Oil States International Inc

NYSE:OIS

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oil States Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Thank you.

I would now like to turn the call over to Ellen Pennington, Oil States Assistant Corporate Secretary. Please go ahead.

[Ellen Pennington, executive]

Good morning, and welcome to Oil States' Second Quarter 2024 Earnings Conference Call. Our call today will be led by our President and CEO, Cindy Taylor, and Lloyd Hajdik, Oil States' Executive Vice President and Chief Financial Officer.

Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain anything -- 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 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 2023 Form 10-K, along with other recent 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'll now turn the call over to Cindy.

[Cindy Taylor, executive]

Thank you, Ellen. Good morning, and thank you for joining our conference call today, where we will discuss our second quarter 2024 results and provide our thoughts on market trends in addition to discussing our company-specific outlook comments.

Our second quarter consolidated revenues and adjusted EBITDA increased 11% and 38% sequentially, driven by increased drilling, subsea and production system demand in key offshore basins, along with the advancement of several significant projects in our offshore/manufactured products segment.

On a consolidated basis, our offshore and international revenues were up 18% sequentially, while U.S. land-driven revenues increased 1%. Our results in the current quarter also benefited from continued customer adoption of our newer technologies and strategic optimization of our Well Site Services segment with the exit of certain underperforming U.S. locations.

Given these initiatives, our Well Site Services adjusted segment EBITDA increased 30% sequentially in an otherwise declining U.S. land market. During the quarter, our Offshore/Manufactured Products segment revenues increased 17% sequentially totaling $102 million, while adjusted segment EBITDA rose 27%. Bookings totaled $101 million compared to $66 million received in the first quarter of 2024, yielding backlog of $300 million as of June 30 and a quarterly book-to-bill ratio of 1x.

Our bookings improvement was partially driven by our newer technology offerings, including orders for our managed pressure drilling systems. Our Well Site Services segment revenues decreased 2% on a sequential quarter basis, given the impact of lower U.S. activity, along with the segment's consolidation and exit over the past 6 months of 4 underperforming locations.

Adjusted segment EBITDA increased 30% from the first quarter of 2024 due to stronger offshore activity in the Gulf of Mexico, along with modest market share gains in the Permian Basin. Our cost reduction initiatives helped yield very strong incremental margins.

In our Downhole Technologies segment, revenues and adjusted segment EBITDA increased 16% and 42%, respectively, from the first quarter of 2024, driven primarily by increased completion product and international purporting sales. We will continue to focus on improving operations and allocating capital to efficiently and safely provide our customers with advanced technologies and services, while enhancing returns, reducing debt and returning cash to our stockholders.

During the quarter, we generated cash flows from operations totaling $10 million, repurchased some of our convertible debt at a discount to par and also made share repurchases. Our gross debt to EBITDA at June 30 was 1.5x and net was 1.2x, giving us significant flexibility.

Lloyd will now review our operational results along with our financial position in more detail.

[Lloyd Hajdik, executive]

Thanks, Cindy. Good morning, everyone. During the second quarter, Oil States generated revenues of $186 million, adjusted consolidated EBITDA of $21 million and net income of $1.3 million or $0.02 per share. Our reported second quarter results included pretax facility consolidation exit charges of $3.5 million, patent defense charges of $1 million and gains of $0.5 million on debt extinguishment.

Excluding these net charges and credits, our adjusted net income was $4.4 million or $0.07 per share. Our Offshore/Manufactured Products segment generated revenues of $102 million and adjusted segment EBITDA of $20 million in the second quarter.

During the second quarter, charges of $1.5 million were recorded at the segment due to the consolidation of Oil States' Southeast Asian operations. Excluding the facility consolidation charges, adjusted segment EBITDA margin was 20% in the second quarter compared to 18% in the first quarter.

Regarding our facility planning, we have strategically relocated our Southeast Asian manufacturing and service operations from Singapore to Batam, Indonesia, which is expected to produce future manufacturing costs for a number of our global product offerings.

