Oil States International Inc (OIS) 2008 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the second quarter 2008 Oil States International earnings conference call. My name is Nora, and 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 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 your host for today's call, Mr. Bradley Dodson, Chief Financial Officer of Oil States. Please proceed, sir.

Thank you, Nora. Welcome everyone to the Oil States second quarter 2008 earnings conference call. Our call today will be led by Cindy Taylor, Oil State's 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 many factors that affect our business, including those risks disclosed in our Form 10(K) and other SEC filings.

I will now turn the call over to Cindy.

Thank you Bradley, and thanks to all of you for dialing into our call this morning. Oil States posted earnings in the second quarter of 2008, which were significantly above First Call estimates, as well as our previous guidance range. As most of you know, this is the seasonally weak quarter for our Canadian operations, primarily impacting our accommodations and rental tools, resulting in earnings that are sequentially down from the first quarter. However our year-over-year growth was significant.

We realized significant improvements in activity and profitability in our Tubular Services segment, strong year-over-year growth in our oil sands accommodations capacity, and contributions from two rental pool acquisitions completed in 2007. In addition, we posted solid performance in our offshore products segment. As we indicated in the press release, we booked a $2.7 million gain on the sale of a portion of our Boots & Coots stock during the quarter. We also had gains in the comparable quarter of last year.

When you exclude this gain from our current quarter results, Oil States reported revenues of $631.4 million, EBITDA of $117.7 million. Our revenues and EBITDA were up 26% and 38% year-over-year excluding the Boots & Coots stock gains from both periods.

I am going to transition, and have Bradley take you through more details of our consolidated results, and then I will conclude our prepared remarks with a discussion of each of our segments, and close with our market outlook.

Thank you, Cindy. Throughout this call we will be excluding from our discussion of EBITDA the $2.7 million gain in the second quarter of 2008, and the $12.8 million gain in the second quarter of 2007 related to sales of portions of our investment in Boots & Coots.

For the second quarter of 2008 we reported operating income of $91 million on revenues of $631.4 million. Our net income for the second quarter of 2008 totaled $60.2 million, or $1.14 per diluted share. The comparable second quarter 2007 results were $68.5 million of operating income, on revenues of $499.3 million.

The second quarter of 2008 results represented 26% year-over-year increase in revenues, and a 33% year-over-year increase in operating income. These increases were primarily due to improved earnings from our Offshore Products -- from our Tubular Services segment, and contributions from our two rental tool acquisitions completed in the third quarter of 2007.

Depreciation and amortization in the second quarter of 2008 totaled $25.7 million, compared to $16.1 million in the second quarter of 2007. This increase was due to the acquisitions and capital expenditures made over the past 12 months. D&A expense is expected to total $27.2 million in the third quarter of 2008.

Net interest expense totaled $3.7 million in the current quarter, compared to $3.0 million in the second quarter of 2007. Third quarter net interest expense is expected to be $3.5 million. The effective tax rate in the quarter was 33.9%, compared to 34.1% in the second quarter of 2007.

Turning to the balance sheet, our net debt at the end of the second quarter was $423 million, down from $475 million at the end of the first quarter, as operating cash flow more than offset the $75 million in CapEx spend during the quarter. As a result, our debt to capitalization ratio was 28% as of June 30, 2008.

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

Let's start with our Well Site Services segment, in this segment we generated revenues of $209.9 million, and EBITDA of 67.6 million in the second quarter 2008, compared to $265.6 million, and $97.6 million respectively in the first quarter of 2008. The sequential declines in revenues and EBITDA were primarily due to the seasonal decline in activity in Canada, caused by spring break up, which impacted our accommodations business and to a lesser extent our rental tools.

We remain at full effective utilization levels in three of our four major lodges, but are experiencing typical seasonally reduced demand for our mobile camp assets. Our Conklin Lodge is also subject to a more seasonal demand pattern. During the second quarter of 2008 we continued to expand our Wapasu Creek Lodge, which now has over 2,000 rooms, up from approximately 1,280 rooms at year end 2007.

Our rental tools generated $84.6 million of revenues, and 25.2 million of EBITDA in the second quarter of 2008, compared to revenues of $82.5 million, and EBITDA of 25.5 million in the first quarter of 2008. Our rental tool results reflect the seasonal decline in our Canadian operations due to break up, almost fully offset by sequentially higher contributions from our U.S. operations. Our drilling revenues and EBITDA were $44.4 million, and 16.4 million respectively, compared to $36.8 million of revenues, and 11.2 million of EBITDA generated in the first quarter of 2008.

