Oil States International Inc (OIS) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the First Quarter 2007 Oil States International Earnings Conference Call. My name is Tanya and I will be your Operator for today. (Operator Instructions) I would now like to turn the call over to Mr. Bradley Dodson, Vice-President, Chief Financial Officer and Treasurer. Please proceed, sir.

Thank you, Tanya. Welcome to the Oil States earning conference call for the first quarter 2007. Our call today will be lead by Cindy Taylor, Oil States' President and Chief Executive Officer.

Before we begin, I'd 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 and many factors that affect our business, including those risks disclose in our Form 10-K and our other SEC filings. I will now turn it over to Cindy.

Thank you, Bradley. First, thanks to all of you for joining us today on the conference call. We are pleased to announce that Oil States concluded another quarter with record results. Our Well Site services and offshore products segments lead our gross contributions during the current quarter. For the first quarter of 2007 Oil States reported revenues of $480.5 million, EBITDA of $98 million, net income of $52.5 million, and record earnings per share of $1.05 per diluted share. Our earnings per share of $1.05 represents an increase of 14% when compared to the $0.92 per share generated in the first quarter 2006, which does include the $0.12 after-tax gain on the sale of our workover businesses which recorded in the first quarter of 2006.

Our financial results reflect the strength of two businesses that are primarily exposed to long term, oil driven activity fundamentals. Those drivers are deep water infrastructure development which drives our Offshore products segment, and oil sands development which drive demand for our Canadian accommodation business. The strength of these businesses coupled with strong overall U.S. drilling and completion activity offset a weak Canadian drilling market in the first quarter and softness in our Tubular Services segment.

I'm going to turn it back over to Bradley and he'll take you through more details of our consolidated results, and then I'll come back and conclude our prepared remarks with a discussion of our segments and our market outlooks.

Thank you, Cindy. During the call, we will be referring to the first quarter 2006 results, which exclude the $11.5 million pre-tax gain on the sale of our workover services business, Boots and Coots, which was completed in March, 2006.

For the first quarter of 2007, we reported operating income of $82.9 million on revenues of $480.5 million and EBITDA of $98 million. Our net income for the first quarter of 2007 totaled $52.5 million, or $1.05 per diluted share.

Excluding the gain on the workover business, the comparable first quarter 2006 results were $79.2 million of operating income on revenues of $496.2 million, with EBITDA totaling $93 million. The first quarter 2007 results represent a 3% year-over-year decline in revenues, but a 5% year-over-year improvement in EBITDA, and a 14% increase in EPS.

Our effective tax rate for the first quarter 2007 was 34.1% We expect our full year rate to approximate 34.4% for 2007. Our total debt at the end of the first quarter was $389.1 million, a decrease of $9.5 million from the year-end 2006 balance as cash flow from operations more than offset capital spending and share repurchases made during the quarter.

As a result, our debt to cap ratio declined to 30% as of March 31, 2007. Our capital expenditures during the first quarter totaled $36.9 million. In addition, we repurchased 240,000 shares of our common stock during the first quarter at an average price of $30.38 per share.

Subsequent to the end of the first quarter 2007, Oil States sold 14.95 million shares of Boots and Coots common stock in an underwritten public offering for net proceeds of $29.4 million. We estimate that we will recognize a pretax gain related to the offering of $12.8 million, or $0.17 per diluted share after-tax in the second quarter of 2007. We will continue to account for our remaining 11.5 million share investment in Boot and Coots under the equity method of accounting.

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

Let's start out with our Well Site Services segment. In our Well Site Services segment we were up 12% sequentially in revenues, and 18% in EBITDA, primarily due to contributions from our accommodations in Canada supporting oil sands development.

Our rental tool operations were up sequentially as well. Do to strengthen the U.S. market and also the seasonal increase in activity in Canada. The seasonal activity increase was muted in 2007 compared to 2006 given the 21% reduction the Canadian rig count from activity levels compared to the first quarter of 2006.

Our accommodations revenues increased 33% sequentially and our EBITDA increased $15.8 million, or 68%. EBITDA margins improved from 33.1% in the fourth quarter of 2006, to 41.8% in the first quarter of 2007. Revenues and EBITDA for our oil sands accommodations increase year-over-year by approximately 54% and 162% respectively. Oil sands activity contributed over 60% of the accommodations EBITDA reported in the first quarter of 2007.

