Oil States International, Inc.

Welcome to the Oil States International Incorporated's first quarter 2023 earnings call. My name is Brent and I will be your operator for today's call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, Again, press star 1. Thank you. I will now turn the call over to Ellen Pennington. Ellen, you may begin.

Thank you, Brent. Good morning and welcome to Oil State's first quarter 2023 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 FCC filings. This call is being webcast and can be accessed at Oil State's website, A replay of the conference call will be available two hours after the completion of this call and will continue to be available for 12 months. I will now turn the call over to Cindy.

Thank you, Ellen. Good morning, and thank you for joining our conference call today where we will discuss our first quarter 2023 results and provide our thoughts on market trends in addition to our outlook comments. During the first quarter of 2023, the company generated EBITDA of $21 million, representing a sequential increase of 4% on revenues of $196 million. We generated net income for the third consecutive quarter, driven by growth and a favorable demand mix in our downhole technologies and well site services segments. along with strong contributions from our offshore manufactured product segment. Backlog at our offshore manufactured product segment increased 6% sequentially, totaling $326 million as of March 31st, driven by quarterly bookings of $118 million, which yielded a quarterly book-to-bill ratio of 1.2 times. Our first quarter bookings included three notable project awards exceeding $5 million each. We are also pleased to report the receipt of our first two contract awards for our newly developed managed pressure drilling equipment. In our well site services segment, we achieved a 6% sequential increase in segment EBITDA driven by higher U.S. completions related activity along with enhanced customer penetration and better equipment utilization, despite a sequential decrease in the average U.S. frack spread count. In our downhole technology segment, revenues increased 4% sequentially, while segment EBITDA increased 164%, due primarily to contributions from higher margin international perforating product sales, coupled with improved integrated gun product sales mix domestically. International perforating product sales tend to be somewhat lumpy and can vary from quarter to quarter depending on customer activities. Our investments in technology and innovation were once more highlighted by the Offshore Technology Conference with the announcement that we are the recipient of two 2023 Spotlight on New Technology Awards for our floating wind platform design and our active seat gate valve technology. We were also recognized with a 2023 Meredith Engineering Award from Hart Energy for our MPD Ready riser system designed for jack-up applications. Finally, last night, the National Ocean Industries Association presented oil states with the 2023 Safety in Seas, Culture of Safety Award, recognizing our sustained commitment to safety in the field. 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 first quarter we generated revenues of $196 million adjusted consolidated EBITDA of $21 million, and net income of $2.2 million, or 3 cents per share. We achieved our third sequential quarter of positive net income, reflective of the continued improvement in our operations and the overall strength of market activity. During the quarter, we repaid in full the remainder of our 1.5% convertible senior notes, plus accrued interest totaling $17.4 million. In addition, we invested $26 million in working capital and also spent $6 million to fund net capital expenditures. Given customary working capital bills in the first quarter, our free cash flow will be weighted to the second half of 2023, similar to what we experienced in 2022. Given the above debt repayment and corporate investments, $5 million in borrowings were outstanding under our revolving credit facility at March 31. We expect to repay these borrowings during the second quarter. Availability under the revolving credit facility totaled $93 million, which together with cash on hand of $16 million resulted in available liquidity of $109 million at March 31. At March 31, our net debt totaled $123 million, yielding a net debt to total capitalization ratio of 15%. On a leverage ratio basis, net debt to adjusted consolidated EBITDA remains at 1.4 times at March 31. In 2023, we expect to invest approximately $25 million in capital expenditures, dependent on market conditions prevailing at the time the capital investments are made. For the first quarter, our net interest expense totaled $2.4 million, of which $0.4 million was non-cash amortization of debt issuance costs. Our cash interest expense as a percentage of average total debt outstanding was approximately 5% in the first quarter. In terms of our second quarter 2023 consolidated guidance, We expect depreciation and amortization expense to total $15.4 million, net interest expense to total $2.4 million, and our corporate expenses are projected to total $10.7 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.

