Oil States International Inc (OIS) 2016 Q3 法說會逐字稿

Welcome to the Oil States International Inc. third quarter 2016 conference call. My name is Sherry and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Patricia Gil Investor Relations. Miss Gil, you may begin.

Thank you, Sharon. Welcome to Oil States' third quarter 2016 earnings conference call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer, Lloyd Hajdik, Executive Vice President and Chief Financial Officer, and we are also joined by Chris Cragg, Executive 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 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 most recent 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 us today for our Earnings Conference Call. For the third quarter of 2016 we reported a net loss of $0.19 per share after adjusting for $0.3 of severance and other downsizing charges. Our operating results improved sequentially as the third quarter provided a number of positive data points for the overall energy industry. The average quarterly US rate count improved 14% sequentially and the industry has added about 150 rigs since the rig count troughed in May of this year. Commodity prices are driving the improvement in activity with both WTI and Brent Crude Oil trading at $50 per barrel and natural gas prices increasing 30% when compared to the second quarter.

Results in our offshore product segment exceeded our guidance for both revenues and EBITDA margins with margins averaging 22% for the quarter. However, this segment continued to be impacted by the deferral of major deep water development projects resulting in reduced orders in the third quarter. Our book-to-bill ratio totaled 0.54 times resulting in a sequential backlog decline of 24% with backlog ending the quarter at $203 million. In our Well Site Services segment revenues grew sequentially due to increases in the number much completion services jobs performed coupled with an increase in our land drilling rig fleet utilization.

Despite EBITDA for this segment remaining below break even levels it did improve from the prior quarter on an adjusted EBITDA basis. Activity levels in our Well Site Services segment improved in the third quarter but were not sufficient enough to generate positive EBITDA given that our service offerings are more levered to complex well completions which tend to naturally lag in timing from the start-up of drilling operations. 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 third quarter we generated revenues of $179 million and reported an adjusted net loss of $9.5 million for a loss of $0.19 per share which excluded $2 million pre-tax or $0.3 per share after-tax of additional severance and other downsizing charges. Adjusted EBITDA improved 20% sequentially to total $16.2 million for the third quarter and our adjusted EBITDA margin was 9.1% due to the strong EBITDA margin performance at our Offshore Products segment along with reduced adjusted EBITDA losses from our Well Site Services segment.

Our adjusted EBITDA margin has improved each quarter thus far in 2016 on a sequential comparison basis. During the quarter we invested $5.5 million in capital expenditures related to expansion area investments for our Offshore Products facilities along with maintenance capital spent on our completion services equipment. Capital expenditures for the full year 2016 are anticipated to range between $35 million and $40 million inclusive of the $24 million spent through September 30th. Protecting our balance sheet and preserving our liquidity position have been of paramount importance throughout the cyclical downturn.

We generated $26 million of cash flow from operations and $2 million of free cash flow during the quarter. We utilized our free cash flow and our available cash to repay $17 million of debt. On a year-to-date basis we have repaid $60 million in debt and as of September 30 our gross and net debt levels totaled $67 million and $13 million respectively, with a net debt-to-book capitalization ratio of 1.1%. At September 30 our leverage ratio using trailing 12-month adjusted EBITDA was 0.7 times which continues to be well below the maximum level of 3.25 times provided for in our credit agreement which does not mature until 2019.

We ended the third quarter with total liquidity of $272 million which is comprised of $218 million available under our revolving credit facility plus cash on hand of $54 million. In terms of our fourth quarter 2016 consolidated guidance we expect depreciation and amortization expense to total $29 million, net interest expense to total $1.2 million and corporate costs to total approximately $11 million. Our fourth quarter and full year 2016 consolidated tax rate benefit is expected to average approximately 36%. And at this time I would like to turn the call back over to Cindy who will take you through the details on each of our business segments.

Thank you, Lloyd. In our off-shored product segment we generated revenues of $133 million during the third quarter of 2016, down 2% sequentially while EBITDA totaled $30 million resulting in an EBITDA margin percentage of 22% exceeding the upper end of our guided range. The outperformance relative to our guidance was largely due to an order for pipeline repair equipment that was both awarded and delivered during the third quarter providing increased revenue cost absorption and margin contribution for one of our divisions coupled with improved demand for our elastomer products.

