ois20160630_10q.htm

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

    For the quarterly period ended June 30, 2016

 

OR

 

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

     
    For the transition period from _________________________ to                                                                

 

Commission file number: 001-16337

 

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 4620,

77002

Houston, Texas

(Zip Code)

(Address of principal executive offices)

 

 

(713) 652-0582


(Registrant’s telephone number, including area code)

None


(Former name, former address and former fiscal year,

if changed since last report)

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

                  YES [X]

NO [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer", “accelerated filer” and "smaller reporting company in Rule 12b-2 of the Exchange Act.

(Check one):

 

Large Accelerated Filer [X]                              

Accelerated Filer [  ]

 

 

Non-Accelerated Filer [  ] (Do not check if a smaller reporting company)  

Smaller Reporting Company [  ]

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

                  YES [  ]

NO [X ]

 

The Registrant had 51,343,160 shares of common stock, par value $0.01, outstanding and 10,920,525 shares of treasury stock as of July 25, 2016.

 

 
1

 

 

OIL STATES INTERNATIONAL, INC.

 

INDEX

 

 

 

Page No.

 

Part I -- FINANCIAL INFORMATION

 
     
Item 1.

Financial Statements:

 
     
 

Condensed Consolidated Financial Statements

 
 

Unaudited Condensed Consolidated Statements of Operations

3

 

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

4

 

Consolidated Balance Sheets

5

 

Unaudited Condensed Consolidated Statements of Cash Flows

6

 

Unaudited Condensed Consolidated Statement of Stockholders’ Equity

7

 

Notes to Unaudited Condensed Consolidated Financial Statements

8 – 16

     

Cautionary Statement Regarding Forward-Looking Statements

17

     
Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17 – 27

     
Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 27 – 28

     
Item 4.

Controls and Procedures

28 – 29

     
     
 

Part II -- OTHER INFORMATION

 
     
Item 1.

Legal Proceedings

29

     
Item 1A.

Risk Factors

29

     
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

29 – 30

     
Item 5. Other Information 30
     
Item 6.  

Exhibits

30

     

Signature Page

31

 

 
2

 

 

PART I -- FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts)

 

    THREE MONTHS ENDED     SIX MONTHS ENDED  
    JUNE 30,     JUNE 30,  
    2016     2015     2016     2015  
                                 

Revenues

  $ 175,849     $ 269,258     $ 345,504     $ 606,617  
                                 

Costs and expenses:

                               

Cost of sales and services

    136,400       194,664       265,215       432,386  

Selling, general and administrative expenses

    30,486       32,002       60,466       67,607  

Depreciation and amortization expense

    29,415       32,432       59,817       65,011  

Other operating (income) expense

    (3,291 )     1,436       (2,728 )     (871 )
      193,010       260,534       382,770       564,133  

Operating (loss) income

    (17,161 )     8,724       (37,266 )     42,484  

Interest expense

    (1,315 )     (1,627 )     (2,760 )     (3,335 )

Interest income

    110       138       202       275  

Other income

    224       355       430       821  

(Loss) income from continuing operations before income taxes

    (18,142 )     7,590       (39,394 )     40,245  

Income tax benefit (expense)

    6,437       (1,442 )     14,453       (14,694 )

Net (loss) income from continuing operations

    (11,705 )     6,148       (24,941 )     25,551  

Net (loss) income from discontinued operations, net of tax

    (1 )     35       (4 )     201  

Net (loss) income attributable to Oil States International, Inc.

  $ (11,706 )   $ 6,183     $ (24,945 )   $ 25,752  
                                 

Net (loss) income attributable to Oil States International, Inc.:

                               

Continuing operations

  $ (11,705 )   $ 6,148     $ (24,941 )   $ 25,551  

Discontinued operations

    (1 )     35       (4 )     201  

Net (loss) income attributable to Oil States International, Inc.

  $ (11,706 )   $ 6,183     $ (24,945 )   $ 25,752  
                                 

Basic net (loss) income per share attributable to Oil States International, Inc. common stockholders from:

                               

Continuing operations

  $ (0.23 )   $ 0.12     $ (0.50 )   $ 0.50  

Discontinued operations

    --       --       --       --  

Net (loss) income

  $ (0.23 )   $ 0.12     $ (0.50 )   $ 0.50  
                                 

Diluted net (loss) income per share attributable to Oil States International, Inc. common stockholders from:

                               

Continuing operations

  $ (0.23 )   $ 0.12     $ (0.50 )   $ 0.50  

Discontinued operations

    --       --       --       --  

Net (loss) income

  $ (0.23 )   $ 0.12     $ (0.50 )   $ 0.50  
                                 

Weighted average number of common shares outstanding:

                               

Basic

    50,210       50,427       50,126       50,627  

Diluted

    50,210       50,515       50,126       50,725  

  

The accompanying notes are an integral part of

these financial statements.

