Q2 2023 Oil States International Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the oil States International second quarter 2023 earnings call I would like to now turn the call over to Ellen Pennington. Please go ahead.

Thank you Marty good morning, and welcome to oil States' second quarter 2023 earnings conference call. Our call today will be led by our President and C. E O Cindy Taylor Lloyd project oil States' executive Vice President and Chief Financial Officer, and Scott Moses oil States' executive Vice President and Chief operating 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.

Her or beyond any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K, along with other SEC filings. This call is being webcast and can be accessed at oil States' website. A replay of the conference call will be available two hours. After the completion of this call.

And we will continue to be available for 12 months I will now turn the call over to Cindy. Thank.

Thank you Alan and good morning, and thank you for joining our conference call today, where we will discuss our second quarter 2023 result, and provide our thoughts on market trends. In addition to discussing our outlook comments are.

Reported second quarter results reflect the diverging trends of activity declines in U S shale basins with offsetting growth coming from offshore and international regions, Our reported revenues and adjusted EBITDA in the second quarter increased from the same period last year, but declined.

Sequentially by 6% and 11% respectively due to the timing of activities in certain U S shale basins and a slow conversion of project projects from our backlog into revenue due to delays in receiving materials.

Spike sequentially weaker second quarter revenues and EBITDA, we confirm our full year guidance of $92 million to $100 million of EBIDTA based upon expected contributions from the ongoing recovery in offshore and international drilling and development.

Our outlook is supported by the backlog growth that we have experienced at our offshore manufactured products segment, which has increased to its highest level. Since the end of 2015, we generated very strong cash flow from operations of $45 million in the second quarter.

Invested $11 million in capital equipment repurchased $3 million of our common stock and repaid all amounts outstanding under our revolving credit facility with cash on hand of $42 million at June 30th and no significant debt maturities until 2026, our financial position.

<unk> remains very strong we remain encouraged by the continued expansion in offshore activity, coupled with future benefits to be gained from our new product introductions. This investment cycle is expected to extend well beyond the next couple of years.

Lloyd will now review our results of operations and financial position in more detail.

Thanks, Andy and good morning, everyone during.

During the second quarter, we generated revenues of $184 million adjusted consolidated EBITDA of $19 million and net income of $1 million or one seven per share.

We reported our fourth consecutive quarter of positive net income.

Our offshore manufacturer product segment generated revenues of $94 million segment EBITDA of $16 million in operating income of $11 million in the second quarter.

Revenues in the second quarter decreased 4% sequentially.

Well our backlog in the segment has steadily increased the cadence of conversion of backlog into revenue was influenced by among other things the timing of material receipts and contractual deliberate terms. However.

However, despite these delays segment EBITDA margin in the second quarter was 17%.

Impaired to 16, 2% in the first quarter.

Backlog totaled $338 million at June 30th an increase of 40% from June 32022.

Current quarter end backlog is at its highest level since the fourth quarter 2015.

Second quarter bookings totaled $106 million.

Yielding a quarterly book to Bill ratio of one one times in a year to date book to Bill Bill ratio of one two times.

Our second quarter bookings were broad based across many product lines and regions.

In our well site services segment, we generated revenues of $65 million segment EBITDA of $11 million and operating income of $5 million in the second quarter.

Segment EBITDA margin was 18% in the second quarter compared to 20% in the first quarter.

Segment revenue and EBITDA declines were primarily driven by slippage of larger customer projects in the north east and the Gulf of Mexico.

In the North East, we completed a large multi well pad project in the first quarter.

With activity on the next large pad not beginning until late in the second quarter.

Activity in the Gulf of Mexico. This quarter was tempered by several third party intervention vessels temporarily out of service due to dry docking.

With one returning to service in the second quarter and one is scheduled to return to service in the third quarter.

On a positive note results for the segments International operations improved sequentially.

And by higher customer activity levels.

In our downhole technologies segment, we reported revenues of $25 million.

An operating loss of $3 million and segment EBITDA of $2 million in the second quarter.

Lower revenues and margins in the quarter were driven by reduced customer demand for perforating perforating product sales reflective of the reduction in frac spreads spreads during the quarter.

