Oil States International Inc (OIS) 2014 Q1 法說會逐字稿

Welcome to the Oil States International Incorporated first-quarter 2014 earnings conference call. My name is Adrian and I will be your operator for today's call.

At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. Please note that this conference is being recorded.

I'll now turn the call over to Patricia Gil. Patricia Gil, you may begin.

Thanks, Adrian. Welcome to Oil States' first-quarter 2014 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 forward information other than historical information. Please note that we are relying on the Safe Harbor protection 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 today.

We reported first-quarter results last night that were largely in line with our guidance despite harsh winter weather experienced across much of the United States during the first quarter along with unfavorable movements in both the Canadian and Australian currencies relative to the US dollar which impacted our accommodations business. Our accommodations segment reported results that reflected softer occupancy levels primarily in Australia, and weaker foreign currency translated results partially offset by greater contributions from the Canadian mobile camp due to the winter busy season.

The accommodations segment now has a name, Civeo Corporation, and Bradley will take you through a detailed explanation of the quarterly results and give you a full update on the proposed spinoff later in the call. Our offshore product segment reported EBITDA of $43 million on revenues of $212 million during the quarter, representing an EBITDA margin percentage of 20.3%.

Strong order flow in the segment continued during the quarter. Our book to bill ratio was slightly above one time and backlog exited March at $578 million, which remains near record levels for this segment.

Activity drivers for offshore products correlate closely with global deepwater field production development. Bidding and quoting opportunities for this business continue to be very robust and prospects are focused on our proprietary product lines.

In our well site services segment we reported strong quarterly revenue and margins as our completion services business recovered from severe winter weather late in the quarter and exited March with momentum going into the second quarter as completion activity continues to ramp up in North America. Further, our land drilling business effectively reached full utilization by the end of the quarter with all of our 34 rigs working.

During the first quarter we continued to opportunistically repurchase our common stock under our authorized share repurchase program. We also made significant progress towards the spinoff of the accommodations segment, which we expect to complete by the end of the second quarter.

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 the proposed spinoff. I will provide a detailed discussion of the remaining business segments and give you are thoughts on the current market outlook.

Thanks Cindy. During the first quarter of 2014 we reported operating income of $114 million on revenues of $658 million. Our net income from continuing operations for the first quarter of 2014 totaled $71 million, or $1.32 per diluted share, which included $0.02 per diluted share after-tax impact from third-party transaction costs incurred in connection with the proposed spinoff transaction.

Excluding these transaction costs, net income from continuing operations would have totaled $72 million, or $1.34 per diluted share. the fourth quarter 2013 results were $133 million of operating income on revenues of $675 million.

Net income from continuing operations for the first quarter of 2013 was $78 million, or $1.40 per diluted share, which included $0.07 of after-tax expenses mainly related to a loss on debt extinguishment reported with the repurchase of $34 million of our 5 1/8% bonds along with the transaction costs incurred. Excluding these items, net income from continuing operations in the fourth-quarter 2013 was $82 million or $1.47 per diluted share.

Our gross and net debt levels total $973 million and $518 million respectively at March 31, 2014. This represented a net debt to book capitalization ratio of approximately 17% and our leverage ratio was 1.3 times at March 31.

As of the end of the first quarter, we have total liquidity of approximately $1.5 billion comprised of $995 million available under our credit facilities and $455 million in cash on hand. During the first quarter of 2014 we reported strong cash flow from operations of $105 million. And we invested $103 million in capital expenditures primarily related to the ongoing expansion of the Canadian accommodations business, the addition of incremental proprietary completion services equipment deployed to service the active US shale plays and ongoing facility expansions in the offshore product segment.

In the first quarter we repurchased $133.6 million of our common stock under our authorized share repurchase program at an average price of $97.69 per share. We have approximately $235 million remaining under our $500 million authorization which is set to expire on September 1, 2014.

In connection with the spinoff we expect to secure commitments from a syndicate of banks for new credit facilities for both Oil States and Civeo. Closing of the new facilities is contingent upon the spin occurring, which we expect to complete by the end of the second quarter.

Civeo's financing structure is expected to total approximately $1.4 billion and be comprised of a $775 million term loan and a $650 million revolving credit facility. Proceeds from the term loan are expected to find a $650 million to $850 million distribution from Civeo to Oil States to facilitate the redemption of our senior notes.

