Oil States International, Inc. (NYSE:OIS)
Credit Suisse Energy Summit Conference Transcript
February 9, 2012 12:35 PM ET
Cindy Taylor – President and CEO
Bradley Dodson – Chief Financial Officer
Patricia Gill – Head, Investor Relations
Brad Handler – Credit Suisse
Brad Handler – Credit Suisse
All right. Let’s move along with our penal here today our session. Very pleased to welcome Oil States International back to our Energy Summit. We have with us from the company today, Cindy Taylor to just in my right, President and CEO; just to her right Bradley Dodson, Chief Financial Officer; and down in front row who doesn’t feel like sitting up here in panel, Patricia Gill, Head of Investor Relations. So thank you all for coming. Appreciate it. And I’m going to turn right over to you, Cindy.
Thank you, Brad. We’re so glad to be here again this year. This is all -- it's great conference for us. Before we get started, I did want to laid off and just let you know that, we are poised to release earnings after market close on Thursday of next week and we’ll host our conference, 10 a.m. Central on Friday. Unfortunately, a lot of the material is through September 30th, simply because we’ve not yet release those earnings.
I’ll just take you through some highlights here. Oil States is a diversified oilfield services company. We deliver our products and services through four business segments as our Accommodations, Offshore Products, Well Site Services and our Tubular Services segment.
A lot of what we are going to talk about are the drivers for our business, those are resource development in both Canada and Australia, investments in global deepwater infrastructure on a global basis, also drilling and completion activity in North America, and as a company a lot of time we look for things that differentiate our products and services.
One thing that we think is a differentiator for our company is that 64% of our EBITDA comes from Accommodations and Offshore Products, both of those businesses have very good visibility going into 2012.
We summarized our EBITDA contribution by each of these four business segments. As you can see Accommodations represented 50% of our contribution, Offshore Products is 14%, again those combined for the 64% with very good visibility going into 2012. The balance comes from Well Site Services and Tubular Services segment, both tied to North American drilling and completion activity.
This is kind of a complicated slide, but what we are trying to demonstrate, if you look at the far right, we have a much greater relative contribution coming from Accommodations and also our Offshore Products business.
We had significant volatility in 2009 with the global financial crisis that really hit. The red bar’s which is our North American expose businesses. You can see a fairly significant recovery in 2009 and ’10, but particularly trailing 12-basis you can see that exceeding good results really on all business lines.
We are heavily focused on returns on invested capital. We stole a slide from some other credit suite report. This gives you the quarterly annualized return on invested capital, again a very position trend over the last five quarters.
Just to give you an update on the areas that we focus on. We’ve delivered a lot of organic growth in both Australia and Canada. We’ve got two new sites in Australia, our Calliope village is exposed to the Gladstone LNG area, and the Karratha new village is going to be up by first or second quarter this year, and it’s exposed to that Northwest shelf both LNG and Iron Ore.
We are also planning expansions in Canada and a lot of people and a lot of people have asked us, we have Accommodations in the lower 48 and we will be growing that as well.
In our Offshore Products segment, we have record backlog level and we are focusing on international growth prospects particularly in Brazil, West Africa, Southeast Asia and Australia.
Lastly, our completion and production services activity impact Well Site Services and our Tubular Services segment. Here we’ve got a very high-end product offering, we are in all the major shale play regions and we do plan to continue to spend organic capital to grow this business line.
It will be on the backdrop of rig count and overall activity. We expect to see declines in obviously dry gas rig count but offset by improvement, and the oil and liquid rich basin also we expect some improvements in the Gulf of Mexico as well.
I’m going to spend some time on the Accommodations business. Here we are an integrated remote site Accommodations provider. We have around engineering staff. We do our own in-house manufacturing, site preparation, installation work. We hold a large suite of assets for rental and deployment and we also do the long-term catering and facilities management.
Just to give you an overview, we’ve got seven major lodges strategically located in the Canadian oil sands region, supporting both mining activity and SAGD activity. We have nine villages deployed now in Australia. It covers a pretty broad basis. The legacy operations were large tied to Metco Mining. A lot of the future growth, again, I mentioned both Karratha and Calliope is going to expose, be exposed to LNG and Iron Ore going forward.
