Oil States International Inc (OIS) 2021 Q3 法說會逐字稿

Welcome to the Oil States International Inc. Third Quarter 2021 Earnings Call. My name is Hilda, and I will be your operator for today. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Ms. Ellen Pennington. Ms. Pennington, you may begin.

Thank you, Hilda. Good morning, and welcome to Oil States' Third Quarter 2021 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're 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 for 1 month. I will now turn the call over to Cindy.

Thank you, Ellen. Good morning, and thank you for joining our conference call where we will discuss our third quarter 2021 earnings and provide our thoughts on the market outlook.

During the third quarter of 2021, the company generated revenues of $141 million and adjusted consolidated EBITDA of $8.5 million. We were on track through August for sequentially stronger results given the ongoing improvement in oil and gas industry fundamentals. However, our results of operations were negatively impacted by Hurricane Ida following its landfall on August 30 along the Louisiana Gulf Coast. Our personnel remains safe through this devastating storm, and our facilities did not sustain major damage.

However, with power not fully restored until late September, results of operations within our Offshore/Manufactured Products and Wellsite Services segments were affected by temporary facility closures and local workforce challenges. We also incurred delays in the production and shipment of goods to our customers. And services in the Gulf of Mexico were suspended for approximately 1 month.

Our reported results have not been adjusted for the estimated impacts of Hurricane Ida. However, on a consolidated basis, we estimate that Hurricane Ida resulted in third quarter revenue and EBITDA shortfall of approximately $6 million and $3 million, respectively, offsetting the benefit of increased U.S. land-based completion activity. Fortunately, these hurricane-related delays are considered transitory and should be recovered in future quarters.

Highlighting our quarter was a 64% sequential increase in our Offshore/Manufactured Products segment bookings, yielding a book-to-bill ratio of 1.5x for the period. Expanding economic activity and increasing backlog levels support a stronger outlook going into 2022.

In September, Oil States was recognized by the Energy Workforce and Technology Council, formerly known as PESA, with the ESG Accelerator Award for significant advances in ESG reporting, score improvement and industry leadership. As a company, we are very proud to have been recognized for our ESG efforts and practices.

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 $141 million while reporting a net loss of $13 million or $0.22 per share. The quarterly results included noncash inventory impairment charges of $2.1 million, along with $0.7 million or $700,000 of severance and restructuring charges.

As Cindy mentioned, our adjusted consolidated EBITDA totaled $8.5 million, which excluded the inventory impairment and restructuring charges incurred in the quarter. As of September 30 and June 30, 2021, no borrowings were outstanding under our asset-based revolving credit facility.

We continue to build cash with $68 million on hand as of September 30 compared to $63 million at the end of the second quarter. As of September 30, the amount available to be drawn under our revolving credit facility totaled $61 million, which, together with cash on hand, resulted in available liquidity of $129 million compared to $113 million at June 30.

At September 30, our net debt totaled $111 million, yielding a net debt to total net capitalization ratio of 14%. We spent $3.7 million in CapEx during the third quarter with approximately $15 million expected to be invested for the full year 2021.

For the third quarter, our net interest expense totaled $2.6 million, of which $0.5 million was noncash amortization of debt issue 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 2021 consolidated guidance, we expect depreciation and amortization expense to total $19 million, net interest expense to total $2.7 million and our corporate expenses are projected to total $8 million.

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.

Thanks, Lloyd. Our Offshore/Manufactured Products segment reported revenues of $69 million and adjusted segment EBITDA of $8.6 million in the third quarter of 2021 compared to revenues of $77 million and adjusted segment EBITDA of $10.3 million reported in the second quarter of 2021.

Revenues decreased 10% sequentially, driven primarily by lower connector product sales and the effects of Hurricane Ida, which caused the temporary closure of a manufacturing and service facility in Southeast Louisiana in September. This revenue shortfall is considered transitory and should be recouped in future quarters.

