Oil States International Inc

NYSE:OIS

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Good day, everyone, and welcome to the Oil States Third Quarter 2023 Earnings Call. Today's call is being recorded. [Operator Instructions]

I would now like to turn the conference over to Ellen Pennington. Please go ahead, ma'am.

[Ellen Pennington, executive]

Thank you, Lisa. Good morning, and welcome to Oil States Third Quarter 2023 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 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 for 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 third quarter 2023 results and provide our thoughts on market trends in addition to discussing our company-specific outlook comments.

Our third quarter results benefited from growth in offshore and international spending with significant sequential and year-over-year increases in offshore project activity and backlog conversion. However, our quarterly performance was tempered by an industry-wide decline in U.S. well completions, which has been ongoing since the first quarter of 2023. We believe U.S. activity declines were triggered by weaker commodity prices in effect earlier this year.

Our third quarter consolidated revenues and adjusted EBITDA increased sequentially by 6% and 23%, respectively, driven by higher offshore and international activity. Year-over-year consolidated revenues and adjusted EBITDA grew by 3% and 7%, respectively. The sequential and year-over-year improvements reflect significant project-driven growth within our Offshore/Manufactured Products segment, where revenues increased 18% sequentially and 16% year-over-year, totaling $111 million in the third quarter, the segment's highest revenue level since the fourth quarter of 2016.

Segment backlog increased for a fifth consecutive quarter totaling $348 million as of September 30. We are benefiting from our customers' increased investments in traditional and alternative energy offshore projects outside the United States. We received 2 notable project awards in the third quarter, including a production facility equipment order destined for Brazil and a contract for our Merlin Deepsea Mineral Riser System designed for use in harvesting seabed minerals at extreme water depths. The segment's bookings totaled $129 million, yielding a quarterly book-to-bill ratio of 1.2x.

Our continued investments in technology and innovation were recognized earlier this month by Gulf Energy with our Active Seat Gate Valve receiving the 2023 Gulf Energy Information Excellence Award for best production technology. This proprietary valve technology provides operators with exception sealing performance while substantially reducing the amount of heavy grease used during valve operations and personnel involved in intervention at the wellhead.

We generated cash flow from operations of $14 million in the third quarter, invested $2 million in net capital equipment and have no short-term debt outstanding. With cash on hand totaling $53 million at September 30, and no significant debt maturities before 2026, our financial position remains very strong. We expect to further enhance our liquidity position and reduce our net debt in future quarters. We remain encouraged by the continued expansion in offshore activity, coupled with future benefits to be gained from our new product introductions, including our managed pressure drilling system, our Merlin Deepsea Mineral Riser System and our Active Seat Gate Valve Technology, among others. This international offshore focused investment cycle is expected to extend well beyond the next couple of years. As it relates to U.S. land-based activity with currently improved commodity pricing, we expect U.S. activity to recover in 2024 from current levels.

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

[Lloyd Hajdik, executive]

Thanks, Cindy, and good morning, everyone. During the third quarter, we generated revenues of $194 million, adjusted consolidated EBITDA of $23 million and net income of $4 million or $0.07 per share. Reported third quarter net income included facility consolidation charges of $1.6 million, which were incurred as we prepare selected facilities for sale. This represents our fifth consecutive quarter of positive net income.

Our Offshore/Manufactured Products segment generated revenues of $111 million, adjusted segment EBITDA of $24 million and operating income of $18 million in the third quarter. Revenues reported in the third quarter are at the highest level since the fourth quarter of 2016.

During the third quarter, we recorded charges of $1.6 million associated with our ongoing consolidation and relocation of certain manufacturing and service locations in an effort to gain operational efficiencies and reduce future costs. Adjusted segment EBITDA margin in the third quarter was 22% compared to 17% in the second quarter. Regarding our facility planning, we consolidated certain facilities in Houston and are in the process of strategically relocating our Asian manufacturing and service operations from Singapore to Batam, Indonesia. Accordingly, we have reclassified 2 facilities as held-for-sale assets at September 30. Given these plans, our capital expenditure investments for 2023 are now expected to total approximately $35 million as a result of our plans to purchase land and begin construction on a new facility in Batam. Proceeds from the sales of our facilities in Singapore and Houston, which are expected to close in late 2023 or early 2024 are expected to range between $35 million and $40 million, exceeding the costs associated with the new facility in Batam.

