Oil States International, Inc. (OIS) Q3 2018 Earnings Report, Transcript and Summary

Welcome to the Oil States International Third Quarter 2018 Earnings Conference Call. My name is Paulette, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded. I will now turn the call over to Patricia Gil, Director of Investor Relations. You may begin.

Thank you, Paula, and good morning and welcome to Oil States' third quarter 2018 earnings conference call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; Lloyd Hajdik, Oil States' Executive Vice President and Chief Financial Officer; and we are joined by Chris Cragg, Oil States' 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 protections afforded by Federal Law. 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' Web site. A replay of the conference call will be available one-and-a-half hours after the completion of the call and will be available for one months. 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 to participate in our third quarter 2018 earnings conference call. As most of you know, we preannounced our third quarter 2018 results on October 17, 2018 reporting revenues at the low end of our previously guided range and highlighting the impact of higher cost, some of which are infrequently recurring. Consistent with that pre-release, earlier this morning we reported third quarter revenues of $275 million, which were up 67% year-over-year and quarterly EBITDA of $28 million, up 213% year-over-year. These significantly improved results were due to contributions from our two strategic acquisitions completed in the first quarter of this year coupled with higher land completions activity across many of the U.S shale play regions. Despite the strong year-over-year growth, our results were lower on a sequential basis. Our results for the third quarter of 2018 were negatively impacted by a number of expense items, including legal fees incurred for patent defense, Fair Labor Standards Act or FLSA claim settlements, and under absorption of manufacturing facility costs in our Offshore Manufactured Product segment. In addition, we incurred higher than expected repair and maintenance and equipment rental expenses in our Completion Services business. Lloyd will take you through additional details of our consolidated results and also provide highlights of our financial position. I will follow with more details by segment and provide additional comments on our market outlook.

Thanks, Cindy. Good morning, everyone. During the third quarter, we generated revenues of $275 million while reporting a net loss of $4 million or $0.07 per share. Our third quarter EBITDA totaled $28 million with an EBITDA margin of 10%. As Cindy mentioned, our quarterly results were impacted by legal fees incurred for patent events totaling $3.5 million and a $2.6 million reserve recorded for prior years' FLSA claim settlements. Excluding these third quarter items, our net income would have been $0.8 million or $0.01 per diluted share and our EBITDA would have been $34 million. We recognized an effective tax rate benefit of 48.8% in the third quarter of 2018. This higher effective tax rate benefit was primarily attributable to a $5.8 million discrete tax benefit related to recent U.S tax reform guidance, which clarified our ability to carry back U.S net operating losses incurred in 2017 against taxable income generated in 2015. With this clarification, we plan to file a carry back claim in the fourth quarter against our 2015 taxable income. As a result, we expect to receive a $5.5 million cash tax refund, which has been reflected in income taxes receivable in our consolidated balance sheet. During the third quarter, we generated $33 million in cash flow from operations. Our capital expenditures totaled $33 million bringing the year-to-date total to $71 million. Our current expectation is that full-year CapEx will range between $85 million and $90 million. And as of September 30, our net debt leverage ratio was 2.3x and our senior secured leverage ratio was 1.3x, well below the allowable maximum ratios of 4.0x and 2.25x, respectively. At September 30, our net debt-to-book capitalization ratio was 18% and our available liquidity position at the end of the third quarter was approximately $186 million inclusive of cash on hand of $36 million. In terms of our fourth quarter 2018 consolidated guidance, we expect depreciation and amortization expense to total approximately $31 million. Further, we expect net interest expense to total $5.2 million and corporate expenses are projected to total $12.2 million. For the fourth quarter, our estimated income tax expense will primarily be dependent upon the level of pre-tax results realized compared to the level of non-deductible items in our tax provision. We expect to report a non-cash income tax provision in the fourth quarter of 2018 of approximately $1 million. And longer term, we expect our effective tax rate to trend toward the U.S corporate tax rate of 21% as our U.S operations return to profitability. And at this time, I'd like to turn the call back over to Cindy, who will take you through the details for each of our business segments.

