Oil States International, Inc. (NYSE:OIS) Q4 2023 Earnings Call Transcript

Oil States International, Inc. (NYSE:OIS) Q4 2023 Earnings Call Transcript February 20, 2024

Oil States International, Inc. beats earnings expectations. Reported EPS is $0.09, expectations were $0.08. OIS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to Oil States International, Incorporated Fourth Quarter 2023 Earnings Call. All participants will be able to listen only until the question-and-answer portion of this call. Please note that today’s call is being recorded. [Operator Instructions] At this time, I would like to introduce the call to Ellen Pennington. You may now proceed please. Thank you.

Ellen Pennington: Thank you, Ellie. Good morning, and welcome to Oil States’ fourth quarter 2023 earnings conference call. Our call today will be led by our President and CEO, Cindy Taylor, and Lloyd Hajdik, Oil States’ Executive Vice President and Chief Financial Officer. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law. No one should assume 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 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 will now turn the call over to Cindy.

Cindy Taylor: Thank you, Ellen. Good morning, and thank you for joining our conference call today where we will discuss our fourth quarter 2023 results and provide our thoughts on market trends in addition to discussing our company-specific outlook comments. For the oil and gas industry, 2023 can be summarized as a year in which international and offshore growth strengthened, while North American activity started to moderate. Our fourth quarter results reflect those trends with revenues in our Offshore/Manufactured Products segment growing 24% sequentially, boosted by a 39% sequential quarter increase in project-driven revenues. This significant growth was offset by the impact of declines in U.S. land-based completion activity due to an approximate 20% decline in the price of crude oil during the quarter with continued weak natural gas prices and holiday impacts.

Despite the reduction in U.S. activity levels during 2023, Oil States reported both positive operating and net income for a sixth consecutive quarter. Our fourth quarter consolidated revenues and adjusted EBITDA increased sequentially by 7% and 2%, respectively, while year-over-year revenues and adjusted EBITDA grew by 3% and 17%. These sequential and year-over-year improvements reflect significant growth within our Offshore/Manufactured Products segment where revenues totaled $138 million in the fourth quarter, the segment’s highest revenue level in eight years. Segment backlog totaled $333 million as of December 31st, with backlog conversions supporting the 39% sequential quarter increase in project-driven revenues. Segment bookings totaled $120 million, yielding a quarterly book-to-bill ratio of 0.9 times and a full year ratio of 1.1 times.

2023 marked the third consecutive year that our book-to-bill ratio was greater than 1 time. We remain encouraged by the continued expansion in offshore activity globally, coupled with enhanced competitive positioning in each of our business segments through our recent new technology introductions. In the fourth quarter, in response to the needs of global drilling contractors to drill more complex wells and unlock previously inaccessible reservoirs more safely, our Offshore/Manufactured Products segment delivered what is believed to be the industry’s first deepwater, slimline, managed pressure drilling system, and we now have begun to market another industry-first MPD-ready system for jackup rigs. Subsequent to quarter close, our Well Site Services and Downhole Technologies segments have also launched key new technologies, including our ActiveHub digital platform for remote well site monitoring and control, along with our Active Seat Gate Valve technology and an expanded portfolio of perforating gun systems called EPIC Precision and EPIC Flex.

Benefits of our expanded technology offering combined with this international offshore focused investment cycle are expected to extend well beyond the next couple of years. Lloyd will now review our results of operations and financial position in more detail.

Lloyd Hajdik: Thank you, Cindy, and good morning, everyone. During the fourth quarter, we generated revenues of $208 million, operating income of $8 million, adjusted consolidated EBITDA of $24 million, and net income of $6 million, or $0.09 per share. This represents our sixth consecutive quarter of positive net income. Adjusted consolidated EBITDA margin in the fourth quarter was 12%, comparable to the prior quarter. Results for the fourth quarter included facility consolidation charges of $0.8 million, which were incurred as we prepare selected facilities for sale, as well as patent defense costs of $0.6 million. Our Offshore/Manufactured Products segment generated revenues of $138 million, operating income of $25 million, and adjusted segment EBITDA of $30 million in the fourth quarter.

As Cindy mentioned, revenues reported by this segment in the fourth quarter are at the highest level since the fourth quarter of 2015. Adjusted segment EBITDA margin was 22% in the fourth quarter, comparable to the prior quarter. Regarding our facility planning, we consolidated certain facilities in Houston and are in the process of strategically relocating our Asian manufacturing and service operations from Singapore to Batam, Indonesia. These two facilities are classified as held for sale assets at December 31. Proceeds from the sales of our facilities in Singapore and Houston, which are anticipated to close in 2024, are expected to range between $35 million and $40 million, exceeding the costs associated with our planned investment in our new Batam facility.

