Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Oil States International, Inc. (NYSE:OIS)

Q1 2014 Earnings Conference Call

May 02, 2014, 12:00 PM ET

Executives

Patricia Gil - Investor Relations

Cindy Taylor - President and Chief Executive Officer

Bradley Dodson - Executive Vice President, Accommodations

Lloyd Hajdik - Senior Vice President, Chief Financial Officer and Treasurer

Analysts

Jim Wicklund - Credit Suisse

Jeff Spittel - Clarkson Capital

Marshall Adkins - Raymond James

Jeff Tillery - Tudor Pickering

John Daniel - Simmons & Company

Chuck Minervino - Susquehanna

Sean Meakim - Barclays

Daniel Burke - Johnson Rice

Kurt Hallead - RBC Capital Markets

Operator

Welcome to the Oil States International Incorporated first quarter 2014 earnings conference call. My name is Adrian, and I'll be your operator for today's call. (Operator Instructions) I'll now turn the call over to Patricia Gil. Patricia Gil, you may begin.

Patricia Gil

Thanks, Adrian. Welcome to Oil States' first quarter 2014 earnings conference call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; Bradley Dodson, Executive Vice President of Accommodations; and Lloyd Hajdik, Senior 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 supported by federal law. 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 and other SEC filings.

I will now turn the call over to Cindy.

Cindy Taylor

Thank you, Patricia. Good morning, to all of you, and thank you for joining our earnings conference call today. We reported first quarter results last night that were largely in line with our guidance, despite harsh winter weather experienced across much of the United State during the first quarter, along with unfavorable movements in both the Canadian and Australian currencies relative to the U.S. dollar, which impacted our accommodations business.

Our Accommodations segment reported results that reflected softer occupancy levels, primarily in Australia, and weaker foreign currency translated results, partially offset by greater contributions from the Canadian mobile camp, due to the winter busy season. The Accommodations segment now has a name, Civeo Corporation, and Bradley will take you through a detailed explanation of the quarterly results and give you a full update on the proposed spin-off later in the call.

Our Offshore Products segment reported EBITDA of $43 million on revenues of $212 million during the quarter, representing an EBITDA margin percentage of 20.3%. Strong order flow in this segment continued during the quarter. Our book-to-bill ratio was slightly above 1x and backlog exited March at $578 million, which remains near record levels for this segment.

Activity drivers for Offshore Products correlate closely with global deepwater field production development, bidding and quoting opportunities for this business continue to be very robust and prospects are focused on our proprietary product lines.

In our Well Site Services segment, we reported strong quarterly revenue and margins, as our completion services business recovered from severe winter weather late in the quarter and exited March with momentum going into the second quarter, as completion activity continues to ramp up in North America. Further, our land drilling business effectively raised full utilization by the end of the quarter with all of our 34 rigs working.

During the first quarter, we continue to opportunistically repurchase our common stock under our authorized share repurchase program. We also made significant progress towards the spin-off of the Accommodations segment, which we expect to complete by the end of the second quarter.

At this time, Lloyd will take you through more details of our consolidated results and financial position; then Bradley will discuss the results of the Accommodations segment, including an update on the proposed spin-off. I will provide a detailed discussion of the remaining business segments and give you our thoughts on the current market outlook.

Lloyd Hajdik

Thanks, Cindy. During the first quarter of 2014, we reported operating income of $114 million on revenues of $658 million.

Our net income from continuing operations for the first quarter of 2014 totaled $71 million or $1.32 per diluted share, which included $0.02 fully diluted share after-tax impact from third-party transaction costs incurred in connection with proposed spin-off transaction. Excluding these transaction costs, net income from continuing operations would have totaled $72 million or $1.34 per diluted share.

The fourth quarter 2013 results were $133 million of operating income on revenues of $675 million. Net income from continuing operations for the fourth quarter of 2013 was $78 million or $1.40 per diluted share, which included $0.07 of after-tax expenses, mainly related to a loss on debt extinguishment reported with the repurchase of $34 million of our 5 and one-eight percent bonds, along with the transaction cost incurred. Excluding these items, net income from continuing operations in the fourth quarter of 2013 was $82 million or $1.47 per diluted share.

Our gross and net debt levels totaled $973 million and $518 million, respectively, at March 31, 2014. This represented a net debt to book capitalization ratio of approximately 17% and our leverage ratio was 1.3x at March 31. As of the end of the first quarter, we had total liquidity of approximately $1.5 billion comprised of $995 million available under our credit facilities and $455 million in cash on hand.