Oil States plans enter into a new $600 million revolving credit facility at the spin date. Borrowings under the revolver, together with the distribution to receive from Civeo coupled with available cash on hand, is expected to be sufficient to refinance our senior notes via a tender offer.

These senior notes have a face value of $966 million as of March 31, and a fair value of approximately $1.044 billion. In connection with the tender offer and the refinancing of our bank debt, we expect to recognize losses on extinguishment of debt equal to the premium paid over book value of the notes and the remaining unamortized debt issue costs associated with the Company's debt.

In terms of our second quarter 2014 consolidated guidance, we expect depreciation and amortization expense to total $72 million and net interest expense to approximate $16.1 million. Our 2014 consolidated effective tax rate is expected to average 27.7% which was adjusted upward slightly due to a higher state income effective tax rate and a greater proportion of domestic sourced income. The annual effective tax rate for both Civeo and Oil States will be reassessed following the spinoff.

Consistent with prior guidance, the Company plans to spend $600 million to $650 million in total capital expenditures for the full year 2014. A large percentage of our 2014 capital expenditures are expected to be spent in our accommodations segment.

Excluding the accommodations capital expenditures, Oil States plans to spend approximately $275 million in capital expenditures during the full year 2014. Obviously if the spinoff occurs by the end of the second quarter of 2014, we will provide standalone guidance moving forward for Civeo and for Oil States.

Subsequent to the spinoff the accommodations segment will be reported as discontinued operations in the financial statements of Oil States. At this time I would like to turn the call over to Bradley who will begin us the discussion of our accommodations segment. Bradley?

Thank you Lloyd. Sequentially our accommodations segment revenues were flat at $253 million and EBITDA decreased to $96 million.

Our results were impacted primarily by the weaker Canadian and Australian dollar exchange rates, which were sequentially down 5% and 3% respectively. The weakening of the Canadian Australia and currencies relative to the US dollars sequentially reduced our revenues by approximately $12 million and our EBITDA by approximately $5 million.

EBITDA was also negatively impacted in the first quarter by higher propane heating costs in Canada due to the severe winter weather. Operationally our results were impacted by lower occupancy levels at our Australian villages partially offset by stronger seasonal revenues and EBITDA from our Canadian mobile camps which carry lower EBITDA margins.

Australian results for the quarter reflected the reduction in customer commitment mentioned in the Form 10 and lower overall customer spending due to weak met coal prices. Occupancy in our Canadian Lodges remained strong and results reflected flat RevPAR in Canada on a constant currency basis.

During the first quarter of 2014 our average available rooms totaled 21,130 rooms. And we reported RevPAR of $94, or $98 on a constant currency basis, both of which were slightly down from the $99 in the fourth quarter of 2013.

Looking at the rest of 2014, as we discussed on the last earnings call we expect the second quarter results for accommodations to be the low point for the year with improvements in the second half. For the second quarter of 2014 accommodations revenues are expected to range between $210 million and $215 million, considering stable results from our Canadian lodges, offset by lower occupancy levels at our Australian villages and the seasonal impact of spring break up in Canada, on our mobile camp activity and on certain Canadian lodges.

EBITDA margins for the second quarter are expected to range from 33% to 34%. For the balance of 2014 we currently expect revenues to improve in both the third and fourth quarters as the Australian village business stabilizes and the McClelland Lake Lodge begins operations.

Margins likewise in the back half of 2014 are expected to improve as well. For the full year the accommodations business expects to spend between $325 million and $375 million in capital expenditures, the majority of which is related to room expansions in Canada including the McClelland Lake Lodge.

The construction of the McClelland Lake Lodge in the Athabasca oil sands continues and is scheduled to open this summer with room additions ramping to approximately 1,591 rooms by year end. The aforementioned forecast of capital spending also includes unannounced Canadian growth projects which will be contingent on customer contracts.

In terms of the announced spinoff of the accommodations business, we've made significant progress since our last conference call in February. In March we received the IRS Private Letter Ruling related to the tax-free nature of the spin.

