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Oil States International (OIS) Q1 2021 Earnings Call Transcript

By Motley Fool Transcribing - Apr 30, 2021 at 2:31AM

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OIS earnings call for the period ending March 31, 2021.

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Oil States International (OIS 13.76%)
Q1 2021 Earnings Call
Apr 29, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the Oil States International, Inc.'s first-quarter 2021 earnings conference. My name is Brandon, and I'll be your operator for today. [Operator instructions] I will now turn the call over to Ellen Pennington. Ellen, you may begin.

Ellen Pennington -- Counsel and Assistant Corporate Secretary

Thanks, Brandon. Good morning, and welcome to Oil States' first-quarter 2021 earnings conference call. Our call today will be led by our president and CEO, Cindy Taylor; 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 one should 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 first-quarter 2021 earnings conference call. First-quarter operating results in each of our segments benefited from increased U.S. land-based completion activity resulting from the improved commodity price environment.

The impact of higher activity levels was partially offset by the severe winter weather event that occurred in February, particularly affecting operations in Texas, Oklahoma, and surrounding states, coupled with continuing impacts from the COVID-19 pandemic. While our facilities did not sustain meaningful damage and our operations and services were restored, following the weather event, our February results of operations were adversely impacted due to the temporary cessation of work at wellsites, facility closures by us and our customers, and delays in the shipment of goods to our customers as well as delayed receipts from our vendors. Revenues in our downhole technologies and well site services segment increased 10% and 2% sequentially, despite the severe winter weather conditions experienced due to a strong activity recovery in March. Revenues in our offshore/manufactured products segment decreased 20% sequentially, but we did achieve a 122 basis point increase in adjusted EBITDA margins, resulting from cost reductions.

Our first quarter bookings improved sequentially to total $70 million, which included one notable project award exceeding $10 million yielding a book-to-bill ratio of 1.2 times for the quarter. Of the $70 million in bookings, 17% related to non-oil and gas projects. We strengthened our long-term liquidity position during the quarter by entering into a new $125 million asset-based revolving credit facility that matures in 2025, issuing $135 million of convertible notes due in 2026, and purchasing $125 million principal amount of our existing convertible notes, which come due in 2023. Each of our operating segments reported positive EBITDA for a second consecutive quarter.

Adjusted EBITDA was $6 million, excluding $3 million of severance and restructuring charges. 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

Thanks, Cindy, and good morning, everyone. During the first quarter, we generated revenues of $126 million, while reporting a net loss of $16 million or $0.26 per share. Our adjusted EBITDA improved due to higher activity levels, driving increased revenues in our U.S. businesses.

On February 10, we completed a new $125 million asset-based revolving credit agreement with a group of our key commercial relationship banks. Our existing revolving credit facility was terminated upon entering into the new assay-based facility. Borrowing availability under the new revolving credit facility is based on a monthly borrowing base calculated based on eligible U.S. customer accounts receivable and inventory.

The maturity date of the revolving credit facility is February 10, 2025. Borrowings outstanding under the new revolving credit facility bear interest at LIBOR plus a margin of 2.75% to 3.25% based on our calculated availability under the facility. On March 19, we issued $135 million aggregate principal amount of convertible senior notes. Net proceeds from the notes offering after deducting issuance costs totaled $130 million.

Convertible senior notes mature in April 2026 and bear interest at an annual rate of 4.75%, which is payable semiannually on April 1 and October 1. We used $120 million in cash proceeds from the offering to purchase $125 million principal amount or 96% of par value of our existing 1.5% convertible senior notes, with the balance of the proceeds added to cash on hand. As of March 31, $32 million in principal amount was outstanding related to the 1.5% notes, which mature in February 2023. As of March 31, $7 million was outstanding under our revolving credit facility compared to $19 million outstanding at December 31, 2020.

Cash on hand totaled $55 million as of March 31 compared to $72 million at the end of the prior year. As of March 31, the total amount available to be drawn under the revolving credit facility was $41 million, and together with cash on hand, our liquidity totaled approximately $95 million. At March 31, our net debt-to-book capitalization ratio was 15%, and our net debt totaled $133 million. For the first quarter of 2021, our net interest expense totaled $2 million of which $1 million was non-cash amortization of debt issuance costs.