During the first quarter of 2014, we reported strong cash flow from operations of $105 million and we invested $103 million in capital expenditures, primarily related to the ongoing expansion of the Canadian Accommodations business, the addition of incremental proprietary completion services equipment deployed to service the active U.S. shale plays and ongoing facility expansions in the Offshore Products segment.

In the first quarter, we repurchased $133.6 million of our common stock under our authorized share repurchase program, at an average price of $97.69 per share. We have approximately $235 million remaining under our $500 million authorization, which is set to expire on September 1, 2014.

In connection with the spin-off, we expect to secure commitments from a syndicate of banks for new credit facilities for both Oil States and Civeo. Closing of the new facilities is contingent upon the spin occurring, which we expect to complete by the end of the second quarter.

Civeo's financing structure is expected to total approximately $1.4 billion and be comprised of a $775 million term loan and a $650 million revolving credit facility. Proceeds from the term loan are expected to fund a $650 million to $850 million distribution from Civeo to Oil States to facilitate the redemption of our senior notes.

Oil States plans to enter into a new $600 million revolving credit facility at the spend date. Borrowings under the revolver, together with a distribution to be received from Civeo coupled with available cash on hand is expected to be sufficient to refinance our senior notes via a tender offer. These senior notes have a face value of $966 million as of March 31, and a fair value of approximately $1.044 billion.

In connection with the tender offer and the refinancing of our bank debt, we expect to recognize losses on extinguishment of debt equal to the premium paid over book-value of the notes and remaining unamortized debt issue costs associated with the company's debt.

In terms of our second quarter 2014 consolidated guidance. We expect depreciation and amortization expense to total $72 million and net interest expense to approximate $16.1 million.

Our 2014 consolidated effective tax rate is expected to average 27.7%, which was adjusted upwards slightly due to our higher state income effective tax rate and a greater proportion of domestic sourced income. The annual effective tax rate for both Civeo and Oil States will be reassessed following the spin-off.

Consistent with prior guidance, the company plans to spend $600 million to $650 million in total capital expenditures for full year 2014. A large percentage of our 2014 capital expenditures are expected to be spent in our Accommodation segment. Excluding the Accommodations capital expenditures, Oil States plans to spend approximately $275 million in capital expenditures during the full year of 2014.

Obviously, if the spin-off occurs by the end of the second quarter of 2014, we will provide standalone guidance moving forward for Civeo and for Oil States. Subsequent to the spin-off, the Accommodation segment will be reported as discontinued operation in the financial statements of Oil States.

At this time, I would like to turn the call over to Bradley, to begin his discussion of our Accommodation segment. Bradley?

Bradley Dodson

Thank you, Lloyd. Sequentially, our Accommodations segment revenues were flat at $253 million and EBITDA decreased to $96 million. Our results were impacted primarily by the weaker Canadian and Australian dollar exchange rates, which were sequentially down 5% and 3%, respectively.

The weakening of the Canadian and Australian currencies relative to the U.S. dollar sequentially reduced our revenues by approximately $12 million and our EBITDA by approximately $5 million. EBITDA was also negatively impacted in the first quarter by higher propane heating costs in Canada, due to the severe winter weather.

Operationally, our results were impacted by lower occupancy levels at our Australian villages, partially offset by stronger seasonal revenues and EBITDA from our Canadian mobile camps, which carry lower EBITDA margin.

Australian results for the quarter reflected the reduction in customer commitments, mentioned in the Form 10, and lower overall customer spending due to weak met coal price. Occupancy in our Canadian lodges remained strong and result reflected flat RevPAR in Canada on a constant currency basis.

During the first quarter of 2014, our average available rooms totaled 21,130 rooms, and we reported RevPAR of $94 or $98 on a constant currency basis, both of which were slightly down from the $99 in the fourth quarter of 2013.

Looking at the rest of 2014. As we discussed on last earnings call, we expect the second quarter results for Accommodations to be the low point for the year with improvements in the second half.

For the second quarter of 2014, Accommodations revenues are expected to range between $210 million and $215 million, considering stable results from our Canadian lodges, offset by lower occupancy levels at our Australian villages and the seasonal impact of spring breakup in Canada on our mobile camp activities and on certain Canadian lodges. EBITDA margins for the second quarter are expected to range from 33% to 34%.

For the balance of 2014, we currently expect revenues to improve in both the third and fourth quarters as the Australian village business stabilizes and the McClelland Lake Lodge begins operation. Margins likewise in the back half of 2014 are expected to improve as well.

For the full year, the Accommodations business is expected to spend between $325 million and $375 million in capital expenditures. The majority of which is related to room expansions in Canada including the McClelland Lake Lodge. The construction of the McClelland Lake Lodge in the Athabasca oil sands continues and is scheduled to open this summer with room additions ramping to approximately 1,591 rooms by yearend.