To date, we have spent $70.8 million to expand our presence in the oil sands region with the development of our Beaver River Executive Lodge, the Athabasca Lodge, and the newly established Wapasu Creek Lodge. These lodges are scalable for future growth as manpower needs increase in the region. We have committed to spend an additional $70.7 million on these lodges. We also benefited in the first quarter from the utilization of our mobile fleet unit dedicated to others oil sands project.

On a sequential basis, our rental tool revenue increased 5%, and EBITDA increased 2.3 million, or 12%, primarily due to strong U.S. activity. Our ability to show year-over-year and sequential the growth and rental tools despite a weak Canadian market demonstrates the benefits of the competitive position we've established in United States, as well as, the proprietary nature of much of our equipment.

Sequentially, our drilling revenues were down 17% and EBITDA was down 36% primarily due to the slowness experienced in January and early February in West Texas, as we discuss with you on our fourth quarter earnings conference call. Our average daily revenues were essentially flat on the sequential basis, but our cash margins were $600 per day lower sequentially due to reduced costs absorption related to lower utilization. The majority of our rigs are working today and we expect utilization to increase to approximately 89% in the second quarter.

If we switch to our offshore products segment, in this segment our revenues increased 11% sequentially, and EBITDA increased 3.3 million, or 20%. Our EBITDA margins increased to 17.2% from 15.9% reported in the fourth quarter of 2006. Our backlog grew to 373.4 million at March 31, 2007 from the prior record level of 349.3 million reported at December 31, 2006. The 7% sequential backlog increase was primarily attributable to the receipt of orders for drilling rig related equipment.

Now, if we shift to our last segment, in our Tubular Services segment, revenues were down 16% sequentially due to lower oil country tubular goods shipments which for us were negatively impacted by the sequential decline in U.S. offshore drilling. Reduced offshore drilling activity negatively impacted demand for seamless alloy products during the quarter. Relatively high industry inventory levels and softer OCTG mill pricing negatively impacted gross margins as well, which declined to 6% in the first quarter of 2007 from 8.5% in the fourth quarter of 2006.

Our inventory did decrease by 10.4 million during the quarter, primarily due to a reduction in average price. Our tonnage in inventory at March 31, totaled 156,189 tons, which was down about 1% from December 31, 2006 levels. Our average price per ton in inventory decreased during the quarter averaging $1,604 per ton, which represents an approximate 3% decrease. About 66% of our OCTG inventories were committed to customer orders at the end of the quarter.

Despite these fairly negative sequential results, OCTG industry inventories did decrease during the quarter on a months supply bases to 5.5 months based upon OCTG situation reports estimates.

Now, I would just like to give you some summary comments as to our outlook as we move forward. In our Well Site Services segment the outlook for our accommodations business remains very bright, particularly for oil sands related accommodations given activity in the regions and the significant capital investments that we continue to make.

Our rental tool contributions should remain strong in the United States, but are expected to weaken in Canada as we goes through normal spring break up in the second quarter. Land drilling utilization has improved by the end of the first quarter 2007, our second core utilization is expected to average 89%, which is up from 72.4% reported this quarter.

In addition, as Bradley mentioned, we will recognize a gain in the second quarter of approximately $12.8 million before tax or $0.17 per diluted share on an after-tax basis given our sale of Boots and Coots common stock during month of April.

In our offshore products segment, the outlook for both the second quarter and the balance of 2007 remains robust. Our backlog position set, yet again, another record this quarter and was up 7% from the prior year end and quoting activity continues to remain high. We expect our second quarter 2007 EBITDA margins at off shore products to be comparable to the levels reported in the current quarter.

In our Tubular Services segment, we do expect to see some recovery in our shipment volume during the second quarter. We expect gross margins to be flat, or slightly up sequentially as industry inventory levels have decreased on a month of supply bases and pricing appears to have stabilized. We believe that the industry consolidation at the mill level will lead to a stronger environment prospectively.

