Q4 2023 Oil States International Inc Earnings Call
Good day and welcome to oil States International incorporated.
Operator: Good day, and welcome to Oil States International Incorporated's fourth quarter 2023 earnings call. All participants will be able to listen only to the question and answer portion of this call. Please note that today's call is being recorded. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, press one or press star and one again. That's all I need to go through for now. At this time, I would like to introduce the call to Ellen Pennington. You may now.
Fourth quarter at 2023 earnings call.
All participants will be able to listen only until the question and answer portion of this call. Please note that today's call is being recorded.
I would like to ask a question. During this time simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question press, one or fresh start and one again.
That's all I need to go through right now at this time I would like to introduce the call to Ellen Pennington you May now proceed. Please thank you.
Ellen Pennington: Thank you. Thank you, Ellie. Good morning, and welcome to Oil State's fourth quarter 2023 earnings conference call. Our call today will be led by our President and CEO, Cindy Taylor, and Lloyd Hajdik, Oil State's 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.
Ellen Pennington: Thank you Ali good morning, and welcome to oil States' fourth quarter 2023 earnings conference call. Our call today will be led by our President and CEO, Cindy Taylor and Lloyd <unk> oil States' executive Vice President and Chief Financial Officer before we begin we would like to caution listeners regarding forward looking statements.
Ellen Pennington: 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.
Ellen Pennington: 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 on Oil States' website. A replay of the conference call will be available two hours after the completion of this call and will continue to be available for 12 months. I will now turn the call over to Cynthia. Thank you, Ellen.
Ellen Pennington: 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.
Ellen Pennington: Now I'll turn the call over to Cindy. Thank you Alan Good morning, and thank you for joining our conference call today, where we will discuss our fourth quarter 2023 results and provide our thoughts on market trends. In addition to discussing our company's specific outlook comments.
Cynthia B. Taylor: Good morning, and thank you for joining our conference call today where we will discuss our fourth quarter 2023 results and provide our thoughts on market trends in addition to discussing our company-specific outlook comments. For the oil and gas industry, 2023 can be summarized as a year in which international and offshore growth strengthened while North American activity started to moderate. Our fourth quarter results reflect those trends, with revenues in our offshore manufactured product segment growing 24% sequentially, boosted by a 39% sequential quarter increase in project-driven revenue. This significant growth was offset by the impact of declines in U.S. land-based completion activity due to an approximate 20 percent decline in the price of crude oil during the quarter, with continued weak natural gas prices and holiday impacts. Despite the reduction in U.S. activity levels during 2023, oil states reported both positive operating and net income for a sixth consecutive quarter.
Cynthia B. Taylor: But the oil and gas industry 2023 can be summarized as a year in which international and offshore growth strengthened while north American activity started to moderate our fourth quarter results reflect those trends with revenues in our offshore manufactured products segment growing 24.
Cynthia B. Taylor: 4% sequentially boosted by a 39% sequential quarter increase in project driven revenues. This significant growth was offset by the impact of declines in U S land buys completion activity due to an approximate 20% decline.
Cynthia B. Taylor: And the price of crude oil during the quarter with continued weak natural gas prices and holiday impacts.
Cynthia B. Taylor: The reduction in U S activity levels during 2023 oil states reported both positive operating and net income for a sixth consecutive quarter.
Cynthia B. Taylor: Our fourth quarter consolidated revenues in Adjusted EBITDA increased sequentially by 7% and 2%, respectively, while year-over-year revenues in Adjusted EBITDA grew by 3% and 17%. These sequential and year-over-year improvements reflect significant growth within our offshore manufactured products segment, where revenues totaled $138 million in the fourth quarter, the segment's highest revenue level in eight years. Segment backlog totaled $333 million as of December 31, with backlog conversions supporting the 39% sequential quarter increase in project-driven revenue. Segment bookings totaled $120 million, yielding a quarterly book-to-bill ratio of 0.9 times and a full-year ratio of 1.1 times.
Cynthia B. Taylor: Our fourth quarter consolidated revenues and adjusted EBITDA increased sequentially by 7% and 2%, respectively, while year over year revenues and adjusted EBITDA grew by 3% and 17% the sequential and year over year improvements reflect significant growth.
Cynthia B. Taylor: Within our offshore manufactured products segment, where revenues totaled $138 million in the fourth quarter. The segment's highest revenue level in eight years segment backlog totaled 333 million as of December 31st with backlog conversions supporting the 13th.
Cynthia B. Taylor: 9% sequential quarter increase in project driven revenues segment bookings totaled $120 million, yielding a quarterly book to bill ratio of <unk> nine times and a full year ratio of 1.1 times 2023 marked the third consecutive.
Cynthia B. Taylor: 2023 marked the third consecutive year that our book-to-bill ratio was greater than one. We remain encouraged by the continued expansion in offshore activity globally, coupled with enhanced competitive positioning in each of our business segments through our recent new technology introductions. In the fourth quarter, in response to the needs of global drilling contractors to drill more complex wells and unlock previously inaccessible reservoirs more safely, our offshore manufactured product segment delivered what is believed to be the industry's first deepwater slimline managed pressure drilling system, and we have now begun to market another industry-first NPD-ready system for jackup rigs. Subsequent to quarter close, our well site services and downhole technology segments also launched key Benefits of our expanded technology offering combined with this international offshore-focused investment cycle are expected to extend well beyond the next couple of years. Lloyd will now review our results of operations and financial position in more detail. Thank you, Cindy, and good morning, everyone.
This year that our book to Bill ratio was greater than one time, we remain encouraged by the continued expansion in offshore activity globally, coupled with enhanced competitive positioning in each of our business segments through our recent new technology introductions in the fourth quarter.
