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Edited Transcript of OIS earnings conference call or presentation 25-Oct-19 3:00pm GMT

Q3 2019 Oil States International Inc Earnings Call

Houston Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Oil States International Inc earnings conference call or presentation Friday, October 25, 2019 at 3:00:00pm 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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* Coleman Wayne Sullivan

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* George Michael O'Leary

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

* Kurt Kevin Hallead

RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research & Analyst

* Marc Gregory Bianchi

Cowen and Company, LLC, Research Division - MD

* Praveen Narra

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

* Sean Christopher Meakim

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

* Vaibhav D. Vaishnav

Scotia Howard Weil, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Oil States International Third Quarter 2019 Earnings Conference Call.

My name is Vanessa, and I will be your operator for today's call. (Operator Instructions)

I'll now turn the call over to your host, Patricia Gil, Investor Relations.

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

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Thank you, Vanessa. Good morning, and welcome to Oil States' Third Quarter 2019 Earnings Conference Call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; Lloyd Hajdik, Oil States' Executive Vice President and Chief Financial Officer; and we are joined by Chris Cragg, Oil States' Executive Vice President, Operations.

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. 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 third quarter 2019 earnings conference call.

Our reported results for the third quarter were largely in line with the guidance that we provided to the market in connection with our second quarter earnings conference call. While our revenues were at the lower end of our guided range, our margins were at the upper end, allowing us to exceed the midpoint of our guidance on EBITDA. Similar to many other oilfield service companies, we witnessed U.S. land-based activity declines later in the quarter, but our operations were fairly resilient overall and benefited from international and deepwater-driven activity improvement.

Our third quarter revenues were flat sequentially, while our costs were lower, contributing to an 18% sequential increase in EBITDA. Each of our 3 segments contributed to the sequential EBITDA improvement, which can be attributed to strong operational execution and good cost control.

I will go through each segment's operating results in more detail later in the call. As I have highlighted on previous calls, our company has consistently generated free cash flow after CapEx and this quarter is no exception. Our cash flow from operations totaled $50 million, which allowed us to pay down $34 million of revolving credit facilities borrowings in the quarter after spending $14 million on capital expenditures.

As you will see, we have continued to consistently reduce debt in 2019, resulting in a net debt to book capitalization ratio of 15% at September 30.

Lloyd will review this with you in more detail. Lloyd?

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

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Thanks, Cindy, and good morning, everyone. During the third quarter, we generated revenues of $264 million, while reporting a net loss of $32 million or $0.54 per share. Our third quarter earnings were negatively impacted by $34 million or $0.45 per share noncash impairment charge to reduce the carrying value of the fixed assets in our drilling services business.

Our third quarter EBITDA totaled $31 million with an EBITDA margin percentage of 12%. Reported EBITDA was also negatively impacted by $700,000 of severance and downsizing charges as we continue to adjust our cost structure and rightsize global operations to better align with the industry outlook.

As Cindy mentioned, we generated $50 million in cash flow from operations and invested $14 million in capital expenditures, resulting in $36 million of free cash flow generated in the quarter.

On the year-to-date basis, we have generated $70 million of free cash flow, which is cash flow from operations after CapEx and have paid down $71 million in outstanding borrowings under our revolving credit facility. In addition, during the third quarter, we repurchased $1 million in principal amount of our convertible senior notes at a 14% discount to the par value.

Our operations have historically and continue to generate significant amounts of free cash flow. Since 2014 and through the third quarter of 2019, we have been free cash flow positive in all but 2 quarters. September 30, our net debt to book capitalization ratio was 15% and our available liquidity position at the end of the third quarter was approximately $154 million inclusive of cash on hand totaling $15 million.

Our liquidity position increased $45 million since the end of the second quarter.

In terms of our fourth quarter 2019 consolidated guidance, we expect depreciation and amortization expense to total $29 million. Further, we expect net interest expense to total $4.6 million, of which approximately $2 million is noncash amortization of debt discount and debt issue costs. Our corporate expenses are projected to total $11.4 million.

