Oil States International Inc (OIS) 2022 Q3 法說會逐字稿

Thank you, Darryl. Good morning, and welcome to Oil States' Third Quarter 2022 Earnings Conference Call.

Our call today will be led by our President and CEO, Cindy Taylor; and Lloyd Hajdik, Oil States' Executive Vice President and Chief Financial Officer.

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. No one should assume that these forward-looking statements remain valid later in the quarter or beyond.

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.

This call is being webcast and can be accessed at Oil States' website. A replay of the conference call will be available 1.5 hours after the completion of this call and will be available -- will continue to be available for 1 month.

I will now turn the call over to Cindy.

Thank you, Alan. Good morning, and thank you for joining our conference call today, where we will discuss our third quarter 2022 results and provide our thoughts on the market outlook.

During the third quarter of 2022, the company continued to show improvement as the industry expands activity to support growing demand following the harsh economic impacts of the COVID-19 pandemic, generating revenues of $189 million and EBITDA of $22 million, representing sequential increases of 4% and 29%, respectively.

We were net income positive for the quarter with sequentially improved results from each of our business segments, driven by strong activity levels in the United States which led to increased demand for our short-cycle products and services.

We generated $29 million in cash flow from operations in the third quarter and an impressive $23 million of free cash flow after deducting net investments and CapEx, totaling $6 million.

Our Offshore/Manufactured Products segment reported sequentially flat revenue revenues, but segment EBITDA increased 24%, benefited by a $6 million litigation settlement offset somewhat by low-margin product sales. Backlog totaled $258 million as of September 30, with quarterly bookings of $115 million, yielding a quarterly book-to-bill ratio of 1.2x.

Our third quarter bookings reflect 51% quarter-over-quarter growth and included 1 notable project award exceeding $10 million. In our Well Site Services segment, we achieved a 10% sequential increase in both revenues and segment EBITDA, driven by land-based completion and production activity.

During the third quarter of 2022, the industry experienced a 3% sequential quarterly increase in the average U.S. frac spread count, compared to the same period in 2021, the average U.S. frac spread count increased by 19%.

Our results were very strong relative to these industry metrics. In our Downhole Technologies segment, revenues increased 8% sequentially due to strong growth in customer demand for our perforating products, both domestically and internationally.

Segment EBITDA increased 44% sequentially given the improvement in perforating product sales, a shift in mix towards our higher-margin products and better manufacturing absorption. Our investments in technology and innovation were again recognized in the third quarter as we were named a finalist by World Oil in 2 categories, Best Deepwater Technology Award for our Managed Pressure Drilling and Riser Gas Handling System, and Best Drilling Technology Award for our Merlin 15K High Pressure, High Temperature Riser System.

Lloyd will now review our consolidated results of operations and financial position in more detail before I go into a discussion of each of our segments.

Thanks, Cindy, and good morning, everyone. During the third quarter, we generated revenues of $189 million. Adjusted consolidated EBITDA of $22 million and net income of $2.1 million or $0.03 per share.

We achieved our first quarter of positive net income since the second quarter of 2018, reflective of the improvement in our operations and the overall levels of market activity. Our third quarter net income included $6.1 million of other income from the settlement of litigation within our Offshore/Manufactured Products segment.

We ended the third quarter with $33 million of cash and generated $29 million of cash flows from operating activities. We used $6 million to fund net capital expenditures.

Further, we used $10 million of cash and issued 1.9 million shares of our common stock and settlement of our promissory note and related accrued interest with the sellers of GEODynamics, which comprises our Downhole Technologies segment.

The settlement resolved all outstanding legal disputes. All of our business segments were free cash flow positive through the first 9 months of 2022. And as a reminder, we define combined free cash flow as cash flow generated from operating activities, less capital expenditures plus proceeds from the disposition of property and equipment.

On a consolidated basis, we have been free cash flow positive for 29 of the last 35 quarters, dating back to the beginning of 2014. As of September 30, no borrowings were outstanding under our revolving credit facility and amounts available to be drawn totaled $80 million, which, together with cash on hand, resulted in available liquidity of $113 million.

At September 30, our net debt totaled $122 million, yielding a net debt to total capitalization ratio of 15%. On a leverage ratio basis, net debt to trailing 12 months adjusted consolidated EBITDA has been materially reduced to a current level of 1.8x at quarter end.

For the third quarter, our net interest expense totaled $2.6 million of which $0.5 million or $500,000 was noncash amortization of debt issuance costs. Our cash interest expense as a percentage of average total debt outstanding was approximately 5% in the third quarter.

In terms of our fourth quarter 2022 consolidated guidance, we expect depreciation and amortization expense to total $16.1 million, net interest expense to total $2.5 million and our corporate expenses are projected to total $10.3 million.