We also benefited from exchange rate gains primarily in the UK. Orders booked for the quarter totaled $71 million causing our backlog to decline to $203 million at September 30th. We received no individual backlog awards in excess of $10 million during the third quarter. As a result our third quarter book-to-bill ratio trended lower to 0.54 times bringing the year-to-date book-to-bill ratio to 0.68 times.

As we progress through the fourth quarter of 2016 we expect revenues in our offshore product segment to decline and range between $120 million and $130 million due to lower backlog levels and gaps in our major project work which we expect to reduce cost absorption thereby pressuring our EBITDA margin percentage. However, we do anticipate continued improvement in demand for our shore cycle consumable products namely our elastomer an valve products in the fourth quarter which will partially offset some of the reduction in our larger project work. Given these variables we project EBITDA margins will average 17% to 19% in the fourth quarter.

In our Well Site Services segment results continue to show sequential improvement and kept pace with the growth in the quarterly rig count despite the natural lag in timing between drilling and completions activity. Our Well Site Services segment revenues increased 14% sequentially to total $46 million and adjusted segment EBITDA improved from a loss of $3 million in the second quarter to a loss of $2 million in the third quarter. These sequential improvements were due to a 10% increase in the number of completion services jobs performed along with improved utilization of our land drilling business which averaged 15% compared to 9% in the second quarter.

These improvements were partially offset by a 4% sequential decrease in revenues per completion service job performed primarily due to Gulf of Mexico storm related disruptions. In terms of our Well Site Services guidance for the fourth quarter our actual results will be dependent on seasonality and customer drilling and well completion activity during the holidays which can be difficult to predict. However, we estimate that fourth quarter revenues for our Well Site Services segment will continue to improve sequentially and range between $47 million and $50 million with segment EBITDA margins at or slightly above break even levels.

In conclusion we reported our first sequential revenue improvement for the Well Site Services segment in 7 quarters. Recent US land rig count and commodity price trends have been more favorable and indicate that we are slowly beginning to exit this protracted downturn in the North American oil and gas industry. Results in our offshore product segment exceeded our third quarter expectations. However, we still have not found a bottom in offshore activity as evidenced by our third quarter backlog decline. The prospects for certain major deep water development projects reaching final investment decision and being sanctioned continue to look reasonable which could lead to backlog increases in 2017 for Oil States.

Our financial discipline, cost reduction initiatives and debt repayment efforts throughout the course of this downturn have afforded us a relatively secure financial position with low levels of leverage. Our and equipment are positioned to respond to increased demand and activity as our customers begin to invest additional capital compared with the levels of capital spent during the previous two years. That completes our prepared comments. Sharon, would you open up the call for questions and answers at this time, please.

Thank you. (Operator Instructions). Our first question comes from Jim Wicklund of Credit Suisse.

Good morning, guys. Congratulations on the first up in seven quarters, that's got to feel good.

It does. Thank you, Jim.

You bet.

All victories today.

Well, considering everything else going on it's a nice way to start a Friday. How much capacity in your well site business, how much capacity can you handle increase without additional CapEx? And I would assume that you would increase CapEx next year. We look for the rig count and activity to go up. I am just curious what would your CapEx be spent on.

I'm looking at Lloyd to give us the estimate, but we don't think we have material amounts of increased CapEx. In fact our guidance for this year.

$35 million to $40 million.

$35 million to $40 million and so we're up kind of modestly next year. Maybe $45 million and what you're going to see is a bit of a shift and recall that in this year's CapEx we have some facility expansions in our Offshore Products that are more one-off expansionary in nature. Very little spent because we didn't need it in our Well Site Services segment. It's more maintenance related when spent. I think that will shift little bit now that we have substantially completed our UK facility and our Arlington build-out in Offshore Products. There won't be as great a need unless there is a new expansionary project, but as we ramp backup I expect to see a little higher level of maintenance CapEx and then as we get increasingly complex with these completions we're more higher-end equipment. That will be a good mix shift for us. It may demand some specialized equipment particularly in harsh environment work.

Okay. (Multiple Speakers).

I don't want to talk too long and have you miss the point that our forecast is CapEx right now based on our outlook for activity is around that $40 million to $45 million.

Okay. And I appreciate that. And just to be a little more granular just so we all understand when you talk about higher-end equipment and demand for specialized equipment what kind of pieces of equipment is this?

Well, it's more of a -- I think a -- my perception is we're going to see a shift towards higher pressure, higher temperature an more towards our isolation equipment over time. Any kind of specialized metallurgical H2S type of equipment. Those are really the things that I'm talking about.

