Oil States International Q1 2024 Earnings Call Transcript

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April 26, 2024

Key Takeaways

  • In Q1 2024, the company reported $167 million in revenues and $15 million of adjusted EBITDA, with a net loss of $13 million (or $0.21/share) driven by a $10 million goodwill impairment and $2.5 million of facility consolidation charges.
  • Oil States realigned its segments by moving short-cycle offshore products into Downhole Technology and is consolidating facilities in Houston and Singapore, funding a new Batam, Indonesia, plant with approximately $35 million in asset sale proceeds.
  • For 2024, management forecasts EBITDA of $85–90 million (about 5% below prior guidance) and free cash flow of $40 million (10%+ yield), supported by steady offshore growth, flat U.S. land spending, and strong international bidding activity.
  • Cost‐control measures are being implemented in low-activity natural gas basins to navigate short-term weakness, while the company remains bullish on long-term natural gas fundamentals.
  • Technology investments earned two 2024 Spotlight on New Technology Awards (Swift Ultra Deepwater Connector and ActiveHub), and the integrated Downhole Technologies segment is enhancing its perforating offerings and international penetration.
AI Generated. May Contain Errors.
Earnings Conference Call
Oil States International Q1 2024
00:00 / 00:00

There are 7 speakers on the call.

Operator

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 20 24 Earnings 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

Thank you. I would now like to turn the call over to Ellen Pennington, Senior Counsel and Assistant Corporate Secretary. Please go ahead.

Speaker 1

Thank you, Dee. Good morning, and welcome to Oil States' Q1 2024 earnings conference call. Our call today will be led by our President and CEO, Cindy Taylor and Lloyd Hodjik, Real Estate's 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.

Speaker 1

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 ks along with other SEC filings. This call is being webcast and can be accessed at Oil States' Web site. 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'll now turn the call over to Cindy.

Speaker 2

Thank you, Ellen. Good morning and thank you for joining our conference call today where we will discuss our Q1 2024 results and provide our thoughts on market trends in addition to discussing our company 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 Technology segment. All prior periods have been conformed with the current year presentation.

Speaker 2

Our Q1 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 in 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 Q1 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 $305,000,000 as of March 31 and a quarterly book to bill ratio of 0.8 times. Our Completion Services and Downhole Technologies businesses have begun to recover from the Q4 2023 activity slowdown that the industry experienced, but progress in this recovery during the Q1 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.

Speaker 2

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 2 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.

Speaker 2

Lloyd will now review our results of operations and financial position in more detail.

Speaker 3

Thanks, Cindy, and good morning, everyone. During the Q1, we generated revenues of $167,000,000 adjusted consolidated EBITDA of $15,000,000 and a net loss of $13,000,000 or $0.21 per share. Our net loss for the Q1 included a non cash goodwill impairment charge of $10,000,000 and facility consolidation and other charges of $2,500,000 Excluding these charges, our adjusted net loss was $1,900,000 or a net loss of $0.03 per share. In the Q1, 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 Q1 2024 revised segment presentation.

Speaker 3

Our Offshore Manufactured Products segment generated revenues of $87,000,000 operating income of $11,000,000 and adjusted segment EBITDA of $16,000,000 in the Q1. During the Q1, the segment recorded charges of $1,500,000 associated with the consolidation of certain manufacturing and service locations. Excluding the facility consolidation charges, adjusted segment EBITDA margin was 18% in the Q1. 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 2 facilities that are classified as held for sale assets at March 31.

Speaker 3

Proceeds from the sales of our facilities in Singapore and Houston which are anticipated to close in 2024 are expected to total approximately $35,000,000 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 twenty twenty five. 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 $305,000,000 at March 31, a decrease of 7% from December 31, 2023. In our Well Site Services segment, we generated revenues of $47,000,000 an operating loss of $400,000 or $400,000 and adjusted segment EBITDA of $7,000,000 in the first quarter.

Speaker 3

During the quarter, the segment recognized $700,000 or $700,000 in costs associated with the consolidation and exit of 3 facilities. Additionally, the segment recorded costs of $400,000 or $400,000 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 4th quarter. In our Downhole Technologies segment, we reported revenues of $33,000,000 and operating loss of $12,000,000 and adjusted segment EBITDA of $2,000,000 for the quarter. These results included a non cash goodwill impairment charge of $10,000,000 recorded in connection with the Q1 2024 segment realignment.

Speaker 3

As is usually the case, during the Q1, we used cash flows from operations totaling $11,000,000 and invested $8,000,000 in land and CapEx net of proceeds from sales of equipment. Net CapEx in the Q1 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 $86,000,000 which together with cash on hand resulted in available liquidity of $110,000,000 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.

Speaker 2

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.