Fourth quarter capital expenditures should approximate $15 million. As we are in early stages of our budget process for 2020, we believe it's important to provide some initial color on our expectations for capital expenditures and depreciation and amortization expense for next year.

For the full year 2020, we expect investing approximately $50 million in CapEx. Further, with the write-down on the carrying value of our land drilling rigs in the third quarter, combined with lower levels of capital investments over the last few years, our depreciation and amortization expense is expected to approximate $105 million in 2020.

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.

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

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Thank you, Lloyd. Starting with our Offshore/Manufactured Products segment, we generated revenues of $105 million, segment EBITDA of $17 million and a segment EBITDA margin of 16% during the third quarter. This represented a 3% sequential increase in segment revenues and a 7% sequential increase in segment EBITDA.

Our improved results were driven by an increase in project-driven sales and other products and services revenues, coupled with improved facility cost absorption at the higher revenue level.

Our incremental segment EBITDA margins were strong at 37% as a result. We received 1 notable project award during the third quarter of 2019 for military products to be delivered over the next few years. Our orders booked in the quarter totaled $123 million, resulting in a 4% sequential increase in backlog and a book-to-bill ratio of 1.2x. Year-to-date, our book-to-bill ratio totaled 1.5x. At September 30, our backlog totaled $293 million, which is our highest reported backlog since March 31, 2016.

Customer conversations remain constructive and visibility for additional major project awards is developing favorably for subsea pipeline and floating production facility content as we progress into 2020.

In our Well Site Services segment, we generated $116 million of revenues, $20 million of segment EBITDA and a segment EBITDA margin that averaged 17% in the third quarter 2019, compared to 16% reported in the preceding quarter. These results benefited from improved completion services customer activity in international markets and in the Gulf of Mexico, along with the benefits of continued cost-reduction measures.

In our completion services business, our revenues were flat sequentially. However, our incremental EBITDA margins were 352%, reflecting cost-reduction initiative and the improved mix of international and Gulf of Mexico work, which, for the third quarter, comprised 21% of our completion services business revenues.

During the third quarter of 2019, following a strategic review of our drilling services operations, we made the decision to reduce the scope of our drilling operations with plans to reduce our fleet from 34 rigs to 9 rigs, reflecting ongoing weakness in customer demand for vertical drilling units, particularly in the Permian Basin. As a result, our drilling services business reported a noncash impairment charge of $33.7 million. The remaining 9 rigs in our fleet will continue to serve customers in the Rocky Mountain region.

In our Downhole Technologies segment, we generated revenues of $43 million and segment EBITDA of $6 million in the third quarter. While sequential segment EBITDA improved considerably, revenue declines were realized as the segment experienced lower customer activity levels later in the third quarter. Segment EBITDA margin was 14% compared to 8% in the preceding quarter.

As a reminder, second quarter 2019 segment EBITDA margin was negatively impacted by $1.4 million of inventory write-off associated with new product design changes.

Regarding progress on our integrated gun offering, we were pleased to release our [vapor] integrated gun systems earlier this month. The vapor system provides the benefits of an integrated gun system with the versatility of an open architecture design, providing operational flexibility to meet wireline and operator customer needs and preferences. Vapor can be provided with our newly released addressable switch. The addressable switch is a proprietary intrinsically sized switch that is uniquely filled, configurable to be run in standard or rapid-fire mode improving speed and efficiencies.

In addition to the vapor system, we are progressing field trials of our [Stratech] integrated gun system, which is a premium system designed to exceed all other integrated gun offerings on the market today by offering the lowest requirement for handling on the wellsite. We expect to commercialize the Stratech system by year-end and look forward to providing our customers a set of integrated gun offerings designed to best meet their individual needs for reliability, efficiency and performance.

I would now like to share our thoughts on the market outlook for the fourth quarter. As all of you realize, the U.S. rig count is currently 8% below the third quarter average of 920 rigs. As a result, we expect our U.S. onshore businesses and product lines to be negatively impacted by these lower rig counts and seasonal weather, coupled with the likely impact of holiday downtime and exhausted customer budgets.

