Oil States International Inc. (OIS)

Company and Industry Analysis

Finance 4431, Spring 2012Michelle Peterson

April 30,2012

Introduction

Company Description

Oil States International Inc. is a top provider of products and services to oil and gas

businesses around the world. Oil States has four main segments of business that include:

“accommodations, offshore products, well site services and tubular services” (Oil States 10-K,

2009). Oil States operates in several countries including the United States off of the Gulf of

Mexico, onshore in the U.S., Canada, South America, Southeast and Central Asia, as well as

West Africa with their headquarters in Houston, Texas .They serve a broad range of customers

including several national oil companies, large and small oil and gas companies, and other

various oilfield service firms. According to the 2009 Annual 10-K, Oil States had 5,474 full-

employees located in the United States, Canada, the United Kingdom, and Argentina (Oil States,

10-K, 2009).

Brief History

Oil States International originally started in 1937 as a supplier of oilfield equipment for

the oilfield drillers in Tulsa, Oklahoma. Since its founding, Oil States has acquired several other

oil suppliers and became incorporated as CE Holdings Inc. in 1995. During that period of time,

they had acquired an oil patch supplier firm named Continental Emsco Company, which also

included the acquisition of Continental’s offshore products subsidiary called Oil States

Industries Inc. In the early 2000s, Continental Emsco changed its name to Oil States

International Inc. with the agreement to merge the three companies, HWC Energy Services Inc.,

PTI Group Inc., and Sooner Inc., and soon after take the company public. In February 2001, Oil

States International completed an initial public offering on the NYSE with shares of stock priced

at $9 dollars a share. Within the year of becoming a publically traded company, Oil States had

owned 1,156 oil rigs in the United States, 266 in Canada and owned and operated four of the

highest producing oil rigs in the U.S. After five years of increased sales and drilling in the U.S.,

Oil states had 153 rigs that began production for the first three months of the year. By 2005

year end, the company had 1,800 rigs in North America which included 1,279 in the U.S. and

521 in Canada. As stock shares hit over $42 a share in 2006, the company remained as a top

leader in the industry by supplying an expanding assortment of revolutionary products and

services. After over thirty acquisitions, and internal expansion, OSI has become the leader in

deep water capital equipment in North America and continues to lead in innovation and steady

growth for the future.

Current Events

In March 2012, Oil States’ revenue in over 12 months has raised to 44.2%, with

inventory increased to 30.4%. The last quarter to the prior-year quarter, revenue has increased

42.9% and inventory at 30.4%. With the sequential quarterly period, the trend appears to be

healthy for the company in the long run. Revenue grew 10.3% and inventory grew 8.4%.

(Jayson, Seth).

Industry Analysis

General Characteristics

The National American Industry Classification System code for Oil States International is

333132, and the company falls under the “Oil and Gas Field Machinery and Equipment

Manufacturing” Industry (US Census Bureau).

According to the Census website, the oil and gas field machinery and equipment

manufacturing industry is defined as “establishments primarily engaged in (1) manufacturing oil

and gas field machinery and equipment, such as oil and gas field drilling machinery and

equipment; oil and gas field production machinery and equipment; and oil and gas field derricks

and (2) manufacturing water well drilling machinery” (US Census Bureau). This industry is

primarily responsible for manufacturing parts that are used for drilling for oil onshore and

offshore and also maintaining the equipment by producing replacement parts and fixtures. This

industry contains a variety of products such as field tools, oil derricks, drilling rigs and tools,

well logging and surveying equipment, and general gas well and oil field machinery and

equipment (Oil Field Machinery). Several companies in the industry in the United States make

specialty drilling equipment and other similar machinery, as other machine tool making

companies manufacture smaller parts for assembly or for replacement while the rig is in

operation. According to Oil States 10-K, demand for the industry’s products are significantly

based on the health of the oil and gas industry, and the customer’s desire to increase

investments in the exploration and development in the oil and gas reserves (Oil States, 10-K

2009). Demand for the products depends on expected oil and natural gas prices which can be

extremely unpredictable.

The industry employed 36,900 workers in 2010 belonging to 1,365 companies in the oil

and gas machinery field (Oil Field Machinery). Texas was the top leader in employment with

around 60 percent, Louisiana with 11 percent, Oklahoma with 10 percent and lastly, Illinois with

6 percent (Oil Field Machinery).

