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Edited Transcript of OIS earnings conference call or presentation 25-Apr-19 2:00pm GMT

Q1 2019 Oil States International Inc Earnings Call

Houston Apr 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Oil States International Inc earnings conference call or presentation Thursday, April 25, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cynthia B. Taylor

Oil States International, Inc. - President, CEO & Executive Director

* Lloyd A. Hajdik

Oil States International, Inc. - Executive VP, CFO & Treasurer

* Patricia Gil

Oil States International, Inc. - Director of IR

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Conference Call Participants

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* Connor Joseph Lynagh

Morgan Stanley, Research Division - Equity Analyst

* George Michael O'Leary

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research

* Ian MacPherson

Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service

* Kenneth Irvin Sill

SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst

* Praveen Narra

Raymond James & Associates, Inc., Research Division - Analyst

* Sean Christopher Meakim

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Stephen David Gengaro

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Oil States International First Quarter 2019 Earnings Conference Call. My name is Raina, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Patricia Gil, Director of Investor Relations. You may begin.

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Patricia Gil, Oil States International, Inc. - Director of IR [2]

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Thank you, Raina, and good morning, and welcome to Oil States' First Quarter 2019 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'd 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. 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 1.5 hours after the completion of the call and will be available for 1 month.

I will now turn the call over to Cindy.

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [3]

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Thank you, Patricia. Good morning to all of you, and thank you for joining us today to participate in our first quarter 2019 earnings conference call. Following a volatile fourth quarter in 2018 regarding commodity prices, we entered the first quarter with a heightened level of uncertainty. However, as the first quarter progressed, our outlook improved, given commodity price increases and a relatively stable, if not improving, level of customer spending activity. All of our business segments completed the quarter at or near the high end of our previous guidance and our margins held up well.

Our Well Site Services and Downhole Technologies segments experienced improved product and service demand as the quarter progressed. We were particularly encouraged by our Offshore/Manufactured Products bookings of $144 million, which led to a 1.63x book-to-bill ratio for the quarter, evidencing improving global offshore demand, which creates better visibility for the balance of the year.

Lloyd will take you through additional details of our consolidated results and also provide highlights of our financial position. I will follow with more details by segment and provide additional comments on our guidance and market outlook.

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Lloyd A. Hajdik, Oil States International, Inc. - Executive VP, CFO & Treasurer [4]

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Thanks, Cindy. Good morning, everyone. During the first quarter, we generated revenues of $251 million, while reporting a net loss of $15 million or $0.25 per share. Our first quarter EBITDA totaled $21 million with an EBITDA margin percentage of 9%. Reported EBITDA was negatively impacted by $1 million of severance charges. We recognized an effective tax rate benefit of 1.9% in the first quarter. Effective tax rate benefit was lower than the statutory rate due to certain nondeductible items impacting the rate.

During the first quarter, we generated $34 million in cash flow from operations and spent $18 million in capital expenditures. We generated $16 million in free cash flow, which we define as cash flow from operations less capital expenditures and utilized our free cash flow to pay down outstanding borrowings under our revolving credit facility by $16 million.

As of March 31, our net debt leverage ratio was 2.6x and our senior secured leverage ratio was 1.2x, well below the allowable maximum ratios of 3.75x and 2.25x, respectively. At March 31, our net debt to book capitalization ratio was 17%, and our available liquidity position at the end of the first quarter was approximately $148 million, inclusive of cash on hand totaling $15 million.

In terms of our second quarter 2019 consolidated guidance, we expect depreciation and amortization expense to total $32 million. Further, we expect net interest expense to total $4.8 million and corporate expenses are projected to total $12 million. Total capital expenditures for the full year 2019 were still expected to range between $65 million and $70 million consistent with previous guidance. For the second quarter, our estimated income tax provision will primarily be dependent upon the level of pretax results realized compared to the level of nondeductible items in our tax provision. Longer-term, we expect our effective tax rate to trend towards the U.S. corporate tax rate 21% as our U.S. operations return to profitability.

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

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [5]

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Starting with our Well Site Services segment, we generated $108 million of revenue, which was at the upper end of our guided range and $13 million of EBITDA in the first quarter of 2019. These results were negatively impacted by disproportionately lower utilization of our land drilling rigs as customers temporarily shut down their drilling programs, following the material decline in crude oil prices in the fourth quarter of 2018. Utilization of our land drilling rigs averaged only 12% in the first quarter of 2019 compared to 30% in the fourth quarter of 2018.

