Welcome to the Oil States International Incorporated Third Quarter 2021 Earnings Call. My name is Hilda and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ms. Ellen Pennington. Ms. Pennington, you may begin.

Thank you, Hilda. Good morning, and welcome to Oil States third quarter 2021 earnings conference call. Our call today will be led by our President and CEO, Cindy Taylor; and Lloyd Hajdik, Oil States' Executive Vice President and Chief Financial Officer. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain information other than historical information, please note that we are relying on the Safe Harbor protections afforded by federal laws. No one should assume that these forward-looking statements remain valid later in the quarter or beyond. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K along with other SEC filings. This call is being webcast and can be accessed at Oil States' website. A replay of the conference call will be available one and half hours after the completion of this call and will be available for one month. I will now turn the call over to Cindy.

Thank you, Ellen. Good morning and thank you for joining our conference call where we will discuss our third quarter 2021 earnings and provide our thoughts on the market outlook. During the third quarter of 2021 the company generated revenues of $141 million and adjusted consolidated EBITDA of $8.5 million. We were on track through August for sequentially stronger results given the ongoing improvement in oil and gas industry fundamentals. However, our results of operations were negatively impacted by Hurricane Ida following its landfall on August 30, along the Louisiana belt coast. Our personnel remained safe through this devastating storm and our facilities did not sustain major damage. However, with power not fully restored until late September, results of operations within our Offshore/Manufactured Products and Well Site Services segments were affected by temporary facility closures and local workforce challenges. We also incurred delays in the production and shipment of goods to our customers and services in the Gulf of Mexico were suspended for approximately one month. Reported results have not been adjusted for the estimated impacts of Hurricane Ida. However, on a consolidated basis we estimate that Hurricane Ida resulted in third quarter revenue and EBITDA shortfalls of approximately $6 million and $3 million respectively, offsetting the benefit of increased U.S. land based completion activity. Fortunately, these hurricane-related delays are considered transitory and should be recovered in future quarters. Highlighting our quarter was a 64% sequential increase in our Offshore/Manufactured Products segment bookings yielding a book-to-bill ratio of 1.5 times for the period. Expanding economic activity and increasing backlog levels support a stronger outlook going into 2022. In September Oil States was recognized by the Energy Workforce & Technology Council, formerly known as PESA, with the ESG Accelerator Award for significant advances in ESG reporting, score improvement, and industry leadership. As a company, we are very proud to have been recognized for our ESG efforts and practices. Lloyd will now review our consolidated results of operations and financial position in more detail before I go into a discussion of each of our segments.

Thanks, Cindy, good morning, everyone. During the third quarter, we generated revenues of $141 million while reporting a net loss of $13 million or $0.22 per share. The quarterly results included noncash inventory impairment charges of $2.1 million, along with $0.7 million or $700,000 of severance and restructuring charges. As Cindy mentioned, our adjusted consolidated EBITDA totaled $8.5 million, which excluded the inventory impairment and restructuring charges incurred in the quarter. As of September 30, and June 30, 2021 no borrowings were outstanding under our asset-based revolving credit facility. We continued to build cash with $68 million on hand as of September 30, compared to $63 million at the end of the second quarter. As of September 30, the amount available to be drawn under our revolving credit facility totaled $61 million which together with cash on hand resulted in available liquidity of $129 million compared to $113 million at June 30. At September 30, our net debt totaled $111 million yielding a net debt to total net capitalization ratio of 14%. We spent $3.7 million in CapEx during the third quarter with approximately $15 million expected to be invested for the full year 2021. For the third quarter our net interest expense totaled $2.6 million, of which $0.5 million was noncash amortization of debt issue costs. Our cash interest expense as a percentage of average total debt outstanding was approximately 5% in the third quarter. In terms of our fourth quarter 2021 consolidated guidance, we expect depreciation and amortization expense to total $19 million, net interest expense to total $2.7 million, and our corporate expenses are projected to total $8 million. And at this time, I'd like to turn the call back over to Cindy who will take you through the operating results for each of our business segments.

