Oil States International Inc (OIS) 2010 Q3 法說會逐字稿

Welcome to the Oil States Q3 earnings conference call. My name is John, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will turn the call over to Mr. Bradley Dodson. Mr. Dodson, you may begin.

Thank you, John.

Welcome everyone to the Oil States third quarter of 2010 earnings conference call. Our call today will be led by Cindy Taylor, Oil States President and Chief Executive Officer. Before we begin, we like to caution n the search regarding forward-looking statements. To the extent today the remarks today continued 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 SEC filings.

In addition, there are risks associated with our announced acquisition of The MAC Services Group Ltd., including the transaction is delayed or does not close, the risk that the business will not be integrated successfully , the risk that any synergies or other benefits from the combination may not be fully realized, or may take longer to be realized than expected. And lastly, the risk that the combination makes it more difficult to maintain relationships with customers, employees, or suppliers. I will now turn the call over to Cindy.

Thank you Bradley, and thanks to all of you for joining our call this morning. Oil States generated revenues of $588.3 million, EBITDA of $100.8 million and earnings per share of $0.88 for the third quarter of 2010. We benefited during the third quarter of the combined strength of our North American leverage businesses and increased capacity in our oil sands accommodations business. Our strategic product and service offering in key North American resource place contributed to year-over-year growth has outpaced the broader recovery and North American drilling and completion activity. Our well site services businesses generated significantly improved results with year-over-year revenue and EBITDA increases of 79% and 224% respectively.

Improved oil sands activity also continue to benefit our accommodation business. The expansion of our Wapasu Creek Lodge for the Kearl contract continues on schedule and under budget. All of our businesses improved materially year over year, except for our offshore products segment which was in hindered by reduced backlog coming into the year, however, our third quarter orders of $164 million lead to much improved backlog September 30, 2010. We improved our financial position in the third quarter and announced a new $900 million credit facility associated with our planned acquisition of The MAC Services Ltd.

On October 15, 2010 we announced that we had entered into an agreement whereby Oil States proposed to acquire all of the shares in The MAC at a cost of AUD3.90 per share. The MAC supplies accommodation services to the coal mining construction and resource industries. Upon completion of the acquisition, which is expected to close by the first quarter of 2011, The MAC will become part of our accommodations segment. There is the possibility that the acquisition could close prior to year end.

At this time, Bradley will take you through more details of our consolidated 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. During the third quarter of 2010 we reported operating income of $70.4 million on revenues of $588.3 million, quarterly our net income for the third quarter of 2010 totaled $46.3 million $0.48 per diluted share. The comparable third-quarter of 2009 results were $38.5 million of operating income on revenues of $456.1 million.

The year-over-year increases in profitability were primarily due to the 71% year-over-year improvement in North American drilling activity as measured by the Baker Two's drilling rig count. Depreciation and amortization in the third quarter of 2010 and totaled $30.4 million compared to $30.2 million in the third quarter of 2009. This increase was due to capital expenditures made over the past 12 months. Depreciation and amortization is expected to total approximately $30 million in the fourth quarter of 2010.

Net interest expense totaled $3.4 million in the current quarter and $3.6 million in the third quarter of 2009. Fourth quarter net interest expense is expected to total $3.4 million. The effective tax rate in the quarter was 30.7% compared to 24.3% in the third quarter of 2009. We expect the effective tax rate for the fourth quarter of 2010 remain a level similar to the rate experienced in the third quarter of 2010.

During the third quarter, we recorded cash flow from operations of approximately $58 million and spent approximately $45 million in capital expenditures. As a result, our net debt at the end of the third quarter was $31 million compared to $65 million at June 30, 2010. As of September 30, 2010, our debt to capital ratio is 9.9%, and our total debt to LTM EBITDA was less than one time. As of September 30, 2010 the Company had approximately $477 million of availability under our current credit facility. At this time I would like to turn the discussion back over to Cindy, who will review the activities of each of our business segments.

Thank you. Our accommodations generated third-quarter revenues in EBITDA of $127.7 million and $49.1 million respectively compared to $110.3 million and $36.3 million respectively in the third quarter of 2009. Year-over-year accommodation's revenues and EBITDA were up 16% and 35% respectively. Strong occupancy levels coupled with increased RAM capacity and a stronger Canadian dollar were partially offset by lower manufacturing sales. Revenues from our major oil sands lodges were up approximately 36% year-over-year.

