Oil States International Inc (OIS) 2017 Q1 法說會逐字稿

Welcome to the Oil States International First Quarter 2017 Earnings Conference Call. My name is Katie, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I'll now turn the call over to Patricia Gil, Director of Investor Relations. Patricia, please go ahead.

Thank you, Katie, and welcome to Oil States' first quarter 2017 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 Form 10-K along with 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 First Quarter 2017 Earnings Conference Call. We reported a net loss of $0.34 per share during the quarter after adjusting for $0.01 of severance and other downsizing charges. Our quarterly results reflect current market trends, including an accelerating recovery in U.S. land-based drilling and completions related activity, offset by reduced spending in certain international regions, coupled with continued underinvestment in deepwater. Our well site services segment benefited from the early stages of a recovery in U.S. land completions activity in select shale play regions, dampened somewhat by sequentially lower activity in the Gulf of Mexico along with lower international results. More than 70% of our completion services revenues were driven by U.S. land-based activities, with our land-driven completion services revenue increasing 21% sequentially. As we noted in our press release, we have revised our Offshore Products segment name to Offshore/Manufactured Products to better reflect the higher weighting of our shorter-cycle products, much of which is driven by land-based activity, to total segment revenues. We have also provided additional revenue detail for this segment.

Revenues and EBITDA margins in this segment were within our guided range, with margins averaging an adjusted 18% for the quarter. We recorded an improved book-to-bill ratio of 1.1x this quarter, which resulted in a sequential improvement in backlog. Our backlog totaled $204 million, which stemmed the tide of 10 quarters of sequential backlog declines.

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 $151 million, while reporting an adjusted net loss of $17.1 million or $0.34 per share, which excluded $0.01 per share after tax of severance and other downsizing charges. First quarter adjusted EBITDA of $5.4 million decreased 60% sequentially, and our adjusted EBITDA margin was 3.6%.

During the first quarter, we invested $5.8 million in capital expenditures related to expansionary investments for our Offshore/Manufactured Products facilities, along with maintenance capital spent on our completion services equipment. We estimate that our 2017 capital expenditures will range between $35 million and $40 million depending on market activity.

We generated $32 million of cash flow from operations, which allowed us to repay $20 million of debt and to fund the purchase of assets and intellectual property complementary to our crane manufacturing and service lines. As of March 31, our gross debt level totaled only $26 million, while our cash on hand exceeded our outstanding borrowings by $39 million. We ended the first quarter of 2017 with total liquidity of $224 million, which is comprised of $159 million available under our revolving credit facility plus cash on hand of $65 million.

In terms of our second quarter 2017 consolidated guidance, we expect depreciation and amortization expense to total $27.7 million, net interest expense to total $1.1 million and corporate cost to total $12.9 million. Our 2017 consolidated effective tax rate is expected to average 28% to 29%.

And at this time, I'd like to turn the call back over to Cindy, who will take you through the details of our segments.

Thank you, Lloyd. I'll start with well site services. In our well site services segment, we generated another quarter of sequential improvement as revenues increased 10% quarter-over-quarter to total $60 million, while adjusted segment EBITDA remained positive totaling $1 million after adjusting for severance and facility closure charges. These sequential improvements in revenue were driven by an increase in the number of completion services jobs performed along with improved utilization of our land drilling rigs. While our completion services business benefited from the early stages of a U.S. land-based recovery as evidenced by 21% sequential increase in U.S. land-based revenue, our first quarter total segment results were impacted by higher personnel costs, customer delays in the U.S. Gulf of Mexico and lower international results, which moderated our sequential growth. Our U.S. land-related completion services results improved throughout the first quarter.

In terms of our well site services guidance for the second quarter of 2017, we see continued growth and estimate that revenues for this segment will improve sequentially and range between $65 million and $75 million, with segment EBITDA margins in the mid- to high single digits. We continue to believe our incremental margins for our completion services should average 40% to 45% as we progress through 2017 and realize the benefits of growing completions activity in the U.S. driven by the positive impact from the doubling of the U.S. land rig count since the trough reached in May of last year.