Thanks Lloyd. Our Offshore/Manufactured Products segment reported revenues of $69 million and adjusted segment EBITDA of $8.6 million in the third quarter of 2021, compared to revenues of $77 million and adjusted segment EBITDA of $10.3 million reported in the second quarter of 2021. Revenues decreased 10% sequentially, driven primarily by lower connector products sales and the effects of Hurricane Ida which caused a temporary closure of our manufacturing and service facility in Southeast Louisiana in September. This revenue shortfall is considered transitory and should be recouped in future quarters. Excluding the estimated effects of Hurricane Ida, revenues and adjusted segment EBITDA would have totaled $74 million and $10.7 million respectively for the segment. Backlog totaled $249 million as of September 30, 2021, a 16% sequential increase. Third quarter 2021 bookings totaled $106 million yielding a quarterly book-to-bill ratio of 1.5 times and a year-to-date ratio of 1.2 times. During the third quarter we booked two notable project awards exceeding $10 million which will leverage our major project revenues in future quarters. Our third quarter bookings were broad based across many product lines and regions. Approximately 5% of our third quarter bookings were tied to non-oil and gas projects, bringing our year-to-date non-oil and gas bookings to 9%. During the third quarter we completed several strategic initiatives, including the second rental of our proprietary Merlin high-pressure drilling riser equipment to a customer in Southeast Asia. The full third-party qualification on our new managed pressure drilling equipment, the award of a multiyear crying contract, that provides long-term utilization for one of our Southeast Asian facilities and the successful running of our first Merlin Deepsea Mineral Riser System. For nearly 80 years our Offshore/Manufactured Products segment has endeavored to develop leading-edge technologies, while cultivating the specific expertise required for working in highly…

Thank you. We have a question from Ian MacPherson from Piper Sandler.

Good morning, Cindy and Lloyd.

Hi, good morning, Ian.

Good morning.

Cindy, you mentioned a new or expanding capability in managed pressure drilling, I wanted to follow up on that and see how that is coming along in terms of its rollout and what you're doing in terms of a product sale versus rental model for that, and what the opportunity bucket looks like?

Right now, we've been working on this obviously for well over a year and important this quarter we completed the qualification testing on our MPD riser integration joint which is allowing us to actively market this equipment to various customers which we have been doing and ongoing. We're also looking at some one-off opportunities to expand our equipment suite, if you will, to be able to offer the complete riser integration package to our customers. So I would just generally say that we're fairly far advanced with this effort, with various customers and I'd like to say we are expecting an order within the next six months, but obviously that's subject to the ultimate award, but fairly far progressed at this stage. At this point I'd say this is more of a sale model, obviously it could turn into rental, but at this point it’s a sale model.

Great. Thank you for that. And then it's good to see, it looks like you have a nice recovery in Q4 moving past the storm impacts in Q3. You said that products would lead the way. I would presume that your other segments will probably be expecting double-digits sequential growth as well. I wanted to get a sanity check on that as well and then maybe ask a little bit about the expected incremental margins that we could look for in Q4 as well if you could comment on that? Thanks.

Yes, so I do agree that the overall outlook for all of our segments looks strong. It's easier to look at Offshore/Manufactured Products because of backlog position and scheduled timing through these facilities, and obviously we have some recovery of what was delayed out of Q3 because of the hurricane and so we do expect that to clearly lead the way, both with our major project revenue as well as some services, which also were delayed throughout this period. I do agree that the outlook for Downhole Technologies and our Well Site segments is also positive, that I always worry that we don't really know what Thanksgiving and Christmas holidays are going to land. I'd say that's number one and then number two, in our own forecasting, we're not expecting a 100% recovery from the hurricane in the Gulf of Mexico. It's gradually picking up, it's not like we're turning on the light switch and what was lost is back. So we expect that to gradually recover through quick Q4. And as I mentioned in my notes, our international activity, particularly in the Middle East lagged as well, and so we're kind of thinking we get a gradual pick up in Gulf of Mexico and international, offset by very positive trends in the U.S. land based areas. So I guess what I would say there while we expect a strong market, there's a little bit of tempering in our mind because of those factors for Well Site services, the other two segments I do look for good incremental revenues in Q4 as we got into it too.

That's great thanks, Cindy. And then lastly, any insights or thoughts on incremental margins for the quarter as well?

Our margins again, I'm leading with Offshore/Manufactured Products in terms of the more significant revenue contributions. Those margins tends to be as you know, kind of mid teens and so I'd be looking for that range for a heavier portion of the revenue increase. The incremental margins at Well Site services are normally in the 30 to 40% range depending on product line and our downhole incrementals can also be in the 30% to 40% range. So, but in totality, again we're weighting this to Offshore/Manufactured Products which will have more of a mid-teens incremental margin.