The aforementioned forecast of capital spending also includes unannounced Canadian growth projects, which will be contingent on customer contracts. In terms of the announced spin-off of the Accommodations business, we've made significant progress since our last conference call in February. In March, we received the IRS private letter ruling, related to the tax free nature of the spent.

We've filed a third amendment to the Form 10 with the SEC on April 22, and publicly announced the businesses new name Civeo Corporation. This last amendment included disclosures regarding our anticipated Board of Directors for Civeo. The distribution ratio of 2 shares of Civeo for each share of Oil States, modifications to pro forma financials to incorporate the expected credit facility and borrowings there under and certain transaction related documents to be executed between Civeo and Oil States.

The range of the cash distribution from Civeo to Oil States in connection with the spin-off had not changed and remains at $650 million to $850 million with the midpoint of $750 million utilized for the pro formas. Using the midpoint of the distribution range, Civeo's initial leverage ratio will be approximately 1.8x on a trailing basis.

We currently expect to complete the SEC review process and conclude the spin-off by the end of the second quarter. As we have discussed on previous calls, Civeo will initially be spun-off as a C-corp. We continue to refine our analysis of the potential REIT election for Civeo. The decision on whether to pursue the REIT election will be made after the completed spin-off by the new Civeo Board of Directors.

Cindy, will now address activities in our other business segments. Cindy?

Cindy Taylor

Thanks, Bradley. In our Offshore Products segment, we generated $212 million of revenues and reported $43 million of EBITDA during the quarter. While revenues came in slightly below our guidance range, our reported EBITDA margin of 20% was at the top end of our guidance for the first quarter.

Certain projects were delayed and slipped into the second quarter due to changes in engineering scope and delays in the procurement and materials needed for these projects. We realized good order flow during the quarter and booked $220 million of new orders.

Reported backlog at March 31, 2014, totaled $578 million. And our book-to-bill ratio for the quarter was maintained at slightly above 1x. Backlog additions during the first quarter included connector products destined for Norway, the Mediterranean, and the Gulf of Mexico along with orders for fixed platform and drilling products worldwide.

For the second quarter revenues are projected to increase to account for certain projects that experience slippage in the first quarter along with higher activity levels and is expected to range between $240 million and $250 million. EBITDA margins, as always, will depend upon our actual revenue mix, project execution success and overhead absorption during the quarter, but are forecasted to be in the range of 19% to 20%.

Despite a harsh winter weather experienced across much of the United State, our completions services business recovered late in the quarter. And our Well Site Services segment generated revenues over $193 million and EBITDA of $63 million in the first quarter of 2014, both of which were at the higher end of our guidance range for this segment. These results compared to revenues and EBITDA of $187 million and $66 million respectively in the fourth quarter of 2013.

Revenue for the first quarter increased 3% quarter-over-quarter, largely due to increased land utilization and an 11% increase in revenue on a per ticket basis for our completion services business. EBITDA decreased 4% quarter-over-quarter as a result of lower completion services cost absorption due to winter weather in January and February and the impact of certain cost approval adjustment, which benefited the fourth quarter of 2013. However, EBITDA margins remained strong at 33% during the first quarter.

As we previously stated on the fourth quarter earnings call, we had five land rigs stacked at December 31, 2013, and stated that the market in the Permian was improving and that we could bring the majority of these stacked rigs back into service by the end of the first quarter. It pleases me to report that we are at effective full utilization in the second quarter to date.

Consistent with our North American service peers, we believe that land rig activity, well-completions and service intensity will continue to rise throughout this year, absent a significant commodity price decline. We estimate that second quarter revenues for our Well Site Services segment will range between $210 million and $220 million with EBITDA margins of 32% to 34%.

In closing, we have made significant progress towards the spin-off of Civeo and are on-track to complete this separation by the end of this quarter. As we progress through the remainder of the second quarter, we will be focused on the spin-off and its smooth execution. The next quarter should reflect the transitional impact of the spin-off, but will allow investors to focus on the separate business drivers going forward. Both Civeo and Oil States look forward to creating shareholder value for our investors as we move forward.

That completes our prepared comment. Adrian, would you open up the call for questions-and-answers at this time, please.

Question-and-Answer Session

Operator

(Operator Instructions) And we have Jim Wicklund from Credit Suisse on line with the question.

Jim Wicklund - Credit Suisse

Where did the name Civeo come from? I Googled it and can't find anything, but you guys on it.

Cindy Taylor

That's a good thing.