 

 
3

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In Thousands)

 

 

   

THREE MONTHS ENDED

   

SIX MONTHS ENDED

 
   

JUNE 30,

   

JUNE 30,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Net (loss) income

  $ (11,706 )   $ 6,183     $ (24,945 )   $ 25,752  
                                 

Other comprehensive (loss) income:

                               

Foreign currency translation adjustment

    (8,870 )     9,773       (7,317 )     (4,718 )

Unrealized gain on forward contracts, net of tax

    --       124       --       72  

Total other comprehensive (loss) income

    (8,870 )     9,897       (7,317 )     (4,646 )

Comprehensive (loss) income attributable to Oil States International, Inc.

  $ (20,576 )   $ 16,080     $ (32,262 )   $ 21,106  

 

The accompanying notes are an integral part of

these financial statements.

 

 
4

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Per Share Amounts)

 

 

   

JUNE 30,

   

DECEMBER 31,

 

 

 

2016

   

2015

 
   

(UNAUDITED)

         
ASSETS                
                 

Current assets:

               

Cash and cash equivalents

  $ 51,957     $ 35,973  

Accounts receivable, net

    264,101       333,494  

Inventories, net

    202,269       212,882  

Prepaid expenses and other current assets

    18,785       29,124  

Total current assets

    537,112       611,473  
                 

Property, plant, and equipment, net

    601,228       638,725  

Goodwill, net

    264,050       263,787  

Other intangible assets, net

    56,889       59,385  

Other noncurrent assets

    23,557       23,101  

Total assets

  $ 1,482,836     $ 1,596,471  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 48,392     $ 59,116  

Accrued liabilities

    42,805       49,300  

Income taxes

    5,948       8,303  

Current portion of long-term debt and capitalized leases

    520       533  

Deferred revenue

    29,427       36,655  

Other current liabilities

    291       293  

Total current liabilities

    127,383       154,200  
                 

Long-term debt and capitalized leases

    83,604       125,887  

Deferred income taxes

    22,983       40,497  

Other noncurrent liabilities

    21,273       20,215  

Total liabilities

    255,243       340,799  
                 

Stockholders’ equity:

               

Oil States International, Inc. stockholders’ equity:

               

Common stock, $.01 par value, 200,000,000 shares authorized, 62,279,956 shares and 61,712,805 shares issued, respectively, and 51,360,090 shares and 50,953,149 shares outstanding, respectively

    623       617  

Additional paid-in capital

    721,082       712,980  

Retained earnings

    1,154,918       1,179,863  

Accumulated other comprehensive loss

    (58,015 )     (50,698 )

Common stock held in treasury at cost, 10,919,866 and 10,759,656 shares, respectively

    (591,015 )     (587,090 )

Total stockholders’ equity

    1,227,593       1,255,672  

Total liabilities and stockholders’ equity

  $ 1,482,836     $ 1,596,471  

 

The accompanying notes are an integral part of

these financial statements.

 

 
5

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

   

SIX MONTHS

ENDED JUNE 30,

 
   

2016

   

2015

 
                 

Cash flows from operating activities:

               

Net (loss) income

  $ (24,945 )   $ 25,752  

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

               

Loss (income) from discontinued operations

    4       (201 )

Depreciation and amortization

    59,817       65,011  

Deferred income tax (benefit) expense

    (20,206 )     (2,331 )

Tax impact of share-based payment arrangements

    --       (215 )

Provision for bad debt

    784       (1,134 )

Gain on disposals of assets

    (372 )     (628 )

Non-cash compensation charge

    10,569       10,697  

Amortization of deferred financing costs

    390       390  

Other, net

    665       (136 )

Changes in operating assets and liabilities, net of effect from acquired businesses:

         

Accounts receivable

    62,321       206,706  

Inventories

    7,677       (6,939 )

Accounts payable and accrued liabilities

    (14,798 )     (70,666 )

