Like most of its peers, the stock of BJ Services Co. (NYSE: BJS) recently has suffered somewhat from falling natural gas prices. But to assume the financial performance of this Houston-based service company hinges solely on the whims of the North American gas market is a mistake that investors should not make, Wall Street analysts say. Serious international growth potential, and a management team that deftly maneuvers through down cycles, should result in strong earnings results for many quarters to come. "On a worldwide basis, they're really hitting on five cylinders right now because the international markets haven't picked up," says Robert Ford of Sanders Morris Harris , who rates BJ a Strong Buy with a $55 price target. "Once the international gets going and they're hitting on all eight cylinders, it's going to be amazing some of the financial results this company can turn in." BJ's stock was trading around $30.35 at press time, down from its 52-week high of $43.10, adjusted for a two-for-one stock split June 1. Its success has been nurtured through an opportunistic acquisition strategy implemented by chairman, president and chief executive officer Bill Stewart and his management team: buying companies at bargain prices during industry downturns. "They did far better than some of their competitors during the downturn. They did a good job of consolidating through the downturn to put them in a better position this cycle than they were last cycle," says Gary Russell of Frost Securities, who rates BJ a Buy with a $60 target. "And you definitely give credit to the management team for that. It's pretty much because of their good positioning through the downturn that I'm so bullish about them through the duration of this cycle, and why I believe there is still an awful lot of growth potential going forward even beyond the activity in North America." Oil and Gas Investor recently sat down with Stewart to talk about the past and future of BJ Services. Investor What is your management strategy? Stewart It's embodied in our mission statement. It includes values like serving customers' needs, and attracting and retaining the best employees and doing what accomplishes the objectives. It addresses values like being committed to operating our business as a good neighbor; charity and care for the environment are important to us. It addresses integrity and honesty, which we think are foremost in managing any business. And the idea of continually improving-I think if there's one of these values that has driven BJ's performance, it's that. We have really become an excellent company through continual improvement, and that was not the case 15 years ago. Investor When you arrived 15 years ago, what did you face? Stewart The company was much smaller than it is today and it didn't really have performance standards. It didn't communicate effectively with its personnel. Expectations were rather modest. So we took a company that had inferior performance and did what was necessary to make it a great company. And that's not easy. You have to work with all your people, set expectations, do a lot of training. You have to lead by example. Investor Give us some specific examples of how far BJ has come. Stewart Safety is a good example. Fifteen years ago, our safety record was the worst in the industry. Today it's probably the best. Fifteen years ago, when we did major frac jobs for our customers, it was difficult to complete those jobs effectively and efficiently. Today there's no question we'll do the best work in the oil field. Investor When referring to financial performance, Wall Street analysts often point to BJ Services as a top performer. What factors do you credit for this? Stewart Our focus is on generating superior earnings growth. When we began as a public company in 1990, we were a relatively small company, generating about $350 million in revenue. The industry wasn't in a recession, but there wasn't a robust and active market at that time. We understood that to be a great company and generate the kind of returns our stockholders expect, we needed to be bigger. At that time, getting bigger could be accomplished by organic growth, but the most significant growth we could achieve was through acquisition. By determining the right time to pursue significant acquisitions, we were able to build the company to what it is today. We acquired The Western Co. in 1995 and Nowsco Well Services in 1996. In 1999, we acquired the remnants of Fracmaster after it was put into bankruptcy. We approached each of those acquisitions with an open mind, and somewhat different than what others might have done. As we combined, we tried to determine best practices between the companies and adopt those strengths. We refer to that as "The Best of the Best." Investor What practices did you adopt from your acquisition targets? Stewart Western Co. was a major company in the U.S., whereas BJ was not quite as big, so we adopted much of Western's sales and operating strengths in the U.S. as we combined the two companies. BJ's international infrastructure and engineering expertise were more comprehensive and we've continued with BJ's system and practices. Nowsco was the premier coiled- tubing company and the No. 1 pumping service company in Canada, and BJ was not in that market. Our challenge with Nowsco was to assure it was managed in a way that it continued to be No. 1. We have accomplished that. The Fracmaster acquisition bought us a foothold position in Russia when Russia was not a desirable place to be. We've brought that up into a nice business for us today, making good money and getting paid promptly. Investor You've had a number of acquisitions. Stewart We've had 14. If you look at our history, we've done them differently than most everyone in the industry. All of our acquisitions have been focused on one service line-pressure-pumping services. This focus, I believe, is one of the strong attributes of BJ Services. There was a time when that strategy may have been questioned, and that was when there was a lot of talk in the industry about integrated services. Some thought you had to have everything from "cradle to grave" to be a successful company, and that's what drove a number of acquisitions by other companies. The assumption was that the customer would rely on the service company to do a lot of things that are core to the customer's success. We didn't believe that was a