Oil States International, Inc Q2 FY2021 Earnings Call

Good morning, and welcome to the Oil States International Second Quarter 2021 Earnings Conference Call. My name is Zanera, and I'll be the operator for today's call. I will now turn the call over to Ms. Ellen Pennington. Ellen, you may begin.

Thank you, Zanera. Good morning, and welcome to Oil States Second 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 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 one and a half hours after the completion of this call and will be available for one month. I will now turn the call over to Cindy.

Thank you, Ellen. Good morning, and thank you for joining our conference call today regarding our second quarter 2021 earnings. Second quarter operating results in each of our segments benefited from the improved commodity price environment. Sequentially, our consolidated revenues and adjusted consolidated EBITDA increased 16% and 64%, respectively. Revenues in our Offshore/Manufactured Products segment led the way with a 27% sequential increase, while revenues in our Downhole Technologies and Well Site Services segments increased 5% and 6%, respectively. We also achieved a 202 basis point increase in adjusted consolidated EBITDA margins, resulting from revenue growth coupled with the benefit of cost reductions. Each of our operating segments reported positive EBITDA for the third consecutive quarter. Adjusted consolidated EBITDA for the quarter totaled $10 million, excluding $3 million of restructuring charges primarily associated with our exit of certain lease facilities. Cash flow from operations totaled $22.4 million for the quarter, allowing us to fully pay off our revolver and repurchase a portion of our 1.5% convertible senior notes. We also were very pleased to receive a 2021 Spotlight on New Technology award from the Offshore Technology Conference for our Merlin Deepsea Mineral 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.

Thank you, Cindy, and good morning, everyone. During the second quarter, we generated revenues of $146 million while reporting a net loss of $15 million or $0.25 per share. The quarterly results included noncash lease asset impairment charges of $2.8 million, along with $2.6 million of restructuring charges, as described in our press release. Our adjusted consolidated EBITDA totaled $10.1 million, improving significantly from the first quarter due to higher activity levels which drove increased revenues in our Offshore/Manufactured Products segment and in our other US land-centric businesses. As Cindy mentioned, we repaid all outstanding borrowings under our asset-based revolving credit facility during the quarter and also bought back $6.4 million principal amount of our 1.5% convertible senior notes at a discount to par value. As of June 30, $26 million in principal amount remained outstanding related to the 1.5% convertible senior notes, which mature in February 2023. Cash on hand totaled $63 million as of June 30, compared to $55 million at the end of the first quarter. As of June 30, the total amount available to be drawn under our revolving credit facility was $50 million, which, together with cash on hand, yielded available liquidity of $113 million, an increase of $18 million from the end of the first quarter. At June 30, our net debt totaled $116 million, yielding a net debt to total net capitalization ratio of 14%. For the second quarter 2021, our net interest expense totaled $2.7 million, of which $0.5 million was noncash amortization of debt issuance costs. Our cash interest expense as a percentage of total debt outstanding was approximately 5% in the second quarter. In terms of our third quarter 2021 consolidated guidance, we expect depreciation and amortization expense to total $20 million, net interest expense to total $2.7 million, and our corporate expenses are projected to total $8.5 million. We spent $3.2 million in CapEx during the second quarter and expect to invest approximately $15 million in total CapEx during the full year 2021. 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 $77 million and adjusted segment EBITDA of $10 million in the second quarter of 2021, compared to revenues of $61 million and adjusted segment EBITDA of $7 million reported in the first quarter of 2021. Revenues increased 27% sequentially, driven primarily by sales of our connector products and production equipment but with noticeable improvement also coming from sales of our fixed platform, short-cycle, and military products. Adjusted segment EBITDA margin in the second quarter of 2021 was 13.4% compared to 11.2% achieved in the first quarter of 2021. Backlog totaled $214 million at June 30, 2021, a decrease of 5% sequentially, yielding a book-to-bill ratio of 0.9x for the quarter. 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. 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 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. Approximately 6% of our second quarter bookings were tied to non-oil and gas projects, bringing the year-to-date non-oil and gas bookings to 12%. In our Downhole Technologies segment, we reported revenues of $27 million and adjusted segment EBITDA of $2 million in the second quarter of 2021, compared to revenues of $25 million and adjusted segment EBITDA of $3 million reported in the first quarter of 2021. Our perforating product line revenues increased 7% sequentially, driven by an increase in completions activity in the United States. Our EBITDA margin suffered a bit in the quarter due to facility under-absorption resulting from weather-induced work stoppages. In our Well Site Services segment, we generated revenues of $42 million, while adjusted segment EBITDA increased sequentially to $5.7 million. The 6% sequential revenue increase was driven by improved U.S. land and Gulf of Mexico activity levels, while our international revenues remained flat with the previous quarter as customers continue to address the ongoing effects of the COVID-19 pandemic. 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 Oil States' completions business. COVID-19 disruptions continue to hamper activity in domestic and international markets, but these disruptions continue to ease. Global oil inventories are beginning to return to their pre-pandemic levels, while improved pricing is spurring an increase in US customer spending. The second quarter 2021 US rig count average was 450 rigs, which was up 15% compared to the average for the first quarter of 2021. Similarly, the industry experienced a 42% sequential quarterly increase in the average US frac spread count, which favorably impacted all of our segments. As we are now a month into the third quarter of 2021, we are continuing to see favorable trends in the US, with the frac spread count increasing by 22 spreads or roughly 10% compared to the second quarter average. This increase gives us optimism that the third quarter is trending favorably, which should support our US shale-driven product and service offerings. Given improvements in the frac spread count, we expect our Well Site Services and Downhole Technologies segments to continue their trend of sequential growth in the third quarter of 2021 with expanding EBITDA contributions. Revenues in our Offshore/Manufactured Products segment are expected to grow modestly given expected strong short-cycle product sales and increased service and repair activities. On a consolidated basis, we expect revenues to grow 4% to 5% sequentially in the third quarter of 2021. From a bookings perspective, we expect our Offshore/Manufactured Products segment to achieve a book-to-bill ratio greater than 1x in the third quarter of 2021. We are raising our full-year guidance given increased levels of US completions activity. Accordingly, we believe that our adjusted consolidated EBITDA will range from $40 million to $44 million for the full year 2021. Now I'd like to offer some concluding comments. Resolution of the pandemic remains uncertain given the COVID-19 Delta variant and worsening trends around new cases and hospitalizations. This uncertainty has negatively impacted energy equities during the month of July due to concerns around growth prospects and the potential negative impact on demand. However, U.S. crude oil inventories grew considerably during the second quarter, leaving the U.S. at 436 million barrels in inventory as of July 23, which is about 7% below the 5-year range. Crude oil prices appear to have stabilized in the $68 to $73 per barrel range following the supply agreement ultimately reached by OPEC+ earlier this month. 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 to meet customer demands globally as we recover from the harsh effects of the COVID-19 pandemic. In addition, we will continue our product development efforts to support emerging renewable and clean tech energy investment opportunities. That completes our prepared comments.

