Oil States International Inc (OIS) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Oil States International first quarter conference call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Mr. Bradley Dodson. Mr. Dodson, you may begin.

Thank you. Welcome to the Oil States first quarter 2009 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 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 10K and our other SEC filings. I will now turn it over to Cindy.

Thank you, Bradley, and thanks for all of you dialing into our call this morning. Like many companies in our industry, we are managing through a downturn in activity triggered by the economic recession. Despite these market conditions, Oil States posted first quarter 2009 earnings which surpassed first-call estimates and our previous guidance range.

However, we experienced significantly lower results from our businesses that are leveraged to North American natural gas, drilling and completion activity, mainly our drilling operations, rental tools, and OCTG distributions. This weakness was partially offset by our oil sands accommodations and deep water capital equipment businesses, which tend to be a bit longer cycle and have better contract coverage or backlog.

For the quarter, Oil States reported revenue of $667.1 million, EBITDA of $113.4 million and earnings per share of $1.13. Our liquidity position continues to improve as we generate profitable operations and proactively manage our cost structure and our capital spending. We are also benefiting from reductions in our working capital. Throughout the remainder of this call, we will update you on our market outlook, our liquidity, and our capital spending plans for 2009.

At this time, Bradley will take you through more details of our consolidates results and financial position, 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. For the first quarter of 2009, we reported operating income of $84.9 million on revenues of $667.1 million. Our net income for the first quarter of 2009 totaled $56.1 million, or $1.13 per diluted share. The comparable first quarter 2008 results were $101.3 million of operating income, on revenues of $601.2 million. This year-over-year decrease in profitability was primarily due to the 27% year-over-year decline in North American drilling activity.

Depreciation amortization in the first quarter of 2009 totaled $28 million, compared to $22.7 million in the first quarter of 2008. This increase was due to CapEx and acquisitions made over the last 12 months. Depreciation amortization is expected to be $29 million in the second quarter of 2009.

Net interest expense totaled $3.9 million in the current quarter and $5.8 million in the first quarter of 2008. Both of these numbers include the non-cash interest expense related to our convertible notes recorded as a result of the retrospective adoption of APB 14-1. Second quarter 2009 net interest expense is expected to be $3.9 million.

The effective tax rate in the quarter was 31.1% compared to 32.6% in the first quarter of 2008. The lower effective tax rate in the current quarter was primarily due to higher foreign-sourced income which is taxed at lower statutory rates. We expect the effective tax rate in the second quarter to be approximately 30.6%.

During the first quarter, we reported cash flow from operations of approximately $98 million and spent approximately $33 million on CapEx in the quarter. During the quarter, we received $21 million from the full repayment of (inaudible) subordinated notes. And as a result, our net debt at the end of the first quarter was $341.5 million, compared to $423.8 million at year end.

As of March 31st, 2009, our debt-to-cap ratio was 23% and our total debt to LPM EBITDA was less than one time. As of March 31st, 2009, the company had $265 million availability under our credit facility, which has grown subsequent to the end of the quarter to over $320 million of availability today. Our current CapEx forecast for 2009 is $139 million, which is down 44% from the $247 million spent in 2008.

At this time, I'd like to turn the discussion back over to Cindy, who will review the activities of each business segment. Please note, throughout the segmental discussion, we will be excluding the goodwill impairments taken in the fourth quarter of 2008. Cindy?

Thank you. Our well site services segment generated revenues of $230.8 million and EBITDA of $73.3 million in the first quarter of 2009, compared to $235.7 million and $80.1 million respectively in the fourth quarter of 2008. The sequential declines in revenue and EBITDA were primarily due to significantly lower North American drilling and completion activity.

We continue to enjoy strong utilization levels in our major oil sands lodge facility. During the first quarter of 2009, accommodations generated $141.8 million of revenues and $56.7 million of EBITDA, compared to $94.6 million of revenues and $35.3 million of EBITDA generated in the fourth quarter of 2008. Our results benefited from increased oil sands accommodations activity, coupled with the seasonal uplift in Canada.

