Earnings Call Transcript - OIS Q1 2022

Operator, Operator

Welcome to the Oil States International First Quarter 2022 Earnings Call. My name is John. I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. And I will now turn the call over to Ellen Pennington. Ellen, you may begin.

Ellen Pennington, Investor Relations

Thank you, John. Good morning and welcome to Oil States' first quarter 2022 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 protection, supported by federal law. No one should assume that these forward-looking statements remain valid later in the quarter or beyond. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K along with other SEC filings. This call is being webcast and can be accessed at Oil States' website. A replay of the conference call will be available 1.5 hours after the completion of this call and will continue to be available for one month. I will now turn the call over to Cindy.

Cindy Taylor, President and CEO

Thank you, Ellen. Good morning, and thank you for joining our conference call, where we will discuss our first quarter 2022 results and provide our thoughts on the market outlook. During the first quarter of 2022, the company generated revenues of $164 million and consolidated EBITDA of $14.5 million, representing sequential increases of 2% and 8% respectively, driven by the improved commodity price environment, which drove strong activity in the United States, along with a favorable sales mix in our Offshore/Manufactured Products segment. Our results were tempered somewhat by ongoing challenges associated with the COVID-19 pandemic, including labor tightness and supply chain disruptions. A key highlight in the first quarter was a 14% sequential increase in our Offshore/Manufactured Products segment EBITDA, coupled with another quarter of strong orders booked into backlog yielding a 1.1 times book-to-bill ratio for the period. Expanding global economic activity and increasing backlog levels support a stronger outlook for this segment going forward. During the first quarter of 2022, the industry experienced a 2% sequential quarterly increase in the average US frac spread count. Compared to the same period in 2021, the average US frac spread count increased over 70%. Increases in US completion activity favorably impacted all of our segments. Increased completion activity in the United States and international perforating product sales led to a 23% sequential increase in our Downhole Technologies segment revenues. In our Well Site Services segment, revenues increased 11% sequentially, due primarily to higher customer activity in our US Mid-Continent and Gulf Coast regions. Tightness in oil and gas markets led to strong demand for our products and services, particularly in March, causing us to exit the quarter strong. Completion activity in the United States shale basins continues to increase and the outlook for the balance of 2022 looks very constructive for continued growth. 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.

Lloyd Hajdik, CFO

Thanks, Cindy, and good morning, everyone. During the first quarter we generated revenues of $164 million, consolidated EBITDA of $14.5 million, and a net loss of $9.4 million or $0.16 per share. We achieved our highest quarterly revenues and consolidated EBITDA since the first quarter of 2020, which coincided with the onset of the COVID-19 pandemic. Our first quarter loss was impacted by $3.4 million of tax expense, resulting from valuation allowances recorded against our US deferred tax assets, as well as certain non-deductible and discrete items. We ended the first quarter with $39 million of cash on hand, compared to $53 million at the end of the fourth quarter. The quarterly decrease in cash was attributable to a $21 million build in working capital associated with the growth and activity levels. As of March 31, no borrowings were outstanding under our asset-based revolving credit facility and amounts available to be drawn totaled $51 million, which together with cash on hand resulted in available liquidity of $90 million. At March 31, our net debt totaled $140 million, yielding a net debt to total capitalization ratio of 17%. We invested $3 million in capital expenditures during the first quarter, which was partially offset by proceeds received from the sale of assets totaling $1 million. In 2022, we expect to invest approximately $25 million to support the expected market expansion. Separately, on April 14, our Offshore/Manufactured Products segment acquired E-Flow Control Holdings Limited or E-Flow for $8.6 million, which was funded with cash on hand. E-Flow is a U.K.-based global provider of fully integrated handling, control monitoring, and instrumentation solutions. For the first quarter, our net interest expense totaled $2.7 million, of which $0.5 million was non-cash amortization of debt issuance costs. Our cash interest expense as a percentage of average total debt outstanding was approximately 5% in the first quarter. In terms of our second quarter 2022 consolidated guidance, we expect depreciation and amortization expense to total $17.3 million, net interest expense to total $2.8 million, and our corporate expenses are projected to total $9.5 million. 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.

