Oil States International Inc (OIS) 2016 Q1 法說會逐字稿

Welcome to the Oil States International, Incorporated, first-quarter 2016 earnings conference call. My name is Adrian and I will be your operator for today's call.

(Operator Instructions)

Please note this conference is being recorded. I'll now turn the call over to Patricia Gil, Investor Relations. Patricia Gil, you may begin.

Thank you, Adrian, and welcome to Oil States first-quarter 2016 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're also joined by Chris Cragg, Senior Vice President, Operations.

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 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 10K and other SCC filings. I will now turn the call over to Cindy

Thank you, Patricia. Good morning to all of you and thank you for joining us today for our earnings conference call.

Yesterday we reported an adjusted loss of $0.24 per diluted share after removing certain severance and other downsizing charges incurred in the first quarter of 2016. As most of you will appreciate, the current industry downturn has been harsher and has persisted for longer than any of us hoped. The US land rig count declined 38% since the end of 2015, bringing the overall decline to 78% since the rig count peaked in 2014. Our customers are spending significantly less on CapEx in order to preserve their own liquidity and to protect their balance sheets during this protracted downturn.

Demand and pricing for our Well Site Services segment remains under considerable pressure and reduced drilling and completion related activity has also negatively affected demand for our shorter cycle Offshore Products and Services. Our Well Site Services segment experienced a 35% sequential decline in completion service jobs performed and average utilization for our land drilling rig fell to a near 6%.

While individual jobs that we perform in our completion services business remain profitable, the margins earned are inadequate to cover our regional and divisional overheads, thus leading to negative quarterly EBITDA margins for this segment for the first time since this downturn started.

In our Offshore Products segment, we recognized another quarter of strong EBITDA margins, averaging 23% for the quarter and our book to bill ratio for the quarter totaled 0.74 times, which was relatively strong given the current market environment. However, our revenues were light at $126 million, partially due to timing issues, but also due to a backlog which has declined steadily since mid-2014.

While final investment decisions for major Offshore Products continue to be economically evaluated, virtually all were deferred.

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

Thanks Cindy. During the first quarter we generated revenues of $170 million and reported an adjusted net loss of $12.2 million or a loss of $0.24 per diluted share, which excluded $1.6 million pretax or $0.02 per diluted share after-tax for additional severance and downsizing charges. EBITDA adjusted for these charges total $12.1 million during the quarter.

Our consolidated first quarter adjusted EBITDA margin was positive at 7.1% due to the contributions from the Offshore Products segment. However the margin we achieved was well below the 18.1% adjusted EBITDA margin we earned in the fourth quarter of 2015.

Protecting our balance sheet and liquidity position remain a top priority. We ended the first quarter with total liquidity of $408 million, which is comprised of $365 million available under our revolving credit facility, plus cash on hand of $43 million. As a reminder, our liquidity position is likely to decline throughout 2016 from the March 31 level as a result of lower expected levels of EBITDA on a trailing 12 months, or TTM basis, which could restrict full access to amounts available under our revolving credit facility.

Our financial position remains healthy. We had meaningful receivable collections during the first quarter and were able to generate $57 million of cash flow from operations.

Using available cash, we repaid $37 million of debt during the quarter and as of March 31, our gross and net debt levels totaled $90 million and $47 million respectively. Our net debt to book capitalization ratio was 3.6% at March 31. And our leverage ratio using TTM-adjusted EBITDA was 0.6 times, which continues to be well below our maximum level of 3.25 times provided for in our credit agreement which is set to mature in 2019.

During the quarter we invested $10 million in capital expenditures. Capital spending during the quarter related to expansionary investments for our Offshore Products facilities, along with maintenance capital spent on our completion services equipment.

For the full-year 2016, we expect to spend approximately $45 million-$50 million on capital expenditures. And as we have mentioned on past conference calls, our level of planned expenditures is highly variable and can be adjusted upward or downward depending on the prevailing market conditions.

In terms of our second-quarter 2016 consolidated guidance, we expect depreciation and amortization expense to total $30.3 million, net interest expense to total $1.3 million, and corporate cost to total $11.5 million. Our second quarter and full year 2016 consolidated tax rate benefit is expected to average approximately 39% to 40%.

At this time, I'd like to turn the call back over to Cindy who will take you through each of our business segments.

Thanks, Lloyd. I'll continue with our segments.

In our Offshore Products segment, we generated revenues of $126 million during the first quarter of 2016, down 26% sequentially while EBITDA totaled $29 million. Our EBITDA margin percentage exceeded our guidance and averaged 23% for the quarter, largely due to strong project execution on several jobs nearing completion during the quarter, along with a lower cost structure. Our revenues were weaker sequentially due primarily to reduced drilling, connected product sales, and weaker service revenues.

