Welcome to the Oil States International 2Q '20 Earnings Conference Call. My name is Cheryl, and I will be your operator for today's call. I will now turn the call over to Ellen Pennington. You may begin.

Thank you, Cheryl. Good morning, and welcome to Oil States' second quarter 2020 earnings conference call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; 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. 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 the call and will be available for 1 month. I will now turn the call over to Cindy.

Thank you, Ellen. Good morning to each of you, and thank you for joining us today for our second quarter 2020 earnings conference call. As we projected on our first quarter earnings call, the market dislocations caused by the global response to the COVID-19 pandemic have been unprecedented. The impact on the energy industry has been extreme due to the rapid demand destruction for crude oil and the resulting inventory builds across the globe that resulted. However, the demand destruction for crude oil proved to be less severe than was originally projected. U.S. shale production shut-ins occurred sooner than expected, and OPEC+ compliance with the announced production cuts has been fairly good. Additionally, the OPEC+ cuts were extended for an additional month through July 2020, helping the industry manage through the crude oil demand destruction and associated inventory builds. With these factors, activity appears to be stabilizing, and crude oil prices have improved with front month WTI approximately $40 per barrel. In conjunction with our discussion of the quarter, we plan to update you on initiatives undertaken to shore up liquidity, give you our thoughts on near-term market conditions, and summarize our efforts to mitigate costs, both capital and operating as we navigate this difficult market. First, I would like to provide an update regarding COVID-19 and its impact on our global operations. We implemented stringent protocols early in the pandemic in an effort to protect our employees, customers, suppliers, and the broader communities within which we work. Measures applied include working remotely where able to do so, adhering to social distancing guidelines, limiting visitors to our work sites to essential personnel, adjusting shifts and work schedules to minimize close contact, implementing mandatory stay-at-home principles when employees show symptoms of illness, performing enhanced cleaning protocols along with other safety measures. Of the confirmed COVID-19 cases that we have been notified of in our global workforce, the majority were asymptomatic or have now recovered and are back to work. However, various states, including Texas, have seen significant spikes in new cases as they began to reopen non-essential businesses, risking a setback in the economic recovery that had begun to take place. Demand for oil and gas and, therefore, our products and services depend on a functional economy, and we intend to maintain our diligence, continue to work safely, and apply lessons learned throughout this pandemic. We reported a $25 million loss during the quarter. However, our second quarter results, excluding severance and downsizing charges, were generally in line with our internal forecast despite being weaker at the revenue line. During the second quarter, our Completion Services revenues were down 56% sequentially with EBITDA margins going negative. Similarly, in our Downhole Technologies segment, revenues declined 64% sequentially, with EBITDA margins also negative. In contrast, revenues in our Offshore/Manufactured Products segment increased sequentially due to stronger project-driven sales. Segment backlog at June 30, 2020, totaled $235 million, a decrease of 12% sequentially. Our segment bookings totaled $64 million, yielding a book-to-bill ratio for the second quarter of 0.7 times, bringing our year-to-date ratio to 0.8 times. During stress periods in our business, we know that the immediate focus needs to be on the preservation of liquidity and the management of variable and fixed costs. To that end, we generated $39 million of cash flow from operations in the second quarter, secured an amendment to our credit facility providing for financial covenant holidays through March 30, 2021, and purchased $12 million face amount of our convertible notes during the quarter at a substantial discount. We have also taken significant actions on the cost side of our business to adjust to the expectation of these revenue declines, particularly those tied to shale completions in the United States, which were in free fall during the second quarter. We believe that we have stabilized the Company during a very difficult period, and we'll continue to closely manage our debt, working capital, and cash flow generation in the quarters to come. 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 second quarter, we generated revenues of $146 million while reporting a net loss of $25 million or $0.41 per share. Our second quarter results were reduced by severance and downsizing charges totaling $5.4 million or $0.07 per share. Our second quarter EBITDA totaled $1 million excluding the noted severance and downsizing charges. We also recorded a $2.2 million charge for receivables where customers have claimed bankruptcy protection. We generated significant free cash flow during the quarter with $39 million in cash flow from operations, offset by $3 million in capital expenditures. As Cindy noted, we purchased $12 million in principal amount of our convertible senior notes at a 51% discount to the par value, thereby partially deleveraging our balance sheet. For the second quarter 2020, our net interest expense totaled $4 million, of which $2 million was noncash amortization of debt discount and debt issue costs. At June 30, our net debt to book capitalization ratio was 21%, and our liquidity totaled $91 million based upon the methodology outlined in our amended credit facility. And we are in compliance with our debt covenants at June 30. Our total net debt declined $39 million during the quarter, inclusive of the convertible note purchases. Our convertible notes, which have a maturity date in February 2023, comprised 61% of our total debt at June 30. Given the negative market outlook and the uncertainty regarding the level of EBITDA to be generated during 2020, coupled with maintenance covenants that govern both total net debt and senior secured debt-to-EBITDA, we worked with our bank group during the quarter to amend our existing cash flow-based revolving credit facility. The amendment converted the availability calculation into one that is governed by a borrowing-based formula tied to accounts receivable and inventory in exchange for a reduction in the size of the facility to $200 million and the suspension of the financial covenants through March 30, 2021. The maturity date of the credit facility remains January 30, 2022. On June 30, our net working capital, excluding cash and the current portion of debt and lease obligations, totaled $304 million compared to borrowings outstanding under our revolver totaling $71 million. In terms of our third quarter 2020 consolidated guidance, we expect depreciation and amortization expense to total $25 million, net interest expense to total $4 million, of which approximately $2 million is noncash, and our corporate expenses are projected to total $9 million. In this environment, we expect to invest approximately $15 million in CapEx during 2020, which is down about 70% from the spending levels in 2019. 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.

