Oil States International (OIS) Q3 2020 Earnings Call Transcript

Oil States International (OIS 0.74%)
Q3 2020 Earnings Call
Oct 30, 2020, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Oil States International third-quarter 2020 earnings conference call. My name is Adrienne, and I'll be your operator for today's call. [Operator instructions] I will now turn the call over to Ellen Pennington. You may begin.

Ellen Pennington -- Counsel and Assistant Corporate Secretary

Thank you, Adrian. Good morning, and welcome to Oil States' third-quarter 2020 earnings conference call. Our call today will be led by Cindy Taylor, Oil States' president and chief executive officer; and Lloyd Hajdik, Oil States' executive vice president and chief financial officer. Before we begin, we would like to caution listeners regarding forward-looking statements.

To the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law. No should so assume that these forward-looking statements remain valid later in the quarter or beyond. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K along with other SEC filings. This call is being webcast and can be accessed at Oil States' website.

A replay of the conference call will be available one and a half hours after the completion of this call and will be available for one month. I will now turn the call over to Cindy.

Cindy Taylor -- President and Chief Executive Officer

Thank you, Ellen. Good morning to each of you, and thank you for joining us today to participate in our third-quarter 2020 earnings conference call. As we discussed on our second-quarter earnings call, we believe that U.S. shale-driven activity, while at historic low levels was stabilizing as we entered the third quarter, with crude oil prices improving off the horrendous levels witnessed in the second quarter.

Some of the early quarter momentum stalled as COVID cases began to increase in several jurisdictions. As a result, U.S. completions declined early in the third quarter, but steadily improved, albeit off a low base in the latter half of the quarter, ending the quarter down 11% sequentially in terms of the average frac spread count. Crude oil prices stabilized around $40 per barrel for much of the third quarter and now tend to trade around COVID-19 trends and stimulus talks in Washington.

In conjunction with our discussion of the quarter, we plan to update you on our actions taken to shore up liquidity, give you our thoughts on near term market conditions and summarize our efforts to mitigate costs both capital and operating as we began to navigate the early stages of a U.S.-led market recovery. Our third-quarter results were generally in line with our internal forecast and limited guidance that we were able to provide other than our offshore manufacture product revenues, which were below our previous guidance due to delays in customer activity and timing of orders. During the third quarter, our well site services revenues were up 3% sequentially, and EBITDA margins improved. In our downhole technology segment, revenues also recovered and were up 25% sequentially, with EBITDA margins exiting the quarter in positive territory.

In contrast, revenues and our offshore manufacture product segment decreased 17% sequentially, due primarily to weaker connector products sales. Segment backlog on September 30, 2020, totaled $227 million, a decrease of 3% sequentially. Our segment bookings increased sequentially totaling $70 million, yielding what appears to be an industry-leading book-to-bill ratio for the third quarter of 0.9 times. During stress periods in our business, we know that the immediate focus needs to be on the preservation of liquidity and the management of variable and fixed costs.

To that end, we had an exceptional quarter generating $87 million of cash flow from operations, with our significant free cash flow we materially delevered during the quarter, reducing our total net debt by $92 million. We believe that we have managed the company effectively during a very difficult period and will continue to closely manage our debt, working capital, and cash flow generation in the quarters to come. Lloyd will now review our consolidated results of operations and financial position in more detail before I go into a discussion of each of our segments.

Lloyd Hajdik -- Executive Vice President and Chief Financial Officer

Thank you, Cindy. And good morning, everyone. During the third quarter, we generated revenues of $135 million, while reporting a net loss of $20 million or $0.33 per share. Our revenues decreased 8% sequentially.

But our EBITDA improved significantly due to cost savings measures implemented. Our third-quarter EBITDA ended in positive territory and totaled $0.1 million. As Cindy mentioned, we generated significant free cash flow during the quarter with $87 million in cash flow from operations, offset by $2 million in capital expenditures. We also sold idle property and equipment during the quarter, generating $4 million in cash proceeds.

We purchased $17 million principal amount of our convertible senior notes at a 45% discount to the par value, and repaid $52 million in outstanding revolving credit facility borrowings, thereby partially deleveraging our balance sheet. For the third quarter, our net interest expense totaled $3.5 million, of which $1.9 million was non-cash, amortization of debt discount, and debt issue costs. At September 30, our net debt to book capitalization ratio was 13%. And our liquidity totaled $164 million based upon the methodology outlined in our amended credit facility.

