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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NO. 1-16337
OIL STATES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0476605
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
THREE ALLEN CENTER, 333 CLAY STREET, SUITE 3460, HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(713) 652-0582
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant:
Voting common stock (as of June 30, 2003)............ $ 316,768,393
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
As of February 27, 2004 Common Stock, par value $.01 per share 49,187,129 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 2004
Annual Meeting of Stockholders, which the Registrant intends to file with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year covered by this Form 10-K, are incorporated by reference into Part
III of this Form 10-K.
TABLE OF CONTENTS
PART I
Item 1. Business....................................................... 2
Item 2. Properties..................................................... 18
Item 3. Legal Proceedings.............................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............ 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 20
Item 6. Selected Financial Data........................................ 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 23
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..... 32
Item 8. Financial Statements and Supplementary Data.................... 32
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure....................................... 32
Item 9a. Controls and Procedures........................................ 33
PART III
Item 10. Directors and Executive Officers of the Registrant............. 33
Item 11. Executive Compensation......................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters..................... 34
Item 13. Certain Relationships and Related Transactions................. 34
Item 14. Principal Accounting Fees and Services......................... 34
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K............................................................ 34
SIGNATURES.................................................................. 38
INDEX TO COMBINED, PRO FORMA COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS.................................................................. 39
1
PART I
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Exchange Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Actual results could differ
materially from those projected in the forward-looking statements as a result of
a number of important factors. For a discussion of important factors that could
affect our results, please refer to "Item 1. Business" including the risk
factors discussed therein and the financial statement line item discussions set
forth in "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" below.
ITEM 1. BUSINESS
OUR COMPANY
We are a leading provider of specialty products and services to oil and
gas drilling and production companies throughout the world. We operate in a
substantial number of the world's active oil and gas producing regions,
including the Gulf of Mexico, U.S. onshore, Canada, West Africa, the Middle
East, South America and Southeast Asia. Our customers include many of the major
and independent oil and gas companies and other oilfield service companies. We
operate in three principal business segments, offshore products, tubular
services and well site services, and have established a leadership position in
each.
General information about us can be found at www.oilstatesintl.com. Our
annual report on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form 8-K, as well as any amendments and exhibits to those reports, are
available free of charge through our website as soon as reasonably practicable
after we file them with, or furnish them to, the SEC.
OUR BACKGROUND
Oil States International, Inc. was originally incorporated in July 1995
as CE Holdings, Inc. On August 1, 1995, CE Holdings, Inc. acquired Continental
Emsco Company, an operator of oilfield supply stores, including its then wholly
owned subsidiary Oil States Industries, Inc. (Oil States Industries). Oil States
Industries is a manufacturer of offshore products.
In May 1996, Oil States Industries purchased the construction division
of Hunting Oilfield Services, Ltd., which provides a variety of construction
products and services to the offshore oil and gas industry as well as certain
connector manufacturing technology. In November 1996, CE Holdings, Inc. changed
its name to CONEMSCO, Inc. (Conemsco).
In July 1997, Conemsco purchased HydroTech Systems, Inc., a full
service provider of engineered products to the offshore pipeline industry, and
SMATCO Industries Inc., a manufacturer of marine winches for the offshore
service boat industry. In December 1997, Conemsco purchased Gregory Rig Service
& Sales Inc., a provider of drilling equipment and services.
In February 1998, Conemsco acquired Subsea Ventures, Inc. (SVI). SVI
designs, manufactures and services auxiliary structures for subsea blowout
preventors and subsea production systems. In April 1998, Conemsco acquired the
assets of Klaper (UK) Limited, a provider of repair and maintenance services for
blowout preventors and drilling risers used in offshore drilling.
In July 2000, Conemsco changed its name to Oil States International,
Inc. In July 2000, Oil States International, Inc., HWC Energy Services, Inc.
(HWC), PTI Group Inc. (PTI) and Sooner Inc. (Sooner) entered into a Combination
Agreement (the Combination Agreement) providing that, concurrently with the
closing of our initial public offering, HWC, PTI and Sooner would merge with
wholly owned subsidiaries of Oil States (the Combination). As a result, HWC, PTI
and Sooner became wholly owned subsidiaries of Oil States in February 2001. In
this Annual Report on Form 10-K, references to the "Company" or to "we," "us,"
"our," and similar terms are to Oil States International, Inc. and its
subsidiaries following the Combination and references to "Oil States" are to Oil
States International, Inc. and its subsidiaries prior to the Combination.
2
In 2002, we acquired the following six businesses for total
consideration of approximately $72.0 million, which was financed primarily with
borrowings under our credit facility:
- Southeastern Rentals LLC, based in Mississippi, Edge Wireline
Rentals Inc. and certain affiliated companies, located in
Louisiana, and J.V. Oilfield Rentals & Supply, Inc. and
certain affiliated companies, located in Louisiana, all of
which are suppliers of rental tools to the oil and gas service
industry. These businesses were merged into our existing
rental tool business included in our well site services
segment.
- Barlow Hunt, Inc., based in Oklahoma, an elastomer molding
company which has become part of our existing elastomer
business included in the offshore products segment.
- Certain assets and related liabilities of Big Inch Marine
Services, Inc., a Texas-based subsidiary of Stolt Offshore,
Inc., which provides subsea pipeline equipment and repair
services similar to those provided by us in the offshore
products segment.
- Applied Hydraulic Systems, Inc., a Louisiana-based offshore
crane manufacturer and crane repair service provider, which
has become part of our offshore products segment.
In 2003, we spent $16.7 million, financed with borrowings under our
credit facility, to acquire five businesses. Three of the businesses were rental
tool companies acquired for a total consideration of $10.5 million. The acquired
rental tool companies conduct operations in South Texas and Louisiana and will
be combined with our existing rental tool business within our well site services
segment. The remaining two businesses, acquired for aggregate consideration of
$6.2 million, were combined with our offshore products segment.
In January 2004, the Company completed the acquisition of several
related rental tool companies. The companies, based in South Texas are leading
providers of thru-tubing services and ancillary equipment rentals. These
companies have been combined with our rental tool subsidiary, and will report
through the well site services segment. The Company paid a total of $34.7
million in cash for the stock of the companies which was funded by the Company's
credit facility.
OUR INDUSTRY
We operate in the oilfield service industry, which provides products
and services to oil and gas exploration and production companies for use in the
drilling for and production of oil and gas. 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 spend capital on the
exploration and development of oil and gas reserves. Demand for our products and
services by our customers is highly sensitive to current and expected oil and
natural gas prices. See Note 15 to our Consolidated and Combined Financial
Statements included in this Annual Report on Form 10-K for financial information
by segment and a geographical breakout of revenues and long-lived assets.
The years 2001 through 2003 were indicative of the cyclical nature of
the oilfield service business. For our well site services and tubular services
businesses, there was higher activity, as measured by the North American rig
count, during the first eight months of 2001 followed by declining activity
levels, except for seasonal winter peaks in Canadian activity, through the
spring of 2002. The average annual North American rig count declined 27% from
2001 to 2002. During 2003, the average North American rig count was 1,404 and
increased by 307 rigs, or 28%, compared to 2002. As of December 31, 2003 the
North American rig count was 1,531. See additional rig count information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -Overview" in this Annual Report on Form 10-K. Our offshore products
business is more influenced by deepwater development activity and rig
construction and repair. Results of operations in this segment of our business
has increased throughout the years 2002 and 2003 as we shipped projects from our
backlog which had increased in 2001 and 2002.
3
OFFSHORE PRODUCTS
OVERVIEW
During the year ended December 31, 2003, we generated approximately 32%
of our revenue and 39% of our operating income, before corporate charges, from
our offshore products segment. Through this segment, we design and manufacture a
number of cost-effective, technologically advanced products for the offshore
energy industry. Our products and services are used in both shallow and
deepwater producing regions and include flex-element technology, advanced
connector systems, blow-out preventor stack integration and repair services,
deepwater mooring and lifting systems, offshore equipment and installation
services and subsea pipeline products. We have facilities in Arlington, Houston
and Lampasas, Texas; Houma, Louisiana; Tulsa, Oklahoma; Scotland; Brazil;
England and Singapore that support our offshore products segment.
OFFSHORE PRODUCTS MARKET
The market for our offshore products and services depends primarily
upon development of infrastructure for offshore production activities, drilling
rig refurbishments and upgrades and new rig construction. As demand for oil and
gas increases and related drilling and production increases in offshore areas
throughout the world, particularly in deeper water, we expect spending on these
activities to increase.
The upgrade of existing rigs to equip them with the capability to drill
in deeper water, the construction of new deepwater-capable rigs, and the
installation of fixed or floating production systems require specialized
products and services like the ones we provide.
PRODUCTS AND SERVICES
Our offshore products segment provides a broad range of products and
services for use in offshore drilling and development activities. In addition,
this segment provides onshore oil and gas, defense and general industrial
products and services. Our offshore products segment is dependent on continuing
innovation and creative applications of existing technologies.
We design and build manufacturing and testing systems for many of our
new products and services. These testing and manufacturing facilities enable us
to provide reliable, technologically advanced products and services. Our
Aberdeen facility provides structural testing including full-scale product
simulations.
Offshore Development and Drilling Activities. We design, manufacture,
fabricate, inspect, assemble, repair, test and market subsea equipment and
offshore vessel and rig equipment. Our products are components of equipment used
for the drilling and production of oil and gas wells on offshore fixed platforms
and mobile production units, including floating platforms and floating
production, storage and offloading vessels, and on other marine vessels,
floating rigs and jack-ups. Our products and services include:
- flexible bearings and connector products;
- subsea pipeline products;
- marine winches, mooring and lifting systems and rig equipment;
- blowout preventor stack assembly, integration, testing and
repair services; and
- other products and services.
