Q3 2024 Oil States International Inc Earnings Call
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Mark: Good morning, my name is Mark and I will be your conference operator today. At this time I would like to welcome everyone to all of the stage 3 crew earnings call. All eyes have been placed on mute to prevent any background noise. After the speakers from our marks, there will be a question in answer session.
Mark: If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I will now turn the call over to Ellen Pennington, Senior Counsel. Ellen, please go ahead.
Ellen Pennington: Thank you, Mark. Good morning and welcome to Oil State's third quarter 2024 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.
Ellen Pennington: 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 these forward-looking statements remain valid later in the quarter or beyond.
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 2023 Form 10-K, along with other recent SEC filings.
Speaker Change: This call is being webcast and can be accessed at Oil State's 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 Cindy.
Cindy Taylor: Thank you, Ellen. Good morning and thank you for joining our conference call today where we will discuss our third quarter 2024 results and provide our thoughts on market trends in addition to discussing our company specific outlook.
Cindy Taylor: During the third quarter, we reported strong results in our offshore manufactured products segment and achieved our largest bookings quarter of the year.
Cindy Taylor: On a consolidated basis, our offshore and international revenues constituted 65% of our consolidated total for the quarter, while U.S. land-driven revenues represented 35%.
Cindy Taylor: As we have discussed in prior quarters, we are in the process of strategically streamlining our operations in the United States through the exit of underperforming locations and business lines.
Cindy Taylor: following the sale of our drilling rigs and the exit of our flow back and well testing operation.
Cindy Taylor: The segment previously named WellSite Services was changed
Cindy Taylor: to Completion and Production Services.
Cindy Taylor: in line with our future go-to-market strategy.
Cindy Taylor: During the quarter, our offshore manufactured product segment revenues totaled $102 million, while adjusted segment EBITDA totaled $23 million.
Cindy Taylor: Bookings totaled $112 million, up 11% sequentially, yielding a backlog of $313 million as of September 30, and a quarterly book-to-bill ratio of 1.1 times.
Cindy Taylor: Together with C-Drill Limited, a global leader in offshore oil and gas drilling, we announced a strategic, non-exclusive, collaborative relationship aimed at increasing the safety and efficiency of offshore NPD operations.
Cindy Taylor: This strategic initiative combines our award-winning NPD-integrated riser joint technology with C-Drill's high-spec fleet of floating drilling vessels.
Cindy Taylor: to enhance operational safety and efficiency while simplifying and standardizing MPD systems operating in the offshore drilling market.
Cindy Taylor: During the quarter, our first integrated riser joints were delivered to C-Drill for use on their West Polaris Deepwater Rig, which is expected to begin MPD operations in Brazil later this year.
Cindy Taylor: As market acceptance of our NPD product line continues, we expect to generate between $35 million and $45 million annually in associated revenue going forward.
Cindy Taylor: with ongoing concerns about potentially reduced oil demand in China and the possibility of OPEC plus
Cindy Taylor: ceasing voluntary production cuts in 2025.
Cindy Taylor: Crude oil pricing declined during the quarter.
Cindy Taylor: With this macro backdrop coupled with record U.S. production, completion activity on U.S. land as measured by the average quarterly U.S. FRAC spread count declined 8% sequentially,
Cindy Taylor: leading to a weaker U.S. market.
Cindy Taylor: Our completion and production services segment revenues decreased 14% on a sequential quarter basis given the impact of these trends along with the segment's consolidation and exit over the past nine months of underperforming locations.
Cindy Taylor: Adjusted segment EBIDTA decreased at a proportionally higher rate from the second quarter of 2024 due to weaker offshore activity in the Gulf of Mexico.
Cindy Taylor: The drop in offshore activity resulted in part from hurricanes in the Gulf of Mexico during the third quarter, but the pause in activity is considered transitory.
Cindy Taylor: In our Downhole Technology segment, revenues in Adjusted Segment EBITDA also decreased from the second quarter of 2024, driven by similar macro issues leading to weaker completion product sales.
