Oil States International, Inc. (OIS) Q2 2016 Earnings Report, Transcript and Summary

Welcome to the Oil States International, Inc. Second Quarter 2016 Earnings Conference Call. My name is Vanessa and I will be your operator for today’s call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Patricia Gil, Investor Relations. You may begin.

Thank you, Vanessa and welcome to Oil States’ second quarter 2016 earnings conference call. Our call today will be led by Cindy Taylor, Oil States’ President and Chief Executive Officer; Lloyd Hajdik, Executive Vice President and Chief Financial Officer; and we are also joined by Chris Cragg, Executive Vice President, Operations. 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 projections afforded by federal laws. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our most recent Form 10-K and other SEC filings. I will now turn the call over to Cindy.

Thank you, Patricia. Good morning to all of you and thank you for joining us today for our earnings conference call. For the second quarter of 2016, we reported a loss of $0.22 per diluted share after adjusting for $0.01 of severance and other downsizing charges. Like virtually every company in the energy services sector, we continue to be impacted by weak U.S. drilling and completion activity as the average U.S. rig count declined an additional 23%, reaching a low of 404 rigs working in mid-May. Despite the 23% sequential decline in the average U.S. rig count during the quarter, our well site services revenue was only down 7% and our consolidated revenue actually improved 4%. Starting later in the quarter, we began to see some encouraging signs that activity was troughing for U.S. lower 48 drilling and completion work and that activity could actually be starting to recover. Evidencing this trend, the average price per barrel of WTI crude improved 36% sequentially in the second quarter and the current U.S. rig count increased 14% from its low point in May 2016. However, the WTI crude price has pulled back about 11% since the end of the quarter to its current level of approximately $42, $43 per barrel. The impact of this recent decline in commodity prices on customer perception and spending will become apparent in the following months. In our Offshore Products segment, we recognized another good quarter with strong EBITDA margins averaging 20%, while revenues came in at the midpoint of our guided range at $135 million. However, the continued deferral of major deepwater development projects has had an impact on our operations and our backlog. Our book-to-bill ratio remained fairly resilient given the current market environment totaling 0.75x for the second quarter. With a book-to-bill ratio below 1, our backlog declined another 12% sequentially ending the quarter at $268 million. Activity and pricing in our well site services segment remain under considerable competitive pressure. However, segmental EBITDA improved sequentially and utilization of our land drilling rigs increased slightly quarter-over-quarter, which is the first sequential increase we have seen since the second quarter of 2014. At this time, Lloyd will take you through more details of our consolidated results and provide highlights of our financial position. I will follow with more details by segment and provide additional comments on our market outlook.

Thanks, Cindy. During the second quarter, we generated revenues of $176 million and reported an adjusted net loss of $11 million or a loss of $0.22 per diluted share, which excluded $1.1 million pre-tax or $0.01 per diluted share after tax for additional severance and downsizing charges. Adjusted EBITDA improved 12% sequentially to total $13.5 million for the second quarter. Our adjusted EBITDA margin was positive at 7.7% due to the strong EBITDA margin performance at our Offshore Products segment, along with reduced EBITDA losses from our well site services segment. During the quarter, we invested $8 million in capital expenditures. Capital spending during the quarter related to expansionary investments for our offshore products facilities along with maintenance capital spent on our completion services equipment. For the full year 2016, we expect to spend approximately $40 million to $45 million in capital expenditures. Throughout this cycle’s downturn, we have endeavored to protect our balance sheet and preserve our liquidity position. We ended the second quarter with total liquidity at $335 million, which is comprised of $283 million available under our revolving credit facility, plus cash on hand of $52 million. As a reminder, our liquidity position is likely to continue to decline throughout 2016 from the June 30 level as a result of lower levels of EBITDA on a trailing 12 months or TTM basis, which serves to restrict full access to amounts available under our revolving credit facility. Our financial position remains healthy. We generated $25 million of cash flow from operations and $17 million of free cash flow during the quarter. We used our available cash to repay $6 million of debt during the second quarter. And as of June 30, our gross and net debt levels totaled $84 million and $32 million respectively. Our net debt to book capitalization ratio was 2.6% at June 30. And our leverage ratio, using TTM adjusted EBITDA, was 0.7x, which continues to be well below our maximum level of 3.25x provided for in our credit agreement, which does not mature until 2019. With respect to our share repurchase program, earlier today, our Board of Directors approved a 1-year extension of our existing share repurchase authorization to July 29, 2017. Amounts remaining available under our current share repurchase authorization totaled $136.8 million, which is unchanged from the end of the first quarter. In terms of our third quarter 2016 consolidated guidance, we expect depreciation and amortization expense to total $29.5 million, net interest expense to total $1.2 million and corporate cost to total $11.1 million. Our third quarter and full year 2016 consolidated tax rate benefit is expected to average approximately 37%. And at this time, I would like to turn the call back over to Cindy who will take you through each of our business segments.