Offsetting these U.S. headwinds, we expect sequential revenue and EBITDA growth to be generated by our Offshore/Manufactured Products segment as higher levels of backlog convert to revenues and we benefit from improved facility cost absorption.

In our Offshore/Manufactured Products segment, we forecast revenues in a range between $104 million and $112 million buoyed by a higher starting backlog level, which will convert over time into greater major project revenue. Segment EBITDA margins are expected to average 15% to 17% depending on products and service mix.

We estimate that fourth quarter revenues for our Well Site Services segment should range between $96 million and $103 million with segment EBITDA margins expected to average 15% to 16%.

Given our decision to reduce our land drilling fleet, we believe it is important to provide separate guidance for our completion services business with revenues expected to range from $90 million to $95 million and EBITDA margins expected to average 16% to 17%.

For our Downhole Technologies segment, we believe that our fourth quarter revenues will decline sequentially due to expected lower customer activity levels and range between $33 million and $39 million with segment EBITDA margins averaging 9% to 11%.

In conclusion, we continue to position our segments to capture future market opportunities, while tightly managing cost. Our growing Offshore/Manufactured Products segment backlog provides enhanced revenue visibility into 2020 and beyond. By generating a higher baseline of revenue in the segment, we are better able to absorb our costs and deliver improved margins going forward.

Our U.S. land-based operations will be challenged in the fourth quarter given my comments above. However, in our completion services business, we continue to expand our scope of operations internationally to capture incremental revenue outside of the United States, mitigating some of the pressure that we expect to face from weakening U.S. land-based activity.

All of our segments remain focused on the research and development of new technologies, which support our product and service offerings over the long term. We remain diligent in controlling our cost, continuing to generate positive free cash flow, while reducing leverage as we strive to generate sustained returns for our shareholders.

That completes our prepared comments. Vanessa, would you please open the call up for questions and answers at this time?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have our first question from George O'Leary with Tudor, Pickering, Holt.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [2]

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Wanted to start off, Cindy, it's really nice to hear the progress on the [vapor] perforating system. And then just kind of comparing and contrasting that with what you guys are working on the [Stratech] side is -- [we think their] E&P well design, seems to be that shorter perf guns are better, whereby you can get more clusters and more shots per stage executed. Is that part of the thought process there? Just kind of help us walk through the differences between those 2 systems and then how much does that length of each perforating gun segment matter?

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

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Well, I mean, you hit on industry trends for sure, but shorter guns are absolutely preferred by our customers. And so just accept that as the new norm, if you will, and we have obviously moved to that in response to customer needs basically, but that would be integrated obviously into both the [vapor] system and the [Stratech] system. So think of that as just an industry trend that will permeate all of the future offerings, whether those are conventional or integrated.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [4]

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Okay. That's very helpful. And then on the completion services side, it was encouraging to see international and Gulf of Mexico work kick in. I know that can be good work for you guys when it crops up. I just wanted to think through the line of sight to that work and not from necessarily a near-term perspective as you think through 2020, is more of that work looking like it's going to crop up? Is there more dialogue around that type of work going forward?

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

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Yes. George, it's always hard to predict exactly where you end up. I would just point out that the kind of weighting of international plus Gulf of Mexico and the progression this year and use that as an indicator, we had a relative percentage weighting towards international and Gulf of Mexico in the first quarter at 16%. It grew to 18% in the second quarter and this quarter came in at 21%. So you're seeing that continue on, which is reflective of our efforts to expand internationally. And I would point out that's not just a completion services strategy. We've got a good base of operation. Obviously, we'd like the balance of having both international and with exposure to the U.S. shale basins that these are also initiatives that permeate into our Downhole Technologies segment as well.

So visibility is never great whether you're in the U.S. or the Middle East, but I think, if you look at the trend line, you can see that we're making some good strides towards getting that balance.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [6]

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Great. That's super helpful. And then just sneaking in one more. A lot of folks have complained about destocking of inventories by their customers, especially as it relates to the North American onshore market. I would imagine that the Downhole Technologies business might be seeing some of that at this point. Is that contributing to the compression quarter-over-quarter in that segment's revenue guidance historically as you analyze that business eventually...

