Oil States International, Inc.

Good morning, and welcome to the Oil States International Second Quarter 21 Earnings Conference Call. My name is Zanera, and I'll be the 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. During the question-and-answer session, if you have a question, please press star, then 1 on your touch-tone phone. I will now turn the call over to Ms. Ellen Pennington. Ellen, you may begin.

Thank you, Zanara. Good morning and welcome to Oil State's second quarter 2021 earnings conference call. Our call today will be led by our President and CEO, Cindy Taylor, and Lloyd Hodgick, Oil State's Executive Vice President and Chief Financial Officer. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain information other than historical information, Please note that we are relying on the safe harbor protections afforded by federal law. 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 State's website. A replay of the conference call will be available one and a 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 today regarding our second quarter 2021 earnings. Second quarter operating results in each of our segments benefited from the improved commodity price environment. Sequentially, our consolidated revenues and adjusted consolidated EBITDA increased 16% and 64%, respectively. Revenues in our offshore manufactured product segment led the way with a 27% sequential increase, while revenues in our downhole technologies and well site services segments increased 5% and 6%, respectively. We also achieved a 202 basis point increase in adjusted consolidated EBITDA margins resulting from revenue growth coupled with the benefit of cost reductions. Each of our operating segments reported positive EBITDA for the third consecutive quarter. Adjusted consolidated EBITDA for the quarter totaled $10 million, excluding $3 million of restructuring charges primarily associated with our exit of certain lease facilities. Cash flow from operations totaled $22.4 million for the quarter, allowing us to fully pay off our revolver and repurchase a portion of our 1.5% convertible senior notes. We also were very pleased to receive a 2021 Spotlight on New Technology Award from the Offshore Technology Conference, for our Merlin Deep Sea Mineral Riser System. 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.