Construction in Batam will commence in the first quarter, with completion targeted for the first half of 2025. In the meantime, temporary manufacturing lines have been set up in Batam so that we can efficiently execute both our contracted backlog and subsequent orders during construction. Backlog totaled $333 million at December 31, an increase of 8% from December 31, 2022. The current quarter-end backlog is at its second highest level since the fourth quarter of 2015. In our Well Site Services segment, we generated revenues of $51 million, an operating loss of $1 million, and adjusted segment EBITDA of $6 million in the fourth quarter. We also recorded charges of $0.6 million associated with the defense and enforcement of certain of our patents.

Adjusted segment EBITDA margin was 12% in the fourth quarter compared to 16% in the third quarter, reflecting industry activity declines in the quarter. In our Downhole Technologies segment, we reported revenues of $19 million, an operating loss of $7 million, and an adjusted segment EBITDA loss of $3 million for the quarter. Lower revenues and margins in the quarter were driven by the North American activity declines previously discussed. Included in the EBITDA loss was $1.3 million of inventory reserves. During the fourth quarter, we generated cash flows from operations of $4 million and invested $6 million in net CapEx to support future growth. As of December 31, no borrowings were outstanding under our revolving credit facility, while amounts available to be drawn totaled $76 million.

This, together with cash on hand, resulted in available liquidity of $123 million. We also extended the maturity date of our revolving credit facility to February 2028. Now Cindy will offer some market outlook and concluding comments.

Cindy Taylor: Thanks, Lloyd. The tight commodity markets of 2022 led to higher commodity prices and activity levels. However, this took a turn in early 2023 as softening global demand, higher production and resultant elevated inventories caused oil prices to drop during the first quarter of 2023. Activity declined in U.S. land basins during the second half of 2023, with the land rig and completion counts down about 20% by the end of the year. WTI and Brent crude oil prices were both down approximately 20% at December 31 compared to the prices in effect at September 30. Global inventories continue to hold within their five-year seasonal average for crude oil, albeit at the low end, but remain above the five-year average for natural gas.

Given current industry dynamics, we expect U.S. land drilling and completion spending in 2024 to remain at or near current levels, but do think we will see increased spending in international and offshore markets. Revenues in our Offshore/Manufactured Products segment are expected to continue to grow year-over-year as a result of strong order flow, increased levels of backlog, and execution of major project milestones. We expect our Well Site Services and Downhole Technologies segments to continue to perform in line with market activity indicators, which soften for U.S. land activities beginning in the second half of 2023. Increased contributions from the commercialization of new technologies that I discussed previously should help us succeed over the longer term in the U.S. land market.

Considering these market conditions, we expect our annual revenues to grow about 5% on a consolidated year-over-year basis, with EBITDA ranging from $90 million to $95 million. Given typical seasonality and slow U.S. land activity, the first quarter of 2024 is expected to be the weakest quarter of the year. In terms of our estimates for free cash flow generation in 2024, we expect to generate at least $40 million in free cash flow, implying a free cash flow yield of 10% or greater. Our planned facility sales create more cash flow variability than is customary for us. Typically, the first quarter represents a use of cash due to the timing of various payments, including the payout of short- and long-term incentives with the balance of the year being cash flow positive.

In terms of free cash flow conversion, we are targeting a free cash flow to EBITDA conversion rate of approximately 40%. We remain focused on optimizing our operations and pursuing profitable activity in support of our global customer base. As market opportunities unfold both in the U.S. and in international and offshore markets, we will continue to focus on core areas of expertise with the deployment of our recently enhanced equipment and technologies to further differentiate our product and service offerings. Now, I would like to offer some concluding comments. 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. In 2023, we experienced an increase in investments in long lead time projects in international markets and deepwater basins around the world based upon the longer range outlook for commodity prices.

Strong macro fundamentals continue to point to a multiyear upcycle outside the U.S., which should drive growth in revenues, earnings, and free cash flow generation from our international and offshore operations. 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 deep sea minerals gathering, fixed and floating offshore wind developments, carbon capture and storage, geothermal applications, and other renewable and clean tech energy opportunities. These new energy transition opportunities create strong potential for us to expand our product and service offerings and our revenue base over the longer term.

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. That completes our prepared comments. Ellie, would you open up the call for questions and answers at this time?

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Q&A Session

Operator: Certainly. We are now opening the question-and-answer session for today. [Operator Instructions] Our first question comes from Connor Jensen from Raymond James. Your line is now open.

