Q3 2020 Oil States International Inc Earnings Call
Oil States International third quarter 2020 earnings conference call.
My name is Adrian and I'll be your operator for today's call at.
At this time all participants are in listen only mode. Later, we'll conduct a question. That's that's kind of course, that's not sure. If you have a question. Please press Star then one on your <unk>.
I'm not sure how it Alan Alan I'm from Allen you may begin.
Thank you Dan Good morning, and welcome to our third quarter 2020 earnings Conference call. Our call today will be led by Cindy Taylor oil States, President and Chief Executive Officer, and Lloyd Hajdik Executive Vice President and Chief Financial Officer before we begin we would like to caution listeners regarding.
Forward looking statements to the extent that are married today contain information other than historical information. Please note that we're 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 money.
There is that affected their grants, including those risks disclosed in our form 10-K, along with other actually see filings. This call is being webcast and can be accessed at all states what website a replay of the conference call will be available one and a half hours. After the completion of this call.
Elbow or whatnot I will now turn the call ever since.
Thank you Alan good morning to each of you and thank you for joining us today to participate in our third quarter 2020 earnings conference call at.
As we discussed on our second quarter earnings call, we believe that U.S. sheltered an activity well at historic low levels, what stabilizing as we entered the third quarter with crude oil prices improving off the horrendous levels witnessed in the second quarter some.
Some of the early quarter momentum stalled at the coated cases began to increase in several jurisdictions.
As a result, U.S. completion, the client early in the third quarter, but steadily improved, albeit off a low base in the latter half of the quarter ending the quarter down 11% sequentially in terms of the average frac spread how crude oil prices stabilized.
Around $40 per barrel for much of the third quarter and now tend to trade around COVID-19 trends and stimulus talks in Washington <unk>.
In conjunction with our discussion of the quarter, we plan to update you on our actions taken to shore up liquidity give you our thoughts on near term market conditions and summarize our efforts to mitigate costs, both capital and operating as we began to navigate the early stages of a U.S. led market.
Recovery.
Third quarter results were generally in line with our internal forecast and the limited guidance that we were able to provide other than our offshore manufactured product revenues, which were below our previous guidance due to delays in customer activity and timing of orders during.
During the third quarter, our well site services revenues were up 3% sequentially and EBITDA margins improved in our downhole technologies segment revenue is also recovered more up 25% sequentially with EBITDA margins exiting the quarter and positive territory.
In contrast revenues and our offshore manufactured product segment decreased 17% sequentially due primarily to weaker connector products sales second.
Segment backlog at September Thirtyth, 2020 totaled $227 million, a decrease of 3% sequentially.
Our segment bookings increased sequentially totaling $70 million, yielding what appears to be an industry, leading book to bill ratio by the third quarter, a 0.9 times.
During stress periods in our business, we know that the immediate focus needs to be on the preservation of liquidity and the management of variable and fixed cost to that end, we had an exceptional quarter generating $87 million of cash flow from operations.
With our significant free cash flow, we materially de levered during the quarter, reducing our total net debt by $92 million. We believe that we have managed the company effectively during a very difficult period and will continue to closely manage our debt working capital and cash flow generation.
As shown in the quarters to come.
Well I will now review, our consolidated results of operations and financial position in more detail before I go into a discussion of each of our segments.
Thank you Tony and good morning, everyone.
During the third quarter, we generated revenues of 135 million.
While reporting a net loss of 20 million or 33 cents per share.
Our revenues decreased 8% sequentially, but our EBITDA improved significantly due to cost savings measures implemented.
Our third quarter EBITDA ended in positive territory and totaled 2.1 million.
As Cindy mentioned.
We generated significant free cash flow during the quarter with $87 million in cash flow from operations offset by $2 million in capital expenditures.
We also sold idle property and equipment during the quarter generating $4 million in cash proceeds.
We purchased $17 million principal amounts of our convertible senior notes had a 45% discount to par value and repaid $52 million and outstanding revolving credit facility borrowings, thereby partially de leveraging our balance sheet.