Thank you, Lloyd. In our Offshore Products segment, we generated revenues of $135 million during the second quarter of 2016, up 7% sequentially, while EBITDA totaled $27 million and our EBITDA margin percentage averaged 20%. These results were largely due to solid project execution during the quarter, benefits from a lower cost structure and exchange rate gains generated primarily in the UK. Orders booked for the quarter totaled $101 million and our backlog at June 30 totaled $268 million representing a sequential decrease in backlog of 12% from the first quarter. Our second quarter book-to-bill ratio was 0.75x. Backlog development is trending in line thus far with our full year expectation of a book-to-bill ratio of roughly 0.7x to 0.75x. Notable backlog additions during the second quarter included orders for pipeline products destined for the Middle East and incremental replacement equipment on a previously sanctioned Gulf of Mexico production facility. On June 30, we acquired the inventory and the right to use the trademark and trade name associated with the Giberson product line from Cameron International Corporation, which we have integrated into our elastomer products offering. As we progress into the third quarter of 2016, we expect revenues in our Offshore Products segment to decline and range between $120 million and $130 million. With reduced revenues, we expect to suffer lower cost absorption, pressuring our EBITDA margin percentage for the third quarter to an average of 17% to 19%. These lower margins are directly correlated to our backlog levels, which have trended lower throughout the year, creating depth in our major project work. We are however, beginning to see some improvement in demand for our short-cycle consumable products, which will partially buffer the loss of some of the larger project work as we progress through a weak cycle for deepwater activity. In our well site services segment, results continue to be weak due to low activity levels in the U.S. land drilling and completions market. However, the U.S. rig count appears to have troughed in the second quarter and has since increased 14% from the low reached in late May. Our well site services segment revenues totaled $41 million, which represented a 7% sequential increase. However, on a slightly more decrease - excuse me, however, on a slightly more positive note, segment EBITDA improved from a loss of $8 million in the first quarter to a loss of $4 million in the second quarter, evidence that we have adjusted our cost structure in response to depressed activity level. We experienced sequentially lower revenues due to a 16% decrease in the number of completion services jobs performed, which was partially offset by 7% increase in revenue per a completion service job, primarily as a result of a mix shift to more long duration job, both in international markets and longer term project work in the U.S. Gulf of Mexico. In addition, sequential improvements in utilization of our land drilling rigs from an average of 6% in the first quarter to an average of 9% in the current quarter contributed to improved results. We have six land rigs working today and expect to report another quarter of sequentially improved utilization in the third quarter. Improvements in crude oil prices following the lows experienced in the first quarter, along with increases in the U.S. rig count, supports the belief that the worst of this cyclical industry downturn in the U.S. lower 48 shale plays is behind us. However, the decline in the WTI crude prices at the end of the quarter to approximately $42, $43 per barrel currently has served to temper our enthusiasm. We are in constant communication with our customers to ensure our readiness to support potential increases in their activity level. Barring another round of disappointments due to declining crude oil prices, we estimate that third quarter revenues for our well site services segment will begin to see some sequential improvement and range between $43 million and $48 million, with segment EBITDA margins at or above breakeven level. In conclusion, the recent improvements in the U.S. land rig count are encouraging. However, we are still in the process of finding a bottom in activity and backlog in our offshore products segment, which needs to occur before revenues and EBITDA are likely to bottom. Major deepwater projects continue to be deferred, but this has resulted in significant underinvestment in deepwater production projects over the past couple of years. It is anticipated that the level of underinvestment in the deepwater could lead to future supply challenges, which should lead to certain of these major developments moving forward. However, the timing of such project sanctions remains uncertain. Over the course of this downturn, we have been successful in maintaining a strong balance sheet position with low levels of leverage. Our actions have positioned us favorably to respond efficiently to a market recovery and to execute on potential M&A opportunities, should they present themselves. That completes our prepared comments. Vanessa, would you open up the call for our questions and answers at this time, please?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And we have our first question from Marshall Adkins with Raymond James.