Our cash interest expense as a percentage of total debt outstanding was approximately 3% in the first quarter. In terms of our second-quarter 2021 consolidated guidance, we expect depreciation and amortization expense to total $21 million. Net interest expense to total $2.8 million, of which approximately $500,000 is noncash, and our corporate expenses are projected to total $8.9 million. In the current environment, we expect to invest approximately $15 million to $20 million in total CAPEX during 2021.

And 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. I'll lead off with our offshore/manufactured products segment. In this segment, we reported revenues of $61 million and adjusted segment EBITDA of $7 million in the first quarter of 2021, compared to revenues of $76 million and adjusted segment EBITDA of $7 million reported in the fourth quarter of 2020. Revenues decreased 20% sequentially due primarily to a reduction in our major project revenues and service activities, partially offset by higher short-cycle product sales.

Segment adjusted EBITDA margin in the first quarter of 2021 was 11%, compared to 10% in the fourth quarter of 2020. Backlog totaled $226 million at March 31, 2021, an increase of 3% sequentially. As I mentioned earlier, this segment received one notable project award over $10 million during the quarter, with bookings totaling $70 million, yielding a book-to-bill ratio of 1.2 times. For over 75 years, our offshore/manufactured products segment has endeavored to develop leading-edge technologies while cultivating the specific expertise required for working in highly technical, deepwater, and offshore environments.

As we embark on the global energy transition, we will be working diligently to expand our core competencies into the renewable and cleantech space. Recent product development should help us leverage our capabilities and support a more diverse base of customers going forward. We continue to bid on potential award opportunities supporting our traditional subsea, floating, and fixed production systems, drilling, and military clients while experiencing an increase in bidding to support multiple new clients actively involved in subsea mining, offshore wind developments, and other renewable and clean tech energy systems globally. As I mentioned earlier in my leading comments, 17% of our first quarter bookings were tied to non-oil and gas projects.

In our downhole technologies segment, we reported revenues of $25 million and adjusted segment EBITDA of $3 million in the first quarter of 2021, compared to revenues of $23 million and adjusted segment EBITDA of $2 million reported in the fourth quarter of 2020. Sales trends for our STRATX-integrated gun systems and addressable switches continue to gain improved customer acceptance with our perforating product line revenues increasing 14% sequentially, driven by an increase in completion activity in the United States, partially offset by a transitory decline in international sales. International volumes are expected to recover in the second quarter. In our Well Site Services segment, we generated $40 million of revenues with sequentially increased adjusted segment EBITDA.

The 2% sequential revenue increase was driven by an 11% increase in U.S. land revenue but was tempered by severe winter weather conditions in February, along with reduced customer activity in the Gulf of Mexico. Further, our international revenues decreased from the fourth quarter of 2020 due primarily to delays in customer projects in the Middle East. We remain focused on streamlining our operations and pursuing profitable activity in support of our global customer base.

We will continue to focus on core areas of expertise in this segment and are actively developing new service offerings to differentiate Oil States' completions business. COVID-19 disruptions continue to hamper activity in domestic and international markets, but these disruptions are beginning to ease. Global oil inventories are beginning to return to their pre-pandemic levels with improved pricing, spurring an increase in U.S. customer spending.

The first quarter 2021 U.S. rig count average was 393 rigs, which was up 26% compared to the average for the fourth quarter of 2020. Similarly, the industry experienced an 18% sequential quarter increase in the average U.S. frac spread count, which favorably impacted all of our segments with short-cycle U.S.

Shell-driven exposure. As we are now a month into the second quarter of 2021, the frac spread count has increased by about 61 spreads, or roughly 39% compared to the first-quarter average. This increase gives us optimism that the second quarter is setting up more favorably for our U.S. Shell-driven product and service offerings.

Given improvements in the frac spread count, we expect our well site services and downhole technologies segments to continue to grow sequentially in the second quarter of 2021, with expanding EBITDA contributions. Revenues in our offshore/manufactured products segment are also expected to increase in the second quarter with an improving backlog of project-driven product opportunities, coupled with increasing short-cycle product sales. On a consolidated basis, we expect revenues to grow 15-plus percent sequentially in the second quarter of 2021. Our outlook for the rest of 2021 suggests that our consolidated revenue will be flattish year over year given the strong first quarter of 2020, which was pre-pandemic.

Given U.S. completions activity and momentum, coupled with improving major project backlog, we believe that our consolidated-adjusted EBITDA will increase from our last guidance with a range of $38 million to $43 million currently expected for the full-year 2021. Now I'd like to offer some concluding comments. Resolution of the pandemic appears to be in sight, particularly in the United States, but the timing remains uncertain.