Excluding the estimated effects of Hurricane Ida, revenues and adjusted segment EBITDA would have totaled $74 million and $10.7 million, respectively, for the segment. Backlog totaled $249 million as of September 30, 2021, a 16% sequential increase. Third quarter 2021 bookings totaled $106 million, yielding a quarterly book-to-bill ratio of 1.5x and a year-to-date ratio of 1.2x.

During the third quarter, we booked 2 notable project awards exceeding $10 million, which will leverage our major project revenues in future quarters. Our third quarter bookings were broad-based across many product lines and regions. Approximately 5% of our third quarter bookings were tied to non-oil and gas projects, bringing our year-to-date non-oil and gas bookings to 9%.

During the third quarter, we completed several strategic initiatives, including the second rental of our proprietary Merlin high-pressure drilling riser equipment to a customer in Southeast Asia, the full third-party qualification on our new managed pressure drilling equipment, the award of a multiyear crane supply contract that provides long-term utilization for one of our Southeast Asia facilities and the successful running of our first Merlin Deepsea Mineral Riser Systems.

For nearly 80 years, our Offshore/Manufactured Products 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 investment in alternative energy sources, we will be working diligently to expand 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 award opportunities supporting our traditional subsea, floating and fixed production systems, drilling and military clients while experiencing an increase in bidding to support multiple new clients actively involved in subsea minerals, offshore wind developments and other renewable and clean tech energy systems globally.

In our Downhole Technologies segment, we reported revenues of $26 million and adjusted segment EBITDA of $1.4 million in the third quarter of 2021 compared to revenues of $27 million and adjusted segment EBITDA of $2.4 million reported in the second quarter of 2021. While improved year-over-year, segment revenues were down 5% sequentially due to delays in perforating product orders for some of our international customers. Offsetting these delays, our completions product line revenues increased 7% sequentially, driven by a 33% increase in customer demand for our SmartStart and QuickStart Toe Valves.

In our Well Site Services segment, we generated revenues of $46 million in the third quarter of 2021. And adjusted segment EBITDA increased sequentially to $5.9 million, excluding severance and restructuring charges in the comparable periods. The reported 9% sequential revenue increase was driven by ongoing improvement in U.S. land-based activity while Hurricane Ida adversely impacted customer activity in the Gulf of Mexico and international service demand also lagged. Excluding the estimated effects of Hurricane Ida, revenues and adjusted segment EBITDA would have totaled $47 million and $6.8 million, respectively.

We remain focused on streamlining our operations and pursuing profitable activity in support of our global customer base. We will continue to focus on core areas of expertise in this segment and are actively developing improved service offerings to differentiate our completion service offerings.

COVID-19 disruptions and supply chain challenges continue to hamper activity in domestic and international markets, but these disruptions appear to be easing. Global oil inventories are now below their prepandemic 5-year seasonal averages, leading to higher commodity prices, along with an increase in U.S. customer spending. During the third quarter of 2021, the industry experienced a 9% sequential quarterly increase in the average U.S. frac spread count, which favorably impacted all of our segments.

As we are now a month into the fourth quarter of 2021, we continue to see favorable trends in the U.S. shale regions, which should continue to support our product and service offerings. However, some amount of holiday downtime during the fourth quarter is likely to temper results in the U.S.

Revenues in our Offshore/Manufactured Products segment are expected to grow sequentially given higher backlog levels entering the quarter, expected strong short-cycle product sales and increased service and repair activities, coupled with a recovery in revenues generated in our Southeast Louisiana manufacturing facilities.

On a consolidated basis, we expect revenues to grow 15-plus percent sequentially in the fourth quarter of 2021, led by our Offshore/Manufactured Products segment. From a bookings perspective, we expect our Offshore/Manufactured Products segment to achieve a onetime or greater book-to-bill ratio depending on the timing of award for several projects currently expected in the fourth quarter of 2021.

