Oil States International, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; unaudited. Comparisons are with the same periods in 2011. Amounts are in U.S. dollars unless noted.
Business context
The company supplies products and services to the oil and gas industry through well site services, accommodations, offshore products and tubular services. Results are sensitive to customer capital spending, commodity prices, drilling and completion activity, OCTG pricing, and foreign exchange rates.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $1,091.1 million | $820.3 million | $2,190.1 million | $1,580.8 million |
| Operating income | $169.3 million | $115.2 million | $373.5 million | $209.9 million |
| Net income attributable to Oil States | $111.2 million | $74.2 million | $246.3 million | $136.3 million |
| Diluted EPS | $2.01 | $1.34 | $4.45 | $2.48 |
| Gross margin as % of revenue | 25% | 25% | 26% | 25% |
- Revenue increased 33% in Q2 and 39% in the first half. First-half operating income rose 78%; diluted EPS rose 80%.
- All four segments grew revenue year over year in Q2. First-half revenue growth was strongest in accommodations (41%), tubular services (42%) and offshore products (45%).
- First-half segment gross-margin gains in accommodations and offshore products helped lift the consolidated gross margin; tubular services remained a lower-margin business, at approximately 6%.
- Operating cash flow was $251.3 million in the first half, versus $96.6 million a year earlier. Capital expenditures were $200.0 million, compared with $230.3 million. Cash increased to $114.4 million from $71.7 million at year-end.
Financial position, debt and liquidity
- At June 30, 2012, total assets were $4.010 billion, total liabilities $1.784 billion and stockholders’ equity $2.226 billion. Current assets were $1.701 billion and current liabilities $519.7 million.
- Total debt, including capital leases, was $1.163 billion, versus $1.177 billion at December 31, 2011. The company reported a 34.3% debt-to-total-capital ratio, down from 37.5% at year-end.
- Cash was $114.4 million. The company reported $648.6 million available under U.S. and Canadian credit facilities and A$114 million available under its Australian facility; $31.8 million of letters of credit were outstanding.
- After quarter-end, all $175.0 million principal amount of 2⅜% convertible notes converted. Holders received cash up to principal and 3,012,380 common shares. The company said facility availability was reduced by $175 million following repayment of the notes.
- Management said cash on hand, operating cash flow and available credit were expected to meet liquidity needs over the next 12 months. The company was in compliance with debt covenants as of June 30 and after the note repayment.
Material changes, outlook and risks
- Management expected 2012 capital expenditures of approximately $600–$700 million, with about two-thirds directed to accommodations, including Canadian oil sands and Australian mining-related facilities. Funding was expected from cash, internally generated funds and credit facilities.
- Offshore products backlog reached a record $562 million at June 30, up from $519 million a year earlier. Management anticipated further deepwater award opportunities over the following 12 months.
- On July 2, 2012, the company acquired Piper Valve Systems for $48 million, funded through U.S. and Canadian credit facilities; Piper’s products are intended to expand offshore and subsea offerings.
- Reported first-half results included a $17.9 million pretax favorable U.S. accommodations contract settlement and a $2.5 million pretax insurance gain related to a drilling rig lost in a fire. Excluding the settlement, first-half accommodations gross margin would have been 48%, versus 52% reported.
- Management highlighted weak U.S. natural-gas prices and declining gas-directed rig activity, potential oil-price pressure from U.S. production and pipeline constraints, global economic uncertainty, and sensitivity to commodity prices and drilling activity. Increased OCTG supply had contributed to price declines during the first half.
- Risks include stricter or additional Gulf of Mexico safety and environmental regulation, foreign-currency movements, and higher interest rates. A 1% increase in floating rates was estimated to raise annual interest expense by about $3.8 million. Approximately 30% of first-half sales originated from subsidiaries outside the U.S.
- Management stated that pending legal matters were not expected to have a material adverse effect, but outcomes cannot be assured. Disclosure controls were assessed as effective; no material second-quarter change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the planned $600–$700 million annual capital program converts into expected utilization, revenue and returns, particularly in accommodations.
- How the convertible-note conversion and related $175 million reduction in credit availability affect debt, interest expense, share count and liquidity in subsequent reporting.
- Whether offshore backlog is executed on schedule and at margins consistent with the quarter’s improvement.
- Whether tubular-services margins hold amid OCTG supply, pricing and inventory changes, and whether working-capital needs remain elevated.
- The repeatability of reported earnings given the contract settlement and insurance gain, and the effects of commodity-price, regulatory, currency and interest-rate risks.