We filed a third amendment to the Form 10 with the SEC on April 22 and publicly announced the Business's new name, Civeo Corporation. This last amendment included disclosures regarding our anticipated Board of Directors for Civeo, the distribution ratio of two shares of Civeo for each share of Oil States, modifications to our pro forma financials to incorporate the expected credit facility and borrowings thereunder, and certain transaction-related documents to be executed between Civeo and Oil States.

The range of the cash distribution from Civeo to Oil States in connection with the spinoff has not changed and remains at $650 million to $850 million with the midpoint of $750 million utilized for the pro formas. Using the midpoint of the distribution range, Civeo's initial leverage ratio would be approximately 1.8 times on a trailing basis.

We currently expect to complete the SEC review process and conclude the spinoff by the end of the second quarter. As we have discussed on previous calls, Civeo will initially be spun off as a C Corp.

We continue to refine our analysis of a potential REIT election for Civeo. The decision on whether to pursue the REIT election will be made after the completed spinoff by the new Civeo board of directors.

Cindy will now address activities in our other business segments. Cindy?

Thanks Bradley. In our offshore product segment we generated $212 million of revenues and reported $43 million of EBITDA during the quarter. While revenues came in slightly below our guided range, our reported EBITDA margin of 20% was at the top end of our guidance for the first quarter.

Certain projects were delayed and slipped into the second quarter due to changes in engineering scope and delays in the procurement of materials needed for these projects. We realized good order flow during the quarter and booked $220 million in new orders.

Reported backlog at March 31, 2014 totaled $578 million and our book to bill ratio for the quarter was maintained at slightly above one time. Backlog additions during the first quarter included connector products destined for Norway, the Mediterranean and the Gulf of Mexico along with orders for fixed platform and drilling products worldwide.

For the second quarter revenues are projected to increase to account for certain projects that experienced slippage in the first quarter along with higher activity levels and is expected to range between $240 million and $250 million. EBITDA margins, as always, will depend upon our actual revenue mix, project execution success and overhead absorption during the quarter, but are forecasted to be in the range of 19% to 20%.

Despite the harsh winter weather experienced across much of the United States, our completion services business recovered late in the quarter and our well site services segment generated revenues of $193 million and EBITDA of $63 million in the first quarter of 2014, both of which were at the higher end of our guidance range for this segment. These results compare to revenues and EBITDA of $187 million and $66 million respectively in the first -- fourth quarter of 2013.

Revenue for the first quarter increased 3% quarter-over-quarter largely due to increased land utilization and an 11% increase in revenue on a per ticket basis for our completion services business. EBITDA decreased 4% quarter-over-quarter as a result of lower completion services cost absorption due to winter weather in January and February and the impact of certain cost accrual adjustments which benefited the fourth quarter of 2013. However, EBITDA margins remained strong at 33% during the first quarter.

As we previously stated on the fourth-quarter earnings call, we had five land rigs stacked at December 31, 2013 and stated that the market in the Permian was improving and that we could bring the majority of these stacked rigs back into service by the end of the first quarter. It pleases me to report that we are at effective full utilization in the second quarter to date.

Consistent with our North American service tiers, we believe that land rig activity, well completions and service intensity will continue to rise throughout this year absent a significant commodity price decline. We estimate that second-quarter revenues for our well site services segment will range between $210 million and $220 million with EBITDA margins of 32% to 34%.

In closing, we have made significant progress towards the spinoff of Civeo and are on track to complete the separation by the end of this quarter. As we progress through the remainder of the second quarter, we will be focused on the spinoff and its smooth execution.

The next quarter should reflect the transitional impact of the spinoff but will allow investors to focus on the separate business drivers going forward. Both Civeo and Oil States look forward to creating shareholder value for our investors as we move forward.

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

Thank you. We'll now begin the question-and-answer session.

(Operator Instructions)

Jim Wicklund, Credit Suisse.

Good morning, guys. Where did the name Civeo come from? I googled it and can't find anything but you guys on it.

That's a good thing. (laughter)

That was the intention. We -- working with our marketing teams and some outside brand advisors we looked at what we were trying to create in terms of the meaning behind the brand.

And as you can imagine in trying to find a name and brand that has not been trademarked in both the US, Canada and Australia it was fairly difficult. The concepts that we were working around were really the idea that we are trying to create a place for our guests and our customers' employees where they can rest, recharge, reconnect with home and with each other and with that we used the two Latin words which mean community and to be well and combined them to create the name Civeo.