Thanks, Lloyd. I will lead off with our Well Site Services segment. In this segment we generated $129 million of revenues, which sequentially improved 3% while EBITDA was down 19% quarter-over-quarter totaling $16 million due to higher cost incurred during the third quarter. The sequential revenue improvement was driven by a 7% increase in the number of completion services jobs performed partially offset by a 4% sequential reduction in revenue per completion services job due to job mix. Our completion services business benefited from modestly improved activity in the South Texas Permian and Northeast regions, partially offset by sequentially lower Mid-Con, Gulf of Mexico, and Rockies regional results. Higher than expected repair and maintenance and equipment rental expenses and the completion services business coupled with an incremental $2.6 million reserve for FLSA claim settlement adversely affected our quarterly segment EBITDA with margins averaging 12% in the third quarter. We do not expect to incur additional FLSA charges in the fourth quarter and expect repair and maintenance costs to moderate. While the Permian led our revenue growth during the third quarter, our customers' focus on pipeline takeaway constraints in the area could weaken our future activities in the area in the near-term. Our broad geographic footprint within our completion services business does help mitigate the potential risk of a slowdown in one particular shale play. As a reminder, our Well Site Services segment is very much a call-out business with short-term visibility on future jobs. During the fourth quarter, we have in the past and by now experienced customer downtime related to weather, holidays, and budget exhaustion; which can be difficult to predict. With that backdrop, we estimate that fourth quarter revenues for our Well Site Services segment should range between $115 million and $122 million with segment EBITDA margins expected to average 14% to 16%. In our Downhole Technologies segment, we have included GEODynamics results of operation from the date of acquisition on January 12, 2018. Segment revenues for the third quarter totaled $57 million with EBITDA totaling $11 million and EBITDA margins of 20%. Segment results were negatively impacted by $3.5 million of patent defense costs incurred in the third quarter. Revenue for the quarter was below our projections largely due to weaker perforating sales. We attribute weaker sales in our engineered perforating solutions business two competitors introducing their integrated gun system to the market ahead of us. We expect to recover sales in our engineered perforating solutions business once our proprietary integrated gun system gains broader market penetration, which is estimated for late first quarter or early second quarter 2019. Field trials commenced this quarter. In addition, GEODynamics has hired personnel for a new technical solutions group. This group will provide tailored support to our wireline and operator customers delivering our product offerings from our manufacturing location to the well site. We plan to deploy both personnel and integrated product solutions directly to the well site to ensure product quality and performance is maintained. While currently working in support of field trials for our newer technology, the group will ultimately generate revenue sufficient to offset their cost. We view this new business line as an investment for the future. We incurred about $1 million of unabsorbed cost during the third quarter of 2018 related to this effort and expect this under absorption to continue in the fourth quarter. Field trials are under way in support newer technology offerings including trials for our addressable switches, our proprietary integrated gun system, and other differentiated plug and power solutions. Technology advancements focused on helping our customers make better wells and the adoption of modern completion techniques drive demand for our Downhole consumable product offerings and start to differentiate Oil States. As we look forward into the fourth quarter, we are cognizant of the well telegraphed risk of slowing completion activity particularly in the Permian Basin. We currently estimate that our segment revenues will slow and range between $50 million and $54 million. With the expectation of continued unabsorbed manufacturing cost coupled with the cost of our new technical solutions group, we believe that our segment EBITDA margins will average 23% to 25% excluding the impact of any residual legal costs that could be incurred as we wind down our patent defense litigation. In our Offshore/Manufactured Products segment, we generated revenues of $89 million, segment EBITDA of $13 million, and segment EBITDA margins of 14% during the third quarter. This equates to a 12% sequential decrease in segment revenues driven predominantly by reduced major project driven revenue, namely connector products and production facility content, due to project award delays and related slippage coupled with reduced short cycle product sales likely due to customer stocking cycles. With lower revenues, our EBITDA margins were pressured by under absorption of manufacturing facility cost. Orders booked totaled $102 million during the quarter resulting in a book to bill ratio of 1.1x for the third quarter. We did not receive any notable individual major project awards during the quarter. However, bidding and quoting levels are improving. With our 1.1x book-to-bill ratio, backlog increased 6% sequentially and totaled $175 million at September 30th. Visibility regarding select project sanctions for 2019 remains constructive. Major project revenues are expected to vary quarter-to-quarter and be driven by our standard connector products in the near-term. Additional project FIDs and order bookings growth will be needed before we see a noticeable recovery in sales of our products used in offshore production infrastructure. Our shorter cycle products, which are tied to North American land activity, are likely to be pressured in the fourth quarter. Accordingly, revenues for this segment are expected to range between $86 million and $94 million during the fourth quarter while segment EBITDA margins are expected to average 10% to 12%. In conclusion, our consolidated fourth quarter results are expected to decline sequentially driven largely by effective lower levels of completion related activity in the U.S. On a positive note, this anticipated pause in activity by our customers is perceived to be transitory with a resumption of higher activity levels in 2019, which would benefit all three of our business segments. Farther, as we continue to progress through year-end and into 2019, the operator set -- the opportunity set for major deepwater project sanction is also expected to improve. In the meantime, we continue to develop enhanced technology that helps our customers improve well productivity and position Oil States as an innovator in this sector. That completes our prepared comments. Paula, would you open-up the call for questions and answers at this time, please.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from James Wicklund from Credit Suisse. Please go ahead.

Good morning, guys. You are in very good company and your quarter and your guidance everybody has warned of a weaker fourth quarter. The fourth quarter is never a good proxy for the following year. And so speaking on the following year, you talk about how things are going to get better. Do they get better just in the second half of the year? Do they start to pick up in the Northeast a little bit early? Can you kind of give us a cadence? CapEx has always backend weighted in this business, but how much is it going to be next year and how many quarters do we have to wait before we actually start to see a recovery?