Starting with our Offshore/Manufactured Products segment, we generated revenues of $95 million and segment EBITDA of $15 million during the second quarter. Revenues increased 4% sequentially due primarily to higher project-driven revenues. Segment EBITDA margin was 16% in the second quarter of 2020 compared to 14% in the prior quarter. Orders booked in the second quarter totaled $64 million, resulting in a quarterly book-to-bill ratio of 0.7x. At June 30, our backlog totaled $235 million, a 12% sequential decrease. For over 75 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. Recent product developments should help us leverage our capabilities and support a more diverse base of energy customers. In 2020, we are bidding on potential award opportunities to support our subsea, floating and fixed production systems, drilling, military, subsea mining, and wind energy clients globally. However, with reduced market visibility, given much lower crude oil prices and reduced customer spending, we continue to believe that our 2020 bookings will be lower than the levels achieved in 2019 but do expect our book-to-bill ratio for the year to be 0.8 times or higher. In our Well Site Services segment, we generated $36 million of revenues and a negative $2 million of segment EBITDA, excluding the impact of severance and downsizing charges. The dramatic sequential decline in revenues was mitigated by aggressive cost reduction measures taken during the quarter, leading to 28% decremental margins when adjusted for severance and downsizing charges in this segment. The 58% sequential revenue decline was driven by materially lower U.S. land completion activity and the reduced number of frac spreads in operation, which market analysts indicate hit a low of approximately 45 active fleets in late May. International and Gulf of Mexico market activity comprised 26% of our second quarter Completion Services business revenues and helped blunt the massive decline in U.S. shale-driven completions-related activity. As announced last year, all of our remaining drilling rigs service customers in the Rocky Mountain region. None of these rigs worked until very late in June, providing minimal revenue contribution to this segment. During July, two of our rigs were working. We are highly focused on streamlining our operations and pursuing profitable activity in support of our global customer base, necessitating headcount reductions and facility closures. We will continue to focus on core areas of expertise and are actively developing and conducting field trials of new proprietary service offerings to differentiate Oil States' completions business. In our Downhole Technologies segment, we generated revenues of $15 million with an EBITDA loss of $4 million in the second quarter excluding severance and downsizing charges. Revenues declined 64% sequentially, but decremental margins were held to 36%, excluding severance and downsizing charges in this segment given the significant cost savings measures that have been implemented. We continue to develop, field trial, and commercialize new products in the Downhole Technologies segment. Sales trends for our vapor gun integrated gun system and addressable switches were gaining customer acceptance following their respective commercializations late in the fourth quarter. In addition, our premium integrated gun system, STRATX, was formally launched in the first quarter. As noted on recent earnings conference calls, we also announced the commercialization of ancillary perforating products, including a new wireline release tool and two new families of shaped charge technology. Our product development efforts are designed with our wireline and E&P customers in mind, where we strive to provide them with flexibility, improve functionality, and increase performance while ensuring the highest level of safety and reliability. Given the market weakness, we recognize that revenue uptake of