Welcome to the Oil States International First Quarter 2018 Earnings Conference Call. My name is Christine, and I'll 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. Please note this conference is being recorded. I will now turn the call over to Patricia Gil, Investor Relations. You may begin.

Thank you, Christine, and good morning and welcome to Oil States' first quarter 2018 earnings conference call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; 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 protections afforded by federal law. 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. I will now turn the call over to Cindy.

Thank you, Patricia. Hi, good morning to all of you, and thank you for joining us today for our first quarter 2018 earnings conference call. As you can appreciate, the past few months have been incredibly active here at Oil States. We successfully closed two strategic acquisitions during the quarter. Operating results from these acquisitions are included in our financials from their respective closing dates. The most significant acquisition was GEODynamics, which is now reported as a third business segment called Downhole Technologies. We also acquired Falcon Flowback Services, which is a flowback and well testing services company that is reported as a component of our Completion Services business. We issued $200 million of convertible senior notes, and amended and extended our credit agreement in connection with funding these acquisitions. Today, on our call, we will review details of our first quarter 2018 results and provide guidance commentary for the second quarter of 2018. During the first quarter, average WTI prices increased 22% year-over-year, and 14% sequentially, averaging $62.91 per barrel, which is the highest quarterly average attained since 2014. Higher commodity prices are driving growth in the U.S. rig count, which is leading to an increase in the number of well completions. Our first quarter 2018 operating results improved meaningfully on a year-over-year and sequential basis as we grew in scale as a company, benefited in part by the partial quarter contributions from our two acquisitions. In our Well Site Services segment our U.S. land completion services revenue increased 28% sequentially, continuing the trend of strong completions-related activity in the lower 48 as our E&P customers continued to focus on complex unconventional completions to increase their oil and gas production. We also benefited from one month of contribution from Falcon. Our new Downhole Technologies segment contributed significantly to our results during the quarter, and generated EBITDA margins that exceeded the upper end of our guided range. In our Offshore Manufactured Products segment results improved sequentially due to higher connected product sales, along with strong short-cycle product contributions. Bookings in the quarter related primarily to smaller project orders and for consumables and services. Our first quarter's book-to-bill ratio averaged 0.92 times, resulting in a backlog decline of 7% sequentially. Lloyd will take you though more details of our consolidated results and also provide highlights of our financial position. I will come back on and follow with more details by segment and provide additional comments on our market outlook.

Thank you, Cindy, and good morning everyone. Our first quarter results included partial quarter contributions from our two recent acquisitions of GEODynamics and Falcon Flowback. During the first quarter, we generated revenues of $254 million, while reporting an adjusted net loss of $800,000 or $0.01 per share which excluded transaction-related and severance charges totaling $0.05 per share, our first quarter adjusted EBITDA totaled $32.3 million with a margin percentage of 12.7%. As Cindy mentioned previously, we had a very busy first quarter. On January 12th, we closed the acquisition of GEODynamics, which was funded with a combination of $295 million of cash which was net of cash acquired, the issuance of 8.66 million shares of our common stock valued at approximately $295 million based on Oil States' share price at the closing and the issuance of a $25 million unsecured promissory note payable to sellers for total acquisition consideration of $615 million. On January 30, we competed an offering of $200 million principal amount of 1.5% convertible senior notes due February 2023. We utilized net proceeds from the offering to pay down a portion of the outstanding borrowings under our revolving credit facility which were drawn to fund the cash portion of the GEODynamics acquisition. In conjunction with the issuance of the convertible senior notes, our credit agreement was further amended and the maturity date extended to January 30, 2022. Lender commitments under the amended revolving credit facility now total $350 million with up to $50 million of the facility available for standby letters of credit. Under our amended credit agreement, we must comply with customary financial conveyance including a total net leverage ratio and a senior secured leverage ratio. As of March 31, our total net leverage ratio was 2.8 times and our senior secured leverage ratio was 1.5…