Thank you all for the detailed commentary. Cindy I want to follow-up on a couple of things, on the completion side, obviously the sequential improvement in EBITDA was out of the ordinary versus most peers out there and it sounds like it was more cost related than pricing, could you give us a little more color on – are there more cost benefits to come and what’s your outlook for pricing in that particular side over the next two quarters, three quarters, four quarters?

Yes. What we are trying to convey there and if you will recall when we exited the first quarter, we gave you guidance that was surprising, I think relative to rig count trends at that point in time. But we mentioned we had some Gulf of Mexico start-up work, intervention work that benefited us and we had some expanded activity in international plays, both of which are generally either longer duration job or certain equipment that goes out and stays on a job. And so it’s really is truly mix, meaning if you have one ticket and that ticket is out there for a month, obviously that’s higher than a ticket that’s on a short job on land. And so we are trying to convey, obviously – clearly, we are not seeing pricing benefits at this point. It is mix, but we will take it. And we are certainly glad to have added contribution for both international work and some Gulf of Mexico work. As it relates to activity in the lower 48, I have been very clear that I think that margins in the near-term are going to be activity based margins. And I would just reiterate that we have a lot of fixed cost structure across the lower 48 in terms of district offices, product line specialists, QA/QC. But that our individual jobs are profitable jobs. So as we get incremental work and incremental jobs, we expect our margins to come in on an incremental basis very favorable.

Right. And obviously, as far as those cost reductions both operationally and on the SG&A side, as things improve, obviously margins get meaningfully better, how sticky are those cost reductions going to be as you go – as we progress through the recovery cycle over the next couple of years?

Well, I will give you an example and this actually is in offshore product. When we talk about our short-cycle opportunities, we are – there, we are a manufacturing operation, but it had some correlation to service. And why I am saying that, we reduced down to a headcount level that I would say even those people oftentimes have had significant pay reductions because they are not getting any overtime. And so the first step of this recovery, as you get an incremental job, I am not going to bring on new people yet, I m going to return some of the hours worked to the people that need it. In the case of again our elastomer operations, we have expanded to, in one case, a six day work week on the low levels of employment we had and we restored some overtime. You are going to do that till the point where it becomes not cost effective for our customers. We want to keep our costs low in this low price environment for our customers as well. So little more art than science in terms of at what level of rig count do you hire more workers versus give incremental work to the people you have. And if that answers your question, so the point of it, there – activity is going to bring good margins, but yes overtime is premium pay. But you are better off doing that to a degree without bringing on incremental people until we get more of a sustained improvement in activity.

Alright. Thank you all.

Thanks Marshall.

And thank you. Our next question is from Jim Wicklund with Credit Suisse.

Good morning Jim.

Good morning. I had e-mailed Marshall all of the good questions I wanted to ask and so he already asked those. So I am stuck with leftovers, so forgive me. On your offshore business, you talked about consumable demand is actually picking up, which items in your consumable area do you see some increased demand for?

Well, there is kind of two areas here. Remember, our elastomer product is broad based. And it’s not just offshore. They are going to be a land element. We don’t know where that goes. So composite bridge plugs, frac plugs, frac balls. Those kinds of things we are seeing an increase, again knowing that there is both an offshore and a land driver there. The other thing is large OD conductor casing connectors, both on kind of a bid and inquiry basis and we had some good revenues this quarter as well.

Okay, that’s all for the original Oil States elastomer business?

Correct.

You talked about offshore and WoodMac came up with a report the other day saying that there looks to be a huge number of FIDs in ‘17, but they are really just ones pushed from ‘16 and ‘15 into some future year. Can you get the impression from talking to any of your clients that they are closer to getting their cost to the point in deepwater where they may actually start issuing FIDs in ‘17?

