Oil States International, Inc.

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. I'd now like to turn the call over to Ellen Pennington, Vice President of Human Resources and Senior Counsel. Please go ahead.

Thank you, Jordan. Good morning and welcome to Oil State's third quarter 2025 earnings conference call. Our call today will be led by our President and CEO, Cindy Taylor, and Lloyd Hodgic, 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 2024 Form 10-K, along with other recent 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 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 Cynthia.

Thank you, Ellen. Good morning and thank you for joining our conference call today where we will discuss our third quarter 2025 results and provide our thoughts on market trends in addition to discussing our company-specific strategy and outlook. In a quarter marked by lower crude oil prices, uncertainty about the oil macro and fluctuating U.S. trade policies, U.S. shale-driven activity slowed further, while offshore and international markets demonstrated resilience, benefiting from long-cycle project investments. With this backdrop, the company performed well, finishing the quarter within our guided EBITDA range, but with weaker contributions from our U.S. operations due to completion activity declines experienced during the quarter. Our consolidated results in the third quarter were driven by backlog growth achieved over recent quarters, along with solid execution of existing projects. WellStakes remains well positioned to benefit going forward as oil and gas operators favor capital allocation to offshore projects with higher production, slower decline curves, and lower break-even commodity prices. During the third quarter, 75% of our consolidated revenues were generated from offshore and international projects, a percentage that is up both sequentially and year-over-year. This continued shift in revenue mix reflects our multi-year strategy to grow our offshore and international project-driven content which generally comprises longer cycle, higher margin work. Our offshore manufactured product segment continued to deliver strong performance. Revenues increased 2% sequentially, while adjusted segment EBITDA rose 6% due to product and service mix. Backlog increased to $399 million, again allowing us to achieve our highest level since June 2015. Robust bookings of 145 million, which represents a 29% quarter-over-quarter increase, was boosted by strong military orders yielding a quarterly book-to-bill ratio of 1.3 times. The strength and diversity of our backlog supports our outlook for total company incremental revenue and earnings growth as we move into 2026. U.S. land completion activity declined significantly during the period, with the average U.S. frack spread count down 11% sequentially. These U.S. activity reductions stem from weaker crude oil prices and OPEC Plus's decision to rapidly unwind over 2 million barrels per day of previous production cuts. Our completion and production services and downhole technology segments which represent a smaller portion of our business mix, experienced sequential quarter revenue declines of 6% and 1% respectively, primarily due to the significant industry-wide reduction in U.S. land-based activity. Sustained margin benefits stemming from our U.S. land-based optimization efforts, which were initiated in 2024, and have continued in 2025 have led to year-over-year EBITDA growth in our completion and production services segment despite weaker industry activity levels. During the third quarter, we grew our cash flow from operations to $31 million, an increase of 105% sequentially, and we generated $23 million of free cash flow. Our ongoing deleveraging efforts should unlock additional equity value for our stockholders as we pay off our convertible senior notes after maturity in April of 2026. We are committed to optimizing our operations and making targeted investments in our highest performing businesses while leveraging cutting-edge technologies to drive growth. Our industry-leading managed pressure drilling, or MPD, system exemplifies this commitment to improve operational safety and performance levels. During the quarter, Oil States was honored with two Energy Workforce and Technology Council Safety Awards, including the President's Gold Award for Health, Safety, and Environment Incident Rate Improvement during the 2023 to 2024 period, and the Fail Safe Technology Award for advancing safer MPD operations in collaboration with Seadrill, a global leader in high spec offshore drilling rigs. Along with our safety culture, we remain focused on three core priorities, growing our offshore and international presence, managing volatility inherent in U.S. land activity, and driving meaningful cash flow generation. Lloyd will now review our operating results along with our financial position in more detail.