Orders booked for the quarter totaled $93 million and our backlog at March 31 totaled $306 million, representing a sequential decrease of 10% from the fourth quarter. Our first-quarter book to bill ratio was 0.74 times, which we believe sets a reasonable expectation for our full-year 2016 book to bill target. Notable backlog additions during the first quarter included orders for connected products destined for the Middle East and mooring equipment for our Gulf of Mexico production facility.

As we progress into the second quarter of 2016, we believe that revenue in our Offshore Products segment will recover slightly and range between $130 million and $140 million as certain orders and job completions shifted to the second quarter from the first quarter. We are not yet seeing much improvement in demand for our shorter cycle and consumable products or services. EBITDA margin guidance for the second quarter is forecasted to range between 18% and 21%.

Going to our Well Site Services segment, results weakened due to further deterioration in activity in the US land drilling and completion market, with the US land rig count having declined an additional 250 rigs, or approximately 38% in the first quarter. Our Well Site Services segment revenues totaled $44 million which represents a 32% sequential decrease caused by a 35% decrease in the number of completion services jobs performed and continued low utilization of our land drilling rigs.

EBITDA decreased sequentially to a loss of $8 million, which included severance and other charges that we incurred during the quarter as we continue to adjust our cost structure in light of the severely depressed levels of activity in North America. As I mentioned previously, land rig utilization declined further in the first quarter to average only 6%.

Given all of these variables, this continues to be an extremely challenging market in which to forecast activity and results for our Well Site Services segment. While there is limited visibility for the onshore North American drilling and completions market, we believe that we are approaching a cycle trough. We estimate the second quarter revenues for our Well Site Services segment will remain depressed and range between $40 million and $45 million with segment EBITDA remaining below breakeven.

In conclusion, the US onshore energy services market poses significant challenges for our businesses. Industry E&C spending is projected be down for a second consecutive year, off an already low base of activity. In addition, major deepwater projects continue to be deferred.

However, the recent improvements in WTI and Brent crude oil pricing is encouraging. Further, the commodity supply demand imbalanced outlook is trending more positive as producers have continued to curtail spending and activity remains at depressed levels. We believe it is only a matter of time before supply and demand rebalance.

On a more positive note, we have maintained a strong balance sheet position during this cycle and have the potential to execute on selected M&A opportunities that should present themselves in this market. We expect to maintain low levels of leverage while we monitor the timing of an expected market recovery.

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)

And our first question comes from Jim Wicklund from Credit Suisse. Please go ahead.

Good morning guys.

Hey Jim.

Good job with as ugly as it was. We, too, think you are approaching a bottom in the current quarter in the US market, and I'm knocking on wood as I say that. And we think the recovery this year will be somewhat anemic because of the leverage that everybody has.

But we're optimistic and so if we were going to put X number of rigs back to work and all of a sudden, you know, it would be nice -- your rig utilization went to a whopping 30%. How long would it take throughout Well Site Services in the different parts? How long would it take to respond, assuming it just comes back in a big rush? So we're going to be optimistic on the hypothetical basis. How long would it take for you to respond and what are your two or three biggest issues in the recovery?

It's a great question and obviously there's no precise answer, but let me start with the land drilling slate. We've historically been able to swing that fairly quickly. We don't see a v-shaped recovery in land drilling by any means.

However, we've had some customer dialogue that is suggestive that -- I'll say a small number, a handful of those rigs could go back to work at about $45 a barrel crude oil, and about $2, $2.25 in MCF. So we're talking a number of rigs, but when you're only working three, I look forward to working six, okay? So that's kind of the landscape, that's the feedback we are getting there. Complete --

Can you do that? Do you have the people to do that?

We've historically been able to do that efficiently, and again, you kind of understand our operations. We've got people that have been in the business their entire careers that we've kept. We've bumped them back, we've held back crew complement.

These are the types of rigs that don't demand a huge number of crew personnel to restart. And so, I feel pretty confident that that's not an issue. Now, if you told me I had to bring all [30%] back in short order, that would be a challenge but I don't expect that.

So I think we are manageable in terms of reactivating anywhere from, I'm going to say three to six rigs, in fairly short order, but again, when you're working three, that would feel pretty darn good. Where completion services lies, I've been very open about. I think we reacted early in terms of recognizing the market downturn.

We've trimmed as necessary, but we've also hit a point that we really don't want to -- I don't want to lose more field personnel at this point. The ones that I have are generally concentrating in basins that are more active. That's not a surprise.