Our total net debt declined $92 million during the third quarter, inclusive of the convertible senior notes purchases and the repayment of the borrowings outstanding on a revolving credit facility. At September 30, our net working capital, excluding cash and the current portion of debt and lease obligations, totaled $215 million compared to borrowings outstanding under our revolving credit facility, which totaled $19 million. In terms of our fourth-quarter 2020 consolidated guidance, we expect depreciation and amortization expense to total $24 million, net interest expense to total $3.2 million, of which approximately $1.8 million is non-cash and our corporate expenses are projected to total $8.5 million. In this environment, we expect to invest approximately $15 million in total CAPEX during 2020, which is down over 70% from 2019 spending levels.

At this time, I'd like to turn the call back over to Cindy, who will take you through the operating results for each of our business segments.

Cindy Taylor -- President and Chief Executive Officer

Thank you, Lloyd. In our offshore manufacture product segment, we generated revenues of $79 million and segment EBITDA of $9 million during the third quarter. Revenues increased 17% sequentially, due primarily to a slowdown in our connector product sales. Segment EBITDA margin was 12% in the third quarter of 2020, in line with our guidance, compared to 16% achieved in the second quarter.

As I mentioned earlier, orders booked in the third quarter increased sequentially totaling $70 million, with a quarterly book to bill ratio of 0.9 times. At September 30, our backlog totaled $227 million. For over 75 years our offshore manufacture product segment has endeavored to develop leading-edge technologies while cultivating the specific expertise required for working in highly technical, deepwater, and offshore environments. Recent product developments should help us leverage our capabilities and support a more diverse base of energy customers going forward.

In 2020, we are bidding on potential award opportunities that support subsea floating and fixed production systems, drilling, military, subsea mining, and wind energy clients globally, while our 2020 bookings will be lower than the levels achieved in 2019, we do expect our book to bill ratio for the year to average 0.8 times or higher. In our well site services segment, we generated $37 million of revenues with near breakeven segment EBITDA. The 3% sequential revenue increase was driven by better U.S. land completion activity later in the third quarter, partially offset by lower Gulf of Mexico contributions due to third-quarter storm activity and project timing.

International and us Gulf of Mexico market activity comprised 24% of our third-quarter completion services business revenues, which was down sequentially due to the significant number of named storms in the Gulf, which led to activity delays and well shut-in. We are focused on streamlining our operations and pursuing profitable activity and support of our global customer base. We will continue to focus on core areas of expertise in this segment and are actively developing and conducting field trials of new proprietary service offerings to differentiate Oil States' completions business. In our downhole technology segment, we improved sequentially with a segment revenue increase of 25%, and a much smaller EBITDA loss recognized in the third quarter.

Incremental EBITDA margins were strong due to cost savings measures implemented at the segment level. We continue to develop the old trial and commercialize new products in the downhole technology segment. Sales trends for our STRATX, and VaporGun integrated gun systems and addressable switches are gaining improved customer acceptance following their respective commercialization. We have also announced the commercialization of ancillary perforating products, including a new wireline release tool and two new families of shaped charge technology.

Our product development efforts are designed with our wireline and E&P customers in mind, where we strive to provide them with flexibility, improved functionality, and increased performance while ensuring the highest level of safety and reliability. COVID-19 disruptions continue to hamper activity in domestic and international markets. The third-quarter 2020 U.S. rig count average was 254 rigs, which was down 35% sequentially.

In contrast, the industry experienced an 11% sequential decrease in the average us frac spread count. However, activity did improve light in the third quarter, which favorably impacted all of our segments with short-cycle U.S. shale-driven exposure. As we are now a month into the fourth quarter, the frac spread count has increased by about 49 spreads are roughly 60% since mid-September.

Its increase gives us some optimism that the fourth quarter is setting up more favorably for our U.S. shale-driven product and service offerings. Activity in the U.S. shale basins has historically been the first market to decline in a downturn.

But it's also the first to show signs of recovery. Crude oil prices seem to be range-bound around $40 per barrel, and there is some improvement in the natural gas outlook with the front end of the carb near $3 per mmBtu. Given current market trends, we project our fourth-quarter revenues and our offshore manufacture product segment to range between $77 million and $83 million, with segment EBITDA margins expected to average 10% to 12% depending upon product and service mix, along with absorption levels. Given improvements in the frac spread count over the last several weeks, we expect our well site services and downhole technology segments to grow sequentially in the fourth quarter and produce positive EBITDA results unless we witness extended holiday downtime, which is not currently expected.