Zanera, would you open the call up for questions and answers at this time? And our first question comes from Stephen Gengaro from Stifel.

So two things, if you don't mind. The first, you talked, Cindy, about the under-absorption in downhole in the quarter. And I was just curious if you could talk about, kind of from these levels, the sort of incrementals we might be looking at and if there's any positive pricing trends that you're seeing in that business yet.

Margins in our Downhole Technologies segment were negatively impacted by called-out weather events. These are lightning strikes in our shaped charge manufacturing facilities. We had a lot of shutdowns. So there's inefficiencies in the quarter. But I would add to that, that there's a general lack of pricing power in the perforating product line coupled with a bit of inflation. So our outlook right now is kind of very modestly improved sequential margins in Q3 with a little more upside in Q4 as we manage through those effects.

You mentioned in your remarks and in your press release about focusing on the growth businesses that offer the best long-term return profiles. Do you see this as a strategy for how you will allocate growth capital moving forward, or do you anticipate any strategic divestitures or similar actions?

Throughout the first six months, we have concentrated on both product lines and regions, doing our best to allocate capital to areas where we are confident of achieving good returns. We are evaluating marginal operations and working to reduce our indirect costs. For instance, there are very few adjustments to reported EBITDA, and nearly all of it is linked to exiting leased facilities that we no longer find beneficial or useful. By eliminating those costs, we can help the individual product lines achieve stronger margins overall. To clarify, we are not making a significant exit from any business; we are trimming operations that are not generating or are unlikely to generate positive EBITDA contributions. The positive aspect for the company and employees is that much of this is now behind us, and we will allocate capital to higher return areas. We have set some thresholds, and I believe that this industry has historically allocated too much capital to equipment over the past decade, which has hurt market share and pricing. I am not alone in believing that we will be more controlled in our growth capital allocation moving forward.

We're hearing more about the potential for a growth rate of around 15% in 2022, and it seems likely that upstream capital expenditures in the North American markets will also reflect that. Given this context, how should we consider the growth rates of your businesses compared to the market overall, even if they don't reach 15%?

I generally agree with that perspective, which I believe is supported by a few factors. First, there has been an increase in activity driven by private companies, which typically do not engage much in hedging within their portfolios. These companies usually make investments based on economic considerations, and the current levels of WTI pricing seem advantageous for them. From discussions with our customers, we anticipate continued improvement, particularly in the latter half of this year and into 2022. Additionally, we monitor the performance of larger public companies, many of which have hedged at lower pricing levels than what we see now. As those hedges expire, it aligns with your idea of a potential 15% overall growth rate in industry capital expenditures. If we examine our product line incrementals, for example in Completion Services, they have been exceptionally strong. All our activities should yield revenue and utilization leverage alongside the benefits from our cost initiatives and rationalization plans. I expect both Completion Services and downhole to exhibit strong incrementals moving forward. We performed well in our offshore products business, and my outlook remains positive. I anticipate that we will exceed a 1x book-to-bill ratio in the third quarter, with several large projects in the pipeline that should contribute positively in 2022. Overall, I expect every product line to improve in 2022, leading to substantial incrementals due to the initiatives implemented over the past six quarters as we navigated the challenges of COVID.

Thank you. And we have no further questions at this time. I'd like to turn the call back over to Ellen.

This is Cindy. I just want to thank all of you for joining our call today. We deeply appreciate your interest in Oil States and your continued dedication and support of the industry. I do wish you good luck as you continue through the remainder of the earnings season. I wish you all the best. Thank you.

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