Thank you. In the following segment comments, the term adjusted EBITDA excludes severance and other downsizing charges and transaction related expenses where appropriate and applicable. In our well side services segment, we generated sequentially improved results with revenues at 22% and EBITDA at 23% quarter-over-quarter. These results reflect organic growth in our base business coupled with one month's revenue contribution from the acquisition of Falcon. These sequential improvements were driven by 15% increase in the number of completion services jobs performed and 8% increase in revenue per completion services job and steady utilization of our land drilling rigs which averaged 31% during the quarter. Our completion services business benefited from increased activity and well intensity across the active U.S. basins particularly in the Permian Basin coupled with sequentially improved international and Gulf of Mexico results. During the quarter, we recorded a $1.8 million bad debt reserve related to a customer who declared bankruptcy which negatively impacted segment EBITDA and related margin. Excluding the bad debt provision of $1.8 million, first quarter 2018 segment EBITDA margins would have averaged 15% and our completion services incremental adjusted EBITDA margins would have averaged 24%. U.S. land base complex well completion activity continues to expand and demand for equipment, and personnel is tightening. Accordingly, we continue to see prudent price increases on our completion services job, we estimate that second quarter revenues for our well site services segment should range between $123 million and $130 million which will include a full quarter's contribution from our Falcon acquisition. Segment EBITDA margins are expected to average 15% to 17%. And our newly reported downhole technology segment, we have included GEODynamics results of operations from the date of acquisition on January 12, 2018 through March 31. Results for this segment exceeded our prior guidance with revenues totaling…

Thank you. [Operator Instructions] And our first question is from Praveen Narra of Raymond James. Please go ahead.

Hey, good morning. Congratulations on a strong quarter.

Thank you, Praveen.

I guess if we could start on GEODynamics, it would be helpful to hear how your outlook has changed now that you've owned the business, gotten to step into the business for a bit longer. And if you could, it seems pretty clear that your customers are increasing collateral lengths this year, but any color on your outlook in conversations with customers on cluster spacing would be very helpful.

Well, we've got that in our investor presentation that kind of demonstrate the massive growth in clusters, we kind of have that out there, kind of an average well in the Permian in 2014 compared to '17. But what you get is that kind of multiplier effect that we're seeing. And I would just generally say we had confidence in that type of activity ramp based on the research that we did, not only lateral length frac stages cluster count. And I think the key for us longer term is going to be reception of our customers to new technology introductions that are outlook has always been pretty sound for this company to have growth. And we think we can augment that growth clearly with expanded locations and service personnel in the lower 48 coupled with, again, longer term the international footprint that we have to help facilitate growth in that business line. So, again, we've had the business, we are working very closely with the team. They are very talented. We've owned them since January 12th. And so at a minimum I would say at this point things are confirmatory of our expectations, that we are optimistic about some of their new product introductions. We'll talk about those as time progresses and we get a better feel for customer reception of that. We spent a lot of time with their team, particularly the two sales forces and meeting our collective customer base to really better understand what they're needs and objectives are, because at the end of the day, our goal is to help them facilitate improved results as well. And so just to summarize, I'd just say so far so good.

Okay, perfect. And I guess on the Well Side Completions Services side, it seem like we got a -- and you mentioned you were starting to see pricing in that segment. But as we think about the increases in rev [ph] per ticket should we still think of the growth so far as being more mix shift driven or are we starting to see that pricing really take hold to a bigger degree?

I think it's a little of both. But we have told you guys that we expected as the market firmed up to see a reversion back to what we would call, hire in completions, more proprietary equipment. We've clearly seen that. But we've also needed to push pricing a little bit particularly in areas where our personnel are particularly tied. And so I don't think we're pushing pricing at an aggressive rate at this point. But we are trying to manage our profitability for our shareholders at the same time, so a little of both. But the positive note on activity, I think everybody expected to see some lift in lower 48 with the caveat that a lot of the companies in this space right now had some logistical challenges. But our activity was up sequentially, but it was also up Gulf of Mexico and international. So really all of our levers were working in a favorable direction this quarter, and we don't see that changing.

