Oil States International, Inc Q2 FY2025 Earnings Call

Thank you for being here. My name is Joel, and I will be your conference operator today. I would like to welcome everyone to the Oil States' Second Quarter 2025 Earnings Call. I will now hand the conference over to Ellen Pennington, VP of Human Resources. You may begin.

Thank you, Joel. Good morning, and welcome to Oil States' Second Quarter 2025 Earnings Conference Call. Our call today will be led by our President and CEO, Cindy Taylor; Lloyd Hajdik, Oil States' Executive Vice President and Chief Financial Officer; and Scott Moses, our Executive Vice President and Chief Operating 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 2024 Form 10-K, along with other recent SEC filings. This call is being webcast and can be accessed at Oil States' website. A replay of the conference call will be available 2 hours after the completion of this call and will continue to be available for 12 months. I will 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 second quarter 2025 results and provide our thoughts on market trends in addition to discussing our company's specific strategy and outlook. In a quarter marked by geopolitical instability, lower crude oil prices, and fluctuating U.S. trade policies, offshore and international markets demonstrated resilience. With this backdrop, the company performed well, achieving the midpoint of our guided EBITDA range for the second quarter of 2025 due to our product and service mix. Our consolidated results in the second quarter were driven by continued strength of international and offshore activity supported by backlog growth over recent quarters. Oil States remains well-positioned to benefit going forward as oil and gas operators favor capital allocation to offshore projects with higher production, slower decline curves, and lower breakeven. During the second quarter, 72% of our consolidated revenues were generated from offshore and international projects, up significantly sequentially and year-over-year. The shift in revenue mix reflects our strategic actions to grow our international project-driven revenues as well as our continuing initiatives to optimize our U.S. land operations given lower industry activity levels and competitive market dynamics. U.S. land drilling and completion activity declined significantly during the period, with the quarter-end rig count down 8% and the frac spread count down 14% from March 31, 2025. These U.S. activity reductions stem from weaker crude oil prices driven by ongoing macroeconomic uncertainty and output cuts' decision to rapidly unwind over 2 million barrels per day of previous production cuts. The sustained margin benefit stemming from our U.S. land-based optimization efforts, which were initiated in 2024 and have continued into 2025, is reflected in our results, albeit tempered by the significant decline in U.S. oil-directed activities during the second quarter. Driven by strong demand across our international and offshore markets, our Offshore/Manufactured Products segment delivered strong performance. Revenues increased 15% sequentially, while adjusted segment EBITDA rose 18%. Backlog increased to $363 million again, allowing us to achieve our highest level since September 2015. Robust bookings of $112 million, reflective of continued strength in offshore project activity, yielded a quarterly book-to-bill ratio of 1.1x and a year-to-date ratio of 1.2x, reinforcing our sustained backlog build. The strength and diversity of our backlog support our outlook for total company incremental revenue and earnings growth over the balance of 2025. Our completion and production services and Downhole Technologies segment, which represent a smaller portion of our business mix, experienced sequential quarter revenue declines of 15% and 10%, respectively, primarily due to the significant industry-wide reduction in U.S. land-based activity levels. Responsive to market conditions, we made the strategic decision to exit 3 additional land-based facilities during the second quarter and to further reduce our U.S. land-focused workforce. During the second quarter, we grew our cash flow from operations, 61% sequentially, and we generated $8 million of free cash flow. Free cash flow, together with cash on hand, was used during the quarter to repurchase $7 million of our common stock and $15 million of our convertible senior notes. Our deleveraging efforts should unlock additional equity value to our stockholders as we have approached net debt zero and pay off our convertible senior notes at their maturity in April 2026. Our capital expenditures in the second quarter were elevated by the ongoing construction of our new manufacturing facility in Batam, Indonesia, which will complete in the third quarter along with the manufacture of our low-impact workover, rental riser equipment built pursuant to contracts. We are committed to optimizing our operations and making targeted investments in our highest-performing operations while leveraging cutting-edge technologies to drive growth. Our commitment to technology and innovation was once again honored with a 2025 Meritorious Engineering Award from Hart Energy, recognizing our low-impact workover package, which I mentioned earlier. This solution integrates proven field technologies to enhance subsea plug and abandonment operations while ensuring the integrity of aging wells. Lloyd will now review our operating results along with our financial position in more detail.