Flexible Bearings and Connector Products. We are the principal supplier
of flexible bearings, or FlexJoints(R), to the offshore oil and gas industry. We
also supply connections and fittings that join lengths of large diameter
conductor or casing used in offshore drilling operations. FlexJoints(R) are
flexible bearings that permit movement of riser pipes or tension leg platform
tethers under high tension and pressure. They are used on drilling, production
and export risers and are used increasingly as offshore production moves to
deeper water areas. Drilling riser systems
4
provide the vertical conduit between the floating drilling vessel and the subsea
wellhead. Through the drilling riser, equipment is guided into the well and
drilling fluids are returned to the surface. Production riser systems provide
the vertical conduit from the subsea wellhead to the floating production
platform. Oil and gas flows to the surface for processing through the production
riser. Export risers provide the vertical conduit from the floating production
platform to the subsea export pipelines. FlexJoints(R) are a critical element in
the construction and operation of production and export risers on floating
production systems in deepwater.
Floating production systems, including tension leg platforms, Spars and
FPSO systems, are a significant means of producing oil and gas, particularly in
deepwater environments. We provide many important products for the construction
of these systems. A tension leg platform is a floating platform that is moored
by vertical pipes, or tethers, attached to both the platform and the sea floor.
Our FlexJoint(R) tether bearings are used at the top and bottom connections of
each of the tethers, and our Merlin connectors are used to join shorter pipe
segments to form long pipes offshore. A Spar is a floating vertical cylindrical
structure which is approximately six to seven times longer than its diameter and
is anchored in place.
Subsea Pipeline Products. We design and manufacture a variety of
fittings and connectors used in offshore oil and gas pipelines. Our products are
used for new construction, maintenance and repair applications. New construction
fittings include:
- forged steel Y-shaped connectors for joining two pipelines
into one;
- pressure-balanced safety joints for protecting pipelines from
anchor snags or a shifting sea-bottom;
- electrical isolation joints; and
- hot tap clamps that allow new pipelines to be joined into
existing lines without interrupting the flow of petroleum
product.
We provide diverless connection systems for subsea flowlines and
pipelines. Our HydroTech collet connectors provide a high-integrity, proprietary
metal-to-metal sealing system for the final hook-up of deep offshore pipelines
and production systems. They also are used in diverless pipeline repair systems
and in future pipeline tie-in systems. Our lateral tie-in sled, which is
installed with the original pipeline, allows a subsea tie-in to be made quickly
and efficiently using proven HydroTech connectors without costly offshore
equipment mobilization and without shutting off product flow.
We provide pipeline repair hardware, including deepwater applications
beyond the depth of diver intervention. Our products include:
- repair clamps used to seal leaks and restore the structural
integrity of a pipeline;
- mechanical connectors used in repairing subsea pipelines
without having to weld;
- flanges used to correct misalignment and swivel ring flanges;
and
- pipe recovery tools for recovering dropped or damaged
pipelines.
Marine Winches, Mooring and Lifting Systems and Rig Equipment. We
design, engineer and manufacture marine winches, mooring and lifting systems and
rig equipment. Our Skagit winches are specifically designed for mooring floating
and semi-submersible drilling rigs and positioning pipelay and derrick barges,
anchor handling boats and jack-ups, while our Nautilus marine cranes are used on
production platforms throughout the world. We also design and fabricate rig
equipment such as automatic pipe racking and blow-out preventor handling
equipment. Our engineering teams, manufacturing capability and service
technicians who install and service our products provide our customers with a
broad range of equipment and services to support their operations. Aftermarket
service and support of our installed base of equipment to our customers is also
an important source of revenues to us.
5
BOP Stack Assembly, Integration, Testing and Repair Services. We design
and fabricate lifting and protection frames and offer system integration of
blow-out preventor stacks and subsea production trees. We can provide complete
turnkey and design fabrication services. We also design and manufacture a
variety of custom subsea equipment, such as riser flotation tank systems, guide
bases, running tools and manifolds. In addition, we also offer blow-out
preventor and drilling riser testing and repair services.
Other Products and Services. We provide equipment for securing subsea
structures and offshore platform jackets, including our Hydra-Lok(R) hydraulic
system. The Hydra-Lok(R) tool, which has been successfully used at depths of
3,000 feet, does not require diver intervention or guidelines.
We also provide cost-effective, standardized leveling systems for
offshore structures that are anchored by foundation piles, including subsea
templates, subsea manifolds and platform jackets.
Our offshore products segment also produces a variety of products for
use in applications other than in the offshore oil and gas industry. For
example, we provide:
- elastomer consumable downhole products for onshore drilling
and production;
- metal-elastomeric FlexJoints(R) used in a variety of military,
marine and aircraft applications; and
- drum-clutches and brakes for heavy-duty power transmission in
the mining, paper, logging and marine industries.
Backlog. Backlog in our offshore products segment was $62.6 million at
December 31, 2003, compared to $100.1 million at December 31, 2002 and $72.4
million at December 31, 2001. We expect substantially all our backlog as of
December 31, 2003 will be completed in 2004. Our offshore products backlog
consists of firm customer purchase orders for which satisfactory credit or
financing arrangements exist and delivery is scheduled. In some instances, these
purchase orders are cancelable by the customer, subject to the payment of
termination fees and/or the reimbursement of our costs incurred. Although our
backlog is an important indicator of future offshore products shipments and
revenues, backlog as of any particular date may not be indicative of our actual
operating results for any future period. We believe that the offshore
construction and development business is characterized by lengthy projects and a
long "lead-time" order cycle. The change in backlog levels from one period to
the next does not necessarily evidence a long-term trend.
REGIONS OF OPERATIONS
Our offshore products segment provides products and services to
customers in the major offshore oil and gas producing regions of the world,
including the Gulf of Mexico, West Africa, the North Sea, Brazil and Southeast
Asia.
CUSTOMERS AND COMPETITORS
We market our products and services to a broad customer base, including
the direct end users, engineering and design companies, prime contractors, and
at times, our competitors through outsourcing arrangements.
Our three largest customers in the offshore products markets in 2003
were ABB Ltd, BP plc and Modec International. None of these customers accounted
for greater than 5% of our consolidated revenues during 2003. Our main
competitors include ABB Ltd, FMC Technologies, Inc., Energy Cranes
International, Ltd. and Rolls-Royce plc.
6
TUBULAR SERVICES
OVERVIEW
On February 14, 2001, the Company completed its acquisition of Sooner.
Sooner's business is reported as our tubular services segment.
During the year ended December 31, 2003, we generated approximately 33%
of our revenue and 9% of our operating income, before corporate charges, from
our tubular services segment. Through this segment, we distribute oil country
tubular goods, or OCTG, and provide associated OCTG finishing and logistics
services to the oil and gas industry. Oil country tubular goods consist of
downhole casing and production tubing. Through our tubular services segment, we:
- distribute a broad range of casing and tubing;
- provide threading, remediation, logistical and inventory
services; and
- offer e-commerce pricing, ordering and tracking capabilities.
We serve a customer base ranging from major oil companies to small
independents. Through our key relationships with more than 20 domestic and
foreign manufacturers and related service providers of OCTG, we deliver tubular
products and ancillary services to oil and gas companies, drilling contractors
and consultants predominantly in the United States. The OCTG distribution market
is highly fragmented and competitive, and is predominately focused in the United
States.
OCTG MARKET
Our tubular services segment primarily distributes casing and tubing.
Casing forms the structural wall in oil and gas wells to provide support and
prevent caving during drilling operations. Casing is used to protect water-
bearing formations during the drilling of a well. Casing is generally not
removed after it has been installed in a well. Production tubing, which is used
to bring oil and gas to the surface, may be replaced during the life of a
producing well.
A key indicator of domestic demand for OCTG is the average number of
drilling rigs operating in the United States. The OCTG market at any point in
time is also affected by the level of inventories maintained by manufacturers,
distributors and end users. Demand for tubular products is positively impacted
by increased drilling of deeper, horizontal and offshore wells. Deeper wells
require incremental tubular footage and enhanced mechanical capabilities to
ensure the integrity of the well. Premium tubulars are used in horizontal
drilling to withstand the increased bending and compression loading associated
with a horizontal well. Operators typically specify premium tubulars for the
completion of offshore wells.
PRODUCTS AND SERVICES
Tubular Products and Services. We distribute various types of OCTG
produced by both domestic and foreign manufacturers to major and independent oil
and gas exploration and production companies and other OCTG distributors. We do
not manufacture any of the tubular goods that we distribute. As a result, gross
margins in this segment are generally lower than those reported by our other
segments. We operate our tubular services segment from a total of five offices
and facilities located near areas of oil and gas exploration and development
activity. We have distribution relationships with most major domestic and
international steel mills.
In this business, inventory management is critical to our success. We
maintain on-the-ground inventory in 58 yards located in the United States,
giving us the flexibility to fill our customers' orders from our own stock or
directly from the manufacturer. We have a proprietary inventory management
system, designed specifically for the OCTG industry, that enables us to track
our product shipments down to the individual joint of pipe.
7
A-Z Terminal. Our A-Z Terminal pipe maintenance and storage facility in
Crosby, Texas is equipped to provide a full range of tubular services, giving us
strong customer service capabilities. Our A-Z Terminal is on 109 acres, is an
ISO 9001-certified facility and has more than 1,400 pipe racks and two
double-ended thread lines. We have exclusive use of a permanent third-party
inspection center within the facility. The facility also includes indoor chrome
storage capability and patented pipe cleaning machines.
We offer services at our A-Z Terminal facility typically outsourced by
other distributors, including the following: threading, inspection, cleaning,
cutting, logistics, rig returns, installation of float equipment and
non-destructive testing.
Tubular Products and Services Sales Arrangements. We provide our
tubular products and logistics services through a variety of arrangements,
including spot market sales and alliances. We provide some of our tubular
products and services to independent and major oil and gas companies under
alliance arrangements. Although our alliances are generally not as profitable as
the spot market and can be cancelled by the customer, they provide us with more
stable and predictable revenues and an improved ability to forecast required
inventory levels, which allows us to manage our inventory more efficiently.
REGIONS OF OPERATIONS
Our tubular services segment provides tubular products and services
principally to customers in the United States both for land and offshore
applications. However, we also sell for export to other countries, including
Canada, Venezuela, Ecuador, Algeria, South Africa and Cameroon.