Okay, perfect. I guess in terms of level of magnitude, with pricing down from a peak, at this point would you kind of - how far below the prior peak pricing are we today generically?

Yes, I'll be honest with you; it varies with our product line. And if we had just one service line out in the market I could answer that more readily. I think my answer, just gut instincts, would be something around probably 15%. It could be 10% to 20%; it depends on the product line and quite frankly the basin that we're in, and the competitive landscape that we operate in.

Perfect. Thank you very much, guys.

Thank you.

Thank you. Our next question is from George O'Leary of Tudor, Pickering, Holt. Please go ahead.

Morning, Cindy. Morning, guys.

Good morning, George.

So, I guess starting off, now you guys have historically done a really good job of generating free cash flow, and we've seen one large transaction and one smaller transaction for you guys in the last, call it, six months. I guess from a capital allocation perspective, where do your priorities sit today with regards to cash flow generation? And what does that M&A landscape look like moving forward?

Well, we're believers that through the downturn there's quite clear evidence that a lot of companies have, one, shrunk in size. We've taken a lot of small companies public. So there is a landscape that is fairly fragmented, particularly as it relates to support of our customers in lower 48. So given that, I do think with the progression of time people are going to find that scale is needed, particularly to return companies back to healthy returns, i.e., that old caveat of returns on invested capital should appear, right. And I think we've been challenged to do that fairly organically just because we've had such difficult headwinds with the market downturn over the last three years. So M&A is going to continue to be a focus. We have always, throughout our history, been able to fund organic growth. And so there's no reason to think that changes. And that's always our first capital allocation priority. I believe our CapEx guidance, I'm looking at Lloyd, it's $75 million to $80 million for the year. If the market continues to expand we might lever, but that would be the first thing that we would kind of lever upward if there's reason and economic results from doing so. Look, we always say M&A is in our DNA so to speak. I think, well, number one, we do it well. We know how to value transactions, close them, integrate them, and get the results that we're looking for. That being said, we're digesting what we have. We're making sure that we do that efficiently, and smoothly, and get the intended results from those two acquisitions. We did take on some debt in connection with those acquisitions, but a lot of that centers in the convert that we issued. And we did that intentionally to allow some pre-payable debt under our revolving credit facility. So it is my expectation that without M&A we'll be dedicating that free cash flow to debt repayment in the near-term. And again, continue to be opportunistic and see what we can do to enhance the returns to our shareholders.

That's very helpful. And then maybe following on the Downhole business, I believe, and correct me if I'm wrong, but that you guys are outsourcing some work in that business because things are going so well. And some of the capital expenditures you guys have slated for this year are going to capacity expansion. I guess one, how much, if you could kind of ballpark it, how much of the revenue stream is being outsourced today. And then two, are there any margin tailwinds that would come from rolling that outsourced portion of the work in-house through time as you bring that capacity expansion on.

Well, GEODynamics has been very high growth over the last three years-plus. And so I think everybody in this space has some kind of strategic combination of in-house capacity and outsource capacity. And we actually like that flexibility. When we talk about expansions what we're really talking about is meeting expected demand. The only comment there, it's a more comfortable investment when you can flex between in-house capacity and outsourced, i.e., in terms of ensuring your returns on that capital employed, and so very, very comfortable with that. But at this point in time we think these capacity expansions; first of all, if we're investing this year we won't reap benefits till next year. But we do believe that is meeting expanded overall market demand as opposed to any type of replacement for currently outsourced product.

Awesome. Thanks for the color, Cindy. Good quarter.

Thanks, George.

Thank you. Our next question is from Ian Macpherson of Simmons. Please go ahead.

Thanks. Good morning. I'm [indiscernible], congratulations on the robust Q1 results.

Thank you.

Yes. So, Cindy, I suppose if you'd wanted to you would have, but I wanted to probe anyway if you maybe shed a little more light on Falcon's contribution for Q1, or even to an airbrush a little bit what its implied contribution to completion services in the Q2 guidance looks like it. Obviously looks like a very good cash generative business. I just want to have a better idea of the scope of it.

