Oil States International Inc (OIS) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Oil State International earnings conference call. My name is Sympana. I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference.(OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Bradley Dodson, Vice President Chief Financial Officer. You may proceed, sir.

Thank you. Welcome to the Oil States first quarter 2008 earnings conference call. Our call today will be lead by Cindy Taylor, Oil States' President and Chief Executive 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 of the many factors that affect our business including those risks disclosed in our Form 10-K and our other SCC filings. I will now turn it over to Cindy.

Thank you Bradley, and thanks to all of you for dialing into our call this morning. Oil States posted record results in the first quarter of 2008 which were significantly above first call estimates and our previous guidance range. As most of you know, this is the seasonally strong quarter for our Canadian operations, strong utilization of our Oil Sands Lodge accommodations and our mobile camp equipment fleet lead this segment to report record results. Our deep water capital equipment business also performed well on a year-over-year basis. In addition, we benefited from the two rental pool acquisitions that we completed in the third quarter of 2007. For the first quarter of 2008, Oil States reported record revenue of $601.2 million, EBIDTA of $125.8 million, and net income of $66.5 million, or $1.31 per diluted share. Our revenues and EBIDTA were up 3% and 33% sequentially. Bradley will take you through more details of our consolidated results and then I'll come back on the line to conclude our remarks with a discussion of each of our individual business segments and close with our thoughts as to the market outlook.

Thank you, Cindy. For the first quarter of 2008, we reported operating income of $101 million on revenues of $601 million and EBIDTA of $126 million. Our net income for the first quarter of 2008 totaled $56.5 million, or $1.31 per diluted share. Our comparable first quarter 2007 results were $83 million of operating income on revenues of $481 million, with EBIDTA totaling $98 million. This first quarter 2008 results represent a 25% year-over-year increase in revenues and a 28% year-over-year increase in EBIDTA. Depreciation and amortization in the first quarter of 2008 totaled $22.7 million compared to $14.4 million in the first quarter of 2007. This increase was due to the acquisition and the capital expenditures made over the past twelve months. DNA is expected to be $24.4 million in the second quarter of 2008. Net interest expense totaled $4.3 million in the current quarter and $3.9 million in the first quarter of 2007. Second quarter net interest expense is expected to be $4 million. The effective tax rate in the quarter was 32.7%. This modestly lower rate was due to reduced tax rates in foreign jurisdictions. Turning to the balance sheet, our net debt at the end of the first quarter was $475 million, up from $461 million at the end of the fourth quarter of 2007. This was due to $61 million in CapEx spent during the quarter and $29 million spent on two acquisitions with this spending partially offset by operating cash flow. Our debt-to-capitalization ratio was 31% as of March31, 2008.

At this time I would like to turn the discussion back over to Cindy, who will review the activities of each business segment.

Thank you, Bradley. Our well site services segment was up sequentially 27% in revenues and 45% in EBIDTA due to increased contributions from our expanded accommodations in the Oil Sands region partially offset by seasonal softness in our Rockies operations and project delays in certain of our U.S. rental pool operations. Our accommodations revenues increased 60% sequentially and our EBIDTA increased $32 million, or 110%, due to contributions from expansions of our Beaver River, Athabasca and Wapasu Creek Oil Sands Lodges coupled with heavy utilization of our mobile camp assets. We remain at full effective utilization levels in all three lodges but are experiencing seasonally-reduced demand for our mobile camp assets. During the first quarter of 2008, we continued to expand our capacity in the Oil Sands region with the acquisition of the Christina Lake Lodge in February, 2008, as well as commencing construction of our fourth major lodge, the PTI Conklin Lodge. Both of these lodges are located in the southern Oil Sands region and expand our presence in this growing area serving several SAGD developments. On a sequential basis, our rental pool revenue was especially flat but EBIDTA declined 9% due to start-up costs for our expanded operations, some project delays and pricing mix issues. Sequentially our drilling revenues and EBIDTA were up 4% and 11% respectively due to improved utilization and margins in our west Texas drilling operations, partially offset by seasonally lower utilization of our Rockies drilling rigs. Our average daily revenues were up $300 per day on a sequential basis and our cash margins were up $200 per day due primarily to improved cost absorptions in our Texas operations.

