Oil States International, Inc.

Good morning. My name is Mark and I will be your conference operator today. At this time, I would like to welcome everyone to the Oil States 4Q24 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker 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, press star one again. Thank you. Ms. Ellen Pennington, you may begin your conference.

Thank you, Mark. Good morning and welcome to Oil States 4Q24 earnings conference call. Our call today will be led by our President and CEO, Cindy Taylor, and Lloyd Hodgick, 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 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 2023 Form 10K, along with other recent SEC filings. This call is being webcast and can be accessed at Oil States 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'll 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 fourth quarter of 2024 results and provide our thoughts on market trends in addition to discussing our company-specific outlook. Through the fourth quarter, we continued to build momentum towards achieving our strategic objectives supported by strong demand in offshore and international sectors while overcoming some headwinds in U.S. domestic land-based activities. With continued expansion of our international and offshore product offerings, along with the strategic optimization of our U.S. land-driven businesses, our international and offshore revenues by destination grew to 72% of our consolidated revenues for the quarter while U.S. land-driven revenues represented 28%. As we have discussed in prior quarters, we have strategically streamlined our operations in the United States through the exit of underperforming locations and business lines. Our focus on business mix optimization continued during the fourth quarter. Along these lines, we completed the sale of a previously addled facility netting cash proceeds of $24.8 million resulting in a pre-tax gain of $15.3 million. Our offshore and international operations grew sequentially in terms of revenue and bookings during the fourth quarter. However, improvements in these regions were offset by our U.S. land-driven operations due to a declining frac spread count triggered by typical fourth quarter seasonality. Our completion and production work in the Gulf of America has rebounded to higher activity levels early in 2025 from a slower second half of 2024 following adverse third quarter weather events. We remain dedicated to growing our operations and strategically investing in our most profitable business areas supported by advanced technologies. We will also continue to focus on the return of cash to our shareholders. During the quarter, we generated cash flows from operations totaling $18 million and repurchased $9 million of our common stock. During 2025, we expect to generate strong free cash flow allowing for further shareholder returns. Lloyd will now review our operating results along with our financial position in more detail.

Thanks, Cindy. Good morning, everyone. During the fourth quarter, we generated revenues of $165 million and adjusted consolidated EBITDA of $19 million. Our adjusted net income totaled $5.5 million or 9 cents per share after excluding a gain of $15.3 million associated with the sale of a previously idle facility and $3.1 million of restructuring charges incurred in connection with certain US land-based operations and facility closures. Our offshore manufactured product segment grew 5% sequentially generating revenues of $107 million and adjusted segment EBITDA of $25 million up 6% sequentially in the fourth quarter. Adjusted segment EBITDA margin was 23% in the fourth quarter comparable to the third quarter. In our completion and production services segment, we generated revenues of $30 million and adjusted segment EBITDA of $3.5 million in the fourth quarter. Adjusted segment EBITDA excluded operating lease asset impairment charges of $1.2 million and facility closure and other charges totaling $1.9 million. Excluding these charges, adjusted segment EBITDA was 12% in the fourth quarter compared to 13% in the third quarter. Excluding the revenue impact of exited operations in both the third and fourth quarters, completion and production services segment revenues declined 1.6 million or 5% sequentially. In our down-hole technology segment, we reported revenues of $27 million and break-even adjusted segment EBITDA for the fourth quarter. Despite some large planned collections from customers moving into early January, oil states generated $18 million in cash flows from operations during the quarter. We invested $14 million in capex, a portion of which was customer funded, which was more than offset by the $25 million in net proceeds received during the fourth quarter from the idle facility sale. As Cindy mentioned, cash was used to buy back $9 million of our common stock. Cindy will offer some market outlook and concluding comments.

