Q3 2021 Oil States International Inc Earnings Call
Welcome to the oil States International incorporated third quarter 2021 earnings call. My name is Hilda and I will be your operator for today.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
During the question and answer session. If you have a question. Please press star and then one on your Touchtone phone.
Please note that this conference is being recorded I will now turn the call over to MS. Ellen Pennington.
And in terms you may begin.
Thank you Hilda good morning, and welcome to oil States' third quarter 2021 earnings conference call. Our call today will be led by our President and CEO, Cindy Taylor and Lloyd <unk> oil States' executive Vice President and Chief Financial Officer before we begin we would like to caution listeners regarding forward looking statement.
To the extent that our remarks 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 many fab.
Actors 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 one and a half hours. After the completion of this call and will be available for one month I will now turn the.
Call over to Cindy.
Thank you Ellen and good morning, and thank you for joining our conference call, where we will discuss our third quarter 2021 earnings and provide our thoughts on the market outlook. During the third quarter of 2021, the company generated revenues of $141 million and adjusted consolidated EBITDA of eight.
5 million, we were on track through August 1st sequentially stronger results, given the ongoing improvement in oil and gas industry fundamentals.
However, our results of operations were negatively impacted by Hurricane Ida following its landfall on August 30th among the Louisiana Gulf Coast. Our personnel remained safe through this devastating storm in our facilities did not sustain major damage however, with power not fully restore.
Award until late September results of operations within our offshore manufactured products and well site services segments were affected by temporary facility closures and local workforce challenges.
We also incurred delays in the production and shipment of goods to our customers and services in the Gulf of Mexico were suspended for approximately one month, our reported results have not been adjusted for the estimated impact of Hurricane Ida However, on a consolidated basis we.
Estimated that hurricane auto resulted in third quarter revenue and EBITDA shortfalls of approximately $6 million and $3 million, respectively. Offsetting the benefit of increased U S land base completion activity. Fortunately these hurricane related delays are considered transitory.
And should be recovered in future quarters.
Highlighting our quarter was a 64% sequential increase in our offshore manufactured products segment bookings, yielding a book to bill ratio of one five times for the period.
Expanding economic activity and increasing backlog level support a stronger outlook going into 2022.
In September oil states was recognized by the energy workforce and technology Counsel, formerly known as Pizza with the ESG Accelerator award for our significant advances in ESG reporting score improvement and industry leadership.
As a company we are very proud to have been recognized for our ESG efforts and practices Lloyd.
Lloyd will now review, our consolidated results of operations and financial position in more detail before I go into a discussion of each of our segments.
Thanks, Andy and good morning, everyone.
During the third quarter, we generated revenues of $141 million, while reporting a net loss of $13 million or 22 per share.
The quarterly results include a noncash inventory impairment charges of $2 $1 million, along with <unk> 7 million or 700000 of severance and restructuring charges.
As Cindy mentioned, our adjusted consolidated EBITDA totaled $8 5 million, which excluded the inventory impairment and restructuring charges incurred in the quarter.
As of September 30, and June 32021, no borrowings were outstanding under our asset based revolving credit facility.
We continue to build cash was 68 million on hand as of September 30, compared.
Compared to $63 million at the end of the second quarter.
As of September 30, the amount available to be drawn under our revolving credit facility totaled $61 million.
Which together with cash on hand resulted in available liquidity of $129 million compared to $113 million at June 30.
At September 30th our net debt totaled $111 million.
Yielding a net debt to total net capitalization ratio of 14%.
We spent $3 $7 million in Capex during the third quarter with approximately $15 million expected to be invested for the full year 2021.
For the third quarter, our net interest expense totaled $2 6 million of which <unk> 5 million was noncash amortization of debt issue costs.
Our cash interest expense as a percentage of average total debt outstanding was approximately 5% in the third quarter.
In terms of our fourth quarter 2021 consolidated guidance.
We expect depreciation and amortization expense to total $19 million.
Net interest expense totaled $2 7 million.
And our corporate expenses are projected to total 8 million.
And at this time I'd like to turn the call back over to Cindy who will take you through the operating results for each of our business segments.
Thanks, Lloyd our offshore manufactured products segment reported revenues of $69 million and adjusted segment EBITDA of $8 6 million in the third quarter of 2021 compared to revenues of 77 million and adjusted segment EBITDA of $10 3 million reported in the second quarter of <unk>.