Cindy Taylor, President and CEO

Thanks, Lloyd. Our Offshore/Manufactured Products segment generated revenues of $84 million and segment EBITDA of $15.6 million in the first quarter of 2022, compared to revenues of $92 million and adjusted segment EBITDA of $13.7 million reported in the fourth quarter of 2021. Segment revenues decreased 9% sequentially, driven primarily by a 22% decrease in project-driven revenues due to timing of the underlying project schedules. Our EBITDA margin improved in the first quarter of 2022 to 19% compared to 15% realized in the fourth quarter of 2021 due to product and service mix. During the first quarter of 2022, the segment recorded bad debt expense of $800,000 on receivables from Russia-based customers. As of March 31, we had no material balance sheet exposure to Russia. Backlog totaled $265 million as of the quarter end, a 2% sequential increase, culminating in our highest backlog level achieved since the first quarter of 2020. First quarter 2022 bookings totaled $93 million, yielding a quarterly book-to-bill ratio of 1.1 times. We have achieved a quarterly book-to-bill ratio in excess of one time in four of the last five quarters. Our first quarter bookings were broad-based across many product lines and regions. Approximately 13% of our first quarter bookings were tied to non-oil and gas projects. For nearly 80 years, our Offshore/Manufactured Products segment has endeavored to develop leading-edge technologies, while cultivating the specific expertise required for working in highly technical deepwater and offshore environments. As the world expands investment in alternative energy sources, we will be working diligently to translate our core competencies into the renewable and clean tech energy space. Recent product developments should help us leverage our capabilities and support a more diverse base of customers going forward. We continue to bid on potential award opportunities supporting our traditional subsea floating and fixed production systems, drilling, and military customers, while experiencing an increase in bidding to support multiple new customers actively involved in subsea minerals, offshore wind developments, and other renewable and clean tech energy systems globally. In our Well Site Services segment, we generated revenues of $48 million and segment EBITDA of $5.5 million in the first quarter of 2022 compared to revenues of $43 million and adjusted segment EBITDA of $6.2 million reported in the fourth quarter of 2021. Segment EBITDA margin in the first quarter of 2022 decreased to 11% compared to the adjusted segment EBITDA margin of 14% recorded in the fourth quarter of 2021. Revenue mix, seasonal events, and inflationary pressures tempered overall first quarter segment EBITDA margins. Given the strong exit rate out of the first quarter, we expect our second quarter 2022 EBITDA margins to exceed 15%, given increased personnel and equipment utilization. During 2021, we made strategic decisions to exit certain non-performing service offerings within this segment. First quarter revenues were tempered by our exit of these underperforming service offerings, which resulted in a $3.9 million reduction in revenues compared to the fourth quarter of 2021. Considering all Well Site Services lines that were exited both domestically and internationally, we have streamlined our operations and will allocate capital going forward to our strongest equipment and service offerings. These service lines and region exits will temper our revenues going forward but are expected to improve segment margins over time. We remain focused on optimizing our operations and pursuing profitable activity in support of our global customer base. As market expansion opportunities continue to unfold in 2022, we will continue to focus on core areas of expertise in this segment and are actively developing improved equipment offerings to differentiate our completions service offerings. In our Downhole Technologies segment, we reported revenues of $32 million and segment EBITDA of $2.9 million in the first quarter of 2022 compared to revenues of $26 million and adjusted segment EBITDA of $100,000 reported in the fourth quarter of 2021, driven by higher demand internationally for our perforating products along with improved US sales of our completion products, including frac plugs and toe valves. Segment EBITDA margin in the first quarter of 2022 was 9% compared to an adjusted segment EBITDA margin of 1% in the fourth quarter of 2021. COVID-19 disruptions and supply chain challenges have hampered activity in domestic and international markets for two years now, but these disruptions appear to be easing. Global oil and gas inventories are now well below their pre-pandemic five-year seasonal averages, leading to higher commodity prices and expectations of continued increases in US customer spending throughout 2022. We are also seeing an improved outlook in international and offshore markets, which should help support our product and service offerings. Given improvements in the frac spread count over the last several quarters, we expect our Well Site Services and Downhole Technologies segments to continue their growth in 2022 with increasing EBITDA contributions. Revenues in our Offshore/Manufactured Products segment are also expected to improve, given increased levels of backlog along with improved short-cycle product demand. Our outlook for the full year 2022 suggests that our consolidated revenues will increase by more than 25%. Accordingly, we are increasing our 2022 full year consolidated EBITDA guidance to a range of $65 million to $75 million. Now I'd like to offer some concluding comments. Following the unprecedented demand destruction caused by the global response to the COVID-19 pandemic, US crude oil and natural gas inventories have now drawn down considerably with expanding economic activity. As of April 22, US crude oil inventory was 414 million barrels, which was about 16% below the five-year average. Natural gas storage for the same period was 1.5 trillion cubic feet, which was about 17% below the five-year average. Crude oil and natural gas prices have responded to these inventory draws, with spot WTI crude oil above $106 per barrel and natural gas at $7 per MMBtu, setting up a very favorable activity outlook for 2022. Initially, the industry responds to higher commodity prices with accelerated shorter-cycle investments in the United States, which we are seeing. Although longer-term in nature, we expect these investments to pick up for long lead time projects as well, including those in deepwater areas. Oil States will continue to conduct safe operations and will remain focused on providing technology leadership in our various product and service offerings, with value-added products and services available to meet customer demands globally. In addition, we will continue our product development efforts in support of emerging renewable and clean tech energy investment opportunities that completes our prepared comments. John, would you open up the call for questions and answers at this time?