CUSTOMERS, SUPPLIERS AND COMPETITORS
Our three largest end-user customers in the tubular distribution market
in 2003 were El Paso Corporation, Burlington Resources and Conoco Phillips. El
Paso Corporation revenues for all of our segments accounted for 6.5% of our
consolidated revenues during 2003. Conoco Phillips and Burlington Resources each
accounted for less than 5% of our consolidated revenues during 2003. Our three
largest suppliers were U.S. Steel Group, Maverick Tube Corporation and Lone Star
Technologies. Although we have a leading market share position in tubular
services distribution, the market is highly fragmented. Our main competitors in
tubular distribution are Total Premier, Red Man Pipe & Supply Co., Inc. and
Bourland and Leverich.
WELL SITE SERVICES
OVERVIEW
During the year ended December 31, 2003, we generated approximately 35%
of our revenue and 52% of our operating income, before corporate charges, from
our well site services segment. Our well site services segment provides a broad
range of products and services that are used to establish and maintain the flow
of oil and gas from a well throughout its lifecycle. Our services include
workover services, drilling services, rental equipment, work force
accommodations, catering and logistics services and modular building
construction services. We use our fleet of workover and drilling rigs, rental
equipment, work force accommodation facilities and related equipment to service
well sites for oil and natural gas companies. Our products and services are used
in both onshore and offshore applications through the exploration, development,
production and abandonment phases of a well's life. Additionally, our work force
accommodations, catering and logistics services are employed in a variety of
mining and related natural resource applications as well as forest fire
fighting.
WELL SITE SERVICES MARKET
Demand for our workover and drilling rigs, rental equipment and work
force accommodations, catering and logistics services has historically been tied
to the level of expenditures by oil and gas producers which is a function of
prices they receive for oil and gas. In general, we expect activity levels to
continue to be highly correlated to oil and gas expenditures which is a function
of many factors that affect well economics.
8
Demand for our workover services is impacted significantly by offshore
activity both in the United States and international areas. Our hydraulic
workover units compete with jackup rigs and conventional workover rigs for
shallow water workover projects. Our hydraulic workover units can be operated,
at times, at a lower cost than alternatives such as jack-up rigs. Costs to
mobilize and set up our hydraulic workover units, for example, are lower than
alternative equipment. Some operations on oil and gas wells under pressure
situations require the use of a hydraulic workover unit. On the other hand, when
activity levels in the oil and gas business decline, our hydraulic units face
more competition from larger equipment offered at lower prices which can become
more competitive with our equipment.
Our rental equipment fleet which is predominantly located near the U.S.
Gulf of Mexico market, is more production oriented and is dependent to a
significant degree on the level of development and workover activities in the
U.S. Gulf Coast area and the Gulf of Mexico. We face competition from many
smaller companies in our rental equipment business in the U.S. Gulf of Mexico
market. The lack of increased drilling in the U.S. Gulf of Mexico has resulted
in a lower than anticipated increase in rental tool revenues and profitability
in 2003.
PRODUCTS AND SERVICES
Workover Services. We provide our workover products and services
primarily to customers in the U.S., Venezuela, the Middle East and West Africa,
for both onshore and offshore applications. Workover products and services are
used in operations on a producing well to restore or increase production.
Workover services are typically used during the development, production and
abandonment stages of the well. Our hydraulic workover units are used for
workover operations and snubbing operations in pressure situations.
A hydraulic workover unit is a specially designed rig used for
vertically moving tubulars in and out of a wellbore using hydraulic pressure.
This unit is used for servicing wells with no pressure at the surface and also
has the ability of working safely on wells under pressure. This feature allows
these units to be used for underbalanced drilling and workover and also in well
control applications. When the unit is snubbing, it is pushing pipe or tubulars
into the well bore against well bore pressures. Because of their small size and
ability to work on wells under pressure, hydraulic workover units offer some
advantages over larger workover rigs and conventional drilling rigs. However,
most wells where we perform workover service are wells with no pressure.
As of December 31, 2003 we had 28 "stand alone" hydraulic workover
units. Of these 28 units, 16 were located in the U.S., five were located in the
Middle East, five were located in Venezuela and two were located in West Africa.
In addition, we had labor and maintenance contracts on two non-owned hydraulic
workover units in Algeria. Typically, our hydraulic workover units are
contracted on a short-term dayrate basis. As a result, utilization of our
hydraulic workover units varies from period to period. Our utilization rate for
hydraulic workover units was 30.7% during 2003 compared to 28.5% in 2002. As of
December 31, 2003, nine of our hydraulic workover units were working or under
contract. The length of time to complete a job depends on many factors,
including the number of wells and the type of workover or pressure control
situation involved. Usage of our hydraulic workover units is also affected by
the availability of trained personnel. With our current level of trained
personnel, we estimate that we have the capability to crew and operate 10 to 12
simultaneous jobs involving our hydraulic workover units.
Our three largest customers in workover services in 2003 were
Sonatrach, Chevron Texaco Corporation and Total Fina Elf. None of these
customers accounted for greater than 5% of our consolidated revenues during
2003. Our main competitors in workover services are Halliburton Company, Cudd
Pressure Control, Inc. and Superior Energy Services.
Drilling Services. Our drilling services business is located in Odessa,
Texas and Wooster, Ohio and provides drilling services for shallow to medium
depths ranging from 2,000 to 10,000 feet. Drilling services are typically used
during the exploration and development stages of a field. We have a total of 17
semi-automatic drilling rigs with hydraulic pipe handling booms and lift
capacities ranging from 200,000 to 300,000 pounds. We added three of these
drilling rigs in 2002, one in December 2003 and one in February 2004. Thirteen
of these drilling rigs are located in Odessa, Texas and four are located in
Wooster, Ohio. As of December 31, 2003, 15 rigs were working or under contract.
Utilization increased from 85.6% in 2002 to 88.4% in 2003.
We market our drilling services directly to a diverse customer base,
consisting of both major and independent oil companies. Our largest customers in
drilling services in 2003 included Energen Resources Corporation, Apache
9
Corporation and Chevron Texaco Corporation. None of these customers accounted
for greater than 5% of our consolidated revenues. Our main competitors are
Patterson-UTI Energy Inc., Key Energy Services, Inc. and Union Drilling, Inc.
The land drilling business is highly fragmented and consists of a small number
of large companies and many smaller companies.
Rental Equipment. Our rental equipment business provides a wide range
of products for use in the offshore and onshore oil and gas industry, including:
- wireline and coiled tubing pressure control equipment;
- pipe recovery systems;
- gravel pack operations on well bores; and,
- surface control equipment and down-hole tools utilized by
coiled tubing operators.
Our rental equipment is used during the exploration, development,
production and abandonment stages. As of December 31, 2003, we provided rental
equipment at 21 U.S. distribution points in Texas, Louisiana, Oklahoma,
Mississippi, New Mexico and Wyoming, an increase of four locations since
December 31, 2002. We completed rental tool acquisitions totaling $10.5 million
during 2003 and $34.7 million during January 2004. We provide rental equipment
on a day rental basis with rates varying depending on the type of equipment and
the length of time rented.
Our three largest customers in rental equipment in 2003 were
Schlumberger Well Services, Baker Atlas and BP plc. None of these customers
accounted for greater than 5% of our consolidated revenues during 2003.
Work Force Accommodations, Catering and Logistics and Modular Building
Construction. We are a large provider of integrated products and services to
support workers in remote locations, including work force accommodation, food
services, remote site management services and modular building construction. We
provide complete design, manufacture, installation, operation and redeployment
logistics services for oil and gas drilling, oil sands mining in the Fort
McMurray region of Northern Canada, diamond mining in Northern Canada and other
mining ventures throughout the world, pipeline construction, forestry, offshore
construction, disaster relief services and support services for military
operations on a worldwide basis. Our work force products and service operations
are primarily focused in Canada and the Gulf of Mexico although we have
activity, currently, in Afghanistan and the Balkans, serving the Canadian
peacekeeping forces. During the peak of our operating season, we typically
provide these services in over 200 separate locations throughout the world with
separate location populations ranging from 20 to 2000 persons.
Work Force Accommodations, Catering and Logistics Services. We sell and
lease portable living quarters, galleys, diners and offices and provide portable
generators, water, sewage systems and catering services as part of our work
force services. We provide various client-specific building configurations to
customers for use in both onshore and offshore applications. We provide our
integrated work force logistics services to customers under long-term and
short-term contractual arrangements.
Modular Building Construction. We design, construct and install a
variety of portable modular buildings, including housing, kitchens, recreational
units and offices for lease or sale to the Canadian and Gulf of Mexico markets.
Our designers work closely with our clients to build structures that best serve
their needs.
In 2003 our three largest customers in work force accommodations,
catering, logistics and modular building construction were Syncrude Canada Ltd,
SNC-Lavalin Group Inc. and Nabors Drilling. None of these customers accounted
for greater than 5% of our consolidated revenues during 2003. Our main
competitors are Atco Structures Limited, Eurest Deutschland GmbH, Aramark
Corporation and Abbyville Offshore Inc.
EMPLOYEES
As of December 31, 2003, we had approximately 3,900 full-time
employees, 35% of whom are in our offshore products segment, 63% of whom are in
our well site services segment and 2% of whom are in our tubular services
10
segment. We are party to collective bargaining agreements covering 452
employees located in Canada and the United Kingdom as of December 31, 2003. We
believe relations with our employees are good.
GOVERNMENT REGULATION
Our business is significantly affected by foreign, federal, state and
local laws and regulations relating to the oil and natural gas industry, worker
safety and environmental protection. Changes in these laws, including more
stringent administrative regulations and increased levels of enforcement of
these laws and regulations, could significantly affect our business. We cannot
predict changes in the level of enforcement of existing laws and regulations or
how these laws and regulations may be interpreted or the effect changes in these
laws and regulations may have on us or our future operations or earnings. We
also are not able to predict whether additional laws and regulations will be
adopted.
We depend on the demand for our products and services from oil and
natural gas companies. This demand is affected by changing taxes, price controls
and other laws and regulations relating to the oil and gas industry generally,
including those specifically directed to oilfield and offshore operations. The
adoption of laws and regulations curtailing exploration and development drilling
for oil and natural gas in our areas of operation could also adversely affect
our operations by limiting demand for our products and services. We cannot
determine the extent to which our future operations and earnings may be affected
by new legislation, new regulations or changes in existing regulations or
enforcement.
