Welcome to the Oil States International First Quarter 2022 Earnings Call. My name is John. 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. [Operator Instructions] Please note that this conference is being recorded.

And I will now turn the call over to Ellen Pennington. Ellen, you may begin. .

Thank you, John. Good morning and welcome to Oil States' first 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 protection, supported 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 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 this call and will be available -- will continue to be available for one month. I will now turn the call over to Cindy..

Thank you, Ellen. Good morning, and thank you for joining our conference call, where we will discuss our first quarter 2022 results and provide our thoughts on the market outlook.

During the first quarter of 2022, the company generated revenues of $164 million and consolidated EBITDA of $14.5 million, representing sequential increases of 2% and 8% respectively, driven by the improved commodity price environment, driving strong activity in the United States, along with a favorable sales mix in our Offshore/Manufactured Products segment.

Our results were tempered somewhat by ongoing challenges associated with the COVID-19 pandemic, including labor tightness and supply chain disruptions.

A key highlight in the first quarter was a 14% sequential increase in our Offshore/Manufactured Products segment EBITDA, coupled with another quarter of strong orders booked into backlog yielding a 1.1 times book-to-bill ratio for the period.

Expanding global economic activity and increasing backlog levels support a stronger outlook for this segment going forward. During the first quarter of 2022, the industry experienced a 2% sequential quarterly increase in the average US frac spread count. Compared to the same period in 2021, the average US frac spread count had increased over 70%.

Increases in US completion activity favorably impacted all of our segments. Increased completion activity in the United States and international perforating product sales led to a 23% sequential increase in our Downhole Technologies segment revenues.

In our Well Site Services segment, revenues increased 11% sequentially, due primarily to higher customer activity in our US, Mid-Continent and Gulf Coast regions. Tightness in oil and gas markets led to strong demand for our products and services, particularly in March, causing us to exit the quarter strong.

Completion activity in the United States shale basins continues to increase and the outlook for the balance of 2022 looks very constructive for continued growth. 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..

Thanks, Cindy, and good morning, everyone. During the first quarter we generated revenues of $164 million, consolidated EBITDA of $14.5 million and a net loss of $9.4 million or $0.16 per share. We achieved our highest quarterly revenues and consolidated EBITDA since the first quarter of 2020, which coincided with the onset of the COVID-19 pandemic.

Our first quarter loss was impacted by $3.4 million of tax expense, resulting from valuation allowances recorded against our US deferred tax assets, as well as certain nondeductible and discrete items. We ended the first quarter with $39 million of cash on hand, compared to $53 million at the end of the fourth quarter.

The quarterly decrease in cash was attributable to a $21 million build in working capital associated with the growth and activity levels.

As of March 31, no borrowings were outstanding under our asset-based revolving credit facility and amounts available to be drawn totaled $51 million, which together with cash on hand resulted in available liquidity of $90 million. At March 31, our net debt totaled $140 million, yielding a net debt to total capitalization ratio of 17%.

We invested $3 million in capital expenditures during the first quarter, which was partially offset by proceeds received from the sale of assets totaling $1 million. In 2022, we expect to invest approximately $25 million to support the expected market expansion.

Separately, on April 14, our Offshore/Manufactured Products segment acquired E-Flow Control Holdings Limited or E-Flow for $8.6 million, which was funded with cash on hand. E-Flow is a U.K. based global provider of fully integrated handling, control monitoring and instrumentation solutions.

For the first quarter, our net interest expense totaled $2.7 million of which $0.5 million was non-cash amortization debt issuance costs. Our cash interest expense as a percentage of average total debt outstanding was approximately 5% in the first quarter.

In terms of our second quarter 2022 consolidated guidance, we expect depreciation and amortization expense to total $17.3 million net interest expense to total $2.8 million and our corporate expenses are projected to total $9.5 million.

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..

Thanks Lloyd. Our Offshore/Manufactured Products segment generated revenues of $84 million and segment EBITDA of $15.6 million in the first quarter of 2022, compared to revenues of $92 million and adjusted segment EBITDA of $13.7 million reported in the fourth quarter of 2021.

Segment revenues decreased 9% sequentially, driven primarily by a 22% decrease in project-driven revenues due to timing of the underlying project schedules. Our EBITDA margin improved in the first quarter of 2022 to 19% compared to 15% realized in the fourth quarter of 2021 due to product and service mix.