Our rental tools businesses generated $71.7 million of revenues and $13.6 million of EBITDA in the first quarter of 2009, compared to revenue of $97 million and EBITDA of $30.5 million in the fourth quarter of 2008. Our rental tool business was negatively impacted by the precipitous decline in North American drilling activity and $2.8 million in one-time costs related to severance, consolidation, and integration efforts.

Our drilling revenues and EBITDA were $17.3 million and $3 million respectively, compared to $44 million of revenues and $14.2 million of EBITDA generated in the fourth quarter of 2008. The sequential decline in revenues and EBITDA was primarily the result of reduced utilization in all if our drilling markets. Our overall utilization decreased to 32% from 79% in the fourth quarter of 2008, with those declines accelerating during the quarter.

If we can turn our attention to off-shore products, in this segment, we reported revenues of $128 million and EBITDA of $23.9 million in the first quarter of 2009 compared to $141.4 million of revenues and EBITDA of $25.6 million in the fourth quarter of 2008. Revenues decreased 10% sequentially due to reduced rig and vessel revenues and profits, largely because we had nearly a record quarter in the fourth quarter in this area. Our backlog at March 31st, 2009, declined 12% sequentially to $318 million, from $362 million at year end, primarily due to reduced orders for off-shore drilling, rig, and vessel equipment.

In our tubular services segment, we reported revenues of $308.3 million and EBITDA of $23.7 million, compared to $524 million and $63.9 million respectively in the fourth quarter of 2008. Revenues decreased 41% sequentially, due primarily to decreased U.S. drilling activity and lower overall OCTG pricing. Our gross margins were 8.7% compared to 12.8% in the fourth quarter of 2008.

Now I'd like to give you some summary comments as to our outlook for the second quarter of 2009 and beyond. The market for North American natural gas drilling and completion activity has deteriorated more rapidly than we initially expected. Our customers have reduced current spending throughout the U.S. as lower commodity prices and borrowing base considerations limit their desire and ability to expand drilling and completion activities. As a result, the U.S. rig count has declined by over 1,000 rigs since its September peak and almost 800 rigs since year end.

We have taken considerable measures to address our cost structure in light of these changes in North American activity. We have significantly reduced our head count in our drilling, accommodations, and rental tool operations, among other cost-saving measures that we have implemented. In addition, we have reduced our capital expenditures significantly. We have experienced a material decline in utilization of our drilling rig fleet and have experienced pricing pressure as well. We currently have nine rigs running and are forecasting similar utilization levels in the second quarter as that experienced in the first quarter of 2009.

Activity for our rental tool business is tied to completion and production services activities, and will generally follow the overall decline in U.S. drilling activity. As such, we expect rental tool revenues to be down 15% to 20% sequentially in the second quarter in the second quarter of 2009. Likewise, shipments of OCTG from our Tubular services segment should follow trends in the U.S. rig count, and we expect our realized price for OCTG to decline in the second quarter of 2009.

Imports of OCTG, particularly from China, continue to flood the U.S. market during the first quarter of 2009, despite declining U.S. drilling activity. As a result, industry inventories on the ground are estimated at 10 to 12 months supply currently. This bloated inventory level will continue to pressure tubular pricing and margins as the industry absorbs this inventory. We currently expect our gross margins in Tubular services to be approximately 4% to 6% in the second quarter of 2009.

In the accommodations area, our oil sands lodge occupancy held up well in the first quarter of 2009. We expect utilization to continue at these levels in the second quarter, as existing projects in the region are continuing. However, we will experience the normal seasonal declines in our mobile camp fleet as we move through breakup.

In our offshore product segment, our backlog remains at healthy levels with continued good product mix and margins. However, our backlog is declining and was down 12% from December 31st, 2008, primarily due to a reduction in drilling and special equipment orders. Historically, our company has fared relatively well during cycle corrections given the diversity of our operations. We believe that our exposure to deep-water activities and to oil sands development will mitigate some of the near-term downward pressure in our North American operations given our contract position and backlog.