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [7]

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I'm going to say -- I think you just have to kind of look at each company individually and not necessarily assume that something like destocking affects everybody. When I think about -- we are so good at our manufacturing process that it truly feels like a just-in-time inventory with a lot of these downhole consumables. And there might be a modest amount if you're selling into distribution centers, but the reality is, we're pretty much book and ship straight to the wellsite, and I don't see that as a significant issue for us. I will say that ordering activity may sometimes precede some of the work at the wellsite, so maybe it's an early indicator. Again, the rig count is down 8% today relative to the average of Q3. So I don't think it's unusual to see that Downhole Technologies, particularly in the latter portion of the quarter, saw some of those early indicators of these rigs going down into the holiday period.

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Operator [8]

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We have our next question from Sean Meakim with JPMorgan.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [9]

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So Cindy, in Downhole, congrats on getting the first integrated system commercial and I think the suite of systems sounds very interesting. Can you maybe talk about expectations for a sales cycle with customers on these new system? Do you have folks ready to trial it? Just some more detail on your market penetration strategy would be helpful, I think, and including to what extent pricing is part of that strategy?

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

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Well, I appreciate the question very much. And first of all, let's just maybe talk about where the market is and what our strategy is around integrated gun offerings. And I would just say simply put, we remain a customer-focused organization and we're responding basically to what we're hearing from our customers that some prefer more of the open architecture system that allows them to customize their gun systems and certainly a wireline company that's already made investments in gun loading shop and wiring personnel, a preference there to kind of step beyond from conventional systems to the [vapor] system. The Stratech system, again, we believe will be kind of state of the art for the industry as we move forward, but depending on who you are that may not be your immediate preference. So first thing is first. We're going to get that vapor system out. We've introduced the addressable switch, which is also a new product line. But I think, your question, which I appreciate is, it does take us a little while to ramp the supply chain. So this will kind of progress more towards meaningful sales in 2020. And one might say well, why didn't you ramp it quicker? Well, we wrote off switches in Q2 and we were cautious to be sure that we got the switch right, but we will be ramping up that supply chain for vapor and marketing that in the near term and progressing the [Stratech] system throughout the quarter and we feel like we have really kind of -- and I don't want to use the word debug, but I say more than anything communication, as an example, from shooting panels to the switches, tweaking a little bit and we'd like a couple more field trials under our belt. And so we kind of anticipate finalizing that process late this quarter. So it definitely is more of a 2020, but very pleased with the efforts of our engineering staff and the technology staff into getting us where we are really as we enter into the fourth quarter.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [11]

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That's very helpful feedback. The improvement in Downhole Tech margins were certainly nice to see. You mentioned the write-off of the switches after 2Q. Did that have any impact on boosting the margin in 3Q? And then I was looking at the guidance you offered for 4Q margins, is that just basically fixed cost absorption or is there anything else in there in terms of pricing or mix that we should consider?

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

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Well, it's really fixed. First of all, our products carry some pretty good incremental. So I'm eager to start talking about incrementals rather than decrementals, yes, I mean, it's fixed cost. We reduced the top line there and we're working a lot on our manufacturing efficiencies, evaluating in-sourcing manufacturing versus outsourcing, doing anything we can to really become a very, very efficient manufacturer and we'll continue to do that. But just the mere fact that the top line is coming down hurts us a bit on fixed cost absorption, but we had no benefit, if that's the question, in Q3 related to switches. And we really had no sales yet. So this is kind of new product that will help us prospectively.

The margins right now are just -- it's a little hard to predict perfectly, but we gave you -- particularly in this environment as we enter the fourth quarter, but we gave you what we think is very rational margin guidance at this point.