In North America, we have selected assets, I would say deployed in the both the Canadian Bakken and the U.S. Bakken. We are getting some foot-holes in the Eagle Ford and we have a legacy operation in the Fayetteville. There is a lot of demand, a lot of shortages. We will likely be growing this operation as well.
I hope that I’ll demonstrate for you that we have a very high-end product offering and differentiated products and services to support our customers in the various regions that we operate in.
I wanted to highlight for you here, just the picture of our Wapasu Creek facility. We’ve been dedicated a lot of our capital program to the Accommodations business and a lot had specifically gone into this facility.
We have over 5,000 rooms on location and we can support roughly 4,500 customers on a daily basis. The balance is used for our internal operations and support. But you can see the extreme remote nature of the operations and the significant logistics effort that’s involved in supporting this number of workers in a single location.
What we try to do here is just give you an overview of operations in the Canadian oil sands with the specific focus on the Athabasca oil sands that are highlighted and blown up to the right. The dark blue indicates the major developers in the region and also the development name associated with each.
A lot of people are talking about where you’ve been? Again, we’ve grown our business about a 30% compound annual growth rate over the last several years. We have continued good prospects and we’ve moved forward a lot of those in the near-term are going to be control by Suncor or Total.
If you look in the upper left the Joslyn development is in RFQ state and in the upper right you see Suncor’s Total joint venture in the Fort Hills mine which is also in RFQ stage longer term kind of that middle is the Voyager. So when you think of new incremental growth in the region, a focus on those three major prospects are what we are bidding on currently and hope to be working on.
Again this through September 30th, but we can show you the current room count and again, this are major oil sands lodges in Canada. We got just under 10,000 rooms. We have already announced and have internal plans to expand that about 9% and again that shows what is going to be in place through the second quarter of 2012. We will give you an update on our capital plans and programs in connection with our conference call next week.
In a like fashion much like we wanted to show you a picture of our Wapasu Creek facility. This is our largest village in Australia. It’s our Coppabella facility. We have over 2,000 rooms now deployed and supporting mining operations in the Bowen Basin. But the hope to takeaway is again the high quality operation that we offer our customers in this area.
We entered the Australian marketplace via the acquisition of a company called the MAC at the end of 2010. So their operations have been part of our Accommodations segment for all of 2011. What took us through our strategic planning to Australia maybe obvious from this chart? But they are the world largest exporter of Metco and also of Iron Ore, second largest exporter of thermal coal and significant activity around other resources including gold, uranium and a lot of the future again around casing gas, conventional drilling and LNG construction.
We summarized again the nine major villages that we have in Australia through September 30th. We had just over 6,400 rooms, again announced plans going into the end of 2011 and into 2012 should expand that number by about 18%. And again, we’ll give you more an update on our plans for 2012 on Friday of next week.
A lot of it is just relate for our modeling purposes, information purposes, but you can see the room count by each of the quarters for the last eight quarters. The dark blue is the legacy presence that we’ve had in the Canadian oil sands. The red is of course what has been added through the MAC acquisition and of course, we have expanded fairly significantly since we close the acquisition at the end of 2010.
I mentioned earlier one of things that kind of set us apart is the contract visibility that we have in this business segment. What we’ve tried to do is highlight our 2013 contract position and our 2012 contract position split between Canada and Australia.
Again we are enjoying very high levels of utilization currently. If you look at the chart we’ve got 85% coverage on our lodge rooms in Canada for this year and we’ve got 87% coverage in Australia, significant coverage into 2013 in Australia, it’s a little bit less, in Canada but most of you know that major facility Wapasu Creek is basically dedicated to Imperial with the Kearl project currently, that contract comes and expires on March 31, 2013.
But it is our expectation that that will be extended a little more independent positive news, of course Imperial got the approval of move forward with Phase II of the Kearl development and they announced that, I believe it was late last year.
The contracts that we have in place are solid contracts. They generally have minimum occupancy guarantees for headcount in the facilities and they also generally provide for our inflationary protections so that we are able to maintain our margins.
Again, we have a whole suite of mobile assets, if you focus on lodge and villages that’s about 85% of our Accommodations contribution. The balance is really coming from these mobile camp assets. A lot of it is in Canada supporting SAGD drilling operations in the oil sand, pipeline construction to a lesser extend I would say, conventional oil and gas drilling activity, we also, again as I mentioned, during the lower 48 as well. This will be growing but likelihood growing at an equal or lesser rate than our lodge and village Accommodations.