While it is difficult to call the bottom of the rig count decline, we believe that activity curtailment will help the industry work through the excess gas inventory over time. However, the second quarter 2009 will be negatively impacted by lower U.S. rig count, reduced completion activity in North America, and the seasonal decline in our Canadian operations.

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

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from John Daniel from Simmons and Company. Please go ahead.

Good morning.

Good morning, John.

Good morning, John.

I just have a couple quick ones for you. The first is on the rental business. At this point, have you completed the facility consolidations?

We're not complete, but they're substantially in progress. We addressed the head count issues generally that we've had to, although they are continuing, and we've had to make further adjustments subsequent to the end of the quarter. Any continuing time delays are really associated with building the facilities where we have intended to consolidate existing multiple facilities in a given region.

Okay. All right. And then, just moving over to the tubulars. I think on the last call you mentioned that something like 80% or more of the inventories were committed. At this point, have any of your customers walked away from the commitments?

No. Our customer base is a very strong customer base, and they have -- we're working diligently with them, really, to try to work through, as I've stated, the excess inventory that's in the market. We're doing everything that we can to assist with that effort and help them manage through those commitments that have been made. Clearly, our inventory turns have slowed from what we experienced last year, because even though the commitments are in place, they're not drilling as many wells. So what you find there is just a slower rate of inventory turns.

Okay. Fair enough. That's it. Thanks a lot.

Thanks, John.

Our next question comes from Victor Marchon from RBC Capital Markets. Please go ahead.

Thank you, and good morning.

Good morning, Victor.

Just on the tubular services as well, the first question, is there a sense that for your inventory the drawdowns will pick up some pace in the second quarter relative to the first?

That's a great question. And, you know, what you don't see, which is what we look at and have continually since we've started this downturn, is not only inventory on the ground but inventory that is in transit, i.e. committed by us. And then open purchase orders which are obviously commitments. So what you're not seeing is the significant rate of decline of the open purchase orders that we have. You just see what's booked in inventory that's received and on the ground for us.

We had predicted that we would not see any significant turn in inventory until late in the quarter, generally, March. That's essentially what did happen. If I recall the number right, I think our inventory was down $27 million for the quarter. If you caught Bradley's comment, our availability has increased fairly significantly subsequent to the quarter. A part of that -- not all of it, but part of that is due to further inventory reductions in the Tubular services segment.

Thank you. And just a question, if I can, on the off-shore product margins. Cindy, it seems from your commentary, that the mix in backlog has remained relatively consistent. Would that be fair to assume that margins going forward will still, at least in the near term, be plus or minus to where you guys have typically guided to that mid- to high-teen range.

Yes, we believe it will.

Great. That's all I had. Thank you, guys.

Thank you, Victor.

Our next question comes from Jeff Tillery from Tudor, Pickering, Holt. Please go ahead.

Hi. Good morning.

Good morning, Jeff.

In your commentary on the outlook for rental tools, I think you said that sequentially revenue down 15% to 20%. So that would imply activity going down probably not as hard as rig count, but seems to also say you're not seeing that much in the way of sequential pricing erosion. Is that fair?

Well, the thing is-- there's a lot of mysteries around rental. That's one of the things that's a little harder for us to forecast. But generally speaking, the rental tools activity and margins lag the rig count declines a bit. Because we are more concentrated on the completion side of business that we really saw more of an acceleration of that decline later in the quarter than earlier.

But clearly, the rig count today is lower than the average for the first quarter, so we do think it's going to be down and will be impacted by seasonal declines, obviously, in Canada.

To counter that, we did have some onetime costs that we will -- we may still have continuing costs on the severance side. But we certainly had higher level in the first quarter than we expect in the second quarter. And kind of some onetime events there.

We haven't seen a tremendous amount of pricing pressure. But it's mixed, because a lot of the work that we're doing, where there is activity remaining is in the resource plays, where our equipment and our revenue content is actually higher than what it is in some of the more lower pressure areas and vertically drilled areas. So mix plays a part to your pricing question, more so than if there is not customer pressure on pricing. Clearly, there is.