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Operator [13]

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And we have our next question from Praveen Narra with Raymond James.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [14]

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I guess, speaking on the Downhole Technologies, how -- this year has been pretty lumpy in terms of where revenues and margins have gone. So how should we think about what that normalized incremental should be as we go into 2020 and we get some of these project -- product rollouts?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [15]

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I would say, first of all, as we are bringing new products to market, let's think about that kind of sequentially improving throughout 2020. It won't be immediate in terms of the revenue bring up and therefore, the margins just because of that fixed cost absorption will probably go hand-in-hand with that. And like any business, I'll tell you the incrementals are dependent on 2 major drivers, not going to be a shock to you here, that is both volume and price. And we're going to see volume ramp, new products do that, that helps you from a fixed cost absorption. We've all seen some pricing pressures in the market generally that, I think, will temper some of those incrementals. So if I kind of bring all of that to bear, I would say, in the early quarters, assuming we're going to get a steady level of activity from year-end, I think, the incrementals are probably more in the range of 25% to 40%. And again, it's that tension between what's the volume ramp and what's the pricing implications and mix. But I think a healthy 25% to 40% is reasonable.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [16]

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Okay. That's very helpful. And then, I guess, if we can think about the Offshore/Manufactured Products segment and maybe the guide, also we have product-driven revenue should start to increase, how do we think about the short cycle piece of that? Last year, it held up pretty well. What are you guys expecting for 4Q and then as we go into 2020 for the short...

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

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Praveen, again, that's a great question. It's a sign that you follow us well and you know our business. But major projects ramping, backlog supports that, margins in our backlog are at consistent levels with prior periods. So that is the plus. That leads on a global basis to better cost absorption. Again, another plus, but there's going to be a tempering impact on our short cycle because it is exposed to U.S. land-based activity. Embedded in the guidance even though we're up sequentially in both revenues and EBITDA, it does factor in a decline in our short cycle, very similar -- at the decremental, very similar to what we're talking about in our completion services line and also in our Downhole Technologies line. So while up, not up as much as it could be once we kind of reestablish improving activity on U.S. land.

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Operator [18]

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We have our next question from Kurt Hallead with RBC Capital Markets.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research & Analyst [19]

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I guess, my focus here would be on the Offshore/Manufactured part of the business. You talked about increased visibility or feeling good about the visibility for -- specifically for subsea pipeline and floating content. Just kind of give us some general sense there of maybe what regions you kind of see some of this dynamic coming from? And do you have any sense as to whether or not there is additional legs, maybe even beyond, say, 2020, not kind of trying to pinning you into a corner. Just trying to get some feel for what kind of momentum you see building there.

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [20]

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Yes. It was interesting. We just had our Board meeting and Scott Moses who leads that division kind of showed us a chart of major offshore production facility content and it was just stark in terms of the lag in activity that we've seen in 2016, 2017, 2018, but based on bidding and quoting project announcements, the next 3 to 5 years do look very promising. And so, again, these are very specific projects. Right now, of course, the weighting we're seeing is Brazil. Obviously, the Guyana prospects and Gulf of Mexico are kind of some of the more imminent ones, I will say, but they're a little bit broader base as I said in the past with the North Sea having some smaller opportunity, Southeast Asia contributing, but the weight are really going to be in South America.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research & Analyst [21]

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Got you. Appreciate that color. And then with that kind of dynamic as the backdrop, do you feel pretty -- do you think it's a reasonable assumption at this point to think you can get a book-to-bill north of 1.0 as you head out into next year as well?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [22]

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Well, we're well -- we hadn't gone through the -- I'd like to have a budget and facts behind me before I give that, but just in terms of overall sentiment, first of all, I should say we expect bookings in Q4 to be at similar levels to Q3 just in terms of book-to-bill ratio. I'll give you a better formal guidance on 2020, at least [false] guidance, once we go through the formal budgeting process.