2021.
Revenues decreased 10% sequentially, driven primarily by lower connector product sales and the effects of hurricane Ida, which caused a temporary closure of our manufacturing and service facility in South East, Louisiana and September. This revenue shortfall is considered transitory and should be recouped in fees.
Quarters.
Excluding the estimated effects of Hurricane Ida revenues and adjusted segment EBITDA would have totaled $74 million and $10 7 million respectively for the segment.
<unk> totaled $249 million as of September 30th 2021, a 16% sequential increase third quarter 2021 bookings totaled $106 million, yielding a quarterly book to bill ratio of one five times and a year to date ratio.
I loved 1.2 times during the third quarter, we booked two notable project awards exceeding $10 million.
Which will leverage our major project revenues in future quarters, our third quarter bookings were broad based across many product lines and regions approximately 5% of our third quarter bookings were tied to non oil and gas projects, bringing our year to date non oil and gas bookings to nine.
Percent.
During the third quarter, we completed several strategic initiatives, including the second rental of our proprietary Merlin high pressure drilling riser equipment to a customer in southeast Asia.
The fall third party qualification on our new managed pressure drilling equipment.
Award of a multi year crane supply contract that provides long term utilization for one of our South East Asia facilities.
And a successful running of our first Marlin deep sea mineral riser system.
For nearly 80 years, our offshore manufactured products segment has endeavored to develop leading edge technologies, while cultivating the specific expertise required for working in highly technical deepwater and offshore environments as the world expanse investment and alternative energy sources.
We will be working diligently to expand our core competencies into the renewable and clean Tech energy space.
Product developments should help us leverage our capabilities and support a more diverse base of customers going forward.
We continue to bid on potential award opportunities supporting our traditional subsea floating and fixed production systems drilling military clients, while experiencing an increase in bidding to support multiple new clients.
Actively involved in subsea minerals offshore wind developments in other renewable and clean Tech energy systems globally.
In our downhole technologies segment, we reported revenues of $26 million and adjusted segment EBITDA of $1 4 million in the third quarter of 2021 compared to revenues of 27 million and adjusted segment EBITDA of $2 4 million reported in the second quarter of 2021.
One.
While improved year over year segment revenues were down 5% sequentially due to delays in perforating product orders from for some of our international customers offsetting these delays our completions product line revenues increased 7% sequentially driven by a 33% increase.
And customer demand for our smart start and click start toe valves.
In our well site services segment, we generated revenues of $46 million in the third quarter of 2021, and adjusted segment EBITDA increased sequentially to $5 9 million, excluding severance and restructuring charges in the comparable periods. The reported 9% sequential revenue increase was <unk>.
Driven by ongoing improvement in U S land based activity, while hurricane Ida adversely impacted customer activity in the Gulf of Mexico and International service demand also lagged.
Excluding the estimated effects of hurricane out our revenues and adjusted segment EBITDA would have totaled 47 million and $6 $8 million respectively.
We remain 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 improved service offerings to differentiate our completion service offerings.
COVID-19, disruptions and supply chain challenges continue to hamper activity in domestic and international markets, but these disruptions appear to be easing global oil inventories are now below their pre pandemic five year seasonal averages leading to higher commodity prices along.
With an increase in U S customer spending during the third quarter of 2021, the industry experienced a 9% sequential quarterly increase in the average U S frac spread count, which favorably impacted all of our segments.
As we are now a month into the fourth quarter of 2021, we continue to see favorable trends in the U S shale regions, which should continue to support our product and service offerings. However, some amount of holiday downtime during the fourth quarter is likely to temper results in the U S.
Revenues in our offshore manufactured products segment are expected to grow sequentially, given higher backlog levels entering the quarter expected strong short cycle product sales and increased service and repair activities, coupled with a recovery in revenues generated in our southeast Louisiana.
Manufacturing facilities.
On a consolidated basis, we expect revenues to grow 15 plus percent sequentially in the fourth quarter of 2021 led by our offshore manufactured products segment.
Bookings perspective, we expect our offshore manufactured products segment to achieve a one time or greater book to bill ratio, depending on the timing of award for several projects currently expected in the fourth quarter of 2021.