In our offshore and manufactured products segment, we generated revenues of $91 million and adjusted segment EBITDA of $16 million during the first quarter of 2017 after adjusting for severance and other downsizing charges. Revenues, adjusted segment EBITDA and EBITDA margin percentage of 18% came within our guided ranges. Major project revenues declined 48%, while our short-cycle product sales increased 31%. Our shorter-cycle product revenues, whose demand is dominated by U.S. land-based activity, comprised 36% of the segment's revenue in the first quarter. Orders booked for the quarter totaled $97 million, resulting in a book-to-bill ratio of 1.1x. Backlog totaled $204 million at March 31. There were no individual major backlog additions above $10 million received during the quarter. This was the first sequential improvement in backlog since the second quarter of 2014, which is encouraging, and hopefully signals that we are near or have passed a trough in segment backlog.

As we have indicated for several quarters, with lower levels of backlog, we expect our project-driven revenues and EBITDA to trough midyear with incremental backlog projected to be awarded as we progress throughout 2017. We should continue to see improvement in demand for our shorter-cycle products due to the recovery unfolding in U.S. land drilling and completions activity, which will offset some of the gaps in timing from our major project work. Given these variables, we estimate that our second quarter revenues in this segment will increase sequentially and range between $100 million and $110 million, while EBITDA margins are expected to remain in the 17% to 18% range.

In conclusion, improvements in the U.S. onshore drilling and completions-related activity are translating into positive results for both of our reporting segments. We believe the outlook for our well site services segment is trending favorably with expanded U.S. land activity. In addition, for the first time in almost 3 years, we experienced a sequential improvement in our offshore and manufactured products segment backlog and are focused on rebuilding that backlog as we progress through the remainder of 2017. Demand for our shorter-cycle products remained strong and is improving at a significant pace, which should serve to help offset near-term declines in major project work resulting from lower levels of major project backlog.

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

(Operator Instructions) And our first question comes from Praveen Narra from Raymond James.

So I guess, as we kind of think about the guidance given for well site services, sounds like revenues are up 16%-ish. So I guess, when we think about how that mix changes, I guess, one of the things we're seeing in the other service lines like pressure pumping is pricing increases. Are we seeing the customers move into the more value added or having interest in the more value-added products and more proprietary than the commoditized products yet?

As I kind of indicated in my prepared comments, we, every month in the first quarter, saw gradual improvements in terms of revenue generation. We have -- we obviously have product line details that we do watch, and we actually saw improvement across most of our product lines. Again, a lot of that is weighted in areas you would think, i.e. the Permian, kind of the SCOOP/STACK region, and we are very broad-based. We are not only located in the Permian, so not all areas increased and yet, we experienced proportionately, I think, appropriate increases in the major markets that saw activity increases. I do feel like we're beginning to see a migration back to some of our higher end products, particularly our isolation tools, but I would say that was probably realized a bit -- little bit later in the quarter rather than early.

Okay. Perfect. That's very helpful. If we can move to the offshore and manufactured division for just a second. In terms of the shorter-term cycle, the elastomers, really, and the valves, so I guess, when we think about those margins, should we think about those as being accretive to the overall segments margins? Or how should we think about that?

As I have explained before, this is largely driven today by land-based activity. So they were not good, really, in '15 and '16 when the rig count was down 80%. However, they are accretive today given improved activity levels.

Our next question comes from Jim Wicklund from Crédit Suisse.

I'm not good at writing quickly considering how many companies report today. Cindy, you had said in the manufacturing division that 49% are major project revenues. Shorter-cycle business was up 41%, dominated by land, which was 36% of revenues?

Let me see if I can -- Lloyd looks like he's got it at this time.

Sequentially, project-driven revenues were down 48% and short cycle were up 31%, sequentially.

And then the relative contribution of each you can figure out, now that we've given the incremental breakout.

Which I appreciate. I understand that Gulf of Mexico and international and completions didn't help and that dragged down your revenue growth only 10%. I guess I'm a little surprised by the magnitude of the drop considering the rig count, the horizontal rig count was up 27%, 28%. Can you talk...

