Oil States International, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial statements are unaudited. Oil States supplies products and services to the oil and gas industry through Well Site Services, Downhole Technologies, and Offshore/Manufactured Products.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $285.8 million | $171.4 million | $539.4 million | $322.9 million |
| Gross margin | 25% | 23% | 25% | 22% |
| Operating income (loss) | $8.7 million | $(18.5) million | $7.8 million | $(41.8) million |
| Net income (loss) | $2.7 million | $(14.2) million | $(0.8) million | $(31.9) million |
| Diluted EPS | $0.05 | $(0.28) | $(0.01) | $(0.63) |
- Q2 revenue increased 67% year over year; management attributed the increase to stronger U.S. shale activity and the 2018 acquisitions. Excluding GEODynamics, revenue rose 32%.
- Six-month operating cash flow was $46.9 million, versus $44.9 million; capital expenditures were $38.3 million, versus $13.3 million. Cash declined to $29.1 million from $53.5 million at year-end 2017.
- At June 30, total debt was $349.8 million, including $157.9 million drawn on the revolver, $200 million principal of convertible notes, and a $25 million acquisition promissory note. The balance-sheet carrying amount of long-term debt and capital leases was $349.2 million.
- The amended revolver had $157.8 million available to draw, constrained by maintenance covenants. Current assets were $546.6 million and current liabilities $142.9 million. The company reported compliance with debt covenants.
Material changes and business drivers
- GEODynamics was acquired January 12 for approximately $615 million in cash, stock, and a promissory note. It contributed $105.1 million revenue and $19.7 million operating income through June 30. Falcon Flowback Services was acquired February 28 for $84.2 million cash consideration.
- Well Site Services revenue rose 80% in Q2, with Completion Services job tickets up 63% and revenue per job up 15%. Drilling Services utilization improved to 30% from 25%, although its Q2 gross margin fell to 6% from 13%.
- Downhole Technologies, consisting of GEODynamics, reported Q2 revenue of $59.3 million and a 34% gross margin. Offshore/Manufactured Products Q2 revenue slipped 1%; its six-month revenue increased 8%.
- Offshore/Manufactured Products backlog was $165 million at June 30, up from $157 million at March 31. The segment reported a Q2 book-to-bill ratio of 1.2x and one notable floating-production-facility award.
Outlook, commentary, and risks
- Management cited improved oil prices and increased U.S. drilling and completion activity, particularly in shale plays. It also noted that global deepwater investment remained subdued, though project-award potential appeared to be improving.
- Expected 2018 capital expenditures were $80–$90 million. Management stated cash, operating cash flow, and available revolver capacity should cover liquidity needs for the next 12 months; spending plans remain subject to industry conditions and cash generation. No specific revenue or earnings guidance was provided.
- Q2 operating income included a $3.6 million Hurricane Harvey insurance-settlement gain. First-half results also included $2.6 million of acquisition transaction costs and $0.8 million of severance charges. The filing reported a $1.8 million bad-debt provision associated with a customer bankruptcy.
- Key risks include oil and gas price and activity cyclicality, customer liquidity and project delays, tariffs and raw-material costs, foreign-exchange movements, acquisition integration and retention, and covenant-limited borrowing capacity. Management warned that costs from tariffs could hurt results if not passed through to customers.
- Foreign currency translation contributed $8.7 million of first-half other comprehensive loss. A 1% rise in floating rates would increase annual interest expense by approximately $1.6 million, based on June 30 borrowings.
- Purchase-price allocations for GEODynamics and Falcon remained preliminary. Management also noted that acquired GEODynamics internal controls were excluded from the current assessment under the SEC acquisition transition guidance.
Important facts for investors to verify
- How much of revenue and earnings growth is attributable to acquisitions versus organic activity, and whether acquired operations meet expected integration and earnings objectives.
- Cash conversion and working-capital needs as activity expands, given first-half working-capital use and the cash decline.
- Debt-covenant headroom and actual revolver availability, which was below stated lender commitments because of covenant limits.
- Progress in offshore backlog conversion, new awards, and the sustainability of improved U.S. shale activity and margins.
- Final acquisition valuations, amortization effects, and exposure to tariffs, customer credit losses, and foreign-exchange changes.