Oil States International - Q1 2024

Transcript

Operator (participant)

Thank you for standing by. My name is Dee, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oil States International First Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press Star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press Star one again. Thank you. I would now like to turn the call over to Ellen Pennington, Senior Counsel and Assistant Corporate Secretary. Please go ahead.

Ellen Pennington (Senior Counsel and Assistant Corporate Secretary)

Thank you, Dee. Good morning, and welcome to Oil States First Quarter 2024 Earnings Conference Call. Our call today will be led by our President and CEO, Cindy Taylor, and Lloyd Hajek, 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 2 hours after the completion of this call and will continue to be available for 12 months. I'll now turn the call over to Cindy.

Cindy Taylor (CEO)

Thank you, Ellen. Good morning, and thank you for joining our conference call today, where we will discuss our first quarter 2024 results and provide our thoughts on market trends, in addition to discussing our company's specific outlook comments. I want to first draw your attention to certain segment changes that we have made to better reflect the underlying activity demand drivers for our business, as well as how we manage our segments. Short-cycle businesses previously reported within our Offshore Manufactured Products segment are now being included in our Downhole Technologies segment. All prior periods have been conformed with the current year presentation.

Our first quarter consolidated revenues and adjusted EBITDA decreased sequentially, due primarily to the impacts of seasonality and the timing of revenue recognition for our percentage-of-completion projects in our Offshore Manufactured Products segment, where revenues increased year-over-year, but declined sequentially. We saw some slowing momentum from an order perspective in the first quarter of 2024 in terms of drilling and subsea equipment orders. Certain orders, which we have a high degree of confidence of being awarded, moved out of the quarter, resulting in segment backlog of $305 million as of March 31, and a quarterly book-to-bill ratio of 0.8 times. Our completion services and Downhole Technologies businesses have begun to recover from the fourth quarter of 2023 activity slowdown that the industry experienced, but progress in this recovery during the first quarter was slow.

Cost control and other reduction measures are being implemented in the areas where we are experiencing lower levels of activity, particularly the natural gas basins, as we do not expect to see much recovery in those basins over the next couple of quarters. However, we remain bullish on natural gas fundamentals over the longer term. Our investments in technology and innovation were again highlighted by the Offshore Technology Conference with the announcement that we are the recipient of two 2024 Spotlight on New Technology awards for our SSwift Ultra-Deepwater Connector and our Active Hub platform. Both of these new technologies are explained in more detail in our press release. 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.

Benefits of our expanded technology offering 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.

Lloyd Hajdik (EVP and CFO)

Thanks, Cindy, and good morning, everyone. During the first quarter, we generated revenues of $167 million, adjusted consolidated EBITDA of $15 million, and a net loss of $13 million, or 21 cents per share. Our net loss for the first quarter included a non-cash goodwill impairment charge of $10 million in facility consolidation and other charges of $2.5 million. Excluding these charges, our adjusted net loss was $1.9 million or a net loss of 3 cents per share. In the first quarter, certain short cycle manufacturing operations historically reported within the Offshore Manufactured Products segment, such as legacy frac plugs and elastomer products, were integrated into the Downhole Technologies segment to better align with the underlying activity demand drivers and current segment management structure, as well as to provide for additional operational synergies.

Historical segment, financial, backlog, and other information were also conformed with the first quarter 2024 revised segment presentation. Our Offshore Manufactured Products segment generated revenues of $87 million, operating income of $11 million, and adjusted segment EBITDA of $16 million in the first quarter. During the first quarter, the segment recorded charges of $1.5 million, associated with the consolidation of certain manufacturing and service locations. Excluding the facility consolidation charges, adjusted segment EBITDA margin was 18% in the first 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. We own two facilities that are classified as held-for-sale assets at March 31.

Proceeds from the sales of our facilities in Singapore and Houston, which are anticipated to close in 2024, are expected to total approximately $35 million, significantly exceeding the costs associated with our planned investment in our new Batam facility. Land was purchased in Batam this quarter, and we commenced construction, with completion targeted for the first half of 2025. In the meantime, temporary manufacturing operations have been established in Batam so that we can efficiently execute both our contracted backlog and subsequent orders during the construction phase. Backlog totaled $305 million at March 31, a decrease of 7% from December 31, 2023.

In our Wellsite Services segment, we generated revenues of $47 million, an operating loss of $0.4 million, or $400,000, and adjusted segment EBITDA of $7 million in the first quarter. During the quarter, the segment recognized $0.7 million, or $700,000, in costs associated with the consolidation and exit of three facilities. Additionally, the segment recorded costs of $0.4 million, or $400,000, associated with the defense of certain patents related to its proprietary technologies. Excluding these charges, adjusted segment EBITDA margin was 14% in the first quarter, compared to 12% in the fourth quarter. In our Downhole Technologies segment, we reported revenues of $33 million, an operating loss of $12 million, and adjusted segment EBITDA of $2 million for the quarter.