Sequentially, accommodations results were up modestly due to be expanded lodge capacity. As I mentioned previously, we announced our acquisition of The MAC Services Group in October. We are very excited about the acquisition, which will expand our accommodations business into Australia. Our well site services group generated revenue and EBITDA growth of 79% in 224% respectively due to primarily to the year-over-year improvement in North American drilling and completion activities.

Our rental tools business generated $91.9 million and $24.3 million of revenues and EBITDA respectively in the third quarter of 2010, compared to revenues of $51.7 million and EBITDA of $6.5 million in the third quarter of 2009. These year-over-year improvements were primarily due to the increased US drilling and completion activity, particularly in the key shale play region including the Marcellus, the Bakken, Haynesville, and Eagle Ford basins combined with improved realized revenue per job.

Our drilling business generated revenues and EBITDA of $33.9 million and $6.3 million respectively in the third quarter of 2010. Up 84% and 115% from the third quarter of 2009. The year-over-year increase in revenue and EBITDA was due to an overall increase in rig utilization to 73% in the third quarter of 2010, up from 40% in the third quarter of 2009, in addition to higher pay rates.

Our offshore products segments generated revenues and EBITDA of $102.4 million and $17.3 million respectively in the third quarter of 2010, compared to $131.8 million of revenue and $123.3 million in EBITDA in the third quarter of 2009. Revenues declined year-over-year at offshore products as a result of lower starting backlog levels and reduced shipments of subsea pipeline a drilling rig equipment. Despite lower revenues, margins and offshore products were essentially flat, year-over-year.

Backlog totaled $264.4 million at September 30, 2010, up 23% sequentially. The increase in backlog was in part due to several large orders for deepwater production facility infrastructure. Specifically, we received an order for Merlin Connectors and flex joints for our PLP offshore Brazil and in order for fair leaves for the Jack Saint Milo project in the US Gulf of Mexico.

Our tubular services segment generated revenues of $232.5 million and EBITDA of $12.4 million during the third quarter of 2010, up from revenues of $143.9 million and EBITDA of $7.2 million in the third quarter of 2009. Tubular services, OCPG shipments were up 76% year-over-year with 118,500 tons shipped in the third quarter of 2010 compared to 67,500 tons shipped in the third quarter of 2009, Reflecting the year-over-year increase in US drilling activity. Gross margin, as a percent of revenue was essentially flat year-over-year, with 6.9% realized in the third quarter of 2010. The Company's OCPG inventory totaled $341 million at the end of the current quarter.

Going forward and looking at our outlook for the fourth quarter, this quarter is normally impacted to some degree by holiday shutdowns which are difficult to predict. Activity for our rental tools business is primarily tied to completion and production services activity in North America and will generally track movements in the rig count. We expect rental tool revenues to increase sequentially in the fourth quarter with margin expansion of approximately 100 basis points on flat to slightly increasing revenues unless holiday shutdowns are more significant than currently expected.

Likewise, shipments of oil country tubular goods from our tubular services segment should follow trends in the US rig count. Industry oil country tubular goods inventories per active rig are gradually declining despite increased imports. And they're currently at approximately 5.5 month supply on the ground. Third-quarter imports were estimated at 266,000 tons, up over 33% from the second quarter of 2010.

We expect the OCPG distribution market to remain competitive throughout the remainder of 2010, as a result we continue to project our gross margins and tubular services in a range of 5% to 7% for the fourth quarter of 2010. In our accommodations business, major projects continue to move forward in the oil sands. Execution of the Wapasu Creek expansion associated with the Kearl contract continues to move forward, on time, and under budget. Imperial has requested additional rooms at the Beaver River, Athabasca and Wapasu Creek lodges. However, we expect to experience holiday shutdowns in Canada, especially over the Christmas holidays, which could result in reduced sequential revenues in this segment.

In our offshore products segment, our operational execution has been solid throughout 2010 with strong revenues and margins. The big story for the quarter in this segment is our backlog, which improved 23% from the second quarter of 2010, primarily due to the receipt of awards for work on production infrastructure. We expect fourth-quarter revenues to improve in a range of $105 million to $115 million. Looking forward, we are seeing favorable trends in our company. Activity associated with deep water production infrastructure is recovering with new project awards being led.

Accommodations continue to perform well and show additional growth opportunities. We also see ongoing strength in North American drilling and completion activity. In addition, we have recently announced several strategic acquisitions. Our progress with closing The MAC transaction continues on schedule. That does conclude our prepared comments. John, would you open the call up for questions and answers?