For the third quarter, our net interest expense totaled 3.5 million.
Of which 1.9 million was non cash amortization of debt discount and debt issue costs.
At September 30, our net debt to book capitalization ratio was 13%.
And our liquidity totaled 164 million.
Based upon the methodology outlined in our amended credit facility.
Our total net debt declined $92 million during the third quarter inclusive of the convertible senior note purchases and the repayment of borrowings outstanding on a revolving credit facility.
At September 30, our net working capital, excluding cash and the current portion of debt and lease obligations total.
Total 215 million.
Compared to borrowings outstanding under our revolving credit facility, which totaled 19 million.
In terms of our fourth quarter 2020 consolidated guidance.
We expect depreciation and amortization expense to total 24 million.
Net interest expense to total 3.2 million of.
Of which approximately $1.8 million as non cash.
And our corporate expenses are projected total 8.5 million.
In this environment, we expect to invest approximately $15 million and total capex during 2020.
Which is down over 70% from 2019 spending levels.
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.
Illinois.
And our offshore manufactured products segment, we generated revenues of 79 million and segment EBITDA of 9 million during the third quarter revenue increased 17% sequentially due primarily to a slowdown in our connector product sales.
EBITDA segment EBITDA margin was 12% in the third quarter of 2020 in line with our guidance compared to 16% achieved in the second quarter as I mentioned earlier orders booked in the third quarter increased sequentially totaling $70 million with quarterly book to Bill ratio.
Like nine times at September Thirtyth, our backlog totaled $227 million or.
For over 75 years, our offshore manufactured products segment has endeavored to develop leading edge technologies, while cultivating the specific expertise required for working at highly technical deepwater and offshore environment.
Recent product developments should help us leverage our capabilities and support a more diverse base of.
Energy customers going forward and 2020, we are bidding on potential award opportunities that support that see floating and fixed production systems drilling military sub sea mining and wind energy clients globally.
Our 2020 bookings will be lower than the levels achieved in 2019, we do expect our book to Bill ratio for the year to average 0.8 times are higher.
In our well site services segment, we generated $37 million up revenues with near breakeven segment EBITDA.
The 3% sequential revenue increase was driven by better U.S. land completion activity later in the third quarter, partially offset by lower Gulf of Mexico contributions due to third quarter storm activity and project timing.
International in U.S. Gulf of Mexico market activity comprised 24% of our third quarter completion services.
Business revenues, which were down sequentially due to the significant number of nine storm, Senegal, which led to activity delays and well shutdown.
We are focused on streamlining our operations and pursuing profitable activity in support of our global customer base. We will continue to focus on core areas of expertise in this segment and are actively developing and conducting field trials.
New proprietary service offerings to differentiate well sites completions business.
In our downhole technologies segment, we improved sequentially with a segment revenue increase of 25% and a much smaller EBITDA loss recognized in the third quarter incremental EBITDA margins were strong due to cost savings measures implemented at the segment level.
We continue to develop field trial and commercialize new products in the downhole technologies segment.
Sales trends for our Stratix and Viper God integrated gun systems, and addressable switches are gaining improved customer acceptance following their respective commercialization we.
We have also announced they can mark commercialization of and fill rates are riding products, including a new wireline release tool and two new families of shaped charge technology. Our product development efforts are designed with our wireline and MP customers in mind, where we strive to provide them with.
Flexibility improved functionality and increased performance.
While ensuring the highest level of safety and reliability.
Now the 19 disruptions continue to hamper activity in domestic and international markets. The third quarter 2020 US rig count average was 254 rigs, which was down 35% sequentially. In contrast, the industry experienced an 11% sequential decrease.
He's in the average U.S. frac spread count.
However activity did improve late in the third quarter, which favorably impacted all of our segments with short cycle U.S. shell driven exposure.