Thanks, Cindy. Good morning, everyone. During the third quarter, we generated revenues of $165 million and adjusted consolidated EBITDA of $21 million. Net income totaled $2 million, or 3 cents per share, which included facility exit, severance, and other charges totaling $4 million, the majority of which related to our U.S. land restructuring efforts. Our adjusted net income totaled $5 million, or 8 cents per share, after excluding these charges. Our offshore manufactured product segment generated revenues of $109 million, and adjusted segment EBITDA of $22 million in the third quarter. Adjusted segment EBITDA margin was 21% in the third quarter. In our completion and production services segment, we generated revenues of $28 million and adjusted segment EBITDA of $8 million in the third quarter. We achieved an adjusted segment EBITDA margin of 29%. During the quarter, the segment recorded facility exit and other restructuring charges totaling $3 million. In our down-hold technology segment, We generated revenues of $29 million and an adjusted segment EBITDA loss of $1 million in the quarter due to the impact of higher costs due to tariffs and lower international activity levels. Turning to cash flow, we generated $31 million of cash flow from operations in the third quarter, double the amount we generated in the second quarter. Our cash flows were used to fund $8 million of net capex. During the quarter, we repurchased $4 million of our common stock under our share repurchase authorization. In addition, we purchased $6 million of our convertible senior notes at a slight discount. Further, as a testament to our strong financial position, as of September 30th, we maintain a solid cash on hand position with no borrowings outstanding under our asset-based revolving credit facility. Given our strong free cash flow outlook, we intend to remain opportunistic with additional purchases of our common stock and convertible senior notes, and we will continue to prioritize returns to stockholders. Now, Cindy will offer some market outlook and concluding comments.

Despite recent economic volatility and continued uncertainty around trade tariffs, we continue to see solid demand for our offshore and international products and services. Our backlog is at a decade-high level, and we anticipate continued strength in future bookings with our fourth quarter book-to-bill ratio again expected to exceed one time. Industry analysts have suggested that while U.S. land-based activity may remain subdued into 2026, offshore and international markets are expected to improve. Analysts point to a growing global emphasis on exploration and offshore development as operators seek more cost-efficient lower carbon resources which place oil states in the center of this secular growth opportunity given our business mix and global base of operations. Regarding our outlook, based on what we know today, our fourth quarter consolidated revenues should increase 8% to 13% sequentially, and our fourth quarter adjusted EBITDA is expected to range from 21 to 22 million. Our cash flows from operations were very strong in the third quarter and are expected to improve in the fourth quarter, bringing the annual amount to $100 million plus. Our business mix and capital allocation strategies are purpose-driven, We are investing in innovation that provides meaningful technology advancements to the industry, driving solid results through project execution, generating significant cash flows that strengthens our balance sheet, while returning cash to our stockholders through share buybacks. The decisions we make are focused on building a stronger, more resilient company that drives meaningful results for those we serve. Our business mix positions us strategically for market opportunities that develop. We have continued the journey to shift our business niche with a focus on generating differentiated cash flow conversion rates and an industry-leading free cash flow yield. By advancing next-generation technologies, building backlog with strong margins, executing with discipline, reducing debt, and returning cash to stockholders, We believe that we offer a compelling investment opportunity. That completes our prepared comments. Jordan, would you open up the call for questions and answers at this time, please?

Certainly. As a reminder, if you'd like to ask a question, press star and one on your telephone keypad. We'll just take a quick moment to compile the Q&A roster. The first question comes from the line of Jim Rolison from Raymond James. Your line is live.

Hey, good morning, Cindy and Lloyd.

Hi, Jim.

Hey, Jim. Cindy, as I kind of listened through earnings season so far this quarter, you know, the drillers, offshore drillers, I should say, are all kind of talking about a kind of mid-late next year rebound and maybe near-term bottom in activity. The Guys in the infrastructure side of things are kind of talking about FIDs picking up next year and beyond. And obviously, you guys had a great bookings quarter, and I think your commentary suggests that should continue. But I would love to just get kind of color on how conversations are going, kind of the flow of conversations, maybe margin profile and impact of tariffs there, and just kind of timing of how this backlog kind of rolls off as you go forward.