Wow. I'm embarrassed. I took five years of Latin and didn't get that. Okay, thank you for that. Good job. On -- Bradley, on Australia, you had the one big customer that you were renegotiating with. Has all that been finalized now?

It's all finalized. We finalized that last year actually and the impact was felt beginning March 1. So we had one month of impact in the first quarter, we'll have the full quarter impact in the second quarter and that is all contemplated in the revenue and margin guidance that we gave.

Perfect. And if I could on my last follow-up, we've been talking for a while about the eventual potential of LNG in Canada and maybe acquisitions or more encroachment into the LNG business on the northwest shelf of Australia. Can you give us some general ideas of timelines about when that work might be awarded regardless of who gets it?

I'll address Canada first. The Canadian LNG opportunity is exciting for us on a multitude of levels. In terms of the lodge-type work, we're currently in the process of land banking to secure land in the area in the hopes that some of our customers do move forward with the projects in Kitimat or the Kitimat area on the West Coast of British Columbia.

In addition to that obviously if those get up ID and move forward then there will be mobile camp work, both for the drilling and the pipeline work. So our full suite of services in Canada could benefit from the LNG moving forward.

In terms of timing, it's all customer depending at this point. As you know us well we are, for particularly for large new investments, we're looking for customer commitments before we commit our capital and we will pursue that strategy here.

So we're executing on our strategy exactly the way we always have, we're working on the land banking, we're making progress there. The next stage will be getting a customer commitment to support the initial investment and we're optimistic. But nothing has been announced at this point.

Okay. Thank you very much for the time.

Thank you Jim.

Jeff Spittel, Clarkson Capital.

Thanks. Good morning, everybody. Bradley, maybe if we could start off with Australia and I guess the source for optimism with stabilization in the back half of the year and maybe even some modest improvement, is any of that derived from maybe a little bit better outlook in the met coal market with some of the production cuts that have kicked in lately?

Well there is inflicted in our guidance that revenue and margins will improve in the back half of the year, that Australia will stabilize in the second quarter and in itself will show some improvement in the back half of the year. Part of that is there are some -- while it's a difficult market in the met coal market, there are opportunities.

We're working to capture some of those and hopeful that those will translate into better results in the back half. It's not currency improvement so there is inflicted in our guidance that there will be an improvement in the met coal side of things in the back half of the year.

Okay, I appreciate it. And Cindy, turning to the completions business, we've seen a nice steady uptick in the average revenue per ticket. I'm assuming a lot of that is based on mix and well intensity.

Is there potential if we continue to see the rig count in addition to the well count ramp throughout the year? Maybe in certain basins to see a pricing component that could add a tailwind as well?

You know it's possible. As you'll recall our margins were very resilient throughout 2013 and continue to be so in early 2014. My however with that is as is typical in the market when the demand accelerates you do have some opportunity for pricing, although I don't think we would expect that until the back half or second half of this year.

At this particular point in time my however there, if you've been tracking our reported revenue per ticket, that has accelerated continually, quite frankly, for the last three years or so. Which we think is a lot focused on our technology, offering new products that we've brought to market and clearly mix weighted towards the more intense completion projects across the United States and North America.

All right, I appreciate the color. Thanks guys.

Thanks Jeff.

Thank you.

Marshall Adkins, Raymond James.

Sounds like you're implying you're not getting pricing yet. Could you give us a little more color on the product lines and geography that you're having the most success in, in the completion side? Because it's -- obviously given the weather you guys rocked it this quarter there.

Well, I think we were not alone in January and February biting our fingernails, but just like everybody else March weather finally cleared as we said it would, activity did begin to accelerate. We're not going to be alone when we tell you that kind of the South Texas Permian region revenues were up stronger in the first quarter than our other basins.

And even though the Permian's impacted by weather, obviously that's where your rig count growth was and some acceleration there. But that was the greatest contributor to the, I would say the moves, if you will in Q1.

Now that weather 's cleared though we're really looking at other basins to get some acceleration. The northeast market in particular is tracking close to our expectations. It has some bias to the upside and the Rockies is a very strong region for us. The only thing -- caveat we've got to give there is we'll be watching road ban impacts. But thus far things are progressing nicely. And for us some investments in the Gulf Coast region have given us more deepwater offshore opportunities that we're focused on and March was very strong for us in the offshore region as well.

