Good morning, everyone. Welcome back to Sidoti May Micro-Cap Virtual Conference. We have an exciting presentation on deck for you. I'm Steve Ferazani, an analyst at Sidoti. Before we get started, I would like to remind everyone we should have two minutes for questions following our discussion. If you do have questions, you just press that Q&A button at the bottom of your screen, type in the question. We'll get to as many as we can, time permitting. I don't want to take up any more time. I'm just so pleased to welcome Oil States International, the ticker is OIS. We're joined by newly appointed President and CEO, Lloyd Hajdik, also a longtime CFO. I think we have a lot to discuss. There's certainly plenty to talk about in the energy space right now.
Lloyd, before we get started, I think a lot of people know the name. Maybe they haven't revisited it in a while, and I know the story has evolved. Maybe if you can start out and give us a brief overview?
Yes. Steve, for everyone on the call or the webcast, thank you so much, we appreciate everyone's time and attention to Oil States. I think you're right, just for everyone's benefit, I'm Lloyd Hajdik. I'm the CEO. I was the CFO for about 12.5 years. Succeeded Cindy Taylor, our longtime CEO, who was CEO for about 19 years. I've been in the chair since May 1st. Again, with the company for about 12.5 years. Oil States operates in three segments, I'd say today, Oil States is not the same company it was even kind of four or five years ago. We kind of repositioned ourselves to be much more focused on international and offshore operations.
The themes are coming out of, even on the macro side of what's becoming much more important to investors, is that we are clearly are better aligned offshore. The whole theme of energy security with what's going on in the Middle East. Traditional hydrocarbon, traditional oil and gas, as well as our businesses that are geared to engineer technology for military applications, as well as some of the transitional opportunities. I mentioned the three segments that we operate in. Our Offshore Manufactured Products segment is probably our longest legacy segment in the business. It dates back actually to the 1940s. That business, Offshore Manufactured Products, is about 2/3 of the revenue for Oil States and about 70% of the EBITDA contribution. Within OMP, we refer to Offshore Manufactured Products, we design and manufacture capital equipment for deepwater offshore applications. Think about floating production facility content.
Both from the facility side all the way down to the seabed for pipeline type of equipment, so subsea infrastructure. We also manufacture and sell topsides top equipment, so cranes and on the topsides of these production facilities. Within this business, we do have applications that we sell content into primarily the U.S. military for naval applications. We also have some applications on the more transitional space in subsea mineral harvesting, as well as developing an offshore wind application, a platform for offshore wind. Our next segment, Completion and Production Services. This is the area that I say we're not the same company as we were even just a couple of years ago. We spent the last couple of years exiting a number of underperforming or non-performing business lines, primarily on U.S. land, that were focused in this particular segment.
Where we are today, we have high-graded the businesses within that segment. We still have some element of U.S. land services, but much of which of this is a kind of a rental model with extended reach completions technology, international applications, as well as offshore with the Gulf of [Mexico]. Again, that business is about, call it 15% of the revenues and about a quarter of the EBITDA contribution. Last segment, Downhole Technologies. It's a downhole consumable products business, so manufacturing led as well, and again, it's about 20% of the revenues, less or so on the EBITDA contribution. It's been the business that's been challenged for us over the last couple of years. It manufactures our perforating products, so think about guns and charges, as well as frac plugs.
On the completion tool side, as well as the perforating side, this is the area that we've dedicated a significant amount of management attention to over the last couple of years. We, like other perf product providers or manufacturers, have had real challenges within the U.S. land complex. We redesigned our perforating portfolio. We have new gun systems that are out in the market that are gaining tremendous market share and customer acceptance. Some challenges there we've had in this business is, A, last year on the tariff regime, us as well as other suppliers import a lot of product in from China. This year, the challenges in some of the raw material inputs, primarily powder and tungsten. No shock that there's a significant amount of powder that are going into munitions that are being used in the Middle East. Challenges there.
We have developed a roadmap for that business, for that segment to really get it back on its feet, and we're really starting to see some green shoots there. Incremental land activity in the U.S. should pick up as well considering what's happening in the Middle East. For Oil States, that's really the three segments, but more on a, I'd say, call it investment thesis for us or for Oil States is the offshore and international growth, which we fully expect is going to increase or going to certainly ramp here more by 2027 once we get through what's the conflict in the Middle East and that settles down. We've high-graded, as I mentioned, our domestic businesses, more stable and cash flow driven. We feel like we have traded a significant discount to our peer group.
