Oil States International, Inc Q1 FY2024 Earnings Call

Thank you for standing by. My name is Dee, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oil States International First Quarter 2024 Earnings Call. Operator instructions were provided. I would now like to turn the call over to Ellen Pennington, Senior Counsel and Assistant Corporate Secretary. Please go ahead.

Thank you, Dee. Good morning, and welcome to Oil States First Quarter 2024 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 two hours after the completion of this call and will continue to be available for 12 months. I'll now turn the call over to Cindy.

Thank you, Ellen. Good morning, and thank you for joining our conference call today, where we will discuss our first quarter 2024 results and provide our thoughts on market trends in addition to discussing our company's specific outlook comments. I want to first draw your attention to certain segment changes that we have made to better reflect the underlying activity demand drivers for our business as well as how we manage our segments. Short-cycle businesses, previously reported within our Offshore/Manufactured Products segment, are now being included in our Downhole Technologies segment. All prior periods have been conformed with the current year presentation. Our first quarter consolidated revenues and adjusted EBITDA decreased sequentially due primarily to the impacts of seasonality and the timing of revenue recognition for our percentage of completion projects and our Offshore/Manufactured Products segment, where revenues increased year-over-year but declined sequentially. We saw some slowing momentum from an order perspective in the first quarter of 2024 in terms of drilling and subsea equipment orders. Certain orders, which we have a high degree of confidence of being awarded, moved out of the quarter, resulting in segment backlog of $305 million as of March 31, and a quarterly book-to-bill ratio of 0.8x. Our Completion Services and Downhole Technologies businesses have begun to recover from the fourth quarter 2023 activity slowdown that the industry experienced, but progress in this recovery during the first quarter was slow. Cost control and other reduction measures are being implemented in the areas where we are experiencing lower levels of activity, particularly the natural gas basins as we do not expect to see much recovery in those basins over the next couple of quarters. However, we remain bullish on natural gas fundamentals over the longer term. Our investments in technology and innovation were again highlighted by the Offshore Technology Conference, with the announcement that we are the recipient of two 2024 Spotlight on New Technology Awards for our Swift Ultra-Deepwater Connector and our ACTIVEHub platform. Both of these new technologies are explained in more detail in our press release. We remain encouraged by the continued expansion in offshore activity globally coupled with enhanced competitive positioning in each of our business segments through our recent new technology introductions. Benefits of our expanded technology offering are expected to extend well beyond the next couple of years. Lloyd will now review our results of operations and financial position in more detail.

Thanks, Cindy, and good morning, everyone. During the first quarter, we generated revenues of $167 million, adjusted consolidated EBITDA of $15 million and a net loss of $13 million or $0.21 per share. Our net loss for the first quarter included a noncash goodwill impairment charge of $10 million and facility consolidation and other charges of $2.5 million. Excluding these charges, our adjusted net loss was $1.9 million or a net loss of $0.03 per share. In the first quarter, certain short-cycle manufacturing operations, historically reported within the Offshore/Manufactured Products segment, such as legacy frac plugs and elastomer products, were integrated into the Downhole Technologies segment to better align with the underlying activity demand drivers and current segment management structure as well as to provide for additional operational synergies. Historical segment financial, backlog and other information were also conformed with the first quarter 2024 revised segment presentation. Our Offshore/Manufactured Products segment generated revenues of $87 million, operating income of $11 million and adjusted segment EBITDA of $16 million in the first quarter. During the first quarter, the segment recorded charges of $1.5 million associated with the consolidation of certain manufacturing and service locations. Excluding the facility consolidation charges, adjusted segment EBITDA margin was 18% in the first quarter. Regarding our facility planning, we consolidated certain facilities in Houston and are in the process of strategically relocating our Asian manufacturing and service operations from Singapore to Batam, Indonesia. We own two facilities that are classified as held-for-sale assets at March 31. Proceeds from the sales of our facilities in Singapore and Houston, which are anticipated to close in 2024, are expected to total approximately $35 million, significantly exceeding the costs associated with our planned investment in our new Batam facility. Land was purchased in Batam this quarter, and we commenced construction with completion targeted for the first half of 2025. In the meantime, temporary manufacturing operations have been established in Batam so that we can efficiently execute both our contracted backlog and subsequent orders during the construction phase. Backlog totaled $305 million at March 31, a decrease of 7% from December 31, 2023. In our Well Site Services segment, we generated revenues of $47 million, an operating loss of $0.4 million and adjusted segment EBITDA of $7 million in the first quarter. During the quarter, the segment recognized $0.7 million in costs associated with the consolidation and exit of three facilities. Additionally, the segment recorded cost of $0.4 million associated with the defense of certain patents related to its proprietary technologies. Excluding these charges, adjusted segment EBITDA margin was 14% in the first quarter compared to 12% in the fourth quarter. In our Downhole Technologies segment, we reported revenues of $33 million, an operating loss of $12 million and adjusted segment EBITDA of $2 million for the quarter. These results included a noncash goodwill impairment charge of $10 million recorded in connection with the first quarter 2024 segment realignment. As is usually the case, during the first quarter, we used cash flows from operations totaling $11 million and invested $8 million in land and CapEx, net of proceeds from sales of equipment. Net CapEx in the first quarter was primarily used to purchase land for our new Batam, Indonesia manufacturing facility. As of March 31, no borrowings were outstanding under our revolving credit facility, while amounts available to be drawn totaled $86 million, which together with cash on hand resulted in available liquidity of $110 million. In February, we extended the maturity date of our revolving credit facility to February 2028. Now Cindy will offer some market outlook and concluding comments.