Thanks, Lloyd. Our offshore manufactured product segment generated revenues of $98 million, segment EBITDA of $15.9 million, and operating income of $11.1 million in the first quarter of 2023. Revenues in the first quarter decreased 7% sequentially, driven primarily by an 11% decrease in project-driven revenues due to timing on certain project schedules, partially offset by the impact of higher customer demand for our short cycle products. Segment EBITDA margin in the first quarter of 2023 was 16.2% compared to 16.9% in the fourth quarter of 2022. Backlog totaled $326 million at March 31st, 2023, reaching its highest level since the fourth quarter of 2015. First quarter 2023 bookings totaled $118 million, yielding a quarterly book-to-bill ratio of 1.2 times. Our first quarter bookings were broad-based across many product lines and regions. 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 expansion in investments in alternative energy sources continues to increase exponentially, we will be working diligently to translate our core competencies into the renewable and clean tech energy space. Our core competencies are well entrenched in the markets we serve, and we continue to bid on potential opportunities supporting our traditional subsea floating and fixed production systems drilling and military customers while also bidding to support multiple new customers and projects involved in developments such as subsea minerals gathering, fixed and floating offshore wind developments, and other renewable and cleantech energy systems globally. These opportunities create the potential for us to expand our product offerings and revenue base. In our well site services segment, we generated revenues of $67 million, segment EBITDA of $13.2 million, and operating income of $7 million in the first quarter of 2023. Segment EBITDA margin was 20% in the first quarter of 2023, compared to 18% in the fourth quarter of 2022. Our revenues were essentially flat with the fourth quarter of 2022, notwithstanding typical seasonality we experienced in the United States. Service offering revenue mix and a continued focus on cost discipline led to a higher segment EBITDA margin sequentially. 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, both in the United States and in international markets, we will continue to focus on core areas of expertise in this segment and the deployment of our recently enhanced completions equipment to further differentiate our completion service offerings. In our downhole technology segment, we reported revenues of $31 million with much improved segment EBITDA of $2.8 million in the first quarter of 2023 compared to revenues of $30 million and segment EBITDA of $1 million reported in the fourth quarter of 2022. Strengthening revenues and margins in the quarter were driven by increased international perforating sales and a favorable shift in sales mix. Global oil and gas inventories have recovered and are now within their five-year seasonal averages for crude oil, but are now significantly above the five-year averages for natural gas, which has led to lower gas prices year over year, tempering expectations somewhat for growth in drilling and completion spending on U.S. land activities. However, we have begun to see an inflection upward in international and offshore markets, which will further support our product and service offerings in global regions. Given the steady levels of frack spread utilization over the last several quarters, we expect our well site services and downhole technology segments to continue to perform in line with or better than market activity indicators. Revenues in our offshore manufactured product segment are expected to continue to grow, especially in the second half of 2023. given strong order flow and increased levels of backlog, along with ongoing short cycle product demand. Given these market trends and indicators, we believe that we will achieve the upper end of our prior annual guidance range. Now I'd like to offer some concluding comments. Softening demand and concerns over the stability of the global banking system caused oil and gas prices to drop during the first quarter of 2023. This was followed by a strong reaction by the OPEC plus countries with a production cut which rallied the market. However, commodity prices have retrenched since the announcement on demand concerns with WTI and Brent crude spot prices currently at $75 and $79 per barrel respectively. Natural gas prices remain range bound at lower levels due to high storage. However, relatively flat U.S. production and increased demand for natural gas for LNG feedstock and for use in the power sector should lift natural gas prices over the longer term. Initially, the industry responded to higher commodity prices with accelerated shorter cycle investments in the United States, which the industry clearly benefited from in 2022. We are now experiencing an increase in investments in long lead time projects as well, including those in international markets and deep water basins around the world. 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 expansion and energy transition opportunities. That completes our prepared comments. Brents, would you open up the call for questions and answers at this time, please?

At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Your first question is from the line of Stephen Jen Jaro with Stifel. Your line is open.

Thanks. Good morning, everybody. Hi, Stephen. Sydney, can you talk a little bit about what you're seeing on the offshore order flow side? I know your book is good. You mentioned a little bit, thinking of a pair of remarks. I'm just curious about the conversations you're having and the visibility that you think you have as you go over the next few quarters as far as order flow.

No, that's a great question, Stephen. Thanks for posing it. Our bookings outlook is very strong. I'm trying to think back to our 2022 bookings, and I think the bookings were up about 29% or so. What's happening, revenue's growing, and so a book-to-bill north of one implies obviously growing bookings. Our bidding activity has been robust and broad. Of course, there's a lot of bidding activity around our conventional subsea proprietary technology in both Brazil, Guyana, and other basins, but obviously those two basins are very, very strong. And again, we're very pleased with some of our new product introductions, particularly our high-pressure riser systems and our MPD equipment, both of which are getting good market attention, and we're beginning to see some order flow there. And then I'll just kind of end with also a bit on the unique side, of course, is our mineral riser systems. And we can continue to bid opportunities around that as well. Those are obviously just a bit lumpier because it's a very immature play at this point in time. But again, just a robust order outlook with strong expectations for continued book-to-bill ratios, even on higher revenues.

