Earnings Call Transcript - OIS Q2 2024

Eric, Operator / Conference Operator

Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oil States Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Operator provided instructions. Thank you. I would now like to turn the call over to Ellen Pennington, Oil States' Assistant Corporate Secretary. Please go ahead.

Ellen Pennington, Assistant Corporate Secretary

Good morning, and welcome to Oil States' second 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 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 2023 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 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.

Cindy Taylor, President and CEO

Thank you, Ellen. Good morning, and thank you for joining our conference call today, where we will discuss our second quarter 2024 results and provide our thoughts on market trends in addition to discussing our company-specific outlook comments. Our second quarter consolidated revenues and adjusted EBITDA increased 11% and 38% sequentially, driven by increased drilling, subsea and production system demand in key offshore basins, along with the advancement of several significant projects in our Offshore/Manufactured Products segment. On a consolidated basis, our offshore and international revenues were up 18% sequentially, while U.S. land-driven revenues increased 1%. Our results in the current quarter also benefited from continued customer adoption of our newer technologies and strategic optimization of our Well Site Services segment with the exit of certain underperforming U.S. locations. Given these initiatives, our Well Site Services adjusted segment EBITDA increased 30% sequentially in an otherwise declining U.S. land market. During the quarter, our Offshore/Manufactured Products segment revenues increased 17% sequentially totaling $102 million, while adjusted segment EBITDA rose 27%. Bookings totaled $101 million compared to $66 million received in the first quarter of 2024, yielding backlog of $300 million as of June 30 and a quarterly book-to-bill ratio of 1 times. Our bookings improvement was partially driven by our newer technology offerings, including orders for our managed pressure drilling systems. Our Well Site Services segment revenues decreased 2% on a sequential quarter basis, given the impact of lower U.S. activity, along with the segment's consolidation and exit over the past six months of four underperforming locations. Adjusted segment EBITDA increased 30% from the first quarter of 2024 due to stronger offshore activity in the Gulf of Mexico, along with modest market share gains in the Permian Basin. Our cost reduction initiatives helped yield very strong incremental margins. In our Downhole Technologies segment, revenues and adjusted segment EBITDA increased 16% and 42%, respectively, from the first quarter of 2024, driven primarily by increased completion product and international perforating sales. We will continue to focus on improving operations and allocating capital to efficiently and safely provide our customers with advanced technologies and services, while enhancing returns, reducing debt and returning cash to our stockholders. During the quarter, we generated cash flows from operations totaling $10 million, repurchased some of our convertible debt at a discount to par and also made share repurchases. Our gross debt to EBITDA at June 30 was 1.5 times and net was 1.2 times, giving us significant flexibility. Lloyd will now review our operational results along with our financial position in more detail.

