Oil States International, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. All financial amounts below are in U.S. dollars; monetary figures are shown in millions unless noted otherwise.
Business context and reporting period
Following the May 30, 2014 tax-free spin-off of its accommodations business, Civeo, Oil States describes itself as a technology-focused energy services company. Continuing operations comprise well site services (completion and drilling services) and offshore products. The filing presents Civeo and the previously sold Sooner tubular services business as discontinued operations for all periods shown.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue from continuing operations | $471.0 | $438.2 | $1,335.9 | $1,207.8 |
| Operating income | $91.6 | $65.8 | $218.4 | $175.4 |
| Net income from continuing operations attributable to Oil States | $58.4 | $35.5 | $69.0 | $93.0 |
| Diluted EPS from continuing operations | $1.07 | $0.64 | $1.27 | $1.67 |
| Net income attributable to Oil States, including discontinued operations | $56.9 | $167.7 | $120.5 | $346.5 |
- Margins: Gross margin was 35% in Q3 versus 31% a year earlier, and 34% for the nine-month period versus 31%. Operating margin was approximately 19.4% in Q3 versus 15.0%; nine-month operating margin was approximately 16.3% versus 14.5%.
- Cash flow and investment: Cash provided by operating activities was $302.5 million for the first nine months, compared with $582.7 million in 2013. Capital expenditures were $262.6 million, versus $355.6 million. Cash used in investing activities was $259.8 million; 2013 investing cash flow included $600 million of proceeds from the Sooner sale.
- Liquidity and debt: At September 30, cash was $69.8 million and total debt and capital leases were $178.5 million, including $171.7 million drawn on a $600 million revolving facility. After $36.4 million of letters of credit, $391.9 million remained available. Current assets were $845.8 million and current liabilities $255.1 million. The company reported compliance with its debt covenants.
- Backlog: Offshore products backlog was $543 million at September 30, down from $580 million at December 31, 2013 and $569 million at September 30, 2013.
Material changes versus prior comparable periods
- Q3 continuing-operations revenue increased 7%; operating income rose 39%. Well site services revenue increased 15%, led by higher completion activity and drilling-rig utilization. Offshore products revenue increased 2%, while segment operating income improved on stronger margins.
- For the first nine months, revenue increased 11% and operating income increased 25%. Gross-margin improvement was particularly pronounced in offshore products, where nine-month gross margin rose to 31% from 26%.
- Nine-month continuing-operations net income fell to $69.0 million from $93.0 million despite higher operating income. The 2014 result included a $100.4 million debt-extinguishment loss, principally from repurchasing the former senior notes; the company also cited $11.0 million of spin-off-related transaction costs in other operating expense and SG&A.
- Reported total net income is not directly comparable: 2013 included a $128.6 million pre-tax gain on the Sooner sale, while 2014 reflects Civeo results only through its spin-off date and no continuing Civeo or Sooner revenue thereafter.
- Cash and total assets were substantially lower than at year-end 2013, reflecting the Civeo spin-off, debt refinancing and other capital transactions. The company repurchased $162.1 million of stock during the first nine months and another $50.0 million through October 29, 2014.
Outlook, management commentary, risks and unusual items
- Management expected 2014 continuing-operations capital expenditures of approximately $200–$225 million, compared with $165 million in 2013. The filing reports $142.6 million of continuing-operations capital expenditures through September 30. Spending remained subject to industry conditions, project approvals, schedules and vendor timing.
- Management expected Q4 offshore products bookings to improve from Q3 and cited prospective deepwater awards in Brazil, West Africa, the U.S. Gulf of Mexico and Southeast Asia. It also described bidding activity as active, but noted no individual project awards above $15 million during Q3. These are expectations, not guarantees.
- Management believed cash, operating cash flow and available credit would meet liquidity needs for the next 12 months. The revolving facility matures May 28, 2019; its covenants require interest coverage of at least 3.0 to 1.0 and limit leverage to 3.25 to 1.0. The filing stated the company expected continued covenant compliance during the remainder of 2014.
- Commodity prices were a significant uncertainty. Oil prices declined late in Q3 and further by October 29, 2014, when WTI and Brent were approximately $82 and $87 per barrel. Management noted that lower prices could constrain customer spending, affecting U.S. well site activity and offshore development. Natural gas prices and spending were also exposed to production growth outpacing demand.
- Other exposures include floating-rate debt and foreign currency movements. The company estimated that a 1 percentage-point increase in floating rates would add about $1.7 million to annual interest expense. It reported $0.3 million of foreign-exchange losses for the first nine months.
- The company was party to various claims and proceedings, including warranty, product-liability and hazardous-material exposure claims; it did not expect any ultimate liability, net of provisions, indemnities or insurance, to materially affect its financial position, results or liquidity. It reported no off-balance-sheet arrangements and no significant changes to the risk factors in its 2013 Form 10-K.
Important facts for investors to verify
- Review continuing-operations earnings separately from discontinued operations and the prior-year Sooner disposal gain; confirm the effects of spin-off accounting on comparability.
- Assess the sustainability of Q3 margin gains, especially offshore products’ improved project mix, cost absorption and execution, and monitor the declining backlog.
- Track operating cash generation, working-capital requirements and capital spending against management’s $200–$225 million full-year forecast.
- Verify debt-facility availability, covenant headroom, interest-rate exposure and the use of cash for share repurchases.
- Monitor oil and gas prices, customer capital-spending plans, offshore award timing and potential legal or indemnification exposures.