My however on that is we're seeing better activity bidding and quoting not only on production infrastructure, which obviously that's some of our core best-performing kind of bread-and-butter projects. So we're excited about that. There is a certain amount of capital drilling equipment that is coming to market largely because of an improvement in offshore activity. We can participate in that area as well. What we hope for is that we at least stand a stabilization of land-based activity so that really all segments are contributing as opposed to having the major projects contributing, but being weighed down a bit by U.S. land activity. And right now, I think I feel more positive about 2020 than maybe others do just based on basic supply-demand fundamentals as we see them, acknowledging that it won't be immediate. It may take to mid-year to get visibility for some of that. But, anyway, I feel really good about where we are positioned overall. I think both the offshore and international areas are beginning to recover off very low bases, I'll acknowledge that. And we'll see, I believe, Lower 48 stabilize next year.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research & Analyst [23]

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Good. Great. And then if I can squeeze one more in just on capital allocation. You guys already provided an outlook for CapEx for next year. I know that you guys tend to see quite a bit of M&A-related type dynamics, but just curious to get an update on your temperature as to share repo versus debt reduction versus M&A and how you see things at this juncture?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [24]

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No, I think that's obviously the most important question shareholders want to understand from us. And what we've done throughout 2019, as you know, is simply pay down the revolver. We're not concerned about our balance sheet at all quite frankly, particularly having our real debt -- that convert, that carries a 1.5% cash interest rate. In other words, when we think of the free cash flow from operations less CapEx, we get a pretty healthy number and very little of that has to go to debt service. And we paid down that revolver dramatically more because we just hadn't seen a lot of M&A optionality. And quite frankly, there are many more companies in the space, as I'll call it, that are not nearly as healthy as we are and we will not do a deal that further levers our company or damages our balance sheet. We think it's a differentiator right now and we're going to be very secure in keeping that.

I'll also say we just hadn't seen much of anything we would be interested in doing from an M&A perspective and probably lack of opportunity puts it lower on the list quite frankly as much as anything. So near term, you'll continue to see debt paydown. Obviously, share repurchases are an option for us that we are constantly evaluating. Particularly, we -- I feel great pride in saying I've been here 20 years and we didn't have any real net incremental shares outstanding from when I took the company public in 2001 with the exception of acquiring the GEO transaction. So we've got about 8.7 million incremental shares. The market loved that transaction when we did it, stock was up dramatically and that was valued at [34 shares.] So it's not lost on me I can buy back a decent amount of shares at a much lower price and it will be carefully evaluated from us against other capital allocation priorities. But share repurchases take front stage above M&A. I'll say that unequivocally.

We're also meeting with all of our major shareholders. I think we have very sustainable free cash flow after CapEx, and therefore, I wouldn't necessarily eliminate the thought of a dividend at some point in time either. I think we're uniquely positioned to have that possibility, but again, we listen to our shareholders and try to weigh what they view as priorities. And I'll only say research and development and organic growth always comes first. But we have always been able to fund both of those things out of free cash flow. So I'm really talking about capital allocation priorities after funding, necessary growth CapEx and R&D.

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Operator [25]

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Our next question is from Marc Bianchi with Cowen.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [26]

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I wanted to just go back to the order progression for fourth quarter that you talked about for Offshore/Manufactured. Sounds like it's going to be at a pretty healthy level here, but I don't -- I'm curious if there's anything -- any large awards that are contemplated in that? Or if this is sort of kind of a run rate recurring number that we might be able to think about as we head into '20?

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

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Yes, I mean I think that's a good question, but there, we do predict that we'll have one -- we define large order as in excess of $10 million and we do have 1 forecasted in Q4.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [28]

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Okay. Okay. That's helpful. And then just on the -- on wellsite. If I look at the guidance here, it implies a decremental at the midpoint of about 30%, which seems reasonable, but you have some cost cutting that's going on. I would have thought that perhaps the cost cutting could offset that more, maybe there's more pricing weakness, maybe there's conservatism. I'm just curious if you could talk to kind of what's left in the pot in terms of cost cutting opportunity and kind of how you're seeing the pricing dynamics shape up?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [29]

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Yes. I'll first say that we have to retain our field hands. They are a revenue-generating potential and honestly, there is some ability to control cost through overtime at that point in time. So a lot of the efforts had been around the layers of management in the field, i.e., district managers, regional managers, very hard decisions to make, but we feel it's critically important to maintain our field hands and our field workers, while managing overtime, obviously. So that is statement 1.