Cindy Taylor: We continue to focus on improving operations and allocating capital to our most differentiated businesses.
Cindy Taylor: while efficiently and safely providing our customers with advanced technologies and services.
Cindy Taylor: enhancing returns, reducing debt, and returning cash to our stockholders. During the quarter, we generated cash flows from operations totaling $29 million, leading to a net debt reduction of $20 million.
Cindy Taylor: Over the last three years, we have made significant progress in our deleveraging journey and we expect to be net debt zero during 2025, which should serve as a catalyst for stock price improvement.
Speaker Change: Lloyd will now review our operational results along with our financial position in more detail.
Lloyd Hajdik: Thanks, Cindy. Good morning, everyone. During the third quarter, we generated revenues of $174 million, adjusted consolidated EBITDA of $22 million, and adjusted net income of $2.7 million, or 4 cents per share.
Lloyd Hajdik: Our recorded third quarter results included pre-tax, intangible, and lease asset impairment charges of 13 million dollars.
Lloyd Hajdik: facility consolidation and exit charges of 3.5 million dollars.
Lloyd Hajdik: and patent defense charges of 1.3 million dollars.
Lloyd Hajdik: Our offshore manufactured product segment generated revenues of $102 million and adjusted segment EBITDA of $23 million in the third quarter.
Lloyd Hajdik: Adjusted segment EBITDA margin was 23% in the third quarter, compared to 20% in the second quarter.
Lloyd Hajdik: We own one remaining U.S. facility that was classified as a Hell Purcell asset at September 30th.
Lloyd Hajdik: We are under contract to close the sale of this facility in November with net proceeds expected to total approximately 25 million dollars.
Lloyd Hajdik: In our Completion and Production Services segment, we generated revenues of $40 million and adjusted segment EBITDA of $5.4 million in the third quarter.
Lloyd Hajdik: During the third quarter, the segment recognized $13 million in non-cash, intangible, and operating lease asset impairment charges.
Lloyd Hajdik: as well as $3 million in costs associated with the consolidation and exit of underperforming locations and workforce reductions.
Lloyd Hajdik: Additionally, the segment recorded charges of a million dollars associated with enforcement of patents related to its proprietary technologies.
Lloyd Hajdik: Excluding these charges, adjusted segment EBITDA margin was 13% in the third quarter compared to 18% in the second quarter.
Lloyd Hajdik: We have included information in our earnings release to assist investors and analysts.
Lloyd Hajdik: in understanding the combined historical results of the segment's U.S. land-based service offerings and facilities exited in 2024 for the three and nine months it ended September 30th.
Lloyd Hajdik: In our downhole technology segment, we reported revenues of $32 million and adjusted segment EBITDA of $1 million for the third quarter.
Lloyd Hajdik: During the third quarter, oil states generated $29 million in cash flows from operations and invested $5 million in net capex.
Lloyd Hajdik: Cash was used to buy back three million dollars of our common stock.
Lloyd Hajdik: On October 24th, our Board of Directors terminated our existing share repurchase program and replaced it with a new 50 million dollar authorization which expires in October 2026.
Speaker Change: Now Cynthia will offer some market outlook and concluding comments.
Cynthia: The long-term outlook for oil, natural gas, LNG, and global energy demand should support sustained high levels of capital investment in offshore and international field developments.
Cynthia: over the longer term, led by the United States, Latin America, Asia, and Africa.
Cynthia: We expect to see support for increased bidding and quoting activity, future bookings, and revenue growth across a number of our product lines.
Cynthia: In addition to solid macro-fundamentals for production-related systems, we are enthusiastic about the potential for our global collaboration with C-Drill, as well as our previously announced collaboration with Halliburton.
Cynthia: both of which will further support market penetration of our managed pressure drilling technology while increasing offshore drilling efficiency and safety across more subsea wells.
Cynthia: Our Completion and Production Services Segment's Active Seat Valve Technology combined with automation and digital offerings should also provide further technological differentiation.