But generally speaking, those factors for us give us a reasonable outlook for rental tools. But we're clearly going to be sequentially down from where we were. We think we've been proactive and aggressive on cost management and control, and that helps mitigate some of that downward impact that we would otherwise experience.

My other little other comment and caveat that's been harder for us to predict, there are a certain number of our customers that are drilling wells and postponing the completion efforts associated with that. There is a certain amount of completion backlog that's developing. So we're not perfectly matching the rig count declines at this stage but the general trends, of course, suggest that we will.

That's very helpful. Exxon's Pearl project looks like it's one of the oil sands projects that is moving forward. Could you talk about -- historically, what does Exxon do from accommodations perspective? Do they own or lease? And then, if they were to lease, just what is the opportunity look like either from a room perspective or revenue perspective, however you want to look at it?

Well, obviously, the Pearl project is one of the most exciting potential projects in the oil sands region in the near term. We are in close dialog and negotiations with Imperial on their efforts, and obviously hope to be a prime supplier of accommodations and services to them.

A lot of times, I think your question may be leading. You're right, a lot of times they may manage their own projects. My "however" on that is that they already have some of their early contractors and managers in our Wapasu Creek facility. So they know first hand what services that we can deliver to them. And their time frame is such that they would be in a very good position to assist them with the early stages of that development.

So all I can tell you is that I think we're in a good position relative to that opportunity. And we do think, consistent with what we have heard from them, that they will make some further announcements by the end of the second quarter relative to that project.

And then my last question, just a question for Bradley. Can you give us the oil sands revenue and EBITDA breakdown in the quarter. And then, if you are discussing it, just how much -- how significant the Fort Hills facility sale was to the Q1 numbers?

Sure. Oil sands and accommodations contributed $115 million of revenues and $52 million of EBITDA in the first quarter of 2009. When you disclose that there is a year-over-year increase in manufacturing revenues and accommodations as a whole of $36 million in the quarter, that is -- that includes the Ford Hills project, but it also includes several fabrication projects we did in the Gulf Coast. So not exclusively Fort Hills, and the margin on that was a little less than $10 million.

Okay. Thank you very much.

Thanks, Jeff.

Our next question comes from Arun Jayaram from Credit Suisse. Please go ahead.

Good morning. Arun Jayaram for Credit Suisse. Mr. Tillery stole all my questions.

We know you can think of others, Arun.

I'll be quick here. On the offshore product side, Cindy, I know backlog's coming down. How much visibility do you have for the balance of the year in terms of revenues and margins?

Well, you know, we had a very strong historic level of backlog as we entered the year, and it's generally 80% to 85% of our backlog turns to sales. So 2009 feels obviously pretty good, with respect to the backlog. We are obviously focused on backlog development.

We have a strong level of confidence in the long-term nature of operations and activities in deep water. There clearly has been some delays. We're not an exception to that. But I think, for us, more particularly, we're aggressively working through some of our drilling rig equipment, and our vessel backlog to meet contract delivery time frames. And that is one area that we don't see building back to levels that we've seen. I don't think that's any surprise to anybody.

The flip side of that, there's some very good key projects out in the marketplace on the production infrastructure side, both floating production facilities as well as the subsea pipeline work that we're optimistic about. It's my opinion based on what we hear in discussions with our customers though, that a lot of those projects will likely not come to market until later this year. So we have, obviously, experienced some backlog declines given those two comments. But again, our overall outlook remains very positive for deep-water off-shore development.

And then, margins are quite a bit better than I had modeled in. Is that sustainable for the balance of the year or are you seeing some pricing pressures?

It is sustainable as long as we can maintain the utilization levels in our facility. So, again, backlog development is key. A lot of times, you know, performance can be impacted, whether it's at more of routine product that we're supplying or whether it's newly engineered higher pressure, higher temperature type equipment that's first time or one time type activity.

So to some extent, we're a little better off right now. Because we are doing a lot of flex joint work, as an example, subsea pipeline type work, which is kind of our bread and butter and has historically been more predictable from a margin perspective.