Strong long-term prospects for oil, natural gas, and LNG coupled with growing global power demand are expected to drive ongoing capital investments in offshore and international projects, led by developments in Latin America, the United States, Asia, and Africa. Recently announced FIDs, which have resulted in production orders with major sub-C OEMs and associated industry backlog builds, should continue to translate into increased demand for our products, driving higher bidding activity, bookings, and ultimately revenue growth. We are successfully marketing our managed pressure drilling systems, which receive further market acceptance with key customer approval to operate in South America during the fourth quarter. We are also seeing positive market momentum across our conductor connector products and our flagship flex joint deepwater riser connector products. In the shallow water environment, project opportunities for fixed platform foundations, sub-C pipeline and associated repair systems, as well as topside equipment are emerging. These opportunities, combined with the low capital intensity of our global manufacturing operations, positions us for strong future growth and shareholder returns. While domestic market conditions and activity levels are expected to remain relatively flat throughout 2025, we expect profitability to improve within our completion and production services and downhole technology segments, given our restructuring initiatives undertaken in 2024, coupled with what is expected to be a more energy friendly regulatory environment. Domestic revenue opportunities for new technology introductions, including our open architecture, perforating systems and digital technologies for wireline service providers, should support market share gains. Internationally, our initiatives to secure contracts with our customers for the supply of perforating products is gaining traction with recent awards in Latin America and the Eastern Hemisphere that are scheduled to commence in 2025. Given a solid offshore and international outlook, combined with the potential for incremental margin improvement across our US land driven businesses, we expect 2025 full year revenues to range between $700 and $735 million and full year EBITDA to range between $88 and $93 million. Our first quarter guidance calls for revenues in a range of $160 to $170 million and EBITDA of $17.5 to $18.5 million. Cash flows from operations are expected to remain strong in 2025 in a range of $65 to $75 million with capex of approximately $25 million planned, providing opportunities for ongoing share repurchases during the year. I would remind listeners that we generally see lower cash flows in the first quarter of each year driven by the timing of funding short and long term incentives payments. Our capital allocation priorities remain very focused. We are committed to investing in organic growth opportunities, prioritizing growth capex and funding organic research and development, which will provide for sustained competitive advantages. Our strategic priorities center on driving long term profitability and growth by optimizing our global operations, capitalizing on the strength of offshore and international markets and focusing on our core competencies and technology differentiators. By leveraging our expanded portfolio of technologies and specialized services, we aim to deliver superior value to our customers and generate strong returns for our stockholders. That completes our prepared comments. Mark, would you open up the call for questions and answers at this time, please?

Absolutely. 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. We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Stephen Gingero with Stifle. Your line is now open.

Thanks. Good morning, everybody. I think two things for me. Cindy, you kind of alluded to free cash flow of looks like 40 to 50 million next in 2025. What are you focused on buybacks over debt reduction at this point? How do you think about the allocation of the free cash?

We feel very comfortable with our debt levels. I think you saw we executed in Q4 with share repurchases. Yes, we do have our debt maturing in April, but at the end of the year, we noted we had roughly 60 million of net debt. In Lloyd's comments, we had some very large receivables due late in December that were actually collected on January 9th, I think. And so I think the point of that is we were roughly net debt 45 million in January. And so we're really not concerned with the level of debt that we have at this point. And I think it is prudent to focus on shareholder returns.

Great. Thanks. And one of the things that kind of keeps surfacing in conversations is this sort of lack of offshore production capacity, that sort of delayed rig activity. When we think about FPSO growth, can you give us a sense or a reminder of the revenue opportunity you have on the FPSO side? I think one of the big players is sort of suggested seven to nine per year that are going to be ordered in the next couple of years. Can you just kind of frame your opportunity?

Well, I can. I mean, we're embedded in our guidance. I know you need to work through the numbers, but there's revenue growth in our offshore manufacturer products business. And that's really grounded on one existing backlog indicating growth in certain regions. Our bidding and quoting activity, particularly in South America, Brazil, Guyana, et cetera, give us the indication that the revenue growth appears solid, coupled with new technology introductions. And so I tend to get a bit more granular when we give our guidance. And it's really predicated on existing bidding and quoting activity that we have coming in. And you know as well, Stephen, we actually try to schedule that as best we can. It's never exact in terms of receiving the orders on a quarter by quarter basis. I think maybe we are a little bit different. Everybody tends to focus on white space for drillers or any kind of new reactivations or rigs coming out of the market. And we're a little more production infrastructure oriented. And I accept and realize that for analysts that follow it, it's a little harder because you don't ever see the back end on the deployment of the production infrastructure. And I think you're asking me in a given FTSO opportunity, how big could that be? And it varies. I hate to tell you, it varies greatly depending on how that field is designed. I were really largely driven by the number of import lines, export lines on a facility. Sometimes they will phase those over a period of time. Sometimes you'll do a larger build out. So I were giving you a range just on the large of the key connectors is probably anywhere from 15 to 25 million order of magnitude. And so they're important to us without question. And it's also some of our leading technology. I hope that answers your questions. I know it's kind of hard to model, but I think important for this call, we are planning for revenue growth in this environment. And I know that the macro suggests kind of a flattish international activity, but new product development, our new baton facility and kind of the existing backlog and bidding and quoting activity give us a level of confidence to guide to higher revenues.

