Oil States International Inc (OIS) 2015 Q2 法說會逐字稿

Welcome to the Oil States International Inc second-quarter 2015 earnings conference call. My name is Loraine and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference call is being recorded. I will now turn the call over to Ms. Patricia Gil. Ms. Gil, you may begin.

Thanks, Loraine, and welcome to Oil States' second-quarter 2015 earnings conference call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; Lloyd Hajdik, Senior Vice President and Chief Financial Officer. And we are also joined by Chris Cragg, Senior Vice President, Operations; and Scott Moses, Senior Vice President, Offshore Products.

Before we began, 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 of that 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 thanks for joining our earnings conference call today. Our second-quarter 2015 earnings remained in positive territory, but continued to be negatively impacted by the low crude oil price environment, particularly in North American well site services segment. WTI averaged $57.85 per barrel in the second quarter and has taken another leg down by $10.46 a barrel or 18%, ending at $47.39 as of July 20, 2015.

At the time of our first-quarter earnings conference call, held at the end of April, we believe that our well site services business would find a bottom and exit the second quarter stronger than where we entered it. However, the onshore market continued to deteriorate throughout May and into June, leading to a larger sequential decline then was originally expected.

The average US rig count decreased 35%, quarter over quarter. The backlog of wells drilled but not completed grew, while pricing pressures persisted. For the second quarter of 2015, consolidated revenues and adjusted EBITDA declined 20% and 37% quarter over quarter, respectively, representing decremental EBITDA margins of 38%, with well site services leading the way down.

Our 2015 results are coming off a record year in 2014, resulting in ugly year-over-year comparisons. Our second-quarter offshore products revenues were a brighter spot during the quarter, coming in within our guided ranges, with an EBITDA margin exceeding the high end of our guidance.

Bidding and quoting for our offshore products and services continued during the quarter, albeit at a slower pace. With backlog declining 14% sequentially, we reported a book-to-bill ratio of 0.63 times, bringing us to a year-to-date book-to-bill ratio of 0.81 times.

At this time, Lloyd it will take you through more details of our consolidated results and financial position. I will follow with more details by segment and provide you additional comments on our market outlook.

Thanks, Cindy. During the second quarter, we generated revenues of $269 million and reported adjusted net income of $7.5 million, or $0.15 per diluted share. This excludes pretax charges of $1.7 million, for severance and other downsizing efforts. EBITDA, adjusted for the severance and other charges, totaled $43 million.

Focusing on our balance sheet and our debt capital structure, we ended the quarter with total liquidity of $498.4 million, which is comprised of $409 million available under our revolving credit facility, plus cash on hand of $89.4 million. Our liquidity increased $70 million from the end of the first-quarter 2015. And we used our free cash flow to fund CapEx, repurchase stock and to reduce outstanding borrowings under our revolving credit facility.

Our financial position remains very healthy, with our gross and net debt levels at June 30 totaling $157 million and $68 million, respectively. Our net debt to book capitalization ratio approximated 5% at June 30. And our leverage ratio, using trailing 12 months adjusted EBITDA, was approximately 0.4 times.

During the quarter, we invested $30.5 million in capital expenditures, the majority of which was associated with projects that carried over from 2014. Capital spending during the quarter was about evenly split between our segments and related primarily to the ongoing facility expansions in the offshore product segment, along with the addition of completion services equipment deployed to service the US shale plays.

For the full-year 2015, we expect to spend approximately $150 million to $160 million in capital expenditures. Our priorities are to complete our new offshore products facility in the UK and to continue to develop our two locations in Brazil.

During the second quarter, we repurchased 359,000 shares under our authorized share repurchase program at an average price at $39.94 per share. And earlier today, our Board of Directors approved the termination of our existing share repurchase authorization that was scheduled to expire on September 1, and replace it with a new share repurchase authorization for up to $150 million, for the term of one year from today.

In terms of our third-quarter 2015 consolidated guidance, we expect depreciation and amortization expense to approximate $32.5 million, net interest expense to approximate $1.6 million, and corporate costs to approximate $11.5 million. Our corporate costs in the second quarter of 2015 benefited from expense reversals associated with our short- and long-term incentive compensation plans.

Our 2015 consolidated effective tax rate is expected to average 35.8% for the full year, which equates to an effective tax rate of approximately 33.2% for the next two quarters. At this time, I would like to turn the call back over to Cindy who will take you through our business segments.