Great. Thank you. And my other just quick question, your confidence at the higher end of the guidance range, I imagine just based on what looks like kind of a stable U.S. market, maybe not growing quite as fast as we had thought a couple months back, is the upper end because of the offshore piece, or are there other elements to it that give you comfort?

You know, we're performing well relative to the market dynamics that you have described very appropriately, but definitely we have a strong outlook, particularly in the second half, around our offshore manufacturer products driven. And again, it's a backlog driven business. And I mentioned in my comments that those major project awards should list our overall revenue and EBITDA generation for that segment. That is not to say that we're negative on U.S. land, but I acknowledge that at a minimum it's flattening just a bit, but I've always looked at you can't just ride the market. You need to do better than the market, and that's going to be driven by customer market share and penetration, increased utilization, and in our case, some new product introductions that if there is this softening around gas, first of all, I don't think it'll be that significant. But two, we hope to counter that with new product introductions and better market share penetration. But the simple answer to your question is most of the lift towards the upper end of that range does in fact come from offshore manufactured products.

Great. That's very helpful, Cindy. Thank you.

Thank you, Steven.

Your next question comes from the line of Luke Lemoine with Piper Sandler. Your line is open.

Hey, good morning. Hello. Hi. Maybe just a comment first, but your stock should not be down 12%. But then on your book deal, it's been strong the past couple of years and fairly consistently above 1x. question might be a little tough since bookings can be pretty diverse, but could you talk about the margin profile you're seeing in your backlog versus maybe 12 to 18 months ago?

Oh, for sure. Thank you, Luke. Yeah, stock trading in this space is a mystery. I always say the gift that keeps on giving because we actually entered this morning thinking our stock would be up 5% to 7% on a 5% beat on EBITDA, so it's a bit confusing, but Certainly what we are booking into backlog is more oriented to our semi-proprietary equipment and therefore does carry strong margins, number one, but also great expertise around the manufacturer of that, meaning we have a great history in these product lines, particularly on the subsea side that includes our SCR flex joints and other equipment. So the mix in backlog is a good mix. We do hope to see continued ongoing demand for the short cycle products. If that happens, our margins will perform well going forward.

Okay. All right. Thanks, Cindy.

Thanks, Luke.

Again, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your next question is from the line of Kurt Hallied with Benchmark. Your line is open.

Hey, good morning. Hey, Kurt. Hey, just a quick kind of follow-up here, Cindy. You made an interesting point about, you know, the EBITDA beat for the quarter, and you made a reference to, you know, your conviction about achieving the higher end of you know, of your guidance and maybe, you know, given the stock being down the way it is, could you just kind of remind us what that guidance range was?

I believe it was a revenue increase year over year of 15 plus percent with an EBITDA range of 92 to 100 million.

Okay, great. I appreciate that. Yes, I see the consensus EBITDA is out there at 92. $95 million, so clearly nothing's changed. And I'd echo Luke's point, your point. It's a head scratcher for sure today. All right, so the dynamics, the focal point here, at least initially, is you kind of referenced some new MPD equipment and demand for that equipment. MPD seems to be gaining a lot of airtime. on a number of different conference calls that I've listened to so far this quarter. You know, I would say just in some instances when some of these, you know, technologies are being discussed at a broad level, it's clearly a demand pull kind of concept. But then it kind of begs the question around, you know, what's the market penetration opportunity? Are we going to see situations where, you know, is demand pull greater than supply? because when a number of different players start entering a market, you know, always beg the question around how aggressive players have to be on pricing. So I just wonder if you just give us as much color as you can around that without, you know, giving up any state secrets.

Well, no, I think your comments are very appropriate. I will say that we are not trying to compete with standard NPD equipment that is in the market. We have designed ours to be both lighter, lower cost, easier to change out pressure control components. So think of this as what we believe is a more suitable, quote unquote, better alternative than the standard NPD equipment that's out in the market. And therefore, don't think about equipment on equipment competition and therefore lower pricing. I don't look at it that way. I look at this as offering enhanced technology to the marketplace that is a better mousetrap, if you want to call it that. And much like we just got an OTC award around our active seat gate valve, you can say, well, that's just another valve to go in frac equipment. It is a much more differentiated and enhanced valve that is gaining rapid market acceptance. So again, I don't think of these as equipment on equipment competition that will lower price. Okay. That's great.