In our completion services business, we experienced a 7% sequential revenue decline, which was concentrated in the midcontinent region and the Permian Basin. EBITDA was negatively impacted by $753,000 of severance costs as we continue to streamline our operations to improve the efficiencies of our service offering. With revenue declines in both the drilling and completion services businesses, along with the severance cost incurred, our segment EBITDA margin averaged 12% in the first quarter of 2019 compared to 15% reported in the fourth quarter of 2018. While our margins declined sequentially, they were slightly ahead of the midpoint of our guidance.

In our Downhole Technologies segment, we generated revenues of $54 million and EBITDA of $9 million with an EBITDA margin of 17% reported in the first quarter. Segment results were positively impacted during the quarter by increased demand for completion, intervention and perforating products, which led to improved manufacturing facility cost absorption due to higher levels of throughput. Further, the nonrecurrence of patent defense costs for litigation, which wrapped up in the fourth quarter of 2018, also positively impacted the sequential EBITDA margin comparison.

Given press on the integrated gun systems in the market, we wanted to provide you with an update on our technology and progress to market. Field testing and early commercialization efforts continue on our integrated gun systems, addressable switch and other associated downhole tools. GEODynamics patented and proprietary system is provided completely assembled with the entire complement of components required for our plug-and-perf operation. All that is required at the wellsite location is removing shipping thread protectors and screwing the guns together before running the system downhole. We believe that our design makes for the space and most efficient perforating system available and is certified to be intrinsically safe by Franklin Applied Physics. Operators continue to request GEODynamics' best-in-class perforating technology, combined with the safety and efficiency provided by fully factory-loaded system. We have expanded our engineering and product development staff and have commissioned our gun loading facility with a multiyear ramp in production planned into 2020. This system further builds on our industry-leading perforating offering through GEODynamics and reinforces our commitment to help operators make better wells.

Our technical solutions group is providing tailored support to our wireline and operator customers, delivering our product offering from our manufacturing location to the wellsite. This group is an investment in our future and affords us the opportunity to deploy both personnel and integrated product solutions directly to the wellsite to ensure product quality and performance is maintained. This group continues to work in support of field trials for our newer technology. Ultimately as trialed products are brought to market, the group will generate revenue sufficient to offset their costs. We expect to recover market share and sales in our engineered perforating solutions business once our proprietary integrated gun system is fully commercialized.

In our Offshore/Manufactured Products segment, we generated revenues of $88 million, EBITDA of $11 million and a segment EBITDA margin of 12% during the first quarter. This 8% sequential decrease in segment revenues was driven by lower military product sales and service revenues, partially offset by higher project driven products sales. We received a major project award during the first quarter for a production facility content destined for South America. Our orders booked in the first quarter totaled $144 million, resulting in a 31% sequential increase in backlog and a book-to-bill ratio of 1.63x. This is our highest reported backlog level attained since June of 2016. Conversations with our customers regarding deepwater offshore project sanctions for 2019 continue to be constructive and visibility for additional project awards is developing favorably.

I would now like to share our thoughts on our market outlook for the second quarter. Our consolidated second quarter results are expected to improve sequentially, driven by higher levels of drilling and completion related activity in the U.S. as well as greater contributions from our Offshore/Manufactured Products segment. Our outlook for U.S. spending activity by our customers is predicated on a supported commodity price environment, given WTI crude prices, which have recovered 45% from year-end to a price of $65.66 per barrel.

Further, improved project driven activity within our Offshore/Manufactured Products segment is expected to lead to sequentially higher revenues for this segment. With this supported commodity price environment, we are estimating that second quarter 2019 revenues for our Well Site Services segment should range between $119 million and $126 million with segment EBITDA margins expected to average between 14% and 16%. These estimates reflect improved utilization levels for our land drilling business as our customers have already begun to resume their drilling programs, following the temporary shutdown in the first quarter, along with increasing levels of completion activity in the U.S. shale plays and international regions in which we operate.

For our Downhole Technologies segment, we currently estimate that our revenues will range between $53 million and $56 million with segment EBITDA margins averaging 17% to 19% in the second quarter. In our Offshore/Manufactured Products segment, we are forecasting that second quarter revenues for this segment will also increase sequentially and range between $92 million and $100 million buoyed by a higher starting backlog level, which will begin to convert into revenue. Segment EBITDA margins are expected to average 12% to 14% depending on products and service mix. To conclude, our second quarter revenue and EBITDA at the midpoint of our guidance ranges is up sequentially for all of our businesses.

