyst

I guess, if we could start maybe on the Mat side, just in thinking about the sales and obviously there's a year end impact to it, but, I guess, we could try to further break it down in terms of did you see additional customers ordering it, whether it were existing customers ordering more in and maybe if could talk -- obviously there is the south -- southern impact with the weather, but what was the geographic dispersion like ?

Matthew S. Lanigan -- Corporate Vice President and President of Mats and Integrated Services

Hi, Praveen. It's Matthew. I will take that one. Couple of questions in there. I think, generally, there were more customers purchasing promising Q4. If you look at that over half of those sales were into utilities customers than sort of spread between that general construction few pipeline customers and some oil and gas customers in there as well. So, really pleased with the diversification in that sales footprint. Geographically, I think it's fair to say they were all over the country, as utility customers primarily focused in the Northeast from the sales perspective or in the North, and then sales throughout the country from there. So really pleased with the way that's developing.

Praveen Narra -- Raymond James -- Analyst

That's great to hear. And I guess just in terms of small follow-on the weather-related impact in 4Q, how much do you estimate that to be?

Paul L. Howes -- President and Chief Executive Officer

I think it will be sort of high single-digit on that, Praveen, when you look at it primarily just to the extension of jobs that we had planned that otherwise would have been picked up. So, not insignificant, but not very meaningful.

Gregg S. Piontek -- Senior Vice President and Chief Financial Officer

And as -- this is Gregg. As I touched on in my comments earlier that weather benefit also impacted not only the rental and service side, but also the timing of some of the orders and that's what led to Q4 being such a strong quarter on the Mats sales side.

Praveen Narra -- Raymond James -- Analyst

Right, And then I guess final question just in terms of capital allocation. You guys are obviously pretty well capitalized and you looked like you're going to generate some pretty good free cash flow in 2019. A lot of competitors especially private seemed to like they are less well capitalized and the the volatility seems like it's adding a little uncertainty. How do you think about M&A in this environment, given kind of your better capitalized nature? Is it attracting further opportunities?

Gregg S. Piontek -- Senior Vice President and Chief Financial Officer

Yes. This is Gregg. In terms of the M&A opportunities, as we've always discussed, they're part of the picture, we evaluate what opportunities are out there. Obviously, our history speaks for itself in terms of where we choose to invest; most of our investment goes to organic investments and we have a number of initiatives here that's really the primary focus of our capital spend, with most of that being really on the Mats side and the diversification efforts there.

Praveen Narra -- Raymond James -- Analyst

Perfect. Thank you very much, guys.

Operator

Thank you. Our next question comes from the line of Jacob Lundberg with Credit Suisse. Please proceed with your question.

Jacob Lundberg -- Credit Suisse -- Analyst

Hi, good morning, guys. Congrats on the quarter.

Paul L. Howes -- President and Chief Executive Officer

Thank you.

Jacob Lundberg -- Credit Suisse -- Analyst

You just to start it off. Paul, you mentioned some efforts around trying to drive increased returns, specifically in the Fluids business. I was just wondering if we could get a little more color on some of the specific actions that you guys are taking in the Fluids business to try and drive increased returns. And then what sort of metrics are you looking at, is there a particular threshold that you'd like to achieve that you can share with us?

Paul L. Howes -- President and Chief Executive Officer

Yes. Certainly, covering our cost of capital is the most important thing, and roughly, we get the Fluids business around 11% margins; we're covering our cost of capital. In terms of some of the levers that we're looking at, certainly, where we have our largest amount of invested capital as you probably knows is in the Gulf of Mexico, in the Port Fourchon and that's why we're very excited about the work that we've got with Shell Oil, the recognition from Shell Oil, the new contract with Fieldwood. As we begin to fill up those facilities that will be a natural pull to get us back up closer to those 10% operating margins. Gregg any other comments?

Gregg S. Piontek -- Senior Vice President and Chief Financial Officer

Yes. I mean, if you look at, there're several elements to it. The growth initiatives that Paul had touched on, whether it be the deepwater Gulf of Mexico, the stimulation chemicals, et cetera; there's also buckets -- the cost optimization continues to be a focus of ours. We've taken some additional actions here in the quarter and that will remain a focus, as we continue to refine the business to match the activity levels overall. Pricing is another lever that we continue to focus on. I think it's broadly understood that the pricing levels in the industry as a whole are still at -- in a top territory and so and disciplined on the pricing side is absolutely critical. And then the last lever is really the working capital side. We have done a lot here as we progressed through 2018. Q4 was a strong quarter in that sense, but there is more work to be done, specifically in Fluids when we look at the inventory levels. They've grown pretty substantially in 2018. So we see that as an area of focus in 2019.

Jacob Lundberg -- Credit Suisse -- Analyst

Go it. And then relatedly, could you just remind us about the amount of costs that you're carrying in Fluids business that you mentioned in your prepared remarks? When do you expect to see those see to -- see those fade?