Bradley Dodson

We're working with our marketing teams and some outside brand advisors. We looked at what we were trying to create in terms of the meaning behind the brand. And as you can imagine in trying to find a name and brands that has not been trademark in both the U.S., Canada and Australia was fairly difficult.

The concept that we were working around were really the idea that we are trying to create a place for our guests and our customers and employees where they can rest, recharge, reconnect with home and with each other. And with that we use the two Latin words which mean community and to be well and combined them to create the name Civeo.

Jim Wicklund - Credit Suisse

I'm embarrassed. I took five years of Latin and didn't get that. Thank you for that. Good job. Bradley, on Australia, you had the one big customer that you were renegotiating with. Has all that been finalized now?

Bradley Dodson

It's all finalized. We finalized that last year actually and the impact was felt beginning March 1. So we had one month of impact in the first quarter. We'll have the full quarter impact in the second quarter and that is all contemplated in the revenue and margin guidance that we gave.

Jim Wicklund - Credit Suisse

And if I could on my last follow-up. We've been talking for a while about the eventual potential of LNG in Canada and maybe acquisitions or more encroachment into the LNG business on the northwest shelf of Australia. Can you give us some general ideas of timelines about when that work might be awarded regardless of who gets it?

Lloyd Hajdik

Well, I'll address Canada first. The Canadian LNG opportunity is exciting for us on a multitude of levels. In terms of the lodge type work, we're currently in the process of landbanking to secure land in the area, in the hopes that some of our customers do move forward with the projects in Kitimat or the Kitimat area on the West Coast of British Columbia.

In addition to that, obviously, if those give up idea and move forward then there will be mobile camp work, both for the drilling and the pipeline work, so our full suite of services in Canada could benefit from the LNG moving forward. In terms of timing, it's all customers-dependent at this point.

As you know us well, we are, particularly for large new investments, we are looking for customer commitments before we commit our capital and we will pursue that strategy here. So we're executing on our strategy exactly the way we always have. We are working on the land banking and we are making progress there. The next stage will be getting a customer commitment to support the initial investment and we're optimistic. But nothing has been announced at this point.

Operator

And we have Jeff Spittel from Clarkson Capital on line for question.

Jeff Spittel - Clarkson Capital

Bradley, maybe if we could start off with Australia, and I guess the source for optimism with stabilization in the back half of the year and maybe even some modest improvement. Is any of that derived from maybe a little bit better outlook in the met coal market with some of the production cuts that have kicked in lately?

Bradley Dodson

Well, there is implicit in our guidance that revenue and margins will improve in the back half of the year. That Australia will stabilize in the second quarter and in itself will show improvement in the back half of the year. Part of that is, is there are some -- well, it's a difficult market in the met coal market. There are opportunities. We're working to capture some of those and hopeful that those will translate into better results in the back half. It's not currency improvements. So there is inflicted in our guidance that there will be an improvement in the met coal side of things in back half of the year.

Jeff Spittel - Clarkson Capital

And Cindy, turning to the completions business, we've seen a nice steady uptick in the average revenue per ticket. I'm assuming a lot of that is based on mix and well intensity. Is there potential if we continue to see the rig count in addition to the well count ramp throughout the year, maybe in certain basins to see a pricing component that could add a tailwind as well?

Cindy Taylor

It's possible. As you'll recall our margins were very resilient throughout 2013 and continue to be so in early 2014. However, what that is, as it's typical in the market, when the demand accelerates, you do have some opportunity for pricing, although I don't think we would except that until the back half or the second half of this year, at this particular point in time.

However there, if you've been tracking our reported revenue per ticket that has accelerated continually quite frankly for the last three years or so which we think is a lot focused on our technology offering, new products that we've brought to market and clearly mix weighted towards the more intense completion projects across the United States and North America.

Operator

And we have Marshall Adkins, Raymond James on line with the question.

Marshall Adkins - Raymond James

Sounds like you're implying. You're not getting pricing yet, could you give us a little more color on the product lines and geography that you're having the most success in, in the completion side, because obviously given the weather you guys rocked it this quarter there?

Cindy Taylor

Well, I think we were not alone in January and February, biting our fingernails. But just like everybody else march once weather finally cleared, as we said it would, activity did began to accelerate. We're not going to be alone when we tell you that kind of the South Texas, Permian region revenues were up stronger in the first quarter than our other basins.

And even though the Permian were impacted by weather, obviously that's where your rig count growth was and some acceleration there. But that was the greatest contributor to, I would say, the moves, if you will in Q1. Now, that weather is clear though we're really looking at other basins to get some acceleration the Northeast market in particular, tracking close to our expectation that has some bias to the upside.