Cynthia: In parallel, the recent introduction of our EPIC portfolio of perforating systems within our downhole technology segment will provide our customers with increased flexibility for their completion operations while expanding our revenue opportunities.
Cynthia: Further, our initiative to secure long-term contracts with our international customers for the supply of perforating products is gaining traction, with recent awards in Latin America and the Eastern Hemisphere commencing in 2025.
Cynthia: Considering current market dynamics, along with our internal restructuring initiatives, we expect our fourth quarter adjusted EBITDA to range between $20 and $23 million.
Cynthia: Free cash flow generation is expected to remain relatively strong at approximately $20 million during the fourth quarter of 2024, which will be augmented by $25 million of anticipated facility sale proceeds as we mentioned earlier.
Cynthia: With these expected cash flows, net debt should fall below $45 million at year-end 2024.
Cynthia: Our capital allocation priorities include growth CapEx and organic research and development opportunities to create sustained competitive advantages over the longer term. We will also focus on share repurchases as a means to increase returns to our investors.
Speaker Change: Given our outlook and strong free cash flow generation, as Lloyd mentioned earlier, we have increased our share repurchase authorization to $50 million with a 2-year expiration date.
Speaker Change: To support long-term profitability and growth, we remain dedicated to enhancing our operations and pursuing profitable ventures to support our global customer base.
Speaker Change: We will continue to capitalize on the strength of offshore and international markets.
Speaker Change: streamline our domestic operations to focus on our core areas of expertise and further leverage our expanded portfolio of technologies and specialized services to generate increased returns for stockholders.
Speaker Change: Safety, quality, efficiency, and cost-effective operations remain fundamental to all that we do and are at the forefront of the value that we deliver to our customers' operations.
Speaker Change: to meet increasing global demand. While major projects in traditional oil and gas developments remain an essential bedrock for long-term revenue visibility,
Speaker Change: We continue to pursue a broad range of energy expansion opportunities within deep sea minerals, offshore wind, geothermal, and carbon capture and storage to further enhance long-term growth opportunities.
Speaker Change: That completes our prepared comments. Mark, would you open up the call for questions and answers at this time?
Mark: Sure! We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. I'll pause for a short moment to compile the Q&A roster.
Speaker Change: And your first question comes from the line of Jim Rollison with Raymond James. Jim, your line is now open.
Jim Rollison: Hey, good morning, everyone.
Jim Rollison: You've been on this kind of interesting journey over the past couple of years of continually having to right-size your U.S. land-oriented businesses, just given how the market dynamics have changed.
Jim Rollison: I'm curious, you know, as you're taking more measures this quarter...
Jim Rollison: And 4Q, I realize, may not be the best barometer given some of the budget exhaustion comments we've heard around this earnings season. But maybe just a little bit of context of how you were thinking about.
Jim Rollison: you know, the margin profile of both the completion and production services and downhole technologies as we just move forward, given what you've done, given some of the new technology introductions, etc. Like, how are you thinking about that, you know, in the context of what we've seen over the last few quarters?
Speaker Change: That's right.
Speaker Change: Fairly material increases in our EBITDA margins coming out of completion and production services and just realize the businesses we are exiting were either
Speaker Change: not generating returns or generating negative returns. And so we also put in the 10-Q, and I believe in the press release, information to allow you to model. You've got to obviously reduce the top line.
Speaker Change: And I just say it varied by quarter, and that mostly because of our Gulf of Mexico mitts, which is a higher margin business.
Speaker Change: always suffers in Q3, but particularly this particular quarter, and so that mix was a little
Speaker Change: But I'd say generally speaking, you're talking about 20, 24 and the mid-teens.
Speaker Change: kind of range for EBITDA margins that, again, a decent amount of variation by quarter, some of them high teens. As we go into, and to your point is correct, one of the keys for us is seeing that offshore pickup.
