Oil States International Inc (OIS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your fourth quarter 2006 Oil States International earnings conference call. My name is Annie, and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, Mr. Bradley Dodson, Vice President and Chief Financial Officer. Please proceed, sir.

Thank you. Welcome to the Oil States fourth quarter 2006 earnings conference call. Our call today will be lead by Douglas Swanson, Oil States Chief Executive Officer, and Cindy Taylor, Oil States President and Chief Operating Officer.

Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent the remarks today contain information other than historical information, we are relying on the Safe Harbor protections afforded by federal law. Any such remarks should be weighed in the context that there are many factors that affect our business, including those risks disclosed in our Form 10-K and our other SEC filings. I'll turn it over to Doug now.

Good morning and welcome to Oil States International's fourth quarter earnings conference call. We are pleased to announce that Oil States International completed the fourth quarter of 2006 with strong results, led by continued strength in all of our business segments.

Looking back at the year 2006, we had an outstanding year. We reported net income of $1.9 billion; record EBITDA of $372.9 million; and record net income of $197.6 million, or $3.89 per diluted share.

Our business lines that are driven by North American drilling activity, all performed very well, benefiting from high activity levels during the quarter. However, our sequential results were tempered somewhat, due to drilling activity slowdowns in Canada.

Tubular Services revenues and [types] shipped were essentially flat on a sequential basis, however gross margins declined from 9.1% in the third quarter to 8.5% in the fourth quarter.

Our Offshore Products segment was down slightly on a sequential basis in revenues, 2.1% and EBITDA 10.6% due to revenue mix and the impact of holidays on absorption. However, our Offshore Products EBITDA margins remain strong at 15.9% for the quarter.

Net income for the quarter was $0.98 per fully diluted share, an increase of 19.6 when compared to the $0.82 per share reported in the fourth quarter of 2005.

We outperformed our previous guidance range, due largely to improved contributions from our oil sands-driven accommodation operations in Canada and less holiday downtime experienced in our drilling operations, coupled with a reduction in our estimated tax rate during the quarter. We had a $0.05 per diluted share tax benefit.

At this time, I'll turn the meeting over to Bradley Dodson, who will review the financial results.

Thank you, Doug. For the fourth quarter of 2006, we reported operating income of $73.2 million on revenues of $484.3 million and EBITDA of $90.4 million. These results compare to $59.1 million of operating income, and revenues of $44.7 million with EBITDA totaling $72.4 million in the fourth quarter of 2005.

The fourth quarter 2006 results represent an 8.3% year-over-year increase in revenues and a 24.8% year-over-year improvement in EBITDA. Our revenues were up 1% sequentially, while EBITDA decreased slightly, by 3.7%. Our net income for the fourth quarter of 2006 totaled $49.4 million, or $0.98 per diluted share.

Stock-based compensation expense recorded during the quarter totaled $1.6 million or $0.02 per diluted share, which was reported as SG&A expense.

Our effective tax rate in the fourth quarter of 2006 was 31.3%, which was lower than expected, due to tax return adjustments and the NOI's benefit of lower state effective tax rates. The effective rate in the fourth quarter of 2005 was 24.8%, which included a $4.6 million net income benefit related to the reversal of substantially all of the Company's remaining valuation allowances applied against its net operating loss carry-forwards. We expect our rate to approximate 34.5% for 2007.

Total debt at the end of the fourth quarter was $398.6 million, a decrease of $6.3 million from Q3 levels, as cash flow from operations more than offset capital spending and share repurchases made during the fourth quarter. Our debt to capitalization ratio was 32% as of December 31, 2006. Our capital expenditures for the fourth quarter totaled $25 million. In addition, we repurchased 300,000 shares of our stock during the fourth quarter, at an average price of $32.92.

At this time, I'd like to turn the discussion over to Cindy Taylor, who will review the activities of each of our business segments.

Thank you, Bradley, and good morning, everybody. I'll start off with our Well Sites Services segment. In this segment, we were up sequentially 3% in revenues and 1% in EBITDA, primarily due to contributions for our accommodations in Canada supporting oil sands development.

