Management issues: Oil States pursues bullish technology push
Interview with CINDY TAYLOR, President and CEO, Oil States
In recent years, Oil States Industries has carved out a niche for itself as a determined innovator of new upstream technology. And the company’s track record over the last four years in winning seven OTC Spotlight on New Technology awards is certainly a testimonial to such innovation. Recently, World Oil Editor-in-Chief Kurt Abraham visited with Oil States President and CEO Cindy Taylor to get her take on the company’s success and where its technical path and market share growth are headed.
World Oil (WO): By all appearances, it seems to have been a really good 12 months for Oil States.
Cindy Taylor (CT): Well, it has been good. If I look at the last three years coming out of Covid—and I think people tend to call that period a bump in the road—it was anything but that. But if I go back and ignore 2020 for obvious reasons, and you look at ‘21, ‘22, ‘23, our revenue growth and our EBITDA growth has been very good. I will say that from a public company stock perspective, small cap stocks are suffering, not only in our industry but broadly. And a clear message to my team is I’ve got to have revenue growth and margin expansion, or people just won't care about our stock. So, that is a huge focus now, allocating capital is part of my governance role, so to speak.
I do want the R&D around the new technologies that we're here talking about, but we can't do everything. I'd spend every penny of free cash flow I have, if I did everything. And sometimes, I want to. So, there's always opportunities. I do know that when we’ve brought these things to the market, we've been very selective, both in terms of where we think the differentiators lie, as well as where the market opportunities lie. And, that’s specific to an earlier comment that we need to gain domestic market share in perforating, but also get more international growth. We've been P&A experts internationally, but we are also completion experts, broadly speaking. So, those are the basic initiatives around the product line. The industry is looking for newer and better technology, not just a replication of existing technology, Fig. 1. The emphasis is really around conventional oil and gas because of the belief that we've got to be able to produce it efficiently, effectively and at low cost, to maintain the price to the consumer.
WO: Meanwhile, you have had two more OTC Spotlight on New Technology winners this year.
CT: I believe we've had seven in the last four years.
WO: So, you’re on a real streak. To what do you attribute this success?
CT: Empowering people and messaging. To some degree, I call it breaking down the silos of our company, and just making everybody recognize that what we have to do is focus on the most beneficial technology. We're in a mature industry, whether we like to admit it or not. If we're going to be relevant for the long term, we’ve got to bring in new technology to the market, including in the existing areas that we work in, with our active seat gate valve being a prime example. And it's all about efficiency, reliability and safety to the operator, which are keen focuses for everybody, because, to some degree, that's your license to operate. You've got to have those.
But there isn't a single person, I don't think, globally, that does not understand that technology advancement is key to our success, and that the management team supports it, because there is a cost, right? There's a cost with all of this technology from an R&D perspective, until you get it commercialized. We have to be very clear, even about patent applications, a patent process and patent defense. At the end of the day, it's millions of dollars for us. And so, we have to be competent, and you've got to sell me your business case, to proceed with some of these projects, because we want to do it, but you can't be all things to all people.
WO: You're right about the patent action, because recently ran an exclusive from a company that will remain unnamed, which won against a smaller company. Apparently, it was quite contentious.
CT: They oftentimes are. But you can't go through the R&D process, you can't get the patents, and then not defend them. I go back to a little history with some of the acquisitions. Sometimes, I have inherited a certain amount of litigation, where you didn't develop the technology, and you don't fully know it. So, do I kill the lawsuit and offend the new guys I just brought onto my team, or do I proceed? There has to be a cost benefit, even around defending some of the litigation. But I was listening to the news, and the Federal Trade Commission is all over every industry for anti-competitive reasons. Yet, they actually don't care if anybody steals your IP.
WO: Would it be accurate to say that the focus of Oil States at this point is certainly on the offshore sector and on international activity?
CT: Yes, but I'll add in selective technology in shale plays of the U.S. That is still a quarter of our business, Fig. 2. However, there are elements of U.S. land work that are highly fragmented, highly competitive, and with few barriers to entry. When I look at that subset, I'm not going to try to allocate a lot of capital to grow there. If it's differentiated technology, the geo technology, downhole consumables space, and active seat gate valves around my well control equipment, those are still good areas to invest in.