That's helpful. Secondly, on the Fort Hills project, how important from a percent of revenue is that to you guys in terms of further expansion of that project or continuation of that project?

Well, it's again one of the key projects in the region. I would put it second in importance right now to Fort Hills, part of that is just because of the timing that we anticipate. The Fort Hills project has obviously been delayed because of various partner issues, not to mention the pending merger between Petro-Canada and Suncor. So we think we kind of put that on the back burner at this stage based on conversations with them.

However, it is a very meaningful long-term project. And we believe that we have worked very well with the Fort Hills consortium to date, and we have tried to protect our opportunities and our rights to manage and lead the accommodations and logistics support, supply that operation; should it move forward in the long-term.

Okay. Cindy, last question. Is the consensus in terms of earnings for Q2 is in the $0.43 range. Historically, you've provided some range for earnings guidance. Do you feel comfortable with that number, or how are you thinking about Q2 in terms of EPS?

Well, -- and I'll tell you, if we had given a guidance range, it would have been so broad that it wouldn't have been terribly helpful to you. But what we've always said and have tried to do is if we have better information than market, we try to give it to you to the extent we can.

There is a lot of a variability right now on the North American businesses, which I think we've covered on the call. We did give you some sense of what we expect our gross margins to be in Tubular services, but we acknowledge that's fairly broad at 4% to 6%. But that's the best deal that we have right now.

Again, rental tools -- where particularly rental tools, because of the size of the operation, there are certain dynamics now where customers are drilling some wells, deferring completions. And so a little bit harder to get our arms around exactly what the activity will be there. But clearly, where we feel the greatest variability for us is in those North American operations. And, again, if I had a very good feel for what that guidance was, I would give it to you. I just don't.

Okay. Thanks, Cindy.

Our next question comes from Joe Gibney from Capital One Southcoast. Please go ahead.

Thanks. Good morning, everybody.

Hi Joe.

All my question have been answered. Good quarter.

Thank you, Joe.

Our next question comes from Dan Boyd from Goldman Sachs. Please go ahead.

Hi. Thanks.

Hi, Dan.

I was hoping we could follow up on the guidance question a little bit, I'm really looking at rental tools. You provided a range for where you think revenue could be next year. And then, on the profitability side, there are some one-time costs that are going away. Can you help us with any visibility on where margins might be or how we should think about margins for rental tools next quarter?

Bradley is kind of flipping his book to help me out a little bit there. But we're obviously projecting further revenue decline from where we are now. And part of our difficulty right now, even in forecasting margins, again, if we give you an indication, it's going to be broad. Largely because we have made so many cost adjustments in the business and facilitated a lot of the integration.

That is -- I think we're doing all the right things but to precisely estimate that in terms of impact is fairly premature at this stage. But I think, just kind of broadly speaking, because of our cost initiatives that we should be able to sustain relatively similar margins quarter over quarter, albeit they could easily be down a couple hundred basis points. But it's not anything that should fall out of bed on us. We don't think. Based on the cost initiatives that we have in place.

Okay. That's very helpful. Sounds like that's based on pricing declines subsiding somewhat to what you've seen to date.

Again, there are pockets of pressure all over the place, but mix is playing an element. Even if you look at our drilling rig fleet, our revenue sequentially was up on a day-rate basis, which is counterintuitive. But the fact is, a lot of our lower-end equipment is not being utilized. It's been laid down, and so that mix has played a factor. The same thing impacts our rental tool business.

Okay. I really appreciate the color. It's helpful. Thanks.

Our next question comes from David Griffiths from Copia Capital. Please go ahead.

Hi. It's Dave Griffiths with Copia.

Hi, Dave. How are you?

Doing well. I was hoping you could walk through the CapEx guidance for the year. Has that changed from your prior guidance, and is there room for you to essentially take out any further CapEx?

It's down slightly. I think our guidance on the last call was roughly $147 million. So it's down a little bit. We're looking at every AFE and CapEx project and scrutinizing them. Thus for, does it meet our return criteria? Is this the right time to spend the money? Is this the right place to be spending the money?

