Oil States International Inc (OIS) 2013 Q4 法說會逐字稿

Welcome to the Oil States International fourth quarter earnings conference call. My name is Silvia and I will be your operator for today's call. At this time, all participants are in 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 Patricia Gil. Ms. Patricia, you may begin.

Thank you, Silvia. Welcome to Oil States' Fourth Quarter 2013 earnings conference call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer, Bradley Dodson, Executive Vice President of Accommodations, and Lloyd Hajdik, Senior Vice President and Chief Financial Officer. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain information, other than historical information, please note the 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 other SEC filings. I will now turn the call over to Cindy.

Thank you, Patricia. Good morning to all of you and thank you for joining our earnings conference call. We reported sequential improvements in the fourth quarter of 2013 due to record quarterly results in our offshore products and well site services segments. We also realized sequential growth in accommodations revenue and EBITDA, despite unfavorable movements in Canadian foreign currency exchange rates. Our accommodations segment reported sequentially improved results, primarily due to additional rooms added in Australia, along with increased Canadian mobile camp activity from the onset of the Canadian winter drilling season. Continued weakness in the Canadian dollar relative to the US dollar negatively impacted the translation of our foreign accommodations revenues and profits in the fourth quarter. However, the negative currency impact was partially offset by the full quarter's contribution from contracted rooms at our Boggabri Village located in New South Wales, Australia.

In our offshore products segment, we reported record EBITDA and strong margins. We also reported another quarter of strong order flow and bookings, which included a large connector product order for a floating LNG facility in Australia. Our book-to-bill ratio for the quarter and full-year 2013 averaged slightly above 1 time. Backlog at December 31, 2013 totaled $580 million. In our well site services segment, we reported strong quarterly EBITDA and margins which averaged 35% during the fourth quarter. The sequential improvement in results was largely due to day rate and cash margin improvement in our drilling services business, along with a 4% quarter-over-quarter increase in completion services job tickets. We also took several strategic actions which will benefit our Company over the longer term.

Earlier this month, we announced the construction of our eighth major lodge in the oil sands region, our McClelland Lake Lodge. Bradley will provide details of this growth investment later in our prepared comments. In December, we closed on the Quality Connector Systems acquisition, which will provide our offshore products segment with additional opportunity to expand our portfolio of subsea pipeline connector products. During the fourth quarter and in early 2014, we have opportunistically repurchased over 2 million shares of common stock under our authorized share repurchase program. In December of 2013, we announced the hiring and appointment of Lloyd Hajdik to our Senior Executive team with the title of Senior Vice President, Chief Financial Officer and Treasurer. Lloyd has more than 25 years of financial and accounting experience, primarily in the oilfield services industry. He succeeds Bradley Dodson, who was promoted to Executive Vice President of Accommodations, and will become the President and Chief Executive Officer of the accommodations entity upon completion of the spinoff, which is expected by the end of the second quarter of 2014.

At this time, Lloyd will take you through more details of our consolidated results and financial position. Then, Bradley will discuss the results of the accommodations segment; including an update on our proposed spinoff of the accommodations business. I will provide a detailed discussion of the remaining business segments, and give you our thoughts on the current market outlook. Lloyd?

Thank you, Cindy. During the fourth quarter of 2013, we reported top earning income of $133 million on revenues of $675 million. Our net income from continuing operations for the fourth quarter of 2013 totaled $78 million or $1.40 per diluted share, which included an after-tax charge of $0.05 related to a loss on debt extinguishment tied to our repurchase of $34 million of our 5 1/8% bonds and a $0.02 after-tax impact related to transaction costs that we incurred for the proposed spinoff transaction. Excluding these items, net income from continuing operations would have totaled $82 million or $1.47 per diluted share. Our effective tax rate for the fourth quarter was 30% compared with 25.9% in the third quarter of 2013. The higher effective tax rate in the fourth quarter resulted from the adjustment of our annual effective tax rate to 27.5% from 26.7% recorded for the first three quarters of 2013.

The third quarter 2013 results were $122 million of operating income on revenues of $684 million. Net income from continuing operations for the third quarter 2013 was $77 million or $1.38 per diluted share, which included $0.08 of after-tax expenses, mainly related to the proposed spinoff transaction and the Sooner divestiture. Excluding these items, net income from continuing operations for the third quarter of 2013 was $81 million or $1.46 per diluted share. Our gross and net debt levels totalled $973 million and $374 million, respectively, at December 31, 2013, for a net debt to cap ratio of approximately 12.5%. Our leverage ratio was 1.23 times at December 31. As of the end of the year, we had total liquidity of approximately $1.6 billion, comprised of $984 million available under our credit facilities and $599 million in cash on hand. During the fourth quarter of 2013, we reported strong cash flow from operations of $112 million and we invested $102 million in capital expenditures, primarily related to the ongoing expansion of our accommodations business, the addition of incremental proprietary completion services equipment deployed to service the active US shale plays, and the purchase of land and ongoing facility expansions in the offshore products segment.

