Business Context and Reporting Period
Company: Oil States International, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company provides products and services to the oil and gas industry through three 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 June 30, 2009 |
Six Months Ended June 30, 2009 |
|---|---|---|
| Revenues | $456,334 | $1,123,433 |
| Net Income/(Loss) Attributable to OI | $(63,486) | $(7,358) |
| Operating Income/(Loss) | $(63,236) | $21,662 |
| Gross Margin % | 21% | 22% |
| Cash and Cash Equivalents | $56,099 | $56,099 |
| Net Cash Provided by Operating Activities | N/A | $271,196 |
| Total Debt (Current + Long-term) | $243,821 | $243,821 |
| Available Credit Facility Capacity | $403.3 million | $403.3 million |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 28% ($175.1 million) for the quarter and 9% ($109.2 million) for the six months compared to the same periods in 2008. This was driven by a 50% year-over-year drop in the North American rig count and reduced pricing.
- Net Loss: The Company reported a net loss of $63.5 million for the quarter and $7.4 million for the six months, compared to net income of $59.2 million and $124.7 million, respectively, in 2008.
- Goodwill Impairment: A significant non-cash goodwill impairment charge of $94.5 million (pre-tax) was recorded in the second quarter of 2009 related to the rental tools reporting unit due to diminished expectations for North American drilling activity.
- Segment Performance:
- Well Site Services: Revenues dropped 27% (quarter) and 19% (six months). Rental tools and drilling services saw significant declines in utilization and pricing.
- Tubular Services: Revenues fell 36% (quarter) due to a 52% decrease in tons shipped, partially offset by higher average selling prices. Gross margins contracted from 12% to 5%.
- Offshore Products: Revenues declined 12% (quarter) due to project delays in deepwater development.
- Debt Reduction: Total debt decreased from $454.0 million at year-end 2008 to $243.8 million at June 30, 2009, primarily due to repayments under the revolving credit facility.
Guidance, Outlook, and Risks
- Capital Expenditures: The Company expects 2009 capital expenditures to total approximately $140 million, a significant reduction from $247.4 million in 2008. Spending will focus on completing projects in progress and maintenance.
- Market Outlook: Management notes that while crude oil prices have recovered from Q1 lows (trading $59-$65/barrel in mid-July), they remain far below 2008 peaks. The rig count is not expected to recover to 2008 levels in the near term.
- Goodwill Risk: Should conditions in the rental tools reporting unit deteriorate further, the Company could potentially write off the remaining goodwill balance of $73.6 million.
- Liquidity: The Company maintains strong liquidity with $56.1 million in cash and $403.3 million available under its credit facilities. Management believes these resources are sufficient for the next 12 months.
- Accounting Change: The Company adopted FSP APB 14-1 effective January 1, 2009, requiring retrospective restatement of convertible debt instruments, resulting in increased non-cash interest expense.
Investor Verification Checklist
- Goodwill Impairment: Verify the assumptions used in the impairment test for the rental tools unit and the potential for further write-downs of the remaining $73.6 million goodwill balance.
- Rig Count Correlation: Monitor North American rig count trends (currently ~1,123 rigs) as a leading indicator for revenue recovery in the Well Site Services segment.
- Inventory Valuation: Assess the risk of "lower of cost or market" write-downs for OCTG inventory given the decline in steel prices and excess industry inventory levels.
- Convertible Notes: Review the classification of the $175 million 2 3/8% Contingent Convertible Senior Notes, which depends on the Company's stock price meeting specific thresholds.
- Foreign Exchange Impact: Evaluate the impact of the weakening Canadian dollar (averaging $0.83 USD in H1 2009 vs $0.99 in H1 2008) on earnings from Canadian operations.