Backlog increased sequentially for a fifth consecutive quarter totaling $348 million at September 30, an increase of 35% from September 30, 2022. The current quarter end backlog is at its highest level since the fourth quarter of 2015. Third quarter bookings totaled $129 million, yielding a third quarter and year-to-date book-to-bill ratio of 1.2x. In our Well Site Services segment, we generated revenues of $60 million, operating income of $3 million and adjusted segment EBITDA of $10 million in the third quarter. Adjusted segment EBITDA margin was 16% in the third quarter compared to 18% in the second quarter.

In our Downhole Technologies segment, we reported revenues of $23 million, an operating loss of $4 million, while adjusted segment EBITDA was essentially breakeven for the quarter. Lower revenues and margins in the quarter were driven by reduced customer demand for completion products and lower manufacturing volumes, driven by the continued reduction in frac spreads coupled with competitive market conditions experienced during the third quarter. During the third quarter, we generated cash flows from operations of $14 million and invested $2 million in net CapEx to support future growth. As of September 30, no borrowings were outstanding under our revolving credit facility and amounts available to be drawn totaled $85 million, which, together with cash on hand, resulted in available liquidity of $137 million.

Now Cindy will offer some market outlook and concluding comments.

[Cindy Taylor, executive]

Thanks, Lloyd. The tight commodity markets of 2022 took a turn in early 2023. Softening global demand and resultant elevated inventories caused oil prices to drop during the first quarter of 2023. This was followed by a strong reaction by the OPEC+ countries with announced production cuts, which has resulted in significantly improved commodity pricing with Brent and WTI averaging $87 per barrel and $82 per barrel, respectively, in the third quarter. However, U.S. land-based activity has thus far lagged the commodity price improvement.

Global oil and gas inventories are normalizing and are now below their 5-year seasonal average for crude oil, but remain above the 5-year average for natural gas, leading to lower natural gas prices year-over-year, thereby tempering expectations for growth in drilling and completion spending on U.S. land activity for the balance of 2023. We are executing well given the current market environment and our growing revenues, adjusted EBITDA and free cash flow on the strength at our offshore and international operations.

Revenues in our Offshore/Manufactured Products segment are expected to continue to grow as a result of strong order flow, increased levels of backlog and execution of major project milestones. We expect our Well Site Services and Downhole Technologies segments to continue to perform in line with market activity indicators which has softened for U.S. land activities in the second half of 2023, but do appear to be bottoming with expected improvements in 2024 as support is gained from a strong commodity price environment.

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 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. In 2023, we are 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 should 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 developments such as deep-sea minerals gathering, fixed and floating offshore wind developments, 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.

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 demand globally. Market-leading technologies will extend the runway for a sustainable competitive advantage.

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

[Operator]

[Operator Instructions] We'll take our first question from Stephen Gengaro with Stifel.

[Stephen Gengaro, analyst]

Just what I wanted to start with was the Offshore/Manufactured Products. The margins were stellar in the quarter. And I imagine some of that's mix and execution. How should we think about sort of the range of outcomes for OMP margins as we go through 4Q and into next year?

[Cindy Taylor, executive]

You're right. Our margins were very strong. As you know, we've kind of guided to high teens EBITDA margins over the course of a longer period of time on a single quarter basis. They were strong, and we had some strong project execution. We talked about our major project work. We also had good contributions from higher service revenues, which, as you know, you commented on mix. Service revenues oftentimes carry higher margins. And so there are several positive factors that lifted our overall margin profile. And of course, part of it is higher revenue base, better absorption.