Further segment EBITDA included a $1 million noncash provision for excess and obsolete inventory.

During the quarter, we generated cash flows from operations of $45 million in.

And invested $11 million in capex to support future growth.

We repurchased 439000 shares of our common stock for $3 million.

And repay the remaining $5 million in borrowings outstanding under our revolving credit facility.

At June 30, our net debt totaled 93 million, yielding a net debt to total capitalization ratio of 12%.

On a leverage ratio basis net debt to adjusted consolidated EBITDA was at one two times at June 30.

In 2023, we expect to invest approximately $28 million in capital expenditures dependent on market conditions prevailing at the time the capital investments are made.

And certainly we'll offer some market outlook and concluding comments.

Thank you the tide commodity markets of 2022 took a turn in our late 2023 softening demand and the resultant elevated inventories caused oil prices to drop during the first quarter of 2023.

This was followed by a strong reaction by the OPEC plus countries with announced production cuts global oil and gas inventories are normalizing and are now within their five year seasonal average for crude oil that remain above the five year averages for natural gas leading to lower prices year over year there.

About tempering expectations for growth in drilling and completion spending on U S. Land activities. However, we have begun to see an inflection upward in international and offshore markets, which will further support our product and service offerings in regions outside of the United States.

Revenues in our offshore manufactured products segment are expected to continue to grow in the second half of 2023, given strong order flow and increase levels of backlog along with ongoing short cycle product demand given the material delays experienced in the second quarter, we will see some.

Top line improvement in the third quarter, but substantial revenue and EBITDA improvement for this segment has pushed to the fourth quarter of this year, we expect our well site services and downhole technologies segments to continue to perform in line with market activity indicators, which had softened a bed for U S.

Our land activities, but do appear to be bottoming, we remain focused on optimizing our operations and pursuing profitable activity in support of our global customer base as market opportunities unfold, both in the United States and in International markets. We will continue to focus on core areas.

Expertise with the deployment of our recently enhanced equipment to further differentiate our product and service offerings now I would like to offer some concluding comments initially the industry responded to higher commodity prices with accelerated shorter cycle investments and the.

On a stage, which the industry clearly benefited from in 2022, we are now experiencing an increase in investments and long lead time projects in international markets and deepwater basins around the world based upon the longer range outlook for commodity prices.

Strong macro fundamentals are pointing to a multi year up cycle, which will drive growth in revenues earnings and free cash flow generation.

Our core competencies are well entrenched in the markets, we serve and we continue to bid on potential opportunities supporting our traditional subsea floating and fixed production systems drilling and military customers. While also bidding to support multiple new customers and projects involve.

In development, such as subsea minerals gathering fixed and floating offshore wind developments and other renewable and clean Tech energy systems globally. These opportunities create strong potential for us to expand our product offerings and revenue base oil states will can.

10, you 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 market, leading technologies will extend the runway for sustainable.

Competitive advantage.

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

The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad, if at any point you'd like to withdraw from the queue. Please press star one again.

We will now take a moment to compile a roster.

We have a question from the line of Steven Kent Garro from Stifel. Please go ahead.

Yeah.

Thanks, Good morning, everybody.

Good morning.

So I think.

It starts with you when we think about your full year guidance and I sort of sort of bridge myself from a first half to get to the full year guidance.

I might have missed a little bit of this in the prepared comments, but I I imagine based on the macro in your commentary that it's it's mostly driven by offshore manufactured products.

Far as the second half a bridge to getting to those numbers is that am I thinking about that right.

You're absolutely correct, you know, it's easier to see that runway with the backlog development that we have and we got it scheduled all of those backlog and turns by quarter and so that one we felt pretty confident about and obviously, we've had softer rig count down about 13 per.

And on land with completion count down about 8% or so and so we're really not projecting a recovery off of that throughout the second half of the year at this point in time, although based on customer conversations we do sense that there's really not a leg down from here.

In our view and to some degree you are softer Q2 for well site and I could say is somewhat timing in the sense that we had a large customer in the northeast. We went from a 12, well large multi well pad and then you'd have transition times between a new pads. So.