And then maybe circling back around to your offshore, you know, manufactured products. And, you know, you kind of referenced, generally speaking, you know, that you look to outperform whatever market dynamics are in play for your variant product line. So, you know, I think some of the data that we've seen recently suggests that, you know, offshore SIDs will be up something along the lines of 50% or so over the course of the next couple of years and going to be at their highest level in over 10 years or so. You know, just want to kind of put it down to a framework is, could your business sort of track that FID kind of increase is kind of an overarching question. And then the subset of that question would be, look, you know, FTI is out there talking about, you know, $25 billion order book over the next few years. And, you know, we've seen substantial increase in deep water drilling activity. Can you just remind us what the kind of lead lag dynamics are around deep border drilling activity and subsea infrastructure as it relates to your business?

No, I think we are highly correlated to the trends that Technique FMC is seeing because they are more weighted to the subsea infrastructure side of the business as we have selected things, i.e. our risers and our MPD equipment that will go on increased drilling, if you will, for new fields, but more weighted on the subsea infrastructure development side, production side of the equation. So I always say when Doug's business at Technique FNC is doing well, we will proportionately perform well also.

Okay, awesome. And maybe if I could add one more just on well site services. Yeah, there is churn taking place as you referenced on the natural gas side. of the business, but it looks like the oil basins are stable to ticking up at the margin at the very least. Land drillers and frack companies have both basically said they're going to hold the line on pricing. Just kind of curious as to what you may be seeing in your product lines in terms of how some of your competitors are acting from a price standpoint.

Yeah, well, first of all, we're not as exposed to the Hainesville. I really think of this conversation around the Hainesville, and there's been projections by analysts that we might drop as many as, I don't know, 30 gas-ordered rigs in the Hainesville. That's a pretty big number for that market. I personally believe that the Northeast gas market holds up pretty well. But in totality, you know, the gas rig count in total is about 20% of the rig count. We're just not that exposed. necessarily to the natural gas basins that we're talking about, particularly the Haynesville. And so I'm not minimizing this conversation, but our business is different than the more capital-intensive businesses that are out there, i.e., land drilling, pressure pumpers. And obviously, you realize I've worked for a driller in my past lifetime. a nominal increase in the rate can have a pretty significant hit to revenues and EBITDA. That's really not the business we have. And our equipment is easily mobilized between locations, just given the size that's there. I just don't see a mineral impact to our land-based business at this point in time. And again, I'm one of the ones, like, I'm very bullish on natural gas for the long term, particularly with the LNG facilities that are going to come in, and even just Freeport LNG being back online helps pretty significantly with this supply-demand balance that was in balance while they were down. I mean, that's a lot, and a warm winter. There's a number of factors there, but again, bullish for the long term, and I just don't see a major degradation in activity here.

Great. Thanks, Cindy. I always appreciate you telling us.

Thank you, Kurt.

Your next question is from the line of John Daniel with Daniel Energy Partners. Your line is open.

Good morning, Cindy and Lloyd. How are you?

Hi, John.

Hi, John. First, I appreciate your comments on trying to understand stock prices. I wasn't very good at it, which is why I quit. Question for you on product development with respect to energy transition. This is more of an educational one for me, but Cindy, when you guys try to – bring a new product or service to market, can you speak to, you know, broadly speaking, the time to do so? And then when you come up with the idea generation for the new sort of transition-related products and services, is that coming from the customer where they say, here's an idea, go execute on it, or is it from your team that says, we've got an idea that might work? Just any color on that would be helpful.