Thank you for the question. I think it's a fantastic one. I mean, what you're hearing from offshore exposed companies is that we've had a good year, but throughout the year with lower crude prices, some of the optimizing for spending has shifted to the right a bit. That's both for contracting rigs as well as kind of new incremental projects, which, you know, hits everybody to a certain degree. And that's why we kind of highlighted that We had a good base bookings quarter, but it was augmented by military. And so I just want to say that's kind of consistent with what you're hearing on the oil and gas side of the market. There is every thought that we're going to have an improved year in 2026, especially because some of this has slipped to the right. As it relates to our fourth quarter, We are going to, again, I told you, I think we're gonna have a book to build north of one that's predicated on projects that are very close to the award stage. And that is both production infrastructure for us and kind of MPD type systems. Those are the drivers. And so it's always a question of the macro versus company specific. But our company specific looks good but maybe not quite as robust as we thought coming into the year with crude prices at 60. Now, all those just shift to the right, and therefore, 26 starts looking better. So I do think that what we're seeing is consistent. We just had a better bookings year possibly than others for various reasons. Maybe it's the best way I'll look at that. I'm going to pivot to what I think was your second question, which was the tariffs. situation. And because so much of our projects that are value add in the U.S. go into international plays, there is less impact on our primary segment, which is the offshore manufactured product segment, where it's hit us harder. And you see that in our results. This quarter was on the consumable side of the business, the downhole technologies, which is largely on the perforating side because we import gun steel like we believe most other companies do in the space from foreign sources, particularly China. You heard some of the issues that Cactus and others are dealing with. They commented on a 95% tariff rate and big increases that hit in June. The exact same thing happened to us and somewhat unexpectedly. So the third quarter unequivocally hit us on the downhole side with higher tariff costs. We, like everybody else, is trying to manage through and understand it. And there was a kind of a temporary agreement between the US and China yesterday, but it really had a very small impact on the overall tariff rate. We believe that our 98% rate came down to 88% for perspective. And if you go back two or three years, that tariff rate was 25%. So these are material increases And guns still cost. Now, it is also our belief that everybody has the same supply sources, which are generally foreign. We're all experiencing the same thing. But there's also been a buildup of inventory as activity has slowed. So I think the industry has to work through the pre-tariff inventory. But then it is my view, if the tariffs hold, they're going to have to be passed on to customers. It's one of timing. That's the best impact or information I can give you. Tariffs are really not an issue for the completion and production services segment. So not a great impact to us, but it certainly has hit the consumable side of the downhole technologies piece of the business, if that answers your question.

It absolutely does appreciate all that color. And maybe just to follow up there, Cindy, on downhole technologies. If you kind of back out the tariff impact, would you, because it was the first quarter you had negative EBITDA on that segment since COVID. I'm assuming that was almost, I mean, the activity was lower, sure, but your margins and CPS stayed very strong given all the things you've been working on for the past year plus. I'm assuming the tariffs were almost the entire extent of what drove that EBITDA negative, and so And then maybe any question or thoughts you have on the timing of how long that takes to actually blow through the inventory that sits there and then pass through, like when do you get back to positive EBITDA?

Yes, you're absolutely correct in your assessment. Now, I will add to that, however, that even our plug demand was very weak in the quarter, not negative EBITDA, but in other words, there was no offset for the other portion of the consumables that we have in the mix are not sufficient offset, I'll call it. And we believe we may even see improved demand, even in fourth quarter is always weak because of holidays. Everybody knows that. We think we're going to see a little bit of an improved demand on the plug side simply because of inventory drawdowns during the quarter. So it's a little bit of a combination, but if I look at a negative impact, yes, I'm going to put it on tariffs. And then to your point, how long it takes, I'm guessing it'll be early next year. You know, I think the strategy for us is the same, which is leverage and grow your international content and therefore have greater overall demand and cost absorption. And as you say, we've got to start passing through the tariff impact. if it's not mitigated or reduced from the levels that we have now. And we're like everybody else. We're looking at every supply source around the world, both domestically and internationally, to get the cost down. You've heard those comments from other people in the space. But it's not immediate. We're also evaluating, do we just start doing gun assemblies in our Batam facility in Indonesia so that we can support the international demand that we have with a lower tariff burden. Again, give us probably six months to work through some of these things, but we're doing our best not to allow it to deter activity too much from a consolidated basis for the company.

I appreciate all that color. Thank you, Cindy.

Thank you, Jim.

Your next question comes from the line of Stephen Gangaro from Stifel. Your line is live.

Thanks. Good morning, everybody. Hi, Stephen. How are you? I guess two things for me, Cindy. The first, you've done a lot on the U.S. land side to kind of high-grade the portfolio and control and cut costs where necessary. Can you talk about when we think about the margin side of that business, especially C&P, do you think we're seeing the full impact of that in the margins? Yeah, I know it gets masked by kind of underlying activity, et cetera, but do you think you're starting to see the full impact of that, or how does that unfold over the next 12 months?