Okay, thanks, Lloyd. In our offshore product segment, results were in line with or better than our projections and the guidance ranges that we provided in connection with our first-quarter 2015 earnings conference call. We booked revenues of $183 million, during the second quarter of 2015 compared to $196 million in the first quarter of 2015.

EBITDA totaled $41 million in the second quarter compared to $43 million in the first quarter of 2015. Our EBITDA margin percentage averaged 22.3% for the second quarter of 2015, coming in slightly better than the 21.8% reported in the first quarter of 2015.

The second quarter of 2015 was impacted by a sequential decrease in revenues from drilling and elastomer products and the impact of $1 million of severance cost recorded, partially offset by increased production and subsea product sales. Bidding and quoting activity during the second quarter of 2015 continued, albeit at a slower pace due to delays in award timing and project deferrals. As a result, orders booked during the second quarter only totaled $115 million, which resulted in a sequential backlog decline of 14%, to $409 million at June 30.

Our second-quarter book-to-bill ratio was 0.63 times, bringing our year-to-date 2015 book-to-bill ratio down to 0.81 times. We did not book any individual orders greater than $10 million in the second quarter.

We are pleased to provide an update on our new manufacturing facility that we have been constructing in the UK, which is now nearing completion. We are planning for our grand opening of this facility in the third quarter.

As we progress into the third quarter, we believe that revenues in our offshore products segment will increase slightly, to range between $185 million and $195 million. We are forecasting sequentially stronger revenue contributions from connectors, subsea pipeline products and production facility equipment, but we do expect to see further reductions in revenues in certain of our shorter cycle and consumable products, as our customers remain focused on cash flow preservation.

It is still our strong belief that projects focused on project infrastructure will ultimately be sanctioned, but the timing is not without the risk of further project deferrals. We are maintaining our EBITDA margin guidance at 19% to 21% for the third quarter.

In our well site services segment, our second-quarter results were impacted by the continuation of the decline of the US land drilling rig count, customers not completing previously drilled wells, and pricing pressure exerted by our customers. For the second quarter we reported a 39% sequential decrease in our well site services revenues, which totaled $86 million. This sequential decline in revenues was attributable to a 32% decrease in the number of completion services jobs performed, a 13% decrease in revenue per ticket and lower utilization for our land drilling rigs.

EBITDA decreased 70% sequentially to $11 million and EBITDA margins averaged 12.9%, for the second quarter, compared to 25.8%, for the preceding quarter. Decremental EBITDA margins came in at 45% in this segment, due to cost-cutting initiatives. Land rig utilization levels continued to decline in the second quarter and averaged 34%, down from 44% in the first quarter. That is consistent with the guidance we gave you.

We currently have 11 of our total fleet of 34 land drilling rigs working, equating to approximately 32% utilization. We are assuming that 30% to 35% utilization levels for our land drilling rig fleet during the third quarter.

If there is a bright side to this market, the taste of recent rig count declines has abated. However, the lower absolute level of US drilling and completions activity that we are experiencing today will continue to weigh on our well site services results in the third quarter. With what appears to be a flattening and possibly the trough in the US rig count, we estimate that third quarter revenues for our well site services segment will range between $82 million and $88 million, with EBITDA margins averaging 12% to 14%.

In conclusion, the North American markets that we serve remain very challenged, with depressed levels of activity expected to continue through the third quarter and likely throughout the remainder of this year. We will remain focused on managing our cost structure, controlling discretionary spending, enforcing capital discipline and seeking to take advantage of investment opportunities where those investments make strategic sense during this cyclical downturn.

To that end, we believe that Oil States remains well-positioned both operationally and financially, with nearly $500 million of liquidity to support our businesses.

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

(Operator Instructions)

Stephen Gengaro, Sterne Agee.

Thanks, good morning -- or good afternoon. Two things. I will start with when I look at the job tickets on the completion services side, I was a little surprised at the sequential drop off in light of some comments that others have made. Can you walk us through that? And then as we talk about that on the revenue per ticket, is that a mixed issue there? And help us understand what is happening there as well.

I will certainly try to do that. Certainly the number of tickets is reflective of activity. And overall, we have been trending in a fairly tight correlation, our revenues have, to the decline in rig count.

There is a piece of me that says that it is both activity and pricing. So in other words, we have somewhat outperformed the rig decline because revenues track in a tight correlation and that includes some pricing pressure, obviously. It is always a little bit elusive overall.