As a reminder, our cost reduction initiatives have included the following, direct operating costs have been reduced in line with activity declines, headcount has been reduced approximately 32% since the beginning of the year, we have reduced planned CAPEX by over 70% year over year, and discretionary spending has been substantially reduced or eliminated. As we discussed on our second-quarter earnings conference call, we estimated that we would reduce 2020 costs by approximately $265 million, of the total roughly 85% is the cost of goods sold and the remainder relates to SG&A. We continue to believe that 20% to 25% of the cost reductions are fixed in nature. Fortunately, we believe activity declines has slowed materially such that additional reductions of significance should not be necessary.

Now I'd like to offer some concluding comments. We believe that we have made substantial progress in terms of shoring up our liquidity with exceptionally strong third-quarter free cash flow generation, coupled with associated debt reduction initiatives. As I mentioned earlier, we believe that we have stabilized the company during a very difficult period. And we will continue to manage our debt, working capital, and cash flow generation in the quarters to come.

Well site will continue to conduct safe operations, and we'll remain focused on providing technology leadership in our product lines with value-added products and services to meet customer demands globally, as we began to recover from the harsh effects of the COVID-19 pandemic response, which dramatically reduced travel and business activity, thereby depressing global oil demand and correspondingly demand our products and services. That completes our prepared comments. Adrian, would you open up the call for questions and answers at this time, please?

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question comes from Sean Meakim from JP Morgan. Your line is open.

Sean Meakim -- J.P. Morgan -- Analyst

Thank you. Hey. Good morning.

Cindy Taylor -- President and Chief Executive Officer

Good morning, Sean.

Sean Meakim -- J.P. Morgan -- Analyst

So, Cindy, Lloyd, obviously a lot of progress on the balance sheet, it's been a clear focus that that's down 60% in a year. With where you stand today, as you note in prepare comments, always looking to do more. But at this stage, I mean, is there much more that you can or should be doing in the next, call it four to six quarters beyond waiting on the macro to give you more volume? It seems to me like we've done probably most of what needs to be done from a balance sheet perspective. And you position yourself to, like I said, kind of weighted out until the macro comes back to you.

Is that a fair assessment?

Cindy Taylor -- President and Chief Executive Officer

Hi, Sean. Cindy, here. I'll let Lloyd elaborate that I think you know, we have had an acute focus on managing working capital through this downturn and it's been -- and our customers are heavily, heavily challenged in this environment, both in terms of CAPEX spend, as evidenced by the activity declines, as well as many that have declared bankruptcies, we've had receivable write-offs. But I'll say despite that, we've really had significant free cash flow generation and to some degree had a very clean set now of receivables to manage through.

We're going to continue the laser focus we have. But to your point, I think at this point, the keys for me are continue to focus, of course, but we need to see EBITDA improvement. And that will probably drive the near term, if you will, in terms of cash flow from operations and needs to quite frankly. Additional levers will, of course -- the realization of the cost initiatives that we put in place.

And sometimes those efforts or math, if you will, i.e., well site services and downhole still slightly below breakeven EBITDA. But if you look at the incremental, you'll really see the benefits of these cost reduction initiatives. But my caution is, again, our guidance while cautious in light of this COVID-19 environment that we're dealing with, and the associated demand destruction is far more favorable, U.S.-led outlook going into Q4 and into 2021. With that, we're not going to alleviate a lot more working capital.

I'm looking at Lloyd to give you additional color on that. But again, I think the answer from here is a profitable operation. Go ahead.

Lloyd Hajdik -- Executive Vice President and Chief Financial Officer

Yeah, Sean. She's exactly right. I mean, we've harvested or benefited so many times working capital in the first nine months. Expect to be pretty flat for the fourth quarter.

And you know, I would say if you look out to 2021 with some improvement that would probably build some working capital. But they are very manageable. Next steps are obviously looking at working with our banks on the credit facility. We have the amendment that goes through the end of March.

So you know what the new credit facility or an amendment credit facility would look like post-March, but the positive in that is we're pretty comfortable with our debt levels today. We paid down to $19 million outstanding on the revolver and the nearest maturity date is on the converts not 'til February 2023. So all in all, we're very comfortable with our leverage levels and could be essentially undrawn on the revolver. By the time that the amendment expires, we put a new credit facility in place or, and then the existing credit facility.