Yeah, I mean, I... Everything we do is responsive to our customers at the end of the day, but these are internally developed technology. We've got a longevity of our team globally, quite frankly, that knows the market very well. And our time to market varies, and so that's going to be an answer I've got to explain. But meaning, you know, if you're adapting an expertise you have, i.e. in riser systems and you're adapting that from conventional oil and gas to deep sea minerals, you have a leg up just in terms of operating conditions and knowledge in deep water environments. And so that was a bit quicker to market as an example. I can contrast that to an NPD system just because we didn't have NPD systems in our portfolio before, even though we've been working in deep water as long as deep water has been around, quite frankly. We're well recognized for it, but that market introduction for MPD system has probably taken a little bit longer just because it's a new product for us. However, we've worked with all the deep water drillers, again, for decades, and they know our capabilities, and so we're beginning to get those products to market. And what you need to do is say we've improved this piece of equipment and can benefit your operations with it. The one that's going to take us longer, and it's going to take the whole industry longer, is the floating TLP system that we have designed around offshore wind. Right now, there are virtually no floating wind systems anywhere in the world. So this is completely new technology, and even the leasing of the areas, as we can talk about, it's in the very, very early stages. we're not really talking about having contractual revenue around floating wind until 2026. So those markets are very immature and they've got to develop. And as I said at certain conferences, the industry hasn't figured it out yet. I always say we're aspirational, we're trying to get tactical. What does it take to deploy 26,500 wind turbines in the next five years or so? Where's the engineering? Where are the manufacturing facilities? Where are the key sides? Where are the installation vessels? Just a lot of work yet to develop. And so it can obviously span a long range. But what we're trying to do is develop existing technologies into new applications. We're not trying to create a think tank, something we've never done before. And so our time to market should be one faster and more efficient than someone that doesn't have the expertise that we have.

Fair enough. And as your team is trying to come up with ideas and solutions, you know, three to five years from now, and again, it's a guess here, Cindy, but are you focused on like three or four things or are there like 20 things on the drawing board in terms of opportunity sets? Just trying to understand the scale.

Given our size, we've been very focused on things that we can manage internally. And obviously, we want to manufacture these long term. So we're positioning our facilities in key markets to be able to handle both conventional work as well as any type of new emerging technology as well.

Okay. Thank you for letting me ask you questions.

No, thank you, John.

Your next question is from the line of Doug Becker with Capital One. Your line is open.

Thanks. So there's a story on Bloomberg that oil states plummet on negative free cash flow results. From my perspective, I didn't think it was a surprise that free cash flow was negative in the first quarter given normal seasonality. Lloyd mentioned a similar growth trajectory on free cash flow as last year, which to me means free cash flow is probably up year over year. So I guess the question is, could you just go into a little more detail about the free cash flow outlook this year?

Yeah, I'll let Lloyd finish, but we got into this. We experience it every first quarter. That's normally just relative to our size. We pay out incentive payments as much as anything, and then coupled with growing revenue, which is what shareholders would want, you're going to have a working capital bill. But we've never had any material write-off of working capital or anything else. So if you look at that Well, I will file our 10Q. First of all, it's in the press release, the full cash flow statement. File our 10Q tonight. But it's kind of, again, disappointing to me. This is one of the cleanest quarters. We don't do add-backs to EBITDA. It's one of the best results we've had. We have no debt maturities until 2026. And these little headlines don't capture the fact that we performed extraordinarily well this quarter relative to expectations. And so... I have no concerns. I'll sleep perfectly well tonight about the working capital and the quote unquote negative free caps in Q1. And again, we got into it. In fact, we did a little bit better than what was in our internal budgets. We will be free cash flow positive for the year. And Lloyd can give you more details on that. But again, I just think it's a misinterpretation of where we are as a company.

Doug, Cindy's exactly right. When I looked at free cash flow from quarter one of last year, quarter one, we're exactly the same in negative free cash flow. First quarter heavy use with short-term and long-term incentives, like she said, as well as working capital investments, not to mention the cash we use to fund the repayment of the converts. All of those things are positive in our view. And then, you know, the balance of the year expect to be significantly free cash flow positive.

Yeah, and Doug, the only other headline we saw this morning, Zax came out and said we missed earnings 25%, i.e. we reported 3 cents a share rather than 4 cents a share, which we haven't traded on EPS in a long time. I'm ready. I'm glad of that. And, you know, we had a higher effective tax rate with non-cash PERMs that normalized over the years. So, again, if we ever get a chance to really parse through I think most people say this is a total overreaction to nothing on our stock. No question.

Your comments make sense to me. I appreciate the time.

Thank you, Doug.

There are no further questions at this time. I will now turn the call back to Cindy Taylor.

Gosh, I just want to thank everybody for dialing in this morning. I know it's the heaviest week of the earnings season. It's particularly important to us, I'd say, today just because we feel like there's some misinformation about the business and the company. And we look forward to, obviously, better stock price performance in our future conversations with you. But I hope the rest of the season goes well, and we'll talk to all of you very soon. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.