And the Rockies is a very strong region for us. The only thing, caveat we got to give there, is we'll be watching road ban impact, but thus far things are progressing nicely. And for us some investments in the Gulf Coast region have given us more deepwater offshore opportunities that we're focused on. And March was very strong for us in the offshore region as well. So hopefully that adds some color.

And again, when I talk about pricing, we had a very favorable pricing mix and we continue to have that outlook again as the complex completions proportionally accelerate and we move and get further penetration in the Gulf of Mexico that makes us favorable. I put that in contrast to absolute across the product line across every geography 5% price increases, we're not seeing that. The markets coming out of the first quarter really has not dictated that at this stage.

Marshall Adkins - Raymond James

And any particular product lines jump out is doing meaningfully better than the others?

Cindy Taylor

I mean, again I will talk to mix, but we'll always focus on our more proprietary equipment, our isolation equipment, our new ball launch system, some of the Tempress technology, the IE, the extended-reach technology that we've brought into the market. And then just generally higher pressure, higher temperature type equipment is going to be in high demand in these complex -- zipper-fracs, a number of things along those lines are getting proportionally greater demand and that's where we're focusing our CapEx dollars and our R&D efforts.

Marshall Adkins - Raymond James

Last one for me. FPSO markets, some of these things have been pushed back. What's your outlook for that over the next year?

Cindy Taylor

Everybody is obviously very focused on the macro there and Brazil was getting a lot of focus for that reason. We have said, if you'll recall, in past conversations, I think most everybody has on this call there was such a euphoria around FPSO investments over the next five-year time, that we always cautioned everybody that that rate of growth was unlikely at one point, it was like 150% forward five years compared to the last five years. I think that has moderated, but we always thought it would.

And so I guess my reaction there when I think about FPSOs in subsea content, we're still very excited about that. There have been deferrals and delays, lots of rebidding and reengineering to get project economics in line, but they're still out there, and we've been saying this for quite some time. We held a strong backlog through 2013 without a lot of these major projects. There are still there. They should come into award activity.

It's always a question of when, but when we look at our bidding and quoting activity, we're still very bullish on the subsea space, the FPSO space and interestingly there's quite a lot of TLP bids out there as well. Again, these play into our highly proprietary product lines and give us enthusiasm to certainly maintain our outlook that we will continue to have a book-to-bill of at least 1 throughout the year of 2014. That is our best outlook today, Marshall.

Operator

And we have Jeff Tillery from Tudor Pickering, on line with the question.

Jeff Tillery - Tudor Pickering

Bradley on the accommodations business, curious if you could provide just some color on kind of regional margins in the first quarter, how you guys have reported into Form 10. I guess that's my first question?

Bradley Dodson

Well we're in the process or will be in the process once we get done with the spin, providing the first quarter Q, that will breakout all of that. And so without having done, to carve out financials, it will be hard to give specific numbers on that, until we have all of that work done, but in terms of the margins, generally speaking the U.S. business was fairly consistent with the fourth quarter. The Canadian business was modestly down. The Australian business was down slightly. So directionally that's where it was headed.

Jeff Tillery - Tudor Pickering

And as I think about it for the full year, just big picture, I think about Canada being kind of flattish from a margin profile and then the drivers for Australia being kind of absorption. And I guess the EBITDA margins last year were mid-50s. I've begin about order of magnitude kind of 1,000 basis point margin decline year over year, so kind of mid-to-high 40%, is that a reasonable line of thinking for Australia?

Bradley Dodson

Well, as I said in my comments, what we're expecting right now is second quarter to be the low point as a whole and that really carries across both Canada and Australia in terms of margin. And then that we expect there to be margin improvement throughout the balance of the year.

Jeff Tillery - Tudor Pickering

And then on the last call you had given kind of guidepost on revenue for the business in aggregate. Have your thoughts around full-year revenue changed at all?

Lloyd Hajdik

Well, we've got first quarter actuals out there. We've guided the second quarter and right now what we've got is we expect revenues to improve Q3 over Q2 and Q4 over Q3. That is built off of the fact that we think that the Australian business will bottom-out in the second quarter and then improve sequentially throughout the year.

And likewise, with the seasonal impact in Canada, the second quarter is expected to be lower and then improve in as we start to see the recovery from the seasonal aspect. Not to mention the fact that the second half of the year will benefit from the McClelland Lake rooms becoming operational and starting to generate results.

Jeff Tillery - Tudor Pickering

And Cindy, when I think about the Offshore Products business for the full year, is it reasonable to think about kind of second half of the year, kind of nearly as good as what we see in the second quarter? I mean obviously Q2 is aided by some deferrals from the first quarter, but I think about kind of plus or minus flat second half of the year with two. Is that reasonable?