No, great. No, that's great color. And if I could just ask one more quick one, and that is without asking you sort of specifics, you've sort of talked about streamlining opportunities and focusing on more value out of product lines of the revenue guidance you gave if you just kind of use that as a framework or even 2024. What percentage of that you think falls in that category of sort of stuff that's kind of, you know, if we could, if we found a way to divest, we would. Is it 10% or is it

greater?

I'm

not sure I understand what you're asking. So, first

off, we did put in the press release that the revenue impact from the exited operations in 2024 was 41 million dollars. So that's that's the starting point. Yeah,

I think the point of what Lloyd is saying, you're maybe modeling different revenue mix because of these exited businesses, but fundamentally the mix and the margin profile has improved and it is more exposed to offshore and international and more differentiated technology than it was before. And if we're answering your specific question.

Yeah,

that helps that helps that helps. Thank you. But we did put all of that information on the exited information. It'll be in the 10 case to help you model.

It's in the press release too. And that's that's just specific to the completion and production services segment.

Yeah, no, that is helpful. I think I probably asked the question poorly. So I think my question was of the remainder of the business of what's left. Currently, how what percentage of that kind of revenue base is kind of what you sort of think about a sort of lower margin of stuff that would be that candidate.

Well, you followed us a long time. The key initiatives are oftentimes around kind of our downhill technologies business. I mean, you look at the overall results that they were relatively break even, but it was a very weak market in November, December with the holidays and shut down a completion activity. But a huge focus of us has been and will be in this year, improving the margin profile for the downhill technology segment and the international expansion efforts are already beginning to pay off in the sense of new contract opportunities internationally. And then we rolling out new technology domestically and we're seeing early indications of market share gains there as well. Great.

Yeah, it's great. Thank you.

Thank you, Stephen.

And your next question comes from the line of. Jim Rolison with Raymond James, please go ahead.

Hey, good morning, everyone. Maybe taking Stephen's questions a step further just. So you probably talked about the revenue side of that. You know, the other part you put in the press release on completion and production services was the kind of 20 million type of, or just just under 20 million of operating losses of stuff that you got rid of. And your full year to date number was low 20 million dollar operating loss. So just kind of trying to bridge the gap here on as we think about 25 and the margin profile in that business segment. How are you thinking about that when you look at what you've done to get rid of the kind of bad mix of stuff that got rid of the new tech and international rollout opportunities and the margins embedded there? How do we think about maybe for the full year, however, you want to talk about it like the margin profile and completion of production for 25 given what happened at 24?

Yeah, I'm looking Deloitte to kind of tell me what it was for 2024. But I think it was mid teens range. I'm sure you have that in front of you. And we are trying to move those margins more into the 19 to 20 percent range in 2025. So very substantial EBITDA. These are EBITDA margins improvement. And even last year, a lot of those were impairment charges. They weren't necessarily cash costs. Some were. But as we go forward, this is a much cleaner year. We envision that today. I we've gotten through a lot of this work. You know, our employees on the phone should know that this is largely behind us and it'll pay off. And I should also mention in completion and production services, we have a mix of businesses, part of which is international weighted to the Middle East, part of which is Gulf of Mexico. And I meant our Gulf of America, as it is now called. So that makes shift to again, a little more international offshore mix of business, which generally is a little higher margin and more resilient. Albeit, you know, the Gulf of America, we count low its beneficial work at good margins. And so that mix helps us as we go forward. And then again, the drag has been just the cost structure and some of the low to no margin contributing businesses that are no longer in our portfolio.

Got it. That's very helpful, Cindy. Appreciate that. You know, I think that's kind of the theme that backlog is kind of been gradually rolling from, you know, lower margin work that was priced back coming out of covid to gradually higher priced backlog as pricing has gotten better because the market got stronger. Maybe just a little bit of commentary around, you know, you talk about bidding opportunities in the general thesis seems to be your OMP revenues will grow year over year, but maybe talk about the kind of margin profile there.