These results included a non-cash goodwill impairment charge of $10 million, recorded in connection with the first quarter 2024 segment realignment. As is usually the case, during the first quarter, we used cash flows from operations totaling $11 million and invested $8 million in land and CapEx, net of proceeds from sales of equipment. Net CapEx in the first quarter was primarily used to purchase land for our new Batam, Indonesia, manufacturing facility. As of March 31, no borrowings were outstanding under our revolving credit facility, while amounts available to be drawn totaled $86 million, which, together with cash on hand, resulted in available liquidity of $110 million. In February, we extended the maturity date of our revolving credit facility to February 2028. Now, Cindy will offer some market outlook and concluding comments.

Cindy Taylor (CEO)

Thank you. U.S. land activity levels took a negative turn in 2023, with softening global demand, higher production, and resultant elevated inventories, which led to an approximate 20% activity decline in the U.S. by the end of the year. While Brent and WTI crude oil prices were up approximately 10% and 15%, respectively, at March 31st, compared to the prices in effect at December 31st, this improvement developed later in the quarter and did not translate into activity increases. Natural gas, U.S.-driven basins where we operate, remain weak, given the low commodity price. Global inventories are slightly below their 5-year seasonal average for crude oil, but remain well above the 5-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 do think we could see increased spending in international and offshore markets. Despite the seasonally slow start in the first quarter of 2024, revenues in our Offshore Manufactured Products segment are expected to grow year over year, given the level of bidding and quoting activity, new product introductions, strong levels of backlog, and the timing of expected execution of major project milestones. We expect our Wellsite Services and Downhole Technologies segments to continue to perform in line with market activity indicators. However, increased contributions from the commercialization of new technologies that I have discussed previously, along with cost reduction initiatives, should improve our results.

Considering these market conditions and a slower start to the year, we expect to generate EBITDA ranging from $85 million-$90 million during 2024, which represents an approximate 5% reduction from the midpoint of our prior guidance range. In terms of free cash flow generation, we expect to generate $40 million in free cash flow during 2024, implying a free cash flow yield of 10% or greater. Various facility sales could increase our free cash flow, but timing of closing remains uncertain. Now, I would like to offer some concluding comments. 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 products and service offerings. 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 deep-sea minerals gathering, fixed and floating offshore wind developments, carbon capture and storage, geothermal applications, and other renewable and clean tech energy opportunities. These new energy transition opportunities create strong potential for us to expand our product and service offerings and our revenue base over the longer term.

Oil States will continue to conduct safe operations and will remain focused on providing technology leadership in our various product and service offerings, with value-added products and services available to meet customer demands globally. That completes our prepared comments. Dee, would you open up the call for questions and answers at this time, please?

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker in your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star one to join the queue, and your first question comes from the line of Jim Rollyson from Raymond James. Please ask your question.

Jim Rollyson (Director and Equity Research Analyst)

Hey, good morning, Cindy and Lloyd.

Cindy Taylor (CEO)

Hi, Jim.

John Daniel (Founder and Managing Partner)

Hi, Jim.

Jim Rollyson (Director and Equity Research Analyst)

How are you guys today? So Cindy, on the Offshore Manufactured Products business, you obviously order slips. You've had, I think, two quarters of sub one times book-to-bill, but you kind of continue to talk, as does others in the industry, around just general spend and you know strong outlook for offshore. Maybe just a little color around what you're seeing from bidding. It sounds like order slipped and you know just some maybe commentary around when you think you capture that. And then the other part I want to get into is just maybe the timing of how your backlog is set to play out through this year, so we make sure we get the timing of revenues in that segment correct.

Cindy Taylor (CEO)

Yeah. Thank you, Jim. Those are great questions, and I'll just kind of reflect a little bit on Q4 and recall that we were very heavy on our major projects. We, obviously, a lot of material receipts came in, which accelerated revenue recognition in Q4 around those major projects, 'cause it's cost incurred, obviously, the total cost expected for those jobs. And so even though our book-to-bill was below 1, with those heavy revenues, our bookings were fairly strong in Q4. I kind of want to throw that out. Specific to Q1, I would speak to, you know, why it wasn't 1-to-1, which was shy of our expectations. But in particular, we had a large order where we secured long lead time orders, but not the full orders that flipped over into Q2.

So I kind of look at the 0.8 differently than if we just weren't, we didn't have anything active that we thought was coming in. So as I mentioned in the notes, we feel very secure about getting those orders because the customer has already ordered lead time pieces of that order. So let's say that that kind of explains the 0.8 book-to-bill. We still expect that our book-to-bill for the year will be north of 1. I always say, though, the vagaries quarter by quarter are very difficult for just an example of the reason I just talked about on timing of orders. So I don't see a massive acceleration of orders, nor do I see any real delays in the orders. They're always gonna be very dependent on when the larger ones come in in a given quarter, and they can move between quarters.