Structures

The information used for the structure classification is from the Risk Management

Association eStatements database system, and for relevancy the operating years of 2009, 2008

and 2007 were used in the comparison. The asset class data was used for the analysis because

it provided the most information that is relevant for the comparison. Although Oil states fell

under the $500 thousand to $2 million asset class for the years 2007 and 2009, the data was

unavailable for 2009. Due to the insufficient data for 2009, I rounded up to the next class of $2

to $10 million for that year. Although there was a problem finding the needed data for 2009,

the data was available for the year 2008 when the company fell under the $2 to $10 million

asset class. This data appears in Exhibit 3, a vertical analysis balance sheet, and Exhibit 4, a

vertical analysis income statement. Both exhibits are used in the analysis of the operating cost

structure and the asset structure of the company and the industry.

Operating Cost Structure

The industry’s gross profit margin in the asset class of $2-10MM in 2009 and 2008 were

38% and 39.9 % respectively. In the asset class of $500-2MM, in 2007 the gross profit was

36.8%. The gross profit margins seems to vary over the three years being analyzed, reasons are

unknown and need further analysis. The operating expenses for 2009 and 2008 in the asset

class of $2-10MM were 27.9% and 29.3%, and in 2007 asset class of $500M-2MM expenses

were 30.2%, as a percent of sales. Based on the declining operating expenses in the years 2007

to 2009, the industry shows improvement on managing its costs. The profit before taxes in

2009 and 2008 were 9.4% and 9.5%, as a percent of sales, respectively. In 2007, the asset class

of $500M- 2MM profit was $4.7 million. The profit in 2008 and 2009 was very close by only .1

percent; this could be because of the decrease in operating costs for those years, although

further analysis needs to be done in order to confirm.

Asset Structure

The industry asset structure for cash and equivalents varied greatly in the years 2009,

2008 and 2007. In 2009, the cash and equivalents, as a percentage of total assets, was 11.2%. In

2008, cash was 7.4% and in 2007 for the $500M-2MM asset class, it was 16.8%. The account

receivable amounts for the years 2009, 2008 and 2007 remained pretty consistent and were

27.9%, 29.5% and 31.5%, as a percent of total assets. The fixed asset values, as a percent of

total assets, for 2009, 2008 and 2007 were 20%, 23.1% and 27.2%, respectively.

Competitors

The three largest competitors in 2010 in the oil field services industry were Halliburton

Co., Baker Hughes Inc., and Schulumberger Ltd (Oil Field Machinery). All three companies are

based out of Houston, Texas and provide oil field services in the areas of drilling/evaluation and

also completion/production (Oil Field Machinery).

Areas of Change, Development, and Growth

According to the Gas Research Institute, the ultra-deep water drilling is predicated to

grow from 3 percent of totally offshore activity in 2000 to 24 percent by 2015 year end (Oil

Field Machinery). Since technology continues to advance and regulations have been more

favorable to the industry, drilling trends have favored at drilling deeper wells offshore. The

industry is also optimistic about using several new materials in their products in order to

increase efficiency. Materials such as titanium used for a drill pipe, have been developed to

become resistant to chemicals, more flexible, and weigh less than steel. Due to the tragic oil

spill in 2010, industry leaders have concentrated on developing more safe and reliable

equipment in order to regain confidence in the oil and gas sector.

Company Analysis

Corporate Mission and Goals

Oil States’ mission is to be an accountable, responsible partner to their clients and help

meet their business challenges, great and small (Oilstatesintl.com).

Major Lines of Business

Products, Markets and Customers

Oil States main products and services include deep water capital equipment used in

floating production platforms, subsea pipelines and floating drilling rigs, remote site

accommodations, land drilling services, and the distribution of oil country tubular goods. The

end-users of Oil States’ products and services include engineering design companies, prime

contractors, and also on occasion competitors for an outsourcing arrangement (Oil States, 10-K

2009).

Divisions and Strategic Business Units

The company operates their products and services under four business segments:

offshore products, accommodations, tubular services, and well site services. The company not

only manufactures parts and provides services, but also rents equipment to their clients which

helps diversify their sources of income (Oil States, 10-K 2009).