Cynthia B. Taylor: In response to the needs of global drilling contractors to drill more complex wells and unlock previously inaccessible reservoirs more safely our offshore manufactured products segment delivered what is believed to be the industry's first deepwater slim line.
Cynthia B. Taylor: Managed pressure drilling system, and we now have begun to market. Another industry first M. P D ready system for Jackup rigs.
Cynthia B. Taylor: Subsequent to quarter close our well site services and downhole technologies segments have also launched key new technologies, including our active hub digital platform for remote well site monitoring and control along with our active seat gate valve technology edge.
Cynthia B. Taylor: And an expanded portfolio of perforating gun systems called epic precision and epic flex benefits of our expanded technology offering combined with this international offshore focused investment cycle are expected to extend well beyond the next couple of years.
Cynthia B. Taylor: Lloyd will now review our results of operations and financial position in more detail.
Lloyd: Thank you Cyndi and good morning, everyone.
Lloyd A. Hajdik: During the fourth quarter, we generated revenues of $208 million, operating income of $8 million, adjusted consolidated EBITDA of $24 million, and net income of $6 million, or $0.09 per share. This represents our sixth consecutive quarter of positive net income. The adjusted consolidated EBITDA margin in the fourth quarter was 12%, comparable to the prior quarter.
Lloyd: During the fourth quarter, we generated revenues of $208 million operating income of $8 million.
Lloyd: Adjusted consolidated EBITDA of $24 million, and net income of $6 million or nine per share.
Lloyd: This represents our sixth consecutive quarter of positive net income.
Lloyd: Adjusted consolidated EBITDA margin in the fourth quarter was 12% comparable to the prior quarter.
Lloyd A. Hajdik: Results for the fourth quarter included facility consolidation charges of $0.8 million, which were incurred as we prepared selected facilities for sale, as well as patent defense costs of $0.6 million. Our offshore manufactured product segment generated revenues of $138 million, operating income of $25 million, and Adjusted Segment EBITDA of $30 million in the fourth quarter. As Cindy mentioned, revenues reported by this segment in the fourth quarter are at the highest level since the fourth quarter of 2015. The Adjusted Segment EBITDA margin was 22% in the fourth quarter, comparable to the prior 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 Batam, Indonesia. These two facilities are classified as help or sell assets at December 31.
Lloyd: Results for the fourth quarter included facility consolidation charges of $8 million.
Lloyd: Which were incurred as we prepare selected facilities for sale as well as patent defense costs, a point $6 million.
Lloyd: We're also a manufactured product segment generated revenues of $138 million.
Operating income of $25 million and adjusted segment EBITDA of $30 million in the fourth quarter.
Lloyd: As Cindy mentioned revenues reported by this segment in the fourth quarter or at the highest level since the fourth quarter of 2015.
Lloyd: Adjusted segment EBITDA margin was 22% in the fourth quarter comparable to the prior 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 Baton Indonesia.
Lloyd: These two facilities are classified as held for sale assets at December 31.
Lloyd: Proceeds from the sales of our facilities in Singapore and Houston.
Lloyd A. Hajdik: Proceeds from the sales of our facilities in Singapore and Houston in 2024 are expected to range between $35 million and $40 million, exceeding the costs associated with our planned investment in our new Bataan facility. Construction in Bataan will commence in the first quarter with completion targeted for the first half of 2025. In the meantime, temporary manufacturing lines have been set up in Batam so that we can efficiently execute both our contracted backlog and subsequent orders during construction. Our backlog totaled $333 million at December 31.
Lloyd: Which are anticipated to close in 2024 are expected to range between $35 million and $40 million.
Exceeding the costs associated with our planned investment in our new <unk> facility.
Lloyd: Construction in Baton will commence in the first quarter with completion targeted for the first half of 2025.
Lloyd: In the meantime, temporary manufacturing lines had been set up in but Tom So that we can efficiently execute both our contracted backlog and.
And subsequent orders during construction.
Lloyd: Backlog totaled $330 million $333 million at December 31, and.
Lloyd A. Hajdik: An increase of 8% from December 31, 2022. Current quarter-end backlog is at its second highest level since the fourth quarter of 2015. In our well site services segment, we generated revenues of $51 million, an operating loss of $1 million, and Adjusted Segment EBITDA of $6 million in the fourth quarter. We also recorded charges of $1.6 million associated with the defense and enforcement of certain of our patents.
Lloyd: An increase of 8% from December 31, 2022.
The current quarter and backlog is at its second highest level since the fourth quarter of 2015.
Lloyd: In our well site services segment, we generated revenues of $51 million.
Lloyd: An operating loss of $1 million and adjusted segment EBITDA of $6 million in the fourth quarter.
Lloyd: We also recorded charges of $6 million associated with the defense and enforcement certain of our patents.
Lloyd A. Hajdik: The adjusted segment EBITDA margin was 12% in the fourth quarter, compared to 16% in the third quarter, reflecting industry activity declines in the quarter. In our downhole technology segment, we reported revenues of $19 million, an operating loss of $7 million, and an adjusted segment EBITDA loss of $3 million for the quarter. Lower revenues and margins in the quarter were driven by the North American activity declines previously discussed. Also, included in the EBITDA loss was $1.3 million of inventory reserve. During the fourth quarter, we generated cash flows from operations of $4 million and invested $6 million in net capital expenditures to support future growth. As of December 31, no borrowings were outstanding under our revolving credit facility, while amounts available to be drawn total $76 million.
Lloyd: Adjusted segment EBITDA margin was 12% in the fourth quarter.
Lloyd: Compared to 16% in the third quarter, reflecting industry activity declines in the quarter.
