Earnings Call Transcript - OIS Q2 2023

Operator, Operator

Thank you, Mandeep. Good morning, and welcome to Oil States' second quarter 2023 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, Oil States' 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 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 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.

Cindy Taylor, CEO

Thank you, Ellen. Good morning, and thank you for joining our conference call today, where we will discuss our second quarter 2023 results and provide our thoughts on market trends in addition to discussing our outlook comments. Our reported second quarter results reflect the diverging trends of activity declines in U.S. shale basins, with offsetting growth coming from offshore and international regions. Our reported revenues and adjusted EBITDA in the second quarter increased from the same period last year but declined sequentially by 6% and 11%, respectively, due to the timing of activities in certain U.S. shale basins and the slow conversion of projects from our backlog into revenue due to delays in receiving materials. Despite sequentially weaker second quarter revenues and EBITDA, we confirm our full year guidance of $92 million to $100 million of EBITDA based upon expected contributions from the ongoing recovery in offshore and international drilling and development. Our outlook is supported by the backlog growth that we have experienced at our offshore manufactured products segment, which has increased to its highest level since the end of 2015. We generated very strong cash flow from operations of $45 million in the second quarter, invested $11 million in capital equipment, repurchased $3 million of our common stock, and repaid all amounts outstanding under our revolving credit facility with cash on hand of $42 million at June 30 and no significant debt maturities until 2026. Our financial position remains very strong. We remain encouraged by the continued expansion in offshore activity, coupled with future benefits to be gained from our new product introductions. This investment cycle is expected to extend well beyond the next couple of years. Lloyd will now review our results of operations and financial position in more detail.

Lloyd Hajdik, CFO

Thanks, Cindy. Good morning, everyone. During the second quarter, we generated revenues of $184 million, adjusted consolidated EBITDA of $19 million, and net income of $1 million or $0.01 per share. We reported our fourth consecutive quarter of positive net income. Our Offshore/Manufactured Products segment generated revenues of $94 million, segment EBITDA of $16 million, and operating income of $11 million in the second quarter. Revenues in the second quarter decreased 4% sequentially. While our backlog in the segment has steadily increased, the cadence of conversion of backlog into revenue was influenced by, among other things, the timing of material receipts and contractual delivery terms. However, despite these delays, segment EBITDA margin in the second quarter was 17% compared to 16.2% in the first quarter. Backlog totaled $338 million at June 30, an increase of 40% from June 30, 2022. The current quarter end backlog is at its highest level since the fourth quarter of 2015. Second quarter bookings totaled $106 million, yielding a quarterly book-to-bill ratio of 1.1 times and a year-to-date book-to-bill ratio of 1.2 times. Our second quarter bookings were broad-based across many product lines and regions. In our Well Site Services segment, we generated revenues of $65 million, segment EBITDA of $11 million, and operating income of $5 million in the second quarter. Segment EBITDA margin was 18% in the second quarter compared to 20% in the first quarter. Segment revenue and EBITDA declines were primarily driven by slippage of larger customer projects in the Northeast and the Gulf of Mexico. In the Northeast, we completed a large multi-well pad project in the first quarter with activity on the next large pad not beginning until late in the second quarter. Activity in the Gulf of Mexico this quarter was tempered by several third-party intervention vessels temporarily out of service due to dry docking, with one returning to service in the second quarter and one scheduled to return to service in the third quarter. On a positive note, results for the segment's international operations improved sequentially driven by higher customer activity levels. In our Downhole Technologies segment, we reported revenues of $25 million, an operating loss of $3 million, and segment EBITDA of $2 million in the second quarter. Lower revenues and margins in the quarter were driven by reduced customer demand for perforating product sales reflective of the reduction in frac spreads during the quarter. Further, segment EBITDA included a $1 million noncash provision for excess and obsolete inventory. During the quarter, we generated cash flows from operations of $45 million and invested $11 million in CapEx to support future growth. We repurchased 439,000 shares of our common stock for $3 million and repaid the remaining $5 million in borrowings outstanding under our revolving credit facility. At June 30, our net debt totaled $93 million, yielding a net debt to total capitalization ratio of 12%. On a leverage ratio basis, net debt to adjusted consolidated EBITDA was at 1.2 times at June 30. In 2023, we expect to invest approximately $28 million in capital expenditures depending on the market conditions prevailing at the time the capital investments are made. Now Cindy will offer some market outlook and concluding comments.

Cindy Taylor, CEO

Thank you. The tight commodity market in 2022 took a turn in early 2023. Softening demand and the resultant elevated inventories caused oil prices to drop during the first quarter of 2023. This was followed by a strong reaction by the OPEC plus countries with announced production cuts. Global oil and gas inventories are normalizing and are now within their 5-year seasonal average for crude oil but remain above the 5-year averages for natural gas, leading to lower prices year-over-year, thereby tempering expectations for growth in drilling and completion spending on U.S. land activities. However, we have begun to see an inflection upward in international and offshore markets, which will further support our product and service offerings in regions outside of the United States. Revenues in our Offshore/Manufactured Products segment are expected to continue to grow in the second half of 2023, given strong order flow and increased levels of backlog along with ongoing short-cycle product demand. Given the material delays experienced in the second quarter, we will see some top line improvement in the third quarter, but substantial revenue and EBITDA improvement for this segment has pushed to the fourth quarter of this year. We expect our Well Site Services and Downhole Technologies segments to continue to perform in line with market activity indicators, which have softened a bit for U.S. land activities, but do appear to be bottoming. 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 United States and in international markets. We will continue to focus on core areas of expertise with the deployment of our recently enhanced equipment to further differentiate our product and service offerings. Now I would like to offer some concluding comments. Initially, the industry responded to higher commodity prices with accelerated shorter-cycle investments in the United States which the industry clearly benefited from in 2022. We are now experiencing an increase in investments in long lead time projects in international markets and deepwater basins around the world based on the longer-range outlook for commodity prices. Strong macro fundamentals are pointing to a multiyear upcycle, which will drive growth in revenues, earnings and free cash flow generation. 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 development such as subsea minerals gathering, fixed and floating offshore wind developments, and other renewable and clean tech energy systems globally. These opportunities create strong potential for us to expand our product offerings and revenue base. 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. Market-leading technologies will extend the runway for sustainable competitive advantage. That completes our prepared comments, Mandeep, would you open up the call for questions and answers at this time, please?

