Oil States International, Inc. (OIS) Q2 2022 Earnings Report, Transcript and Summary

Welcome to the Oil States International, Inc. Second Quarter 2022 Earnings Conference Call. My name is Jenny. I'll 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 Ellen Pennington. Ellen, you may begin.

Thank you, Jenny. Good morning, and welcome to Oil States' Second Quarter 2022 Earnings Conference Call. Our call today will be led by our President and CEO, Cindy Taylor; and Lloyd Hajdik, Oil States' Executive Vice President and Chief Financial Officer. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law. No one should assume these forward-looking statements remain valid later in the quarter or beyond. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our 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 1.5 hours after the completion of this call and will be -- will continue to be available for 1 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 second quarter 2022 results and provide our thoughts on the market outlook. During the second quarter of 2022, the company generated revenues of $182 million and consolidated EBITDA of $17 million, representing sequential increases of 11% and 17%, respectively, and the highest quarterly revenues and consolidated EBITDA reported since the first quarter of 2020 before the onset of the COVID-19 global pandemic. Sequentially improved results were driven by the improved commodity price environment driving strong activity levels in the U.S. and abroad. This led to increased demand for our short-cycle products and services in the United States. We also benefited from improved sales of our project-driven products in our Offshore/Manufactured Products segment. A notable achievement in the second quarter was a 61% sequential increase in our Well Site Services segment EBITDA driven by land-based completion and production activity. During the second quarter of 2022, the industry experienced a 4% sequential quarterly increase in the average U.S. frac spread count. Compared to the same period in 2021, the average U.S. frac spread count increased by over 25%. Our results were very strong relative to these industry metrics. Our Offshore/Manufactured Products segment reported a 15% sequential increase in revenues driven by a 21% increase in project-driven revenues, coupled with higher demand for our short-cycle products. Backlog totaled $241 million as of June 30 with quarterly bookings of $77 million, yielding a quarterly book-to-bill ratio of 0.8x and 0.9x year-to-date. Our second quarter bookings were below our forecast due to timing delays in certain contract awards, coupled with negative exchange rate trends affecting our foreign backlog in orders. We expect improved bookings in the second half of 2022 compared to the first half of 2022. In our Downhole Technologies segment, revenues decreased 4% sequentially due to transitory reduction in customer demand for perforating products internationally. Our investments in technology and innovation were again recognized by the Offshore Technology Conference with two 2022 Spotlight on New Technology Awards presented for our Managed Pressure Drilling and Riser Gas Handling System and our Merlin 15K High-Pressure, High-Temperature Riser System. Additionally, during the quarter, OSI Renewables, which is a newly branded product offering within our Offshore/Manufactured Products segment, introduced the most recent addition to our growing portfolio of new technologies, a fixed tension leg platform for floating wind solution that leverages our deepwater expertise into additional green energy technologies. 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, and good morning, everyone. During the second quarter, we generated revenues of $182 million, consolidated EBITDA of $17 million and a net loss of $5.1 million or $0.08 per share. As Cindy noted, we achieved our highest quarterly revenues and consolidated EBITDA since the first quarter of 2020, which coincided with the onset of the COVID-19 pandemic. Our second quarter loss was negatively impacted by $1.8 million of tax expense resulting from valuation allowances recorded against our U.S. deferred tax assets as well as certain nondeductible and discrete items. We ended the second quarter with $22 million of cash. Cash was used during the quarter to fund a $16 million build in working capital associated with the growth in activity levels, $8 million for the acquisition of E-Flow Control Holdings, a U.K.-based global provider of integrated handling, control and instrumentation systems and $6 million in open market purchases of our outstanding 1.5% convertible senior notes at a slight discount to par value. All of our business segments were free cash flow positive through the first 6 months of 2022. And as a reminder, we define free cash flow as cash flow generated from operating activities, less capital expenditures plus proceeds from the disposition of property and equipment. As of June 30, no borrowings were outstanding under our asset-based revolving credit facility and amounts available to be withdrawn totaled $62 million which, together with cash on hand, resulted in available liquidity of $84 million. At June 30, our net debt totaled $150 million, yielding a net debt to total capitalization ratio of 18%. Additionally, on June 28, we agreed to pay $10 million and issue approximately 1.9 million shares of our common stock, which had a market value of $10.3 million on July 1 to settle the $17.5 million promissory note to the sellers of GEODynamics, which comprises our Downhole Technologies segment, together with related accrued interest and resolve all outstanding legal disputes. The cash payment and the issuance of the 1.9 million shares of our common stock were made on July 1 and will be recorded in the third quarter of 2022. We invested $4 million in capital expenditures during the second quarter, which were partially offset by proceeds received from the sales of assets totaling $1 million. For the full year 2022, we expect to invest approximately $20 million in capital expenditures to support continued market expansion. For the second quarter, our net interest expense totaled $2.6 million, of which $0.5 million was noncash amortization of debt issuance costs. Our cash interest expense as a percentage of average total debt outstanding was approximately 5% in the second quarter. In terms of our third quarter 2022 consolidated guidance, we expect depreciation and amortization expense to total $16.9 million, net interest expense to total $2.4 million and our corporate expenses are projected to total $10 million. 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.