As we are now a month into the fourth quarter. The Frac spread count has increased by about 49 spreads are roughly 60% since mid September. This increase gives us some optimism that the fourth quarter is setting up more favorably for our U.S. shell driven product and service.
Offerings active.
Activity in the U.S. shale basins has historically been the first market to decline in a downturn, but it's also the first to show signs of recovery crude.
Crude oil prices seem to be range bound around $40 per barrel and there is some improvement in the natural gas outlook with the front end of the car up near $3 per annum BT you.
Given current market trends, we project, our fourth quarter revenues in our offshore manufacture products segment to range between.
77, and $83 million with segment EBITDA margins are expected to average 10% to 12%, depending upon product and service mix along with absorption levels.
Given the improvements in the Frac spread count over the last several weeks, we expect our well site services and downhole technologies segment to grow sequentially in the fourth quarter and produced positive EBITDA result, unless.
And lastly, witness extended holiday downtime, which is not currently expected.
As a reminder, our cost reduction initiatives have included the following direct operating costs have been reduced in line with activity declines head count has been reduced approximately 32% since the beginning of the year we.
We have reduced planned capex by over 70% year over year, and discretionary spending has been substantially reduced or eliminated.
As we discussed on our second quarter earnings Conference call. We estimated that we would reduce 2020 costs by approximately $265 million.
Of the total roughly 85% as cost of goods sold and the remainder relates to SGN I.
We continue to believe that 20% to 25% of the cost reductions are fixed in nature.
Fortunately, we believe activity declines has slowed materially such that additional reductions of significance should not be necessary.
Now I'd like to offer some concluding comments, we believe that we have made substantial progress in terms of shoring up our liquidity with exceptionally strong third quarter free cash flow generation, coupled with associated debt reduction initiatives as.
As I mentioned earlier, we believe that we have stabilized the company during a very difficult period, and we will continue to manage our debt working capital and cash flow generation in the quarters to come.
Well sites will continue to conduct safe operations and will remain focused on providing technology leadership and our product lines with value added products and services to meet customer customer demands globally. As we began to recover from the harsh effects of the COVID-19 pandemic response.
Which dramatically reduced travel and business activity, thereby depressing global oil demand and correspondingly demand for our products and services.
That completes our prepared comments Adrian would you open up the call for questions and answers at this time please.
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And our first question comes from Sean Meakim JP Morgan Your line is open.
Thank you Hey, good morning.
Sean.
So sandy going obviously, a lot of progress on the balance sheet has been a clear focus that debt's down 60% in the year.
With where you stand today as you noted in the prepared comments always looking to do more.
But.
At this stage I mean is there.
Much more that you can or should be doing in the next call. It four to six quarters beyond.
We're waiting on the macro to give you more volume.
Yes.
It seems to me like we've done probably most of what needs to be double of algae perspective, and you position yourself to.
Like I said kind of.
Wait it out until the.
The macro comes back to you is that a fair assessment.
Hi, Sean and Cindy here I'll, let Lloyd elaborate but I think you know we have had an acute focus on managing working capital through this downturn and its been.
In our customers are heavily heavily challenged in this environment both in terms of Capex spend.
As evidenced by the activity declines as well as many.
That has declared bankruptcies weve had receivable write offs, but I'll side despite that.
We really had significant free cash flow generation and to some degree you have a very clean set now.
Receivables managed through a we're going to continue the laser focus we have but to your point.
Thank you at this point the keys for me are continue to focus of course, but we need to see EBITDA improvement and that will probably drive the near term. If you will in terms of cash flow from operations and they stayed quite frankly additions.
Additional levers will of course that realization of the cost initiatives that we put in place and sometimes it.
Those efforts our math, if you will I well site services and downhole still.
Slightly below breakeven EBITDA, but if you look at the incremental you'll really see the benefits of these cost reduction initiatives that my my caution as again our guidance while cautious in light of this code at 19 environment that we're dealing with and.
The associated demand destruction is for a more favorable.
You asked lad outlook going into Q4 and into 2021.