There is certainly a mix effect. We have had some completions test substitution away from our higher technology, higher value added type products, in favor of cheaper lower completion alternatives. There is always a bit of that.

Again, I don't know if I answered your question completely. But activity is trending in the same direction, obviously, as the rig count. But with revenues fairly mirroring the rig count, I think we've slightly outperformed.

Thanks. When you look at the substitution effect, the lower technology versus some of your offerings, is that dragging -- how do you work your pricing decisions and structure around the possible substitution of somebody else's?

I'm really talking most specifically about our isolation tools. A lot of times you can go with a higher pressure wellhead. You can go with a frac stack. There are different alternatives there. And those are bid in different basins, differently, depending on the competitive landscape, particularly I would say on the frac head side.

You have to keep your ear to the ground almost on a daily basis to try to understand that. And you know we also offer frac heads, so we can be competitive with alternative solution techniques as well.

Thank you. If I can slide in one more, when you look at the bid ask on the acquisition front, is any change over the last three months?

I feel like maybe some of our targets, and the list is building. We have some dialogue. It depends on whether you are talking well site services or offshore products. We are not seeing as much on the service side yet.

I don't know how much pain has to be felt before those emerge. As you know, even in our own business, our well site services is down so hard, it would be very difficult to try to monetize that business at the trough.

We are seeing some offshore products. Even they feel like -- they are there, but I don't know that they are imminent. It kind of depends on the depth and duration of this down cycle. I think the book is building, maybe that is a better answer. But in terms of bid ask, I don't think I can have too much commentary there.

Okay, thank you, Cindy.

Thank you.

Jim Wicklund, Credit Suisse.

Good morning, guys.

Hi, Jim.

It is hard for somebody to pay you based on your second-quarter well site run rate anything close to what you would think it would be ultimately worth.

(laughter) Well put. You got my drift.

Okay, question on subsea, I mean offshore. 63% book-to-bill, 82% for the first half, so we can see the direction. We saw what happened, FMC gave us some detail as to how that plays out. NOV gave us some detail on how that plays out.

Doesn't this implicitly say that your 2016 and 2017 revenues are going to trend down from current levels?

Jim, as you know, we have got to have a lot of flexibility when we look at these things. We have a base case and a downside case. Right now, both by varying degrees, would suggest down results for 2016, but wide variation. That is specifically because of the bid book and projects that are there.

The commentary that I want you to focus on was no projects awarded during the second quarter in excess of $10 million.

Over $10 million, yes.

So this is recurring standard connectors, it is service-oriented work, it is in-and-out work, but no major orders. That does not mean we are not bidding on them, we certainly are.

The difficult time with all of this is that we don't know if they come in the third quarter, the first quarter, early next year. Although, there have been some announcements of projects either getting resurrected or coming towards closer to FID, if not receiving FID, that I think our overall guidance, and I think what you are asking me for is, is that soft, whether you call it a forecast or a goal, of the 0.8 times book-to-bill for the year, still in play?

I'm going to tell you it is still in play, but it is just so hard to estimate when these things are going to come into backlog. But I'm not just because of the second quarter with the overall lack of large project awards, I'm not ready to back off of that goal.

What percentage of all of this, Cindy, is like you say, longer-cycle stuff versus what we have seen cut so much with the shorter-cycle stuff as everyone conserves cash? Can you give us an idea of the split though, because you're shortening up -- (multiple speakers)

You've seen in Q1 and Q2 as I've told you what occurred, that short-cycle stuff is quickly eroding out of our backlog and eroding out of our revenue stream, to where you are going to find a floor, meaning that the sequential comps get a little bit easier. Q3 and Q4 of last year for offshore products and, quite frankly well site services, were record quarters.

And so composite bridge plugs as an example, drilling diverter valves, there's a number of things I can talk about. Drilling flex joints, those are going to work their way through the system. And then you are going to stabilize. I think that it'll stabilize the revenue contribution and stabilizes your book-to-bill as well.

And then there is certainly the potential for the shot in the arm, because of some of the projects that are out there that are fairly broad-based, but they're Gulf of Mexico, Brazil, and Southeast Asia. That probably won't surprise you either, because that's where the activity is. Anyway, if that -- (multiple speakers)

How much of your backlog is short cycle?

What?

How much of your backlog today is short cycle business?

First of all, we don't historically carry as much backlog in those businesses.