Lloyd: Okay.
Lloyd: In our downhole technologies segment, we reported revenues of $19 million and operating loss of $7 million and an adjusted segment EBITDA loss of $3 million for the quarter.
Lloyd: Lower revenues and margins in the quarter were driven by the North American activity declines previously discussed.
Lloyd: Included in the EBITDA loss was $1 $3 million of inventory reserves.
Lloyd: During the fourth quarter, we generated cash flow flows from operations of $4 million and invested $6 million of net capex to support future growth.
Lloyd: As of December 31.
Lloyd: No borrowings were outstanding under our revolving credit facility.
Lloyd: And while amounts available to be drawn totaled $76 million.
Cynthia B. Taylor: This, together with cash on hand, resulted in available liquidity of $123 million. We also extended the maturity date of our revolving credit facility to February 2028. Now Cindy will offer some market outlook and concluding comments. Thanks, Lloyd.
Lloyd: This together with cash on hand resulted in available liquidity of $123 million.
Lloyd: We also extended the maturity date of our revolving credit facility to February 2028.
Lloyd: Now Sidney will offer some market outlook and concluding comments.
Sidney: Thanks Lloyd.
Cynthia B. Taylor: The tight commodity markets of 2022 led to higher commodity prices and activity levels. However, this took a turn in early 2023 as softening global demand, higher production, and resultant elevated inventories caused oil prices to drop during the first quarter of 2023. Activity declined in U.S. land basins during the second half of 2023, with the land rig and completion counts down about 20 percent by the end of the year. WTI and Brent crude oil prices were both down approximately 20 percent at December 31, compared to the prices in effect at September 30.
Sidney: <unk> type commodity markets of 2022 led to higher commodity prices and activity levels. However, this took a turn in early 2023 is softening global demand higher production and resultant elevated inventories caused oil prices to drop during the first quarter.
Sidney: Our 2023 activity declined in U S land basins during the second half of 2023 with the land rig and completion counts down about 20% by the end of the year W. T I and Brent crude oil prices were both down approximately 20% at December 30 <unk>.
Sidney: One compared to the prices in effect at September 30th Global inventories continue to hold within their five year seasonal average for crude oil, albeit at the low end, but remain above the five year average for natural gas.
Cynthia B. Taylor: Global inventories continue to hold within their five-year seasonal average for crude oil, albeit at the low end, but remain above the five-year average for natural gas. Given current industry dynamics, we expect U.S. land drilling and completion spending in 2024 to remain at or near current levels, but we do think we will see increased spending in international and offshore markets. Revenues in our offshore manufactured product segment are expected to continue to grow year over year as a result of strong order flow, increased levels of backlog, and execution of major project milestones. We expect our well site services and downhole technology segments to continue to perform in line with market activity indicators, which will soften for U.S. land activities beginning in the second half of 2023. Increased contributions from the commercialization of new technologies that I discussed previously should help us succeed Considering these market conditions, we expect our annual revenues to grow about 5% on a consolidated year-over-year basis, with EBITDA ranging from $90 to $95 million. Given typical seasonality and slow U.S. land activity, the first quarter of 2024 is expected to be the weakest quarter of the year.
Sidney: Given current industry dynamics, we expect U S land drilling and completion spending in 2024 to remain at or near current levels, but do think we will see increased spending in international and offshore markets.
Sidney: Revenues in our offshore manufacturer product segment are expected to continue to grow year over year. As a result of strong order flow increased levels of backlog and execution of major project milestones, we expect our well site services and downhole technologies segments to continue to perform.
Sidney: Warm in line with market activity indicators, which softened for U S land activities beginning in the second half of 2023.
Sidney: Increased contributions from the commercialization of new technologies that I discussed previously should help us succeed over the longer term and you in the U S land market considering these market conditions, we expect our annual revenues to grow about 5% on a consolidated year over year.
Sidney: <unk> with EBITDA, ranging from $90 million to $95 million.
Sidney: Given typical seasonality and slow U S land activity. The first quarter of 2024 is expected to be the weakest quarter of the year in terms of our estimates for free cash flow generation in 2024, we expect to generate at least $40 million in free cash flow.
Cynthia B. Taylor: In terms of our estimates for free cash flow generation in 2024, we expect to generate at least $40 million in free cash flow, implying a free cash flow yield of 10% or greater. However, our planned facility sales create more cash flow variability than is customary for us. Typically, the first quarter represents a use of cash due to the timing of various payments, including the payout of short- and long-term incentives, with the balance of the year being cash flow positive.
Sidney: So implying a free cash flow yield of 10% or greater are planned facility sales create more cash flow variability than is customary for us typically the first quarter represents a use of cash due to the timing of various payments, including the payout.
Sidney: Short and long term incentives with the balance of the year being cash flow positive in terms of free cash flow conversion, we are targeting a free cash flow to EBITDA conversion rate of approximately 40%. We remain focused on optimizing our operations and pursuing profitable Act.
Cynthia B. Taylor: In terms of free cash flow conversion, we are targeting a free cash flow to EBITDA conversion rate of approximately 40%. 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 and technologies to further differentiate our product and service offerings. Now, I would like to offer some concluding comments.
Sidney: <unk> 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 and technologies to further differentiate our product and service.
Sidney: <unk> offerings 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 and 2023, we experienced an increase in <unk>.
Cynthia B. Taylor: 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 experienced an increase in investments in 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 continue to point to a multi-year upcycle outside the U.S., which should drive growth in revenues, earnings, and free cash flow generation from our international and offshore operations. 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 developments such as These new energy transition opportunities create strong potential for us to expand our product and service offerings and our revenue base over the longer term. Oil States will continue to conduct safe operations and will remain focused on providing technological leadership in our various product and service offerings, with value-added products and services available to meet customer demands globally.
