Patricia Gil - Investor Relations Cindy Taylor - President and CEO Lloyd Hajdik - EVP and CFO Chris Cragg - EVP, Operations.

Stephen Gengaro - Loop Capital Markets Blake Hutchinson - Howard Weil Marc Bianchi - Cowen Chase Mulvehill - Wolfe Research Joe Gibney - Capital One Daniel Boyd - BMO Capital Markets.

Welcome to the Oil States International Fourth Quarter 2016 Earnings Conference Call. My name is Eric and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I will now turn the call over to Patricia Gil of Investor Relations. Please go ahead..

[Technical Difficulty], 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 laws.

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 which will be filed tomorrow along with other SEC filings. I will now turn the call over to Cindy..

Thank you, Patricia. Good morning to all of you and thank you for joining us today for our earnings conference call. For the fourth quarter of 2016 we reported a net loss of $0.20 per share after adjusting for a penny of severance and other downsizing charges.

Our Well Site Services segment reported another quarter of sequential improvement, along with positive EBITDA results for the first time in three quarters.

These improvements were driven by an increase in the number of completion services jobs performed, coupled with increased revenues per service job and higher utilization of our land rig drilling fleet. Customer sentiment regarding a onset of a recovery in the U.S. onshore markets has clearly improved. The industry has added 337 rigs since the U.S.

rig count trough in May 2016. As of the current date, the Permian Basin accounted for roughly half of the noted rig count increase.

Revenues in our Offshore Product segment came in slightly below our guided range, however EBITDA margins yet again outperformed our guidance averaging 22% for the quarter due to continued strong execution on major project work.

Our book-to-bill ratio totaled 0.98 times for the fourth quarter bringing the full year to 0.74 times very much in line with our expectations set forth early in 2016. Our backlog ended the quarter at $199 million supporting our belief that our forward and backlog will be reached in early 2017.

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

Thanks Cindy. During the fourth quarter we generated revenues of $170 million while reporting an adjusted net loss of $10.3 million or a loss of $0.20 per share which excluded 600,000 pretax or $0.01 per share after-tax of severance and other downsizing charges.

Adjusted EBITDA decreased 16% sequentially to total $13.7 million for the fourth quarter and our adjusted EBITDA margin was 8% due to the strong EBITDA margin performance achieved at our Offshore Products segment along with our Well Site Services segment returning to positive margins.

During the quarter we invested $5.8 million in capital expenditures related to expansion area investments for our Offshore Products facilities along with maintenance capital spend on our completion services equipment.

Capital expenditures for the full year 2016 totaled $30 million and we currently forecast 2017 capital expenditures to range between $40 million to $45 million depending on market activity. We generated $41 million of cash flow from operations and $36 million of free cash flow during the quarter which allowed us to repay $21 million of debt.

During the full year 2016, we repaid $81 million of debt and as of December 31, our gross debt level totaled only $46 million while our cash on hand exceeded our outstanding borrowings by $23 million.

At December 31, our leverage ratio using trailing 12 months adjusted EBITDA was 0.7 times which continues to be well below the maximum level of 3.25 times provided for in our credit agreement which does not mature until 2019.

We ended 2016 with total liquidity of $222 million which is comprised of $153 million available under our revolving credit facility, plus cash on hand of $69 million.

In terms of our first quarter 2017 consolidated guidance, we expect depreciation and amortization expense to total $28 million, net interest expense to total $1.1 million and corporate costs to total $12.2 million. Our 2017 consolidated tax rate is expected to average approximately 32%.

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

Thanks Lloyd. In our Offshore Products segment, we generated revenues of $115 million and EBITDA of $25 million during the fourth quarter of 2016 down 13% and 14% respectively on a sequential basis. Although revenues were slightly below our guided range, we achieved an EBITDA margin percentage of 22% which again exceeded the upper end of our guidance.

Revenues underperformed relative to guidance primarily due to decreased demand for our standard connector products used in drilling applications, while EBITDA exceeded guidance thanks to strong execution on a number of our major projects that were generally completed during the quarter along with the benefits from improved demand for our shorter cycle elastomer product utilized primarily in onshore applications.