these new technologies will continue to be slow, but look forward to some market recovery in the third quarter. The 2020 U.S. rig count average was 392 rigs, which was down 50% sequentially. Notably, it was down 64% from the end of the first quarter to the end of the second quarter, reaching the lowest point in the Baker Hughes dataset history. The industry experienced a 72% sequential decline in the average U.S. frac spread count, which negatively impacted all of our segments with short-cycle U.S. shale-driven exposure. Based upon market data that we have, we believe the completions activity in the U.S. shale regions bottomed late in the second quarter, and we saw some modest improvement in the month of June. While we believe that we had a trough in completions activity in late May, it's hard to predict what the average activity in the third quarter will be, given uncertainty associated with the COVID-19 pandemic's trajectory and the associated economic shutdowns that are continuing. However, based on current customer indications, we believe that both our Well Site Services and Downhole Technologies segments will be fairly flat to up sequentially despite April being the strongest month of the second quarter. In our Offshore/Manufactured Products segment, we are more confident in our ability to forecast revenues given our backlog position and the relatively low level of short-cycle product sales and our current revenue mix. We project our third quarter revenues in this segment to range between $87 million and $92 million with segment EBITDA margins expected to average 12% to 13%, depending on product and service mix along with absorption levels. Our margins are expected to be compressed in the near-term due to reduced cost absorption globally as we deal with continued supply chain issues and other inefficiencies created by the COVID-19 pandemic. Management teams have to make difficult decisions during market downturns, such as this, to protect the health of their companies. We wanted to provide an update on actions taken to mitigate the material decline in revenue that we have experienced to date in 2020. CapEx will be reduced roughly 70% year-over-year and total approximately $15 million. Direct operating costs will continue to be reduced in line with activity declines. Headcount has been reduced approximately 40% to 45% in our Well Site Services and Downhole Technologies segments, respectively, since the beginning of the year. SG&A headcount has been reduced by approximately 20% since the beginning of the year as well. Various salary personnel, including executive management, have taken salary reductions in addition to other reductions in short-term and long-term compensation. Discretionary spending has been substantially reduced or eliminated. As an update to our cost-out program, we now estimate that we will reduce our 2020 costs by $265 million, which is up from the previously forecasted total of $225 million. Of the updated total, roughly 85% is cost of goods sold, and the remainder relates to SG&A. We continue to believe that 20% to 25% of the cost reductions are fixed in nature. Now I'd like to offer some concluding comments. We believe that we made substantial progress in terms of shoring up our liquidity with strong second quarter free cash flow generation, coupled with the amendment to our revolving credit facility. Our strong working capital position will help us manage through this downturn. As I mentioned earlier, we believe that we have stabilized the Company during a very difficult period, and we'll continue to manage our debt, working capital, and cash flow generation in the quarters to come. Oil States will continue to conduct safe operations and will remain focused on providing value-added products and services to meet customer demands globally. That completes our prepared comments. Cheryl, would you open up the call for questions and answers at this time, please?