During the second quarter, we sold our facility in Singapore and received net cash proceeds of $10 million. While construction of our long-term Batam facility continues, with completion targeted for the first half of 2025, provisional operations were established in Batam during the quarter allowing us to efficiently execute both our contracted backlog and subsequent orders during the construction phase.

We own 1 remaining U.S. facility that was classified as a held for sale asset at June 30. Net proceeds from the sale of this facility, which is expected to close in late 2024, are expected to total approximately $25 million. In our Well Site Services segment, we generated revenues of $46 million and adjusted segment EBITDA of $9 million in the second quarter.

During the quarter, the segment recognized $2 million in costs associated with the consolidation and exit of underperforming locations. Additionally, the segment recorded charges of $1 million associated with the enforcement of patents related to its proprietary technologies.

Excluding these charges, adjusted segment EBITDA margin was 18% in the second quarter compared to 14% in the first quarter. In our Downhole Technologies segment, we reported revenues of $38 million and adjusted segment EBITDA of $3 million for the second quarter. Adjusted segment EBITDA margin was 8% in the second quarter compared to 7% in the first quarter.

And during the second quarter, Oil States generated $10 million in cash flows from operations and received $10 million in proceeds from the facility sale. Cash was used to fund capital expenditures of $6 million, purchased $11.5 million principal amount of our 4.75% convertible senior notes at a discount and buy back $2.4 million of our common stock.

Now Cindy will offer some market outlook and concluding comments.

[Cindy Taylor, executive]

Despite some concerns about oil demand in China and the possibility of OPEC+ ceasing voluntary production cuts in 2025, crude oil pricing has remained relatively stable over the first half of the year, generally in the $75 to $85 per barrel price range which has provided our E&P customers a predictable environment for planning and sanctioning major offshore and international projects.

Stable oil prices and a strong long-term outlook for natural gas and LNG demand supports significant levels of capital investment in offshore field development led by the U.S., Latin America, Asia and Africa. Major subsea OEMs continue to experience significant backlog growth as a result of orders for subsea production systems. We expect this trend to positively influence our business and future bookings.

Growth trends continue to look favorable, given the level of offshore capital investment, our bidding and quoting activity, new product introductions, along with strong levels of bookings and backlog. Second quarter U.S. land activity levels have declined despite favorable WTI crude oil prices. Even with lower activity levels and weak natural gas prices, production and inventory levels have remained high, leading to a more challenging land market.

Given current industry dynamics, we expect U.S. land drilling and completion spending over the balance of 2024 to remain at or near current levels. We expect our Well Site Services and Downhole Technologies segments to perform in line with market activity indicators, which are weighted to U.S. land activity. The consolidation and exit of underperforming locations and the implementation of additional cost control measures should provide tangible margin benefits in subsequent quarters as assets are redeployed to more favorable operating locations.

We are benefiting from the continued adoption and deployment of our new technologies, including our proprietary active seat valves within our Well Site Services segment. Within our Downhole Technologies segment, we expect to see further market penetration with the recent introduction of our new Epic portfolio of perforating systems.

Considering market dynamics, we are able to confirm our adjusted EBITDA guidance of $85 million to $90 million for 2024. In terms of free cash flow generation, we expect to generate approximately $40 million in free cash flow during 2024, which excludes the planned fourth quarter U.S. facility sale and remains in line with prior guidance, implying a free cash flow yield of 10% or greater.

We will continue to maintain disciplined capital allocation priorities by judiciously investing in growth CapEx and organic research and development opportunities to drive additional technology differentiation. We will continue to evaluate debt reduction opportunities, share repurchases and targeted acquisitions.

Now I would like to offer some concluding comments. 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 U.S. and in international and offshore markets, we will continue to focus on core areas of expertise with the deployment of our recently enhanced equipment and technologies to further differentiate our product and service offerings.