It's a great question. And what happened through this downturn is more and more of our kind of top line and the EBITDA contribution, Jim, as you know is coming from shorter cycle businesses and therefore more dependent on U.S land just in the near-term. As I commented, we don't have great visibility in our Well Site segment nor really in Downhole Technology, just given that a lot of this is either short-term order cycles or call-out work. Now, however, on that is what we've estimated at best we can in Q4 is that we’re going to have some holiday downtime and we’ve factored in top line reductions for both November and December, anticipating that it is our belief that we have a resumption in the first quarter somewhat I'll call renewed activity. And that’s based on customer conversations. Nobody really wants to give you too much indications, but I don't see that we're in a kind of permanent decline on U.S land, particularly given much stronger crude oil pricing and just general supply demand balances that are out there. That’s the one lag. The other one is of course my offshore products. And on that I'm continually looking at bidding and quoting activity in every single month and quarter we're looking at those bids. The potential order value in the anticipated timing of receipt of orders and while there are no guarantees, we do expect first half bookings to improve off level, first half 2019 to improve off level that we’ve seen kind of most of this year. And if you'll recall, at the beginning of this year 2018, we’ve guided to a 1 -- roughly 1x book-to-bill ratio. We've achieved that. Meaning that a lot of this is more in and out work and we knew we weren't going to have a lot of major project awards. I will say there have been a couple that have slipped out of 2018 into 2019. But again, I don't think we're alone in the thought that bidding and quoting activity is for offshore is improving. I'm not going to say if the hockey stick up into the right, but almost anything off the low base that we've been on is going to be helpful and impactful from here.

Okay. We could all talk a couple of weeks ago that oil may not be deepwater. Offshore is definitely improving. Your commentary about the perforating gun systems intrigues me. I know that Core Lab just made an acquisition of a company that’s basically addressable switches and conveyance system, you talk about how people are introducing integrated perforating gun systems and you will be there shortly and you mentioned addressable switches. This was the biggest -- one of the biggest bottlenecks we had coming out of recovery back in '16, perforating guns and obviously the multiples you paid for GEODynamics was -- indicated the strategic benefit of that. Can you talk about how much this is going to change the business? Is this really a step change in efficiency and how we complete wells. And can you tell us why that matter so much?

Well, we and other customer -- competitors, obviously, believe that in. There are just some times when you think, gee, this just makes common sense, And you think about kind of a fully integrated gun system with safety features, leaving a safe and close manufacturing location under your control and going out to well side, rather than having to be assembled on the well side. Obviously, it just makes common sense at the end of the day, but I would say importantly, our customers are seeing the improved efficiencies there and in labor -- in tight labor markets with a lot of new personnel at the rigs side, particularly when you think about the service companies i.e. wireline companies getting paid on efficiencies, you want optimal productivity going out to the well side in the first place. And this is technology that GEODynamics started years ago, in fact, some patents were issued in late 2015. It is my belief just the significant process they went through during the sale process with a huge amount of bidders interested in the company. I think it did delay a little bit some of their field trials and research and development efforts. I don't think there's any great loss here, we will make that up. And as I said in our commentary, we're doing field trials right now and expect that to be commercial late first, early second quarter.

Okay. That’s cool. Last question, what are you looking for labor inflation for 2019?

Jim, it's funny you asked. I asked Chris to give me an analysis of that generally. We are just working through it. Obviously, it's not critical at this point in time with the market suggesting a flowing in Q4, but we will be working on that as we go into 2019 with our budgeting and planning process. I think the key here is how we respond and how we manage over time, and so headcount needs to swing according to that. But I don't think we're seeing massive wage increased pressures that kind of what you're asking at this point in time. And again, we are all over the lower 48, and so some of it will be of course region specific with the hottest market having been of course the Permian. We’ve got a combination thereof in base in labor, but also rotators coming into the space.

Okay. Thank you very much. Chris, get to work. Thanks, guys.

You’re welcome.

Nice, Jim.

Our next question comes from Marshall Adkins from Raymond James. Please go ahead.

Good morning, Cindy, and team.

Good morning, Marshall.

I want to follow-up on Jim's first question. You mentioned your short cycle nature of your business customers aren't given a lot of commitments yet. But you seem to be running your business and investing in technologies and other things just by your tone that you’re planning on a decent recovery in '19. So I’m going to ask it a little different way. Just in terms of how you’re running your business, where -- what's your gut feel on how '19 plays out?