Cindy Taylor

Right now, our backlog has held steady at a very flat with a book-to-bill of 1. That is always a great indicator of how we're going to do. There just like anything else, as you know, individual projects had different timing that come into your revenue stream, but there is nothing that I see today that is telling me that the back half would be materially different than the first half.

Operator

And your next question comes from John Daniel from Simmons & Company.

John Daniel - Simmons & Company

Bradley, just want to follow on Jeff's line of questions if I could on the Accommodations business. And I know you don't want to get too specific, but just as we think about the margins in the back half, is it appropriate to keep margins model below the Q1 levels, which has generally been the case historically?

Bradley Dodson

Well, right now, consistent with our past practices we're giving one quarters' worth the guidance. Given where we are in this year for the Accommodations business we've augmented that and say that we expect the margins to improve, but have not quantified it any further than that.

John Daniel - Simmons & Company

Given that you're at 100% utilization on the drilling side, does it make sense to build new rigs this year? And if so how many might you guys build?

Cindy Taylor

This probably won't shock you, but we're really looking to optimize our operations and our fleet. And we will make upgrades to our fleet. There has been opportunities to do that and make them more useful for our customer base in the region. However, what the market is demanding right now is, as you know, a very high specification rig. There are many companies out there that are willing to step-in and do that. And so I think our focus right now is on asset optimization and returns on invested capital of the business.

John Daniel - Simmons & Company

And then just, a last one really for me is, on the completion services. Cindy, there is some movement in RevPAR ticket, in a number of tickets. I'm assuming the RevPAR ticket jump was just mix related and the reason for the decline in tickets was Q1 weather related. Any color there?

Cindy Taylor

I'm just going to say, I agree. You got it.

John Daniel - Simmons & Company

And then last one, any share repurchases in April?

Cindy Taylor

I'm trying to even think back to our timing. But rather than misspeak, I'll just not speak on that comment.

Operator

And your next question comes from Chuck Minervino from Susquehanna.

Chuck Minervino - Susquehanna

Bradley, question on the second quarter margin guidance there. Would you mind giving us a little bit more color, how much of that you think is seasonality versus maybe kind of just the step down in occupancy levels, just to help us gauge kind of how to think about that going forward?

Bradley Dodson

The margin guidance has implicit in it a larger, as you'd expect, impact on the occupancy decline in Australia, impacting the consolidated margin guidance. There is some seasonality to it. It would be in line with historical results from Canada, in terms of step down sequentially from Q1 to Q2, as you'd expect. And as I mentioned, the U.S. business is fairly steady state at this point.

Chuck Minervino - Susquehanna

In the U.S. business, just given the pick up in drilling activity and completion activity and all that, do you see any prospects for the U.S. business to start picking up here for the remainder of the year?

Bradley Dodson

There is that potential. At this point, it's a little early for me to really say, that it will come to fruition. But there are some green shoots, if you will.

Chuck Minervino - Susquehanna

And then I was wondering if you could give us also an update, in the Form 10, they mentioned 5,500 rooms expected to roll-off contract in '14 and about 6,773 to roll-off in '15. I was just curious, if there has been a kind of material change in those numbers that that's worth noting?

Bradley Dodson

Most of the roll-off in '14 is related to Australia. And right now there is no prospect, if they will see a material improvement in that in '14. The '15 roll-off is both in Canada and Australia. And at this point, it's too early for those conversations to occur in terms of renewals on that side of re-contracting on that side.

Chuck Minervino - Susquehanna

And then just a question for Lloyd. If I get this right, you're going to get that payment in from Civeo and it looks like your debt levels will be fairly low or your net debt level will be almost non-existent at that point. If that's right, can you just talk about capital structure of Oil States as a remaining company going forward post-spin?

Lloyd Hajdik

Chuck, like I mentioned in my comments, we're going to go out with a $600 million revolver for Oil States. And again, it largely depends on future share repurchase, it will drive the levels of our borrowing under the revolver.

Operator

And we have Sean Meakim from Barclays on line with a question.

Sean Meakim - Barclays

Bradley, just wanted to talk a little bit about the opportunity for M&A, as it relates to some of your customers' insourced assets once the spin-off is complete. Can you talk a little bit about the timing? Is it something where those opportunities maybe kind of on hold until a decision has been made on the REIT and the spin-out is complete or are those opportunities that you're actively kind of looking at or maybe having conversations?