Sidney: Investments in long lead time projects in international markets and deepwater basins around the world.
Sidney: Based upon the longer range outlook for commodity prices strong macro fundamentals continue to point to a multiyear up cycle outside the U S, which should drive growth in revenues earnings and free cash flow generation from our international and offshore operations are core competencies are.
Sidney: 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 military customers. While also bidding to support multiple new customers and projects involved in development such as deep sea.
Sidney: <unk> 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.
Sidney: And our revenue base over the longer term.
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.
Operator: That completes our prepared comments. Ellie, would you open up the call for questions and answers at this time? And certainly, we are now opening the question and answer session for today. If you'd like to ask a question, please press star and number one on your telephone keypad.
L. A: That completes our prepared comments L. A would you open up the call for questions and answers at this time.
L. A: Certainly we are now opening the question and answer session for today, if you'd like to ask a question. Please press star and number one on your telephone keypad, that's star and number one on your telephone keypad. Our first question comes from Connie.
Connor Jensen: Our first question comes from Connor Jensen from Raymond James. Your line is now open. Hey guys, thanks for taking my call today. Hi Connor.
L. A: Jansen from Raymond James Your line is now open.
Connie Jansen: Hey, guys. Thanks for taking my call today.
Connie Jansen: Hi, Conor.
Connie Jansen: Yeah, So first quarter the book to Bill fell below one for the first time in a little bit.
Cynthia B. Taylor: Yeah, so in the first quarter, the book to bill fell below one for the first time in a little bit. How about some color around bidding activity and the current outlook would be great, maybe contrast that with the past few quarters and if this is something that's going to continue or if you expect that to jump back above one. Yeah, thanks for the question, Connor.
Connie Jansen: Kind of some color around bidding activity in the current outlook would be great. Maybe contrast that with the past few quarters and if this is something that is good.
Speaker Change: Can I continue or do you expect that to jump back above one.
Speaker Change: Yeah. Thanks for the question Conor I think you meant fourth quarter book to Bill of 0.9, and the annual was 1.1 that I have to point out that quarter by quarter bookings, obviously can vary and importantly, we have one of the strongest revenue quarters in years and so.
Cynthia B. Taylor: I think you meant the fourth quarter book-to-bill of 0.9, and the annual was 1.1. I have to point out that quarter-by-quarter bookings obviously can vary, and importantly, we had one of the strongest revenue quarters in years, and so bookings at $120 million were actually favorable bookings overall. So you can't necessarily look quarter-by-quarter, but importantly, I think it's important for us to look at that. Importantly, I would say what we are looking at for 2024, and I guided to a book-to-bill north of 1 at this point in time, and, as always, we may have some mixed shifts in there, whereas we had lower kind of connector products activity really in 2023. We expect some uplift in 2024, strong production facilities, particularly in Brazil, that may moderate just a bit given the timing of projects only, but importantly, some of our new capital drilling equipment technologies around our MPD systems and our high-pressure riser systems will get a lift that we've not seen in several years, and we're pleased to say that our first MPD system has been in the works. Our first MPD system has been in the water operating in MPD mode successfully in the first quarter, so we're pretty positive about this new piece of our business that, again, is a brand-new technology for us.
Speaker Change: Bookings at 120 million were actually favorable bookings overall, so you can't necessarily look quarter by quarter, but importantly, I would say what are we looking at for 2024 and I guided to a book to Bill North of one at this point in time and as always we may have.
Speaker Change: Some mix shifts in there.
Speaker Change: Whereas we had lower kind of connector products activity really in 2023, we expect some uplift in 2024 strong production facilities, particularly in Brazil that may moderate just a bit given timing of projects only but importantly, some of our new.
Capital drilling equipment technologies around our MPD systems, and our high pressure riser systems will get a lift that we've not seen in several years and we're pleased to say that our first MPD system has been in the water operating in MPD mode successfully in the first quarter. So.
Speaker Change: We're pretty positive about this new piece of our business that again is brand new technology for us so while some projects can flatten or moderate other ones are listening. We also expect to see strong activity on the military order side of our business and so that on balance that.
Cynthia B. Taylor: So while some projects can flatten or moderate, other ones are rising; we also expect to see strong activity on the military Order side of our business. And so, on balance, again, expect a book-to-bill north of 1. There can be variations quarter by quarter. There always are, so we tend to look at the annual-type book-to-bill more so than individual quarters because of both order variability as well as revenue-generating variability. Yeah, thank you. That's a great context there.
Speaker Change: Again expect a book to Bill North of one there can be variations quarter by quarter. There always are so we tend to look at the annual type book to build more so than individual quarters because of both order variability as well as revenue generating variability.
Speaker Change: Yeah. Thank you that's great contract there and then just following up you said that you expect military to be strong obviously, it ticked up a little bit here do you expect those levels to continue higher or was this kind of a one off.
Cynthia B. Taylor: And then just following up, you said that you expected the military to be strong. Obviously, it picked up a little bit here. Do you expect those levels to continue higher or was this kind of a one-off? Now, we expect a very strong order book in 2024 as well. Great, that's it for me. Thanks, guys....
Speaker Change: Now, we expect very strong order book in 2024 as well.
Speaker Change: Great. That's it for me thanks, guys.
Speaker Change: Thanks Connor.
Alec: Our next question comes from Alec from Stifle. Your line is now open. All right, good morning, everyone, and thanks for taking my question. So just to kick us off here, I was wondering if you could provide us some color on your expectations for margins on the well site and downhaul technologies, if that could be where they remain steady around current levels in the North American landscape. Yeah, I think that's a very good focal point for us. I'm having Lloyd kind of look at the model vis-à-vis the margins, but just generally speaking, it's no secret that the natural gas market is under significant pressure right now. And in fact, the March contract for NatGas closed below $2 at $1.61 on Friday.