Last I looked on a 2026 multiples basis, we're at about 6.5x. Our peer group average is about 13x, so call it a 50% discount. Historically, Oil States has been much of a free cash generating company. Last year, great, strong, free cash flow.
Yeah.
A lot of working capital. In our Bloomberg estimates, and these are Bloomberg, not Oil States estimates, our free cash flow yield's about 7%. The peer group is a little under 2, or call it sub-3%. Strong free cash flow generation, which for us would be valuable for an investor. Again, just the investment opportunity, the long-term macro and driving demand, again, international and offshore, heavily weighted to international and offshore to about 75% of our revenues by destination or non-U.S., so international offshore. We've really strategically transformed the business mix, as I mentioned, high-graded that, and stronger EBITDA contribution or margins coming out of the Completion and Production Services segment. Free cash flow. I think we have a superb balance sheet. We paid off our convertible senior notes on April 1st. We were net cash at the end of March by $4 million, so effectively no debt.
As I mentioned, just really a very attractive valuation from an EBITDA multiples basis compared to our peers. Steve, I covered a lot there.
You did. You covered an awful lot. There's plenty of questions that can come out of that.
Sure.
Thanks so much, Lloyd. You kept it brief.
I'll take a breath.
Start out with, I think, probably the big point you brought up in the overview, which is the transformation you've undergone. Particularly for folks who maybe haven't checked in on the company in a few years, it's a significant transformation over the last three or four years. Walk us through why you decided to become more focused on international and offshore, pull back in terms of your exposure to U.S. land, and how far along you are now in that transformation.
Yeah. I'll maybe take the second question first. In terms of the U.S. land, that was really within the Completion and Production Services segment, we actually had the segment name as Well Site Services up until a couple of years ago. Once we made the decisions to exit a number of underperforming businesses on U.S. land drilling rigs. We owned a small fleet of land rigs. We had flow back and well testing businesses. These are in high employee-base businesses, very low margins, highly commoditized, essentially consumed a lot of capital.
Well testing. A lot of capital, very low to no return. A, very little, if any, free cash flow, and very low or subpar returns on invested capital. We are an ROIC-driven business or company. Once that does not meet the hurdle rates, we're going to decide to do something, whether either, A, we're selling it or exiting it and selling off the assets, selling off the facilities associated with it. That's been the last 24 months or so, and I would say the last couple of two, three quarters, you've seen that popping up in our results. The revenue contribution on that business is smaller, but the margins are around 30%. We did 29.5% in the first quarter, and we've guided to low 30s on a forward-looking basis. That's been one. Purely, I'd say it's economics driven.
Yeah.
Has allowed us to pivot more and certainly preserve from a capital allocation perspective, not allocating so much capital into those low-performing businesses.
Okay.
That's what's really largely driven our exposure to international and offshore. With where we were about four years ago, we were about 50% U.S. land in terms of revenue and 50% international and offshore. The way we look at international and offshore, we're manufacturing equipment here in the United States that's going for offshore applications. We look at that as international or offshore revenues, depending if it's land or deep water. That's now 75% of the business as opposed to being 50/50. These are higher grade customers, stickier margins, longer duration type projects, and again, it's manufacturing led. As I mentioned earlier, Offshore Manufactured Products is 2/3 of the revenue. It's manufacturing led. In terms of capital allocation into that business.
Yeah.
It's maintenance CapEx, absent building out new facilities, which we just completed one in Indonesia. That's been, I say, the strategic pivot, strategic focus is focusing on those longer duration, higher margin businesses that historically generate higher levels of free cash flow. The Downhole Technologies business is a downhole consumable products. Again, it's manufacturing led. That's the business that I mentioned that's had its share of challenges, notwithstanding any of our other competitors in the market or peers in the market. We're seeing turnaround there, too. Again, we revamped our perforating systems and enhanced the technology, seeing really good customer uptake from that. I think that with the roadmap that we've developed for that business, seeing it transition into a higher grade, higher performing business. It's just taking some time.
We've got to still work through some of these issues in terms of our kind of raw material inputs and cost structure.
Part of this is, particularly with offshore projects, you have far greater visibility. Typically, a lot of what you're in now is less competitive, so theoretically less pricing pressure, better margins. All those true?