Orders booked for the quarter totaled $113 million causing our backlog to only decline $4 million sequentially to end the year at $199 million. Major backlog additions during the fourth quarter included an order for our production riser equipment on a flowing production system.

With the strength of our fourth quarter bookings, our full year 2016 book-to-bill ratio averaged 0.74 times. However, our end of year backlog declined 41% from the beginning of 2016.

In early January 2017, we acquired certain intellectual property and assets complementary to our global crane manufacturing and servicing division adding active heat compensation technology and knuckle-boom crane designs to our existing crane offering. Total consideration paid was less than $10 million.

As we have indicated for several quarters, we expect our backlog to trough in early 2017 with revenues and EBITDA hitting a trough about six months later.

Accordingly we expect our first quarter 2017 revenues and our Offshore Products segment to decline sequentially due to current low backlog levels and gaps in our major projects work which we expect to reduce revenues and cost absorption levels thereby pressuring our EBITDA margins percentage.

However we do continue to anticipate improvement and demand for our short cycle consumable products namely our elastomer and valve products which will partially offset some of the reduction and contribution from our larger projects work. Demand for the short cycle consumable products is increasing due to the recovery that is unfolding in U.S.

land drilling and completions activity. Given these variables we estimate that our first quarter revenues in this segment will range between $88 million and $95 million while EBITDA margins are expected to decline to the 17% to 18% range.

In our Well Site Services segment, we generated another quarter of sequential improvement with our Well Site Services revenues increasing 18% to total $55 million while adjusted segment EBITDA improved to a positive $1 million in the quarter.

Incremental margins were 42% in the fourth quarter excluding small amounts of severance and restructuring charges.

These sequential improvements were due to a 3% increase in the number of completion services jobs performed, a 16% increase in revenue par completion services jobs, along with improved utilization of our land drilling rigs which averaged 18% in the fourth quarter. These improvements were driven primarily by increased activity across the U.S.

Shale Basin with the bulk of activity increases in the Permian. Demand for our fleet of land rigs is steady and is stabilized at nine rigs running today.

In terms of our Well Site Services guidance for the first quarter, we estimate that revenues for this segment will continue to improve sequentially and range between $58 million and $63 million with segment EBITDA margins in the mid-to-high positive single digits.

We believe our incremental margin should average 40% to 45% as we progress through the first quarter of 2017. We expect to see growing completions activity driven by more stable commodity prices and an increasing North American rig count.

However, competition in the major shale basins remain hot, particular in the Permian which will serve to moderate the pace of our recovery in a market that is otherwise trending more favorable. The recovery in U.S.

onshore drilling and completion activity which is currently underway should provide improved result for our Well Site Services segment this year which will help lessen the impact of declines in our Offshore Products segment as it reaches a bottom and operating result likely in the first half of 2017 due to a lack of investment in deepwater development which has depressed major projects FID over the past couple of years.

That being said, demand for our shorter cycle consumable product is improving at a fairly rapid pace.

We remained well positioned both operationally with our higher end product and service offerings, and financially with $222 million of liquidity at the end of 2016 to support growth in our businesses as our customers began to invest additional capital as the recovery takes hold. That completes our prepared comments.

Eric, would you please open up the calls for questions and answers at this time?.

[Operator Instructions] And our first question comes from Stephen Gengaro from Loop Capital Markets. Stephen your line is now open..

Thank you, good morning. Two questions please Cindy and Lloyd. When you think about the Well Site Services and revenue growth going forward, obviously there is a lag on the completion side.

Do you think by the second to third quarter we start to see revenue growth that we can kind of use the rig count as a better proxy going forward?.

We’re smiling at that here. We always say it’s kind of the best proxy that we have. But however is particularly activity in the Permian that is much more pad drilling focus, you've got multiple ply that you are targeting there. The wells drill is actually the best measure, it’s just not as easy to obtain.

But I think you’ve hit on the key point, there is a natural lag between drilling and completion activity, its exaggerated to the extent that you are dealing with large multi well pads. So I think the trim lines as we have seen on thus far have come out pretty much as we would expect that it would.

However the leading indicators clearly rig count movement which we've seen and we commented on are very favorable.

