Oil States International, Inc. (OIS) Earnings Call Transcript & Summary

I am David Anderson, Head of U.S. Oilfield Services Research at Barclays. Our next guest is one of the longest-serving CEOs in Oilfield Services, Ms. Cindy Taylor, CEO of Oil States International. Oil States is a global product and service company, predominantly serving the drilling completion subsea production and infrastructure sectors of the energy industry. Company's manufactured products include highly engineered capital equipment as well as products, consumables in the drilling, well construction and production side. Cindy, thank you very much for joining us today. I believe you have a short presentation, and we'll have a few questions at the end. So please, the floor is yours.

Wonderful, David. It's so nice to see you again. I look forward to the time we can be in person. But in the meantime, we're going to take you through an update to our presentation. And I would like to lead off with a handful of slides that demonstrate our commitment to our environment, social and governance priorities, which are top of mind to so many of our investors today. As I do so, I plan to highlight areas of opportunities for Oil States and also summarize our near-term and longer-term ESG goals, if you'll bear with me on that. If you look at the current slide, I really want to focus at the top and just let you know that Oil States remains very focused on advancing the future of energy that is derived from traditional sources. We're going to need that for a very long period of time. However, we do want to be focused and enable new pathways to a lower-carbon multi-source energy mix going forward, to meet the growing global demand for energy. As we do so, I want to highlight some of the near-term opportunities we have to bring value to our customers and revenue to Oil States. Lloyd, if you would progress to Slide 6. This sets forth our ESG priorities and policies. It's a complicated slide. I'll just hit a couple of bullets. We have embedded our ESG commitments into our culture and into our business practices. While we are low on the carbon emission scales as an individual company, we are looking for ways and evaluating our own operations for improvement. I think it's very important that we try to be as environmentally friendly in conventional oil and gas while looking for opportunities to longer-term alternative investments. As to social priorities, which is on the upper right, our Board of Directors and the executive leadership team here at Oil States strive to set a tone that is values-driven, which support our concepts around diversity, equal employment opportunities, career enhancement through training programs and long-term development opportunities for our workforce. Governance is pretty standard. We want to be transparent and establish a strong foundation that supports all of these ESG policies, priorities and practices within Oil States. If we go to Slide 7, this gives some more specific data as it relates to our environmental commitment. As I mentioned earlier, we think we're a fairly low emitter of greenhouse gas emissions. However, we have nonetheless set goals for reduction that we plan to implement a 10% reduction in our Scope 1 and Scope 2 emissions over the next 3 years. And as we continually focus and measure the footprint that we have, I think we'll likely be able to do better than that. If you look at some of the highlights, what we found in the early stages here, the major 2 areas of greenhouse gas emissions are in 2 places. One is just the energy systems that fuel the facilities that we operate globally as well as the rolling stock, i.e., the pickups, trucks that we have going to wellsite locations. So the larger focus is, of course, on the sourcing of our energy systems to our facilities, and we're going to look for areas to improve that through low-impact energy providers, lighting systems, the various things that we can do. And what we found in evaluating our operations, a lot of the vehicle emissions comes from idling on work locations because extreme heat and cool temperature. So a lot of things that we're focused on to make conventional energy more competitive for the longer term. Slide 8 sets forth very specific data as it relates to our social commitment. I will say that if you look at the slide at the end of last year, women made up about 18% of our global workforce, 19% of our executive and senior management team, which may seem a little light. But I think everybody in this audience knows and understand Energy Services demand a lot of outdoor work, remote locations, and we just don't have that many females willing to step up in the field roles, although we're doing what we can to expand that. As of our proxy reporting period in 2021, women comprised 38% of our Board of Directors. And David, as you mentioned, I'm one of the longer tenured CEOs in the space. And I believe the first public company energy services female to lead a company like Oil States. So clearly, my Board and my team is committed to diversity. I think what we can really do is make an investment in our employees largely through training programs, development programs that offer career advancement potential. Our employees completed over 34,500 hours of training and development in 2020 in a broad span of workforce learning initiatives. And so again, we're doing what we can to advance that. If we could move on to Slide 9. This really highlights our governance program, including the manner in which we manage risk and the programs around oversight that we and the board have put in place. And I think importantly, just the last bullet we put there is that we frequently engage with our major institutional stockholders in an effort to be continuously aware of governance trends and priorities that they have put in place so that we are informed proactively in terms of areas of interest of our shareholders. If we can now progress to Slide 10. There are 2 real