We have made substantial progress globally in reducing the historic well lot of mass during the pandemic at 493.1 million barrels of U.S. crude oil inventory. We are now only about 1% above the five-year range. Crude oil prices appear to have stabilized in the $60 to $65 per barrel range, setting up a more conducive investment landscape for our customers.

Oil States will continue to conduct safe operations and will remain focused on providing technology leadership in our various product and service offerings with value-added products and services to meet customer demands globally as we recover from the harsh effects of the COVID-19 pandemic. In addition, we will continue our product development efforts to support emerging renewable and clean tech energy investment opportunities. That completes our prepared comments. Brandon, would you open up the call for questions and answers at this time.

Questions & Answers:


Operator

Yes. Thank you. [Operator instructions] And from Stifel, we have Stephen Gengaro. Please go ahead.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

Thanks. Good morning, Cindy and Lloyd.

Cindy Taylor -- President and Chief Executive Officer

Good morning, Stephen.

Lloyd Hajdik -- Executive Vice President and Chief Financial Officer

Hi, Stephen.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

So I guess two things if you don't mind. The first quarter -- I mean, obviously, when you're talking about small numbers, incremental margins can look kind of funky. And very strong in some cases here. As we think about going forward, do you think you start to see those normalize closer to historical levels? How should we think about either incremental margins or just general margin progression as we go forward?

Cindy Taylor -- President and Chief Executive Officer

No. You're absolutely right. And you see some unusually strong incremental margins. And if you think about it, as we continue to cut costs and streamline operations, you have a cost reduction benefit, which is clear.

And then every dollar of incremental revenue, in theory, can comment on the early stages, near 100%. And so we're going to -- we anticipate continuing strong incremental margins in Q2, but they are trending to normalize as those cost reduction impacts flow through the system and then the incremental revenues start carrying with it that variable cost that goes with it. So it's hard to say exactly, but I'd say you kind of have probably two to three quarters of kind of unusually strong incrementals until you get to a more normal level of activity. And then I would go back and say, you should expect normalized margins if we remain in a more steady state, slower growth in recovery environment than what we've seen over the last two or three quarters coming off a very low bottom that we reached in second and third quarter of last year.

If that's helpful.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

Yes. That's very helpful. And the second part, and I apologize, I may have missed a little bit of this, but on the first quarter and the weather disruptions, I'm not sure if -- was the offshore/manufactured products business? Were there just some deliveries and some disruptions that weighed on the revenue in 1Q because the margins were very good, but revenue was lighter than I thought, but I think that's what it's related to, but I just wanted to quantify that? And is any of that sort of spilling over to 2Q?

Cindy Taylor -- President and Chief Executive Officer

There's nothing spilling over into Q2, but I would characterize Q1. We knew it would be a soft quarter. We just kind of had avoid of major project backlog for a short period of time late last year. Again, a lot of people delayed awarding those projects, as you can expect, in a COVID-induced downturn.

So it's an air pocket. We've talked over the last quarter or two about weak connector product sales. Those are in our major projects queue. And I would say it's mostly that that dragged down revenues.

But again, we do believe that's more transitory. First quarter is always a little bit of a weaker quarter two. As it relates to weather impacts, that would have a greater impact on our short-cycle product sales. However, again, coming off a very low base in 2020, short cycle was up just not up to the degree that it would have been absent the weather impacts.

Again, that short-cycle largely benefits U.S. Shell land-based activity. And so it's kind of a combination of the two. But in my comments, as I told you, we're really expecting all segments to have pretty good sequential growth.

With a consolidated total growing 15-plus percent sequentially depending upon how they come in. But as I have said on prior calls, one of the critical things to watch for the offshore/manufactured products segment is a rebuild of the major project's backlog. Again, our book to bill was 1.2 times this quarter, and highlighting a large for us individual major project award is the kind of trend line that we want to see to support that revenue growth in later quarters.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

Great, and I thank you for the color.

Cindy Taylor -- President and Chief Executive Officer

Thank you, Stephen. Good talking to you.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

Thanks.

Operator

From Daniel Energy Partners, we have John Daniel. Please go ahead.

John Daniel -- Daniel Energy Partners -- Analyst

Hey. Thanks, Cindy and Lloyd for putting me in. Just a --

Cindy Taylor -- President and Chief Executive Officer

Good morning, John.

