Business Context and Reporting Period
Company: Oil States International, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Industry: Oilfield Services (Offshore Products, Tubular Services, Well Site Services)
Oil States International provides specialty products and services to oil and gas drilling and production companies globally. The company operates in three principal segments: Offshore Products, Tubular Services, and Well Site Services (which includes accommodations, rental tools, and drilling). The 2008 reporting period was characterized by a global financial crisis, a sharp decline in oil and gas prices, and a subsequent reduction in customer capital spending and drilling activity, particularly in the fourth quarter of 2008 and continuing into 2009.
Key Financial Metrics
| Metric | 2008 | 2007 | 2006 |
|---|---|---|---|
| Revenues | $2,948.5 million | $2,088.2 million | $1,923.4 million |
| Net Income | $222.7 million | $203.4 million | $197.6 million |
| Diluted EPS | $4.33 | $3.99 | $3.89 |
| Operating Income | $383.8 million | $297.8 million | $297.9 million |
| EBITDA | $495.6 million | $385.5 million | $372.9 million |
| Capital Expenditures | $247.4 million | $239.6 million | $129.6 million |
| Net Cash from Operating Activities | $257.5 million | $247.9 million | $137.4 million |
| Total Assets | $2,299.2 million | $1,929.6 million | $1,571.1 million |
| Total Debt | $479.9 million | $491.8 million | $391.7 million (Long-term only) |
| Cash and Equivalents | $30.2 million | $30.6 million | $28.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 41% to $2.95 billion, driven primarily by a 73% increase in Tubular Services revenues (due to higher OCTG prices and volumes) and a 34% increase in Well Site Services revenues (driven by accommodations and rental tools).
- Goodwill Impairment: The company recorded a non-cash goodwill impairment charge of $85.6 million ($79.8 million after-tax) in the fourth quarter of 2008. This charge was attributed to the Tubular Services and Drilling reporting units due to the global economic recession and declining market capitalization.
- Segment Performance:
- Tubular Services: Gross margin improved from 6% in 2007 to 13% in 2008 due to tight supply and higher mill prices, though management expects margins to contract in 2009 as steel prices decline.
- Well Site Services: Accommodations revenues grew 37% due to expansion in Canadian oil sands. Rental tools revenues grew 37% due to acquisitions and utilization.
- Offshore Products: Revenues were flat year-over-year ($528.2 million), though backlog remained stable at $362.1 million.
- Acquisitions: Completed two acquisitions in 2008 totaling $29.9 million (Christina Lake Lodge in Canada and a waterfront facility in Houston).
- Investment Sales: Sold remaining shares of Boots & Coots common stock in 2008, realizing a net after-tax gain of $3.6 million.
Guidance, Outlook, and Risks
Management Commentary and Outlook:
- 2009 Capital Expenditures: Management plans to significantly reduce capital spending in 2009, projecting approximately $147.0 million compared to $247.4 million in 2008.
- Market Conditions: The company anticipates a material negative impact on revenues and margins in 2009 due to decreased energy prices, reduced drilling activity, and weakening OCTG prices. Rig counts have fallen precipitously in early 2009.
- Inventory: The company has reduced forward purchase commitments for OCTG and expects inventory levels to decrease in 2009.
Risks and Contingencies:
- Economic Downturn: Severe disruption in credit markets and a global recession have reduced customer liquidity and capital spending.
- Commodity Prices: Demand is highly sensitive to oil and natural gas prices. A prolonged decline could lead to further asset impairments.
- Goodwill Impairment: Additional impairment charges are possible if economic conditions deteriorate further or if future cash flow projections decline.
- Oil Sands Exposure: While long-term prospects remain sound, some customers have suspended or delayed oil sands projects due to lower crude prices, impacting the accommodations segment.
- Convertible Notes: The company has $175 million in 2 3/8% Contingent Convertible Senior Notes due 2025. New accounting rules (FSP APB 14-1) adopted in 2009 will increase non-cash interest expense by approximately $7 million annually.
Investor Verification Checklist
- Goodwill Impairment: Verify the assumptions used in the fourth-quarter goodwill impairment test for Tubular Services and Drilling units, and assess the risk of further impairments in 2009.
- OCTG Inventory Valuation: Review the lower-of-cost-or-market valuation of the $396.5 million tubular goods inventory, given the rapid decline in steel prices and rig counts post-2008.
- Oil Sands Contract Stability: Confirm the status of major Canadian oil sands accommodation contracts, specifically regarding the 1,016-bed facility suspension and potential revenue delays.
- Liquidity and Covenants: Monitor compliance with debt covenants (Interest Coverage Ratio of 3.0:1 and Leverage Ratio of 3.25:1) given the projected reduction in EBITDA for 2009.
- Convertible Note Accounting: Review the impact of the new FSP APB 14-1 accounting standard on reported interest expense and equity classification starting in 2009.