As discussed, we continue to believe the opportunity set for major deepwater project sanctions is trending positively in 2019, as evidenced by the significant deepwater project award we booked in the first quarter. This award, coupled with a favorable outlook for additional project FIDs will benefit our Offshore/Manufactured Products segment. U.S. customer spending trended up as we progressed through the first quarter, setting the stage for a sequential improvement in our Well Site Services and Downhole Technologies segment. We remain focused on developing technology advancements across all of our segments, helping our customers make better wells, while carefully controlling our cost, generating positive free cash flow and generating positive returns on our invested capital. That completes our prepared comments.

Raina, would you open up the call for questions and answers at this time, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Praveen Narra of Raymond James.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [2]

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I guess, we could start just on the change in the macro environment in terms of oil prices going -- moving higher. Can you talk about how your customers post budgets have kind of progressed? Obviously, it sounded like March was better than the rest of the quarter, but how are you thinking about 2Q and second half of the year in terms of what kind of indications you're getting?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [3]

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Well -- and I realized there's kind of a different set here. When I talk about Well Site Services and Downhole Technologies, we're really primarily driven by U.S. land shale play activity, and of course that's what everybody is trying to get your arms around. What I can say is when the prices collapsed in Q4, every customer I'm associated with and know was reassessing their budgets, their plans, really doing scenario planning. It was most evident for us with our land drilling operations. We fill these wells very quickly. They tend to be a little more discretionary. And generally when crude prices fall below $50, you see a significant quick reduction in activity. That being said, we also saw a slowdown in our completion services, not to the degree we thought.

But as we progressed through the quarter, we fairly quickly realized that whatever happened to crude prices, whether that was driven by technical trades, et cetera, we saw relief fairly quickly by end of January anyway, and again more people were really solidifying their plans. And so as you suggested, we did see continual improvement throughout the quarter with obviously March exiting at the higher rate than we had in January. And of course, it's now April 25. We're roughly 1 month into the quarter, but at this stage, we're seeing a continuation, if not modest improvement of exit rates in Q1 for land, and we see no indication by the customers that we work for that that's really going to change and go -- reverse itself in Q2.

So that's the best guidance. I mean that's -- it's the tough part about shale land, the visibility is just shorter. And I can only tell you what we've experienced, the conversations that we've had. And I would also tell you, as it relates to Well Site Services, of course, drilling we're already seeing quite a lot of those rigs go back to work. So the guidance that's embedded for Well Site Services, again, is proportionately down on drilling. On the way back up, it will be disproportionately weighted towards drilling because again pretty significant utilization decline in Q1 that we're already seeing a fairly significant recovery back to fourth quarter level. As it relates to Manufacturing/Offshore Products, these are longer lead time, as you know. Visibility for us is really what projects are in the market, which FIDs are out there.

But bookings and quoting activity, project awards are significant for us. Having a book-to-bill ratio of 1.63x really bolsters our confidence in both our, I'll call it, soft book-to-bill ratio that we provided last quarter, both in terms of absolute dollars as well as timing of receiving those awards and backlog really fueled our major project work that has been buoyed for us quite frankly the last couple of years. So it's hard for me not to feel a little more enthusiastic about our outlook for the balance of 2019 relative to where we've been over the last couple of years.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [4]

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Right. That's super helpful. I guess, if we could switch to integrated gun quickly. I guess, just to make sure, in terms of full commercialization, so it sounds like you expect that to be done in Q2. And could you also, I guess, talk about the pace of the production ramp up as that reaches to 2020?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [5]

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So I want to be clear of that. First of all, we, through GEODynamics acquisition and their long history on engineered perforating solutions, we're already a leader in the space. We already lead in terms of the components that are integrated into the gun systems. So I don't necessarily think of this as a revolutionary brand new product as much as it is a much enhanced delivery system. So what we're -- in other words, we have, I think, the best shaped charge in the business. So that's going to be integrated. We manufacture both long guns and short guns, that is going to be part of the package. What is less, I would say, known at this point is the switch and the packaging of that integrated gun.