I wouldn't think so, yes.

I could look at it. But I am looking at my bridge plugs and my valves. I'm going to say it is $15 million to $20 million, depending on what you define as short cycle, because --

Understand, understand. I'm just looking for relative ideas. Okay, that is helpful.

On the well site end of the business, activity stabilizing, or at least it was when oil was stabilizing. We will see what happens now. In terms of ducts, drilled but uncompleted, you noted those in your comment about their having an impact. Have we started to drill those off? And how many do you think there are?

I think it is anybody's guess. We just had our Board meeting and we actually cited, I believe, Bloomberg as a source, that it estimated about 4,000 drilled uncompleted, which I believe it was about 10% of the wells drilled. Chris, do you have any added comments?

Jim, I think we started seeing some of those jobs come on the board. So the recent downtick in oil, we will have to watch and see the sustainability and some of those. I don't think the numbers moved very much. It is pretty difficult to pinpoint an exact number. But I don't think it has been worked down much.

I will take general impressions. Okay, guys, thanks much. Appreciate it.

Thank, Jim.

Marshall Adkins, Raymond James.

Hi, guys. Let's spend a minute more on well site services. It sounds as if -- and again, I think a lot of this was probably predicated on higher oil prices than we're staring at on our screen today. It seems like things are bottoming. Things should stabilize the back half of the year. That is what I heard in your commentary. Am I interpreting that correctly?

You absolutely are interpreting it correctly. And based on customer -- I will generally cut through the chase and say end of May I was feeling pretty good. The rig count declines had pretty much stopped, and then we actually got a ring count increase. We are sticky around $60 a barrel.

And then of course, that is why I put my other comments in on what has happened since the end of June. So I would just say it with caution in the air, in the sense that I felt pretty good that we had found a bottom in the May-June timeframe. Nominally, not much better in July, but I could point to a green shoot or two.

I worry with crude oil below $50 in the short term. So, yes, you could predict this as well as I can now. The crude oil price decline is certainly attention grabbing.

Perfect. That's what I figured, I just wanted to make sure I got it. On the offshore margins, you gave us pretty good guidance there for Q3. As we look out over the next year, what could take that higher or lower? Are there more cost savings or streamlining to occur that might help it? Or is the possibility for lower throughput down some? What could affect those margins looking out beyond Q3?

I can help you with that. These are going to be probably, obvious, comments. But first of all, I would like to commend my team for managing margins so well thus far, despite -- granted, we are not falling off like well site services are, but we've had some fall-off in activity. And we managed proactively, I think, very well to report the margins that we have thus far in the first half of this year. So it would be wrong of me not acknowledge that.

Now, there are two to three larger bid opportunities out there that play into some of our key connector technology, that if we could get that into backlog, particularly late Q3 or early Q4, I think that helps us, certainly as we go into 2016. That is the simple answer. Get backlog under high-margin products, no shock there. But we are bidding it.

And Shell Appomattox is out there, as an example, we all know that. There is a FEMA project in the marketplace. There are some very specific projects, activities in Brazil, that we are on top of. That could really counter this backlog decline that we experienced in Q2.

The second key element there is, do we in fact get any type of US land-based recovery, which could help our elastomer products. It's not a huge piece of our business, but in austral products the elastomer technology has some extension into land-based activity, just like Cameron and FMC and others. No surprise there.

I think those are the major two data points. I don't really want to focus on cost-cutting as a solution. I would rather have top-line growth. We only trim when we are forced to do so, based on our backlog and our activity levels.

But again, there are some possibilities there that could give us a more positive outlook for 2016. We will know the answer to that by late third quarter or probably early fourth quarter.

With those awards be more on the drilling side or the production-oriented side? It sounds like it's more drilling-related.

Production. Production. Production.

Okay. Just want to make sure. Thank you.

Thank you, Marshall. Good talking to you.

Jeff Tillery, Tudor, Pickering & Holt.

Good morning.

Hi, Jeff.

Almost afternoon. On the completion service businesses, I'm curious, if I look at the revenue per ticket over the last couple of quarters, it is down by about a third. I am curious, can a relative contribution of that in terms of the mix of business versus pricing versus other factors underneath the radar that I'm not thinking about.

Jeff, this is Chris. Let me take a stab at it and Cindy can weigh and as well. I think there are a few factors. First of all, obviously pricing goes into that as well. There is some product mix.