Speaker Change: Our next question comes from Alec from Stifel. Your line is now open.
Alec: Hi, good morning, everyone and thanks for taking my question good morning.
Alec: So just to kick us off here I was wondering if you can provide us some color on your expectations for margins in the well site and downhole technologies activity remained steady around current levels in the North American one.
Speaker Change: Yeah, No I think that's a very good focal point for us I'm, having Lloyd kind of look at the model. These are the the margins, but just generally speaking it's no secret that the natural gas market is under significant pressure right now in fact the March contract.
Speaker Change: For Nat gas closed below two at $1 61 on Friday, that's the lowest.
Cynthia B. Taylor: That's the lowest price we've seen in 25 years. And so that's the major message for me around land. Crude oil prices seem to be trading in a steady band, and therefore activity in your oilier basins should be at least flat, if not modestly higher, throughout the year. But we've got to really focus on the margin degradation that occurs in areas like the Northeast, the Hainesville, the stack, et cetera. And so our focus has to be around cost management and control, intense conversation with our customers in terms of what activity, if any, they're going to pursue during this time. And so I'm kind of looking at our EBITDA margins for well sites in Q4 were 10.4%. If I'm looking at the correct numbers, that's the well site.
Speaker Change: Price, we've seen in 25 years and so that's.
Speaker Change: That's the major message for me around land crude oil prices seem to be trading in a steady band.
Speaker Change: And therefore activity in your oily basins.
Speaker Change: Should be at least flat if not modestly up throughout the year, but we've got to really focus on the margin degradation that occurs in areas like the northeast the haynesville.
Speaker Change: Stack et cetera, and so our focus has to be around cost management and control intense conversation with our customers in terms of what activity if any theyre going to prosecute during this time and so I'm kind of looking at our EBITDA margins.
Speaker Change: For well site in Q4 were 10, 4% if im looking at the correct numbers Thats, a well site those are down from kind of mid to high teens throughout.
Cynthia B. Taylor: Those are down from the kind of mid to high teens throughout the other three quarters of 2023. Now, we are looking to have slightly better margins in totality in 2024, but that is really predicated on significant cost control initiatives in the natural gas basins, as well as our newer technology, particularly our active seat gate valves, which not only we think leverage our revenue, our kind of market share revenue generating potential, but it also reduces our cost of repairs, our cost of greasing, et cetera. And so, you know, overall margins in totality fly up to up, but the reality is they just got to come up from where they are, at least for the year 2024, compared to where they were in the fourth quarter, if that is helpful to you. But November and December for our business and for most really fell off, but for all the factors we're talking about, and it's hard to really get your costs down immediately in that timeframe, but that's an acute focus for us going forward this year. I got it. Now, that's great. That's a great color there.
Speaker Change: The other three quarters of 2023 now we are looking to have slightly better margins in totality in 2024, but that is really predicated on significant cost control initiatives in the natural gas.
Speaker Change: Basins as well as our newer technology, particularly our active phase gate valves, which not only we think leverage our revenue are kind of market share revenue generating potential but it also reduces our cost of repairs are cost of grazing et cetera, and so.
Speaker Change: You know overall margins in totality flat to up but the reality is they just got to come up from where it's at least for the year of 2024 compared to where they were in the fourth quarter. If that is helpful to you, but November and December for our business and for most really fell off but for all the <unk>.
Speaker Change: <unk>, we're talking about and its hard to really get your cost down immediately and that timeframe, but that's an acute focus for us going forward this year.
Got it no that's great that's great color there and then also just continuing in our downhole technologies has there been any.
Cynthia B. Taylor: And then also, just continuing in download technologies, has there been any noteworthy change in the competitive landscape as well as in pricing? Like, for example, are operators paying more for integrated systems, or is there any kind of color you could provide there? I think that what we are looking at right now is trying to look internally and say, "How is our technology and where is it on the competitive continuum against the landscape that we operate in?" And that's why we've invested both R&D money and engineering time in 2023 to bring an upgraded suite of products to the domestic market, which is the technology that I referenced in my call notes. And then, in addition to that, most of our international activity has been more P&A oriented, which can be extraordinarily cyclical and lumpy depending on the activity.
Speaker Change: Noteworthy change in the competitive landscape as well as pricing like for example, or operators trained more for integrated systems is there any kind of color you can provide there.
Speaker Change: I think that what we are looking at right now is trying to look internally and say we're at how is our technology and where is it on the competitive continuum against the landscape that we operate in and that's why we have invested both R&D money in engineering time.
Speaker Change: And 2023 to bring a upgraded suite of products to the domestic market, which is the technology that I referenced in my call notes and then in addition to that most of our international activity has been more P&I oriented, which can be extraordinarily cyclical and lumpy depending on.
Speaker Change: On activity and so we're really working to really get more than our national steady revenues around them.
Cynthia B. Taylor: And so we're really working to really get more international steady revenues around, you know, the completion side of the business, the shorter guns, as well as the charges that go internationally to more stabilize the ongoing cost absorption in our international side of the business. But those are the major focus initiatives that we are entering 2024 with, and we do expect to see improvement over 2023 because of the technology introductions. Now, the first quarter is a weak quarter.
Speaker Change: The completion side of the business the shorter guns as well as the charges that go internationally to more stabilize the ongoing cost absorption in our international side of the business, but those are the major focus initiatives that we are entering.
Speaker Change: Entering 2024 with and we do expect to see improvement over 2023 because of the technology introductions now.