In our offshore products segment, we reported revenues of $126.9 million and EBIDTA of $24.1 million compared to revenues of $141.2 million and EBIDTA of $21.3 million reported in the fourth quarter of 2007. Margins in our offshore products segment improved sequentially and on a year-over-year basis. Overall our EBIDTA margin in the first quarter improved to 19%, increasing from 15% in the fourth quarter of 2007 and 17% in the first quarter of 2007. Our backlog grew during the quarter to $383.5 million compared to $362.2 million at December31, 2007. One of our more significant backlog additions during the quarter was the award of an order for sub-C pipeline equipment for Block 15 in Angola with athergy. Our tubular services revenue and EBIDTA were down sequentially 9% and 8% respectively, as our tonnage (inaudible) declined primarily due to seasonally strong orders in the fourth quarter of 2007. Sequentially our gross margins improved to 6.1% from 5.7% realized in the fourth quarter of 2007. Industry inventories continued to decline due to strong demand, reduced imports and U.S. mill production challenges. Industry OCTG industry inventory levels are currently at 4.3 month supply based upon the April OCTG situation report estimates. Now if I could I'd like to give you some of our summarized comments as to the market outlook as we move into the second quarter of 2008.

Within our well site services segment, we will continue to see significant growth opportunities for our accommodations business in the Oil Sands region. In the second quarter we will continue to execute our previously-announced expansions of our Conklin and Wapasu lodges. However, the second quarter is our seasonally weak quarter due to Canadian break up. We expect accommodations EBIDTA could be down 55% to 60% sequentially in the second quarter due to the seasonal decline in activity related to break up. We expect second quarter EBIDTA margins to be comparable to be second quarter 2007 margins as a result. Our rental pool contributions are expected to remain fairly flat sequentially given normal seasonal decline during break up in Canada offset by higher commodity prices in the U.S. which should translate into increased completion activity and momentum. Land drilling utilization in west Texas recovered nicely in the first quarter. We should see further utilization improvements in the second quarter as activity in the Rockies recovers from the seasonally soft first quarter. Overall we are forecasting utilization of approximately 86% in the second quarter, up from 75% in the first quarter of 2008. In our offshore products segment, our backlog position remains at strong historic levels over all and product mix and margins within backlog remain consistent with recent levels. We continue to forecast second quarter EBIDTA margins in the range of 16% to 18% on continued strong sales activity.

As for tubular services, industry inventory levels have continued to decrease on a month-to-supply basis. With rising steel import costs, recently announced price increases by the major U.S. mills, coupled with continuing strong demand, our second quarter outlook for tubular services is more optimistic than it has been in recent quarters. Given that the second quarter is our seasonally weak quarter in Canada, our earnings guidance range for the second quarter is estimated at $0.90 to $0.97 per diluted share. We remain very positive about the long term prospects for our company, particularly given the strong rebound in natural gas prices which has lead to announced spending increases by many of our key customers in the United States. That concludes our prepared comments. Sympana, would you open the call up for questions and answers at this time?

No problem. (OPERATOR INSTRUCTIONS). And the first question comes from the line of [Jeff Tillery] of [Tudor, Pickering and Holt]. You may proceed sir.

Hi, good morning.

Morning, Jeff.

Hi, Jeff.