So a lot of things went right in the quarter. As we look out, I don't want you to think it's going to be north of 20% every quarter, but we are averaging up every single quarter, generally speaking, on our overall margins in that segment, and you've seen that progression throughout the year. I'm looking at my schedule, we were about for this particular segment, 16% in Q1, 17% in Q2, again, a bit of an anomaly at 22% in Q3, but we're looking for those high teens margins in Q4 and moving forward, if that's helpful.

[Stephen Gengaro, analyst]

That is helpful. And then also on the same segment, the backlog has been growing. I think you're up 13% from the end of last year. Are you -- is that a reasonable gauge of how the project-driven business should act a year out. So when we sort of think about '24 potential revenue growth in the segment, at least in the projects piece, is that a reasonable guide as a change in kind of the way the backlog is being realized.

[Cindy Taylor, executive]

It is a major project driven at this point in time, obviously, in terms of backlog, and there's always going to be puts and takes because of timing, but a lot is led by our subsea technology right now, particularly tied to production infrastructure and a lot of that is home from Brazil and Guyana. That's probably no surprise. Now there'll always be ebbs and flows quarter-to-quarter in that award activity, number one, but what we're trying to do is bolster that base level of award activity by new product introductions like our MPD systems. And we've gotten the very early stages of contracts there in place. And we are seeing significant interest going forward.

So I'll always kind of hedge a bit and say it's hard to predict quarter-by-quarter. But in totality, we're looking for a book-to-bill of 1 or better on, again, much higher revenues every quarter. So I think that's kind of my overall -- I'll lay out my specific guidance on book-to-bill ratios once we go through the planning process on our next earnings call. But again, higher revenues demand higher bookings just to sustain that 1:1 but there's nothing out there that tells me we should not be able to do that over the course of a time. But again, there may be ups and downs quarter-by-quarter depending on timing of our customers letting those awards.

[Stephen Gengaro, analyst]

Great. And then just one quick one to your -- you didn't -- I don't think you mentioned sort of this year's full year guide, which would kind of also guide in the fourth quarter. But when we think about the fourth quarter, I mean, I think the consensus is like $29 million, $29.5 million. Is that a reasonable ballpark given what we know about, the U.S. land piece right now. I know there is seasonality that is hard to predict.

[Cindy Taylor, executive]

Yes. I will tell you, I didn't isolate on the fourth quarter, but our annual first call consensus was about $91.5 million. And what I do see is that, that would -- we had -- I mean, let's face it, we had a weaker third quarter on U.S. land-based activity. Now thankfully, it was more than offset by strength in our international and offshore. The [ rule ] I always say it doesn't do any good to get the market guidance unless you've got better knowledge and information than the market. What I can -- what I do know is inventories, crude inventories are much lower than they were earlier this year, about 60 million barrels lower. And while nat gas is still above the 5-year average, it's compressed a lot, the strip is improved. The question you got to ask yourself is, are we really going to get a U.S. land-based lift in Q4 with the holidays? Or is that going to push into 2024. I would say, based on years of experience in this industry, I would not count on a lift on U.S. land-based activity around Thanksgiving and Christmas. But 2024 looks very good. And again, crude prices, I don't know where they bottomed in the first half this year, but they were certainly in the $70 range. Now they sit mid-80s and outlook for next year, over $90. So it tells me commodities are improved. Natural gas, I think, lags a bit, but the strip is better. And you're forecasting about a 20% increase in nat gas exports, both driven by LNG as well as exports to Mexico. So the commodity fundamentals tell me globally, but certainly, U.S. land will benefit in 2024. But I think embedded in fourth quarter is an improvement on U.S. land that I would not necessarily be comfortable with.

[Operator]

We'll take our next question from Jim Rollyson with Raymond James.

[James Rollyson, analyst]

On the move from Singapore to Batam and just kind of some of the general consolidation activities you're looking at, maybe frame up how to think about the ultimate benefit. You mentioned the cost which ultimately is paid for by the sale of existing facilities. But just how do we think about that? Is it a margin improvement? Just kind of how to think about why you're making the moves in terms of what that's ultimately going to drive from a margin standpoint.