Bradley Dodson

Well, in terms of our overall growth strategy. The spin-off, the intent, as Cindy has mentioned many times, is that we continue to pursue all of the business lines growth strategies and not allow the spin-off to impact those effort, and that is consistent. The ability or the desire to buy customer rooms has always been there. And since we have not done one, it's not been one that we've been successful on yet, but we continue to pursue it.

Sean Meakim - Barclays

So nothing kind of specific to the spin-off or the REIT that would kind of delay or hamper your ability to complete one, if the opportunity presented itself?

Bradley Dodson

No.

Sean Meakim - Barclays

And Cindy, on the rig fleet, great to see the utilization numbers. Given how strong the Permian is turning over to the horizontal, could you just give us a little more color on kind of what's been the driver of, is it just new customers, kind of some smaller customers looking for more vertical well, looking to drill more vertical wells? And then do you see this level of utilization somewhere closer to 100% being sustainable on a going-forward basis, given what's happening in the Permian?

Cindy Taylor

I'll just give you a little color. Over the last five years, we've had various transitions in our customer base. And at one point in time, virtually all of our customers were large independents or majors. And I said last year to various people that I thought it was a transitional year where, as you know, many of the customer base in the Permian was refocusing their activity from vertical well to the horizontal rig. They are bringing in new 2,000 horsepower all AC rigs.

And in the process, we had weaker utilization and probably averaged in the range of 75% last year. But I view the economics very good for the type of drilling that we do and realized that a portion of our fleet can drill a horizontal. They're not 2,000 horsepower all AC rig, but they can drill horizontal. And I did expect that there will be some customer transition that occur during that process and that's exactly what happened.

Now, I'd tell you, it's about 50-50, in terms of who the rigs went to work for i.e., legacy larger independent and some private companies, but these are companies that we have worked for off and on throughout our operating history. So I don't think you should be concerned about resource, longevity or credit quality, if that is the suggestion in your question.

Operator

And we have Daniel Burke from Johnson Rice on line with the question.

Daniel Burke - Johnson Rice

I apologize, if I missed this, but maybe one for Bradley. Bradley, what specifically are the drivers of improvement in Australia in the second half of this year?

Bradley Dodson

We expect that we'll be able to put additional rooms to work in the back half of the year. It won't be earth shattering, but we do believe that the second quarter results will be the low point both for that part of our business as well as the business as a whole.

Daniel Burke - Johnson Rice

And can you parse the comment on additional rooms, maybe Bowen Basin versus x Bowen Basin?

Bradley Dodson

We have not parsed it any further than that. No.

Daniel Burke - Johnson Rice

So one other one, I was never quite clear that the termination compensation that you received from the client in Australia, do we see that in Q1 somehow or do we see that ongoing in any way in Q2? I was never quite clear how that mechanism works?

Bradley Dodson

Revenues received from the termination payments were recognized partially in March and will be recognized going forward. The termination payments are recognized from a revenue standpoint over the balance of those contracts in terms of their term.

Daniel Burke - Johnson Rice

And so you book revenue, is there associated cost that comes through?

Bradley Dodson

No.

Daniel Burke - Johnson Rice

And what's the duration that those payments will continue?

Bradley Dodson

Well, the revenue recognition will continue through the end of the contracts, one, which goes through '15; and one, goes through '16.

Cindy Taylor

Maybe I can tag in and add a little more color. I'll ask Bradley to follow-up if necessary. These are not termination payments per se. It's a contract restructuring, where they're restructuring some of their room needs in more than one facility. And so to Bradley's point, if you're freeing up room, we do expect to be able to refill some of those rooms with other customers and other activity.

And I just want to be clear, when you say, are there any costs, there is nothing per se attached to those contract renegotiation structuring. However, you're going to have lower utilization in the facilities, until we backfill with other work and other customers, so that does have the margin impact that you were seeing and that we guided to in Q2, if that is helpful.

Operator

And we have Kurt Hallead from RBC Capital Markets on line with the question.

Kurt Hallead - RBC Capital Markets

Cindy, a question for you. Once we get the Accommodations spin -- and nice name by the way, Bradley, Civeo, very clever.

Bradley Dodson

Thank you.

Kurt Hallead - RBC Capital Markets

Once the spin occurs, I just wondered if you might be able to give us some initial thoughts on your growth strategy for Oil States moving forward, where you may see some -- generally where you may see some opportunities, whether or not is it North American land centric, what your offshore dynamics may be? And once again, I know, you don't want to get specific and wouldn't get specific on a call like this, but I'm just curious what your thoughts are post-spin?