For the full year 2022, we expect to invest approximately $20 million in capital expenditures. And at this time, I'd like to turn the call back over to Cindy who will take you through the operating results for each of our business segments.

Thank you, Lloyd. Our Offshore/Manufactured Products segment generated revenues of $96 million, operating income of $13.4 million and segment EBITDA of $18.3 million in the third quarter of 2022.

Revenues in the third quarter were flat sequentially due to project timing as supply chain headwinds delayed progress on some percentage of completion projects. During the third quarter of 2022, the segment recorded a litigation settlement gain of $6.1 million, partially offset by low margin product sales during the quarter, where we incurred high material and freight costs given the timing of project deliverables, which we view as an isolated occurrence.

Adjusted segment EBITDA margin in the third quarter of 2022 was 19.1% compared to 15.3% reported in the second quarter of 2022. Backlog totaled $258 million as of quarter end, a 7% sequential increase from the second quarter. Third quarter 2022 bookings totaled $115 million, yielding a quarterly book-to-bill ratio of 1.2x, while our year-to-date 2022 book-to-bill ratio is 1x. Our third quarter bookings were broad-based across many product lines and regions with approximately 7% of our bookings tied to non-oil and gas projects.

As I noted earlier, our third quarter bookings reflect a 51% quarter-over-quarter improvement and included 1 notable project award exceeding $10 million. The year 2022 marks the 80th anniversary of our company, with its origins evolving into what is now our Offshore/Manufactured Products segment.

This segment has endeavored to develop leading-edge technologies while cultivating the specific expertise required for working in highly technical deepwater and offshore environments. As the world expands investments in alternative energy sources, we will be working diligently to translate our core competencies into the renewable and clean tech energy space.

Recent product developments should help us leverage our capabilities and support a more diverse base of customers going forward. We continue to bid on potential opportunities supporting our traditional subsea floating and fixed production systems, drilling and military customers while experiencing an increase in bidding to support multiple new customers actively involved in subsea minerals extraction, fixed and floating offshore wind developments, and other renewable and clean tech energy systems globally.

In our Well Site Services segment, we generated revenues of $61 million, operating income of $2.4 million and segment EBITDA of $9.7 million in the third quarter of 2022. Segment EBITDA margin was 16% in both the second and third quarters of 2022.

Improved segment results benefited from expanding activity levels in the United States, along with some recovery in our international operations, along with decisions made in 2021 to streamline our operations and exit underperforming regions and service offerings.

We remain focused on optimizing our operations and pursuing profitable activity in support of our global customer base. As market expansion opportunities continue to unfold, both in the United States and in international markets, we will continue to focus on core areas of expertise in this segment and the deployment of our recently enhanced completions equipment to further differentiate our completions service offerings.

In our Downhole Technologies segment, we reported revenues of $33 million and segment EBITDA of $4.1 million in the third quarter of 2022 compared to revenues of $31 million and adjusted segment EBITDA of $2.9 million reported in the second quarter of 2022.

The quarter-over-quarter improvement was driven by growing sales of perforating products in both the United States and international markets. Adjusted segment EBITDA margin in the third quarter of 2022 was 12.5%, up from 9.3% in the second quarter, reflecting incremental margins of 54%.

Supply chain challenges, access to available labor and rising inflation have challenged our industry and many others as the world comes out of the pandemic induced shutdowns and disruptions caused by the COVID-19 pandemic, and the loose fiscal policies that followed.

While demand has taken a hit over the past last couple of months, global oil and gas inventories remain below their pre-pandemic 5-year seasonal averages which has supported higher commodity prices and sets expectations for robust levels of drilling and completion spending going forward.

We are also beginning to see an inflection upward in international and offshore markets, which should further support our product and service offerings.

Given improvements in the frac spread count over the last several quarters, albeit with growth slowing somewhat recently, mainly due to limited ability to attract labor, we expect our Well Site Services and Downhole Technologies segments to continue to perform in line with or better than market activity indicators.

Revenues in our Offshore/Manufactured Products segment are also expected to continue to grow, given increased levels of backlog and growing short-cycle product demand. Our outlook for the remainder of the year suggests that we will hit our consolidated revenue guidance, increasing by approximately 30% year-over-year and we are updating our full year 2022 EBITDA guidance to a range of $72 million to $75 million.

Now I'd like to offer some concluding comments. Following the unprecedented demand destruction caused by the global response to the COVID-19 pandemic, U.S. crude oil and natural gas inventories have drawn down considerably. As of October 21, U.S. crude oil in inventory, excluding strategic petroleum reserves, which are now at a 4-decade low totaled 440 million barrels which is about 2% below the 5-year average.

Natural gas and storage for the same period totaled 3.4 trillion cubic feet, which was about 5% below the 5-year average. Despite these inventory trends, crude oil and natural gas prices corrected to the downside from the highs reached earlier in the summer due to ongoing recession concerns, tightening global monetary policies and the associated impact on commodity demand.