We are seeing, again, the early shorter cycle consumable demand whether that is [OCDG] [ph] or in our case the composite bridge plug, the large number of products that we have and many others that are telling that the completion side is ramping..

Thank you. And then as you think about the incremental, obviously the first quarter your guidance seems to suggest strong incrementals, and it sounds like you haven't gotten much - if any pricing yet at this point.

So based off of that, would using that level of incrementals for 2017 going forward be reasonable? Do you think they accelerate with pricing? How should we think about that?.

I think they are reasonable. I will tell you there's going - I don’t think you’re going to see a consistent quarter-by-quarter, two obvious comments, if we get favorable equipment substitution that carries higher margins, those incremental are going to tend up. If we get any pricing, those are very, very strong incrementals.

You may buffer that just a little bit with what I’ll call cost as you ramp up whether those are overtime for existing personnel, whether that’s bringing on new personnel as you ramp, we don’t expect that we’re going to have a material amount of cost i.e. moving equipment from one location to another, housing and the like, I don’t think it's smooth.

But I think we are comfortable with kind of that 40% to 45% right now, just caveat just a little bit it's not that perfect trajectory quarter-by-quarter but I think overall that’s the best information we could give you today..

Great, thank you..

And our next question comes from Blake Hutchinson from Howard Weil. Blake your line is now open..

Good morning. A couple of questions regarding Offshore Products and some of your commentary.

First of all, I take it that as you point towards perhaps finding a backlog bottom early in 2017, that any potential benefit year-over-year, in terms of major product flow, you think would be second-half weighted? And then the second part to that question, given where guidance is kind of starting for the year and looking at recent run rates of order flow from 2016 - where would your confidence level be regarding achieving kind of a onetime book-to-bill for the year?.

Okay. Blake let me know if I missed any of the questions that you just threw out but I think the broader question that you asked if I get this, kind of plan trajectory a major project of award, again just for everyone else is benefit on the call when we call something out as a major award is over $10 million - individual order of $10 million.

So we called out one that hit in Q4 because of that when order that help leverage that to a book-to-bill of one. Now, my only caveat on all of this is we're operating up lower revenue base and so we had an absolute decline in our backlog despite the fact that I think we have one of the best book-to-bill ratios in the industry in 2016.

Our guidance to you is really unchanged at this point where we have said we're tracking, unfortunately it's not a huge number of major projects that are handful, the bidding and quoting activity is solid. I think the timing is in line with our expectations.

We had a bit of a question in Q4 whether this one order would hit Q4 early next year in fact it came in kind of consistent with what we thought.

We believe today that some of the other orders based on our major bids and quoting activities of light will likely come into our order book more in line with Q2 and Q3 but again I think that's very much in line with what we told you along the way.

With that we don’t know where Q1 bookings come in and I think if we were going to give you any kind of soft guidance, we would estimate probably 0.8 to 0.85 without visibility of any one of these individual key orders coming in the backlog in Q1 that they will likely come in Q2, Q3.

If one of those orders comes in Q1 we'll do better than that but that’s kind of the trajectory I could give you but I think if there is - the stepping back comment here is the industry has under invested in deepwater not just in 2016, our peak backlog was in - Q2 of 2014 and hit it is a road to steadily since that time.

That underinvestment will absolutely cause production to decline overtime over the next four, five years and so these key projects I think our customers have confidence in moving forward and we put a much lower risk factor on those gaining trajectory in FID then maybe we would have a year ago..

Great. And then I guess just as follow-on to round out that discussion, you pointed to the fact that we do need to consider facility throughput and mix.

I haven't heard it necessary a called out, but as we replace old backlog with new backlog, and try to reconnoiter where margins may bottom, do we need to consider, in any major way, a new pricing regime? Or do you think that's a secondary or third consideration to mix and throughput..

Well, let me see if I hit your answer appropriately but I think my team has done a fantastic job of maintaining very high margins in 2016 despite suffering decline in throughput. And we had to be proactive on efficiencies, cost structures and project execution throughout the year.