successful strategy for BJ. There are only a few places where integrated services are done today, and through alliances with other service companies BJ can participate in these markets. Investor Do you intend to maintain your focus on pumping services? Stewart Yes, and we will continue to evaluate synergistic opportunities and technologies. Today there are fewer pumping-service companies, but there are a couple of acquisition opportunities. The returns we are getting in our business today are very good. They provide great opportunities to reinvest in our own business-to improve the efficiency of existing capacity, and add a little more capacity, sufficient to cover the jobs we are not able to make today and to respond to market growth opportunities. There are some real exciting markets in West Africa and Central Asia that have significant market-share growth opportunities for BJ. We have proven we can do well in these markets. Investor How important to BJ's growth is the boom in natural gas activity? Stewart Gas is a major part of our business in North America, and we think it's going to be more significant in the international markets than it is today. In North America, many of the gas reservoirs are significantly depleted. The easy-to-get gas is behind us. The remaining gas opportunities are more difficult and costly to access and require more complex completions to produce. That is good for our business since more of our proprietary products and services are required to make a good well. Investor How are you able to control costs while increasing activity? Stewart As the market began to recover in the latter part of 1999 we were very focused on getting our equipment utilization up. The primary objective was to hire personnel who could operate equipment. We were very stingy in adding overhead costs. We go through a process of updating our year-forward plan every quarter. Everyone has needs that require additional cost; we just have to decide which we can address now and which should be deferred. Investor What steps is BJ taking to hire the people it needs to propel its growth? Stewart When the market recovered, our senior equipment operators advanced to management jobs. We have been hiring beginning equipment operators; however, getting equipment operators on board has not been real easy. In the U.S. market, we have hired 50 to 60 people per month for the last year and a half. We rely on our regional staff to establish local hiring efforts with help from corporate. Investor Where are the best opportunities for growth in your company? Stewart There should be some growth in the U.S., but the potential for significant growth is in international markets. We expect Latin America to be strong. The Far East and Middle East have experienced some growth already. And Central Asia-such as Kazakhstan and Azerbaijan. All these countries offer new opportunities. West Africa is another market that is just beginning to experience good, solid growth. Investor How much will new technology play in the future of BJ? Stewart Research and development is important, no doubt about it. We have done a lot in the area of technology as we have grown the company. When we started in 1990 as a public company, we were spending about $8 million a year on research and engineering. This year we'll spend $35- to $37 million. Although we do research and development in all our service lines, we've been significantly focused on improving and advancing in the stimulation area, fracturing and acidizing. Our goal has been to be the innovation leader. Investor What value does BJ place on information technology? Stewart A lot of value. Our IT department has been the fastest-growing department during the past five-year period. We have about 80 employees involved in IT today. IT will make information more readily available to our people. We can then use that information for designing and executing more effective jobs for our customers, compared with our competition. That's our objective. Investor What do you think of e-procurement? Stewart I think there's a place for it. Initial uses most probably will focus on the purchase of common parts and components for our manufacturing. Presently, we've determined that we're pretty efficient and change could be disruptive, however we'll continue to evaluate the benefits as the technology evolves. As for our customers' use of e-procurement, I don't think it will be a significant part of our business in the foreseeable future. So much of what we do is custom job-design depending on special customer needs. We're like a consultant in many cases, and being a consultant requires a lot of one-on-one dialogue with your customer. So I don't think we can really accomplish what is needed today with the current concepts of e-procurement, although that may change. Investor How has the relationship between service companies and oil companies evolved? Stewart There's a lot of respect, I think, that the oil companies have gained for the service companies. That respect has translated into reliance. We give great service, and I think that's recognized by the oil companies. Years ago, the oil companies did their own research because they didn't trust the service companies. There's very little research that duplicates what we do today. Investor What are the biggest challenges you see in the near future, both for BJ and for the oil-service industry? Stewart The biggest challenge we have today is getting the people on board and being able to cover all the work that's available to us because we can't do everything that comes our way. We're trying to hire people, so that's one big challenge. I think the next big challenge, as this market recovery continues, is getting more efficient equipment designed and out into the field. Making our operating fleet more efficient and effective with higher horsepower pumps and automated controls, to add efficiency to our business, is the other major challenge we have here. Investor What do you expect BJ to look like in the next five to 10 years? Stewart It depends on the marketplace. Our focus up to now has been to be the best. And I think we've done a great job in achieving our objectives and improving the company from an operations perspective, improving the quality of our services in the field, the quality of our products. I suppose five to 10 years from now, we'd like to be the biggest in the business, but still the best.