Yes, we do. I mean, there is probably meaningful conversations with customers and it varies by geographic area in terms of where they think their breakeven costs are now, but undoubtedly, they are down materially. And I would just kind of characterize where we are right now, it’s interesting but you know Scott very well. And I believe if I got his quote right that we kind of had four project – only four project sanctions in 2015 and we have had only one this year of any consequence. So, what – the recent offer you have had this is not new. We have been deferring and delaying these projects now for multiple years, not just the current year. And yes, what we have on our radar screen, there is a long list, many of which we are probably in the second, third or possibly, even fourth re-bid stage. And a lot of these, as I mentioned previously, are not just about cost reductions coming out of the supply chain. It’s also about reengineering in many cases. What we are going to see, in my view, in the next 6 to 12 months are collective view is more of the lower cost tiebacks to existing facilities., Some of them were shallow production opportunities, Southeast Asia, Middle East. And the market is looking for these huge major project FIDs. I think we are going to be buoyed a little bit in the interim, but some of these Southeast Asia and Middle East fields, we are certainly bidding things in both Gulf of Mexico, Brazil and other geographic regions. But to your point, I don’t think any of the major incremental FIDs come late this year. We have some opportunities set that maybe a little unique. So, 2017, we do have the expectation we will see some of these. We have got a whole page of projects and we kind of highlighted in red the one and trying to handicap which quarter or which year they may come in. They maybe a long-winded way of saying we tend to agree with Wood McKenzie. It’s all a matter of kind of which quarter, which half a year we see these things move forward.

Okay, that’s very helpful. And the last if I could, we have talked for the last year about M&A and the point has been consistently made that until activity stops going down, you can’t have any meaningful M&A activity. Now, the second quarter represents what we hope and appears to be a bottom in onshore North American activity, have you seen a pickup in flow of opportunities, what you buy and what you don’t buy none of us know, but have you seen a pickup in opportunities or offers out there in the market since the activity has bottomed or is it still too early?

No, I would say that we have seen a pickup in activity both LOIs rendered as well as due diligence/offers made. Fairly broad-based in both segments at this point in time in terms of what we are seeing. And I wouldn’t necessarily say we can’t get anything done until we stop going down. What that does though is create great uncertainty in terms of what your forward outlook is and so there is still – there has been a disconnect between sellers’ expectation buyers. Are we going to go back to peak 2,000 rig count or is one major out there saying 900S is the new 2,000. So, my point is uncertainty in terms of the outlook. Sellers are going to think we are going back to peak. Buyers are probably saying probably not. And so – but to answer your question, yes, we are more active now in terms of bidding opportunities. There is a wide range of what that will translate to in terms of reality.

At least, we can start arguing about it. Okay, thanks guys.

Thank you.

Thank you. Our next question is from Bill Herbert with Simmons & Company.

Thanks. Good morning.

Good morning, Bill.

Hi, Bill.

Your well site services guidance encouraging with regard to the EBITDA guidance and it just seems like on the high end of the revenue range assuming you breakeven for the quarter, it’s kind of a 50%ish incremental quarter-on-quarter. What’s the primary driver of that? Is it primarily the land rig business working at 6 rigs versus 3 in the second quarter or are you expecting to see good uplift in incrementals as well for your completions business?

Yes, it’s a little above, but I would weigh to the completion business. We do expect to see positive EBITDA on our land drilling rigs. So, that will be welcome, but that’s not the major driver. And two comments there, number one, obviously, the land-based rig count is up and we will proportionately get some of that work and as we bid it profitable margins, not everybody does, but we do. We will get a full quarter’s benefit of some of the Gulf of Mexico intervention work, which will also help us overall. And I can’t remember on international, but I would say flat to modestly better there as well.

But if you are – on your land rig business, if you got call it 6 rigs working, maybe assuming kind of a flattish day rate, again, off the small numbers. You are almost getting a doubling in revenue here, which would imply that – I mean, you are getting a pretty decent margin in the land rig business in the third quarter. Is that right logic or no?

Well, I mean, it is. Like you said, it’s pretty darn small base when we are going – coming off 9% utilization to, yes, double-digits, but it’s just a smaller contributor, but the answer is yes, I mean, the incrementals...

