Oil States International, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; unaudited. Amounts below are in U.S. dollars. The company provides oilfield products and services through well site services, accommodations, offshore products, and tubular services.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $902.6 million | $588.3 million | $2,483.4 million | $1,715.2 million |
| Operating income | $144.5 million | $70.4 million | $354.4 million | $187.9 million |
| Net income attributable to Oil States | $91.9 million | $46.3 million | $228.2 million | $124.1 million |
| Diluted EPS | $1.67 | $0.88 | $4.15 | $2.37 |
| Operating cash flow | Not separately reported | Not separately reported | $223.1 million | $153.4 million |
- Year-over-year revenue rose 53% in Q3 and 45% for the first nine months; operating income rose 105% and 89%, respectively.
- Gross margin was 26% in Q3 versus 24% and 25% for the nine months versus 23%. SG&A was 5.0% of Q3 revenue and 5.3% of nine-month revenue, down from 6.3% and 6.4%.
- Net interest expense was $16.8 million in Q3 and $39.5 million for nine months, substantially higher than prior-year periods, chiefly reflecting the new 6.5% notes and higher debt.
- Nine-month capital expenditures were $371.2 million, versus $121.0 million a year earlier. Operating cash flow less capital expenditures was approximately negative $148.1 million, versus positive $32.4 million in 2010. Working capital absorbed approximately $171 million.
- At September 30, cash was $118.9 million; current assets were $1.329 billion and current liabilities $607.6 million. Total debt was $1.098 billion, up from $912.9 million at year-end 2010; net debt was approximately $979 million. The company reported a 37.7% debt-to-total-capital ratio and compliance with debt covenants.
Segments and material changes
- Q3 revenue increased across all four segments: well site services 37%, accommodations 78%, offshore products 36%, and tubular services 56%. Nine-month increases were 39%, 59%, 28%, and 47%, respectively.
- Growth reflected stronger North American drilling and completion activity, increased accommodations capacity and contributions from acquisitions, and higher offshore product demand. Tubular-services shipments rose 54% in Q3 and 44% for nine months.
- Accommodations’ higher-margin contribution helped lift consolidated gross margin. Q3 gross margins were 49% in accommodations, 37% in well site services, 28% in offshore products, and 6% in tubular services. Tubular-services margin was 6% versus 7% in Q3 2010.
- Offshore-products backlog was $513.9 million at September 30, 2011, up from $264.4 million a year earlier.
- The full-period contribution of The MAC and Mountain West acquisitions, acquired in late 2010, boosted accommodations results; Acute contributed to offshore products. The stronger Canadian and Australian dollars also affected translated results.
Liquidity, outlook, and risks
- Management expected 2011 capital expenditures of approximately $635 million, around 75% for accommodations expansion in Canada and Australia; some spending could carry into early 2012. Funding was expected from cash, operating cash flow, and borrowings.
- At quarter-end, $729.6 million was available under U.S. and Canadian credit facilities, plus A$119.0 million under the Australian facility. Management said available cash, operating cash flow, and borrowing capacity should meet liquidity needs for the next 12 months.
- In June 2011 the company issued $600 million of 6.5% senior notes due 2019, using about $515 million of proceeds to repay secured-credit borrowings and the balance for general corporate purposes. The 2⅜% convertible notes, with $175 million principal, were classified as current based on a July 2012 put/call date. Conversion thresholds were met at quarter-end, allowing holders to present notes for conversion in the following quarter; management did not expect significant conversion before July 2012.
- Management cited oil, gas, coal and mineral prices, customer capital spending, global economic uncertainty, foreign exchange, and U.S. offshore permitting and regulatory delays as important business factors. It expected deepwater spending opportunities in several international markets and reported stronger oil-sands activity and accommodations demand.
- Risks include cyclical commodity-linked demand, tubular-goods pricing and inventory, execution and timing of major capital projects, higher interest rates and debt service, currency movements, and potential financing needs. A 1% rise in floating rates was estimated to increase annual interest expense by about $3.2 million.
- The company reported pending claims and proceedings but believed any ultimate liability not covered by insurance or indemnity would not materially affect its financial position, results, or liquidity. Disclosure controls were deemed effective; a new tubular-services accounting system was implemented in August 2011, with controls to be monitored.
Important facts for investors to verify
- Whether the $635 million capital-spending plan is delivered on schedule, and how much carries into 2012.
- Cash conversion and working-capital requirements as revenue and inventory expand, especially given nine-month capital spending above operating cash flow.
- Availability and terms of credit facilities, leverage, and potential cash or share settlement of the convertible notes ahead of the July 2012 put/call date.
- Whether offshore backlog converts into revenue and cash flow, and whether low tubular-services margins remain under pressure.
- Exposure to commodity-price changes, offshore permitting delays, and Canadian and Australian currency movements.