Thank you. (Operator Instructions). Our first question comes from Jeff Tillery from Tudor, Pickering, Holt. Please go ahead.

Hi, good morning. With orders this strong in the third quarter in offshore products, which imagined earlier this week, is there a chance against the orders sustained at this level the fourth quarter?

It all comes down to timing every seat but there is a lot of large projects out there and we feel pretty good about our backlog, generally speaking. It is just whether it comes in the fourth quarter or the first quarter, quite frankly we mentioned some work as an example on the Chevron project in the Gulf of Mexico.

That is just a piece of the work that we are bidding and quoting. As I mentioned, that was for the Jack Saint Milo project and we are bidding quite a bit of other content so that is one example and I think you are aware that Shell is moving forward with their Mars B development.

There are some very significant bids out there for us and it is hard to predict whether it all comes in the fourth quarter. I can just tell you they are beginning to be led and that is evidenced in our third-quarter backlog and I do believe we will see some incremental large awards in the fourth quarter.

And, with the mix of work, it looks like you are winning, that would seem to argue that margins are improving. Do we see margins go back to where they were several years ago in that business and can we see high margins and offshore products going forward?

Actually, we have pretty sustained good margin this year despite the fact that our revenues are down fairly significantly, which I have been pleased with but clearly we can definitely go back to high teens margins, particularly with a mix which is more favorable for us, in the sense that it is weighted towards some of our semi-proprietary connector technology where we generally perform generally well on that. I am optimistic we will see some margin expansion coupled with revenue growth going forward. Recognizing that these are longer lead time projects that we have the award in house, we need to get the materials in hand and start work so it is not immediate in terms of revenue recognition but nonetheless, it bodes very well for 2011 and into 2012.

My last question for Bradley on CapEx, it's moving a little slower this quarter than I expected. Can you give some color on that as well as your expectations for the fourth quarter?

We think the full-year CapEx will be around $200 million for the full year, which basically puts us on track for all of our expansions that we are expecting. We have realized some savings on, particularly on the Wapasu expansion and have seen some delays in permitting on wastewater treatment for accommodations which is the biggest driver. I continue to expect, subject Board approval that the CapEx, a standalone basis, would be in the magnitude of $225 million to $250 million next year that is subject to the overall market outlook but that is my expectation for CapEx.

Thank you both very much.

Just to be clear, that forecast for next year was excluding The MAC.

Our next question comes from John Daniel from Simmons. Please go ahead.

Just a follow-up to Jeff's question. Can you give us a sense as to how the bidding environment in offshore products compares today versus the 2007, 2008 time period?

It is very active and of course we have been extraordinarily busy, largely because so many of these projects have been delayed and have lagged in several of these have been bid and rebid multiple times so certainly feels like the volume is certainly significant at this point time. The character has changed just a bit for us in the sense that if you go back, you mentioned to the 2007 timeframe, we have more rig equipment type activity when we we're in the rig building cycle. And also, vessel building cycle, that is less of an impact today that has been replaced by production infrastructure, where the focus right now is on a lot of these already drilled prospects offshore, particularly in Brazil, West Africa, and the Gulf of Africa where the native production facilities, whether those are TLPs or FPSO, it is more of a character that has changed, the volume is certainly high right now.

Okay. Fair enough. Turning to The MAC acquisition, briefly the incremental debt that you are taking on, does this increase the possibility that we can see some select asset divestitures going forward? Or debt reduction?

I will take that know and I'll let Bradley tag in. Our balance sheet was quite frankly underutilized with the debt to cap below 10% we felt it was appropriate to recharacterize the balance sheet and put some debt on it. Even day one, with the acquisition, we are targeting a 40% that's to cap with the debt to EBITDA of 2.3 times, so it is comfortable, in my view, overall in terms of the overall financing structure that we have laid in place. And the only reason I characterize that, we would evaluate business divestitures but no means we feel compelled to do it because of the debt position that we have. We will evaluate those types of divestitures on our own merits.

Okay. You gave thoughts on revenue in Q4 for both the combinations and offshore products, can you give us a feel on the margins as well?

Well typically, offshore, I will start with offshore products and typically offshore products has lower margins in the fourth quarter just because of the holidays. You have a large employee base and you have essentially 5% of the days in the business days in the month that are company holiday so that impacts margins by approximately 100 basis points, just off the bat and I think in mix we are kind of targeting a EBITDA margin for offshore products around 15%. For the fourth quarter. For accommodations, I think we consistently said the margins should be in the 35% to 37% EBITDA range and that is what I am expecting for the fourth quarter.