Speaker Change: First quarter is a weak quarter I'll be the first one to tell you that the natural gas basins are weak right now and again those are comments that I'll also offered you offered to you in my call, but we do think the upgraded technology gets legs and some footing to help us be the most competitive.
Cynthia B. Taylor: I'll be the first one to tell you that these natural gas basins are weak right now. And again, those are comments that I also offered to you in my call. But we do think the upgraded technology gets legs and some footing to help us be the most competitive in both the U.S. market and the international market. You do mention the landscape, and I would say it's generally stable.
Speaker Change: Is in both the U S market and the international market.
Speaker Change: You do mention the landscape and I would say, it's generally stable. It's no secret that DMC global is evaluating what to do with the Donna energetics business, but I would just say at this point, we don't have clarity around whether it really changes anything in the landscape. So we've got to do what we can control which is <unk>.
Cynthia B. Taylor: It's no secret that DMC Global is evaluating what to do with the Dyna Energetics business. But I would just say at this point, we don't have clarity around whether it really changes anything in the landscape. So we've got to do what we can control, which is enhance our technology offering to our customer base.
Speaker Change: Enhance our technology offering to our customer base.
Speaker Change: Got it. Thank you and then also just shifting gears a little bit to the RMP I was curious if you could.
Alec: Thank you. And then also, just shifting gears a little bit to O&P. I was curious if you could provide some color on what's on the backlog and how that should kind of flow through the margins in 2024. Yeah, our margins have been pretty steady. You know, the key for us is the mix and backlog. But as I mentioned, production infrastructure, capital drilling equipment, service revenues, those are really favorable to our margin profile and mix, then it becomes one of just kind of timing and absorption across our facilities. Even though we had a really good 2023, our short cycle piece of the business, which has a little bit of a land focus, obviously suffered some declines late in 2023, and it'll be slow to kick off in 2024. That's really why we've got it in on a consolidated basis that the first quarter will be the weakest quarter for. Got it. Thank you. And if I could squeeze one more in, I'd appreciate it for being with me here.
Speaker Change: Some color on whats on the backlog and how that should kind of flow through to margins in 2024.
You know our margins have been pretty steady you know the key for us.
Speaker Change: Is that mix in backlog, but as I mentioned in our production infrastructure capital drilling equipment service revenues those are.
Speaker Change: Really favorable to our margin profile and mix then it becomes one of just kind of timing and absorption across our facilities.
Speaker Change: Even though we had a really good.
Speaker Change: 2023 are.
Speaker Change: Our short cycle piece of the business, which has a little bit of a land focus obviously suffered some declines light in 2023 and it will be slow to kick off in 2024, that's really why we've got it and on a consolidated basis that the first quarter will be the weakest quarter for us.
Okay.
Speaker Change: Got it thank you and if I could squeeze in.
Speaker Change: I appreciate you bear with me here just on the.
Alec: Just on the, when we're thinking about 2024, I know that there's some variability given the assets held for sale, but just curious if you could provide some details on what you're expecting in terms of just working capital, capital spending, and just the free cash flow conversion. I think you said it was 40% in 2024. Yeah, I'm really thankful. Yeah. Go ahead, Alec. I'm sorry. Now, almost.
Speaker Change: So when we're thinking about 2024 I know you.
Speaker Change: So there is some variability given the assets held for sale, but just curious if you could provide some details on what you're expecting in terms of just working capital capital spending and just settled the free cash flow conversion RPT was 40% in 2020 I don't.
Speaker Change: I really think.
Yes go ahead, Alex I'm, sorry, I thought you were done.
Alex: It's now almost and then I was just around that I was wondering if you could just comment on that.
Alec: And then I was just around that. I was wondering if you could just comment on the patent defense charges during the fourth quarter and if that's expected to continue or where that stands. Perfect. I'll kick off, and Lloyd will pick up along the way.
Alex: Defense charges during the fourth quarter, and if thats expected to continue or where that stands.
Perfect I'll kick off and Lloyd will pick up along the way I'm really glad you asked the question about kind of free cash flow generation and.
Cynthia B. Taylor: I'm really glad you asked the question about the kind of free cash flow generation. And I mentioned in the notes there's quite a lot of variability in our free cash flow because of these facility sales. I just want to be clear that what we've included in the guidance of roughly $40 million is the Singapore facility sale and the Patam CapEx construction simply because that Singapore facility is currently under contract. We haven't yet included the cash proceeds from the Houston facility sale because we don't know the timing. It's not under contract.
Lloyd: I mentioned in the notes there is quite a lot of variability in our free cash flow because of the facility sales and I just want to be clear that what we've included in the guidance of roughly a $40 million is the Singapore facility sale and the baton.
Lloyd: Capex construction simply because that Singapore facility is currently under contract we've not yet included the cash proceeds from the Houston facility sale, because we don't know the timing is not under contract. We do expect it to sell so there could be upside to that cash.
Cynthia B. Taylor: We do expect it to sell, so there could be upside to that cash flow. I'm trying to give you guidance that, to some degree, would be the floor, I would say, in terms of EBITDA conversion and free cash flow generation. I'm going to ask Lloyd to comment on working capital. But, you know, I'll just say, importantly, the shift towards more offshore and international revenue, i.e., growth in that, does it carry with it percentage of completion accounting and, therefore, some increases in average working capital because of project duration? He's got the numbers for you. I'm looking at him right now to offer comments.
Lloyd: Flow I'm trying to give you the guidance.
Lloyd: Some degree would be the floor I would say in terms of EBITDA conversion and free cash flow generation now I'm going to ask Lloyd the comment on working capital, but you know I'll, just say importantly, the shift towards more offshore and in our national revenue I E growth and that does.