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 developments such as deep sea minerals gathering, fixed and floating offshore wind, carbon capture and storage, geothermal applications and other renewable and clean tech energy opportunities. These new energy transition opportunities create strong potential for us to expand our product and service offerings and our revenue base over the longer term.

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.

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

[Operator]

[Operator Instructions] The first question comes from the line of Jim Rollyson with Raymond James.

[James Rollyson, analyst]

Cindy was obviously great to see a nice sequential rebound in the offshore manufactured products business, which kind of falls in line typically, I guess, with your seasonal factors. But curious with kind of the orders and backlog and as you see that over the back half of the year, how are you thinking about kind of revenue and margin trajectory based on kind of the timing of what's in backlog today, kind of a similar trend to last year or something different?

[Cindy Taylor, executive]

Clearly, if you kind of look at the guidance, to some degree, the revenue and trajectory, I'll call it, over the next couple of quarters looks -- I'm going to call it strong, but fairly level given that our bookings to date are at 0.9x. And so a lot of the momentum we're seeing, I would say, carries into 2025. We -- again, I don't know if we made comments about our bookings outlook, but we still expect our overall book-to-bill to be north of 1, which implies greater than a one-time book-to-bill for the second half of this year.

And again, I think that sets up very well for 2025. I haven't looked at my individual quarters in terms of revenue generation. But again, embedded in our guidance, a lot of the activity is going to be driven by offshore and international. No surprise there based on the overall macro environment that we're looking at, and that implies strong results for this particular segment.

[James Rollyson, analyst]

Perfect. Yes, just looking for confirmation there. So I appreciate that. And on the Well Site Services and Downhole Technologies, you mentioned similar in the past, your revenues kind of performed in line with activity. But clearly, some of the kind of internal things you're doing on the cost side and managing operations that weren't performing have obviously paid through in margin benefits this quarter. And you mentioned just that growing as you continue to work on those things. Any sense of kind of how you're thinking about magnitude of potential margin expansion in the kind of flattish from here outlook?

[Lloyd Hajdik, executive]

Yes. So Jim, I'll take that. So when we're looking at Well Site Services with us closing some of these underperforming locations, we could see that the margins overall getting into the low 20% range, EBITDA margins.

[James Rollyson, analyst]

Okay. Yes. No, that's very healthy. And what are you thinking about for Downhole Technologies because that obviously had an improved quarter as well from a few different things.

[Lloyd Hajdik, executive]

Yes. So high single digits, low double digits.

[Cindy Taylor, executive]

On EBITDA margin. .

[Lloyd Hajdik, executive]

On EBITDA. Yes.

[Operator]

The next question comes from the line of Stephen Gengaro with Stifel.

[Stephen Gengaro, analyst]

So just quickly to clarify, you guiding -- were you suggesting well site margins in the low 20s in the second half of the year. Is that -- was that your -- I was trying to just make sure I understood that correctly.

[Lloyd Hajdik, executive]

Yes.

[Cindy Taylor, executive]

Yes.

[Stephen Gengaro, analyst]

Okay. Great. I guess 2 things for me. First, Cindy, you've been watching this market a long time like I have, and we've been kind of consistently frustrated by the lack of U.S. activity growth on the land side. And I know there's M&A reasons and the gas market has been soft. But what are you -- do you see anything else there? And maybe how do you think about maybe the catalyst or what needs to happen to get kind of a recovery on the U.S. land side even if it's several quarters out?

[Cindy Taylor, executive]

Yes. Well, first and foremost, embedded in my comments is just the statement. If you look back for the last 15 months, maybe 18 months. Activity on land is down kind of 20-plus percent. It's kind of shocking quite frankly. And yet despite that, we're producing record levels. And the way I look at that, I don't do basin by basin analysis. But certainly, there are a lot of analysts that do that say productivity per foot is flat to down in most of the basins. And so it is my opinion that a lot of this M&A activity is more gearing towards the resource play and being able to move from 2-mile laterals to 3.