I think we are seeing duration of jobs tighten up a little bit as customers are running the well sites a little more tightly than they have before, where jobs aren't -- we're not out there as long, frankly. I think all of those contribute to the drop in the revenue per ticket.

There is probably not a very good answer for this, but obviously -- or I think substitution is having an impact. And so as we step into recovery, when do things like efficiency and safety and whatnot, matter more? Is it early stages of recovery? Or do we need to see 100 rigs added to the mix before you think the customers focus on those elements?

I don't want to infer that our customers are out there taking more safety risks that are out there. Some of our products, if I can just be clear, part of their value is savings of rig time, savings of other service time at the rig site.

I think what Chris is trying to say, when all of those services gets so cheap, it is a little harder to justify the incremental investment in the higher-technology products. I don't think our customers out there are taking undue risks at the site at this point time.

Last question, around the offshore products order side. You didn't book anything of substantial size in the quarter. I think I know the answer to this, but I want to ask the question anyway. Was there any market share change in the quarter? Did you miss on something you thought you would win? Or is it just a timing of those particular --

Absolutely not. One of the beauties of our product offering is, they are somewhat unique in the marketplace. And we have a very high market share on a lot of them.

Where we have competitive market share, i.e. standard connector products, our cranes, we are getting our fair share of the work. And don't feel like we've ceded market share there.

Okay, thank you.

Sean Meakim, JPMorgan.

Good afternoon.

Hey, Sean.

Hi. On offshore, do some of the various (Subsea SURF] JVs that we have seen in the last couple months be announced, do those pose a competitive risk for Oil States? Or do you see opportunities there as the value chain is trying to find ways to save costs and make more projects economic?

I think that overall -- I would rate it either neutral to seeing more opportunities. And part of that is simply put our customers need to make money. And if we get more projects to come to the forefront because they become more economic overall, that is good for not only us but for the whole industry.

Again, with somewhat of a unique product offering and product line, I don't think we would be advantaged by entering into one of these joint ventures. And to do so is almost saying that one installation contractor, particularly as it relates to our subsea products, it is so strong globally or in a given market, that you want to align with that one. We have the beauty of supplying products to a variety of projects and a variety of customers, and we interact with all of the installation contractors. I don't in any way feel disadvantaged.

I have acknowledged before, I think it dates back close to five years, where we contemplated entering into an alliance arrangement, not a JV, an alliance arrangement in a given geography, with an installation contractor for just this purpose. We concluded, after discussions that we felt like that would disadvantage us with respect to other installation contractors, and elected not to pursue it. Hopefully, that is responsive.

Got it, that makes sense. And then, sticking with offshore, are you seeing any delays in delivery requests from customers that are backlogged, as we have seen from other parts of that space?

No, we are not.

All right, fair enough. Thanks, Cindy.

Okay, thanks, Shawn.

Kurt Hallead, RBC Capital Markets.

Good afternoon.

Hi, Kurt.

I was wondering if you might provide some additional color on the offshore products for the quarter in the context of what was revenue out of backlog and what was book-and-turn?

I'm looking for my team here. I don't have that at my fingertips at this point in time. Sorry.

Okay, no worries. Maybe as a follow-up on the well services side, Cindy, you provided the guidance range on the EBITDA margin. How does that mix between drilling versus well services? In other words, do you expect the second-quarter drilling services implied cash margin to remain flat in the third quarter so that the variance on margin is all completion-related work?

Yes. I think the guided margins are consistent with our reported margins for the most part, are they not, Scott?

But the variability is around the completion work and not really land drilling? Like the 12% to 14% range that you provided --

I'm going to let Chris answer that.

Yes, we're looking at each other. Probably the general answer to your question is yes. Although, again, we guided to a utilization number for drilling. If a rig goes down or we pick up extra rigs, it will impact the margin at this level, simply at the lower revenue levels, everything can impacted at a greater extent.

So we've got a range for both. And it depends upon what the variability actually ends up being as far as what drives it, of course. The answer your question is yes.

I know it is a little bit granular. But a lot of the bigger picture questions were already answered. I appreciate that color. Thank you.

Think you, Kurt.

Chase Mulvehill, SunTrust.

Hi, Chase.

Hi, how are you, Cindy?

Doing good, thanks.

A quick question on your guidance. I was kind of surprised that revenue was basically guided flat. But if you look at the rig count, it's trending down about 4%, you hold it flat from here. Are you assuming flat activities from here? Are you seeing completion activity outperforming land drilling activity? Help connect the dots there.