Gregg S. Piontek -- Senior Vice President and Chief Financial Officer

Yes. The costs that we're carrying associated with the growth areas, it continues to provide a headwind of around 1 point of margin in the Fluids business, and really, it's a matter of those investments and costs that we're carrying ahead of the revenue stream. And so, it's -- once we start generating the sustainable revenues in those areas that you really see that alleviate.

Paul L. Howes -- President and Chief Executive Officer

Yes. And that's why we are encouraged by our first field trial and our stimulation business that was successful, again being able to leverage our brand equity, brand identity with our drilling fluids customers to be able to get on a frac fleet, get our technology tested, have an opportunity to prove its efficacy and so we believe obviously that we're going to be seeing sales this year in the stimulation chemicals space.

Jacob Lundberg -- Credit Suisse -- Analyst

Got it. Appreciate the color. Thanks guys.

Operator

Thank you. Our next question comes from the line of Ken Sill with SunTrust Robinson Humphrey. Please proceed with your question.

Kenneth Irvin Sill -- SunTrust Robinson Humphrey -- Analyst

Yes, good morning. It's nice to see a green start on the screen today. I got a question on the stimulation and completion fluids. Could you describe the kind of volume opportunity and margin opportunity relative to traditional chemicals? Trying to figure out, is this something that -- it's really more about pushing more volume through the facilities, which improves returns or is it going to drive better margins too?

Paul L. Howes -- President and Chief Executive Officer

It's a combination of both. I'll let Gregg take it first and then I'll also comment.

Gregg S. Piontek -- Senior Vice President and Chief Financial Officer

Yes. I mean, in terms of the margin profile, I think it's fair to say that it's -- in terms of the incremental margins of those areas, it's similar to what we see in the drilling fluids. We've always talked about the drilling fluids providing somewhere in the 20s (ph) range of incremental margins stimulation chemicals, completion fluids; once you get rolling and get some critical mass with it, you would expect to see a similar lift from those areas. Obviously early on it's a little bit different because you don't have that consistency in the revenue stream and that makes it a little more cost inefficient.

Paul L. Howes -- President and Chief Executive Officer

So if you look at some of the fixed assets that we have in place, our Conroe facility that we've build a few years ago is running at I wouldn't say low utilization, but there's a lot of available capacity. And as the stimulation market and sales grow, our goal is to be able to fill up that facility. So that again will help on return on invested capital.

Kenneth Irvin Sill -- SunTrust Robinson Humphrey -- Analyst

Okay. And that's what I was trying to get at. And then in terms of the total revenue dollar potential, I know stimulation chemicals are a small volume that goes into the stimulation fluid and I'm not actually is up to speed on what goes under production chemicals, but drilling fluid is a big volume business.

Paul L. Howes -- President and Chief Executive Officer

Yes. I mean the way to frame it up here is in terms of the overall stimulation chemical market. A single frac fleet, it can range depending on the specifics, but a single frac fleet can consume 5 million to 10 million of stim chemicals per year. So that gives you a sense of the size of the market overall. And on the completion fluid side, I think the way to frame that up is when you look at the anchoring off of the drilling fluids, experience that we have, when you look at the spend of drilling fluids versus completion fluids, it's kind of an 80%-20%, 80% drilling fluids, 20% completion fluids in that mix.

Kenneth Irvin Sill -- SunTrust Robinson Humphrey -- Analyst

Okay. And then I'm just kind of curious a lot of people sell chemicals and stuff. Is the strategy -- is there much in the way of proprietary chemistry or is it really, look you can have a single point supplier of your stimulation and -- I mean, your drilling stimulation and production chemicals, right? Or completion, I am sorry, not production or is it (multiple speakers)

Paul L. Howes -- President and Chief Executive Officer

Yes. On the stimulation side, there is some proprietary technology, but again there is also some that's more commodity based, an example would be like bio sides would be more commodity-based, maybe some of the friction reducers, flow back enhancers have a little more proprietary technology in them. And another piece of this obviously is the service element. And again, that's something I think we do exceptionally well in the Company.

Kenneth Irvin Sill -- SunTrust Robinson Humphrey -- Analyst

Okay. All right, that's all. Thanks.

Paul L. Howes -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of John Hunter with Cowen & Company. Please proceed with your question.

John Hunter -- Cowen & Company -- Analyst

Good morning and thanks for taking my question.

Paul L. Howes -- President and Chief Executive Officer

Good morning.

John Hunter -- Cowen & Company -- Analyst

So, first one I had is just on the Kuwait oil contract. Is this -- I know that you had signed one back in 2014. So my first question is, is this a follow on to that same contract and are you offering anything incremental should we be thinking about this as apples-to-apples? And then from a revenue perspective same question is the $165 million similar to what the 2014 contract was?