Well, I think we're clearly looking for higher crude oil pricing just broadly speaking. And of course just recall coming into this year, the expectations, the budget expectations were much lower, somewhere -- probably around $50 to $55 a barrel. So even just exit rate 2018 pricing is suggestive of strong budgets coming into 2019. And I read your research a lot, I know you and I are aligned in thinking that supply demand does correct itself. And importantly, we need production out of the lower 48 to compensate for global declines elsewhere. So that sets up to be really a bullish statement for not only near-term, but longer-term activity in the Lower 48. Our customers are excited about their potential. Yes, there are some pipeline bottleneck constraints that that many people think are almost a bit overblown, time will tell on that, but it is self-correcting fairly quickly. And so when you plan a business, as you say, I got to be responsive to the long-term and I think the great thing for the state of Texas and our nation as a whole is that we have brought forth such great technology that we are a true competitor now on a global scale. This activity doesn't go away in one quarter. In fact, it probably gets more robust over the long-term as we get the appropriate investments and take away capacity port facilities to participate more fully into export business. And so, again, you’re right. I have to invest in technology and people and research and development for the long-term, but I do believe lower 48 activity is here for the long-term. Our customers are moving into broader development mode. I do think we're likely to see more consolidation in the space, but that lends itself to stronger companies long-term both on the E&P side and on the service side. So again, we want to offer the right technology at the right place at the right value proposition to our customers. And I think what the initiatives we're taking with the recently acquired GEODynamics business are evidence of our long-term investment thesis along those lines.

That’s helpful answer. Thank you. And then shifting gears a little bit, pricing, I know we’re going with this little air pocket slow down in Q4 etcetera. How much pricing pressure have you seen and how do you expect that to evolve in your different segments next year?

You know, in totality we had, as we mentioned, in the well side business more of a mix oriented revenue per ticket decline, but think that's evident that we're really not seeing significant pricing weakness for our products and services. I would say the same as true for GEODynamics. I mean if there's a little bit we might need to clean up some inventory, but there's no real significant I think price weaknesses across our product lines. What I had -- the guidance we gave you is just more anticipated around activity declines and product delivery decline simply through the fourth quarter. But I feel pretty good about where we are from a pricing perspective.

So pricing hold -- is holding the lower EBITDA's throughput. Any strength in pricing next year or just kind of model the same type pricing, but better throughput and etcetera?

Yes. It's really activity-based incremental, but particularly in my manufacturing operations both GEODynamics and Offshore/Manufactured Products, what, they kind of go hand-in-hand. Higher activity brings more fuller cost absorption. And so while not pricing related, you do get margin expansion as you have greater throughput as you know. I’m not telling you what there, but we do expect expanded benefit above and beyond just the incremental.

Right. Thank you. I appreciate it.

Thanks, Marshall.

The next question comes from Sean Meakim from JPMorgan. Please go ahead.

Thank you. Hey, good morning.

Good morning, Sean.

So, Cindy, on the completion services business, maybe could you give us a little more detail on the higher R&M costs and the third-party rentals that you called out for the quarter, were those elective or they somewhat unexpected? And just how much is thing factor into your thinking for you guidance in the fourth quarter?

Well -- and I’m going to just be very transparent and honest there, it was a little above. And the one that I would say, was expected, if you will, our choice is particularly in our kind of basin. And I think I may have mentioned this before, our base well testing business, pre-acquisition of Falcon, we kind of have some laid down equipment. Our activity just wasn't as strong as it could have been. And so there were choices there that reactivate some of that equipment again under Falcon's leadership, let them take that equipment and try to put it getting ready to put to work in early 2019. There are other kind of things that we learned since owning Falcon, i.e. that there are certain amount of equipment that they do rent. And we had some job slip, so you find out, gee, you’re kind of paying a monthly rental and be going at risk for some of this rental equipment such that if a job pushes two weeks you’re eating that. So we need to do some, kind of cleanup and restructuring of operations there. I would say that would hit in the unexpected side, however addressable, we can certainly take care of that. We may choose obviously just to buy some of that equipment instead of subjecting ourselves to adverse kind of margin impact from the rental side. But I will say that there is an element here that, I would kind of hear in tone from other customers that there are some higher R&M occurring just because of the complexity of the completion operations at the well side, but we’re laser focused on that and we will kind of manage through it. But I do kind of step back and we put it in our guidance. We have that labor -- laser focus. Some of this was expected. But some was unexpected, but addressable, if that helps.

Definitely helps. Thank you for that. And then in Downhole Technology, maybe we could talk a little more about the quarter-over-quarter decline in margin, adjusting for the legal fees I think in your prepared comments you highlighted just absorption challenges being the main driver there. But given the 4Q guidance is that -- so just that maybe you think the margin profile is stabilized from here and trajectory looks better, at some point looking in '19?

Well, I don’t remember. I tend to take our reported EBITDA margin. I add back those legal costs because, yes, while we’ve been incurring them, we are trying to wind down that activity and get both focus back on business. But I believe they were in either high 25% range adjusted for the legal fee.

25.8%.

