Oil States International, Inc.
Q2 2021 Earnings Call Transcript

Published: 31 Jul 2021

[Operator:]

Good morning, and welcome to the Oil States International Second Quarter '21 Earnings Conference Call. My name is Zanera, and I'll be the operator for today's call . I will now turn the call over to Ms. Ellen Pennington. Ellen, you may begin.

[Ellen Pennington:]

Thank you, Zanera. Good morning, and welcome to Oil States Second Quarter 2021 Earnings Conference Call. 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 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 one and half hours after the completion of this call and will be available for one month.

[Cindy Taylor:]

Thank you, Ellen. Good morning, and thank you for joining our conference call today regarding our second quarter 2021 earnings. Second quarter operating results in each of our segments benefited from the improved commodity price environment. Sequentially, our consolidated revenues and adjusted consolidated EBITDA increased 16% and 64%, respectively. Revenues in our Offshore/Manufactured Products segment led the way with a 27% sequential increase, while revenues in our Downhole Technologies and Well Site Services segments increased 5% and 6%, respectively. We also achieved a 202 basis point increase in adjusted consolidated EBITDA margins, resulting from revenue growth coupled with the benefit of cost reductions. Each of our operating segments reported positive EBITDA for the third consecutive quarter. Adjusted consolidated EBITDA for the quarter totaled $10 million, excluding $3 million of restructuring charges primarily associated with our exit of certain lease facilities. Cash flow from operations totaled $22.4 million for the quarter, allowing us to fully pay off our revolver and repurchase a portion of our 1.5% convertible senior notes. We also were very pleased to receive a 2021 Spotlight on New Technology award from the Offshore Technology Conference for our Merlin Deepsea Mineral Riser System. Lloyd will now review our consolidated results of operations and financial position in more detail before I go into a discussion of each of our segments.

[Lloyd Hajdik:]

Thank you, Cindy, and good morning, everyone. During the second quarter, we generated revenues of $146 million while reporting a net loss of $15 million or $0.25 per share. The quarterly results included noncash lease asset impairment charges of $2.8 million, along with $2.6 million of restructuring charges, as described in our press release. Our adjusted consolidated EBITDA totaled $10.1 million, improving significantly from the first quarter due to higher activity levels which drove increased revenues in our Offshore/Manufactured Products segment and in our other US land centric businesses. As Cindy mentioned, we repaid all outstanding borrowings under our asset-based revolving credit facility during the quarter and also bought back $6.4 million principal amount of our 1.5% convertible senior notes at a discount to par value. As of June 30, $26 million in principal amount remained outstanding related to the 1.5% convertible senior notes, which mature in February 2023.

[Cindy Taylor:]

Thanks, Lloyd. Our Offshore/Manufactured Products segment reported revenues of $77 million and adjusted segment EBITDA of $10 million in the second quarter of 2021, compared to revenues of $61 million and adjusted segment EBITDA of $7 million reported in the first quarter of 2021. Revenues increased 27% sequentially, driven primarily by sales of our connector products and production equipment but with noticeable improvement also coming from sales of our fixed platform, short-cycle and military products. Adjusted segment EBITDA margin in the second quarter of 2021 was 13.4% compared to 11.2% achieved in the first quarter of 2021. Backlog totaled $214 million at June 30, 2021, a decrease of 5% sequentially, yielding a book-to-bill ratio of 0.9x for the quarter. For over 75 years, our Offshore/Manufactured Products segment has endeavored to develop leading-edge technologies while cultivating the specific expertise required for working in highly technical deepwater and offshore environment. As the world expands investment in alternative energy sources, we will be working diligently to expand our core competencies into the renewable and clean tech space. Recent product developments should help us leverage our capabilities and support a more diverse base of customers going forward. We continue to bid on potential award opportunities supporting our traditional subsea, floating and fixed production systems, drilling and military clients while experiencing an increase in bidding to support multiple new clients actively involved in subsea minerals, offshore wind developments and other renewable and clean tech energy systems globally. Approximately 6% of our second quarter bookings were tied to non-oil and gas projects, bringing the year-to-date non-oil and gas bookings to 12%.

[Operator:]

And our first question comes from Stephen Gengaro from Stifel.

[Stephen Gengaro:]

So two things, if you don't mind. The first, you talked, Cindy, about the under-absorption in downhole in the quarter. And I was just curious if you could talk about, kind of from these levels, the sort of incrementals we might be looking at and if there's any positive pricing trends that you're seeing in that business yet.

[Cindy Taylor:]

Margins in our Downhole Technologies segment were negatively impacted by called-out weather events. These are lightning strikes in our shaped charge manufacturing facilities. We had a lot of shutdowns. So there's inefficiencies in the quarter. But I would add to that, that there's a general lack of pricing power in the perforating product line coupled with a bit of inflation. So our outlook right now is kind of very modestly improved sequential margins in Q3 with a little more upside in Q4 as we kind of manage through those effects.

[Stephen Gengaro:]

And you referenced just in your remarks and on your -- in your press release as far as sort of focusing in on the growth businesses with the best sort of long-term return profiles. Do you envision this as just sort of a strategy of how you allocate growth capital going forward or would you envision any sort of strategic divestitures or anything of that nature?

[Cindy Taylor:]

As you can see throughout the first 6 months, we're really focusing both on product line and region and doing our very best at kind of the subproduct line to allocate capital where we're confident we're going to get good returns, and we are assessing kind of marginal operations and trying to trim out our indirect cost. And as an example, there are very few adjustments to reported EBITDA, but most of this -- or virtually all of it is associated with exiting leased facilities that we believe have no longer benefit or utility. So again, eliminating those costs prospectively help the individual product lines report stronger margins overall. So to say that there's a big exit of a business, the answer is no. We've trimmed out businesses that are not making or don't look like they will make positive EBITDA contributions. And so I think the good news for the company and the employees is a lot of this is behind us now. And we are going to allocate capital to the higher return. We -- and set some thresholds. I think what this industry has done wrong for many years, at least the last decade, is allocate too much capital to equipment, therefore destroying market share and pricing. And I don't think I'm alone in saying we're going to be controlled about that growth capital going forward.

[Stephen Gengaro:]

And then if I could throw in one more. We're hearing more -- and curious your thoughts on this that in 2022, sort of a 15%-ish or more growth rate, and upstream CapEx in the North America markets is looking likely or at least pretty possible. In that environment, how should we think about the growth rates of your businesses relative to -- and even if it's not 15%, just relative to the market in general?

[Cindy Taylor:]

So I guess my comment there is, one, I generally agree with that, and I think it's supported by a couple of things. Number one, you've seen an increase in activity driven by privates thus far. Typically, those privates don't manage a lot of hedging activity in their portfolio. And I'd say they're generally investing based on economic decision-makings. And at these current levels of WTI pricing, I think it's beneficial for them to do that. And based on indications from our customers, even as early as the second half of this year, much less 2022, we do see continued improvement, as I mentioned in my notes. And I would add to that, again, we track a lot of the public -- larger public companies as well. And many are hedged at much lower than current pricing levels. So as those hedges roll off, it certainly seems to support your thesis of a 15% overall growth rate in industry CapEx. So I would say that's kind of number one.

[Operator:]

Thank you. And we have no further questions at this time. I'd like to turn the call back over to Ellen.

[Cindy Taylor:]

This is Cindy. I just want to thank all of you for joining our call today. We deeply appreciate your interest in Oil States and your continued dedication and support of the industry. I do wish you good luck as you continue through the remainder of the earnings season. I wish you all the best. Thank you.

[Operator:]

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