Sean Meakim -- J.P. Morgan -- Analyst

That's right. I think that's really, that's really helpful. I appreciate all the detail. Maybe on offshore manufacturing products, a pretty good book to bill, probably the best we've seen in the group this quarter.

That's also a function of the denominator, not just the numerator, of course. And so you know, your peers have pretty brutal results from an order perspective. And some seem a little more optimism, maybe going forward, maybe for the fourth quarter, and we'll see for '21. Cindy, how do you feel about a bottoming for orders, at least in the near term, and maybe even a real inflection isn't on the horizon? Just your thoughts around order cadence would be helpful.

And even outside of your traditional oil and gas customers, great to hear about any other areas that you'd be focused on? Obviously, you've had some good contacts on the military end, and then even things around New Energy offshore-related, love just to get a good recap around those opportunities, I think they'll be helpful.

Cindy Taylor -- President and Chief Executive Officer

Well, that's a fantastic comment and one that is pretty critically important to us at this point in time. And, you know, we experienced many of the same trends, of course, that our competitors do. But if I could say, if you step back, there's no one look-alike between the product offerings, generally speaking, in this space, and we have what I would characterize as a bit more diversified product offering that has helped our book to bill ratio. Now no question, the denominator is a factor here.

But whatever math you look at, we're in a historically draconian environment. But I think that the diversification of our customer base helps. And if I look back on the year, our bookings are relatively better, part of that is driven by military orders as an example, which are outside core oil and gas. And we did have an order that we announced in Q2 that is more of an R&D project around subsea mining.

But I think these are very indicative of the potential that we and others in the industry have. And it's both for us, you know, if you think we're offshore experts, we are floating in fixed production platform experts, riser experts. So that's going to -- or in the alternative space, it's going to orient it more and toward, in this case, subsea mining and you say, well, why mining, if mining for rare earth minerals, which are the foundation of any shift toward alternatives over the long term. And you can either try to mine 90% out of the ground, probably in China and other regions, or you're going to look for other sources, one of which is offshore.

But I still consider those conversations while beneficial to us, they are long range in nature. But they have very good potential both on the wind side and the subsea mining side. When I give you maybe a greater sense of optimism on bookings relative to the rest of the industry and also look to Q4, which is more oriented toward the core, subsea driven projects that we have on our radar screen, now that we always hedge a bit and say that these projects going to come into our bookings in Q4 or in early 2021. We don't really know the answer to that.

But we're actively bidding on a number of subsea projects, most of which, not surprisingly are in Brazil. And that's what's on the radar screen. We also announced another project, a large project in the second quarter, which was core oil and gas, and it happened to be in the Gulf of Mexico. So we're beginning to see what this is, it's the prioritization of capital by our customer base and the region's they expect to focus their capital over the long term.

In markets like this, there's always delays and award opportunities and bookings. And we've seen that, but still on a relative basis, this is an outstanding business for us and it will recover over time.

Sean Meakim -- J.P. Morgan -- Analyst

Thanks, Cindy. That was really helpful.

Cindy Taylor -- President and Chief Executive Officer

Thanks, Sean.

Operator

And our next question comes from Stephen Gengaro from Stifel. Your line is open.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Thanks, and good morning.

Cindy Taylor -- President and Chief Executive Officer

Hi, Stephen.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

So I guess two things. Just one from a balance sheet perspective. And I know you talked a little bit about this. As you think about the next 12 months and you look at kind of expectations for free cash flow, Lloyd how should we be thinking about working capital? And I know a little bit of it depends on the revenue growth, but is there anything that is different from sort of the parameters that are driving working capital that we should be considering into like free cash next year?

Lloyd Hajdik -- Executive Vice President and Chief Financial Officer

No. Not more recent today, Stephen, if there's an increase in the operation results, we'll have increases in receivables. So I call it traditional kind of working capital build that very, that's a very moderate, and its short cycle. So it turns pretty quickly as well.

So it's not a significant cause of cash or liquidity in any one period of time.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

OK. Thanks. And then second, as you think about the consolidation on the E&P side, I've sort of gotten varying responses from different service companies, but how do you think about your positioning, particularly in the U.S. land market, as you see more consolidation based on customer relationships and probably what you've seen in the past as well? How should we think about that impact on you?