During the first quarter of 2022, the segment recorded bad debt expense of $800,000 on receivables from Russia-based customers. As of March 31, we had no material balance sheet exposure to Russia. Backlog totaled $265 million as of quarter end a 2% sequential increase, culminating in our highest backlog level achieved since the first quarter of 2020.

First quarter 2022 bookings totaled $93 million yielding a quarterly book-to-bill ratio of 1.1 times. We have achieved a quarterly book-to-bill ratio in excess of one-time in four of the last five quarters. Our first quarter bookings were broad-based across many product lines and regions.

Approximately 13% of our first quarter bookings were tied to non-oil and gas projects. For nearly 80 years our Offshore/Manufactured Products 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 award opportunities supporting our traditional subsea floating and fixed production systems, drilling and military customers, while experience an increase in bidding to support multiple new customers actively involved in subsea minerals, offshore wind developments and other renewable and clean tech energy systems globally.

In our Well Site Services segment, we generated revenues of $48 million and segment EBITDA of $5.5 million in the first quarter of 2022 compared to revenues of $43 million and adjusted segment EBITDA of $6.2 million reported in the fourth quarter of 2021.

Segment EBITDA margin in the first quarter of 2022 decreased to 11% compared to the adjusted segment EBITDA margin of 14% recorded in the fourth quarter of 2021. Revenue mix, seasonal events and inflationary pressures tempered overall first quarter segment EBITDA margins.

Given the strong exit rate out of the first quarter, we expect our second quarter 2022 EBITDA margins to exceed 15%, given increased personnel and equipment utilization. During 2021, we made strategic decisions to exit certain non-performing service offerings within this segment.

First quarter revenues were tempered by our exit of these underperforming service offerings which resulted in a $3.9 million reduction in revenues compared to the fourth quarter of 2021.

Considering all Well Site Services lines that were exited both domestically and internationally, we have streamlined our operations and will allocate capital going forward to our strongest equipment and service offerings. These service lines and region exits will temper our revenues going forward but are expected to improve segment margins over time.

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 in 2022, we will continue to focus on core areas of expertise in this segment and are actively developing improved equipment offerings to differentiate our completions service offerings.

In our Downhole Technologies segment, we reported revenues of $32 million and segment EBITDA of $2.9 million in the first quarter of 2022 compared to revenues of $26 million and adjusted segment EBITDA of $100,000 reported in the fourth quarter of 2021, driven by higher demand internationally for our perforating products along with improved US sales of our completion products, including frac plugs and toe valves.

Segment EBITDA margin in the first quarter of 2022 was 9% compared to an adjusted segment EBITDA margin of 1% in the fourth quarter of 2021. COVID-19 disruptions and supply chain challenges have hampered activity in domestic and international markets for two years now but these disruptions appear to be easing.

Global oil and gas inventories are now well below their pre-pandemic five-year seasonal averages leading to higher commodity prices and expectations of continued increases in US customer spending throughout 2022. We are also seeing an improved outlook in international and offshore markets, which should help support our product and service offerings.

Given improvements in the frac spread count over the last several quarters, we expect our Well Site Services and Downhole Technologies segments to continue their growth in 2022 with increasing EBITDA contributions.

Revenues in our Offshore/Manufactured Products segment are also expected to improve, given increased levels of backlog along with improved short-cycle product demand. Our outlook for the full year 2022 suggests that our consolidated revenues will increase by 25-plus percent.

Accordingly we are increasing our 2022 full year consolidated EBITDA guidance to a range of $65 million to $75 million. Now I'd like to offer some concluding comments.

Following the unprecedented demand destruction caused by the global response to the COVID-19 pandemic, US crude oil and natural gas inventories have now drawn down considerably with expanding economic activity.

As of April 22, US crude oil inventory was 414 million barrels, which was about 16% below the five-year average Natural gas and storage for the same period was 1.5 trillion cubic feet, which was about 17% below the five-year average.

Crude oil and natural gas prices have responded to these inventory draws, with spot WTI crude oil above $106 per barrel and natural gas at $7 per MMBtu, setting up a very favorable activity outlook for 2022.

Initially, the industry responds to higher commodity prices with accelerated shorter-cycle investments in the United States, which we are seeing. Although, longer term in nature, we expect these investments to pick up for long lead time projects as well, including those in deepwater areas.