Connor Jensen: Hey, guys. Thanks for taking my call today.

Cindy Taylor: Hi, Connor.

Connor Jensen: Yeah. So, first quarter, the book-to-bill fell below 1 for the first time in a little bit. How’s the — kind of some color around bidding activity in the current outlook would be great. Maybe contrast that with the past few quarters. And if this is something that’s going to continue, or if you expect that to jump back above 1?

Cindy Taylor: Yeah, thanks for the question, Connor. I think you meant fourth quarter book-to-bill of 0.9 and the annual was 1.1.

Connor Jensen: Yes.

Cindy Taylor: I have to point out that quarter-by-quarter bookings obviously can vary. And importantly, we had one of the strongest revenue quarters in years. And so, bookings at $120 million were actually favorable bookings overall. So, you can’t necessarily look quarter-by-quarter, but importantly, I would say, what are we looking at for 2024, and I guided to a book-to-bill north of 1 at this point in time. And as always, we may have some mixed shifts in there, whereas we had lower kind of connector products activity really in 2023. We expect some uplift in 2024. Strong production facilities, particularly in Brazil, that may moderate just a bit, given timing of projects only. But importantly, some of our new capital drilling equipment technologies around our MPD systems and our high-pressure riser systems will get a lift that we’ve not seen in several years.

And we’re pleased to say that our first MPD system has been in the water, operating in MPD mode successfully in the first quarter. So, we’re pretty positive about this new piece of our business that, again, is brand new technology for us. So, while some projects can flatten or moderate, other ones are lifting, we also expect to see strong activity on the military order side of our business. And so, that — on balance, again, expect a book-to-bill north of 1. There can be variations quarter-by-quarter. There always are. So, we tend to look at the annual type book-to-bill more so than individual quarters because of both order variability as well as revenue generating variability.

Connor Jensen: Yeah, thank you. That’s great context there. Then just following up, you said that you expect military to be strong. Obviously, it ticked up a little bit here. Do you expect those levels to continue higher or was this kind of a one-off?

Cindy Taylor: No, we expect a very strong order book in 2024 as well.

Connor Jensen: Great. That’s it for me. Thanks, guys.

Lloyd Hajdik: Thanks, Connor.

Cindy Taylor: Thank you, Connor.

Operator: Our next question comes from Alec from Stifel. Your line is now open.

Unidentified Analyst: Hi, good morning, everyone.

Cindy Taylor: Good morning.

Unidentified Analyst: Thanks for taking my question. Good morning. So, just to kick us off here, I was wondering if you can provide us some color in your expectations for margins in the Well Site and Downhole Technologies, if activity were to remains steady around current levels in the North American land.

Cindy Taylor: Yeah, I think that’s a very good focal point for us. I’m having Lloyd kind of look at the model vis-a-vis the margins. But just generally speaking, it’s no secret that the natural gas market is under significant pressure right now. In fact, the March contract for nat gas closed below $2, at $1.61 on Friday. That’s the lowest price we’ve seen in 25 years. And so that’s the major message for me around land. Crude oil prices seem to be trading in a steady band, and therefore, activity in your oilier basins should be at least flat, if not modestly up, throughout the year. But we’ve got to really focus on the margin degradation that occurs in areas like the Northeast, the [Haynesville, the STACK] (ph), et cetera. And so, our focus has to be around cost management and control, intense conversation with our customers in terms of what activity, if any, they’re going to prosecute during this time.

And so, I’m kind of looking at our EBITDA margins for Well Site, in Q4, were 10.4%. If I’m looking at the correct numbers, that’s the Well Site. Those are down from kind of mid- to high-teens throughout the other three quarters of 2023. Now, we are looking to have slightly better margins in totality in 2024, but that is really predicated on significant cost control initiatives in the natural gas basins as well as our newer technology, particularly our Active Seat Gate Valves, which not only we think leverage our revenue — our kind of market share revenue-generating potential, but it also reduces our cost of repairs, our cost of greasing, et cetera. And so, overall margins in totality flat to up, but the reality is they just got to come up from where — at least for the year 2024 compared to where they were in the fourth quarter, if that is helpful to you.

But November and December for our business and for most really fell off for all the factors we’re talking about. And it’s hard to really get your costs down immediately in that timeframe, but that’s an acute focus for us going forward this year.

Unidentified Analyst: Got it. No, that’s great color there. And then also just continuing in Downhole Technologies, has there been any noteworthy change in the competitive landscape as well as pricing? Like, for example, are operators paying more for integrated systems or is there any kind of color you could provide there?