Oil States International, Inc. — Q1 2012 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2012, compared with Q1 2011. Oil States provides accommodations, offshore products, well site services and tubular services to the oil and gas and mining industries. Interim results are not necessarily indicative of full-year performance. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $1,099.0 | $760.4 |
| Gross profit | $303.2 | $186.0 |
| Gross margin | 28% | 24% |
| Operating income | $204.2 | $94.8 |
| Net income attributable to Oil States | $135.1 | $62.1 |
| Diluted EPS | $2.43 | $1.13 |
| Cash from operating activities | $67.2 | $36.2 |
| Capital expenditures | $101.4 | $92.6 |
- Revenue grew 45%; operating income rose 116%. Gross margin increased to 28% from 24%. Operating margin was approximately 18.6%, versus 12.5%.
- Reported Q1 2012 diluted EPS included an estimated $0.23 after-tax benefit from a favorable U.S. accommodations contract settlement; the settlement contributed $18.3 million of revenue. Excluding it, accommodations gross margin was 51%, versus reported 54%.
- Operating cash flow improved year over year, but exceeded capital expenditures by less than the amount spent: operating cash flow less capex was negative $34.2 million. Working capital absorbed $122.4 million, mainly from tubular-services investment and higher receivables.
- At March 31, cash was $70.7 million; total debt was $1,201.6 million, implying net debt of approximately $1,130.9 million. Current assets were $1,665.1 million and current liabilities $513.9 million. Stockholders’ equity was $2,136.9 million.
- The company reported $618.8 million available under U.S. and Canadian credit facilities, plus A$115 million available on its Australian facility. It had $29.8 million of letters of credit outstanding and stated it was in compliance with debt covenants.
Material changes versus Q1 2011
- All segments grew revenue: accommodations +53% to $301.8 million; tubular services +46% to $428.5 million; offshore products +45% to $185.7 million; and well site services +30% to $183.0 million.
- Accommodations operating income increased to $119.0 million from $49.0 million, reflecting expanded Canadian and Australian capacity and the contract settlement. Offshore products operating income rose to $32.5 million from $16.8 million; well site services to $41.3 million from $26.6 million; tubular services to $22.4 million from $13.0 million.
- Tubular services shipments rose 33% to 205,400 tons, with realized revenue per ton up 9%. Segment gross margin edged up to 6.3% from 5.9%. Drilling-services rig utilization increased to approximately 88% from 71%, and average day rates rose to $17,800 from $15,300.
- Net interest expense increased 91% to $17.9 million, principally reflecting the 6.5% senior notes issued in 2011. The effective tax rate increased to 28.2% from 27.3%, largely due to a higher foreign tax rate.
- Total debt increased from $1,176.9 million at December 31, 2011 to $1,201.6 million at March 31, 2012. Cash declined from $71.7 million to $70.7 million. Accounts receivable and inventory rose to $843.0 million and $727.8 million, respectively.
Outlook, commentary and risks
- Management expected 2012 capital expenditures of approximately $600–$700 million, around 65% directed to accommodations, including Canadian oil sands and Australian mining-related capacity. It expected to fund spending with cash, internally generated funds and credit facilities. No full-year earnings or revenue guidance was provided.
- Management cited stronger oil prices and expected higher global exploration and production spending, while noting significant global economic uncertainty. U.S. natural gas prices were at or below $2.00/Mcf; weak gas prices and oversupplied inventories could reduce gas drilling. Management also noted potential effects of rising U.S. oil production on supply and prices.
- Offshore-products backlog was $529 million at March 31, 2012, up from $416 million a year earlier but down from $535 million at December 31, 2011. Management anticipated deepwater project opportunities over the following twelve months.
- Management said cash, operating cash flow and available borrowing capacity should meet liquidity needs for the next twelve months, but additional acquisitions or changed assumptions could require more capital. Additional debt could increase financing burden; equity issuance could dilute shareholders.
- Convertible-note holders could present the 2⅜% notes for conversion in the quarter following the March 31 measurement date because conversion thresholds were met. The company said it would use existing credit facilities to fund the cash portion if holders converted.
- Floating-rate debt was approximately $419.7 million; a 1 percentage-point rate increase would add about $4.2 million in annual interest expense. The company reported $1.0 million of foreign-exchange losses for the quarter.
- Risks include cyclical customer spending and commodity prices, OCTG supply and pricing, working-capital needs, and regulatory changes in the U.S. Gulf of Mexico after the Macondo incident. The filing identifies possible expanded regulation of contractors as a risk that could increase compliance costs and liabilities. Management did not expect pending legal matters, net of insurance or indemnification, to materially affect financial position, results or liquidity.
Important facts for investors to verify
- How much of Q1 earnings growth is sustainable after adjusting for the $18.3 million contract settlement and its $0.23-per-diluted-share benefit.
- Whether planned $600–$700 million annual capex can be supported by operating cash flow, given Q1 working-capital investment and capex above operating cash flow.
- Execution, utilization and returns from planned accommodations expansion, and the outlook for offshore backlog conversion.
- Debt and liquidity capacity, including any conversion of the 2⅜% notes and the terms and availability of revolving facilities.
- Exposure to commodity-price shifts, natural-gas weakness, OCTG inventory and pricing, foreign exchange, and evolving Gulf of Mexico contractor regulation.