Oil States International, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Market Context: Quarter marked by lower crude oil prices, US shale slowdown, but offshore and international markets showed resilience due to long-cycle project investments.
• Revenue Mix: 75% of consolidated revenues came from offshore and international projects in Q3, a shift reflecting multiyear strategy for higher margin work.
• Offshore Segment: Revenues up 2% sequentially, adjusted segment EBITDA up 6%, backlog at $399M, bookings $145M (29% QoQ increase), book-to-bill ratio 1.3 times.
• US Land Activity: US land completion activity down 11% sequentially due to lower crude prices. Completion and Production Services segment revenue down 61% sequentially but EBITDA grew year-over-year due to optimization.
• Cash Flow: Cash flow from operations $31M (105% QoQ), free cash flow $23M, ongoing deleveraging efforts.
• Safety: Honored with two energy workforce and technology council safety awards, including president's gold award and FellSafe Technology Award.
• Core Priorities: Grow offshore/international presence, manage US land volatility, drive cash flow generation.

Segment Performance

• Offshore Manufactured Products: Revenues increased 2% sequentially, adjusted segment EBITDA rose 6%. Backlog reached $399 million, and bookings were $145 million, a 29% quarter-over-quarter increase. This segment contributed 75% of consolidated revenues in the third quarter.
• Completion and Production Services and Downhole Technology: Revenue declined 61% sequentially due to significant reduction in US land-based activity. However, year-over-year EBITDA growth was achieved due to U.S. land-based optimization efforts.
• Downhole Technologies: Generated revenues of $29 million, but adjusted segment EBITDA loss was $1 million due to tariffs and lower international activity levels.

Guidance

• Q4 Outlook: Consolidated revenues expected to increase 8-13% sequentially. Q4 adjusted EBITDA range $21-22 million.
• Cash Flow: Cash flows from operations expected to improve in Q4, annual amount to $100 million plus.

Risks

• Tariffs: Impacting Downhole Technologies segment, particularly on gun steel costs with 98% tariff rate (temporarily reduced to 88%) affecting EBITDA.
• Market Uncertainty: Uncertainty in US land activity levels and crude oil prices, as well as impact of trade policies on business.

Q: Hey. Good morning, Cindy and Lloyd. As I kind of listened through earnings season so far this quarter, the drillers, offshore drillers, I should say, are all kind of talking about kind of mid to late next year rebound and maybe near-term bottom in activity. The guys in the infrastructure side of things are kind of talking about FID is picking up next year and beyond, and obviously, you guys had a great bookings quarter, and I think your commentary suggests that should continue. But I would love to just get kind of color on how conversations are going, kind of the flow of conversations, the maybe margin profile and the impact of tariffs there, and just kind of timing of how this backlog kind of rolls off as you go forward?

A: Thank you for the question. I think it's a fantastic one. I mean, what you're hearing from offshore exposed companies is that we've had a good year, but throughout the year with lower crude prices, some of the optimizing spending has shifted to the right a bit. That's both for contracting rigs as well as kind of new incremental projects, which you know, hits everybody to a certain degree. And that's why we kind of highlighted that we have a good base bookings quarter, but it was augmented by military. And so I just want to say that's kind of consistent with what you're hearing on the oil and gas side of the market. There is every thought that we're going to have an improved year in 2026, especially because some of this has slipped to the right. As it relates to our fourth quarter, we are going to again, I told you, I think we're going to have a book-to-bill north of one that's predicated on projects that are very close to the award stage, and that is both production infrastructure for us and kind of MPD type systems. Those are the drivers. And so it's always a question of the macro versus company-specific. But our company-specific looks good but maybe not quite as robust as we thought coming into the year with crude prices at sixty. Now all those just shift to the right, and therefore, '26 starts looking better. So I do think that what we're seeing is consistent. We've just had a better bookings year possibly than others for various reasons. Maybe it's the best way I'll look at that. I'm going to pivot to what I think was your second question, which was the tariff situation. And because so much of our projects that are value-add in the US go into international plays, there is less impact on our primary segment, which is the offshore manufacturing products segment, where it hit us harder and you see that in our results this quarter, was on the downhole, the consumable side of the business, the Downhole Technologies, which is largely on the perforating side because we import gun steel like we believe most other companies do in the space from foreign sources, particularly China. You heard, you know, some of the issues that Cactus and others are dealing with. They commented on a 95% tariff rate and big increases that hit in June. The exact same thing happened to us, and somewhat unexpectedly. So the third quarter, unequivocally hit us on the downhole side with higher tariff costs. We, like everybody else, are trying to manage through and understand it, and there was a, you know, kind of a temporary agreement between the US and China yesterday, but it really had a very small impact on the overall tariff rate. We believe our 98% rate came down to 88%. For perspective. And if you go back two or three years, that tariff rate was twenty-five percent. So these are material increases in gun steel cost. Now it is also our belief that everybody has the same supply sources, which are generally foreign. We're all experiencing the same thing. But there's also been a buildup of inventory as activity has slowed. So I think the industry has to work through the pre-tariff inventory, but then it is my view that the tariffs hold, they're going to have to be passed on to customers as one of timing. That's the best impact or information I can give you. Tariffs are really not an issue for the completion and production services segment. So not a great impact to us, but it certainly has hit the consumables side of the Downhole Technologies piece of the business. If that answers your question.

Q: Thanks. Good morning, everybody. How are you? I guess two things for me, Cindy. The first, you've done a lot on the US land side to kind of high-grade the portfolio and control and cut costs where necessary. Can you talk about when we think about the margin side of that business, especially C and P, do you think we're seeing the full impact of that in the margins? Yeah. I know it gets masked by kind of underlying activity, etcetera, but do you think you're starting to see the full impact there? How does that unfold over the next twelve months?

