Oil States International Inc

NYSE:OIS

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Oil States International Second Quarter 2023 Earnings Call. I would like to now turn the call over to Ellen Pennington. Please go ahead.

[Ellen Pennington, Counsel and Assistant Corporate Secretary]

Thank you, Mandeep. Good morning, and welcome to Oil States' second quarter 2023 earnings conference call. Our call today will be led by our president and CEO, Cindy Taylor; Lloyd Hajdik, Oil States' Executive Vice President and Chief Financial Officer; and Scott Moses, Oil States' Executive Vice President and Chief Operating Officer.

Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law. No one should assume that these forward-looking statements remain valid later in the quarter or beyond. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K along with other SEC filings. This call is being webcast and can be accessed at Oil States' website. A replay of the conference call will be available 2 hours after the completion of this call and will continue to be available for 12 months.

I will now turn the call over to Cindy.

[Cindy Taylor, President, CEO and Executive Director]

Thank you, Ellen. Good morning, and thank you for joining our conference call today, where we will discuss our second quarter 2023 results and provide our thoughts on market trends in addition to discussing our outlook comments. Our reported second quarter results reflect the diverging trends of activity declines in U.S. shale basins, with offsetting growth coming from offshore and international regions.

Our reported revenues and adjusted EBITDA in the second quarter increased from the same period last year but declined sequentially by 6% and 11%, respectively, due to the timing of activities in certain U.S. shale basins and the slow conversion of projects from our backlog into revenue due to delays in receiving materials. Despite sequentially weaker second quarter revenues and EBITDA, we confirm our full year guidance of $92 million to $100 million of EBITDA based upon expected contributions from the ongoing recovery in offshore and international drilling and development.

Our outlook is supported by the backlog growth that we have experienced at our offshore manufactured products segment, which has increased to its highest level since the end of 2015. We generated very strong cash flow from operations of $45 million in the second quarter, invested $11 million in capital equipment, repurchased $3 million of our common stock and repaid all amounts outstanding under our revolving credit facility with cash on hand of $42 million at June 30 and no significant debt maturities until 2026. Our financial position remains very strong. We remain encouraged by the continued expansion in offshore activity, coupled with future benefits to be gained from our new product introductions. This investment cycle is expected to extend well beyond the next couple of years.

Lloyd will now review our results of operations and financial position in more detail.

[Lloyd Hajdik, Executive VP, CFO and Treasurer]

Thanks, Cindy. Good morning, everyone. During the second quarter, we generated revenues of $184 million, adjusted consolidated EBITDA of $19 million and net income of $1 million or $0.01 per share. We reported our fourth consecutive quarter of positive net income.

Our Offshore/Manufactured Products segment generated revenues of $94 million, segment EBITDA of $16 million and operating income of $11 million in the second quarter. Revenues in the second quarter decreased 4% sequentially. While our backlog in the segment has steadily increased, the cadence of conversion of backlog into revenue was influenced by, among other things, the timing of material receipts and contractual delivery terms. However, despite these delays, segment EBITDA margin in the second quarter was 17% compared to 16.2% in the first quarter.

Backlog totaled $338 million at June 30, an increase of 40% from June 30, 2022. The current quarter end backlog is at its highest level since the fourth quarter of 2015. Second quarter bookings totaled $106 million, yielding a quarterly book-to-bill ratio of 1.1 times and a year-to-date book-to-bill ratio of 1.2 times. Our second quarter bookings were broad-based across many product lines and regions.

In our Well Site Services segment, we generated revenues of $65 million, segment EBITDA of $11 million and operating income of $5 million in the second quarter. Segment EBITDA margin was 18% in the second quarter compared to 20% in the first quarter. Segment revenue and EBITDA declines were primarily driven by slippage of larger customer projects in the Northeast and the Gulf of Mexico.

In the Northeast, we completed a large multi-well pad project in the first quarter with activity on the next large pad not beginning until late in the second quarter. Activity in the Gulf of Mexico this quarter was tempered by several third-party intervention vessels temporarily out of service due to dry docking with one returning to service in the second quarter and one is scheduled to return to service in the third quarter. On a positive note, results for the segment's international operations improved sequentially driven by higher customer activity levels.