Also in the fourth quarter, we repurchased $34 million, principal amount, of our 5 1/8% notes. As a result of this transaction, we recognized a pretax loss on debt extinguishment of $4.1 million or an after-tax impact of $0.05 per share. The $4.1 million consisted of the cash premium paid of $3.7 million and partial write-off of the unamortized deferred financing costs. In the fourth quarter, we repurchased $104 million of our common stock under our authorized share repurchase program at an average price of $101.58 per share. Since year end, we have repurchased another $100 million of our common stock at an average price of $99.04 per share. We have approximately $270 million remaining under our $500 million authorization, which expires in September of 2014. In terms of our first quarter 2014 guidance, we expect depreciation and amortization expense to total $70 million and net interest expense to approximate $16.5 million.

Our 2014 effective tax rate is projected to average 26.7%. The Company currently plans to spend $600 million to $650 million in capital expenditures for the full year 2014, which include several projects in the accommodations and offshore product segments, whose timing was delayed from 2013 into 2014, in addition to other planned expansionary projects, including the construction of our previously announced McClelland Lake Lodge. At this time, I'd like to turn the call over to Bradley who will begin a discussion of our accommodations segment. Bradley?

Thank you, Lloyd. Sequentially, our accommodations segment revenues increased 3% to $254 million and our EBITDA increased 2% quarter-over-quarter to $103 million, primarily due to increased Canadian mobile camp utilization from the onset of the winter busy season, partially offset by lower lodge and village revenue. Our lodge and village revenues were down 4% sequentially, due to lower realized rates in Canada, the impact of weaker Canadian dollar relative to the US dollar, which is partially offset by the full quarter impact of contracted rooms at the Boggabri Village in Australia. During the fourth quarter of 2013, our average available rooms totalled 21,054 rooms; a sequential increase of 455 rooms with a RevPAR of $99. Earlier this month, we announced that we have begun construction of a new Canadian Lodge, the McClelland Lake Lodge, which is located north of Fort McMurray in the Athabasca oil sands region of Alberta, Canada. This Lodge will initially support a new oil sands mining project in the region under a three-year contract for the majority of the rentable rooms. McClelland Lake Lodge will have an initial capacity of 1,561 rooms with the potential to reach 1,997 rooms in the future, as demand dictates.

We plan to open the lodge in the summer, and we'll reach full initial capacity by the end of 2014. Accommodations revenues are expected to range between $250 million and $260 million in the first quarter of 2014, as a result of stronger Canadian mobile camp activity, partially offset by lower Australian occupancy. Weaker met coal prices and cost cutting efforts by our customers caused an Australian customer to reduce their forward room commitments beginning in March of 2014, in return for certain termination compensation to be received by us beginning in March 2014. EBITDA margins are expected to range between 38% to 39% during the first quarter. Now I'd like to provide an update regarding the proposed spinoff of our accommodations business. We continue to make progress on this front. In December of 2013, we filed the initial Form 10 with the SEC and we received their first round of comments in January.

On February 11, we filed the first amendment to the Form 10. We expect the review process with the SEC to continue while we complete the standalone audit of the 2013 financial statements for the accommodations business. We currently expect to complete the SEC review process by the end of March or early April. In August 2013, we filed a private letter ruling request with the US Internal Revenue Service regarding the proposed spinoff of our accommodations business and anticipate receiving the ruling in the first quarter. The accommodations business will initially be spun off as a C Corp, as it offers a faster path to separation and is expected to be tax-free to our shareholders. We continue to refine our analysis of a potential REIT election for the accommodations business. Ultimately, the decision to pursue a REIT election will follow the completion of the proposed spinoff.

We're making progress in identifying our management teams, directors, and the separate company financial structures. We are currently recruiting executive and management positions for the accommodations business, as well as assessing potential candidates for the accommodations Board of Directors. In the latest amendment to the Form 10, we disclosed the pro forma financials for SpinCo, which include initial guidance for the expected distribution from SpinCo to Oil States in connection with the spinoff. This cash distribution is expected to range between $650 million and $850 million and we use the midpoint of this range for the pro forma calculation purposes. Oil States is expected to utilize the distribution from SpinCo, together with cash on hand, to refinance its outstanding high yield bonds. Using the midpoint of the distribution range, we anticipate SpinCo's initial leverage ratio to approximate 1.8 times based on total debt to trailing 12 months EBITDA. Cindy will now address the activities of our other business segments.

Thanks, again, Bradley. In our offshore products segment, we generated $235 million of revenue and set a quarterly EBITDA record reporting $52 million of EBITDA during the fourth quarter. Sequentially, revenues decreased 3% due to the inclusion of cash through revenue in the third quarter, while EBITDA increased 14%. EBITDA margin was 22%. During the quarter, we enjoyed a revenue mix that favored our high-end products and we realized improved cost absorption at certain manufacturing locations. We realized strong order flow during the quarter and booked $248 million in new orders. Reported backlog at December 31, 2013 totaled $580 million.

Our book-to-bill ratio for the quarter and full-year were over 1 time. Noteworthy backlog additions in the fourth quarter included connector products destined for a floating LNG facility in Australia and six platform products and deck equipment orders for the Chinese market. On December 2, 2013 we acquired Quality Connector Systems. QCS is headquartered in Houston, Texas and designs, manufactures, and markets a portfolio of proprietary deep and shallow water pipeline connectors for subsea pipeline construction, repair, and expansion projects. QCS has been reported in our offshore products segment since the date of acquisition. For the first quarter, revenues are projected to range between $215 million and $225 million. EBITDA margins will depend upon our actual revenue mix, project execution, and overhead absorption during the quarter, but are forecasted to be in the range of 19% to 20%.