The sequential improvement in revenues and EBITDA was primarily the result of improved utilization in our Texas and Rockies operations. Our overall utilization increased to 84.2% in the second quarter of 2008, up from 74.5% in the first quarter of 2008. Our average daily revenues were up $800 per day sequentially, and our cash margins per day increased $1,500 per day, as our cost absorption improved with the higher utilization levels.

In our Offshore Products segment we reported revenues of $139.9 million, and EBITDA of $27.8 million, compared to revenues of $126.9 million, and EBITDA of $24.1 million, reported in the first quarter of 2008. Revenues improved sequentially by 10.2%, due primarily to increased after market service work, and deliveries of our highly engineered products. Our backlog grew slightly to 385.8 million, compared to 383.5 million at March 31, 2008.

Our Tubular Services generated record quarterly revenues and EBITDA of $281.6 million and 29.2 million respectively during the second quarter of 2008, compared to revenues of $208.8 million, and EBITDA of $10.1 million in the first quarter of 2008. Our 34.9% revenue increase was due to both higher volumes shipped, and price increases implemented by the domestic OCTG mills during the quarter. In the second quarter of 2008 we shipped 146,200 tons, up 15% from 127,100 tons shipped in the first quarter of 2008. Gross margin percentage improved significantly to 11.6% in the second quarter of 2008, up from 6.1% in the first quarter of 2008.

Now I would like to just give some summary comments as to our outlook as we move forward. Within our Well Site Services segment, we continue to see significant growth opportunities for our accommodations business in the oil sands region. In the second half of 2008 we will continue to execute our previously announced organic growth plan. Our rental tool contributions are expected to improve sequentially in the third quarter of 2008, given favorable trends in the North American rig count, which should positively impact completion services activity.

Land drilling utilization improved in the second quarter, despite a slower recovery in the Rockies than initially expected due to weather. We are projecting further improvement in utilization in this region in the third quarter. Overall we are forecasting utilization of approximately 90% in the third quarter, up from 84% in the second quarter. In our Offshore Products segment, our backlog position remains at strong historic levels overall, and product mix and margins within backlog remain consistent with recent levels.

In our guidance range, we continue to forecast strong quarterly revenues and EBITDA margins somewhere in the mid-teens, which can vary due to products and service mix, as well as timing of shipments. We have made significant strides during the second quarter at our new ship channel facility. Additional workers have been hired, machinery and tools have been added, and we have moved several significant projects to the facility for completion.

As to Tubular Services, industry OCTG inventory levels have continued to decrease on a months of supply basis, and additional price increases have been announced by the major domestic mills to be effective July 1. The demand environment is robust resulting in our third quarter outlook for Tubular Services being more optimistic. We expect our margins in the third quarter to be at or above second quarter levels, and our revenues should grow as these price increases take effect.

Our investment in inventory is also expected to increase, as the higher mill prices take effect. Given all of the above factors, our earnings guidance range for the third quarter 2008 is estimated at $1.19 per share to $1.24 per diluted share. We continue to execute on our strategic growth plan as our results indicate. We remain very positive about the long-term prospects for our Company, given the strong industry fundamentals.

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

Thank you very much. (OPERATOR INSTRUCTIONS). Your first question comes from there line of Jeff Tillery. Please proceed.

Hi, good morning.

Good morning, Jeff.

Cindy and Bradley, could you talk a little bit about how you achieved the volume growth in the Tubular Services business? Is that a new mill arrangement, or is that taking share, could you just provide a little color on that, and about the sustainability of those volumes?

Absolutely, and it is a great observation that our volumes have grown at a rate in excess of the rig count growth. What we obviously think is that we are taking market share in this environment. We are, although it is a fragmented market, one of the leaders as relates to OCTG distribution, if not the leader.

We have great mill arrangements and support from those mills, and we feel like an environment like this when it's so tight on inventory, that having a strong call in those mill allocations, has helped us from a market share perspective.

And I think you guys were looking at some additional international mill relationships. Can you just update us on the progress there?

We continue to look at all sources for our mills. We have historically distributed some product if our customers desire that from international mills. And that really remains the same today, as you would expect.

So if we see the rig count continue to increase here in the third quarter, do you believe the relationships give you the ability to increase volumes as well, from the second quarter level?

Right now, we are working in very close communication with all of our customers, as well as the mills. I think it is fairly evident that the US mills are pretty much running at near capacity. So it is critically important that we plan appropriately.

We have got great dialogue with our customers, and thus far we have been able to supply our customers with their requirements, such that they have been able to consistently keep up or maintain their drilling and completion programs. I think it is going to be extremely challenging as we move forward. There is about a 3.8-month supply of inventory on the ground, which is a very tight situation. But thus far we have been successful, and we think we will be able to continue to supply our customers' needs.