If you just look at the capital allocation of our customer base, a lot of it is offshore and international. From my perspective, I've got great history there, but there are a lot of barriers to entry. It's a whole lot harder to have facilities in the UK, Singapore and Brazil, as well as Vietnam and India, and manage all of that, than it is in the U.S. Just give me a little money and a truck in the Permian, and I'm going to start up a business next week. That's how I think of it. But if I have differentiated technology, particularly one I can patent and defend—Active Seat gate valves come to mind immediately, as do extended-reach tools through my Tempress technology—then, yes, we're going to try and expand it.
I'll take that a step further. Those are obvious candidates for international expansion, as well, Fig. 3.
WO: What is your sense of the upstream market at this point? It seems like we've ground to a halt in the U.S.
CT: We have. We're producing 13.1 MMbopd, which is near-record levels of shale production in an environment where OPEC or OPEC-plus has millions of barrels held off the market. So, what does that mean? No one needs to be terribly aggressive in terms of increasing production right now. I'm speaking of crude oil. For natural gas, the prices are non-economic at this point in time. So, we're faced with a situation of what I'll call a flat line or a pause following a 20% decline in the rig count and completion count last year, because we're producing 13.1 MMbpd.
Now, I struggle, because I don't do the detailed analysis. So, I have to rely on research analysts to do it. And they'll tell you that in six of the seven (U.S.) shale basins, the net productivity is declining. Okay. So, why am I producing 13.1 MMbpd, up 1.1 MMbpd, year over year? The answer is the technology has allowed us to expand from two-mile laterals to now three-mile laterals. And, whereas, we only did that pretty much in the gas basins in the Northeast, now that is translating into shale basins and the Permian in North Dakota, the Mid-Con, and other operators, including private operators, are gaining the technology from service companies like us.
I believe the real fuel for all the operator consolidation is exactly that. It's getting the acreage in such a position that you can go the three-mile laterals. It's not so much about, oh, Pioneer's a great company, and they are. And, therefore, I want to acquire their expertise. They also have the adjacent acreage in Denver, Crown Quest. All of those were specifically targeted. Oxy's out early about selling some of their acreage, because it doesn't really fit that jigsaw puzzle to allow the operating efficiencies. From my perspective, though, if we're drilling three-mile laterals now, you're drilling up a lot of acreage. So, there will be a second wind. There will be growth in the shale basins, as long as the acreage position persists. You are already moving from tier one to tier two. We just don't see it because of the extended activity that's occurring.
WO: But because of all this efficiency and all these results, it might be easy for the average, lesser-informed person in the public to say, "hey, you guys are too efficient. Now you've actually got yourself a problem by being too efficient."
CT: I don't know a consumer out there that doesn't want us to be efficient and keep their costs low at the end of the day. And we can say that, though that's a kind of "woe is me" comment that doesn't work, so let's move on. But what we need is obviously higher activity levels and market share gains that we intend to get through technology. It's not enough just to ride this 20% down, maybe 10% up. Let's gain market share with newer technologies. Now, I will say, I need natural gas prices to improve, because nothing’s going on. I've got pockets of work, particularly in the Northeast of this country and East Texas, that are very inactive right now, because no operator is going to drill, unless you're hedged. You might do a limited amount of work, but you're producing natural gas at a loss. Or, you may drill it and wait to complete it.
There's a whole combination of that, predominantly because Freeport LNG's been off-line until this past spring. It started with one train, then it moved to three. But now, after Hurricane Beryl, they're trying to get all three trains back up after taking them down before the storm. So, you've got this bottleneck. We've always had natural gas that is in a captive market in the U.S. We freed it with LNG, only to have it bottleneck again. And, of course, I won't start about President Biden's ban in January on permitting additional LNG exports. It was a political move that cost the industry some time, but thankfully, the federal judge in Lake Charles (Louisiana) threw out the ban on July 1.
WO: Meanwhile, the industry seems to be waiting for a change of administrations in Washington before trying to expand activity in the Gulf of Mexico.
CT: You know, the Gulf is an interesting place. I've been doing this business a very long time. And in 2001, we had upwards of 200 rigs working in the Gulf. We've got 20 today, and a lot of that now is in a maturing province. We can say that, and it took us to get deeper and deeper from a technology perspective. But it's also permitting and regulatory issues, and the Macondo well blowout in 2010 was almost a death knell for our industry—almost.
WO: Would it be unreasonable to suggest that, based on the current prospects still in the Gulf, and with all the expertise we have, we could easily be running double the number of rigs there every year?
CT: Oh, absolutely. But the rigs and the vessels move out to regions that allow them to work. Simple as that. I was on the board of Tidewater for many years, and the vessels follow the rigs. It's a case of give them a contract in Brazil or Southeast Asia or the UK North Sea and West Africa, and they're going to move.
