Oil States International, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Oil States supplies products and services to the oil and gas industry through Well Site Services, Downhole Technologies, and Offshore/Manufactured Products. Results are sensitive to commodity prices and customer spending.
Financial performance
- Q2 revenue: $264.7 million, down 7% from $285.8 million. Product revenue fell 8% to $125.0 million and service revenue fell 7% to $139.7 million.
- Q2 earnings: Operating loss of $6.4 million (operating margin -2%), versus operating income of $8.7 million (3%) in Q2 2018. Net loss was $9.7 million, or $0.16 per diluted share, versus net income of $2.7 million, or $0.05 per share.
- First-half revenue and earnings: Revenue was $515.3 million, down 4%. Operating loss was $17.2 million (margin -3%), versus operating income of $7.8 million (1%). Net loss was $24.4 million, or $0.41 per diluted share, versus a $0.8 million net loss, or $0.01 per share.
- Segments, Q2: Well Site Services revenue was $116.0 million and operating loss $3.1 million; Downhole Technologies revenue was $46.7 million and operating loss $1.5 million; Offshore/Manufactured Products revenue was $102.0 million and operating income $9.8 million.
- Cash flow, first half: Operating cash flow was $66.0 million, compared with $46.9 million in 2018. Capital expenditures were $31.6 million; cash used in investing activities was $30.9 million and financing activities used $41.6 million. Cash decreased $6.9 million to $12.4 million.
- Debt and liquidity at June 30: Total debt carrying value was $298.4 million, including $97.5 million under the revolver, $170.7 million carrying value of convertible notes, and a $25.0 million seller promissory note. Revolver availability was $96.0 million after $16.1 million of letters of credit; availability was constrained by maintenance covenants. The company reported covenant compliance. Current assets were $511.4 million and current liabilities $191.6 million.
Changes and drivers
- Q2 revenue weakness reflected lower U.S. land activity and competitive pricing in conventional perforating products. Downhole Technologies revenue declined 21%; its operating result moved from $11.6 million income to a $1.5 million loss, with lower revenue, unfavorable mix, higher costs, expanded field support, and $1.4 million of inventory write-offs cited as factors.
- First-half Well Site Services revenue was nearly flat, but Drilling Services revenue fell 41% amid reduced rig utilization. Offshore/Manufactured Products first-half revenue declined 9%, partly due to lower project-driven sales.
- Offshore/Manufactured Products backlog rose $104 million from year-end to $283 million, its highest reported level since Q2 2016. First-half orders were $297 million, with a 1.6x book-to-bill ratio; management cited improving deepwater awards.
- Q2 included $1.3 million of severance and downsizing costs. The prior-year quarter included a $3.6 million Hurricane Harvey insurance gain and $1.5 million of patent-defense costs. First-half 2019 included $2.3 million of severance and downsizing costs; the 2018 comparison included acquisition-related, legal, severance, and FLSA-related items.
Outlook, risks and contingencies
- Management expects 2019 capital expenditures of $60–$65 million, subject to industry conditions, project approvals, vendor timing, cash generation, and liquidity. It expects cash, operating cash flow, and revolver availability to meet liquidity needs for the next 12 months.
- Management described improving planned global deepwater investment, but noted that U.S. shale spending remained moderated by commodity-price volatility and customer capital discipline. No earnings or revenue guidance was provided in the supplied filing text.
- Key risks include oil and gas price volatility, cyclical customer activity, competition and pricing pressure, tariffs and import duties, foreign exchange, interest rates, customer credit, and possible impairment of goodwill or long-lived assets. The company reported no Q2 impairment after a qualitative assessment.
- The company voluntarily disclosed to U.S. Customs and Border Protection a potential anti-dumping/countervailing-duty issue involving certain Chinese steel products historically imported by GEODynamics, and stopped further purchases of potentially affected products. It asserted an indemnification claim against the seller; the related $25 million note maturity is extended pending resolution, and the company expects the amount paid may be reduced. Management said pending litigation and claims are not expected to have a material adverse effect, while acknowledging outcomes are uncertain.
- The $200 million principal convertible notes bear 1.50% cash interest and mature in 2023; accounting interest expense reflects an approximately 6% effective rate. A 1% increase in floating rates would increase annual interest expense by approximately $1.0 million. The board extended the $150 million share-repurchase authorization through July 29, 2020; $119.8 million remained authorized at June 30.
Important facts for investors to verify
- Whether improving offshore orders convert into revenue and cash flow, and how the $283 million backlog is scheduled and subject to cancellation or delay.
- Trends in U.S. completion activity, rig utilization, Downhole Technologies pricing, product costs, and inventory write-offs.
- Revolver availability and covenant headroom, given availability below lender commitments despite reported covenant compliance.
- Resolution and potential financial effect of the GEODynamics customs-duty indemnification matter and extended seller note.
- Execution of the $60–$65 million capex plan and sufficiency of liquidity if operating conditions weaken.