Our well site services segment generated revenues of $187 million and EBITDA of $66 million in the fourth quarter of 2013. These results compared revenues and EBITDA of $196 million and $64 million, respectively, in the third quarter of 2013. Revenue for the fourth quarter decreased 5% quarter-over-quarter, largely due to weather, while EBITDA increased 3% quarter-over-quarter. EBITDA margins for the segment were very strong at 35% and were lifted somewhat by favorable accrual reversals. Despite the flat sequential US rig count, this segment grew profits primarily due to greater service intensity in the active shale basins, along with improved activity levels in Mexico and Canada, coupled with higher drilling services margins, which were partially offset by lower activity in the Northeast and Midcontinent regions due to weather. As we previously reported on the third quarter earnings conference call, our drilling business experienced some downtime between customer contracts early in the fourth quarter due to permitting delays in the Rockies resulting from the government shutdown. However, several rigs began to go back to work in early 2014.

While we had five rigs stacked at December 31, 2013, we do expect the majority of these stacked rigs to return to work late in the first quarter. While we are seeing improving land fundamentals, our completion services business was hindered by extremely cold weather in the early part of the first quarter. We estimate that first quarter revenues for our well site services segment will range between $182 million and $190 million with EBITDA margins of 31% to 33%, depending upon startup and mobilization costs associated with activating some of our stacked drilling rigs. In closing, each of our three business segments reported sequential earnings improvements during the fourth quarter. We have many strategic initiatives underway to benefit our shareholders. Our focus remains fixed on our strategic plan and we will continue to focus on ways to enhance shareholder value. That completes our prepared comments. Silvia, would you open up the call for our questions and answers at this time, please?

(Operator Instructions) Collin Gerry, Raymond James.

I continue to be impressed with the completion services, both revenues and margins, frankly, and a lot of your, maybe not competitors, but a lot of the industry was dealing with a lot of weather this quarter. My question is, number one, on the margin front, did you benefit from certain regional issues where maybe you didn't have as much exposure to some of the freeze-offs that we saw in the other parts of the oil service spectrum?

Part two of the question is, we're seeing the horizontal rig count really accelerate here. I'm wondering, if we think about that business, should your revenues grow at a faster pace than horizontal activity or in line with overall drilling activity?

They're two great questions and I'll have to comment a little bit on the fourth quarter. Again, our completion services revenues was down just a little bit and there's always a mix factor involved. But, clearly, we, too, were impacted by the cold weather. My however is, it was a little more of a December impact in the fourth quarter. I'd say it's been felt more severe, quite frankly, early in the first quarter.

But again, revenues were down and yes, our margins were incredibly impressive, our cost management was obviously good through this period, given the weather disruptions. I still say we had some like open TOs that closed favorably to our margin. So, I have guided you back to little bit more normal margin range, but nonetheless, those margins are clearly holding, if not improving.

You mentioned the trend on the horizontal rig count acceleration; that is clearly a very favorable trend for us. I'd love to tell you that we do better than everybody else, but let's just say I think we'll participate at least equally. But again, movements in the horizontal rig count do favor us more than the overall kind of rig count metrics; again, the longer the lateral, the more zones completed, the better we do.

It's kind of a catch-22 where we find ourselves today. We know the trends are there. Our customers are enthusiastic. We've just been plagued for about 45 days, particularly in the Rocky Mountain region, the Bakken, and the Northeast, like everybody, with sloppy weather.

Okay. That covers it quite a bit.

I think in the offshore side of the business, we're seeing some of your competitors are just general sentiment in the space that we're seeing kind of a pause or maybe a slowdown in the rate of growth. Do you think that translates into your book-to-bill as we go through 2014? Can we stay over 1 or are you starting to feel or hear a little bit of that softer sentiment in that side of the business that maybe keeps a little bit under 1?

Collin, we're actually very optimistic about our capabilities to sustain backlog this year, if not expand backlog. I always say, this is the hardest business for everybody to get your arms around because it really depends upon what stage of the field development process that you're active in. A lot of the enthusiasm over the last 18 months or so has been over some of the drilling areas and that sounds like it's slowing just a little bit, some of the tree installation work.

Now, I feel like there's a great phase for field development, particularly with some delays that occurred during 2013. Everybody is going to talk about delays in Brazil, as an example. But when it comes down to subsea pipeline work, interconnects into floating production facilities, the floating production facilities themselves, whether those are FPSOs or TLP's and/or export lines, we feel pretty positive about.

Even though 2013 was a good booking year for us, we didn't have a lot of the floating production facility work. We did get some pretty decent subsea pipeline work where we still have a very good throughput of that bidding and quoting activity right now. Today, I'll just tell you I don't feel, in any way, let down by the prospects in our aspects of the business.

That is very helpful color. Thank you. I'll turn back. Congratulations on the busy year.

Blake Hutchinson, Howard Weil.

I'm not sure who the question is most directed at, but I wanted to, as we look at the accommodations guidance, it is, first of all, the currency impact that we've seen in both Canada and Australia year-to-date, factored into that number?