Structures

Operating Cost Structure

In Exhibit 1, Oil States gross profit percentages compared to the industry averages are

significantly lower, with 22.20%, 24.20%, and 23.7% for the years 2009, 2008 and 2007

respectfully. Compared to the industry, for the years 2009, 2008 and 2007 operating expenses,

as a percent of sales, were significantly lower, at 16.69%, 11.24% and 9.06% respectively. Oil

States had lower than the industry’s profit before taxes for the year 2009 with 5.01%, but

higher in 2008 and 2007 with 12.67% and 14.13%, as a percent of sales. Since Oil States health

as a business depends highly on the health of the oil and gas sector, and also the overall

economy, reasons for lower profits in 2009 may be due to the recession which affected almost

every company operating in the United States that year.

Asset Structure

The company had significantly lower cash assets compared to the industry, with 4.64%,

1.31%, and 1.59%, as a percent of total assets, in 2009, 2008 and 2007 respectively. The

accounts receivable for the company in 2009, 2008 and 2007 were 19.97%, 25.06% and 23.33%.

The increase of cash from 2008 to 2009 may be due to the decrease in accounts receivable

from 2008 to 2009. Both cash and accounts receivable accounts were lower than the industry

averages displayed in Exhibit 3. The company’s fixed asset values as a percent of total assets

were 38.79%, 30.25% and 30.42% for years 2009, 2008 and 2007 respectively. For all three

years, the company had significantly higher fixed asset values than the industry average shown

in Exhibit 3.

Investment and Expansion Goals

Oil States long-term growth strategy includes the continuation of acquisitions, reviewing

of complementary acquisitions and also the organic capital expenditures in order to improve

cash flows (Oil States 2009 10-K). The company will continue to grow as long as the health of

the oil and gas industry remains at a steady growth pattern.

REFERENCES

"Oil Field Machinery." Encyclopedia of American Industries, Online Edition. Gale, 2011. (SICs:

3533) Reproduced in Business and Company Resource Center. Farmington Hills, MI.: Gales

Group. 15 April 2012.

Jayson, Seth. “A Hidden Reason Oil States International's Future Looks Bright” The Motley Fool.

13 March 2012. 1 April 2012. http://www.fool.com/investing/general/2012/03/13/a-

hidden-reason-oil-states-internationals-future-.aspx .

Oil States International Inc. 20 Feb. 2012. Investor Relations. SEC Filings. 10-K Reports. 2008-

2010. http://www.oilstatesintl.com/fw/main/Investor_Relations-4.html.

OilStatesintl.com. About Us: History. 15 April 2012.

http://www.oilstatesintl.com/fw/main/Company-Overview-131.html .

Risk Management Association. (2007-2010). NAICS 333132. Retrieved April 15, 2012 from RMA

eStatement Studies database.

U.S. Census Bureau, NACIS Definition 2007. North American Industry Classification System. 20

March 2012. http://www.census.gov/econ/industry/def/d333132.htm.

EXHIBIT 1: BALANCE SHEET

OIL STATES

BALANCE SHEET 2009 2008 2007-------------------------------------- --------- --------- ---------ASSETSCurrent Assets: Cash 4.64% 1.31% 1.59% Marketable Securities 0.00% 0.00% 0.00% Gross Receivables 19.97% 25.06% 23.33% Less: Allowance for Bad Debts 0.00% 0.00% 0.00% Net Trade Receivables 19.97% 25.06% 23.33% Inventories 21.89% 26.65% 18.10% Prepaid Expenses 1.39% 0.82% 1.84% Other Current Assets 0.00% 0.00% 0.00%

--------- --------- ---------Total Current Assets 47.90% 53.84% 44.86%Long-Term Assets:Net Tangible (Fixed) Assets (other than construction in progress) 38.79% 30.25% 30.42%Construction in Progress 0.00% 0.00% 0.00%Intangible Assets 11.32% 13.29% 20.30%Investments 0.27% 0.26% 1.28%Other Nonoperating Assets 1.72% 2.36% 3.14%Other Operating Assets 0.00% 0.00% 0.00%

--------- --------- ---------Total Long-Term Assets 52.10% 46.16% 55.14%Total Assets 100.00% 100.00% 100.00%LIABILITIES AND EQUITYCurrent Liabilities: Accounts Payable 10.79% 16.18% 12.39% Short Term Loans 0.00% 0.00% 0.00% Current Maturity of L.t. Debt 0.02% 0.22% 0.24% Other Current Liabilities 5.50% 6.95% 3.17%