Cindy Taylor -- President and Chief Executive Officer

Well, obviously, we reflect on that heavily. There have been a number of significant, obviously, announcements of consolidation as we go forward. These are very strong companies that are getting stronger. And I like to say, in past years, and maybe conventional wisdom would always say that, when you put two together, you rarely get the sum of the two, it's awesome that there's lesser activity.

I do think this is different because the industry widely acknowledges the need for consolidation to strengthen companies and strengthen returns on invested capital. And if you look through the type of announcements that have been made, a lot of these are the majors of the very large company gaining exposure to basins that they really didn't have exposure to before, particularly obviously, the Permian in the lower 48. And so our thinking today is that there's likely to be a reallocation of capital into these operating areas where some of these companies really didn't have a strong presence before. And so whether that is a flat type investment profile or growing, I do think that its net-net not negative at this stage, but I also acknowledge that no one's released their spending plans or capital allocation.

And these are announced deals, they hadn't even closed yet. But I do think this might be a bit of a difference. If you look at the specific combinations we're talking about, it's going to come down to what is your opportunity set and where do you choose to allocate capital, but I think we all agree that the lower 48 has some good opportunities going forward.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Great. Thank you. And then just one final one, and that is when we think about the cost out initiatives that have gone and you think about your incremental margin potential, and if we think about over 12 months and quarters can be bumpy. But any change in any specific segment when we figure out incremental margin capabilities relative to history because of what we've seen on the cost side?

Cindy Taylor -- President and Chief Executive Officer

Well, I mean, obviously I am going to focus you toward probably our U.S.-centric businesses right now because that's where we're seeing indications of an uplift in activity as evidenced by the frac spread counts. I don't think that's going to shock you. But I go back to it, even though it's hard and some of the performance is masked even in Q3, but you saw an instance is greater than 100% incrementals, which we know are not sustainable. But what that means is on flat to small growth in revenues, we've been able to deliver either reduced EBITDA losses or positive EBITDA gains, because of cost initiatives.

As we actually get top-line growth, those incremental should be strong relative to historical trends. Now I have to caution a bit and say, there's always been significant pricing pressure as well. But I think the cost-out programs have exceeded the pressure on the top line at this point in time.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Great. Thank you for the color.

Cindy Taylor -- President and Chief Executive Officer

Thanks, Dave, and good talking to you.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Thanks.

Operator

And our next question comes from Kurt Hallead from RBC.

Kurt Hallead -- RBC Capital Markets -- Analyst

Hey. Good morning. Can you hear me OK?

Cindy Taylor -- President and Chief Executive Officer

Oh, yeah. I think we talked over each other. Sorry about that.

Kurt Hallead -- RBC Capital Markets -- Analyst

Cindy, thanks. Lloyd, thanks for all the incremental color. So might as well just touch on the downhole technology side, you did reference some customer acceptance for STRATX and vapor. And that talked about some opportunities on not cheap, cheap charges.

So I wonder if you might be able to delve into that just a little bit more. And what kind of customer acceptance, how should we or how could you categorize that for us to help us understand the traction that you're getting?

Cindy Taylor -- President and Chief Executive Officer

I'd be happy to and just recall, you know, particularly with the integrated gun offerings that we have, they were really introduced being field trials light in 2019, early 2020, when we had our first-quarter call, we actually commented that we believe that we were gaining share in the integrated offerings, because of our revenue growth sequentially compared to industry metrics, if you will. And so again, thought we were gaining share, then we get hit in the face with COVID, and you have an absolute shutdown of activity in Q2 to horrendous levels where it was catching a falling knife. So I don't think you can look at really Q2 or Q3 is indicative of market share. Just because-and in fact, Q3 saw the liquidation of a lot of what we'll call standard conventional guns, at very, very low prices and as included just trying to say the market is going to shift to an integrated offering.

Over time, our customers are trying to remain modestly active, but incredibly price-sensitive. And so we liquidated some inventory, as did others in the space. But generally, no either losses are no margins. And if you'll notice, we wrote down some inventory during the quarter that ties back to the market conditions that you actually saw a shift and Q3 away from and I think you're hearing this from other competitors in this space from the integrated offering to just what is the cheapest thing that I can find.