Speaker Change: which will commence in Q4, but it won't be as strong as possibly it was earlier in the year just yet. But with the mix we anticipate, both international, Gulf of Mexico, and a much more streamlined U.S. land,
Speaker Change: piece of the business, we're looking for EBITDA margins more like 23 to 25 percent.
Speaker Change: In 2025, again, you've got to crop off the revenue a bit to reflect the exit of these business lines.
Speaker Change: taken to market. It is being field tested and has been field tested over the last quarter or so.
Speaker Change: Now, I will acknowledge this market has not been the best to bring new technology to market because
Speaker Change: activities have been down. However, the initial customer reception is good.
Speaker Change: for the new technology domestically and then the second leg of the stool has been international penetration on the completion side.
Speaker Change: of the business, and recall that historically, most of our international perforating work was P&A driven, not completions driven, and again, as Lloyd mentioned,
Speaker Change: We're getting some early success, one with work in Brazil and the other one in the Eastern Hemisphere. And so while it's early days...
Speaker Change: We are expecting to see improvement on the downhole technology side. And I'm looking to Lloyd for kind of a range of 2025 EBITDA margins for the business. Low double digits. Kind of low double digits compared to very little contribution this year.
Speaker Change: Right, in that business. Yeah, very helpful and I presume in downhole technologies you might actually see revenue improvement as well just because of the the new product kind of uptake in international markets.
Speaker Change: international markets, correct.
Speaker Change: Yep, and then my follow-up question, I guess...
Speaker Change: We've heard kind of through this earnings season some varying commentary, but
Speaker Change: One of the the bottom lines I've heard is kind of
Speaker Change: with this pullback in oil prices, some of the shorter cycle activity, not just in the U.S., but even international.
Speaker Change: generally going forward. Just kind of as you talk to customers, especially this probably relates as much as anything to your offshore manufactured products business, but just kind of how the conversations are going and you know, you guys had a great bookings quarter and backlog bounced back up to the highest level in four quarters, but just you know, kind of trying to
Speaker Change: figure out how you're seeing the backdrop given what's kind of happened on the macro front.
Speaker Change: Thank you for joining us. Have a great day.
Speaker Change: profiles, and so you're logically going to spend, obviously, the money to develop the reserves that are already discovered. And that is true for our specialized connectors, for our flex joint technology, and any of our subsea type connectors.
Speaker Change: Investments and applications. So in my mind, I think think of that as kind of the base recurring business
Speaker Change: that we do believe will grow, and as you see these large EPIC contracts awarded around these field developments, that logically obviously plays into our product line, given that that is the driver for the business.
Speaker Change: With backlog, yes, but also bidding and quoting activity and the fact that it is more production oriented, development oriented for fields already in play.
Speaker Change: We feel pretty confident we'll see growth. Now, we're not forecasting heroic growth on what I call the base business, you know, kind of mid-single-digit type growth, although it could be better if our award...
Speaker Change: profile is good.
Speaker Change: But then remember what we're trying to communicate is we have brand new technology coming to market.
Speaker Change: and that has been largely the NPD offering that we have and we quoted some revenue, go forward annual revenue which should be additive to the business. The mineral riser systems, I believe we've
Speaker Change: So yes, our outlook is good. Now, you know, the headlines right now with crude oil aren't great, but I think where people are going to spend money is in these large field developments offshore internationally where a lot of money has already been sunk.
Speaker Change: appreciate the color and look forward to net net zero
Speaker Change: Yeah, thanks. Yeah, we do too, Jim. Thank you.
Speaker Change: Your next question comes from the line of Stephen Jengero with Stifel. Stephen, your line is now open.
Stephen Jengero: Good morning, everybody.
Stephen Jengero: and Eric Hasravan.
Stephen Jengero: So just to start, and you just gave some color on the margins in 2025. When we think about
Stephen Jengero: What you've done so far, is there more to come as far as some of these, or is this sort of the bulk of the strategic initiatives on the different product lines?
Speaker Change: Well, I mean, there's a little bit of this that's ongoing in the fourth quarter, but as we obviously have simplified the business, we'll be looking to
Speaker Change: internal efficiencies, particularly around SG&A. That shouldn't surprise anybody, but a lot of the work has been done on the operational product line basis.
