Business context and reporting period
Oil States International, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2020. The company supplies products and services to the oil and gas industry through Well Site Services, Downhole Technologies, and Offshore/Manufactured Products. Results were affected by the COVID-19 pandemic and the sharp oil-price decline; interim results are not necessarily indicative of full-year performance. Financial amounts below are in U.S. dollars.
Financial performance and position
- Revenue: $219.7 million, down 12% from $250.6 million in Q1 2019. Product revenue fell 11% to $103.0 million; service revenue fell 13% to $116.7 million.
- Profit and margins: Net loss was $405.0 million, or $6.79 per diluted share, versus a $14.6 million loss, or $0.25 per share, a year earlier. Operating loss was $441.8 million. Gross profit before depreciation and amortization was $22.1 million, approximately 10.1% of revenue; this includes $25.2 million of inventory impairments. Reported operating results included $436.5 million of non-cash asset impairments and $0.7 million of severance and facility-closure costs.
- Cash flow: Operating cash flow was $5.4 million, compared with $34.3 million in Q1 2019. Capital expenditures were $5.9 million, versus $17.9 million. Cash and cash equivalents increased to $24.3 million from $8.5 million at year-end.
- Debt and liquidity: Total debt was $264.9 million at March 31, including $71.7 million drawn on the revolver and $186.6 million principal on convertible notes (their balance-sheet carrying value was $164.4 million). Current assets were $514.5 million and current liabilities $176.2 million. The company reported $107.6 million available under its revolver, constrained by maintenance covenants. Total liabilities were $509.4 million.
- Other metrics: Total assets were $1.312 billion, down from $1.728 billion at year-end, primarily reflecting impairments. Offshore/Manufactured Products backlog was $267 million, down 4% from year-end and up 14% year over year; Q1 bookings were $87 million and book-to-bill was 1.0x. Separate contract backlog for contracts with an original duration over one year was $161 million.
Material changes versus Q1 2019
- Revenue declined $30.9 million, driven by weaker U.S. land activity and lower Downhole Technologies sales; Offshore/Manufactured Products revenue increased 4%, partly on higher project-driven sales.
- Goodwill impairments totaled $406.1 million: Completion Services $127.1 million, Downhole Technologies $192.5 million, and Offshore/Manufactured Products $86.5 million. Goodwill in Completion Services and Downhole Technologies was fully impaired; Offshore/Manufactured Products was partially impaired. The company also recorded $25.2 million of inventory and $5.2 million of fixed-asset impairments.
- Operating cash flow fell $28.8 million year over year. Capital spending decreased, while net revolver borrowings provided $19.8 million of financing cash during the quarter.
- Currency translation contributed a $14.8 million comprehensive loss, compared with $2.5 million of comprehensive income in Q1 2019.
Outlook, commentary, risks and contingencies
- Management expected COVID-19 disruption and low oil prices to materially reduce demand during the remainder of 2020, particularly in U.S. shale markets, and expected customer activity to decline significantly through 2020 and into 2021. WTI and Brent closed at $21 and $15 per barrel, respectively, on March 31; both were $16 on April 24. The U.S. rig count on April 24 was 465, 41% below the Q1 average.
- Management reduced planned 2020 capital expenditures by approximately 70% from 2019 levels and estimated 2020 spending of $15–$20 million. U.S. personnel levels were reduced approximately 23% between December 31 and April 28; further reductions and related costs were possible.
- The company was negotiating to convert its $350 million cash-flow-based revolver into an asset-based facility expected to range from $175 million to $200 million, with completion targeted for Q2 2020. The amendment remained subject to final documentation and lender approval. Without an amendment, management forecast possible noncompliance with the total net leverage covenant in Q3 2020 as EBITDA declined; it stated it expected sufficient liquidity for the next 12 months and could repay revolver borrowings or seek a lender waiver. The company was covenant-compliant at March 31.
- Management expected approximately $41.2 million of tax refunds in 2020 from CARES Act net operating loss carrybacks; $43.95 million of income taxes receivable was recorded at March 31. The tax benefit in Q1 included a $14.8 million discrete benefit related to the carrybacks.
- Key risks include further oil-price and demand deterioration, customer credit losses or payment delays, supply-chain and workforce disruption, facility closures, covenant or refinancing risk, and additional asset impairments. The company disclosed an unresolved GEODynamics-related indemnification claim and expected the $25 million seller promissory note to be reduced through set-off. Management did not expect pending legal matters, individually or in aggregate, to materially affect financial position, results, or liquidity.
Important facts for investors to verify
- Whether the asset-based revolver amendment was completed, its final borrowing base and terms, and compliance with applicable covenants.
- Actual 2020 customer activity, revenue, backlog conversion, capital spending, and cash flow compared with management’s stated expectations.
- Collection of the anticipated CARES Act tax refunds and changes in receivables, inventory reserves, and customer credit risk.
- Whether further impairment, severance, or facility-closure charges were recorded as market conditions evolved.