With that we're not going to alleviate a lot more working capital I'm looking at Lloyd to give you additional color on that.
But again I think the answer from here as profitable operation.
Go ahead, yes.
Sean She's it's exactly right I mean, we've harvested or benefit of 75 million working capital in the first nine months expected to be pretty flat for fourth quarter and what I would say if you look out to 2021 with some improvement that we probably built some working capital but.
They are very manageable.
Next steps are obviously looking at working with our banks on the credit facility. We have the amendment that goes through.
The end of March.
What the new professor credit facility or an amendment to the credit facility would look like post March but that they see the positive in that is we're very comfortable with our debt levels. Today, we paid down to zero to 19 million outstanding on the revolver and the nearest maturity date. So on the converts not to February 22003.
So all in all were very comfortable with our leverage levels and could be essentially undrawn on the revolver.
By the time that the amendment expires, we put a new credit facility in place or amend the existing credit facility.
That's right I think that's really that's really helpful. I appreciate all the detail.
So maybe on offshore manufactured products.
Pretty good book to Bill probably the best we've seen on the group this quarter.
That's also a function of the denominator not just numerator course.
And so you know your peers have pretty brutal results from an orders perspective.
And some of Thats like a little more optimism maybe going forward maybe for the fourth quarter, we'll see for 21.
Cindy how do you feel about.
A bottoming for orders at least in the near term and maybe even if a real inflection is on the horizon. Just your thoughts around order cadence would be helpful and even outside of your traditional oil and gas customers great to hear about any other areas that you'd be focused on obviously you've had some good contracts.
On the military and then even things around new energy offshore related love just to get a good recap around those opportunities like that will be helpful.
Well.
Thats, a fantastic comment and one that is created critically important to us at this point in time and you know we experienced many of the same trends of course that our competitors do but if I could cite if you step back there is no one look alike between the product offerings generally speaking.
And that space and we have what I would.
Characterize it a bit more diversified product offering that has helped our book to bill ratio down no question. The denominator, it's a factor here, but whatever map you look at a were in a truck historically draconian environment, but I think that diversification of our customer base help than if I look back on.
For the year, our bookings relative relatively better part of that is driven by MELA.
Military orders as an example, which are outside core oil and gas and we did have an order that we announced in Q2 that is more of an R&D project around sub sea mining, but I think these are very indicative of the potential that we and others in the industry has and it's both.
For us the Nike think we're offshore experts were floating and fixed per Bakken production flat platform experts rides are expert so thats going up or in the alternative space, It's gonna oriented more for towards wind and talk in this case, that's the mining any sizable by mining at if mining for rare Earth minerals, which are.
The foundation of any shift towards alternative over the long term and you can either try to mine, 90% out of the ground probably in China and other regions or you're going to look for other sources, one of which is offshore.
But I still consider those conversations while beneficial to their long range in nature, but they have very good potential both on the wind side and the subsidy mining side.
When I give you maybe a greater sense of optimism on bookings relative to the rest of the industry and also look to Q4, which is more oriented towards core.
Sub sea driven projects that we have on our radar screen now that we always hedge a bit inside that these projects are going to come into our bookings in Q4 or in our late 2021, we don't really know the answer to that but were actively bidding on a number of subsea projects most of which not surprisingly.
Finally, our and in Brazil, and that's what's on the radar screen. We also announced as another project large project and the second quarter, which was core oil and gas and it happened to be in the Gulf of Mexico. So we're beginning to see.
But this is prioritization of capital by our customer base in the region by expect to focus that capital over the long term in markets like if theres always delays in award opportunities and bookings and we've seen that.
But still on a relative basis. This is an outstanding business for us and it will recover over time.
Thanks revenue that was really helpful.
Thanks Juan.
And our next question comes from Steven.
Sungard off from Stifel. Your line is open.
Thanks, and good morning.
Hi, Steve.
So I guess.
Thanks.
Just warm from balance sheet perspective, I know you talked a little bit about this.