Okay, 25.8%, so I’m pretty close. So -- and my point in that being in the third quarter, we absorbed about $1 million as I highlighted in my call, from personnel, this technical solutions group. We think that same thing will translate into Q4, but also have a little bit lower on the top line and therefore we got at our margins down a bit from that 25.8% adjusted margin. And I want to be very clear, we don't yet have an estimate of wind down of legal costs on this case and so we’re omitting that. We will have some hit, although it won't be as much as we certainly don't expect it to be as much as what we took in Q3. But it is the intention that when we go into 2019 to have very little of that recurring.

And I guess my -- the point I was going to get at just to say, with the fourth quarter drop in activities and the challenges that are well-documented, is it fair to say that feels like a kind of bottoming period in terms of profitability for that business or still it's too early to say?

It was always too early to say, but I could certainly go along with your thesis there. If you’re clean of the legal costs and we start getting more third-party billings associated with technical solutions and top line, that sounds like a good thing for margins for sure.

Okay. That all sounds very helpful. Thanks a lot.

Thanks, Sean.

The next question comes from Jud Bailey from Wells Fargo. Please go ahead.

Thanks. Good morning.

Hi, Jud.

Hey, Cindy. Question on Offshore/Manufactured Products just on the guidance, did the revenue was kind of in line with what we’re thinking the margins were on the lower end. Could you may be walk us through kind of how you’re thinking about the mix in the fourth quarter, and where margins are troughing and regional expectations on those normalizing higher assuming North America recovers etcetera, and kind of what you expect for the long cycle business?

Yes, I will certainly do that. I don't anticipate margins below this level. Its predicated on, obviously lower revenue from what we saw in Q4, I'm sorry in Q3. And we are expecting again short cycle to be down a bit further just because of all the well communicated noise around Lower 48, particularly Permian slowdown that its high-margin business for us, a relatively high margin business rise and we -- kind of see a little bit of a pocket on services as well. And so I hope that guidance proves to be conservative, but right now just with the mix of activity and a little bit the uncertainty around short cycle, I think it's prudent to look in that. But our annual margin is of course better than that. And again, I'm becoming increasingly more optimistic about order activity in that segment as we go into 2019. So I'm -- I just don't believe we will be going below margins at this level.

Okay.

As we move forward. In fact they should improve.

Okay. But is it safe to figure, if we get through this fourth quarter kind of blip that getting back up to 14%, 15% is a reasonable kind of baseline. And thinking about where the business should be not where we troughed in the fourth quarter.

Absolutely. Absolutely.

Yes, okay. Okay. And then my follow-up is on Downhole tools again. As you look at that business, the margins are kind of balanced between 25% and 27%. You’re obviously making some investments in the business. As you think about that business on a longer term basis, how do you think about -- what do you think the margin profile should look like, if that in 25% to 27%, do you think it could grow higher. Ultimately with some of the investments you’re making in technology etcetera. I should be curious to get your thoughts on how you think that business longer term in the margin profile?

Yes, I wouldn’t want a guide above 25% to 27% over the next several quarters. However, with the new product development that is out there and again expansion of technical solutions groups and at the end of the day, I do think they could be biased higher than that. But we really do need to get some of the things I talked to you about out in the market and start capturing some of that increase market demand as well as pricing. But 25%, 27% margins in this business are pretty darn good. But I do think that if things go well, yes, we could be better than that.

Okay, great. I appreciate it. I will turn it back.

Thanks, Jud.

The next question comes from George O'Leary from Tudor, Pickering Holt. Please go ahead.

Good morning, Cindy. Good morning, guys.

Hi, George.

On the integrated gun systems and going through field traffic. I just want to make sure, I understand kind of what the primary benefits are for your customers, my understanding is these are effectively preloaded gun systems that come out of the well site. You don't have a bunch of folks loading perforation guns on sites. So, one, it reduces labor. Two -- the other thing I’ve heard from E&Ps and from wireline providers as you have your misfiring with these integrated systems. One, is that kind of correct? And then, two, what your customers actually viewing is the biggest benefit of these integrated gun systems when you talk to them?

Well, it all comes down to exactly what you just initiated. It's higher efficiencies, greater safety and then you also have kind of what I call a single point of contact, it's just like in the former situation. If you’re going to assess blame, who do you go to. It's a product manufacturer, it's the gun loader at the well side etcetera, and us having complete control with experienced personnel, dedicated to that product line. Again, I just kind go back to my earlier comments and say it just makes common sense. And we're there on the site watching how it's run, recording the efficiency and success of those lines and then it is an appropriate feedback loop for us to say, is there anything we need to tweak to improve our product offering. But I think it's pretty well accepted and communicated that this is the preferred route that our customers want we and our competitors to take.

Got it. That’s very helpful. And then on the Offshore side just a quick one. Any color on as you look around geographically and look at the shots on goal increasing in 2019 and potentially seeing more FIDs. What regions standout as your -- in your mind is being stronger or weaker, potentially?