Perfect. Perfect. Okay. I appreciate the detail. And the Arlington plant facility that was the home of the elastomers for Oil States. What was -- I know what you did the in the UK. What was the Arlington facility expansion.

Actually, Arlington was really a brand new office building. It wasn't operational and while our elastomer products may have originated in Arlington we have expanded over the years and we're in both Central Texas and in Oklahoma so we have a pretty broad footprint for that activity.

Okay. The last one if I could sneak one in your offshore business you mentioned no orders more than $10 million. Was there a geographic concentration or was it broadly spread?

It was broadly spread and I would say, I have to even go back, when you get these small individual orders, a lot of them are more like a said an emergency pipeline repair order that came in kind of routine conductor casing connector type work. Again, downhole consumables it is of course elastomer business and I -- we highlight $10 million because that is generally indicative of a major project FID as opposed to more the routine (Multiple Speakers).

Or small repair brownfield type connections orders that we get.

Good distinction. (Multiple Speakers).

Yes.

Thanks, guys.

Thanks, Jim.

And our next question comes from (inaudible) of Morgan Stanley.

Yes. Thank you very much. I have a question on the changing nature of the offshore alliances and how they're kind of impacting the business and how it would potentially impact you if at all. We are seeing (inaudible) and FTI talking about a number of paid studies for tie backs and executed (inaudible) basis and Schlumberger, Cameron in a similar way. Is this in any form or shape impacting the demand for your connectors or the demand for any of your products? Could you elaborate a little bit on that?

Yes. Good morning, Ole. I will be happy to do that and I will just have to say thanks. We appreciate your new following of the Company and your positive outlook, so we had this question before. It's a very logical one and I always say you really have to go to an individual company's product offering to determine impact from offshore joint ventures and consolidation which we have done and about the only area that has really I call it the potential to be impacted is our subsea product offering given that if we're tying into a TLP or (inaudible) these are very proprietary equipment well accepted by the marketplace.

We don't see that demand changing and it's a bit of a unique product offering. So as it relates to subsea, we do have good work. We have always worked with installation contractors such as (inaudible) but since we don't have a tree offering ourselves we don't have a lot of products that connect into the subsea tree and we tend to work more away from the tree towards either the export lines and/or connections into floating production facilities and we feel like we are not negatively impacted by a joint venture in bidding those types of opportunities. I would generally say that I think these types of joint ventures are on a net basis positive not only for us but for the industry as a whole because it serves to reduce that breakeven cost for our customers and if projects move forward that is good for the industry and it's also good for Oil States.

I would add one further comment that we evaluated a similar joint venture for a very narrow portion of our product offering in one geography with an installation contractor many years ago, but in our case we really want to market to the breadth of companies that are out there and we felt like aligning with one even in a narrow geography was not -- not to our advantage.

And I can understand this given your 90% plus market share in a number of other products that you -- that you offer. If we assume that these contractors are right in their prediction that will be one or two awards in the fourth quarter and then start to pick up more gradually throughout the next year, how would that impact the timing of your order? Would they come roughly at the same time or with a lag or ahead?

You know there's a little bit of both, but I would tend to say some of the major project work we are likely to see some early kind of pre-FID ordering. We don't get everything in one fell swoop as you can imagine. We have got a fairly broad product offering and we may receive orders for a given project that reaches either pre (inaudible) or FID work over the course of 18 months, but I think it is very realistic to say particularly with our leading-edge technology TLP, FPSO, SCR type equipment you would either see that kind of immediately before FID or shortly thereafter. There are other things that are more field development oriented on the subsea space that would tend to lag.

Okay. Thanks for clarifying. I'll hand it back.

Thanks Ole.

Our next question comes from Stephen Gengaro of Loop Capital Markets

Thanks. Good morning.

Good morning, Stephen.

I think two things if you don't mind. If I start with on the -- on the acquisition or potential acquisition front are you -- are you seeing much that's exciting? Are you seeing sort of a narrowing of bid asks on that front?

I would probably say we remain very active. We continue to look at transactions throughout the third quarter albeit you can count them almost on one hand. It's not -- we're not alone in saying that the M&A prospects have been fairly narrow and you can see that in terms announced transactions and the ones that have been announced are generally on the smaller end kind of $200 million or less. Many of which are $100 million dollars or less and I would say that we're probably at least the deals we looked at in the third quarter that bid ask spread does seem to be coming more in line. There just really aren't that many things out there just being completely frank with you.

