Business Context and Reporting Period
Company: Oil States International, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: The Company provides products and services to the oil and gas industry through three reportable segments: Well Site Services (accommodations, rental tools, drilling), Offshore Products, and Tubular Services. Operations are highly cyclical and dependent on global oil and gas prices and drilling activity levels.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Revenues | $456,103 | $1,579,536 |
| Net Income (Attributable to OSI) | $26,579 | $19,221 |
| Diluted EPS | $0.53 | $0.39 |
| Operating Cash Flow | N/A | $352,275 |
| Cash and Cash Equivalents | $61,281 | $61,281 |
| Total Debt (Long-term + Current) | $193,103 | $193,103 |
| Available Credit Facility | $450.3 million | $450.3 million |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 44% ($358.7 million) for the quarter and 23% ($467.9 million) for the nine months compared to the same periods in 2008. This was driven by a 52% year-over-year drop in the North American rig count.
- Segment Performance:
- Tubular Services: Revenues fell 68% (quarter) and 32% (nine months) due to reduced tonnage shipped and lower realized prices per ton caused by excess industry inventory.
- Well Site Services: Revenues declined 28% (quarter) and 22% (nine months). Rental tools and drilling services saw significant drops in utilization and pricing. Accommodations revenue increased slightly (5% quarter, 2% nine months) due to oil sands expansion in Canada.
- Offshore Products: Revenues increased 10% for the quarter but were flat for the nine months.
- Goodwill Impairment: The Company recorded a non-cash goodwill impairment charge of $94.5 million (pre-tax) in the second quarter of 2009 related to the rental tools reporting unit. This significantly impacted net income for the nine-month period.
- Profitability: Net income attributable to the Company dropped 70% for the quarter and 91% for the nine months compared to 2008. Gross margins declined across most segments, particularly Tubular Services (7% vs 17% in 2008) and Rental Tools (25% vs 42% in 2008).
- Debt Reduction: Total debt decreased significantly from $454.0 million at year-end 2008 to $193.1 million at September 30, 2009, primarily due to repayments under the revolving credit facility.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects 2009 capital expenditures to total approximately $170 million, a significant reduction from $247.4 million in 2008. Spending is focused on Canadian oil sands accommodations and maintenance.
- Market Outlook: Management notes early signs of economic improvement but emphasizes that the pace is slow. The North American rig count is not expected to recover to 2008 peak levels in the near term. Crude oil prices have recovered to the $73-$80 range but remain below historical highs.
- Goodwill Risk: Should conditions in the rental tools reporting unit deteriorate further, the Company could potentially write off the remaining $74.5 million of goodwill in that unit.
- Inventory Risk: Excess industry OCTG inventory levels continue to pressure pricing and margins. There is a risk of future lower-of-cost-or-market write-downs on inventory.
- Accounting Changes: The Company adopted a new accounting standard for convertible debt (2 3/8% Notes) effective January 1, 2009, requiring retrospective restatement. This increased non-cash interest expense but had no impact on actual cash flows.
Investor Verification Checklist
- Goodwill Impairment: Verify the assumptions used in the goodwill impairment test for the rental tools unit and the potential for further write-downs.
- Inventory Valuation: Assess the risk of inventory write-downs in the Tubular Services segment given the high industry inventory levels and declining prices.
- Convertible Notes: Review the terms of the $175 million 2 3/8% Contingent Convertible Senior Notes, specifically the conversion thresholds and the impact of the new accounting standard on reported interest expense.
- Canadian Operations: Monitor the impact of the Canadian dollar exchange rate on the translation of earnings from the significant accommodations business in Alberta.
- Liquidity Position: Confirm the availability of the $450.3 million credit facility and the Company's ability to fund operations without further dilution or debt issuance.