It's also in the basins that are more likely to see the near-term improvement. Most of these guys would clamor for overtime and incremental pay, basically more work. So I feel like we can kind of use the existing -- we've got great basis of operations, great facilities, we've got people, we've got equipment.

So I think that, again, it all depends on how many rigs we are talking about. That's the magic question. If you are at 400-ish rigs, can you go to 800 before you feel a pinch point? And I generally say I think we could if it were a little more balanced.

If it's all going to be in one basin, that is going to create some challenges. And it always is the latter not the former, I think we know that.

But I do think that, not only us but the industry as a whole, has some propensity to pick up activity without adding much in terms of incremental costs, other than necessary logistics, transportation, and in our case overtime. I know probably want a little more precision around that answer, but again, it's not --

Only if I thought you could give it.

My point of that is if it's not a broad-based recovery, you do create bottlenecks and I don't think it will be. I think we are going to see selected basins start to recover ahead of some of the other ones. That's maybe an obvious comment, but that's what we're going to see.

And my follow-up, if I could Cindy, on the offshore sector. You know, people on my side get myopic. When something is announced, we think it is done and business is kind of usually when it started. You talk about you think you can hold a 0.73 book to bill, or hope you can, in Marine for the rest of the year.

When does Marine Products -- when do revenues bottom and start to pick back up in your opinion? Is that a two quarter or a four quarter or a six quarter, or just some frame of reference on how long before they bottom and you can expect to start coming back up?

Well, that's a tough question and I'm probably a little more, I will say optimistic, than maybe what you've heard for other manufacturers and part of it is because we do have these short cycle products in there.

And so there's going to be a trajectory and the best I can guide to right now is that point -- if it's 0.7, 0.75, I'm going to be ecstatic. I think the second quarter bookings are going to be the weaker quarter from a booking standpoint, just based on bidding, quoting, inquiries, all the things that we are working on. Some pick up in the second half, just again, based on specific bidding type opportunities that are out there.

What that would mean, and these are more -- right now the kind of content we are getting, if you look at what we said on some of the notable backlog additions, some of these are repair -- like subsea repair type systems on the pipeline side, additional content for projects already FID'd. What we are lacking is any new project FID.

But they're certainly still in the bidding, quoting, and evaluation stage. And obviously, an obvious comment -- we and everybody else would like to see at least one FID in the second half of this year. But in the meantime, we are bidding things like I talked about, and we're seeing some pretty strong -- or strong is not the word -- improving bidding around some of our crane products, some mooring systems.

Again, things that are not as project FID dependent. When you're asking about revenues bottoming, I think what's going to happen, what we call POC, or my project FID revenue is steadily declining, we're not going to see that lift until 2017.

One offset though that I do expect to see is some improvement in short cycle and service. And in fact, our short cycle I will call it, was flattish to slightly up sequentially. That doesn't necessarily evidence a trend, but I do think by the second half we will see a little bit of improved -- and service was weak for us, that was part of the top line miss relative to our guidance was on the service side, but we don't think that it's permanent.

And that may be a long-winded way of saying revenue's probably trough, probably trough, depending on mix, but I'm going to say early 2017, fourth-quarter 2016. It's elusive and it's really dependent upon the timing and extent of recovery on short cycle products and services.

Cindy, thank you very much, I appreciate it.

Thanks Jim.

And our next question comes from Blake Hutchinson of Howard Weil.

Good morning.

Hi Blake.

Just thinking about Offshore Products margins here, you know, several quarters if not years timeframe of excellent execution. I take it there's parts where it's the franchise, that portion of the franchise as a whole. Then there's projects you've been tracking specifically that have been coming in above cost estimates or better than estimated.

Is there a point where you caution us that you do run through enough of that backlog that you've been tracking, you know, that you purposely hadn't switched over to the UK facility, et cetera, where the potential for positive margin gains runs out? Or is it really, would you just highlight the kind of overall execution of the decision?

Well, I've talked before about kind of the underlying cost structure in Offshore Products is a little different than what we experienced on completion service, in that, depending on the product, roughly 60%, 65% is materials based. And so, you don't have the work, you don't incur the materials cost. So we've really got to control that other kind of 35% to 40% by facility, given that we've got manufacturing facilities all over the globe.

And so, I track what's going on in every unique facility. You mentioned the UK. That's where we have some of our most proprietary products, number one.

Number two, one good thing when a market does slow down a little bit, you can be more efficient, your people are skilled people, experienced people. They are very, very focused on the projects that we have in the shop. We're not as strained, if you will.