Yes. We have factored in what we've seen thus far in terms of setting our first quarter guidance.

Okay. Bradley, it's been out there and it's been alluded to, but you've talked a bit about some of the occupancy declines in Australia. Are those hitting, as you get those payments in, is the majority of the actual physical occupancy decline actually hitting that first quarter number, too? Or would you expect that to be more of a second quarter -- hit the second quarter result?

Right. Between the fourth quarter and the first quarter guidance for Australia, we'll see a step down in the earnings out of Australia. I would estimate, in just rough terms, you'd see an 80% occupancy-related, 20% currency-related. Then there will be another step down in the second quarter from an occupancy standpoint. The succinct answer to your question is, we'll feel some of it in Q1, but we'll feel the second piece in Q2.

Now based on what we see today, I'm cautiously optimistic that Q2 should set the baseline for us, but certainly, as we progress through the first few months of the year, we'll certainly update everyone on the next earnings call.

Okay. That's helpful. The 1.8 total debt to trailing EBITDA ratio that you laid out there, is that net or just total net to EBITDA?

That's gross.

Okay, great. Thank you. Jeff Tillery, Tudor, Pickering, Holt.

Bradley, I'm just following on Blake's question around the way the changes in Australia will flow through. Q2 was another step down operationally. As we think about, from what we know today, the full year accommodations is kind of the bogie from a top line standpoint down 10% year-over-year for the full year?

It'll be somewhere between 5% and 10%, assuming we don't have any further degradation in the exchange rates. I think we're all going to have to, and I'll certainly endeavor with the market to alert people when we start seeing movements, because I think a lot of the movement in exchange rates that we saw late last year, it's tough to -- it does have a direct impact on the accommodations earnings from a translation standpoint.

I'll certainly try and keep people real-time on the movements there so they can adjust their expectations. But assuming that we don't have any further degradation in the forward curve for the Canadian dollar or the Australian dollar, I don't see it being quite 10%, but it'll be somewhere in the 5% and 10% range. But probably the bigger issue is going to be the mix, and while revenues aren't down that significantly, certainly, we'd prefer them to be going the other direction without a doubt, is that the Australian business is a high-margin business.

The mix there will have a, what I hope will end up being a, temporary impact on the margins for the business. But it will have an impact on the overall segment margins.

If Q2 does prove to be a baseline for Australia, really there shouldn't be any reason to think about margins degrading beyond Q2, should there?

I would hope not. Intellectually, that's the right way to think about it.

Cindy, in the offshore products business, as we think about the full year in 2014, so certainly Q4 of 2013 results were helped by mix, but if you look at the totality of the business mix 2014 versus 2013, is there a material change, either helpful or hurtful, to the offshore mix?

I commented earlier, a lot of our bookings last year came almost routinely. Mix was very comparable. I did point out that we had one order in Q4 that related to an order for a floating LNG facility. Again, those tend to be our proprietary equipment. That type of order will impact our mix favorably.

We are looking for, again, or certainly bidding on some significant subsea pipeline orders, as well as both FPSO and TLP orders in 2014. My reaction is to say, the backlog mix coming out of 2013 was comparable but good and at high levels. I think we have the ability, assuming these projects move forward, to high-grade that backlog mix in 2014.

Perfect. Thank you guys very much.

Stephen Gengaro, Sterne Agee.

Cindy, sticking on the offshore products theme, have you seen any change in the interest level and/or bidding process for some of these new jobs offshore?

I'll tell you the trim line that I'm seeing is that some of the projects that we have been both bidding and quoting board, so to speak, for quite some time, we're starting to see some orders; i.e., the LNG project in Australia. There other activities in Brazil that still have momentum, but we're waiting to see those actually be let into contracts. The other trim line, I'm seeing a bit more coming out of West Africa than we have seen in a while.

Okay. It sounds like, from your mix comments, that you're getting more comfortable with a 20% level over time. Is that fair and we should probably think about that as we get maybe into 2015 or is it too early to tell?

It's too early to tell. But, again, I do feel like the backlog development, if these projects move forward, the ones that I'm referring to in our backlog does, in fact, take that mix shift, I don't see a reason why we couldn't be there. I don't have the numbers directly in front of me, but I do believe, that with a strong fourth quarter, that our 2013 annual EBITDA margin came in at 19.8%.

Not that I'm watching that 20% like a hawk, but it was a successful year for us. We're exiting the year with a high level of backlog and our prospects are good. Yes, I'm pretty positive about the business. We've got a lot of initiatives in place internally that I think are making a difference.

Time will tell. It's always about what's the next order going to look like. But the team is doing a very good job.

On the accommodations side, I just want to clarify one comment and ask another. But you said accommodations, with the revenue thoughts you gave to a prior question on 5% to 10%, that's aggregate accommodations, right? That's not just Australia?

That is correct.

Okay. Can you give us some sense for how you're thinking about in 2014, the RevPAR number? It's always a hard number for me to get my arms around. Is there any color you could add there?

Let me start off with where we are on the first quarter. Usually, the first quarter has been the strongest RevPAR quarter for us. Implicit in our guidance is probably around $110 to $112 range, but that will likely be the high watermark for the year. Overall, assuming, again, going back to Jeff, I believe it was Jeff's question, that this is all caveated with exchange rates, but expecting a RevPAR for the year in the $110 range.