[Cindy Taylor, executive]

No. Clearly, it is geared around margin improvement. And there's these kind of independent things, that the real Southeast Asian move is into a lower-cost labor manufacturing environment into Batam. And we will keep a presence, obviously, in Singapore, but a lot of the work on the machining and manufacturing side will be done in Batam. And the goal there is absolutely to, one, increase the top line, our ability to bid has been hampered by higher cost in our Singapore operations, so expand the revenue and improve the margin. That is kind of the subset of Southeast Asia. In doing so, we'll have facility proceeds, they won't fully offset the new facility in Batam, but they will certainly help.

Separately, we have multiple facilities all over Houston, which I think you know. And we've already been almost idled in one of those facilities. There is a lot of interest in that facility. We've had multiple bidders come in. And so we feel comfortable saying we expect to sell that in Q4 or early 2024. Those proceeds, quite frankly, just become corporate proceeds to us. And so the sum of both Singapore and Houston will exceed the new investment that we will make in Batam.

[James Rollyson, analyst]

Perfect. And then on Downhole Technologies, obviously, margins there just kind of felt pray to a weaker U.S. completion activity. As activity bottoms kind of in this quarter and we start to see that recovering next year as we were talking about a minute ago, how do we think about the recovery in margins there? Is there a certain revenue level that you generally think of that you need to get EBITDA back to positive territory? Are there anything on the -- from an internal standpoint, you can do the cost structure? Or were you guys carrying kind of higher cost because this is a somewhat temporary -- viewed as a temporary dip? Just kind of trying to think about how that segment plays out over the next few quarters if we actually see that recovery we're all looking for next year.

[Cindy Taylor, executive]

Yes, Jim, I want to be clear. Are you talking about Well Site or GEO.

[Lloyd Hajdik, executive]

Downhole.

[Cindy Taylor, executive]

Downhole. Okay. I just wanted to make sure. So we are basically -- essentially breakeven at the Downhole Technologies segment for Q3. What we see, 2 major things need to happen. And just kind of to explain it, you see quite a dichotomy in other service companies this quarter, whether you are contracted long on some of your, i.e., the pressure pumpers, the people that had contracts in place versus the spot market performed very differently. This business, as I call out product-sell businesses and a lot of our wireline customers or spot-based providers to the market. So several frac fleets go down, which means the demand for the downhole tools also goes down. And so it's a combination. But the biggest thing in that particular business is top line, it's revenue at this point in time.

Now that being said, we are making investments around newer technology. So we -- yes, we have engineering costs and R&D costs that we did not cut. There's no reason to cut that in a kind of a soft quarter because we believe in that business for the long term. But the drivers that will improve that going forward, of course, we need increase of recovery in activity, particularly spot-based activity and some of the improved technology that we're going to bring to market in 2024 will help domestically. And of course, we are trying to expand our international penetration as well. Those are the major initiatives to bring enhanced profitability to that business. And as we talked about at our Board meeting yesterday, to your question, it doesn't take much, 2 to 4 frac fleets to follow will have a good topline impact. And so we're confident that we can turn that business to enhance profitability in 2024.

[Operator]

We'll take our next question from Luke Lemoine with Piper Sandler.

[Luke Lemoine, analyst]

Cindy, you had a very nice orders in 3Q and OMP, the Merlin order and the production facility order. Can you talked about those being at least $50 million each, which leaves a lot of room for various other orders in 3Q. Can you maybe talk about kind of what comprises the rest of that mix? And then maybe what you see for more standard orders over the next 6 to 12 months outside of kind of large things like Merlin or production facility.

[Cindy Taylor, executive]

Yes. I mean, we've always said we get a lot of broad-based almost recurring type orders, and those are on our high-end conductor casing connectors as an example of routine orders. We've got a very good fixed platform and crane business line that enjoys strong orders. We have military work, et cetera. So it's kind of hard to isolate. We typically just call out larger orders, which are the 2. But then there's always going to be a lot of our diverter valves, our production valve order technologies that are recurring and to some degree, short-cycle orders as well. So it's kind of hard for me to glom on to any one major driver. I'd say they're broad-based, both product line and geography, quite frankly.