Our first question comes from Sean Meakim from JP Morgan.

So thank you for all the feedback in the prepared comments. It'd be great just to maybe elaborate a bit more on where you all see your progress in terms of addressing cost alignment with the current reality? And then as you evaluate what the market may give you over the next, say, 2 to 6 quarters, how do you see that process of evaluating further opportunities to kind of keep digging, as you need to, to get margins where they need to be?

Sean, I'll be happy to do that. Of course, we quantified what we think the increase is, obviously, from our first quarter call to the current call, upping that to $265 million. And of course, I have to just be totally honest. There's no choice in Completion Services and Downhole Technologies, given the immense rate of decline that everyone on this call is extraordinarily familiar with. And so we took aggressive action, and I will say early enough, thankfully that we really kind of muted the decremental margin impact in those two businesses. Now as I noted on the call, you had this progression with April, obviously, early in the shutdown era holding up a bit better than clearly, May was a horrific month and we started to see a little bit improvement later in the quarter. But based on what we see in customer indications, and I should also say Q2 is not only activity-driven. As it relates to businesses like my Downhole Technologies business as well as short-cycle and offshore products, it's exacerbated even more by customer destocking. And so we've got a combination of conversations, feedback with customers that suggest that Q2 will show some improvement from the end of the second quarter such that we should be flat to up in Q3 based on what we know today. But those cost actions, obviously, were taken early and aggressively. And we took quite a lot of a hit from facility closures and severance relative to the size of those businesses, but I view that as behind us. I won't say there won't be any more severance or facility closure costs, but it should be dramatically less than what we saw in Q2. So I kind of put that as being somewhat behind us as long as activity holds up as we expect that it will. We're continuing to try to find cost efficiencies in our Offshore/Manufactured Products segment, but of course, what we're trying to do is be more effective, as an example, with working remotely, doing things virtually rather than traveling, and also trying to find manufacturing efficiencies. But with the backlog, that business has proved to be more resilient, but we just have to watch that bookings trajectory as we progress through the second half as to whether there's more benefit and action there. As I mentioned, SG&A, headcount has come down about 20%. And that has had a benefit at the overhead line item, if you will. We're trying to maintain a high-quality, strong management team throughout this downturn. Obviously, if push came to shove, we could do more dramatic things. But we generally feel like we've made extensive progress on that front. We are going to continue to look for, I call them, deeper efficiencies, if you will, which are more at the manufacturing facility level, looking for opportunities to enhance manufacturing, individual manufacturing facilities to help us with unabsorbed manufacturing costs. But I'd say that would be our focus and initiative going forward.

And I guess, given the success you had in opportunistically buying back some of the convert, really strong free cash for the quarter, some items really helped there. I guess just maybe talk about your confidence level in being able to generate free cash regardless of the range of outcomes that you get. And clearly, debt reduction is a part of that and net debt reduction is a key part of the strategy, but just how you see best uses of that cash. So capability in what may still be an ongoing challenging market and then uses of that cash going forward?

I’ll begin and then ask Lloyd to add any further comments if I overlook anything. From my prepared remarks, it’s clear our tone shows we feel much more secure now compared to the beginning of the quarter, especially considering the decline we experienced in North American shale activity and global uncertainties regarding COVID-19 responses. We completed the quarter with strong working capital releases that positively impacted our free cash flow. Moving forward, we have an in-depth forecast and expect to see benefits in the third quarter from two primary sources: improved receivables due to a significant revenue month in June for our Offshore Products business, and favorable timing of payments from military contracts. Additionally, as mentioned in the first quarter call, we executed NOL carrybacks and anticipate some CARES Act benefits in Q3. Overall, when we project for the year, we estimate around $100 million in cash flow from operations. I’m looking to Lloyd for any further insights on this. Furthermore, we’ve minimized capital expenditures, projected to be about $15 million, which will support our overall goal of reducing debt. Our purchase of the convertible debt at a discount effectively contributes to this deleveraging, as it reduces the amount owed below face value. Importantly, we are also working on lowering the outstanding amount on our revolver, and you can expect us to maintain our focus on reducing debt.