Yes, I can. First of all, historically, Gulf of Mexico and international hasn't been as significant just because we've had greater land-based activities. You get to kind of these lower levels and all of a sudden $2 million is quite a lot of money. And particularly, we've got limited international penetration, I'll call it, mostly driven by Middle East activity and Argentina. Argentina was down, it feels like, almost the whole quarter because of strikes in the region. And unfortunately, those are harsh decrementals, because all it means is, I got my people, I got my base and I had no revenue. I know it might be an exaggeration, but you get my point. So that was a major event, but it's all -- also transitory given that a lot of those things have been addressed at this point in time. Middle East for us was down a little bit as well. I don't think that's inconsistent with what you're hearing from the rest of the market. And Gulf of Mexico, we believe, is transitory as well. This is some just operational -- customer operational delays outside of our control, both on completions work as well as intervention work. It's hard because a lot of this still remains call-out work, we bid it, we generally think we have the work. But if the customer has delays in getting kicked off, then obviously, it impacts us. But again, a lot of this is what I almost call just a victim of small numbers here where one-off events in Argentina, the Gulf of Mexico can impact low levels of EBITDA more significantly than you would think. But there is nothing here that suggests these are permanent-type trends.

But to reiterate, U.S. land was up 21% sequentially in completion services.

Okay. That's very helpful. I appreciate it guys. And all the companies that have reported have said that while international activity may have bottomed, it may take a while to come back up and there was more fierce pricing competition than had been expected. In either of the segments, are you seeing the same thing? And when do you think that the onshore international recovery might begin?

Again, I think, we have to comment more specific to us. When we're looking at kind of sequential performance in the Middle East, we're kind of flat from Q1, i.e. not really recovering back at this stage. It would be hard to say otherwise. Argentina should recover back because those were unique issues. And then Gulf of Mexico is kind of the same thing. Those can be spotty. But we're not looking for wholesale improvements. We'd just kind of like to see a steady, either flat to steady improvement from international and Gulf of Mexico. As it relates to pricing, you're right. It's -- pricing is very competitive in both of those markets, but we don't see it going down further from where we are. I also don't think that, that is -- we'll, more likely to, obviously, see price improvements on land-based activity before international and Gulf of Mexico, even if it is somewhat flat.

Okay. And last, if I could. Cindy, you and I have talked about acquisitions and how that private equity in the public market is outbidding companies for deals, but we're seeing some of these deals price at less than 4x EBITDA. Is it difficult IPO market improving your chances of making an acquisition? Or is that transitory as well and not really having an impact?

I'll say to be determined. Right now, we are doing 2 things. We are looking at small tuck-ins and offshore products. We closed a small one in Q1. We are looking at U.S. land-driven M&A-type activity. There is a couple in the hopper that we are looking at now. Valuation was very concerning 45 to 60 days ago. Clearly, in fact, I asked Patricia to kind of model some of the recent trends in IPO performance for the ones that have already had some history as well as recent trends as you point out in terms of value expectations. So I think that is clearly more favorable. What will determine our course of action is quality of operations, any intellectual property that the company might have, valuations and after today how that competes with just buying back our own stock.

Our next question comes from Ken Sill from SunTrust.

Cindy, as Jim was saying, there is a lot of the big guys saying, international is hopefully bottoming, but pricing concessions are going to offset any modest revenue increase. Reading a lot of notes about at some point, projects, international project developments, particularly offshore, will start to tick up again. I'm curious, for you specifically, how much of an activity increase do you need to see in offshore project development or the offshore rig count, or however you want to couch it, to rebuild some of the backlog for your major projects?