The seasonalities, , that you guys are guiding to in the second quarter is kind of toward the high end of the range of what we've seen historically. I think it's pretty similar to what we saw in 2004. , could you just talk about what in the first quarter drove Q1 either unusually high or, or is there anything unusual that you see in the seasonality going forward for the

Well I just think what we're really dealing with was an exceptionally strong first quarter on all fronts. Our major lodge facilities, as we indicated, were full during the quarter and our mobile camp equipment was extraordinarily busy. A lot of times we have both large camps and smaller camps. We've made investments on these larger camps, particularly in support of SAGD drilling operations and pipeline construction operations that are tied to the Oil Sands development. But nonetheless, you can't drill there nor build pipelines during break up so that will come down hard, and has, as has the conventional fleet. But really the conventional side of the business is less meaningful compared to this and you can impact in the, the Oil Sands area so I think the answer to that is, , we're just coming off a higher base, if you will, from where we've been before and a portion of that is driven by growth in our lodge facilities, which are year round and therefore non-seasonal. But again significant growth in our mobile camps (inaudible) that does remain

And, and, and Bradley, in the past you have given us indication of how much of the oil, how much of the accommodations business was in Oil Sands. Could you do that for us for the first quarter as well?

Sure. I believe it was $94 million of Oil Sands revenues and let's see, $94 million of Oil Sands revenues and about $46 million of Oil Sands EBIDTA. That includes both the lodges and the mobile camp equipment.

Is it fair to say that those, those mobile camps were somewhere in the kind of 30% or 40% of that revenue number for the first quarter? Is that a right ball park?

That's right.

Okay. As you guys look at, , rental pool margins going forward, do you think that the first quarter is, the first quarter is kind of trough or, or do you think we should see a decline with the, with Canadian activity down in the second quarter as

I'm sorry. Would you repeat, repeat that just a second?

Sure. Could you talk a little bit about your outlook on, on rental pool margins? Do you think that the first quarter, , it's a trough in those margins or do you think that we see a little bit of a decline with the second quarter decline in Canadian

I think that we should stay pretty flat if not slightly improved and you're right, we have the seasonal decline in Canada. That's not the biggest percentage, obviously, of our pool with the much smaller fees, but offsetting that we expect improvements in the U.S. from where we were first quarter due to the things we mentioned. We had some startup costs in some of our expansion opportunities, , including Mexico and a couple of the resource play areas. There were some, particularly on the deep water side, there were some deferrals of activities that go from Q1 to Q2 and mix was a bit of an issue for us, too, as well with some of the work just being the activity was there but it was lower-pressure work where, of course, our higher rental rates come on high-pressure-type work. So kind of mix plays an impact. But I think if I look at those two things I would expect flat to slightly improve to margins in Q2 on a EBIDTA margin percentage

Okay. Thank you guys very much.

Thanks, Jeff.

And the next question comes from the line of [Victor Marcony] from IBC Capital Markets. You may proceed.

Thank you, good morning.

Hi, Victor.

The first question I had is,, could you give us an update on how the new waterfront facility is going?

I can. Obviously I don't remember, I guess we closed that on February15, in the first quarter. It's a twenty-two acre property with about 200,000 square feet of enclosed manufacturing and assembly-type capacity and capabilities with, , just about 400-plus tons of overhead crane capacity so it's really ideally suited for a lot of this large project work which is being let in the marketplace now some of which we were trying to handle and do in our Houston operations. , we've got a new manager out there. We've increased the staff and we're fully operational at this point in time. Of course we were working on an outsource basis prior to buying the facility. The kind of work that we've got in the facility right now is some BOP stack-up work fixed platform work and riser handling equipment. Most of this, of course, is backlog that we already had in our south Houston operation so it is more of a transfer of work and kind of de-bottlenecking right now to insure we make deliveries. Our goal, of course, is now to over time build a stand alone backlog for that facility and become more self-sufficient. That will take some time obviously, to do but the facility itself is very functional, working, and we're making a handful of improvements

Thank you all for that. And would it be fair to say that from a stand alone backlog standpoint that we'd be looking at the second half of this year?

Yes.

Just switching over to tubular services in looking at some of the, the recent price increases from the mills pretty significant. I wanted to see if you could sort of quantify where margins could be on that business in the second quarter given the price increases that we've seen to date.