Yes. Sean, Cindy is absolutely correct.

Very good. I think that's sort of you need a lot more runway to cash flow generate this year. So thanks for the feedback.

Thank you. Our next question comes from Stephen Gengaro from Stifel. Your line is now open.

Good morning. I hope everyone is doing well. I have two questions. First, considering the cost reductions that have been implemented and your comments regarding third-quarter revenue, do you think that excluding the severance charges from the second quarter, it's possible to see margins increase slightly in a stable revenue environment due to the current cost situation?

Yes. We don't make this practice of adding back a lot of things and giving you adjusted EBITDA. We try to give you the information to allow you to adjust it consistently across the board. And in addition to severance and downsizing costs, we were hit relatively hard about $2.2 million by customers claiming bankruptcy protection, which is also in the press release. And of course, we do expect to get the pretty full benefit of these cost reduction measures in Q3. So twofold; number one, we really did mitigate the decrementals, I think, very effectively in the harsh environment of Q2. But as we progress, logic tells you that as long as you get the revenue that you think that you do, you'll have pretty good incrementals as we generate that revenue. Whether that's Q3 or Q4, who knows, right? We've got our own internal thoughts and forecasts. But again, all these efforts should lend themselves to pretty strong incrementals when we come out of this.

Great. That's helpful. On the Downhole side, you mentioned some early traction with STRATX and vapor. Are you seeing any tendency among customers to purchase traditional components instead of systems? Or do you believe that the efficiencies those systems provide will help you gain traction as we start to recover from the current challenges?

Well, I think your comments are accurate, number one. We do sell components and have in the past and are migrating more towards integrated systems. So we see both and, quite frankly, benefit from both. And I think your comments are accurate that in a draconian activity environment like we faced, our customers that continue to work are looking to do so very cheaply. And so I do think there might have been a brief short-term migration back to components, if you will. I will say, it's always hard to measure market share when you lose over 70% of completion activity in a quarter. However, we did outperform in Q1 on perforating relative to the industry metrics that we track. And so that tells me those new integrated products were gaining share in Q1. And what I look at is Q2, how much did we decline relative to other competitors? And generally speaking, we were at or better than some of our peers in terms of rate of decline. Now there's a mix there because we have both U.S. driven activity and a little bit of international activity in there. But in totality, I do believe that while this is an extraordinarily difficult market that our vapor gun and STRATX are gaining share.

Our next question comes from George O'Leary from Tudor, Pickering, Holt & Company.

As you mentioned, and pardon me if I get this wrong, a fighter drove off at the very beginning of your call because I'm actually in the office today. But you guys mentioned that I think you're working on some innovations on the completion side. Just curious if you could share any color on what types of problems you're looking to solve, what specifically you're focused on, on the innovation side and the Completion Services side? Any color there would be super interesting.

Yes. Thank you, George. I appreciate that you asked that. And I think while these are ongoing efforts that we have and many times, these are, I'll call them, step out and enhancements of our existing offerings. But I'll use our extended reach technology initially, as an example. It's named our Tempress product line, where we clearly have leading market share in the really extended reach laterals, the harsher type jobs, but it is a premium piece of equipment that, of course, commands a premium price. And so what we'd like to do is introduce really efficient technology around the mid-range laterals so that we can also have leading market share in the mid-range laterals. And we have some newly patented technology. It's a complicated name. It's the Tempress fluidic oscillator. But that's what it is. But that's an example. Again, it's technology we know very well, but we're trying to adapt it to mid-range-type uses by our customer base. And as you know, we are very experienced in valve technology, and we're looking to find more efficient ways to mitigate or eliminate sand migration, which obviously helps the operators, and it also helps us in terms of reduced maintenance and upkeep on our own equipment. Those are a couple of examples. And along those same lines, we have penetration in international regions, but we're trying to leverage a broader range of our existing offerings into international regions as well. But those are examples, George.