Okay. Thank you. And then on the services side and I'm sort of using the mid point of your guidance as a proxy but it's probably a bigger picture question. When you think about the costs that have come out and you think about incremental margins as you move into 2017, can you give us -- is there historical time period you would refer to or should we expect sort of higher than usual incremental simply because of the costs are lower? How should we sort of frame that going forward?

Well, I have generally Said the last couple of quarters and still believe we're really looking at activity based incrementals that we're just utilization is too loose and sloppy right now to think that you're going to get pricing. If we show an increase in revenue per ticket, we clearly believe that it's going to be mix oriented often times weighted towards either Gulf of Mexico or international which are just longer duration jobs as opposed to one-off land job, necessarily in the US. Or mix-related again going from lower pressure equipment to higher pressure moving from frac heads to isolation tools et cetera and so activity base mix oriented improvement in the near-term. I do think those incrementals are good, though, and we have talked about this before. I'm not aware that we are bidding anything at job losses. And we -- I don't know how long you have been tracking us this year, but we have a decent amount like everybody does of QAQC overhead operational overhead in the district that has to be recovered but as we get just incremental revenues we're going to get decent margins with those and so I do expect to see pretty reasonable incremental margins but they are activity based incrementals, not pricing based incrementals at this stage.

Very good. Thank you.

Thanks, Steven.

Next question comes from George O'Leary with Tudor, Pickering, Holt & Co

Morning guys.

Morning, George.

It seems like the completion services business is headed in the right direction at this point and just curious we're talking a little bit about technology earlier Jim was asking some questions and are you seeing any shift as we move into fourth quarter and following onto the -- the increase in drilling activity that we saw in the third quarter in terms of work mix and what I'm getting at is any green chutes on the guys progressing into looking to use some of your higher end technologies and services on the completion services side?

I would say first of all we -- we clearly are feeling a more positive trajectory. I think that is reflected in -- in improved sequential guidance going forward both topline and margins. We're in a lot -- have been in discussions quite frankly with kind of revised MSAs with some new customers and so I feel like there's some decent -- and again they say why is that and I do think that there are a few good -- a handful of customers that are looking to kind of upgrade some of their equipment and you hear it every day whether it's Chesapeake's new monster frac announcement whomever it is higher profit volumes, higher sands volumes, increased pressures, longer laterals, they are pushing the limits of some of the equipment in the field. We've always believed that we have some of the higher end equipment and so I think this should be a natural progression over time.

Great. That's very helpful. Then as far as new product development for you guys and new services offerings, where are you guys spending most of your time, what does it seem like the customers are headed into your point on trying to improve efficiencies for the customers what areas are taking up most of your time on that front today?

I'm sorry. Could you repeat that.

Sure. As you guys look at developing new products and new service offerings alongside those where are you spending your -- time today in customers are looking at increasing efficiencies drilling more high pressure, more intense horizontal wells where are the opportunities in you alls' eyes from a product development standpoint.

Well, I would say a lot of it is, again, we invested in the Tempress technology as an example which is extended reach technology and a lot of what you're doing is just incremental step-outs if you will, or extension is of existing technology whether it's extended reach, whether it's our isolation equipment, again, that's geared towards expanded stages, expanded pressures volumes, et cetera. All the things that we have been talking about. I think the other things that we've got to really focus on our equipment and service interfaces given the complexity of what we're doing in multiple customers on an individual rig site just to ensure that we're all on the same page, we're working towards the same goals and that we have got good communication and efficient interfaces for our customers operations that every single day it seems like there's incremental demands a lot of it, too, is just making sure you -- people again, when with you start ramping activity particularly after this extended downturn you know do I have enough people number one, number two, are they the right tenure, the right experience level. So those are all things that we work on for obviously quality, delivery of services to our customers, safety on location is critical. So a lot of this has to be as you ramp backup what's the experience level of my people, inspection testing, documentation of our equipment. Again, we have got some key, key equipment on locations so we have to really work on our QAQC as we always do just to ensure that we have got a high-quality product and service offering to our customers.

Great. Thanks very much for the color, Cindy and Lloyd, thanks, George.

Thanks, George. (multiple speakers)

(Operator Instructions). And our next question is from Sean Meakim of JPMorgan.

Hi. Good morning.

Good morning, Sean.