Well, it's obviously a question mark. We see what April's doing at this point in time and what's really happened has been just a dramatic change in the tubular business over the last sixty or ninety days and, , there have been several price increases announced. The ones early in the first quarter were smaller in the kind of $75 to maybe $100 a ton range. Late in the quarter more increases were announced and most recently US Steel, within the last two or three days, announced an additional $250 per ton surcharge on all product delivered effective May1. So we're scrambling a bit in terms of communicating that change to our customer base that steel prices are moving significantly,and that does , improve our margins and our commentary on the call is clearly suggestive of improved margins. I can't give you a number in terms of what they'll come out to be overall but I think you could look in the range of 200 basis points improvement on where we were in Q1. If the market holds up it certainly looks like

And the last one I had was just on the land drilling side. I just wondered if you could just talk to what you're seeing on the pricing side as well as the expectations of utilization getting back up the 85%, 86% range in the second quarter what operating costs will do under that utilization expectation.

Cindy Taylor. , clearly the, the, the first and immediate thing that we want to do is get our utilization up. And we did - had good success in Texas during the first quarter. The Rockies were, , particularly hard this last quarter our utilization isolated just on the Rockies was 49% compared to 60% in the Rockies in the first quarter of 2007, so particularly difficult weather conditions. We need to get those rigs back to work and get the utilization up. But that looks good just from a stand alone company basis. From a more macro basis, as you know, the industry as a whole is putting rigs back to work which will firm up net pricing environment. You certainly heard that from the major drilling companies to date and we are seeing the same thing. But first goal is to get utilization up. That helps us, obviously, as you point to a cost-per-day basis simply because you've got a broader base of working rigs to spread the costs over. I think we're looking in the range of $500 per day margin improvement as we reach these utilization levels. We're not forecasting price increases at this stage. I think the industry needs to firm up a bit before we

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

Thank you so much.

Thank you, Victor.

Thank you, Victor.

And the next question comes from the line of Ken Sill from Credit Suisse. You may proceed.

Ken Sill. Thank you and good morning.

Cindy Taylor. Hi, Ken.

Good morning.

Hi. I wanted to follow up on the, the new capacity additions in offshore products. Obviously you've got a lot more capacity there with the new facility. Is there any idea on what you're new, you know, is there any idea of what the limitation could be now in terms of run rate on revenue with the new facility?

Well, I think the point that I'm trying to speak to is that we've got to build a backlog for the facility. It's a very sizeable, significant facility and we've already got a work force. Ken, I don't know if we're at seventy-five-ish or so in the facility already and could expand that, obviously, if we get that backlog in the facility, so again, it's going to be what types of products are let in the marketplace and our ability to build that backlog. But you're right. The capacity is there. Our challenge is to do the engineering work necessary and bid successfully to get a stronger backlog. In the meantime, it's, it's additive and helpful just in the sense that, improving our ability to deliver on time to our customer base.

And then, follow on to that is as you kind of integrate that facility and ramp it up, , what kind of an impact on margins could that have over the next three, four

Well, we're not, I'll just tell you until I get a revenue base more sustainable I really don't know the answer to that but we're going to be bidding, obviously, products that are comparable to what we have currently in our backlog so I don't know that yet I'm willing to say it really enhances margins. It depends on the mix that goes in that facility and whether if it's kind of fabricated, assembled product that it's not going to necessarily leverage our margins up but it won't hurt us either.

So if it's assembly-type work, it's not going to help you, but if you can actually get better absorption from -

Well, it helps us, obviously, from a revenue standpoint and an absorption standpoint.

Yes.

Just the gross margin attributable to the individual projects that are in there.

Yes. I was just kind of curious if you could get how much impact you might get out of the system absorption if there's no change in mix and you just get the volumes up in there.

Yes. It's just a little early to tell and it was not a - it seems pretty apparent that we can pay that off rather quickly based on activity that we foresee going into the facility. But we really need to get it wrapped up.