Some of our employees who perform services on offshore platforms and
vessels are covered by the provisions of the Jones Act, the Death on the High
Seas Act and general maritime law. These laws operate to make the liability
limits established under states' workers' compensation laws inapplicable to
these employees and permit them or their representatives generally to pursue
actions against us for damages or job-related injuries with no limitations on
our potential liability.
Our operations are subject to numerous foreign, federal, state and
local environmental laws and regulations governing the release and/or discharge
of materials into the environment or otherwise relating to environmental
protection. Numerous governmental agencies issue regulations to implement and
enforce these laws, for which compliance is often costly and difficult. The
violation of these laws and regulations may result in the denial or revocation
of permits, issuance of corrective action orders, assessment of administrative
and civil penalties, and even criminal prosecution. We believe that we are in
substantial compliance with applicable environmental laws and regulations.
Further, we do not anticipate that compliance with existing environmental laws
and regulations will have a material effect on our consolidated financial
statements.
We generate wastes, including hazardous wastes, that are subject to the
federal Resource Conservation and Recovery Act, or RCRA, and comparable state
statutes. The United States Environmental Protection Agency, or EPA, and state
agencies have limited the approved methods of disposal for some types of
hazardous and nonhazardous wastes. Some wastes handled by us in our field
service activities that currently are exempt from treatment as hazardous wastes
may in the future be designated as "hazardous wastes" under RCRA or other
applicable statutes. This would subject us to more rigorous and costly operating
and disposal requirements.
The federal Comprehensive Environmental Response, Compensation, and
Liability Act, or CERCLA or the "Superfund" law, and comparable state statutes
impose liability, without regard to fault or legality of the original conduct,
on classes of persons that are considered to have contributed to the release of
a hazardous substance into the environment. These persons include the owner or
operator of the disposal site or the site where the release occurred and
companies that disposed of or arranged for the disposal of the hazardous
substances at the site where the release occurred. Under CERCLA, these persons
may be subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment and for
damages to natural resources, and it is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment. We
currently have operations on properties where activities involving the handling
of hazardous substances or wastes may have been conducted prior to our
operations on such properties or by third parties whose operations were not
under our control. These properties may be subject to CERCLA, RCRA and analogous
state laws. Under these laws and related regulations, we could be required to
remove or remediate previously discarded hazardous substances and
11
wastes or property contamination that was caused by these third parties. These
laws and regulations may also expose us to liability for our acts that were in
compliance with applicable laws at the time the acts were performed.
The Federal Water Pollution Control Act and analogous state laws impose
restrictions and strict controls regarding the discharge of pollutants into
state waters or waters of the United States. The discharge of pollutants into
jurisdictional waters is prohibited unless the discharge is permitted by the EPA
or applicable state agencies. Many of our properties and operations require
permits for discharges of wastewater and/or stormwater, and we have a system for
securing and maintaining these permits. In addition, the Oil Pollution Act of
1990 imposes a variety of requirements on responsible parties related to the
prevention of oil spills and liability for damages, including natural resource
damages, resulting from such spills in waters of the United States. A
responsible party includes the owner or operator of a facility or vessel, or the
lessee or permittee of the area in which an offshore facility is located. The
Federal Water Pollution Control Act and analogous state laws provide for
administrative, civil and criminal penalties for unauthorized discharges and,
together with the Oil Pollution Act, impose rigorous requirements for spill
prevention and response planning, as well as substantial potential liability for
the costs of removal, remediation, and damages in connection with any
unauthorized discharges.
Some of our operations also result in emissions of regulated air
pollutants. The federal Clean Air Act and analogous state laws require permits
for facilities that have the potential to emit substances into the atmosphere
that could adversely affect environmental quality. Failure to obtain a permit or
to comply with permit requirements could result in the imposition of substantial
administrative, civil and even criminal penalties.
Although we believe that we are in substantial compliance with existing
laws and regulations, there can be no assurance that substantial costs for
compliance will not be incurred in the future. Moreover, it is possible that
other developments, such as the adoption of stricter environmental laws,
regulations and enforcement policies, could result in additional costs or
liabilities that we cannot currently quantify.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We include the following cautionary statement to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
for any forward-looking statement made by us, or on our behalf. The factors
identified in this cautionary statement are important factors (but not
necessarily all of the important factors) that could cause actual results to
differ materially from those expressed in any forward-looking statement made by
us, or on our behalf. You can typically identify forward-looking statements by
the use of forward-looking words such as "may," "will," "could," "project,"
"believe," "anticipate," "expect," "estimate," "potential," "plan," "forecast,"
and other similar words. All statements other than statements of historical
facts contained in this Annual Report on Form 10-K, including statements
regarding our future financial position, budgets, capital expenditures,
projected costs, plans and objectives of management for future operations and
possible future acquisitions, are forward-looking statements. Where any such
forward-looking statement includes a statement of the assumptions or bases
underlying such forward-looking statement, we caution that, while we believe
such assumptions or bases to be reasonable and make them in good faith, assumed
facts or bases almost always vary from actual results. The differences between
assumed facts or bases and actual results can be material, depending upon the
circumstances.
Where, in any forward-looking statement, we, or our management, express
an expectation or belief as to the future results, such expectation or belief is
expressed in good faith and believed to have a reasonable basis. However, there
can be no assurance that the statement of expectation or belief will result or
be achieved or accomplished. Taking this into account, the following are
identified as important factors that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, our company:
- fluctuations in the prices of oil and gas;
- the level of drilling activity;
- the level of offshore oil and gas developmental activities;
- general economic conditions;
12
- our ability to find and retain skilled personnel;
- the availability of capital; and
- the other factors identified under the captions "Risks Related
to Our Business Generally" and "Risks Related to Our
Operations" that follow.
RISKS RELATED TO OUR BUSINESS GENERALLY
DECREASED OIL AND GAS INDUSTRY EXPENDITURE LEVELS WILL ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
We depend upon the oil and gas industry and its ability and willingness
to make expenditures to explore for, develop and produce oil and gas. If these
expenditures decline, our business will suffer. The industry's willingness to
explore, develop and produce depends largely upon the availability of attractive
drilling prospects and the prevailing view of future product prices. Many
factors affect the supply and demand for oil and gas and therefore influence
product prices, including:
- the level of production;
- the levels of oil and gas inventories;
- the expected cost of developing new reserves;
- the cost of producing oil and gas;
- the availability of attractive oil and gas field prospects
which may be affected by governmental actions or environmental
activists which may restrict drilling;
- the availability of transportation infrastructure;
- depletion rates;
- the level of drilling activity;
- worldwide economic activity;
- national government political requirements, including the
ability of the Organization of Petroleum Exporting Companies
(OPEC) to set and maintain production levels and prices for
oil;
- the impact of armed hostilities involving one or more oil
producing nations;
- the cost of developing alternate energy sources;
- environmental regulation; and
- tax policies.
EXTENDED PERIODS OF LOW OIL PRICES MAY DECREASE DEEPWATER EXPLORATION AND
PRODUCTION ACTIVITY AND ADVERSELY AFFECT OUR BUSINESS.
Our offshore products segment depends on exploration and production
expenditures in deepwater areas. Because deepwater projects are more capital
intensive and take longer to generate first production than shallow water and
onshore projects, the economic analyses conducted by exploration and production
companies typically assume lower prices for production from such projects to
determine economic viability over the long term. If oil prices remain near
13
or below those levels used to determine economic viability for an extended
period of time, deepwater activity and our business will be adversely affected.
BECAUSE THE OIL AND GAS INDUSTRY IS CYCLICAL, OUR OPERATING RESULTS MAY
FLUCTUATE.
Oil prices have been and are expected to remain volatile. This
volatility causes oil and gas companies and drilling contractors to change their
strategies and expenditure levels. We have experienced in the past, and we may
experience in the future, significant fluctuations in operating results based on
these changes.
DISRUPTIONS IN THE POLITICAL AND ECONOMIC CONDITIONS OF THE FOREIGN COUNTRIES IN
WHICH WE OPERATE COULD ADVERSELY AFFECT OUR BUSINESS.
We have operations in various international areas, including parts of
Africa, South America and the Middle East. Our operations in these areas
increase our exposure to risks of war, terrorist attacks, local economic
conditions, political disruption, civil disturbance and governmental policies
that may:
- disrupt our operations;
- restrict the movement of funds or limit repatriation of
profits;
- lead to U.S. government or international sanctions; and
- limit access to markets for periods of time.
WE MIGHT BE UNABLE TO EMPLOY A SUFFICIENT NUMBER OF TECHNICAL PERSONNEL.
Many of the products that we sell, especially in our offshore products
segment, are complex and highly engineered and often must perform in harsh
conditions. We believe that our success depends upon our ability to employ and
retain technical personnel with the ability to design, utilize and enhance these
products. In addition, our ability to expand our operations depends in part on
our ability to increase our skilled labor force. The demand for skilled workers
is high, and the supply is limited. A significant increase in the wages paid by
competing employers could result in a reduction of our skilled labor force,
increases in the wage rates that we must pay or both. If either of these events
were to occur, our cost structure could increase and our growth potential could
be impaired.
THE LEVEL AND PRICING OF TUBULAR GOODS IMPORTED INTO THE UNITED STATES COULD
DECREASE DEMAND FOR OUR TUBULAR GOODS INVENTORY AND ADVERSELY IMPACT OUR RESULTS
OF OPERATIONS. ALSO, IF STEEL MILLS WERE TO SELL A SUBSTANTIAL AMOUNT OF GOODS
DIRECTLY TO CUSTOMERS IN THE UNITED STATES, OUR RESULTS OF OPERATIONS COULD BE
ADVERSELY IMPACTED.
U.S. law currently restricts imports of low-cost tubular goods from a
number of foreign countries into the U.S. tubular goods market, resulting in
higher prices for tubular goods. If these restrictions were to be lifted or if
the level of imported low-cost tubular goods were to otherwise increase, our
tubular services segment could be adversely affected to the extent that we then
have higher-cost tubular goods in inventory. If prices were to decrease
significantly, we might not be able to profitably sell our inventory of tubular
goods. In addition, significant price decreases could result in a longer holding
period for some of our inventory, which could also have a material adverse
effect on our tubular services segment.
We do not manufacture any of the tubular goods that we distribute.