Starting with our Offshore/Manufactured Products segment, we generated revenues of $96 million and segment EBITDA of $14.7 million in the second quarter of 2022, compared to revenues of $84 million and segment EBITDA of $15.6 million reported in the first quarter of 2022. Segment revenues increased 15% sequentially driven primarily by a 21% increase in project-driven revenues and higher customer demand for short-cycle products, while margins declined due to a shift in product mix from the first quarter of 2022. Our EBITDA margin in the second quarter of 2022 was 15.3% compared to 18.5% reported in the first quarter of 2022. Backlog totaled $241 million as of quarter end, a 9% sequential decrease from the first quarter. Second quarter 2022 bookings totaled $77 million, yielding a quarterly book-to-bill ratio of 0.8x, while our first half of 2022 book-to-bill ratio was 0.9x. Our second quarter bookings were broad-based across many product lines and regions with approximately 13% of our bookings tied to non-oil and gas projects. As I noted earlier, our second quarter bookings were below our forecast due to delays in certain contract awards, coupled with negative exchange rate trends affecting our foreign backlog and orders. We do, however, expect improved bookings in the second half of 2022 compared to the first half of 2022. This year marks the 80th anniversary of our company with its origins evolving into what is now our Offshore/Manufactured Products segment. This segment has endeavored to develop leading-edge technologies while cultivating the specific expertise required for working in highly technical, deepwater and offshore environments. As the world expands investment in alternative energy sources, we will be working diligently to translate our core competencies into the renewable and clean tech energy space. Recent product developments should help us leverage our capabilities and support a more diverse base of customers going forward. We continue to bid on potential opportunities supporting our traditional subsea, floating and fixed production systems, drilling and military customers while experiencing an increase in bidding to support multiple new customers actively involved in subsea minerals, fixed and floating offshore wind developments and other renewable and clean tech energy systems globally. In our Well Site Services segment, we generated revenues of $55 million and segment EBITDA of $8.9 million in the second quarter of 2022 compared to revenues of $48 million and segment EBITDA of $5.5 million reported in the first quarter of 2022. Segment EBITDA margin in the second quarter of 2022 was 16.2% compared to 11.5% reported in the first quarter of 2022, yielding segment EBITDA incremental margins of 50%. Our second quarter 2022 segment EBITDA margin of 16.2% represented the highest quarterly margin achieved since the third quarter of 2019, boosted by expanding activity levels in the U.S., some recovery in our international operations and our decisions made in 2021 to streamline our operations and exit underperforming regions and service offerings. We are now seeing the benefits of our actions in improved segment EBITDA margins. We remain focused on optimizing our operations and pursuing profitable activity in support of our global customer base. As market expansion opportunities continue to unfold in 2022, we will continue to focus on core areas of expertise in this segment and are actively developing improved equipment offerings to differentiate our completion service offerings. In our Downhole Technologies segment, we reported revenues of $31 million and segment EBITDA of $2.9 million in the second quarter of 2022 compared to revenues of $32 million and segment EBITDA of $2.9 million reported in the first quarter of 2022. Lower-than-expected sales of our perforating products in international markets drove the modest sequential decline in revenue. However, we believe demand for our perforating products internationally will improve in the second half of 2022. Segment EBITDA margin in the second quarter of 2022 was 9.3%, flat with the first quarter. Going on to our market outlook comments. Supply chain challenges, access to available labor and rising inflation have challenged our industry and many others as the world comes out of the pandemic-induced shutdowns and faces disruptions caused by the COVID-19 pandemic. Global oil and gas inventories remain below their pre-pandemic 5-year seasonal averages, leading to higher commodity prices and expectations of continued increases in drilling and completion spending throughout 2022. We are also seeing an improved outlook in international and offshore markets, which should further support our product and service offerings. Given improvements in the frac spread count over the last several quarters, we expect our Well Site Services and Downhole Technologies segments to continue their growth in 2022 with increasing EBITDA contributions. Revenues in our Offshore/Manufactured Products segment are also expected to continue to expand given improved project-driven and short-cycle product demand. Our outlook for the full year 2022 has improved and suggests that our consolidated revenues will increase by approximately 30% year-over-year. Accordingly, we are increasing the low end of our 2022 full year consolidated EBITDA guidance from $65 million to $70 million. Our annual guided consolidated EBITDA range is, therefore, $70 million to $75 million, bringing the midpoint of our guidance up 4%. Now I'd like to offer some concluding comments. Following the unprecedented demand destruction caused by the global response to the COVID-19 pandemic, U.S. crude oil and natural gas inventories have now drawn down considerably with expanding economic activity. As of July 22, U.S. crude oil in inventory totaled 422 million barrels, which was about 6% below the 5-year average. Natural gas and storage for the same period totaled 2.4 trillion cubic feet, which was about 12% below the 5-year average. Despite these inventory trends, crude oil and natural gas prices corrected to the downside in recent weeks due to ongoing recession concerns, which is expected to hurt demand if it occurs. However, WTI crude oil spot prices remains above $96 per barrel and natural gas is currently trading at approximately $8.50 per MMBtu, supporting continued favorable activity for the balance of this year. Initially, the industry responds to higher commodity prices with accelerated shorter-cycle investments in the United States, which we are experiencing. Although longer term in nature, we expect investments to pick up for long lead time projects as well, including those in deepwater areas. Oil States will continue to conduct safe operations and will remain focused on providing technology leadership in our various product and service offerings with value-added products and services available to meet customer demands globally. In addition, we will continue our product development efforts in support of emerging renewable and clean tech energy investment opportunities. That completes our prepared comments. Jenny, would you open up the call for questions and answers at this time, please?