Speaker Change: And what we're left with, essentially, if you're thinking about U.S. land, it's our frack and isolation business. That's our active-seed gate valves, that's where we have the automation and digitization.
Speaker Change: efforts underway and our isolation tools, as you know, has always had some proprietary standing in the market. And so it really comes down to, do we have a decent level of activity to support a high-graded product offering across the basins that we're in?
Speaker Change: and we're assuming that is the case at this point, and we're focusing only on the product lines that offer good EBITDA margins over the long term. As well as our extended reach technology. Yeah, let's not forget our extended reach technology.
Speaker Change: Any guidance on sort of the
Speaker Change: the turn of the backlog and how to think about that, but also
Speaker Change: The margins in the quarter were very good. I think it was the highest level since the back half of last year, and I think one of the higher levels ever. How should we think about those margins in general? I mean, I always think about them as sort of high teens to low 20s. Is there any change to that based on what's in the backlog and pricing, et cetera?
Speaker Change: You know, Stephen, you've been with us a long time, and you know that the product mix shipped out the door in a given quarter really does matter, but I do think, you know, our internal goal this year, I believe, was 19% EBITDA margins.
Speaker Change: And clearly we can exceed that, as you've seen. But I think I have to look annually, not quarter by quarter. And these are sustainably higher than they were a couple of years ago. And there's room to go, but the key there is going to be...
Speaker Change: Quality throughput through all of our various manufacturing facilities around the world.
Speaker Change: and we do feel good about that, but as revenue grows, your cost absorption improves and we could see a baseline improvement.
Lloyd Hajdik: in those EBITDA margins. But again, quarter by quarter, it can vary just a bit. So I kind of stick with the kind of 19% to 20% range, at least right now. I'm looking for Lloyd for validation if you feel any different, tell me. Yeah. That's correct.
Speaker Change: Okay, thanks and any thoughts on the revenue side?
Speaker Change: You had a question about backlog. I'm sorry. So, you know, backlog conversion, I'm doing this off the cuff based on history, not a level of precision on the exact backlog, but generally about 75% of the backlog turns in the forward.
Speaker Change: I'd also like to remind you that we have a decent amount of service, repair, inspection, spare parts work.
Speaker Change: That's not really black backlog driven and so and you know that can be anywhere from 15 to 20 percent of our revenue Over time just you get a large installed base you have to Support that installed base with service and repair work
Speaker Change: Okay. That's very helpful. I'll get back in line. Thank you.
Speaker Change: Thank you, Stephen.
Speaker Change: Again, if you would like to ask a question, simply press star followed by the number one on your telephone keypad.
Speaker Change: Your next question comes from the line of Sean Mitchell with Daniel Energy Partners. Sean, your line is now open.
Sean Mitchell: Hey, good morning team. Thanks for taking my questions.
Sean Mitchell: You guys highlighted some Gulf of Mexico weakness in Q3 and the related storms that's returning. It'll be returning in Q4, but could you speak to kind of your outlook for the Gulf in 25, Cindy?
Cindy Taylor: Well, I'll just generally say our offshore business, we've been in it for decades, and it is a very high-margin, good contributor for us. Now, a lot of this work is around
Cindy Taylor: and intervention work that, as you think of it in that vein, some of it is call-out work. And customers are – and we saw a soft Q3.
Cindy Taylor: Based on last year and this year, you should probably model a softer Q3 in 2025. But on balance, we see modestly improving activity in the Gulf of Mexico. Actually, there are some customers returning to that.
Cindy Taylor: I'm sorry, we're getting a little bit of feedback, but some customers returning to the Gulf level of activity, and then again, work over and intervention work is pretty solid throughout the period.
Speaker Change: Got it. And then you mentioned earlier in the call Brazil, but could you just walk us through international markets today where you're seeing potential softness and where you're seeing opportunities for the business to grow in 25? I think you mentioned Brazil earlier, but is there anything else to add to any color around international?