Historically, users of tubular goods in the United States, in contrast to
outside the United States, have purchased tubular goods from a distributor. If
customers were to purchase tubular goods directly from steel mills, our results
of operations could be adversely impacted.
WE ARE SUBJECT TO EXTENSIVE AND COSTLY ENVIRONMENTAL LAWS AND REGULATIONS THAT
MAY REQUIRE US TO TAKE ACTIONS THAT WILL ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
Our hydraulic well control and drilling operations and our offshore
products business are significantly affected by stringent and complex foreign,
federal, state and local laws and regulations governing the discharge of
substances into the environment or otherwise relating to environmental
protection. We could be exposed to liability for cleanup
14
costs, natural resource damages and other damages as a result of our conduct
that was lawful at the time it occurred or the conduct of, or conditions caused
by, prior operators or other third parties. Environmental laws and regulations
have changed in the past, and they are likely to change in the future. If
existing regulatory requirements or enforcement policies change, we may be
required to make significant unanticipated capital and operating expenditures.
Any failure by us to comply with applicable environmental laws and
regulations may result in governmental authorities taking actions against our
business that could adversely impact our operations and financial condition,
including the:
- issuance of administrative, civil and criminal penalties;
- denial or revocation of permits or other authorizations;
- reduction or cessation in operations; and
- performance of site investigatory, remedial or other
corrective actions.
WE MAY NOT HAVE ADEQUATE INSURANCE FOR POTENTIAL LIABILITIES.
Our operations are subject to many hazards. We face the following risks
under our insurance coverage:
- we may not be able to continue to obtain insurance on
commercially reasonable terms;
- we may be faced with types of liabilities that will not be
covered by our insurance, such as damages from environmental
contamination or terrorist attacks;
- the dollar amount of any liabilities may exceed our policy
limits; and
- we may incur losses from interruption of our business that
exceed our insurance coverage.
Even a partially uninsured claim, if successful and of significant size, could
have a material adverse effect on our results of operations or consolidated
financial position.
WE ARE SUBJECT TO LITIGATION RISKS THAT MAY NOT BE COVERED BY INSURANCE.
In the ordinary course of business, we become the subject of various
claims, lawsuits and administrative proceedings seeking damages or other
remedies concerning our commercial operations, products, employees and other
matters, including occasional claims by individuals alleging exposure to
hazardous materials as a result of our products or operations. Some of these
claims relate to the activities of businesses that we have sold, and some relate
to the activities of businesses that we have acquired, even though these
activities may have occurred prior to our acquisition of such businesses. We
maintain insurance to cover many of our potential losses, and we are subject to
various self-retentions and deductibles under our insurance. It is possible,
however, that a judgment could be rendered against us in cases in which we could
be uninsured and beyond the amounts that we currently have reserved or
anticipate incurring for such matters.
WE MIGHT BE UNABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN OUR INDUSTRY.
We sell our products and services in competitive markets. In some of
our business segments, we compete with the oil and gas industry's largest
oilfield services providers. These companies have greater financial resources
than we do. In addition, our business, particularly our tubular services
business, may face competition from business-to-business internet auction
activities. Our business will be adversely affected to the extent that these
providers are successful in reducing purchases of our products and services.
15
RISKS RELATED TO OUR OPERATIONS
WE ARE SUSCEPTIBLE TO SEASONAL EARNINGS VOLATILITY DUE TO ADVERSE WEATHER
CONDITIONS IN OUR REGIONS OF OPERATIONS.
Our operations are directly affected by seasonal differences in weather
in the areas in which we operate, most notably in Canada and the Gulf of Mexico.
Our Canadian work force accommodations, catering and logistics operations are
significantly focused on the winter months when the winter freeze in remote
regions permits exploration and production activity to occur. The spring thaw in
these frontier regions restricts operations in the spring months and, as a
result, adversely affects our operations and sales of products and services in
the second and third quarters. Our operations in the Gulf of Mexico are also
affected by weather patterns. Weather conditions in the Gulf Coast region
generally result in higher drilling activity in the spring, summer and fall
months with the lowest activity in the winter months. In addition, summer and
fall drilling activity can be restricted due to hurricanes and other storms
prevalent in the Gulf of Mexico and along the Gulf Coast. As a result, full year
results are not likely to be a direct multiple of any particular quarter or
combination of quarters.
WE MIGHT BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.
We rely on a variety of intellectual property rights that we use in our
offshore products and well site services segments, particularly our patents
relating to our FlexJoint(R) technology. We may not be able to successfully
preserve these intellectual property rights in the future and these rights could
be invalidated, circumvented or challenged. In addition, the laws of some
foreign countries in which our products and services may be sold do not protect
intellectual property rights to the same extent as the laws of the United
States. The failure of our company to protect our proprietary information and
any successful intellectual property challenges or infringement proceedings
against us could adversely affect our competitive position.
IF WE DO NOT DEVELOP NEW COMPETITIVE TECHNOLOGIES AND PRODUCTS, OUR BUSINESS AND
REVENUES MAY BE ADVERSELY AFFECTED.
The market for our offshore products is characterized by continual
technological developments to provide better performance in increasingly greater
depths and harsher conditions. If we are not able to design, develop and produce
commercially competitive products in a timely manner in response to changes in
technology, our business and revenues will be adversely affected.
LOSS OF KEY MEMBERS OF OUR MANAGEMENT COULD ADVERSELY AFFECT OUR BUSINESS.
We depend on the continued employment and performance of Douglas E.
Swanson and other key members of management. If any of our key managers resign
or become unable to continue in their present roles and are not adequately
replaced, our business operations could be materially adversely affected. We do
not maintain "key man" life insurance for any of our officers.
IF WE HAVE TO WRITE OFF A SIGNIFICANT AMOUNT OF GOODWILL, OUR EARNINGS WILL BE
NEGATIVELY AFFECTED.
As of December 31, 2003, goodwill represented approximately 31% of our
total assets. We have recorded goodwill because we paid more for some of our
businesses than the fair market value of the tangible and separately measurable
intangible net assets of those businesses. Current accounting standards, which
were effective January 1, 2002, require a periodic review of goodwill for
impairment in value and a non-cash charge against earnings with a corresponding
decrease in stockholders' equity if circumstances indicate that the carrying
amount will not be recoverable. See Note 5 to our Consolidated and Combined
Financial Statements included in this Annual Report on Form 10-K.
IF WE WERE TO LOSE A SIGNIFICANT SUPPLIER OF OUR TUBULAR GOODS, WE COULD BE
ADVERSELY AFFECTED.
During 2003, we purchased from a single supplier approximately 49% of
the tubular goods we distributed and from three suppliers approximately 75% of
such tubular goods. We do not have contracts with any of these suppliers. If we
were to lose any of these suppliers or if production at one or more of the
suppliers were interrupted, our tubular services segment and our overall
business, financial condition and results of operations could be
16
adversely affected. If the extent of the loss or interruption were sufficiently
large, the impact on us would be material.
RISKS RELATED TO OUR RELATIONSHIP WITH SCF
L.E. SIMMONS, THROUGH SCF, EFFECTIVELY CONTROLS THE OUTCOME OF STOCKHOLDER
VOTING AND MAY EXERCISE THIS VOTING POWER IN A MANNER ADVERSE TO OUR
STOCKHOLDERS.
SCF-III, L.P. and SCF-IV, L.P., private equity funds that focus on
investments in the energy industry (collectively, "SCF"), together hold
approximately 40% of the outstanding common stock of our company as of February
27, 2004. L.E. Simmons, the chairman of our board of directors, is the sole
owner of L.E. Simmons & Associates, Incorporated, the ultimate general partner
of SCF. Accordingly, Mr. Simmons, through his ownership of the ultimate general
partner of SCF, is in a position to effectively control the outcome of matters
requiring a stockholder vote, including the election of directors, adoption of
amendments to our certificate of incorporation or bylaws or approval of
transactions involving a change of control. The interests of Mr. Simmons may
differ from those of our stockholders, and SCF may vote its common stock in a
manner that may adversely affect our stockholders.
SCF'S OWNERSHIP INTEREST AND PROVISIONS CONTAINED IN OUR CERTIFICATE OF
INCORPORATION AND BYLAWS COULD DISCOURAGE A TAKEOVER ATTEMPT, WHICH MAY REDUCE
OR ELIMINATE THE LIKELIHOOD OF A CHANGE OF CONTROL TRANSACTION AND, THEREFORE,
THE ABILITY OF OUR STOCKHOLDERS TO SELL THEIR SHARES FOR A PREMIUM.
In addition to SCF's position of effective control, provisions
contained in our certificate of incorporation and bylaws, such as a classified
board, limitations on the removal of directors, on stockholder proposals at
meetings of stockholders and on stockholder action by written consent and the
inability of stockholders to call special meetings, could make it more difficult
for a third party to acquire control of our company. Our certificate of
incorporation also authorizes our board of directors to issue preferred stock
without stockholder approval. If our board of directors elects to issue
preferred stock, it could increase the difficulty for a third party to acquire
us, which may reduce or eliminate our stockholders' ability to sell their shares
of common stock at a premium.
TWO OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
DIRECTORS OR OFFICERS OF SCF. THE RESOLUTION OF THESE CONFLICTS OF INTEREST MAY
NOT BE IN OUR OR OUR STOCKHOLDERS' BEST INTERESTS.
Two of our directors, L.E. Simmons and Andrew L. Waite, are also
current directors or officers of L.E. Simmons & Associates, Incorporated, the
ultimate general partner of SCF. This may create conflicts of interest because
these directors have responsibilities to SCF and its owners. Their duties as
directors or officers of L.E. Simmons & Associates, Incorporated may conflict
with their duties as directors of our company regarding business dealings
between SCF and us and other matters. The resolution of these conflicts may not
always be in our or our stockholders' best interest.
WE HAVE RENOUNCED ANY INTEREST IN SPECIFIED BUSINESS OPPORTUNITIES, AND SCF AND
ITS DIRECTOR NOMINEES ON OUR BOARD OF DIRECTORS GENERALLY HAVE NO OBLIGATION TO
OFFER US THOSE OPPORTUNITIES.