Cindy Taylor

Well, I'll give you an overview and this probably won't shock you either. But at the end of the day, we're going to be a much more focused energy services company, what I think are very attractive drivers. And then deepwater capital equipment space and then also on high-technology completions in North America and both of those have some pretty good tailwinds right now. And there's no doubt about it.

But I'll also tell you that both business lines are heavily technology-focused, so anything that we will do, both organic investments and M&A investments are going to be to further leverage the technology space and reputation that we have in the marketplace. We've done that for last 15 years.

You're not likely to see that change, but as it relates to Offshore Products, as you know, a lot of the smaller companies specialized acquisition targets that are there, we've done several things that are probably indicative of things we'd like to do going forward, the Piper Valve, Acute technology, QCS to name a few.

I would just point out to you that, again, as I streamline more focused companies, those acquisitions and the size of them have had a little more impact and meaning than they had pre-spin-off of the Accommodations business. To some degree, I think those types of contributions almost get lost, but they really help us affect our long-term strategy in the deepwater environment.

As it relates to North America, we have done consolidating acquisitions maybe less of late, because the things that we are seeing are more commoditized offering that we have quite frankly resisted. And we really want to focus on higher technology product offerings to meet the needs of our customer base. And so we'll continue to do that. And it will be, obviously, very opportunity-dependant.

Again, given the size of the company and the opportunity set, I think somebody talked about our overall capital structure, you were asking Lloyd about that, we have a lot of optionality, as I will call it, to invest in the business, and that may mean continued share repurchases during a period that we don't have M&A growth opportunities. But you're going to see more of the same, I would say for us, it's just going to be a bit different given the platform that we have moving forward.

Kurt Hallead - RBC Capital Markets

Now, I was also curious too, Cindy, given the cycle history that you have, a lot of noise in the first quarter, seems like there's a lot of pent-up demand coming out of that. What do you think the sustainability is as we get through 2014? And I mean that in the context, do you think we're in acceleration mode in aggregate when you look at this cycle versus maybe prior or do you think its kind of more of the slow, steady state dynamic that's pretty much been in place for the last a year plus?

Cindy Taylor

We're clearly in an acceleration mode. I mean if you do the math on our guidance, its suggesting a sequential growth on revenues and the EBITDA in the range of 10% to 15%, which is pretty good quarter-to-quarter. And we're not atypical of the outlook that is out there. And so clearly, our customers are excited, and they're well-capitalized, they're moving forward, and I would say that is without a natural gas driver despite higher gas prices and very low storage. I don't think anybody in their guidance is really anticipating a lot of investments in gas.

And so again, I've been in this business too long, sustainability beyond this year is going to depend on crude oil prices, which is very dependent upon the rate of storage-build in the U.S. And then ultimately, what are we going to do with gas. And are we going to be an LNG exporter and have other alternative uses for it. That's the long-term answer. And look my visibility is as good as anybody else, 2014 looks great. Customer conversations look great. And again, I think we've positioned our company to participate fully because of the technology focused that we have oriented our actions toward.

Kurt Hallead - RBC Capital Markets

And then maybe just one final follow-up, just in the context you mentioned natural gas not being in most companies' guidance, which is true. Two things, you get the sense that the E&P companies are still looking for, say, the 24-month strip to be in that $4.50 to $5.00 range. And maybe ask this question as well is do you think if natural gas gets into that $4.50 to $5.00 range, that we might start to see some basin-on-basin competition for oil field services assets or do you think that the companies will just try to add -- you know what I'm trying to get a here?

Cindy Taylor

No, I get what you're trying to get. I mean, right now, I think there is going to be kind of a release of spare capacity that has been in the market for -- every product line is different. But you hear about, certainly our customers and service company talking about pressure pumping, releasing stock capacity, bringing on new capacity. And I don't really anticipate basin-on-basin competition yet. I don't see that. Just because again, I don't think my customers are really planning to make material investments to natural gas right now.

Now, the first market, not surprising that I anticipate will move, it's going to be the Northeast market. And the price range you gave, I think is rational, but it's generally going to be more of the purer play gas company that I think moves there. Right now, the focus is so much on liquids that it's just hard to envision that you're going to see a major broad-based shift this year.

Operator

And we have no further questions at this time.

Cindy Taylor

Great. Well, thanks to all of you for participating in the call. We are incredibly busy and active and very focused on completing the spin-off here and getting you a view of just what the two separate companies look like. And we very much look forward to having discussions with all of our investors as we progress through the quarter. And I know Bradley and his new management team will be eager to get out in front of you and tell the broader story about Civeo. So thanks again and we look forward continuing our dialogue as we progress through the quarter. Thanks. Have a great weekend.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Oil States International's CEO Discusses Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts