Oil States International Is 40% Overvalued
Oil States International OIS became a pure-play oil services company after spinning off its accommodation services division, Civeo Corporation CVEO, in Q2 2014. The company now has two divisions - Wellsite Services (28% of revenue) and Offshore Products (72% of revenue).
A year ago revenue was split nearly evenly between the two segments. The oil rout and cuts to the rig count by North American land drillers has punished Wellsite Services. The unit's revenue fell 22% sequentially in Q4, while Offshore Products revenue was only off 3%.
Source: Shock Exchange
Oil States Is Worth $15
Analysts expect Q1 2015 revenue to decline about 17% from the $235 million reported last quarter. Build into the estimate is a double-digit drop in revenue from Offshore Products. A sharp decline in the company's top line could hurt EBITDA margins due to a loss of scale.
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Revenue
The starting point for the valuation is run rate revenue. I simply took Q4 2015 results and annualized them to derive a run rate of $938 million. This builds in a certain level of optimism given the expected decline in revenue in Q1 2016.
EBITDA
EBITDA equates to Q4 2015 results annualized. The margin of 17.2% is probably optimistic. The company's margins could fall sharply in Q1 if revenue declines by double digits as expected. If quarterly revenue declines continue unabated, at some point margins could break support. I expect the loss of economies of scale to hurt sentiment for OIS going forward.
EBITDA Multiple
A multiple of 5.0x-7.0x is appropriate for a company with cyclical revenue and earnings in decline. I previously valued OIS at the top end of the range. Oil prices are expected to remain lower for longer, and 2016 looks like it could be a tough year for the oilfield services sector. Not only is EBITDA not expected to grow, it will likely decline.
Secondly, with only $35 million in cash on hand, Oil States' liquidity (or lack thereof) is becoming a glaring weakness. It may have to tap credit lines in order to stay afloat. Given the industry contraction and company-specific risks, I believe the low-end of the valuation range is now appropriate.
Enterprise Value
The company's enterprise value (equity and debt) is $808 million.
Equity Value
After subtracting net debt (debt less cash and equivalents) of $93 million, I derived an equity value of $715 million.
Per Share Price
I assumed 50.9 million shares outstanding, which was sourced from Yahoo Finance.
Conclusion
With a market capitalization of $1.3 billion and an enterprise value of $1.4 billion, OIS trades at 8.4x run rate EBITDA. Keep in mind, my run rate EBITDA is optimistic; that metric worsens on a forward basis. Longs are holding out hope that when the price of oil rebounds, the EBITDA multiple will not matter. That may have been the case last year, but in my opinion, things have changed.
Given the company's paltry liquidity, Oil States' balance sheet has become more of the focus. The company's ability to survive the oil industry downtown might be dependent on banks' willingness to extend it more credit. Banks are looking to cut exposure to energy, not lend more. If liquidity worsens in Q1, I believe the share price of $24.93 could fall closer to its intrinsic value. Continue to avoid OIS.