It's a very good comment, and I'll just tell everybody, I think we'll be through a lot of this transition by the end of the year, which makes the results a little bit cleaner going forward. Once we get the finalization, I'll call it, you realize we're moving equipment all over the place, you know, going into new basins, new customers, closing facilities, incurring severance. And again, I do pray that we get kind of most of this out of the system by the end of the year and have clean margins going forward. But once we do, We expect, depending on timing of work and everything else, caveat that goes with it, high 20s to low 30s EBITDA margins. And so, again, I think that is in the context of 2024. Lloyd, correct me if I'm not wrong, being in the high teens EBITDA margins? Mid-teens. Mid-teens. So what you see, yeah, the revenue is going to be a bit lower, and we'll give you very specific guidance on that as we move forward into 2026. but it will be at higher margins and greater free cash flow because the businesses, this is part, yeah, it's an EBITDA drag, but more importantly, it's a cash flow drag. And so we're really making step changes in that segment focused specifically on free cash flow generation over the long term.

Thanks. And just two other things. One's a follow-up to that. Again, outside of underlying activity levels, have we seen, I think this is right, but we've seen the majority of the revenue impact already, right, from businesses that have been pared down or divested as you high grade the portfolio?

The majority, yes.

Okay, good. The other quick one is I think at the end of last year, I think you said, okay, I think the number was 70% of the backlog was going to convert over the next 12 months. I think that was right from last year. You've had very good order flow this year. Do you expect, is it fair to assume that your current backlog is in a similar spot from a realization perspective over the next 12 months? Or is that, is it elongated at all? How should we think about that?

It's a little bit elongated with the military awards that we got. Those are typically multi-year kind of deliveries that span over a period of time. The awards we expect to get in Q4 will probably leverage that back towards the longer-term kind of trends that you see on product rollout. If I look at a point in time, the point in time with the military would be down just a little bit in terms of that percentage roll-off in the forward 12 or 15 months. That can change, obviously, with the mix of things coming in the backlog, and what we expect in Q4 moves it back the other direction, if that makes sense.

Yes. Okay. Perfect. I think that's all for me. Thank you. All right. Thank you, Stephen. Thanks, Stephen.

Your final question comes from the line of Joshua James from Daniel Energy Partners. Your line is live.

Thanks. Good morning.

Good morning.

First question for you. I'm going to stick on the offshore theme. A number of the customers you deal with have exposure to both U.S. land and offshore as there's been sort of a massive wave of E&P consolidation over the last couple of years. When you talk to those customers, in their capital. Do you view this as a structural shift offshore versus U.S. land spending, and do you think this consumes a greater share of their budgets moving forward, or is this just sort of what happens in a weaker commodity environment as offshore break-evens have continued to come down?

I do think it's more of a secular trend, and of course we have a mix of customers that some do have both exposure to U.S. land and offshore, others like Petrobras as an example, is much more just focused on offshore deep water, and so it's a mix there. There's always different reasons for the investments that are made, but we can all debate whether we're at Tier 1 acreage, Tier 2 acreage. It all comes down to what are the break-evens and how attractive are they are 60 to 70 dollars a barrel right which is kind of the environment we see going forward but you get below 60 and I think those marginal investments tend to shift just a bit. I made those comments on my call and the flip side is you know there's kind of lower AFE costs, shorter time to first production on land. So there's oftentimes reasons to drill wells on land without question, but they also, the decline curves are much higher. So it's really hard to isolate on one versus the other for someone that has dual exposure. I just think that the macro trend with greater success in deep water they are longer lived reserves and the time from discovery to first production has shortened that that just definitely seems to be a trend more of a secular trend in our view and of course a lot of the decisions we make are based on product differentiation history in the marketplace technology differentiators. And we just have a lot more, quite frankly, that we deliver to the offshore and international market. It's much harder to not have commoditization on U.S. land. That's just reality. And so we are trying to really focus on areas that we think bring value to the company and bring value to our shareholders.

So on that point, Cindy, could you expand a little bit more? You highlighted some of the safety awards, at least one of which was around NPD. Could you elaborate a bit more on some of the products that have been driving your backlog build offshore? And I assume a lot of them have to do with not only safety, but making operations more efficient for the customers. We hear about efficiencies a lot in U.S. land, but maybe just speak to the things you're doing there. and the specific products that have really driven this outside of the military awards, this strength in the backlog offshore?