Okay thank you. Good quarter guys.

Thank you John.

Our next question comes from Victor Marchon from RBC Capital Markets.

Good morning. The first question is on rental tools, you guys had talked about this previously and in the press release as well. As it relates to CapEx. I just want to see the capital you are putting to work in that business, is that in new areas in North America are is that just building out existing locations?

I would say it is primarily the latter . Primarily in 2008 ourselves and the industry as a whole is supporting an overall activity level with 2000 rigs running. We have had over the last two years, obviously we have been below that in terms of overall activity but we are starting to see some tightness, both for our equipment as well as the industry as a whole. I think it is well documented the pressure pumping market is tight for equipment. Our CapEx for rental tools is primarily to really support the very busy regions, which are the ones you would expect, Eagle Ford, Marcellus, Bakken, Haynesville and others.

I might add onto that, Victor, briefly. We go back to 2008 and continuing to 2009, we were spending quite a bit of capital on new locations and new facilities that I think are paying dividends right now. We combined a lot of our rental tool product lines into major supercenters. They got that investment behind us in 2008 and 2009 and the CapEx today is more focused on customer needs and equipment needs in the field. That is a little bit different and you might not have seen as much of an absolute increase because we spent quite a bit of money on facilities in 2008 and 2009 but it is really focused on equipment in the field right now.

Thank you for that. Just switching gears to accommodations, you had mentioned increased demand for a number of your lodges and I just want to get a sense, and looking at the expansion is underway into 2011, can you give us a sense as to how the rooms are booking up relative to expectations and how things are working through that because I think you mentioned everything is on time and under budget but just from booking the rooms perspective, any color on that?

You recall, if you think about Wapasu it as it stands today, Imperial has access to the full facilities for three years, that's under contract. As I mentioned in my comments, they're asking for incremental rooms in the Beaver River and Athabasca area, which we were pretty full during the third quarter, and also remember we asked for expansions on those facilities and comp ones that should complete in 2011 to handle increased demand. We are kind of at a transition phase where I am now.

In other words, we are getting a lot of things to book up and even our mobile camp assets seem to be in high demand at this stage. But, in addition to that, we are having several conversations with our major customer base with projects and the region, assessing their needs -- needs, which are pretty significant. And the question is how much of this dialogue turns into incremental room count in addition to what we have additionally had. And I don't know the answer to that, I just know the conversations are very active.

Great. That is all I had. Thank you guys.

Thanks Victor.

Our next question comes from Jeff Spittel from Madison Williams. Please go ahead.

Good morning, Cindy and Bradley. Could you walk us through the nice sequential uptick in cash operating margins in the land drilling business and can you give us a sense of what is going on as potential sustainability of that?

We have seen higher revenues as we talked about, utilization was somewhat flat sequentially and I did mention on the last conference call, that we have some inefficiencies on some of our footage contracts in Q2 and we just did a little bit better, quite frankly, performance in Q3, that leveraged to improve margins and I think we can sustain them. Yes. The only caveat I always worry a little bit about, fourth-quarter, Thanksgiving and Christmas holiday, sometimes they drill right through and a lot of our rigs are in the Permian, we drew wells of 5 to 7 days the operators don't have to plan much ahead to shut those down for the holidays.

We kind of forecasted reduced utilization right now. Expecting that. It has nothing to do with the long-term operations but I just want a reminder out there so that you are cognizant that if we do have a falloff in utilization, it is likely due to holiday shutdown.

Okay. I appreciate that. Have you started to mobilize rigs out of Ohio, I think that was a topic of discussion on the last call?

We have already done that now is a very marginal area with only four rigs working over the course of the operating history of those rigs. We have moved those into the Rocky Mountain region and we are evaluating with various customers how best to market those rigs and get them to work but there is some interest in them. We're not going to spend a lot of capital on them really until we get a pretty good indication of , and a lot is relative to those rigs but in other words, we are not going to spend much money on them until we have pretty good visibility other utilization.

Okay. Switching over to the tubulars market, you mentioned you started to see an uptick in imports. As that primarily concentrated on the Chinese or is it coming from another area?

No. The Chinese are effectively out of the market. At this point with the anti-dumping and other tariffs that replaced finalized on them earlier this year. We are seeing a lot of imports out of South Korea and Canada.

Okay. That is what I thought. Thanks guys. Appreciate it. Great quarter.

Thanks Jeff.

Our next question comes from Brian Ullmer from Global Hunter. Please go ahead.

