Oil States International Inc.

(OIS)
Company and Industry Analysis
Finance 4431, Spring 2012 Michelle 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 fullemployees 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 Continentals 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 industrys products are significantly based on the health of the oil and gas industry, and the customers 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 industrys 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 industrys 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 companys 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/ahidden-reason-oil-states-internationals-future-.aspx. Oil States International Inc. 20 Feb. 2012. Investor Relations. SEC Filings. 10-K Reports. 20082010. 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 -------------------------------------ASSETS Current Assets: Cash Marketable Securities Gross Receivables Less: Allowance for Bad Debts Net Trade Receivables Inventories Prepaid Expenses Other Current Assets Total Current Assets Long-Term Assets: Net Tangible (Fixed) Assets (other than construction in progress) Construction in Progress Intangible Assets Investments Other Nonoperating Assets Other Operating Assets Total Long-Term Assets Total Assets LIABILITIES AND EQUITY Current Liabilities: Accounts Payable Short Term Loans Current Maturity of L.t. Debt Other Current Liabilities Total Current Liabilities Long-Term Liabilities: Long-term Debt Reserves Deferred Liabilities Noncontrolling Interest Redeemable Preferred Other Long-term Liabilities Total Long-term Liabilities Total Liabilities Shareholders' Equity: Preferred Equity Common Equity-incl. Ret. Ern. Total Equity Total Liabilities and Equity 2009 --------2008 --------2007 ---------

4.64% 0.00% 19.97% 0.00% 19.97% 21.89% 1.39% 0.00% --------47.90%

1.31% 0.00% 25.06% 0.00% 25.06% 26.65% 0.82% 0.00% --------53.84%

1.59% 0.00% 23.33% 0.00% 23.33% 18.10% 1.84% 0.00% --------44.86%

38.79% 0.00% 11.32% 0.27% 1.72% 0.00% --------52.10% 100.00%

30.25% 0.00% 13.29% 0.26% 2.36% 0.00% --------46.16% 100.00%

30.42% 0.00% 20.30% 1.28% 3.14% 0.00% --------55.14% 100.00%

10.79% 0.00% 0.02% 5.50% --------16.31% 8.49% 0.00% 2.86% 0.00% 0.00% 0.81% --------12.17% 28.48% 0.00% 71.52% --------71.52% 100.00%

16.18% 0.00% 0.22% 6.95% --------23.34% 19.54% 0.00% 2.82% 0.00% 0.00% 0.55% --------22.90% 46.25% 0.00% 53.75% --------53.75% 100.00%

12.39% 0.00% 0.24% 3.17% --------15.80% 25.24% 0.00% 2.10% 0.00% 0.00% 0.63% --------27.98% 43.78% 0.00% 56.22% --------56.22% 100.00%

EXHIBIT 2: INCOME STATEMENT OIL STATES

INCOME STATEMENT --------------------------------------Net Sales Less: Cost of Goods Sold Gross Profit Other Operating Revenue Less: Operating Expenses Operating Income Less: Interest Expense (no capitalized interest) Other Income (Expenses) Unusual or Infreq. Item; Gain (Loss) Equity in Earnings of Assoc.; Profit (Loss) Income before Taxes Less:Taxes Related to Operations N.I. before Noncontr. Inc Noncontrolling income (loss) N.I. before Nonrecurring Items Oper. of Discontinued Segment; Income (Loss) Disposal of Discont. Segment; Gain (Loss) Extraordinary Item; Gain (Loss) Cum. Effect of Acct Change; Gain (Loss) Net Income (Loss) 2009 ---------100.00% 77.80% ---------22.20% 0.12% 16.69% ---------5.63% 0.72% 0.02% 0.02% 0.07% ---------5.01% 2.19% ---------2.83% -0.02% ---------2.80% 2008 ---------100.00% 75.80% ---------24.20% 0.05% 11.24% ---------13.02% 0.80% -0.02% 0.33% 0.14% ---------12.67% 5.23% ---------7.44% -0.02% ---------7.42% 2007 ---------100.00% 76.73% ---------23.27% 0.04% 9.06% ---------14.26% 1.13% 0.06% 0.78% 0.16% ---------14.13% 4.55% ---------9.58% -0.01% ---------9.57%

0.00% 0.00% 0.00% 0.00% ---------2.80%

0.00% 0.00% 0.00% 0.00% ---------7.42%

0.00% 0.00% 0.00% 0.00% ---------9.57%

EXHIBIT 3 333132-BALANCE SHEET 2007: $500M-2MM Asset Class 2008-2009: $2-10MM Asset Class RMA eStatements ASSETS Cash & Equivalents Trade Receivables - (net) Inventory All Other Current Assets Total Current Assets Fixed Assets (net) Intangibles (net) All Other Non-Current Assets Total Assets LIABILITIES Notes Payable-Short Term Cur. Mat.-L/T/D Trade Payables Income Taxes Payable All Other Current Liabilities Total Current Liabilities Long Term Debt Deferred Taxes Other Non-Current Liabilities Net Worth Total Liabilities & Net Worth 2009 11.2 27.9 24.8 7.3 71.2 20 1.6 7.3 100.0 11.9 3.8 14.3 0.6 13.2 43.7 10.5 1.0 2.6 42.2 100.0 2008 7.4 29.5 26.2 8.5 71.6 23.1 3.0 2.3 100.0 11.4 3.7 15.3 .4 10.7 41.5 12.6 .9 1.4 43.6 100.0 2007 16.8 31.5 22 0.5 70.8 27.2 0 2.1 100.0 6.9 2.1 19.7 0 10.1 38.8 13.2 0.2 13.1 34.8 100.0

EXHIBIT 4 333132-INCOME STATEMENT 2007: $500M-2MM Asset Class 2008-2009: $2-10MM Asset Class RMA eStatements INCOME DATA Net Sales Gross Profit Operating Expenses Operating Profit All Other Expenses (net) Profit Before Taxes 2009 100.0 38 27.9 10.1 0.7 9.4 2008 100.0 39.9 29.3 10.6 1.1 9.5 2007 100.0 36.8 30.2 6.6 1.9 4.7