Taxes payable

    5,908       5,005  

Other operating assets and liabilities, net

    (5,688 )     (9,816 )

Net cash flows provided by continuing operating activities

    82,126       221,495  

Net cash flows (used in) provided by discontinued operating activities

    (6 )     314  

Net cash flows provided by operating activities

    82,120       221,809  
                 

Cash flows from investing activities:

               

Capital expenditures

    (18,398 )     (68,740 )

Acquisitions of businesses, net of cash acquired

    --       (33,427 )

Proceeds from disposition of property, plant and equipment

    546       1,061  

Other, net

    (1,551 )     (392 )

Net cash flows used in continuing investing activities

    (19,403 )     (101,498 )
                 

Cash flows from financing activities:

               

Revolving credit (repayments) borrowings, net

    (42,422 )     10,224  

Debt and capital lease repayments

    (263 )     (273 )

Issuance of common stock from share-based payment arrangements

    367       2,209  

Purchase of treasury stock

    --       (90,659 )

Tax impact of share-based payment arrangements

    --       215  

Shares added to treasury stock as a result of net share settlements due to vesting of restricted stock

    (3,924 )     (6,750 )

Other, net

    (1 )     --  

Net cash flows used in continuing financing activities

    (46,243 )     (85,034 )
                 

Effect of exchange rate changes on cash

    (490 )     892  

Net change in cash and cash equivalents

    15,984       36,169  

Cash and cash equivalents, beginning of period

    35,973       53,263  
                 

Cash and cash equivalents, end of period

  $ 51,957     $ 89,432  

 

 

The accompanying notes are an integral part of these

financial statements.

 

 
6

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In Thousands)

 

   

Common

Stock

   

Additional

Paid-In

Capital

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

(Loss) Income

   

Treasury

Stock

   

Total

Stockholders'

Equity

 

Balance, December 31, 2015

  $ 617     $ 712,980     $ 1,179,863     $ (50,698 )   $ (587,090 )   $ 1,255,672  

Net loss

                    (24,945 )                     (24,945 )

Currency translation adjustment (excluding intercompany notes)

                            (10,890 )             (10,890 )

Currency translation adjustment on intercompany notes

                            3,573               3,573  

Exercise of stock options, including tax impact

            (2,395 )                             (2,395 )

Amortization of restricted stock compensation

            9,148                               9,148  

Stock option expense

            1,355                               1,355  

Restricted stock awards granted

    6       (6 )                             --  

Surrender of stock to pay taxes on restricted stock awards

                                    (3,924 )     (3,924 )

Other

                                    (1 )     (1 )

Balance, June 30, 2016

  $ 623     $ 721,082     $ 1,154,918     $ (58,015 )   $ (591,015 )   $ 1,227,593  

 

  

The accompanying notes are an integral part of these financial statements.

 

 
7

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

 

1.

ORGANIZATION AND BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements of Oil States International, Inc. and its wholly-owned subsidiaries (referred to in this report as we or the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the Commission) pertaining to interim financial information. Certain information in footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to these rules and regulations. The unaudited financial statements included in this report reflect all the adjustments, consisting of normal recurring adjustments, which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and for the financial condition of the Company at the date of the interim balance sheet. Results for the interim periods are not necessarily indicative of results for the full year.

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. If the underlying estimates and assumptions, upon which the financial statements are based, change in future periods, actual amounts may differ from those included in the accompanying condensed consolidated financial statements. Our industry is cyclical and this cyclicality impacts our estimates of the period over which future cash flows will be generated, as well as the predictability of these cash flows including our determination of whether a decline in value of our long-lived assets and related fair values of our reporting units have occurred. A longer term continuation of the current down cycle will likely result in changes in our estimates of forward cash flow timing and amounts and may result in impairment losses.

 

The financial statements included in this report should be read in conjunction with the Company’s audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2015 (the 2015 Form 10-K).

 

2.

RECENT ACCOUNTING PRONOUNCEMENTS

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the FASB), which are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.

 

In March 2016, the FASB issued guidance on employee share-based payment accounting which makes several modifications to the current guidance related to the accounting for forfeitures, employer tax withholding on stock-based compensation and the financial statement presentation of excess tax benefits or deficiencies. This guidance also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. We are evaluating the impact of the future adoption of this standard on our consolidated financial position, results of operations and related disclosures.