WO: But we have this interesting situation, where natural gas prices are way down, and yet you've got people (in Texas) like CenterPoint Energy that are raising the wholesale electricity rates. Then, the retail folks are raising it to the consumer, and residents are saying, “hey, wait a minute. You've got really low gas prices, and you want to raise your rates.”
CT: Yeah, but the the problem, the reason we've had lower gas prices for the last three or four years, is because natural gas prices have subsidized investments in wind and solar that are less reliable. Coal-fired generation is probably the cheapest, but it's deemed environmentally unfriendly. And we're shutting down coal power plants all over this country. And they're actually mothballing natural gas-fired plants, as well, in favor of renewables—wind, solar, etc. But they come at a higher cost, and the average consumer has no idea where their power comes from.
I had an interesting question last week, from someone from the UK, who said, "did you have any idea that Ercot was a stand-alone system, not part of the national grid? And I said, "oh, absolutely." And then they started talking about the ice storm (February 2021), and asked, doesn't that concern me? I said, “no, we need to learn how to dispatch power more efficiently”. I also said, “Texas, on average enjoys a 30% discount to national energy prices, and nobody knows it.”
We're (Texas) the number-one power producer from wind in the U.S., number two in solar, and we have a lot of natural gas. But all of that ebbs and flows, depending on the wind blowing and the sun shining. But you’ve got to have dispatch capabilities. And I pointed out that this was never an issue in the winter. Our power demands are summer-oriented. And it (the winter storm) was for two days, for goodness sakes. But the question that people need to know is, "are you enjoying 30% lower power prices, or do you want it to go up 30%?" And if you want the former, you're going to have to admit that natural gas is the answer. Nobody would know that greenhouse gas emissions in this country are actually down 3% in the last year. It's because of natural gas displacing coal.
WO: And they've been coming down for a number of years, which nobody seems to know outside of our own industry.
CT: That's exactly right. Increasingly, though, and it's kind of crazy the things that might trigger knowledge and information, including a disaster. And the Russia-Ukraine crisis triggered a round of that. There was a sudden revelation that reliance on foreign sources for your power could be a negative thing, particularly for Germany, as one example. And then you can go through the whole analysis, whether it's Superstorm Uri, or even a study about the eclipse (during the spring in the U.S.). The eclipse lasted for maybe 15 to 20 minutes. But the power dip was amazing, and you had to have natural gas to come back in, or we would have had problems, just during that brief period of the eclipse.
But it takes things like that for people to expand their knowledge. Now, the big thing is data centers, AI-driven technology that all of a sudden, again, you've got Amazon buying a nuclear power plant in the Northeast, because they know they need 24-7 baseload-reliable power. But without the technology sector, people are not going to even have the awareness of these issues.
WO: So, in summation, what are the challenges you are working on, forward?
CT: The challenges we face are broad. And I think there are a lot of smaller cap companies like us that bring a lot of value to the industry. But overregulation, lack of permitting, dealing with issues like cyber security and others, it all comes at a cost. A lot of us would love life, if we could just do our technology, do our R&D, support our customers freely and openly, and not worry about everything. But I think, listening to the chairman of the FTC—who, by the way, is 35, and she was not born and raised in this country—I wonder, how long can I survive in my small cap size and have access to capital. I hate to say it, but the UK is the most unfriendly place—they're almost banning activities in the North Sea. The insurance industry largely has been situated in the UK, and now they are almost banning any company that has conventional oil and gas in their portfolio from getting insurance and from raising capital from banks.
CINDY B. TAYLOR is the chief executive officer and president of Oil States and is a member of the company’s board of directors. She has held these positions for 16 years since assuming the role in May 2007. From May 2006 until May 2007, Ms. Taylor served as president and chief operating officer of Oil States, having served as senior vice president—chief financial officer and treasurer prior to that. From August 1999 to May 2000, Ms. Taylor was the chief financial officer of L.E. Simmons & Associates, Incorporated. Ms. Taylor served as the vice president—controller of Cliffs Drilling Company from July 1992 to August 1999 and held various management positions with Ernst & Young LLP, a public accounting firm, from January 1984 to July 1992. She has been a director of the Federal Reserve Bank of Dallas since January 2020 and previously served as a director of the Federal Reserve Bank's Houston Branch from 2018 to 2019. She received a BBA degree in accounting from Texas A&M University and is a Certified Public Accountant.