Now I'd like to offer some concluding comments. COVID uncertainty has negatively impacted certain global regions, but the pandemic appears to be waning with delta hospitalizations and case counts on the decline. U.S. crude oil inventories grew considerably during 2021 with expanding economic activity, leaving the U.S. at 420.9 million barrels in inventory as of September 30, which is about 7% below the 5-year range.

Already declining inventories were further reduced by Hurricane Ida's extensive and unexpectedly lingering disruption to output. Crude oil prices have responded with spot WTI crude oil approximating $84 per barrel.

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. Hilda, would you open up the call for questions and answers at this time, please?

(Operator Instructions) And we have a question from Ian MacPherson from Piper Sandler.

Cindy and Lloyd. Cindy, you mentioned that you were expanding capability in managed pressure drilling. I wanted to follow up on that and see how that is coming along in terms of its rollout and what you're doing in terms of a product sale versus rental model for that and what the opportunity bucket looks like.

Right now, we've been working on this, obviously, for well over a year. And important this quarter, we completed the qualification testing on our MPD riser integration joint, which is allowing us to actively market this equipment to various customers, which we have been doing and ongoing.

We're also looking at some one-off opportunities to expand our equipment suite, if you will, to be able to offer the complete riser integration package to our customers. So I would just generally say that we're fairly far advanced with this effort with various customers.

And I'd like to say we are expecting an order within the next 6 months. But obviously, that's subject to the ultimate award, but fairly far progressed at this stage.

At this point, I'd say this is more of a sale model. Obviously, it could turn into rental. But at this point, it's a sale model.

Great. And then it's good to see -- it looks like you have a nice recovery in Q4, moving past the storm impacts in Q3. You said that products would lead the way. I would presume that your other segments would probably be expecting double-digit sequential growth as well. I wanted to get a sanity check on that as well. And then maybe ask a little bit about the expected incremental margins that we could look for in Q4 as well, if you could comment on that.

Yes. So I do agree that the overall outlook for all of our segments look strong. It's easier to look at Offshore/Manufactured Products because of backlog position and scheduled timing through these facilities. And obviously, we have some recovery of what was delayed out of Q3 because of the hurricane. And so we do expect that to clearly lead the way, both with our major project revenue as well as some services, which also were delayed throughout this period.

I do agree that the outlook for Downhole Technologies and our Well Site segments is also positive. I always worry that we don't really know what Thanksgiving and Christmas holidays are going to lend. I'd say that's number one.

And then number two, in our own forecasting, we're not expecting a 100% recovery from the hurricane in the Gulf of Mexico. It's gradually picking up. It's not like we're turning on the light switch and what was lost is back. So we expect that to gradually recover through Q4.

And as I mentioned in my notes, our international activity, particularly in the Middle East, lagged as well. And so we're kind of thinking we get a gradual pickup in Gulf of Mexico and international, offset by very positive trends in the U.S. land-based areas.

So I guess what I would say there, while we expect a strong market, there's a little bit of tempering in our mind because of those factors for Well Site Services. The other 2 segments, I do look for good incremental revenues in Q4, as we've guided to.

That's great, Cindy. And then lastly, any insights or thoughts on incremental margins for the quarter as well?

Our margins, again, I'm leading with Offshore/Manufactured Products in terms of the more significant revenue contributions. Those margins tend to be, as you know, kind of mid-teens. And so I'd be looking for that range for a heavier portion of the revenue increase. The incremental margins at Well Site Services are normally in the 30% to 40% range depending on product line. And our Downhole incrementals can also be in the 30% to 40% range. So -- but in totality, we're -- again, we're weighting this to Offshore/Manufactured Products, which will have more of a mid-teens incremental margin.

(Operator Instructions) the next question comes from Stephen Gengaro from Stifel.

