Oil States International, Inc. (NYSE:OIS) Q4 2022 Earnings Call Transcript
Oil States International, Inc. (NYSE:OIS) Q4 2022 Earnings Call Transcript February 17, 2023
Operator: Hello. And welcome to the Oil States International Incorporated Fourth Quarter 2022 Earnings Conference. My name is Michelle and I will be your operator for today's call. At this time, all participant lines are in listen-only, but we will be accepting questions later. As a note, this presentation is being recorded. I will now turn the meeting over to Ellen Pennington. Ma'am, you may begin.
Ellen Pennington: Thank you, Michelle. Good morning. And welcome to Oil States fourth quarter 2022 earnings conference call. Our call today will be led by our President and CEO, Cindy Taylor; and Lloyd Hajdik, Oil States Executive Vice President and Chief Financial Officer. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain information other than historical information, please note that we are relying on the Safe Harbor protections afforded by federal law. No one should assume that these forward-looking statements remain valid later in the quarter or beyond. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K, along with other SEC filings.
This call is being webcasted and can be accessed at Oil States website. A replay of the conference call will be available one and half hours after the completion of this call, and we will continue to be available for one month. I will now turn the call over to Cindy.
Cindy Taylor: Thank you, Ellen. Good morning. And thank you for joining our conference call today, where we will discuss our fourth quarter 2022 results and provide our thoughts on the market outlook. During the fourth quarter of 2022, the company continued to show improvement as the industry expands activity to support growing energy demand, generating revenues of $202 million and EBITDA of $21 million, representing sequential increases of 7% and 30% respectively, after excluding a third quarter 2022 litigation related settlement gain of $6.1 million. We were net income positive for the quarter, driven by strong activity levels in our traditional project driven businesses, as well as from increased demand in the U.S. for our completions oriented service offerings.
We generated $14 million in cash flow from operations during the fourth quarter, with a $11 million of free cash flow after deducting net investments in CapEx. Our Offshore Manufactured Products segment's revenues rose 9% sequentially with adjusted segment EBITDA totaling $18 million. Backlog increased 19% sequentially, totaling $308 million as of December 31st, driven by quarterly bookings of $152 million, which yielded a quarterly book-to-bill ratio of 1.5 times. Our fourth quarter bookings increased 32% from the third quarter and included two notable production facility project awards exceeding $20 million each with increased broad based bookings across most product and service offerings. Further in early February, we are pleased to report the receipt of our first contract award on our newly developed managed pressure drilling riser equipment.
In our Wellsite Services segment, we achieved a 12% sequential increase in revenues and an impressive 29% sequential increase in segment EBITDA, driven by higher U.S. completion and production activity, along with enhanced customer penetration and better equipment utilization. Although the average U.S. frac spread count was flat sequentially, the average increased 9% when compared to the fourth quarter of 2021. In our Downhole Technology segment revenues decreased 10% sequentially, while segment EBITDA decreased 75% due to the timing of international perforating products sales, lower integrated gun product sales mix domestically as several key customers delayed light quarter startups, supply chain challenges in inventory and receivable write-off, many of these issues are deemed to be transitory.
Notable technological achievements realized in the fourth quarter included the successful test of OSI minerals deep sea riser system at a water depth of over 13,000 feet and testing of a prototype model of our tension leg platform design for offshore floating wind installations in water depths beyond the normal limits suitable for fixed installations. Given significant reductions in our debt, our Board of Directors approved a $25 million stock repurchase program, which extends through February 2025. Lloyd will now review our consolidated results of operations and financial position in more detail before I go into a discussion of each of our segments. Lloyd?
Photo by Dean Brierley on Unsplash
Lloyd Hajdik: Thanks, Cindy, and good morning everyone. During the fourth quarter, we generated revenues of $202 million, adjusted consolidated EBITDA of $21 million and net income of $2.9 million or $0.05 per share. We achieved our second quarter in a row of positive net income, reflective of the improvement in our operations and the overall strength of market activity. We ended the fourth quarter with $42 million of cash and generated $14 million of cash flows from operating activities. We used $3 million to fund net capital expenditures. All of our business segments were free cash flow positive in 2022, and on a consolidated basis, we have been free cash flow positive for 30 quarters of the last 36 quarters, dating back to the beginning of 2014.
As a reminder we define free cash flow as cash flow generated from operating activities, less capital expenditures, plus proceeds from the disposition of property and equipment. As of December 31st, no borrowings were outstanding under our revolving credit facility and amounts available to be drawn totaled $92 million, which together with cash on hand of $42 million, resulted in available liquidity of $134 million. At December 31, our net debt totaled $111 million, yielding a net debt to total capitalization ratio of 14%. On a leverage ratio basis, net debt to adjusted consolidated EBITDA has been materially reduced to 1.4 times at December 31. Further on February 15, we repaid $17.3 million in principal amount along with accrued interest of our 1.5% convertible senior notes with cash on hand.
With this repayment, we have no significant maturities of long-term debt until 2026. For the fourth quarter, our net interest expense totaled $2.3 million, of which $0.5 million was non-cash amortization of debt issuance costs. Our cash interest expense as a percentage of average total debt outstanding was approximately 5% in the fourth quarter. In terms of our first quarter 2023 consolidated guidance, we expect depreciation and amortization expense to total $15.3 million, net interest expense to total $2.6 million and our corporate expenses are projected to totaled $10.3 million. For the full year 2023, we expect to invest approximately $25 million in capital expenditures. Given customary seasonality and working capital builds in the first quarter, our free cash flow will be weighted to the second half of 2023 comparable to what we experienced in 2022 when we generated $33 million in free cash flow in the second half of the year.