Very helpful, Cindy. If you think about the structural costs that you've taken out of your business and even some of the variable costs that maybe don't have to come back if and when things cycle back up, across the three segments, where have the majority of those structural costs actually come out? Any color there?

I'll be honest. I've looked at it more in totality. My divisions kind of build that up. And I would just generally describe it as broad-based. But right now, of course, as I said, it's been a bit weighted towards Well Site Services and Downhole Technologies because that is where the rapid rate of decline has occurred. And so those are, and I also say it's tough to say, 'Okay, what is variable, what is fixed?' But where I have eliminated a facility as an example, and I have no intentions really to reinvest or reopen that facility, obviously, that is permanent. We have taken out mid-level management layers, just like so many other companies in here, that we don't, we're going to challenge new people and younger people to step up. So we're viewing those as more permanent, obviously, costs out of the system. And so we've been very diligent about trying to identify those. And some of the initiatives we put in place were honestly pre-COVID, but they've really helped us, i.e., telematics and vehicles in terms of fleet maintenance, preventive maintenance, areas we have an OIS Scout program that its intent was to help us with quality, health, safety, environment, management programs, but what you find out push comes to shove, it also can be leveraged into, as an example, COVID case identification and management via system that you already have in place without layering on a lot of incremental cost. It helps us with onboarding new employees. It helps us with training new and existing employees. So it's leveraging a lot of software systems, if you will, as opposed to hiring headcount that need to travel to regions and do those training programs and onboarding programs. And again, those are things that we think we implemented pre-COVID, but they are certainly benefiting us in this more virtual operating environment. And I did say on the call, and I should add, we're not sitting on our laurels because our Offshore/Manufactured Products is more resilient with the backlog. We're looking for efficiencies across the globe to better serve our customers and use existing resources globally, which means you can flex your manufacturing capacity in given areas. And looking, we're in the early stages of more cross-segment manufacturing efficiencies between Downhole Technologies and Offshore Products. And I'll just say more to come on that in future quarters.

Our next question comes from Kurt Hallead from RBC Capital Markets.

I appreciate all the info, color, and commentary perspective. I just wanted to follow-up, Cindy, on the context of which you provided your viewpoints on the profession on Well Site Services and Downhole Technologies kind of revenue going out into third quarter. I was just wondering if you could potentially give us a little bit more directional color on what the impact on margins may be, first, from the cost out in those two segments, and then in terms of the stabilization in revenue as you kind of progress? I know you may be hesitant to kind of give specific kind of EBITDA margin ranges, and I do appreciate that, but also given your cost out dynamics, I want to make sure we kind of give you credit or credits to...

I'm sorry, Kurt, but I think I missed part of your question. From what I gathered, you were asking about the progress of revenue and EBITDA in Well Site and Downhole, and how that relates to future incremental margins. Did I understand that correctly?

Yes, Cindy. You got the gist correctly. And it was really in the context of wanting to make sure we give credit or credits to with respect to the cost-out programs.

Okay. On the cost-out program, I got you. Again, a lot of it has almost been parallel in terms of magnitude. I commented, I believe a lot of the reductions were about 40% in our Completion Services product line. And again, remember, they have both Gulf of Mexico and international exposure. So you'd probably expect that to be just a little bit lower than Downhole Technologies where their headcount reductions have been in the range of 45%. So obviously, not a fun quarter for anybody just in terms of that. But again, the goal we had is to watch all of that diligently so that you don't let that cost creep back into the system. But once you do that, again, if we can just get a revenue lift, the incrementals are strong obviously, as you come out of this. But as it relates to Q3, our guidance is right now, forecasters suggest that the rig count will be down as much as maybe 25%. But completions should be flat to up. And so our guidance right now, again, remember, April was still a strong month in the quarter. So we'll be up from exit rate, but we'll probably be flattish relative to Q2. Obviously, we won't have the severance and downsizing charges, at least not anywhere near the magnitude that we had in the second quarter. So just talking that through will lend through to a more breakeven result for those two segments in the third quarter. I hope that addressed your question.

