Q3 2023 Oil States International Inc Earnings Call
Good day, everyone and welcome to the oil States' third quarter 2023 earnings call. Today's call is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one on your telephone keypad to remove your.
From the queue. It is star one again.
I'd now like to turn the conference over to Ellen Pennington. Please go ahead ma'am.
Thank you Lisa good morning, and welcome to oil States' third quarter 2023 earnings conference call. Our call today will be led by our President and C. E O Sydney Taylor and Lloyd hijacked oil States' executive Vice President and Chief Financial Officer before we begin we would like to caution listeners regarding forward book.
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 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 for two hours. After the completion of this call and we will continue to be available for 12 months I'll now turn the call over to Cindy.
Thank you Alan and good morning, and thank you for joining our conference call today, we will discuss our third quarter 2023 results and provide our thoughts on market trends. In addition to discussing our company's specific outlook comments.
Our third quarter results benefited from growth in offshore and international spending with significant sequential and year over year increases in offshore project activity and backlog conversion.
However, our quarterly performance was tempered by an industry wide decline in U S well completions, which has been ongoing since the first quarter of 2023, we believe U S activity declines were triggered by weaker commodity prices in effect earlier this year.
Third quarter consolidated revenues and adjusted EBITDA increased sequentially by 6% and 23%, respectively, driven by higher offshore and international activity.
Year over year consolidated revenues and adjusted EBITDA grew by 3% and 7% respectively.
The sequential and year over year improvements reflect significant project driven growth within our offshore manufactured products segment, where revenues increased 18% sequentially and 16% year over year totaling 111 million.
In the third quarter, the segment's highest revenue level since the fourth quarter of 2016.
Segment backlog increase for a fifth consecutive quarter totaling $348 million as of September 30th.
We are benefiting from our customers increased investments and traditional and alternative energy offshore projects outside the United States. We received two notable project awards in the third quarter, including a production facility equipment order desk.
And for Brazil, and a contract for our Marlin deep sea mental riser system designed for use in harvesting C bed minerals at extreme water depth, the segment's bookings totaled $129 million, yielding a quarterly book to bill ratio of one.
0.2 times.
Our continued investments in technology and innovation were recognized earlier this month by golf energy with our active seat gate valve receiving the 2023 golf Energy Information Excellence Award for best production technology.
It's proprietary valve technology provides operators with exceptional sealing performance, while substantially reducing the amount of heavy grease used during valve operations and personnel involved in intervention at the wellhead widget.
We generated cash flow from operations of $14 million in the third quarter.
Invested $2 million and net capital equipment and have no short term debt outstanding with cash on hand totaling $53 million at September 30th and no significant debt maturities before 'twenty 'twenty six our financial position remains very strong.
We expect to further enhance our liquidity position and reduce our net debt in future quarters.
We remain encouraged by the continued expansion in offshore activity, coupled with future benefits to be gained from our new product introductions, including our managed pressure drilling system.
Our Marlin deep sea mineral riser system, and our active seat gaped out technology among others.
International offshore focused investment cycle is expected to extend well beyond the next couple of years as it relates to U S land based activity with currently improved commodity pricing, we expect U S activity to recover in 2024 from current law.
Levels Lloyd will now review our results of operations and financial position in more detail.
Thank you Sydney and good morning, everyone.
During the third quarter, we generated revenues of $194 million adjusted consolidated EBITDA of $23 million and net income of $4 million or seven cents per share.
Reported third quarter net income included facility consolidation charges of $1 $6 million.
Which were incurred as we prepare selected facilities for sale.
This represents our fifth consecutive quarter of positive net income.
Our offshore manufactured products segment generated revenues of $111 million.
Segment, EBITDA of $24 million and operating income of $18 million in the third quarter.
Revenues reported in the third quarter or at the highest level since the fourth quarter of 2016.
During the third quarter, we recorded charges of $1 $6 million.
Associated with our ongoing consolidation and relocation of certain manufacturing and service locations in an effort to gain operational efficiencies and reduce future cost.
Adjusted segment, a segment EBITDA margin in the third quarter was 22% comp.
Compared to 17% in the second quarter.
Regarding our facility planning, we consolidated certain facilities in Houston.
We're in the process of strategically relocating our Asian manufacturing and service operations from Singapore to Baton Indonesia.
Accordingly, we have reclassified two facilities as held for sale assets at September 30.
Given these plans our capital expenditure investments for 2023 are now expected to total approximately $35 billion.
As a result of our plans to purchase land and begin construction on a new facility in Baton Rouge.
Proceeds from the sales of our <unk> facilities in Singapore and Houston.
Which are expected to close in late 2023 early 2024 are.
Our expected range between $35 million and $40 million exceeding the cost associated with the new facility in Baton Rouge.
Backhaul backlog increased sequentially for a fifth consecutive quarter totaled totaling 348 million at September 30th.
An increase of 35% from September 32022.
The current quarter and backlog is at its highest level since the fourth quarter of 2015.
Third quarter bookings totaled $129 million yielding.
Yielding a third quarter and year to date book to Bill ratio of one two times.
In our well site services segment.
We generated revenues of $60 million operating income of $3 million and adjusted segment EBITDA of $10 million in the third quarter.
Adjusted segment EBITDA margin was 16% in the third quarter.
Compared to 18% in the second quarter.