Yes, I will. Right now, the visibility we have is July, basically. It is very specific to our own operations. The nominal type improvement that we are talking about, quite frankly, can come in an individual geographic market. Right now we support offshore as well as on shore. We are seeing, in July only, a little bit of improvement of contribution from some of our offshore work.

Okay. And so, if you think about July on the completion services side, was it better than the 2Q run rate?

Again, I'm thinking of it more in the context of was, it better than the exit rate for the quarter? And I would say, nominally better but I attribute it to offshore more than land.

Okay. And so, thinking on the completion services, if we do the quick math and look at basically your cash costs, so I take your revenue minus your EBITDA and get cash costs of about $60 million associated with your completion services in 2Q, how much of that is fixed versus variable?

The prior relationship was about 60% of our costs are headcount-driven, meaning salary, wages, benefits, plus travel that goes along with that. Obviously, our costs have come down as market activity has come down. I think that percentage might have weighted up a little bit higher. We have not cut our workforce, obviously, to the degree that the rig count has come down at this point in time. I hope that helps.

But even costs outside of headcount-driven costs, some of it is truck mileage, fuel. We drive all over the earth supporting our customers on location. R&M associated with the level of activity of equipment, et cetera. So, a lot of the costs, on a percentage basis, are in fact, variable.

Right, okay. Real quick, on offshore products. If orders don't pick up from here, 2016 looks like it is going to have some headwinds on the revenue side, where revenue from backlog could be down pretty materially. So as we think about the mix there, revenue from backlog to be down materially next year. Maybe you get some stabilization in the shorter-cycle business and the after-market business. So how should we think about the margin profile as we move into 2016. Or if maybe you want to talk decrementals rather than margins?

Actually, I think I'm just going to wait on that. I don't like hypothesizing 2016 without knowing what my backlog is. I would rather defer that until a later conference call, if you don't mind. We have got great historical data on how we performed through the cycle on our margins. I was just looking back to the last five years. I think it'd give you a really good indication of how you choose to model those margins.

Okay. So it's fair to assume that you wouldn't -- nothing that you see right now -- that you would break below the 17%, is where I think you troughed in 2010?

I specifically was looking to 2010 as an indicator for me, yes. I don't remember if it was exactly 17%, but that was a thought process I had. We keep running five-year models, both base case and downside. That is exactly the kind of trend line I would look to.

Awesome. Appreciate the color, Cindy. Thank you.

Blake Hutchinson, Howard Weil.

Good afternoon.

Good afternoon.

First question for Chris. Wanted to talk a little bit about Jeff's earlier question with regard to what you were seeing [in road of lee], with regard to perhaps substitution trends. I understand it is very hard to data mine a business that's fallen off as much is it has in the first half.

Bust as you look back in the first half of the year, I want to establish that you actually do feel that perhaps there have been some preference changes in terms of equipment usage that have also hurt the business. And after it is all said and done, you look the same as you did in 4Q. It is just more that thought process, more [of torrent] that's general weakness of the market than really any clear-cut trends and usage.

I think it is more of a short-term issue, Blake. If you look at our revenues for the second quarter, as you know, we have always said, ballpark 70%, 75% of our revenues in completion services comes from our product lines where we have some proprietary advantage, as we've defined it. That relationship still holds true. So I'm not concerned about any long-term trends of something supplanting our technology.

Okay, great, that's exactly what I was looking for. A couple of quick ones. With regard to the near-term margin guidance and offshore products, does the UK facility itself, and the introduction of that, have any drag on results?

We hope not. We planned very carefully for a smooth transition. There is a little bit of risk, I don't think it would be material. But certainly there's some relocation type from one facility to the next. We hopefully have buffered -- we're going to support our customers.

We are probably carrying a little more inventory of our standard connectors right now to try to prevent or smooth any types of transitional type activities. Overall, I don't expect any material disruption or impact to the margins from it.

Okay. And I don't want to get overly technical. I realize you said you didn't necessarily have the numbers at hand, but I was trying to get a feel for simply the short-cycle business transition in offshore products from 1Q to 2Q.

Even if you're just couching it, it's the drilling and elastomer business. Were we talking 10%, 20% negative comparison, broad strokes on how the short cycle might have compared to the backlog degradation?