Lloyd Hajdik, Executive Vice President and Chief Financial Officer

Thanks, Cindy. Good morning, everyone. During the second quarter, Oil States generated revenues of $186 million, adjusted consolidated EBITDA of $21 million and net income of $1.3 million or $0.02 per share. Our reported second quarter results included pretax facility consolidation exit charges of $3.5 million, patent defense charges of $1 million and gains of $0.5 million on debt extinguishment. Excluding these net charges and credits, our adjusted net income was $4.4 million or $0.07 per share. Our Offshore/Manufactured Products segment generated revenues of $102 million and adjusted segment EBITDA of $20 million in the second quarter. During the second quarter, charges of $1.5 million were recorded at the segment due to the consolidation of Oil States' Southeast Asian operations. Excluding the facility consolidation charges, adjusted segment EBITDA margin was 20% in the second quarter compared to 18% in the first quarter. Regarding our facility planning, we have strategically relocated our Southeast Asian manufacturing and service operations from Singapore to Batam, Indonesia, which is expected to reduce future manufacturing costs for a number of our global product offerings. During the second quarter, we sold our facility in Singapore and received net cash proceeds of $10 million. While construction of our long-term Batam facility continues, with completion targeted for the first half of 2025, provisional operations were established in Batam during the quarter allowing us to efficiently execute both our contracted backlog and subsequent orders during the construction phase. We own one remaining U.S. facility that was classified as a held-for-sale asset at June 30. Net proceeds from the sale of this facility, which is expected to close in late 2024, are expected to total approximately $25 million. In our Well Site Services segment, we generated revenues of $46 million and adjusted segment EBITDA of $9 million in the second quarter. During the quarter, the segment recognized $2 million in costs associated with the consolidation and exit of underperforming locations. Additionally, the segment recorded charges of $1 million associated with the enforcement of patents related to its proprietary technologies. Excluding these charges, adjusted segment EBITDA margin was 18% in the second quarter compared to 14% in the first quarter. In our Downhole Technologies segment, we reported revenues of $38 million and adjusted segment EBITDA of $3 million for the second quarter. Adjusted segment EBITDA margin was 8% in the second quarter compared to 7% in the first quarter. And during the second quarter, Oil States generated $10 million in cash flows from operations and received $10 million in proceeds from the facility sale. Cash was used to fund capital expenditures of $6 million, purchased $11.5 million principal amount of our 4.75% convertible senior notes at a discount and bought back $2.4 million of our common stock. Now Cindy will offer some market outlook and concluding comments.

Cindy Taylor, President and CEO

Despite some concerns about oil demand in China and the possibility of OPEC+ ceasing voluntary production cuts in 2025, crude oil pricing has remained relatively stable over the first half of the year, generally in the $75 to $85 per barrel price range, which has provided our E&P customers a predictable environment for planning and sanctioning major offshore and international projects. Stable oil prices and a strong long-term outlook for natural gas and LNG demand supports significant levels of capital investment in offshore field development led by the U.S., Latin America, Asia and Africa. Major subsea OEMs continue to experience significant backlog growth as a result of orders for subsea production systems. We expect this trend to positively influence our business and future bookings. Growth trends continue to look favorable, given the level of offshore capital investment, our bidding and quoting activity, new product introductions, along with strong levels of bookings and backlog. Second quarter U.S. land activity levels have declined despite favorable WTI crude oil prices. Even with lower activity levels and weak natural gas prices, production and inventory levels have remained high, leading to a more challenging land market. Given current industry dynamics, we expect U.S. land drilling and completion spending over the balance of 2024 to remain at or near current levels. We expect our Well Site Services and Downhole Technologies segments to perform in line with market activity indicators, which are weighted to U.S. land activity. The consolidation and exit of underperforming locations and the implementation of additional cost control measures should provide tangible margin benefits in subsequent quarters as assets are redeployed to more favorable operating locations. We are benefiting from the continued adoption and deployment of our new technologies, including our proprietary active seat valves within our Well Site Services segment. Within our Downhole Technologies segment, we expect to see further market penetration with the recent introduction of our new EPIC portfolio of perforating systems. Considering market dynamics, we are able to confirm our adjusted EBITDA guidance of $85 million to $90 million for 2024. In terms of free cash flow generation, we expect to generate approximately $40 million in free cash flow during 2024, which excludes the planned fourth quarter U.S. facility sale and remains in line with prior guidance, implying a free cash flow yield of 10% or greater. We will continue to maintain disciplined capital allocation priorities by judiciously investing in growth CapEx and organic research and development opportunities to drive additional technology differentiation. We will continue to evaluate debt reduction opportunities, share repurchases and targeted acquisitions. 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, 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. Eric, would you open up the call for questions and answers at this time?

Eric, Operator / Conference Operator

Operator provided instructions. The first question comes from the line of Jim Rollyson with Raymond James. Please go ahead.

Jim Rollyson, Analyst (Raymond James)

Hey. Good morning, Cindy and Lloyd. Cindy, it was obviously great to see a nice sequential rebound in the offshore manufactured products business, which kind of falls in line typically, I guess, with your seasonal factors. But curious with kind of the orders and backlog and as you see that over the back half of the year, how are you thinking about kind of revenue and margin trajectory based on kind of the timing of what's in backlog today, kind of a similar trend to last year or something different?