A couple of things. Just -- one, just a follow-up on Ian's question. When you're highlighting those incrementals, you're -- I believe, and I want to make sure, you're talking about them before layering in any of the recovery of that $3 million of lost EBITDA from the storms. Is that fair?

I'm just talking incrementals normally in any period of time because it's not just EBITDA that falls to the bottom line. You get the recovery in revenue at its normal incremental margin, if I'm answering you correctly on that.

Yes. So you're talking normal incrementals, but I guess what I'm asking is could they be a bit higher as you layer in the impact of the lost hurricane profitability in the quarter, in the third quarter?

Yes. I'm not really expecting that at this point in time. I think your answer -- my answer to you is there's a certain amount that is just lost absorption, i.e., you don't pick that back up. Meaning, if you got a facility that's basically closed for a month, you'll pick up the revenue at its normal margin, but you're not going to recover some of the absorption effects. Does that make sense?

That does. The -- so on the Downhole side, you and I think at least 1, if not 2 others, both mentioned this sort of slower international sales in the quarter. Is there anything behind that? Or is it just kind of the quarter and COVID and transportation issues? Or is there anything behind that we should be thinking about? And also, can you ballpark what the international piece is kind of on average or a range for Downhole?

Well, first of all, just because of their nature, these are kind of lumpier quarters in the first place. There's not a broad-based, multi-client type distribution every month. And so for this to be -- have an effect is not that atypical. And it's really -- these were more operational or project specific. And a lot of this is P&A work. And there -- if you get a really good cement job, you may not need ultimately the perforating products.

And so I don't view this as any trend line at all. It's just that is what was in our forecast and plans did decline a bit sequentially. While international is not a huge part of the revenue, if you'll recall, it's probably in the range of...

14% to 15% year-to-date.

Yes, 14% to 15% year-to-date. They do come at very good margins, and they typically are one-off larger projects for us.

Great. Any commentary on the Well Site Services side as far as well pricing dynamics are looking like? And maybe even a lot of your competitors, big and small, sort of set this sort of 20% plus benchmark for 2022 upstream spending growth. Are you in that ballpark as well?

I think we are, Stephen. And we're really being very focused in terms of where we want to allocate our people and our capital going forward in both regions and product line, I would say, at the end of the day. So we're really trying to high grade our product offering here because it does tend to require capital and I want to be sure we're allocating it in the best areas possible.

And so I do feel pretty good about our opportunity set. We've expanded to a broader range of products with some of our key customers in this basin. The 20%, I think it's a question mark because that's more of an activity indicator. We clearly need to get pricing. And so we've been actively working on our customers to get incremental pricing to offset increased labor cost, material cost, which you are very familiar with. Obviously, the goal is not just to cover these costs, but to bring some incremental bottom line dollars in the process.

Our next question comes from John Daniel from Daniel Energy Partners.

I don't have a number -- not a numbers question for you, but just if tomorrow, you had a staff meeting and had the segment heads from all 3 in the office, who would be the most excited for '22 and why?

That's a wonderful question. I think everybody, not just our segment heads, but our workforce generally is looking much more forward to 2022 than where we were in Offshore/Manufactured Products. Of course, that is Scott Moses, who you know very well.

And it's not just the improvement in backlog what we're seeing. But as I mentioned on the call, a lot of these are broad-based in terms of the product line, in terms of the regions that we are supporting, which obviously helps given the breadth of global manufacturing facilities that we do have.

But in addition to that, there's quite a heavy amount of bidding and quoting activity, particularly associated with production infrastructure, where, number one, our market share is very strong and our performance is good. So he's always going to say that incremental capital spending in the sector should benefit us fairly strongly. And so I think that's probably a highlight in the near term.

We've already enjoyed some pickup in U.S. land-based activity, but there's certainly nothing out there that tells us that activity won't further improve as we go into 2022. And so again, anybody running a business wants to be able to offer strong opportunities to your workforce particularly. And that has picked up a bit.