Yes, and just -- obviously, we don't just reiterate it. We only had the results for one month in the first quarter, and so we'll get a multiplying effect in Q2. You're right, we're intentionally not providing breakout information largely because in the first week escalated sales force, and then customer bases, personnel moving between locations. And so it's very murky to say there's a standalone there. So I ask your patience and allow us to report a full quarter, and then you get a better baseline of activity moving forward.

Fair enough. If Flowback commands more growth capital from you in the future could you now do it organically or is there an opportunity to roll that business up a little bit more inorganically?

Well, I think that's always the question. And it's so easy to look at an individual piece of equipment and say, "Wow, that pays out in short order," without thought to all of the non-revenue-producing infrastructure, both capital and human capital alike. And so once we get critical mass, particularly with that employee base that we found so attractive, my guess is that we'll orient more towards organic CapEx. But a lot of that, again I go back, I don't want to beat the drum too hard here. Personnel in this business are tightening very, very quickly. And while we can all spend capital to get equipment, you better be able to efficiently put it in the field. And so that's why I would say I'd be more focused on an acquisition that had highly talented, qualified service personnel more so than the physical equipment that goes with it.

Well, that makes sense. And then lastly, the outlook for Offshore/Manufactured Products for the first-half of this year, it's been better for Q1 and Q2 than we would've thought. And it's up -- first-half of this year is up probably 10% or more over the first-half of last year. Do you see an inflection in the second-half or maybe by the fourth quarter or getting based on the offshore project queue ramping up or do you think that the liftoff of that business is probably going to be more weighted towards next year?

So, I guess I have generally characterized that business hitting trough backlog. We've been saying that a few quarters. It is much more weighted to, as I said, more of our specialty connector products that are not major FID dependent. Meaning they're in exploratory drilling profiles that are often times multi-year in nature or so. You get somewhat of a repeat nature there. We do book it in major project work, but I would characterize that as a bit different, i.e., we're not waiting on [indiscernible] announcement, in other words, on a completely new field. That's what's going to drive my production infrastructure and that's what I was trying to convey in my comment. In the meantime, we've got this great baseline of work around the standard connectors, short-cycle products and services that are allowing us to report fairly resilient revenues and operating margins. So I call the backlog improvement, and the project FIDs that will come kind of as an option on a much broader recovery in deep water. We're fine in the meantime. I hope you can look at our recent quarters and say thumbs up. The operation has done very well in a difficult environment. We've streamlined our costs. We've got what used to be historically average margins in the business without some of our lead products, our more proprietary products, of any consequence anyway, contributing to those overall margins. So, I look at this year as kind of steady state from here both in terms of revenue generation and booking. Again, if I look at my quarter by quarter projections, I think there is a small number, but some major project awards that could improve and that would bolster a better outlook in 2019 if that addresses your question.

Yes, it absolutely does. Thanks for the help there.

Thank you.

Thank you. Our next question is from Sean Meakim [technical difficulty].

Just curious how does that impact working capital? I am thinking about collection numbers, receivables, inventory, demand, just thinking about how working capital metrics impacted by that mixture? How should we think about that impact…

Well, yes, that's a fantastic question. And we had what I will call a temporary working capital build this quarter for really two reasons. Number one, a lot of incentive comp is paid in the first quarter. Almost every company in this space had a decline in receivables because you bill those through the year. You liquidate after audited result. So that's next portion of the payable reduction kind of normalizes from this quarter forward. We had a receivable billed but that's the good news. It means that the business is growing. But, it's interesting that despite the receivable bills, our DSOs came down materially from an excess of a 100 days to I think roughly 82 days. I don't have the exact numbers. What that is reflective of is the mix shift picture speaking to where a lot of Lower 48 activity is shorter cycle in nature. Those receivables turn quicker. And so that mix shift actually reduces our investment in working capital compared to a multi-month or multi-year large project in our offshore manufactured product segment or even in our completion services, international receivables are generally slower to collect. And so, again while you are focused on potentially a receivable bill again very positive thing it is the revenue growth that's driving that while our DSOs are actually coming down.