I understood. Thanks Cindy.

Thank you, Ian.

Thanks Ian.

Thank you. The next question comes from Stephen Gengaro from Stifel.

Thanks, good morning.

Good morning, Stephen.

A couple of things, just one, just to follow up on Ian’s question, when you're highlighting those incrementals your, I believe and I’m trying to make sure, you're talking about them before layering in any of the recovery of that $3 million of lost EBITDA from the storms. Is that fair?

I'm just talking -- incrementals normally in any period of time because it's not just EBITDA that falls to the bottom-line, you get the recovery and revenue at its normal incremental margin, if I'm answering you correctly on that.

Yes, so you're talking normal incrementals. But it could -- I guess what I'm asking is, could they be a bit higher as you layer in the impact of the lost hurricane profitability in the third quarter?

Yes, I'm not really expecting that at this point in time, I think your answer, my answer to you is, there's a certain amount that is just lost absorption, you don't pick that back up. Meaning if you've got a facility that's basically closed for a month, you'll pick up the revenue at its normal margin, but you're not going to recover some of the absorption effects. Does that make sense?

That does. Thank you. So on the Downhole side, you and I think, at least one if not two others, both mentioned this sort of slow international sales in the quarter. Is there anything behind that or is it just kind of the quarter and COVID and transportation issues? Or is there anything behind that we should be thinking about? And also, can you ballpark what the international piece is kind of on average or as a range for Downhole?

Well, first of all, just because of the nature, these are kind of lumpier orders in the first place. So it's not a broad base multi-client type distribution every month. And so, for this to be having effect is not that atypical and it's really these were more operational or projects specific and a lot of this is P&A work and there if you get a really good cement job, you may not need, ultimately the perforating products and so it, I don't do this as any trend line at all. It's just that is what was in our forecast and plans did decline a bit sequentially, while international is not a huge part of the revenue, if you'll recall, it's probably in the range of…

14% to 15% year-to-date.

Yes, 14% to 15% year-to-date. They do come at very good margins and they typically are one-off larger projects for us.

Great, any commentary on the on the Well Site services side as far as what pricing dynamics are looking like? And maybe even, a lot of your competitors, big and small have sort of set this sort of 20% plus benchmark for 2022, upstream spending growth are you in that ballpark as well?

I think we are, Stephen, and we're really being very focused in terms of where we want to allocate our people and our capital going forward in both regions and product line, I would say at the end of the day. So we're really trying to high grade our product offering here because it does tend to require capital, and I want to be sure we're allocating it in the best areas possible. And so, I do feel pretty good about our opportunity set. We've expanded to a broader range of products with some of our key customers in this space. And the 20%, I think it's a question mark, because that's more of an activity indicator. We clearly need to get pricing and so we've been actively working on our customers to get incremental pricing to offset increased labor cost, material cost, which you are very familiar with. Obviously, the goal is not just to cover these costs, to bring some incremental bottom-line dollars in the process.

Great, thank you.

Thank you, Stephen. Good talking to you.

Thank you. Our next question comes from John Daniel from Daniel Energy Partners.

Good morning Cindy and Lloyd, thanks for putting in.

Good morning.

Don't have a number. Not a numbers question for you, but just if tomorrow you had a staff meeting and had the segment heads from all three in the office, who would be the most excited for 2022 and why?

That's a wonderful question. I think everybody, not just our segment heads, but our workforce generally, is looking much more forward to 2022 than where we were in Offshore/Manufactured Products. Of course, that is Scott Moses who you know very well. And it's not just the improvement in backlog what we're seeing, but as I mentioned on the call, a lot of these are broad based in terms of the product line, in terms of the product line, in terms of the regions that we are supporting, which obviously helps given the breadth of global manufacturing facilities that we do have. But in addition to that, there's quite a heavy amount of bidding and quoting activity, particularly associated with production infrastructure, where number one, our market share is very strong, and our performance is good. So he's always going to say that incremental capital spending in the sector should benefit us fairly strongly. And so, I think that's probably a highlight in the near term. We've already enjoyed some pickup in U.S. land based activity, but there's certainly nothing out there, that tells us that activity won't further improve as we go into 2022. And so again, anybody running a business wants to be able to offer strong opportunities to your workforce, particularly and that has picked up a bit. We have restored most of the pay cuts that were cut, during the harsh down -- COVID-induced downturn in 2020. And we've restored, are in the process of restoring some benefits. So we've had to be gradual about that to marry that with the revenue and activity improvements that we're seeing. But it does lift up the whole company, quite frankly, and Lloyd has done yeoman's work dealing with our banks, bringing forth a new converts such that we don't really have a near-term maturity and no debt outstanding under the credit facility and no maturity as a consequence until 2026. So certainly, as a company and a management team we're much more optimistic as we go into 2022.