You think about the next 12 months and you look at.
Our expectation for free cash flow.
More and how should we be thinking about working capital I know a little bit of it depends on the revenue growth from is there any any anything that is different from some of the parameters that are driving.
Working capital that we should be considering as like a free cash next year.
No not from where we sit today, Steve and as Steve said if.
There's increase in the operation results will have increases in receivables.
I call it traditional can working capital build.
But very thats, a very moderate and it's short cycle. So it turns pretty quickly as well.
So it's not a significant use of cash and liquidity in any one period.
Period of time.
Okay. Thanks, and then second.
As you think about the consolidation on the ERP side.
I forgot bearing.
Losses from different service companies, but how do you think about your positioning.
In the us land market as you see more consolidation.
Based on customer relationships, and probably what you've seen in the past as well how should we think about that impact on you.
Well, obviously, we reflect on that heavily there have been a number of significant obviously announcement.
Consolidation as we go forward. These are very strong company better at getting stronger and Ali site in past years, and Mighty conventional wisdom would always say that.
When you put two together you rarely get the sum of the two it's often that theres.
Lesser activity I do think this is different because the industry widely acknowledges the need for consolidation to strengthen companies and strengthen returns on invested capital and if you look through the type of announcements that have been made.
A lot of these are the majors are the very large company gaining exposure or to basins that they really didnt have exposure to perform particularly obviously the problem in in the lower 48, and so our thinking today is that there is likely to be a reallocation of capital into these operating areas where.
Some of these companies really didnt have a strong presence before and so whether that is a flat type investment profile are growing I do think that it's net net not negative at this stage, but I also acknowledge that no one's released their spending plans our capital Alec.
Patients and these are announced Dale they hadn't even closed yet but.
But I do think this might be a bit of a different if you look at the specific combinations. We're talking about it's going to come down to what is your opportunity set and wording choose to allocate capital, but I think we all agree that the lower 48 has some good opportunities.
Going forward.
Great. Thank you and then just one final one and that is when we think about the cost.
The cost out initiatives that have gone and you think about your incremental margin potential if.
If we think about over 12 months quarters can be can be bumpy, but any change in.
I mean specific segments or we figure that incremental margin capabilities relative to history because of what we've seen on the cost side.
Well I mean, obviously.
I'm going to focus you towards probably a hour.
USA centric businesses right now because that's where we're seeing indications of an uplift in activity as evidenced by the Frac spread Cal I don't think thats going to shock you, but I go back to.
Even though it's hard and some of the performance is math given in Q3, but you saw it in instances greater than a 100% incrementals.
Which we know are not sustainable, but what that means as on flat to small growth in revenue, we've been able to deliver either reduced EBITDA losses are positive EBITDA gains because of cost initiatives as we actually get topline growth.
Both incremental should be strong relative to historical trends.
Trends now I always have to caution a bit and say, there's always spend significant pricing pressure as well but.
But I think the cost out programs have exceeded.
The pressure on the top line at this point in time.
Great. Thank you for the color.
Thanks, Dave and good talking to you.
Thanks.
Next question comes from occurring Helen from RBC.
Hey, good morning.
Hey, there can you hear me okay.
Okay, and again I think we talked over each other sorry about that.
Yes.
Oh, sorry.
So sandy thanks Lloyd Thanks for all the incremental color on that Michael just to touch on the the downhole technology side you did reference.
Customer acceptance for their stride acts and vapor.
And talked about some opportunities that cheap cheap charges. So wonder if you might be able to delve into that a little bit more and what kind of customer acceptance, how should we or how could you categorize that for us to help us understand the traction that you're getting.
I'd be happy to and just recall, particularly with the integrated gun offerings that we have they were really enter days being field trials light in two.
2019 early 2020, when we had our first quarter call. We actually commented that we believed that we were gaining share and the integrated offerings the cause of our.