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.

John, would you open up the call for questions and answers at this time?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question is from Ian MacPherson from Piper Sandler..

Thank you. Good morning, Cindy and Lloyd..

Good morning, Ian..

Good morning..

So with everything improving, it seems like Products and Well Site are getting back towards reasonable mid-cycle margins and Downhole has – is still tracking margins that are at a bigger deficit to historical heights that you've had before. And it just seems like most of the completion services complex has tightened up in a hurry.

Some parts of that complex pricing and margins are going vertical.

What do you think the opportunity is for an upside surprise with Downhole Technologies in the cycle here with some duration and continued tightness through this year and into next year?.

Yeah. Ian, that's just a fabulous observation and question and there is no question that the significant decline in activity we witnessed during 2020 led to more commoditization, if you will of the whole service space. And in this case, pricing was acute – pricing losses were acute during this period.

There was also excess inventories, which led everyone to kind of sell at fire-sale pricing almost. And I always say, the one thing that is really challenging to recover is pricing, but we are beginning to see that as the market is tightening up a bit and excess inventories are going out the door.

And I'll say, also for us that mix of domestic product coupled with some international sales, it tends to be kind of lumpy quarter-to-quarter. But if we can get that mix, it's a favorable outcome for us with some of the international sales coming along.

We are as I've said in my commentary, projecting improved margins as we progress through 2022 and it's kind of predicated on all those factors. But as you know, a lot of this comes down to fundamental supply/demand. And we have been a bit challenged on – particularly, in our charge production. But hiring labor, you hear about it everywhere.

There is certain volume-based improvements that, we could experience, if we can get a more consistent stream of labor in our facility. So it's always just multifaceted, but I always tried initially to say, let's get the top line up, you get better absorption and improve margins from that.

And then we work on pricing, but that's going to be a factor of the competitive landscape. But again, we are seeing improvements..

Okay. That's really helpful. Thanks. And then just on the opportunity for orders for products. It seems like we have probably an improving more – a bigger opportunity set for floating production units in Brazil and Guyana. I think those continue to grow. And I would suspect that there is more offshore green shoots in other markets as well.

How do those stack up against your short-cycle business in terms of maybe the inbound acceleration this year? Which do you think could be more of a positive beneficiary to a warmer cycle this year?.

In our Offshore/Manufactured Products segment there are a little bit of international opportunities there, but most of the drivers for short-cycle product is still US land. We continue to penetrate international markets, but I think US land is a driver and therefore you'll continue to see improvements in the short cycle piece.

Globally you hit on a lot of the key developmental programs going on globally and we'll participate in those. I would say that over the last several years, not just currently we're much more weighted to development programs that are underway particularly in Brazil and Guyana as you mentioned along with kind of the production services side of it.

I hope we see more on the exploratory or green shoot side. But I think that's going to be longer term incoming as opposed to the large development programs that are out there.

And I do think that the first for us beneficiaries of that will be a little bit around offshore rig reactivations particularly around riser equipment and MPD equipment, which we've made some significant R&D investments over the last five years around MPD equipment.

And, of course, the riser work that we have done also has carryover benefit into alternative energy opportunities. And in fact we had some of those opportunities on the offshore metals recovery side contributing to our 13% mix of non-oil and gas opportunities and bookings this quarter. So everything is progressing pretty well.

But short cycle, I don't -- it's hard to say it's in the bag but it's certainly tied to something that has strong tailwinds behind it being US land-based activity. And then the fact that we are very present and active in both Brazil and Guyana and these big development programs is another plus..

Super. Thanks Cindy..

Thank you Ian..

[Operator Instructions] Our next question is from Stephen Gengaro from Stifel..

Thanks. Good morning,.

Thanks Stephen..

So I guess two things for me. The first probably pretty simple and you talked a little bit about this. But when you think about the uptick in your revenue guide for the year and EBITDA expectations, what are the main drivers? And is it -- and I imagine part of it is just a higher level of confidence that activity has been moving higher.

But just curious if you could highlight the main changes on the upside to your forecast?.

Yeah, for sure. We've got a lot of initiatives in place in the US. And again always the case when a market inflects up or down the US short cycle is the initial beneficiary. And our commentary hopefully was clear that we built revenue and our EBITDA contributions throughout the quarter.