Okay. Great, that's helpful. Thank you.

Sean Meakim, Barclays.

In the release, it seemed that there was an increased emphasis on contract rollers in Canada leading to some of the drivers for the quarter. Was that, in fact, the case? What does that imply for the outlook for 2014?

There was a reference to contracted rates, but those were not roll-overs, but more already contracted rate changes, and those actually came to fruition. Contract rollovers, really, for both businesses, while there will be some in 2014, most of the larger rollovers are in 2015.

Okay, good. One other thing from the release, I noticed that CapEx was a good bit lower than we had talked about in the last quarter's call. You mentioned, in your prepared comments, about some delays on the accommodations side. Could you give us a little more color on what drove the delays and anything else we should be looking at there?

The biggest piece was we had already started on McClellan late, and as is typical, and we always try and adjust for this, it's always hard to figure out how much is going to rollover to the next calendar year. We always make an effort to be as precise as we can, but it's a hard exercise. As a result, no read through, I don't think, in my opinion, as to something going wrong or going sideways. It was really just a matter of when the spending occurred relative to our initial expectations.

Obviously, with the press release on McClellan Lake, we've updated everyone as to timing of when those rooms will come on. We're very excited about the contract that we got, we're very excited to partner with this customer for three years, on a take or pay basis, in a new area for us and so, we are very pleased with the win there.

I think, not just to drag it out too much, but I think one of the reasons that we were able to secure this contract, to get this lodge contracted before we fully installed it, was because of the land making strategy. Our position up there in that area led to our ability to deliver in a timeframe that was attractive to the customer.

In fairness, I'll chime in, Sean, a little bit of the reduced CapEx in Q4 was offshore products, partially due to, really, I'd say, some permitting issues with our new facilities in Brazil, but also, just strategically timing those facility investments to meet the expected demand timeframe and so it was a combination of both of those.

But I do think that, as it relates to accommodations, it's really, every time we enter into a budget year, we anticipate that certain contract conversations lead into actions on behalf of CapEx and depending upon the timing of those, and McClellan Lake's a prime example, it took us a little longer than we probably had hoped to secure that contract. There is nothing other than timing in nature that I would point out to you.

Great, that makes a lot of sense. We talked a little bit earlier about the horizontal rig count growth and we're seeing that most pronounced in the Permian today. It seems like the rigs or the transition towards a new customer base seems to be going pretty well, just given the numbers we've seen and what you've projected for 1Q. Is that, in fact, the case? Can you give us an update of how that customer transition is going?

I'm not sure. Are you talking about drilling rigs or are you talking about completion services?

On the rigs, yes.

Okay, I just wanted to be clear there, because I think we serve everybody in completion services. What we're seeing, there's almost, I'll call it three classes of rigs that are coming out, with obviously mechanical rigs, the SCR-type rigs, and more recently, AC-type rigs. There's all different types of demand, and over the last five years, we have transitioned from smaller companies drilling on footage all the way to the majors and the large independents.

We have a broad range there, but as more and more of these large companies move towards AC rigs drilling in the horizontal sections of the play, particularly in the Permian, it is creating short-term availability of our rigs. The good news is, they're now being picked up by some of the smaller -- as long as WTI -- we've got some refining disconnects right now, but as long as the WTI's in that $95 range, I do think those rigs will be utilized.

They're very good assets and people seem to roll very profitably at the current crude oil prices that we have. That's what we're seeing is a little bit of a period of rig reallocation or substitutions based upon customer needs.

All right. Great, thanks a lot.

Kurt Hallead, RBC Capital Markets.

I wanted to follow-up on the spin coming up here for accommodations and then I think there is an element of expectation in the marketplace about the next step being a potential REIT of the accommodations. Bradley, I was just wondering if you might be able to walk us through some of the process or analytical process that you may be going through to determine that? I put that in the context of what you mapped out already today with respect to the elements of accommodations, top line being down 5% to 10% year-on-year.

Again, the market expectation of the REIT is for some sustained surety of cash flow, and this is a pretty cyclical business. It's an open-ended question, Bradley, but I'll leave it to you on how you want to answer it.

On the REIT election, we have, as we've discussed multiple times with investors and the street, we continue to refine the analysis that we prepared for the Oil States Board last summer, around some of the key assumptions that go into determining, not only does our business neatly fit into the REIT structure, but then also, ultimately, what is the distributable income and leverage capabilities of the accommodations business in a REIT.

That analysis is ongoing. We continue to, as Oil States, try and put the SpinCo company in as good a position as it can be in order to make that determination on a put after the spin has occurred. Ultimately, that election will be the responsibility of the SpinCo Board.

The spinoff remains very much on track, if not ahead of schedule. As I may have mentioned in my comments, the Form 10, we got back comments from the SEC. They were very reasonable. We responded on the 11th. We then expect to get another round of comments back from the SEC at some point here as we try and finish the 2013 audit of SpinCo or the accommodations business on a standalone basis.

