Oil States International Inc (OIS) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Oil States International earnings conference call. My name is Carol, and I'll be your coordinator for today. At this time, all participants are in a listen- only mode. We'll be facilitating a question and answer session at the end of the today's conference.

[Operator Instructions]

As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to the host for today's call, Mr. Bradley Dodson, sir, please go ahead.

Thank you. Welcome to the Oil States first quarter 2005 earnings conference call. Our call today will be led by Douglas Swanson, Oil States President and Chief Executive Officer, and Cindy Taylor, Oil States Senior Vice President and Chief Financial Officer.

Before we begin, we would like to caution our listeners regarding forward-looking statements. To the extent remarks today contain other than historical information, we rely on Safe Harbor protection reported by federal law. Any such remarks will be laid in the context of the many factors that affect our business, including those risks disclosed in our form10-K and our other SEC filing. Now, I'll turn it over to Doug.

Thank you, Bradley and good morning. We're pleased to announce that Oil States International completed the first quarter of 2005 with record results led by continued strength in our Canadian operations, North American land drilling activity, and the impact of acquisitions completed during 2004 and early 2005.

We significantly outperformed previous estimates, largely due to contributions from our tubular services and our offshore products segments. All of our business lines reported significantly improved year-over-year operating results, and all but 2 were up sequentially.

Our well site service segment was up sequentially in revenues, 44.1% and EBITDA 50.5%, largely due to the seasonal contributions in Canada. Significant growth in our oil stands region activity and the impact of the Ellenburg acquisition. We completed the Ellenburg acquisition n in February 1, 2005, which provided us with a strong base of operations, drilling operations, in the Rockies. This acquisition added 7 rigs to our fleet.

Our tubular service segment was down sequentially in revenues 4.2% due to did, 4.2% due to the result of heavy buying in the fourth quarter for 2004, however, EBITDA increased 21.1% due to the sequentially higher margins, 13% in the first quarter versus 10.4% in the fourth quarter.

Our offshore products segment was up 9.5% in revenue, and EBITDA was up 59.4% on a sequential basis. Our offshore products EBITDA margins improved significantly from 8% to 11.6%. In addition, the backlog of offshore products at the end of the quarter was 99.8 million, up slightly from the fourth quarter 2004 levels.

Net income for the quarter for $0.50 per share, compared to $0.31 reported in the fourth quarter of 2004 and $0.32 reported in the fourth quarter of 2004. At this time, I'll turn it over to Cindy Taylor, who will review our financial results.

Thank you, Doug. I'm going to take you through our total results, as we customarily do. For the first quarter of 2005, our operating income totaled 42.2 million on revenues of 331.9 million. Our EBITDA for the quarter totaled 52.5 million. These results compared to 19.1 million of operating income on revenues of 204.2 million for the first quarter of 2004.

The first quarter of 2004 EBITDA totaled 27.8 million. Our current quarter performance represents a 62.6% year-over-year increase in revenues, and an 88.7% improvement in EBITDA.

On a sequential basis, our revenues were up 13.3%, but our EBITDA increased by an impressive 45.8%. Our net income totaled 25.3 million, or $0.50 per diluted share for the first quarter of 2005. As we mentioned in our press release, we did have a fuller tax rate at 36.9%, that compares to a fairly low effective tax rate in the quarter a year ago of 8.6%.

Leading on, as Doug mentioned, our current quarter results reflect the benefits of strong North American drilling activity, growth in the oil sands region of Canada, and contributions from acquisitions that we completed in 2004 and early 2005, which resulted in very strong year-over-year growth in our well site services segment.

In addition, our tubular services segment did extremely well during the quarter due to the impact of increasing prices for oil country tubular goods, continued strong demand from our customers, as well as the added impact of the coming acquisition, which, as you know, we closed in May of 2004. Tubular service EBITDA was up 11.4 million, or 287.5% on year-over-year basis.

In addition, our offshore product segment contributed EBITDA growth of 6.3 million, or 430.8% year-over year, primarily due to increased activity levels at the revenue line, and also, margin improvement.

Just to focus a little bit on our financial position, our balance sheet still remains very strong, with a debt-to- capitalization ratio at the end of the current quarter of 28.2%. Our total debt did increase during the quarter by 45.8 million, which was due to closing the Ellenburg acquisition at the beginning of February, which we talked about earlier.