Now I'd like to offer some concluding comments COVID-19 uncertainty has negatively impacted start in global regions that the pandemic appears to be waning with Delta hospitalizations in case counts on the decline U S crude oil inventories drew considerably during 2021 with expanding.
Economic activity, leaving the U S at 429 million barrels in inventory as of September 30th which is about 7% below the five year range already declining inventories were further reduced by hurricane Addis extensive and unexpectedly.
Lingering disruption to output.
Crude oil prices have responded with spot W. T I crude oil approximating $84 per barrel oil states will continue to conduct safe operations and will remain focused on providing technology leadership and our various product and service offerings with value added products and services available.
To meet customer demands globally.
Additional we will continue our product development efforts in support of emerging renewable and clean Tech energy investment opportunities.
That completes our prepared comments Hilda would you open up the call for questions and answers at this time please.
Thank you if you'd like to ask a question. Please press star and then one on your Touchtone phone if you wish to be removed from the question queue. Please press the pound sign or the husky.
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Once again, if you have a question. Please press star and then one using your Touchtone phone.
And we have a question from Ian Macpherson from Piper Sandler.
Good morning, Cindy and Lloyd.
Hey, good morning, Ian.
Cindy you mentioned, a new we're expanding our capability in managed pressure drilling I wanted to follow up on that and see how are you.
That is coming along in terms of its rollout and.
What are you doing in terms of a product sale versus rental model for that and what the opportunity bucket looks like.
Right now we've been working on this obviously for well over a year and important this quarter. We completed the qualification testing on our M. P. D riser integration joint which is allowing us to actively market. This equipment to various customers, which we have been doing in an ongoing we're also.
Looking at some one off opportunities to expand our equipment suite, if you will to be able to offer the complete rise our internet integration package.
To our customers. So I would just generally say that we're fairly far advanced with this effort.
With various customers and you know.
I'd like to say, we are expecting in the water within the next six months, but obviously that's subject to.
The Ultimate award, but a fairly far progressed at this stage at this point I'd say this is more of a sell model obviously, it could turn into rental but at this point, it's a sale model.
Great. Thank you for that and then it's good to see your books do you have.
A nice recovery in Q4 are moving past the storm impacts in Q3.
You said that our products would lead the way I would presume that your other segments would probably be expecting double digit sequential growth as well I wanted to.
Get a sanity check on that as well then maybe ask a little bit about the expected.
Our incremental margins that we could look for in Q4 as well if you could comment on that thanks.
Yeah. So you know I do agree that the overall outlook for all of our segments looks strong you know it's easier to look at offshore manufactured products, because our backlog position and scheduled timing through these facilities and obviously, we have some recovery up what was delayed out of Q3 because of the hurricane.
And so we do expect that to clearly lead the way both with our major project revenue as well as some services, which also are delight throughout.
This period I do agree that the outlook for downhole technologies in our well site segments is also positive that I always worry that you know, we we don't really know what Thanksgiving and Christmas holidays are going to land them I'd say, that's number one and then number two in our own <unk>.
Casting we're not expecting a 100% recovery from the hurricane in the Gulf of Mexico, It's gradually picking up it's not like we're turning on a light switch and what was lost his back.
So we expect that to gradually recover through Q4 and as I mentioned in my notes our international activity.
Particularly in the middle East lagged as well and so we're kind of thinking we get a gradual pick up in Gulf of Mexico, and international are offset by very positive trends.
In the U S land based areas. So I guess, what I would say there while we expect a strong market, there's a little bit of tempering in our mind because of those factors for well site services. The other two segments I do look for good incremental revenues in Q4 as we've got.
Got it too.
That's great. Thank Cindy then lastly, any insights or thoughts on incremental margins.
For the quarter as well.
You know, our our margins again, I'm, leading with offshore manufactured products in terms of the more significant revenue contribution.
Contribution margins tends to be as you know kind of mid teens and so I'd be looking for at that range for a heavier portion of the revenue increase the incremental margins at well site services are normally in the 30% to 40% range, depending on product line and our downhole.
Incrementals can also be in the 30% to 40% range so but in totality. We're again, we're waiting this to offshore manufactured products, which will have more of a mid teens incremental margin.
Understood.
Thanks Cindy.