A: It's a very good comment. And I, you know, I just tell everybody, I think we'll be through a lot of the transition by the end of the year, which makes the results a little bit cleaner going forward. Once we get the finalization, I'll call it, you realize we're moving equipment all over the place. You know? Going into new basins, new customers, closing facilities, incurring severance, and again, I do pray that we get kind of most of this out of the system by the end of the year and have clean margins going forward. But once we do, we expect depending on timing of work and everything else caveat that goes with it, high twenties to low thirties EBITDA margins. And so again, I think that is in the context of 2024, Lloyd, correct me if I'm not wrong, being in the high teens EBITDA margins? Mid teens. Mid teens. So what you see, yeah, the revenue is going to be a bit lower, and we'll give you very specific guidance on that as we move forward into 2026. But it will be at higher margins. And greater free cash flow because the business is this is part yeah. It's an EBITDA drag, but more importantly, it's a cash flow drag. And so we're really making step changes in that segment focused specifically on free cash flow generation over the long term.

Q: Thanks. And just two other things. One's a follow-up to that. Have again, outside of underlying activity levels, have we seen the majority of the revenue impact already? Right, from businesses that have been pared down or divested as you high-grade the portfolio?

A: The majority. Yes.

Q: Okay. Good. The other quick one is I think at the end of last year, I think you said in the K, I think the number was 70% of the backlog was going to convert over the next twelve months. I think that was right from last year. You've had very good order flow this year. Do you expect is it fair to assume that your current backlog is in a similar spot from a realization perspective over the next twelve months? Or is that elongated at all? How should we think about that?

A: It's a little bit elongated with the military awards that we got. Those are typically multiyear kind of delivery that span over a period of time. So awards we expect to get in Q4 will probably leverage that back towards the, you know, longer-term kind of trends that you see on product rollout. If I look at a point in time, the point in time with the military would be down just a little bit in terms of that percentage roll-off in the forward twelve or fifteen months. That can change, obviously, with the mix of things coming in the backlog and what we expect in moves it back the other direction, if that makes sense.

Q: Thanks. Good morning. First question for you, and then stick on the offshore theme. A number of the customers you deal with have exposure to both US land and offshore, and as there's been sort of a massive wave of E and P consolidation over the last couple of years. When you talk to those customers about their capital, do you view this as a structural shift offshore versus US land spending? And do you think this consumes a greater share of their budgets moving forward? Or is this just sort of what happens in a weak commodity environment as offshore breakevens have continued to come down?

A: I do think it's more of a secular trend. And, of course, we have a mix of customers that some do have both exposure to US land and offshore, others like Petrobras as an example, is much more just focused on offshore deepwater. And so it's a mix there. I just do there's always different reasons for the investments that are made. But we can all debate whether we're at tier one acreage, tier two acreage. It all comes down to what are the breakevens and how attractive are they at sixty or seventy dollars a barrel, right, which is kind of the environment we see going forward, but you get below sixty. And I think those marginal investments tend to shift just a bit. I made those comments on my call. And the flip side is, you know, there are kind of lower AFE cost, shorter time to first production on land. So there's oftentimes reasons to drill wells on land without question, but they also the decline curves are much higher. So it's really hard to isolate on one versus the other for someone that has dual exposure. I just think that the macro trend with Rider success in deepwater, they are longer-lived reserves. And the time from discovery to first production has shortened, that that just definitely seems to be a trend more of a secular trend in our view. And, of course, a lot of the decisions we make are based on product differentiation, history in the marketplace, technology differentiators, and we just have a lot more quite frankly, that we deliver to the offshore and international market. It's much harder to not have commoditization on US land. That's just reality. And so we are trying to really focus on areas that we think bring value to the company and bring value to our shareholders.

Q: So on that point, Cindy, could you expand a little bit more? You highlighted some of the safety awards, at least one of which was around MPD. Could you elaborate a bit more on some of the products that have been driving your backlog build offshore? And I assume a lot of them have to do with not only safety but, you know, making operations more efficient for the customers. We hear about efficiencies a lot in US land, but maybe just speak to the things you're doing there. And the specific products that have really driven this outside of the military towards the strength in the backlog offshore?

A: We have some, honestly, just ongoing recurring backlog that comes from our key connector products in many basins. We have crane operations. There's a number of, I'll call it, just base orders. But what has really augmented our orders of the military awards that really came in Q3 has been production infrastructure, most of which is high technology. It's our key leading flex joint technology you know very well. The industry knows very well. And much of that has gone into the demand environment in Brazil, not surprisingly, Petrobras has by far a leading position in offshore activity and investment. And so that is really kind of what has led. Now we are augmenting that with new technology, the MPD systems we brought to market early last year, it's working well, getting strong customer acceptance. And we expect that to continue to grow. There is the hope that we'll get incremental new demand from things like the mineral recovery that we have in place for subsea minerals recovery. We've had pilots that have been in backlog, but not much this year. And then we as you know, we have that offshore wind kit. We're still bidding and quoting and working with companies on budgets and planning, but nothing's really come into bear at this point in time. So could be some upside outside of our standard oil and gas and military awards long term. But right now, just think ongoing recurring demand that the general industry can consume married with production infrastructure investment.

Q: To come back in, but Cindy, I want to make sure I heard something right. Did you say with your guidance that you guided 4Q revenues and EBITDA and that was a little bit lower maybe than what the full year original guidance was a lot of guidance that have come down throughout the year. But did I hear you right that your cash flow from operations supposed to be a $100 million for the full year?

A: We had a, in our view, a very strong Q3, and we're going to have an even stronger Q4. You know, we in our project businesses that are long term, the timing of receivables and inventory purchases ebbs and flows. We are confident when we say that it'll be a $100 million plus for the year, which is a very significant number, as you know.