Oil States International, Inc. — FY 2019 Form 10-K
Business context and reporting period. The company supplies products and services to the global oil and gas industry through Well Site Services, Downhole Technologies and Offshore/Manufactured Products. This annual report covers the fiscal year ended December 31, 2019; it also reports fourth-quarter results. The business is cyclical and particularly exposed to oil prices and customer spending in U.S. shale markets.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $1,017.4 million | $1,088.1 million |
| Operating income (loss) | $(228.2) million | $(5.9) million |
| Net income (loss) | $(231.8) million; $(3.90) per diluted share | $(19.1) million; $(0.33) per diluted share |
| Cash provided by operating activities | $137.4 million | $103.2 million |
| Capital expenditures | $56.1 million | $88.0 million |
| EBITDA, as defined by the company | $98.9 million | $120.8 million |
| Cash and cash equivalents at year-end | $8.5 million | $19.3 million |
| Total debt, carrying value | $248.2 million | $331.7 million |
Operating margin was approximately negative 22.4% in 2019, versus negative 0.5% in 2018. The 2019 operating loss included $165.0 million of non-cash goodwill impairment and $33.7 million of non-cash fixed-asset impairment. The company recorded a $8.9 million income tax benefit on a $240.7 million pretax loss.
At December 31, 2019, current assets were $483.4 million and current liabilities were $183.1 million. The company reported $51.9 million outstanding under its revolving credit facility, $19.3 million in letters of credit and $131.1 million available to draw, with availability limited by maintenance covenants. It was in covenant compliance and expected to remain compliant over the next 12 months. Convertible-note principal outstanding was $192.3 million; the notes mature in February 2023. Total operating lease liabilities were $44.1 million.
Material changes versus the prior comparable period
- Revenue declined 7%, reflecting lower U.S. land activity, competitive pricing and weaker short-cycle demand. Well Site Services revenue fell 10% and Downhole Technologies revenue fell 15%; Offshore/Manufactured Products revenue rose 2%.
- Downhole Technologies recorded a $165.0 million goodwill impairment following a lower near-term demand outlook for short-cycle products in U.S. shale regions. Its revenue fell to $182.3 million from $213.8 million.
- Well Site Services reduced its vertical drilling fleet from 34 rigs to 9 because of weak demand, recorded a $33.7 million fixed-asset impairment and sold substantially all decommissioned rigs in the fourth quarter.
- Offshore/Manufactured Products backlog increased 57% to $280 million from $179 million. Orders were $523 million, a 1.3x book-to-bill ratio; the company expected approximately 75% of year-end backlog to convert to revenue in 2020.
- Operating cash flow increased by $34.3 million, supported in part by a $39.3 million working-capital decrease. Capital expenditures fell by $31.9 million. The company used cash to repay $84.2 million of revolving-credit borrowings and repurchased $7.8 million principal amount of convertible notes at a discount.
Outlook, commentary, risks and unusual items
- Management expected customer-driven activity to decline further in early 2020 as operators prioritized spending within cash flow. WTI and Brent averaged $57 and $64 per barrel in 2019, down 13% and 10%, respectively, from 2018; the U.S. rig count ended 2019 at 805, down 26% from its December 2018 peak.
- Management described its long-term energy outlook as constructive and noted improved deepwater bidding and orders in 2019. It expected 2020 capital expenditures of $40–45 million, subject to industry conditions, project schedules, liquidity and cash flow.
- Key risks include commodity-price volatility and customer spending reductions; covenant-constrained borrowing capacity; possible additional asset impairments; competitive pricing and product substitution; customer credit and cancellations; tariffs and supply costs; environmental, climate, hydraulic-fracturing and offshore regulations; international, currency and geopolitical exposure; and operational, safety, litigation and cybersecurity risks. The filing also identified the coronavirus outbreak at the beginning of 2020 as a potential risk to the global economy.
- Other notable matters include a pending indemnification claim against the GEODynamics seller relating to potentially applicable duties on certain China-sourced steel products. The related $25 million promissory note’s maturity is extended pending resolution, and the company expects the amount ultimately paid may be reduced. Management said pending legal matters were not expected to materially affect consolidated results, financial position or liquidity.
- The company reported no dividends since its 2001 IPO; its credit agreement restricts dividends. The $165 million goodwill impairment was non-cash and, according to the filing, did not affect liquidity, cash flows or debt covenants.
Important facts for investors to verify
- Whether cash generation and covenant headroom can withstand the expected early-2020 activity decline; confirm the facility’s borrowing availability and compliance calculations.
- Whether the Downhole Technologies outlook, integrated perforating-gun offering and remaining goodwill carrying value support future results without further impairment.
- Whether the $280 million offshore backlog converts on schedule and profitably, considering cancellation rights, customer credit and project execution risks.
- The outcome and financial effect of the GEODynamics duty-indemnification claims and the eventual settlement of its promissory note.
- How 2020 capital spending, working capital and customer activity compare with management’s $40–45 million capital-expenditure plan and stated outlook.