So we are looking at that very diligently at the divisional level, and then obviously here at corporate as well. If I had to guess, on our $139 million forecast for '09, we typically -- some of that is always going to slide out, just given timing. So I think there's probably room for that to move a little bit lower, in terms of when we spend the money.

The majority of it continues to be in Canada; the accommodations business. We've got some additional projects that are underway to complete the expansion, in particular of Wapasu. And there are a handful of projects where we can spend some CapEx and start to insource some of the services that we do for those oil sands lodges and improve our operating cost structure with good paybacks that are sub-two years. So those are the kind of projects that I think we'll continue to do. I think you would want us to do as well.

Okay. And what type of -- if Pearl were to materialize here in the second quarter, with kind of CapEx do you think we would be talking about on that type of project?

It could be very significant. We're in a lot of negotiations right now. I wouldn't want to quantify that. But clearly opportunities in the oil sands that are capital-intensive could have a significant change for us. And we'd be thrilled to have it, because it's backed by, one, a very strong customer and, two, longer term contracts.

And have your return requirements on those types of projects, have those changed from how you have thought about those projects in the past?

I don't think they necessarily changed but as -- in terms of the quantitatively. I think qualitatively, we've obviously come full circle. We started off in 2005 with Beaver River, and the Athabasca Lodge, both of which we kicked off with anchor tenants involved that we got just from the anchor tenant contract, which typically were two to three years. We got substantial payback on the initial investments.

Then when we went to Wapasu Creek lodge, we decided we could see the activity. We had four or five projects that we were comfortable were going to move forward. And at the time which was late 2006, I believe, we announced we were going to move forward with that anyway.

The reason being that we had been six months of back and forth with the customer trying to get that anchor tenant contract in place, and decided, you know what? We know you're going to need the rooms. You've got other clients that are going to need the rooms. We're going to move forward with Wapasu Creek on a speculative basis. That turned out to be the right decision.

Obviously things have -- fast-forward three years, things have changed significantly, and we're back to the situation where we've got good positions in terms of where our four major lodges are. If we were to put in incremental capital work, we're going to expect to get longer term contracts to support that.

Then my last question is regarding uses of cash. Obviously you guys are going to generate a lot of free cash flow this year as cash comes out of working capital and the cumulative services inventory gets worked down. Just want to talk to you about potential uses of cash and how you prioritize those right now.

Also, I was hoping you could say for me, again, what the balance of the revolver is at the end of the quarter and how much of that revolver you think you will be able to pay down by the end of the year.

Okay. Well, right now, I think we're still in the position right now where we think having liquidity, having some dry powder, those give investors comfort that we have a very strong balance sheet to weather this storm. But also we think there are going to be organic and potentially acquisition opportunities later in the year.

Our first use of cash would be to pay down the debt on the revolver. The revolver balance at the end of the first quarter, was approximately $217-18 million. We have a little bit of other debt, and then you have got the convert, which as you mentioned is now being recorded under APB 14-1, which bifurcated the debt component over that convert and the equity component retrospectively back to the date of issuance.

Where I think the revolver balance could go, as we mentioned, it's down another almost $60 million, a little over $60 million since quarter end. As we continue to generate profits and reduce that tubular inventory amongst other things, also the seasonal declines in Canada. I think we'll generate pretty significant free cash flow where we could pay down a significant portion of the revolver this year.

Okay.

In Canada.

Okay, great. Thanks very much, guys.

Barring another project-- major project up there.

Well, that would be a welcome development.

Absolutely.

We think so, too.

Thank you.

(Operator Instructions) And I'm showing that there's no further questions.

Thank you, Jamie, and thanks to all of you for joining our call today. I know it's been a grueling couple of weeks for each and every one of you. We appreciate that you took the time to join us today. Thank you.

Thank you. Ladies and gentlemen, this concludes the Oil States International first quarter earnings conference call. Thank you for participating. You may all disconnect.