SCF has investments in other oilfield service companies that compete
with us, and SCF and its affiliates, other than our company, may invest in other
such companies in the future. We refer to SCF, its other affiliates and its
portfolio companies as the SCF group. Our certificate of incorporation provides
that, so long as SCF and its affiliates continue to own at least 20% of our
common stock, we renounce any interest in specified business opportunities. Our
certificate of incorporation also provides that if an opportunity in the
oilfield services industry is presented to a person who is a member of the SCF
group, including any of those individuals who also serves as SCF's director
nominee of our Company:
- no member of the SCF group or any of those individuals has any
obligation to communicate or offer the opportunity to us; and
- such entity or individual may pursue the opportunity as that
entity or individual sees fit, unless:
17
- it was presented to an SCF director nominee solely in that
person's capacity as a director of our company and no other
member of the SCF group independently received notice of or
otherwise identified such opportunity; or
- the opportunity was identified solely through the disclosure
of information by or on behalf of our Company.
These provisions of our certificate of incorporation may be amended only by an
affirmative vote of holders of at least 80% of our outstanding common stock. As
a result of these charter provisions, our future competitive position and growth
potential could be adversely affected.
THE AVAILABILITY OF SHARES OF OUR COMMON STOCK FOR FUTURE SALE COULD DEPRESS OUR
STOCK PRICE
Sales by SCF and other stockholders of a substantial number of shares of our
common stock in the public markets, or the perception that such sales might
occur, could have a material adverse effect on the price of our common stock or
could impair our ability to obtain capital through an offering of equity
securities. SCF has sold shares recently and may continue to sell shares in the
future.
ITEM 2. PROPERTIES
The following table presents information about our principal properties and
facilities. Except as indicated below, we own all of these properties or
facilities.
APPROXIMATE
SQUARE
LOCATION FOOTAGE/ACREAGE DESCRIPTION
- ---------------------------------- --------------- -----------------------------------------------------------
United States
Houston, Texas (lease).......... 3,095 Principal executive offices
Arlington, Texas................ 11,264 Offshore products business office
Arlington, Texas................ 55,853 Offshore products manufacturing facility
Arlington, Texas (lease)........ 63,272 Offshore products manufacturing facility
Arlington, Texas................ 44,780 Elastomer technology center for offshore products
Arlington, Texas................ 60,000 Molding and aerospace facilities for offshore products
Houston, Texas (lease).......... 25,638 Offshore products business office
Houston, Texas.................. 130,000 Offshore products manufacturing facility
Houston, Texas (lease).......... 38,260 Offshore products warehouse
Lampasas, Texas................. 47,500 Molding facility for offshore products
Tulsa, Oklahoma................. 65,000 Molding facility for offshore products
Houma, Louisiana................ 153,000 Offshore products manufacturing facility and yard
Houma, Louisiana (lease) 108,714 Offshore products manufacturing facility and yard
Crosby, Texas................... 109 acres Tubular yard
Belle Chasse, Louisiana......... 11 acres Accommodations manufacturing facility and yard
for well site services
Lafayette, Louisiana (lease).... 9 acres Accommodations equipment repair yard for well site services
Houma, Louisiana................ 24,000 Well control yard and office for well site services
Houma, Louisiana................ 8,400 Well control office and training for well site services
Broussard, Louisiana............ 19,000 Rental tool warehouse for well site services
Odessa, Texas................... 7,500 Office and warehouse in support of drilling
operations for well site services
Alvin, Texas.................... 20,450 Rental tool warehouse for well site services
International
18
APPROXIMATE
SQUARE
LOCATION FOOTAGE/ACREAGE DESCRIPTION
- ---------------------------------- --------------- -----------------------------------------------------------
Aberdeen, Scotland (lease)...... 68,400 Offshore products manufacturing facility
Bathgate, Scotland.............. 28,000 Offshore products manufacturing facility
Barrow, England................. 14,551 Offshore products manufacturing facility
Singapore, Asia (lease)......... 23,600 Offshore products manufacturing facility
Macae, Brazil (lease)........... 45,702 Offshore products manufacturing facility
Nisku, Alberta.................. 8.58 acres Accommodations manufacturing facility for well site services
Edmonton, Alberta............... 31,000 Accommodations office and warehouse for well site services
Spruce Grove, Alberta........... 15,000 Accommodations facility and equipment yard for well site
services
Grande Prairie, Alberta......... 14.69 acres Accommodations facility and equipment yard for well site
services
Peace River, Alberta (lease).... 80 acres Accommodations equipment yard for well site services
We have five tubular sales offices and a total of 21 rental tool supply
and distribution points in Texas, Louisiana, New Mexico, Mississippi, Oklahoma
and Wyoming. Most of these office locations provide sales, technical support and
personnel services to our customers. We also have various offices supporting our
business segments which are both owned and leased.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various pending or threatened claims, lawsuits and
administrative proceedings seeking damages or other remedies concerning our
commercial operations, products, employees and other matters, including
occasional claims by individuals alleging exposure to hazardous materials as a
result of our products or operations. Some of these claims relate to matters
occurring prior to our acquisition of businesses, and some relate to businesses
we have sold. In certain cases, we are entitled to indemnification from the
sellers of businesses and in other cases, we have indemnified the buyers of
businesses from us. Although we can give no assurance about the outcome of
pending legal and administrative proceedings and the effect such outcomes may
have on us, we believe that any ultimate liability resulting from the outcome of
such proceedings, to the extent not otherwise provided for or covered by
insurance, will not have a material adverse effect on our consolidated financial
position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2003.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK INFORMATION
Our authorized common stock consists of 200,000,000 shares of common
stock. There were 49,187,129 shares of common stock outstanding as of February
27, 2004, including 339,965 shares of common stock issuable upon exercise of
exchangeable shares of one of our Canadian subsidiaries. These exchangeable
shares, which were issued to certain former shareholders of PTI in the
Combination, are intended to have characteristics essentially equivalent to our
common stock prior to the exchange. For purposes of this Annual Report on Form
10-K, we have treated the shares of common stock issuable upon exchange of the
exchangeable shares as outstanding. The approximate number of record holders of
our common stock as of February 27, 2004 was 99. Our common stock is traded on
the New York Stock Exchange under the ticker symbol OIS. There was no public
market for our common stock before February 9, 2001. The closing price of our
common stock on February 27, 2004 was $13.62 per share.
The following table sets forth the range of high and low sale prices of
the Company's common stock.
SALES PRICE
------------------
HIGH LOW
-------- --------
2001:
First Quarter (from February 9, 2001 to March 31, 2001).......... $ 12.50 $ 9.00
Second Quarter..................................................... 15.00 8.95
Third Quarter...................................................... 10.40 5.80
Fourth Quarter..................................................... 9.95 5.99
2002:
First Quarter...................................................... 11.10 6.90
Second Quarter..................................................... 11.96 9.80
Third Quarter...................................................... 11.89 8.85
Fourth Quarter..................................................... 13.50 9.96
2003:
First Quarter...................................................... 13.16 10.43
Second Quarter..................................................... 13.85 9.95
Third Quarter...................................................... 12.79 10.73
Fourth Quarter..................................................... 14.84 11.85
2004:
First Quarter (through February 27, 2004).......................... 16.35 13.03
We have not declared or paid any cash dividends on our common stock
since our initial public offering and do not intend to declare or pay any cash
dividends on our common stock in the foreseeable future. Instead, we currently
intend to retain our earnings, if any, to finance our business and to use for
general corporate purposes. Furthermore, our existing credit facilities restrict
the payment of dividends. Any future determination as to the declaration and
payment of dividends will be at the discretion of our Board of Directors and
will depend on then existing conditions, including our financial condition,
results of operations, contractual restrictions, capital requirements, business
prospects and other factors that our Board of Directors considers relevant.
EQUITY COMPENSATION PLANS
The information relating to the Company's equity compensation plans
required by Item 5 is incorporated by reference to such information as set forth
in the Company's Definitive Proxy Statement for the 2004 Annual Meeting of
Stockholders and from Item 12. "Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters" contained herein.
