Oil States International, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. Amounts are in U.S. dollars. Following the 2013 sale of Sooner, the tubular services business is reported as discontinued operations, so continuing-operations comparisons exclude it.
Business context
Oil States provided well site services, accommodations, and offshore products to oil and gas customers, with accommodations also serving mining customers. Results depend on commodity prices, customer investment, drilling and completion activity, and foreign exchange rates. The company was pursuing a tax-free spin-off of its accommodations business as Civeo.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $658.0 million | $675.5 million | Down 3% |
| Operating income | $113.6 million | $146.5 million | Down 22% |
| Income from continuing operations attributable to Oil States | $71.3 million | $93.2 million | Down 23% |
| Diluted EPS from continuing operations | $1.32 | $1.69 | Down $0.37 |
| Net cash from operating activities | $105.3 million | $218.6 million | Down $113.3 million |
| Capital expenditures | $103.4 million | $107.4 million | Down $4.0 million |
Consolidated gross margin was 37%, versus 38% a year earlier. SG&A rose 13% to $56.5 million, and depreciation and amortization rose 6% to $70.4 million. Net interest expense fell 17% to $17.1 million; the effective tax rate increased to 27.7% from 26.5%.
Operating cash flow was lower in part because working capital used $39.7 million, principally from increased offshore-products receivables and inventory; Q1 2013 working-capital changes provided $56.4 million. Investing activities used $101.6 million. Financing activities used $141.1 million, primarily for share repurchases. Cash declined $144.4 million to $454.9 million.
Segments and material changes
- Well site services: Revenue rose 9% to $193.0 million and operating income rose to $36.8 million from $32.7 million. Higher activity and utilization improved margins; drilling-rig utilization increased to 81% from 72%.
- Accommodations: Revenue fell 15% to $252.7 million and operating income fell 41% to $56.3 million. Lower contracted rates, reduced Australian occupancy, and weaker Canadian and Australian currencies weighed on results. Currency translation reduced year-over-year revenue by $25.8 million; segment gross margin fell to 43% from 49%.
- Offshore products: Revenue increased 5% to $212.2 million and operating income increased to $37.3 million from $32.1 million, supported by QCS, acquired in December 2013, and higher subsea sales. Backlog was $578 million at March 31, 2014, compared with $580 million at December 31, 2013.
- The company reported $0.2 million of discontinued-operations income, versus $9.0 million in Q1 2013, which included $393.9 million of Sooner revenue. The Q1 2014 amount primarily reflected adjustments related to Sooner employee awards.
Liquidity, debt, outlook, and risks
At March 31, 2014, cash was $454.9 million, total debt was $973.1 million, and $717.1 million was available under U.S. and Canadian revolving facilities after letters of credit; a separate A$300 million Australian facility was undrawn. The principal debt was $600 million of 6.5% notes due 2019 and $366 million of 5.125% notes due 2023. The company reported compliance with debt covenants and believed available cash, operating cash flow, and borrowing capacity would meet needs over the next 12 months.
Management forecast 2014 capital expenditures of $600–$650 million, including substantial accommodations spending; excluding accommodations, planned well site services and offshore-products spending was about $275 million. Actual spending depended on industry conditions, approvals, schedules, and vendor timing.
The proposed Civeo spin-off was expected by the end of Q2 2014, subject to regulatory review, agreements, market conditions, and board approval. The company anticipated a $650–$850 million distribution from Civeo and planned to refinance facilities and tender for its outstanding notes. These were plans, not completed transactions, and the filing anticipated debt-extinguishment losses from premiums and unamortized issuance costs.
Key risks included volatile oil, gas, and met-coal prices; customer spending decisions; depressed coal prices and natural-gas activity; Canadian and Australian currency movements; accommodations rate and occupancy pressure; and execution and financing of the proposed spin-off. The filing said pending legal matters were not expected to materially adversely affect financial condition, results, or liquidity. Disclosure controls were assessed as effective; a new Australian accommodations accounting system had been implemented in March 2014.
Important facts for investors to verify
- Whether the Civeo spin-off, debt tender offers, and replacement credit facilities closed as planned, and their final terms and costs.
- Whether accommodations pricing, occupancy, and foreign-exchange effects improved or continued to pressure earnings.
- Whether the $600–$650 million capital-spending forecast was achieved and how spending was allocated after the spin-off.
- Whether offshore backlog converted to revenue and cash, and whether working-capital investment moderated.
- Subsequent operating cash flow, share repurchases, debt levels, and covenant headroom.