OIL STATES INTERNATIONAL, INC.
The following discussion and analysis should be read together with our condensed
consolidated financial statements and the notes to those statements included
elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial
statements and notes to those statements included in our 2021 Annual Report on
Form 10-K in order to understand factors, such as charges and credits, financing
transactions and changes in tax regulations, which may impact comparability from
period to period.
We provide a broad range of manufactured products and services to customers in
the energy, industrial and military sectors through our Offshore/Manufactured
Products, Well Site Services and Downhole Technologies segments. Demand for our
products and services is cyclical and substantially dependent upon activity
levels in the oil and gas industry, particularly our customers' willingness to
invest capital in the exploration for and development of crude oil and natural
gas reserves. Our customers' capital spending programs are generally based on
their cash flows and their outlook for near-term and long-term commodity prices,
making demand for our products and services sensitive to expectations regarding
future crude oil and natural gas prices, as well as economic growth, commodity
demand and estimates of resource production and regulatory pressures related to
environmental, social and governance ("ESG") considerations.
Recent Developments
The spot price of Brent crude oil price averaged$101 per barrel during the first quarter of 2022, an increase of 27% from the fourth quarter 2021 average and the highest quarterly average level observed since the second quarter of 2014. The higher commodity price environment was driven by crude oil supply reductions resulting from the Russian invasion ofUkraine onFebruary 24, 2022 , increased demand as the global effects of the COVID-19 pandemic have moderated and slower crude oil production growth due to reduced investments by operators globally. Brent and West Texas Intermediate ("WTI") crude oil and natural gas pricing trends were as follows: Average Price(1) for quarter ended Average Price(1) for year ended Year March 31 June 30 September 30 December 31 December 31
Brent Crude (per bbl)
2022 $ 100.87 $ - $ - $ - $ 100.87
2021 61.04 68.98 73.51 79.61 70.86
WTI Crude (per bbl)
2022 $ 95.18 $ - $ - $ - $ 95.18
2021 58.09 66.19 70.58 77.33 68.14
2022 $ 4.67 $ - $ - $ - $ 4.67
2021 3.50 2.95 4.35 4.75 3.90
________________
(1)Source: U.S.
OnApril 22, 2022 , Brent crude oil, WTI crude oil and natural gas spot prices closed at$105.15 per barrel,$102.86 per barrel and$6.59 per MMBtu, respectively. Additionally, as presented in more detail below, theU.S. drilling rig count reported onApril 22, 2022 was 695 rigs, 10% above the first quarter 2021 average. 20 -------------------------------------------------------------------------------- In January of 2022, we completed the previously announced exit of certain non-performing service offerings within our Well Site Services segment. These service offerings generated revenues of$4.4 million in the first quarter of 2021. During the first quarter of 2022, we recorded bad debt expense of$0.8 million related to receivables fromRussia -based customers of the Offshore/Manufactured Products segment. As ofMarch 31, 2022 , we had no remaining material balance sheet exposure related toRussia . OnApril 14, 2022 , our Offshore/Manufactured Products segment acquiredE-Flow Control Holdings Limited ("E-Flow"), a global provider of fully integrated handling, control, monitoring and instrumentation solutions. E-Flow, founded in 1988, provides a broad range of engineering, design, manufacturing, installation and commissioning services to its customers in the energy industry. The purchase price of$8.6 million , which is subject to customary post-closing adjustments, was funded with cash on-hand. Overview Current and expected future pricing for WTI crude oil, along with expectations regarding the regulatory environment, are factors that will continue to influence our customers' willingness to invest inU.S. shale play developments as they allocate capital and strive for financial discipline and spending levels that are within their capital budgets and cash flows. Expectations for the longer-term price for Brent crude oil will continue to influence our customers' spending related to global offshore drilling and development and, thus, a significant portion of the activity of our Offshore/Manufactured Products segment. Crude oil prices and levels of demand for crude oil are likely to remain highly volatile due to numerous factors, including geopolitical conflicts (such as the direction and outcome ofRussia's invasion ofUkraine ), unrest and tensions; sanctions; global uncertainties related to the COVID-19 pandemic; domestic or international crude oil production; changes in governmental rules and regulations; the willingness of operators to invest capital in the exploration for and development of resources; use of alternative fuels; improved vehicle fuel efficiency; a more sustained movement to electric vehicles; and the potential for ongoing supply/demand imbalances. Capital investment by our customers recently reached a 15-year low due to negative developments with respect to many of these factors. Customer spending in the natural gas shale plays has been limited due to technological advancements that have led to significant amounts of natural gas being produced from prolific basins in theNortheastern United States and from associated gas produced from the drilling and completion of unconventional oil wells inthe United States .U.S. drilling, completion and production activity and, in turn, our financial results, are sensitive to near-term fluctuations in commodity prices, particularly WTI crude oil prices, given the short-term, call-out nature of ourU.S. operations. Our Offshore/Manufactured Products segment provides technology-driven, highly-engineered products and services for offshore oil and natural gas production systems and facilities globally, as well as certain products and services to the offshore and land-based drilling and completion markets. This segment also produces a variety of products for use in industrial, military and other applications outside the traditional energy industry. This segment is particularly influenced by global spending on deepwater drilling and production, which is primarily driven by our customers' longer-term commodity demand forecasts and outlook for crude oil and natural gas prices. Approximately 40% of Offshore/Manufactured Products segment sales in the first quarter of 2022 were driven by our customers' capital spending for products used in exploratory and developmental drilling, greenfield offshore production infrastructure, and subsea pipeline tie-in and repair system applications, along with upgraded equipment for existing offshore drilling rigs and other vessels (referred to herein as "project-driven products"). Deepwater oil and gas development projects typically involve significant capital investments and multi-year development plans. Such projects are generally undertaken by larger exploration, field development and production companies (primarily international oil companies and state-run national oil companies) using relatively conservative crude oil and natural gas pricing assumptions. Given the long lead times associated with field development, we believe some of these deepwater projects, once approved for development, are generally less susceptible to short-term fluctuations in the price of crude oil and natural gas.
