Q2 2022 Oil States International Inc Earnings Call
Yeah.
Welcome to the oil States International Inc. Second quarter 2022 earnings Conference call. My name is Jenny I'll be your operator for today's call. 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 zero one on your Touchtone.
Don.
Please note that this conference is being recorded I will now turn the call over to Ellen Pennington Ellen you may begin.
Thank you Jenny good morning, and welcome to oil States' second quarter 2022 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 statements.
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.
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.
Replay of the conference call will be available one and a half hours. After the completion of this call. It will be will continue to be available for one month I will now turn the call over to Cindy.
Thank you Alan.
Good morning, and thank you for joining our conference call, where we will discuss our second quarter of 2022 results and provide our thoughts on the market outlook during.
During the second quarter of 2022, the company generated revenues of $192 million and consolidated EBITDA of 17 million representing sequential increases of 11%.
And 17%, respectively, and the highest quarterly revenues in consolidated EBITDA reported since the first quarter of 2020 before the onset of the COVID-19 global pandemic.
Sequentially improved results were driven by the improved commodity price environment driving strong activity levels in the U S and abroad. This led to increased demand for our short cycle products and services in the United States. We also benefited from improved sales of our project driven product.
In our offshore manufactured products segment.
A notable achievement in the second quarter was a 61% sequential increase in our well site services segment EBITDA driven by land base completion and production activity during the second quarter of 2022, the industry experienced a 4% so.
<unk> quarterly increase in the average U S frac spread count compared to the same period in 2021, the average U S. Frac spread count increased by over 25%. Our results were very strong relative to these industry metrics are offshore manufacturer product set.
<unk> reported a 15% sequential increase in revenues driven by a 21% increase in project driven revenues, coupled with higher demand for our short cycle products backlog totaled 241 million as of June 30, with quarterly bookings of 77.
Yielding a quarterly book to Bill ratio of <unk>, eight times and nine times year to date, our second quarter bookings were below our forecast due to timing delays in certain contract awards, coupled with negative exchange rate trends affecting our foreign backlog and orders we expect.
Improved bookings in the second half of 2022 compared to the first half of 2022.
In our downhole technologies segment revenues decreased 4% sequentially due to transitory reduction in customer demand for perforating products internationally.
Our investments in technology and innovation were again recognized by the offshore technology conference with to 2022 spotlight on New Technology Awards presented for our managed pressure drilling and riser gas handling system and our Marlins 15th.
High pressure high temperature riser system and.
Additionally, during the quarter OSI renewables, which is a newly branded product offering within our offshore manufactured products segment introduced the most recent addition to our growing portfolio of new technologies, a fixed tension leg platform for floating wind solution.
That leverages, our deepwater expertise into additional green energy technologies.
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 second quarter, we generated revenues of $182 million consolidated EBITDA of $17 million and a net loss of $5 $1 million or <unk> <unk> per share.
Cindy noted we achieved our highest quarterly revenues in consolidated EBITDA since the first quarter of 2020.
Which coincided with the onset of the COVID-19 pandemic.
Our second quarter loss was negatively impacted by $1 $8 million of tax expense, resulting from valuation allowances.
Record it against our U S deferred tax assets as.
As well as certain non deductible and discrete items.
We ended the second quarter were $22 million of cash.
Cash was used during the quarter to fund a $16 million build in working capital associated with the growth in activity levels.
$8 million for the acquisition of E flow Control's Holdings, a U K based global provider of integrated handling control and instrumentation systems.
And $6 million in open market purchases.
Outstanding one 5% convertible senior notes.
Slight discount to par value.
All of our business segments, where free cash flow positive through the first six months of 2022.
And as a reminder, we define free cash flow as cash flow generated from operating activities less capital expenditures plus proceeds from the disposition of property and equipment.
As of June 30, no borrowings were outstanding under our asset based revolving credit facility.
And amounts available to be drawn totaled $62 million.
Which together with cash on hand resulted in available liquidity of $84 million.
At June 30, our net debt totaled $150 million, yielding a net debt to total capitalization ratio of 18%.
Additionally on June 28th.
We agreed to pay $10 million and issue approximately one 9 million shares of our common stock.
Which had a market value of $10 $3 million on July one.
To settle the $17 $5 million promissory note.
To the sellers of Geodynamics, which comprises our downhole technologies segment.
Together with related accrued interest and resolved all outstanding legal disputes.
The cash payment and the issuance of the one 9 million shares of our common stock were made on July one and will be recorded in the third quarter of 2022.