On a parallel basis, the IRS ruling appears to be making good progress, and as I mentioned, we expect to get that in the first quarter of 2014. All of this, I think an important data point update that was in the press release, and it's in the 10-K when we file it, here shortly, is that the timing for the spinoff is now expected to be in the second quarter of 2014.

I think that, from the very beginning, in terms of your comment about the volatility of SpinCo's earnings, from the very beginning it should have been apparent that 90% of our earnings come from foreign jurisdictions, in which foreign currency will be a key component, so that is somewhat out of our control and something that, as SpinCo moves forward, we'll have to determine how we manage that appropriately and if hedging is warranted.

As it relates to the Australian business, met coal prices are as low as they were in the recession, so the impact on our business, I think we're in as a good a position as we can be with our contract coverage. I think, while it's disappointing to have to release a customer from their room commitments, it was the right thing to do to try and help out that customer as they try and manage their own cost-cutting efforts.

But our contracts held up firm and that is what allowed us to have very constructive dialogue with the customer in which we were substantially held whole from what we were initially anticipating underneath those contracts. So I'm hopeful that in terms of Australia the 2014 will be the bottom and we will start to see some improvement as we head into 2015. But with the contracted met coal price at $150 and spot rates below that, that's a hard headwind to fight.

That's great. I appreciate all that color and detail. On the follow-up relating to Australia then, when you risk-assessed outlook and gave the 5% to 10% down year-on-year revenue. How should we think about Australian room rate utilization? In that context, Bradley, given the challenges around met coal in Australia and this one particular customer, what's the risk of another customer having to have the similar negotiation with another customers as the year goes on?

I'll answer the last part first. It's certainly it's always a possibility, but there's nothing anticipated at this point. In terms of our -- I mentioned to Stephen's question earlier, an estimate of full-year RevPAR, which includes my expectations for Australian occupancy and rates.

Okay. Any additional color around what the utilization of rooms might be in Australia?

We haven't historically disclosed utilization for rooms.

We don't have it handy.

We don't have it handy.

I do have one on offshore products for Cindy. I heard your answer to a previous question. A lot of nervousness out there on the investor base around some of these offshore projects. It seems to me like they're kind of one-off situations for a few different companies. It doesn't look like there's anything broad-based to necessarily be concerned about. But can you maybe expand upon that a little bit? How do you look at what the major oil companies have been doing recently in reassessing the cost on some of these projects?

I think we're in a phase here and it's always hard for me to get my arms around if you're not directly sitting in that aspect of the business. But right now, there's there is a cloud, obviously, over leading-edge deepwater drilling rates and leading-edge vessel rates.

And again, that's both the demand side, but we all know some of these big projects have slid, number one. But we've also had a lot of capacity coming on. It's not a one-edge sword here. You've got to look at the capacity element, as well as the demand element.

It is very clear to me on the projects that we have bid, there have been delays, we've just been blessed by the fact that we held that backlog, despite those delays. But I can only speak to what I provide to the marketplace, which right now is increasingly weighted towards subsea developments and floating developments. But we are expecting continued high demand for our casing and conductor products, for our FCR flex joints, that's going to go on TLPs, as well as FPSOs, pretty high bidding demand for plins and plets.

Generally, some of what we saw in 2013, release for those major project awards were a bit slow, but overall the number of those major project opportunities for us is growing. I think you're going to find some of those, as you call it, they're selective companies that have different things going on, but I do not see broad-based negativity around deepwater.

That's great. I appreciate it, Bradley and Cindy, I appreciate your time and those answers. Thanks.

Chuck Minervino, Susquehanna.

I just wanted to touch base a little bit more on 2Q EBITDA margins. You gave the guidance for 1Q and it kind of steps down a little bit from 4Q. It sounds like a steps down a little bit in Q2, as well. I was wondering if you could help us bracket that number a little bit if that's where we're going to be stabilizing out?

I'm sorry, Chuck, what segment is the question on?

Accommodations segment.

Okay on the accommodations? I think Bradley addressed it. I'll try to recap it succinctly. But with Australia going down, in terms of top line, which we have guided to in the Form 10, as well as today, it is a higher EBITDA margin business, so the mix with your higher margin business going down and your Canadian and US business holding, US may even expand a little bit, the balance of that leads to lower overall margins. I think the color, if there is a distinction Q1 to Q2, is some of these contract utilization reductions start in March, so the brunt will be felt in Q2. Is that fair Bradley?

I agree.

That's very helpful. Can you help us with a little bit of a number range on the EBITDA margins? How you're thinking about that in Q2 in accommodations? I think you mentioned 38-39% in 1Q, where you think that stabilizes in 2Q?

At this point, we're just prepared to give directional guidance, and I think, in our prior answers, we've done so. Obviously, with Australia being, as Cindy mentioned, as I mentioned before, with Australia being down in the second quarter, we'll have another step down in margins for accommodations.

Okay. In the Canadian business, you always have a pretty good outlook well in advance of new project opportunities. Can you talk a little bit about Canadian accommodations, room growth opportunities maybe outside of McClelland Lake? Maybe not in 2014, but in 2015 and beyond?

We continue to see opportunities in lodge growth in the in situ region of the oil sands play. We are working on several of those, and those still have potential. Those would, in all likelihood, look a lot like an Anzac Lodge that we opened last year and has been doing quite well. That's a 300 to 500 rooms per lodge opportunity and we're chasing some of those. Longer-term, as we look at room growth, we'll continue, we believe, to see oil sands growth.