In our downhole technologies segment, we reported revenues of $23 million and operating loss of $4 million, while adjusted segment EBITDA was essentially breakeven for the quarter.
Lower revenues and margins in the quarter were driven by reduced customer demand for completion products and lower manufacturing volumes driven by the continued reduction in frac spreads coupled with competitive market conditions experienced during the third quarter.
During the third quarter, we generated cash flows from operations of $14 million and invested $2 million of net capex to support future growth.
As of September 30, no borrowings were outstanding under our revolving credit facility and amounts available to be drawn totaled $85 million, which together with cash on hand resulted in available liquidity of $137 million.
Now Sony will offer some market outlook and concluding comments.
Thanks Lloyd.
Commodity markets of 2022 took a turn in early 2023 softening global demand and 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 an ounce production.
Actual cuts, which has resulted in significantly improved commodity pricing with Brent and W. T are averaging $87 per barrel and $92 per barrel, respectively. In the third quarter. However, U S land based activity has thus far lag the commodity price improves.
Matt.
Global oil and gas inventories are normalizing and are now below their five year seasonal average for crude oil, but remain above the five year average for natural gas leading to lower natural gas prices year over year, thereby tempering expectations for growth in drilling and completion spending on U S land.
Activities for the balance of 2023.
We are executing well given the current market environment and our growing revenues adjusted EBITDA and free cash flow on the strength of our offshore and international operations revenues in our offshore manufacturer product segment are expected to continue to grow as a result of strong order flow in.
<unk> levels of backlog and execution of major project milestones, we expect our well site services and downhole technologies segments to continue to perform in line with market activity indicators, which have softened for U S land activities in the second half of 2020.
Three but do appear to be bottoming with expected improvements in 2024 as support is gained from my strong commodity price environment, 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 U S and in international and offshore markets. We will continue to focus on core areas of expertise with the deployment of our recently enhanced equipment to further differentiate our product and service offerings now I would like to.
To offer some concluding comments.
Initially the industry responded to higher commodity prices with accelerated shorter cycle investments in the United States, which the industry clearly benefited from in 2022 and 2023, we are experienced an increase in investments in long lead time project.
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 should 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 involved in development, such as deep sea minerals gathering fixed and floating offshore wind developments carbon capture and storage geothermal applications and other renewable and clean Tech energy opportunities. These new energy.
<unk> opportunities create strong potential for us to expand our product and service offerings and our revenue base 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 market, leading technologies will extend the runway for a sustainable competitive advantage that completes our prepared comments Lisa would you open up the call for questions and answers at this time.
Yes. Thank you as a reminder, everyone that is star one to ask a question we will take our first question from Stephen <unk> with Stifel.
Thanks, Good morning, everybody.
Hi, Good morning, it's David.
So thanks for all the color just what I wanted to start with.
Offshore manufactured products, where.
The margins were worse were stellar in the quarter.
I imagine some of that is mix and execution.
Where should we think about sort of the range of outcomes for our MP margins as we go through <unk> into next year.
Yeah, you're right our margins were very strong as you know we've kind of guided to high teens EBITDA margins over the course of a longer period of time on a single quarter basis. They were strong and we had some strong project execution, we talked about our major project work. We also had good <unk>.
Contributions from higher service revenues, which as you know you you've commented on mix our service revenues oftentimes carry a higher margins and so there are several positive factors that lifted.
You know our overall margin profile and of course part of it is higher revenue base better absorptions. So a lot of things went right in the quarter I do as we look out I don't want you to think it's going to be north of 20% every quarter, but we are averaging up every single quarter generally speaking.
<unk> on our overall margins in that segment and you've seen that progression throughout the year I'm looking at my schedule. We were about for this particular segment, 16% in Q1 17 in Q2 again a bit of an anomaly at 22% in Q3, but we're looking for those high teens margins.
In Q4 and moving forward if that's helpful.
That is helpful and then.
Because you also.
The same segment.
The backlog has been growing I think you were up 13% from the end of last year are you.
Is that a reasonable gauge of how the project driven business should act a year out so when we start to think about 'twenty four potential revenue growth in this segment at least in the projects piece is that a reasonable guide or a change in kind of the way the backlog is being realized.
You know it is major project driven at this point in time, obviously in terms of backlog and there's always going to be puts and takes because of timing, but a lot is led by our subsea technology right now, particularly tied to production infrastructure and a lot of that is com.
From Brazil in Guiana, that's probably no surprise now there'll always be ebbs and flows quarter to quarter and that award activity number one but what we're trying to do is bolster that base level of award activity by new product introductions like our MPD systems and we've got.
In the very early stages of contracts there in place and were seeing a significant interests going forward. So you know I'll always kind of hedge a bet and say, it's hard to predict quarter by quarter, but in totality. We're looking for a book to bill of one or better on again much her.
Our revenues every quarter. So I think that's kind of my overall I'll lay out my specific guidance on book to Bill ratios. Once we go through the planning process.
Process on our next earnings call, but again higher revenues demand higher bookings just to stay in that one to one but theres nothing out there that tells me we should not be able to do that over the course of time, but again, there may be ups and downs quarter by quarter, depending on timing of our customers letting.
Those awards.
Great. Thank you and then just one one quick one your you.
You didn't I don't think you mentioned sort of this year's full year guide, which would kind of also guy here fourth quarter.