Speaker Change: You know, we've been in Brazil for quite a long time and have a very, very solid base of operations.
Speaker Change: You know, if I go to all the industry data, I think they're probably 40% or more of deep water activity. So you're not really participating in deep water if you're not in Brazil, and that has been such a good...
Speaker Change: opportunity for us vis-a-vis the production facilities and the infrastructure around that, as is Gianna, but
Speaker Change: You know, that's just where the dollars are being spent. And again, these are production facilities for discoveries that are already in place. But in addition to that, they're looking at new step-out fields continually, and so it's going to be a
Speaker Change: multi-decade resource play for us that I think we're very well positioned with Petrobras and and other operators in the region.
Speaker Change: I'd say generally it has been really around production infrastructure, but with the introduction of our NPD equipment, we do hope to garner more drilling equipment, particularly riser type opportunities, some of our connectors.
Speaker Change: There is a broad base there that we can opportunistically take advantage of. It's hard for me to say that I've seen weakness.
Speaker Change: per se in any of the offshore basins where we see weaknesses on U.S. land, and we've taken actions accordingly.
Speaker Change: Got it. Great color. Charlie, the third-party data would suggest that the largest contributors for EPIC-type spending are Latin America, Asia, and Africa.
Speaker Change: And Africa quite frankly is kind of a new emerging type. We've certainly been in West Africa for decades but it took a big pause and now it's getting kind of a renewed interest I'll call it.
Speaker Change: Thank you so much for the color and thanks for taking my questions. I'll turn it back.
Speaker Change: Thanks, Sean.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of, again, Stephen Nguyen-Garo, with Stifel. Stephen, your line is now open.
Speaker Change: Is there any chance you're on mute?
Stephen Jengero: Oh, sorry, I was on mute, Cindy, I'm sorry. All good.
Stephen Jengero: The
Stephen Nguyen-Garo: The two quick follow-ups, and I know you're sort of, I'll call it loosely guided, on some CMP and down home margins next year. Are those...
Stephen Nguyen-Garo: kind of where you are today when you when you adjust for the for the businesses being sold or is there anything from a pricing activity or improvement perspective that you need to kind of get to those levels?
Speaker Change: I will have to caveat, it's not where we are today simply because of the softness in the gulf in Q3. But if I were to pro forma out
Speaker Change: Q3 softness, i.e. streamline it with Q1 or Q2, I'd say we're getting pretty close to that, as is. In this market, we are not counting on price improvement.
Speaker Change: Okay, great, that's helpful. And then the other quick one was...
Speaker Change: I guess they're a little bit tied together. But outside of that, I think like a million and three of DNA that's coming out of the C&P segment is 4Q DNA pretty flattish with the third quarter.
Speaker Change: You know, as he looks for the specific number, Stephen, I will say that
Speaker Change: the higher performing businesses, and when you do that, our completion services...
Speaker Change: DDNA is starting to run out because we had heavy capex over the last decade, much lighter capex and particularly our active seat valve technology really does.
Speaker Change: protect and reduce some of the wear on the frack equipment. And so all these things kind of play into lower sustained CapEx going forward that translates into lower DDNA and enhanced free cash flow.
Speaker Change: That's really the message. Yeah, and to your point that, you know, DD&A is going down fourth quarter And I'm in line with the reduction from the exit at businesses
Speaker Change: about a million dollars. Yeah, thanks Lloyd and Cindy. Thanks for the details.
Steven: Thanks, Steven.
Speaker Change: There is no further question at this time. I will now turn the conference back over to Cynthia Taylor for closing remarks.
Cynthia Taylor: Thank you, Mark. You did a great job today, and thanks to all of you who were able to join our call. We know it's a busy week of earnings, and we certainly appreciate your interest in oil states. We will be available for follow-up questions should you have any, and I wish you success through the balance of the earnings season. Take care.
Speaker Change: Thank you, Cindy. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Speaker Change: [music]