tangible areas of energy transition opportunities that we have as a company. In our offshore manufactured segment operations, we've had about probably 10% revenue coming from nonconventional areas, largely military and industrial. But again, as I made an earlier statement, we've got a legacy in conventional oil and gas globally penetrating deepwater environment. That affords us great experience to help move towards an energy transition. For us, there's 2 areas of focus, deep sea mineral extraction to support a transition to alternative energies and also offshore wind opportunities. We'll lead off with the slide for deepsea mineral extraction opportunities, which again is very real and tangible for us. What we've done is work with several companies that we've noted on the slide. These are real bids, quotes and awards that we've gotten around early-stage, front-end engineering and design studies as well as prototype deepsea mineral riser system opportunities that we put into backlog and into development in our manufacturing facilities around the world. And in fact, Oil States was recognized in May of this year with Offshore Technology Conference's Spotlight on New Technology Award for -- we branded this our Merlin Deepsea Mineral Riser System. So again, I would just highlight that these opportunities are very tangible for us and under development, albeit I think it will take a long term for these things to materialize significant revenue contribution, not only for us but for the industry as a whole. The other area of interest for us is offshore wind. Again, the U.S. Gulf of Mexico is in its early stages of progressing towards land opportunities, but there are other areas around the world that are a little more advanced around these systems. And I mentioned we have 80 years of offshore experience,supporting fixed and floating structures. It is only natural that we take this expertise into new opportunities like wind. And if you go to the next slide, it will highlight those opportunities around fixed structures, and the associated installation. We also have prospects around floating wind systems, albeit these are on the horizon, that gives us the opportunity around installation support around these vessels, lifting and handling systems as well as the engineering work that is necessary to progress that. I'd like to go to Slide 15 now and just give you a snapshot around oil states. As many of you know, we deliver our products and services through 3 business segments. Those are our Offshore/Manufactured Products segment. If you look at the graph to the right, that is just in excess of 50% of our revenue and EBITDA contributions. Our Downhole Technology segment represents roughly 20%, with our Well Site Services, largely a completions-focused business rounding out about 30%. In our Offshore/Manufactured Products segment, this is very much a long-term long history, technology-focused business driven by investments in global deepwater capital equipment. Both our Downhole Technologies and Well Site Services is more weighted towards U.S. shale activity with Downhole Technologies represented -- 84% of the revenues comes from U.S. shale. In the case of Well Site Services, again, roughly 78%, although both businesses do have international exposure as well. If we go to the next slide, I would say much of the accomplishments over the last 12 to 15 months have been enhancing our financial position. There's hardly any business in 2020 impacted by the pandemic that didn't have a major hit to revenues and earnings, and we were no exception to that. With that, we needed to do some balance sheet repair in the sense of a credit facility amendment initially, followed by a new bank credit facility. And earlier this year, we issued a new 4.75% convertible senior note. At the end of the day, you can see from the chart, we have no near-term debt maturities outside of the $26 million of the early convert -- the 1.5% convert that comes due in 2023. And the rest of that largely is 2026 and later associated with the new convertible senior note that we issued. On the next slide, you'll see that we have a strong history of generating free cash flow through industry cycles. I think we've demonstrated that. Importantly, free cash flow has been positive for 27 of the last 30 quarters since 2014. I highlight the start in 2014 because that was an industry peak for just about every company in the space. We have reduced our net debt by $128 million during 2020, which was very helpful to our balance sheet refinancing efforts earlier this year. If we go on to the next slide, I'm going to start a transition to talking about our individual segment, starting with the global footprint that we maintain and a strong customer base, you can see that we're broad-based. A lot of these foreign locations are associated with our Offshore/ Manufactured Products segment. Going to, I guess, it would now be Slide 20, leading off with Offshore/Manufactured Products segment. Again, this is a company, an entity with roughly 80 years of experience operating and deepwater environments. Our products and services support offshore field development, subsea pipeline equipment, to a lesser extent offshore drilling activities as well as some onshore consumables. That lends itself to a very large installed base of equipment, providing aftermarket service and support. As I mentioned earlier, we also participate on industrial, military, wind and prospectively subsea minerals development as well. Backlog is a big indicator of future activity for this segment. We've given you a chart of our historical backlog position. I would say a couple of important data points. Backlog as of June 30, 2021, did increase 20% from the end of 2018. Our bookings in the first half of 2021 totaled $135 million, resulting in a book-to-bill ratio of 1x. Bookings have ranked in about $65 million to $70 million for the last 5 quarters. Again, that's following the COVID induced shutdowns that