Revenue growth sequentially compared to industry metrics, if you will and so again I thought we were gaining share then we get hit in the face with co bid and you have an absolute shutdown of activity in Q2, two two horrendous level, where it was catching a falling knife, though.
Don't think you can look at really Q2, or Q3 is indicative of market share.
Just because and in fact Q3 saw liquidation of a lot of what we'll call standard conventional guns at very very low prices with and US included just trying to say the market is going to shift to an integrated offering over time, our customers are trying to remain modestly.
Active but incredibly price sensitive and so we liquidated some inventory.
As did others in the space, but generally no either losses are no margins and if you'll notice we broke down some inventory during the quarter that ties back to the market conditions, but you actually saw a shift in Q3, a wife I think you're hearing this from other competitors in that space from the integrated offers.
To just what is the cheapest thing that I can find and to the extent that our customers are holding inventory.
Switches charges anything else, they actually want to get those out of their own inventory to create working capital cash flows and so it was again not a market that's indicative of the future. The bright side of that as a lot of that is conventional items are being or have been lift partially liquids.
They did in Q3, we believe and that this very predicated on customer conversations and in fact, a handful of orders that in Q4 is going to shift back more towards the integrated offerings specifically for us both.
Both the Viper Gyn and Stratix products that we offer to the marketplace. So just in terms of market share I'll, just generally side, we've really made a little stabilization of the market to even measure market share, but I can unequivocally say I expect to sell more integrated guns in Q4 than I did in Q3.
Okay. That's great color work, what kind of feedback are you getting from the customer with respect to your integrated offering say relative to some of the competition I mean, all the all the metrics fairly fairly comparable or is there one specific or a few specific things that really make.
The stratix or vapor standout.
Well again, there there are two different offerings for really two different customer types and again the FIFO done quite frankly was developed with our wireline partners generally.
And the consideration at the well and it was designed with the thought that ideally are we really want.
That customer to do.
Coal GL offering which includes our short charges, our switches et cetera, but to the extent again that you have other relation historical relationships are importantly, existing inventory were given those wireline companies a conduit.
Two.
FX that this RFP will stride acts as a highly integrated system, we really improved the reliability.
That I think for the market will trend to that type of offering over time it may be a process.
But its a highly integrated highly reliable system that we improve.
Each and every month and so I think it will be very competitive with the best integrated offerings that are out there.
Okay. That's great and then you have been pretty a pretty significant.
Overall debt and that debt reduction.
I would imagine you continue to expect to be free cash flow positive even going into 2021. So is.
You say the primary use of cash going forward is still going to be geared towards debt reduction.
Yes for capital allocation purposes, Yes, correct correct.
And do you have a general magnitude of what you think you could reduce debt by.
Into into next year.
Yes, it really could be again it depends upon our level of EBITDA and 21, which are just now going through the budget process along.
So stay tuned.
Okay fair enough. Thank you.
Thank you Carlos.
And our next question comes from Ian Macpherson from Simmons Your line is open.
Thanks, Good morning, Sandy Lloyd congratulations on that.
Sweeping de leveraging it really is.
Impressive what you've accomplished this year in such a such a horrible context.
Back to the.
The consolidation question earlier right there.
The real impulse for upstream consolidation.
The need for.
Better scale you know.
And.
Absorption in a market thats been redefined smaller.
The details are different for service, but the general impulses.
Equivalent for servicing you have under scale market cap as well. So there is a need for for consolidation everywhere.
What are your thoughts on that as it applies specifically to oil states and do you have any interest in transacting equal.
Corporate M&A and.
Why don't you and if so what might that look like.
You know I think email me very well I've been in this business a long time I know the competitive landscape very well I do absolutely agree with your comments and tar the need for scale.
Quite frankly that was one of the reasons as well as the incredible technology and basin exposure that Geo offered as why we did that transaction.
A couple of years ago, and so our eyes and ears are open all the time to do what is right for our shareholders and if that means trying to do a transaction our sales finally being open to others fine to do what's right for shareholders I have said and really continue.
