Business context and reporting period
Oil States International, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company provides energy products and services through its well site services and offshore products segments. Its accommodations business was spun off in May 2014 and is reported as discontinued operations; comparisons with 2014 are therefore affected by the spin-off.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $269.3 | $459.6 | $606.6 | $864.8 |
| Gross margin | 28% | 33% | 29% | 33% |
| Operating income | $8.7 | $67.5 | $42.5 | $126.8 |
| Continuing-operations net income (loss), attributable to Oil States | $6.1 | $(24.1) | $25.6 | $10.6 |
| Diluted continuing-operations EPS | $0.12 | $(0.45) | $0.50 | $0.20 |
- Second-quarter operating margin was approximately 3.2%, versus 14.7% a year earlier; first-half operating margin was approximately 7.0%, versus 14.7%.
- Second-quarter consolidated gross profit was $74.6 million, down from $151.7 million. Well site services gross margin fell to 19% from 36%; offshore products gross margin was 32%, compared with 31%.
- Continuing operating cash flow was $221.5 million for the first half, versus $45.3 million in 2014. Management attributed $124.3 million of first-half 2015 cash generation to net working-capital reductions, primarily lower receivables. Capital expenditures were $68.7 million; continuing investing activities used $101.5 million.
- Cash and cash equivalents were $89.4 million at June 30, up from $53.3 million at year-end. Total debt was $157.4 million, including $150.9 million drawn on the revolving facility; net debt was approximately $67.9 million.
- The $600 million revolver matures in May 2019. After $40.1 million of letters of credit, $409.0 million remained available. The company reported compliance with its financial covenants, which require interest coverage of at least 3.0x and leverage no greater than 3.25x.
- Current assets were $658.1 million and current liabilities $195.2 million at June 30. Total liabilities were $405.6 million and stockholders’ equity $1,275.4 million.
Material changes versus the prior comparable period
- Second-quarter revenue fell 41% year over year; first-half revenue fell 30%. Well site services revenue declined 59% in Q2 and 43% in the first half; offshore products revenue declined 27% and 18%, respectively.
- Completion-services Q2 revenue fell 55%, reflecting both fewer service tickets and lower revenue per job. Drilling-services Q2 revenue fell 69%; average rig utilization declined to 34% from 91%. Across the first half, average drilling rig utilization was 39%, versus 86%.
- Lower activity and pricing pressure weakened well site services margins. Cost reductions and lower activity-related expenses did not offset the revenue decline. Offshore products margins were comparatively resilient.
- Second-quarter 2015 continuing net income included $1.7 million of severance and downsizing charges; first-half results included $3.8 million of such charges and a $2.3 million deferred-tax adjustment. By contrast, 2014 continuing results included a $100.4 million debt-extinguishment loss in Q2 and first half, plus spin-off-related transaction costs.
- Net income from discontinued operations was only $0.04 million in Q2 2015 and $0.2 million in the first half, compared with $16.2 million and $53.0 million in 2014, respectively, largely reflecting the absence of Civeo operations after the spin-off.
- Offshore products backlog was $409 million at June 30, down approximately 16% from $490 million at December 31, 2014 and from $599 million a year earlier, reflecting project deferrals and slower award timing.
Outlook, commentary, risks and unusual items
- Management forecast 2015 capital expenditures of approximately $150–$160 million, subject to industry conditions, project approvals and schedules, vendor timing, and cash generation. Planned funding sources include cash, operating funds and revolver borrowings.
- Management said cash on hand, operating cash flow and available revolver capacity should meet liquidity needs over the next 12 months, while noting that changed assumptions or acquisitions could require additional capital.
- Management described a difficult commodity and customer-spending environment. WTI averaged $57.85 per barrel in Q2 2015 versus $103.35 in Q2 2014; Brent averaged $61.65 versus $109.69. By July 28, WTI and Brent were approximately $48 and $53 per barrel. Lower prices, customer capital-spending cuts, deferred completions and continued supply-demand imbalance could further reduce demand.
- On July 29, 2015, the board terminated the existing repurchase authorization and approved a new program for up to $150 million of stock purchases, expiring July 29, 2016. First-half 2015 repurchases used $90.7 million of cash.
- The company acquired Montgomery Machine Company on January 2 for $33.4 million net of cash acquired; the purchase-price allocation remained preliminary.
- Risks include commodity-price volatility, reduced drilling and completion activity, pricing pressure, project delays, foreign-exchange movements and floating-rate exposure. A 1 percentage-point rise in floating rates was estimated to increase annual interest expense by approximately $1.5 million.
- Current and former employees have filed federal lawsuits alleging Fair Labor Standards Act misclassification and unpaid overtime; plaintiffs seek damages and class certification. The company is defending the claims and stated it did not expect pending proceedings to materially affect its financial position, results or liquidity. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether commodity prices, rig activity, customer spending and deferred well completions continue to pressure well site services revenue, utilization and margins.
- Whether the $409 million offshore products backlog converts to revenue as scheduled, given project deferrals and delayed awards.
- Whether working-capital cash generation is sustainable; first-half operating cash flow benefited materially from receivables reductions.
- Liquidity, covenant compliance and cash availability, including the location and potential repatriation of foreign cash; the filing says $88.1 million was held by foreign subsidiaries and about $37 million could be repatriated without incremental tax consequences.
- The outcome and potential exposure from FLSA litigation, as well as the final purchase-price allocation for Montgomery Machine Company.