We invested $4 million in capital expenditures during the second quarter.
Which were partially offset by proceeds received from the sales of assets totaling $1 million.
For the full year 2022, we expect to invest approximately $20 million and capital expenditures to support continued market expansion.
For the second quarter, our net interest expense totaled $2 $6 million of which 5 million was noncash amortization of debt issuance costs.
Our cash interest expense as a percentage of average total debt outstanding was approximately 5% in the second quarter.
In terms of our third quarter 2022 consolidated guidance.
We expect depreciation and amortization expense totaled $16 $9 million.
Net interest expense totaled $2, four excuse me $2 $4 million.
In our corporate expenses are projected to total $10 million.
And at this time I would like to turn the call back over to Cindy who will take you through the operating results for each of our business segments.
Starting with our offshore manufactured products segment, we generated revenues of $96 million and segment EBITDA of $14 7 million in the second quarter of 2022 compared to revenues of $84 million and segment EBITDA of $15 6 million reported in the first quarter of <unk>.
2022 segment revenues increased 15% sequentially, driven primarily by a 21% increase in project driven revenues and higher customer demand for short cycle products, while margins declined due to a shift in product mix from the first quarter of 2000.
22, our EBITDA margin in the second quarter of 2022 was 15, 3% compared to 18, 5% reported in the first quarter of 2022 backlog totaled 241 million as of quarter end, a 9% sequential decrease from the first.
Quarter second quarter, 2022 bookings totaled 77 mill that million, yielding a quarterly book to bill ratio of <unk> eight times, while our first half of 2022 book to Bill ratio was <unk> nine times, our second quarter bookings were broad based across many.
<unk> lines and regions with approximately 13% of our bookings tied to non oil and gas projects and so on.
Noted earlier, our second quarter bookings were below our forecast due to delays in certain contract awards, coupled with negative exchange rate trends affecting our foreign backlog and orders. We do however expect improved bookings in the second half of 2022 compared to the first.
Half of 2022.
This year marks the eighth anniversary of our company with its origins evolving into what is now our offshore manufacturer product segment. This segment has endeavored to develop leading edge technologies, while cultivating the specific expertise required for working in highly technical deepwater and <unk>.
Offshore environment.
As the World expanse investment and alternative energy sources, we will be working diligently to translate our core competencies into the renewable and clean Tech energy space recent product developments should help us leverage our capabilities.
Support a more diverse base of customers going forward, we continue to bid on potential opportunities supporting our traditional subsea floating and fixed production systems drilling military customers, while experiencing an increase in bidding.
Support multiple new customers actively involved in subsea minerals fixed and floating offshore wind developments in other renewable and clean Tech energy systems globally.
In our well site services segment, we generated revenues of $55 million and segment EBITDA of $8 9 million in the second quarter of 2022 compared to revenues of $48 million and segment EBITDA of $5 5 million reported in the first quarter of 2022 segment EBITDA margin.
In the second quarter of 2022 was 16, 2% compared to 11, 5% reported in the first quarter of 2022, yielding segment EBITDA incremental margins of 50% our second quarter 2022 segment EBITDA margin.
16, 2% represented the highest quarterly margin achieved since the third quarter of 2019 boosted by expanding activity levels in the U S. Some recovery in our international operations and our decisions made in 2021.
To streamline our operations and exit underperforming regions and service offerings. We are now seeing the benefits of our actions and improved segment EBITDA margins, we remain focused on optimizing our operations and pursuing profitable activity in support of our global customer base.
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As market expansion opportunities continue to unfold in 2022, we will continue to focus on core areas of expertise in this segment and are actively developing improved equipment offerings to differentiate our completion service offerings in our downhole technologies.
Segment, we reported revenues of $31 million and segment EBITDA of $2 9 million in the second quarter of 2022 compared to revenues of $32 million and segment EBITDA of $2 9 million reported in the first quarter of 2022.
More than expected sales of our perforating products in international markets drove the modest sequential decline in revenue. However, we believe demand for our perforating products internationally will improve in the second half of 2022 segment EBITDA margin in the second quarter of 2022 was nine three.
Percent flat with the first quarter.
Going on to our market outlook comments supply chain challenges access to available labor and rising inflation have challenged our industry and many others as the world comes out of the pandemic induced shut downs and faces disruptions caused by the COVID-19 pandemic global.
Oil and gas inventories remain below their pre pandemic five year seasonal averages.
Leading to higher commodity prices.