I actually don't think that decrementals of 30% are necessarily weak in any way. We're not a 100% variable-based company. We never will be. So there is a fixed cost element to be absorbed both in terms of district managers, shops, facilities, warehousing as well as the people that are out there every day in the field. So I measured and monitored in our guidance -- I think your decrementals are pretty close to right. I think they are appropriate based on the top line guidance that we gave you.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [30]

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Okay. And any comment on just sort of the trajectory of pricing?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [31]

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I don't think there is a service company [one] that's going to tell you it is other than competitive. But we have never really marketed products below breakeven. And so -- and actually, at a reasonable margin. And so I'm not going to tell you we're going to sit here and stack equipment that is noneconomic because we've always -- we are not bidding jobs at losses. And so -- but to say that we don't have -- our customers are facing challenges from lower crude prices and strained balance sheets and we're trying to be responsive as a service company to help them make it through a tough time and honestly help them make better wells at the end of the day and that's what we have to do. But also protect the health of this company and respond to our shareholders. So just simply put, it's a competitive environment for every product line out there. And I'm sure that there are certain product lines that have been under certain price pressures, but it's incumbent upon us as managers to work through that and continue to generate returns on the investment and free cash flow. It's just simple as that.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [32]

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Yes, yes. Well, good free cash flow this quarter.

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Operator [33]

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Our next question is from Cole Sullivan with Wells Fargo.

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Coleman Wayne Sullivan, Wells Fargo Securities, LLC, Research Division - Senior Analyst [34]

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On Offshore and Manufactured Products margins, we seem to be kind of in that 16.5 range and we got guidance for the fourth quarter. As we look into 2020, we have project-driven revenues improving, maybe short cycle can stabilize next year and the military award that you guys booked this quarter will help the kind of other products category. Is that what's needed to kind of get margins back towards 20% maybe as early as next year?

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

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Yes. I think our backlog is up. I'm looking at Lloyd. 68% since the end of the year, so -- am I right, since the end of '18?

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Lloyd A. Hajdik, Oil States International, Inc. - Executive VP, CFO & Treasurer [36]

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Year-over-year.

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

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Yes, year-over-year. And so I -- so we're doing what we need to do to drive the project-driven products, which drives absorption throughout our facilities. What I really -- in other words, I don't want to say it's in the bag, because you have got to execute, but we're -- all those headwinds are behind us, we've got now backlog, that's good. I need to get some stabilization in land on U.S. on my short-cycle products. And if I get both of those things moving in a favorable direction, our margins will come up.

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Coleman Wayne Sullivan, Wells Fargo Securities, LLC, Research Division - Senior Analyst [38]

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All right. And then in completion services, looks like the land side was fairly resilient in 3Q and then obviously the guidance is pointing things breaking lower in 4Q. What kind of drove that resiliency we saw in 3Q? And then what are some of the moving parts you guys are factoring in, in 4Q? Obviously, U.S. land is down, but I guess, what are you seeing on the Gulf of Mexico and international side there specifically?

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [39]

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Yes. And Cole, just to be very clear, U.S. land operations was down sequentially in Q3. However, it was more than offset by improved Gulf of Mexico and international activity. That coupled with some prudent cost measures implemented early this year, led to, I thought, very good results in Q3 relative to really our competitors and relative to just rig count signals, if you will, frankly, signals to the market. So proud of that activity, but cost control, improved Gulf of Mexico and international were drivers there. So now you say, okay, what about Q4? Again, we're getting -- every week, I get that report the rig count is down 7 to 9 rigs. And when you wake up and you're down about 20% year-over-year, coupled with what we know will likely be holiday softness. So that's really what's embedded in that guidance for Q4.

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Operator [40]

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Our next question is from Vebs Vaishnav with Howard Weil.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [41]

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Congratulations on a good quarter, especially the Well Site was pretty awesome. One question and I think it's just a continuation of the last question. So if I'm doing my math correctly, it seems like Gulf of Mexico plus international was almost up 30%. Can you just provide color on like, if -- first of all, if that is a correct math and like, what's driving that and the sustainability?