On the completion side just curious if you could get a little update on how job tickets are tracking in October and compare them to September or the third quarter average. Just trying to think about where --you have that natural lag between drilling and completions how that's moving as activities -- moving into the fourth quarter.

Well, I think that obviously we gave you increased revenue guidance for the fourth quarter. That is again reflective of activity based incrementals not pricing so clearly we're projecting an increase. As I said on my prepared comments there's a little bit of uncertainty as it relates to holiday downtime. In the Well Site Services segment, though, we think that we'll be probably hit a little harder in our drilling operations just given one, a lot of what we do is more vertical work and, two, we drill wells so darn fast that you will be completed -- say you're completed right before Thanksgiving or Christmas so there would be a lag in picking that back up, we don't expect as much on the completion services side just because it's a different cycle. If you start a job you're going to work through the holidays to get it completed. So, again, I really think that's probably embedded in the guidance that we gave you and that is clearly we have weekly meetings in terms of basing customer level activity and that's based on what we have seen to-date. Which is a pickup in activity.

Okay. And then in that business thinking about in the third quarter the impact that the Gulf of Mexico offshore mix had to the numbers the average revenue per ticket from your perspective in that business are we getting a sense of we will see some stabilization in the Gulf of Mexico going forward here and just thinking how that piece is going (inaudible).

Well, I will back you up. If you will go back to our second quarter call, recall that most everybody was surprised that we had an improvement in our revenue per ticket and part of that was some Gulf of Mexico start-ups particularly around intervention work. Now, our revenue per ticket is down just a little bit in this quarter and you would say well, why is that. Part of that is just even though we didn't have a major storm we had incidences where we probably lost as many as ten days just for risk of a storm and shutdowns of activity and so these are -- are maybe tweaking comments that the overall Gulf of Mexico for us as it relates to Well Site Services we think is on a more sustainable improving trend from where we have been in prior quarters.

Okay. That's good to hear. Thanks, Cindy.

Thanks, Sean.

Thanks, Sean.

Our next question is from John Daniel of Simmon & Companies.

Hey, guys.

Hey John.

How are you? One question in terms of visibility beyond Q4. I know you don't like to give specific guidance I'm not asking for that but just what type of visibility did you have into Q1?

I would have to say if I just look at industry trends one is going to certainly suggest that there will be sequentially improved in Well Site Services. We have told you all along that we think we will probably trough in terms of bookings, backlog and offshore product late this year, maybe early next year. That will be a delayed impact on revenues and EBITDA for about six months. So this is a very short-term kind of issue for us where my goal is to not let the bottoming of Offshore Products out weigh the improvement that we're getting in our North American Well Site Services operations through again maybe six, nine months. That's just kind of the trajectory we're on, but if you look at North America, clear improving trend. Once budgets are set I think that you're going to see completions activity be pretty interesting, but that may lag a tiny bit and -- until budgets are finalized, but I don't see anything negative on the horizon for particularly our lower 48 type activity. In our guidance for Offshore Products when we get into Q1 I do expect it to be on the -- the back lower backlog coming into the quarter and Q1 often times is a little bit seasonally weak for Offshore Products. So for a total company outlook you might look to us finding that bottom in the first half. Again, with the dynamic of improving trends in our North American service business and troughing trends in our offshore products, but along the way unless I'm mistaken in that period of time we'll probably start seeing some improvements in our bookings and our bag log.

Okay. Perfect. That's all I would thank you, guys, thanks, John.

Thanks, John.

Thank you and our next question comes from Stephen Gengaro of Loop Capital

Hey Steven.

Hi. Thanks just a follow-up. Given the high end nature of your completion services onshore does -- do you care who's operating the frac equipment? Like does it matter if it's a large integrated service company versus a smaller player? Does it have any impact on you?

We don't believe it does. I mean as long as it's the higher end equipment it will carry the same type of revenue. Now, obviously, if it's a bigger job, larger pad drilling opportunity with your very, very high end equipment, will stay on location longer and generate more revenue, but I think that doesn't necessarily all go to the majors so I would say we're very fairly agnostic and we are routinely working with many frac companies.

Great. Thank you.

Thanks, Steven.

And then at this time I'm showing no additional questions or comments.

Great. I know it's an incredibly busy week and so I appreciate all of you that managed to dial into our call and we'll be happy to address any follow-up questions that we have and so just everybody have a great week end. We'll be in touch in the next quarter. Thanks.

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