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Coverage Initiation: Oil States International
Oil States International (OIS) recently made its Value Line Investment Survey debut. The company provides specialty products and services to oil & gas drilling and production companies worldwide. Its operating areas include Canada, the United States, West Africa, the North Sea, South America, and Southeast and Central Asia. Founded in 1995, OSI completed its IPO in February of 2001. It operates through three main business segments— Well Site Services, Offshore Products, and Tubular Services.
Well Site Services (makes up 37% of total revenues and 50% of operating income) provides drilling rigs, rental equipment, and accommodation services. This segment is largely tied to the level of exploration and production activity, which is highly correlated to oil and gas prices.
Offshore Products (24% of revenues, 33% of operating income) provides services and equipment to deepwater drilling operations. These services include connector products, subsea pipeline, blowout preventer stack assembly, repair services, and others. This segment has operations throughout the world but is largely based in the Gulf of Mexico. Growth in this segment is mainly dependent on the amount of offshore drilling activity.
Tubular Services (39% of revenue, 17% of operating income) distributes casing and tubing, provides threading, inventory management services, and e-commerce services. This unit mostly operates within the United States in both onshore and offshore applications. Demand for this segment is largely driven by activity levels and increases in drilling depths and horizontal drilling.
The company’s business strategy is focused on growing market share in sectors that are expected to expand rapidly. Currently, management is focusing on the Oil Sands of Canada, the shale plays in North America, and expanding deep water capabilities worldwide. Management believes these specific sectors are going to lead to growth of the company, as there is room to gain market share without sacrificing profitability. Management also expects that these segments have great potential over the next couple of years.
The deep water offshore moratorium has affected Oil State’s operating environment as 24% of its revenues come from offshore oil servicing. We expect that regulations will hurt deepwater drilling going forward, at the very least making it more difficult to start projects, and will likely delay some of the ventures that Oil States is currently bidding on, such as Big Foot, Jack/St. Malo, and Mars V.
Management has continued investing in the business. Since February 2001, the company has spent $981.5 million on growth and maintenance projects. It has also completed nearly $500 million worth of acquisitions over this same time period. This is in line with the company’s growth strategy to expand into different operational regions where there are opportunities to increase market share and boost long-term prospects.
Recent results have been promising although they are well below 2008’s highs. We are expecting the company to report earnings of around $3.10 a share this year, compared to 2008’s record bottom line of $5.88 a share. Revenues will likely continue to be weak on fears that the economic recovery may take many years to develop fully. These fears continue to depress oil prices, which remain well below 2008’s record levels. Oil States operations are primarily driven by oil prices, so the stock will likely fluctuate as this commodity continues to be highly volatile and questions about the economy continue to surface.
This stock is currently trading above historical norms. We typically have seen these shares trade around 11 times earnings. Recently, the stock has been trading at around 16 times earnings, which discounts some of the earnings expected this year. Due to the current price level, the offshore drilling moratorium uncertainty, and added regulations, we suggest that most investors take a wait-and-see approach in regard to this issue. However, investors who believe oil demand will strengthen and are particularly interested in gaining some exposure to Canadian oil sands and North American shale plays, may find this stock of interest.