You know, we really didn't have the adverse margin. We didn't take a lot of loss leaders, if you will, during the down market. And so ours tend to be mix oriented. And if you go back for the last five years, our offshore manufacturer products business has been very solid in terms of growth and margin profile over the years and cash flow generation. I mean, it's great business. And what we are looking for really is increased market share, top line growth that incrementals come through very well. But we I can't say that the margin profile is really that different in totality. Just higher revenues helps with absorption and incremental.

Got it. Got it. And then one last follow up is just kind of circling back to the to the 40, 50 million of free cash flow. If you even ask the question about debt repayment, and that that makes sense, especially given where you're your converts are trading. How do you think about deploying that free cash flow between buying back stock and just kind of building more cash, given kind of where you are now and presumably where you are as of January with the extra collections?

Oh, we favor share repurchases. No, no shareholder pays us to sit on cash. And we've got plenty of balance sheet working capital to support repayment of the debt. I'm very fine with our debt level, but I don't think you sit for a year and not return cash to shareholders.

Awesome. Thanks for all the color. Appreciate it, guys.

Thanks, Jim.

Thanks, Jim. Again, if you would like to ask a question, simply press star followed by the number one on your telephone keypad. And our next question comes from the line of Blake McLean with Daniel Energy Partners. Please go ahead.

Hey, good morning, y'all. I'm Blake. I was hoping maybe on the international and offshore opportunities that you could just maybe maybe provide a bit more color on the various markets and how they differentiate and what those what those outlooks look like from an activity perspective from an oil state technology adoption perspective, maybe just a little more color on specific markets.

Well, I will. I mean, I hit on some of it already, but some of our most differentiated technology is the connection technology we put into production facilities, specifically FPSOs and others. And that has been and will continue to be driven by areas like Brazil, Guiana and on an emerging basis, or NAMI as an example, where we have active bidding and quoting activity that aligns very well with the industry dynamics, i.e. Petrobras is the largest deep water driller and producer in the world. So one would think it that we would have significant exposure there and we do and have for years. And a growing presence, i.e. expanding into other product lines into the region, even including perforating products as an example. We probably have had static or shrinking market share in Southeast Asia because of a higher cost base of manufacturing that was the specific objective in building this new facility in Batam. And with that, we do expect to take on incremental market share. We have very active bids and quotes of consequence around our large O.D. conductor casing connectors in that region. And we have the potential longer term opportunity to move more manufacturing into that region. You know, our quote unquote transitional energy activities are not that big as a percentage, but we do have some exposure, obviously, to fix foundation wind. We talked about that in our conference call notes. We're doing some around CCS and geothermal and we have longer term potential for offshore wind, not in the United States, but really in the European region. But we're not counting on much growth there. It's more traditional products coupled with new technology introductions, including the managed pressure drilling system.

Got it. That's helpful. Thank you. I guess my last one. Maybe on US land, you talked about sort of flat-ish activity, although you guys will have improving profitability. But how do you think about the trajectory of activity here going forward through the rest of this year? Hope Springs Eternal on the dry gas basins, I guess. But any any color you would provide on how you're thinking about that or things you're looking at or customer conversations?

Yeah, I mean, we've seen a lift in activity as early as January and taken on incremental flat fleet. We are very selective with our product offering on land. It's generally fracking isolation and extended reach technology for the most part. And we're very region specific and customer specific in doing so. So we have got to think about how I've run an efficient operation and gain market share with the in in the regions and with the customers that give us continuous work. We're not trying to be all things to all people in this. And again, we've augmented our operations with new technology introductions in that space, specifically the active seat gate valves that are used in fracking isolation. And more recently, we're introducing our automation equipment into that market. Just think about us being more high end and very selective in terms of capital allocation to that business. You know, as an example, we did show a little higher capex in this segment in Q4, but this was stuff we already had an inventory. We're moving it into the manufacturer of the valves supporting the new fractal leaks that we have gained in January. But very selective in terms of that capital allocation.

Got it. Cindy, thank you all very much for your time.

Thanks, Blake.

There are no further question at this time. I turn the call back over to you, Missy Taylor.

Okay, thank you, Mark. I just want to thank all of you for joining the call today and for your continued interest and support in oil states. We know we have some conferences coming up and we hope to catch up with you more fully in the coming weeks and months. Have a great earnings season and hope to see some of you soon. Take care.

That includes today's conference call. You may now disconnect.