But when we think about the fourth quarter I mean, I think the consensus is like 29, 29, and a half million does that is that a reasonable ballpark given what we know about the U S land piece right now I know there's seasonality.
<unk>.
It's hard to predict.
Yeah, I will tell you I didn't isolate on the fourth quarter, but our annual first call consensus was about 91, and a half million dollars and what I do see is that that would be we had a I mean, let's face. It we had a weaker third quarter on U S land based activity now thankfully.
It was more than offset by strength in our international and offshore the real as I always say it doesn't do any good to get the market guidance, unless you've got better knowledge and information than the market what I can't tell what I do know is inventories crude inventories are much lower than they were earlier this year about.
60 million barrels lower and while Nat gas is still above the five year average is compressed a lot. The strip has improved the question you've got to ask yourself is are we really going to get a U S land based lift in Q4 with the holidays or is that going to push into 2024.
I would say based on years of experience in this industry I would not count on a lift on U S land based activity around Thanksgiving and Christmas, but 2020 for looks very good and again, you know crude prices I don't know where they bottomed in the first half this year, but they were certainly in the <unk>.
$70 range now they said mid eighties and outlook for next year are over 90. So tells may commodities are improved natural gas I think lags a bit but the strip is better and you know you you're forecasting about a 20% increase in Nat gas exports, both driven by LNG.
As well as exports to Mexico. So the commodity fundamentals tell me globally, but certainly U S land will benefit 2024, but I think embedded in fourth quarter is an improvement on U S land that I would not necessarily be comfortable with.
Thank you.
[laughter].
We will take our next question from Jim Rollyson with Raymond James.
Good morning, Cindy and Lloyd.
Good morning.
On the move from Singapore to the Com and just kind of some of the general consolidation activities Youre looking at maybe frame up how to think about.
The ultimate benefit to you you mentioned the cost.
Which ultimately are paid for by the sale of existing facilities, but just how do we think about that is it or is it a margin improvement just kind of how to.
Think about why you're making the moves in terms of what that is ultimately going to drive from a margin standpoint.
No clearly it is.
Geared around margin improvement and there's these kind of independent things, but the real southeast Asian mood is into a lower cost labor manufacturing environment into baton and we will keep a presence obviously in Singapore, but a lot of the work on the.
The machining and manufacturing side will be done in Bhutan and the goal. There is absolutely to one increase the top line our ability to bad has been hampered by higher cost in our Singapore operations. So expand the revenue and improve the margin that is kind of the subset of southeast Asia.
In doing so we will have facility proceeds they won't fully offset the new facility in baton, but they will certainly help separately, we have multiple facilities all over Houston, which I think you know and we've already been almost idled and one of those facility Theres a law.
Lot of interest in that facility, we've had multiple bidders come in and so we feel comfortable saying, we expect to sell that in Q4 or early 2020 for those proceeds quite frankly, just become corporate proceeds are to us and so the sum of both Singapore and.
And well exceed the new investment that we will make in baton.
Perfect.
Helpful color, there and then downhole technologies.
Obviously margins there just kind of fell prey, so a weaker U S completion activity.
The activity bottoms kind of in this quarter and we start to see that recovering next year as we were talking about a minute ago, how do we think about the recovery in margins there.
Is there a certain revenue level that you generally think of that you need to get EBITDA back to positive territory or is there anything on the from an internal standpoint, you can do on the cost structure or what are you guys carrying kind of higher cost. Because this is a somewhat temporary are viewed as a temporary dip just kind of trying to think about how that segment.
He is out over the next few quarters, if we actually see that recovery. We're all looking for next year.
Yeah, Jim I want to be clear are you talking about wealth side or G. O do downhole. Okay. I just wanted to make sure. So we were basically essentially breakeven.
At the downhole technologies.
Segment for Q3, what we see two major things need to happen and just kind of do explain it you know you see a quite a dichotomy in other service companies. This quarter, whether you are contracted long on some of your I E. The pressure pumper that people that had contra.
<unk> in place versus the spot market perform very differently. This business as I call out products sell businesses and a lot of our wireline customers are spot based providers to the market. So several frac fleets go down which means the demand for the downhole tools also goes down and so.
It's a combination but the biggest thing in that particular business as top line is revenue at this point in time now that being said, we are making investments around newer technologies. So we yeah. We have the engineering cost and R&D cost that we did not cut there's no reason to cut that in a kind of a soft <unk>.
Water because.
Because we believe in that business for the long term, but the drivers that will improve that going forward of course, we need increased a recovery in activity, particularly spot based activity.
And some of the improved technology that we're going to bring to market in 2024 will help domestically and of course, we are trying to expand our international penetration as well those are the major initiatives to bring enhanced profitability of that business and as we talked about at our board.
Meeting yesterday to your question it doesn't take much you know two to four frac fleets to follow we will have a good topline impact and so we're confident that we can turn that business to enhance profitability in 2024.
Unknown Executive: Good day, everyone, and welcome to the Oil States Third Quarter 2023 Earnings Call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise.
Perfect I appreciate the color.
Unknown Executive: After the speech is remarked, so it will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad to remove yourself from the queue. It is star one again.
Thanks, Jim.
Yeah.
We'll take our next question from Luke Lemoine with Piper Sandler.
Hey, good morning, Luke 98.
Ellen Pennington: I would now like to turn the conference over to Ellen Pennington. Please go ahead, ma'am. Thank you, Lisa.