So I don’t have question that will be able to continue to do that I know everybody on the call to, is tended to handicap my margin guidance every time because we’ve outperformed I think every quarter this year.

What I’m trying to caution you on is we have truly just about completed most of these major projects that landed itself to higher than expected margin performance.

And so the first two quarters of this year are going to be more based business, short cycle consumable sub pipeline repair work that carry very good margins but without that top line the throughput is going to be challenged. Our guidance is real when we say we think its 17% to 18% for this quarter.

However, I will be pleased with that performance that these lower revenue level.

The other thing that is good while anything onshore is not the wealth of what we do it is bustling some of that under utilization of our facilities and getting the elastomer demand and more recently improve valve demand again that was very, very low levels of activity like kind of 2015 and 2016.

So they’ll carry some good incremental that help buffer this downturn for us and that may make us a little bit unique compared to some of the other more deeper water focus manufacturing companies. If I missed anything that you were trying to get me to direct my comments to please let me know..

Not a bit, that was very well covered. Thank you for that..

And our next question comes from Marc Bianchi from Cowen. Marc your line is now open..

Thank you.

Cindy may be you could talk a little bit more about the elastomer business, seems like very strong year-over-year revenue growth there curious what that look like sequentially and how to think about that going forward I would suspect that there is some sort of restocking aspect to this business so how does that play with kind of the overall well count activity that you talked about is being a good driver of demand?.

Well I think the major comment there we think our demand is sustainable and I do believe you’re right you get a immediate kind of uplift from a restocking standpoint we think that was actually earlier in 2016 not in fourth quarter it’s not based on our current outlook.

But one thing I have to hit hound to this is historically when I got much greater major project work this wasn’t a huge percentage of our revenue base, but now our shorter cycle more consumable products in the first quarter of this year is going to be about third of our revenue contribution.

So it’s growing proportionally with the expansion on land, but we’ve also had shrinkage of our major projects work though.

And we may start breaking this out for you until we kind of normalize back to other levels as I know everybody is needing that in terms of doing their modeling, but the key point there is two-fold number one the demand is sustainable and the rig count is only growing at this point in time.

So I’ll say sustainable in growing in terms of anything shorter cycle that is consumed on land but the other word is it’s consumed and that means you’re going to need it every single week every single month. And so we’re pretty optimistic about that piece of the business.

The other thing I will tell you is our major project backlog you need great lead times there and so a lot of times you think about take my backlog take 80% of that that’s revenue, in this case the order flow is in and out and we only carry probably 45 to 60 days of backlog for this type of business..

Sure.

Is there a distinguishable margin difference between the longer cycle work in Offshore Products and the shorter cycle stuff that we’re talking about here?.

I would say not really but again as I have told you in the past we have a broad range of margins depending on whether it’s a proprietary product or whether it’s more of a competitive product I’ll use a crane there is a lot of crane manufacturers that’s a lower margin for us but this business has healthy margins, I will say - however is that the extremely low levels of demand that we suffered in 2015 and 2016 of course the margin are low because absorption was so poor but if I can have a normalized level of activity these are good margins..

Okay, thanks for that.

Maybe just one more for Lloyd on working capital as you think about the guidance you provided for first quarter and perhaps the balance of 2017, what sort of range of working capital needs do you think you will have?.

I think Mark to answer your question we have looked at working capital builds and decreases over 2017 and kind of forecasted it to be relatively flat. So any working capital builds in Well Site Services as a result of increased receivables is probably offset by some decrease in Offshore Products and inventories.

So really kind of guide to flat working capital where I sit here today in February, obviously I will give you more updated guidance in another quarter or so once we progress the year..

Sure, it makes sense. Thanks a lot, I will turn it back..

And our next question comes from Chase Mulvehill from Wolfe Research. Chase your line is now open..

Good morning. I guess on Well Site Services, just want to make sure that I heard you right, so the revenue guidance was $58 million to $63 million, correct..

It is correct..

Okay.

That implies that revenues are up 5% to 15%, so help us understand why the revenue growth slows down a little in the first quarter?.

I haven't actually done the sequential growth what do you give -what is your base that you are calculating that?.

So you did $55 million of Well Site Service revenues in the fourth quarter and so you guided $58 million to $63 million..