Well, I think that's a great question and I appreciate that you asked it. Kind of in the near-term, I'd say the next six months a lot of what we got out there are more the standard, if you will, conductor and casing joints that we offer to the market and we've got some interesting bids out there along those lines as it relates more to our proprietary SCR equipment floating production facility content, the clear focus there is around projects in both Guyana and Brazil that are some of the more interesting bids. And then just kind of unique to us, we do have other non-industry opportunities around military. There are some wind installation technologies and some more opportunities around that equipment, that I think could be interesting for us. But more broadly speaking, we are focused a lot on Guiana and Brazil as most of the industry and then there's, what I'll call a smattering of opportunities around the world from the South China Sea, Gulf of Mexico etcetera.

Great. Thanks very much for the color, Cindy.

Thank you.

The next question comes from Ian Macpherson from Simmons. Please go ahead.

Hey, thanks. Good morning.

Good morning, Ian.

Cindy, if the market is moving towards the integrated gun solutions, can you bridge sort of your Downhole will do about $250 million of revenues for you in 2018. How does your revenue mix evolved towards being driven by integrated gun solutions in the future over the next 1 to 2 years compared to how your revenue composition from your current product suite has driven the 2018 revenues?

Well, what happened for us, first of all, the GEODynamics acquisitions has performed, I would say, in line if not better than our year one acquisition economics. And I tend to kind of -- if I adjust for the legal fees that exceeded our acquisition economics, but we got there in different ways, meaning some of the content around plug and power solutions, toe valve has done better than what we expected, but the engineered perforating solutions have lagged. And again, I was very clear on why I think that its lagged. So overall, it's still been a good year, but we need to get that engineered perforating solutions business back up and we believe key to that are addressable switches, integrated guns and then we're constantly kind of redesigning some of our plug and perf [ph] solutions around specific customer needs, those are in field trials as well. And so I feel good about continuity around the product lines that grew this year, but we need to recover that engineered perforating solutions business. And when we do, I do think that we recover top line growth, sequential growth going forward. I tend to give you quarterly guidance, so I’m not ready to go and tell you what the integrated gun solution market looks like until we get there, which I think will be like first quarter or early second quarter I'll be able to give you more color around that.

Ian, this is Lloyd. I just want to clarify one thing. You had mentioned that GEO's revenues for '18 around 250. If you take the midpoint of Q4 -- yes, they’re 212 at the midpoint of Q4 guidance for the full-year.

Yes.

For the period that we owned it from JAN 12 forward.

Yes, we don’t exclude the first half of the month Jan of April.

Yes. Thanks, Lloyd. And then your CapEx, it looks like it's coming down pretty sharply from Q3 to Q4. Including working capital, Lloyd, what type of expectations for free cash flow should we have for Q4?

Modestly positive to flat quite frankly.

Two comments there. Our Q3 CapEx encompass some one-time CapEx where as part of the acquisition of GEODynamics, there were some facilities that were owned by the predecessor owners and least and we prefer clearly to own that rather than have the related party lease. So there were some one-time CapEx in Q3 that will not recur as we move forward associated largely with the GEODynamics acquisition and we're watching our working capital some of that is built in Completion Services, but the good news its generally -- it was tied to sequentially improved revenue. But I don't really see our working capital going any higher than it is. We have a little bit of inventory to reduce as well. So consistent with Lloyd's comments, I do think you will see some working capital benefit as we move forward.

All right. Very helpful. Thank you, both.

Thanks, Ian.

Thanks, Ian.

Our next question comes from Kurt Hallead from RBC. Please go ahead.

Hey, good morning.

Good morning.

Hey, Cindy, I was wondering if you can give us some insights when you look out into 2019. What do you think the two or three most significant drivers of margin improvement is going to be for each of the business just in a relative order of magnitude, if you would?

Well, I mean, it won't shock you that I'm going to focus on Offshore/Manufactured Products and the clear lead there is short cycle recovery driven by Lower 48 land activity, improved backlog, therefore getting facility cost absorption more in line with historical norms and where we need to be. And so, I'd put that probably number one, on my list. The second thing I’m going to focus on is my Downhole Technologies and the need to improve top line there, particularly focus on addressable switches and the integrated gun system collectively, maybe say engineer perforating solutions. But along with that, I’m also ready to focus my time, my energy, and my money in the business and stay out of the court room on a lot of these patent defense issues if possible. I do think it's critically important that we develop unique differentiated and therefore patented technology and defend that, but at the same time if we can manage through those issues and focus on the business, I think we're better off. I can focus on my Completion Services business next and tell you there it got -- we've got to be a low cost provider in this market, particularly in the Permian Basin. And so we’ve to be acutely focused on things like how R&M areas where we can reduce rental cost and therefore optimize our margins in that business. We definitely want to support our field workers and we will pay appropriate for that, but some of the other associated costs we need to manage and control. And those are -- may be a long winded answers, but those are three very significant priorities that we’ve going into 2019.

