Q3 2022 Oil States International Inc Earnings Call

<unk> million dollars.

Adjusted consolidated EBITDA of $22 million and net income of $2 1 million or <unk> <unk> per share.

We achieved our first quarter of positive net income since the second quarter of 2018 reflective of the improvement in our operations and the overall levels of market activity.

Our third quarter net income included $6 1 million of other income from the settlement of litigation within our offshore manufactured products segment.

We ended the third quarter with $33 million of cash and generated $29 million of cash flows from operating activities.

We used 6 million to fund net capital expenditures.

Further we used $10 million of cash and issued one 9 million shares of our common stock and settlement of our promissory note and related accrued interest with the SEC.

Sellers of Geodynamics, which comprises our downhole technologies segment.

The settlement resolved all outstanding legal disputes.

All of our business segments, where free cash flow positive through the first nine 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.

On a consolidated basis, we have been free cash flow positive for 29 of the last 35 quarters dating back to the beginning of 2014.

As of September 30, no borrowings were outstanding under our revolving credit facility, an amount and amounts available to be drawn totaled $80 million, which together with cash on hand resulted in available liquidity of $113 million.

At September 30.

Our net debt totaled $122 million.

Yielding a net debt to total capitalization ratio of 15%.

On our leverage on a leverage ratio basis net debt to trailing 12 months adjusted consolidated EBITDA.

Has been materially reduced to a current level of one eight times at quarter end.

For the third quarter, our net interest expense totaled $2 6 million.

Of which $5 million or $500000 was noncash amortization of debt issuance 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 2022 consolidated guidance, we expect depreciation and amortization expense to total $16 1 million.

Net interest expense to total $2 $5 million.

In our corporate expenses are projected to total $10 $3 million.

For the full year 2022, we expect to invest approximately $20 million and capital expenditures.

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.

Thank you Lloyd.

Our offshore manufacturer product segment generated revenues of $96 million operating income of $13 for marijuana and segment EBITDA of $18 3 million in the third quarter of 2022 revenues in the third quarter were flat sequentially due to project timing as supply chain headwind.

The light progress on some percentage of completion projects.

During the third quarter of 2022, the segment recorded a litigation settlement gain of $6 1 million, partially offset by low margin product sales during the quarter, where we incurred higher material and freight costs, given the timing of project deliverables, which we view as an isolated occurrence.

Adjusted segment EBITDA margin in the third quarter of 2022 with 19, 1% compared to 15, 3% reported in the second quarter of 2022.

Backlog totaled $258 million at the quarter and a 7% sequential increase from the second quarter third quarter 2022 bookings totaled $115 million, yielding a quarterly book to Bill ratio of one two times, while our year to date 2022 book to.

Bill ratio is one time, our third quarter bookings were broad based across many product lines and regions with approximately 7% of our bookings tied to non oil and gas projects.

As I noted earlier, our third quarter bookings reflect a 51% quarter over quarter improvement and included one notable project awards exceeding $10 million.

The year 2022 marks the <unk> anniversary of our company with its origins are bobbing into what is now our offshore manufactured products segment. This segment has endeavored to develop leading edge technologies, while cultivating the specific expertise required for working in highly technical.

<unk> deepwater and offshore environments as the world expands investments in 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 and support a more.

<unk> 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 to support multiple new customers actively involved in subsea <unk>.

Minerals extractions fixed and floating offshore wind development and other renewable and clean Tech energy systems globally.

In our well site services segment, we generated revenues of $61 million operating income of $2 4 million and segment EBITDA of $9 $7 million in the third quarter of 2022.

Segment EBITDA margin was 16% in both the second and third quarters of 2022, and <unk> segment results benefited from expanding activity levels in the United States, along with some recovery in our international operations.

Along with decisions made in 2021 to streamline our operations and exit underperforming regions and service offerings, we remain focused on optimizing our operations and pursuing profitable activity in support of our global customer base as market expansion opportunity.

