Oil States International Inc (OIS) 2016 Q4 法說會逐字稿

Welcome to the Oil States International fourth-quarter 2016 earnings conference call. My name is Eric, and I'll be your operator for today's call.

(Operator Instructions)

Later, we'll conduct a question-and-answer session. I will now turn the call over to Patricia Gil, Investor Relations. Please go ahead.

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--the Vice President of 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 Form 10-K, which will be filed tomorrow along 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 fourth quarter of 2016, we reported a net loss of $0.20 per share, after adjusting for a penny of severance and other downsizing charges. Our well site services segment reported another quarter of sequential improvement, along with positive EBITDA results for the first time in three quarters.

These improvements were driven by an increase in the number of completion services jobs performed, coupled with increased revenue per service jobs and higher utilization of our land rig drilling fleet. Customer sentiment regarding the onset of a recovery in the US onshore market has clearly improved.

The industry has added 337 riggs since the US rig count troughed and May 2016. As of the current date, the Permian basin accounted for roughly half of the noted rig count increase. Revenues in our offshore product segment came in slightly below our guided range. However, EBITDA margins, yet again, outperformed our guidance, averaging 22% for the quarter, due to continued strong execution on major project work. Our book-to-bill ratio totaled 0.98 time for the fourth quarter, bringing the full-year of 0.74 times, very much and line with our expectations set forth early in 2016.

Our backlog ended the quarter at $199 million, supporting our belief that a forward and backlog will be reached in early 2017. 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 detail, by segment, and provide additional comments on our market outlook.

Thanks, Cindy. During the fourth quarter, we generated revenues of $170 million, while reporting an adjusted net loss of $10.3 million, or a loss of $0.20 per share, which excluded $600,000 pre-tax, or $0.01 per share, after tax of severance and other downsizing charges. Adjusted EBITDA decreased 16% sequentially, to a total of $13.7 million for the fourth quarter and our adjusted EBITDA margin was 8%, due to the strong EBITDA margin performance achieved at a offshore product segment, along with our well site services segment returning to positive margins.

During the quarter, we invested 5.8 million in capital expenditures related to expansionary investments for our offshore products facility, along with maintenance capital spent on our completion services equipment. Capital expenditures for the full-year 2016 totaled $30 million, and we currently forecast 2017 capital expenditures to range between $40 million to $45 million, depending on market activity.

We generated $41 million of cash flow from operations and $36 million of free cash flow during the quarter, which allowed us to repay $21 million of debt. During the full year 2016, we repaid $81 million of debt, and as of December 31, our gross debt level totaled only $46 million, while our cash on hand exceeded our outstanding borrowings by $23 million.

At December 31, our leverage ratio, using trailing 12 months adjusted EBITDA, was 0.7 times, which continued 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 2016 with total liquidity of $222 million, which is comprised of $153 million available under our revolving credit facility, plus cash on hand of $69 million.

In terms of our first quarter 2017 consolidated guidance, we expect depreciation and amortization expense to total $28 million, net interest expense to total $1.1 million and corporate costs to total $12.2 million. Our 2017 consolidated tax rate is expected to average approximately 32%.

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

Thanks, Lloyd. In our offshore product segment we generated revenues of $116 million and EBITDA of $25 million during the fourth quarter 2016, down 13% and 14%, respectively on the sequential basis. Although revenues were slightly below our guided range, we achieved an EBITDA margin percentage of 22%, which again exceeded the upper-end of our guidance.

Revenues underperformed, relative to guidance, primarily due to decreased demand for our standard connector products used in drilling applications while EBITDA exceeded guidance, thanks to strong execution on a number of our major projects that were generally completed during the quarter, along with the benefits from improved demand for our shorter-cycle elastomer products utilized primarily in onshore applications.

Orders booked for the quarter totaled $113 million, causing our backlog to only decline $4 million sequentially, to end the year at $199 million. Major backlog additions during the fourth quarter included an order for production riser equipment on a floating production system.