So hopefully that adds some color. And again when I talk about pricing we've had a very favorable pricing mix and we continue to have that outlook again as a complex completions proportionally accelerate and we move and get further penetration in the Gulf of Mexico, that mix is favorable.

I put that in contrast to absolute across the product line, across every geography, 5% price increases. We're not seeing that. The market coming out of the first quarter really has not dictated that at this stage.

And any particular product lines jump out as doing meaningfully better than the others?

Well I mean, again I'll talk to mix, but we'll always focus on our more proprietary equipment; our isolation equipment, our new ball launch system, some of the Tempress technology, the IE, the extended reach technology that we've brought into the market. And then just generally higher pressure, higher temperature type equipment is going to be in high demand in these complex zipper fracs, a number of things along those lines are getting proportionately greater demand and that's where we're focusing our CapEx dollars and our R&D effort.

Awesome. Last one for me. FPSO markets, some of these things have been pushed back. What's your outlook for that over the next year?

Everybody is obviously very focused on the macro there and Brazil is getting a lot of focus for that reason. We had said if you'll recall in past conversations, I think most everybody has on this call, there was such a euphoria around FPSO investments over the next five-year term that we always cautioned everybody that, that rate of growth was unlikely at one point.

It was like 150% forward five years compared to the last five years I think that has moderated but we always thought it would. And so I guess my reaction there when I think about FPSOs and subsea content we're still very excited about that.

There have been deferrals and delays lots of rebidding and reengineering to get project economics in line. But they're still out there.

And we've been saying this for quite some time, we held a strong backlog through 2013 with a lot -- without a lot of these major projects. They're still there, they should come into award activity.

It's always a question of when, but when we look at our bidding and quoting activity we're still very bullish on the subsidy space, the FPSO space and interestingly there's quite a lot of TLP bids out there as well. Again, these play into our highly proprietary product lines and give us enthusiasm to certainly maintain our outlook that we will continue to have a book to bill of at least one throughout the year of 2014. That is our best outlook today, Marshall.

Sounds good, Cindy, thanks.

Thanks.

Jeff Tillery, Tudor Pickering.

Hi, good morning.

Hi Jeff.

Bradley on the accommodations business curious if you could provide just some color on kind of regional margins in the first quarter, how you guys have reported into Form 10. I guess that's my first question?

Well we're in the process, or will be in the process once we get done with the spin, of providing a first quarter Q that will break out all of that. Without having done the carve-out financials it will be hard to give specific numbers on that until we have all of that work done.

But in terms of the margins, generally speaking the US business was fairly consistent with the fourth quarter. The Canadian business was modestly down.

The Australia business was down slightly. So directionally that's where it was headed.

And as I think about it for the full year, just big picture, I think about Canada being kind of flattish from a margin profile and then the drivers for Australia being kind of absorption. I guess the EBITDA margins last year were mid-50%s.

I've begin about order of magnitude kind of 1,000 basis point margin decline year over year so kind of mid- to high 40% is that a reasonable line of thinking for Australia?

As I did in my comments what we're expecting right now is the second quarter to be the low point for -- as a whole and that really carries across both Canada and Australia in terms of margin. And then that we expect there to be margin improvement throughout the balance of the year.

And on the last call you had given kind of guideposts on revenue for the business in aggregate. Have your thoughts around full-year revenue changed all?

Well we've got first quarter actuals out there. We've guided to second quarter and right now what we've got is we expect revenues to improve Q3 over Q2 and Q4 over Q3.

That is built off of the fact we think the Australian business will bottom out in the second quarter and then improve sequentially throughout the year. And likewise with the seasonal impact in Canada the second quarter is expected to be lower and then improve as we start to see the recovery from the seasonal aspect. Not to mention the fact that the second half of the year will benefit from the McClelland Lake rooms being operational and starting to generate results.

And Cindy when I think about the offshore products business for the full year, is it reasonable to think about the second half of the year kind of nearly as good as what we see in the second quarter? I mean obviously Q2 is aided by some deferrals from the first quarter, but think about plus or minus flat second half of the year with two. Is that reasonable?

