Oil States International, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Oil States provides products and services to the oil and gas industry through Well Site Services, Downhole Technologies, and Offshore/Manufactured Products. Results reflect the severe decline in oilfield activity associated with COVID-19 and lower oil prices.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $134.8 million | $263.7 million | $500.7 million | $779.0 million |
| Operating loss | $30.8 million | $34.9 million | $506.0 million | $52.1 million |
| Net loss | $20.0 million | $31.9 million | $449.6 million | $56.3 million |
| Loss per diluted share | $0.33 | $0.54 | $7.52 | $0.95 |
- Q3 revenue fell 49% year over year; product revenue declined 41% and service revenue 56%. Nine-month revenue fell 36%.
- Nine-month operating results included $406.1 million of goodwill impairments, $31.2 million of inventory impairments, and $8.2 million of fixed-asset impairments. These were non-cash charges. A $16.4 million CARES Act tax benefit and $10.7 million non-cash gain on debt extinguishment partially offset the reported loss.
- Cash from operations was $131.1 million for the first nine months, versus $115.9 million a year earlier. The company reported $128.4 million of operating cash flow less investing cash flow. Operating cash flow benefited from a $41.3 million tax refund and $74.8 million of net working-capital decreases.
- Capital expenditures were $11.3 million for the first nine months; management expected approximately $15 million for full-year 2020.
- At September 30, cash was $79.7 million, compared with $8.5 million at year-end 2019. Total debt carrying value was $189.1 million, including $157.4 million principal outstanding on convertible notes and $19.0 million drawn on the revolver. Revolver availability was $83.8 million as of October 1, subject to the borrowing base.
- Current assets were $433.3 million and current liabilities $172.3 million. Deferred revenue rose to $48.9 million from $17.8 million at year-end.
Material changes and segment trends
- Well Site Services revenue fell 68% in Q3 and 53% for the first nine months. Downhole Technologies revenue fell 56% and 48%, respectively. Offshore/Manufactured Products revenue fell 25% in Q3 and 10% year to date, with project-driven sales partly offsetting lower short-cycle sales.
- Offshore/Manufactured Products backlog was $227 million at quarter-end, down 23% from September 2019. Q3 bookings were $70 million, with a 0.9x book-to-bill ratio; year-to-date book-to-bill was 0.8x.
- Management reduced headcount 32% from December 2019, cut planned 2020 capital spending by more than 70% versus 2019, reduced incentive awards, and closed or consolidated facilities.
- The company purchased $34.9 million principal amount of convertible notes for $20.1 million in cash during the first nine months, reducing principal outstanding. Its share-repurchase program expired July 29, 2020.
Outlook, risks, and unusual items
- Management expected customer activity to remain depressed in the United States through the rest of 2020 and into 2021. The filing provides no earnings or revenue guidance.
- The revolver commitment was reduced from $350 million to $200 million in June 2020; financial covenants were suspended through March 30, 2021, and borrowing availability is limited by a monthly borrowing base. Management said it might not meet covenants after the suspension ends, but believed cash, operating cash flow, and available borrowing capacity would support liquidity and repayment of revolver borrowings over the next 12 months.
- Key risks include further oil-price or demand declines, customer spending cuts or nonpayment, COVID-related workforce, travel and supply-chain interruptions, tariffs and duties, currency movements, and possible further asset impairments. The company cautioned that pandemic effects remain uncertain.
- A GEODynamics seller sued in August 2020, alleging breach of contract over a $25 million promissory note and claiming entitlement to approximately $19 million in CARES Act tax-carryback proceeds. Oil States disputes the claims and intends to defend the suit; it asserts indemnification claims and expects set-off rights may reduce amounts ultimately payable on the note.
- The company plans to adopt revised convertible-debt accounting on January 1, 2021. It estimated a $12.2 million increase in the notes’ net carrying value, a $3.7 million decrease in deferred taxes, and an $8.5 million decrease in equity at adoption.
Investor verification priorities
- Track U.S. customer activity, oil prices, and the pace of recovery in short-cycle demand.
- Confirm revolver availability and covenant compliance as the suspension period approaches its March 2021 end, including the impact of borrowing-base changes and cash restrictions.
- Assess whether cash generation remains sustainable after the tax refund and working-capital benefits, and whether planned capital spending stays near $15 million.
- Monitor Offshore/Manufactured Products backlog, bookings, and conversion to revenue.
- Follow the GEODynamics litigation, indemnification claims, and potential exposure related to the promissory note and tax carryback proceeds.
- Review the assumptions behind impairment testing and customer credit reserves if industry conditions weaken further.