Oil States International Inc. (NYSE:OIS)
Barclays CEO Energy Conference Call
September 7, 2016 3:05 PM ET
Cindy Taylor - President and Chief Executive Officer
Christopher Cragg - Executive Vice President of Operations
Unidentified Company Representative
Okay. Thank you very much. Good afternoon. Next up, we have Oil States, and we have Ms. Cindy Taylor. She is the CEO, and she’s joined by Chris Cragg, who is EVP of Operations, right? Okay.
Ms. Taylor has been – she has been President – she has been CEO since 2007. Prior to that, she held various positions since 2000, including CFO and Chief Operating Officer. She is also on the Board of Directors of Tidewater and on AT&T. Thank you very much for joining us, Cindy.
Thank you, David. We always enjoy being here, visiting with both shareholders and prospective investors. This is a fun time of the year and a good way to kick off the investor season. Chris and I are going to take you through this, but I’m going to lead off with some introductory slides, and then take you through one of our segments, Offshore Products.
I see some familiar faces, but I’ll just kind of go through some highlights. Oil States is a technology-focused, pure-play energy services company. We deliver our products and services through two business segments. Those are offshore products and our well site services.
And as we mentioned, Chris is going to take you through well site services later in the presentation. We’ve gotten a lot of questions in the one-on-one. This is one business that’s exposed to some improvement in activity largely in the Lower 48. You will see the drivers behind offshore products are more global in nature. They are manufactured product. And I’ll say, primarily it flows to deepwater and offshore development. Chris’ business is largely completion-focused with a grounding, if you will, in North America, but we also have exposure internationally and also in Gulf of Mexico.
What we wanted to do is show the relative contribution by segment. I’m not going to spend a lot of time here, because the next slide kind of depicts the trends just a little bit better. The green bar is our well site services contribution and this is EBITDA. The blue bar is offshore products. And as you know, the market has adjusted quite dramatically in the U.S., particularly on land. That’s why you see, one, the dramatic growth in the green bar from 2009 through our peak activity level in 2014. But with an 80% reduction in the rig count, of course, that contribution has fallen off materially.
In a little different vein, we’ve seen strong growth in our Offshore Products segment and a little bit more of a muted decline largely because of two things, number one, the global nature of the business expose – exposes us to more basins of activity, more customers. And importantly, we carry a backlog in this business and seldom have we seen any type of material backlog cancellation in this business, and we haven’t seen that in this downturn either.
But when you look at that, what has happened is the relative mix, which used to be about 50-50, if you will, between the two segments in terms of EBITDA contribution is now weighted more heavily to contributions coming from our offshore products, and Chris will take you through this. We – even though it looks like a fairly significant decline. We’ve actually been more resilient than most throughout the depths of this cycle largely because of the technology focus and the service platform that we have in place.
In our Offshore Products segment, as I mentioned, again a primary driver there is global offshore development with a particular bias to high-technology deepwater investments and applications. I wanted to focus on some of our key products and services and really tie that to the activity driver, starting with some of our most proprietary equipment, our steel catenary riser connectors and receptacles, TLP tendon connectors, our FlexJoint technology, if you will, which goes on various riser applications. That, again are largely driven by high-end field infrastructure development, again, TLPs, FPSOs are big drivers for that.
We also participate on the subsea side of the business, offer things like high-end collet connectors, jumpers, pipeline end manifolds, tie-in sleds. I’d like to characterize that a little bit as the high-end technology – jewelry, if you will, on a subsea pipeline installation. We also offer a whole host of repair equipment and services. And right now, with the significant delay in new project FIDs, some of the sustaining activity that we have is on the repair side of the equation, some of the shorter brownfield-type CapEx on the pipeline side.
And then, we have kind of our other equipment, if you will, which include mooring and winch systems. We mentioned our FlexJoint twice. One, it has application and production infrastructure above, but it is the most proprietary FlexJoint offered on a drilling riser as well, such that there is probably not a newbuild drilling rig in the world that doesn’t have our proprietary FlexJoint on it.
We also offer large OD conductor casing connectors, cranes and a whole host of riser repair services as well. I wanted to just give you some pictures if I can to show you some of the various types of subsea developments. And again, you can see the buckets of our equipment and how we participate in those. You’ve got a really supported riser development, a lazy-wave technology, freestanding hybrid riser. But again, all of these are taking a field that has been discovered and delineated and tying that back into host production facilities.