Cindy Taylor, President and CEO

Clearly, if you look at the guidance, to some degree, the revenue trajectory over the next couple of quarters looks strong but fairly level given that our bookings to date are at 0.9 times. A lot of the momentum we're seeing, I would say, carries into 2025. We still expect our overall book-to-bill to be north of 1, implying a book-to-bill greater than one for the second half of this year. Again, I think that sets up very well for 2025. Embedded in our guidance, a lot of the activity is going to be driven by offshore and international, no surprise there based on the overall macro environment that we're looking at, and that implies strong results for this particular segment.

Jim Rollyson, Analyst (Raymond James)

Perfect. Yeah. Just looking for confirmation there. I appreciate that. And on the Well Site Services and Downhole Technologies, you mentioned similar in the past, your revenues kind of performed in line with activity. But clearly, some of the internal things you're doing on the cost side and managing operations that weren't performing have obviously paid through in margin benefits this quarter. And you mentioned just that growing as you continue to work on those things. Any sense of how you're thinking about magnitude of potential margin expansion in the kind of flattish from here outlook?

Lloyd Hajdik, Executive Vice President and Chief Financial Officer

So Jim, when we're looking at Well Site Services with us closing some of these underperforming locations, we could see the margins overall getting into the low 20% range for EBITDA margins.

Jim Rollyson, Analyst (Raymond James)

Okay. Yes. No. That's very healthy. And what are you thinking about for Downhole Technologies because that obviously had an improved quarter as well from a few different things.

Lloyd Hajdik, Executive Vice President and Chief Financial Officer

For Downhole Technologies, we would expect high-single-digit to low-double-digit EBITDA margins.

Jim Rollyson, Analyst (Raymond James)

Yeah. Perfect. Well, I appreciate that. I'll turn it back to someone else for the next question.

Cindy Taylor, President and CEO

Thanks, Jim.

Eric, Operator / Conference Operator

Operator provided instructions. The next question comes from the line of Stephen Gengaro with Stifel. Please go ahead.

Stephen Gengaro, Analyst (Stifel)

Thanks. Good morning, everybody. So just quickly to clarify, were you suggesting Well Site margins in the low-20s in the second half of the year? I was trying to just make sure I understood that correctly. Also, Cindy, you've been watching this market a long time like I have, and we've been kind of consistently frustrated by the lack of U.S. activity growth on the land side. I know there's M&A reasons and the gas market has been soft. But do you see anything else there? Maybe how do you think about the catalyst or what needs to happen to get a recovery on the U.S. land side even if it's several quarters out?

Lloyd Hajdik, Executive Vice President and Chief Financial Officer

Yes, we did indicate well site margins in the low-20s for the second half of the year.

Cindy Taylor, President and CEO

If you look back over the last 15 to 18 months, activity on land is down roughly 20% plus. It's surprising given that production levels remain high. From my perspective, a lot of the M&A activity has been geared toward resource plays and moving to longer laterals—moving from two-mile to three-mile laterals, which means operators are drilling and completing a lot of available footage. Productivity per foot can be flat to down in many basins, even as overall production stays robust. We and others believe production will turn at some point; the question is when. In my view, 2025 looks different as some decline curves hit. Natural gas and LNG demand are also key catalysts; if we see both improved natural gas activity and stronger crude oil activity, those would drive recovery for U.S. land service companies. Right now, the market is cautious because of concerns about demand in China and the possibility OPEC+ reverses voluntary cuts late this year or in early 2025. You always have to consider the macro. I'm optimistic that 2025 will be better than some expect.

Stephen Gengaro, Analyst (Stifel)

Got you. Great. Thanks for the color. When you think about rig efficiency and completion efficiency and longer laterals, where does that benefit you guys the most? Which product lines see the most benefit?