20
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data on the following pages include selected
historical and unaudited pro forma financial information of our company as of
and for the years ended December 31, 2003, 2002, 2001, 2000, and 1999. The
following data should be read in conjunction with Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Company's financial statements, and related notes included in Item 8, Financial
Statements and Supplementary Data of this Annual Report on Form 10-K.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
2001
2003 2002 2001 2000 1999 ------------ 2000 1999
--------- -------- --------- --------- -------- CONSOLIDATED --------- ---------
CONSOLIDATED PRO FORMA (1) AND COMBINED COMBINED
---------------------- --------------------------------- ------------ ---------------------
Statements of Operations
Data:
Revenue.................. $ 723,681 $616,848 $ 719,722 $ 595,647 $487,380 $ 671,205 $ 304,549 $ 267,110
Expenses
Product costs, service
and other costs ....... 573,114 487,053 582,934 482,662 405,652 537,792 217,601 199,865
Selling, general and
administrative......... 57,710 51,791 51,157 46,146 43,815 50,024 37,816 33,624
Depreciation and
amortization(2)........ 27,905 23,312 28,693 26,729 26,306 28,039 21,314 20,275
Other expense
(income)............... (215) 132 (347) (69) 2,448 (346) (69) 2,448
---------- -------- --------- --------- -------- ------------ --------- ---------
Operating income......... 65,167 54,560 57,285 40,179 9,159 55,696 27,887 10,898
--------- -------- --------- --------- -------- ------------ --------- ---------
Net interest expense..... (7,541) (4,394) (9,178) (9,260) (10,943) (9,458) (11,504) (12,496)
Other income (expense) 1,028 867 87 89 (534) 88 89 (1,297)
--------- -------- --------- --------- -------- ------------ --------- ---------
Income (loss) before
income taxes........... 58,654 51,033 48,194 31,008 (2,318) 46,326 16,472 (2,895)
Income tax (expense)
benefit(3)............. (14,222) (11,357) (2,090) (4,542) 3,979 (2,054) (10,776) (4,654)
---------- -------- --------- --------- -------- ------------ --------- ---------
Income (loss) from
continuing operations
before minority
interest............... 44,432 39,676 46,104 26,466 1,661 44,272 5,696 (7,549)
Minority interest........ -- -- 4 (30) (31) (1,596) (4,248) 610
--------- -------- --------- --------- -------- ------------ --------- ---------
Income (loss) from
continuing operations.. $ 44,432 $ 39,676 $ 46,108 $ 26,436 $ 1,630 $ 42,676 $ 1,448 $ (6,939)
========= ======== ========= ========= ======== ============ ========= =========
Income (loss) from
continuing operations
before extraordinary
item per common share
Basic.................. $ 0.92 $ 0.82 $ 0.96 $ 0.55 $ 0.03 $ 0.94 $ 0.05 $ (0.30)
========= ======== ========= ========= ======== ============ ========= =========
Diluted................ $ 0.90 $ 0.81 $ 0.95 $ 0.55 $ 0.03 $ 0.93 $ 0.04 $ (0.30)
========= ======== ========= ========= ======== ============ ========= =========
Average shares outstanding
Basic............... 48,529 48,286 48,198 48,013 48,156 45,263 24,482 23,053
========= ======== ========= ========= ======== ============ ========= =========
Diluted................ 49,215 48,890 48,619 48,358 48,529 46,045 26,471 23,069
========= ======== ========= ========= ======== ============ ========= =========
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2001
2003 2002 2001 2000 1999 ------------ 2000 1999
--------- -------- --------- ------- ------- CONSOLIDATED -------- ----------
CONSOLIDATED PRO FORMA (1) AND COMBINED COMBINED
---------------------- --------------------------------- ------------ --------------------
Other Data:
EBITDA as defined(4).... $ 94,100 $ 78,739 $ 86,069 $66,967 $34,900 $ 82,227 $ 45,042 $ 30,486
Capital expenditures.... 41,261 26,086 29,718 29,671 21,383 11,297
Net cash provided by
operating activities.. 58,703 45,375 60,013 54,872 33,937 5,170
Net cash provided by
(used in) investing
activities............ (54,902) (89,428) (27,648) (22,667) (22,377) 112,227
Net cash provided by
(used in) financing
activities............ 4,319 50,381 (34,005) (32,415) 304 (116,122)
21
AT DECEMBER 31,
------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
CONSOLIDATED COMBINED
------------------------------ --------------------
Balance Sheet Data:
Cash and cash equivalents..................... $ 19,318 $ 11,118 $ 4,982 $ 4,821 $ 3,216
Net property and equipment.................... 194,136 167,146 150,090 143,468 142,242
Total assets.................................. 717,186 644,216 529,883 353,518 355,544
Long-term debt and capital leases,
excluding current portion................... 136,246 133,292 73,939 102,614 120,290
Redeemable preferred stock of
subsidiaries................................ -- -- -- 25,293 25,064
Total stockholders' equity.................... 455,111 387,579 344,197 56,549 58,462
- ----------
(1) The unaudited pro forma statements of operations and other financial
data for 1999, 2000 and 2001 give effect to:
- our initial public offering in February 2001 of 10,000,000
shares at $9.00 per share and the application of the net
proceeds to us;
- our issuance of 4,275,555 shares of common stock to SCF in
exchange for approximately $36.0 million of our indebtedness
held by SCF (SCF Exchange) effected in connection with our
initial public offering;
- the three-for-one reverse stock split of Oil States common
stock effected in connection with our initial public offering;
- the combination of Oil States, HWC and PTI immediately prior
to our initial public offering, excluding the minority
interest of each company, as entities under common control
from the dates such common control was established using
reorganization accounting, which yields results similar to
pooling of interest accounting;
- the acquisition of the minority interests of Oil States, HWC
and PTI in the Combination using the purchase method of
accounting as if the acquisition occurred on January 1, 1999,
2000 and 2001, respectively; and
- the acquisition of Sooner in the Combination using the
purchase method of accounting as if the acquisition occurred
on January 1, 1999, 2000 and 2001, respectively.
(2) In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," which we adopted effective January 1, 2002. Under
SFAS 142, goodwill and intangible assets deemed to have indefinite
lives are no longer amortized but are subject to annual impairment
tests. Accordingly, beginning in 2002, we no longer amortize goodwill.
See "Risks Related to Our Operations -- If we have to write off a
significant amount of goodwill, our earnings will be negatively
affected" in "Item 1. Business" above.
(3) Our effective tax rate is affected by our net operating loss carry
forwards. Our 2003 effective tax rate for financial reporting purposes
was approximately 24%. Although there are a number of factors that
could affect it, we currently estimate that our 2004 effective tax rate
for financial reporting purposes will be approximately 33%. See "Item
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Tax Matters" in this Annual Report on Form
10-K.
(4) The term EBITDA as defined consists of net income plus interest, taxes,
depreciation and amortization. EBITDA as defined is not a measure of
financial performance under generally accepted accounting principles.
You should not consider it in isolation from or as a substitute for net
income or cash flow measures prepared in accordance with generally
accepted accounting principles or as a measure of profitability or
liquidity. Additionally, EBITDA as defined may not be comparable to
other similarly titled measures of other companies. The Company has
included EBITDA as defined as a supplemental disclosure because its
management believes that EBITDA as defined provides useful information
regarding our ability to service debt and to fund capital expenditures
and provides investors a helpful measure for comparing its operating
performance with the
22
performance of other companies that have different financing and
capital structures or tax rates. The Company uses EBITDA as defined to
compare and to monitor the performance of its business segments to
other comparable public companies and as a benchmark for the award of
incentive compensation under our annual incentive compensation plan.
We believe that net income is the financial measure calculated and
presented in accordance with generally accepted accounting principles
that is most directly comparable to EBITDA as defined. The following
table reconciles EBITDA as defined with our net income, as derived from
our financial information:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
2001
2003 2002 2001 2000 1999 ------------ 2000 1999
-------- -------- ------- -------- -------- CONSOLIDATED -------- --------
CONSOLIDATED PRO FORMA (1) AND COMBINED COMBINED
------------------- ---------------------------- ------------ -------------------
Net income (loss) from
continuing operations before
extraordinary item............. $ 44,432 $ 39,676 $46,108 $ 26,436 $ 1,630 $ 42,676 $ 1,448 $ (6,939)
Depreciation and
amortization................... 27,905 23,312 28,693 26,729 26,306 28,039 21,314 20,275
Interest expense, net............ 7,541 4,394 9,178 9,260 10,943 9,458 11,504 12,496
Income taxes..................... 14,222 11,357 2,090 4,542 (3,979) 2,054 10,776 4,654
-------- -------- ------- -------- -------- ------------ -------- --------
EBITDA as defined................ $ 94,100 $ 78,739 $86,069 $ 66,967 $ 34,900 $ 82,227 $ 45,042 $ 30,486
======== ======== ======= ======== ======== ============ ======== ========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis together with
"Selected Financial Data" and our financial statements and the notes to those
statements included elsewhere in this Annual Report on Form 10-K.
This discussion contains forward-looking statements based on our
current expectations, assumptions, estimates and projections about us and our
industry. These forward-looking statements involve risks and uncertainties. Our
actual results could differ materially from those indicated in these
forward-looking statements as a result of certain factors, as more fully
described under "Cautionary Statement Regarding Forward-Looking Statements" in
this Form 10-K. Except to the extent required by law, we undertake no obligation
to update publicly any forward-looking statements, even if new information
becomes available or other events occur in the future.
CRITICAL ACCOUNTING POLICIES
In our selection of critical accounting policies, our objective is to
properly reflect our financial position and results of operations in each
reporting period in a manner that will be understood by those who utilize our
financial statements. Often we must use our judgment about uncertainties.
There are several critical accounting policies that we have put into
practice that have an important effect on our reported financial results.
We have contingent liabilities and future claims for which we have made
estimates of the amount of the eventual cost to liquidate these liabilities or
claims. These liabilities and claims sometimes involve threatened or actual
litigation where damages have been quantified and we have made an assessment of
our exposure and recorded a provision in our accounts to cover an expected loss.
Other claims or liabilities have been estimated based on our experience in these
matters and, when appropriate, the advice of outside counsel or other outside
experts. Upon the ultimate resolution of these uncertainties, our future
reported financial results will be impacted by the difference between our
estimates and the actual amounts paid to settle a liability. Examples of areas
where we have made important estimates of future liabilities include litigation,
taxes, postretirement benefits, warranty claims and contract claims.
The determination of impairment on long-lived assets, including
goodwill, is conducted when indicators of impairment are present. If such
indicators were present, the determination of the amount of impairment would be
based on our judgments as to the future operating cash flows to be generated
from these assets throughout their estimated useful lives. Our industry is
highly cyclical and our estimates of the period over which future cash flows
23
will be generated, as well as the predictability of these cash flows, can have a
significant impact on the carrying value of these assets and, in periods of
prolonged down cycles, may result in impairment charges.
We recognize revenue and profit as work progresses on long-term, fixed
price contracts using the percentage-of-completion method, which relies on
estimates of total expected contract revenue and costs. We follow this method
since reasonably dependable estimates of the revenue and costs applicable to
various stages of a contract can be made. Recognized revenues and profit are
subject to revisions as the contract progresses to completion. Revisions in
profit estimates are charged to income or expense in the period in which the
facts and circumstances that give rise to the revision become known. Provisions
for estimated losses on uncompleted contracts are made in the period in which
losses are determined.
Our valuation allowances, especially related to potential bad debts in
accounts receivable and to obsolescence or market value declines of inventory,
involve reviews of underlying details of these assets, known trends in the
marketplace and the application of historical factors that provide us with a
basis for recording these allowances. If market conditions are less favorable
than those projected by management, or if our historical experience is
materially different from future experience, additional allowances may be
required. We record a valuation allowance to reduce our deferred tax assets to
the amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of our net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made. Likewise,
should we determine that we would not likely be able to realize all or part of
our net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to expense in the period such determination was made.
The selection of the useful lives of many of our assets requires the
judgments of our operating personnel as to the length of these useful lives.
Should our estimates be too long or short, we might eventually report a
disproportionate number of losses or gains upon disposition or retirement of our
long-lived assets. We believe our estimates of useful lives are appropriate.