Very nice orders in <unk> and O N E Merlin ordered in the production facilities water.
Cynthia Taylor: Good morning and welcome to Oil States Third Quarter 2023 Earnings Conference Call.
At least 50 million, each which leaves a lot of room for various other orders in for Q2.
Cynthia Taylor: Our call today will be led by our president and CEO, Cindy Taylor and Lloyd Hajdik, 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 are 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 factors that affect our business, including those risks disclosed in our Form 10K, along with other SEC filings.
Can you maybe talk about kind of what comprises the rest of that mix and then.
Maybe what you see for a more standard orders over the next six to 12 months outside of kind of large things like Maryland at our production facility.
Yeah, I mean, we've always said, we get a lot of broad based almost recurring type orders and those are on our high end conductor casing connectors is an example of routine orders we've got a very good fixed platform and crane business line that enjoys strong.
Unknown Executive: This call is being webcast and can be accessed at Oil States website. A replay of the conference call will be available for two hours after the completion of this call and will continue to be available for 12 months.
Orders, we have military work et cetera.
Hard to isolate we typically just call out larger orders, which are the two but then there's always going to be a lot of you know our <unk> valves are production valve order technologies that are recurring and to some degree short cycle orders as well. So it's kind of hard for me to glom onto any one.
Cynthia Taylor: I'll now turn the call over to Cindy. Thank you, Ellen. Good morning and thank you for joining our conference call today where we will discuss our third quarter 2023 results and provide our thoughts on market trends in addition to discussing our company-specific outlook comments. Our third quarter results benefited from growth in offshore and international spending with significant sequential and year-over-year increases in offshore project activity and backlog conversion. However, our quarterly performance was tempered by an industry wide decline in U.S, well completions, which has been ongoing since the first quarter of 2023.
Major driver I'd say, they're broad based both product line and geography quite frankly.
Okay got it that's helpful. Thank you.
Thanks Luke.
As a reminder, everyone that is star one to ask a question we will take our next question from John Daniel with Daniel Energy Partners.
Hey, Cindy and Lloyd how are you.
Great how are you John.
I am well.
Well I got a question can you referenced military customers I'm, just curious any signs.
Cynthia Taylor: We believe U.S, activity declines were triggered by weaker commodity prices in effect earlier this year. Our third quarter consolidated revenues and adjusted EBITDA increase sequentially by 6%, and 23% respectively driven by higher offshore and international activity. Year-over-year consolidated revenues and adjusted EBITDA grew by 3%, and 7% respectively.
Orders from that group are poised to rise just given current geo political given the climate.
We are we have a lot of bidding and quoting around that I can't necessarily correlate it to the geopolitical environment, but they are on the rise quite frankly in a lot of times. These orders do come in large batches and can span multiple years and so it is my expectation to see an IND.
Kris and military ordering again.
Lloyd Hajdik: The sequential and year-over-year improvements reflect significant project-driven growth within our offshore manufactured product segment, where revenues increased 18% sequentially and 16% year-over-year, totaling $111 million in the third quarter, the segment's highest revenues level since the fourth quarter of 2016. Segment backlog increased by a fifth consecutive quarter totaling $348 million as of September 30th. We are benefiting from our customers increased investments in traditional and alternative energy offshore projects outside the United States.
This is an adaptation of core technology, we've used in oil and gas.
Particularly with some of our elastomer influx joint type technology used in military applications and we've we've done so for decades, but to your point.
There is fundamental grounds for those to improve.
Okay, and then here's the dumb Guy a question for me because I don't know much about seabed minerals, but what's the opportunity set there.
Harvest enough.
Oh I think they are incredibly robust wherein the extreme early stages of that and so I think we've talked before and there's a lot of media and press around an area called the Clarion Clippard zone, which is I always say you know a lineman would say middle of nowhere deepwater Pacific.
Lloyd Hajdik: We received two notable project awards in the third quarter, including a production facility equipment order destined for Brazil, and a contract for our Marlin DC mineral riser system designed for use in harvesting seabed minerals at extreme water depth. The segment's bookings totaled $129 million, yielding a quarterly book to bill ratio of 1.2 times. Our continued investments in technology and innovation were recognized earlier this month by Gulf Energy with our active seat Gate Valve receiving the 2023 Gulf Energy Information Excellence Award for Best Productions Technology.
And but that is governed by an international seabed authorities in it that is slower to lift as opposed to sovereign.
International waters, where we are getting more bidding opportunities simply because one country controls the permitting in those areas and that is the case with the order. We received in this quarter. There are other countries that are actively looking.
At these opportunities so I think sovereign controlled international waters will move faster than possibly possibly you know the clariant <unk> zone, but these areas are extraordinarily resource rich with the metals and minerals required particularly for.
Lloyd Hajdik: This proprietary Valve Technology provides operators with exceptional ceiling performance while substantially reducing the amount of heavy grease used during valve operations and personnel involved in intervention at the well head. We generated cash flow from operations of $14 million in the third quarter, invested $2 million in net capital equipment and have no short-term debt outstanding. With cash on hand totaling $53 million that September 30th and no significant debt materities before 2026, our financial position remains very strong.
Alternative energy transition battery technology.
Wind et cetera solar. So you know you have to access the resource and then new side because right now there's a lot of countries that fail highly dependent on China for these metals and minerals and they they have a huge percentage of global supplies. So diversification is front end.
