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Earnings call: Oil States International reports mixed Q1 2024 results

EditorNatashya Angelica
Published 2024-04-29, 11:52 a/m
© Reuters.
OIS
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Oil States International (NYSE:OIS) has disclosed its financial outcomes for the first quarter of 2024, revealing a blend of achievements and challenges. The company reported consolidated revenues of $167 million and adjusted EBITDA of $15 million, alongside a net loss of $13 million. Despite a slowdown in the natural gas sector, the firm remains optimistic about the market's long-term potential.

Oil States also celebrated technological advancements, winning awards for their Swift Ultra-Deepwater Connector and ACTIVEHub platform. Looking ahead, the company projects an EBITDA between $85 million to $90 million for the year and anticipates a free cash flow of $40 million.

Key Takeaways

  • Consolidated revenues stood at $167 million with an adjusted EBITDA of $15 million.
  • The company experienced a net loss of $13 million in the first quarter.
  • Oil States remains positive about the long-term outlook of the natural gas market.
  • Technological innovation is a strong focus, as evidenced by awards for two new products.
  • The company forecasts an EBITDA of $85 million to $90 million for 2024.
  • Free cash flow is expected to reach $40 million.
  • CEO Cindy Taylor addressed the Offshore/Manufactured Products segment, expecting a book-to-bill ratio above 1 for the year.

Company Outlook

  • Oil States anticipates a steady increase in revenues across Q2, Q3, and Q4, particularly for offshore products.
  • The company is concentrating on enhancing operations and expanding in energy transition opportunities.

Bearish Highlights

  • Activity in natural gas basins slowed down in the first quarter.
  • The book-to-bill ratio was below 1 in Q1 due to a large order moving to Q2.

Bullish Highlights

  • Oil States is optimistic about the natural gas market's long-term fundamentals.
  • Investments in technology and innovation are expected to strengthen the company's market position.

Misses

  • Net loss reported at $13 million for the first quarter.

Q&A Highlights

  • The integration of the Downhole Technologies segment is a current focus to improve the base business.
  • The company is navigating a competitive landscape, with larger players potentially exiting, which may lead to a healthier market.
  • Oil States is committed to delivering technology and supporting customers in the supply chain.
  • Management is focused on cost management and retaining field service technicians to mitigate losses.
  • The impact of E&P consolidation and the appreciation for technology in the industry were discussed.

Oil States International ended the earnings call by thanking investors and industry stakeholders for their ongoing support. Despite the current challenges, the company is strategically investing in technology and market differentiation, aiming to capture growth in the evolving energy sector and deliver value to shareholders.

InvestingPro Insights

Oil States International (OIS) has recently faced a challenging market environment, as reflected in their first quarter financial results for 2024. Here are some insights based on the latest data and analysis from InvestingPro:

InvestingPro Data:

  • The company's market capitalization currently stands at $276.77 million USD.
  • Oil States International has a negative Price-to-Earnings (P/E) ratio of -94.68, indicating that the company has reported a loss over the last twelve months as of Q1 2024.
  • The stock's price has experienced a significant decline, falling by over 30% in the past month and nearly 47% over the past six months.

InvestingPro Tips:

  • The Relative Strength Index (RSI) suggests that the stock is in oversold territory, which might interest investors looking for potential buying opportunities.
  • Analysts have recently revised their earnings expectations downwards for the upcoming period, signaling potential headwinds for the company's financial performance.

For investors seeking to delve deeper into the financial health and future prospects of Oil States International, additional InvestingPro Tips can be found at https://www.investing.com/pro/OIS. With a total of 12 InvestingPro Tips available, investors can gain a more comprehensive understanding of the company's position. Remember to use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, providing even more valuable insights to inform your investment decisions.

Full transcript - Oil States International Inc (OIS) Q1 2024:

Operator: 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 speakers’ remarks there will be a question-and-answer session. [Operator Instructions] 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: 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 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 two 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: 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 and 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 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 Swift Ultra-Deepwater Connector and our ACTIVEHub 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: 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 $0.21 per share. Our net loss for the first quarter included a noncash goodwill impairment charge of $10 million and 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 $0.03 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 Well Site 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 cost 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: 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 31 compared to the prices in effect at December 31, 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 five-year seasonal average for crude oil, but remain well 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 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 Well Site 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 to $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 product 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: Thank you. We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Jim Rollyson from Raymond James. Please ask your question.