We still have, as I mentioned in my comments, capacity to expand the McClelland Lake Lodge in the future, should it be warranted. We'll have in situ growth, we'll have sprint growth at McClelland Lake. Longer-term, certainly, there's been some press around the British Columbia, West Coast Canada, LNG opportunities and we are pursuing those. I think it's clearly too early for us to comment in any specificity on that. But longer-term, we see that as a potential opportunity and are pursuing that.

Okay. In the Australian business with some of these contract renegotiations, do you see any opportunities there for alternative use for those rooms or alternative customers to re-contract some of those rooms at this point in time?

We do, in certain areas, and expect to get some uplift. That's mitigating some of the issues. There are other areas where, at least for the near term, those will be unoccupied.

Generally speaking, I would say that maybe one of three facilities we do see is in a very prime location. We serve a multitude of customers. We do think there'll be some offset there, yes, Chuck.

All right. Thank you very much.

Michael Lamotte, Guggenheim.

Bradley, first question for you, I just want to clarify on the revenue margin for 2014 in accommodations. A lot of discussion around occupancy, currency, and mix. But pricing in each of the markets is relatively stable, is that correct?

I would generally say that's the case. I'll address each individually. In the Canadian market, I would say pricing is firm, and so I don't see, really, a pricing issue there. The US has been a difficult market for us in accommodations.

We're hoping -- 2013 was not a good year for US accommodations for a myriad of reasons, some market related some self-imposed. We're hoping that 2014, and so far 2014 seems to be firming up, so I would say that the US is, I will say, I'm optimistic it's stabilizing.

In Australia, it's less of a pricing issue and more of a demand issue. There are certain markets where we have adjusted pricing to and have had positive impacts to the occupancy. Those are not -- to date those have not been in the met coal region. I think in the met coal region with the prices that I discussed earlier where they are dropping the prices significantly, wouldn't have the requisite change in occupancy.

I would say that the rates that we're getting in Australia are stable, it's just the overall volume of demand isn't there in certain areas. As Cindy mentioned, even though we have had some of those room commitments handed back to us, and in particular one location, we expect we'll have some ability to re-contract those rooms.

Is there any CapEx related to mothballing any of these rooms that may not be occupied for some time?

No. It's a fairly variable cost model. There's not a lot of fixed cost. Even if there were some, I don't know that we would be able to capitalize it. We'd likely have to expense it as incurred.

But we really don't expect any significant -- I don't want to use a simple analogy, but closing a room off in a hotel doesn't require much.

I can ask a technical question on the spin, the PLR for the spin has been filed. Have you heard back from the IRS on that?

We've been in dialogue with them and we've been working with them as they request information and we provide answers. We've been in contact, really, from the beginning starting in August, our team -- both internal team, as well as external team have been working to push that process forward.

Okay. The filing of a PLR for the REIT conversion, is that something that can only be done after SpinCo's Board approves it, assuming they do. Or is that something that can be done as part of the due diligence and feasibility?

There are no plans on moving forward with the PLR on the REIT until after the SpinCo Board is formed and after the spin is complete.

Okay. I know execution's been the top priority, given everybody's running two or three jobs down there. As I think about Oil States after the spin, should we continue to see acquisitions along the lines of QCS and buybacks? Or have you started to entertain other strategic directions, perhaps the addition of another third segment? You've demonstrated great capability of running multi-segment businesses. I'm just wondering how you're thinking about life after the spin?

I just smile at the question. I think I'll answer it and just say that I am trying to establish and capitalize the Company for complete optionality. It's an interesting thing, we're carrying out a lot of the strategic initiatives we have in place. We'll be much more of a pure play energy services company and I think, an incredibly attractive line and what will then be in the small-cap space.

Interestingly, you mentioned QCS -- I'll also remind you, in the last 12 or 14 months, we also closed the Piper acquisition and the Acute acquisition. Those are fairly small; they're not on a lot of people's radars screens. But they'll be more meaningful and that's just in offshore products. There were a couple in the completion services business, Tempress and others, but again, they'll have more magnitude of weight in the smaller, more focused company. But I'll also tell you, all of those acquisitions had a purpose for us.

It did have to do with enhancing our operations, filling in gaps, leading to more OEM products; although most of what we deliver to the marketplace are fully OEM products, it also leads to enhanced operational efficiencies and effectiveness. The market may look at them as pull-through, tuck-in acquisitions. I tend to look at them much more strategically than that. So I'm excited about those kinds of deals.

It's interesting because in our 13 year history, quite frankly, we haven't had an acquisition that has failed to produce the results. I think that is a rare outcome. I do think that we're pretty good at it.

I liked optimizing what we have, extending product lines in the spaces that we're in and I think we still have opportunities to do that. I would tend to favor that route than just adding another leg, unless it's very strategic to -- we have come a long way to get to a more pure play company. So I'm a little reluctant to jump off the cliff day one and complicate it a little bit further.

Understood. Thanks for the answer and thanks for the time.

John Daniel, Simmons and Co.

I understand from a prior answer that you don't have the average room count handy, that's fine. Could you give us any color, Bradley, on what the other accommodation revenue might look like for Q1? That way, we can back into --.