Thank you. U.S. land activity levels took a negative turn in 2023 with softening global demand, higher production and resultant elevated inventories, which led to an approximate 20% activity decline in the U.S. by the end of the year. While Brent and WTI crude oil prices were up approximately 10% and 15%, respectively, at March 31 compared to the prices in effect at December 31, this improvement developed later in the quarter and did not translate into activity increases. Natural gas basins where we operate remain weak given the low commodity price. Global inventories are slightly below their five-year seasonal average for crude oil, but remain well above the five-year average for natural gas. Given current industry dynamics, we expect U.S. land drilling and completion spending in 2024 to remain at or near current levels, but do think we could see increased spending in international and offshore markets. Despite the seasonally slow start in the first quarter of 2024, revenues in our Offshore/Manufactured Products segment are expected to grow year-over-year given the level of bidding and quoting activity, new product introductions, strong levels of backlog and the timing of expected execution of major project milestones. We expect our Well Site Services and Downhole Technologies segments to continue to perform in line with market activity indicators. However, increased contributions from the commercialization of new technologies that I have discussed previously along with cost reduction initiatives should improve our results. Considering these market conditions and a slower start to the year, we expect to generate EBITDA ranging from $85 million to $90 million during 2024, which represents an approximate 5% reduction from the midpoint of our prior guidance range. In terms of free cash flow generation, we expect to generate $40 million in free cash flow during 2024, implying a free cash flow yield of 10% or greater. Various facility sales could increase our free cash flow but timing of closing remains uncertain. Now I would like to offer some concluding comments. We remain focused on optimizing our operations and pursuing profitable activity in support of our global customer base. As market opportunities unfold both in the U.S. and in international and offshore markets, we will continue to focus on core areas of expertise with the deployment of our recently enhanced equipment and technologies to further differentiate our product and service offerings. Our core competencies are well entrenched in the markets we serve, and we continue to bid on potential opportunities supporting our traditional subsea, floating and fixed production systems, drilling and military customers while also bidding to support multiple new customers and projects involved in developments such as deep sea minerals gathering, fixed and floating offshore wind developments, carbon capture and storage, geothermal applications and other renewable and clean tech energy opportunities. These new energy transition opportunities create strong potential for us to expand our product and service offerings and our revenue base over the longer term. 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. That completes our prepared comments. Dee, would you open up the call for questions and answers at this time, please?

Operator instructions were provided. And your first question comes from the line of Jim Rollyson from Raymond James.

So Cindy, on the Offshore/Manufactured Products business, you obviously have had two quarters of sub-1x book-to-bill, but you continue to talk, as others in the industry do, about general spend and a strong outlook for offshore. Maybe a little color around what you're seeing from bidding. It sounds like orders slipped, so some commentary on when you think you will capture that would be helpful. The other part I want to get into is the timing of how your backlog is set to play out through this year so we make sure we get the timing of revenues in that segment correct. And then, as you look at it, you have better insight than we do on how the revenue progression should play out, and I recognize some of it is backlog driven and some of it is shorter-cycle work. Just looking at backlog and the way things are supposed to play out in the calendar, which they don't always do, how do you think this year proceeds? You gave color for the full year being up year-over-year, but maybe walk us through how you lay that out from a quarter-to-quarter perspective.

