Oil States International, Inc. — Q2 2011 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2011. Oil States supplies accommodations, offshore products, well site services and tubular services to the energy and mining industries. Results are unaudited; interim results are not necessarily indicative of full-year performance.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $820.3 million | $594.5 million | $1,580.8 million | $1,126.9 million |
| Operating income | $115.2 million | $57.8 million | $209.9 million | $117.6 million |
| Net income attributable to Oil States | $74.2 million | $37.5 million | $136.3 million | $77.7 million |
| Diluted EPS | $1.34 | $0.71 | $2.48 | $1.49 |
| Gross margin | 24.8% | 21.0% | 24.7% | 22.3% |
| Operating margin | 14.0% | 9.7% | 13.3% | 10.4% |
- Cash flow and investment: First-half operating cash flow was $96.6 million, versus $85.9 million. Capital expenditures were $230.3 million, versus $76.1 million, implying operating cash flow less capex of negative $133.6 million. Management said working capital absorbed $148.2 million, primarily reflecting tubular-services investment, Canadian receivables and offshore-products raw materials. Cash ended at $123.3 million.
- Debt and liquidity: Total debt and capitalized leases were $1.077 billion at June 30, compared with $912.9 million at year-end 2010; cash-adjusted debt was approximately $954 million. The company issued $600 million of 6.5% senior notes due 2019, using about $515 million of net proceeds to repay secured credit-facility borrowings and about $75 million for general corporate purposes. It reported $727.4 million available under U.S. and Canadian facilities, plus A$75 million available under its Australian facility, and compliance with debt covenants. The $175 million principal amount of 2.375% convertible notes was classified as current because conversion thresholds were met; management did not expect significant conversions over the following 12 months.
- Segments: Q2 revenue increased across all segments: well site services 36%, accommodations 66%, offshore products 24%, and tubular services 31%. Accommodations benefited from recent acquisitions, added oil-sands room capacity and stronger Australian margins. Offshore-products backlog rose to $518.6 million from $215.7 million a year earlier. Tubular-services growth reflected higher drilling activity and shipments.
Material changes and management commentary
- Revenue increased 38% in Q2 and 40% for the first half year over year; attributable net income nearly doubled in Q2. Management cited higher North American drilling activity, stronger utilization and pricing in rental tools, accommodation capacity and acquisition contributions, and higher tubular shipments.
- Q2 consolidated gross margin improved to 25% from 21%, mainly from a greater share of accommodations revenue and improved Australian accommodations margins. Offshore-products Q2 margin declined to 25% from 27% due to product mix and lower service content; tubular-services margins remained low at 6%.
- Net interest expense rose to $12.5 million in Q2 from $3.5 million, and to $22.8 million in the first half from $7.0 million, reflecting higher debt, the new notes and financing-cost amortization. The first-half effective tax rate fell to 27.6% from 30.0%, largely due to foreign income taxed at lower statutory rates.
- Management expected approximately $650 million of 2011 capital expenditures, for accommodations expansion, rental tools, mobile camps and ongoing projects and maintenance. It believed cash, operating cash flow and available borrowings would meet liquidity needs for the next 12 months. No earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- Demand is cyclical and sensitive to commodity prices, customer capital spending, economic conditions and drilling activity. The company cited continuing delays and uncertainty in Gulf of Mexico drilling from post-Macondo regulatory requirements and permitting.
- Foreign exchange affects reported results, particularly Canadian and Australian operations. A 1% increase in short-term rates was estimated to raise annual interest expense by approximately $3.0 million on floating-rate borrowings at period-end.
- Management expected pending legal claims, net of insurance or indemnification, not to have a material adverse effect, while noting outcomes cannot be assured. The new notes carry restrictive covenants; failure to complete the required exchange offer on time could trigger additional interest, capped at 0.5% annually ($2.6 million maximum).
- The company reported effective disclosure controls and no significant change in risk factors from its 2010 Form 10-K. The filing describes no formal earnings outlook.
Important facts for investors to verify
- Whether offshore backlog converts into revenue and margins, and whether drilling and accommodation demand sustains current growth.
- Execution, funding and returns on the $650 million capital-spending plan, including its effect on working capital and cash flow.
- Potential timing and cash consequences of conversion of the 2.375% notes, which were classified as current.
- Available borrowing capacity and covenant compliance as investment spending and debt service continue.
- Exposure to commodity-price cycles, Gulf of Mexico permitting and regulation, steel/OCTG pricing, interest rates and foreign exchange.