Right now our backlog is held steady at a very flat with a book to bill of one that is always a great indicator of how we're going to do. Just like anything else, as you know, individual projects have different timing that come into your revenue stream. But there's nothing that I see today that is telling me that the back half would be materially different than the first half.

Great, thank you both.

Thanks Jeff.

Thank you.

John Daniel, Simmons & Company.

Hi Bradley. Just want to follow on Jeff's line of questions if I could on the accommodations business. I know you don't want to get too specific, but just as we think about the margins in the back half is it appropriate to keep margins model below the Q1 levels, which has generally been the case historically?

Right now, consistent with our past practices we're giving one quarters worth the guidance given where we are in this year for the accommodations business we've augmented that to say that we expect the margins to improve but have not quantified it any further than that.

Okay, fair enough. Given that you're at 100% utilization on the drilling side, does it make sense to build new rigs this year and if so how many might you guys build?

This probably won't shock you, but we're really looking to optimize our operations in our fleet and we will make upgrades to our fleet. There's been opportunities to do that to make them more useful for our customer base in the region.

However, what the market is demanding right now is, as you know, a very high specification rig. There are many companies out there that are willing to step in and do that and so I think our focus right now is on asset optimization and returns on invested capital of the business.

Okay. Fair enough. And then just a last one really for me is on the completion services. Cindy, this movement in rev per ticket and number of tickets, I'm assuming the rev per ticket jump was just mix related and the reason for the decline in tickets was Q1 weather related? Any color there?

I'm just going to say I agree. You got it.

Okay. Just making sense. And then last one, any share repurchases in April?

I'm trying to even think back to our timing, but I'd rather than miss speak I'll just not speak on that comment.

Okay. Thanks guys.

Chuck Minervino, Susquehanna.

Hi, good afternoon. Bradley, question on the second quarter margin guidance there. Would you mind giving us a little bit more color how much of that you think is seasonality versus maybe kind of just the step down in occupancy levels just to help us gauge kind of how to think about that going forward?

The margin guidance has implicit in it a larger, as you would expect, impact on the occupancy decline in Australia impacting the consolidated margin guidance. There is some seasonality to it. It is not -- it would be in line with historical results from Canada in terms of the step down sequentially from Q1 to Q2. As you'd expect and as I mentioned, the US business is fairly steady state at this point.

In the US business just given the pick up in drilling activity, completion activity and all that, do you see any prospects for the US business to start picking up here for the remainder of the year?

There is that potential. At this point it's a little early for me to really say that it will come to fruition. But there are some green shoots if you will.

Okay. And then was wondering if you could give us also an update. In the Form 10 you had meant -- they mentioned 5,500 rooms expected to roll off contract in 2014 and about 6,773 to roll-off in 2015. I was just curious if there has been a kind of material change in those numbers that's worth noting?

Most of the roll off in 2014 is related to Australia. And right now there's no prospects that we'll see a material improvement in that in 2014. The 2015 roll off is both in Canada and Australia, and at this point it's too early for those conversations to occur in terms of renewals on that side or recontracting on that side.

Okay. Great. And then just a question for Lloyd.

If I get this right you're going to get that payment in from Civeo and it looks like your debt levels will be fairly low, or your net debt level will be almost nonexistent at that point. If that's right, can you just talk about capital structure of Oil States as a remaining Company going forward post spin?

Yes, no Chuck like I mentioned in my comments we're going to go out with a $600 million revolver for Oil States. And again it largely depends upon future share repurchase that will drive the levels of our borrowing and the revolver.

Okay, thank you.

Sean Meakim, Barclays.

Good morning, everyone.

Hi John.

Bradley, just wanted to talk a little bit about the opportunity for M& A as it relates to some of your customers in sourced assets once the spinoff is complete? Can you talk a little bit about the timing?

Is it something where those opportunities may be kind of on hold until a decision has been made on the REIT and the spin out is complete? Or are those opportunities that you're actively kind of looking at or maybe having conversations?

Well, in terms of our overall growth strategy the spinoff, the intent as Cindy 's mentioned many times, is that we continue to pursue all of the business lines growth strategies and not allow the spinoff to impact those efforts and that is consistent. The ability or the desire to buy customer rooms has always been there. It has, since we have not done one it's not been one that we've been successful on yet, but we continue to pursue it.