However, despite these factors, WTI and Brent crude oil spot prices remain above $87 and $95 per barrel respectively, and natural gas is currently trading at approximately $5.67 per MMBtu. Initially, the industry response to higher commodity prices with accelerated shorter-cycle investments in the United States which we have experienced in 2022.

Although longer term in nature, we expect investments to pick up for long lead time projects as well including those in international markets and deepwater basins around the world. However, global monetary policies and the result in increases in interest rates by the various reserve banks in an attempt to rein in inflation will likely have a continuing impact on demand in the near term as global GDP struggles as a result.

Oil States will continue to conduct safe operations and will remain focused on providing technology leadership in our various product and service offerings with value-added products and services available to meet customer demands globally.

In addition, we will continue our product development efforts in support of emerging renewable and clean tech energy investment opportunities. That completes our prepared comments. Darryl, would you open up the call for questions and answers at this time.

(Operator Instructions) And our first question comes from Stephen Gengaro from Stifel.

Little jealous you guys are playing in the World Series. But I am rooting for you. So the...

Good. Keep it up.

I don't think you want me rooting for your teams based on my track record with sports. But anyway -- when I think about your 4Q sort of the midpoint of your implied EBITDA guidance, I think it's about $20 million.

Can you talk about a little bit about sort of the puts and takes sequentially from the third quarter to fourth quarter? Because I think ex the gain, I mean, you're looking at a pretty solid sequential rise.

Yes, for sure. And anything I talk about is ex the gain. But we are -- as I commented on the call, in the offshore products segment, as you know, a lot of our larger projects or percentage of completion type accounting as opposed to booking when delivered.

There were some delay, not surprisingly with the supply chain issues that we faced. And so I'd say, with that and higher backlog and good short-cycle demand, we are projecting sequential growth in our offshore products segment, #1.

#2, again, the EBITDA margins, excluding the gain should improve because, again, we had really it was 1 larger project that completed in the third quarter at lower margins than we bid, mostly because of having to procure third-party pipe or casing at higher inflation prices and freight. And we scrubbed them up. People will worry, what does that imply for your backlog? And we scrub that and feel very comfortable that we've locked in pricing sufficiently that our bid margins are fine in backlog.

So I do view this as I commented on, is kind of a one-off, but it was a bit of a larger project at single-digit margins, which is atypical for that segment. As for Well Site Services and our Downhole Technologies segment, we're really -- you always worry going into the holidays, there could be a softening. We don't see that right now.

So we're looking for pretty strong Q4 results for both of those segments commensurate with what we've been seeing all year. So if there is any softening, you're going to know that because of industry factors, it shouldn't be anything to do with us. But we just don't see that right now based on customer conversations.

Is the range based on just kind of concerns about seasonality?

Yes. I mean, it's that. And then as always, it's -- there are certain things that even in GEO as an example, these -- you have to ship by year-end to book the revenues, and you always worry that particularly our international orders can flip in and out of the quarter.

I think we had 1 in the third quarter that literally made it by hours to get it booked in. And you're subject to those variations. But again, those are not big issues, but we're trying to give a range sufficient that it accounts for any of these timing type items, but we don't see anything negative at all coming at us.

And the other question I wanted to ask that is Downhole Technologies your approach has been, I think, and correct me if I'm wrong, but you have the flexibility on the fully integrated gun or even some on the component side. It seems like the market has gone that way, with I think some machine shops, assembling guns and almost mimicking integrated products. How have you seen that market evolve? And what do you think is driving your growth there over the next 4, 5, 6 quarters?

So I guess, #1, there are dynamics in the space, particularly, I would say, some of the larger wireline companies see benefit for bringing some of that in-house, i.e., procuring the components and doing the gun integration themselves.

And so it varies based on wireline companies, other ones that don't want to invest the time, money, resources hire the people, quite frankly, would rather procure a fully integrated system and run that. So there's no single answer to that.

But when you talk about these smaller machine shops, they're largely probably working for big wireline companies that have chosen to do a lot of that integration and gun loading themselves.

And so that's just the market. In terms of our growth, in GEO, there's kind of 3 product lines there, perforating. Of course, we have the downhole plug business as well. And so we're looking for completion crew growth, which every indication is we're going to have year-over-year growth next year.

And then, of course, we need to increase our market share, and we've gotten some favorable indications from the market just in terms of, I'll call it, favorability ratings about our products and service in that space that should come back and increase revenues and EBITDA accordingly.

I mentioned international, goal of ours since we bought the GEO business has been to expand internationally. It is becoming more important to us. But as you grow, these are lumpier sales and that can really moderate our month-to-month or quarterly revenues and EBITDA until we get a more sustained level of international activity and demand. But those are the major puts and takes for that segment.