Well, ours is more specific to infrastructure development, not particularly tied to the rig count. I mean, we have some offshore consumables and our large OD conductor casing connector that are more well driven, but the large majority that we are looking at in terms of rebuilding backlog are infrastructure related. It won't surprise you that these are projects that are headline projects right now, the [Leiser] project, Mad Dog 2, [Korando, Zevazebad], some of the Petrobras FPSO opportunities, et cetera, very much feel that -- infrastructure driven. We have got, obviously, good knowledge of bidding and quoting. The key there is one of timing. In the past earnings report, I provided to you the thought that we could see some of these bookings come likely in Q2 and/or Q3. We did not expect to receive them in Q1, and we didn't. And again, on a positive note, despite that, we still had a book-to-bill north of 1.

So I guess, with commodity price volatility, is Q2, Q3 still reasonable? Or given the crystal ball, you're just not willing to...?

Well, again, if you're talking, about 2 -- 3 comments come to mind. Number one, yes, we just fell below $50 a barrel. That may be your comment. I don't think that will change the decision on some of these major deepwater projects to move forward or not. If it had any near-term impact, it would likely be more on land, but I certainly don't expect that you'll see any trend changes this quarter.

And our next question comes from Ole Slorer from Morgan Stanley.

Yes, nice to see the book-to-bill ratio go above 1, I think, for the first time since the second quarter of 2014. So are you willing to call a trough in your offshore products here, Cindy?

I think we are very close. I don't know if it's Q1 or what would prove to be Q4 on that or Q2. The 2 variables there are I'm increasing my revenue guidance such that even if I had flat bookings sequentially, it wouldn't quite be 1, it'd be very close to 1. So we're kind of on a razor's edge here on trough bookings. But if we're not there, we are very close to there. And the key will be are we going to get a major project award in Q2, or are they going to be deferred into Q3. But either way I don't really think that changes the outlook for this segment.

But there is some seasonality there isn't there? Isn't the first quarter typically a weak quarter of the kind of bread and butter business in terms of order intake?

It can be. Definitely, particularly, our large OD conductor casing connectors. But again, most of the backlog churn was smaller projects, repair and maintenance and short cycle, as we've talked about. So I don't know whether to attribute that to seasonality or not, to be honest with you. In the absence of any major project awards in the quarter, a lot of this almost becomes kind of ongoing -- hate to say recurring order activity because who knows what's recurring anymore. But we feel pretty good about our overall position, and it seems very consistent with the outlook that we provided the market 6 months to 12 months ago.

Yes it does, just checking. If I turn to the completion side, any changes that we should be aware of in terms of either the competitive landscape with the likes of what Cameron-Schlumberger are doing or FMC or emergence or disappearance of mom-and-pops now that the world is getting a little bit more corporatized. Particularly around kind of (inaudible) and frac stacks and everything you do there on U.S. land?

Well, I'm not as worried about the competitive dynamics. I think if we are to see any major impact from -- you mentioned specifically Schlumberger-Cameron. It probably would be more in international regions. Again, that's a lot of their focus and weighting at this point in time. That's not as significant for us. So I don't view that as a major threat. When we talk about the mom-and-pops, they've -- quite frankly, a lot of those have very good regional relationships. They are not as geographically broad-based as we are, we believe. Still today, we have the [highest-end] technology and better quality programs and people, but we are a little more expensive. And so when you're in a very weak market cycle that we saw in '15 and '16, price somewhat rules the day. And if these regional players are raising prices, as we know they are, people are experiencing service quality issues. We normally have a reversion back where they're willing to pay a little bit more for higher quality products and services. So again, we feel like our market position is very sound. We do have a lot of ground to recover just in terms of activity, but all the trends right now on land-based activity is moving in a positive direction. That's kind of the -- I don't know if that's too genetic for your answer, I hope not.

A little bit on the generic side, Cindy, but that's okay. Well, we can dig more into the details later.

(Operator Instructions) And we have no further questions. This concludes the question-and-answer session. I'll now turn the call over for closing remarks.

Okay. Katie, thank you so much. And I appreciate all of you who joined the call. I know this is a hectic season and a particularly hectic day based on all the releases that came in last night. We will standby, be ready for follow-up questions. Of course, we're about to move into OTC week and so I'm sure we'll see a lot of you there and welcome the interaction. So thanks so much, and hope to see you next week.

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