Editor's note: A previous version of this article misstated the terms of NOV's spinoff. The Fool regrets the error.
At first glance, Oil States International (NYSE: OIS ) does not look like a winning investment choice.
Year to date, the company's shares have underperformed the S&P 500 by approximately 0.4%. The company's first quarter results weren't that impressive, either.
The company's net income from continuing operations for the quarter came in at $71.3 million, or $1.32 per diluted share; this was down from $93.2 million, or $1.69 per diluted share, reported during the same period last year. Revenue came in at $658.0 million, lower than the $675.5 million, down 2.6% year on year.
Oil States' management blamed these poor results on the unfavorable impact of currency, as well as lower occupancy levels at the company's accommodation business. Lower contracted Canadian lodge rates also affected results.
However, what's really attractive about Oil States as an investment is the company's planned spinoff. Named Civeo Corporation, the spinoff is going to be Oil States' accommodation segment, and the transaction is expected to be completed by the end of the second quarter.
Civeo provides an essential and often overlooked service for the oil industry. The entity provides accommodation facilities for employees in remote regions. This is a service without which the oil industry would find it hard to operate.
When spun off, Civeo will have $224 million in cash, long-term debt of $771 million, and net debt of $547 million, giving it a gearing ratio of 47%.
On a pro forma basis, Civeo's revenue for 2013 came in at $1.04 billion with a gross margin of 53%. The company's pro forma operating margin was 25%, and net income was $185 million for 2013. What's really attractive about the new spun-off entity though is the fact that it will be able to buy up growth through bolt-on acquisitions. Of course, the company could also become the target of a buyout.
Over the long term, it is expected that Civeo will convert to a REIT. This would enable the company to return the majority of its income to investors.
How much could the new entity be worth? Well, during the world-famous Sohn conference held in Manhattan last year, Greenlight Capital's David Einhorn put forward a case that supported a valuation of $118 per share for Oil States and Civeo together. If Civeo was to convert to a REIT, Einhorn placed the price target at closer to $155 a share.
Oil States is not the only oil services company spinning off assets this month, however. National Oilwell Varco (NYSE: NOV ) is planning to spin off its distribution side of the business into a new company called NOW.
NOW is a sort of Wal-Mart for oil companies, stocking and distributing all kinds of equipment for the oil industry. Unfortunately, NOW is the lower margin side of National Oilwell's business. The company has international exposure, however, and will be spun off with a relatively clean balance sheet.
What's more, National Oilwell's management has stated that the stock of the new entity will become a valuable acquisition currency. It would seem as if the new business has plans to grow through acquisitions.
National Oilwell and Oil States are both spinning off attractive parts of their businesses, and this should be good news for shareholders.
National Oilwell is spinning off its distribution business. It will have a clean balance sheet, which will allow the new company, NOW, to buy up growth and drive expansion.
Oil States is spinning off its accommodation business, with the ultimate aim of converting the business into a REIT. This should lead to lucrative dividend payouts for investors.
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