Operator, Operator

Thank you. We will now begin the question-and-answer session. And our first question is from Ian MacPherson from Piper Sandler.

Ian MacPherson, Analyst

Thank you. Good morning, Cindy and Lloyd.

Cindy Taylor, President and CEO

Good morning, Ian.

Lloyd Hajdik, CFO

Good morning.

Ian MacPherson, Analyst

So, with everything improving, it seems like Products and Well Site are getting back towards reasonable mid-cycle margins and Downhole has – is still tracking margins that are at a bigger deficit to historical heights that you've had before. And it just seems like most of the completion services complex has tightened up in a hurry. Some parts of that complex pricing and margins are going vertical. What do you think the opportunity is for an upside surprise with Downhole Technologies in the cycle here with some duration and continued tightness through this year and into next year?

Cindy Taylor, President and CEO

Yeah. Ian, that's just a fabulous observation and question. There is no question that the significant decline in activity we witnessed during 2020 led to more commoditization of the whole service space. In this case, pricing losses were acute during this period. There was also excess inventories, which led everyone to kind of sell at fire-sale pricing almost. I always say that the one thing that is really challenging to recover is pricing, but we are beginning to see that as the market is tightening up a bit and excess inventories are going out the door. And I’ll say that for us, the mix of domestic product coupled with some international sales tends to be kind of lumpy quarter-to-quarter. But if we can get that mix, it's a favorable outcome for us with some of the international sales coming along. We are, as I've said in my commentary, projecting improved margins as we progress through 2022, and it's predicated on all those factors. But as you know, a lot of this comes down to fundamental supply and demand. We have been a bit challenged particularly in our charge production. But hiring labor, you hear about it everywhere. There are certain volume-based improvements that we could experience if we can get a more consistent stream of labor in our facility. So, it's multifaceted, but I always try to initially say, let's get the top line up, so you can get better absorption and improve margins from that. Then we work on pricing, but that's going to be a factor of the competitive landscape. Again, we are seeing improvements.

Ian MacPherson, Analyst

Okay. That's really helpful. Thanks. And then just on the opportunity for orders for products. It seems like we have probably an improving more – a bigger opportunity set for floating production units in Brazil and Guyana. I think those continue to grow. And I would suspect that there are more offshore green shoots in other markets as well. How do those stack up against your short-cycle business in terms of maybe the inbound acceleration this year? Which do you think could be more of a positive beneficiary to a warmer cycle this year?

Cindy Taylor, President and CEO

In our Offshore/Manufactured Products segment, there are a little bit of international opportunities there, but most of the drivers for short-cycle product is still US land. We continue to penetrate international markets, but I think US land is a driver and therefore you'll continue to see improvements in the short cycle piece. Globally, you hit on a lot of key developmental programs going on globally and we'll participate in those. Over the last several years, we're much more weighted to development programs that are underway, particularly in Brazil and Guyana, as you mentioned, along with the production services side of it. I hope we see more on the exploratory or green shoot side, but I think that's going to be longer-term incoming as opposed to the large development programs that are out there. I do think that the first beneficiaries of that will be a little bit around offshore rig reactivations, particularly around riser equipment and MPD equipment, for which we've made some significant R&D investments over the last five years. Of course, the riser work that we have done also has a carryover benefit into alternative energy opportunities. In fact, we had some of those opportunities on the offshore metals recovery side contributing to 13% of our mix of non-oil and gas opportunities and bookings this quarter. Everything is progressing pretty well, but short cycle – it's hard to say it's in the bag, but it's certainly tied to something that has strong tailwinds behind it being US land-based activity. The fact that we are very present and active in both Brazil and Guyana, and these big development programs is another plus.

Ian MacPherson, Analyst

Super. Thanks Cindy.

Cindy Taylor, President and CEO

Thank you, Ian.

Operator, Operator

Our next question is from Stephen Gengaro from Stifel.

Stephen Gengaro, Analyst

Thanks. Good morning.

Cindy Taylor, President and CEO

Thanks, Stephen.

Stephen Gengaro, Analyst

So I guess two things for me. The first probably pretty simple, and you talked a little bit about this. But when you think about the uptick in your revenue guidance for the year and EBITDA expectations, what are the main drivers? And I imagine part of it is just a higher level of confidence that activity has been moving higher, but just curious if you could highlight the main changes on the upside to your forecast?