Got it. Thank you. That makes a lot of sense. And Cindy on Downhole technology any anecdotes you can share early days I guess in terms of cross selling opportunity or found some success? And I guess it will be great. And now you have a little time to look under the hood, how you characterize the margin trajectory for that business?

So we've had a very positive 3 or 4 months with the management team. We have been very diligent about bringing together sales forces so that each group better understand the product and service capabilities of the other. I would say that probably the near-term focus right now even -- and we have met with a lot of customers too, certainly services at the well side and how we can integrate that better with the products -- the Downhole products offered by Geo in terms of more complete packages delivered to the well side is a another focus that we are on. And I would say generally our customers are looking at opportunities where our extended reach technology can benefit kind of the collective company as a whole. Those are probably the more near-term things. The leader David of our GEODynamics operation has already made an international tour and visited our facilities, our people, and are looking where we think there might be international opportunities as well. So, I will say it's early days but certainly focused on those opportunities.

Very good. Thanks, Cindy.

Thank you.

Thank you. Our next question is from Stephen Gengaro of Stifel. Please go ahead.

Thanks. Good morning.

Good morning, Stephen.

I guess two things if you don't mind. And one is to kind of continue on the Downhole tool side. When you think about that business and sort of the price/incremental margin dynamics, how should we think about that playing out over the next sort of 2 to 4 quarters? And if you don't want talk specifically about price, just maybe on incremental and how it should react relative to well side?

Well, we have got two drivers there on incremental. The first one is just the product [indiscernible] incremental which are very strong north of 40% generally. It depends on whether these kind of proprietary charges, highly engineered charges, more commodity. So again there is always going to be some mix element there. But the gross margins on pure products are good. However, we are also growing our R&D efforts and our engineering talent and efforts which will have future benefit. And so, I just kind of look to normalized margins. They are going to vary a bit quarter by quarter. But, it's generally going to be related to human capital investments for the longer term.

Okay, thank you. And then just in that business on the technology side, I mean I know when you made the acquisition we heard from several folks that was it an extremely high end business. Are you seeing anything on the competitive front there changing over the next couple of quarters?

I mean we are on it every day. And I think what our customers are looking for is the type of technology that does multiple things. But importantly helps their ultimate reservoir recovery, helps get productivity all the way to the total of the well, eliminate some of the sand blockages that occur on flow, artificial lift. I mean I can go on and on. But the customers as I have seen are very willing to assess and look at and run field trials around new technology that helps achieve that goal, are looking for reduced drill out times and plug-and-perf operations reduced water usage. So there is quite a number of things that we are focused on. Again in an effort to help our customers develop better wells, more productive wells at the end of the day.

Okay. Thank you.

Thanks, Stephen.

Thank you. Our next question is from Vaibhav Vaishnav of Cowen. Please go ahead.

Hey good morning. And thank you for taking my questions. Cindy, it sounds like you have booked any -- like have not booked Carvando [Ph] project. Just wanted to see if you can provide any color around what your thoughts are.

I am sorry which project?

You said, Carvando.

Yes, CRDM.

So we had -- first of all, Carvando is a shallow water development, so we had lower content opportunity there to start with. We did have some selective work on Carvando. It just didn't rise to the level to separately split out as a major project award. Some of that was underway which will be paid for. But, unlike some of the people in the space, it wasn't so material but it's a headline mover one way or another.

Got it. Okay. Offshore, the short cycle business helped. we saw the third quarter and fourth quarter last year, it was-- the revenue was down sequentially. Was it made up in first quarter or should we expect the current pace to continue for the near term at least?

You know, Vaibhav, on the short cycle business for offshore products is expected to be pretty strong for the rest of this year. I mean there are some looks of last year in third and fourth quarter to your earlier comment, but it should remain strong for the balance of this year.