We have restored most of the pay cuts that were cut during the harsh down -- COVID-induced downturn in 2020. And we've restored -- are in the process of restoring some benefits. So we've had to be gradual about that to marry that with the revenue and activity improvements that we're seeing. But it does lift up the whole company, quite frankly.

And Lloyd has done yeoman's work dealing with our banks, bringing forth a new convert such that we don't really have a near-term maturity and no debt outstanding under the credit facility and no maturity of consequence until 2026. So certainly, as a company and a management team, we're much more optimistic as we go into 2022.

(Operator Instructions) We have a follow-up question from Ian MacPherson from Piper Sandler.

I was just reflecting on John's question and looking at where your products backlog is likely to be if you're 1x book-to-bill in Q4, your year-on-year growth for ending year backlog would be quite positive for products. So I would assume the visibility there would be, I would say, higher than consensus international OFS spending growth for 2022. Would that also be a fair assumption?

Yes, it is. It's all dependent on backlog. But we're also optimistic about our short-cycle product sales, again driven by shale activity in the U.S., which forms a part of the segment as well as the outlook for services. So we're really doing a lot in that segment, I think, to create a much more favorable 2022 potential, if you will, backlog dependent, but things are moving in the right direction and the opportunity set seems to be there.

And then lastly, Cindy, how has the experience been coping with hyperinflation as you've been booking the products backlog into next year? And how do you see -- how would you frame the risk to margins based on what's happened with all of that as you've taken in bookings in the second half of this year and how you're pricing your product bids for the first half of next year as well? Do you think that margins can continue as we described in the prior Q&A? Or do you think there's more variability with it as we get into next year's conversion?

No, I think they can continue. Our bids in this segment, some are shorter, i.e., in the range of 6 months. But a lot of these are longer term, 12 to 18 months. We have a robust risk management bidding process in place to where the bids are only good for a certain amount of time. A lot of these long lead items that go into these projects are specifically bid with fixed costs behind them.

Now I would say, from a risk management perspective, in other words, we're not going to subject ourselves to dramatic risk between the bidding phase and the execution phase on these projects. So I don't think you should worry that the bookings and backlog have margin erosion as great a consequence in there.

Now the longer risk is some of the materials have escalated dramatically. And we're having -- and these projects are typically bid months, quarters, sometimes years in advance on a recurring basis. Some of these are just more of an expression of interest in terms of the bidding and quoting. Then they come down to firm engineered drawings, as an example, that are concrete. The risk is between the original indication of interest in the firm that the costs have escalated, then it becomes upon the operator to say, is this still a good project and is it still economic with the higher cost that are involved?

And there are instances where we've had to go back to the drawing board with the customer on equipment redesigns because of some of the costs or developing alternative materials because of material escalation. So I would say it's a more complex process, but we're not taking on a lot of incremental risk in our bidding and quoting activity.

Okay. And then has there been any evidence of customers tapping the brakes a little bit with placing orders and waiting for cost to come down a bit? Or is there an expectation the cost relief will not be forthcoming and they'd rather proceed sooner than later with the orders?

I think they'd rather proceed sooner than later. And a lot of these, again, have been under development for years. I think they're finding ways to normalize. But not to mention, just -- their price is much higher, and the free cash flows going to these operators is significant.

And so the project green light is not likely to get a no unless it was a more marginal prospect in the first place. A lot of our bidding and quoting are in the South American region broadly, Petrobras, Guyana, et cetera. These are very prolific projects that are going to continue, long lead time. So I'm not as worried about that as at least the ones that we're bidding currently.

At this moment, we show no further questions.

Hilda, thank you today for hosting our call. And thank you to all of you who: one, participated in the call; and two, asked some clarifying questions of us. We'll be going obviously through our budget cycles and year-end close and look forward to sharing our more refined thoughts on 2022 in connection with our fourth quarter call. Hope you all have a great day, and I can't resist saying, "Go Astros!" Take care.

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