Business context and reporting period
Oil States International, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2019. The company supplies products and services to the oil and gas industry through Well Site Services, Downhole Technologies and Offshore/Manufactured Products. Results are cyclical and depend substantially on customer activity and commodity prices. Comparisons with Q1 2018 are affected by the 2018 GEODynamics and Falcon acquisitions, which contributed for only part of that prior-year quarter.
Financial performance and condition
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $250.6 million | $253.6 million |
| Operating loss | $10.8 million | $0.9 million |
| Net loss | $14.6 million | $3.5 million |
| Diluted loss per share | $0.25 | $0.06 |
| Cash from (used in) operations | $34.3 million | $(12.3) million |
| Capital expenditures | $17.9 million | $14.2 million |
- Revenue comprised $116.3 million of products and $134.3 million of services. Product revenue fell 10%, while service revenue rose 8% year over year.
- Operating results weakened despite lower SG&A: cost of revenues rose $10.0 million, including higher service costs and a full quarter of acquired-business costs. Q1 2019 included $1.0 million of severance costs; Q1 2018 included $0.8 million of severance and $2.6 million of transaction-related costs.
- Cash and cash equivalents were $15.3 million at March 31, 2019, down from $19.3 million at year-end 2018. Current assets were $508.8 million and current liabilities $179.6 million.
- Total debt was $317.6 million, versus $331.7 million at December 31, 2018; stockholders’ equity was $1.43 billion. Revolver borrowings were $120.2 million, with $20.4 million of letters of credit and $133.1 million available to draw, subject to covenant-based borrowing limits. The company reported covenant compliance.
- Q1 operating cash generation included $13.3 million from net working-capital decreases, primarily lower receivables. The company used $20.4 million in financing activities, mainly for net revolver repayments.
Material changes and segment results
- Well Site Services revenue increased 8% to $108.4 million, but its operating loss widened to $8.1 million. Completion Services revenue benefited from a full quarter of Falcon; Drilling Services revenue fell 56% to $7.8 million as customers suspended activity.
- Downhole Technologies revenue rose 19% to $54.3 million, while operating income declined 50% to $4.1 million amid competitive pricing, higher unabsorbed manufacturing costs and expanded field support.
- Offshore/Manufactured Products revenue fell 18% to $87.9 million and operating income fell 58% to $5.3 million, reflecting lower project-driven and short-cycle sales and higher unabsorbed manufacturing costs.
- Offshore/Manufactured Products backlog rose $55 million during the quarter to $234 million, its highest level since Q2 2016. First-quarter orders were $144 million, with a 1.6x book-to-bill ratio.
- Operating lease assets and liabilities were recognized following adoption of the new lease accounting standard on January 1, 2019; the company said the adoption had no material financial-statement impact.
Outlook, risks and contingencies
- Management expected 2019 capital expenditures of $65 million to $70 million, funded with available cash, operating cash flow and revolver borrowings. Spending depends on industry conditions, project timing, free cash flow and liquidity monitoring.
- Management believed cash on hand, operating cash flow and available revolver capacity would meet liquidity needs for the next 12 months, while noting that changed assumptions or acquisitions could require additional capital.
- Management described commodity-price volatility and customer capital discipline as important uncertainties. Other cited risks include oil and gas activity, customer financial health, pipeline capacity, deepwater project delays, tariffs and duties, raw-material costs, foreign exchange, litigation and acquisition integration.
- A GEODynamics-related matter concerns potential U.S. anti-dumping and countervailing duties on certain Chinese steel products. The company stopped purchasing the potentially affected products and voluntarily disclosed the matter to U.S. Customs and Border Protection. Seller indemnification and set-off rights against the $25 million promissory note may affect the note’s payment timing or amount.
- The $25 million GEODynamics promissory note was scheduled to mature July 12, 2019. The $200 million principal amount of 1.50% convertible notes matures in 2023; no conversion or repurchase conditions were met at quarter-end. Management stated that ordinary-course legal claims were not expected to have a material adverse effect, but outcomes cannot be assured.
- No specific earnings or revenue guidance was provided in the filing. The company noted Q1 average U.S. rig count was 8% higher year over year but 3% lower than Q4 2018, and that customer spending remained sensitive to oil prices and financial discipline.
Important facts for investors to verify
- Whether the offshore backlog increase converts into scheduled revenue and cash collections, and whether bookings remain strong.
- Whether segment profitability improves, especially in Drilling Services and Downhole Technologies, given demand, pricing and manufacturing-cost pressures.
- Revolver availability and covenant headroom, including the effect of covenant limits on liquidity; the company disclosed $133.1 million available at quarter-end.
- The outcome and potential financial exposure of the GEODynamics customs-duty matter, indemnification claims and promissory-note set-off.
- Whether the planned $65 million–$70 million capital program is maintained and can be funded while preserving liquidity.
- How customer activity responds to commodity prices, pipeline capacity, global offshore investment and broader industry volatility.