Jim Rollyson: Hey, good morning Cindy and Lloyd.

Cindy Taylor: Hi, Jim.

Lloyd Hajdik: Hi, Jim.

Jim Rollyson: 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-1 times back book-to-bill, but you kind of continue to talk as those others in the industry around just general spend and strong outlook for offshore. Maybe just a little color around what you're seeing from bidding. It sounds like orders slipped and 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 kind of get the timing of revenues in that segment correct.

Cindy Taylor: Yes, 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. Obviously, a lot of material receipts came in, which accelerated revenue recognition in Q4 around those major projects because 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 why it wasn't 1:1, which was shy of our expectations. But in particular, we had a large order where we secured a long lead time orders, but not the full orders that slipped 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 orders. There are always going to be very dependent on when the larger ones come in, in a given quarter and they can move between quarters. 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.

James Rollyson: 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 I recognize some of it is backlog driven and some of it is shorter cycle stuff. But just as you look at backlog and the way things are supposed to play out in the calendar, which they don't always do, just how do you think this year proceeds? Because 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: Just basically as it's typical, if you even look at history, that's why I kind of said this quarter looks kind of rough for offshore products, but it's actually up year-over-year. There is always that seasonal element to it. But what you're going to 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, obviously, it's depending on the timing of getting 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: Got it, I'll turn it back. Appreciate the comments.

Cindy Taylor: Thank you, Jim.

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

Luke Lemoine: Yes, hey, good morning.

Cindy Taylor: Good morning, Luke.

Luke Lemoine: Good morning. Cindy, you touched on some of the pieces earlier, but could you just refresh us on where you are on the Downhole evolution? What are some of the key initiatives and kind of where you are on the new product and technology rollout?

Cindy Taylor: No, 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 further international penetration on the perforating side that honestly, our plug business is fine. And it's both getting good market share and making margins. So that's really not the focus. The focus has been on the perforating side of the business. And 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: Okay, got it. Thanks a lot, Cindy.

Cindy Taylor: Thanks, Luke.

Operator: [Operator Instructions] Our next question comes from the line of Stephen Gengaro from Stifel. Please ask your question.

Stephen Gengaro: Good morning, everybody.

Cindy Taylor: Hi, Stephen.

Stephen Gengaro: 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: No, not at this point in time. It was interesting when we did the recast, kind of 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: Okay, thanks. And 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 kind of U.S. land activity related? Or is there anything else in there we should be thinking about?

Cindy Taylor: At this point in time, we obviously have 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 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 as early as 2025. And so controlling cost in the natural gas plays, really, is going to 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: Okay. Great. And then maybe just one final one. 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: I'll be honest. Yes, 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 generally say that from a competitive landscape, it's hard for me to say that it's not getting a little bit or it will be as some of these transactions occur. And I think more important for us specifically is the investment we made last year and the new technology rollout. And importantly, the go-to-market strategy, which has evolved from moving away from wireline companies to E&Ps and back. And 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: If I could slip in one more, Cindy, sorry. Does the E&P consolidation and the larger operators appreciation for that technology ultimately help you?

Cindy Taylor: I think it would for sure. I mean, it all comes down to reliability. And in the world we work in, it's also got to be cost, and we've made significant improvements on there. But 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 going to be the key differentiators. And drivers of our success going forward.

Stephen Gengaro: Okay, great. Thank you.

Cindy Taylor: Thanks, Stephen.

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

John Daniel: Hey, good morning, Cindy and Lloyd.

Cindy Taylor: Hi, John.

Lloyd Hajdik: Hi, John.

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

Cindy Taylor: Well, I think, yes, they will. But actually, a lot of people are shutting doors, and that just firms up the competitive positioning in 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 activities. So my singular focus right now is trying to mitigate losses and keep our 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 having no profitability at all, right? And so singular focus is on cost management and control and retaining those FSTs through the next three quarters.

John Daniel: Okay. Well, that's all I had. So thanks for including me.

Cindy Taylor: Thank you, John.

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

Cindy Taylor: 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 busy period of time, but we'll catch up with all of you if you choose to give us a call back. So thanks so much.

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

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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