commenced in mid-March of 2020. We are looking for that bookings range to expand. And at this point, I feel confident that we'll exceed this level of bookings in the current quarter when we report Q3 results. So bidding and floating activity is looking favorable at this point in time. If I look at the absolute amount of backlog, it totaled $214 million at June 30. I do mention for new investors that historically, about 75% of our backlog turns into revenue in the forward 12 months. That will be important as we start to assess our outlook for 2022 towards the end of this year. Also driving improvement in this segment is our short cycle manufactured product orders, which increased as rig count and completion count increases. The next slide is a slide prepared by Westwood Global Energy Group. This is really here just to show the very significant projected improvement in floating production systems. Starting at 2020, you can see the very low activity levels in the COVID era, but significant improvement, particularly around new build facilities. The lower left really shows the areas of future investment with Latin America really leading the charge. But pretty broad-based with Africa, Asia Pac, Gulf of Mexico offering areas of investment opportunities as well. I'd like to now transition to our Downhole Technologies business. This is a business we've owned for roughly 3 years now. Highly engineered culture of products, these downhole consumables, largely around perforating products and frac plugs at the end of the day. Again, the growing completion count and the high-end completion drive demand for these products. Over time, we do have over 372 patents either granted or pending in this segment, which offers some barriers to entry. The next slide really demonstrates the scope of the product offerings that we have from engineered perforating solutions, completion products, including proprietary frac plugs, toe valves and other completion products as well. As I mentioned previously, the next slide outlines the increasing completion intensity in the U.S. It outlines some of the typical wells that you see and the greater demands on manufactured products and service companies driven by longer lateral lengths, increased frac stages and more perforating clusters, which really sets the demand stage for our products. Recent market trends include customer movements towards shorter perforating guns, consistent hole sizes, customization of shot phasing and the use of advanced charge technology. So again, being a high-end engineering firm, researcher development, great testing facilities, it really helps us with our customer interfaces around these initiatives. As we go forward, a lot of what we've tried to do since acquiring this company is focus on scaling production to meet increased demand while lowering the cost of manufacturing. We've done that through facility integration and engineering talent integration across segments, which should help us with our incremental margins as we go forward. We do have a high-end gun system named STRATX that really helps our customers with efficient operations. We think that our energetics have unmatched quality performance. And we've then introduced several new products, including our FracIQ Equal Entry Technology and other things as well. Our last segment is our Well Site Services segment. I'll hit a couple of themes there. Again, this is largely completion-focused covering completion operations, including wireline, coiled tubing support, frac equipment, zipper manifolds along with extended reach technology for high-end drill-outs followed by flowback operations. You can see those enumerated at the bottom in terms of our service offerings. The next shows that we have broad North American coverage. Not surprisingly, it shows the locations and the basins that we operate within as well as the rig count associated with each basin. So we're active in all of the crude oil and natural gas plays in the lower 48, as demonstrated on this slide. The next few slides really walk you through more details of our product offering from frac stacks to isolation tools, wireline support equipment, progressing on through our Tempress Technology, which is our extended reach technology married with thru tubing services and production services as well as flowback operations. I'll now conclude with a slide to try to put this all in perspective. As it relates to Oil States, we are getting the benefit of improved global macro supply demand fundamentals. That is evidenced by higher crude oil prices, natural gas prices and of course, with that growing rig and completion crew counts. I've always said, U.S. land-based activity is the first to decline in a down market, but it's also the first to show meaningful improvement, which we are seeing in 2021. That improvement benefits all of our 3 segments. We're also seeing improved major offshore project FID outlook, which will benefit our Offshore/Manufactured Products segment. I mentioned that our kind of a static book-to-bill ratio looks to improve as early as Q3 this year. We have focused strategically on being a more asset-light manufacturing company, with processes and services that allow for portfolio optimization around that. We invest in engineering, research and development around new products that -- an end result of that is this example, it's a deepwater mineral riser system that we've introduced to the market along with other products yet to be introduced. You mentioned, David, we have a highly experienced management team, much deeper than myself that makes me feel very comfortable that we can capitalize on opportunities for the longer term as this market recovers. Again, we have a long history of generating free cash flow and allocating capital well. And so a better market will provide better opportunities to create sustainable long-term shareholder value. David, that concludes our prepared comments. I hope I've left a little bit of time for questions.