Speaker 2

By the end of the year, While Brent and WTI crude oil prices were up approximately 10% 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 U. S. Driven basins where we operate remain weak given the low commodity price. Global inventories are slightly below their 5 year seasonal average for crude oil, but remain well above the 5 year average for natural gas.

Speaker 2

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 see increased spending in international and offshore markets. Despite the seasonally slow start in the Q1 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 technology segments to continue to perform in line with market activity indicators.

Speaker 2

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 $85,000,000 to $90,000,000 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 $40,000,000 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.

Speaker 2

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 cleantech energy opportunities.

Speaker 2

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

Thank you. We will now begin the question and answer session. And your first question comes from the line of Jim Rolison from Raymond James. Please ask your question.

Speaker 4

Hey, good morning Cindy and Lloyd.

Speaker 1

Hi Jim. Hi Jim.

Speaker 4

How are you guys today? So Cindy, on the offshore manufactured products business, you obviously order slips, you've had I think 2 quarters of sub one times back book to bill, but you kind of continue to talk as does others in the industry around just general spend and strong outlook for offshore. Maybe just a little color around what you're seeing from bidding. It sounds like orders slipped and just some maybe commentary around when you think you capture that? And then the other part I want to get into is just maybe the timing of how your backlog is set to play out through this year so we make sure we kind of get the timing of revenues in that segment correct?

Speaker 2

Yes. Thank you, Jim. Those are great questions. And I'll just kind of reflect a little bit on Q4 and recall that we were very heavy on our major projects. Obviously, a lot of material receipts came in, which accelerated revenue recognition in Q4 around those major projects because it's cost incurred, obviously, to total cost expected for those jobs.

Speaker 2

And so even though our book to bill was below 1 with those heavy revenues, our bookings were fairly strong in Q4. I kind of want to throw that out. Specific to Q1, I would speak to why it wasn't 1 to 1, which was shy of our expectations. But in particular, we had a large order where we secured long lead time orders, but not the full orders that flipped over into Q2. So I kind of look at the 0.8 differently than if we just weren't we didn't have anything active that we thought was coming in.

Speaker 2

So as I mentioned in the notes, we feel very secure about getting those orders because the customer has already ordered lead time pieces of that order. So let's say that that kind of explains the 0.8 book to bill. We still expect that our book to bill for the year will be north of 1. I always say though, the vagaries quarter by quarter are very difficult for just an example of the reason I just talked about on timing of orders. So I don't see a massive acceleration of orders nor do I see any real delays in orders.

Speaker 2

They're always going to be very dependent on when the larger ones come in, in a given quarter and they can move between quarters. I wish it weren't that way, but I will tell you if I ever see a slowdown that I expect our book to bill to go below 1, and at this point, I do not. Right now, our forecast for Q2 is to be slightly north of 1, and it's predicated obviously on the order I just talked about, plus some pipeline orders that are fairly broad based across the globe as well as some service bookings that we expect in Brazil. So those are kind of the lay of the land from an order perspective, but our outlook for overall bookings over the year really haven't changed.

Speaker 4

Okay. And then just on as you look at you have better insight obviously than we do on how the revenue progression should play out and recognize some of its backlog driven and some of its shorter cycle stuff. But just as you look at backlog and the way things are supposed to play out in the calendar, which they don't always do, just how do you think this year proceeds? Because you gave the color for the full year being actually up year over year, but just maybe how you lay that out from a quarter to quarter perspective?

Speaker 2

Just basically as typical, if you even look at history, that's why I kind of said this quarter looks kind of rough for offshore products, but it's actually up year over year. There is always that seasonal element to it. But what you're going to see, I think, is kind of a steady ramp as we progress throughout Q2, Q3 and Q4 for offshore products. And those are kind of trends we've seen consistently in past years. And again, obviously, it's dependent on the timing of getting the backlog in the door, but a lot of it is already secured at this point in time.

Speaker 2

I would focus on, to some degree, the service orders because mix always plays a bit of an impact as well and service tends to be higher margin. But overall, just assume a steady ramp from Q1 throughout the year in terms of revenues and EBITDA generation.

Speaker 4

Got it. I'll turn it back. Appreciate the comments.

Speaker 2

Thank you, Jim.

Operator

Our next question comes from the line of Luke LeMoyne from Piper Sandler. Please ask your question.

Speaker 5

Yes. Hey, good morning.

Speaker 2

Good morning, Luke.

Speaker 5

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

Speaker 2

No, that is also a great question, Luke. And what we've done and why we're blending these groups together, we have a more integrated downhole technologies offering and this is how we're managing the business now to where the short cycle offshore products are getting highly integrated with our Downhole Technologies segment from a leadership perspective, reporting perspective, everything, procurement and support. And so, I think the go forward for the business is in improved shape. What I'll call the base business before the segment reallocation did improve sequentially, both in terms of revenue and EBITDA. And so we're seeing results now.