Our rental tool operations were down sequentially, due to activity declines, principally due to the softness in completion work in Canada. Our accommodations business represented 37% of our Well Site Services segmental EBITDA during the quarter, the majority of which was generated in Canada. Our accommodations revenues increased 10% sequentially and our EBITDA increased $2.9 million, or 14%. EBITDA margins improved from 31.8% in the third quarter of 2006 to 33.1% in the fourth quarter 2006.

Shifting to our rental tools, this business line represented 32% of our Well Site Services segmental EBITDA during the quarter. On a sequential basis, rental tools revenues decreased 5% and EBITDA decreased $3.1 million, or 14%, primarily due to the softness experienced in Canada.

Drilling and Other represented 31% of our Well Site Services segmental EBITDA during the quarter. Sequentially, our drilling revenues were essentially flat, but EBITDA did increase 6%. Our average daily revenues were up $400 a day on a sequential basis, as were our daily cash margins per rig.

Going to our Offshore Products segment. Here, our revenues decreased 2% sequentially, while EBITDA declined $2 million, or 11%. Our EBITDA margins came in at 15.9% during the quarter, compared to the very strong levels realized in the third quarter 2006 of 17.4%.

To put it in perspective, our annual EBITDA margins for 2006 came in at 17.2% compared to 13.4% realized during 2005.

Our backlog continued to increase during the quarter, bringing the total to $349.3 million from the prior record backlog of $321.2 million reported in the third quarter of 2006. This 9% sequential backlog increase was primarily attributable to the receipt of additional connector orders for our project named BC10, which is an FPSO Offshore Brazil, additional wench work from Noble. We got orders for two more of their rigs during the quarter, and awards for other drilling equipment. Compared to the backlog at the end of 2005, our ending 2006 backlog has almost tripled.

Closing with the prepared comments for the results at Tubular. Here, our Tubular Services revenues were fairly flat sequentially, but EBITDA declined $1.6 million or 9%, due to lower growth margins realized.

We shipped good volumes during the quarter due to strong customer demand. Our inventory decreased by $18.1 million during the quarter, primarily due to a reduction in tonnage. Our tonnage in inventory at December 31st totaled 157,319 tons, which was down 8% from September 30th levels.

Our average price per ton in inventory increased slightly during the quarter, about 2% and came in at $16.56 a ton. Approximately two-thirds of our OCTG inventories were committed to customer orders at the end of the quarter.

OCTG industry inventories increased during the quarter on a months of supply basis, despite total inventory tons being relatively flat. Average inventory on the ground totaled approximately 6-months supply based upon OCTG situation report estimates.

Now if we can just shift, I'd like to give some summary comments and give you some more details as to our outlook for the first quarter 2007. Our accommodation results were strong during the fourth quarter, due primarily to contributions from our accommodations in support of oil sands activity in Canada.

The outlook remains very bright for oil sands related accommodations, given activity in the region and the significant capital investments that we have made and currently have in progress. However, we are seeing weakness in the demand for our drilling camps due to reduced drilling activity in Canada.

Our Rental Tools contributions are likely to remain strong in the US, but have weakened in Canada due to concerns over natural gas pricing and the related storage levels. Land drilling utilization declined during the fourth quarter due to holiday and end of year shutdowns, predominantly in the Permian Basin. These rigs were slow to start back to work in January as well. However, the majority of our Permian rigs are back to work currently or will be so by this weekend. As a result of a slow start in January, coupled with normal weather issues in the Rockies during the first quarter, our first quarter utilization is estimated to average approximately 75%.

Despite this forecasted reduction in utilization, our year-over-year first quarter drilling EBITDA should be essentially flat due to capacity added over the last 12 months. Given the above factors, we estimate that Well Site Services EBITDA will increase sequentially by approximately 10% in the first quarter 2007.

In our Offshore Products Division, the outlook for the first quarter and the full-year 2007 remains extremely robust. Our backlog position set yet another record this quarter and was up 216% from the prior year-end and quoting activity continues to remain high.