And when you do that, the real answer is you're just drilling and completing a lot of available footage, and we're benefiting from that. And so this "Efficiency Measure" gets a little more elusive when you're talking about productivity per foot versus just extended laterals, it's all good for the operator.

But again, I think we and everybody else believe that production is going to turn at some point. And the question that -- agile question is when does that happen? But clearly, in my opinion, 2025 kind of spells a different level of overall production as some of these decline curves hit, that's number one.

Number two is just natural gas. They're in anyone that really debates the long-term contribution and benefit from both natural gas and LNG. It will come, and if you get kind of the double trigger, if you will, between natural gas activity and an improved crude oil activity environment, those are clearly the drivers for a service company like us as it relates to U.S. land. It's just very hard for me to see how that does not happen in 2025. But all I hear from everybody right now is kind of a muted 2025 U.S. land outlook, and that's because of 2 things right now, this perception of reduced demand in China, which I mentioned in my notes, coupled with the fact that OPEC+ has voluntary production cut in place that they're telling the market they may reverse late this year, early 2025.

So it's always about the macro in this world. And maybe I'm just an optimist because you need to be an optimism in this space, but I see a better 2025 shaping up than maybe the analysts have in their models and what they're thinking. In fact, we had one kind of cut our outlook for 2025, and I just don't see it right now.

[Stephen Gengaro, analyst]

Got you. Great. And then maybe as a follow-up to that, when you think about rig efficiency and completion efficiency and longer laterals, where does that benefit you guys the most? Which product lines -- yes, that might be helpful. Just some color on that.

[Cindy Taylor, executive]

It's across both our Well Site Services and our Downhole Technologies segments, predominantly because the -- you're really talking again about a U.S. land-driven activity at this point in time. And with our active seat valves, number one, they are more efficient to the operating. They work very well in extended laterals multipad type work and it's cost effective for us to bring those to market just from the efficiency at the Well Site.

And then our new suite of Downhole Technologies, again, the Epic product line, we have hoped to gain market share even in a flatter market, much less an improving market. That, coupled with in a national penetration, we believe, helps us turn that segment around.

[Stephen Gengaro, analyst]

Great. No, that's very helpful. And then just maybe one final one for me. I think you mentioned maybe a book-to-bill of over 1 in offshore manufactured products in the back half of the year. Is there -- when we think about the trajectory of growth for that business, should we just really be thinking about offshore deepwater rig activity and then any rigs that get added and how that kind of ultimately morphs into demand for your products? Is it the best proxy we can use for what that growth could look like in '25 and '26?

[Cindy Taylor, executive]

Yes. It's kind of near term, long term, and let me explain that a little bit. Rigs go to work in development drilling profiles prove up work that leads into longer-term production infrastructure. Again, you know all of that. It used to be we were not heavily exposed, and we're weighted to offshore production facility development. My however is with the recent introduction of our new Managed Pressure Drilling Technologies, as rigs do go to work, we are seeing incremental demand for particularly MPD equipment.

But even deck equipment and other types of riser products that we have. So we'll see some -- that's what I call, nearer term because everybody knows rigs are going to work. They're being upgraded. They're getting longer-term contracts. But the great news is the follow-on from that will be increased subsea and production infrastructure development. And again, you've seen other larger companies in the space with some very good bookings that kind of are a precursor to the demand for some of our products and services.

[Operator]

[Operator Instructions] Your next question comes from the line of John Daniel with Daniel Energy Partners.

[John Daniel, analyst]

Just 2 for me. You noted in the prepared remarks that you anticipate activity in the, I guess, lower 48 to be at or near current levels. I'm just curious if that's where we stay for the balance of the year and maybe even into Q1. How do you see that changing the competitive landscape and your -- in the areas you serve and how many people don't make it, if you will. Just your thoughts on that.