Thank you very much, Cindy. So maybe just going some off of what you were just talking about before with some of your consumables business and the shale, with your shale customers. What's your sense of what's happening out there in the field today? We've seen the rig count has been sort of slowly grinding higher. It sounds like the completion count is kind of in that kind of 215 to 220 range. What's your sense from your customers in terms of looking out to next year? You being in the consumables business, you need to stay a little in front of that. So just curious what you're seeing today.

Yes. I would say both on the consumables side and the services side, we need to stay in front of it, particularly with the right people in the right basins with the right equipment, which has evolved over time, quite frankly. But the indicators look fairly positive. The initial recovery in the rig and completion count was driven by large privates, as you know, and material movement there. The public companies, for various reasons, have been constrained on their CapEx investments. And I'd say twofold. Number one, their shareholders really don't want them to outspend cash flows, as you know. And they kind of set targets of limits, if you will, on their CapEx investments relative to other shareholder return initiatives, and they're sticking with that. And the other thing, with the extent of hedges that were put in place coming out of 2020, which kind of capped some of the cash flow for several of the operators both exposed to crude oil and natural gas. So I actually see pretty good outlook going into 2020. Two, again, my public company E&Ps have done a really good job of managing their cash flows, paying down their debt. And some of these underwater hedges will now come to where the cash flow yields to these publics will get better. In the last couple of weeks, we've seen movements in the rig count more oriented towards the public company E&Ps than the privates. So I think that's just an indicator of what's to come.

Does it matter to you either way? Do you have more exposure to the public side versus the private?

I'd just say we tend to have high-quality, high-end operations broadly. And what that has meant in the past is that we were probably more weighted to the majors and the very large end of public company independents because they were the ones making the largest investments. As private companies have stepped up this year, we have been very intentional on making sure that we're servicing them as well. So these are large private companies. I'm the one -- I'm talking about, they're not one-off smaller that don't have sustained operations.

Right. That's a bit of a misconception, I think, out there that all the privates are these small little mom-and-pops.

Anything...

So in the beginning, you talked about energy transition in a couple of different areas. You talked about deep sea minerals and the offshore wind systems. Help me understand the Deeps Minerals a little bit more. What minerals are we going after there that you're seeing out there? Help me understand what that market looks like. It's not something we usually hear too much about.

I think it's a bit unique for us. However, if you look into a lot of the emerging companies that are funding long-term investments in the space. You know you need battery technology, which is dependent upon rare earth minerals. And I think everybody is trying to look at this pathway, whether that's 2040, 2050, how do you really grow what is necessary around battery technology when you're so reliant on these rare earth minerals, many of which are open pit mines in what is viewed as relatively unfriendly locations and several of the companies that we enumerated on the earlier slides are looking at permitting and leasing in ultra-deepwater areas like the Clarion Clipper zone, which I was not familiar with until about 18 months ago,, to find alternative sources for these rare earth minerals that would not be so disruptive to the environment. There's got to be a lot of work done. And so the initial things we're doing is making the customer contacts associated with these future investments, number one; number two, doing the front-end engineering work on what's going to be required from these are ultra-deepwater, again, that are going to require expertise like we have as well as developing the prototype around the riser. So I always think about try to do what is your core competencies and expand that into new applications as opposed to try to say, should you be looking at green hydrogen, where I have 0 experience around that. And so that's our real focus. And again, this is long term in nature but it's already bearing fruit for us because we're on the front end in the early stages.

That's good to hear. And then on the offshore wind systems, I was -- what sort of -- you had mentioned a number of different products into that market. What are kind of the 2 or 3 things we should really be looking for? Are you starting to see orders for that now? We had Clay Williams from NOV on earlier. He's obviously involved in that market as well. I'd just kind of love to know how you're thinking about that market and the opportunities in the next kind of 2 years, let's just say.

Yes. I would just look at Oil States has been a pioneer in offshore deepwater applications for -- since its infancy. And so clearly, we have worked with fixed platforms installations. That's what we're talking about to house that offshore wind equipment at the end of the day. So fixed platform expertise around the installation and maintenance is one area, lifting systems, if you will, that we do all the time that are necessary to hoist the facilities on location. So I think a lot about the original installation around the fixed platform work that we have and the equipment [ weather ] that we've used in the past in alternative scenarios. We do not manufacture the blades themselves. And so that's going to -- there are other companies that have done that for quite some time. And so we're looking to take our expertise into wind. We just need more wind -- we had great penetration already, it's just not going to be the biggest ticket item for us. That's why I mentioned the riser system first because if you think about it, we progressed as an industry in ultra-deep waters and now we're retreating back into fixed platform work. National Ocean Industries Organization, I know you know well as do I. They're even talking about repurposing some of the fixed platforms that are in the Gulf into a wind application. So it's very visible for us, and it will be kind of call a layup. But the revenue ticket is going to be smaller probably than the opportunities we have around minerals recovery.

Got it. Well, Cindy, it's about all the time we have. I want to really thank you very much for your time and the nice presentation. And I hope to see you in person next year. I'm kind of done with this. I don't know about you, but enough of this virus stuff.

Sam here. But we appreciate you giving us a platform to get our story updated and out -- out to the market. So thanks so much.

Always. Nice to see you again, Cindy. Bye-bye.

Bye-bye.