And expectations of continued increases in drilling and completion spending throughout 2022. We are also seeing an improved outlook in international and offshore markets, which should further support our product and service offerings.
Given improvements in the Frac spread count over the last several quarters, we expect our well site services and downhole technologies segments to continue their growth in 2022 with increasing EBITDA contribution.
Revenues in our offshore manufactured products segment are also expected to continue to expand given improved project driven and short cycle product demand our outlook for the full year 2022 has improved and suggests that our consolidated revenues will increase by approximate.
30% year over year. Accordingly, we are increasing the low end of our 2022 full year consolidated EBITDA guidance from 65 million to $70 million, our annual guided consolidated EBITDA range is therefore 70 to 75.
Bringing the midpoint of our guidance up 4%.
Now I'd like to offer some concluding comments following the unprecedented demand destruction caused by the global response to the COVID-19 pandemic U S crude oil and natural gas inventories have now drawn down considerably with expanding economic activity.
As of July 22nd U S crude oil in inventory totaled 422 million barrels, which was about 6% below the five year average natural gas in storage for the same period totaled $2 four trillion cubic feet, which was about 12% allowed.
The five year average despite these inventory trends crude oil and natural gas prices corrected to the downside in recent weeks due to ongoing recession concerns, which is expected to hurt demand if it occurs.
However, WTS crude oil spot prices remain above $96 per barrel and natural gas is currently trading at approximately $8 50 per M. M. Btu supporting continued favorable activity for the balance of this year.
Initially the industry responds to higher commodity prices with accelerated shorter cycle investments in the United States, which we are experiencing although longer term in nature, we expect investments to pick up for long lead time projects as well, including those in deep water areas.
Well 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. In addition, we will continue our product development efforts and support.
Port of a margin renewable and clean Tech energy investment opportunities that completes our prepared comments Jenny would you open up the call for questions and answers at this time please.
Of course, if you have a question. Please press zero one on your Touchtone phone, if you wish to be removed from the queue. Please press zero to if youre using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press zero one on your Touchtone phone.
And we do have a question from Steven Gengel. Please go ahead.
Good morning.
Hi, Steven.
So I guess two things from me if you don't mind. The first you talked about the second quarter bookings and offshore manufactured products and the expectation for improvement in the back half of the year could you just talk a little bit about the visibility on that and that's in the types of projects Youre, you sort of see flowing.
Through as the year progresses.
Yeah, we keep a very detailed list of near term projects and longer term opportunities that we are actively bidding and as typical.
We assigned probabilities to those but what we're really seeing is slippage and the timing the projects are still there they're still going and in fact, some of the awards have already come in.
In the month of July and so when we we definitely have projections on a quarter by quarter basis.
And there was just a couple that slipped from Q2 to Q3, so nothing negative there and again the visibility is strong in terms of the product queue that we're looking at through the balance of 2022, a lot of those are both predominantly I'm gonna site tied to Gil.
<unk>, Guyana, and Brazil, but also some selected major project opportunities in the Gulf of Mexico. Most of those are production facility oriented.
We would get upside as some of our new riser technology in MPD equipment as an example would get to market.
Okay, great. Thank you.
When we think about the third quarter and without sort of dig into deeper into the into the specifics but.
You had really good incrementals in world.
How should we think about the Incrementals are there and then any color you can give on offshore manufactured products given how backlog converts in the third quarter.
In our comments, we guided both to revenue increases if you will.
Sequentially going from Q2 to Q3.
It'll always be a mix issue in offshore products depending upon.
Some of our higher margin products and services compared to some of the major products in I E. If we get a lift as an example from our connector products remember that there's a pass through element a pipe that we acquire and then we attach our specialized connectors those are on average.
Lower margin because of the pass through piece of that so it's all a mix issue going forward, but just generally speaking the margins that we achieved in the first half of 2022 are both very acceptable in my view, we had a very.
<unk> mix in Q1, so even though we're down sequentially, there's still healthy margins in my view and we'll see that continue but we should get top line improvement.
Just on our internal internal forecast and again I've mentioned in the call that I expect our book to bill to be North of one as some of these awards come in the door, which again they are beginning to in the month of July as it relates to well site services will continue to see strong Incrementals I don't think they are.
Going to be 60% that would be great. Historically, our incrementals had kind of range I'll say, 30% to 40%.
And I think you'll see that normalize at that level, but nonetheless, very very strong incrementals and importantly, all of these business lines are now generating free cash flow.
Great. Thanks, and then just one follow up we've been hearing.