<unk> continued to unfold both in the United States and in International markets. We will continue to focus on core areas of expertise in this segment and the deployment of our recently enhanced completions equipment to further differentiate our completion service offerings.

In our downhole technologies segment, we reported revenues of $33 million and segment EBITDA of $4 1 million in the third quarter of 2022 compared to revenues of $31 million and adjusted segment EBITDA of $2 9 million reported in the second quarter of 2022.

Over quarter improvement was driven by growing sales of perforating products in both the United States and international markets adjusted segment EBITDA margin in the third quarter of 2022 was 12, 5% up from nine 3% in the second quarter, reflecting incremental.

Margins of 54%.

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 shutdowns and disruptions caused by the COVID-19 pandemic and the loose fiscal policies that followed while demand has taken a hit.

Over the past last couple of months global oil and gas inventories remain below their pre pandemic five year seasonal averages, which has supported higher commodity prices and set expectations for a robust levels of drilling and completion spending going forward.

We are also beginning to see an inflection upward 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.

With growth slowing somewhat recently, mainly due to limited ability to attract labor, we expect our well site services and downhole technologies segments to continue to perform in line with or better than market activity indicators.

Revenues in our offshore manufactured products segment are also expected to continue to grow given increased levels of backlog and growing short cycled product demand our outlook for the remainder of the year suggests that we will hit our consolidated revenue guidance, increasing by approximately 30% year over year.

And we are updating our full year 2022, EBITDA EBITDA guidance to a range of 72 million to $75 million.

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 drawn down considerably as of October 21, U S crude oil in inventory excluding strategic.

Petroleum <unk>, which are now at a four decade low totaled 440 million barrels, which is about 2% below the five year average natural gas in storage for the same period totaled $3 four trillion cubic feet, which was about 5% below the five year average.

Despite these inventory trends crude oil and natural gas prices corrected to the downside from the highs reached earlier in the summer due to ongoing recession concerns tightening global monetary policies and the associated impact on commodity demand. However, despite these factors WTS and Brent <unk>.

Rudolph spot prices remain about $87 $95 per barrel, respectively, and natural gas is currently trading at approximately $5 67.

Mmm Btu.

Initially the industry responds to higher commodity prices with accelerated shorter cycle investments in the United States, which we have experienced in 2022, although longer term in nature, we expect investments to pick up for long lead time projects as well include.

<unk> knows in international markets in deepwater basins around the world, However, global monetary policies and the resulting increases in interest rates by the various reserve banks and an attempt to rein in inflation will likely have a continuing impact on demand in the near term as global GDP struggles.

As a result oil states will continue to conduct safe operations, and we 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 effort.

And supportive of emerging renewable and clean Tech energy investment opportunities.

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

We will now begin the question and answer session. If you have a question. Please press zero and one on your Touchtone phone. Once again, that's zero then one on your Touchtone phone and I am standing by for questions.

Yeah.

And our first question comes from Steven again, Garo from Stifel Go ahead Stephen.

Hi, Thanks, good morning, everybody.

Hi, Steven.

<unk> gel as you guys are playing in the World series.

But I am rooting for you.

Keep it up.

I don't think you want me rooting for your team is based on my track record with sports, but anyway.

[laughter].

When I think about your <unk>, you sort of a mid point of your implied EBITDA guidance I think it's about $20 million can you talk about a little bit about some of the puts and takes sequentially from third quarter to fourth quarter, because I think ex the gain on when Youre looking at a pretty solid sequential rise.

Yes for sure.

And anything that talk about his extra game, but we are as I commented on the call.

In the offshore products segment as you know a lot of our larger products projects are percentage of completion type accounting as opposed to booking when deliver there are some delight not surprisingly with the supply chain issues that we faced and so I'd say with that and higher backlog and good short cycle demand, where we are.

<unk> sequential growth in our offshore.

Product segment number one number two again, the EBITDA margins excluding the gain.

Should improve because again, we had really it was one larger pre.

Project that completed in the third quarter at lower margins than we bed, mostly because of.