Certain things that we might have had to outsource, we can in-source. And so that lends itself to generally kind of predictable, healthy type performance, unless it is some unique product or technology that we've not really done before. And so, that's the positive side of it but again, some of these projects we commented in fourth quarter, and again this quarter, are maturing into the revenue stream.

We're not getting significant FID, so my mix, particularly in my UK facility, is going to trend to a little bit lower margin, quite frankly. If we get the offset though, short cycle service, and I mentioned cranes and moorings, bidding activity in my Houma based operation and elsewhere, we can offset that.

And that's why we kind of widened our EBITDA margin guidance range for Q2 even, to 18% to 21%. We're just trying to give you a frame of reference that we think we can operate in. But you're exactly right, but there is, again, it's kind of an ebb and flow across all of our global facilities with some puts and takes, depending upon product mix that goes through it.

Thanks, that is exactly what I was looking for.

And then, just understanding, again, in your earlier commentary, you're kind of following the narrative that you're not losing money at the field level, you're not losing cash at the field level in completion services. Help us understand competitively what empowering your people to kind of I guess turn down work that has done, are you actually experience a heightened level of job turndowns? Or, are you just kind of last man standing at this point and you feel like you're getting your share and actually seeing other players come and retire, again, what we can't see from our seats?

Yes, I generally, I don't think -- we're bidding most all the work that is out there, and so we're not quote-unquote turning it down, meaning, we are bidding it at what we think we can make money at. We know that we're losing some jobs on pricing and I always say, you always hear about the jobs you lost, not the jobs you won sometimes, particularly from the field because they want the work.

But it's just, in other words, know your cost structure, know what it takes to deliver a project, bid accordingly. We're not losing market share, but I don't want market share that causes me to lose cash in the field. That's a no-win situation.

I would rather be the healthy one remaining. If I comment specifically on Q1, pricing has not improved. We had a better mix and part of that better mix is really driven by international work, is driven by -- and I say on a percentage basis, because land US is so challenged.

International content has been a little better for us, and we've seen somewhat of an improvement for our specific product offshore Gulf of Mexico. And I will just say some mix improvement on land, but don't think of that as pricing improvement, because is it is not there.

Got it. Thanks for your time, I'll turn it back.

Thanks Blake.

And our next question comes from George O'Leary from TPH and Company. Go ahead.

Good morning, guys.

Hey George.

I thought the Well Site Services revenue guidance for the second quarter was interesting -- $40 million to $45 million. Kind of in line-ish with what you guys did in the first quarter and just given what we've seen from an activity standpoint, where it looks like activity's troughing, I guess. Is that more maybe the thought that some incremental land rigs go back to work, or just that the job ticket outlook you have on the completion services side was driving that to be flat and not maybe down where average activity's probably going to be down quarter on quarter?

For us, I think this would be a Company-specific comment and we've got some Gulf of Mexico startup work that we think is going to weigh in our favor. We're seeing to date what I would just call stable land activity, albeit at a low level, but that might be a more company-specific comment.

All right, and Blake stole my other more granular question, so I'll toss out the obligatory M&A question. What are you guys seeing on the M&A front today, are bid-ask spreads compressing at all? I've heard a little bit that it may be becoming more of a buyer's market.

It seems like a lot of the opportunities you guys have seen previously have been distressed and things you wouldn't necessarily be interested in. Is there anything more intriguing popping up?

Well, there are a couple of things out there, yes, that are intriguing and we're kind of in that process of, I will call it understanding the bid-ask spread to figure out whether we're successful or not. But we can't go through the depth and duration of this down cycle and not to expect to see some opportunities.

I don't think they just didn't really mature last year because of I think a lot of ongoing dialogue around debt issues and other restructuring and other things. But we expect to see more this year than we did last year.

The one caveat I will throw out there, that will be a little bit of a headwind for us is just the sheer amount of private equity money that is out there and every deal pretty much that we'd look at today is going to have a comp competitive bid out there from private equity. And I think strategics like us are the ideal people to do this because we can generate some true synergies and consolidation savings.

I think in the long run, be advantaged over some private equity investments, that's just reality. There's a lot of money out there and they're in the deal money out there and they're in the deal that we look at that we're not to some degree competing with private equity fund.

And we can talk all day about the dynamics of private equity, having to shift to more equity versus debt. It does create I will say a little more level playing field, if not somewhat of an advantage playing field for us. Because I do believe that the right acquisitions we can generate both savings and synergies that might give us a competitive advantage, particularly as private equity can't layer on quite as much leverage as they have in the past.

Great, thanks very much for the color, Cindy.

Thank you.

Our next question comes from Sean Meakim from JPMorgan. Please go ahead.