But it’s a smaller absolute competitor, but what I am getting at in the longwinded fashion here is the sustainability of that margin going forward, because it’s a pretty good improvement.

Well, I mean, we do see sustainability. I will caution in the wind right now is if anything, a lot of the rigs went back to work when we were approaching or touching $50 a barrel, and we have retrieved a bit. And I just in the land business, I will just say our outlook is spotty. Yes, the rigs are going back to work, but don’t think there is any contract behind it. And we are so efficient that we are drilling wells in a number of days. And so – but my visibility is as good as it is today. But right now, I feel pretty confident saying that we will have sequentially improved utilization and positive EBITDA in that business for Q3.

Okay. And switching from onshore to offshore and just assuming the following framework, which were oil is kind of oscillating between $40 and $50 for the balance of the year and we start getting improved evidence of inventory draws in 2017 and oil prices continued to normalize higher next year. At this juncture, what do you think is the right glide path here with regard to offshore product revenues and backlog? And when do kind of both of those you think trough? I mean, you mentioned you improved visibility with regard to your shorter cycle businesses, plenty of discussions I think encouragingly with regard to tieback activity in Southeast Asia and the Middle East, major project FIDs, who knows, I mean, our own view is probably late ‘17 and 2018. But just curious as to kind of glide path on the items that I mentioned.

Well, I will do the best I can and I am going to kind of take you back to my guidance of Q1, where we expected to have a relatively weak bookings quarter in the second quarter. And while 0.75x may not feels heroic, I would say it’s one of the best, if not the best on the Street and it exceeded our expectations. So, now, I am going to set you up to say maybe a trough in Q3 and everybody wants me to frame it. It’s not that precise, but maybe that’s 0.5 to 0.75 range. It’s not awful. And right now, whether we are right and that we could get in the order in Q3 that is uncertain at this point that makes it a little bit better. And we targeted an award in Q4 that we would say we are going to trough late Q3, maybe Q4, depending on a couple of orders that we are tracking diligently at this point in time. Our outlook for 2017 is a bit more positive based on the project queue and the bidding activity and the conversations we have with our customers. So, who knows if this is right or wrong, but we would call a trough at this point in the second half of this year.

Do you think its rash to assume a book-to-bill of close to 1x for most of next year?

Yes, it’s probably too early to tell.

Okay, alright. Thank you.

Thanks, Bill.

And thank you. Our next question comes from Blake Hutchinson with Howard Weil.

Good morning.

Hi Blake.

Hi Blake.

Hi. Just kind of sticking with offshore products segment for the time being, as we – as you alluded to, you are starting to grapple a bit more with under-absorption, can you give us an idea – a little more idea qualitatively that the buckets that are more problematic and help us understand maybe then qualitatively what we should be paying attention to in terms of new order flow to help kind of alleviate that problem as well?

Well, I can. And for us, it’s what I termed in my introductory comments, which is major project work. And that encompasses a few buckets, but it’s my sub-sea pipeline products. And if you go back to our investor presentation, we had good backlog, good content coming out of Brazil, as an example, we are working that backlog down. And we have gotten some modest smaller replacement work there. That’s in our Houston based operations. But as that backlog erodes, obviously my cost absorption is impacted just a bit there. In my Houma based operations, we have zero what we call deck equipment work, any type of mooring systems, anything like that. So were living off crane, one construction to service right now, lot of cost control efforts. And I don’t know where to floor because we haven’t had any meaningful deck equipment in that facility for six months to nine months now. My UK operations, again we have had some very good production facility work. A lot of those were Gulf of Mexico, major FIDs and our backlog is declining there as well. And so what we are getting to, both in terms of backlog and we will eventually get in revenues is more of a base line amount of consumable work, whether that’s large OD conduct casing, we call it kind of our standard connector product, the service work, the crane work, the elastomer products, etcetera that will be a base level of work. But then we need to reload that backlog. And you kind of connect the dots. If we are right and we see a lower backlog obviously coming out of Q3 is our thoughts right now. But if that trough somewhere light this year, then we can trough on revenues and EBITDA probably early next year and start having some forward momentum from there.