With the strength of our fourth quarter bookings, our full-year 2016 book-to-bill ratio averaged 0.74 times. However, our end-of-year backlog declined 41% from the beginning of 2016. In early January 2017, we acquired certain intellectual property and assets complementary to our global crane manufacturing and servicing division, adding active key-compensation technology and knuckle-boom crane designs to our existing crane offerings. Total consideration paid was less than $10 million.

As we've indicated for several quarters, we expect our backlog to trough in early 2017, with revenues and EBITDA hitting a trough about six months later. Accordingly, we expect our first quarter 2017 revenues in our offshore product segment, to decline sequentially due to current low-backlog levels and gaps in our major projects work, which we expect to reduce revenues and cost absorption levels, thereby pressuring our EBITDA margin percentage.

However, we do continue to anticipate improvement in demand for our shorter-cycle consumable products, namely our elastomer and valve products, which will partially offset some of the reduction in contribution from our larger-project work. Demand for the shorter-cycle consumable products is increasing, due to the recovery that is unfolding in US land drilling and completions activity.

Given these variables, we estimate that our first quarter revenues in the segment will range between $88 million and $95 million, what EBITDA margins are expected to decline to the 17% to 18% range.

In our well site services segment, we generated another quarter of sequential improvement, with our well site services revenue increasing 18% to total $55 million, while adjusted segment EBITDA improved to a positive $1 million in the quarter. Incremental margins were 42% in the fourth quarter, excluding small amounts of severance and restructuring charges.

These sequential improvements were due to a 3% increase in the number of completion services jobs performed, a16% increase in revenue par completion services jobs, along with increased utilization of our land drilling rigs, which average 18% in the fourth quarter. These improvements were driven primarily by increased activity across the US Shell basins, with the bulk of activity increases in the Permian. Demand for our fleet of land rigs is steady and it's stabilized at nine rigs running today.

In terms of our well site services guidance for the first quarter, we estimate that revenues for the segment will continue to improve sequentially and range between $58 million and $63 million, with segment EBITDA margins in the mid- to high- positive single digits. We believe are incremental margins should average 40% to 45% as we progress through the first quarter of 2017. We expect to see growing completions activity driven by more stable commodity prices and an increasing North American rig count.

However, competition in the major Shell basins remain high, particularly in the Permian, which will serve to moderate the pace of our recovery in a market that is otherwise trending more favorable. The recovery in US onshore drilling and completion activity, which is currently underway, should provide improved results for our well site services segment this year, which will help lessen the impact of declines in our offshore product segment as it reaches a bottom in operating result likely in the first half of 2017, due to a lack of investment in deepwater development, which has depressed major project FIDs over the past couple of years.

That being said, demand for our shorter-cycle consumable products is improving at a fairly rapid pace. We remain well-positioned, both operationally with our higher-end product and service offerings and financially with $222 million of liquidity at the end of 2016, to support growth in our businesses as our customers begin to invest additional capital, as the recovery takes hold.

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

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Stephen Gengaro, Loop Capital Markets.

Thank you, good morning.

Good morning, Stephen.

Two questions please, Cindy and Lloyd. I guess first, when you first think about the well site services for revenue growth going forward, what do you think -- obviously, there is a lag on the completion side. Do you think by the second or third quarter we start to see revenue growth -- that we can use the rig count as a better proxy going forward?

We are smiling at that, here. We always say it's the best proxy that we have. The however is, particularly, activity in the Permian that is much more pad drilling-focused. You've multiple sites that you are targeting there. The wells drilled is actually the best measure, it's just not as easy to obtain.

I think you've hit on the key point. There is a natural lag between drilling and completions activity. It's exacerbated to the extent that you're dealing with large, multi-well pads. The trend lines, as we have seen them thus far, have come out pretty much as we would expect that it would.

However, the leading indicators are clearly rig count movement, which we've seen and we commented on, are very favorable. We're seeing, again, the early shorter-cycle consumable demand, whether that is OPTG, or in our case, the composite bridge plugs, elastomer products that we have, and many others that are telling that the completion side is ramping.

Thank you. As you, and then, as you think about the incrementals -- obviously, the first quarter of your guidance seems to suggest strong incrementals. And it sounds like you haven't gotten much, if any pricing yet, at this point. So, based off of that, would using that level of incrementals for 2017 going forward be reasonable? You think they accelerate with pricing? How should we think about that?