In many cases, again, that can be a TLP or an FPSO. We also build export lines, if there’s a choice to take that production to shore. Again, this particular segment is global in scope and scale. We have over 20 locations, I’ve listed those for reference. Some of the manufacturing locations we have in place are, of course, many locations in the United States, the UK, Singapore, Brazil. We’re also in areas like India, Thailand, and elsewhere and have sales and service locations broadly across the globe.
We’ve instituted over the last several years what we term Centers of Excellence. Those are around particularly engineering and high-end welding, and again, this helps us deliver high-quality projects to our customer base on time with little interruptions in terms of quality. We wanted to give you a little bit of industry data. People are really struggling trying to understand where the activity is, when we’re going to see any type of new project FIDs, particularly given the significant delays that we’ve seen really over the last two to three years in terms of these large deepwater development.
This particular source comes from Infield. It has been updated very recently. But generally, what you are going to see, while the absolute amount of forecasted spending is down, you will see it’s down from $68 billion to $59 billion, what most of these companies are doing is just shifting everything to the right with the recognition, which we agree with that these projects aren’t going away. They are just not coming to market as soon as many people expected.
And of course, as we progress, there has been reengineering occurring and the absolute price of these projects has come down. And I really think this is not the number of projects decreasing as much as it is the average cost has come down. And again, we’ve got the orientation of where these projects should occur, but they’re very broad based. And when we say Latin America, that’s largely Brazil, West, and of course, West Africa, Gulf of Mexico, Southeast Asia, but fairly broad amount of opportunity set.
One of the best ways to kind of measure our business, estimate our business as we move forward is to think about backlog as a driver for roughly 60% of our business as we have major project awards driven by project FIDs. We also have roughly 20% service content that’s not backlog driven and about 20% that is shorter cycle, more consumable products, which, while we have some backlog is not a full year’s duration of backlog, and that will give you an order of magnitude. But what you see from that, we hit a real trough in backlog in the 2008, 2009 timeframe, which was, of course, the global financial crisis that ensued, and then it’s followed on with the Macondo well event.
So a very weak cycle, low levels of backlog. I believe that trough was about $206 million in 2009. We exited June 30, again, we are at roughly two years into this downturn at $268 million, so you are seeing similar trends. With that, revenue and EBITDA tends to lag, both in upswing and a downturn about six months. And that’s what the green line is suggesting to you.
As that backlog has come down, we are seeing on a lag basis a decline in our revenues and EBITDA. We are often asked, where do we go from here? And where do you sense that you’re going to find the bottom? And in connection with our last earnings call just based on bidding and quoting activity that we have outstanding, coupled with a lower level of bookings generally each quarter now we’re looking to find the floor in backlog probably late this year, early next year, which means the revenue and EBITDA from this one segment likely floors midyear 2017. That’s the best estimate that we can give you based upon our product and service mix.
We listed for you major backlog awards. And on this schedule are ones that are greater than $10 million as of date of award. We oftentimes gets follow-on content for previously sanctioned projects, so we don’t aggregate all of that over the course of time. But these are individual awards north of $10 million. We’ve shown for you the customer, the type of product or service that we’re offering and the geo market that we’re in, which should show you that we do have a very diversified product offering and very much global in scope in terms of the customers and the areas that we supply product to.
The obvious caveat here is this list is getting shorter, meaning, we are working some of that backlog into revenues as we have progressed, and we’ve not been rebuilding that at the rate that we would like to. I will say, our book-to-bill last year was 0.8 times. This year to-date through the June 30, was 0.75 times, which again, in this world is all relative, but on a relative basis, we are the one having the best bookings ratio, I would say, over that 18-month period. But nonetheless, it does cause an erosion in backlog until we see some of these new projects get FID-ed and come into our backlog.
Again, I’m going to just kind of summarize a little bit of outlook comments. While we have lower backlog, we have a solid backlog. We’ve executed very well on it, and that does provide pretty good revenue visibility. We generally turn 85% to 90% of backlog to sales in the forward 12 months. So that’s an indicator for roughly, again, it will be 50% to 60% of our business as we go forward through that.