Okay. Thanks for that that kind of rounds up that discussion. I appreciate that. And then just for really for our own reference maybe for future references, understanding how huge a hit the U.S. completion services business has taken. Are we talking about Gulf of Mexico and international in a period like this representing something in the range of 40% to 50% of the completion services revenue versus maybe 20% or something like that last year, just to kind of frame how significant that business is at these lower levels and is that, why it’s entered back into the conversation or is there actually an absolute kind of growth case there, kind of smaller markets taking share, etcetera?

Well, it’s very – that’s a great question and I will tell you where our thoughts were. If you would have asked me that kind of at the peak rig count it would have been a much smaller piece, maybe 10%, 15% depending on activity. Again, with the U.S. rig count down 80%, it is on a proportionate basis a little bigger. I am looking at Chris and he is signaling roughly 35% now. So that’s one answer. Then I think you also asked, is there any potential growth there and certainly a focus for us to expand with the activity international. And some of our key operating executives are going to the Middle East next week to work on some of those initiatives and further penetration in Gulf of Mexico. Again, we believe we are a premium high end provider of equipment. What work is out there in the Gulf we think we should participate in and so focus areas for us, but if things play out and land recovers in any meaningful degree by 2017, then the international Gulf piece will shrink back proportionately.

Great. Thanks for that, very helpful on those. I will turn it back.

Thanks a lot.

And thank you. Our next question is from Sean Meakim with JPMorgan.

Thank you.

Thanks. Hi Sean.

I just wanted to talk a little bit about free cash flow and you guys have done very well historically on that metric and just thinking about how you look at free cash flow generation through this cycle, so as things look better, particularly in North America and onshore perhaps and I don’t know if there will be a different cadence for offshore, how you think about working capital, CapEx flexibility to sustain some of the positive free cash as we are in kind of early cycle phase?

I am going to let Lloyd take that one.

Thanks Sean. From a working capital perspective I mean we have generated about $55 million, actually about $65 million of working capital benefit in first half of the year, I would expect that to slowdown as our operation start to improve. So maybe a little bit of a working capital build, okay. From a free cash flow perspective, our CapEx is pretty flexible. We have guided to $40 million to $45 million for the full year. That’s down from where we started the year, so CapEx spend fund is fairly flexible. We don’t really look at free cash flow per se on individual segments basis. The segments have their operating cash flow and CapEx. I think that the – we are really looking at free cash flow on a consolidated basis. Expectations throughout the cycles that will be positive free cash flow throughout and use the free cash flow to essentially pay down our debt or M&A or share repurchase.

Right. I guess that’s what I was getting at, so as well as we get into a ramp and some of the businesses maybe at different points in the cycle, but you expect that you build continue to generate free cash flow through out those changes in the environment?

Yes.

Okay, great. And I think a similar question as some of the others were asked on the margin side, but just thinking about in the recovery state, perhaps in near-term for completions or let’s say well site services and then longer term for offshore products how we should think about incremental margins for those businesses as we get into an early-cycle phase?

Well, I would tie that to an earlier comment that I think it was Marshall I was responding to. We were the first incremental we believe we are going to – we can get some mix impact. But it’s going to be activity based incremental. So it’s going to be the incremental margin based on the type of job we are doing. Those can very significantly depending on it’s our high end proprietary lines or something say it’s a little more competitive like well testing. But those margins can range anywhere from probably 20% to 60%, depending on what the product or service is. So – but that gives you at least a fair way of thinking. But think about activity based incremental at this point in time. It’s probably a little premature to talk about offshore products incrementals until we hit a floor at this point in time. But as our history is a pretty good indicator, if you want to go back to offshore products, I think floored in terms of backlog in 2009. And I believe they floored in terms of EBITDA and EBITDA margins probably in 2010. But again, you can look a little history as barometers. I will give you more firm guidance as we move into 2017, largely because we will hopefully have brought on our UK facility. And there is a few things embedded in our cost structure that I think may yield a more positive outcome as we go into a recovery in that segment.

Okay. So just saying history is a guide for offshore maybe that 17% range is still a good guidepost to think about we will learn more as time goes on. And then perhaps there are some incremental drivers here that could help boost incremental margins for the well site service business in the early cycle or maybe even extend perhaps some of those higher incrementals?