Just turning to the rental pools business, Q2 is a little bit funny in that we have got Canada declining in detrimental margins, and the US improving. Can you just talk about if you separate out Canada did the US rental margins improve sequentially?

Well, I would have to look in total to be honest. I feel like they were probably a little improved but frankly I don't know that I have a sheet in front of me that answers that question with it split out. We not only have rentals in Canada. We have other international contributions as well. I have it for my breakout for the second quarter, but I don't have it compared on that basis on a sequential analysis basis.

But I think just maybe getting to the heart of your question, the second quarter there was some ramp in activity, but I would say it was more towards the mid to latter portion of the quarter. We expect sequential improvement Q2 to Q3, probably at a rate more in excess of what we saw going from Q1 to Q2.

And my last question for Bradley, could you just provide the revenue and EBITDA for the oil sands accommodations business in the quarter?

The revenues for oil sands were $58.5 million in the second quarter, with EBITDA of $24.2 million.

Okay. Thank you very much.

Thank you Jeff.

Your next question comes from Stephen Gengaro, Jefferies and Company, please proceed.

Thanks, good morning. Back to the Tubular side, can you tell us, I mean going into the quarter and just looking at the margins, how much, and I know you talked about the sustainability of margins in the next quarter, but how much of the margin improvement had to do kind of with inventory gains, as opposed to just higher volumes and higher prices? Can you break that out at all?

You really can't. We are consistently turning that inventory anywhere from probably 3 to 4.5 times. So just realize how fast that moves from, in our inventory. There may be a handful, low percentage of pipe that has a longer life. But in reality you have got to look at it as a fast turning business.

My way of thinking there is not much of inventory holding gain, however it is clearly evident when you are in a ramping price environment, you have a lower inventory base than your forward price. I mill them out about a $500 per ton increase effective July 1. That $500 per ton is not yet baked into my inventory. It is certainly ramping. And so I don't look at it as a one-time inventory gain.

You just have to realize that in a favorable price environment our margins have a tendency to expand. They did expand faster than what we guided you to at the end of the first quarter, because prices went up quicker, number one. Two, our market share improved, which is a favorable environment. Kind of a combination of things, and just the balance of program and spot business worked fairly well in our favor as well.

Thanks. We have heard quite often that Tubulars are about as tight as they have been in a long, long time. You definitely see that, and it definitely has impacted you think your market share because of your ability to get product?

Yes, absolutely. And, of course, I have been associated with the business a long time, but more importantly the people that run our operations have made this their lifetime career, and they would tell you it is about as tight as we have ever seen it, but for third party independent verification, you can go to OCTG's [situation for pipe lodging], and I think that would also confirm that on a month's supply basis, it is about as low as it has been historically.

Thanks. One final question, back to the margins on the rental tool side a bit. What have you seen from a pricing trend on the rental tool side over the last quarter or two, and what do you think going forward on that front?

I will lead off and I will see if Bradley has any additive comments. Again, really activity hasn't, if it ramped it really ramped a little bit lighter in the second quarter, and of course, a lot of our rental tools are focused on completion production services activity, which is going to lag the rig count just a little bit, although we are drilling wells so quickly today it is not as much as maybe it used to be.

I didn't sense that we had too much pricing increase power during the quarter. I think our outlook may improve if the rig count expands, as we think it will in the second half of this year.

Great. Thank you.

Thank you, Stephen.

Your next question comes from the line of Chuck Minervino, Goldman Sachs. Please proceed.

Hi, thank you. I just want to touch on OCTG again. Given how tight the inventory levels are right now, I was wondering if you could touch on what you are seeing in terms of the imports at this stage, and how that is going to factor into how long it takes for this market to really balance itself out?

The last information I saw on imports showed that import market share remains about 47%. That is no real change from where we stand. First quarter I think was a little thin on imports, which led us to such, kind of a dramatic correction in months supply on the ground.

But the macro factors are that there is a strong international demand environment, the dollar has weakened as a currency over the course of the last 12 months, which make it less attractive than it was. And in addition to that, transportation costs have increased. So with all of those factors it is a little difficult for me to think that the import market share moved significantly from where it is today.

However, what has happened over the last three years has really been the improvement in import market share, that has really helped supply our customers product, because again, the US mills are functioning at very high levels of utilization right now. However each and every one of them is making concerted efforts to look at their internal processes, their assembly, the mix of products, to help leverage that capacity. And I think one, I believe they will do a good job, and I think it will be necessary in order to support expanded drilling activity in North America.

And also just on pricing going forward here, we have had very sharp pricing increases in OCTG. And given the tightness of the market, are you anticipating further substantial price increases here going forward?