Great. That's great color. And notably absent from the commentary was pricing. Do you think the market dynamics next year could be conducive to improve pricing on a year-on-year basis for your business segments?

You know I think that’s going to depend -- obviously be dependent on the level of activity. What we're focused on right now is, particularly in our Completion Services Group, where do we’ve unique market products and services and how can we leverage those. We’ve, I believe, the best extended reach technology for the longer laterals. How can we leverage the top line there and therefore get very, very strong incrementals? We’ve seen some customers move back toward isolation equipment as an example and if we can continue that trend, that also carries very strong incrementals. The rest of it is going to -- there are certain product lines that are going to be competitive on well testing and flow back. We think Falcon had differentiated services there and so we need to do better than the competitive landscape. There's also a lot of competition around wireline support equipment and I just think we are going to have to focus and be the best at what we do in an otherwise competitive market, particularly in the Permian. What has always helped that business, if we can get a broader base of operations across the Lower 48 instead of having significant stand-alone basin concentration where it is very, very competitive, but all of those things should help us as we progress forward. And none of that is what I will -- we are not counting on pure pricing there, but certainly mix and cost absorption can help us.

That’s awesome. Thank you so much. Appreciate that.

Thanks. Thanks, Kurt.

Our next question comes from Marc Bianchi from Cowen. Please go ahead.

Thank you. Cindy, I would like to just clarify something about the guidance you're talking about here for the Onshore parts of your business in fourth quarter. If I’m hearing right, is it fair to say that you haven't seen a decline from the takeaway concerns that are out there, but you are forecasting one for November and December just kind of on a -- to be prudent, but you haven't necessarily heard from customers that that's occurring yet?

That's exactly right. And we know what we know, it's the end of October and all I have is visibility kind of on my weekly revenues, but I don’t really expect anything this early. The big unknown -- I’ve kind of handicap what I think the holiday downtime will be in around the Thanksgiving and Christmas holidays. As you know, there are people saying some customers could shut down from mid November forward, I don't buy that. I think particularly the larger companies know that you can't just shut the industry down for 45 days and be very efficient on the way back up and they are certainly not talking about that to us. Now I will tell you if that happens, we are going to have a tough time. Everybody is making any semblance of a fourth quarter, but we just don’t anticipate that based on any conversations that we've had.

Right. Okay. Okay and then on the Offshore and Manufactured Product side, you’ve been posting pretty good orders here for the last few quarters and it still doesn't seem like there's any large projects really included in there. Is it reasonable to think about this kind of $100 million order run rate as a recurring level for you as you kind of go forward and then we add large projects on top of that?

I think that’s fair. Whether it's $90 million or $100 million, a lot of that is determined by these large OD conductor casing orders that kind of help it ebb and flow between that kind of $90 million to $100 million. A lot of the other stuff is more in and out both short cycle order activity, service activity, smaller kind of -- I almost call them repair, Brownfield tiebacks, they’re welding technology and the like that kind of come in and out in a given quarter. But we really need what I call that shot in the arm for more sustainable ideally SCR equipment floating production facility equipment that give us greater visibility, number one; but multi quarter absorption in our facilities is what we are looking for.

Sure. And could you share any kind of range of opportunity on the Guyana and Brazil projects that you mentioned earlier in terms of dollar value?

These are multiple awards and honestly we did the -- there -- these are multiyear type project opportunities. We don’t get a single award and that's it. And so I'd be reticent to say that what an entire project could mean over the life of that. But obviously what we’ve called a major project award in the past has been north of $10 million in any given order. And so when I talk about bidding and quoting in Guyana or Brazil, these would be call out type orders in excess of that $10 million threshold.

Great. Thanks so much. I will turn it back.

Thanks, Marc.

Our next question comes from Ken Sill from SunTrust Robinson Humphrey. Please go ahead.

Yes. Thanks for letting [ph] me in, Cindy. Looking out further in our crystal ball, so 2019 whether it starts slow or fast, everybody thinks Lower 48 is going to recover. We're hearing some mid single-digit, other people double-digit improvements internationally in Offshore. I guess for you the first thing we're going to see is project awards. So if you could lay out how -- when you start seeing some of these awards, when does that start flowing through into your results? And if you could give us like as you flow into early 2020, which we are going to be looking at, how do you see 2019 to 2020 evolving?