In our Downhole Technologies segment, we reported revenues of $25 million, an operating loss of $3 million and segment EBITDA of $2 million in the second quarter. Lower revenues and margins in the quarter were driven by reduced customer demand for perforating product sales reflective of the reduction in frac spreads during the quarter. Further segment EBITDA included a $1 million noncash provision for excess and obsolete inventory. During the quarter, we generated cash flows from operations of $45 million and invested $11 million in CapEx to support future growth. We repurchased 439,000 shares of our common stock for $3 million and repaid the remaining $5 million in borrowings outstanding under our revolving credit facility.

At June 30, our net debt totaled $93 million, yielding a net debt to total capitalization ratio of 12%. On a leverage ratio basis, net debt to adjusted consolidated EBITDA was at 1.2 times at June 30. In 2023, we expect to invest approximately $28 million in capital expenditures depending on market conditions prevailing at the time the capital investments are made.

Now Cindy will offer some market outlook and concluding comments.

[Cindy Taylor, President, CEO and Executive Director]

Thank you. The tight commodity market 2022 took a turn in early 2023. We softening demand and the resultant elevated inventories caused oil prices to drop during the first quarter of 2023. This was followed by a strong reaction by the OPEC plus countries with announced production cuts. Global oil and gas inventories are normalizing and are now within their 5-year seasonal average for crude oil but remain above the 5-year averages for natural gas, leading to lower prices year-over-year, thereby tempering expectations for growth in drilling and completion spending on U.S. land activities. However, we have begun to see an inflection upward in international and offshore markets, which will further support our product and service offerings in regions outside of the United States.

Revenues in our Offshore/Manufactured Products segment are expected to continue to grow in the second half of 2023, given strong order flow and increased levels of backlog and along with ongoing short-cycle product demand. Given the material delays experienced in the second quarter, we will see some top line improvement in the third quarter, but substantial revenue and EBITDA improvement for this segment has pushed to the fourth quarter of this year.

We expect our Well Site Services and Downhole Technologies segments to continue to perform in line with market activity indicators, which have softened a bit for U.S. land activities, but do appear to be bottoming. We remain focused on optimizing our operations and pursuing profitable activity in support of our global customer base as market opportunities unfold, both in the United States and in international markets. We will continue to focus on core areas of expertise with the deployment of our recently enhanced equipment to further differentiate our product and service offerings.

Now I would like to offer some concluding comments. Initially, the industry responded to higher commodity prices with accelerated shorter-cycle investments in the United States which the industry clearly benefited from in 2022. We are now experiencing an increase in investments in long lead time projects in international markets and deepwater basins around the world based upon the longer-range outlook for commodity prices. Strong macro fundamentals are pointing to a multiyear up cycle which will drive growth in revenues, earnings and free cash flow generation.

Our core competencies are well entrenched in the markets we serve and we continue to bid on potential opportunities supporting our traditional subsea, floating and fixed production systems, drilling and military customers while also bidding to support multiple new customers and projects involved in development such as subsea minerals gathering fixed and floating offshore wind developments and other renewable and clean tech energy systems globally. These opportunities create strong potential for us to expand our product offerings and revenue base.

Oil States will continue to conduct safe operations and will remain focused on providing technology leadership in our various product and service offerings with value-added products and services available to meet customer demands globally. Market-leading technologies will extend the runway for sustainable competitive advantage.

That completes our prepared comments, Mandeep, would you open up the call for questions and answers at this time, please?

[Operator]

[Operator Instructions] We have a question from the line of Stephen Gengaro from Stifel. Please go ahead.

[Stephen Gengaro, Stifel]

So I think -- maybe to start, Cindy, when we think about your full year guidance and I sort of bridge myself from the first half to get to the full year guidance. I might have missed a little bit of this in the prepared comments, but I imagine based on the macro and your commentary that it's mostly driven by offshore and manufactured products as far as the second half bridge to get into those numbers. Is that -- am I thinking about that right?

[Cindy Taylor, President, CEO and Executive Director]

You're absolutely correct. It's easier to see that runway with the backlog development that we have, and we've scheduled all of those backlogs into turns by quarter. And so that one, we feel pretty confident about. Obviously, we've had softer rig count down about 13% on land with completion comp down about 8% or so. And so we're really not projecting a recovery off of that of the second half of the year at this point in time. Although based on customer conversations, we do sense that there's really not a leg down from here, in our view. And to some degree, our softer Q2 for Well Site I could say it's somewhat timing in the sense that we had a large customer in the Northeast. We went from a 12-well large multi-well pad and then you have transition times between a new pad. So it depends on how you look at it. And now the next pad did shift from a 12 well to a 6 well you always say is that just timing only? Or is it indicative of a little bit of a slowdown of customer activity.