Breakeven results at the EBITDA line?

Right. Right.

Kurt, are you there?

Kurt, does that answer your question? It looks like his line is disconnected. I am moving on to the next question.

That sounds great, Cheryl. Thank you.

Our next question comes from Connor Lynagh from Morgan Stanley. Your line is now open.

Yeah, thanks. Good morning. I was wondering, if we rewind the clock to the 2016 downturn, we did see some negative EBITDA in the Completion Services business. But I think the general color from you guys was that it was more of a volume issue than a pricing issue; the field margins had held up relatively well. I was wondering if you could basically characterize whether or not that's the case again in both Completion and Downhole? Just any broad pricing trends we should be aware of in either of those segments that are driving the negative margins there?

Yes. Very interesting question. We've troughed in activity in February of 2016. We had a very severe rate of decline, like no one we'd ever seen before, only to be followed by a worse one in this quarter. And to your point, in both cases, these were dramatic activity declines. And I got to be honest with you, I challenge most businesses across the world, the United, to adapt to an environment where you can lose 50% to 75% of your revenue in a quarter, but activity-driven without question. And I'd say this decline is different in some respects just because of the duration. We've already had to be fairly efficient because relative to where we've been, while we had ebbs and flows, it's not been a dramatic pickup in activity for years. And so your cost base is already at a lean level, I will call it. We do, and you can't lose this kind of activity and not have pricing pressure as well, which we have, but the cost reductions, that's really what we've had to do to stabilize margins. And of course, we do have overhead, which we try to reduce. It's hard to reduce it. You can't reduce it 75%. So I would say, in totality, the margins are probably fairly similar, but lower price environment, lower cost environment of necessity. That's kind of a broad-based kind of general answer. But I think you're actually seeing it. If you read all the E&P notes that are coming out, many are doing better than they thought they were going to do in the second quarter. And importantly, a lot of their drilling and completion costs are down and their LOE costs are down relative to expectations. And so you've had a pretty significant industry compression of cost as we move through this fairly draconian environment.

Got it. That's helpful. I guess in both cases, you've got, it's certainly not single product line businesses. As we think about potential recovery and improvement in the markets, is there any major mix shift that's occurred over the past couple of quarters if things have trended lower here that we should be aware of? Obviously, we all think in terms of incrementals and decrementals, but that can be pretty severely altered by mix. Is there any major mix shift you would point us to in either of those segments that would drive the margins one way or another relative to a normal incremental type model?

Well, I think just stepping back broadly, first of all, the more resilient business has been our Offshore/Manufactured Products business largely because of diversification, global reach, and backlog. And so that alone, if you just look at the segmental revenue mix, is going to favor that segment just because they're not as immediately impacted, obviously, by land U.S. activity like Wellsite and Downhole is. I had comments particularly on the Completion Services side that Gulf of Mexico and international is now 26% of the total of Completion Services revenue that is up proportionately over the last year or so, as you would expect, because again, the rate of decline oftentimes sits faster and harder on land U.S. just because of the nature of the operations, and it’s generally call-out work for most people in the business, and it responds very quickly to changes. And the very same thing is true for Downhole Technologies, although I say sometimes it can almost be exacerbated to the downturn, downside because you also have inventory destocking to the extent that customers have held inventory, which they do, particularly on the plug side of the business and probably some of the other product lines as well. So I hope that answered your question. But of course, then I'd say, let's not get lost in just one quarter's of activity. One of the most important things, as management teams, that we have to do is set strategy and allocate capital. So the real question is not, where were we in the quarter? What's going to happen long-term? And I think what we're all trying to wrestle with is whether U.S. shale feeds share to other global markets longer term. And that is the challenge that we're going to be addressing over the next quarters to come.