Center, and then energy security and advancement of your own country's internal needs is a focus for these countries that tells me unequivocally youre going to advance it, particularly if it's in your sovereign control.
Lloyd Hajdik: We expect to further enhance our liquidity position and reduce our net debt in future portals. We remain encouraged by the continued expansion and offshore activity coupled with future benefits to be gained from our new product introductions, including our managed pressure drilling system, our Merlin deep sea mineral riser system, and our active seat Gate Valve technology among others. This international offshore focused investment cycle is expected to extend well beyond the next couple of years.
And I will say in addition to that there's increasing environmental concerns around open pit mining around the world and so there has to be all types of environmental assessments on the seabed, but it seems like there will be less environmental.
Concerns and consequences with this activity then there will be with our open pit mining in order to grow the energy transition right.
Alright.
Be willing to hazard, a guess as to how many systems for that five to seven years could be an opportunity for you.
Cynthia Taylor: As it relates to U.S, land-based activity with currently improved commodity pricing, we expect U.S, activity to recover in 2024 from current levels.
I. Unfortunately, I can't do that I wouldn't have thought I'd worth a try had theirs yeah.
Lloyd Hajdik: Lloyd will now review our results of operations and financial positions in more details. Thanks, and good morning, everyone. During the third quarter, we generated revenues of $194 million, adjusted, consolidated EVA of $23 million, and net income of $4 million or $0.7 per share. Reported third quarter net income included facility consolidation charges of $1.6 million, which were incurred as we prepare selected facilities for sale. This represents our fifth consecutive quarter of positive net income.
Hey, John also pointed out on our website, we have an animation of deep sea mineral riser system in operation. So.
Urge you to go take a look at that.
I'll do that thanks, guys for including me.
Thanks, John.
And there are no further questions at this time I would like to turn the call back over to Cindy Taylor for closing remarks.
Thank you so much thanks for joining us today and I appreciate the interest that's always it's a busy busy day with a lot of companies reporting I will leave my thoughts that we're headed into kind of a multi year improved environment for the conversion.
Lloyd Hajdik: Our offshore manufactured product segment generated revenues of $111 million, adjusted segment EVA of $24 million, and operating income of $18 million in the third quarter. Revenue is reported in the third quarter at the highest level since the fourth quarter of 2016. During the third quarter, we recorded charges of $1.6 million associated with our ongoing consolidation and relocation of certain manufacturing and service locations in an effort to gain operational efficiencies and reduce future costs.
<unk> oil and gas business led by international and deepwater I, certainly think the U S will be robust last year at the U S land activity robust next year, as well, which sets it up for a fundamentally strong outlook for our company and for that of.
Others in the space I do think that for our size, we are differentiated because of the higher technology products.
Products that we've had working in deepwater basins around the world for many decades quite frankly, and we are doing and making a lot of inroads towards introducing those technologies and transitioning those into new applications, which I think again for our size is a bit unique and you're seeing that really.
Lloyd Hajdik: Adjusted segment at segment EVA Dow margin in the third quarter was 22%, compared to 17% in the second quarter. Regarding our facility planning, we consolidated certain facilities in Houston and are in the process of strategically relocating our Asian manufacturing and service operations from Singapore to Patam Indonesia. Accordingly, we have reclassified two facilities as health or cell assets at September 30. Given these plans, our capital expenditure investments for 2023 are now expected to total approximately 35 million dollars as a result of our plans to purchase land and begin construction on a new facility in Patam.
Not just talked about but realized in our revenue stream right now and in our backlog and bookings and so I hope that translates into.
Our strong growth from our company and therefore strong return returns for our shareholders I do hope you have a good remainder of the earnings season, and we will be available to.
Work with you on any follow up questions you might have.
<unk>.
Okay.
And that concludes today's presentation. Thank you for your participation and you may now disconnect.
Lloyd Hajdik: Proceeds from the sales of our facilities in Singapore and Houston which are expected to close in late 2023 or early 2024 are expected to range between 35 million and 40 million dollars, exceeding the costs associated with the new facility in Patam. Backlog increased sequentially for a fifth consecutive quarter, totaling 348 million at September 30th, and increased a 35% from September 30, 2022. The current quarter end backlog is at its highest level since the fourth quarter of 2015.
Okay.
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Lloyd Hajdik: Third quarter bookings total $129 million, yielding a third quarter and year-to-date book-to-build ratio of 1.2 times. In our well-site services segment, we generated revenues of $60 million operating income of $3 million and adjusted segment EBITDA of $10 million in the third quarter. Adjusted segment EBITDA margin was 16% in the third quarter compared to 18% in the second quarter. In our down-hole technology segment, we reported revenues of $23 million and operating loss of $4 million while adjusted segment EBITDA was essentially break-even for the quarter.
Okay.
Yeah.
Yes.
Uh huh.
Yeah.
Okay.
Lloyd Hajdik: Lower revenues and margins in the quarter were driven by reduced customer demand for completion products and lower manufacturing volumes driven by the continued reduction in fracks breads, coupled with competitive market conditions experienced during the third quarter. During the third quarter we generated cash flows from operations of $14 million and invested $2 million in net cat-backs to support future growth. As of September 30, no barings were outstanding under our evolving credit facility, and amounts available to be drawn total $85 million, which together with cash on hand resulted in available liquidity of $137 million.