I, I wish it weren't that way, but I will tell you, if I ever see a slowdown, that I expect our book-to-bill to go below 1, and at this point, I do not. Right now, our forecast for Q2 is to be slightly north of 1, and it's predicated, obviously, on the order I just talked about, plus some pipeline orders that are fairly broad-based across the globe, as well as some service bookings that we expect in Brazil. So those are kind of the lay of the land from an order perspective, but our outlook for overall bookings over the year really haven't changed.

Jim Rollyson (Director and Equity Research Analyst)

Okay. And then just on, as you look at, you have better insight, obviously, than we do on how the revenue progression should play out, and, and I recognize some of it's backlog driven and some of it's shorter cycle stuff. But just as you look at backlog and the way things are supposed to play out on a calendar, which they don't always do, just how do you think this year proceeds? Because you, you gave the color for the full year being actually up year over year, but just maybe how you lay that out from a quarter-to-quarter perspective.

Cindy Taylor (CEO)

Yeah, just basically as is typical, if you even look at history, that's why I kind of said, you know, this quarter looks kind of rough for offshore products, but it's actually up year-over-year. There's always that seasonal element to it. But what you're gonna see, I think, is kind of a steady ramp as we progress throughout Q2, Q3, and Q4 for offshore products. And those are kind of trends we've seen consistently in past years. And again, it obviously is dependent on the timing of getting the, the backlog in the door, but a lot of it is already secured at this point in time. I would focus on, to some degree, the service orders, because mix always plays a bit of an impact as well, and service tends to be higher margin.

But overall, just assume a steady ramp from Q1 throughout the year in terms of revenues and EBITDA generation.

Jim Rollyson (Director and Equity Research Analyst)

Got it. I'll turn it back. Appreciate your comments.

Cindy Taylor (CEO)

Thank you, Jim.

Operator (participant)

Our next question comes from the line of Luke Lemoine from Piper Sandler. Please ask your question.

Luke Lemoine (Managing Director and Senior Research Analyst)

Yeah, hey, good morning.

Cindy Taylor (CEO)

Good morning, Luke.

Luke Lemoine (Managing Director and Senior Research Analyst)

Cindy, good morning. Cindy, you touched on some of the pieces earlier, but can you just refresh us on where you are on the downhole evolution? You know, what are some of the key initiatives, you know, and kind of where you are on the new product and technology rollout?

Cindy Taylor (CEO)

Yeah, that is also a great question, Luke. And what we've done and why we're blending these groups together, we have a more integrated Downhole Technologies offering, and this is how we're managing the business now to where the short cycle offshore products are getting highly integrated with our Downhole Technologies segment from a leadership perspective, reporting perspective, everything, procurement and support. And so I think the go forward for the business is in improved shape. What I'll call the base business before the segment reallocation did improve sequentially, both in terms of revenue and EBITDA. And so we're seeing results now. We expect further improvement in Q2, and that is predicated on some improved interest, I'll call it, on the domestic perforating side, in addition to higher international sales.

So the keys there are technology rollout, market share in the U.S., and in turn further international penetration on the perforating side. That, you know, honestly, our plug business is fine, and it's both, you know, getting good market share and making margin, so that's really not the focus. The focus has been on the perforating side of the business. I'm always don't get me excited about it, but I am saying we're seeing improvements at this point in time.

Luke Lemoine (Managing Director and Senior Research Analyst)

Okay, got it. Thanks so much, Cindy.

Cindy Taylor (CEO)

Thanks, Luke.

Operator (participant)

Once again, if you would like to ask a question, please press star one on your telephone keypad and wait for your name to be announced. Our next question comes from the line of Stephen Gengaro from Stifel. Please ask your question.

Stephen Gengaro (Managing Director)

Good morning, everybody.

Cindy Taylor (CEO)

Hi, Stephen.

Stephen Gengaro (Managing Director)

Two for me. First, with the recasting of the segments and just thinking about Offshore Manufactured Products, should we think about the potential margin profile and/or sort of incrementals in that business any differently as we look out over the next several quarters?

Cindy Taylor (CEO)

No, not at this point in time. It was interesting when we did the recast, kind of the margin profile ended up in similar positions, and so we don't expect incrementals. Obviously, incrementals should go up if we get the top line growth that we're looking for, but that's not unique to the mix of businesses. That's just cost absorption.

Stephen Gengaro (Managing Director)

Okay, thanks. I got dialed in a little late, so I apologize if you addressed this, but when you think about the change in your full-year guide from the prior guidance, is most of that just kinda U.S. land activity related, or is there anything else in there we should be thinking about?