We have seen major delays in new awards. We don’t expect that to change on a dime by any means, but there are a handful of projects that we are bidding and, in fact, rebidding multiple times that based on conversations. We do feel like one or possibly two awards will come – of significance could come to our backlog late this year, early next year.
In the meantime, we’re somewhat supported by ongoing downhole consumable, short cycle products and service. We’ve listed some of those. And as an example, there are elastomer products are the base of many of our high-end, high-technology products. But we’ve adapted that into various applications, including frac plug, as an example, that can go anywhere across the globe. But importantly, they’ll have a land application as well as an offshore application.
Same thing is true for some of our valve products. And while we haven’t seen much yet in way of an uptick in service work or valves demand, we are seeing that on the frac plug side of the business, so some of our short cycle is already seeing a little bit of the lift. We also, as I mentioned, supply large OD conductor casing connectors. Those are downhole consumables.
So in a lot of these large development drilling programs across the world, we tend to have generally some ongoing demand in a multiyear development drilling program that creates ongoing demand for these connectors. We do have a very narrow product offering exposed to drilling rig equipment. It’s generally our FlexJoint and some riser applications, but of course, with the duration of the downturn and the excess supply of rigs, we have very little backlog tied to drilling rig equipment today. So I don’t view that as a drag. It would be upside if and when we start to see some demand for that going forward.
I’m going to turn it over to Chris, who is going to take you through our Well Site Services segment and conclude with some closing comments. Thank you.
Thank you, Cindy. Our well site services group comprises our drilling and completion operations. Although a relatively small part of our company, we do have 34 super single drilling rigs serving the two largest vertical markets in the country. 24 of those rigs working in the Permian and 10 of them working throughout the Rockies. Again, these are highly mobile rigs, very well suited for the very short quick drilling operations for the vertical market.
Most of our well site services group is represented by our completion services operations. We provide services throughout the completion phase of all oil and gas operations from wireline coal tubing support, frac, flowback and well testing.
Our focus has always been where we have some type of proprietary advantage, a proprietary technology-driven, high-pressure, high-temperature equipment well suited for the completions being conducted today. We hold over 200 patents within this particular group. Again, to clarify, while we don’t own wireline units or coal units, we are not a pressure pumper. We do provide support services for all of these operations to help our customers in their complex completions.
Slide 17 does highlight some of our primary product offerings within our completion services group. And I’d like to point out some of these areas – some of these product lines where we have greater proprietary component. Let me start out towards the upper left-hand side our isolation tools.
Our primary offering here is our stage frac tool. And our stage frac tool actually isolates the wellhead. We actually sting through the wellhead, take control of the well, gearing fracking operations. So our tool contains the pressure, withstands the abrasiveness of the proppant and provides very efficient switching between wireline operations for plug and perf operations and pumping the stages within the well.
To the lower right there is Tempress. This was actually the only acquisition we’ve made in this group. We acquired Tempress about three-and-a-half years ago. The primary offering here is our HydroPull, and that is extended reach technology that actually pulls the coil across the lateral of a well allowing our customers to reach the tow and effectively produce all of the zones that were fracked and plugged back.
Working our way around the Ball Launcher, again, that was internally developed product to allow safer, more intelligent operations that require a ball being dropped into the wellbore to activate downhole sleeves or other operations. And again, wireline support, frac stack, a key part of our business where we have extensive quality control procedures to support our customers.
As with anybody in this business location is very critical, we must be close to where our customers are drilling and completing their oil and gas wells. While we’ve closed probably 20% or more of our regional districts throughout the U.S., we have elected to maintain over 40 locations serving the primary shale basins across the U.S. in order to support, again, our customer operations.
We’ve got a lot of questions over the last couple of days about the outlook for this business. And clearly, 2015, 2016, the downturn has been long in duration and has really cut into the infrastructure of our entire business and our entire industry, in fact. Customer capital expenditures are down for the second consecutive year, the first time that’s happened since the 1980’s. And we’ve seen – no matter what metric you use, we’ve seen a decline in activity, be it drop in rig count, a decline in net wells drilled from the peak in 2014 to estimated 2016, about a 70% drop, a very comfortable drop in footage drilled, again, from 2014 to 2016.
However, we are beginning to see signs that the market is stabilizing. The rig count has come up off the trough 23% at medley, 23% off a very low base. But again, that’s one of the things that we have to see happen in order for the market to stabilize and for our completion business to increase.