Our quarterly revenues and EBITDA will continue to be impacted by the timing of shipments and the related revenue mix coming out of our various facilities. We expect our EBITDA margins at Offshore Products to increase in the first quarter 2007 from what was realized in the fourth quarter 2006.

In our Tubular Services segment, we expect to see a similar mix of carbon grade product compared to alloy products in 2007, due to the relative activity on US land compared to that of the Gulf of Mexico. We expect to continue to realize strong shipments and revenues during the first quarter 2007, given our views of current activity levels.

However, first quarter margins are likely to be down sequentially due to higher industry-wide inventory levels. If we can consolidate that and frame up our guidance process, considering all of the above factors, our earnings guidance range for the first quarter 2007 is estimated at $0.97 to $1.02 per diluted share.

Just one other point of reference, our depreciation and amortization should total approximately $15.5 million in the first quarter 2007.

If we exclude the gain recognized in the first quarter of 2006, our projected first quarter 2007 earnings should be up approximately 5 to 10% on a year-over-year basis. Weakness in North American drilling activity is being fully offset by strength in our oil sands accommodations and Deepwater capital equipment business line.

The concludes our prepared comments. Annie, would you open the call up for questions and answers?

[OPERATOR INSTRUCTIONS] Thiru Ramakrishnan with Simmons.

Have you guys thought about CapEx budgets for '07?

Thiru, we plan to announce that in about a week. We've got our Board meeting next Friday and we'll give a lot of details and specificity. I think at this time, subject to Board approval, our CapEx will look something like $190 to $200 million. A large portion of that, if you'll realize, has already been announced with our announced expansions at the Beaver River Lodge, the Athabasca Lodge and the new lodge that we're building called Wapasu Creek, in our oil sands division, as well as two new rigs that are currently underway, pursuant to two-year contracts in the Rockies.

Any plans besides the two new rigs that are on long-term contract, any more land rigs that you guys are planning on building in '07?

Right now we've scaled back our plan to adding one additional rig in the Permian, but we don't have to start commitment for that and that's targeted for work in 2008. We're going to evaluate that a bit further at this time.

Okay, great. On the Offshore product side, could you give us an idea of what type of projects you guys are bidding on and what you would expect potential awards could be over the next six to 12 months?

In my prepared comments we talked about it. We're seeing continued strong activity, quite frankly, in all of the elements of our business, from connector work to the additional wench work which we got some of, and there's more out there. A lot of BLP stack-up and integration work, as well as other drilling equipment. So it's fairly broad-based type activity.

Is it fair to say the stuff that you're bidding on is higher margin type work?

The margins are much the same as what we've seen in the past. We feel like we're enhancing our contract terms as we go through this.

Okay, great. And on the OCTG side, inventory was down quarter-over-quarter. Are you guys restocking again in Q1 or what do inventory turns look like for you guys?

We really manage our inventories based on customer demand and what happens particularly in the first quarter is you do have the letting and award of a lot of the program work. So a lot of our activity movement, quite frankly, in the first quarter will be tied to the receipt and awards of some of that program work. I wouldn't say that we are obviously changing our stance on building speculative inventory, given the level of inventory on the ground.

Okay. And then last question. On the accommodation side, you guys sold a camp this quarter to an oil sands operator. Could you give us some color on why the operator would want to buy the camp rather than just rent it from you guys?

Well, realize Thiru, we sell camps to customers all the time. Typically though it comes straight off of our manufacturing line. As you know, we built, as an example, in 2005, the huge facility for CNRL but that was new equipment versus used equipment.

But continually our customers are making buy versus lease decision making for their operations and this was--I don't want to call it unique, it just happened to be that we had some facilities on rent that were located on their dedicated facility that they felt like with their operations and facility layout it was better for them to own. And we negotiated an acceptable term for that. But clearly, that was accommodations we were leasing to them at that point in time. It's a longstanding very valuable customer to us, so we're going to work to help them accommodate their needs.