Cindy Taylor (CEO)

You know, at this point in time, we obviously had a lower quarter in our Offshore Manufactured Products business than we expected to have, with a little bit of these orders pushed out. And so I'm putting a little downward pressure on Offshore Manufactured Products. And, you know, the key to U.S. land for us is kind of managing through the exposure that we have in the gas plays efficiently, I'll say, this year, given the very low activity levels, but staying prepared for what should be an uplift on those plays, you know, whether as early as 2025. And so controlling costs in the natural gas plays really is gonna be the game for the next couple of quarters as it relates to U.S. land.

But we are proactively doing what we need to do, so it's not a terrible drag on the overall results.

Stephen Gengaro (Managing Director)

Okay, great. And then, maybe just one final on the perforating side, there's been a lot of movements over the last couple of years, I think, just in the competitive landscape, and you have one competitor, I think, who's trying to sell their business. Can you just speak to the dynamics there? Have you seen any changes there as far as the perforating side is concerned? And what are you seeing there from a pricing perspective?

Cindy Taylor (CEO)

Well, I'll be honest, yeah, there is a larger player that is looking to monetize, and there's actually a couple of smaller competitors looking to monetize, so that could lend itself to a healthier market going forward for the business. We are committed to the business, and we're committed to delivering the technology it takes to be successful in it. I'll just kind of, you know, generally say that from a competitive landscape, it's hard for me to say that it's not getting a little bit better or will be as some of these transactions occur. And I think more important for us specifically is the investment we made last year in the new technology rollout, and importantly, the go-to-market strategy, you know, which has evolved from moving away from wireline companies to E&Ps and back.

We just want to support our customers regardless of where they are in the supply chain, and I think that's going to benefit us over the longer period of time.

Stephen Gengaro (Managing Director)

Thanks. And if I could slip in one more, Cindy, sorry. Do you—does the ENP consolidation and the larger operators' appreciation for that technology ultimately help you?

Cindy Taylor (CEO)

Oh, I think it would, for sure. I mean, it all comes down to reliability, and in, in the world we work in, it's also got to be cost. And, we've made significant improvements on there. But I, I think the technology differentiators really play more probably in the international market, just because of, the reliability factor that is necessary, and there's not quite as much competition, quite frankly, in international basins. And so those are gonna be the key differentiators and, drivers of our success going forward.

Stephen Gengaro (Managing Director)

Okay, great. Thank you.

Cindy Taylor (CEO)

Thanks, Steven.

Operator (participant)

Our next question comes from the line of John Daniel from Daniel Energy Partners. Please ask your question.

John Daniel (Founder and Managing Partner)

Hey, good morning, Cindy and Lloyd.

Cindy Taylor (CEO)

Hi, John.

Lloyd Hajdik (EVP and CFO)

Hi, John.

John Daniel (Founder and Managing Partner)

Yes. You sort of answered my question was in response to Stephen's question, but I'll maybe rephrase it a little bit. I mean, the carnage in that gas markets is growing, and yet the medium to longer term outlook remains constructive. It's really just how do you capitalize on the, the present disconnect? 'Cause there's a lot of... As you all know, there's a lot of small service companies, regional ones, struggling, and those struggles probably intensify, thus would seem to create opportunities if you-

Cindy Taylor (CEO)

Well, I think-

John Daniel (Founder and Managing Partner)

-to just-

Cindy Taylor (CEO)

Yeah, they will, but actually a lot of people are shutting doors and, you know, that just firms up-

John Daniel (Founder and Managing Partner)

Right

Cindy Taylor (CEO)

The competitive positioning and the plays. We already work for, particularly in the Northeast, some of the larger players that are active there. We're doing the multi-well pads as opposed to the lower tier type activity. So my singular focus right now is trying to mitigate losses and keep our,

John Daniel (Founder and Managing Partner)

Yeah

Cindy Taylor (CEO)

... field service technicians employed. And if that means rotating to other plays, and there'll be some incremental costs there, but it's better than losing your FSTs and, and having no profitability at all, right? And so-

John Daniel (Founder and Managing Partner)

Yeah

Cindy Taylor (CEO)

... singular focus is on cost management and control and retaining those FSTs through the next three quarters.

John Daniel (Founder and Managing Partner)

Okay. Well, that's all I had, so, thanks for including me.

Cindy Taylor (CEO)

Thank you, John.

Operator (participant)

That concludes our Q&A session. I will now turn the conference back over to Cindy Taylor for closing remarks.

Cindy Taylor (CEO)

All right. Thank you, Dee, and thanks to all of you for joining our call today. We always appreciate your interest in Oil States and your continued support, not only for us, but for the industry as a whole. I know it's a very, very busy period of time, but we'll catch up with all of you if you choose to give us a call back. Thanks so much.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.