Having to procure third party Piper casing at higher inflation prices in flight and we scrubbed and people will worry what what does that imply for your backlog and we scrubbed that and feel very comfortable that we've locked in pricing sufficiently that our bid margins are fine and backlog. So I do view this as I commented.

On it's kind of a one off but it was a bit of a larger project at single digit margins, which is atypical.

For that segment.

As far our well site services and.

In our downhole technologies segment, where really you always worry going into the holidays, there could be a softening we don't see that right now so we're looking for.

Pretty strong Q4 results for both of those segments commensurate with what we've been seeing.

All year or so if there is any softening youre going to know that because of industry factor. It shouldnt be anything to do with us, but we just don't see that right now based on customer conversations.

Okay.

The range based on just kind of concerned about about seasonality.

Yes, I mean, it's that and then as always if there are certain things that even in <unk>. As an example, these you have to ship by year end to book the revenues and you always worry that particularly our international orders can't slip.

In and out of the quarter I think we had wine and the third quarter that literally made it by hours.

To get it booked in and decide they're subject to those variations, but again those are not big issues, but we're trying to give a range sufficient that it accounts for any of these timing type items, but we don't see anything negative at all.

Coming at Us.

Okay. Thanks, and then the other.

Question I wanted to ask is in downhole technologies.

<unk> you.

Our approach has been I think and correct me if I'm wrong, but you have the flexibility on the full year, greater gone or or even some on the component side. It seems like the market has gone that way with I think some machine shops, assembling guns and almost mimicking integrating products how are you.

Are you seeing that market evolve and what do you think is driving.

Your growth there over the next 456 quarters.

So I guess number one there are dynamics in that space, particularly I would say some of the larger wireline companies see benefit for bringing some of that in house I E procuring the components and doing the gun integration themselves.

And so.

So they vary based on wireline companies other ones that don't want to invest.

Time money resources or.

How are the people quite frankly would rather procure at fully integrated.

System and run that said there is no single answer to that but when you talk about the smaller machine shops are largely probably working for big wireline companies that have chosen to do a lot of that integration and gun loading themselves and so that's just the market.

In terms of our growth.

And Geo Theres kind of three product lines, there perforating and of course, we have the downhole plug business as well and so we're looking for completion, Craig our growth, which every indication is we're going to have year over year growth next year, and then of course, we need to.

<unk> increased our market share and we've gotten some favorable indications from the market just in terms of I'll call. It favorability ratings about our products and service in that space that should come back and increase.

Revenues and EBITDA Accordingly, I mentioned international.

A goal of ours since we bought the <unk> business has to been to expand internationally. It is becoming.

More important to us, but as you grow these are lumpier sales and that can really moderate our month to month or quarterly revenues and EBITDA until we get a more sustained level of international activity and demand, but those are the major puts and takes for that segment.

Although I think we demonstrated this quarter with 54% and sequential margin improvement.

A few revenue dollars can matter in this business.

Yes. Thanks.

Not all of you have seen this but in the latest kimberlite survey who looks at these things you guys come out looking very good on the on the perforating gun side. So that's why I asked the question.

One just final quick one from me could.

Could you talk about what you see you mentioned is a little bit in the remarks on the offshore manufactured product side and the book to Bill has been solid this year and strong in the quarter are you expecting based on activity and we're hearing positives on offshore and youre going to see an acceleration in order flow next year.

Yes, honestly I hope, we see an acceleration in Q4 based on our bookings forecast now and our bidding activity is fairly robust and the market has to look towards leading indicators of activity, which is customer capital allocation as an example, leading edge al.

Your day rates utilization et cetera, and all those things are trending favorably for us specifically it is very much our bidding and quoting activity and our order book.

But as I sit here today, I think we're going to have a strong bookings quarter in as early as Q4, but certainly in 2023.

Great. Thank you for all the detail.

Thank you Stephen I appreciate your time always.

And once again, it's zero one on your Touchtone phone. If you have a question. Our next question comes from Sean Mitchell from Daniel Energy Partners go ahead, Sean.