Our Offshore Products, I mentioned kind of the highlights for the business has been our backlog development over the last four to six quarters. I did want to highlight for you our product and service offering, and we are trying to tie that to the demand driver leading off with flooding production facility, these are generally FPSO's or TLPs, we do participate on Spars and other facility, but FPSO’s and TLPs are significant drivers.
We are fortunate to have two proprietary products that go on the installation of this floating production facility. Those are our still cantnery riser connectors and receptacle, and also our TLP tendon connector. The good thing about that the proprietary nature is such that we have very market share and a very high hit rate such that, if there is an FPSO or TLP that moves forward, we do have a high degree of confidence that our content will be on.
We also offer riser tensioning equipment, high-end wielding services, engineering services. We manufacture cranes generally for production platform as well.
We participate on the subsea side, I think most of you know a lot of that activity has lagged over the last 12 or 18 months. A lot of the installation contractors are beginning to see bids and quotes come out for subsea pipeline activity and we think you will see an increase in our content there as the market moves up. We offer collet connectors, jumpers, pipeline and manifolds, tie-in sleds and a whole host of repair equipment and services on the subsea side of the business.
We kind of group the balance of products that we have that are expose either to offshore drilling activity, rig construction or vessel construction, that includes mooring and vent system. Again our FlexJoint has proprietary application on the drilling riser towards very high market share associated with new rig construction.
We also offer high-end large D conductor casing connectors on the global basis generally compete with GE and [Drillclip] in this space and also riser repair services as well.
To be effective in deepwater development you have to be global in scope. We’ve shown for you our major manufacturing service and sales locations on the chart, over the last three to four years we’ve been heavily focus expanding our manufacturing capability and our footprint starting initially with expansions in the U.S. We followed with upgrades and expansions in the U.K., last year we opened a brand new facility in Singapore and our focus in 2012 is likely to be in Brazil. We have expanded a lot of our sales and technical service positions already will be continuing to expand that as we move forward. Obviously, a lot of the goals here are to continue to expand our market share in these various international regions that we operate in.
FPSO’s get a lot of attention, I actually have a market slide a little later but there is an announced plan roughly 120 FPSO’s coming into marketplace in the near-term. We always get the question, what’s your content? What do you deliver on an FPSO.
A lot of times we talk about that middle right hand side which are more proprietary equipment, FlexJoints, receptacle, Merlin connectors. Again, we feel like if there is an FPSO development high success rate, high hit rate with those products. But we also offer mooring connectors, deck equipment and various thing subsea particularly associated with the risers. So pretty good content there and again it’s weighted towards our higher end, higher margin proprietary products.
If we look at the earlier slide in terms of Offshore Products, we actually saw fairly good year in 2009. Our operations held up very well. But it’s because that we had a strong backlog position coming into the year.
What you don’t see is just -- until you get to this slide is the significant backlog erosion during, one, the global financial crisis and then two, the [Delice] and mortuary associated with the Macondo well blowout.
The good news is the last four to six quarters have been exceedingly good on a bookings basis and this is again through the third quarter, we’ll update you next Friday through the fourth. But we are now at record backlog levels and I would comment not only is the absolute dollar amount favorable the mix is also very favorable.
If you look at our quarter by quarter operating results for this segment, in 2011 you see fairly continual improvement in our EBITDA margin percentages over the first three quarters, again pretty much tied to the quality of the backlog that we have in place.
I mentioned earlier what we try to do is add some independent validation to the statement that we expect global deepwater infrastructure to be very strong. These particular sources do come from published information from Quest Offshore and Jefferies.
But what we wanted to focus on, again if you look in the next five year horizon subsea CapEx is estimated to grow about 80% through 2014, and the projections we see now number 120 FPSO’s, 20 TLPs and some 25 floating LNG platform. So, again, this is a very significant increase in baseline activity from where we are today.
Lastly, I’m going to talk about the rest 35% of our contribution that comes from activity in North America both drilling and completion services. We do have 34 land rig. I’m not going to spend much time on that, that’s about 5% of our EBITDA contribution on the last 12 months -- trailing 12 months basis.
The primary things we are going to focus on are the OCTG platform that we have in Tubular services and also our rental equipment and service that is tied largely to completion activity in North America.