Stephen Gengaro, Analyst

I think to start, Cindy, when considering your full year guidance and connecting the first half to the full year, I might have missed some of this in the prepared comments. However, based on the macro environment and your insights, it seems that the second half guidance is primarily influenced by offshore and manufactured products. Am I understanding that correctly?

Cindy Taylor, CEO

You're absolutely correct. It’s easier to understand our trajectory with the backlog we have developed, and we have scheduled all of those backlogs by quarter. We feel confident about that. We have seen a decline in rig counts, down about 13% on land, with completion counts down about 8%. At this point, we are not anticipating a recovery in the second half of the year. However, based on our discussions with customers, we sense that we are not going to see a further decline from here. Our softer performance in Q2 for Well Site can be partly attributed to timing issues. We had a significant customer in the Northeast transition from a 12-well multi-pad operation to a new pad, which influences our metrics. Currently, the new pad has shifted from a 12-well to a 6-well project, raising questions about whether this is purely a timing issue or reflects a slowdown in customer activity. In the Gulf, we experienced downtime with some third-party intervention vessels due to dry docking, which is a normal occurrence. It is a mix of factors. However, we must consider the activity indicators, which have softened on land. Our forecasts suggest a generally flat outlook moving forward, indicating some potential market softening. The two factors I mentioned are expected to recover—namely, the intervention vessels returning to service and the resumption of work on other pads in the Northeast. Additionally, we have some new product introductions planned. Overall, we are projecting a flat trend from here, which will impact both our Downhole Technologies and Well Site segments.

Stephen Gengaro, Analyst

And Cindy, to follow up on that, in the second quarter, were some of those headwinds related to mix or timing? Did they impact the margin? Should we consider the second half EBITDA margins in Well Site to potentially improve even in a flat revenue environment?

Cindy Taylor, CEO

Yes. That's a very fair assessment because anytime you do a high-end, large multi-well pad, the margins are definitely better because the intensity of the equipment on site is obviously higher. Cost absorption is better. And then anything we do in the Gulf of Mexico tends to come forward at accretive margins. And so you're absolutely right, our EBITDA margins for Well Site declined from the first quarter just because of both mix and a little bit hit on the top line.

Stephen Gengaro, Analyst

You mentioned the possibility of activity plateauing. It seems that some of our competitors, including one from the U.S., suggested yesterday that the fourth quarter could actually be seasonally stronger due to some visibility of improvements. Are you hearing anything in your discussions that supports this idea? We believe we are reaching a bottom, but is there anything concrete you can share that reinforces that? I know oil prices have increased to $80, which is beneficial, but is there anything else that indicates we are nearing a bottom?

Cindy Taylor, CEO

Well, ours are based on customer conversations, and I think anything in this world for us comes back to what regions are you in? We're broad-based, what customers are you working with and what are their individual plans? And as you know, a lot of the softening in the first half of this year came from private releasing rigs more so than public; our customers held up fairly well, I would say, in completion services, and these other things were more transitory. I will say that in the case of GEO, some of our wireline customers do work probably more weighted to private and I would say they were hit disproportionately hard in the quarter because of that softening. And I'll tell you though, we're not a pressure pumper. And therefore, we don't really have committed work too far out. I mean, we'll have indications from our major customers, and that's where my feel, my gut instincts tell me we're hit them in terms of activity. But to say I can give you concrete evidence, that would be a stretch.

Stephen Gengaro, Analyst

You mentioned a strong second half of 2022 in terms of orders, particularly in the fourth quarter, and a solid start to this year in the first half. Considering the pricing and margins included in the last four quarters of orders, can we infer anything about the margin trends in the offshore products business for the latter half of the year?

Cindy Taylor, CEO

Yes. The key for us has been the continuous improvement in margins as we have built our backlog, both from a mix perspective and cost absorption. If I recall correctly, our EBITDA margins in the first quarter were 16.2%, and they increased to 17% despite slightly lower revenues in the second quarter. As we move forward, maintaining or improving those margins is reasonable, but it does depend on the mix and backlog. I would advise some caution for the third quarter because much of our backlog growth was related to our standard connectors. Additionally, we have some third-party pass-through revenue involved. This mix may not be entirely beneficial for overall margins, but overall, the trends in top-line growth and the mix are positive, and our backlog should support strong margins. All right. Thank you, Mandeep. I realized we picked a very busy day to hold this call this morning. And so I appreciate those of you that have dialed in; we do look forward to further conversations as we progress through the quarter. I hope you have a great earnings season throughout the rest of the next couple of weeks, and we'll talk to all of you soon. Thank you.

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.