Yes, I think they are reasonable. I will tell you, there is going to -- I don't think you are going to see a consistent quarter-by-quarter. Two obvious comments, if we get equipment substitution that carries higher margins, those incrementals are going to tend to -- if we get any pricing, those are very, very strong incrementals.

You may buffer that just a little bit with, what I will call, cost as you ramp-up, whether those are overtime for existing personnel, whether it's bringing on new personnel as you ramp. We don't expect that we're going to have a material amount of cost -- i.e. moving equipment from one location to another, housing and the like.

I do not think it's smooth. But, I think we're comfortable with that 40% to 45% right now. Caveating just a little bit, it's not that perfect trajectory, quarter-by-quarter. But I think overall, that's the best information we could give you today.

Great, thank you.

Thank you, Stephen.

Blake Hutchinson, Howard Weil.

Good morning.

Good morning, Blake.

A couple of questions regarding offshore products and some of your commentary. First of all, I take it that, as you point toward perhaps finding a backlog bottom early in 2017, that any potential benefit year-over-year, in terms of major product flow, you think would be second-half weighted?

And then, the second part to that question, given where guidance is starting for the year and looking at recent run rates of order flow for 2016 -- where would your confidence level be regarding achieving a one times book-to-bill for the year?

OK Blake, let me know if I've missed any of the questions that you just threw out. But I think the broader question that you asked, if I get this, is kind of, planned trajectory and major product awards.

Again, just for everyone else's benefit on the call, when we call something out as a major award, it's an individual order over $10 million. So we call that one that's hitting Q4, because of that one order that helped leverage us to a book-to-bill of one.

Now, my only caveat on all of this is, we are operating off lower revenue base, and so we have -- at least have an absolute decline in our backlog, despite the fact that I think we've had one of the best book-to-bill ratios in any industry in 2016.

Our guidance to you is really unchanged at this point. Where we have said, we are tracking -- unfortunately it's not a huge number of major projects, but a handful. The bidding and coding activity is solid. I think the timing is in line with our expectations. We've had a bit of a question in Q4, whether this one order would hit Q4 or early next year. In fact, it came in, kind of consistent with what we thought.

We believe today, that some of the other orders, based on our major bids and quoting activities of late, will likely come into our order book more in line with Q2 and Q3. But again, I think that's very much in line with what we've told you along the way.

With that, we don't know where Q1 bookings come in. I think if we were going to give you any kind of soft guidance, we would estimate probably 0.80 to 0.85, without visibility of any one of these individual key orders coming into backlog in Q1, that they will likely come in Q2 or Q3. If one of those orders comes in Q1, we will do better than that. But, that's kind of the best trajectory I could give you.

But, I think if there is just a stepping back comment here, is the industry has under-invested in deepwater, not just in 2016. Our peak backlog was in Q2 of 2014, and it has eroded steadily since that time. That under-investment will absolutely cause production to decline over time -- over the next four or five years.

These key projects -- I think our customers have confidence in moving forward. We put a much lower Risk Factor on those gaining trajectory and FID than maybe we would have a year ago.

Great. Just as a follow-on to round out that discussion, you pointed to the fact that we do need to consider facility throughput and mix. I haven't heard it necessarily a called out, but as we replace old backlog with new backlog, and try to reconnoiter where margins may bottom, do we need to consider, in any major way, a new pricing regime? Or do you think that's a secondary or third consideration to mix and throughput.

Let me see if I hit your answer appropriately. I think my team has done a fantastic job of maintaining very high margins in 2016, despite suffering declining throughput. We've had to be proactive on efficiencies, cost structures and project executions throughout the year. I don't have question that we'll be able to continue to do that.

I know everybody on the call, too has tended to handicap my margin guidance every time, because we've outperformed, I think, every quarter this year.

What I am trying to caution you on is, we have truly just about completed most of these major projects, that lended itself to higher-than-expected margin performance. And so the first two quarters of this year, are going to be more base business, short-cycle consumables, sub-sea pipeline repair work. And, they carry very good margins. But, without that pipeline, the throughput is going to be challenged. Our guidance is real, when we say we think it's 17% to 18% for this quarter.