Thanks, Cindy. Good morning, everyone. During the second quarter, we generated revenues of $165 million and adjusted consolidated EBITDA of $21 million. Net income totaled $3 million or $0.05 per share, which included facility exit, severance, and other charges and credits totaling $3 million. Our adjusted net income totaled $5 million or $0.09 per share after excluding these charges and credits. Our Offshore/Manufactured Products segment generated revenues of $107 million and adjusted segment EBITDA of $21 million in the second quarter. Adjusted segment EBITDA margin was 20% in the second quarter compared to 19% in the first quarter. In our Completion and Production Services segment, we generated revenues of $29 million and adjusted segment EBITDA of $8 million in the second quarter. Adjusted segment EBITDA margin was 28%, benefiting from facility and equipment sale gains in the second quarter compared to 25% in the first quarter. During the quarter, the segment recorded facility exit and other restructuring charges totaling $2 million. In our Downhole Technologies segment, we generated revenues of $29 million and $1 million of adjusted segment EBITDA in the second quarter. During the quarter, the segment recorded a noncash operating lease and asset impairment charge of $1 million as well as severance charges. We generated $15 million of cash flow from operations in the second quarter. Our cash flows were used to fund $10 million of CapEx, which was offset by $3 million in proceeds from the sale of idle properties and equipment. During the quarter, we repurchased $7 million of our common stock under our current share repurchase authorization. In addition, we purchased $15 million of our convertible senior notes at a slight discount. As a testament to our strong financial position as of June 30, we maintained a solid cash-on-hand position with no borrowings outstanding through the company's asset-based revolving credit facility. On July 28, we amended our revolving credit facility to provide for additional borrowing availability to lower interest charges and the plan for the retirement of our remaining convertible senior notes at maturity in April 2026. We intend to remain opportunistic with additional purchases of our common stock and convertible senior notes, given our solid free cash flow outlook, and we'll continue to prioritize returns to stockholders. Now Cindy will offer some market outlook and concluding comments.

Despite recent economic volatility and the imposition and uncertainty around new trade tariffs, we continue to see strong demand for our offshore and international products and services. Our backlog remains at a decade high level, and we anticipate continued strength in future bookings and have confidence in our offshore project execution. Industry analysts have suggested that while U.S. land-based activity may remain subdued, offshore and international markets are expected to lead upstream growth. Analysts have also highlighted a global pivot towards exploration and offshore development driven by the need for lower cost, lower carbon resources. As it relates to guidance, based on what we know today, we are maintaining our full year EBITDA guidance in a range between $88 million to $93 million. However, our revenue guidance needs to be updated for the streamlining of our U.S. land operations, which will reduce our full year revenue range to $685 million to $700 million. Our margins will improve with the high grading of our business mix, along with cost reduction initiatives. Our third quarter guidance calls for revenues in the range of $165 million to $170 million and EBITDA of $21 million to $23 million. Strong projected cash flow from operations, which are still expected to be in a range of $65 million to $75 million for the full year underscores Oil States' free cash flow yields, which is one of the most attractive across our peer group. Our business mix and capital allocation strategies are purpose-driven. We are investing in innovation that provides meaningful advancements to customer operations, driving solid results through project execution, generating significant cash flow that strengthens our balance sheet while unlocking equity value for our stockholders. At the same time, we're building solutions that help our customers thrive in a dynamic world. These decisions we make are focused on building a stronger, more resilient company that drives meaningful results for those we serve. That completes our prepared comments. Joel, would you open up the call for questions and answers at this time.

Your first question comes from the line of Jim Rollyson of Raymond James.

Cindy, maybe circling back to offshore, listening to some of the commentary through this earnings season so far, generally, most people seem to have suggested everything still seems to be on the same track there, and most of the uncertainty seems to be hitting the shorter cycle markets like the U.S. land market you mentioned. Just love to hear the kind of color from conversations you've had because you made a comment that everything seems to be on track. That fits with what everybody is saying. There have been some talking about some decisions getting pushed into next year just from a timing and because of the uncertainty, but it doesn't sound like that's impacting you. Just love to get whatever you could expand on that, if you don't mind.

No, I'd be happy to. It's difficult for me to comment on other companies regarding the postponement of projects, but I believe that their investments are likely discretionary. These could involve offshore drilling rig equipment or various new opportunities, while our focus is primarily on production infrastructure related to large fields that are already drilled and discovered. Our developments are usually long-term, spanning multiple years or even decades. We have significant visibility on individual projects, which means they are not easily affected by short-term economic fluctuations. The main distinction is that their investments might be more discretionary, likely involving upgrades, drilling rig equipment, and consumables, compared to our large-scale production infrastructure projects that have been key to our backlog growth. We have also added several new products to our backlog, including our new MPD system. This reflects a combination of the types of equipment we offer and the advantages of new technology introduced to the market. I also want to mention that our bookings outlook remains strong, and we fully expect that the remainder of the year will maintain a book-to-bill ratio above 1.