Hi, Cindy and Lloyd good morning, Thanks for taking my question.

Just as we think about.

I know you've mentioned supply chain issues and I think the industry at large on most of the calls thus far.

We have identified some of those same issues on the supply chain side is there anything in particular that you can point to.

Where you see things getting better maybe on supply chain that might give people. Some hope that things are getting better.

Number one and then number two I just wanted to ask you a little bit you guys historically have been.

Involved in M&A and as we come out of the bottom and the depths of the cycle here and things seem to be improving across the board for some of them.

Service companies are that what does the M&A space look like today to you and how do you feel about it over the next kind of six months do you think youre going to see some opportunities.

Thank you for the questions, they're great ones you know in the supply chain side I would say there are certain areas that feel like they are easing a bit I would say, particularly probably on the freight side.

That really tightened up and was fairly difficult in late second quarter early third quarter, that's not say, it's behind us, but I would say that is easing just a little bit there are other areas that are still a challenge.

Chip technology, which that's part integrated into our perforating switches as an example explosive powder those things are still very tight and so make no mistake about it there are other areas.

Had a concerted effort in this company to go through a deep process of Derisking, our supply chain, particularly if we can get out we get forgings out of.

Italy is an example, and all of the European Union is somewhat at risk going into the winter for both high cost of power potential rationing of power. So we are actively looking for backup sources elsewhere to be sure. We don't get caught in I think we're going.

After going through that exercise I think we have adequately prepared ourselves for these types of contingencies that Mister.

<unk>, China issues are real and I think everybody knows that.

We do see some areas of I would say easing just a bit particularly in a potential recessionary environment a lot of the discretionary type goods and services are taking a hit and so that should alleviate particularly some of the freight transportation concerns that.

We've had in the past CDL drivers et cetera. So.

Some may be favorable trends there M&A.

I would say, there's just a lot of conversations still.

We've got a group of investment bankers that keep us apprised of the market on an ongoing basis. There are some attractive opportunities that we.

But I'd say there are limited, but there are some attractive opportunities where people are looking for.

<unk> not really to exit the investments, but to find ways for combination growth going forward I will say we have been.

Very disappointed in our own multiple we don't want to over lever the company I'm very happy that our net leverage is now below two times. So I don't want to Jack that up again through an acquisition, meaning we would have to issue stock that.

It's gotten a little better over the last day or two but on a forward basis. Our multiple is ranging between a five or six times that really doesn't afford much in the way of opportunity to say there is an attractive M&A deal out there I think our own stock should appreciate first I have great confidence in our capabilities technology and people.

<unk>.

So while we will remain active interested looking there are just some hurdles we gotta get beyond to consummate anything I hope that's helpful.

No that's great color I really appreciate it and then maybe I can sneak one more in just as you think about North America, we saw pretty good incrementals.

I just I'm wondering is it any specific basin, you can point to that stronger than others right now in terms of what youre seeing in terms of the callout work.

Kind of shorter cycle stuff in North America.

I would have despite probably the mid con the Bakken and for us the northeast a bit and part of that is.

Tunnel.

Self help I'll call. It in terms of expanding our customer base. So that we don't have as much downtime between some this major pad work, it's a more limited market the Permian for us.

We're continuing to work on it as a great opportunity, but it's also very very competitive.

And so I'd say all areas were heavily focused on improvement.

And what we can do better going forward sits in the Permian for us.

Great. Thanks, guys.

Thank you Sean it's Sean.

And once again, if you have a question is zero one on your Touchtone phone once again that zero one if you have a question.

And we have no more questions at this time I'll turn it back to the speakers for final comments.

Fantastic. Thank you for your help today, Daryl we very much appreciate it and thanks to all of you that took the time to dial in these quarterly calls get very tight with a lot of people reporting on the same day. So we appreciate your attention to ours and so we are excited here as Stephen said I'll, just take ghost Roes have a great week.

And everyone.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

Okay.