And to the extent that our customers are holding inventory, switches, charges, anything else, they actually want to get those out of their own inventory, to create working capital for cash flows. And so it was, again, not a market, that's indicative of the future. The bright side of that is, a lot of those conventional items are being or have been lit partially liquidated in Q3, we believe and this is very predicated on customer conversations, and in fact, a handful of orders that in Q4 is going to shift back more toward the integrated offering, specifically for us, both the VaporGun and STRATX products that we offer to the marketplace. So just in terms of market share, I'll just generally say we really made a little stabilization of the market to even measure market share, but I can unequivocally say I expect to sell more integrated guns in Q4 than I did in Q3.

Kurt Hallead -- RBC Capital Markets -- Analyst

OK. That's a great color. What kind of feedback are you getting from the customer with respect to your integrated gun offering, say relative to some of the competition? I mean, are they all the metrics, you know, fairly comparable, or is there one specific or a few specific things that really make you know, the STRATX or vapor stand out?

Cindy Taylor -- President and Chief Executive Officer

Well, again, they're two different offerings for really two different customer types. And again, the VaporGun, quite frankly, was developed with our wireline partners, generally, in the consideration, if you will, and it was designed with the thought that ideally or we really want that customer to do cold geo offering, which includes our short charges, our switches, etc. But to the extent again that you have other relations, historical relationships or importantly, existing inventory, we're giving those wireline companies that can't do it to effect that desire, if you will. STRATX is a highly integrated system, we really improve the reliability that I pay for -- the market will trend to that type of offering over time.

It may be a process. But it's a highly integrated, highly reliable system that we improve each and every month. And so I think it will be very competitive with the best-integrated offerings that are out there.

Kurt Hallead -- RBC Capital Markets -- Analyst

OK. That's great. And then you have some significant overall debt and net debt reduction. I would imagine you continue to expect to be free cash flow positive, even going into 2021.

So just say the primary use of cash going forward is still going to be geared toward the debt reduction?

Lloyd Hajdik -- Executive Vice President and Chief Financial Officer

Yes. For capital allocation purposes, yes, Kurt. Correct.

Kurt Hallead -- RBC Capital Markets -- Analyst

And the other general magnitude of what you think you could reduce that by into the next year?

Lloyd Hajdik -- Executive Vice President and Chief Financial Officer

Yeah. It really, again, depends upon our level of EBITDA in '21, which we're just now going through the budget process on, so stay tuned.

Kurt Hallead -- RBC Capital Markets -- Analyst

OK. Fair enough. Thank you.

Cindy Taylor -- President and Chief Executive Officer

Thank you, Kurt.

Operator

And our next question comes from Ian Macpherson from Simmons. Your line is open.

Ian Macpherson -- Simmons Energy PLC -- Analyst

Thanks. Good morning, Cindy. Lloyd, congratulations on the sweeping deleveraging. It really is impressive what you've accomplished this year in such a horrible context.

Back to the consolidation question earlier, right, the real impulse for upstream consolidation, the need for better scale, you know, and absorption in a market that's been redefined smaller. The details are different for service, but the general impulses equivalent for service and you have under scaled market cap as well. So there's a need for consolidation everywhere. What are your thoughts on that as it applies specifically to the Oil States? And you know, do you have any interest in transacting in corporate M&A, or don't you do? And if so, what might that look like?

Cindy Taylor -- President and Chief Executive Officer

I think you know me very well. I've been in this business a long time. I know the competitive landscape very well; I do absolutely agree with your comments and terms of need for scale. You know, quite frankly, that was one of the reasons, as well as the incredible technology and dice and exposure that [Inaudible] offered is while we did that transaction a couple years ago.

And so our eyes and ears are open all the time to do what is right for our shareholders. And if that means trying to do a transaction ourselves fine, it's being open to others, fine, do what's right for your shareholders. I have said and really continue to say that I think there are still some challenges to overcome. And most of that is the balance sheet trade that so many companies have, you see the trading levels of debt, which are indicative of problematic situations for many companies, and outlook on the balance sheet, and until you find a way to get past that.

And sadly, it's in an environment where nobody wants to allocate capital to conventional energy companies. And so it's just hard to get past the balance sheet differences among companies to possibly do deals that should be done. I can just assure you and any of my shareholders on this call, though, we are absolutely eager to improve the outlook for positive returns to our shareholders, and that might necessitate M&A. I think it's an obvious comment.

We look at it every day, every week, every month. I just view that the opportunity set may be so delayed a period of time until you see more balance sheet prepare. Its simple answer. Lloyd, do you have any incremental comments?