[Cindy Taylor, executive]

I'm sorry, you're asking kind of the competitive landscape on U.S. land activity?

[John Daniel, analyst]

If we stay in this sort of flattish range right now, do you see it changing the competitive landscape at all over the next 6 to 9 months?

[Cindy Taylor, executive]

Yes. I'm going to respond to that, and I'll see if Lloyd has any add-on comments. We get anecdotal comments and evidence of smaller players kind of shutting down local operations, various facilities, trimming headcount, tamping down for the summer. I almost think of those as one-offs that do modestly improve the competitive landscape. But I'll offer you a bigger picture comment that what I've probably not seen as many M&A opportunities in a very long time.

And so I think when everybody recognizes how competitive the energy services market is, they're looking for opportunities to either exit or just kind of optimize their operations through M&A. And we see quite a lot. And certainly, on a basin specific level, we're seeing that. But I'd say even importantly, larger service companies are, I'll call it, drinking our customers' cooled in the sense that they're seeing the market consolidation. They're seeing the need for size and scale from an operating perspective, not to mention from a shareholder perspective.

And so we have all kinds of inbounds right now from both private and public entities. And so while, yes, I think some of the smaller players fall out just by closing locations, facilities, trimming headcount, I think the bigger picture is going to be the consolidation which it seems like is heating up.

[John Daniel, analyst]

Okay. The next one is on the new products and technologies that you guys are introducing. Can you just address customer willingness to try new products at this stage and sort of how you see the expected adoption rates playing out over the next year or 2 -- 1 to 2 years?

[Cindy Taylor, executive]

Yes. And again, my comments may not surprise you. There's much greater willingness to trial a one-off technology introduction on U.S. land. And just think about it, the wells are smaller, the AFE costs are smaller. Generally, they're going with proven operators in the first place. And secondarily, those types of customers are really coming to us and others telling us the enhancements that they need. And so to some degree, these are being developed in conjunction with operator involvement and communication. And so their willingness to trial them is better.

Now that being said, I'll use my example of Downhole Technologies, there's a lot of offerings in the market right now. And when activity is down to the degree it has been over the last 15 to 18 months, it is harder to get a partner to trial, new technology. And so it's maybe the uptake is a little bit slower.

I'll put that in complete contrast to deepwater offshore. And our company has been participating in that space for 80 years, and the barriers to entry are just significant. And it always would stun me if a, I'll call it, a one-off newer company tried to get a product introduced. I think it'd be very, very difficult as opposed to someone that has a deep, long demonstrated operating history in this space. And I'll use a couple of examples.

Number one is our high-pressure riser systems. We've been putting riser systems in the market for decades. So you're more willing to be able to adapt and advance that technology and get market acceptance. Probably the newer technology I'll talk about is the MPD systems that we've got great acceptance thus far of our products and great interest thus far, but we brought a newer, more advanced, more efficient offering to the market that was already there, again, in conjunction with conversations around customer needs to get there.

And I want to say, and oh, by the way, we've been working on this off and on for probably 7 years. And so complete difference in terms of market introductions, and we're going to be cautious about bringing any new technology to bear just because the risk of reputation and the risk of failure is great offshore, right? But -- and then I'll take this a step further, as we prove up technologies on U.S. land, then we're going to take those into international markets more efficiently.

[Operator]

I will now turn the call back over to Cindy Taylor, President and CEO, for closing remarks. Please go ahead.

[Cindy Taylor, executive]

You bet. Thank you, Eric, and thanks to all of you for joining our call today. I know it's a very busy portion of the earnings season. We're very glad to report stronger improved results, both this quarter and our outlook, I think, will guide to better days ahead as well. And so hope the rest of the earnings season goes well, and we look forward to catching up with each of you throughout the next several months. Take care. .

[Operator]

Ladies and gentlemen, this concludes today's call. You may now disconnect.