Okay.
Uh huh.
Okay.
Right.
Yes.
Okay.
Cynthia Taylor: Now Sony will offer some market outlook and concluding comments. Thanks Lloyd. The tight commodity markets of 2022 took a turn in early 2023. Softening global demand and resultant elevated inventories caused world 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, which has resulted in significantly improved commodity pricing with Brent and WTI averaging $87 per barrel and $82 per barrel respectively in the third quarter.
Cynthia Taylor: However, US land-based activity has thus far lagged the commodity price improvement. Global oil and gas inventories are normalizing and are now below their five-year seasonal average for crude oil but remain above the five-year average for natural gas, leading to lower natural gas prices year-over-year thereby tempering expectations for growth and drilling and completion spending on US land activities for the balance of 2023. We are executing well given the current market environment and are growing revenues, adjusted EBITDA and free cash flow on the strength of our offshore and international operations.
Cynthia Taylor: Revenues in our offshore manufacturer product segment are expected to continue to grow as a result of strong order flow, increased levels of backlog, and execution of major project milestones. We expect our well-site services and downhill technology segments to continue to perform in line with market activity indicators, which is softened for U.S, land activities in the second half of 2023, but do appear to be bottoming with expected improvements in 2024 as support is gained from a strong commodity price environment.
Cynthia Taylor: 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 U.S, and in international and offshore markets, we will continue to focus on core areas of expertise with the deployment of our recently enhanced equipment to further differentiate our product and service offerings.
Cynthia Taylor: Now I would like to offer some concluding comments. Initially, the industry responded to higher commodity prices with accelerated shorter cycle investments in the United States, which the industry clearly benefited from in 2022. In 2023, we are experiencing increase in investments in long lead-time projects in international markets and deep water basins around the world based upon the longer-range outlook for commodity prices. Strong macro fundamentals are pointing to a multi-year upcycle which should drive growth in revenues, earnings, and free cash flow generation.
Cynthia Taylor: Our core competencies are well entrenched in the markets we serve, and we continue to bid on potential opportunities supporting our traditional sub-sea floating and fixed production systems, drilling and military customers, while also bidding to support multiple new customers and projects involved in developments, such as deep sea minerals gathering, fixed and floating offshore wind developments, carbon capture and storage, geothermal applications, and other renewable and clean tech energy opportunities. These new energy transition opportunities create strong potential for us to expand our product and service offerings and our revenue base.
Cynthia Taylor: Well, states will continue to conduct safe operations and will remain focused on providing technology leadership in 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.
Cynthia Taylor: That completes our prepared comments.
Unknown Executive: Lisa, would you open up the call for questions and answers at this time? Yes, thank you. As a reminder, everyone, that is Star One to ask a question.
Stephen Gengaro: We'll take our first question from Stephen Gengaro with Steeple. Thanks. Good morning, everybody. Good morning, Steve. So, thanks for all the color. Just what I wanted to start with was the offshore manufacturing products. The margins were stellar in a quarter. And I imagine some that's mixed in execution.
Cynthia Taylor: How should we think about sort of the range of outcomes for for OMP margins as we go through 4Q and into next year? You're right. Our margins were very strong. As you know, we've kind of guided to high teens, EBITDA margins over the course of a longer period of time on a single quarter basis. They were strong and we had some strong project execution. We talked about our major project work. We also had good contributions from higher service revenues, which as you know, you commented on MIX service revenues oftentimes carry higher margins. And so there are several positive factors that listed our overall margin profile. And of course, part of it is higher revenue based, better absorption. So a lot of things went right in the quarter.
Cynthia Taylor: As we look out, I don't want you to think it's going to be north of 20% every quarter. But we are averaging up every single quarter, generally speaking, on our overall margins in that segment. And you've seen that progression throughout the year. I'm looking at my schedule. We were about for this particular segment, 16% in Q1, 17, and Q2. Again, a bit of an anomaly at 22% in Q3, but we're looking for those high teens margins in Q4 and moving forward.
Stephen Gengaro: If that's helpful. That is helpful.
Cynthia Taylor: And then, excuse me, also on the same segment, the backlog has been growing. I think you're up 13% from the end last year. Are you, is that a reasonable gauge of how the project-driven business should act a year out? So when we sort of think about 24 potential revenue growth in the segment, at least in the project's piece, is that a reasonable guide or a change in kind of the way that the backlog is being realized?
Cynthia Taylor: You know, it is major project driven at this point in time, obviously, in terms of backlog. And there's always going to be puts and takes because of timing. But a lot is led by our sub-sea technology right now, particularly tied to production infrastructure. And a lot of that is calm from Brazil and Guiana. That's probably no surprise. Now, there'll always be ebbs and flows quarter to quarter in that award activity. Number one, but what we're trying to do is bolster that base level of award activity by new product introductions, like our MPD systems. And we've gotten the very early stages of contracts there in place. And we're seeing significant interest going forward.
Cynthia Taylor: So, you know, I'll always kind of hedge a bet and say it's hard to predict quarter by quarter. But in totality, we're looking for a book to bill of one or better on, again, much higher revenues every quarter. So, I think that's kind of my overall, I'll lay out my specific guidance on book to bill ratio once we go through the planning process on our next earnings call. But again, higher revenues demand higher bookings, just a sustain that one to one. But there's nothing out there that tells me we should not be able to do that over the course of a time.