Thank you Ian Thanks, Ian.
Thank you as a reminder, if you have a question. Please press star one.
Next question comes from Stephen <unk> from Stifel.
Hi, Thanks, good morning.
Good morning, Steven.
A couple of things.
One just a follow up on <unk> question.
Where you are when you're highlighting those incrementals.
I believe and I'll make sure you are talking about them before layering in MTV.
The recovery of that $3 million of lost EBITDA from the storms is that fair.
I'm just talking Incrementals normally in any period of time, because it's not just EBITDA that falls to the bottom line you get the recovery in revenue at its normal incremental margin if I'm answering you correctly on that.
Yeah, so you're talking normal incrementals, but.
I guess, what I'm asking is could they be a bit higher as you layer in the impact of.
Of the last hurricane profitability in the core in the third quarter.
Yeah, I'm not really expecting that at this point in time are your I think your answer.
My answer to you is there's a certain amount that is just lost absorption I you don't pick that backup meaning if he got a facility. That's basically closed for a month, you'll pick up the revenue at its normal margin but.
But you're not going to recover some of the.
Absorption effects does that makes sense.
Thank you.
So on the downhole side.
And I think we.
Just one if not two others. Both mentioned this sort of slower international sales in the quarter is there is there anything behind that or is it just kind of.
Kind of the quarter, and Covid and transportation issues or.
Is there anything behind that we should be thinking about and also.
Can you ballpark, what what the international piece is kind of an average or a re.
<unk> for downhole.
Well first of all just because of their nature of these are kind of lumpier orders in the first place there's not a broad based multi client type distribution every month and so.
For this to be have an effect.
It's not that atypical and it's really because we're more operational or project specific and a lot of this is P&A work and there if you get a really good cement job you may not need ultimately are the perforating products and so I don't view this as any trend line at all it just that is what was.
In our forecast and plans.
Did decline a bit sequentially, while international it's not a huge part of the revenue if you'll recall, it's probably in the range of.
Uh huh, 14% to 15% year to date, 14% to 15% year to date and they do come at very good margins and they typically are one off larger projects for us.
Great and any commentary on the well site services side as far as what pricing dynamics are looking like and and maybe even.
A lot of your competitors big and small are sort of.
Seth this sort of 20% plus benchmark for 2022 upstream spending growth are you.
In that ballpark as well.
I think we are Stephen and we're really being very focused in terms of where we want to allocate our people and our capital going forward and both our regions and product line I would say at the end of the day. So we're really trying to high grade our product offering here because it does tend to.
Acquired capital and I want to be sure we're allocating in our best areas possible and so I do feel.
Pretty good about our opportunity set we've expanded to a broader range of products with some of our key customers in this basin.
The 20% I think it's a question mark because that's more of an activity indicator, we clearly need to get pricing and so we've been actively working on our customers to get incremental pricing to offset increased labor costs material costs, which you are very familiar with obviously the goal is.
Not just to cover these costs to bring some incremental bottom line dollars mm.
In the process.
Great. Thank you.
Thank you Steven good talking to you.
Thank you. Our next question comes from John Daniel from Daniela Energy partners.
Good morning, Thanks for putting me in.
They don't have a number not a numbers question for you, but just this.
If tomorrow you had a staff meeting and had this segment had small three.
And the office, who would be the most excited for 'twenty two and why.
That's a wonderful question I think every body not just our segment heads, but our workforce generally.
<unk> is looking much more forward to 2022 than where we were in offshore manufactured products of course about as Scott Moses, who you know very well and it's not just the improvement in backlog, what we're seeing but as I mentioned on the call. A lot of these are broad based in terms of the product line in terms of the region that.
We are supporting which obviously helps given the breadth of global manufacturing facilities that we do have but in addition to that theres quite a heavy amount of bidding and quoting activity.
Particularly associated with production infrastructure, we're number one our market share is very strong and our performance is good so he's he's always going to say that you know.
Incremental capital spending in the sector should benefit us fairly strongly in and so I think that's probably a highlight in the near term we've already enjoyed some pick up in U S land based activity, but there's certainly nothing out there that tells us that activity won't further improve.
As we go into 2022, and so again anybody running a business wants to be able to offer strong opportunities to your workforce, particularly and that has picked up a bit we have restored most of the pay cuts that were cut during the harsh doubt COVID-19 induced downturn.