Cindy Taylor, President and CEO

The benefit is across both our Well Site Services and Downhole Technologies segments because this is largely a U.S. land-driven activity. Our active seat valves in Well Site Services are more efficient for operators and work very well in extended laterals and multi-pad operations. They are cost effective and provide efficiency at the well site. In Downhole Technologies, our new EPIC perforating portfolio is aimed at gaining market share even in a flatter market and particularly in an improving market, coupled with international penetration, which we believe will help turn that segment around.

Stephen Gengaro, Analyst (Stifel)

Great. No, that's very helpful. And then maybe one final one: you mentioned a book-to-bill over 1 in offshore manufactured products in the back half of the year. When we think about the trajectory of growth for that business, should we be thinking about offshore deepwater rig activity as the best proxy for what growth could look like in '25 and '26, or is there a different proxy we should be using?

Cindy Taylor, President and CEO

It's both near-term and long-term. Rigs going to work drive development drilling profiles that prove up work and lead to longer-term production infrastructure. We're still weighted to offshore production facility development. With our managed pressure drilling (MPD) technologies, as rigs go to work, we're seeing incremental demand for MPD equipment as well as deck equipment and riser products. That's nearer-term because rigs are being upgraded and entering longer-term contracts. The follow-on is increased subsea and production infrastructure development. Other large companies in the space have announced bookings that are precursors to demand for some of our products and services, which supports our positive outlook for 2025 and beyond.

Stephen Gengaro, Analyst (Stifel)

Great. Thank you for all the color.

Eric, Operator / Conference Operator

Operator provided instructions. Your next question comes from the line of John Daniel with Daniel Energy Partners. Please go ahead.

John Daniel, Analyst (Daniel Energy Partners)

Hey. Good morning, Cindy and Lloyd. You noted in the prepared remarks that you anticipate activity in the Lower 48 to be at or near current levels. If we stay in this flattish range for the balance of the year and maybe into Q1, how do you see that changing the competitive landscape in the areas you serve? How many players or how many people don't make it, if you will? Just your thoughts on that.

Cindy Taylor, President and CEO

We hear anecdotal evidence of smaller players shutting down local operations, closing facilities or trimming headcount, which modestly improves the competitive landscape. More importantly, I am seeing many M&A opportunities—companies looking to exit or optimize operations through M&A. On a basin-specific level this is happening and larger service companies are responding to market consolidation, looking for size and scale from both operating and shareholder perspectives. We have a lot of inbound interest from both private and public entities. So while some smaller players may fall out by closing locations, I expect broader consolidation to accelerate.

John Daniel, Analyst (Daniel Energy Partners)

Okay. Thank you for that. The next question is on new products and technologies you are introducing. Can you address customer willingness to try new products at this stage and how you see expected adoption rates playing out over the next one to two years?

Cindy Taylor, President and CEO

There's greater willingness to trial new technology on U.S. land, where wells are smaller and AFEs are smaller. Operators are often more willing to test one-off technologies, and many of our products are developed with operator involvement and feedback. That makes uptake better on land. However, when activity is down, it's harder to get partners to trial new technology, so uptake can be slower. Offshore deepwater is a different environment—barriers to entry are significant and reputation and operating history matter a lot. We've been in deepwater offshore for decades, so our established track record helps. Examples: our high-pressure riser systems have long market acceptance; our MPD systems have seen great interest and acceptance so far, and we've been developing that technology for several years. We're cautious about bringing new technology offshore due to the risk to reputation, but as we prove technologies on U.S. land, we will take them into international markets more efficiently.

Eric, Operator / Conference Operator

I will now turn the call back over to Cindy Taylor, President and CEO, for closing remarks. Please go ahead.

Cindy Taylor, President and CEO

You bet. Thank you, Eric, and thanks to all of you for joining our call today. I know it's a very busy portion of the earnings season. We're very glad to report stronger improved results both this quarter and our outlook, which I think will guide to better days ahead as well. We hope the rest of the earnings season goes well, and we look forward to catching up with each of you throughout the next several months. Take care.

Eric, Operator / Conference Operator

Ladies and gentlemen, this concludes today's call. You may now disconnect.