Stephen Gengaro: But again, there may be ups and downs quarter by quarter, depending on timing of our customers letting those awards. Great. Thank you.
Cynthia Taylor: And then just one one quick one to your you didn't I don't think you mentioned sort of this year's full year guy, which would kind of also guy to the fourth quarter. But when we think about the fourth quarter, I mean, I think the consensus is like 29, 29 and a half million. Is that is that a reasonable ballpark given what we know about the US land piece, right? I know there's seasonality that is hard to predict.
Cynthia Taylor: Yeah, I will tell you I didn't isolate on the fourth quarter, but our annual first call consensus was about 91 and a half million dollars. And what I do see is that that would be we had it. I mean, let's face it, we had a weaker third quarter on US land based activity. Now, thankfully, it was more than all set by strengthening our international and all shore. The real I always say it doesn't do any good to give the market guidance unless you've got better knowledge and information than the market.
Cynthia Taylor: What I can't what I do know is inventories, crude inventories are much lower than they were earlier this year, about 60 million barrels lower. And while that gas is still above the five-year average is compressed a lot, the strip is improved. The question you got to ask yourself is, are we really going to get a US land based lift in Q4 with the holidays? Or is that going to push into 2024?
Cynthia Taylor: I would say based on years of experience in this industry, I would not count on a lift on US land based activity around Thanksgiving and Christmas, but 2024 looks very good. And again, you know, crude prices, I don't know where they bottomed in the first half this year, but they were certainly in the $70 range. Now they sit mid-80s and outlook for next year or over 90. So tells me commodities are improved.
Cynthia Taylor: Natural gas, I think lags a bit, but the strip is better. And, you know, you're forecasting about a 20% increase in that gas exports both driven by LNG as well as exports to Mexico. So the commodities fundamentals tell me globally, but certainly US land will benefit 2024.
Stephen Gengaro: But I think embedded in fourth quarter is an improvement on US land that I would not necessarily be comfortable with. Great. Thank you.
Jim Merlison: We'll take our next question from Jim Merlison with Raymond James.
Cynthia Taylor: Good morning, Cindy Lloyd. Good morning. On the move from Singapore to Batam and just kind of some of the general consolidation activities you're looking at, maybe frame up how to think about the ultimate benefit you mentioned the cost, which ultimately is paid for by the sale of existing facilities. But just how do we think about that? Is it a margin improvement? Just kind of how to think about why you're making the move in terms of what that's ultimately going to drive from a margin standpoint?
Cynthia Taylor: No, clearly it is geared around margin improvement and there's these kind of independent things, but the real Southeast Asian move is into a lower cost labor manufacturing environment into Batam. And we will keep a presence obviously in Singapore, but a lot of the work on the machining and manufacturing side will be done in Batam and the goal there is absolutely to one increase the top one. Our ability to bid has been hampered by higher cost in our Singapore operations.
Cynthia Taylor: So expand the revenue and improve the margin. That is kind of the subset of Southeast Asia in doing so we'll have facility proceeds. They won't fully offset the new facility in Batam, but they will certainly help.
Cynthia Taylor: Separately we have multiple facilities all over Houston, which I think you know, and we've already been almost adult in one of those facility. There's a lot of interest in that facility. We've had multiple bidders come in and so we feel comfortable saying we expect to sell that in Q4 or early 2024. Those proceeds, frankly, just become corporate[inaudible] to us. And so the sum of both Singapore and Houston will exceed the new investment that we will make in the Tom.
Jim Merlison: Perfect, that helpful, helpful color there.
Jim Merlison: And then on downhole technologies, obviously margins there, just kind of fell prey to weaker US completion activity as activity bottoms, kind of in this quarter. And we start to see that recovering next year, as we were talking about a minute ago, how do we think about the recovery?
Cynthia Taylor: Is there a certain revenue level that you generally think of that you need to get EBITDA back to positives territory? Are there anything on the, you know, from the internal standpoint, you can do the cost structure or were you guys carrying kind of higher cost because this is a somewhat temporary reviewed as a temporary dip. Just kind of trying to think about how that segment plays out over the next few quarters if we actually see that recovery we're all looking for next year.
Cynthia Taylor: Yeah, Jim, I want to be clear, are you talking about well side or geo downhole? Okay, I just want to make sure so we're basically essentially break even at the downhole technologies segment for Q3. What we see two major things need to happen and just kind of do explain it, you know, you see quite a dichotomy in other service companies this quarter, whether you are contracted long on some of your IE, the pressure pumpers, the people that had contracts in place versus the spot market performed very differently.
Cynthia Taylor: This business is a call out product sell businesses and a lot of our wireline customers are spot based providers to the market. So several frags leads go down, which means the demand for the downhole tools also goes down. And so it's a combination, but the biggest thing in that particular business is top line, it's revenue at this point in time. Now, that being said, we are making investments around newer technology, so we have engineering cost and R&D cost that we did not cut.
Cynthia Taylor: There's no reason to cut that in a kind of a soft quarter because we believe in that business for the long term. But the drivers that will improve that going forward, of course, we need increased recovery and activity, particularly spot based activity. And some of the improved technology that we're going to bring to market in 2024 will help domestically. And of course, we are trying to expand our international penetration as well.
