Oil States International, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2010. Amounts below are in U.S. dollars; financial statement amounts originally reported in thousands are shown in millions unless noted.
Business context and results
The company provides oilfield products and services through well site services, accommodations, offshore products and tubular services. Demand depends on oil and gas activity, commodity prices, customer spending, and—in accommodations and offshore products—the longer-term outlook for crude oil.
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $594.5 | $456.3 | $1,126.9 | $1,123.4 |
| Operating income (loss) | $57.8 | $(63.2) | $117.6 | $21.7 |
| Net income (loss) attributable to Oil States | $37.5 | $(63.5) | $77.7 | $(7.4) |
| Diluted EPS | $0.71 | $(1.28) | $1.49 | $(0.15) |
| Gross margin | 21% | 21% | 22% | 22% |
Q2 revenue rose 30% year over year; first-half revenue was nearly unchanged. Q2 results compared with a year-earlier loss that included a $94.5 million goodwill impairment charge ($84.5 million after tax). First-half operating income also benefited from the absence of that impairment; the filing attributes most of the year-over-year increase in operating income to this comparison.
Segments and material changes
- Well site services: Q2 revenue increased 76% to $113.3 million; first-half revenue rose 38% to $211.2 million. Higher rental-tool utilization, pricing and product mix, plus drilling-rig utilization, improved segment margins. Drilling-rig utilization was 73.3% in Q2 2010 versus 24.7% a year earlier.
- Accommodations: Q2 revenue rose 38% to $121.9 million and first-half revenue increased 16% to $267.5 million. Growth reflected oil-sands activity, facility expansions, a stronger Canadian dollar and, for the first half, $25 million of Winter Olympics contract revenue. Segment gross margin declined to 40% in Q2 from 45%, and to 42% for the first half from 44%, partly due to lower minimum-guarantee revenue.
- Offshore products: Q2 revenue declined 13% to $106.0 million; first-half revenue declined 17% to $209.0 million, primarily due to lower backlog, delayed or reduced deepwater spending, and lower subsea and rig-equipment shipments. Backlog increased 5% from year-end to $215.7 million at June 30.
- Tubular services: Q2 revenue increased 40% to $253.3 million as shipments rose 93%, partly offset by realized revenue per ton falling 27%. First-half revenue declined 10% to $439.2 million as realized revenue per ton fell 34%, despite a 35% increase in tons shipped. First-half gross margin fell to 5% from 7%, reflecting lower-priced prior customer commitments.
Cash flow, liquidity and debt
- First-half operating cash flow was $85.9 million, versus $271.2 million in 2009. The company said working capital used $57.1 million, primarily for higher OCTG inventory; the prior-year period benefited from $130.6 million of working-capital inflows.
- Investing cash outflow was $74.2 million, including $76.1 million of capital expenditures, compared with $33.6 million of investing outflow and $52.8 million of capex in the prior-year period. Operating cash flow less capital expenditures was approximately $9.8 million in the first half.
- Cash and cash equivalents were $102.9 million at June 30, versus $89.7 million at December 31, 2009. Current assets were $982.4 million and current liabilities $459.5 million; the increase in current liabilities primarily reflects reclassification of convertible notes.
- Total debt was $167.9 million, including $159.4 million carrying value of 2⅜% contingent convertible notes and $8.5 million of capital leases and other debt. No revolving-credit borrowings were outstanding; $22.7 million of letters of credit left $477.3 million available on the $500 million facility, which matures December 5, 2011.
- The notes were classified as current because stock-price conversion thresholds were met at quarter-end, allowing holders to present notes for conversion in the following quarter. The company said it did not expect significant conversion over the next 12 months. Management stated that cash, operating cash flow and available credit should cover liquidity needs over that period.
Outlook, risks and unusual items
- Management expected 2010 capital expenditures of approximately $219 million, versus $124 million in 2009, for accommodations expansion, offshore-products international expansion, tubular-services capacity and maintenance. Funding was expected from cash, internally generated funds and revolving-credit borrowings.
- The Deepwater Horizon incident and Gulf of Mexico drilling restrictions created delays and uncertainty. The filing warned of potential reduced demand for offshore products, tubular services and well site services, as well as additional regulation, higher customer costs and reduced or more expensive insurance. The moratorium’s scope and timing remained uncertain.
- North American rig activity strengthened: average total activity was 1,674 rigs in Q2 2010 versus 1,026 in Q2 2009. Management noted that U.S. natural-gas prices remained weak and did not expect near-term activity or prices to return to 2008 peaks.
- Oil-sands accommodations demand was supported by project extensions and new contracts. The company announced approximately $62 million of planned capital expenditures to expand three facilities.
- The Canadian dollar averaged $0.97 per U.S. dollar in the first half of 2010 versus $0.83 in 2009, materially benefiting translation of Canadian accommodations results.
- Pending claims and legal proceedings included commercial, warranty, product-liability and other matters. Management believed any ultimate liability, net of provisions, indemnification and insurance, would not materially adversely affect financial position, results or liquidity.
- No formal earnings or revenue guidance was provided. The company cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the convertible notes remain eligible for conversion and the resulting cash, stock and balance-sheet impacts.
- Whether the $219 million capex plan is achieved and how it affects cash generation, inventory and credit-facility usage.
- Progress and margins in tubular services, particularly realized pricing per ton and OCTG inventory and supply conditions.
- Changes to Gulf of Mexico restrictions, permitting, regulation and insurance availability, and the effect on offshore backlog and demand.
- Whether accommodations project activity, minimum-guarantee revenues and Canadian-dollar exchange rates sustain segment performance.