Those facilities had been leased to them for one to two years, so they were on a permanent facility, permanent operating base for the major oil sands producers. As Cindy said, it was a buy versus lease decision and they decided it was better to buy it.

Stephen Gengaro with Jefferies & Company.

Two things. One, can you give us a sense, when you look at Canada right now in the accommodations business, kind of what portion of that we should think about as seasonal and what portion of that we should think about as kind of year-round? Any guidance to that end?

We have not, I'll be honest with you, framed out the split specifically and have it in front of us for the first quarter. It has been more like 60/40 drilling to accommodations. But obviously, with the growth in the accommodations, again, which another beauty of that is that it's nonseasonal, coupled with a decline in the drilling side of the business, those percentages are likely to continue to shift, in addition to the capital investments, which for us, have been focused on that high growth business in the oil sands support area.

Thank you. And then the second question I had was, when I look at your distribution operations in the US market, I've gone through this many times as far as the impact of the Maverick and NS Group acquisitions. Do you expect to see any impact on your business as you look forward for the next two or three years?

At this stage we really don't see any fundamental change at all in the distribution business. We've done a lot of analysis. There is an enormous number of customers that we and the distribution business supply. I think the only thing that people have in the back of their mind that could fundamentally change is whether those mills develop a mill-direct pattern, and include the distributors.

But the fact of the matter is, distribution plays a significant role in the OCTG business. It has. Sooner's been around since the 1930s. Somebody needs to do this function. There's a significant service facilities handling function that we provide. And given the number of customers drilling, particularly about 70% of the drilling occurring by smaller independents, we feel like that there won't be a fundamental change, in the visible near-term anyway.

That's very helpful.

Stephen, we think that the consolidation of the mills is a positive factor for us. It would indicate better pricing discipline, we think, in the marketplace. And we think there's an opportunity to grow our distribution business within this environment.

Good. That's very helpful. That's basically what we've come out on it, but I wanted to get your view. So thank you.

[OPERATOR INSTRUCTIONS] Daniel Boyd with Goldman Sachs.

Looking at the accommodations business and the revenue from oil sands, was that greater than $25 million this quarter?

It was $20 to $25 million.

And how should we think about that growth going forward?

Based on our current expectations, we are looking for, given the phasing of the new capacity coming online, we're looking at a 20% top-line growth rate in oil sands, '07 versus '06.

That's helpful. And then switching to the Offshore products division, can you comment on the margin in your current backlog?

The margin in the current backlog, as of the end of the year, was slightly up from where we were at the third quarter, on a consolidated basis.

Okay. And what's the timing to work through that backlog?

The large majority for us turns in a 12-month forward period. That's still the case today. I don't have the exact percentage. We'll say 80 to 85% will likely turn in the forward 12 months.

Okay. And then, what's the current utilization of the current facilities for the Offshore product division?

We talked about that before, we're getting fairly full. I mean, the ideal situation of continuous throughput on a daily basis probably will never happen. What we do do to enhance our capabilities; there is upgraded machinery, adding different shift levels as demand dictates.

So we continue to believe that we can get the revenue generation up to $125 million a quarter if everything hits right; timing of customer award, timing of receipt of the equipment from the customer to the extent that it's customer supplied, etc. So, we've got some room there, but there's a lot of potential bottlenecks that occur, given the overall strain on the industry right now with the activity levels that are seen not only by us, but National Oilwell, Cooper-Cameron, FMC, etc.

So it sounds like you're going to hold off on any type of roofline expansion at this point?

Yes. Again, we may do some slight modifications to facilities by adding high-valued various things; waterfront load float-out and those types of things, but no new roofline is planned.

All right, thanks. And one last question. If a customer was to purchase with a term contract for a land rig, would you consider going back up to the two per quarter?

I'm sorry, to putting out two a quarter, is that what you said?

Yes, when you're adding two--.

We're adding two in the whole year 2007, pursuant to two term contracts. If it's the strength of the type of operators that we have in our base, we would definitely consider adding capacity pursuant to term contracts. The reality for us with the type of rigs we are generally getting term contracts more for work in the Rockies. The Permian tends to be a spot market business. But we like our rigs. We think they're a very good tool for our customers, that give us great returns. And with the fundamental long-term outlook, we want to continue to enhance our fleet there, but we'll be sensitive to near-term demand factors.