Well, what we talked about a little bit earlier is kind of the near-term project awards in our Offshore/Manufactured Product segment. It's going to be more tied toward conductor and casing connector orders. In addition to what we just talked about with Marc, it's kind of baseline orders around short cycle service, smaller project type awards i.e., below $10 million. I think as early as potentially second quarter forward, we’re bidding and we’ve indications of FID and awards coming around that time frame, around some of the SCR equipment floating production facilities. Once we do that, that bodes much better for both top line and for our margins because of facility absorption as we progress into second half of 2019. 2020 is just too far off for me, but there's a wide range. I think everyone believes that once we get out of kind of Q4, Q1 unknowns that Lower 48 strengthens. I certainly can't disagree with that. How many products and services and rigs are needed to get that type of productivity, a bit unknown at this point in time. But it's certainly a healthy market environment as we go forward. So if we get the orders we are looking for, certainly 2020 does look pretty promising, particularly, as I think supply demand globally continues to adjust more favorably for the industry.

That's all. Thanks.

Thanks, Ken.

Our next question comes from James West from Evercore ISI. Please go ahead.

Hey, Cindy. Hey, Lloyd.

Hi, James.

Good morning.

So just one quick question from me, I think most of my main questions have already been answered. But on the labor side in the U.S land market, particularly the Permian, I know you mentioned that as somewhat of a higher cost issue. Could you maybe describe in a little more detail exactly what you are seeing on the labor front and what is your ability to kind of push through labor costs to your customer base?

Well, you raise a good point there. We’ve obviously been through a fairly significant transition as an industry moving from more salary and job bonus type pay structures to hourly because of FLSA issues that we think are behind us at this point in time, but it puts our workers on an hourly pay structure basis with meaningful overtime pay that goes along with that. And certainly our workers have been compensated better this year than they were in the prior two years largely because there is overtime pay that goes along with that. We recently have initiated, I will call, it selected job bonus type incremental pay for our workers that we are able to pass through. So, it's a clear focus for us. But as I mentioned earlier, I don't sense the need to make massive pay structure changes as we go forward in this environment. And part of the reasons that we acquired the Falcon operations was just the ability to attract and ideally retain a significant number of workers that is just very hard to do when you're in a tight labor environment to hire incremental. We can hire a lot of people, but if we lose 95% of what we hire -- we haven't kind of on a treadmill there. So, I think the pay is pretty reasonable. We will continue to focus on that. We will have to make adjustments as necessary. But I think as I mentioned, we really need to focus on controlling overhead cost and non-essential cost and focus on our workers and that'll be what we look at as we go into our budget season.

Okay. And the ability to kind of push through those costs to your customer base, is that not there at this point?

Well, as I said, we’ve instituted selective job bonus programs and we are passing that through.

Your business. Okay, great. Okay. Got it. Thanks, guys.

Our next question comes from Ben Schrader from BMO Capital Markets. Please go ahead.

Hi. Thank you. Cindy, given that build in the new products are reducing, do you think that the U.S land businesses could outgrow the rig count in 2019?

Well, we focus on the dock build as does as everybody else. But we -- I think we’ve to all accept that these are more operational docks than discretionary. There may always be some discretionary element in there, particularly if it's takeaway capacity constraints that are driving it, but just the sheer complexity of the well site, the pad drilling, the type of completion work that we are doing has naturally led to an increase in docks. And so, I wouldn't get too lost in thinking that all that translates into higher activity even though the rig count doesn't move because we do -- are getting more efficient at the rig side, just in time delivery of products and services so we might be able to bring that down a little bit. But I'm kind of looking at Chris for confirmation. He's shaking his head and thinking that it does create a great backlog of work, there's no question about it. But I don't think that we can meaningfully reduce that number just because some of it is operational in nature.

Okay. One more, if I could. Could you give us some color on the patent dispute and the scope of the Downhole Technologies portfolio that might be subject to it?

I'm sorry, I'm having a hard time hearing. Okay. Okay, if you’re asking about the patent dispute, it's around our reactive charge technology. That dispute dated long before we acquired Geodynamics so it's an ongoing I think for as much as three years. I think it's prudent at this point in time that we find resolution to those disputes and move forward with our business and our competitors in a more productive way going forward. So we're going to look to wind that down. But it's clearly patented technology that we have owned that we were defending, basically we brought these patents or brought these cases in defense of our own patents. I will tell you this is highly complex in terms of hearing these types of cases, particularly in a jury trial. It's also very, very difficult to recreate what occurs Downhole. And so, I think it's just prudent that we find a means to move forward productively.

Okay. Thank you.

I will now turn the call back to Oil States International for closing comments.

Okay, great. Thanks to all of you for joining the call today. We recognize that this has been a tough quarter and that oilfield services firms generally are looking forward to a challenging fourth quarter, but we are increasingly optimistic really about the outlook for 2019 and really beyond based on crude oil fundamentals that are strengthening. I know sometimes it's hard to see that with the red tape that we’ve all been suffering through over the last several weeks. But I do think there are better days that lie ahead and I appreciate all of your support, your following of our company and our stock, and look forward to future conversations with you. Thanks so much.

Have a great week.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating and you may now disconnect.