Oil States International: Ready to Capitalize on Bullish Oil/Gas Environment

Mar. 2.11 | About: Oil States (OIS)

Oil States International Inc. (NYSE:OIS) is a diversified oil services company with a long history of solid business practices. Oil States is well placed in the current bullish environment for the oil and gas business. It has four business segments:

  • Accommodation

  • Offshore Products

  • Well Site Services

  • Tubular Services

Oil States has three current business drivers. The first is oil sands and resource developments in Australia and Canada. The second is the recent investments being made in global deep water oil recovery. Lastly, and what seems to be the most important factor, with respect to drilling and completion activity in North America.

2010 was a very good year for Oil States. Much of the gain in stock price was seen from September on as was seen with many of the names in this space. It seems the rise of oil pricing also increased spending in these names to start new wells and invest in the infrastructure of current locations. In September of 2010 this stock was trading for $40/share and now sits above $70/share. Last year's EBITDA of $380 million looks like this:

  • 47% Accommodations

  • 27% Well Site Services

  • 17% Offshore Products

  • 9% Tubular Services

Pro Forma EBITDA for the same time period totaled $458 million. This included contributions from recently completed acquisitions of the MAC Services Group Limited, Mountain West and Acute Technological Services. Pro Forma EBITDA breaks down as follows:

  • 54% Accommodations

  • 23% Well Site Services

  • 15% Offshore Products

  • 8% Tubular Services

Recent years have been quite volatile for Oil States' stock. Much of this is best correlated with the United States rig count. North American drilling and production is:

  • 2005- $164.8 million

  • 2006- $233.1 million

  • 2007- $203.8 million

  • 2008- $351.4 million

  • 2009- $92.1 million

  • 2010- $151.3 million

The U.S. rig count has correlated closely with these numbers: In the year 2005 there were about 1350 rigs, while 2008 was at approximately 1850. The 1850 rigs were the peak in this time frame, as can be seen by Oil States' EBITDA. In 2009, U.S. rig counts fell significantly to approximately 1150, and then rebounded to around 1550 rigs last year. This trend looks to continue on today's oil pricing, and if nothing changes it would not be surprising if we find U.S. rig counts near the 1850 number sometime in the near future. Another interesting note is the consistent climb in Oil States' Accommodations business:

  • 2005- $52.9 million

  • 2006- $92.6 million

  • 2007- $109.3 million

  • 2008- $156.2 million

  • 2009- $178.6 million

  • 2010- $196 million

The accommodations segment of OIl States is levered to oil sands activity in Canada and natural resource development in Australia. Expansionary growth from capacity increases at Wapasu Creek Lodge is supported by a three year Imperial contract. Oil States recently announced the acquisition of an accommodations platform in Australia. Expansion is planned over the next twelve months. There is also the possibility of additional greenfield projects.

There have been significant increases in infrastructure spending with respect to deepwater drilling. Oil States was recently awarded content on Papa Terra, Jack St. Malo, and Mars B. There are several areas of growth that could be attained in the near term. These areas are Brazil, West Africa, and Southeast Asia. Oil States is planning to continue increasing its service and product offering. The company has said it can do this internally or through acquisition.

Completion and production activity in North America directly affects the tubular and well site services portions of Oil States' business. Completion activity has been very aggressive with respect to North America. Although this has been slowed somewhat as bottlenecks have been reported through many of the more difficult shale plays. Industry inventories have reached a better supply and demand balance, which should lead to continual pricing increases and margin improvements. This has been seen especially with higher end rigs associated with shale plays (Bakken).

Oil States' accommodations business has continued to expand even when the economy was no longer on stable footing. This segment provides:

  • Manufacturing and Construction

  • Fleet Rentals

  • Facility Management

  • Lodge/Open Camp Operations

Oil States has four major lodges strategically located outside of major oil sands projects. Six villages are located in Australia. These sites are used with several types of resource areas, from coal to iron and gold. The North American fleet is much more mobile as they are used in conjunction with shale drilling, and are much more temporary in nature. This same fleet can also be used with pipeline development.