Through the OCTG platform, we have five company-owned yards and about 30 third-party stocking locations, a very broad distribution network where we supple casing and production tubing to most of the major oil and gas basins in the United States.
As it relates to our completion, equipment and services, we are focused on wireline, coiled tubing slick line type support equipment and personnel. We have again some proprietary wellhead isolation equipment associated with stage frac work that is done exceedingly well with the increase complexity of the completion in the various shale plays that we operate in.
We handle the harsh flow back and ultimately well testing post completion of the well. We deliver this product and services about 50 locations in United States, Canada and Mexico, and we have about 1,700 works in this segment supporting activity in the various shale play regions.
We’ve given you a picture again, a lot of people, it’s hard to comprehend all the various products and services that are integral to a drilling and completion operation. But the takeaways here and we circle them, where we have kind of the greatest contribution in market share or in our wireline and slick line support equipment, our isolation tools, well tubing support equipment and services and well testing, again, a significant concentration around well completion activity.
We’ve given you a math that really depicts predominantly the large number of rental tool locations that we have. Again, we are in two basins with drilling rigs, we’ve got five company-owned yards, highlighted in green for Tubular’s, quite a lot of third-party stocking locations and we’ve also started adding the Accommodations.
Again, a lot of people ask us, do you with all the shortages, why aren’t you in the Bakken. Clearly, we are there, we’re in the Rocky Mountain region a little bit and Arkansas, emerging operation in the Eagle Ford and some legacy operations supporting Gulf Coast activity as well.
The major message in North America these days is increase well complexity. What we’ve tried to do is quantify that and make it more understandable for our own product lines. If you look at our rental tool services line, here we look at average revenue per ticket and what we are trying to show is that increase well complexity is leading to incremental content on a per well or per rig basis.
The last again, trend line and increasing trend line, we are highlighting that based on the year-to-date activity in 2011. We are already about 22% ahead of the prior peak in 2008. Again it’s a testament that even in the flat rig count environment we can see improve contribution and results given the complexity of the activity that we are working on.
The same is actually true in Tubular Services segment, again we supple casing and production tubing, as we are doing the extended horizontal and the multi-stage type completions, you’re introducing artificial pressure through the fracking process, you need different wall, higher strengthen alloy type product that translate to increase tonnage per rig for us. Again that is the metric that we are showing you here, steady growth over the last three years and about 15% increase in 2011 over the prior peak tonnage per rig consumption in 2008.
I know it’s a lot of information. I wanted to kind of highlight the primary drivers of our individual business segments. But I’d like to just kind of leave you with the few thoughts that might could bring it all together.
Again, Accommodations is about 50% of our contribution. We have very strong growth in our legacy operations in Canada, continuing very strong growth in Australia, both at about a compound annual growth rate of 30%.
We deployed a lot of rooms in Canada and Australia. I think the Canadian metric there is from January 1 of ’11 through the expectation through mid-year 2012. In the case of Australia, it’s capturing an estimate for 2011. But again, substantial organic growth in all of these basins, we have assets and operations in a shale plays. We will be growing that again kind of at a comparable way as demand dictate.
On the deepwater side there is a very strong outlook. But I would say more importantly to the outlook are actual result have shown significant improvement in growth. Our backlog is at very strong level, in fact record levels. And we are continuing to see great prospects as we move forward.
There are things that we have to do to capture or maintain or increase our market share on international areas and heavily focused on that. You’ve seen us doing at the last three years and we’ll continue that focus going forward.
Lastly, again, we’ve gotten a lot of questions in the conference around North American activity, shale play activity, particularly with the significant decline in natural gas pricing. We had expected declines in a lot of the basins in North Louisiana, East Texas, the Barnett Shale, some of the Mid Con regions. But we have also fully expected that to be offset by growth in the Eagle Ford, the Permian, the Bakken and also recovery in the Gulf of Mexico.
I think that statement still holds true the one market I’m little more concern about today than previously is the Marcellus. We thought that would not only hold up but grow in kind of a $3.50 to $4 Mfc environment sub, $2.50, I think it’s questionable.
Right now customers that we are talking to that will be reducing activity in the Marcellus seem to be picking those rigs up in the Utica. So we may have somewhat of a natural offset in that Northeast market. But that certainly what we are watching. But, however, just given the trend lines and projections we have, we still look for a very strong market in 2012 for both our Well Site Services and our Tubular Services segment.