Okay. So nothing kind of specific to the spin out or the REIT that would kind of delay or hamper your ability to complete one if the opportunity presented itself?

No.

Okay, fair enough. And Cindy on the rig fleet great to see the utilization numbers. Given how strong the Permian is turning over to the horizontal, could you just give us a little more color on kind of what's been the driver of -- is it just new customers, kind of some smaller customers looking for more vertical wells -- looking to drill more vertical wells? And then do you see this level of utilization somewhere closer to 100% being sustainable on a going forward basis, giving what's happening in the Permian?

I'll just give you a little color. Over the last five years we've had various transitions in our customer base. And at one point in time virtually all of our customers were large independents or majors.

And I said last year to various people, that I thought it was a transitional year where, as you know, many at the customer base in the Permian was refocusing their activity from vertical wells to the horizontal rigs. They're bringing in new 2,000-horsepower all AC rigs. And in the process, we had weaker utilization and probably averaged in the range of 75% last year.

But I view the economics very good for the type of drilling that we do. And realize that a portion of our fleet can drill a horizontal. They're not 2,000-horsepower all AC rigs, but they can drill horizontal.

I did expect that there would be some customer transitions that occurred during that process and that's exactly what's happened. Now I'd say it's about 50/50 in terms of who the rigs went to work for i.e., Legacy, larger independents and some private companies, but these are companies that we have worked for off and on throughout our operating history. I don't think you should be concerned about resource, longevity or credit quality, if that is the suggestion in your question.

That's very helpful. Thanks Cindy, appreciate it.

Thank you.

(Operator Instructions)

Daniel Burke, Johnson Rice.

Good morning, guys. Just I apologize if I missed this, but maybe one for Bradley. Bradley, what specifically are the drivers of improvement in Australia in the second half of this year?

We expect that we'll be able to put additional rooms to work in the back half of the year. Won't be earth shattering, but we do believe that the second quarter results will be the low point, both through that part of our business as well as the business as a whole.

And can you parse the comment on additional rooms? Maybe Bowen Basin versus ex-Bowen Basin?

We have not parsed it any further than that, no.

Fair enough. And so one other one. I was never quite clear that the termination compensation that you received from the client in Australia, do we see that in Q1 somehow or do we see that ongoing in any way in Q2? I was never quite clear how that mechanism works?

Revenues received from the termination payments were recognized partially in March and will be recognized going forward. The termination payments are recognized from a revenue standpoint over the balance of those contracts in terms of their term.

And so you book revenue, is there associated cost that comes through?

No.

And what's the duration that those payments will continue?

Well the revenue recognition will continue through the end of the contracts, one which goes through 2015 and one goes through 2016.

And maybe I can tag in and add a little more color. I'll ask Bradley to follow-up as necessary.

These are not termination payments per se. It's a contract restructuring where they're restructuring some of their room needs in more than one facility.

And so to Bradley's point if you're freeing up rooms, we do expect to be able to refill some of those rooms with other customers and other activity. And I just want to be clear where you say are there are there any costs, there's nothing per se attached to those contract renegotiation structuring.

However, you're going to have lower utilization in the facilities until we backfill with other work and other customers. So that does have the margin impact that you were seeing and that we guided to in Q2, if that is helpful.

No, that's very helpful. Thanks to you both.

Thanks Daniel.

(Operator Instructions)

Kurt, RBC.

Good afternoon, or good morning I guess, barely. How are you?

Hi Kurt, we're good.

Cindy, a question for you. Once we get the combination spin, and nice name by the way, Bradley, Civeo, very clever.

Thank you.

Once the spin occurs I just wonder if you might be able to give us some initial thoughts on your strategy, your growth strategy for Oil States moving forward? Where you may see some -- generally where you may see some opportunities, whether or not is it North American land centric, what your offshore dynamics may be. Once again I know you don't want to get specific and wouldn't get specific on a call like this, but I'm just curious what your thoughts are post spin?

I'll give you an overview and this probably won't shock you either. But at the end of the day we're going to be a much more focused energy services company, which what I think are very attractive drivers and then deepwater capital equipment space and then also on high technology completions in North America. And both of those have some pretty good tailwinds right now.