Lloyd Hajdik -- Executive Vice President and Chief Financial Officer

No. I would just say that any kind of combinations or the deals you're looking at could be for stock anyway.

Cindy Taylor -- President and Chief Executive Officer

Yeah. Exactly. Very good comment. It's going to be, but nonetheless, you got to take out debt.

Lloyd Hajdik -- Executive Vice President and Chief Financial Officer

That's right.

Cindy Taylor -- President and Chief Executive Officer

OK. So we're going to have time to control, but nonetheless, as we have done in the past and will continue today, we really want to focus on technology, asset, diversification, differentiation, and more of an asset-light model, as we go through this.

Ian Macpherson -- Simmons Energy PLC -- Analyst

That all make sense. And, I mean, no one's redefined their cap structure for the better than you have over the course of this year. So it certainly puts you in a better starting block position. Switching gears, I might have missed it, but it sounded like you gave us the customary, you know, pretty specific guidance for LNP, but not for well site and downhole.

Unless I missed it, but I guess we should follow activity, higher revenues better, decent incrementals positive EBITDA in Q4, some fashion for both of those is --

Cindy Taylor -- President and Chief Executive Officer

Yeah. We're not ready to give specific revenue and EBITDA percentages yet. But what I did say is we expected sequential revenue improvement in those segments, as well as positive EBITDA in Q4. With that caveat that everybody is going to give you, we are currently not expecting any material holiday shutdowns, as we've seen in past years.

But if we complain through that, it'll should be an improved quarter for our U.S.-centric operations.

Ian Macpherson -- Simmons Energy PLC -- Analyst

Got it. Thanks so much.

Cindy Taylor -- President and Chief Executive Officer

Thank you, Ian.

Operator

And our next question comes from Connor Lynagh from Morgan Stanley. Your line is open.

Connor Lynagh -- Morgan Stanley -- Analyst

Yeah. Thanks. I was wondering. We've kind of been approaching this in a few different ways.

And I appreciate the outlook for next year is very uncertain. Could you maybe just sort of help us think through the big moving pieces in sort of a bridge from 2020, free cash flow to 2021 free cash flow? Working capital sounds like the big variable that's obviously dependent on activity, but you know, tax refunds, CAPEX any other you know, restructuring costs, things like that? Could you help us think through what some of the big uses of cash have been this year and how those would look next year?

Cindy Taylor -- President and Chief Executive Officer

Yeah. I'll try to do that. The first quarter historically in 2020 has compensation liquidations that are a headwind to positive working capital generation. Those are traditional now, obviously, in this environment, thus are much smaller.

So we don't expect much in Q1 relative to what we had in 2020. I think Lloyd guided you to our 2020 CAPEX, the end about $15 million. And as we go into 2021, we're going to look at comparable levels to that, again, it will be market dependent upon timing of any activity recovery among our business lines. And we're going to be quite frankly, very, very cautious about that allocation of capital, based on the visibility, which U.S.

visibility is short, unlike offshore products, where you know, backlog will help us dictate some of our CAPEX means, but those are the puts and takes. But again, we'll give you more guidance in February when it goes through it on CAPEX. But at this point, we're not expecting a huge need for CAPEX, albeit at the allocation between segments might be different, just depending upon the opportunity set that we have. Clearly, you know, our revenues are down from 2019 to 2020, that has led to liquidation if you will of working capital, I think we've done better than that.

Just in terms of squeezing out some receivable liquidation as we've gone. That clearly, we've paid our payables in a very timely manner. So nothing we've done is really extended out the payables landscape to create that working capital if you will. We've been very transparent and clear in our Q2 and Q3 documents, that the magnitude of the Cares Act benefit was $41 million.

So it had a very favorable impact to our cash flow. Now that is nothing more than monetization of an asset on our balance sheet. But previously, when the administration took over, they limited the ability to carry back those NOLs. But obviously, that was the point of the Cares Act.

So it's just a monetization of an asset we had. I hope I've answered your questions and all I said, cost out certainly have helped, but it's in an environment and it's been harsh revenue declines. So as we recover back those revenues, particularly if you get back to 2019 levels, we need to be looking at the roughly 20%, 20% of cost out of the system that we think are going to be permanent. And therefore, again, your incrementals improve that I think everybody in this industry, clearly us included, are looking for, obviously, an improved outlook, you know, with the COVID induced demand destruction has been horrific.