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

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Well, I don't have all my stats in front of me and I always caution it, but when you look at overall industry activity, the rig count is up in the Gulf of Mexico. In fact, I think it was up about 50%. I just caution everybody and saying, it's -- yes, U.S. Gulf last time I looked, active rigs were 53% higher. Just know that's off of a weak base coming into it, but improved activity in the Gulf of Mexico and then just generally speaking, a lot of our activity is around -- in and around the Middle East and their activity is also improving, but we've taken very specific initiatives and put them in place to expand our international activity, particularly with Saudi. And so I think those are the real drivers of the improvement. I didn't do the math other than the improving relative percentage of the total of Gulf of Mexico and international relative to my completion services revenue. Again, you may be right, I just didn't do it.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [43]

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Got it. And it sounds like it's sustainable going forward as well...

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

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Absolutely. We believe it is. Yes, I'm sorry, that was the end of your question.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [45]

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Okay. Just one follow-up, if I think about the Downhole Technology, it is -- like can you say how much of that is international?

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

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Right now, there is very little international contribution. The last time I looked at it, international was about 5% of the total revenue. That can vary -- some of these are more [P&A] related and lumpier, as I'll call it, but just if you smooth that out, it's maybe 5%, I will say. However, we are aggressively trying to expand that number with initiatives predominantly, I'll say, in the Middle East, but also Argentina and Mexico, North Sea as well. Of course, North Sea is kind of our base that we have now, but some new initiatives and new markets more around the Middle East, Argentina and Mexico.

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Operator [47]

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It seems we have a follow-up question from Kurt Hallead with RBC Capital Markets.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research & Analyst [48]

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I just want to make sure I understood one piece of the guidance correctly. Lloyd, you referenced about $4.6 million of interest expense and then I think you referenced that there was going to be some noncash component to that. Could you repeat that for me, please?

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Lloyd A. Hajdik, Oil States International, Inc. - Executive VP, CFO & Treasurer [49]

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Yes, absolutely, Kurt. So $4.6 million is the estimate for total interest expense for Q4 of which about $2 million is noncash amortization of the debt issue cost and the debt discount.

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [50]

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And just to clarify, this convert -- there is a conversion feature that accounting rules basically force you to put a value of that conversion feature, so you accrete up to the face amount of that $200 million convert over its life. So it's definitely a noncash item that some people forget about because I always just try to point out our cash interest carry, it's fairly small. And so that allows -- it's true cash flow available to shareholders at the end of the day as opposed to debtholders.

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Lloyd A. Hajdik, Oil States International, Inc. - Executive VP, CFO & Treasurer [51]

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And Kurt, we have a separate line item in the cash flow statement for the debt issue costs and the debt discounts, $5.9 million year-to-date. So that's the delta between total interest expense and cash interest expense.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research & Analyst [52]

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Okay. That's helpful. That $4.6 million would though compare apples-to-apples with the $4.3 million, $4.4 million you guys just reported in the third quarter, is that correct?

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Lloyd A. Hajdik, Oil States International, Inc. - Executive VP, CFO & Treasurer [53]

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That's correct.

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Operator [54]

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(Operator Instructions)

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [55]

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Okay Vanessa, sounds like there might not be any.

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Operator [56]

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That's correct.

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Cynthia B. Taylor, Oil States International, Inc. - President, CEO & Executive Director [57]

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Okay, I'll just close. I know it's a very busy day. I was reading all the earnings report that came out this morning, but I would just like to close with a thought for all of you. And I always think about sustainability, and I think it's an ill-defined and oftentimes overused term, but I just want to say I'm very confident in the long-term success of Oil States based on our technology leadership, our strategic focus, our mix of businesses and importantly, our consistent free cash flow generation. As always, we're receptive to follow-up questions regarding the quarter should you have them and we look forward to future discussions as we move into 2020. Thanks to all of you.

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Operator [58]

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Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Speakers please stand by for your post-conference.