At this time, I'd like to turn the call back over to Cindy, who will take you through the operating results for each of our business segments.
Cindy Taylor: Our Offshore Manufactured Products segment generated revenues of $105 million, segment EBITDA of $17.8 million and operating income of $12.3 million in the fourth quarter of 2022. Revenues in the fourth quarter were up 9% sequentially due to incremental production facility revenues, stemming from recent project awards, along with service revenue growth. Segment EBITDA margin in the fourth quarter of 2022 was 16.9%, compared to 13% when adjusted to exclude the $6.1 million litigation gain reported in the third quarter of 2022. Backlog totaled $308 million at December 31, 2022, an increase of $50 million or 19% from September 30, 2022. Fourth quarter 2022 bookings totaled a $152 million, yielding a quarterly book-to-bill ratio of 1.5 times.
Our fourth quarter bookings were broad based across many product lines and regions with approximately 9% of our 2022 bookings tied to non-oil and gas projects. During the fourth quarter this segment was awarded two notable production facility project awards exceeding $20 million each. This segment has endeavored to develop leading edge technologies, while cultivating the specific expertise required for working in highly technical, deepwater and offshore environments. As the world expands investment in alternative energy sources, we will be working diligently to translate our core competencies into the renewable and clean tech energy space. Recent product developments should help us leverage our capabilities and support a more diverse base of customers going forward.
We continue to bid on potential opportunities supporting our traditional subsea floating and fixed production systems drilling and military customers, while also bidding to support multiple new customers and projects involved in developments such as subsea minerals gathering, fixed and floating offshore wind developments, and other renewable and clean tech energy systems globally. These opportunities create the potential for us to expand our product offerings and revenue base. In our Wellsite Services segment, we generated revenues of $68 million, segment EBITDA of $12.5 million and operating income of $5.3 million in the fourth quarter of 2022. Segment EBITDA margin was 18% in the fourth quarter of 2022, compared to 16% in the third quarter of 2022.
Our revenue growth and strong incremental margins were driven by higher U.S. completion and production activity, along with enhanced customer penetration and better equipment utilization. We remain focused on optimizing our operations and pursuing profitable activity in support of our global customer base. As market expansion opportunities continue to unfold, both in the U.S. and in international markets, we will continue to focus on core areas of expertise in this segment and the deployment of our recently enhanced completions equipment to further differentiate our completions service offerings. In our Downhole Technologies segment, we reported revenues of $13 million and segment EBITDA of $1 million in the fourth quarter of 2022, compared to revenues of $33 million and segment EBITDA of $4.1 million reported in the third quarter of 2022.
Weaker revenues and margins in the quarter resulted from the timing of international perforating products sales, which can be lumpy from quarter-to-quarter, lower integrated gun product sales mix, manufacturing labor constraint, supply chain challenges, along with inventory and receivable write offs totaling $600,000. Now I'd like to turn our attention to market outlook. Supply chain challenges, access to available labor and rising inflation have challenged our industry and many others over the last year or two, with our commodity prices demand took a hit over the last few months in 2022 and early 2023. Global oil and gas inventories recovered and are now within their five-year seasonal averages, which has led to lower commodity prices year-over-year tempering expectations for growth in drilling and completion spending on U.S. land activities.
However, we are beginning to see an inflection upward and international and offshore markets, which should further support our product and service offerings. Given improvements in the frac spread count over the last several quarters, albeit with growth slowing somewhat recently, we expect our Wellsite Services and Downhole Technologies segments to continue to perform in line with our better than market activity indicators. Revenues in our Offshore Manufactured Products segment are expected to continue to grow, given increased levels of backlog and strong short cycle product demand. Considering these market drivers, we project that our annual revenues will grow about 15% on a consolidated year-over-year basis, with EBITDA ranging from $92 million to $100 million.
Given cyclical seasonality, the first quarter is likely to be the weakest. Now I'd like to offer some concluding comments. Crude oil and natural gas prices corrected to the downside from the highs reached in early summer 2022 due to ongoing recession concerns, tightening global monetary policies and the associated impact on commodity band. However, despite these factors, WTI and Brent crude oil spot prices remain above $76 per barrel and $83 per barrel, respectively, with natural gas, currently trading at approximately $2.30 per MMBtu. These prices while lower than the average commodity prices realized in 2022 are likely to support demand increases in 2023. Initially, the industry response to higher commodity prices with accelerated shorter cycle investments in the United States, which we experienced in 2022.
We now expect to see investments pickup for long lead time projects as well, including those in international markets and deepwater basins around the world. However, global monetary policies in the resulted increases in interest rates by the various Reserve banks in an attempt to rein in inflation will likely have a continuing impact on demand in the near term. Oil States will continue to conduct safe operations and will remain focused on providing technology, leadership in our various product and service offerings with value-added products and services available to meet customer demands globally. In addition, we will continue our product development efforts in support of emerging, renewable and clean tech energy investment opportunities. That completes our prepared comments.
Michelle, would you open up the call for questions and answers at this time?
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