Depends on how you look at it and now the next pad did shift from my 12, well do a six well. They all I can say is that just timing only or is it indicative of a little bit of a slowdown of customer activity and then in the golf. We had some third party intervention vessels that were down for dry docking and those things happen. So there.

A combination of things there, but nonetheless I have to look at the activity indicators, which have softened on land in the way we forecast from here is essentially kind of flat, meaning there could be a little market softening, but the two things I mentioned do recover I E. The intervention vessels go back to work and we'll go back to work on other.

<unk> pads in the northeast and so and then we've got some new product introductions, but on balance. We're just generally saying kind of flat from here, which affect both our downhole technologies segment as well as our well site segment.

Actually just following up on that is the.

In the second quarter some of those some of those headwinds.

Mixture timing related did they weigh on margin I guess.

Should we think about the second half EBITDA margins and we're all site even in a flat revenue environment recovering a little bit.

Yeah, that's a very fair assessment, because anytime you do a high end large multi well pad the margins are definitely better because the intensity of the equipment onsite is obviously higher than cost absorption is better and then anything we do in the Gulf of Mexico tends to come forward at accretive margins.

And so you're absolutely right, our EBITDA margins for our well site.

The decline from the first quarter, just because of both mix and a little bit hit on the top line.

Thanks.

You mentioned kind of plateauing of activity potentially it sounds like from from some others and even one Youre wrestling, a competitor said something yesterday about the fourth quarter actually potentially being seasonally stronger because there have some visibility on improvement already or are you seeing anything.

The conversations that suggest I mean, I know, we think we're bottoming, but anything concrete.

Can talk about which supports that I know oils backup the box so that helps but anything could.

To give comfort that we're seeing a bottom.

Well I, yeah ours are based on customer conversations and I think anything in this world for US comes back to what regions are you in were broad base. What customers are you working with and what are their individual plans and as you know are you know a lot of the quote unquote softening in the first half of this year came from private.

Releasing rigs more so than public our customers held up fairly well I would say in completion services and these other things where more transitory I will say that in the case of G. O. Some of our wireline customers do work, probably more weighted to privates and I would say they were hit.

Disproportionately hard in the quarter AR because of that softening and I'll tell you, though you know where we're not a pressure pumper and therefore, we don't really have committed work too far out I mean, we'll have indications from our major customers and that's where my feel my gut instincts tell me worked hit a bottom.

In terms of activity, but to say I can give you concrete evidence that would be a stretch.

Okay. Thanks, and then and if you don't buy one more you had a.

A very strong second half 'twenty to have orders, especially in the fourth quarter I think a very good start to this year first half when you when we think about the the pricing slash margins embedded in those last four quarters of orders is there anything we can read into.

Margin progression in the offshore products business offshore manufactured product business in the back half of the year.

Yeah, you know the key for us you've seen continual margin improvement as we built that backlog both from a mix perspective.

And you know and it cost absorption I believe we were at I'm doing this off the top of my head I think our EBITDA margins in Q1 were 16, 2% and they accreted up to 17% on a little bit lower revenues in Q2, so as we progress.

Holding those margins are improving than is reasonable only with the caveat. It does depend on the mix in backlog and I would caution you a little bit on Q3, because a lot of our backlog billed was around our standard connectors and I'll just remind you we have some third party pass through revenue there and so that.

That mix is not necessarily accretive overall the margins are obviously good at the end of the day. So there's always a little bit of a hedge there for us, but the trends of topline growth and the mix is good and our backlog should lend itself to strong margins.

Great. Thank you for the color.

Thank you Steven.

Good talking to you.

Again. This is as a reminder, the floor is now open for your questions to ask a question press star one on your telephone keypad.

Yeah.

Okay.

Yeah.

Okay.

I would now like to turn the call over to Cindy Taylor for closing remarks.

Alright, Thank you Monday, Bob realized we picked a very busy day to hold this call. This morning, and so I appreciate those of you that have.

<unk> dialed in we do look forward to further conversations as we progressed through the quarter I Hope you have a great earning season throughout the rest of the next couple of weeks and we will talk to all of you soon.

Thank you.

Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.

Okay.