My team is trying to pull that together. I believe what they've come up with is that when you include short cycle and services combined, with about 20%, and about 80% was backlog-driven. So again, relative to nine months ago, the contribution from the short cycle and services is clearly down.

Okay, I follow that, great. Appreciate it and sorry for pressing that. Thanks for getting that data so quickly. I will turn it back.

Thank you, Blake.

John Daniel, Simmons & Company.

Hey, guys, good afternoon.

Hey, John.

I know you guys don't like providing guidance beyond the current quarter, but I want to see if you'll opine on this. Let's assume we do stay at stable activity levels, specifically within well site services, and we stay there for the next three or four quarters. Are there any steps that you can take at this point, beyond maybe cost reductions, that could lead to margin recovery? Or is Q2, Q3 perplexed at a stable environment over the near to medium term?

We are watching everything on, obviously, a daily basis, trying to find as many efficiencies as we possibly can, from third-party procurement to internal-type efficiencies. Let's face it, John, at some point, you hit diminishing impact.

What we have said all along, the crude oil price environment we find ourselves in feels non-sustainable, at some point in time. I hope it is not three to four quarters in duration. Certainly if it is, we will be fine. We are prepared for that eventuality. I'm not sure that everyone is.

There are levers to pull. Again, headcount is down dramatically in this business. We have adjusted variable base pay. It gets harder and harder to pull those levers once you get to a certain level of activity.

Fair enough. I don't know if you touched on this earlier, so I apologize if it was discussed. But did you give any color on expectations for orders in offshore products for Q3?

Not specifically Q3. But the question I think most people want to know is, how are you going to end the year. We had a really strong Q1 bookings relative to the Street. Q2 was softer. While I'm not giving guidance, I'd set a soft goal of 0.8 times.

I think some of the commentaries around, is that is still achievable. Right now, we are not going to back off of that based on the bidding and quoting activity that is out there.

Okay, thank you. Last one, but very minor. You noted that 11 rigs are running today. At this point, do you have visibility in terms of that rig count going up or down over the next two to three months?

We are guiding to flat. As soon as we put a rig or two out, we have another rig or two come down. It is just on the margin at this point, but guiding to flat.

Okay, thank you very much.

Jeffrey Spittel, Clarkson.

Hi, Jeff.

Hi, Cindy. Hi, guys. We have covered a lot of ground. So let's keep it short and sweet. Cindy, you referenced back in May and June when the world was looking like a little bit of a happier place. Can you talk us through, were you starting to see any evidence of some customers gravitating back toward more the proprietary equipment and technology in the completions business? Or was it a little bit too early to expect to see that happen?

We haven't really seen it. We had a modest, I think, 19-rig improvement, which was just last week. So I'd say there's no trend line changes at this point.

Okay. And then the project slippage that you talked about in offshore products, we hear it a lot from the subsea vendors that they are going back and rebid these projects. Is that also consistent with what you have been doing? Or for the most part, have you been able to maintain the current bids? And maybe the slippage use due to kinks elsewhere and the supply chain?

We have absolutely rebid them. But I don't want to infer that that's all price concessions. A lot of this is reconfiguring, redesigning. The order that we got in Q1 is very indicative. I think we have been bidding that for two years. And it probably came in at a third of the original values.

If you think about a line, how many future connects might you have into that export line? And do you build those in now or do you build them in later? It is still the same field, the same project. But there are ways to redesign around those and scale, I'll just say scale, those projects over time.

I'm sure there are some pricing-type concessions. But we typically try to get the benefit on the cost side to offset that. But then there is a lot of what I could call redesign, reengineering; over the last five to seven years, I didn't know how many versions of metallurgies could go into a project. Every time I would ask, well, is this project is going to be like X, Y or Z that we did last year? And the answer was always, no. So we weren't getting economies of scale and benefits from prior experience.

It's somewhat operator behavior that is adjusting as well. Proven metallurgy, proven technology, proven designs in the field, were not being repeated and repeatability is how we obtain efficiencies.

That makes sense. All right, thanks. I will turn it back. Appreciate it.

Thanks, Jeff.

Michael Lamotte, Guggenheim.

Thanks, everybody. Cindy, I don't know if you or Lloyd want to take this one, but a couple questions on the cash side quickly. It looks like receivables coming down have been a good source of cash last couple of quarters. But inventories are relatively flat from fourth-quarter levels.

Is that a function because the majority of that is offshore products? Is there any work to be done on that front in terms of creating a source of cash?