From a pressure pumper that they are effectively sold out most of the big guys are not adding much capacity is that impacting sort of how we should think about growth rates and well site.
Yeah, I'll tell you, where you know we do Frac support and what I'm trying to do is expand market share and get some of my underutilized equipment to work in the completion services business. So if theres any growth resistance there it's not so much.
The market Frac fleet, it's more labor and so our greatest challenge is getting labor are sufficient to grow that revenue base, but we're you know it's a difficult process, but we're managing through it from a labor perspective, I would say the one area that I think it has kind of hindered.
A little bit of the recovery I These frac fleets.
Getting off the ground consistently it's on the demand for the downhole products and while its improving I think it would be better.
If we could have more active frac fleets going to work and to the extent there's delays there. It just delays some of our products as well.
Maybe one quick follow up.
Can you quantify the delays from international at all size of international or how it impacted the quarter.
We do right now we are expanding and aren't recall that when we bought geodynamics. They only had five or 10% Max tied to international activity. So these are newer initiatives, where I'll just generally say, we're making good headway, but we don't have that broad.
Base.
Tablets to operations in initially.
The largest contributor to our international revenue New associate with P&I work P&A work can go as you know, it's not routine and it's not.
Steady state quarter by quarter, and then also it's also dependent on the quality of the cement job you get whether you need the products at all and so they tend to be lumpy on the P&A side. Now we also have initiatives to expand our market share, particularly for shaped charges and more routine.
Completion operations, and we are getting making headway there and so just think about this is evolving but right now we're still in that window of kind of new market penetration in certain areas and a little bit of a whiting right now tied to P&A activities, which is lumpy again nothing negative here at all.
In fact, I think it's very positive to see that we're taking.
Taking share internationally.
Great. Thank you for the color.
Thank you, Steve and I know, it's a busy day.
As a reminder, if you have a question. Please press zero one on your Touchtone phone.
And we have a question from Sean Mitchell. Please go ahead.
Thanks, Sean.
Hey, sorry.
Just really quick you talked a little bit about in your opening comments or your commentary on the macro supply chain challenges could you just maybe.
Kind of.
Anything you can provide in terms of lead times on I'm guessing on manufacturer on your offshore products side or anything on the manufacturing side one of the biggest challenges you're seeing still today on supply chain.
As it relates to offshore products.
I would say you know the heart of what we do on major projects comes down to forging and ability to access that and with the Russia. Ukraine crisis. There are just certain issues not to mention very high power cost in Europe . As an example at Youre hearing more and more.
More about activity reductions I think the last one I heard was a massive reduction in ammonia production because the.
The cost of powering some of these facilities is getting excessive in light of the disruption in that market.
But that being said we had good sources right now the forgings, but it's certainly something to watch you mentioned specifically offshore manufactured products.
I would also say just things like access and availability of fright at reasonable cost is a real challenge.
In our downhole technologies business I'm not sure. If you wanted commentary on that but not surprisingly some of our switches as an example, anything that's chip related again much like the global business those are challenges for us and so we're trying to engineer into.
<unk> solutions to alleviate those and we're very carefully monitoring our inventory and supply chain for those critical items.
I go back if I well side, it's not so much of an issue that I think about on materials, it's more labor.
But those are.
One of many challenges, we face, but again managing through them at this point.
And then maybe on well site just I mean, a lot of the larger kind of Frac company is on the call. So far this quarter have really turn they're talking about their customer conversations turn into 'twenty. Three are you seeing that as well.
I'll have to say, yes, with a caveat and so ours is typically call out work, but our.
Our bigger customers that have multiple wells and multi pad high end type activities understand that they need to be talking to us in securing availability.
For their projects and so to the extent there are bigger customers usually are top five in this business. They are giving us that visibility, particularly for the big pads that will be upcoming if it's a shorter cycle say isolation job our flowback job.
We just kept continual work with them, but theyre not necessarily locking up capacity, nor do they need to so it was kind of a mixed bag depending upon service offering.
Got it thanks for the color.
Thanks, Sean Thanks, Sean.
And once again, that's zero one quick question.
Okay, Jenny it looks like from our screen Theres no further questions. We acknowledge it's incredibly busy today I think I understood. This week theres about 50% of the S&P 500 reporting so for those of you that could join we appreciate it.
<unk> a lot to.
Go back and review it off our website and we look forward to any follow up questions that might arise from that good luck through the rest of the earning season and we look forward to talking to you as the quarter progresses take care.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Okay.
Okay.
Yeah.