Oil States International, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Oil States provides products and services to the oil and gas industry through Well Site Services, Downhole Technologies, and Offshore/Manufactured Products. Comparisons are affected by the January 2018 GEODynamics and February 2018 Falcon acquisitions.
Financial performance and liquidity
- Revenue: Q3 revenue was $274.6 million, up 67% year over year; nine-month revenue was $814.0 million, up 67%. Q3 product revenue was $120.3 million and service revenue was $154.3 million. Acquisitions and stronger U.S. shale activity were major contributors.
- Profitability: Q3 operating loss was $3.7 million, versus a $18.2 million loss in Q3 2017; net loss was $4.0 million, or $0.07 per diluted share, versus $15.0 million, or $0.30 per share. Nine-month operating income was $4.1 million versus a $60.0 million loss; net loss was $4.8 million, or $0.08 per share, versus $47.0 million, or $0.94 per share. Operating margin was negative 1% for Q3 and approximately breakeven for the nine months.
- Segments: Q3 Well Site Services revenue rose 67% to $128.6 million, but the segment still recorded a $5.5 million operating loss. Downhole Technologies, including acquired GEODynamics, generated $56.6 million revenue and $6.5 million operating income. Offshore/Manufactured Products generated $89.4 million revenue and $7.1 million operating income.
- Cash flow and capital spending: Nine-month operating cash flow was $80.1 million, compared with $76.3 million a year earlier. Investing cash outflow was $446.8 million, including $379.7 million for acquisitions and $71.3 million of capital expenditures. Financing activities provided $348.6 million. Cash declined to $36.3 million from $53.5 million at year-end 2017.
- Liquidity and debt: Current assets were $565.6 million and current liabilities $185.9 million. Total debt and capitalized leases were $354.4 million; stockholders’ equity was $1.45 billion. The company reported $160.6 million of revolver borrowings, $23.0 million of letters of credit, and $149.8 million available to draw, subject to covenant limits. It was in compliance with debt covenants at quarter-end.
Changes versus prior comparable periods
- Revenue growth and improved operating results reflect acquired businesses and increased U.S. completion activity; they should not be read as purely organic growth. Nine-month Well Site Services operating losses narrowed to $14.0 million from $50.2 million.
- Debt increased substantially following acquisitions and financing transactions. The company issued $200 million of 1.50% convertible senior notes due 2023 and amended its revolving facility, extending maturity to January 2022.
- Currency translation produced a $11.2 million nine-month other comprehensive loss, compared with $13.5 million of other comprehensive income in the prior-year period.
Outlook, commentary, risks and unusual items
- Management expected 2018 capital expenditures of $85–$90 million, primarily for completion equipment, Downhole Technologies facilities and equipment, and Offshore/Manufactured Products assets. Funding was expected from cash, operations, and revolver availability.
- Offshore/Manufactured Products backlog was $175 million at September 30, up from $165 million at June 30; Q3 book-to-bill was 1.1x. Management said deepwater award potential appeared to be improving, while bidding and orders remained slower than in prior years. Of $71.2 million of disclosed remaining performance obligations for contracts longer than one year, the company expected to recognize about 18% in 2018 and 57% in 2019.
- Management cited higher oil prices and U.S. shale spending as supportive, but warned that Permian pipeline constraints and resulting price differentials could curb customer activity. Other risks include oil and gas price volatility, the cyclical industry, tariffs and raw-material costs, foreign exchange, litigation, and acquisition integration and retention.
- Unusual reported items include Q3 patent-defense costs of $3.5 million and a $2.6 million reserve for prior-year Fair Labor Standards Act settlements; nine-month amounts were $5.9 million and $3.3 million, respectively. A $5.8 million discrete tax benefit reflected revised estimates under U.S. tax reform guidance. Nine-month results also included a $3.6 million Hurricane Harvey insurance settlement gain and $2.6 million of transaction-related costs.
- Oil States disclosed a voluntary report to U.S. Customs and Border Protection concerning potentially applicable anti-dumping and countervailing duties on certain Chinese steel products historically imported by GEODynamics. The seller provided certain indemnification rights, and amounts due under the $25 million seller promissory note may be subject to set-off. The company said the ultimate liability from pending legal matters was not expected to materially affect its financial position, results, or liquidity.
Important facts for investors to verify
- How much of reported revenue and operating improvement is attributable to acquisitions versus organic activity, and whether acquired operations meet expected performance and integration goals.
- Available revolver capacity and covenant headroom, given that borrowing availability is constrained by maintenance covenants; monitor debt service and floating-rate exposure.
- Progress on the GEODynamics trade-duty review, related indemnification or promissory-note set-off, and the FLSA and patent-defense matters.
- Whether the $175 million offshore backlog converts on schedule and whether planned capital spending and operating cash flow support liquidity needs.
- Effects of Permian takeaway constraints, tariffs and input costs, commodity-price changes, and foreign-exchange movements on customer demand and margins.