Another key factor is that, you need to look and understand the types of wells being completed in the U.S. in this market. Our customers are really focusing on the key parts of the play and really have refined their completion techniques to exploit the reservoir in each of those locations.
So we are seeing these complex well completions’ increased efficiencies really drive the market. And again, complex completions with longer laterals, more sand, more profit, higher pressures, higher temperatures, longer laterals, they are becoming the focus of our customers, and that has always been aligned with our strategy, again, to concentrate on the more complex activities in the oilfield.
As the two graphs show there, I think it is important to realize that our revenue per rig has been fairly resilient through this downturn. Any time your activity levels fall 70% to 80%, you are going to be impacted. But again, I think we have – this demonstrates that we have been able to hold some of our market share and our position with our customers.
Let me wrap up with a few comments on our overall drivers of our profitability for both of our segments. As Cindy talked through offshore products, again, very much geared to our proprietary products and services. Our backlog is $268 million at June 30. Our book-to-bill, while less than one has been fairly resilient compared to many of our peers.
We are continuing with our ongoing facility expansion, which is – which we’ve incurred a lot of capital in our – improving our infrastructure, if you will, in the UK and Brazil. But again, we’ve demonstrated our ability to really pace those projects and time those projects as we match the future outlook for a particular market.
For well site services, again, service intensity is critical, and that is what will drive our business, and it is aligned with the type of work being done in the market today. We will continue our focus on the higher-end proprietary equipment, where there is some type of technology – technological advantage for us. As always, we have responded to this market and have aggressively cost – addressed our cost structure in response to the cycle. And really, I think it’s safe to say have almost reset our cost structure in anticipation of the market coming back.
Having a strong balance sheet is such key advantage in this market, and Oil States’ balance sheet is in great shape. We have $335 million of liquidity as of June 30. Our total debt to TTM adjusted EBITDA is a very favorable 0.7 times. We’ve got no significant debt maturities until 2019, this is through our revolver.
We generated good cash during the first six months, $64 million, most of which went to reduce debt during the first-half of 2016. Both of our segments have aggressively addressed our cost structures to match activity levels and allows us to really be mature and disciplined in our approach to capital allocation. And we view our capital allocation and capital choices really in three main areas. Our organic capital expenditures, which, in this market, we could manage very closely to match the cycle.
M&A is a key part of our DNA ever since going public in 2001. We’ve completed more than 40 acquisitions since going public, and we’re continuing to work through that, even though valuations today are still relatively difficult, or we can also – we have a share repurchase plan in place, which is available to us as well.
So in terms of our overall outlook, we have a highly experienced management team. I guess, it’s not our first rodeo is the best way to say that. We’ve all been in this business for our entire career, and our underlying divisions operations have been in business for decades, many, many decades.
So we are experienced and know how to navigate the current short-term challenges that face us. But we can also not only navigate those, but capitalize on the opportunities that exist for us today. We have an outstanding customer base in both of our segments, both in the international customers and domestic for offshore products and also for our U.S. customers for our well site service group. Again, we have an outstanding balance sheet position, and we can be opportunistic, and in this market that’s a true advantage for us.
The last bullet point, I guess in conclusion is always our goal has been to create long-term shareholder value through strategic growth and returns on invested capital. It was that way in strong markets. It’s that way in the markets, which we find ourselves today, and we’ll continue to work to achieve that goal.
So thank you very much for your interest in Oil States.
Q - Unidentified Analyst
A few Q&As here up here. Cindy, maybe if I can just first ask you some of the M&A M&A front, sorry.
[You guys are a little bit away from] [ph] microphone, get a microphone.
Anyway, so I’m just curious on the M&A front. If I look at kind of your subsea products, there would seem to be opportunities for other kind of bolt-on that would seem to fit pretty well in there, right. How does that market look right now? Is that – is there opportunities out there? Is it kind of – it seems like it’s fairly fragmented industry?
It’s a great question and one we’ve been asked frequently over the course of the last couple of days. And I would frame it a little differently. We’re being asked if there is a preference to either do M&A in the completion services side of the business more exposed to U.S. shale plays or expand more globally within an offshore/deepwater element to it. And I have answered and would that we’re interested in both.