We also invested capital expenditures of $17.1 million during the quarter, and also had to make other working capital investments, which is very typical for the first quarter, particularly given our seasonally strong Canadian operations, and the growth that we've realized in the Oil Sands region over the period.

Now, we'd like to break this down, as we usually do, on a segment-by-segment basis, and Doug is going to just briefly go through highlights of activities in each one of those segments, and then we're going to close with some thoughts as to the market outlook and our guidance.

Thank you, Cindy. As Cindy indicated, we'll go through this on a sequential basis to provide the best comparison for you. On well site services, revenue in the quarter was 127.6million, up 44.1% from 88.5 million in the fourth quarter. EBITDA, 32.1 million, up 50.5%, and EBITDA margins were 25.2% versus 24.1% in the fourth quarter.

The sequential increase in revenues in EBITDA occurred primarily due to the impact of the seasonality in Canada, and significantly to the growth in our activity in the Oil Sands region. In addition, we realized significant improvements from our land drilling operation and from the activity of the addition of these new rigs.

EBITDA, from the Oil Sands activities, represented approximately 35.4% of our Canadian business in the first quarter of 2005. This compares to 15% of our Canadian business in the first quarter of 2004. EBITDA, from Oil Sands, grew over $3 million on a year-to-year basis. Again, this reflects the investments we've made in new facilities in the Oil Sands area.

Our land drilling operations were strong, sequentially, in both revenues and EBITDA due to the Ellenburg acquisition completed in February, coupled with improved utilization and pricing from our base operations. Our average daily revenues were up on sequential basis to $9600 a day from $8600 a day. And, our daily cash margin for rigs was $3300 a day, up from the $2600 a day from the fourth quarter.

In offshore products, revenue was 66.5 million, up 9.5% from the fourth quarter. EBITDA increased significantly to 7.7 million, up 59.4%, again, primarily attributable to the increased margins of 11.6% in the first quarter, 4.9 -- excuse me, 8% in the fourth quarter.Our backlog at the end of the quarter was 99.8, up 2.4% from the 97.5 million on December 31st.

In tubular services, we had very strong results, despite the fact that revenue was down 4.2%. EBITDA was 15.4 million, up 21.1% from the 12.7 million in the fourth quarter. Our gross margins were 13% compared to 10.4, and our EBITDA margin was 11.2%, compared to 8.8%.

Our inventory at the end of the quarter was 141.3 million, up 14.3% from the 123.6 million at the end of the fourth quarter. Tons shipped were 82,000, versus 97,800 in the fourth quarter. Year-over-year improvements in volumes and gross margins were due primarily to improved demand, increasing OCTG prices and the benefits from the hunting acquisition.

Our order book, which is the orders that we have from our customers, our parent backlog, increased significantly during the quarter due to spot market orders and the impact of the hunting acquisition.

The order book at the end of the first quarter was 230.2 million, up from 146 million at the end of fourth quarter, a 58% increase in this particular quarter. Our inventory increased by $18.3 million, primarily due to price increases, as our actual tonnage decreased 3%. Our tons in inventory at the end of the quarter were $102,819 tons versus 103,161 tons at December 31st.

Obviously, our purchase price increased during the quarter due to mill price increases. Our average price per ton is now $1,374 a ton, compared to $1,192 a ton at December 31st, a 15.3% increase. It should be noted that approximately 85% of our OCTG inventory is committed to customer orders at the end of the quarter. OCTG demand, shipment and inventories were fairly balanced during the quarter. Supplying the ground remains reasonable at current rate count. It's estimated there's a 4-month supply of inventory on the ground.

Getting into some summary comments on the outlook for 2005, again, the key drivers for Oil States International is North American drilling activity, particularly gas drilling, plus the deep water infrastructure development. In well site services, our year-over-year results in Canada were much improved due to the impact of the Oil Sands development. The significant construction activity in that area, we think this trend will continue for several years to come. Land utilization is strong and should continue through 2005. Backlog visibility remains strong in the areas that we operate in -- Texas, Ohio, and the Rockies, with commitments extending into the second half of 2005.

We are realizing price increases as the rates come off their current commitments. We had one new rig that sputtered in December and we are now in the process of constructing another rig, which should commence work on a one-year contract in the Rockies in May of 2005.

Our rental tool contributions should continue to increase due to the acquisitions we completed. Rig count improvements, and the improvements of the capacity of our equipment. In offshore products, our first quarter of revenues and EBITDA and margins increased sequentially, evidencing the increased activity and our ability to have better cost absorption.