Hey, good morning.

Hey Sean.

So Cindy, I'm just trying to think about the recent offshore revenue coming in below guidance last three quarters, but margins coming in considerably stronger. Just, so as I'm trying to understand the underlying moving pieces, and you've given a lot of detail on this call. It sounds like early phase project revenue recognition getting pushed to the right so that impacts the top line.

But then that mix shift is towards legacy projects that are probably later stages where you often get better margins toward the end. Is that a reasonable interpretation of some of the moving parts we've seen in that business?

Well, I'll speak specifically to Q1, and you're accurate that we were short of our revenue guidance. Part of that, as I said, service revenue, there's no finite predictor there, it's not a backlog-driven, you just, you really forecast it based on history and conversations with your customers.

So we're a little bit light on the service side, and some of the large OD conductor casing connectors moved and that's depending on timing of awards, so to speak. If you get a little lighter than you thought you would, you don't produce that to revenue. And so we'll see some of that return in the second quarter.

You're absolutely right in saying -- although, I will absolutely tell you it's not always the case that at end of a project, you have better margins. I feel -- I'm smiling as I sit here that I can say that we have had that, which is fantastic. But you are right in the sense that -- and it's particularly for our UK operations, some of these high-end products are maturing and coming out of our backlog in those locations.

Fortunately, they have had favorable margins which have offset lower top line, if I'm addressing your question as I think you ask it.

No, very much so. Thank you for that. And then, I just have one more around cash and liquidity.

So, just curious how much working capital release you think can be achieved if we end up staying in a lower for longer environment? And then, I guess the second part would be just, is there any hesitancy to draw on the revolver in a material way in pursuit of M&A, until you get a better trajectory of maintaining above breakeven on EBITDA?

Yes. That's a fantastic question and it's one we think about every week, if not every day pretty much. And so, going to the M&A question, and of course Lloyd has been very good and very careful about not talking about near-term capacity and availability, but forward capacity and availability, which we are forecasting, for good or for bad, through 2019.

And it's fluid obviously, but we're watching that very, very closely. But if you look at us over history, we do a lot of the smaller tuck-in acquisitions, typically for cash. Those that range, I'd say generally in kind of the $30 million to $60 million range, and we're comfortable doing that.

Depends on the number as to whether you start then thinking about, what is the absolute leverage? Is there some element of equity that should go with that? But in the near term, one or two of these deals, we feel comfortable doing.

I've been open about saying our preference right now is top line growth. We've got a lot of great people in this company and we have the propensity to do a lot more than we are doing currently. And the best way to address that is with an expanded content and revenue at the top line.

So very focused on that. Again, from an availability standpoint, I've got a moving forecast I watch every week. So I am not worried about that.

And again, if you got larger deals or more of the smaller tuck-ins, we'd evaluate use of equity, but we don't see that necessarily in the near term. What was your first question?

Working capital.

Working capital. Okay, we did generate good cash flow last year from working capital, good cash flow in the first quarter.

We're continuing to get -- there was a few one-off receivables that are coming into cash in the second quarter, but that probably is dependent upon overall activity levels. But if you walk through our guidance, in totality, you come out with something that is relatively sequentially flat.

And so I wouldn't expect much receivable improvement other than $10 million. And then at some point, when we get a pickup in activity, you'll start building that working capital back. So the other one we are very focused on is inventory, and I do think we can get some inventory benefit by the end of the year, but it's not huge. I think you're talking $10 million to $15 million.

And so there's a put and take there that with our own internal forecast, which is a softer Q2 followed by some improvement throughout the balance of 2016, we may have some nominal working capital improvement in Q2 that may reverse in the second half. Again, with projected improvement a little bit on US land and some of our short cycles and services in Offshore Products

I think you've seen the majority of your benefit in working capital in Q1 and that's largely on the backs of the Q4 working capital build and receivables for some of the larger projects that we had completed in the fourth quarter in Offshore Products, that we collected in Q1.

Got it. And no doubt you guys have done a great job putting yourself in a good position with this balance sheet, so thank you for all the detail.

Thank you.

Thanks Sean.

(Operator Instructions)

Okay, Adrian, it looks like there are none.

Thank you. I'll turn the call back for final comments

Okay, thanks Adrian. I appreciate all your time. I know somehow we always end up in your various busy week in terms of trying to handle all the earnings that are coming out. As always, we very much appreciate your following the Company and the good work that you do and we look forward to future follow-up as we go to various conferences and get out on the road.

So thanks again. Have a great week. We will be at OTC and look forward to seeing all of you there if you're present. So thanks again.

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