[Operator Instructions] We do have a question from Stephen Gengaro.

So I guess two things for me, if you don't mind. The first, you talked about the second quarter bookings in Offshore/Manufactured Products and the expectation for improvement in the back half of the year. Can you just talk a little bit about the visibility on that and the types of projects you sort of see flowing through as the year progresses?

Yes. We keep a very detailed list of both near-term projects and longer-term opportunities that we are actively bidding and as typical, we assign probabilities to those. But what we're really seeing is slippage in the timing. The projects are still there, they're still going. And in fact, some of the awards have already come in, in the month of July. And so when we definitely have projections on a quarter-by-quarter basis. And there was just a couple that slipped kind of from Q2 to Q3. So nothing negative there. And again, the visibility is strong in terms of the product queue that we are looking at through the balance of 2022. A lot of those are both predominantly, I'm going to say, tied to Guyana and Brazil but also some selected major project opportunities in the Gulf of Mexico. Most of those are production facility oriented. We would get upside as some of our new riser technology and NPD equipment as an example would get to market.

Okay. Great. And when we think about the third quarter and without sort of digging too deeply into the specifics, but you had really good incrementals in Well Site. How should we think about the incrementals there? And then any color you can give on Offshore/Manufactured Products given how backlog converts in the third quarter.

Well, in our comments, we guided both to revenue increases, if you will, sequentially going from Q2 to Q3. It will always be a mix issue in Offshore Products, depending upon some of our higher-margin products and services compared to some of the major products. And if we get a lift as an example from our connector products, remember that there is a pass-through element of pipe that we acquire and then we attach our specialized connectors. Those are on average lower margin because of the pass-through piece of that. So it's all a mix issue going forward. But just generally speaking, the margins that we achieved in the first half of 2022 are both very acceptable in my view. We had a very strong mix in Q1. So even though we're down sequentially, there's still healthy margins in my view. And we'll see that continue, but we should get topline improvement based on our internal forecast. And again, I mentioned in the call that I expect our book-to-bill to be north of 1 as some of these awards come in the door, which again, they are beginning to in the month of July. As it relates to Well Site Services, we'll continue to see strong incrementals. I don't think they're going to be 60%. That would be great. Historically, our incrementals have kind of range, I'll say, 30% to 40%. And I think you'll see them normalize at that level, but nonetheless, very, very strong incrementals. And importantly, all of these business lines are now generating free cash flow.