Our backlog improved based upon current bidding activity and the activity we see in deep water. We expect our backlog and mix to continue to improve in 2005.We are continuing our process of reorganizing our fused-in home-up based manufacturing operations in order to effect manufacturing efficiencies and project executions.

The cost initiatives we initiated last year are being implemented and should impact our margins going forward. In tubular services, prices continue to increase during the first quarter as mills implemented additional price increases. We expect mills to continue to increase prices in the second and third quarters.

Our OCTG inventories are still at low levels, given our backlog position at the end of the quarter. We expect this to continue to realize strong revenues during 2005, with current activity levels and the realization of price increases and the benefit of the hunting acquisitions.

Again, our margins in the quarter were very strong due to the strong customer demand and the strong level of pricing. On a consolidated basis, we expect continued strength in tubular services and the well site services, and well site services will be led by our drilling activity, our acquisitions completed, and the impact of price increases in the various business lines.

We expect strong contributions from Canadian operations going forward, given our expanded activity and capital additions in the Oil Sands region. Our offshore products should continue to improve year-over-year given the increased backlog and benefit of the facilities consolidation.

In providing some guidance going forward, we expect year-over-year growth in well site services and offshore products segments. We expect to be taxed at an estimated rate of 35 to 38% in 2005. We will adopt stock option accounting in the first quarter of 2006. Second quarter 2005 earnings will be down sequentially, due to the normal slowdown in Canadian drilling activity, and we believe that second quarter earnings should be in the range of $0.28 to $0.33 per diluted share. We'll be pleased to answer any questions you might have.

[Operator Instructions] Your first question comes to you from the line of Bill Herbert of Simmons International. Please go ahead.

That was close...hey, guys. I guess it feels like, looks like steel prices are moderating. Demand is still relatively brisk for OCTG. Expected price increases going forward in Q2 and Q3.Any reason why your tubular gross margins would not expand from what you realized in Q1?

Expand?

Yes.

Well, I think that the continued strong demand and as we estimated or expect, there will be price increases, not as large as in 2004, but still price increases in the second and third quarter. I think this will maintain those margins, Bill. I don't think you'll see them expanding.

Aren't your inventory costs, however, going to basically stabilize? I assume that steel prices are basically moderating, and we thought that's what one reason here is.

We see moderation in the rate of increase.

Okay. All right, and then secondly, with respect to the offshore products group, give us a sense as to what a realistic targeted margin Q2 through Q4 is on an EBITDA basis.

Right now we've given early guidance, I think, in the 11 to 13% range, just depending upon timing of realizing our consolidation benefits in the manufacturing facility. Our EBITDA margins for the first quarter came in at 11.6%, versus, I think, 8% in the fourth quarter last year. So, we really, I think, we started off pretty good in the early quarters. We expected that to ramp a little bit slower.

And right now I'd say that gives us an upside on our margin somewhere, outside anywhere from 11 to 15% is realistic depending upon, you know, what mix of projects comes into our backlog as we move forward throughout the year.

Okay, and one final one from me. Given the fairly significant increase in tar sands activity that you guys are witnessing, does that soften the blow with respect to breakup?

Yes.

Okay.

And that's one of the reasons that we like to invest in the Oil Sands area. They're longer-term commitments and it mitigates the volatility and activity in Canada.

All right, it just seems, so when you put all these pieces together, your guidance once again is characteristically conservative, which is fine. But, it just seems that fundamentals and operationally, business is going quite well for you.

Right. I think we have to agree with that. You know, clearly, you were talking about seasonality in Canada, there will continue to be. But if we look out of before every quarter we expect to be year-over-year fairly significantly up, and again that is based on Oil Stands activity. And the first quarter is a prime example, given that the really -- the recount's down slightly in Canada, but you saw tremendous growth in our overall results coming out of Canada. And the large majority of that is really attributable to activity in the Oil Sands region.

Now, the traditional breakup will be there in our operations, it's just going to be moderated by the activities that we have in support of the Oil Sands operation.

Bill, to give you some insight, we actually on a year-over-year basis increased or capacity or bed-count in the Oil Sands area by 38% from last year. And, as a result of that 38% increase in capacity, plus the increased activity, our actual utilization year-over-year was up 50%.

Okay, thanks very much, and well done.

Thank you.

Thank you, sir. Your next question comes to you from the line of Stephen Gengaro of Jefferies & Company. Please go ahead.