Paul L. Howes -- President and Chief Executive Officer

Yes. In terms of a follow on part of that is yes, part of it's not. In the Southern part where we have our existing facility that is a follow on of the existing work that we've been doing. What we're also excited about is that we've won a new contract in the Northern part of Kuwait, which is the high temperature, high pressure regions, which obviously requires a different level of technology. Our hope is a different level margins as well, higher service intensity. And so that is new work that we're doing. And as Gregg had referenced in his comments was that that's roughly about an $8 million plant that we'll end up building.

Gregg S. Piontek -- Senior Vice President and Chief Financial Officer

Yes. And in terms of the reference to the volume or revenue potential as compared to the previous work, I think I would frame it up as although the contract award value is a little bit less than what we had been running more recently on the previous contract. What we found in working with them is their drilling plans change over time and just like in the last contract, we ended up running at a much higher rate than what was originally anticipated. And so, there's some of that goes into our thinking, as we -- the comment that I made earlier, it's our expectation that once we hit our full run rate with the addition of the second base of operations in Northern Kuwait, we think the run rate will be mostly higher than the previous contract.

John Hunter -- Cowen & Company -- Analyst

Got it. Okay, thank you. And then my second question is just on use of cash, you should be generating a good amount of free cash flow in the next couple of years. So, how do you weigh paying down debt versus buying back your stock?

Gregg S. Piontek -- Senior Vice President and Chief Financial Officer

Our approach on that does not change. We've always been thoughtful and prudent with our capital deployment, maintain a modest debt load. We're pleased with where we're at now, with our leverage ratio back on the 1.5 times EBITDA. With putting the share buyback program back in place, it just provides us the flexibility to use excess cash. And just as we've done in past years, pre-downturn using that as a maintenance program where each quarter we evaluate what's our leverage level, what's our near-term outlook in terms of cash flows. And then based on that, you'll use the access to repurchase shares on our maintenance program.

John Hunter -- Cowen & Company -- Analyst

Very good. All right. Thank you very much.

Gregg S. Piontek -- Senior Vice President and Chief Financial Officer

Welcome.

Operator

Thank you. (Operator Instructions) Our next question comes from line of Bill Dezellem with Tieton Capital Management. Please proceed with your question.

Bill Dezellem -- Tieton Capital Management -- Analyst

Thank you. I had one question for each of the two businesses. First of all, relative to the Fluids business, you had a 4.6% operating margin in the fourth quarter and yet the full year was 5.6%. Can you help us understand -- I feel like the slow pony here why that business was lower margin in the fourth quarter? And then relative to the Mats business, the seasonal strong purchases from the utility business. We understand what about the other sales, were those also year-end seasonal buys or is there something different going on there?

Paul L. Howes -- President and Chief Executive Officer

You want to take the Mats one first?

Matthew S. Lanigan -- Corporate Vice President and President of Mats and Integrated Services

Yes, Bill, it's Matthew. I'll take that one on the Mats. Look, I think it was a combination of a lot of project activity we mentioned part of it being driven by the weather, I think there was some significant project activity also going on that pulled forward people's purchase requirements not so much year-end driven as we see typically around that utility space, but project related as well.

Gregg S. Piontek -- Senior Vice President and Chief Financial Officer

And with regard to the fluids margins out of the 4.6% that we had in the fourth quarter. Now that includes the $2.5 million of charges. Obviously if you normalize for that in the 6%-ish (ph) range. Now, as far as that comparing to the overall year. Now, if you look at our flow through the year Q1, Q2, we had some very strong mix that we had talked about in those few quarters. And then, as we got into the end of the year, we have had a little bit of a transition, we started to see the transition of the Kuwait contract coming to an end. As well as the issue of continuing to add costs as we progress through the year associated with these targeted growth areas. So that's what's weighing on the margins a little bit on the back-end of the year.

Bill Dezellem -- Tieton Capital Management -- Analyst

Thank you, both.

Gregg S. Piontek -- Senior Vice President and Chief Financial Officer

All right.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any final comments.

Paul L. Howes -- President and Chief Executive Officer

All right. Thank you once again for joining us on our call and for your interest in Newpark Resources. And we'll look forward to talking to you again next quarter.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 46 minutes

Call participants:

Ken Dennard -- Chief Executive Officer and Managing Partner

Paul L. Howes -- President and Chief Executive Officer

Gregg S. Piontek -- Senior Vice President and Chief Financial Officer

Praveen Narra -- Raymond James -- Analyst

Matthew S. Lanigan -- Corporate Vice President and President of Mats and Integrated Services

Jacob Lundberg -- Credit Suisse -- Analyst

Kenneth Irvin Sill -- SunTrust Robinson Humphrey -- Analyst

John Hunter -- Cowen & Company -- Analyst

Bill Dezellem -- Tieton Capital Management -- Analyst

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