However, I will be pleased with that performance at these lower revenue levels. The other thing that is good, while anything on-shore is not the wealth of what we do, it is buffering some of that under-utilization of our facilities and getting the elastomer demand, and more recently, improved valve demand. Again, those were at very, very low levels of activity in late 2015 and 2016.

So, they will carry some good incrementals that help buffer this downtime for us. That may make us a little bit unique, compared to some of the other, more deepwater-focused manufacturing companies.

If I missed anything that you were trying to get me to direct my comments to, please let me know.

Not a bit, that was very well-covered. Thank you for that.

Thanks, Blake.

Marc Bianchi, Cowens.

Thank you. Cindy, maybe you could talk a little bit more about the elastomer business. It seems like very, very strong year-over-year revenue growth there. I'm curious what that looked like sequentially and how to think about that going forward. I would suspect that there is some sort of a re-stocking aspect to this business. So, how does that play with the overall well count activity you talked about as being a good driver of demand.

I think the major comment there -- we think our demand is sustainable. And, I do believe you're right. You get an immediate uplift from a restocking standpoint. We think that was actually earlier in 2016, not in the fourth quarter. It's not based on our current outlook.

The one thing I have to hit home to this, is historically, when I've much greater major project work, this wasn't a huge percentage of our revenue base. But now, our shorter-cycle, more consumable products in the first quarter of this year, is going to be about a third of our revenue contribution. So, it's grown proportionately with the expansion on land.

But we've also had shrinkage of our major project work. We may start breaking this out for you until we normalize back to other levels, because I know everybody is needing that, in terms of doing their modeling. But, the key point there is twofold. Number one, the demand is sustainable. The rig count is only growing at this point in time.

So, I'll say sustainable and growing, in terms of anything shorter-cycle that is consumed on land. But, the other word is, it's consumed. And, that means you're going to need it every single week, every single month. So, we're pretty optimistic about that piece of the business.

The other thing I will tell you is, our major project backlog, you need great lead times there. And so, a lot of times you think about taking a backlog -- take 80% of that -- that's revenue. In this case, the order flow is in and out. We only carry 45 days to 60 days of backlog on this type of business.

Sure. Is there a distinguishable margin difference between the longer-cycle work in offshore products and the shorter-cycle stuff that we're talking about here.

I would say, not really. But again, as I've told you in the past, we have a broad range of margins, depending on whether it is a proprietary product or whether it's more of a competitive product. I'll use a crane. There's a lot of crane manufacturers. That's a lower margin for us. But, this business has healthy margins.

I will say, my however is, that the extremely low levels of demand that we suffered in 2015 and 2016, of course the margins were low, because the absorption was so poor. But if I can have a normalized level of activity, these are good margins.

Okay. Thanks for that. Maybe just one more for Lloyd on working capital. As you think about the guidance you provided for first quarter, and perhaps the balance of 2017, what sort of range of working capital needs do you think you will have.

I think Mark, to answer your question, the way I've looked at working capital, our builds and decreases over 2017, I've kind of forecasted it would be relatively flat. So, any working capital builds and well site services, as a result of increase [in steeple] is probably offset by some decreases in offshore products and inventory. So, I really kind of guide to flat working capital, where I sit here today in February. Obviously, I will give you more updated guidance in another quarter or so. Once you progress the year.

Sure. It makes sense. Thanks a lot. I'll turn it back.

Thanks, Marc.

Chase Mulvehill, Wolfe Research.

Good morning.

Hello, Chase.

I guess on well site services, I just want to make sure I heard you right. The revenue guidance was $58 million to $63 million, correct?

That is correct.

Okay, that implies that revenues are up 5% to 15%. So, help us understand why the revenue growth slows down a little bit in the first quarter.

I haven't actually done the sequential growth. Are you using -- what is your base that you're calculating that off of?

You did $55 million of well site revenues in the fourth quarter. And so, you guided $58 million to $63 million.

$60.5 million.

What's that?

A midpoint of $60.5 million.

