Oil States International, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Comparisons are with the corresponding 2015 periods unless otherwise stated. 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 its well site services and offshore products segments. Results reflect a prolonged oil and gas downturn, weak customer spending and reduced drilling and completion activity.
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $179.0 | $258.9 | $524.5 | $865.5 |
| Operating income (loss) | $(15.6) | $6.6 | $(52.9) | $49.1 |
| Net income (loss) | $(10.8) | $1.7 | $(35.8) | $27.5 |
| Diluted EPS | $(0.22) | $0.03 | $(0.71) | $0.53 |
| Gross margin | 24% | 27% | 24% | 28% |
Financial position, cash flow and liquidity
- Cash: $53.8 at September 30, 2016, versus $36.0 at December 31, 2015. Current assets were $515.1 and current liabilities $115.3; working capital was approximately $399.8.
- Debt: Total debt and capital leases were $66.9, down from $126.4 at year-end 2015. The company repaid $59.7 net under its revolving facility during the first nine months.
- Credit availability: The $600 facility matures May 2019. At quarter-end, borrowings were $63.1, letters of credit $27.8, and reported borrowing availability $217.8. Availability was restricted by the maximum leverage covenant and could decline with lower trailing EBITDA.
- Covenants: The company reported compliance at September 30 with minimum interest coverage of 3.0x and maximum leverage of 3.25x; it expected to remain compliant through the rest of 2016. The filing does not state covenant headroom.
- Operating cash flow: $107.8 for the first nine months, versus $252.8 in 2015. The company cited $64.6 of cash provided by working-capital reductions, primarily lower receivables.
- Investing and capital spending: Investing cash outflow was $24.4, including $23.9 of capital expenditures, versus $124.3 and $92.3, respectively, in 2015. Operating cash flow less capital expenditures was approximately $83.9; this is a simple derived measure, not company-defined free cash flow.
- Share repurchases: None under the repurchase program during the first nine months. The authorization had $136.8 remaining and was extended to July 29, 2017.
Material changes and segment performance
- Revenue fell 31% in Q3 and 39% in the first nine months. Product revenue was $109.3 and service revenue $69.7 in Q3, compared with $139.9 and $119.0, respectively, in Q3 2015.
- Well site services revenue declined 44% in Q3 and 58% year to date. Segment operating losses were $26.1 in Q3 and $85.9 year to date. Completion-service activity and drilling utilization weakened; drilling rig utilization averaged 15% in Q3 and 10% for the first nine months, versus 33% and 37% in 2015.
- Offshore products revenue declined 24% in Q3 and 29% year to date. Segment operating income was $22.9 in Q3 and $67.9 year to date, down from $33.5 and $104.9. Segment gross margin remained about 31% in Q3 and was 30% for the first nine months.
- Consolidated operating losses reflected sharply lower volumes and margins, especially in well site services. Q3 gross margin fell to 24% from 27%; year-to-date margin fell to 24% from 28%. SG&A and depreciation also declined, but did not offset the revenue deterioration.
- Offshore products backlog was $203 at September 30, down from $268 at June 30, $340 at December 31, 2015, and $394 a year earlier, amid project deferrals and delayed awards.
Outlook, commentary and risks
- Management expected fiscal 2016 capital expenditures of approximately $35–$40, funded by cash, operating cash flow and revolver borrowings. This is capital-spending guidance; the filing provides no earnings or revenue forecast.
- Management said cash on hand, operating cash flow and available revolver borrowings were expected to meet liquidity needs for the next 12 months. It cautioned that lower EBITDA could further reduce revolver availability.
- Management described commodity-price and customer-spending conditions as uncertain. It noted that weak or declining oil and gas prices could further depress demand and pricing, impair cash flows, and lead to asset or goodwill impairment charges. A sustained downturn may require revised cash-flow estimates; no new goodwill impairment was reported in the supplied filing text.
- Industry indicators included Q3 Brent averaging $45.80 per barrel and WTI $44.85. The average North American rig count fell 52% year over year for the first nine months. Deferred completions (DUCs), pricing pressure, customer financial distress and potential inability of customers to pay were cited as risks.
- Q3 results included $2.0 of severance and other downsizing charges ($1.3 after tax); nine-month results included $4.6 ($3.0 after tax). Foreign currency translation contributed to comprehensive losses; accumulated other comprehensive loss increased to $63.2 from $50.7 at year-end.
- The company reported $3.4 of foreign-exchange gains in the first nine months. A 1 percentage-point increase in floating rates would increase annual interest expense by approximately $0.6. No off-balance-sheet arrangements were reported.
- FLSA class-action settlement judgment was entered in November 2015; most claims were settled, and remaining individual claims were not expected to be significant. The company said other pending matters were not expected to have a material adverse effect, while noting outcomes cannot be assured.
- On October 3, 2016, after quarter-end, the revolver was amended to permit certain intercompany transactions and make other technical changes. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether oil and gas prices, rig counts, customer capital spending and completion activity recover—and whether the recovery is sufficient to improve well site services utilization and margins.
- How quickly offshore backlog converts to revenue, and whether further project deferrals or award delays reduce backlog.
- Revolver availability and covenant headroom as trailing EBITDA changes; the filing does not quantify the company’s cushion against covenant limits.
- Cash-flow sustainability as working-capital releases diminish, and execution of the $35–$40 fiscal 2016 capital expenditure plan.
- Potential asset or goodwill impairment exposure, customer credit losses, and the outcome of remaining legal claims.