Victor Marchand with RBC Capital Markets.

The first question I have was just on the rental tools in the US. Things seem to be remaining solid and I just wanted to get a sense as to pricing and margins that you guys see in '07, based on your outlook for US activity?

At this stage, we see no fundamental change in activity, utilization or pricing, and we don't foresee that really in the US. We've got a high-end equipment line that we think serves our customers well. We serve not only land-based applications, we do also support Deepwater operations with our rental tool operations. And we've done a lot to high-grade the equipment. So our bias is to say that both our top-line and our margins are flat with the potential to improve in the US in 2007.

Is that Deepwater part a small portion of it or can you give a sense as to a percent of the business, Land versus Offshore?

Actually, our guys may have given those slips, but it's certainly been a while since I've looked at it. It's not going to be, obviously, starting at 50%, it's a relative contribution given the number of rigs working in Deepwater. But what happens is it's high-pressure, high-temperature, high-end equipment that commands longer utilization and higher day rates, so it's very good work for us. It may be the best way. It may be smaller but growing, given the activity and the outlook for Deepwater.

The second question I have was just on the land rig side. I just wanted to see if you can give a sense into the day rates for the rigs that you had mentioned were going back to work by this weekend, relative to where they were working previously?

What we did, Victor, is kind of look at our projected rig rights for the first quarter '07 compared to the fourth quarter 2006 levels. We're looking at a moderation of those rates in the range of about $750 to $800 a day, which is down about 5% from fourth quarter levels.

Great. That's all I had. Congratulations on the quarter.

Karen Green with Oppenheimer.

I had a question following up on Victor's prior question on the rental tools. What percentage of your overall rental tool revenue is tied to Canada?

Historically it's been about 15% and that held true for '06 and the '07 plan, I think it will be slightly less than that, given the current outlook for Canadian activity overall. So I think it will be slightly lower than that.

And are the margins in Canada comparable to the margins domestically?

Historically, the margins in Canada are a little bit lower than the US margins.

Okay. Have you seen any change? I know we saw a pretty large pick up recently in the Canadian rig count. Have you seen any change at all in your activity levels there? Is it commensurate with what we've seen in the rig count?

We haven't seen it immediately. You typically do get a lift as you move from January to February. And realize, most of our equipment in Canada is on the completion side of the business, so it won't immediately tie to a change in the rig count. But it does get there, it follows, obviously.

Thanks, Cindy. And just one last question. Normally you guys provide the accommodation operating statistics in the press release. I noticed this time it was not there. Is that something that you could provide us with?

Karen, we took those out, because with the changing of our business mix going to the oil sands accommodations away from the drill camp and mix from previous international activities at note, we just felt like the statistics are no longer really correlating to the business, and therefore, felt like it was not appropriate to put them in there. And to our knowledge, we didn't feel like anybody really built their models off of it. But if we did, we feared that it wouldn't really give you the best indication of our performance.

Okay. And can you give us some kind of idea in terms of timing on the accommodations side of the business in '07, as to how many beds are going to be added quarterly or is there one quarter specifically where you're going to see a lot, versus other quarters which may not?

Most of the capacity on the oil sand side is going to come on really in the late third quarter or early fourth quarter.

[OPERATOR INSTRUCTIONS] Matt McGeary with Sentinel Asset Management.

Do you have any comment on how things are looking in the M&A landscape right now?

We continue to be actively looking at transactions. We are active last year. I think one thing we're hoping is that the moderation and the outlook in terms of activity in Canada and some plateauing here in the US, that expectations will become in our mind, a little bit more reasonable. We continue to be active and we're hopeful that we'll be able to put some of the free cash flow that we expect to generate in '07 to use towards acquisitions.

There are no further questions at this time.

Okay, thank you, Annie, and thanks to everyone who dialed in today. We appreciate your time this morning and look forward to future quarters with you. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.