Yes, it is. That's why in Offshore Manufactured Products, but in that segment, we have generated historically around 20% EBITDA margins. There are some periods where it has been below that. There are some periods that it's been above that, and I think that, one, is going to be driven along based upon your levels of backlog, which is going to generate throughput to your facilities and absorption. We could see those margins moving higher or lower to mid-20s. From a guidance perspective, 20% EBITDA margins, and that's the business that generates all the free cash flow.
Yeah. You've completed the transformation, or largely. You've reset sort of your business and product lines. That being said, coming out of Q1, there was some pressure on your stock. Can you talk a little bit about the Q1 results and maybe what investors might be missing?
No. Again, in this environment, anytime that you're going to come short of consensus or estimates, you're going to get punished for it. A miss is a miss. We were slightly below on EBITDA, slightly below on revenue, and largely based upon two things. I thought we were pretty clear this on our Q1 earnings conference call. We did have some Middle East impact. In other words, the war, conflict kicked off end of February, March 1st, one month. We had $2 million of revenue lost in the quarter, but call it $1 million or so of EBITDA. We also had, in the Offshore Manufactured Products segment, a customer deferral of an ongoing project. These long-term projects, or longer duration projects, we account for on a percentage of completion basis, like most-
Yeah.
Equipment manufacturers do. Specifically it was a managed pressure drilling project. A customer had designated a particular rig for the equipment to be deployed on. They were switching that rig out. They were trying to source another rig. They asked us to pause the project, and we said, obviously, "Fine" with the customer. That did cost us, I want to say $4 million, $4.5 million of revenue and probably a million and a half of EBITDA. Those two things right there alone, in our size company, those matter.
Yeah.
In the law of small numbers.
Yeah.
Right? That's, I'd say, those couple of things, and there's puts and takes there, but those were the big items for us.
Okay.
[inaudible] We still have some impact from the Middle East. I'll say our international land operations within the Completion and Production Services business is picking back up, mainly in areas outside of Saudi. Saudi was slow coming into the year.
Okay.
The conflict didn't have that great of impact on Saudi because it still was kind of ongoing. Countries like Kuwait, and the UAE.
Yeah.
Those areas that essentially kind of shut down their onshore and offshore operations, those are getting back to work.
They are already?
Yeah. They are getting back to work. We're seeing the pickup back there. Yeah, the other impact we had in the quarter from those disruptions are just timing of some orders. There were some larger type orders that we had expected to book in the backlog, Middle East customers, that didn't happen because they got deferred because of what was happening with the conflict. The other big part is whether or not we were going to reconfirm or adjust our full-year guidance. We were somewhat couched on it that we gave, obviously, second quarter guidance didn't change full-year guidance.
Yeah.
That could be viewed as, "Well, are they bringing it down? Are they increasing it?" The answer to that is, our visibility is we haven't changed our guidance.
Right.
I think that without being explicit about that had some impact as well.
That wasn't uncommon for a lot of names with even the more land names, because we don't know what the second half-
Exactly. Whenever we're giving information on these calls, hand on heart, we're giving you the best information that we have with us at that particular time.
Yeah.
We're not going to go out on limbs and prognosticate on things that could or could not happen.
Right.
With the level of uncertainty that we're facing.
Yeah.
In the second half of the year. Come our July, so our second quarter call in July, we'll have much better visibility.
Yeah. Fair. You talked about the impact in the Middle East, but as you're looking at offshore and international, do you see some better long-term growth opportunities as you're looking ahead?
Oh, no question. I mentioned how we've reweighted to a much heavier international and offshore. Brian can chime in on this, too, but we subscribe to different levels of data and research from the different bureaus out there. Westwood Energy is one of them.
Yeah.
Estimates of EPCI or EPC spending over the next five years or so. Robust levels for offshore. I think what's front and center coming out of this conflict, as I mentioned early, is energy security. Many of these operators are now looking at the deep water, not without risk, but lower risk basins that are a little more, call it say, spread across different regions. Lower risk, obviously very prolific deep water basins. Deep water spending is going to increase, you'd expect it to be in the traditional sets in the Brazil or offshore-
Yeah.
Latin America, Brazil, Guyana. We're seeing pickup in West Africa, actually even some call it Gulf of America, as well as North Sea. Those traditional basins are all starting to see increases in levels of activity from a bidding and quoting perspective.
We saw this post-Ukraine, right? When there was all the concern about energy security was the buzz term that's now come around again.
Sure.
It was a lot around natural gas picking up LNG activity. This is an even larger issue, potentially.
It's a much larger issue.