I will actually speak to that because it won't surprise you that that has been a focus of mine. The working capital benefit that we have received has been substantial in the first half of the year. That has come, as you point out, largely from accounts receivable, which I am pleased and proud of. It was a very focused effort for us.

Inventory, I believe, was actually up, about $5 million in total, about evenly split between well site and offshore products. As it relates to well site, and they sound counter-intuitive, but recall that it was just October where we had record peak rig counts. And so certain ordering activity, some of which was coming from international destinations, was in our order book that has come into inventory, and quite frankly, a little bit into CapEx as well, that we didn't see prudent to cancel. We are in a strong financial position. We don't need to do that.

And so that CapEx, I think, will trail off a bit as we go into the second half. And certainly inventory purchase activity pretty much come to a standstill. I do think you will see that trend down again in well site services. I have done an in-depth look at in offshore products. Again, not a huge bill, but one might say, why isn't it coming down. But a lot of this is very much product-specific inventory that is destined to backlog projects in various locations.

I think I mentioned a little bit earlier, possibly to John or Jeff, that we are carrying a little more in terms of standard connectors in the UK, so that we don't have a customer service interruption of any type, as we relocate from Aberdeen into the heartland facility in the third quarter. But my comment there is, absent improved backlog and timing, we probably do think that inventory will begin to come down a little bit.

Based on that color, I can tell you really have been looking at it. Thanks, Cindy. Quickly on CapEx, you've talked in the past about not putting capital into CapStar.

But I'm wondering, as we go through this downturn, and we hear some of the other contractors and certainly the equipment companies talk about, everybody wants an AC rig. Everybody wants a class A rig. How do you feel about the quality of the fleet? And are you at all having to reconsider on the idea of putting money into those to make them more competitive?

I don't mind commenting at all about CapStar. We never said we would not put capital in the business. I think we maintain state-of-the-art relative to what we have. They are shallow water rigs. They do only maximum light horizontal work. But we will not run a rig if it is not well maintained.

There is maintenance CapEx that we are spending on an ongoing basis. Through the first six months, we invested about $9 million of CapEx in our fleet of rigs, despite the fact that we only have, on average now, about nine running. I would rather stack them then have them run poorly. That is not what we will do.

The good news is, even at these fairly low, if not Draconian levels of utilization, we are still generating cash from the operation. We generated about $3 million of cash in June. And we will absolutely maintain the fleet.

Great, thanks, Cindy.

Stephen Gengaro, Sterne Agee.

Thanks, Cindy. One quick follow-up. Could you walk us through quickly, when you think about your own stock versus another company, how you guys think about that at this point in the cycle?

By another company, do you mean acquisitions?

Yes, potential acquisition candidates versus just buying more OAS.

I do feel like, that at these low levels we are experiencing, we need to grow the top line. And it has been in the past, whether it is organic, there aren't many organic opportunities right now, given the downturn in activity. I do think that with the passage of another six months or so, there will be some consolidation opportunities.

It is not lost on me that there is market consolidation occurring and the big companies are getting bigger. And some of the small companies are going to be disappearing. I do think that consolidation is a favorable trend, if they emerge as we think that they will.

Our stock is always an alternative, particularly at these low prices. I think Lloyd announced we re-upped our share repurchase authorization. At these low price levels, that authorization is 10% of our outstanding stock at today's prices. So I think there is benefit from that too.

Historically, when we rank those capital allocation opportunities, we put organic first. The type of M&A that we do, i.e. the way we price it, value and integrate it, proves to be second. It gives top-line growth and helps us leverage a very strong operation and a strong management team.

There are times however, when our stock is valued such that we will buy those shares in. The good thing is, we've got a lot of financial flexibility to date, to do just that. But we do believe there is going to be M&A opportunities that emerge. If you say my body language today, I want to be prepared for that.

But, Stephen, we have done both, like we did in the first quarter when we bought MMC and did share repurchase.

Exactly right. It's not one or the other. I understand. Thank you, that is a good answer, though, thank you.

Thank you. We have no further questions at this time. I would now like to turn the call over to Oil States International for closing remarks.

Okay, I appreciate it, Loraine. I would want to thank everybody for continuing to follow us. I know it is kind of tough sledding, it is a busy day. This industry is cyclical and it is never dull. We look forward to our next call, and hopefully a more stable and brighter outlook. Thanks so much.

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