$65 million..

What is that?.

Mid-point of $65 million..

I would say just as a general comment, we are expecting again strong growth in the shale plays on the U.S. maybe a little bit lag affected just because of the completion cycles.

We are seeing a little bit of a softness in the Gulf of Mexico at least in the month of January there is purely operator driven with issues that they are having on permitting some of the wells that they are drilling, it is not a huge amount but we are right now thinking Gulf of Mexico could be down modestly and then our - and some of that is weather in the Rockies or there is a handful of things that and international will be flat too likely modestly down.

So you get a little bit going on there but the macro trends first of all anything I’m talking about weather in Gulf is strictly timing in nature, international I think that's our outlook, we don’t have - again when you had no activity on land in the U.S.

international was bigger than it has historically been but our outlook is flat to be modestly down in the various areas that we work in but that doesn’t take away from the robust recovery in the U.S..

Okay. Could you tell us how much of 4Q completion services revenues was kind of U.S.

land, don't know if you have that number handy or not?.

While I'm looking at Chris here and see if you can give you - I'm thinking it was about 70% but I'm looking for validation that is 70%..

Okay..

Chase, offshore Gulf of Mexico and international was about 35%. So it has got 65%, 70% U.S. land..

Okay. All right, that is helpful, thanks for sharing that.

And last one I will turn it back over, could you talk about your outlook for large orders as we kind of go through 2017?.

I think I have already addressed that, I felt like I did and Offshore Products we are looking at a handful of projects that we have actively bid and rebid quite frankly for quite some time now.

We have one significant order again that order in $10 million came in Q4 that brought us to essentially a one-to-one book-to-bill getting that larger order right now in the guidance we gave you we are not expecting a major order in Q1 but we do have in schedules in our planning for Q2 and Q3..

Okay, all right.

And so the $75 million is a good run rate for kind of your underlying business, it looks like that's kind of what it was in 3Q and maybe if we back-out that large order that is what it was in 4Q and that's what you see it as in 1Q, correct?.

Are you speaking to bookings?.

Yes, just bookings. Just trying to think of the underlying business, what kind of orders, what’s the rates look like. And then we’re going to stack on top of that, larger orders as they come in 2Q, 3Q, and 4Q..

Yes, that's a fair estimate..

Okay. I’ll turn it back over..

And our next question comes from Joe Gibney from Capital One. Joe, your line is now open..

Thanks once more guys. Lloyd a question for you on corporate cost side. Just curious as we progressed to the year a little bit, I think your guidance for 1Q is 12.2.

Is this sort of nominal lift to be cognizant of a little bit more of a ramp up for the order rate to the year just little bit help on one item?.

Yes, corporate, I’m sorry not yesterday, this morning and it’s driven by some relative increases in incentive compensation. And also if you start the first of the year, you’re going to have higher payroll and burden cost for your payroll taxes and that will decrease as people start to max out..

Okay, helpful. And just one clarification, Cindy, there is potential sort of the notion of shorter cycle mix book in turn within offshore that you are talking about. So reaching a third of your revenue admittedly this is going to be sort of trough of your major product offshore revenue mix, I understand that.

What I am just trying to understand short cycle as you are referencing it there, is that book in turn inclusive of onshore and book in turn offshore or just trying to understand how much of the onshore mix is there when you are talking about it representing a third of your revenue at the trough when obviously when major project flow through is slowing down, of course?.

That’s fair. It is both, I'd say its weighted to onshore at this point. And I’ll use my favorite example. As I'm talking [indiscernible] we're really saying that that's onshore driven activity. Valve as an example have both offshore, fixed platform, land application.

In past years, I had the best of auto valve in the market that goes on wiser, but there's no demand for that. So what’s happening right now, the weight of this is trending onshore. But there is some other things, caisson work, parts, supplies et cetera that are broad based in that number..

Okay, helpful. I appreciate it. I’ll turn it back..

And our next question comes from Daniel Boyd from BMO Capital Markets. Daniel your line is now open..

Hi, thanks. I just want to follow up on the mix conversation in the completion segment. Can you all both or maybe give us some color on what growth you saw in 4Q of the U.S.

land business?.