Those are great questions. I'll reflect a little bit on the fourth quarter. Recall that we were very heavy on our major projects; a lot of material receipts came in, which accelerated revenue recognition in Q4 because revenue recognition for those projects is driven by cost incurred relative to total expected cost. Even though our book-to-bill was below one with those heavy revenues, our bookings were fairly strong in Q4. Specific to Q1, the reason book-to-bill was below one was that we had a large order where we secured long-lead items, but not the full order, and the remainder slipped into Q2. We feel very secure about getting those orders because the customer has already ordered the long-lead pieces. So I view the 0.8 book-to-bill differently than if we had no activity expected. We still expect that our book-to-bill for the year will be north of one. Quarter-by-quarter variability is difficult; larger orders can move between quarters. Right now, our forecast for Q2 is to be slightly north of one, and it's predicated on the order I mentioned plus some pipeline orders that are fairly broad-based across the globe as well as some service bookings we expect in Brazil. For the year, our outlook for overall bookings hasn't changed. Regarding the way the revenue progression should play out, as is typical and based on history, Q1 can look rough for offshore products but still be up year-over-year. There is a seasonal element. I expect a steady ramp in revenues and EBITDA generation throughout Q2, Q3 and Q4 for offshore products, subject to the timing of backlog execution. Focus on service orders to some degree because mix plays an impact and service tends to be higher margin. Overall, assume a steady ramp from Q1 throughout the year in terms of revenues and EBITDA generation.

Our next question comes from the line of Luke Lemoine from Piper Sandler.

Cindy, you touched on some of the pieces earlier, but could you refresh us on where you are on the Downhole evolution? What are some of the key initiatives and where are you on the new product and technology rollout?

That's a great question. We have a more integrated Downhole Technologies offering, and we are now managing the business so that the short-cycle offshore products are highly integrated with our Downhole Technologies segment from a leadership, reporting, procurement and support perspective. The base business, before the segment reallocation, did improve sequentially both in terms of revenue and EBITDA, and we are seeing results now. We expect further improvement in Q2, predicated on improved interest on the domestic perforating side and higher international sales. The keys are technology rollout, market share in the U.S., and further international penetration on the perforating side. Our plug business is performing well, gaining market share and making margins, so the focus has been on the perforating side. We made investments and are rolling out new technology, and we are seeing improvements at this point in time.

Our next question comes from the line of Stephen Gengaro from Stifel.

Two for me. First, with the recasting of the segments and just thinking about Offshore/Manufactured Products, should we think about the potential margin profile and/or incrementals in that business any differently as we look out over the next several quarters? And when you think about the change in your full year guide from the prior guidance, is most of that just U.S. land activity related? Or is there anything else in there we should be thinking about? Also, on the perforating side, there's been a lot of movement over the last couple of years in the competitive landscape, and I think one competitor is trying to sell their business. Can you speak to the dynamics there as far as the perforating side is concerned, and what you are seeing from a pricing perspective? If I could slip in one more, does the E&P consolidation and the larger operators' appreciation for that technology ultimately help you?

On the recast, not at this point in time. When we did the recast, the margin profile ended up in similar positions. We don't expect incrementals to change specifically because of the mix; incrementals should improve if we get the top-line growth we are looking for due to cost absorption, but that's not unique to the mix of businesses. Regarding the change in our full year guidance from the prior guidance, we have a lower quarter in our Offshore/Manufactured Products business than we expected because a few orders were pushed out, so I'm putting a little downward pressure on Offshore/Manufactured Products. For U.S. land, the key is managing our exposure in the gas plays efficiently this year given very low activity levels while staying prepared for an uplift as early as 2025. Controlling cost in the natural gas plays is the focus for the next couple of quarters. On the perforating competitive landscape, a larger player is looking to monetize and a couple of smaller competitors are looking to monetize, which could lead to a healthier market going forward. We are committed to the business and to delivering the technology needed to be successful. Our investment last year, the new technology rollout and our evolved go-to-market strategy, including supporting E&Ps directly as well as other parts of the supply chain, should benefit us over the longer term. Regarding E&P consolidation, it should help. It comes down to reliability and cost. Technology differentiators play more in the international market because reliability is more critical and there's less competition in those basins. Those will be key differentiators and drivers of our success going forward.

Our next question comes from the line of John Daniel from Daniel Energy Partners.

You sort of answered my question in response to Stephen's, but I'll rephrase it. The carnage in natural gas markets is growing and yet the medium- to longer-term outlook remains constructive. How do you capitalize on the present disconnect? There are a lot of small regional service companies struggling, and those struggles probably create opportunities.

Yes, I think they will. Many smaller companies are shutting doors, and that firms up the competitive positioning in the plays. We already work for some of the larger players, particularly in the Northeast, focusing on multi-well pads rather than lower-tier activities. My focus now is to mitigate losses and keep our field service technicians employed. If that means rotating to other plays, there will be some incremental costs, but it's better than losing technicians and having no profitability at all. Our singular focus is on cost management and control and retaining those field service technicians through the next three quarters.

That concludes our Q&A session. I will now turn the conference back over to Cindy Taylor for closing remarks.

All right. Thank you, Dee, and thanks to all of you for joining our call today. We always appreciate your interest in Oil States and your continued support, not only for us but for the industry as a whole. I know it's a very busy period of time, but we'll catch up with all of you if you choose to give us a call back. So thanks so much.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.