Oil States 3Q26 Earnings Call - OIL STATES INTERNATIONAL INC

Financial Performance:

• Q3 2026 revenue was $170 million (up 8% sequentially) and adjusted EBITDA was $20 million (up 6% sequentially), both exceeding guidance.
• Net income was $3 million ($0.05/share); adjusted net income was $8 million ($0.15/share), excluding executive transition and facility exit charges.
• Consolidated revenue in the first nine months was 72% from offshore and international activities, a shift from 50% in 2023.
• Offshore manufactured product segment: $104M revenue, $19M adjusted EBITDA (18% margin).
• Completion and production services segment: $23M revenue, $6M adjusted EBITDA (26% margin); revenue declined 5% sequentially due to US land activity changes.
• Downhole technology segment: $42M revenue, $4M adjusted EBITDA; revenue up 6% sequentially, hitting highest levels since Q1 2023.
• Backlog reached $482 million, the highest level in nearly 12 years, with a Q3 book-to-bill ratio of 1.3x and 1.2x year-to-date.
• YTD capital expenditures were $10 million; $13 million generated from asset sales, with $14 million in assets held for sale remaining to be monetized.
• Free cash flow for Q4 is projected at $15–$25 million, reflecting inventory buildup and seasonal collection delays; full-year FCF is expected to be lower than previous expectations due to $38 million in inventory investments.

Guidance and Future Outlook:

• Q4 2026 revenue guidance is $172–$184 million; adjusted EBITDA guidance is $20–$23 million.
• Management anticipates operator spending in the U.S. will strengthen in 2027, supported by elevated crude oil prices.
• The backlog provides visibility for growth starting in 2027, particularly in deepwater and international markets.
• Management expects revenue growth in 2027 to align with general market estimates, with the majority of growth coming from international offshore and U.S. land.
• Management does not provide specific 2027 backlog guidance but expects momentum to persist.
• Raw material cost headwinds, specifically for explosive powders, are expected to moderate in the first half of 2027.
• Long-term model includes approximately $35–$40 million in MPD revenues at very good margins.

Business Segments and Product Lines:

• Offshore Manufactured Products: Driven by production platform, military, and connector products; backlog is 90% related to offshore energy products with significant military programs (approx. 46-50% of total backlog).
• Completion and Production Services: Focusing on high-grade, higher-margin core service lines including extended reach tools and Gulf of Mexico operations.
• Downhole Technology: Growth supported by expanded product portfolio and US activity; facing headwinds from tungsten, explosive powder, and copper costs.
• New Technology/Momentum: Secured an MPD rental project in Q3 and expects a rental (cell) order in Q4; progressing deep-sea mineral gathering systems.
• Strategic Initiatives: Continued investment in managed pressure drilling (MPD), riser/connector/pressure control capabilities, and selective M&A to fill technology gaps.

Market and Competitive Landscape:

• Global energy security needs are strengthened by geopolitical conflicts in the Middle East and Europe, driving demand for offshore and international investments (Brazil, Guyana, Asia).
• The offshore sector shows strong multi-year investment drivers; 70% of drill ships currently have MPD, with potential to reach 85-90%.
• Competition in pricing has remained stable with no major concessions observed in recent capital equipment tenders.
• The company sees opportunities in well maintenance, workovers, and decommissioning applications leveraging existing subsea intervention capabilities.
• U.S. land frack spread counts are up year-over-year and expected to rise modestly in 2027.

Risks and Challenges:

• Geopolitical uncertainties in the Middle East and Europe continue to create volatility in crude prices and project timing.
• Inflationary pressures on raw materials (tungsten, explosive powders, copper) remain a headwind, though expected to ease in 2027.
• Customer activity in U.S. land markets is subject to change, impacting quarterly revenue mix.
• Seasonal slowdowns in customer collections and project timelines create quarter-to-quarter variations in results.
• Execution risks associated with converting a record backlog into revenue, particularly for multi-year military projects which have slower conversion rates.

Management Commentary and Tone:

• Management tone is confident and positive, citing a "strong foundation" and "multi-year uptick in offshore spend."
• Emphasis on disciplined capital allocation, focusing on organic growth, selective M&A, and share repurchases.
• Acknowledged the strategic shift to offshore/international mix as a key driver for long-term resilience.
• Expressed caution regarding immediate 2027 backlog guidance but confidence in underlying demand.

Analyst Questions and Answers:

• Jim Rollison (Raymond James): Asked about MPD market penetration and backlog drivers. Management confirmed MPD momentum with rental bookings and future cell orders, expecting $35–$40M in MPD revenue. Noted 90% of YTD bookings are offshore, providing 2027 visibility.
• Stephen Gengaro (Stifel): Inquired about U.S. land growth and backlog burn rates. Management expects 2027 growth to align with market estimates; noted military products in backlog have a 50-55% conversion rate over the next 4-12 months.
• Josh Jane (Daniel Energy Patterns): Asked about pricing power and capital allocation. Management confirmed no pricing concessions and outlined a capital framework of CapEx/R&D, opportunistic M&A (stating they are "not content" with current portfolio), and share repurchases.
• Chuck Minervino (Susquehanna): Requested updates on FCF guidance and raw material costs. Management revised Q4 FCF to $15–$25M due to $38M inventory buildup for backlog support; confirmed raw material costs will moderate in H1 2027.

Other Key Points:

• Board approved a new $50 million share repurchase authorization (valid through Oct 2028), replacing the prior expiring plan.
• Company retired all outstanding convertible senior notes and maintains a net cash position with ample liquidity.
• $9 million of stock was repurchased in the first nine months of 2026.
• $38 million invested in inventory YTD to support backlog execution and future demand for downhole consumables.
• Military products awards from late 2025 and Q3 2026 now comprise nearly half of the total backlog.