It was pretty broad based. It's about all of our product lines and we’ve saw a lift in most of our markets. The difference there is the Permian is the weight of the rig count so the weight of the increased came in the Permian but it wasn’t any individual product line. That’s what happens when activity improves.

And quite frankly, the best thing that could happen to us, it has one more broad based activity improvements across all of the basins, not just one. And two impact, a wider array of our product and service offering, particularly the higher end offering where we had competitive advantage..

So did the U.S.

land portion of that business grow faster than the overall segment of 18%, almost favorably 19%?.

I’m not sure I know your question..

U.S. land, Gulf of Mexico and international, I’m just wondering if the U.S. land portion of that mix grew faster than the overall segment growth..

Yes, intuitively I’d say that it probably did..

Okay. And my follow up question to that is, I know that your products tend to save time on the well site. That time wasn't necessarily something that A&Ps or your customers cared about as much during the downturn and I think you lost a little bit of share there. As the recovery has increased, frac spreads have become much tighter.

Are you gaining market share, some of that lost market share back?.

I don’t know how much we did in Q4 to be honest with you. But we’re beginning to see higher demand for example, for our stakes tool, our isolation equipment. And so I think that is coming.

I don’t know how much really benefited Q4 at this stage but we’ve always said, you revert to the highest quality operator unless it is all a price driven decision and I keep focusing on the Permian but that is where half of the rig count improvement has been and when people were closing operations and relocating people and equipment they relocated all of it in the Permian and it's a very, very competitive market that was very price driven in the low commodity price environment that as we ramp up we are expanding that horizontal extent of these wells, very complex work, extended laterals and we just know intuitively that has a call on higher quality equipment which we believe we have..

Okay, thanks..

And our next question comes from Stephen Gengaro from Loop Capital Markets. Stephen your line is now open..

Thank you.

Just one quick follow up, I'm not sure how much - when you look at the Permian impact is that generally - it sounds like or maybe not, has there been slightly dilutive to sort of the margin short term because I was interesting in your press release you talked about the rise in price per completion ticket and I think you alluded the Gulf and International.

I guess I'm trying to be....

First of all I want to be clear those are longer jobs, so think of it on land that you get equipment called out and it may work a shorter period of time from three to five days.

When you are called off offshore and that's you have, if you take that 30 days divided by five, you have a multiple of tickets on land that a piece of equipment side that goes offshore, we just did the first ever ball launch job that we have ever done offshore, that 's one ticket and it is high value and so that revenue per ticket is accretive to that number but nothing has really changed.

This is what I'm trying to make since here, nothing has really changed other than that high end equipment is stayed on location long time and so that is good for us. So it can get too loft in these revenue per ticket numbers, just look at the trend lines in terms of our - is activity increasing and it's pricing either holding or moving forward.

The other half of your question I think is our Permian operations diluted to our results and I would not say that, what I would like to see though is that if the Permian is half of the rig count that it is half of my revenue and profitability and it is not yet that..

Okay, that's helpful. So the revenue per day is different than the revenue per ticket basically we are getting to, that is fine, that makes sense to me.

And then just one final quick one and maybe it is for Lloyd, the drop, I know this is minor but the drop in D&A by about a 1 million bucks is that coming out of anyone specific segment sequentially?.

It is coming out of completion services..

Okay, great..

And just to add a little more color to that, the average life of our rental equipment which is - its either facilities in these regions that we operate in that most of its equipment to most of those carry a seven year life and we have cut CapEx spending significantly over the last two, so that should be consistent with what you think and when I think about a major manufacturing facility in offshore product that was live there I believe generally 30 years and so you're going to carry a more consistent level of depreciation for that segment..

Perfect, that's very helpful. Thank you..

We have no additional questions at this time..

Okay, great. Well I appreciate all of you that dialed in today. I think the market is clearly showing signs of improvement, it's going to take us probably the mid-year to start turning the corner on profitability but things are certainly looking a little more positive than they have over the last two years, so we'll take it.

I appreciate you following the company and we look forward to some of the upcoming conferences where we can spend more time together. Thank you..

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