And I'll also tell you, I've thought about this because it's not lost, should not lost on anybody, if you watch the news every day, that we're back into yet another kind of COVID-induced concern, if you will. I think the difference is, I think we've learned how to work through a lot of the COVID situation and still keep your doors open. I know my attitude about the way I conduct my daily life, today is much more informed than it was in April and May. And you look back, we had a horrific 30% decline, nearly 25% to 30% decline in demand.

Because, you know, we didn't know if we're picking up germs off of tables and waterfalls, you know, it is different today. And I think, importantly, the big hit to current demand has been airlines, and jet fuel demand was never recovered. So one has to say, can it get materially worse from here? I think the answer is no, at this point in time, I'm not minimizing. And by any means the entirety of the pandemic, but I think we're in a kind of a different place, with the knowledge we gained on how to work safely, while it's still in our communities, if that helps.

Connor Lynagh -- Morgan Stanley -- Analyst

Yeah. Help of context there. This is kind of a complete pivot versus the prior question. But, you know, it occurs to me, there's a lot of excess capacity in North America, which is not a particularly insightful statement.

But if I think about your business, you've got some product lines and some services that you do have an international presence of others that are much more domestically focused. Do you see any opportunities to sort of broadening your reach? I mean, you know, new energies are obviously an interesting thing to talk about. But are there opportunities to sort of, you know, stay within your core product lines, but just expand your addressable market? Any particular areas you would think of in that context?

Cindy Taylor -- President and Chief Executive Officer

For sure. I mean, we are global in scope and scale. However, I'd say it's our offshore manufacture product group that has the broadest reach, and our well site services segment, we probably operate in 30 different countries, our path at various times, but it's more on a rotational basis, offering some of our better technology to customers. And again, a concentration more in the Middle East.

And I still find that's an active area of focus for us and basin exposure that I think is long term in nature. And we will continue to try to grow that and expand it over time with two initiatives. One is, of course, just greater penetration with our service personnel and the equipment that we have, but also upgrading our technology to meet the unique needs and demands of our global customer base. But I still say a particular focus on growth in the Middle East.

Connor Lynagh -- Morgan Stanley -- Analyst

Got it. Thanks very much.

Cindy Taylor -- President and Chief Executive Officer

Thank you.

Operator

And the next question comes from Stephen Gengaro from Stifel. Your line is open.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Thanks. Just a quick follow up. The offshore products business -- offshore manufacture products, the project-driven side of it, it seems like it's based on the backlog, it sets up reasonably well for next year. Do you have a comment of how that piece plays out next year?

Cindy Taylor -- President and Chief Executive Officer

Well, I do. I mean, again, a little more diversified, a big lift to our bookings this year has come from military awards, which we've booked a lot this year, we're likely to book less in terms of the military next year. Our thoughts as we go forward are very much focused on subsea infrastructure, both in Q4 and in 2021 with the bidding and quoting we've done, there's a concentration not surprisingly, of activity again Guiana, Brazil regions. There's obviously opportunities elsewhere across the globe, and then augment that with some unique bid opportunities around subsea mining and wind.

But I do think that the cause of the bidding and quoting and some of the delays and award that the next leg bookings for us is more our bread-and-butter subsea-type production facility infrastructure awards as we move into 2021.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Great. Thank you.

Cindy Taylor -- President and Chief Executive Officer

Thanks, Stephen.

Operator

And we have no further questions. I'll turn the call back for final remarks.

Cindy Taylor -- President and Chief Executive Officer

Thank you, Adrian. And thanks to all of you for continuing to follow this company in such a difficult time in the market also know it's a crowded week in terms of earnings and I know you have alternatives in terms of how you spend your time. Lloyd and I are always available for follow up if needed. And again, we appreciate your support.

And I look forward to talking to you in connection with our fourth quarter in February. Thank you.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Ellen Pennington -- Counsel and Assistant Corporate Secretary

Cindy Taylor -- President and Chief Executive Officer

Lloyd Hajdik -- Executive Vice President and Chief Financial Officer

Sean Meakim -- J.P. Morgan -- Analyst

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Kurt Hallead -- RBC Capital Markets -- Analyst

Ian Macpherson -- Simmons Energy PLC -- Analyst

Connor Lynagh -- Morgan Stanley -- Analyst

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