So we're looking at exit rate March to help solidify that upside outlook going into Q3 and the balance -- or Q2 and the balance of 2022. And that is both Well Site Services and our Downhole Technologies segment and short cycle quite frankly in our Offshore/Manufactured Products segment.

So, you can't always be reticent to say those are in the bag, but if activity continues as it should and as we expect, yes, we have pretty strong confidence in our guidance there. And I have been very clear with my team that the first thing we need to do is improve personnel and equipment utilization. Our incrementals are strong.

They will lead to higher margins over time without question. And so we've been very, very focused on targeting new customer activities in various basins. And some of that equipment is already being "locked up". And so again a pretty high degree of confidence.

When I go to Offshore/Manufactured Products, we kind of, covered short cycle and said that that's got strong tailwinds. And then I'm looking at my book-to-bill ratio, which as Lloyd suggested was positive in the four of the last five quarters. So, that backlog is creeping up which gives us better project visibility as we move forward.

Then the only variables left are the level of service activity that we will see which again should ramp with ramping major project activity as well coupled with the kind of military and alternative energy investments we have. I will acknowledge not so much the military, but the alternatives are very lumpy right now because they're so early stage.

You may have no contribution one quarter and then a real good order another quarter. And -- but I think we're doing all the right things in terms of customer contact activity.

And importantly, the research and development spending we're doing, I think we're putting in products and services that are going to be needed longer term, both in conventional areas as well as alternative type investments..

Great. No, that's helpful. So, I'm not exactly sure how to ask this but the -- when I think about like the US pressure pumping business it's fairly easy to sort of think about supply/demand and pricing trends and we kind of have a sense for how many frac fleets are working, et cetera.

And I'm just curious on the Well Site side, can you give us some commentary on how to think about the sort of the supply/demand currently and sort of the competitive landscape and pricing dynamics?.

Yes, I can. Now, I'll acknowledge it's a challenge even for us to track the various -- nobody just reports number of units whether they're frac heads, whether it's isolation tools, whether it's flowback assets, unite drill out assets. And so what I can tell you is that we are not alone in exiting and divesting non-profitable business lines.

And that's on the one hand, which means those who are left in those businesses will have a tighter market going forward. There's also not a lot of capital chasing new investments in this space. Whereas in past years once you get to crude north of $100 million, money would -- private equity money particularly would be flooding this industry.

That is not the case. And so again that just lends itself to a more fundamentally tighter market. And it lends itself to better utilization, which we need quite frankly in our own space. And so we're being very targeted with the customers we are seeking that have us -- will offer us more continuous utilization of both our people and equipment.

My concern is not necessarily getting the equipment back to work in this environment or facing a lot of new market entrants, it's more how quickly can I ramp the people side of the business to ensure that we can grow that top line as much as we would like to and as much as our customers want us to. .

Great. Thank you for the color. And then just one final, maybe for Lloyd.

When we think about the cash flow statement for the year, where should we think about sort of the puts and takes as far as working capital, uses of cash as revenues grow and how that sort of impacts the free cash flow expectations?.

Yes. I mentioned we built working capital of $21 million in the first quarter which that's kind of a typical seasonal quarter where we use more working capital. As operations are continuing to improve, we'll probably build a little bit more in the second quarter. It's going to moderate for the full year kind of the back half of the year.

Do expect to be free cash flow positive after the $25 million of CapEx, as well as the $8.6 million we used to fund the E-Flow acquisition? So... .

Okay. Thanks. And then maybe just one final one.

You mentioned -- how does E-Flow fit into the mix? And where does that sort of add to the offering?.

What and if, it's really a higher tech offering that is more of a vertical integration at this point. Many of our products particularly our newer higher-end products on the MPD equipment as an example some of our alternative energy investments need the control system.

And think of the smarter pieces of this equipment which we have outsourced in the past that we are bringing that technology in-house to further leverage our technical capabilities around these products..

Thank you..

Thank you, Stephen..

And we have no further questions at this time. I will now turn the call back over to Cindy for closing remarks. .

John, thank you for hosting our call today. We also appreciate those of you who have joined the call today. We do recognize this is a heavy earnings reporting period and appreciate your continued interest in Oil States. We hope you all have a great day. Thanks so much. .

Thank you, ladies and gentlemen. That concludes today's conference. Thank you for participating. You may now disconnect. Speakers stand by for your debrief..