Yes. That's great to hear. And Cindy, any updated view or Lloyd, any updated view on kind of tariff impacts, just given a few changes since last quarter?

I'm happy to report that we do not expect a significant impact from the tariff situation. This is due to our diverse global supply sourcing and the ability to manufacture most of our projects anywhere in the world before shipping them to international locations. However, we may see modest cost increases in the Downhole perforating segment of our business, which is relatively small for us.

Yes, absolutely. And last one, just on the cash flow, free cash flow outlook, Lloyd, you mentioned kind of reiterated the $65 million to $75 million of cash flow from operations and your CapEx obviously in 2Q was a little more heavy relative to 1Q. And my recollection was your kind of annual CapEx guidance of somewhere in the $25 million ballpark. Just trying to circle back on what your CapEx view is like we can back into where free cash flow should come out for the full year?

Yes. Great. Jim, we're going to guide to CapEx about $30 million because we are a little higher in the second quarter for the completion of the Batam and some specific built riser equipment for customer contracts.

Yes. And the Batam spending within our plans, but what's new is this low-impact workover riser. And again, this is equipment built for future revenue streams. So perfectly logical that we would up that guided CapEx range for this is special spending pursuant to contracts.

Right. But also, what wasn't included in your guidance was some additional proceeds from asset sales, which have at least partially offset that incremental $5 million, correct?

That's correct, and that's likely to continue as we exit some of these land-based operations; we will have excess equipment, excess inventory, and facilities to monetize. As you know, a lot of that monetization will take time. And so we don't have that in our forward guidance.

Your next question comes from the line of Patrick Quellette of Stifel.

It's Pat Quellette for Stephen Gengaro. Your revenue mix was about 72% offshore international during the quarter. Do you have any idea what maybe a normalized mix is given the high grading of the U.S. product lines?

That's a great question. To break it down, about half of the 28% current land base mix originates from our Downhole Technologies segment. A portion involves military applications, which might not be what we typically expect. In reality, the Completion and Production Services segment, which includes Gulf of Mexico activity, land-based activity, and international activity, sees land-based operations accounting for only about 11% or 12% of CP&S. This segment has undergone restructuring, making it a smaller component of U.S. land-driven service activity than most people might assume.

That's really helpful. As you continue to streamline the U.S. land operations, could you give us maybe any guidance on the puts and takes of current market conditions and your improving cost structure and how that impacts 2H '25 margins?

Yes. I'll ask Lloyd to discuss that and note that margin improvement will build throughout the second half and will be higher, frankly, into 2026. This is due to our recent decisions to exit three facilities. We have accrued some severance costs, and there are still some relocation expenses and equipment sales ongoing. Therefore, there will be some continued pressure on margins, but the margins moving forward, particularly in 2026, should be in a certain range that Lloyd can specify.

Upper 20s to low 30s.

Yes. So noticeable almost a doubling of our EBITDA margins by these actions.

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

The first one is just a housekeeping. Cindy, can you remind me what percent of the U.S. land-based business is tied to production versus D&C activity?

I attribute virtually everything we do to completions. Remember, we are completely out of flowback and well testing, which you might have categorized as part of completions, but we're entirely out of that area. Everything we have left is really focused on completion activity, with no drilling.

Right. Got it. Okay. And the second one, if you could wave a magic wand and get whatever land-based business you wanted, what would that be today and why?

We have our Downhole technologies, which include perforating and plugs, as these are downhole consumables. Although the market has experienced competitive pressure, it remains a strong long-term business due to the nature of downhole consumption, allowing for better cost management. Our Tempress product line is a leading technology for drilling out plugs during completion operations, and I would strongly endorse it.

It's clear when a frac company or workover rig company shuts down, but I don't always observe the situation with the niche tool businesses. I'm interested to know if you're encountering any difficulties with your competitors in those product areas.

What do you mean by niche tools?

Well, I'm just saying like it's just any type of like small tool rental businesses. When you drive around, I don't know, we write about it, like you'll see like a rig yard shutdown, a frac yard shutdown, a coiled tubing person shutdown, but I don't often hear about some of the smaller rental companies. And I'm just curious like within some of the markets you compete, are you seeing maybe the competitive dynamics potentially getting more favorable to you because some of your less well-capitalized competitors maybe don't.