I understand, we’ll take some Q&A, is that right, Brad.
Brad Handler – Credit Suisse
If you look at your expansion plans on the Accommodation sides most of that has been done. Can you talk about what you want to do in the future and specifically talk about the oil sands and more so on Australia in terms of, one, you do organic growth and then two on, further acquisitions like MAC?
I will just for benefit of the webcast, the question was, a comparison to past growth in the -- well, actually, the Accommodations business generally and our projections for the future? Again, we are going to give you a lot of detail information on our CapEx plans, is just kind of unfortunate, that’s not out yet. However, if you look at kind of past general guidance that we give in the market, we’ve been looking for roughly 1,500 room adds in Australia and about 1,500 room adds in Canada in 2012, again we’ll firm all that up.
If I look at the nine villages in Australia what we are really thinking about a step out expansion with existing customers, existing villages, kind of increased activity around those. The good thing about that is, you’ve already got the permit, you’ve got the development authority, you general are already had a contract in place. So these are much readily -- more readily able just to tack on to those existing operations.
For that reason, pretty high degree of confidence that will be able to deploy those rooms. And also probably did so sporadically throughout 2012. A little bit in contrast to that is Canada, we have the continue expansion of Hyundai which will form part of that, part of our thinking is of course around the RFQs that are out for Fort Hills, for Joslyn, for Voyager. We haven’t heard yet that is going to be, I hate the word, but lumpier in the sense that is dependent upon the contract award. But that’s really our outlook in thinking there.
We have been so pleased with the MAC acquisition that we closed at the end of year 2010. If we look at our 2011 results, we were about 50% ahead of our year one acquisition economics great fantastic deal.
We haven’t found another MAC across the globe. So right now our plans internally are organic growth. We are continuing to look for put holds particularly in new geographic markets for Accommodations but an acquisition Canada is not obvious today.
Brad Handler – Credit Suisse
Can you hear me? Just piggy backing on something you just mentioned there, the request for proposal in Canada have -- your clients offered any sort of guidance is to when those awards will be given?
We expect, I mean, first quarter, they are already somewhat delayed from what we thought. Now it subject to obviously what they want to do. But they’ve extended some of the deadlines already, although not by much, maybe a week or two. So I’m still going to say first quarter.
Brad Handler – Credit Suisse
And then secondly, could you maybe just talk for a moment about the expansion in the lower 48 the mobile unit that seems to be something new that’s starting to get more and more into the presentation?
We’ve had a presence in the Gulf Coast for a long time and a presence in the Fayetteville with Southwestern for about five years. Quite frankly, I just didn’t really think the big use or big demand for this particular product or service until again the Bakken development, the Eagle Ford development, possibly the Permian.
We have probably a 1,000 rooms deployed in the Bakken. We just bought a foot-hold in Carrizo Springs for the Eagle Ford, it was a very small deal, but the issue there is they have land and they have permit in place, permit is extraordinarily difficult then all these basins and so we really bought that to have an option on activity in the Eagle Ford.
There is another site that we have up and ready, we are just trying to get permitting for the units and sales to bring those on location. So there will be opportunity, if you hear about it from the customers of course on shortages, we are here to fill that, we are -- it’s going to take us while because the permitting. But we are very focus on it. But I still think there are limits to how much you can deploy given the infrastructure that implies in a lot of these areas.
You’ve built your Accommodations business in Canada and Australia developed countries. Have considered taking the Accommodations business into the resource rich areas of the world like Africa and Latin America, which aren’t developed countries?
I would say our next major focus market is in South America, largely focused on Brazil, but also Chile, possibly Argentina and other areas. We’ve had inquires in Columbia, that really not been the type that has been attractive to us. We had inquiries in West Africa as well. Again, just the nature of the opportunity is didn’t think the risk reward was there.
There are certain things going in (inaudible) Guyana, so you’re absolutely right there. I think there is going to be a growing set of opportunities and I think that our developed own operate model where we do everything from start to finish, we’ll be very attractive not only caveat is that, we want to go in with some assurance that that risk reward in area was there from safety and security, contract coverage, et cetera. And so we are looking at a lot of things, it’s -- we kind of enjoy working in some of the developed countries and it’s been very good to us, and like I said, I think, Brazil is probably the next focus market.
Brad Handler – Credit Suisse
Okay. Thank you so much.
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