And so I feel good about where we are. We are in field trials. When we do field trials, some of them are absolute, 100% successes, some of them require a little bit of tweaking. So we're kind of working through that in the current quarter and do expect commercialization fairly soon, whether it's late this quarter, early third quarter, again. As you said -- as you see in our first quarter results, we were actually showed some improvement on perforating solutions without having the integrated gun. We just firmly believe that our customers are looking for the improved reliability, operating efficiencies and ease of running, which means packaging products we already have into that integrated gun system, but I don't think we're on track.

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Operator [6]

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Our next question comes from Ian MacPherson of Simmons.

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Ian MacPherson, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [7]

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I believe congratulations are in order this morning, Cindy.

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [8]

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I'll take it, any day. Thanks, Ian.

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Ian MacPherson, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [9]

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Yes, for sure. The -- I would infer, correct me if I'm wrong, that the majority of the step-up in your orders in the first quarter pertained to the large production facility package bookings? Or was there also step-up in your base load orders in addition to that?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [10]

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Well, I have -- I'll -- just general agreement, of course. This was a significant order for us and a welcome one on many fronts. One, because of its size; but two, it is weighted towards our most proprietary products, if you will, kind of our core production infrastructure, floating production infrastructure product, so good. I will tell you though that our base business would have yielded a book-to-bill ratio north of 1 even without it, but not by a tremendous amount. But if you look back the last couple of years, we've been at or slightly above a 1 to 1 book-to-bill for the last couple of years without any major project awards. And so now having that, it really did elevate that book-to-bill ratio far north of 1.5x.

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Ian MacPherson, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [11]

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Okay. That's very helpful. And then it sounds like you're more comfortable and encouraged with the 1.3 to 1.5 target for this year, and there are other significant awards that are in play for you later. Can you talk to what the gestation period looks like for the one that you just got and others going forward? And how should we think about your conversion of the backlog going forward relative to, I guess, the recent standard?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [12]

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Well, I think we're in great shape, number one. We've been much busier in our manufacturing facilities in past years. And so they are eager to get to work, and we'll be very attentive to quality, timely delivery and on-budget type performance for the orders that we are getting. So I would say that's obviously good news. When we talk about our subsea production infrastructure, these are -- obviously, require lot of front-end engineering and materials fulfillment. We'll start to recognize revenues this year, but it won't be immediate because of that fact. We do percentage of completion, but the front-end engineering done lend a lot to revenue recognition. The good news is other areas of backlog build, particularly our standard connector products is a little bit shorter duration in terms of revenue recognition. And most of the sequential improvement in revenues and EBITDA that we guided to is really driven by standard connectors at this point as opposed to a lot of revenue recognition from this large order, if that answer your question, Ian?

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Ian MacPherson, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [13]

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Absolutely. But generally speaking, the bigger POC projects will convert typically within a couple of years?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [14]

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Normally, I would say 18 months or less. I haven't studied this one particular order at this point, but normally I'd say 18 months or less for that one. The good thing is, again, it starts fairly immediately, lending itself to engineering cost absorption and down the road, of course, manufacturing facility cost absorption.

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Operator [15]

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Our next caller is Stephen Gengaro from Stifel.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [16]

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I guess, Cindy, 2 questions. Just start with on the Offshore/Manufactured Products side. The order flow you're seeing right now, I know there is sort of an overhead absorption positive that we hopefully see as you see this backlog unfolds on the income statement. But how is the pricing looking right now as far as what you're bidding on versus kind of what you've seen over the last year?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [17]

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Pricing, this is kind of one of the issues we have in the sense that the more that we are weighted towards our proprietary product, I would say, the less pricing pressure that you're getting. Because these are more project oriented economics, not necessarily individual component price competition. We've tried to be responsive to the needs of our customers in terms of providing the most cost-effective equipment that we can. We've also reduced our cost in the process. You've seen that through streamlined manufacturing and, to some degree, of course, headcount reductions over the last 3 or 4 years. So again, we -- this type of product, I just generally say, with that combination of events, we expect similar margins to what you've witnessed in our history.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [18]

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Okay. And then, my second question, it might be for Lloyd, and you removed from sort of disclosure the completion service job tickets and average revenue per ticket, which quite honestly always confused me anyway. But that being said, when you look at your completion services piece of Well Site, how should we think about that revenue growth relative to either rig count growth or frac stage growth? Will it be sort of in line-ish, will it be a little better? And can you remind us kind of what portion of that business is U.S. land?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [19]

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I'm going to start with that and just explain why we did take that disclosure out, and it's exactly what you just said. We were probably as confused as you are. And then you say, why is that. Everything is changing, and what we are and everybody else is trying to do is create efficiencies within our own operations and generate free cash flow. And to the extent that we might have held a ticket open for weeks, as an example, across month, and we're billing quicker. And so yes, you have a greater number of tickets, but do you really have a greater number of revenue. We acquired Falcon.