To conclude, if you consider all the above factors, our earnings guidance range for the second quarter 2007 is estimated at $0.98 to $1.03 per diluted share, which doesn't include the expected gain of $0.17 per share gain related to the Boots and Coots offering. Without the gain our earnings are expected to be essentially in line with current First Call estimates.

That does conclude our prepared comments. Tanya, you would you please open a call up for questions and answers?

Yes, thank you. (Operator Instructions).

Your first question comes from the line of Bill Herbert with Simmons. Please proceed.

Thanks, good morning. Nice effort here for Q1. A couple questions here. Cindy, I thought that the accommodations margins for Q1 were exceptionally strong. I'm wondering given the mix shift in your business are we witnessing a structural shift higher with regard to your margins on a go forward basis with respect to ETI, not suggesting that you're going to generate 41% margins every quarter, but what I'm wondering is that if we've witnessed a step change increase higher with respect to your margins on the average basis going forward because of the mix shift as it relates to oil sands?

Bill, I do think you're going to see that. And you're absolutely right, we typically do get peak margin percentages in the first quarter because we not only have the strength of the oil sands, but we do it the leverage from the seasonal increase in our camp, which obviously the rental portion leverages those. But, what you saw was we had significant improvement in first quarter compared to other years first quarters. We think will be down a bit in Q2 just as you go through break up. But, if you look at that Q2 relative to other Q2's you will see improvement, yes.

Okay, great. And then secondly, as it relates, going to--from the very good to the not so good at least in the Q1 OCTG, it sounds like giving were inventory trends have come with respect to months of inventory on the ground really compressing, do we think that business as basically bottomed? And what are your expectations going forward?

Well, as the said on the fourth quarter call, we thought it would be a very competitive environment coming in to the first half of the year. Predominately focused on inventory on the ground and pricing and we certainly saw that. Is probably a bit exaggerated in the first quarter with the letting of all the program work and a lot of price negotiations that occur, particularly early in the quarter.

I am feeling more positive than I did obviously at the end of the last quarter given the inventory did come down, the mills have done a very responsible job with respect to output in this environment and with inventories on the ground decreasing and again, pricing seems to be stabilizing. I think it helps confirm that we will have a better second half market absent and any other structural change, but a better second half market than what we've seen this quarter.

How do you see gross margins for sooner evolving as the year unfolds?

We have them increasing modestly in Q2 with further increases as we move through Q3 and Q4, based on the fundamentals that we see today.

And finally, with regard to the broader, longer-term implications for the domestic OCTG business with respect to U.S. Steel, Lone Star, what is your perspective on that?

We have very strong relationships with both of those mills, as well as other mills in the United States and we just generally think that the mill consolidation is a favorable trend with respect to output and management of supply, demand economics. So, we are optimistic that it is going to bring enhanced ability to the market as we move forward.

Any redefinition or reshaping, if you will, with respect to the competitive dynamics in your business? Clearly, [Tamarus] and Maverick there has been some intimations that at least there was going to be perhaps a pursuit of a direct sale model with the largest consumers of OCTG in the U.S.. What are your expectations on that front?

We don't really see changes at this stage from the [Tamarus]/Maverick combination. Realize that Maverick has always had a marketing effort and have dialogue with their customers, which not every mill does. So, that is not necessarily a broad departure from the way they have done business in the past. Maverick has been one of our strongest mill relationships, as well. As has U.S. Steel and Loan Star. So, at this stage we really don't see structural changes.

The most important thing the distribution business does serve a valuable role in the United States and always has. The mills as a rule do not have the infrastructure marketing that's necessary that the distribution business has served very effectively for the last 75 years. So, we really don't anticipate any structural changes there.

Thank you very much.

Thank you, Bill.

Your next question comes from the line of Victor Marchon with RBC Capital Markets. Please proceed.

Thank you. Good morning everyone.

Good morning Victor.

The first question I have in on offshore products. Can you talk about the mix you guys have in your backlog now versus prior few quarters, and also can you just touch on how much of the work--how much of the backlog is expected be worked off this year and also in '08?

The mix right now fortunately, is holding in very good is slightly improved is very broad based in the sense that we have good demand for our connectors associated with offshore infrastructure development. We've got good activity subsidy on the pipeline side. And we're continuing to get good orders on the drilling rig equipment side.

So, it's particularly nice when it's broad based like that because it does give us good throughput through all of our facilities for the most part. So, were optimistic about that. The margin and backlog are strong. Typically I have my report which calculates how much turns in a given year, I would have to turn to Bradley about that.

Right now we expect about 71% plus or minus to turn in '07 calendar year. And we already built 25% of the current backlog is related to '08 based on our current schedules.

Great. And just to staying on offshore products. The quoting the backlog, is there any thoughts to increasing the manufacturing capacity there? I know you guy's had touched on it in some prior quarters. I just wanted to see if you could give us an update on that?

We are definitely continuing trying to expand our product delivery capabilities that encompasses machinery upgrades. We're doing some facility expansion, particularly in our Houston operations; we're going to add a high bay there. And, also improving server outsourcing arrangements, such that we can gain access to other facilities that may not be working at the levels of utilization that we are, or making access to water from facilities and the like.

But, we're trying expand our product delivery capabilities through those means, as opposed to building complete new infrastructure associated with new manufacturing capacity.

The only other question I have is just on the acquisition side. I was wanted to see if you guys could give us an update on what the landscape looks like now and your thoughts on the opportunity, specifically in what the areas of your business your see most likely over the next six to 12 months?

I think the acquisition market has improved over the last six months. Part of it was continue strong activity in the U.S. provides opportunities for us. We're going to be looking there typically on the completion side of the business.

In Canada, the change in the Income Trust tax regime that has been announced, has made that market a lot more attractive. We'll be focused on adding operations that are more focused on the oil sands side of the business that the traditional Canadian drilling site. I think we continue to look for opportunities in the deep water arena, but as we stated those are more difficult to come by.

That's great. That's all I had, Thank you and congratulations on the quarter.

Thanks so much.

Your next question comes from the line of Jeff Tillery with Pickering Energy Partners. Please proceed.

Hi, good morning.

Good morning Jeff.

You spoke in the prepared marks about the percentage of the combinations profitability from oil sands, could you help us out what that comprise as revenue in the quarter?

We'll have to dig it out for you.

While you're looking for that we can move on to another question on the oil sands. As you look at the progression through this year you got a lot of capacity coming on late this year. How do you see the revenue trending between now and the capacity on line? Are you fully booked, and this is a current run rate until we get to that capacity?

We are definitely fully booked. That is what has happened if you go back even thinking through the progression and of what Wapasu Creek facility. We announced that the intention that's being a spec type facility that we felt was appropriate based on activity in the region, and in fairly short order, two to three months, we had already secured a contract for all of that available capacity. And recently, about a month ago, we announced a further expansion of that facility which was, in this plan all along, but that is earlier than we had expected.

The capacity, most of the capacity that we have at the major lodges, Beaver River, Athabasca and Wapasu Creek are contacted by capacity. But, even the portions that are not, which is ours our strategy, has been in very high demand right now. So, right now we're on track and budget to deliver those incremental rooms in accordance with our press release dates and submitted dates to have those up. So, we'll be ramping those up on that schedule.

In the first quarter of '07 we had about $39.6 million of oil sands revenues, that's an estimate. And about 25.1 million of oil sands EBITDA. And note that there are a lot of the uplift that we saw was in utilizing some of our mobile units for oil sands purposes. So, these are large camp units, etc.

Those mobile units, do those carry spot type premium pricing, verses the permanent lodges?

The real difference there, if you think about it, there is a lot of site preparation work and a lot of facility work that is necessary to install a lodge facility that accommodates 1000 to 2000 beds and you've got to recover a lot of ground clearing, ground stabilization. We set pilings, it's very complex type environment to get these lodges up and therefore that cost has to be recovered by the initial rentals.

What Bradley is referring to is we have a broad sweep of smaller camps. But we have been focusing on what we term our 49 man dorms, which means they accommodate 49 men. But, they can be configured into camps anywhere from 100 to 500 type and size that do support activities in the oil sands region. But, we consider those more mobile camps.

But, they do have the extent of the site preparation investment. And obviously, it's pure--not pure rental, but it's rental, and we'll have a catering element that goes with it. But obviously that's very high margin type work. The 49 manned work, not only in support of construction activities, i.e. we have huge demand at the Athabasca Lodge beyond the beds that we had available and we moved in 449 beds to take overflow, if you will, around that Athabasca Lodge.

That's one example. Another example is when these dorms go out into the region in support core drilling. A lot of our customers right now are doing some of the core drilling and taking samples for the future side B work, and they also need the camp support in those activities.

Any reason to think these mobile units won't stay pretty fully utilized going forward?

They will be, but the thing that we have to accept is drilling activity. And they go through normal seasonal decline. Now, a lot of our customers, given the activities around their core drilling, have already committed to the next season. So we've generally left those on location with some stand by revenues.

But, there is a seasonal element that still remains for those drilling activity even though it's "oil sands related" drilling activities because they have the same issues of moving equipment during breakup.

My last question on the sooner business. You spoke a bit about the impact off Gulf of Mexico and seamless alloys on the results, Were volumes down on land as well?

We didn't look necessarily at every single customer. We really did a major customer analysis, both year-over-year and sequential, and focused on where we have activity declines. And again for us, it is somewhat--I don't think it is a macro trend unnecessarily. It could be partially customer specific in this quarter, but for us it related to some of our offshore accounts and seamless alloy.

My last question on the land drilling business. The margin was actually better than we had modeled. How do you see margin trending in the next quarter or two?

Well, as we said, we had really more of a blip in utilization that we talked about on the fourth quarter conference call; just a very slow start coming back from the Christmas holidays. So, to have enjoyed EBITDA margins of 41.7%, although down sequentially, I thought they were pretty nice given that our utilization only averaged about 72.5%. But, as utilization ramps up, which we've projected, those margins, EBITDA margins improve.

Okay, thank you very much.

Thank you.

The next question comes from the line of Kevin Pollard, with J.P. Morgan. Please proceed.

Thanks, good morning. I just wanted to follow-up on the question on land drilling actually. It looks like the average pricing is holding up a little bit better than I thought it would. I know you will get some of the margin back as the utilization improves, but are you actually seeing your top line day rates hold in or, have you experienced price deterioration there?

Our day rates are holing in at this stage. We made a little bit of day rate concession in the first quarter when we put some of those rigs back to work.

But, we're in a pretty stable environment and enjoying strong utilization for our rigs. So, I think we are in a good place right now do the pricing. That can vary quarter to quarter just a little bit because we're obviously compensated for moves and a few things like that. So, it will vary in and out, but we don't see structural changes in that day rate at this time.

And with that business stabilizing utilization getting back up to previous levels, where are your thoughts right now on further capacity additions beyond the two rigs you have in the works?

You are right, we have two rigs coming out pursuant to term contracts in the Rockies, and they will be out in the summertime. In our capital plan, which we announced at the beginning of the year, we have one additional rig.

But, our thoughts are right now that the Permian seems to be pretty well served by capacity right now. I'm not sure we would add equipment there. If we had additional interests and term contracts in the Rockies, which is about the only market that offers it for our type of rig, we would be interested in that. And, keenly interested in getting penetration in the Barnett and the Fayetteville. And if we had opportunities there, I think we'd put some capacity to work there to get a foot hold in those markets.

But, I think that would be more the limited exception that would encourage us to capacity out right now.

Okay. If I could switch over to the offshore segment? I wanted to--you commented earlier about some of the activities you're take the throughput of that business, and the capacity without real roofline expansion. Where do think the quarterly revenue capacity can go? You have talked in the past about 125 million, a rough number on a quarterly basis. Where do you think some of these efforts you are undertaking could push that quarterly revenue capacity to?

Well, we hope to test that 125+ million level this next quarter, and so we'll see how we do right now and with the next quarter and will go from there and update it.

But, we're optimistic that we can exceed that 125 million if we do the right things. And a lot of the things have to tie in together, quite frankly, because you have a lot of facilities in both United States and the U.K. that need to be enjoying good shipments and percentage of completion work at the same time to hit those levels. But, we think Q2 is going to be a good quarter for us.

Okay. And my last question, if I can move up to the accommodations. You have a lot of the capacity going on the oil sands later this year. Are there any sort of start up costs or things like that would impact the margins of that stuff comes on in Q3 and Q4 that we should be thinking about?

Nothing specific, but you hit on something that is relevant on these lodges. The margins on the earlier installations, I don't even want to use the word, they're not as high, they're certainly not low by any means, but they're not as high because again they are absorbing a lot of site preparation and the core infrastructure; kitchen diners, rec rooms, etc..

As we expand capacity we leverage those margins up because you're just generally adding incremental rooms. You don't have to do more extensive site preparation. And you may or may not have to expand your core infrastructure. So, what happens when you get these large dorms, the expansions actually help our margins.

Thanks, that's very helpful. That's all I had, thank you.

Thanks, Kevin.

Your next question comes from the line of Dan Boyd, with Goldman Sachs. Please proceed.

Hi, good morning.

Hi, Dan.

I like to spend some time and oil sands, as well. Would be correct to say that 25% of the oil sands revenue is related to the mobile units?

That's a level of detail that we don't even cut it ourselves.

Just trying to go through the numbers, it looked like there was significant improvement just over all in the oil sands that wouldn't even be related to the mobile units?

Our lodge facilities, Beaver River, Executive lodge, Athabasca lodge, have all contributed very well. We've got, again, remember a legacy contract with [inaudible Group] that contributes and the mobile work as well. And, even though it is a weaker Canadian market, there was side by side camp support that is seasonal in nature.

So it's a combination of things. We can completely ignore the drilling activities support which always lives are revenues and EBITDA in the first quarter. It was just as we said much more muted this year given that the rig count was actually down about 21% when you look year-over-year.

Did that provide the opportunity for you to take more mobile units to serve the oil sands?

Typically, the type of mobile units are more large camp units, which is where we have been making our capital investments over the last three years. As opposed to the more traditional, we term it a "side by side" camp market that only generally serves 20 to 30 people. It's sufficient at the drilling site. So, they're really different configurations and different pieces of equipment.

We've kind of been in a maintenance mode, if you will, on the side by side drop cap market over the last few years just because we really haven't seen significant grows in the drilling rig count there, and clearly didn't this year.

Yes, thanks. Then, switching to Tubulars. How do you see the mix shift changing as we go through the next year? And are you factoring in a recovering of the Gulf of Mexico activity into your improving margin expansion?

We really are not. We're not seeing much in terms of, again, our customer mix base and the Gulf of Mexico rig count has obviously been down. You wonder if it to get any worse, I guess it could. Yes, I think there's an upside there to the extent that the market does improve. In this case we're not counting on it at the stage.

Okay, one final question. I think we would agree that when we deal with some of the parts on oil stakes, there's a discount with some of the peers within the product groups. Can you just comment about how you think about that, and if you see any potential opportunities to try to eliminate that gap?

Obviously, we think about it a lot. I don't think there are too many companies that think their stock is fairly valued or over valued by any means. But, I think we have some challenges because we have a mix of businesses that are somewhat unique compared to other service companies. OCTG business is one, given that there are not that many distribution companies out there.

We've always felt like if we can grow our business line and achieve good returns on invest capital, that the share price moves, which has done, the stock price has performed very well over the last five or six years in total. But, then the question is, do you "get that some of the parts valuation." If we became convinced that wouldn't be the case I think we would think about packaging the mix of businesses possibly differently to enhance that, which I think is the nature of your question.

But again, we really focus on the fundamental business lines and opportunities for growth and return on invested capital, very much like what we did with our workover business and the like it was very much better for that business to be married with a well response company that had the personnel on the ground and, therefore, sold that to Boot and Coots, which of I go back to the time I think a lot of my shareholders may have thought that was a fairly complex transaction for the size.

But, at the end of the day we were convinced it was the right thing for the business, the right thing for Boots and Coots, and would help us maximize the returns on our investments in that business. And quite frankly, I think that has worked out very well.

Yes, it was a little bit more complex. But, I think you have to look at those types of opportunities to truly "unlock" the value of an individual business line. We look at these opportunities all the time, quite frankly.

Okay, thanks a lot.

Thank you.

(Operator Instructions)

Are there no more?

I show no more questions at this time.

Okay. Thank you so much, Tanya. I want to thank all of you for dialing in today. I know it's a very busy week with those earnings and OTC week. So, appreciate your time and look for to future quarters with you.

This concludes the presentation. You may now disconnect and have a great day.