Well, I remember, there's only about 11% or 12% of revenue mix today. And no, I'm just going to throw that out there. So I'm going to put the reverse in, you ought to look at what we are doing, which will firm up the market, but it'll firm it up for someone else.

Our focus is more international and offshore correct?

No, I know. I'm just stuck as an old man here. Sorry. Just digging in.

Okay. The market will firm up, and there's lots of discussion about consolidating the land-based market, which is overdue. All I'm saying is that's not going to be what we do.

Your next question comes from the line of Chuck Minervino of Susquehanna.

So just a couple of questions. Number one, the guidance for the full year, it kind of implies a step-up in revenues in the fourth quarter and also EBITDA. So I was just wondering if you could kind of touch on what's happening there to kind of get to that full year number.

No. That's a very keen observation, and it is absolutely correct. The growth will be driven by our Offshore/Manufactured Products Segment, primarily based on the backlog build. We've recorded a 1.2 year-to-date book-to-bill ratio. While there may be some concern about whether revenue comes in the fourth quarter or shifts to the first due to material receipts, these are typically POC contracts and are generally included in the backlog. However, you are correct; there is expected to be an increase in the fourth quarter as a result.

Got it. And then the completion of production segment, I thought it was interesting that such a small piece of that is U.S. land business, just given the decline year-over-year in revenues in that segment. So I was just wondering what other aspects of that business kind of saw a sharp decline? Or if you could just explain a little bit what's going on there? It sounds like it was maybe was more than just the U.S. land piece that may have declined.

I believe the key point that may not have been fully recognized is that we are continuously moving away from commoditized product lines, a process that began last year. While we had some revenue from flowback and well testing, it contributed little to EBITDA and likely had a negative impact on cash flow, but that is no longer part of our revenue. We previously announced the closure of several regions in our CP&S segment in the Northeast, East Texas, and additional areas, and we have just announced three more. This does lead to a decrease in revenues, but since these operations were marginal, they are not hurting our EBITDA and are actually enhancing our free cash flow.

Yes. I did notice the substantial margin improvement there as well.

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

I apologize if I missed this because I joined late, but I was curious about the offshore side and the order flow side. It has been a very good year-to-date. From conversations I've had, there seems to be a strong possibility for a significant increase in offshore activity in 2026. Are you noticing that? Additionally, do you have any insights on how we should approach order flow for the next several quarters?

No, absolutely. I think you missed my earlier comment that we expect a book-to-bill ratio above 1 for the rest of this year and we are optimistic as we move into 2026. We received some very insightful questions, particularly from Jim, regarding what sets us apart. While many companies are lowering their guidance, we are more focused on long-cycle projects and production infrastructure rather than short-term upgrades and refurbishments of rig equipment. The exposure we have in rig equipment is very strategic, featuring new technology in the market, especially our MPV-type assets, which we introduced early last year and have received very positive feedback from various customers. I want to highlight Seadrill, as we have some joint marketing videos that emphasize how our equipment is differentiated in the market. Additionally, we have recently launched a low impact system for plugging and abandonment operations that we believe offers unique and improved technology, particularly beneficial for older wellheads. This investment raised our capital expenditure forecast from $25 million to $30 million, as it was aligned with our contracts with customers. About 50% of our spending is geared towards unique and expansionary projects, like the Batam facility and a new intervention riser we plan to market on a rental basis.

Great. I have another question that I'm a bit hesitant to ask because I reviewed my model that goes back to 2001 regarding offshore product margins over the years. When you consider the projections for 2025 and 2027, especially with the nice increase observed in the second quarter, should we be estimating a range around 20% for the next year or two? Or do you see potential for upside if absorption is slightly higher?

I would probably model in.

'20 to '22.

We have a five-year model, and a key factor for improving margins is maintaining steady, consistent throughput in our facilities. As our backlog increases, we expect that to happen. There are always some mix issues depending on which products have a greater weight in any given quarter. Historically, over the last two decades in that segment, our margins have ranged from about $13 million to $17 million. In the past five years, we've seen favorable revenue growth, EBITDA growth, and margin progression in that segment, which has stabilized around 19% to 20%. If our revenue continues to grow as we anticipate, we expect those margins to increase to 21% to 22% over time.

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

All right. Joel, thank you so much for helping us host the call today. And I do thank all of you for your time in joining us. We attempted to communicate during this call that we are focused on the right end markets, we're getting leaner by design, and we're being more selective about our capital allocation strategies. With that backdrop, we expect to see higher EBITDA margins and enhance cash flows. All efforts that should benefit our stockholders. Thanks, and have a great day.

This concludes today's conference call. You may now disconnect.