Offshore Stymies Oil States

| About: Oil States (OIS)
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Summary

OIS's revenue from land drilling is growing by double-digits Q/Q.

Offshore (68%) of revenue continues to stymie the company. The segment might not rebound unless oil stays in the mid-$50 range.

OIS's liquidity will allow it to survive the oil patch. With oil prices sub-$50 the stock is a hold.

Oil States International (NYSE:OIS) is a conundrum of sorts. Its mix of onshore and offshore products provides diversification. However, it appears that when one segment does well, the other segment under-performs.

Push/Pull Between Onshore And Offshore Continues

Oil States has been punished by the rout in oil prices. In order to stem cash burn, shale oil plays have squeezed suppliers. The company's Wellsite Services segment represented as much 48% of revenue in 2014; it fell to as low as 23% last quarter. The rig count rose by 14% in Q3, and growth in the company's Wellsite Services segment has been white hot.

The segment generated $54.9 million in revenue, up 18% sequentially. The company has a major presence with shale oil plays in the Permian Basin in West Texas and in the Rocky Mountains. That has served the company well as the Permian is where the lion's share of growth in the rig count has occurred. Its revenue growth was much higher than larger players like Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI).

The company experienced a 3% sequential increase in completion services jobs performed, and a 16% increase in average sales price ("asp") per job. These improvements, along with increased activity in the Permian basin and increased usage of land rigs are expected to drive Q1 2017 revenue growth at a minimum of 5% sequentially.

While land drilling is showing signs of life, the Offshore segment is in decline. Offshore revenue fell 13% sequentially due to falling demand for products used in drilling applications. Oil prices might have remain above $60 for a sustainable period before drilling demand improves. The company expects revenue in the first half of 2017 to be down substantially. It could overshadow any improvement in land drilling revenue.

Liquidity Remains Strong

The bottom line is as long as Oil States maintains strong liquidity and cash flow the company is not going anywhere. The company has working capital of $383 million, which is solid for a company of its size. For full-year 2016 the company generated free cash flow of $119 million. Management cut costs to match its declining revenue base. Capex for the year was only $30 million, versus $115 million in 2015. Its long-term debt of $46 million less than 1x EBITDA, which is paltry compared with larger competitors like Weatherford International (NYSE:WFT) and Halliburton whose balance sheets are more challenged.

Through cost-containment efforts OIS has been able to maintain EBITDA margins in the 7% - 8% range. Along with solid free cash flow, the company should be able to weather another downturn in oil prices. The OPEC supply cut has help spur prices off their Q1 2016 lows. However, I expect the increase in supply from shale oil plays could keep prices in check. The break-even costs for shale plays continue to fall, so drilling activity could remain robust even if oil falls to the mid-$40s. That does not bode well for long-term oil prices.

Takeaway

Oil States has an enterprise value of 34x trailing EBITDA. The stock is up about 3% Y/Y and will likely trade with oil prices. I rate the stock a hold as oil prices could stay in a trading range for the rest of 2017.

Disclosure: I am/we are short HAL, WFT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.