Speaker 2

We expect further improvement in Q2 and that is predicated on some improved interest, I'll call it, on the domestic perforating side in addition to higher international sales. So the keys there are technology rollout, market share in the U. S. And further international penetration on the perforating side, that honestly, our plug business is fine. And it's both getting good market share and making margins.

Speaker 2

So that's really not the focus. The focus has been on the perforating side of the business. And I'm always don't get me excited about it, but I am saying we're seeing improvements at this point in time.

Speaker 5

Okay, got it. Thanks a lot Cindy. Thanks

Operator

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

Speaker 6

Good morning, everybody. 2 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 sort of incrementals in that business any differently as we look out over the next several quarters?

Speaker 2

No, not at this point in time. It was interesting when we did the recast kind of margin profile ended up in similar positions. Positions. And so we don't expect incrementals, obviously, incrementals should go up if we get the top line growth that we're looking for, but that's not unique to the mix of businesses. That's just cost absorption.

Speaker 6

Okay. Thanks. And I got dialed in a little late, so I apologize if you addressed this. But when you think about the change in your full year guide from the prior guidance, is most of that just kind of U. S.

Speaker 6

Land activity related? Or is there anything else in there we be thinking about?

Speaker 2

At this point in time, we obviously have a lower quarter in our offshore manufactured products business than we expected to have, with a little bit of these orders pushed out. And so I'm putting a little downward pressure on offshore manufactured products. And the key to U. S. Land for us is kind of managing through the exposure that we have in the gas plays efficiently, I'll say, this year, given the very low activity levels, but staying prepared for what should be an uplift on those plays whether as early as 2025.

Speaker 2

And so controlling costs in the natural gas plays really is going to be the game for the next couple of quarters as it relates to U. S. Land. But we are proactively doing what we need to do, so it's not a terrible drag on the overall results.

Speaker 6

Okay, great. And then and maybe just one final. On the perforating side, there's been a lot of movements over the last couple of years, I think just in the competitive landscape and you have one competitor, I think, who's trying to sell their business. Can you just speak to the dynamics there? Have you seen any changes there as far as the perforating side is concerned?

Speaker 6

And what are you seeing there from a pricing perspective?

Speaker 2

I'll be honest, yes, there is a larger player that is looking to monetize and there's actually a couple of smaller competitors looking to monetize. So that could lend itself to a healthier market going forward for the business. We are committed to the business and we're committed to delivering the technology it takes to be successful in it. I'll just kind of generally say that from a competitive landscape, it's hard for me to say that it's not getting a little bit better or will be as some of these transactions occur. And I think more important for us specifically is the investment we made last year in the new technology rollout.

Speaker 2

And importantly, the go to market strategy, which has evolved from moving away from wireline companies to E and Ps and back. And we just want to support our customers regardless of where they are in the supply chain. And I think that's going to benefit us over the longer period of time.

Speaker 6

Thanks. If I could slip in one more Cindy, sorry, does the E and P consolidation and the larger operators appreciation for that technology ultimately help you?

Speaker 2

I think it would for sure. I mean it all comes down to reliability and in the world we work in, it's also got to be cost. And we've made significant improvements on there. But I think the technology differentiators really play more probably in the international market, just because of the reliability factor that is necessary and there's not quite as much competition, quite frankly, in international basins. And so those are going to be the key differentiators and drivers of our success going forward.

Speaker 6

Okay, great. Thank you.

Speaker 2

Thanks, Stephen.

Operator

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

Speaker 5

Hey, good morning, Cindy and Lloyd.

Speaker 2

Hi, John. Hi, John.

Speaker 5

You sort of answered my question was in response to Steven's question, but I'll maybe rephrase it a little bit. I mean, the carnage in natgasmarkets is growing and yet the medium to longer term outlook remains constructive. It's really just how do you capitalize on the present disconnect? Because there's a lot of as you all know, there's a lot of small service companies, regional ones struggling and those struggles probably intensify that seem to create opportunities.

Operator

Well, I think,

Speaker 2

yes, they will, but actually a lot of people are shutting doors and that just firms up the competitive positioning in the place. We already work for particularly in the Northeast, some of the larger players that are active there. We're doing the multi well pads as opposed to the lower tier type activities. So my singular focus right now is trying to mitigate losses and keep our field service technicians employed. And if that means rotating to other plays, and there'll be some incremental cost there, but it's better than losing your FSTs and having no profitability at all, right?

Speaker 2

And so singular focus is on cost management and control and retaining those FSTs through the next three quarters.

Speaker 5

Okay. Well, that's all I had. So thanks for including me.

Speaker 2

Thank you, John.

Operator

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

Speaker 2

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, very busy period of time, but we'll catch up with all of you if you choose to give us a callback. So thanks so much.

Operator

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

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