Cynthia Taylor: Those are the major initiatives to bring enhanced profitability to that business. And as we talked about at our board meeting yesterday, to your question, it doesn't take much, you know, two to four frags leads to follow will have a good top line impact. And so we're confident that we can turn that business to enhance profitability in 2024. Perfect. Appreciate the color. Thanks, Jim.
Luke Lemoine: We'll take our next question from Luke Lemoy with Piper Sandler. Hey, good morning. Hi, Luke. Hey, you have very nice orders in three few months. O.M, he had the Merlin order, then the production facility order. And you talked about those in at least 15 million each, which leaves a lot of room for various other orders in through Q. And you maybe talk about kind of what comprises the rest of that mix.
Luke Lemoine: And then maybe what you see for more standard orders for the next six to 12 months outside of kind of large things like Merlin or production facility. Yeah, I mean, we've always said we get a lot of broad based, almost recurring type orders. And those are on our high end conductor casing connectors. It's an example of routine orders. We've got a very good six platform and crane business line that enjoys strong orders.
Luke Lemoine: We have military work, etc. So it's kind of hard to isolate. We typically just call out larger orders, which are the two. But then there's always going to be a lot of, you know, our diverter valves, our production valve order technology that are recurring. And to some degree, short cycle orders as well. So it's kind of hard for me to glom onto any one major driver. I'd say they're broad based, both product line and geography quite frankly. Okay, got it. Um, no, that's helpful. Thank you. Thanks, Luke.
Unknown Executive: As a reminder, everyone, that is star one to ask a question.
John Daniel: We'll take our next question from John Daniel with Daniel energy partners. Hey, Cindy, Lloyd, how are you? Great. How are you? I'm well. I'm doing well. I got a question.
Cynthia Taylor: Cindy, your reference military customers, I'm just curious, any signs orders from that group are poised to rise just given current geocolidical, given climate? We are, we have a lot of bidding and quoting around that. I can't necessarily correlate it to the geopolitical environment, but they are on the rise quite frankly. And a lot of times these orders do come in large batches and can span multiple gears. And so it is my expectation to see an increase in military ordering.
Cynthia Taylor: Again, this is an adaptation of core technology we've used in oil and gas, particularly some of our last summer in flex joint type technology used in military applications. And we've we've done so for decades. But to your point, there is fundamental grounds for those to improve. Okay.
Cynthia Taylor: And then here's the dumb guy question for me because I don't know much about sea bed minerals, but what's the opportunity shut there in harvesting? Oh, I think they're incredibly robust. We're in the extreme early stages of that. And so I think we've talked before. And there's a lot of media and press around an area called the Clarion Clipperton Zone, which is I always say, you know, alignment would say middle of nowhere, deep water Pacific.
Cynthia Taylor: And but that is governed by an international sea bed of authorities. And that is lower to lift as opposed to sovereign international waters where we are getting more bidding opportunities simply because one country controls the permitting in those areas. And that is the case with the order we received in this quarter. There are other countries that are actively looking at these opportunities. So I think sovereign controlled international waters will move faster than possibly possibly, you know, the Clarion Clipperton Zone, but these areas are extraordinarily resource rich with the metals and minerals required particularly for alternative energy transition, battery technology, wind, et cetera, solar.
Cynthia Taylor: So you know you have to access the resource. And then you say, because right now there's a lot of countries that build highly dependent on China for these metals and minerals and they have a huge percentage of global supplies. So diversification is front and center. And then energy security and advancement of your own countries, internal needs is a focus for these countries that tells me unequivocally you're going to advance it, particularly if it's in your sovereign control.
Cynthia Taylor: And I will say in addition to that, there's increasing environmental concerns around open pit mining around the world. And so there has to be all types of environmental assessments on the seabed, but it seems like there will be less environmental concerns and consequences with this activity than there will be with open pit mining in order to grow the energy transition, right? All right.
Cynthia Taylor: Would you be willing to hazard a guess as to how many systems that five to seven years could be an opportunity for you? I don't want to. I wouldn't. I'd work the try. There's. Yeah.
Cynthia Taylor: Hey, John, I'll also point out on our website, we have an animation of the deep sea mineral riser system and operation, so I encourage you to go take a look at that. Yeah, I'll read that. Thanks, Garcil, including me. Thanks, John.
Unknown Executive: And there are no further questions at this time.
Cynthia Taylor: I'd like to turn the call back over to Cindy Taylor for closing remarks. Thank you so much. Thanks for joining us today. I appreciate the interest as always. It's a busy busy day, but the lot of companies reporting.
Cynthia Taylor: I will leave my thoughts that were headed into kind of a multi-year improved environment for the conventional and gas business led by international and deep water. I certainly think the US will be robust last year at the US land activity robust next year as well, which sets it up for a fundamentally strong outlook for our company. And for that of others in the space, I do think that for our size, we are differentiated because of the higher technology products that we've had working in deep water basins around the world for many decades quite frankly.
Cynthia Taylor: And we are doing and making a lot of inroads towards introducing those technologies and transitioning those into new applications, which I think again for our size is a bit unique. And you're seeing that realize not just talked about, but realized in our revenue stream right now and in our backlog and bookings. And so I hope that translates into a strong growth from our company and therefore strong returns for our shareholders. I do hope you have a good reminder of the earning season, and we will be available to work with you on any follow-up questions you might have. Thank you.
Unknown Executive: And that concludes today's presentation. Thank you for your participation. And you may now disconnect. Thank you.