I'd say, as a general comment, we are expecting, again, strong growth in the shelf plays on the US, maybe a little bit lag-affected just because of the completion cycle. We are seeing a little bit of softness in the gulf of mexico, at least in the month of January. It is purely operator-driven, with issues that they are having on permitting some of the wells that they're drilling.

It's not a huge amount, but we are right now thinking Gulf of Mexico could be down modestly. And some of that, is whether in the Rockies -- there's a handful of things. And international will be flat to likely modestly down. You've got a little bit going on there. But the macro trends -- first of all, is anything I'm talking about weather in the Gulf, is tickly timing in nature. International, I think that's our outlook.

We don't have the - again, when you have no activity on land in the US, international looks bigger than it has historically been. But our outlook is flat to modestly down in the various areas that we work in. But that doesn't take away from the robust recovery in the US.

Okay. Could you tell us how much of 4Q completion services revenue was US land? I don't know if you have a number handy or not?

I am looking at Chris. He is here. We will see if he can give -- I am thinking it was about 70%. I am looking for validation. About 70%.

Okay.

Chase, offshore Gulf of Mexico and international was about 35%, about 65% to 70% US land.

Okay, alright, that's helpful. Thanks for sharing that. Last one, and I will turn it back over. Could you talk about your outlook for large orders, as we go through 2017?

I think I've already addressed that, or I felt like I did. In offshore products we're looking at a handful of projects that we've actively bid and re-bid for quite some time now. We had one significant order, again, that order greater than $10 million and came in Q4. That brought us to, essentially a one-to-one book-to-bill -- getting the larger order. Right now, in the guidance we gave you, we are not expecting a major order in Q1, but we do have them scheduled and our planning for Q2 and Q3.

Okay, alright. And so, the $75 million is a good run rate for your underlying business. It looks like that's kind of what it was a 3Q. And maybe if we back out that large order, that's what it was in 4Q, and what you see it as in 1Q, correct?

Are you speaking to bookings?

Yes, just bookings. Just trying to think of the underlying business -- what kind of orders? What's the rate look like? And then we're going to stack on top of that, larger orders as they come in, in 2Q, 3Q and 4Q.

Yes, that's a fair estimate.

Okay. Alright, I'll turn it back over.

Thank you.

Thanks, Cindy. Thanks, Lloyd.

Thanks, Chase.

Joe Gibney, Capital One.

Thanks, and hello guys.

Hello, Joe.

Lloyd, a question for you on the corporate call side. Just curious, as we progress through the year a little bit here, I think the guidance for 1Q is [$12.2 million], is this - other than what's not on the list, would we be cognizant of a little bit more of the ramp-up as we're go through the year? I just need help with a line item.

Yes, on the corporate -- I saw your note yesterday -- or this morning. It's driven by some relative increases in compensation. And also, as you start the first of the year, you are going to have higher payroll and burden costs for your payroll taxes. And that will decrease as people start to max out too.

Okay, helpful. And just one clarification, Cindy. The notion of shorter-cycle mix, book-in-turn within offshore, that you're talking about. Reaching a third of your revenue, admittedly, this is going to be, sort of the trough of your major product offshore revenue mix, I understand that.

But, I'm just trying to understand short-cycle, as you're referencing it there. Is that book-in-turn inclusive of onshore and book-in-turn offshore? Or just, trying to understand how much of these onshore mix is there, when you're talking about it representing a third of your revenue at the trough. And obviously, when major project flow through is slowing down, of course.

That is fair. It is both. I would say its weighted to onshore, at this point. And I will use my favorite example. If I'm talking elastomers, we're really saying, that's an onshore driven activity. Valves, as an example, have both offshore, fixed platform land applications.

In past years, I had the best diverter valve in the market, that goes on riser, but there's no demand for that. What's happening right now, the weight of this is trending onshore. But there is some other things: caisson work, parts, supplies, et cetera, that are broad-based in that number.

Okay. Helpful. I appreciate it. I will turn it back.

Daniel Boyd, BMO Capital Markets.

Hi, thanks. I just want to follow-up on the mix conversation in the completion segment. Can you help us -- or maybe give us some color on what growth you saw in 4Q of the US land business?