Either side that I think there are still some challenges to overcome and most of that is the quote unquote balance sheet try that so many companies have you.
We see the trading levels of debt, which are indicative of problematic situations for many companies and outlook on the balance sheet and until you find a way to get past that and sadly its in an environment, where nobody wants to allocate capital to conventional energy companies.
So it's just hard to get past the balance sheet differences amotz companies to possibly do deals that should be done I can just assure you and any of my shareholders. On this call that we are absolutely eager to improve the outlook.
For positive returns to our shareholders and that May necessitate M&A.
I think it's an obvious comment.
We look at it every day every week every month.
I just view that the oxforty opportunities that might be delayed a period of time until you see more balance sheet repair.
Just a simple answer no I do you have any incremental comments I would just say that any to kind of combinations are the deals you're looking at our suburban repeat for stock any.
Anyway yeah.
Very good comment, it's going to be better, but nonetheless, you got to take out that in the past. The cats are going to have a change of control, but nonetheless, as we have done in the past and we'll continue today, we really want to focus on.
Technology asset diversification differentiation and more of an asset light model.
As we go through this.
That all makes sense and I mean, no one's redefine their cap structure for the better than than you have over the course of this year. So it certainly puts you in a better.
Starting block position.
Switching gears I.
[laughter].
I might have missed it but it sounded like you gave us the customary some pretty specific guidance for LMP, but.
But not for well site and downhole.
Unless I missed it but I guess, we should follow activity higher revenues better decent incrementals positive EBITDA in Q4, some some fashion for both of those is that that there yes.
We're not ready to give specific revenue and EBITDA percentages, yet, but what I did say is we expected sequential revenue improvement.
And those.
Segments as well as positive EBITDA in Q4 with that caveat that everybody's going to give you. We are currently not expecting any material holiday shutdowns as we've seen in past years, but if we.
Come clean three that it'll should be an improved quarter for our U.S centric operations.
Got it thanks, so much.
Thank you Leo Shannon.
And your next question.
Conor from Morgan Stanley Your line is open.
Yes. Thanks.
I was wondering we've kind of been approaching this in a few different ways and I. Appreciate the outlook for next year is this very uncertain.
Could you maybe just sort of help us think through the big moving pieces in sort of a bridge from 2020 free cash flow to 2021 free cash flow works.
Working capital sounds like the big variable Thats, obviously activity, but.
You know.
Tax refunds capex any other.
Restructuring costs things like that could you help us think through what some of the big uses of cash have been this year and how those would look next year.
Yeah, I'll try to do that you know the first quarter historically in 2020 has some compensation.
What agents that are a headwind to positive working capital generation and that is our traditional now obviously in this environment.
That's our much smaller so we don't expect much in Q1 relative to what we had in 2020 I think Lloyd guided you to our 2020 capex being about 15.
15 million and as we go into 2021, we're going to look at comparable levels to that again, it will be market dependent upon.
Timing of any activity recovery amongst our business lines and we are going to be quite frankly, very very cautious about that allocation of capital based on the visibility, which us visibility is short that unlike offshore products, where backlog will help us dictate some of our capex needs.
But those are the puts and takes but again, we'll give you more guidance in February when we go through it on Capex, but at this point, we're not expecting a huge need for capex, albeit the allocation between segments.
Might be different just depending upon the.
The opportunity set that we have.
Clearly you know our revenues are down 2019 to 2020 that has led to.
[music].
In liquidation if you will of working capital I think we've done better than that.
Just in terms of squeezing out some.
Receivables receivable liquidation as Weve gone at clear Lake, we paid our payables in a very timely manner. So nothing we've done this really extended out the payables landscape as to create that working capital. If you will we've been very transparent and clear in our Q2 and Q3 docking.
But the magnitude of the cares Act benefit was 41 million. So it had very favorable.
Impact to our cash flow now that is nothing more than monetization at an asset on our balance sheet, but.
Previously when the administration took over limited the ability to carry back those in our wells, but.