Okay. And another thing that's seems to have come up is the rise of essential shale plays in Canada. Is that going to have an impact on your mobile camp business?

It could. I mean the question is the timing of the rent but in fact, we're having a strategic planning meeting much of which is to assess our opportunities in some of these developing shale play markets but, that would absolutely be a positive driver for our mobile camp fleet as long as it's in an area such as D.C. where you need camps. If it's in a non-camp-type territory, Saskatchewan and a few other places, it won't help us as much but every indication is that there would be, if those plays develop, that there would be a need for equipment and we want to be very proactive and on the forefront there so that we, , have the capacity if and when the demand

Okay. Thank you very much.

Thank you, Ken.

The next questions comes from the line of Kevin Pollard from JPMorgan. You may proceed.

Thanks. Good morning.

Morning.

I want to, pursue your Oil Sands just a little bit more specifically the role the mobile camps play in that. I mean I know there's more seasonality there than you might think with those mobile camps in Q1. It sounds like yes, that's accounted for most of the drop off in Q2. , when would you begin to get that kind of $30 million to $40 million or so, $30 million to $35 million I guess it sounds like of mobile camp revenue back in Q3 and

Without speaking to the dollar amount, because I don't have that clearly in front of me, Q2 is always the hardest quarter as you go on break up. You need things to dry out and firm up quite frankly and, , again I hope I've covered it but the mobile camp fleet supports a number of activities that are tied to those developments but most particularly the SAGD drilling effort and then the follow on is the pipeline connections necessary to get the (inaudible) into processing facilities and so we had, , a decent amount of camps dedicated to pipeline construction. Neither of those two activities will or have ongoing activity during particularly the early stages of break up. It really depends on weather conditions but typically the third quarter kicks off and ramps through the fourth and then peaks in the first as it relates to mobile camp-type activity and there is no reason to think that that's really any different

So if we just sort of think about all of the moving parts in the Oil Sands business for you through the year you'll have the, the, the accommodations will stay consistent and grow as the other new capacity comes on line you'll probably get at least a portion of your mobile camp revenue back in Q3 and Q4. Is that kind of the way to think about it?

That's right. That's exactly right. And realize that when we do our economic analysis of making investments in mobile camps we typically assume 90 to 100 days of utilization. So all the economic analysis is based on the seasonal impacts that are present in this marketplace.

Okay. Thanks. And then if I could switch back over to the, the land drilling business. You know in the past you've built a few new rigs and then kind of backed off of that as the market softened last year. I was just, is the outlook looking better? Can you give us an update on, what's your thoughts are on additional expansion in that business?

What we are doing with our land rig fleet is really bringing on capacity that's commensurate with our existing kind of customer base needs. We're not per se building a lot of speculative-type rigs. As an example we delivered two in the Rockies I think in the third quarter, or at least the last half of last year pursuant to term contracts with one of our major customers. We brought a rig out earlier this year for work in the Barnett, which is a market that we won new incremental access in. We delivered one rig within the last week to two weeks that we were building and completed. And you're right we didn't eliminate that program but we certainly scaled it back with capacity concerns that hit the marketplace. However, we have one rig that was in our plan that was in the early stages of construction that we will continue with and deliver into the market late in the year it's my recollection in terms of the timing there. And we'll evaluate that, but, , ideally if we build new rigs they would be pursuant to term contracts in the Rockies number one, or penetrating newer markets for us which targets are the Barnett Shale and the Fayetteville. Those are kind of the circumstances. I think spec rigs for the [Permian] not terribly

Okay. Thanks. And then one last question. This on the rental pool side. How much longer are you expecting the startup costs that pressured the margin in Q1 to persist? Is that something that you're largely done with or is that going to have a lingering effect over the next quarter or two?