The four major lodges in oil sands regions are now adding to current room capacity. As these areas continue to expand, they will need to add space as employees are hired. Oil States seems to have the advantage because of its differentiated lodge amenities. Oil and other resource companies have an incentive to use Oil States' accommodation based on workforce retention. As oil prices increase and production does the same, companies may try to lure skilled help away. Also, by offering the best, it can help in new hires. Satellite, phone and internet are offered at these facilities.

On December 30th of 2010, Oil States purchased MAC Services Group for $651 million. This was an all cash deal funded through a new $1.05 billion bank facility. The Mac is a leading provider of accommodation services in Australia to the natural resource industry. The purchase brought 5210 total rooms, plus planned expansions to 6178 rooms by the end of this year. Some 94% of these rooms are under contract, but this deal also allowed for expansion. This deal is immediately accretive to earnings before synergies are figured.

Australia currently is the leading exporter of:

  • Metallurgic Coal

  • Thermal Coal

  • Iron Ore

Australia is the second leading producer of gold and has the largest uranium resources in the world. All of this shows that Australia should continue to need Oil States' accommodations, and continued demand for base materials could expand these needs significantly. The addition of the MAC Australian villages to its current oil sands lodges increased room capacity from 7800 to 13032.

Oil States also has a mobile camp fleet utilized for SAGD developments, pipeline construction, and drilling camps. These continue to grow a presence in northern shale plays like the Bakken, Rockies and Fayetteville.

Offshore products have been driven by worldwide deepwater capital spending. Oil States serves floating production facilities. They provide items like TLP tendon connectors, riser tensioning equipment, and cranes. It also provides items for subsea pipelines. Items include pipeline end manifolds and pipeline repair equipment. Oil States also works with offshore drilling, rigs and vessel equipment. It provides drilling riser flexjoints, conductor casing connectors, just to name a few.

Oil States provides a global platform of products and services. From the United States to Brazil and England to the Middle East, Oil States is located throughout the globe. Currently, it is addressing capacity on concerns, to make sure they will be able to meet demand.

OIl States expanded its Singapore facility and that was completed in the final quarter of last year. Growth is continuing in Southeast Asia markets. It also acquired Acute in the last quarter of 2010. Oil States' backlog has been increasing starting in the second half of last year and revenue has begun to rebound also. Quarterly order bookings for last year have increased:

  • $122 million for the first quarter of 2010

  • $106 million for the second quarter of 2010

  • $164 million for the third quarter of 2010

  • $208 million for the fourth quarter of 2010

Oil State's North American services are also well placed going forward. It owns and operates 33 land drilling rigs in the Permian Basin and the Rockies. They are highly mobile and can be moved from one site to another quickly. Oil States also has a distribution network of five company-owned yards. It produces casing and tubing for usage in drilling.

Oil States is also involved in completion tools and services. It provides wireline, coiled tubing and gravel pack support equipment and personnel. Oil States also provides well head isolation equipment and services which are integral to stage frac operations. Flowback and separation equipment and services are also supplied. This company has over 55 locations in Canada, the United States and Mexico. Oil States has a leading position in oil and gas shale plays and has high tech equipment that is suited for this work. Production services like well and production testing equipment with personnel are a specialty of this company. Production is a growing component in Oil States' shale segment.

In summary, accommodations growth should help to drive profits for some time. It has strong occupancy with expanding room counts. Benefits from the additional 5210 rooms from the MAC purchase will be seen at the end of the first quarter of 2011.

Oil States is also excited about the growth it is experiencing in the Bakken to the Rockies. Deepwater development spending is gaining real momentum. This should also increase growth substantially as oil prices maintain a level of good margins and profitability for companies looking for oil and gas. There is even further growth tied to acquisition of Acute. Oil States sees this area as a great place for expansion as countries begin to look for more oil overseas.

North American activity is one of my favorite areas, and it seems that Oil States thinks it will be able to grow this end of the business significantly as shale plays continue to show large reserves and oil exploration and production companies need more of its services. The company should capitalize by the rentals of its higher end horizontal equipment. Oil States plans to add additional capital as companies in the U.S. continue to need more equipment. As oil production increases worldwide, Oil States will be there to capitalize.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Sources: U.S. rig counts were from Baker Hughes. North American drilling and production consists of tubular services and well site services business segments.