Yes. I think I tried to listen to everything that you said. I think we floored on our offshore products EBITDA margins around 16% in 2010. I don’t have the quarter-by-quarter breakout in front of me, but I think that’s correlating to what you said. And then again, we have a mix of products and services, so trend lines, I think can be informative. But depending on the mix of products that will obviously impact our gross and our EBITDA margin.

In that 2010 number, 16.8%, just under 17%, that’s a full year number.

I don’t have the quarter-by-quarter number.

Right, exactly, it’s very helpful. Thank you both. I appreciate it.

Thank you.

And thank you. Our next question is from George O’Leary with Tudor, Pickering, Holt. George O’Leary: Good morning, guys.

Hi, George. George O’Leary: Most of my questions have been answered, so I just had one follow-up. As you look at the completion service business with the focus on U.S. onshore in particular, we have heard from a lot of the completion services, sorry, a lot of the pressure pumpers and sand producers that intensity continues to increase E&Ps we are talking about. Just curious what you guys are seeing on the completion side of your business with respect to increasing intensity and which pieces of that business may benefit most from that trend in the eventual up cycle?

Well, I mean we wouldn’t affirm all the things that you have heard in terms of individual completion, complexity, intensity, number of stages. There are talking a lot about volume, whether it’s frac volume and pressures or whether it’s sand volumes at the end of the day. And ours is more high pressure, high temperature as a driver for our hiring technology equipment, but the correlation is the same. And if you look at the rig count improvement that we have seen today since the floor, it is very much weighted towards the more complex horizontal wells. And of course, the Delaware Basin has enjoyed probably 50% of the improvement in rig activity. So again, it has the same impact, although our equipment is more days on location and higher end pressure and temperature as opposed to a volumetric type measure such as frac fluid or sand. George O’Leary: So, the incremental time it takes to complete these longer laterals and more stages, more profit that could actually be a tailwind for that business as well?

Yes. George O’Leary: Great, thanks for the color, guys. That’s all I got.

Thanks, George.

Thank you. Our next question is from Kurt Hallead with RBC Capital Markets.

Hey, good morning.

Good morning, Kurt.

Cindy, just curious, you talked about some short cycle business pickup I believe on the offshore products side of the business, can you remind us what percentage of the offshore is short cycle?

Well, part of it’s how you define short cycle, but historically, we have been anywhere from, I must say roughly 15%, 20%, depending what I define as short cycle anyway, which is predominantly our valve products and elastomer products and then about 20% historically has been service. And again, some people might book the large OD conductor casing connectors in that definition we are not. So again, that’s kind of order of magnitude.

Great. That’s helpful. And then I understand the cautionary commentary given the dip in oil prices as it relates to the well site businesses. I would expect that the momentum is probably too great as indicated by your guidance to affect the revenue progression in the third quarter. So, the caution will really come in the fourth quarter in your view possible tail off in revenue depending on what happens with crude?

Yes. And I would just generally say, there is nothing specific here, customer conversations, nothing like that. I would just say when you have been bitten by a snake you worry another one is in the grass. And we kind of went through this head cycle last year, but we think nothing suggestive of that. And I do think this ability within Q3 is pretty good, but it’s July 27 and we are a spot-based business and it can turn rather quickly. That’s all the comments I can offer you.

That’s great. And then just lastly on the outlook for Offshore Products, you gave some commentary about being confident about how 2017 maybe shaping up? I don’t know it’s still early on that process. Given the fact that your business is not driven by subsea equipment and the project list is not as maybe transparent, just wondering if you can offer up a little bit more color on where that visibility maybe coming from?

I absolutely can. And you hit on a good point that I think in the interim, we may benefit for some smaller one-offs somewhat I don’t call them unique projects, but projects that benefit our product line. And if I were to generalize kind of the next 6 to 9 months, we have got some bids outstanding in the Middle East and Southeast Asia. And they range, quite frankly, everything from cranes to small PLP, but more I call those somewhat little more shallow. I don’t want to call them marginal field-type development. but not the big project FID that I think is in everybody’s radar screen. Although, we obviously are bidding work in Brazil, Gulf of Mexico and other regions as well. And we had this ongoing base of business with our standard connector products, our cranes again the short cycle consumable products, valves and service work. So again, we are tracking I can count on a hand pretty much five projects that we are trying to handicap, whether we get an FID Q3, Q4 or the first half of 2017.

Alright, great color. Appreciate it. Thanks.

Thank you.

And thank you. Our next question is from Marc Bianchi with Cowen & Company.

Thank you. Most of my questions have been answered, but I supposed just to circle back on the conversation with Sean on free cash flow. As we think about an activity ramp and maybe say 200 rigs or something like that, how should your working capital trend over a couple of three quarters in that environment, I am just kind of curious how much of a restocking aspect there is to the business and also any kind of customer credit that gets extended along with that.

Yes. Good question. As far as working capital over the next couple of quarters if your rig counts building activity is going to go up. Now we expect working capital to build slightly. I don’t have it modeled that materially quite frankly over the next two quarters or three quarters second half of this year, wait to see what 2017 was going to look like. And as far as our customers and extending credit, we have a work with a top rating customer base our collections have been – we haven’t had any problems with those guys.

Yes. I mean our modeling quite frankly, we got a 5-year model it’s really modeled off historic day sales and receivables and payables and inventory. And so really flows with activity we simply put.

Yes. And our DSO actually has come down quarter-over-quarter.

Okay. So not a dramatic change, I guess just thinking more about the pace of the business and well site services as you progress through the year, you mentioned the Gulf of Mexico and usually, there is some seasonality in the middle two quarters for a lot of the companies that serve the GOM, how does that behave for your business, is there any expectation here that fourth quarter, some of this work that you are seeing will just sort of go dormant for a little while or help us understand the dynamics there if you can?

Well again, we are really working on intervention work and so these tend to be a little bit longer term contracts that are in place not as susceptible to short-term weather patterns.

Okay. Thanks very much. I will turn it back.

Great. Thanks.

And thank you. [Operator Instructions] And we had our next question from Chuck Minervino with Susquehanna.

Hi, good afternoon.

Hi Charles.

Just a couple of questions on offshore products that I had, I was wondering if you could talk a little bit about how much of that offshore products business is really that aftermarket work and if you have a sense of how much of that has kind of been delayed by your customers over the past couple years and really would need to kind of have a catch-up order flow when prices recover is when the spending does come back.

Made very good point, you are right. Just over the course of history, it’s little ebb and flow, but roughly 20% of our revenue is service oriented revenues. And honestly, we have been hit harder on that than I would have expected through the downturn. Generally, you kind of find down to a floor and you need to do ongoing service and maintenance work. And so we really came down a bit harder than I would’ve thought we did. And so to your point, I think there has been fairly material deferrals of work that we will need to pick up. Again, once people kind of get this inertia out and start releasing some incremental fund.

Great. And then just a second question here. On the 3Q – if I heard your guidance correctly, it sounded like the offshore revenue guidance was something like $1.20 to $1.30 and I think you mentioned something like a book to bill around 0.5 to 0.75. I guess it comes out to roughly I guess $80 million of orders. If that number is somewhat right, would you say that that’s kind of a good place to be for like is that like a purely maintenance order number, it doesn’t sound like there is much new project activity, would you say that that’s kind of a good new baseline for maintenance orders going forward?

Well, I think as it relates to Q3 it is definitely more, I hate to characterize it as maintenance. We really talk about large projects as being north of $10 million. We may, as an example, get follow-on work on a previously sanctioned project. So in other words, that is a major project FID, but it is less than $10 million, it’s kind of in the flow. Some of our service work, short-cycle work is not a backlog driven. It’s in and out in a quarter, so you can’t necessarily lead to that. But what I will confirm is in that bookings are inherent, bookings guidance, we are not currently planning on a major award in that cycle – in that quarter, meaning an award greater than $10 million.

Great. Thank you.

Thank you.

And thank you. We have no further questions at this time. I will now turn the call over to Cindy Taylor for closing remarks.

Okay. Thanks so much. I appreciate that all of you have dialed in and continue to be interested in our company through this downturn. We do have some favorable green shoots, so hopefully in the next quarter, we will have some improved results, at least on land base in the lower 48. I wish you all a good earnings conference season. And we will be in touch over the next ensuing months. Thanks so much.

Thank you. Ladies and gentlemen, this concludes today’s conference. We thank you for participating. You may now disconnect. Speakers, please stand by for your post conference.