It can have a lingering effect. I mean particularly we've got a new operation we're kicking off with Pemex in Mexico. We're just now beginning to get some of the tools on a rental basis. They're certainly located down there. We've got the office set up and the people in place but it'll continue to ramp through Q2. These are not huge dollar amounts. I mean it's incremental locations. We've got some product-line expansions. Again if you go back to the underlying strategy here we bought two businesses in the third quarter of 2007 that had well-established operations within the markets that they served. However we had greater plans to expand their particular product lines, service lines into our broader network of rental tool locations with immediate short term targets in Arkansas, Fayetteville and the Rockies and a little maybe in the mid-con. Again, those are efforts that will pay off in the long term.

Okay, I think that's all I had. Thanks, Cindy.

Thank you.

(OPERATOR INSTRUCTIONS). I would now have the next call from [Steven Gerardo] from (inaudible). You may proceed.

Good morning.

Hi, Steven.

Hi, Steven.

I guess just kind of one question with I guess two parts, but on the acquisition front, can you kind of give us kind of an update on what you're seeing from a from an acquisition price perspective and then maybe as a follow up to that are there any areas or businesses geographically or business lines that you're not in that you have some interest in that you'd feel would fit in well with the product and service mix?

Steven, I'll tackle that and let Cindy add to my comments. The market right now has stabilized. I think we're seeing, , relatively attractive valuation levels particularly in the private and kind of smaller deal space in terms of areas that we are keenly looking at I think we'd always, as we've always said we'd like to look at products that are additive to our offshore products suite, , in the deepwater capital equipment area. Those will be harder to do but we continue the diligent effort to source those deals. I think the other area that we'll be focused in on is, , providing equipment and products that are complementary to our completion services and real tools strategy. Anything that is involved in the kind of shale play or U.S.-based or North American-based area that's related to completion and production we're going to focus in on so we're looking at opportunities in that area as well And in Canada. And we're, I think the accommodation side, we did the one small acquisition. We continue to look there, but there's right now there appear to be more organic opportunities and in that area than there are acquisitions, just kind of due to the maturity

Is there and this may be, well, when you look at the opportunity on the offshore products side, would that be an area would you deviate from your - what I kind of view as your extremely sound financial approach to these acquisitions for something that may be a bit more strategic?

I think that we will, you have to value each of the businesses on what they bring and so that the valuation levels for a highly technical, , equipment manufacturer for deepwater is very different than it is for a rental tool business or tubular services business so, , if implicit in that is the valuation levels differ between those opportunities, yes. , would we look at deals that are dilutive? No. not at over the low , not over the short term. We've tried to keep all the creative deals and know that we can make our return on capital goals

Yes, I think that maybe the only exception to that would be if we found an opportunity with a newly-developed-type technology that has yet to have been commercialized or they'd be rare exceptions to that but again, if it has strategic merit you've got to evaluate it but it's tough for us to do deals that are dilutive. I mean.

Makes sense to me. The other just quick follow up. Your offshore products side, would you, how would you classify the sort of the bidding activity levels right now and sort of the mix of those opportunities?

As evidenced by our backlog, continue to hold and slightly build our backlog, I'd say bidding activity, it feels about the same. As I've said before, I think over time we're going to end up possibly with a more weighting towards floating production facility type work, production infrastructure, sub-C pipelines, , and maybe to a lesser extent our drilling equipment although again a lot of the winch work that we were awarded in 2005 has already been brought into our revenue base so that trend line is already beginning to turn just a bit. , so I kind of think that's the macro environment, but overall, depending upon timing of awards being let, (inaudible). I feel pretty good about the overall tone of the backlog and the strength of it for the next

Very good. Thank you.

Thank you, Steven.

At this time we don't have any further questions in the queue. I will turn the call over to Ms.Cindy Taylor for closing remarks.

Well I just appreciate all of your support and efforts to call in. I know it's a very busy week so we appreciate your time and look forward to, hopefully, another very good quarter. Thank you.

Thank you Ladies and Gentlemen. This concludes the presentation for today. You may now disconnect.