Backlog reported by our Offshore/Manufactured Products segment increased to
Backlog as of
Year March 31 June 30 September 30 December 31
2022 $ 265 $ - $ - $ -
2021 226 214 249 260
2020 267 235 227 219
21-------------------------------------------------------------------------------- Our Well Site Services segment provides completion services and, to a much lesser extent, land drilling services, inthe United States (including theGulf of Mexico ) and the rest of the world.U.S. drilling and completion activity and, in turn, our Well Site Services results, are sensitive to near-term fluctuations in commodity prices, particularly WTI crude oil prices, given the short-term, call-out nature of its operations. We primarily supply equipment and service personnel utilized in the completion of and initial production from new and recompleted wells in ourU.S. operations, which are dependent primarily upon the level and complexity of drilling, completion and workover activity in our areas of operations. Well intensity and complexity have increased with the continuing transition to multi-well pads, the drilling of longer lateral wells and increased downhole pressures, along with the increased number of frac stages completed in horizontal wells. Our Downhole Technologies segment provides oil and gas perforation systems, downhole tools and services in support of completion, intervention, wireline and well abandonment operations. This segment designs, manufactures and markets its consumable engineered products to oilfield service as well as exploration and production companies. Product and service offerings for this segment include innovations in perforation technology through patented and proprietary systems combined with advanced modeling and analysis tools. This expertise has led to the optimization of perforation hole size, depth, and quality of tunnels, which are key factors for maximizing the effectiveness of hydraulic fracturing. Additional offerings include proprietary frac plug and toe valve products, which are focused on zonal isolation for hydraulic fracturing of horizontal wells, and a broad range of consumable products, such as setting tools and bridge plugs, that are used in completion, intervention and decommissioning applications. Demand drivers for the Downhole Technologies segment include continued trends toward longer lateral lengths, increased frac stages and more perforation clusters to target increased unconventional well productivity, which requires ongoing technological and product developments. Demand for our completion-related products and services within each of our segments is highly correlated to changes in the total number of wells drilled inthe United States , total footage drilled, the number of drilled wells that are completed and changes in the drilling rig count. The following table sets forth a summary of theU.S. and international drilling rig count, as measured by Baker Hughes Company, as of and for the periods indicated. Average for the Three Months Ended March 31, As of April 22, 2022 2022 2021 United States Rig Count: Land - Oil 537 493 286 Land - Natural gas and other 145 123 91 Offshore 13 17 16 695 633 393 International Rig Count: Land 828 667 Offshore 193 169 1,021 836 1,654 1,229 TheU.S. energy industry is primarily focused on crude oil and liquids-rich exploration and development activities inU.S. shale plays utilizing horizontal drilling and completion techniques. As ofMarch 31, 2022 , oil-directed drilling accounted for 79% of the totalU.S. rig count - with the balance largely natural gas related. Due to the unprecedented decline in crude oil prices in March and April of 2020, drilling and completion activity inthe United States collapsed - with the active drilling rig count declining from 790 rigs as ofFebruary 29, 2020 to a trough of 244 rigs as ofAugust 14, 2020 . From this trough, theU.S. rig count has increased to 670 rigs as ofMarch 31, 2022 . As can be derived from the table above, the averageU.S. rig count for the first three months of 2022 increased by 240 rigs, or 61%, compared to the average for the first three months of 2021. We use a variety of domestically produced and imported raw materials and component products, including steel, in the manufacture of our products.The United States has imposed tariffs on a variety of imported products, including steel and aluminum. In response to theU.S. tariffs on steel and aluminum, theEuropean Union and several other countries, includingCanada andChina , have threatened and/or imposed retaliatory tariffs. The effect of these tariffs and the application and interpretation of existing trade agreements and customs, anti-dumping and countervailing duty regulations continue to evolve, and we continue to monitor these matters. If we encounter difficulty in procuring these raw materials and component products, or if the prices we have to pay for these products increase and we are unable to pass corresponding cost increases on to our customers, our financial position, cash flows and results of operations could be adversely affected. Furthermore, uncertainty with respect to potential costs in the drilling and completion of oil and gas wells could cause our customers to delay or cancel planned projects which, if this occurred, would adversely affect our financial position, cash flows and results of operations. See Note 11, "Commitments and Contingencies." 22 -------------------------------------------------------------------------------- Other factors that can affect our business and financial results include but are not limited to: the general global economic environment; competitive pricing pressures; public health crises; natural disasters; labor market constraints; supply chain disruptions; inflation in wages, materials, parts, equipment and other costs; climate-related and other regulatory changes; geopolitical tensions; and changes in tax laws inthe United States and international markets. We continue to monitor the global economy, the prices of and demand for crude oil and natural gas, and the resultant impact on the capital spending plans and operations of our customers in order to plan and manage our business.
Human Capital
For more information on our health and safety, diversity and other workforce policies, please see "Part I, Item 1. Business - Human Capital" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 23 --------------------------------------------------------------------------------
Selected Financial Data
This selected financial data should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and related Notes included in "Part I, Item 1. Financial Statements" of this Quarterly Report on Form 10-Q and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and related notes included in "Part II, Item 8. Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the year endedDecember 31, 2021 in order to understand factors, such as charges and credits, financing transactions and changes in tax regulations, which may impact the comparability of the selected financial data.
© Edgar Online, source