 

In February 2016, the FASB issued guidance on leases which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The guidance will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. We are evaluating the impact of the future adoption of this standard on our consolidated financial position, results of operations, cash flows and related disclosures.

 

In April 2015, the FASB issued guidance on the presentation of debt issuance costs which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued additional guidance on this topic which adds comments from the Commission addressing the guidance issued in April 2015 and debt issuance costs related to line-of-credit arrangements. The Commission commented it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The recognition and measurement guidance for debt issuance costs are not affected by this guidance. This new guidance requires retrospective application and represents a change in accounting principle. For public business entities, this guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company adopted this new guidance during the first quarter of 2016. The adoption of this new guidance did not affect the Company’s results of operations or cash flows, but it resulted in the Company reclassifying its deferred financing costs associated with its revolving credit agreement from other noncurrent assets to long-term debt on a retrospective basis. The Company's consolidated balance sheets included deferred financing costs of $2.7 million as of December 31, 2015 that were reclassed from other noncurrent assets to long-term debt. See Note 7, “Debt.”   

 

In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In August 2015, the FASB issued guidance deferring the effective date by one year to December 15, 2017 for fiscal years, and interim periods within those years, beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and continue to evaluate the impact of the amended guidance on our consolidated financial position, results of operations and related disclosures.

 

 
8

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

3.

DETAILS OF SELECTED BALANCE SHEET ACCOUNTS

 

Additional information regarding selected balance sheet accounts at June 30, 2016 and December 31, 2015 is presented below (in thousands):

 

   

JUNE 30,

   

DECEMBER 31,

 
   

2016

   

2015

 

Accounts receivable, net:

               

Trade

  $ 163,500     $ 210,313  

Unbilled revenue

    105,396       124,331  

Other

    2,531       5,738  

Total accounts receivable

    271,427       340,382  

Allowance for doubtful accounts

    (7,326 )     (6,888 )
    $ 264,101     $ 333,494  

 

   

JUNE 30,

   

DECEMBER 31,

 
   

2016

   

2015

 

Inventories, net:

               

Finished goods and purchased products

  $ 95,043     $ 97,362  

Work in process

    40,886       42,182  

Raw materials

    78,894       86,236  

Total inventories

    214,823       225,780  

Allowance for excess, damaged, or obsolete inventory

    (12,554 )     (12,898 )
    $ 202,269     $ 212,882  

 

   

JUNE 30,

   

DECEMBER 31,

 
   

2016

   

2015

 

Prepaid expenses and other current assets:

               

Prepayments to vendors

  $ 5,864     $ 5,266  

Prepaid insurance

    3,592       4,827  

Income tax asset

    2,722       11,519  

Prepaid non-income taxes

    2,105       1,680  

Prepaid rent/leases

    909       1,108  

Other prepaid expenses and current assets

    3,593       4,724  
    $ 18,785     $ 29,124  

 

  Estimated     

JUNE 30,

   

DECEMBER 31,

 
  Useful Life     

2016

   

2015

 

Property, plant and equipment, net:

                         

Land

            $ 28,029     $ 26,334  

Buildings and leasehold improvements

3 - 40 years       188,833       185,274  

Machinery and equipment

2 28 years       447,465       462,054  

Completion services equipment

2 10 years       441,190       421,386  

Office furniture and equipment

3 10 years       41,031       32,200  

Vehicles

2 10 years       123,263       125,211  

Construction in progress

              84,871       92,800  

Total property, plant and equipment

              1,354,682       1,345,259  

Accumulated depreciation

              (753,454 )     (706,534 )
              $ 601,228     $ 638,725  

 

 
9

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

 

   

JUNE 30,

   

DECEMBER 31,

 
   

2016

   

2015

 

Accrued liabilities:

               

Accrued compensation

  $ 17,836     $ 19,402  

Insurance liabilities

    7,416       9,855  

Accrued taxes, other than income taxes

    5,215       3,619  

Accrued leasehold restoration liability

    2,846       3,389  

Accrued product warranty reserves

    2,113       2,638  

Accrued commissions

    1,223       2,033  

Accrued claims

    1,038       896  

Other

    5,118       7,468  
    $ 42,805     $ 49,300  

 

 

4.

ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Our accumulated other comprehensive loss, reported as a component of stockholders’ equity, increased from $50.7 million at December 31, 2015 to $58.0 million at June 30, 2016, primarily as a result of foreign currency exchange rate differences. Our accumulated other comprehensive loss is primarily related to fluctuations in the foreign currency exchange rates compared to the U.S. dollar which are used to translate the foreign operations of our reportable segments (primarily in the United Kingdom, Canada, Brazil, and Argentina). The exchange rates of the Canadian dollar and the Brazilian real compared to the U.S. dollar strengthened by 7% and 19%, respectively, in the first half of 2016 compared to the exchange rates at December 31, 2015, while the exchange rates of the British pound and the Argentine peso compared to the U.S. dollar weakened by 10% and 13%, respectively, during the same period.

 

 

5.

EARNINGS PER SHARE

 

The numerator (loss/income) and denominator (shares) used for the computation of basic and diluted (loss) earnings per share were as follows (in thousands):

 

   

THREE MONTHS ENDED JUNE 30,

 
   

2016

   

2015

 
   

Income (Loss)

   

Shares

   

Income (Loss)

   

Shares

 

Basic:

                               

Net (loss) income attributable to Oil States International, Inc.

  $ (11,706 )           $ 6,183          

Less: Undistributed net income allocable to participating securities

    --               (130 )        

Undistributed net (loss) income applicable to common stockholders

    (11,706 )             6,053          

Less: Loss (income) from discontinued operations, net of tax

    1               (35 )        

Add: Undistributed net income from discontinued operations allocable to participating securities

    --               1          

(Loss) income from continuing operations applicable to Oil States International, Inc. common stockholders – Basic

  $ (11,705 )     50,210     $ 6,019       50,427  

Diluted:

                               

(Loss) income from continuing operations applicable to Oil States International, Inc. common stockholders – Basic

  $ (11,705 )     50,210     $ 6,019       50,427  

Effect of dilutive securities:

                               

Options on common stock

    --       --       --       79  

Restricted stock awards and other

    --       --       --       9  

(Loss) income from continuing operations applicable to Oil States International, Inc. common stockholders – Diluted

    (11,705 )     50,210       6,019       50,515  

(Loss) income from discontinued operations, net of tax, applicable to Oil States International, Inc. common stockholders

    (1 )             34          

Net (loss) income attributable to Oil States International, Inc. common stockholders – Diluted

  $ (11,706 )     50,210     $ 6,053       50,515  

 

 
10

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

 

   

SIX MONTHS ENDED JUNE 30,

 
   

2016

   

2015

 
   

Income (Loss)

   

Shares

   

Income (Loss)

   

Shares

 

Basic:

                               

Net (loss) income attributable to Oil States International, Inc.

  $ (24,945 )           $ 25,752          

Less: Undistributed net income allocable to participating securities

    --               (539 )        

Undistributed net (loss) income applicable to common stockholders

    (24,945 )             25,213          

Less: Loss (income) from discontinued operations, net of tax

    4               (201 )        

Add: Undistributed net income from discontinued operations allocable to participating securities

    --               4          

(Loss) income from continuing operations applicable to Oil States International, Inc. common stockholders – Basic

  $ (24,941 )     50,126     $ 25,016       50,627  

Diluted:

                               

(Loss) income from continuing operations applicable to Oil States International, Inc. common stockholders – Basic

  $ (24,941 )     50,126     $ 25,016       50,627  

Effect of dilutive securities:

                               

Undistributed net income reallocated to participating securities

    --       --       1       --  

Options on common stock

    --       --       --       90  

Restricted stock awards and other

    --       --       --       8  

(Loss) income from continuing operations applicable to Oil States International, Inc. common stockholders – Diluted

    (24,941 )     50,126       25,017       50,725  

(Loss) income from discontinued operations, net of tax, applicable to Oil States International, Inc. common stockholders

    (4 )             197          

Undistributed net income reallocated to participating securities

    --               --          

Net (loss) income attributable to Oil States International, Inc. common stockholders – Diluted

  $ (24,945 )     50,126     $ 25,214       50,725  

 

Our calculation of diluted loss per share for the three and six months ended June 30, 2016 excluded 756,653 shares and 759,206 shares, respectively, issuable pursuant to outstanding stock options and restricted stock awards, due to their antidilutive effect. Our calculation of diluted earnings per share for the three and six months ended June 30, 2015 excluded 766,203 shares and 739,695 shares, respectively, issuable pursuant to outstanding stock options and restricted stock awards, due to their antidilutive effect.

 

6.