Thanks Good morning. Just to follow up a little bit on what you said on the offshore product site. Cindy, you gave a range on the margins of 11-15%. Are you talking about as an average for the year?

Yes. We were 11.6 in the first quarter and if you look kind of where we're at in our backlog position, you could make a stance that if the mix doesn't improve, you stay around that level to slightly up from that. If we get a turn in the mix with some of these higher profile projects, that can come into operations this year I'd say there's an upside from that, obviously.

And then as a follow-up, when you look at '03, you were above 18% for a couple of quarters. Is that a realistic goal, as we kind of move through '05 into '06, or you think you can do something better than that?

Well, obviously, we want to get back to that level. And the two critical things, I would say, that get us there are the large high-profile projects, and that participate once they are awarded and moving forward on a timely basis which is called first element and that's being awarded, although we're highly confident that if they're there he we will participate in them.

Secondly, realizing the consolidation benefits, which will put us in a better position. If we had equal mix to what we had in that period where we peaked on those margins we should do better with the cost efficiencies that we've gained. But, those are the two critical elements that we are highly focused on.

Thank you, and then, finally, as we look at your expectations for the next quarter, and then as we go out through the rest of the year -- I just want to make sure I'm correct. When we go from the first quarter to the second quarter the entire decline is related to a slowdown in Canada. There's nothing else that you see sort of tailing off. I guess maybe on the tubular side, the margins bit, is that?

That's exactly right. As Bill said, the margins are hard to predict. We don't want to be overly aggressive on the tubular services margin. I think we've been pretty clear on that, consistently, and really, the only other impact I have mentioned is the seasonal decline in Canada.

Very good. Thank you.

Thank you, sir. [Operator Instructions] Your next question comes to you from the line of Hasad Sen (ph) of Goldman Sachs. Please go ahead.

Good morning. Great quarter. Just a quick question on the tubular shipment. That declined about 16%, sequentially. How should we think about shipments for the full year '05, relative to '04, including the hunting acquisition, Cindy?

Well, just speaking to the fourth quarter if you'll recall, we felt like we had a very heavy level of buying activity in that quarter. We conveyed that on the call. I think that is also very consistent with what the either marketplace has said, that our customers that kind of spending in their end of period budget money.

So, I think that our results are very consistent with the things that you've heard, first quarter buying activity from a volume perspective was down a bit, and we attributed that to that heavy level of buying in the fourth quarter. Just going forward, we're looking for pretty strong activity levels. Kind of, I would say, probably in the 90,000-ton per range is realistic. That will blip up and down, quarter by quarter.

And a similar question on top line for offshore products. Looks like revenue per quarter seems to be stabilizing in the $60, $65 million per quarter range. If you analyze that, that would be a lot higher than, I think, your previous guidance was 10% to 13% growth. How should we think about that now?

Right now, if we look at where we stand with our backlog, the current kind of top line looks to hold in about the range that we saw in the first quarter, more or less. Again, we ended up with strong backlog at the fourth. We sustained that through the first. The mix, again, is still not exactly where we'd like to see it. We've got one or two kind of good projects in there.

We also have a lot of lower margin connector-type activity on there that on balance leaves our mix about where it was at the end of the year. But it does help us from the perspective of that top line in the cost of absorption. And you saw that in our margin improvement in the first quarter. But if I look where we are in backlog and the optimism we have for future projects, the top line looks pretty sound at this level.

Great, and the only soft spot that I saw in the quarter was hydraulic work over. Why did cash margins decline sequentially in year-over-year? What was that?

Our margins were actually up year-over-year in our work-over division. You know, I don't know if you're talking percentages or?

Well, the cash margin, $1,000 per day, it's 1.9, versus 2.1.

It was the mix of business. We had more domestic, lower margin business than the international higher margin business. And we were also impacted in that quarter that we had a significant insurance loss.

We had workers comp claim.

Approximately $500,000 that hit in the quarter.

And finally, Doug, any update on the share buyback program?

Right now, we've gotten authorization in place. We've had other things on our plate that we're looking at. We have not executed share buybacks at this time, but we are in a position to do that fairly readily. When we think circumstances are right.

Excellent. Thank you.

[Operator Instructions] Again, we do have a follow-up question from Stephen Gengaro with Jeffries & Company. Please go ahead.

Thank you. As you look at the landscape for potential acquisitions, and obviously, you can give us as much detail as you want. But can you give us a sense for what you're seeing out there in the current market, and whether it's fairly encouraging to you that you'll be able to continue your successful track record here?