So our mix of ticket count is also different today than it was, kind of pre the Falcon acquisition. And then our customers have changed. They are truly focused on every day, every hour of efficiencies. They are not necessarily going to hold equipment out from one well to the next, which they might have done, quite frankly, in prior periods. And so we recognize what you do is, that this is not really lending itself to meaningful information for us or for analysts, whereas it used to and it used to correlate to drilling rig count. And with the really change in completion activity, we said it correlated more to well count, which aren't really readily available or is as accurate as probably the rig count.

So again, we never take away information we think is useful to you. We felt like this was not only not useful, it might even be confusing. So that was question 1. Then question 2, what are we more tied to. It would be well count. There's always going to be nuances in terms of equipment mix on given jobs, some more proprietary, some less proprietary, different prices. But generally speaking, well count, these are not downhole consumables, so they don't vary necessarily with horizontal footage or stages completed, like my Downhole Technologies business. So well count is really the better driver there. I think you asked one more question, I was hopeful that Lloyd would answer. I don't struck, what it is?

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Lloyd A. Hajdik, Oil States International, Inc. - Executive VP, CFO & Treasurer [20]

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Stephen, you asked about geographic mix on completion services?

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [21]

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Yes, Lloyd.

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Lloyd A. Hajdik, Oil States International, Inc. - Executive VP, CFO & Treasurer [22]

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Pretty consistent. Fourth -- excuse me, first quarter was 84% U.S. land and the balance between U.S. Gulf of Mexico, offshore and international.

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Operator [23]

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The next question comes from George O'Leary of Tudor, Pickering, Holt.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [24]

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My first question is really on more an actual curiosity than anything else but given the other thing we're hearing about from the -- some of the wireline players is also increased demand for these quick connect guns and then maybe some disintermediation of the wireline players, whereby the E&Ps go direct to the manufacturers with the charges themselves and try to be more selective with the charges. I guess, you talk about the interplay there between quick connect versus the integrated guns? And then secondarily, if you're seeing E&Ps coming to you guys more often, to GEODynamics more often to buy those charges directly?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [25]

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George, thanks for the question. You did cut out briefly. I think I heard all of the content, but if I missed anything, just kind of repeat the question after I address your question. So -- I mean, you are definitely hitting on a point, and it might have big picture stand back and look at it. Our customers are going to dictate how they want things performed at the wellsite, service companies are not. And they're looking for the most efficient, most effective and most cost -- lowest cost option to bring that to market in the safest fashion possible. You were talking about the differences between basically products shipping to the wellsite, being assembled on the wellsite by wireline companies.

Collectively, as an industry, that is both product suppliers, services companies and the E&P customers have all said, I want this done more safely and more efficiently. Because at the end of the day, most of the "issues" that occur or misruns that occur are human errors at the wellsite. We all talk about the difficulty in attracting and retaining skilled labor. So that kind of variation when you know that human error can cause problems at the wellsite, if there is any way that the industry can mitigate that, then we have an obligation, I think, to do that in support of our customers, and quite frankly, in support of safety at the wellsite. That is really what this movement to the integrated gun system is all about.

Now that being said, how best to deliver that. The ship is straight from the factory and make it as simple as possible for a wireline gun loader to do it on location, do you send drone personnel out to ensure that it is absolutely run with the standards. That's all evolving, quite frankly. And it will evolve in a manner that is most supportive of what our customers are looking for at the wellsite. So there's no one single answer to that.

As I understand it, there is roughly 48 or 49 wireline companies in the Permian Basin alone. All of them handle this work differently. And so one answer does not apply to everybody, quite frankly. And the majors execute and perform these services differently than selected other wireline companies. And so the trend is clearly what I enunciated, but there's no one single answer today anyway that suites all operations and all customers.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [26]

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Okay. Great. You hit on all my questions, that was very helpful for framing, Cindy. I appreciate it. And then maybe just one more for me. On the offshore products side, the big South American production award, underlying book-to-bill sounds like it would have been north of 1, even without that larger one.