Lloyd: <unk>.
Lloyd: Carry with it percentage of completion accounting and therefore, some increases in average working capital because of project duration. He's got the numbers for you I'm looking at him right now to offer comments, yes, Alex So in 2023, we.
Lloyd A. Hajdik: Alex, so in 2023, we used working capital of $21 million. With revenues up, we gave guidance of about 5%. I kind of would expect working capital to be fairly consistent with 2023, maybe slightly less. And again, in the first quarter of last year, we used 26 million of working capital. First quarter is typically, as Cindy mentioned, typically the heavier use of cash quarter with the rest of the year cash flow positive.
Lloyd: The used working capital of $21 million.
Lloyd: With revenues up <unk>.
Alex: It's been about 5%.
Alex: I would expect working capital be fairly consistent with 2023 may be slightly less.
Alex: And again in the first quarter of last year 2023, we used $26 million of working capital first quarter is typically as Cindy mentioned is typically the heavier use of cash quarter with a mixed the rest of the year cash flow positive.
Lloyd A. Hajdik: So forecasting, say, $15 to $20 million of working capital in 2024. In terms of the CapEx, I guess we are kind of forecasting around $40 million. That's gross CapEx, including the lion's share of the construction costs associated with the Bataan facility. As Cindy mentioned, we've got the proceeds of the Singapore facility in our forecast or in our budget, and that will offset the lion's share of the CapEx needs for Bataan. And that's how we arrive at roughly $40 million of free cash flow for the year, again only including the Singapore facility. Could be, you know, if you add in the potential proceeds from the Houston ship jambo, that could be in the $60 million round. Got it. That's a great color.
Alex: Forecasting say $15 million to $20 million of working capital in 2024.
Alex: In terms of the Capex I guess.
Alex: We're kind of forecasting around $40 million, that's gross capex, including the lion's share of the construction costs associated with the proton facility as Cindy mentioned, we've got the proceeds of the Singapore facility.
Alex: Our forecast are in our budget and that will offset those.
Alex: Lions share of the Capex needs for Tom.
Alex: And that's how we arrive at roughly the $40 million of free cash flow for the year again, only including the Singapore facility.
Alex: Could be good if.
Alex: If you add in the <unk>.
Alex: Proceeds from the Houston ship channel that could be in the $60 million range.
Speaker Change: Got it that's great color. Thanks for thanks for your comments for taking all my questions I'll turn it back.
Alec: Thanks for your time and for taking all my questions. I'll turn it back. Thanks, Alec. We have our next question from John Daniel from Daniel Energy Partners. Your line is now open.
Speaker Change: Thanks, Alex Thanks, Alan.
Speaker Change: Okay.
Speaker Change: We have our next question from John Daniel Convenient Energy Partners. Your line is now open.
John Daniel: Hey, good morning, Cindy and Lloyd Thank you for including me.
John Daniel: Hey, good morning, Cynthia and Lloyd. Thank you for including me. All right, John.
John Daniel: John.
Cynthia B. Taylor: First, sort of a big picture, it's a two-part question, and the first part's a big picture, but just sending your thoughts on the U.S. landscape in light of the E&P consolidation. And then the second part is just given all of the E&P consolidation, how does that influence your willingness to either invest growth CapEx in the U.S. or prosecute domestically? I think that is a fantastic question, John. I'm not surprised by that, but our focus is to try to stay high technology and, I'll say, as asset light as we can. And a lot of these new technology rollouts really achieve our objectives as well as the objectives of our customer base. And so focus around active seat valves and automation are the keys for us to do both of those things because, you know, it's hard to be in the service business and support large customers without a broad range of equipment, but that carries high labor costs, high R&M costs, and high CAPEX.
Sort of a big picture, it's a two part question and one for start Big picture, but just your thoughts on.
Speaker Change: U S landscape in light of the E&P consolidation and the impact of the business.
John Daniel: And then the second part is just given all of the E&P consolidation, how does that influence your willingness to either invest.
John Daniel: Growth Capex in the U S or prosecute domestic M&A.
John Daniel: I think that is.
Speaker Change: Fantastic question, John not surprised by that but our focus is to try to stay high technology and I'll say as asset light as we can and a lot of these new technology Rollouts really achieve our objectives as well as the objectives of our.
Speaker Change: Our customer base and sales focus around active seat valves and automation are keys for us to do both of those things because you know it's hard to be in the service business and support.
Speaker Change: These large customers without a broad range of equipment, but with that carries high labor cost high R&M costs and high Capex and we tend to not want to do all of that because of the cyclical nature of the business and so we are trying to stay niche.
Cynthia B. Taylor: And we tend not to want to do all of that because of the cyclical nature of the business. And so we are trying to stay niche, I'll call it, in our product and service offerings. We're more likely to de-emphasize growth in M&A around this piece of the business, particularly if we view it as a more commoditized market with few barriers to entry, which, quite frankly, is about all the transactions we have seen heretofore. If there are unique technologies that are more asset-light or manufacturing in support of U.S. land, yes, we would be interested in looking at those.
Speaker Change: <unk> I'll call it in our product and service offerings, we're more likely to.
Deemphasize growth in M&A around this piece of the business, particularly if we view it as a more commoditized market with few barriers to entry.
Speaker Change: Which quite frankly is about all of the transactions. We have seen heretofore. If there are unique technologies that are more asset light more manufacturing in support of U S. Land, yes, we would be interested in looking at those just to date, we haven't seen a lot.