And then in the Gulf, we had some third-party intervention vessels that were down for dry docking and those things happen. So it's kind of a combination of things there. But nonetheless, I have to look at the activity indicators which have softened on land, and the way we forecast from here is essentially kind of flat, meaning there could be a little market softening, but the two things I mentioned do recover i.e., the intervene vessels go back to work, and we'll go back to work on other pads in the Northeast. And so -- and then we've got some new product introductions. But on balance, we're just generally saying kind of flat from here, which affect both our Downhole Technologies segment as well as our Well Site segment.

[Stephen Gengaro, Stifel]

And Cindy, just to follow up on that, is the -- in the second quarter, some of those headwinds that were mix or timing related. Did they weigh on margin? I guess, like should we think about the second half EBITDA margins in Well Site even in a flat revenue environment recovering a little bit?

[Cindy Taylor, President, CEO and Executive Director]

Yes. That's a very fair assessment because anytime you do a high-end, large multi-well pad, the margins are definitely better because the intensity of the equipment on site is obviously higher. And cost absorption is better. And then anything we do in the Gulf of Mexico tends to come forward at accretive margins. And so you're absolutely right, our EBITDA margins for Well Site decline from the first quarter just because of both mix and a little bit hit on the top line.

[Stephen Gengaro, Stifel]

And you mentioned kind of plateauing of activity potentially. It sounds like from some others and even one U.S. land competitor said something yesterday about the fourth quarter actually potentially being seasonally stronger because they have some visibility on improvement already. Are you seeing anything in the conversations that suggest -- I mean, I know we think we're bottoming, but anything concrete you can talk about, which supports that. I know oil is back up to $80, so that helps. But anything to give comfort that we're seeing a bottom?

[Cindy Taylor, President, CEO and Executive Director]

Well, ours are based on customer conversations, and I think anything in this world for us comes back to what regions are you in? We're broad-based, what customers are you working with and what are their individual plans. And as you know, a lot of the softening in the first half of this year came from private releasing rigs more so than public, our customers held up fairly well, I would say, in completion services, and these other things were more transitory. I will say that in the case of GEO, some of our wireline customers do work probably more weighted to private and I would say they were hit disproportionately hard in the quarter because of that softening. And I'll tell you though, we're not a pressure pumper. And therefore, we don't really have committed work too far out. I mean, we'll have indications from our major customers, and that's where my feel, my gut instincts tell me we're hit them in terms of activity. But to say I can give you concrete evidence, that would be a stretch.

[Stephen Gengaro, Stifel]

And then -- and if you don't mind one more, you had a very strong second half '22 of orders, especially in the fourth quarter, I think, a very good start to this year, the first half. When we think about the pricing/margins embedded in those last 4 quarters of orders, is there anything we can read into margin progression in the offshore products business, Offshore/Manufactured Products business in the back half of the year?

[Cindy Taylor, President, CEO and Executive Director]

Yes. The key for us, you've seen continual margin improvement as we built that backlog, both from a mix perspective and cost absorption. I believe we were -- if I'm doing this off the top of my head, I think our EBITDA margins in Q1 were 16.2%, and they accreted up to 17% on a little bit lower revenues in Q2. So as we progress, holding those margins are improving them is reasonable. Only with the caveat, it does depend on the mix and backlog and I would caution you a little bit on Q3 because a lot of our backlog build was around our standard connectors. And I'll just remind you, we have some third-party pass-through revenue there. And so that mix is not necessarily accretive overall, the margins, obviously, good at the end of the day. So there's always a little bit of a hedge there for us, but the trends of top line growth and the mix is good, and our backlog should lend itself to strong margins.

[Operator]

[Operator Instructions] I would now like to turn the call over to Cindy Taylor for closing remarks.

[Cindy Taylor, President, CEO and Executive Director]

All right. Thank you, Mandeep. I realized we picked a very busy day to hold this call this morning. And so I appreciate those of you that have dialled in, we do look forward to further conversations as we progress through the quarter. I hope you have a great earnings season throughout the rest of the next couple of weeks, and we'll talk to all of you soon. Thank you.

[Operator]

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.