John Daniel -- Daniel Energy Partners -- Analyst

Hey. Good morning. Just a quick question on supply chain, if you guys are seeing any stress points right now and how you see that playing out over the course of the year.

Cindy Taylor -- President and Chief Executive Officer

I haven't really seen any significant stress points. I think everybody in the U.S. economy broadly has listen to the early morning news this morning, is really kind of watching the impacts of potential inflation, hitting the industry. I would just say at this point in time, with our product and service offering, again, coming off that base of 2020 and having some inventory, we think we're in reasonably good shape.

Trucking and transportation, driver shortages are hitting certain pockets. We're less reliant on those types of activities, given that most of our equipment is small, mobile, transferable, and we employ our own drivers and own our own fleet of transportation vehicles. So on a -- I can't say that we're going to be excused from any of these issues. But right now, I think we're managing fine.

John Daniel -- Daniel Energy Partners -- Analyst

OK. And then just one for me on the labor front. I mean, we hear a lot about labor tightness. Can you -- I'm just curious if you would characterize that more being sort of that entry-level worker or trying to bring back the experienced person.

Just any thoughts on that?

Cindy Taylor -- President and Chief Executive Officer

It's more -- we're seeing some challenges is, again, coming off a horrible year in 2020. It's painful for our workers, whether you are laid off temporarily, whether your hours were cut and some people have chosen, particularly entry-level, chosen to seek other employment. And I think everybody at entry-level has alternatives. There's a lot of the industries that are growing and kind of heavy machinery, heavy industry, even working in areas supply areas like Lowe's, those are the types of companies that compete for entry level, particularly manufacturing, headcount, coupled with high levels of unemployment benefits that are afforded people.

There are some challenges, but they are more entry-level at this point in time. But the key for us is managing through that, but also trying to -- we cut tie in 2020 for our experienced people. And so it's balancing really timing of recovery of those pay and benefits with a market recovery and an ability to get a little bit of pricing to cover that. That's really the primary challenge that we face.

John Daniel -- Daniel Energy Partners -- Analyst

OK. And then I guess last one, again, big picture, not necessarily Oil State specifics, I apologize. But when you look at the strip and where it is and what it could imply for potential activity uplift call it, Q1, 2022, once budgets reset, all that good stuff. How hard do you think it's going to be for the industry to see that call given what you've just talked about, broader opportunities for people elsewhere? It just seems like we could be in a pinch, a real pinch.

Cindy Taylor -- President and Chief Executive Officer

I do worry about it. It's a combination of the cyclical nature of our industry that is challenging. I'd say, for people that want to make a career in this industry and to attract new workers for all those things. I am concerned about it.

I think for that reason, the energy industry is more sustainable, quite frankly, at WTI north of $60 a barrel. We know that. And the way that we attract new workers is to have an affordable, livable wage for entry level and some sense of stability. So I hope I can make it from today to first quarter of 2022 with WTI north of $60, and I think that will help.

But I do believe that the efficiencies that we've brought to the market over the years, which mitigate some of the need for headcount at the Well Site is going to be essential because I do think long term, particularly with the headline every day of an energy transition, people -- young people are going to question the long-term viability of taking jobs in our industry. That's just being transparent and open about it. And I think we have to continue to do more whether it's digital, whether it's consolidating the simufact, however you say it at the well side, all the things would help us do more with fewer workers are going to be essential.

John Daniel -- Daniel Energy Partners -- Analyst

I appreciate you, guys, very much, and best of luck to the rest of this quarter of the year. Thanks, Cindy.

Cindy Taylor -- President and Chief Executive Officer

Thanks, John.

Lloyd Hajdik -- Executive Vice President and Chief Financial Officer

Thanks, John.

Operator

[Operator instructions] And looks like we have no further questions at this time. Cindy, we'll turn it back to you for closing remarks.

Cindy Taylor -- President and Chief Executive Officer

Thank you, Brandon. We hit today with so many companies releasing earnings. I think everybody is split between calls, and I'm sure that we'll get some follow-up questions. But as Ellen indicated, the call is webcast, and you can get some follow-up information there, and we are very open to addressing any questions you might have after you've caught up with our conference call.

We do thank all of those who attended and look forward to future calls with you. Have a great day.

Operator

[Operator signoff]

Duration: 28 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

Stephen Gengaro -- Stifel Financial Corp -- Analyst

John Daniel -- Daniel Energy Partners -- Analyst

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