Although I think we demonstrated this quarter with 54% in sequential margin improvement, a few revenue dollars can matter in this business.

Yes, thanks. And I don't know if you've seen this, but in the latest Kimberlite survey who looks at these things, you guys come out looking very good on the perforating gun side. So that's why I asked the question.

One just final quick one for me. Can you talk about what you see -- you mentioned this a little bit in the prepared remarks on the Offshore/Manufactured Products side. And the book-to-bill has been solid this year and strong in the quarter. Are you expecting based on activity and we're hearing positives on offshore that you're going to see an acceleration in order flow next year?

Yes. Honestly, I hope we see an acceleration in Q4 based on our bookings forecast now and our bidding activity. It is fairly robust. And the market has to look towards leading indicators of activity, which is customer capital allocation as an example, leading-edge offshore day rates, utilization, et cetera, and all those things are trending favorably.

For us specifically, it is very much our bidding and quoting activity and our order book. But as I sit here today, I think we're going to have a strong bookings quarter as early as Q4, but certainly in 2023.

(Operator Instructions) Our next question comes from Sean Mitchell from Daniel Energy Go ahead.

Just as we think about, I know you've mentioned supply chain issues, and I think the industry at large on most of the calls thus far have identified some of those same issues on the supply chain side.

Is there anything in particular that you can point to where you see things getting better maybe on supply chain that might give people some hope that things are getting better, #1. And then #2, I just want to ask you a little bit.

You guys historically have been involved in M&A. And as we come out of the bottom and the depths of the cycle here and things seem to be improving across the board for some of the service companies or what does the M&A space look like today? Do you -- and how do you feel about it over the next kind of 6 months? Do you think you're going to see some opportunities?

Thank you for the questions. They're great ones. On the supply chain side, I would say there are certain areas that feel like they're easing a bit, I would say, particularly probably on the freight side that really tightened up and was fairly difficult in late second quarter, early third quarter.

That's not to say it's behind us, but I would say that is easing just a little bit. There are other areas that are still a challenge. Chip technology, which -- that's integrated into our perforating switches as an example, explosive powder. Those things are still very tight. And so I make no mistake about it.

There are other areas had a concerted effort in this company to go through a deep process of derisking our supply chain, particularly if we get forgings out of Italy as an example, and all the European Union is somewhat at risk going into the winter for both high cost of power, potential rationing of power.

So we are actively looking for backup sources elsewhere to be sure we don't get caught. And I think we're in -- after going through that exercise, I think we have adequately prepared ourselves for these types of contingencies. But the supply chain issues are real, and I think everybody knows that.

But we do see some areas of, I would say, easing just a bit, particularly in a potential recessionary environment, a lot of the discretionary type goods and services are taking a hit. And so that should alleviate particularly some of the freight transportation concerns that we've had in the past, CDL drivers, et cetera. So some may be favorable trends there.

M&A, I would say there's just a lot of conversations still. We've got a group of investment makers that keep a surprise to the market on an ongoing basis. There are some attractive opportunities that we -- but I'd say they're limited, but there's some attractive opportunities where people are looking for means not really to exit the investments, but to find ways for combination growth going forward.

I will say we have been very disappointed in our own multiple. We don't want to overlever the company. I'm very happy that our net leverage is now below 2x. So I don't want to jack that up again through an acquisition, meaning we would have to issue stock. But it's gotten a little better over the last day or 2, but on a forward basis, our multiple is ranging between a 5x or 6x. That really doesn't afford much in the way of opportunity to say there's an attractive M&A deal out there.

I think our own stock should appreciate first. I have great confidence in our capabilities, technology and people. So while we will remain active, interested looking, there are just some hurdles we've got to get beyond to consummate anything. I hope that's helpful.

No, that's great color. I really appreciate it. And then maybe I can sneak one more in. Just as you think about North America, you saw pretty good incremental, I just -- I'm wondering, is it any specific basin you can point to that's stronger than others right now in terms of what you're seeing in terms of the call-out work and the kind of shorter cycle stuff in North America?

I would have to probably the Mid-Con, the Bakken and for us, the Northeast a bit, and part of that is internal self-help. I'll call it in terms of expanding our customer base so that we don't have as much downtime between some -- this major pad work. It's a more limited market.

The Permian for us, we're continuing to work on. It's a great opportunity, but it's also very, very competitive. And so I'd say all areas were heavily focused on improvement and what we can do better going forward sits in the Permian for us.

(Operator Instructions) And we have no more questions at this time. I'll turn it back to the speakers for final comments.

Fantastic. Thank you for your help today, Darryl. We very much appreciate it, and thanks to all of you that took the time to dial in. These quarterly calls get very tight with a lot of people reporting on the same day. So we appreciate your attention to ours. And so we are excited here, as Stephen said, I'll just say go (inaudible). Have a great weekend, everyone.

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