In 2020, and we've restored or are in the process of restoring some benefits. So we've had to be gradual about that to marry that with the revenue and activity improvements that we're seeing but it does lift up.
The whole company quite frankly, and Lloyd has done yeoman's work dealing with our banks are bringing forth a new convert such that we don't really have a near term maturity.
And no debt outstanding under the credit facility and no maturity. That's a consequence until 2026, so certainly as a company and a management team we're much more optimistic as we go into 2022.
Okay. That's all I had thank you guys.
Thanks, John.
Thank you once again for any questions. Please press star one.
Yeah.
We have a follow up question from Ian Macpherson from Piper Sandler.
Oh, Thanks for the follow up I was just reflecting on John's question in.
Looking at where your are your products backlog its like would it be if you are 111.
One times book to Bill in Q4.
Your year on year growth for your you know ending your backlog.
Would be quite positive for products, So I would assume the visibility there would be.
I'd say higher than consensus.
International <unk> spend.
It's been a growth for 2022 would that also be a fair assumption.
Yes. It is.
Yes, it's all dependent on backlog, but we're also optimistic about our short cycle product sales again, driven by shell activity in the U S, which forms a part of this segment as well as the outlook for services. So we're really doing a lot in that segment I think to create a much more favorable.
<unk> 2022, a potential if you will backlog dependent but things are moving in the right direction and the opportunity set seems to be there.
And then lastly, Cindy how how has the experience been coping with hyperinflation as you've been booking the products backlog into next year and how do you see how would you frame the risk to margins based on you know what's happened with.
With with all of that as you've taken in bookings in the second half of this year and how youre pricing your.
Your product.
<unk> for the first half of next year as well do you think that margins can continue.
As we described in the prior Q&A or do you think theres more variability with it as we get into next year's conversion.
No I think they can continue you know our our bids in this segment. Some are shorter I E. In the range of six months, but a lot of these are longer term 12 to 18 months, we have a robust risk management bidding process in place to where the bids are only good for a certain amount of time a lot of these long lead.
Items.
That go into these projects are specifically bad with fixed costs behind them now I would say from a risk management perspective. Another words, we're not going to subject ourselves to dramatic risk between the bidding phase in the execution phase on these projects. So I don't think you should worry about.
The bookings and backlog have margin erosion.
That's quite consequence in there now the the longer risk as some of the materials have escalated dramatically and we're having an end to this.
Projects are typically bad March quarter, sometimes years, an at bat on a recurring basis. Some of these are just more of an expression of interest in terms of.
The bidding and quoting them they come down to farm engineer drawings as an example that are concrete.
The risk is between the original indication of interest in the farm that the costs have escalated then it becomes upon the operator to say is this still a good project and is it still economic with the higher costs that are involved in there are instances, where we've had to go back to the drawing boards with the customer.
<unk> an equipment redesigns because of some of the costs are developing alternative materials because of material escalation. So yeah, I would say, it's a more complex process, but we're not taking on a lot of incremental risk in our bidding and quoting activity.
Okay, and then has there been any evidence of customers tapping the brakes, a little bit with placed.
Placing orders.
Waiting for cost to come down a bit or or is there an expectation that cost cost relief will not be forthcoming and they'd rather they'd rather proceed sooner than later with the waters.
I think they they are rather proceeds sooner than later and a lot of these again have been under development for years and.
They are finding ways to normalize but not to mention just the there their price is much higher and the free cash flows go into these operators is significant and so the project Green light is not likely to get a no unless it was a more marginal prospect in the first place a lot of our bidding and quoting.
Putting her in the store.
South American region broadly Petrobras Schiano et cetera. These are very prolific projects that are going to continue long lead time.
So I'm not as worried about that as a at least the ones that are bidding currently.
Makes sense.
Thank you Cindy I appreciate it.
Thank you Ian.
Thank you at this moment, we show no further questions.
Thank you today for hosting our call and thank you to all of you who one participated in the call in to ask some clarifying questions of us will be going obviously through our budget cycles and year end close and look forward to sharing our more refined thoughts on 2022 in connection with our fourth quarter.
Our call Hope you all have a great day, and I can't resist I and go Astros.
Take care. Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Yeah.
Yeah.