There's always timing because these are things that run in the field routinely. And you'll have adjustments up and down in terms of the desired inventory levels by the service companies that are running that in the field. But the trend line is clearly positive.

Clearly positive and also included in the short cycle are valve products which those orders kind of vary quarter by quarter.

Got it. And one last question if I may just on well side, can you help us think about how the Gulf of Mexico and international business progress in Q1, how should we think about going forward? And how much -- if you could help just think about how much Falcon helped in first quarter?

I'll just generally say a couple of -- first of all the later question has already been answered, so I'll talk about the former. And just remind everybody on the call that pre-Falcon, Gulf of Mexico and international represented about 25% of total completion services business line, not the segment the business line. That will be a smaller percentage in theory with the addition of Falcon. So I want everybody put that in perspective. Gulf of Mexico can vary question-by-quarter largely just because there are just not that much opportunity up there. So -- and a lot of this equipment will stay on kind of the life of the field almost, and so, depending on what we got billing on in the Gulf that can be a contributor, again, it was up sequentially. International, we are a smaller player internationally and we have a concentration of work in the Middle East. I would say that's generally going to be kind of flat from here, is my best guess right now.

That's very helpful. Thank you so much for taking my questions, again.

Thanks.

Thank you. [Operator Instructions] And our next question is from Chase Mulvehill of Wolfe Research. Please go ahead.

Hi, good morning Cindy.

Hi. Good morning, Chase.

I guess if we would stick with Falcon a little bit, but just overall you know, broad strokes about how you are thinking about M&A going forward, is it just still kind of smart tuck-ins and still kind of looking at things that make sense, or do you want to hit the pause button for a little while?

Well, actually I said earlier we really plan to focus on integration and achieving the results for the two acquisitions that we have. We look at a lot of acquisitions. We think it's important in this market to create a scale. Obviously those need to both accretive and generate returns on the capital that we invest. So, we will continue to look, but there is nothing immediate on the radar screen at this point, and again we are going to focus on integration of the two we have. We are going to focus on organic CapEx investments, which have a -- generally always generated the best returns, in the near-term we set up the balance sheet [indiscernible] so that we have the ability to pay down a portion of the debt, i.e. the bank debt in the interim until better market opportunities present themselves and/or future M&A.

Okay. And on the rigs, I can't remember, do you have any rigs that you could upgrade to kind of super-spec quality or the kind of more lower spec rigs?

We have already upgraded a handful of the rigs, but we really have mostly vertical capabilities. There are some that have, what I'll call, light horizontal capabilities, and if there is a reason to upgrade is more for a preeminent customer that really wants to do Starfish drilling for the horizontal plans. And our goal there is just to optimize the assets. We are not trying to grow into a drilling company.

Okay. And I know you talked about divesting the rigs, is that getting any closer given that the market's getting better?

I have not talked about plans to divest the rigs. So, might be another company.

Oh, sorry. Okay. And then last one on capacity expansion potentially in GEO, are you bumping up on capacity limits there, and what are the expansion plans from a manufacturing standpoint?

Well, yes, I mean our high growth business starts hitting issues there. The good thing is we have been able to kind of stay ahead of that, but as I've said on earlier calls, we plan to invest capital to grow their engineered perforating solutions business there on the Millset [ph] campus. We plan to try to get that done this year, but it will have more benefit in 2019 forward, we also have plans to expand their capabilities and the Midland [indiscernible] region to support Permian operations as well. So those are our most immediate CapEx plans.

Okay, that's helpful. I will turn it back over. Thanks.

Thanks Chase.

Thank you. We have no further questions. I will now turn the call back over to the company for closing remarks.

Okay, Christine, thank you so much. I know this is a busy day for everybody. I appreciate all of you who have dialed in. And we are just so pleased to have positive results, and obviously realizing the intended benefits of the acquisition, which give us greater scale and greater return to the potential. So, we look forward to catching up with all of you over the next few months. And hope you have a great day, and a great earnings season. Thank you.

Thank you. And thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.