Oil States International, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
Oil States supplies products and services to the oil and gas industry through well site services, accommodations, offshore products and tubular services. Results are exposed to commodity prices, customer capital spending, drilling activity, OCTG pricing and foreign exchange. The filing notes that North American rig activity fell year over year, largely because of reduced natural gas drilling. The accommodations business also has seasonal exposure to Canadian spring break-up.
Financial performance
| Metric | Q2 2013 | Q2 2012 | H1 2013 | H1 2012 |
|---|---|---|---|---|
| Revenue | $1,040.5 million | $1,091.1 million | $2,110.0 million | $2,190.1 million |
| Operating income | $126.6 million | $169.3 million | $287.6 million | $373.5 million |
| Net income attributable to Oil States | $76.5 million | $111.2 million | $178.7 million | $246.3 million |
| Diluted EPS | $1.38 | $2.01 | $3.22 | $4.45 |
| Gross margin | 25% | 25% | 25% | 26% |
| Operating cash flow | Not provided separately for the quarter | $359.0 million | $251.0 million |
Q2 revenue declined 5% and operating income fell 25% year over year; H1 revenue declined 4% and operating income fell 23%. Higher depreciation and amortization, SG&A and weaker accommodations and tubular services results weighed on earnings. H1 capital expenditures were $240.4 million, implying operating cash flow less capital expenditures of approximately $118.6 million, compared with approximately $51.1 million in H1 2012.
At June 30, cash and cash equivalents were $225.9 million; current assets were $1.728 billion and current liabilities $482.5 million. Total debt, including current maturities and capital leases, was $1.166 billion, versus $1.310 billion at year-end 2012. The company reported $713 million available under U.S. and Canadian facilities after letters of credit, plus AUD$300 million available under its Australian facility. It was in compliance with debt covenants. Management said cash, operating cash flow and available facilities should meet liquidity needs for the next 12 months.
Material changes and segment trends
- Accommodations: Q2 revenue declined 6%; operating income fell 34%. Lower Canadian contracted rates, weaker Australian occupancy and lower U.S. utilization contributed. H1 revenue declined 4%, with comparison also affected by a favorable $18.3 million contract settlement in U.S. accommodations in Q1 2012.
- Tubular services: Q2 revenue declined 12% and H1 revenue 10%; segment gross margin was 5.1% in both 2013 periods versus 6.3% in 2012. Lower OCTG prices, product mix and drilling activity pressured results.
- Well site services: Q2 revenue increased 6%, while H1 revenue was up 1%. Completion services growth and favorable tool mix were partly offset by lower drilling-services activity and rig utilization.
- Offshore products: Revenue increased 7% in both Q2 and H1, partly reflecting the Piper acquisition and higher product sales. Backlog was $561 million at June 30, unchanged from December 31, 2012.
- Comprehensive income and currency: H1 foreign-currency translation loss was $170.1 million, primarily from weaker Canadian and Australian dollars; accumulated other comprehensive income moved from $107.1 million at year-end 2012 to a $62.9 million loss at June 30. This reduced comprehensive income but is distinct from net income.
Outlook, risks and unusual items
- Management forecast 2013 capital expenditures of approximately $550–$600 million, about three-fifths for accommodations, subject to industry conditions, project approvals, schedules and vendor timing. The company had spent $240.4 million through June.
- Management cited active offshore-products bidding and expected robust global deepwater spending, with opportunities in Brazil, West Africa, the U.S. Gulf of Mexico and Southeast Asia. Offshore-products backlog remained strong at $561 million.
- The board approved pursuing a tax-free spin-off of accommodations, targeted for the first half of 2014. It remains conditional on market conditions, tax-related clearance or opinion, SEC review of the spin-off company’s Form 10, separation agreements and final board approval; completion and intended benefits are not assured.
- Key operating risks include oil and gas price volatility; weak natural gas activity; lower met coal prices and delayed Australian projects; reduced accommodations rates and occupancy; OCTG oversupply and pricing pressure; and currency movements. July 2013 antidumping and countervailing-duty petitions concerning OCTG imports could affect U.S. supply and pricing.
- Q2 unusual items included a $3.0 million charge for increased Tempress contingent consideration and $1.9 million of strategic transaction costs; Q2 completion-services revenue also included a $1.6 million reduction for an international revenue accrual. H1 included a $4.0 million gain from reversal of Mountain West contingent consideration. 2012 comparisons included the accommodations contract-settlement gain and a $2.5 million drilling-rig insurance gain.
- The company disclosed that its Singapore subsidiary received approximately $2.2 million in final payments during Q2 on a prior transaction involving equipment for the South Pars Gas Field in Iran; the overall transaction was approximately $4.2 million with estimated net profit of $0.4 million. The company said it had wound down the Iran-related business and submitted voluntary disclosures to OFAC and the State Department.
- Various legal claims and proceedings were pending; management did not expect ultimate liabilities, net of provisions, indemnities or insurance, to materially affect consolidated financial position, results or liquidity. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether the accommodations spin-off receives required approvals, closes on schedule and achieves its stated objectives.
- Whether planned capital spending converts into utilization, revenue and returns, particularly in accommodations.
- OCTG pricing, inventory and the outcome and effect of the trade petitions on tubular-services margins.
- Trends in accommodations rates and occupancy, North American drilling and completion activity, and offshore backlog conversion.
- Foreign-exchange effects on Canadian and Australian operations and the company’s ability to maintain liquidity and covenant compliance.
- Any follow-up disclosure or regulatory developments relating to the Iran-related transaction.