Thank you, Cindy, and good morning, everyone. During the second quarter, we generated revenues of $146 million, while reporting a net loss of $15 million, or 25 cents per share. The quarterly results included non-cash lease asset impairment charges of $2.8 million, along with $2.6 million of restructuring charges, as described in our press release. Our adjusted consolidated EBITDA totaled $10.1 million, improving significantly from the first quarter due to higher activity levels, which drove increased revenues in our offshore manufactured product segment and in our other U.S. land-centric businesses. As Cindy mentioned, we repaid all outstanding borrowings under our asset-based revolving credit facility during the quarter and also bought back $6.4 million principal amount of our 1.5% convertible senior notes at a discount to par value. As of June 30, $26 million in principal amount remained outstanding related to the 1.5% convertible senior notes, which mature in February 2023. Cash on hand totaled $63 million as of June 30, compared to $55 million at the end of the first quarter. As of June 30, the total amount available to be drawn under our revolving credit facility was $50 million, which together with cash on hand yielded available liquidity of $113 million, an increase of $18 million from the end of the first quarter. At June 30, our net debt totaled $116 million, yielding a net debt to total net capitalization ratio of 14%. For the second quarter of 2021, our net interest expense totaled $2.7 million, of which $0.5 million was non-cash amortization of debt issuance costs. Our cash interest expense as a percentage of total debt outstanding was approximately 5% in the second quarter. In terms of our third quarter 2021 consolidated guidance, we expect depreciation and amortization expense to total $20 million, net interest expense to total $2.7 million, and our corporate expenses are projected to total $8.5 million. We spent $3.2 million in CapEx during the second quarter and expect to invest approximately $15 million in total CapEx during the full year 2021. 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 product segment reported revenues of $77 million and adjusted segment EBITDA of $10 million in the second quarter of 2021, compared to revenues of $61 million and adjusted segment EBITDA of $7 million reported in the first quarter of 2021. Revenues increased 27% sequentially, driven primarily by sales of our connector products and production equipment, but with noticeable improvement also coming from sales of our fixed platform, short cycle, and military products. Adjusted segment EBITDA margin in the second quarter of 2021 was 13.4% compared to 11.2% achieved in the first quarter of 2021. Backlog totaled $214 million at June 30, 2021, a decrease of 5% sequentially, yielding a book-to-bill ratio of 0.9 times for the quarter. For over 75 years, our offshore manufactured product 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 expand our core competencies into the renewable and clean tech space. Recent product development should help us leverage our capabilities and support a more diverse base of customers going forward. We continue to bid on potential award opportunities supporting our traditional subsea floating and fixed production systems drilling and military clients while experiencing an increase in bidding to support multiple new clients actively involved in subsea minerals, offshore wind developments, and other renewable and clean tech energy systems globally. Approximately 6% of our second quarter bookings were tied to non-oil and gas projects, bringing the year-to-date non-oil and gas bookings to 12%. In our downhole technology segment, we reported revenues of $27 million in adjusted segment EBITDA of $2 million in the second quarter of 2021, compared to revenues of $25 million in adjusted segment EBITDA of $3 million reported in the first quarter of 2021. Our perforating product line revenues increased 7% sequentially, driven by an increase in completions activity in the United States. Our EBITDA margins suffered a bit in the quarter due to facility underabsorption resulting from weather-induced work stoppages. In our well site services segment, we generated revenues of $42 million while adjusted segment EBITDA increased sequentially to $5.7 million. The 6% sequential revenue increase was driven by improved U.S. land and Gulf of Mexico activity levels while our international revenues remain flat with the previous quarter as customers continue to address the ongoing effects of the COVID-19 pandemic. We remain focused on streamlining our operations and pursuing profitable activity in support of our global customer base. We will continue to focus on core areas of expertise in this segment, and are actively developing improved service offerings to differentiate oil states' completions business. COVID-19 disruptions continue to hamper activity in domestic and international markets, but these disruptions continue to ease. Global oil inventories are beginning to return to their pre-pandemic levels, while improved pricing is spurring an increase in U.S. customer spendings. The second quarter 2021 US rig count average was 450 rigs, which was up 15% compared to the average for the first quarter of 2021. Similarly, the industry experienced a 42% sequential quarterly increase in the average US frac spread count, which favorably impacted all of our segments. As we are now a month into the third quarter of 2021, we are continuing to see favorable trends in the U.S. with the frack spread count increasing by 22 spreads, or roughly 10%, compared to the second quarter average. This increase gives us optimism that the third quarter is trending favorably, which should support our U.S. shell-driven product and service offerings. Given improvements in the frack spread count, we expect our well site services and downhole technology segments to continue their trend of sequential growth in the third quarter of 2021 with expanding EBITDA contributions. Revenues in our offshore manufactured product segment are expected to grow modestly given expected strong short-cycle product sales and increased service and repair activities. On a consolidated basis, we expect revenues to grow 4 to 5 percent sequentially in the third quarter of 2021. From a bookings perspective, we expect our offshore manufactured product segment to achieve a book-to-bill ratio greater than one times in the third quarter of 2021. We are raising our full-year guidance given increased levels of U.S. completions activity. Accordingly, we believe that our adjusted consolidated EBITDA will range from $40 to $44 million for the full year 2021. Now I'd like to offer some concluding comments. Resolution of the pandemic remains uncertain given the COVID-19 Delta variant and worsening trends around new cases and hospitalizations. This uncertainty has negatively impacted energy equities during the month of July due to concerns around growth prospects and the potential negative impact on demand. However, U.S. crude oil inventories drew considerably during the second quarter, leaving the U.S. at 436 million barrels in inventory as of July 23rd, which is about 7% below the five-year range. Crude oil prices appear to have stabilized in the $68 to $73 per barrel range following the supply agreement ultimately reached by OPEC Plus earlier this month. 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 to meet customer demands globally as we recover from the harsh effects of the COVID-19 pandemic. In addition, we will continue our product development efforts to support emerging renewable and clean tech energy investments opportunities. That completes our prepared comments. Venera, would you open the call up for questions and answers at this time?

Absolutely. Thank you. We will now begin the question and answer session. If you have a question, please press star, then one on your touchtone phone. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touchtone phone. Waiting on standby for any questions. And our first question comes from Stefan Gungaro from Stiesel. Please go ahead. Your line is open.

Thanks. Good morning.