Cynthia B. Taylor: Just to date, we haven't seen a lot, if that's helpful. And then I just have a labor question, but, you know, clearly, natural gas basins are weak, and that's probably going to result in the OFS space, rationalizing costs to try to preserve margin generally has an impact on the labor market, but we also all kind of expect. Gas E-Markets are expected to take off in 2025, hopefully, as L&G comes online.
Speaker Change: If that is health care.
That's helpful and then I just have a labor question, but.
Speaker Change: Clearly natural gas basins are weak and that's probably going to result in the olefins space.
Speaker Change: Rationalizing costs to try to preserve margin.
Speaker Change: Which generally has an impact on the labor.
Speaker Change: But we also all kind of expect those gassy markets to take off in 'twenty five hopefully as LNG comes online. So just the push and pull of how do you deal with labor and those isolated markets and being ready to react.
Cynthia B. Taylor: The push and pull of how do you deal with labor and those who are isolated. Yeah, no, you're absolutely right. I'll call it labor, but another key area of focus for this business is the associated costs that go with labor. All of your travel, your hotels, your vehicle costs, leasing, gasoline, per diems, and so I obviously prefer to focus on the ancillary costs, i.e., you know, if my labor utilization is low, maybe I just let them sit at home. Don't make them drive to the shop. And then when they drive to the shop, they start doing R&M on equipment, so you have a double whammy in a low-revenue environment.
Speaker Change: You're absolutely right I'll call it labor, but another key area of focus for this business are the associated costs that go with labor all of your travel your hotels your vehicle caused leasing gasoline.
Speaker Change: Per Dms and so obviously profile at focus on the ancillary cost I. If my unit labor utilization is low maybe I'll just let them set at home don't make them drive to the shop and then when they drive to the shop. They start doing R&M on equipment. So you have a double whammy in a low revenue environment.
Cynthia B. Taylor: I do not, I really want to focus on labor retention for all the reasons that you talk about. We're really diligently working with our customers because, as you know, several of these natural gas plays are thinly supported by customers, i.e., the Northeast. There just aren't that many big customers working up there, so we really do need to retain a certain amount of work with the ones that we have to support a core labor component, but we are absolutely going to have to look at out-of-basin labor support in the oilier regions and do what we can. The key question for us right now is, do we have to cut the workweek down from historically an average of about 60 hours of workweek to But, you know, labor is essential, and I think our customers recognize that. Not a lot matters when prompt map gas is 161.
Speaker Change: I do not.
Speaker Change: Really want to focus on labor retention for all the reasons that you talk about where really diligently working with our customers because as you know several of these natural gas plays are thinly supported by customers I E. The northeast there just aren't that many big customers working up there so.
Speaker Change: We really knew need to retain a certain amount of work with the ones that we have to support a core labor component.
Speaker Change: But we are absolutely going to have to look at out of basin labor support in the Wailea regions and do what we can we and the key question for US right. Now is do we have to cut the work week down from historically on average of about 60 hours.
Speaker Change: Work week to lower levels.
Speaker Change: Just to sustain our labor through 2024 and that is the acute focus we have right now.
Speaker Change: Okay, and a library of central and I think our customers recognize that.
Not a lot matters when prop month, Nat gas is $1 61.
Speaker Change: Right makes sense well, thank you for indulging my questions today.
Cynthia B. Taylor: Makes sense. Well, thank you for indulging my questions today. Thanks John, see you later this week. If you'd like to ask any questions, please press star and number one on your telephone keypad. That's star and number one on your telephone keypad.
Speaker Change: Thanks, John Cid later this week, thanks, John Yes, ma'am.
Speaker Change: If you'd like to ask any questions. Please press star and number one on your telephone keypad that starting number one on your telephone keypad.
It looks like we don't have any questions answers demo mix I'd now like to hand back over to Cindy for closing remarks.
Operator: Looks like we don't have any questions at the moment. I'd now like to hand it back over to Cindy for closing remarks. Oh, thank you so much, Ellie. And thanks to all of you for joining us today and answering good, insightful, market-oriented questions that we can respond to. Obviously, as is always the case in this business we love, there are a lot of things going on that affect the commodities at this point in time. But I do think, fundamentally, supply-demand will get back into a healthy balance for natural gas. It's logical, anyway.
Cynthia B. Taylor: Well. Thank you so much allie and thanks to all of you for joining us today in answering good insightful market oriented questions that we can.
Cynthia B. Taylor: Respond to obviously there as is always the case in this business, we love Theres a lot of things going on that affect the commodities at this point in time, but I do think fundamentally supply demand.
Cynthia B. Taylor: I'll get back into a healthy balance for natural gas. It's logical anyway. We are in an election year. So I think theres a lot of unexpected things that might hit us such as this permitting pause if you will around LNG export facilities and other things but.
Cynthia B. Taylor: We are in an election year, so I think there are a lot of unexpected things that might hit us, such as this permitting pause, if you will, around LNG export facilities and other things. But, you know, maybe I'll just say that ends up making us stronger in the long term in terms of how to run and manage businesses. And so there's always a bright side.
Cynthia B. Taylor: You know maybe.
Cynthia B. Taylor: Maybe I'll I'll, just say that ends up making a stronger in the long term in terms of how to run and manage businesses and so there's always a bright side I think a lot of it will be at the conference. Later this week here in town and we look forward to visiting with you all than hope you have a great remainder of the earning seasons and a nice week. Thanks, so much.
Cynthia B. Taylor: I think a lot of you will be at the conference later this week here in town, and we look forward to visiting with you all then. Hope you have a great remainder of the earnings season and a nice week. Thanks so much. Thank you for attending today's call. You may now disconnect. Thanks for watching!
Cynthia B. Taylor: Okay.
Speaker Change: Thank you for attending today's call you may now disconnect.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Okay.
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Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Okay.