Energy security is tossed around a ton during the last earnings season.
Right.
The impact has to be real, right? In terms of the reaction.
Well, certainly. Coming into this year, every operator, including ourselves, anyone who's putting a budget together, had to forecast $55-$60 WTI Brent.
Yeah.
The last time I looked at the strip, which is right before our board meeting, we don't get back to $70 on the strip for another couple of years.
No.
I think the oil macro has fundamentally changed at least for the next couple of years, notwithstanding the fact that your global inventories have drawn down so much over the last 90-120 days.
Yeah.
Coming into the year with, to my earlier point, $55-$60 oil in an oversupplied market, now I think that's completely reversed.
Got it. Talk to me about your expected trends on backlog with all that's going on. You had, for several quarters, well above 1x. Can you get back there? What's your expectations?
Oh, yeah. No, I did. We had a 0.9 book-to-bill in Q1. I mentioned there was some orders that we'd expected to come into backlog that were delayed with the conflict in the Middle East. They're coming into backlog now, and on the earnings conference call, I did guide to a one time or better book-to-bill for the full year. It's always hard. These orders move in and out of a quarter. You might have a 0.8, 0.9 book-to-bill. You may have a 1.3 book-to-bill. If we look at it on a full year basis, and we've been one or better on a book-to-bill, and I would say probably better than our peer group, for the last five years. From 2021 forward through 2025 and our expectation for 2026, one- time book-to-bill or better.
Think about that you're on increasing levels of revenue as well. Your denominator's increasing. We feel good. About 50% of our backlog today is military products. Think, remember back, if you're familiar, in the third and fourth quarter of 2025, we booked a significant level of military products orders, primarily for the US Navy. It was $112 million-ish, I think, of orders. That backlog is a longer duration backlog, meaning these are block orders that were let or given or sent out by our customer and the US Navy that are fulfilled over, oh, about a 5-year period. Historically, backlog would convert to revenue, in the 4-12 months would be about a 70% conversion rate, 65%-70% of backlog would convert to revenues in the 4-12 months.
That's weighted down a little bit now with the longer multi-year products orders from military. I'd say it's around 50, 55%. That's a net positive for us, because the military products awards are-
Yeah.
Still at comparable margins to the product set within the business.
We do have some questions coming in about if you could talk a little bit about how you ended up in the military products market and what exactly you're doing in that market.
Yeah, I have to be somewhat careful there.
Sure.
Yeah, we've actually provided high-end military products for several decades.
Okay.
It really came as an offshoot of our elastomer products technology within Offshore Manufactured Products. There's elastomeric compounds that go within our FlexJoints to give it some of the motion compensation. That elastomer products content was then morphed into products for naval applications. Think about these are particular for vessels. We refer to them as acoustic damping or shock mounts, where you reduce the vibration or noise footprint on a vessel, where you bring these coupling, these connections together.
Okay.
We've been providing content to the military, and not only U.S., but other military.
Right.
Mostly naval application. Almost all. I'll just say all naval applications.
Got it. That's helpful. When we talk oil field services, technology doesn't come up a lot. I know when I'm talking to investors, it's not a conversation I have a lot. It does matter, and companies do like to point out the differentiation. Can you talk a little bit about your technology and how it can drive growth?
Yes, it does. step back in the Offshore Manufactured Products business. Again, we're very much technology-driven. Going back to our original FlexJoint product, it should be probably on every deep water drilling rig and on most floating production systems.
Looks like Lloyd's frozen up a little bit here. Brian, do you want to jump in, or?
Yeah, sure. I'll jump in while we're getting the video sorted out there. Like Lloyd said, our products are on a lot of the drilling rigs, floating production infrastructure with the FlexJoint technology. One of the areas where we've seen a lot of traction here lately, as Lloyd mentioned earlier, we're not only involved on the traditional oil and gas side of things, we're also on the transitional type energy renewables type product line. Many cases, we're able to take the existing technologies from historical oil and gas applications and then reapply that to new, more broader energy mix, which we're kind of an all of the above type approach.
Sorry, guys
Yeah, there you go. All right.
Technology, it happens. We were speaking about technology, so it fits.
Yeah, I'm technology challenged. My iPad literally just died. Sorry about that. Brian may have covered some of it. Technology development is really at the forefront of our business.
Yeah.
That's one of the reasons when you think about what we exited U.S. land, highly commoditized.
Yeah.