Obviously that was the point of care side. So it's just a monetization of an asset we had.
I hope I have answered your questions and I lost that cost out certainly have help but its in an environment I think harsh.
Revenue decline so as we recover back those revenues, particularly if you get back to 2019 level, we need to be looking at the roughly 20, 20% of cost out of the system that we think are going to be permanent and therefore again your incrementals and places that I think everybody in this industry.
For a clearly US included are looking for obviously an improved outlook.
The Calvin induced demand destruction has been terrific and I'll also tell you I've thought about this because it's not loss and the loss on any body. If you watch the news every day that we're back into yet another on a cold induced.
Concern if you will.
I think the difference as I think we've learned how to work through a lot of the coveted situation and still keep your doors open I know my attitude about Matt the way I conduct my daily life today is much more informed than it was in April and May and you look back we had our her with.
30% decline nearly EUR, 25% to 30% decline in demand.
Because of you know, we didn't know for picking up germs off the tables than.
Waterfall it it's different today and I think importantly, the big hit to current demand has been airlines and jet fuel demand was never recovered. So one has to say can it get materially worse from here I think the answer is no at this point in time, I'm, not minimizing and by any means the impact.
The pandemic, but I think we're in at kind of a different place with the knowledge, we gained on how to work safely.
While it is still in our communities if that helps.
Yes, yes, all all helpful context there.
This is good it's kind of a complete credit versus the prior question, but.
It occurs to me, there's a lot of excess capacity in North America, which is not a particularly insightful statement, but.
If I think about your business, you've got some product lines and some services that you.
Do you have an international presence you have others that are much more domestically focused do you see any opportunities to sort of broaden your reach I mean, you know new energies are obviously, an interesting thing to talk about but.
Are there opportunities to sort of stay within your core product lines, but just expand your addressable market.
Any particular areas you would pick up and in that context.
For sure I mean, we are global in scope and scale. However, I'd say, it's our ash offshore manufacturer product group that has the broadest reach and our well site services segment, we probably operate in 30 different countries are have at various times, but it's more on a rotational.
Basis, offering some of our better technology to customer cannot again, a concentration more in the middle East and I still feel thats, an active area of focus for us for base.
And bison exposure that I think as long term in nature, and we will continue to try to grow that and expand it over time with two initiatives. One is of course, just greater penetration with our service personnel and the equipment that we have but also upgrading our technology to meet the unique needs.
And demands of our global customer base, but I still say at a particular focus on.
Growth in the Middle East.
Got it thanks very much.
Thank you.
And your next question comes from Stephen Gengaro from Stifel. Your line is open.
Thanks, just a quick follow up.
We offshore products business.
Oh sure manufacturer partner.
The project driven side of it.
Seems like.
It's it's.
Based on the backlog is reasonably well for next year do you have any comments on how that piece plays out next year.
Well I do I mean, again, well look we're a little more diversified.
Big lift to our bookings this year have come from military awards, which we booked a lot. This year will likely to book last in terms of military next year, our thoughts as we go forward are very much focused on sub C infrastructure.
Both in Q4 and in 2021 with the bidding and quoting we've done there the concentrates and not surprisingly of activity again, Vianna, Brazil regions.
There are obviously opportunities elsewhere across the globe and then augment that with.
Some unique bid opportunities around something mining and when but I do think that that caused the bidding and quoting and some of the delays in awards that the next leg of bookings for US is more our bread and butter subs the type production facility infrastructure.
Awards as we move into 2021.
Great. Thank you.
Thanks Steven.
And we have no further questions I'll turn the call back for final remarks.
Thank you Adrian and thanks to all of you for continuing to follow this company in such a difficult time in the market out there I know, it's a crowded weak in terms of our earnings and I know you have up.
Alternative in terms of how you spend your time.
Larry and I are always available for follow up as needed and again, we appreciate your support and look forward to talking to you in connection with our fourth quarter and February.
Take care.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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