Our next question comes from John Daniel from Daniel Energy.

I just got a couple of big picture questions, no modeling questions here. But Cindy, first one is on pricing. You have many great and long-term relationships with E&P company executives. And I'm just curious what you were telling them as it relates to the unsustainability of current OFS pricing and just how they are responding to you?

You're right. I have a lot of dialogue. And honestly, I think that E&P customers do recognize the unsustainability of where we are. I would say, however, if you're facing $25 crude oil, as we saw, and I'm not going to even focus on the contract that flipped negative, forget that, but they've got their own issues, their own problems, their own challenges. Probably the more sympathetic customers we have are the more well-capitalized customers that are out there. But if you're an E&P with high leverage and you're trying to figure out how to make your interest payment, honestly, relationships and friendships, to some degree, go by the wayside and lowest price works. I have said this crazy industry is so highly fragmented in the U.S., more differentiated offshore and international, but highly fragmented. And of course, we're tracking all the many bankruptcies, both on the E&P side and the service side. So the real question is, do we end up with a more consolidated, fundamentally stronger supply chain after we come out of this, which I think we will without Wall Street support as well as much PE money flowing into the space. And so hold on to what we can. We do try to be higher technology, focusing on quality, QHS, and everything we can possibly do to be good partners to our customers, but conversations are tough for everybody when you're struggling through a downturn like this. Okay. Fair enough. Just seeing if they had any sympathy yet for you. You did touch on market fragmentation, which is a big deal. I'm just curious with presumably all the business rightsizing hopefully behind you, how much time, if any, is being spent on assessing M&A opportunities, whether big or small? And when do you think the right time will be to aggressively pursue some of those opportunities? Well, I'll just share my thoughts. We recently conducted a significant assessment of the market landscape as we usually do. There are a few key insights from this review: most transactions anticipated will be stock-for-stock, likely with little to no premium. To pursue these deals, it is crucial to have a strong understanding of the strategic reasons for the merger and to effectively reduce the risks associated with integration. This perspective inherently narrows down the number of potential deals in the near term, especially given the varied leverage situations within the industry. During market downturns, all companies experience a decline in enterprise value, but the impact is notably harsher on equity for those with leverage compared to those without it or those holding net cash. With the expectation that transactions will primarily be stock-for-stock, this further complicates the exchange ratio. Therefore, I believe we will see more transactions in the exploration and production sector, as they are easier to value based on reserves, compared to many service companies. Personally, I feel that over the next year, significant activity will be limited until some companies reduce their leverage or undergo restructuring. We continuously monitor various service companies as they grapple with determining valuations based on 2021 or 2022 figures, with most leaning towards 2022, resulting in a wide range of multiples from 3 to 30 times. Consequently, closing these deals is proving to be quite challenging. We will keep an eye on the situation, but to me, it seems more like an intellectual exercise at this moment. I don't foresee much occurring aside from restructuring.

Until several of these companies either reduce their debt or restructure, we are monitoring a large number of service companies. People are trying to decide whether to value these companies based on 2021 or 2022, with most leaning towards 2022. We observed a range of valuation multiples from 3 to 30 times, making it challenging to finalize deals. We will keep an eye on the situation, but for now, it feels more like an intellectual exercise to me, as I don't anticipate much happening apart from restructuring.

All right, Cheryl. It sounds like we're concluded. Is that right?

Yes. I show no further questions in the queue.

All right. Thank you for hosting our call, Cheryl, and thanks to all of you for dialing in. As I saw the reports come in last night and today, I knew it would be an extraordinarily busy day. And so good luck with all of that, and we'll be in touch in the quarters to come. Thank you so much.

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