Let me make a few comments, and then I will let Cindy. We see a mixed environment out there. We see a lot of broker-type transactions that there's a lot of activity in bidding on and there will be higher prices. But, at the same time, we are seeing internally, we're seeing some internally-generated opportunities to tack-on type of businesses, and we see these, and these are fairly priced type deals. What do you say, Cindy?

Just to tag into that, I would say that, you know, as usual, we have really energized our operations people to be highly focused on that. We had incentive programs in place, that are growth-oriented, and acquisition are one element of that, in addition to organic growth. We just consider that part of our routine process that we do every quarter, every year. Kind of where we are in the cycle.

We're very mindful of the full cycle economics, that our strategy has not changed. We're continuing to look for these acquisitions within our business lines, and we feel very comfortable that we can continue to find these opportunities and value them at reasonable multiples, even in today's environment. But, they tend to be a little more unique in the sense that they're identified in the field. They're not brokered. They're not highly shopped. But, we view them these kind of tack-on acquisitions that are very strategic for us.

Is there any area of emphasis, or it across the gamut of the business line?

It's across the gamut, as I said always has been. As I said before, there just seemed to be more opportunities to consolidate the well site services market, similar to the Ellenburg acquisition that we did in the beginning of the year. We're highly focused on our business lines, and certain geographic markets where we think there's good long-term potential for the company as a whole. And, we'll continue to do that.

But, we look across business lines that clearly the waiting has been and will likely continue to be in well site services.

And, in well site services we will continue to add on in the rental tool business, where we're consolidating various smaller companies. And the other area of significant emphasis will be up in the Canadian Oil Sands area, where we've had a very active organic growth program adding facilities, and we'll be looking at acquisitions there to assist us in that area, too.

Very good. Thank you.

Thank you, sir. Your next question comes to you from the line of Will Foley of Oil States International. Please go ahead.

Good morning, guys. Just a question on rental tools. Do you anticipate a continued improvement in the rental tool business, this year or just organically, or do we need acquisitions to kind of keep that business growing from here?

Well, if you know that, sequentially, it was down. But I think it was down sequentially from fourth quarter. That was due to we had an unusual fourth quarter with a lot of high revenue, deepwater, gravel pack activity in the fourth quarter. But, basically, we were very pleased with the results in the first quarter at the rental tool business. We saw increase in volume, and we also saw increase in the prices per ticket, so, we see continued growth there. We see that we are getting price increases going forward, and we think we'll have greater activity as we progress.

And if fact just adds another comment to that. We're highly focused on, you know, that level of growth, whether it's organic or acquisitions, really, in all of our business lines. But, if you look at our EBITDA on that business, it improved right at 30% on a year over year basis, comparing first quarter last year to first quarter this year.

The largest acquisition we did was done at the first of last year, and, therefore, had an equal impact on the quarter. There was a couple of smaller ones we did mid-year, maybe the total consideration around $4.5 million. So, I think the point I'm making is you're seeing that right now in our year-over-year results. There's a portion of that growth that relates that the smaller acquisitions done mid-year last year. But, in reality a lot of this year-over-year growth has come from organic improvement, as well as the focused investments that we've been making to upgrade our tools, particularly, these deepwater gravel pack-oriented tools.

Just one last question. What is the mix in terms of leverage rental tools to land versus offshore at the moment?

We have not updated that information of recent. A lot of these tools can go back and forth between shelf and land-type operations. So, a lot of that is migrated away from shelf to land that hurt us last year from a pricing perspective, some of the higher-capacity equipment, of course, is statistically geared more toward deepwater projects, where we spent some of our capital investments. So, we have not measured it, but in the past it used to be kind of revenue with 50/50 land and offshore, but on much higher weight of EBITDA coming from out source that is clearly shifted as the rig count has migrated more to a land emphasis. But, we have not separated that.

I think the primary thing is the tools can be used, universally, for the most part between land and offshore. They just have commanded lower day rates on land. But, I think we've already worked through that situation over the last 18months or so, where that capacity has migrated from work more on shelf-oriented type work to land-driven work.

Okay Thank you very much.

Ladies and gentlemen, that concludes your question and answer portion for today. And I'll now turn your presentation back to Doug Swanson for his closing remarks, sir?

Thank you for joining us today, and we look forward to visiting on our next quarter. Have a good day.

Ladies and gentlemen, thank you very much for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have yourself a great day.