--------- --------- ---------Total Current Liabilities 16.31% 23.34% 15.80%Long-Term Liabilities: Long-term Debt 8.49% 19.54% 25.24% Reserves 0.00% 0.00% 0.00% Deferred Liabilities 2.86% 2.82% 2.10% Noncontrolling Interest 0.00% 0.00% 0.00% Redeemable Preferred 0.00% 0.00% 0.00% Other Long-term Liabilities 0.81% 0.55% 0.63%

--------- --------- ---------Total Long-term Liabilities 12.17% 22.90% 27.98%Total Liabilities 28.48% 46.25% 43.78%Shareholders' Equity: Preferred Equity 0.00% 0.00% 0.00% Common Equity-incl. Ret. Ern. 71.52% 53.75% 56.22%

--------- --------- ---------Total Equity 71.52% 53.75% 56.22%Total Liabilities and Equity 100.00% 100.00% 100.00%

EXHIBIT 2: INCOME STATEMENT

OIL STATES

INCOME STATEMENT 2009 2008 2007

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-Net Sales 100.00% 100.00% 100.00%Less: Cost of Goods Sold 77.80% 75.80% 76.73%

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Gross Profit 22.20% 24.20% 23.27%

Other Operating Revenue 0.12% 0.05% 0.04%Less: Operating Expenses 16.69% 11.24% 9.06%

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Operating Income 5.63% 13.02% 14.26%

Less: Interest Expense 0.72% 0.80% 1.13% (no capitalized interest)Other Income (Expenses) 0.02% -0.02% 0.06%Unusual or Infreq. Item; Gain (Loss) 0.02% 0.33% 0.78%Equity in Earnings of Assoc.; Profit (Loss) 0.07% 0.14% 0.16%

----------

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Income before Taxes 5.01% 12.67% 14.13%

Less:Taxes Related to Operations 2.19% 5.23% 4.55%---------

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-N.I. before Noncontr. Inc 2.83% 7.44% 9.58%

Noncontrolling income (loss) -0.02% -0.02% -0.01%---------

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-N.I. before Nonrecurring Items 2.80% 7.42% 9.57%

Oper. of Discontinued Segment; Income (Loss) 0.00% 0.00% 0.00%Disposal of Discont. Segment; Gain (Loss) 0.00% 0.00% 0.00%Extraordinary Item; Gain (Loss) 0.00% 0.00% 0.00%Cum. Effect of Acct Change; Gain (Loss) 0.00% 0.00% 0.00%

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Net Income (Loss) 2.80% 7.42% 9.57%

EXHIBIT 3333132-BALANCE SHEET

2007: $500M-2MM Asset Class2008-2009: $2-10MM Asset Class

RMA eStatements

ASSETS 2009 2008 2007Cash & Equivalents 11.2 7.4 16.8Trade Receivables - (net) 27.9 29.5 31.5Inventory 24.8 26.2 22All Other Current Assets 7.3 8.5 0.5Total Current Assets 71.2 71.6 70.8Fixed Assets (net) 20 23.1 27.2Intangibles (net) 1.6 3.0 0All Other Non-Current Assets 7.3 2.3 2.1Total Assets 100.0 100.0 100.0LIABILITIESNotes Payable-Short Term 11.9 11.4 6.9Cur. Mat.-L/T/D 3.8 3.7 2.1Trade Payables 14.3 15.3 19.7Income Taxes Payable 0.6 .4 0All Other Current Liabilities 13.2 10.7 10.1Total Current Liabilities 43.7 41.5 38.8Long Term Debt 10.5 12.6 13.2Deferred Taxes 1.0 .9 0.2Other Non-Current Liabilities 2.6 1.4 13.1Net Worth 42.2 43.6 34.8Total Liabilities & Net Worth 100.0 100.0 100.0

EXHIBIT 4333132-INCOME STATEMENT

2007: $500M-2MM Asset Class2008-2009: $2-10MM Asset Class

RMA eStatements

INCOME DATA 2009 2008 2007Net Sales 100.0 100.0 100.0Gross Profit 38 39.9 36.8Operating Expenses 27.9 29.3 30.2Operating Profit 10.1 10.6 6.6All Other Expenses (net) 0.7 1.1 1.9Profit Before Taxes 9.4 9.5 4.7