Oil States International, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Comparisons are with Q1 2016 unless otherwise noted. Dollar amounts are in millions except per-share data.
Business context and results
Oil States provides products and services to the oil and gas industry through Well Site Services and Offshore/Manufactured Products. Results remain sensitive to commodity prices, customer capital spending, and the cyclical recovery in drilling and completion activity.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $151.5 | $169.7 |
| Gross profit | $32.6 | $40.8 |
| Gross margin | 21% | 24% |
| Operating loss | $(23.3) | $(20.1) |
| Net loss | $(17.7) | $(13.2) |
| Diluted loss per share | $(0.35) | $(0.26) |
| Cash from operating activities | $31.6 | $56.8 |
| Capital expenditures | $5.8 | $10.3 |
Financial position and liquidity
- At March 31, cash and cash equivalents were $65.2, total assets $1,345.0, and stockholders’ equity $1,190.0. Cash declined $3.6 from year-end 2016.
- Reported total debt was $26.2, including $20.6 of revolving facility debt (net of issuance costs); the company separately disclosed $22.4 of revolving borrowings under the credit agreement. Debt decreased from $45.9 at December 31, 2016.
- The $600 revolving facility matures May 28, 2019. With $25.5 of letters of credit, disclosed availability was $158.9, limited by the maximum leverage covenant. The company was in compliance with its covenants at quarter-end and expected continued compliance through 2017.
- Operating cash flow included $23.9 from net working-capital reductions, primarily lower receivables. Financing activities used $25.1, mainly for revolving debt repayments.
- About $64 of cash was held by international subsidiaries; management intended to use at least part of it for investment outside the United States. Approximately $34 could be repatriated without incremental tax consequences.
Changes versus the prior comparable period
- Revenue fell 11%, as a $34.6 decline in Offshore/Manufactured Products more than offset a $16.4 increase in Well Site Services.
- Well Site Services revenue rose 38% to $60.2. Completion Services increased 19%; Drilling Services revenue rose to $11.5 as average rig utilization improved from 6% to 25%. Segment gross margin improved to 8% from negative 1%.
- Offshore/Manufactured Products revenue fell 27% to $91.3, and segment operating income declined to $9.5 from $23.3. Project-driven product revenue declined 56% to $32.3, while short-cycle product revenue rose 60% to $33.1. Segment gross margin was 31%, versus 33%.
- Consolidated gross margin declined to 21% from 24%; operating loss widened despite lower SG&A and depreciation and amortization. Net loss increased to $17.7 from $13.2.
- Cash from operating activities declined to $31.6 from $56.8, reflecting a smaller working-capital benefit than in the prior-year quarter.
Outlook, commentary, and risks
- Management expected 2017 capital expenditures of $35–$40, compared with $30 spent in 2016. Spending depends on industry conditions, project schedules, cash generation, and liquidity; planned funding sources include cash, operating funds, and facility borrowings.
- Offshore/Manufactured Products backlog was $204 at March 31, up from $199 at December 31, 2016, with a Q1 book-to-bill ratio of 1.1x. Management cited continued customer delays and deferrals on major offshore projects.
- Management described improving oil and gas prices and higher North American rig counts as supportive of land-based activity, but warned that prices and demand could weaken again. Q1 average Brent and WTI prices were approximately $54 and $52 per barrel, respectively; natural gas averaged $3.02 per MMBtu.
- Management said cash on hand, operating cash flow, and available borrowings should meet liquidity needs for the next 12 months. However, facility availability is constrained by the leverage covenant; additional acquisitions or changed assumptions could require more capital.
- Q1 included $0.8 of severance and downsizing charges before tax. A January acquisition of crane-related intellectual property and assets cost $4.2; purchase-price allocation remained preliminary.
- Risks include commodity-price volatility, customer spending and financial health, offshore project deferrals, industry cyclicality, liquidity and covenant limits, currency movements, and litigation. A customer accounted for 14% of Q1 revenue and 10% of accounts receivable.
- Pending legal matters include remaining individual wage-and-hour claims; the company said these were not expected to be significant and did not expect pending proceedings, net of applicable indemnity or insurance, to materially affect its financial position, results, or liquidity.
Most important facts for investors to verify
- Whether the land-based activity recovery translates into sustained Well Site Services revenue and improved profitability.
- Whether offshore project orders and backlog continue to stabilize, and the timing of conversion into revenue and cash.
- Actual revolving-credit availability under the leverage covenant, covenant compliance, and the difference between facility borrowings disclosed gross and debt presented net of issuance costs.
- Cash-flow sustainability given the material contribution from receivables reductions, plus the timing and funding of planned 2017 capital expenditures.
- Final purchase-price allocation for the $4.2 acquisition, and any material changes in tax valuation allowances, litigation exposure, or customer credit risk.