OVERVIEW
We provide a broad range of products and services to the oil and gas
industry through our offshore products, well site services and tubular services
business 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 spend capital on the exploration for
and development of oil and gas reserves. Demand for our products and services by
our customers is highly sensitive to current and expected oil and natural gas
prices. Our offshore products segment provides highly engineered and technically
designed products for offshore oil and gas development and production systems
and facilities. Sales of our offshore products and services depend upon the
development of offshore production systems, repairs and upgrades of existing
drilling rigs and construction of new drilling rigs. In this segment, we are
particularly influenced by deepwater drilling and production activities. In our
well site services business segment, we provide hydraulic well control services,
pressure control equipment and rental tools, drilling rigs and work force
accommodations, catering and logistics services. Demand for our well site
services depends upon the level of worldwide drilling and workover activity.
Through our tubular services segment, we distribute a broad range of casing and
tubing. Sales of tubular products and services depend upon the overall level of
drilling activity and the types of wells being drilled.
Energy and oilfield service activities are highly cyclical, depending
upon crude oil and natural gas pricing, among other things. Beginning in late
1996 and continuing through the early part of 1998, stabilization of oil and gas
prices led to increases in drilling activity as well as the refurbishment and
new construction of drilling rigs. In the second half of 1998, crude oil prices
declined substantially and reached levels below $11 per barrel in early 1999.
With this decline in pricing, many of our customers substantially reduced their
capital spending and related activities. This industry downturn continued
through most of 1999. The price of crude oil and natural gas increased over 1999
levels in 2000 and 2001 due to improved demand for oil, supply reductions by
OPEC member countries and reductions in natural gas storage levels. Crude oil
and natural gas prices decreased significantly from levels reached in early 2001
by the end of 2001. The economic slowdown in the United States and the rest of
the world, moderate weather and the resultant increased inventories of oil and
gas, especially in the United States, contributed
24
to those price declines. With those price reductions, our customers responded
with decreased drilling activity and spending on exploration and development. In
early 2002, oil and gas prices began to increase and they are currently at
relatively high historic levels.
We have a diversified product and service offering which has exposure
throughout the oil and gas cycle. Demand for our tubular services and well site
services is highly correlated to movements in the rig count in the United
States. The table below sets forth a summary of North American rig activity, as
measured by Baker Hughes Incorporated, as of and for the periods indicated.
AVERAGE RIG COUNT FOR THE YEAR ENDED
RIG COUNT AS OF DECEMBER 31,
JANUARY 31, -----------------------------------------
2004 2003 2002 2001 2000 1999
--------------- ---- ----- ----- ----- ----
US...................... 1,101 1,032 831 1,156 918 624
Canada.................. 554(1) 372 266 341 345 245
----- ----- ----- ----- ----- ----
North America......... 1,655 1,404 1,097 1,497 1,263 869
===== ===== ===== ===== ===== ====
- ----------
(1) Canadian rig counts typically increase during the peak winter drilling
season.
The rig count in the United States and Canada, as measured by Baker
Hughes Incorporated, fell from 1,481 rigs in February 1998 to 559 rigs in April
1999. The downturn in activity in 1998 and 1999 had a material adverse effect on
demand for our products and services, and the results of our operations
decreased significantly. Our business benefited from the improvement in crude
oil and natural gas pricing in 2000 and early 2001 and the resulting increases
in the rig count in 2000 and the first half of 2001. During 2002, the U.S. rig
count decreased in the first half of the year. The U.S. rig count reached its
lowest level since 1999 when it totaled 738 rigs on April 15, 2002. Since then,
the U.S. rig count has risen and totaled 1,404 as of December 31, 2003.
We believe that our offshore products segment lagged the general market
recovery in 2000 and 2001 because its sales primarily relate to offshore
construction and production facility development which generally occur later in
the exploration and development cycle. Worldwide offshore construction and
development activity improved in 2002, and backlog in our offshore products
segment increased to $100.1 million at December 31, 2002, compared to $72.4
million at December 31, 2001. We reported record results for our offshore
product segment in 2002 and 2003 as a result of this increased backlog. Our
backlog has decreased to $62.6 million as of December 31, 2003 reflecting
decreased activity in support of offshore construction and production facility
development. As a result, we expect 2004 activity in the offshore products
segment to result in reduced revenues compared to 2003 with smaller projects and
lower margin work.
Throughout 2003, North American oilfield activity levels, as measured
by rig counts, increased as exploration and production companies spent
additional cash flows resulting from higher oil and gas prices. However, the rig
count increase resulted primarily from shallow land drilling activity while the
U.S. offshore Gulf of Mexico rig count remained relatively flat in 2003. Our
tubular services and well site services businesses results of operations are
impacted by activity levels in the U.S. Gulf of Mexico. The lack of increased
drilling in the U.S. Gulf of Mexico and other more service-oriented areas,
versus the shallow land wells being drilled, has resulted in a lower than
anticipated increase in oil service revenue and profitability in 2003. We expect
strong Canadian and U.S. land drilling activity to continue in 2004. In
addition, contributions from late 2003 and early 2004 acquisitions should
favorably impact results of operations in our well site services segment in
2004.
Management believes that fundamental oil and gas supply and demand
factors will lead to increased drilling activity in North America over time. The
combination of declining U.S. natural gas production, relatively high cash flow
for exploration and production companies, solid demand growth for both oil and
natural gas and expected continued OPEC discipline should lead to continued rise
in oilfield activity levels. However, there can be no assurance that these
expectations will be realized or that increased activity will be in regions that
will benefit our business segments. We view the recent increases in oil and
natural gas prices and reduction in related supplies as important steps toward
increased demand for oilfield service activity.
25
THE COMBINATION
Prior to our initial public offering in February 2001, SCF-III, L.P.
owned majority interests in Oil States, HWC and PTI, and SCF-IV, L.P. owned a
majority interest in Sooner. L. E. Simmons & Associates, Incorporated is the
ultimate general partner of SCF-III, L.P. and SCF-IV, L.P. L.E. Simmons, the
chairman of our board of directors, is the sole shareholder of L.E. Simmons &
Associates, Incorporated. Immediately prior to the closing of our initial public
offering, the Combination closed and HWC, PTI and Sooner merged with wholly
owned subsidiaries of Oil States. As a result, HWC, Sooner and PTI became our
wholly owned subsidiaries.
The financial results of Oil States, HWC and PTI have been combined
from the beginning of calendar 2001 until February 14, 2001 using reorganization
accounting, which yields results similar to the pooling of interests method. The
combined results of Oil States, HWC and PTI form the basis for the discussion of
our results of operations for those periods. The operations of Oil States, HWC
and PTI represent two of our business segments, offshore products and well site
services. Concurrently with the closing of our initial public offering in
February 2001, Oil States acquired Sooner, and the acquisition was accounted for
using the purchase method of accounting. The pro forma financial statement for
the year ended December 31, 2001 reflects the acquisition of Sooner effective as
of January 1, 2001. Following the acquisition of Sooner, we reported under three
business segments.
CONSOLIDATED AND PRO FORMA RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
------- ------- -------
CONSOLIDATED PROFORMA
-------------------- --------
Revenues
Well site services......................... $ 256.1 $ 209.8 $ 239.8
Offshore products.......................... 231.9 190.6 129.3
Tubular services........................... 235.7 216.4 350.6
------- ------- --------
Total..................................... $ 723.7 $ 616.8 $ 719.7
======= ======= ========
Gross Margin
Well site services......................... $ 80.9 $ 63.1 $ 86.2
Offshore products.......................... 56.0 52.9 29.5
Tubular services........................... 13.7 13.8 22.1
Corporate/other............................ -- -- (1.0)
------- ------- --------
Total..................................... $ 150.6 $ 129.8 $ 136.8
======= ======= ========
Gross margin as a percent of revenues
Well site services......................... 31.6% 30.1% 35.9%
Offshore products.......................... 24.1% 27.8% 22.8%
Tubular services........................... 5.8% 6.4% 6.3%
Total..................................... 20.8% 21.0% 19.0%
Operating income (loss)
Well site services......................... $ 37.2 $ 27.4 $ 47.4
Offshore products.......................... 27.9 27.3 6.6
Tubular services........................... 6.0 5.4 12.5
Corporate/other............................ (5.9) (5.5) (9.2)
------- ------- --------
Total..................................... $ 65.2 $ 54.6 $ 57.3
======= ======= ========
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Revenues. Revenues increased $106.9 million, or 17.3%, to $723.7
million during the year ended December 31, 2003 compared to revenues of $616.8
million during the year ended December 31, 2002. Well site services revenues
increased $46.3 million, or 22.1%, and offshore products revenues increased
$41.3 million, or 21.7%, during the same period. Well site services revenues
increased compared to the prior year primarily due to increased drilling
activity in Canada and the United States, favorable Canadian dollar exchange
rates, which strengthened compared to the U.S. dollar in 2003 compared to 2002
resulting in an increase of approximately $14.0 million, and the impact of
acquisitions completed in the third quarter of 2002. Canadian expenses were also
impacted by exchange rate movements in 2003 compared to 2002 and offset some of
these revenue gains. Offshore products revenues increased primarily as a result
of greater activity supporting offshore production facility construction,
primarily in the U.S. Gulf of Mexico, and the impact of acquisitions completed
in the third quarter of 2002. Tubular services revenues increased $19.3 million,
or 8.9%, in the year ended December 31, 2003 compared to the prior year. This
revenue increase resulted from greater quantities shipped caused by higher rig
counts partially offset by lower international sales and reduced revenue per ton
shipped caused by product mix oriented to shallow land drilling.
26
Gross Margin. Our gross margins, which we calculate before a deduction
for depreciation expense, increased $20.8 million, or 16.0%, from $129.8 million
in the year ended December 31, 2002 to $150.6 million in the year ended December
31, 2003.
Well site services gross margins increased $17.8 million, or 28.2%, to
$80.9 million in the year ended December 31, 2003. Within our well site services
segment, shallow drilling and specialty rental tool businesses' gross margins
increased $4.0 million, or 61.9%, and $3.0 million, or 16.2%, respectively,
during the year ended December 31, 2003 compared to the year ended December 31,
2002 primarily as a result of rigs added to the fleet and the rental tool
acquisitions completed. Also in the well site services segment, our work force
accommodations, catering and logistics services and modular building
construction services gross margins increased by $11.1 million, or 37.5%,