No technology differentiation, obviously then the inability to have any pricing leverage. We've been, over the last three or four years, developing new technologies within OMP. Our new managed pressure drilling system that is getting great customer acceptance from the deepwater drillers is one. We just brought to market a Low Impact Workover Package we refer to as LIWP. Same thing within that business, so it's an offtake of our riser technology. Allows us to connect to these older subsea wellheads, puts less pressure, less weight on the subsea wellhead for workover or intervention or for decommissioning purposes. Mentioned are some of the kind of non-oil and gas plays we're involved in, subsea mineral harvesting or subsea mineral mining.
Yeah.
We have riser technology associated with that. Obviously, Donald Trump's executive order that he signed last year has created a tremendous amount of interest in that. That's the area where we're actually selling equipment, and that's not theoretical, that's actual applications for us.
Yeah.
The last one is, and newer technology, would be in terms of the floating offshore wind content. That's, again, that's more still in the concept phase. We have a design. We just need to get a sea trial on it.
Yeah.
In Downhole Technologies, I mentioned our revamp of our perforating gun systems. in that business, constant kind of technological evolves.
Yeah
The need to be at the forefront. We've done that with our new Epic-style gun systems, and customers have been very pleased with the reliability.
Excellent.
Sorry about that. I've just got to catch up.
No, it happens. It happens often. I know we don't have a ton of time left, but I do want to be able to touch on the fact that you were in the CFO seat for many years. You probably bring a different perspective now in the CEO seat. Can you tell me, excuse me, any changes you want to push through? Anything you saw differently? What do you bring differently, having been the CFO for many years?
Yeah. I'd say, first off, have been the CFO chair for 12 and a half years. Sat next door to Cindy for the entire time. We're very aligned on strategy.
Yeah.
Co-developed between Cindy, myself, Philip Moses, our COO, and the other management leaders of the management team. Everything that we've done structurally has been co-developed and co-managed.
Okay.
I don't think you're going to see a fundamental shift in strategy going forward.
Okay.
Cindy came up through the organization as the CFO as well. That mindset is a little bit the same in terms of CFO to CEO ascension. Same for me.
Okay.
The great thing about this is now we can look more at how do we allocate capital going forward.
Right.
Maybe we have organic capital, organic growth that we'd allocate for CapEx spend. We've been proponents of share repurchases. We have the share repurchase authorization in place, and we'll execute on that. With us now having paid off the debt, having paid off the convertible senior notes April 1, does provide us with optionality for M&A purposes. Either, A, tuck-in type acquisitions for cash or things of larger scope and scale. These are things that we all as a management team have talked about for years. I do believe we have more optionality now than we had before, especially having paid off the debt and with the, I could say, divesting ourselves of those low-performing cash using or capital using businesses. We have clearly more capital allocation for other purposes other than allocating them to poor performing businesses.
Do you see a lot of M&A opportunities out there right now?
We do. We've seen a number, and it's really a bifurcation of a number of opportunities of commoditized U.S. land. No, thanks. Not doing it. We're constantly in search for the technology type tuck-ins. I think our success in M&A has really been a lot of our business unit leaders that see adjacencies in the businesses in their areas. I use the U.K. as an example. The U.K. has been probably our best developer of new technologies over the half dozen years or so. They also see other technology type businesses that they may be suppliers into, as an example, into the business. We bought a business back in 2022 that's the control system aspect for our managed pressure drilling business. It's been phenomenally successful.
Yeah.
I think those type of adjacencies, and again, with improving stock price and improving, hopefully, a multiple on our stock then lends itself to the opportunities to use stock as a currency.
Excellent. I know we are kind of past time here. We covered a lot of terrain in this last half hour, and there's just so much going on right now. We could have done this for another half hour.
Sure.
At least give you a chance, what do you hope people watching today walk away from with the Oil States story?
Well, I want to just say, kind of reiterate from my opening comments. We are different than we were just three or four years ago. I think we're a much better aligned company in terms of what the go forward on the margins and the cash flow, which translate into an improved investment thesis for those that are listening to the call. I can't stress enough the free cash flow generation of the business, the focus on the offshore and international markets, the super strong balance sheet, and the optionality that that provides us to do.
Yeah.
Share repurchases as well as M&A or transformational type of transactions.
Excellent. Lloyd Hajdik, President and CEO of Oil States. Thanks so much, Lloyd Hajdik. Appreciate it today.
Steve, thank you, and thanks everyone on the call. We certainly appreciate your time. Have a great rest of your day.