I think last time we spoke, you'd mentioned that Southeast Asia was also a region where you're expecting to see some pick up. Have we -- is that still on to come and might there be some large rewards from that region or are there other regions, other geographies where you're also seeing green shoots that could also provide a tailwind to orders as we progress through the rest of the year?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [27]

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I'll just say, yes, yes, and yes. And so what did that mean? Yes, we are still seeing some bidding and quoting activity that is attractive and interesting in Southeast Asia. Yes, we do expect to see at least one, if not a couple, of significant project awards out of that region. And then yes, there are other basins of interest and we talk about South America, this most recent award, I don't mind to be honest. And we talked about Southeast Asia. But we're bidding work elsewhere, Gulf of Mexico, Brazil, I'd say a lesser extent in other regions. And it's -- we're really -- right now, we're kind of talking about our large OD conductor casing connectors, we're talking about subsea floating production facility work.

There's also an uplift in terms of kind of drilling equipment, mostly inspection, repair, upgrade type work. And there's also a little bit of a lift on development drilling, which again that feeds into our, we call them, standard connectors, large OD conductor casing connectors. So a little bit of an uplift across the board. And I should also say, even though we do have military work, and we're expecting some renewed interest in backlog coming from military as well.

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Operator [28]

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Our next question comes from Sean Meakim with JPMorgan.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [29]

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So Cindy, I think the original bogey for commercialization on the integrated system was for the second quarter. Is that the timing could slip a little bit. Can you maybe just give us a little feel for the puts and takes in terms of what you're trying to accomplish to get that towards -- across the finish line?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [30]

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Well, it's just basically we want extremely high reliability. I mean, I need a 94% reliability. We want that to be improved. We want ideally 0 misruns on your field trials, but it's not that an incredibly high reliability factor, and we're getting there. We're close to that at this point in time. There are -- I don't probably need to go through the very, very technical nuances that are involved there, but this is about limiting misruns to a very low level.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [31]

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That's very helpful. That's exactly what I was looking for. And then I'd love to hear your latest thoughts on the competitive dynamic in that business. On the one had you have 4 players, higher barriers to entry. It seems folks tend to play nice in the sandbox historically, but there's been the shift in customer adoption of these integrated systems, these may be taking off rather quickly, so there's a bit of race ongoing.

I'd love to hear more how you're viewing the competitive dynamics in light of -- seems like [boom] is making some strong inroads along with Titan and then Core is now commercial with their integrated switch system. How that shifting versus what the marketing had looked like for some period prior to this changing customer behavior?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [32]

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I think, Sean, I'll comment just a little bit further. But this is one product within a whole suite that we are developing within our Downhole Technologies segment alone. So I don't want to overplay this hand. But I'll just simply say GEODynamics has absolutely been a leader, if not the leader, in engineered perforating solutions for years. This is, as I said, more of an improved delivery system of technologies that are -- were components before that we're now integrating more into a system delivery. We are very cognizant of the competition we have. We are respectful of the competition that we have, but we also believe that we are a clear leader in this space.

And these things don't have -- we may be talking about them more in the last quarter or 2, simply because of some other companies that are very much weighted towards this single product, where we are multifaceted at the end of the day, but this has been under development for years. I mean -- and when you talk about an addressable switch, this is not something you dream up in one quarter and bring it to market the next. These are highly technical, highly complicated, highly regulated service delivery options to our customer base. And so I don't think that the competitive landscape per se has changed. What has changed is our customers desire on how that is going to be delivered to the wells.

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Operator [33]

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Our next question comes from Connor Lynagh of Morgan Stanley.

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Connor Joseph Lynagh, Morgan Stanley, Research Division - Equity Analyst [34]

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Just wondering if we could turn back to the completion services business margins on the EBITDA line. They've been kind of bouncing around in the mid- to high-teens. I'm just thinking higher level here. What does it take to get those higher from here? Is it geographic mix, product mix, pricing, what do you think about that?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [35]

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Well, I would generally say all those factors would be helpful. But I'll generally say what I've said in the past, I just need more work. And our margins are accretive margins from almost every product line because we have a high level of field infrastructure across all of the Lower 48, quite frankly. We support international operations as well, that's both through machining, technology, valves, district level support, product line support, I think you get the point.