Good morning, Steven.

So two things, if you don't mind. The first... You talked, Cindy, about the underabsorption and downhole in the quarter. And I was just curious if you could talk about, you know, kind of from these levels, the sort of incrementals we might be looking at and if there's any positive pricing trends that you're seeing in that business yet.

Sure. You're right. Margins in our downhole technology segments were negatively impacted by, called out weather events. These are lightning strikes in our shape charge manufacturing facilities. We had a lot of shutdowns, so there's inefficiencies in the quarter. But I would add to that that there's a general lack of pricing power in the perforating product line coupled with a bit of inflation. So our outlook right now is kind of very modestly improved sequential margins in Q3 and with a little more upside in Q4 as we kind of manage through those effects.

Great. Thank you. And you referenced this in your remarks and in your press release as far as sort of focusing in on the growth businesses with the best sort of long-term return profiles. Do you envision this as just sort of a strategy of how you allocate growth capital going forward, or would you envision any sort of strategic divestitures or anything of that nature?

We are, as you can see, throughout the first six months, we're really focusing both on product line and region and doing our very best at kind of the sub-product line to allocate capital where we're confident we're going to get good returns. And we are assessing kind of marginal operations and trying to trim out our indirect costs. And You know, as an example, there are very few adjustments to reported EBITDA, but most of this, or virtually all of it, is associated with exiting leased facilities that we believe have no longer benefit our utility. So, again, eliminating those costs prospectively help the individual product lines report stronger margins overall. So to say that there's a big exit of a business, the answer is no. We've trimmed out businesses that are not making or don't look like they will make positive EBITDA contributions. And so I think the good news for the company and the employees is a lot of this is behind us now, and we are going to allocate capital to the higher return and set some thresholds. I think what this industry has done wrong is for many years, at least the last decade, is allocate too much capital to equipment, therefore destroying market share and pricing. And I don't think I'm alone in saying we're going to be controlled about that growth capital going forward.

Thank you. And if I could throw in one more. We're hearing more and curious your thoughts on this that in 2022, sort of a 15%-ish or more growth rate and upstream capex in the North American markets is looking likely or at least pretty possible. In that environment, how should we think about the growth rates of your businesses relative to, and even if it's not 15%, just relative to the market in general?

So, you know, I guess my comment there is, one, I generally agree with that, and I think it's supported by a couple of things. Number one, you've seen an increase in activity driven by privates thus far. Typically, those privates don't manage a lot of hedging activity in their portfolio, and I say they're generally investing based on economic decision makings, and at these current levels of WTI pricing, I think it's beneficial. for them to do that. And based on indications from our customers, even as early as the second half of this year, much less 2022, we do see continued improvement, as I mentioned in my notes. And I would add to that, again, we track a lot of the larger public companies as well, and many are hedged at much lower than current pricing levels. So as those hedges roll off, it certainly seems to support your thesis of a 15% overall growth rate in industry capex. So I would say that's kind of number one. For us, you know, if you look at our product line incrementals, completion services as an example, they are very, very strong. And I think all the activities we've got, you're going to get the revenue leverage from utilization leverage coupled with benefit of these cost initiatives and rationalization plans that we've put in place. So I do think those incrementals in both completion services and downholes should be strong going forward. We had a good quarter in our offshore products business. I think our outlook is continuing to improve. I mentioned that by the expectations that we go north of a one times book to bill and Q3 going forward, and there's quite a lot of large projects in the pipeline that bodes fairly well for 2022. So at this point, my expectation is that every single product line improves in 2022 and will bring forward pretty strong incrementals because of the initiatives that have been put in place really over the last six quarters as we've gone through this COVID-induced challenge.

Great. That's a great caller. Thank you.

Thank you, Stephen. Thanks, Stephen.

Thank you. And we have no further questions at this time. I'd like to turn the call back over to Ellen.

This is Cindy. I just want to thank all of you for joining our call today. We deeply appreciate your interest in oil states and your continued dedication and support of the industry. I do wish you good luck as you continue through the remainder of of the earnings season. I wish you all the best. Thank you.

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