Well, I have got to be honest, the rate of increase the first six months, have been ahead of what we expected. I think OCTG prices have doubled pretty much from the beginning of the year, to where we are today. With that backdrop, I don't think that they are going to continue at this rate.

Obviously there are a lot of issues to deal with on a global basis, but I don't have probably any better insight on it than you do, in terms of raw materials sourcing. But just again on the backdrop of where we've been over the last six or seven months, I would think there would be there may be further increases, but at a lower level. That would be our thinking today.

Okay. Also just one last question. In your guidance for 3Q, can you just talk about what you are thinking about in terms of cash margins per ton?

I can, but--.

No, we don't have that in front of us, I am sorry. I think you could probably back into where we were in the second quarter, and just use our guidance that we think our margins will be at or above where they were at Q2, and come up with a very reasonable estimate.

Okay. Thank you.

Thanks.

Your next question comes from the line of John Daniel of Simmons and Company, please proceed.

Good morning.

Hello, John.

How are you guys doing? I would like to ask a quick question on your drilling business. A lot of people have been talking about new build and new construction. Do you guys have any rigs under construction right now?

At this particular time we have one rig under construction, and would be evaluating additional, and again, if you will recall, we build our own rigs.

We do use components from some of the manufacturing suppliers of course, but we build our own rigs. So we have got a good crew out there ready now to initiate activity, if we decide it is strategic to do that.

Then just a follow up. I know you have got a good position in the Rockies and the Permian. Any thought of moving to new regions here in '09?

We kind of had a rig kind of flip in and out of the Barnett. We would really like to get a more established position in the Barnett Shale, and ideally if we could get equipment in either the Fayetteville or the Haynesville, I think that would be strategic as well. At this stage, we are not looking for new markets. We would expand in the Rockies as well, if the opportunities present themselves on an attractive basis.

Final question then, Cindy, of the rigs how many are locked up in terms contracts?

Typically we are essentially a spot market provider, albeit we commit to multiple wells at a time, because we drill wells so quickly with the type of rigs that we have. Where we do have term contracts it is generally in the Rockies. And that is two to three rigs kind of order of magnitude.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Victor Marchon of RBC Capital Markets, please proceed.

Thank you. Good morning. First question I had was on Conklin. Was that generating revenue in the month of July? Is that all up and running?

Before July there was some manpower in there, but it is somewhere in the 100 man range. And the difference there if you will recall, the Conklin Lodge is situated more in the south, and it is more in support of SAGD type drilling, in contrast to our other three lodges, who are in support of construction of the upgrading and processing equipment, which is more year-round fully utilized permanent.

Again the Conklin Lodge is more seasonal in nature. It supports more seasonal activity. So it is contributing revenue, but it is at a lower level given break up.

Okay. And switching to Offshore Products, the new ship channel facility, are expectations in third quarter you will start running some standalone revenue through that facility?

Yes, I think that we are moving that way. It can be the third quarter or the fourth quarter. Right now we have got a lot of backlog that we are debottlenecking through the facility, so I don't know if you would call it standalone or not.

The point is it has been booked for a while, and we are aiding our customers with deliveries by having that facility. It really is incremental revenue, because we couldn't put it out as quickly in our southeastern operations, absent having the ship channel facility. The longer term goal, as you know, is to build a standalone facility. You don't do that overnight. It is going to take some time.

But we got it up and running very well from a labor perspective, as it relates to operations. Over time I envision it could likely have its own, it probably will share common engineering, but purchasing, all of your back office support functions, quality control, et cetera. Right now we are essentially sharing our south Houston operations. But if the market continues as we think it will, it will evolve into a complete standalone facility. I don't know whether that is the end of this year, or early next year.

And last thing I have is just on the land rig business, when you look at what you guys are expected for on a utilization side, just on the operating costs, would you expect that number to continue to trend down on a per day basis, or more of a flattish type of number?

I would say flattish right now. Costs are clearly not going down for anybody from a material cost to R&M, fuel, to the extent that it impacts what our operations, labor, et cetera. However as we ramp our utilization, that effective cost per day does improve, which you saw in the very strong, I think our incrementals were about 75%, and our EBITDA incremental this quarter. Part of that is increases on the revenue line, but a lot of it is leveraging that cost as well.

All right. Great. That is all I had. Thank you.

Thanks, Victor.

Your next question comes from the line of [Ron Deharam] from Credit Suisse.

Good morning. Bradley, I was wondering, or Cindy, if you could comment if you are still on track at Wapasu to get to 2,300 [beds] by year end?

Yes, we are.