It was pretty broad-based. It is about all of our product lines and we saw a lift in most of our markets. The difference there is the Permian is the weight of the rig count. So, the weight of the increase came in the Permian. It wasn't any individual product line. That's what happens when activity improves.

Quite frankly, the best thing that could happen to us, is to have one more broad-based activity improvement across all of the basins, not just one. And two, impact a wider array of our product and service offerings, particularly, the higher-end offerings where we have competitive advantage.

Did the US land portion of that business grow faster than the overall segment of 18% almost -- basically 19%?

I am not sure I know your question.

Did US land, Gulf of Mexico and international -- I am just wondering if the US land portion of that mix grew faster than the overall segment growth?

Yes, intuitively, I would say that it probably did.

Okay. My follow-up question to that is -- I know that your products tend to save time on the well site. That time wasn't necessarily something to the EMPs, or your customers cared about as much during the downturn. And, I think you lost a little bit of share there.

As the recovery has increased, frac spreads have become tighter. Are you gaining market share -- some of that lost market share back?

I don't know how much we did in Q4, to be honest with you, but we're beginning to see higher demand for example, for our stakes tools -- our isolation equipment. And so, I think that is coming. I do not know how much, really benefited Q4, at this stage.

We've always said, you revert to the highest-quality operator, unless it's all a price-driven decision. I keep focusing on the Permian. But that's where half of the rig count improvement has been. And when people were closing operations and relocating people and equipment, they relocated all of it in the Permian. And it's a very, very competitive market that was very price-driven in a low-commodity price environment. But, as we ramp up, we are expanding the horizontal extent of these wells -- very complex work, extended laterals. And, we just know intuitively that has a call on higher-quality equipment, which we believe we have.

Okay, thanks.

Stephen Gengaro, Loop Capital Markets.

Thank you. Just one quick follow-up.

I am not sure how much of -- when you look at the Permian impact, is that generally -- it sounds like -- maybe not. Has that been slightly dilutive to the margin short-term? It was interesting in your press release, you talked about the rise in price per completion ticket. And I think you alluded to the Gulf and international.

I want to be clear -- those are longer jobs. Think of it on land -- that you get equipment called out and it may work a shorter period of time, from three to five days.

When you're called off, offshore -- if you take that 30 days divided by five, you have a multiple of tickets on land that -- a piece of equipment, say, that goes offshore -- we just did the first ever ball launch job that we've ever done offshore. That's one ticket and it's high-value.

And so, that revenue per ticket is accretive to that number. But nothing has really changed. It's that -- what I'm trying to make sense here. Nothing has really changed, other than, that's high-end equipment. It stayed on-location a long time. And so, that is good for us. You can't get too lost in this revenue per ticket numbers. Just look at the trend lines, in terms of, is activity increasing and is pricing either holding or moving forward.

The other half of your question, I think, is are Permian operations diluted to our results? And, I would not say that. What I would like to see though, is that if the Permian is half of the rig count, that it is half of my revenue and profitability. And, it is not yet that.

Okay, that's helpful. So the revenue per day is different than the revenue per ticket. Is basically -- well, that's fine. That makes sense to me. One final quick one, and maybe for Lloyd. I know this is minor, but the drop in DNA by about $1 million, is that coming from any one specific segment, sequential?

It is coming out of completion services.

Okay, great.

To add a little more color to that, the average life of our rental equipment -- it's either facilities in the regions that we operate in. But most of it is equipment -- most of those carry a seven-year life. And we have cut CapEx spending significantly over the last two. So that should be consistent with what you think. And when I think about a major manufacturing facility in offshore products, those lives are, I believe, generally 30 years. And so, you're going to carry a more consistent level of depreciation for that segment.

Correct.

Perfect, that's very helpful. Thank you.

We have no additional questions at this time.

Okay, great. Well, I appreciate all of you that dialed it today. I think the market is clearly showing signs of improvement. It's going to take us probably to mid-year to start turning the corner on profitability. But, things are certainly looking a little more positive than they have over the last two years. So, we'll take it.

I appreciate you following the company and we look forward to some of the upcoming conferences, where we can spend more time together. Thank you.

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