There might be a bias in the near-term to land-based Lower 48 activity simply, because the visibility of recovery looks good and most of the customer base is viewing that as a great opportunity set, particularly in the next five to 10 years. And it’s a lower risk, if you will, meaning, there is not long-term contracts in place. You are not as strung out on investment between early investment and production. There are some challenges, meaning, just about everybody that we look at has negative EBITDA and may have debt.
And so consolidation, you have to have a pretty strong conviction in terms of what your future cash flows are in that business and how to asses intrinsic value of the acquisition. They’re different in the offshore products. Again, I showed you the global footprint. We’ve got many – very high-end key technology, key manufacturing facilities across the globe. And while they are not be – might not be an imminent market recovery until 2017, 2018, again depending on the product line, there are clear near-term opportunities to consolidate facilities, leverage our technology, our manufacturing footprint, our infrastructure and machining capacity to bring in incremental product lines to the existing base that we already have in place.
So I think the key there is evaluate all aspects that have the technology bias that we’re looking for and try to get that visibility of EBITDA and cash flow, so that you properly value the business. I will say that we’ve closed probably 40-plus – mostly smaller tuck-ins, some larger before we did a spinoff of a business a couple of years ago, but I think we’re good at it.
I and others have a private equity background. I think we’re good at valuing businesses. We’re good at doing due diligence and integrating those business. And where we stand today, whether you believe the lower for longer thesis or not, I can tell you that we would benefit greatly by more scale and more revenue generation to leverage the investment and the infrastructure that we have in place.
Your – on the subsea side, your book-to-bill ratio is remarkably strong, one of the stronger ones I’ve seen out of all the capital [ph]. Do you think you can – where you are thinking that heads the rest of kind of into next year? Do you think you can keep that kind of above 0.7? I mean, it’s a pretty – like you said, it’s a pretty strong number?
I started out the year with, I call it, just a soft goal more than a guidance, because there is a lot of – was a lot of uncertainty, particularly been around 0.7 to 0.75 times. I thought then that our second quarter would be our weaker quarter for bookings. And it just didn’t prove to be that. We had some kind of unexpected follow-on warp for some projects, already FID-ed some repair systems, et cetera, that really kind of helped our overall bookings ratio in Q2.
So we’ve kind of rolled it now and said, Q3 might be the softer bookings quarter. But as we progress, we get more and more comfortable with that soft guidance of 0.7 to 0.75 times.
Okay. And then on the Well Site Services business, you’ve kind of mix of rental and consumables in there. Is it – or is it all rentals?
It’s really not. Think of us as a service business.
Meaning, yes, we have a lot of high-end equipment from isolation tools to frac heads to extended reach technology, ball drop systems, etc., there is nothing that goes on location without our service personnel. We’ve got DOT trained drivers. You’ve got certified trained operators. These are high-pressure, high-temperature kind of the hardest of the hard type of completions that are out there, and we would not trust our equipment to be run effectively without our highly trained personnel on location with it.
And pretty much, it should be aligned with the well count, more or less?
Well count or frac stages, Chris likes to say the best metric, if you can get it is well intensity. And what we mean by that, wells drilled aren’t as important as probably footage drilled, but we don’t have a volume metric measure, meaning, we’re not a sand producer. But the higher the intensity, the the higher-end equipment, the higher technology and higher revenue that we’re going to get accordingly.
Got it. That’s great. Are there any questions in the audience?
I appreciate the top line question, but…
Thank you. I appreciate the top line question. But it sounds like in the middle of the year, you had an idea, a goal in your mind for what might be a realistic book-to-bill ratio. I’m just curious, as you think about 2017 for the offshore business, do you think – how do you think bookings will compare qualitatively speaking with 2016? Do you think it will be up? Do you think it will be flat? Do you think it will be down? And I guess, I’m assuming it’s sort of $45 to $50 oil price world.
Well, I can answer that. Just again, it’s based on bidding and quoting activity and discussions with customers around FIDs. And I’ve kind of guided to maybe one coming in the backlog by the end of this year. So with that framework, I have to say 2017 would look better than 2016, realizing we hadn’t had much in 2016.
Q - Unidentified Analyst
Great. Well, if there are no more questions, great. Well, Cindy and Chris, thank you very much. I appreciate it.
Thanks all of you. Enjoy the conference. We appreciate being here.
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