So I just would love to see more work. If that were more geographically diverse, that would also be very helpful. I've said in the past and I would reiterate again. When you got about half of the U.S. rig count located in one basin and so many service companies chasing that work, it puts downward pressure on price. I mean -- so geographic certainly would help. I mean, you and I both know that price is always helpful, but I don't count on that. I'm not counting on that for quite some time. I think what we need to do is scale the business, control our costs as we described in our conference call notes and those incremental margins should fall out.

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Connor Joseph Lynagh, Morgan Stanley, Research Division - Equity Analyst [36]

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Got it. And I think you've spoken in the past about some content shifts in the U.S. away from your higher technology products. Has that fully reversed at this point? Or is there still more room to go on that front?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [37]

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I don't think that has shifted. And in fact, we still favor a couple of our high-end product lines that are proprietary are our isolation tools and equipment as well as our extended-reach technology through the Tempress flow. Those are, in fact, I think, gaining broader adoption. But our mix is different, largely because of the Falcon acquisition. That may be what you're thinking about, which puts us more weighted towards flowback. While this is high-end flowback work, it's not quite the same. It has a more proprietary patent-protected equipment that we have in some of our other product systems.

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Operator [38]

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Our next question comes from Ken Sill of SunTrust.

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Kenneth Irvin Sill, SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst [39]

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Congratulations for helping all of us there.

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [40]

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I'd like to be on the receiving end of that.

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Kenneth Irvin Sill, SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst [41]

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Yes, it's nice for a change. I just really have a kind of big question. So we've seen a nice rebound in oil prices, but we know historically that the international market just moves more slowly. In North America, at least on the rig count basis, there's usually a 3- to 6-month lag. So it sounds to me that what you're saying is your customers have kind of come out from under the tables, but it doesn't sound like there's actually been much response to commodity price improvement in North America and maybe not any at all internationally? And could you kind of talk about how you think those 2 markets will progress if we stay in a $60 to $70 oil world through Q3, Q4?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [42]

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I think you hit on a point that has been true for many, many years. But I think the other key element here is that both international and deepwater tend to be longer lead times type opportunity. So while we're really now seeing inflection, obviously, in project FIDs, bidding, quoting activity, that has been going on for quite some time. This isn't like the light went off when crude oil prices even went done in Q4, recovered the 45% they have to date in 2019. So these are real projects with real economics and generally we know long-range pricing outlook as opposed to spot pricing outlook.

And so I'm going to agree with everything you said. But probably this has been a long time coming, in terms particularly of the deepwater field development efforts that we are seeing, internationally will move slowly. But it also tends to have lags and commitments and just realize the customer base is so totally different, whether these are NOCs, the large IOCs. And once they commit the project and ramping in activity, you're almost a necessity, you have to carry it through because you will have mobilized equipment, oftentimes you've entered into long-term contracts or arrangements with suppliers. It's just the a bit different than when you're doing everything on a well by well, pad by pad basis in highly competitive basins like the Permian.

So they just operate, as you know, Ken, so very differently. I've been with so many of my investors. I understand what they are looking for, not only from our company, but for our competitors and our customers. I think that fact alone is what is quelling a bit of the activity on shale plays, on land in the U.S., and I'm not sure you should inflect what you normally would when you see this level of pricing because of the cash flow ROIC demands of the owners of these companies in the United States. And so I think there's a different dynamic here in play than just movement in crude oil price.

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Kenneth Irvin Sill, SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst [43]

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Yes, this is the big debate among investors, is like all the public E&P guys saying we're not going to change our budgets no matter what. But the capitalist in me says somebody will spend more money at $65 than they would have at $55 at some point. I just don't know how much of the market will respond to that. I don't know if you guys will...

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [44]

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I [won’t tell on that], yes.

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Kenneth Irvin Sill, SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst [45]

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Okay. But -- so it's encouraging that we're seeing the rig business pick up because, obviously, that's kind of front edge of thing, at least for you all.

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [46]

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Yes, it is. And of course, we supply the downhole products at the rig site too and so having sequentially outperformance there, that's also will lead obviously to completing a well.

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Operator [47]

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Thank you. There are no more questions at this time.

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [48]

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Okay. Thank you so much, Raina. Thank you to all of you who have dialed into the call and spent the time to give us some questions and answers that you are interested in and concerned about. I know it's an incredibly busy week. Again, thanks for your time. We look forward to catching back up with you at future conferences or our next conference call. Have a great week.

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Operator [49]

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Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.