There's no doubt about it. But we're -- I'll also tell you that both business lines are heavily technology focused. So anything that we will do, both organic investments and M&A investments, are going to be to further leverage the technology space and reputation that we have in the marketplace.

We've done that for the last 15 years. You're not likely to see that change, but, as it relates to offshore products, as you know, a lot of the smaller companies specialized acquisition targets that are there we've done several things that are probably indicative of things we'd like to do going forward: the Piper Valve, Acute technology, QCS to name a few.

I would just point out to you that again as they streamline more focused companies, those acquisitions and the size of them have a little more impact and meaning than they had pre-spinoff of the accommodations business. To some degree I think those types of contributions almost get lost. But they really help us affect our long-term strategy in the deepwater environment.

As it relates to North America, we have done consolidating acquisitions, maybe less of late because of things that we have seen are more commoditized offering that we have quite frankly resisted. And we really want to focus on higher technology product offerings to meet the needs of our customer base.

So we'll continue to do that and it will be obviously very opportunity dependent. Again, given the size of the company and the opportunities that -- I think somebody talked about our overall capital structure, you were asking Lloyd about that, we have a lot of optionality as I will call it, to invest in the business and that may mean continued share repurchases during a period that we don't have M&A growth opportunities.

But you're going to see more of the same. I would say for us it's just going to be a bit different given the platform that we have moving forward.

That's really helpful. Now I was also curious too, Cindy, given the cycle history that you have, a lot of noise in the first quarter, seems like there's a lot of pent-up demand coming out of that.

What you think the sustainability is as we get through 2014? And I mean that in the context do you think we're in acceleration mode in aggregate when you look at this cycle versus maybe prior? Or do you think its more of the slow, steady state dynamic that's pretty much been in place for the last year plus?

We're clearly in an acceleration mode. I mean if you do the math on our guidance it's suggesting a sequential growth on revenues in the EBITDA in the range of 10% to 15%, which is pretty good quarter-to-quarter. And we're not a-typical of the outlook that is out there.

So clearly it is -- our customers are excited and their well capitalized, they're moving forward. And I would say that without a natural gas driver, despite higher gas prices and very low storage, I don't think anybody in their guidance is really anticipating a lot of investments in gas.

And so again, I've been in this business too long. Sustainability beyond this year is going to depend on crude oil prices which is very dependent upon the rate of storage build in the US. And then ultimately what are we going to do with net gas? And are we going to be an L&G exporter and have other alternative uses for it?

That's the long-term answer. My visibility is as good as anybody else. 2014 looks great. Customer conversations look great and again, I think we've positioned our company to participate fully because of the technology focus that we have oriented our actions toward.

Okay. And maybe just one final follow-up. In the context you mentioned natural gas and not being in most companies' guidance which is true.

You get the sense, two things, you get the sense that the E&P companies are still looking for the 24-month strip to be in that $4.50 to $5.00 range. And maybe ask this question as well is do you think if natural gas gets into that $4.50 to $5.00 range that we might start to see some basin-on-basin competition for oil field services assets? Or do you think that the companies will just try to -- you know what I'm trying to get a here?

I get what you're trying to get at. I mean right now I think there's going to be kind of a release of spare capacity that has been in the market for some -- every product line is different.

But you hear about, certainly our customers and service company talking about pressure pumping, releasing stack capacity, bringing on new capacity and I don't really anticipate basin-on-basin competition yet. I don't see that just because again, I don't think my customers are really planning to make material investments in natural gas right now.

The first market, I'm not surprising that I anticipate will move, it's going to be the northeast market and the price range you gave I think is rational. But it's generally going to be more of the purer play gas companies that I think move there right now. The focus is so much on liquids that it's just hard to envision that you're going to see a major broad-based shift this year.

Got it. That's great, really helpful, appreciate it.

Thanks, Kurt.

And we have no further questions at this time.

Okay. Great. Well thanks to all of you for participating in the call. We're incredibly busy and active and very focused on completing the spinoff here and getting you a view of what the two separate companies look like.

And we very much look forward to having discussions with all of our investors as we progress through the quarter. I know Bradley and his new management team will be eager to get out in front of you and tell the broader story about Civeo.

So, thanks again and we look forward to continuing our dialogue as we progress through the quarter. Thanks. Have a great weekend.

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