Oil States International, Inc. — Q1 2016 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2016, compared with Q1 2015. Oil States provides energy products and services through its well site services and offshore products segments. Results were pressured by depressed oil and gas prices and reduced customer spending.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $169.7 million | $337.4 million |
| Gross profit / gross margin | $40.9 million / 24% | $99.7 million / 30% |
| Operating income (loss) | ($20.1 million) | $33.8 million |
| Net income (loss) attributable to Oil States | ($13.2 million) | $19.6 million |
| Diluted earnings (loss) per share | ($0.26) | $0.38 |
| Cash from continuing operating activities | $56.8 million | $114.4 million |
| Capital expenditures | $10.3 million | $38.3 million |
At March 31, 2016, cash and cash equivalents were $43.1 million, total assets were $1.52 billion, and total liabilities were $273.3 million. Total debt and capital leases were $89.7 million, including $89.2 million classified as long-term. The company reported $86.1 million of revolving-credit borrowings, $38.4 million of letters of credit and $364.6 million available to draw; covenant limits constrain availability. It was in compliance with its debt covenants.
Material changes and operating performance
- Revenue fell 50% year over year. Well site services revenue declined 69% to $43.8 million; offshore products revenue fell 36% to $125.9 million.
- Well site services recorded a $32.4 million operating loss versus $9.9 million of operating income a year earlier. Its gross margin was negative 1%, versus 30%, reflecting lower activity and pricing, weak utilization and poor cost absorption. Drilling-rig utilization fell to 6% from 44%.
- Offshore products operating income decreased to $23.3 million from $36.5 million, while gross margin improved to 33% from 29%, reflecting project execution and a lower cost structure. Segment backlog declined to $306 million from $340 million at year-end 2015 and $474 million a year earlier, amid project deferrals and delayed awards.
- Consolidated SG&A declined 16% to $30.0 million; depreciation and amortization declined 7% to $30.4 million. The company recorded $1.6 million of severance and other downsizing charges. Management stated that excluding those charges, continuing-operations net loss would have been $12.2 million, or $0.24 per diluted share.
- Operating cash flow was lower than the prior-year period, but working-capital reductions provided $44.9 million, primarily through lower receivables. Cash increased $7.1 million during the quarter. The company repaid $36.8 million net under its revolver; no share repurchases were made under the current program.
Outlook, risks and other matters
- Management expected 2016 capital expenditures of approximately $45–$50 million, subject to industry conditions, project timing, cash generation and liquidity. Planned funding sources were cash, internally generated funds and revolver borrowings.
- Management expected North American rig counts and well site services demand to remain low in 2016 unless commodity prices improved. It warned that continued low or declining commodity prices could further reduce demand and pricing, harm cash flows, and lead to asset or goodwill impairment charges. Customer liquidity problems, defaults or insolvencies were also identified as risks.
- WTI and Brent averaged approximately $33 per barrel in Q1 2016, below Q1 2015 averages of approximately $48 and $54, respectively. Natural gas averaged $1.99 per mmBtu versus $2.90. Management noted uncertainty around supply-demand rebalancing and commodity prices.
- The company believed cash, operating cash flow and available credit would meet liquidity needs for the next 12 months, but noted that lower trailing EBITDA could further limit revolver availability under the leverage covenant. It reported no off-balance-sheet arrangements.
- FLSA class-action settlement was approved in November 2015; most claims were settled, and remaining individual claims were not expected to be significant. Other ordinary-course litigation was not expected by management to have a material adverse effect, although outcomes were uncertain.
- Disclosure controls were deemed effective. A new financial and inventory accounting system was implemented in the completion services business in January 2016; management said it was monitoring controls around the transition.
Important facts for investors to verify
- Whether weak commodity prices, customer spending and rig activity persist, and how they affect segment margins and offshore backlog.
- Whether the company maintains covenant compliance and how trailing EBITDA changes affect the stated $364.6 million of revolver availability.
- Whether working-capital cash generation can be sustained as receivables and customer payment risks evolve.
- Whether planned 2016 capital expenditures remain within the $45–$50 million estimate and are funded without materially increasing debt.
- Whether continued downturn conditions require asset or goodwill impairments, and whether any remaining employment or other legal claims become material.