We have some, honestly, just ongoing recurring backlog that comes from our key connector products in many basins. We have crane operations. There's a number of, we'll call it just base orders, but what has really augmented our orders outside of the military awards that really came from in Q3 has been production infrastructure, most of which is high technology. It's our leading flex joint technology. You know very well, the industry knows very well, and much of that has gone into the demand environment in Brazil. Not surprisingly, Petrobras has by far a leading position in offshore activity and investment. And so that is really kind of what has Now, we are augmenting that with new technology, including the MPD systems we brought to market early last year. It's working well, getting strong customer acceptance, and we expect that to continue to grow. There is the hope that we'll get incremental new demand from things like the mineral recovery system that we have in place for subsea minerals recovery. We've had pilots that have been in backlog, but not much this year. And then we, as you know, we have that offshore wind kit. We're still bidding and quoting and working with companies on budgets and planning, but nothing's really come into bear at this point in time. So could be some upside outside of our standard oil and gas and military awards long term. But right now, just think, ongoing recurring demand that the general industry consumed married with production infrastructure investments.

Okay, thanks. And then I'd like to sneak in one quick U.S. land question, if I might, just thinking about the cycle. So it's been talked about a little bit on the call, but your ability to expand margins in a pretty tough market has been impressive over the last 12 to 18 months. Michael, just when I think about customers living within cash flow, but at some point they don't want their production to roll. It'll be interesting to see at what level activities necessary to maintain production. But how do you view where we are and how do you avoid cutting too much in the U.S. land business to make sure that when the business improves, you can take advantage of knowing that? You know, there seems to be a structural shift towards natural gas activity over the next three to five years. That's going to be coming. And then I'll turn it back. Thanks.

Yeah, no, I think it's a great question. And what we have done, this is not a one-year decision. It's been a multi-year look back. Where have our technology held up? Where have our margins held up? And importantly, what has been the free cash flow generation at 560 rigs working or 1,000 rigs working. And we are being selective in saying, you know, some of the businesses are so commoditized now, they weren't really generating returns in much higher rig count environments, and they're certainly not doing it in low. So the point is, is that trend going to be different if the rig count goes up 100 rigs or completion count? we concluded the answer is not for selected product lines. So this is not a view of U.S. land, you know, never coming back. It is a view of what product lines we want to offer to the U.S. land market long term. And that's really what it was because you can look at our margins that there's really good margins in selected businesses. Most of those are in our extended reach technology, our Gulf of Mexico operations, and our international, they were less so around, you know, you all knew we got into flow back thinking it was a cash flow generating a return. Well, it turned out not to be a very good business, and we just don't want to be in that business, right? And so I think that's kind of more we're being, not getting out of land, we're just being very selective about the ones we pursue long term.

Understood. Thank you. I'll turn it back.

We have our final question from Jim Wallace and from Raymond James. Your line is live.

Sorry to come back in, but Cindy, I want to make sure I heard something right. Did you say with your guidance that you guided 4Q revenues and EBITDA, and that was a little bit lower maybe than what the full year original guidance was, as a lot of guidances have come down throughout the year. But did I hear you right that your cash flow from operations is supposed to be $100 million for the full year?

We had, in our view, a very strong Q3, and we're going to have an even stronger Q4. These project businesses that are long-term, the timing of receivables and inventory purchases, ebbs and flows. We are confident when we say that it'll be $100 million plus for the year, which is a very significant number, as you know.

Yeah, so just doing math on that, you've done $55 million year-to-date, so it kind of implies a $45 million plus 4Q number. And Lloyd, correct me if I'm wrong, but your capex is supposed to be a little bit on the lower end in 4q so like it puts you on track for a very big 4q free cash flow number and probably something you know north of 75 million dollars for the year do i have that math right you do okay just want to make sure i wasn't missing something because i that didn't register when you first said it so i went back and looked at the numbers and then i had a holy cow moment so appreciate that no

Great question. It is a great question. Thank you.

There are no further questions. I would now like to turn the call back over to Cindy Taylor for closing remarks.

Oh, I appreciate it, Jordan, and thanks to all of you for your time today. We believe we are focused on the right end markets. We're getting leaner by design. and we're being more selective about our capital allocation priorities. With that backdrop, we expect to see higher EBITDA margins and enhanced cash flows as we move into 2026, all efforts that should benefit our stockholders. Thanks for dialing in today and have a great weekend.

This concludes the meeting. You may now disconnect.