Cindy Taylor, President and CEO

Yeah, for sure. We've got a lot of initiatives in place in the US. Again, when a market inflects up or down, the US short cycle is the initial beneficiary. Our commentary was clear that we built revenue and our EBITDA contributions throughout the quarter. We're looking at exit rate March to help solidify that upside outlook going into the second quarter and the balance of 2022. This is both Well Site Services and our Downhole Technologies segment and short cycle, quite frankly, in our Offshore/Manufactured Products segment. You can't always be reticent to say those are in the bag, but if activity continues as it should and as we expect, we have strong confidence in our guidance there. I've been very clear with my team that the first focus needs to be on improving personnel and equipment utilization. Our incrementals are strong. They will lead to higher margins over time without question. Hence, we have been very focused on targeting new customer activities in various basins, and some of that equipment is already being locked up. So again, a pretty high degree of confidence. In Offshore/Manufactured Products, we've covered short cycle and mentioned that it has strong tailwinds. I'm looking at my book-to-bill ratio, which, as Lloyd suggested, was positive in four of the last five quarters. The backlog is creeping up, which gives us better project visibility as we move forward. The remaining variables are the level of service activity that we will see, which should ramp with increasing major project activity, coupled with military and alternative energy investments. I will acknowledge that, not so much the military, but the alternatives are very lumpy right now because they're in early stages. You may have no contribution one quarter and then a significant order the next quarter. We're doing all the right things in terms of customer contact activity and importantly, the research and development spending we're doing. We are putting in products and services that are going to be needed longer term, both in conventional areas as well as alternative type investments.

Stephen Gengaro, Analyst

Great. No, that's helpful. So, I'm not exactly sure how to ask this but when I think about the US pressure pumping business, it's fairly easy to consider supply/demand and pricing trends and we have a sense for how many frac fleets are working, etc. I'm curious, on the Well Site side, can you give us some commentary on how to think about supply/demand currently and the competitive landscape and pricing dynamics?

Cindy Taylor, President and CEO

Yes, I can. I recognize that it is challenging for us to track the various metrics; there isn't a straightforward report of unit numbers, whether they are frac heads, isolation tools, flowback assets, or unit drill-out assets. What I can share is that we are not alone in exiting and divesting unprofitable business lines. This means that those remaining in these businesses will face a tighter market moving forward. Additionally, there isn't much capital seeking new investments in this sector. In previous years, when crude prices surpassed $100 million, it was common to see an influx of private equity into this industry. That is no longer the case, which contributes to a fundamentally tighter market. This scenario also aids in achieving better utilization, which is necessary for us. We are carefully targeting customers that can provide us with more consistent use of both our personnel and equipment. My main concern isn't about getting the equipment operational in this environment or encountering numerous new market entrants; rather, it is about how quickly we can scale the people side of the business to ensure we grow our revenue as much as we would like and as our customers desire.

Stephen Gengaro, Analyst

Great. Thank you for the color. One final question for Lloyd. When we think about the cash flow statement for the year, what should we consider as far as working capital, uses of cash as revenues grow and how that impacts free cash flow expectations?

Lloyd Hajdik, CFO

Yes. I mentioned we built working capital of $21 million in the first quarter, which is typical for a seasonal quarter where we use more working capital. As operations improve, we will likely build a bit more in the second quarter. It's going to moderate for the full year, kind of in the back half. We do expect to be free cash flow positive after the $25 million of CapEx, as well as the $8.6 million we used to fund the E-Flow acquisition.

Stephen Gengaro, Analyst

Okay. Thanks. And then maybe just one final question about E-Flow. How does E-Flow fit into the mix and where does that add to the offering?

Cindy Taylor, President and CEO

What E-Flow adds is really a higher tech offering that is more of a vertical integration at this point. Many of our products, particularly our newer higher-end products, need integrated control systems. Think of the smarter pieces of equipment, which we have outsourced in the past but are now bringing those technologies in-house to further leverage our technical capabilities around these products.

Stephen Gengaro, Analyst

Thank you.

Cindy Taylor, President and CEO

Thank you, Stephen.

Operator, Operator

And we have no further questions at this time. I will now turn the call back over to Cindy for closing remarks.

Cindy Taylor, President and CEO

John, thank you for hosting our call today. We also appreciate those of you who have joined the call today. We recognize this is a heavy earnings reporting period and appreciate your continued interest in Oil States. We hope you all have a great day. Thanks so much.

Operator, Operator

Thank you, ladies and gentlemen. That concludes today's conference. Thank you for participating. You may now disconnect. Speakers, stand by for your debrief.