[Operator]

[Operator Instructions] We'll take our next question from John Daniel with Daniel Energy Partners.

[John Daniel, analyst]

I got a question, Cindy, you referenced military customers. I'm just curious, any signs -- orders from that group are poised to rise just given current geopolitical, given the climate?

[Cindy Taylor, executive]

We are -- we have a lot of bidding and quoting around that. I can't necessarily correlate it to the geopolitical environment, but they are on the rise, quite frankly. And a lot of times, these orders do come in large batches and can span multiple years. And so it is my expectation to see an increase in military ordering. Again, this is an adaptation of core technology we've used in oil and gas particularly some of our elastomer and flex joint type technology used in military applications, and we've done so for decades. But to your point, there is fundamental grounds for those to improve.

[John Daniel, analyst]

Okay. And then here's the dumb guy question for me because I don't know much about Seabed minerals, but what's the opportunity set there in harvesting that.

[Cindy Taylor, executive]

I think they're incredibly robust. We're in the extreme early stages of that. And so I think we've talked before, and there's a lot of media and press around an area called the Clarion-Clipperton Zone, which is I always say a layman would say, middle of nowhere, deepwater pacific. And -- but that is governed by an International Seabed Authority, and that is slower to lift as opposed to sovereign international waters where we are getting more bidding opportunities simply because one country controls the permitting in those areas, and that is the case with the order we received in this quarter.

There are other countries that are actively looking at these opportunities. So I think sovereign-controlled international waters will move faster possibly the Clarion-Clipperton Zone, but these areas are extraordinarily resource rich with the metals and minerals required, particularly for alternative energy transition, battery technology, wind, et cetera, solar. So you know you have to access the resource.

And then new site, because right now, there's a lot of countries that feel highly dependent on China for these metals and minerals, and they have a huge percentage of global supplies. So diversification is front and center. And then energy security and advancement of your own country's internal needs is a focus for these countries that tells me unequivocally you're going to advance it, particularly if it's in your sovereign control.

And I will say in addition to that, there's increasing environmental concerns around open-pit mining around the world. And so there has to be all types of environmental assessments on the seabed, but it seems like there will be less environmental concerns and consequences with this activity than there will be with open pit mining in order to grow the energy transition, right?

[John Daniel, analyst]

All right. Would you be willing to hazard a guess as to how many systems in that 5 to 7 years could be an opportunity for you?

[Cindy Taylor, executive]

I unfortunately can't do that. I would -- yes.

[Lloyd Hajdik, executive]

John, I'll also point out. On our website, we have an animation of the Deepsea Mineral Riser system in operation. So I encourage you to go take a look at that.

[Operator]

And there are no further questions at this time. I'd like to turn the call back over to Cindy Taylor for closing remarks.

[Cindy Taylor, executive]

Thank you so much. Thanks for joining us today. I appreciate the interest. As always, it's a busy, busy day with a lot of companies reporting. I will leave my thoughts that we're headed into kind of a multiyear improved environment for the conventional oil and gas business led by international and deepwater, I certainly think the U.S. will be robust last year, U.S. land activity robust next year as well, which sets it up for a fundamentally strong outlook for our company and for that of others in the space.

I do think that for our size, we are differentiated because of the higher technology products that we've had working in deepwater basins around the world for many decades, quite frankly. And we are doing and making a lot of inroads towards introducing those technologies and transitioning those into new applications, which I think, again, for our size is a bit unique, and you're seeing that realize -- not just talked about, but realized in our revenue stream right now and in our backlog and bookings. And so I hope that translates into a strong growth from our company and therefore, strong returns for our shareholders.

I do hope you have a good remainder of the earnings season, and we will be available to work with you on any follow-up questions you might have. Thank you.

[Operator]

And that concludes today's presentation. Thank you for your participation, and you may now disconnect.