Oil States International, Inc. — Q3 2019 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2019, compared with the same 2018 periods. The company serves the oil and gas industry through Well Site Services, Downhole Technologies, and Offshore/Manufactured Products. Results are exposed to cyclical customer spending and commodity-price changes.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $263.7m | $274.6m | $779.0m | $814.0m |
| Operating income (loss) | $(34.9)m | $(3.7)m | $(52.1)m | $4.1m |
| Net income (loss) | $(31.9)m | $(4.0)m | $(56.3)m | $(4.8)m |
| Diluted loss per share | $(0.54) | $(0.07) | $(0.95) | $(0.08) |
| Operating cash flow | Not presented by quarter | $115.9m | $80.1m |
Margins and segments. Consolidated operating margin was approximately -13% in Q3 2019 versus -1% in Q3 2018, and -7% for the first nine months of 2019 versus approximately break-even in 2018. Q3 Offshore/Manufactured Products revenue rose 17% to $104.8m and operating income increased to $11.1m. Downhole Technologies revenue declined 24% to $42.9m and operating income fell to $0.7m. Well Site Services revenue fell 10% to $116.0m; its $34.8m operating loss included the fixed-asset impairment. For the nine-month period, total revenue declined 4%.
Cash flow, liquidity and debt. Nine-month operating cash flow was $115.9m; investing cash outflow was $43.7m and financing cash outflow was $76.9m. Capital expenditures were $45.8m, implying approximately $70.1m of operating cash flow after capex. Cash was $14.7m at September 30, down from $19.3m at year-end 2018. Total debt was $265.2m, compared with $331.7m at year-end; total debt less cash was approximately $250.5m. The revolving facility had $65.0m borrowed, $22.6m in letters of credit, and $139.1m available to draw, with availability constrained by maintenance covenants. The company reported covenant compliance. Current assets were $505.4m and current liabilities were $203.9m.
Material changes and unusual items
- Q3 and nine-month results included a $33.7m non-cash fixed-asset impairment in Drilling Services, reducing the carrying value of rigs to be decommissioned or sold and the remaining operating rigs. The charge followed plans to reduce the fleet from 34 rigs to 9 because of weak demand for U.S. land vertical rigs.
- The company recorded severance and downsizing costs of $0.7m in Q3 and $2.9m for the nine months. Q3 2019 also included a $0.6m increase in reserves for potentially uncollectible receivables.
- Offshore/Manufactured Products backlog rose to $293m at September 30, up $114m from year-end 2018 and the highest level since Q1 2016. Nine-month orders were $430m, with a 1.5x book-to-bill ratio. Management reported improved deepwater bidding and project awards.
- Compared with 2018, the nine-month comparison includes acquisitions of GEODynamics and Falcon for only part of the 2018 period; 2019 includes both for the full period. 2018 also included a $3.6m insurance-settlement gain and acquisition-related costs.
- Adoption of lease accounting in January 2019 resulted in $45.5m of operating lease assets and $45.8m of operating lease liabilities at September 30; the adoption did not materially affect earnings or cash flows.
Outlook, commentary and risks
- Management expected 2019 capital expenditures of $60m–$62m, subject to industry conditions, project schedules, liquidity and cash generation. It expected cash, operating cash flow and available revolver borrowings to cover liquidity needs over the next 12 months.
- Approximately 13% of the $174m of remaining backlog for contracts with original durations over one year was expected to be recognized in the final three months of 2019, 55% in 2020, and the balance thereafter.
- Management cited a general improvement in planned global deepwater investment, but continuing moderation in U.S. shale spending amid commodity-price volatility, lower rig activity and customer capital discipline. The average U.S. rig count in Q3 was 12% below the prior-year quarter.
- Key risks include oil and gas price and demand swings, customer spending and creditworthiness, competition and pricing pressure, tariffs and duties on materials, foreign exchange movements, interest-rate exposure, and potential future asset impairments. A 1% increase in floating interest rates would increase annual interest expense by approximately $0.7m.
- The company disclosed a potential customs duty matter involving certain Chinese steel products historically imported by GEODynamics. It voluntarily disclosed the matter to U.S. Customs and asserted an indemnification claim against the seller; the $25m seller promissory note’s maturity is extended pending resolution, and the company expects the amount ultimately paid may be reduced. The filing does not provide a clear quantified exposure for the customs matter.
- Management said ordinary-course legal proceedings, to the extent not covered by reserves, indemnity or insurance, were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Investor verification points
- Assess whether lower U.S. land activity and Downhole Technologies pricing pressure persist, and whether Offshore/Manufactured Products backlog converts to revenue and cash.
- Verify the operating and cash-flow effects of the Drilling Services fleet reduction, including any further impairments or restructuring costs.
- Monitor revolver availability and covenant headroom, particularly because drawable capacity is below lender commitments and earnings remain weak.
- Track resolution and potential financial impact of the GEODynamics customs-duty and indemnification matter, including the extended-dated $25m promissory note.
- Compare actual 2019 capital expenditures and liquidity with management’s stated $60m–$62m capex plan and 12-month liquidity assessment.