I think that, if I recall correctly, built into our guidance is about $75 million of other accommodations revenues, $75 million to $80 million, so it's in that range.

Okay. Cindy, on completion services, that business just continues to do very well, given as you describe, proprietary services. Given that niche, if you will, and the backdrop of better E&P capital spending, at this point, are you seeing opportunities to get pricing traction in the segment?

We've done pretty well, quite frankly, about holding pricing even throughout 2013. I think that has been a differentiator for us. Part of the reason, I think, is the focus on technology that we have and we've really stuck to our knitting, so to speak, and not varied from that. We've avoided opportunities to commoditize the business. I don't really know that we should be having a conversation about firming price back up, because I don't feel like we've really lost much.

You always have some on the margin in one basin or another. But if I just think in broad based, in totality, we've done pretty well there. But the trends are going in the right direction, always the service intensity, well intensity, horizontal, you hear it over and over and over, it's a broken record, I'm sure. But that will serve us well.

Okay. Bradley, I've got to come back to accommodation, I apologize on this, but I know it's hard to forecast or at least want to make a forecast in the back half on the margins. But historically Q1 is the high mark for margins in accommodations. Is that the expectation, again, for this year?

They could be, although I'm not going to say that it's definitive that we couldn't recover in the back half of the year. As I danced around the margin guidance for Q2, that will clearly be lower. And in the second half, I will dance around again and say that I hope it's somewhere in between Q2 and Q1.

Okay, that's perfect. G&A, no guidance, I presume, is that because, obviously, more transaction costs this quarter? Is it Q4 similar to Q1?

I'm looking at the team to try to pull up a comparison. We did have the transaction costs, they were not reported. I'm looking for Bradley, somebody for confirmation here. But the transaction costs were outside of SG&A. They were reported, I think, in other income and expense just for modeling purposes.

I want to be clear, I've got the tone from some of the overnight notes, almost as if people are thinking these are built-in costs that are long-term. The kind of costs that we've highlighted here are truly costs associated with getting the spin done. This is not an ongoing burden to the entity prospectively. I'm glad you mentioned that, I wanted to point it out. The SG&A in Q4, I think, might have been modestly higher for just for some year-end accrual. But I think when you look at that line item, it's going to be fairly flat.

Okay. Thanks, guys.

Jim Wicklund, Credit Suisse.

It's actually Jonathan. Lloyd, in your remarks, you mentioned you were expanding land for offshore products. Is that to expand roofline, manufacturing roofline?

I don't mind picking up on that. Again, in our CapEx guidance of $600 million to $650 million, we have a much higher level of CapEx for our offshore products than we typically do. I will kind of go through some of the things that we're doing there. First and foremost, we had in our budget last year, effectively two new facilities commencing construction in Brazil, that's in Santa Cruz and Macae, those are really flipping over into 2014.

Again, with some of the delays in Brazil, we just haven't felt compelled to rush these. But those are examples. We've been in the operating on out of Bathgate and Aberdeen as long as this Company has been around, before I was born, quite frankly.

Our facilities there are dated and they're really not stepping up to the expanded needs that we have. We are going to commence groundwork on a new UK facility in 2014 and then we're opening a new facility in Thailand at the end of the first quarter.

When we bought Piper they already had some expansion plans underway. We factored that in our acquisition economics and we will be expanding that facility, as well, in the second quarter. Somewhat atypical for offshore products, is normally a fairly low, I'm going to say $30 million is kind of CapEx a year, and I believe our budget is roughly $100 million with these fairly significant land and facility investments. But most of the land investment is in the UK.

Thank you for that, Cindy. Aftermarket, how big is that within offshore products these days?

Historically, because generally I'm going to classify these as service businesses and its roughly 25% of the top line for our offshore products. That's one of the beauties as we get bigger and get a larger installed base, you also create more of a recurring service element there.

That's all for me, thank you.

Stephen Gengaro, Sterne Agee.

Did you give any sense for room count growth in 2014 in aggregate?

Right now, the guidance we're basically sticking with is McClelland Lake, I can't remember whose question it was, asked about other growth, maybe it was Chuck's, other growth opportunities, if those materialize to a further degree and greater certainty around the in situ growth comes to fruition, we'll certainly update everyone. But as we look at year-over-year growth, we're really just counting on McClelland Lake.

We don't see any in Australia. As the original McClelland Lake press release mentioned, we'll open that up in 2Q 2014 and it will ramp from there, but it will be very backend-weighted. Year-end to year-end, I would expect room count growth to be in that 1,500, maybe a little bit more from December 31, 2013 to December 31, 2014. The average will be something less than that 1500 number, because all of it will be, or a significant portion of it will be the second half weighted.

Okay. Great that's helpful thank you for clarifying.

Thank you, Stephen.

It sounds like we're closed off at this point, no more questions. I'm looking at Patricia for confirmation. I think we're going to sign off here. I do apologize, it ran a little bit beyond an hour. I appreciate the interest so much and there is a lot going on for us.

We're excited about the events of the second quarter, completion of the spin and kind of moving forward at that stage. Again, I appreciate all of your continued interest over the many years and we look forward to updating you in our next call. Thanks so much.

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