And if you could just comment on what your future expansion plans are in the accommodations business?

There are lots of opportunities right now bidding and quoting activities, as strong quite frankly as it has ever been, and there are a lot more projects that are going to have manpower needs, and we will plan obviously to address those needs of our customers. I don't see any of our organic growth strategies changing, with respect to our operations in the oil sands, as is typical if we get a material type change, we will announce that separately.

Just from a volume perspective, are you seeing just from an industry basis, growth from a volume perspective in the double digits?

What period are we talking about exactly?

'09, '10, the next couple of years?

Yes, I think we can continue to grow the accommodations business, particular as it relates to the lodge and oil sands operations by double digits.

Okay. That is helpful. Secondly, on Offshore Products, the book-to-bill about 1:1 in the quarter. Could you comment maybe, Cindy, what you are seeing in terms of deepwater opportunities, the potential to expand the book-to-bill?

Well, like everybody else, I think the major projects on the subsea side, are being led in West Africa and Brazil, and we are actively trying to participate in those markets. I guess it was first quarter where we announced participation with ExxonMobil and Acergy on Block 15 in West Africa.

We are active in trying to meet the requirements to increase our contributions from Brazil as well. Obviously incremental rigs will help us also. Again, a lot of those are probably forced from the Brazilian market as well. I don't see any trend line change at this stage in terms of our activity.

We don't see today too many large new FPSO packages, or PLC packages that are imminent, although we never have more than one or two going on at a time. So I don't think that there is any negative trend that I see at this stage, but just a lot of money being spent, and a lot of resources being thrown into effort, and we are doing everything we can to maintain or increase our market share in this environment.

Okay. Last question in terms of CapEx, what are some of the priorities, in terms of some of your growth CapEx, and in particular can you comment on what kind of investments you are doing on the rental tool side?

Well, I think for the year we forecasted in the Q for $344 million, $343 million of CapEx for 2009, the large majority of that is going to be accommodations business. On the rental tool side, we are actively expanding active regions. We are expanding our location in the Fayetteville. We are expanding our location in the Barnett. We are expanding in the Rockies. We have opened new locations up in Appalachia, and in the Bakken.

And so a lot of our spending in rental tools this year is driven by location, expansions, and additions, as well as really rolling out equipment for the businesses that we acquired in 2007 that had more of a West Texas, New Mexico, South Texas presence. And really rolling them out to the Conway area, and Arkansas, into the Rockies, strengthening their position in the Barnett. So those are the major drivers behind our spending in rental tools this year.

Thanks a lot.

Your next question is a follow-up question from Steven Gengaro. Please proceed.

Thanks. As a follow up, Cindy, where we look at the sort of parameters you gave for the third quarter, and your earnings guidance, can you help us, we are looking at, by using what you told us basically, what would you think about as the debits and credits in the third quarter versus the second quarter? Are there things which you think could get sequentially worse, because I am struggling to use your parameters and stay within your numbers?

Well, the only comment there, obviously we are going to get sequential improvement in the accommodations business. Q3 is historically a better quarter than Q2, that would go on the debit side. Again in our guidance range, we tempered our Offshore Products margins a bit, just because we are looking at historical trend lines not necessarily any specific content, although here and there we have got some pass-through revenues at very low margins included in our forecast for Q3.

The reality is that those margins are highly dependent upon our products and services mix, as well as the timing of our deliveries. So when we build our range, we temper those just a little bit, right or wrong. We will see what happens as those numbers come out. And obviously we are looking at some growth in our drilling, because we told you our utilization is expected to improve from about 84% to 90%, as well as a little bit of growth in our rental tools.

So I am looking to Bradley just to see.

And also I think if you are working off of the $1.14 actuals for Q2, there is a $0.03 gain in there that won't be repeated for Boots & Coots sales stock. And also the conversion of our accounting for our remaining Boots & Coots investment, from equity method accounting to marketable securities held for sale accounting, also has an impact that is being offset by the growth in drilling and accommodations and Tubular.

Okay. That is helpful. And then on the rig side, does that cash margin, do you think with kind of inflationary pressures, that cash margin is sustainable given the utilization rates and absorption?

Yes, we think they are sustainable. We really haven't built in much in the way of increases at this stage.

Okay. That is very helpful. Thank you.

Thank you, Steven.

You have no further questions at this time.

Thank you so much. We appreciate it. We know it has a very busy earnings season and this is a particular busy week, so we appreciate all of you taking the time to dial into the call.

We are excited about the business, and look forward to visiting with you again in connection with our third quarter call. Thanks so much.

Thank you very much. Ladies and gentlemen, this concludes your presentation. You may now disconnect. Have a great day.