I just want to dig in a little deeper on rental tools and what the price of the improvements and increased revenues, could we see incremental margins that are little bit better moving forward or what is the movement on tools are what is your thought on that and how does that look?

The business is doing very well on the way we look back, you realize we have about 50 locations across North America and what we track is average revenue per ticket. Sometimes that is impacted by price increases and sometimes it is impacted by mix so we have to go with knowledge from the field, if you will, in terms of what is true underlying price increases but we are getting some. We did mention and speak to the expectation that we would see some incremental margin improvement and some sequentially, which again, can have some holiday downtime and even there, we are looking at 100 basis point improvement in our margins there. I don't know Bradley wants to add anything.

I think that is right.

Okay. You're not going to go into detail on a regional basis on which ones are the outperformers?

I think we mentioned that on the call. Right now we are getting good growth and returns in areas like the Eagle Ford, the Bakken and Haynesville has been steady, Permian has picked up with activity and drilling in the Permian as well but that is not to say the other markets are good, those are the higher contributors right now.

Switching gears completely over to The MAC, as I try to look at it, into 2012 in their presentation for what their anticipated growth regions are, can you give a forward look on how your CapEx looks in their growth plans if you are going to, I guess follow through on expectations to the regions they want to grow to and how should I look at CapEx for that? The way I look through 2012, seems that you are going to have a fairly substantial cash build and very easily cover all of your debt services, even bring down the revolver so I'm curious is how you are looking at that as we move out to 2012.

I'm not going to be able to speak to specific CapEx requirements, Bradley might be able to do that. You are right, when we look at, we do five-year modeling when we do something as significant as The MAC, and we will be paying down that revolver as projected. I will say there is a however there. I'd also expect there is probably going to be projects move forward faster than what we expected in Australia and also possible in Canada. I could be wrong on that but my gut instincts tell me that there may be some organic growth above and beyond what we projected but your observation is absolutely right. We are a strong free cash flow generating company and quite frankly we have been for the last 10 years and that is why again I felt like it was very pretty to go ahead and get leverage on the balance sheet and the point I would highlight on The MAC, recall that their forward fiscal year revenues are 77% booked by contract in fiscal 2012, I think 64% I believe is the percentage .

That is correct.

Pretty secure cash flows with what is existing there and I think the other question we have to answer, is whether there are any strategic change in the way that we approach the business from the way that they did. They do everything just like we do, however, they did pay about 50% of the cash flow out in the form of a dividend and they typically only expanded when they had firm contracts in hand. And depending upon the demand environment, we may want to try at least, to accelerate some of that. It is kind of a long-winded answer of saying yes, based on the projections that we see from them and that we look at, we will be paying down possibly fairly significantly on the debt, but also there are some great opportunities out there that we just haven't fully assessed yet.

Okay. That definitely answered my question. The point is, you could be more aggressive than the current projections?

We could. They have historically added somewhere between 800 and 1000 rooms per year and you can kind of expect that CapEx historically is going to put them in a $40 million to $60 million of CapEx the year and I think that is a reasonable outlook.

Outstanding. Thank you so much.

Thank you Brian.

The next question comes from David Griffith from Copia Capital. Please go ahead.

Good morning, how are you doing? Could I get some prognostication a little bit on the outlook for the offshore group, maybe as you move into 2012 and how they understand maybe the mix of projects you had back in the really good years, like 2008 versus the mix of projects you see yourself fitting on this year going into 2012. And talk a little bit about the margins should be higher because there is more specialty connectors and stuff like that. Do you think 2012 could be a record year in the offshore products group?

I always have to hedge my answer with, it is depending upon the backlog development, of course. However, if things continue right now as they look like they will, I think that yes, we could do better in 2012. 2012 should be a better year than 2011 just because backlog is going to, in theory, be building over that period of time and it takes us a little while to get these projects underway but obviously the critical thing we have to do is build a sufficient backlog because it will be, in my view, I have quality backlogs. So the key is just to get the jobs booked in and underway. But I am pretty optimistic right now, for 2012.

Then, do you think there is a bump up against the 20% EBITDA margin if you can get the utilization and the right product mix?

I don't really think it is possible. It has been my goal for quite some time to do it for multiple quarters instead of one.

Great. Thank you very much.

Thank you David.

(Operator Instructions). We have no further questions at this time.

Great trade thank you. I appreciate everybody's time today. We are excited about our prospects and look forward to visiting with you further. Everybody have a great weekend. Thanks.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.