Great. And then just one follow-up. We've been hearing from the pressure pumpers that they're effectively sold out. Most of the big guys are not adding much capacity. Is that impacting sort of how we should think about growth rates in Well Site?

I'll tell you where -- we do frac support. And what I'm trying to do is expand market share and get some of my underutilized equipment to work in the completion services business. So if there's any growth resistance there, it's not so much the market frac fleet, it's more labor. And so our greatest challenge is getting labor sufficient to grow that revenue base. But we're -- it's a difficult process, but we're managing through it from a labor perspective. I would say the one area that I think it has kind of hindered a little bit of the recovery, i.e., these frac fleets getting off the ground consistently is on the demand for the Downhole products. And while it's improving, I think it would be better if we could have more active frac fleets going to work. And to the extent there's delays there, it just delays some of our products as well.

Now that you mentioned it, one quick follow-up maybe. Can you quantify the delays from international at all, either size of international or how it impacted the quarter?

What we do right now, we are expanding. And I recall that when we bought GEODynamics, they only had 5% or 10% mix tied to international activity. So these are newer initiatives where I'll just generally say we're making good headway, but we don't have that broad-based established operations. And initially, the largest contributor to our international revenues, they were associated with P&A work. P&A work can go, as you know, it's not routine and it's not a steady state quarter-by-quarter. And then also, it's also dependent on the quality of the cement job you get whether you need the products at all. And so they tend to be lumpy on the P&A side. Now we also have initiatives to expand our market share, particularly for shaped charges and more routine completion operations, and we are getting -- making headway there. And so just think about this is evolving. But right now, we're still in that window of kind of new market penetration in certain areas and a little bit of a waiting right now tied to P&A activities, which is lumpy. Again, nothing negative here at all. In fact, I think it's very positive to see that we're taking share internationally.

[Operator Instructions] We have a question from Sean Mitchell.

Cindy, sorry, just really quick. You talked a little bit about in your opening comments or your commentary on the macro supply chain challenges. Could you just maybe kind of -- anything you can provide in terms of lead times on -- I'm guessing on manufactured -- on your offshore product side or anything on the manufacturing side? What are the biggest challenges you're seeing still today on the supply chain as it relates to offshore products?

I would say the heart of what we do on major projects comes down to forgings and ability to access that. And with the Russia-Ukraine crisis, there are just certain issues, not to mention very high power cost in Europe, as an example. You're hearing more and more about activity reductions. I think the last one I heard was a massive reduction in ammonia production because the cost of powering some of these facilities is getting excessive in light of the disruption in that market. But that being said, we had good sources right now, the forgings, but it's certainly something to watch. You mentioned specifically Offshore/Manufactured Products. I would also say just things like access and availability of freight at reasonable cost is a real challenge. In our Downhole Technologies business, I'm not sure if you wanted commentary on that, but not surprisingly, some of our switches as an example, anything that's chip-related, again, much like the global business, those are challenges for us. And so we're trying to engineer and design solutions to alleviate those. And we're very carefully monitoring our inventory and supply chain for those critical items. I go back, if -- Well Site is not so much of an issue that I think about on materials, it's more labor. But those are one of many challenges we face, but again, managing through them at this point.

And then maybe on Well Site, just -- I mean a lot of the larger kind of frac companies on the call so far this quarter have really turned -- they're talking about their customer conversations turn into '23. Are you seeing that as well?

I'll have to say yes with a caveat. And so ours is typically call-out work. But our bigger customers that have multiple wells and multi-pad, high-end type activities understand that they need to be talking to us and securing availability for their projects. And so to the extent there are bigger customers, usually are top 5 in this business, they're giving us that visibility, particularly for the big pads that will be upcoming. If it's a shorter cycle say isolation job or flowback job, we just have continual work with them, but they're not necessarily locking up capacity nor do they need to. So it's kind of a mixed bag depending upon service offering.

[Operator Instructions]

Okay. Jenny, it looks like from our screen, there's no further questions. We acknowledge it's incredibly busy today. I think I understood this week, there's about 50% of the S&P 500 reporting. So for those of you that could join, we appreciate it. We expect a lot to go back and review it off our website. And we look forward to any follow-up questions that might arise from that. Good luck through the rest of the earnings season, and we look forward to talking to you as the quarter progresses. Take care.

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