Okay, that's all I had. Thank you, guys.

Thanks, John.

Thanks, John.

Thank you. We have a followup question from Ian MacPherson from Piper Sandler.

Thanks for the followup. I was just reflecting on John's question and looking at where your products backlog is likely to be if you're a one times book-to-bill in Q4, your year-on-year growth for ending your backlog would be quite positive for products, but so I would assume the visibility there would be, I would say higher than consensus international, OFS spending growth for 2022, would that also be a fair assumption?

Yes, it is.

Yes.

It's all dependent on backlog. But we're also optimistic about our short-cycle product sales, again, driven by Shell activity in the U.S., which forms a part of the segment as well as the outlook for services. So we're really doing a lot in that segment, I think to create a much more favorable 2022 potential, if you will, backlog dependent, but things are moving in the right direction, and the opportunity set seems to be there.

And then lastly, Cindy how has the experience then coping with hyperinflation as you've been booking the products backlog into next year? And how do you see, how would you frame the risk to margins based on what's happened with all of that, as you've taken in bookings in the second half of this year, and then how you're pricing your product bids for the first half of next year as well? Do you think that margins can continue, as we described in the prior Q&A or do you think it's just more variability with it as we get into next year's conversion?

No, I think they can continue. Our bids in this segment, some are shorter i.e. in the range of six months, but a lot of these are longer term 12 to 18 months. We have a robust risk management bidding process in place to where the bids are only good for a certain amount of time. A lot of these long lead items that go into these projects are specifically bid with fixed costs behind them. Now, I would say from a risk management perspective, in other words, we're not going to subject ourselves to dramatic risks between the bidding phase and the execution phase on these projects. So I don't think you should worry about the bookings and backlog have margin erosion as a great consequence in there. Now the longer risk is, some of the materials have escalated dramatically. And we're having -- and then these projects are typically bid months, quarters, sometimes years in advance on a recurring basis. Some of these are just more of an expression of interest in terms of the bidding and quoting, then they come down to firm engineered drawings as an example that are concrete. The risk is between the original indication of interest and the firm that the calls have escalated, then it becomes upon the operator to say, is this still a good project? And is it still economic with the higher costs that are involved? And there are instances where we've had to go back to the drawing board with the customer on equipment redesigns, because of some of the costs or developing alternative materials because of material escalation. So I would say it's a more complex process, but we're not taking on a lot of incremental risk in our bidding and quoting activity.

Okay. And then has there been any evidence of customers tapping the brakes a little bit with placing orders and waiting for cost to come down a bit? Or is there an expectation the cost -- cost relief will not be forthcoming and they'd rather proceed sooner than later with orders?

I think they'd rather proceed sooner than later and a lot of these again, have been under development for years. And I think they're finding ways to normalize, but not to mention just their price is much higher, and the free cash flows go into these operators is significant. And so, the project green light is not likely to get a no unless it was a more marginal prospect in the first place. A lot of our bidding and quoting are in the South American region broadly, Petrobras, Guyana, et cetera. These are very prolific projects that are going to continue long lead time. So I'm not as worried about that as at least the ones that we're bidding currently.

Makes sense. Thank you, Cindy. I Appreciate it.

Thank you, Ian.

Thank you, at this moment, we show no further questions.

Hilda, thank you today for hosting our call and thank you to all of you who one, participated in the call, and two asked some clarifying questions of us. We will be going obviously through our budget cycles and year end close and look forward to sharing our more refined thoughts on 2022 in connection with our fourth quarter call. I hope you all have a great day and I can't resist saying Go Astro . Take care.

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