BUSINESS ACQUISITIONS AND GOODWILL

 

On January 2, 2015, we acquired all of the equity of Montgomery Machine Company, Inc. (MMC). Headquartered in Houston, Texas, MMC combines machining and proprietary cladding technology and services to manufacture high-specification components for the offshore capital equipment industry. We believe that the acquisition of MMC strengthens our position in our offshore products segment as a supplier of subsea components with enhanced capabilities, proprietary technology and logistical advantages. Total transaction consideration was $33.4 million, net of cash acquired. The operations of MMC have been included in our offshore products segment since the acquisition date.

 

 
11

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

Changes in the carrying amount of goodwill for the six month period ended June 30, 2016 were as follows (in thousands): 

 

   

Well Site Services

                 
   

Completion Services

   

Drilling Services

   

Subtotal

   

Offshore Products

   

Total

 

Balance as of December 31, 2015

                                       

Goodwill

  $ 198,903     $ 22,767     $ 221,670     $ 159,412     $ 381,082  

Accumulated impairment losses

    (94,528 )     (22,767 )     (117,295 )     --       (117,295 )
      104,375       --       104,375       159,412       263,787  

Foreign currency translation and other changes

    728       --       728       (465 )     263  
    $ 105,103     $ --     $ 105,103     $ 158,947     $ 264,050  
                                         

Balance as of June 30, 2016

                                       

Goodwill

  $ 199,631     $ 22,767     $ 222,398     $ 158,947     $ 381,345  

Accumulated impairment losses

    (94,528 )     (22,767 )     (117,295 )     --       (117,295 )
    $ 105,103     $ --     $ 105,103     $ 158,947     $ 264,050  

 

7.

DEBT

 

As of June 30, 2016 and December 31, 2015, long-term debt consisted of the following (in thousands):

 

   

June 30,

2016

   

December 31,

2015

 
                 

Revolving credit facility, which matures May 28, 2019, with lending commitments up to $600 million(1)

  $ 78,159     $ 120,191  

Capital lease obligations and other debt

    5,965       6,229  

Total debt

    84,124       126,420  

Less: Current portion

    520       533  

Total long-term debt and capitalized leases

  $ 83,604     $ 125,887  

 

 

(1)

Amounts presented are net of $2.3 million and $2.7 million, respectively, of unamortized debt issuance costs in accordance with FASB guidance issued in April 2015 regarding the presentation of debt issuance costs.

 

Credit Facility

 

The Company currently has a $600 million senior secured revolving credit facility (the revolving credit facility) with an option to increase the maximum borrowings under its revolving credit facility to $750 million subject to additional lender commitments prior to its maturity on May 28, 2019. The revolving credit facility is governed by a Credit Agreement dated as of May 28, 2014 (the Credit Agreement) by and among the Company, the Lenders party thereto, Wells Fargo Bank, N.A., as administrative agent, the Swing Line Lender and an Issuing Bank, and Royal Bank of Canada, as Syndication agent, and Compass Bank, as Documentation agent. Amounts outstanding under the revolving credit facility bear interest at LIBOR plus a margin of 1.50% to 2.50%, or at a base rate plus a margin of 0.50% to 1.50%, in each case based on a ratio of the Company’s total leverage to EBITDA (as defined in the Credit Agreement). During the first half of 2016, our applicable margin over LIBOR was 1.50%. We must also pay a quarterly commitment fee, based on our leverage ratio, on the unused commitments under the Credit Agreement. The unused commitment fee was 0.375% for the first half of 2016. The Credit Agreement contains customary financial covenants and restrictions. Specifically, we must maintain an interest coverage ratio, defined as the ratio of consolidated EBITDA to consolidated interest expense, of at least 3.0 to 1.0 and our maximum leverage ratio, defined as the ratio of total debt to consolidated EBITDA, of no greater than 3.25 to 1.0. Each of the factors considered in the calculations of these ratios are defined in the Credit Agreement. EBITDA and consolidated interest, as defined, exclude goodwill impairments, losses on extinguishment of debt, debt discount amortization, and other non-cash charges. As of June 30, 2016, we were in compliance with our debt covenants.

 

Borrowings under the Credit Agreement are secured by a pledge of substantially all of our assets and the assets of our domestic subsidiaries.  Our obligations under the Credit Agreement are guaranteed by our significant domestic subsidiaries. The revolving credit facility also contains negative covenants that limit the Company's ability to borrow additional funds, encumber assets, pay dividends, sell assets and enter into other significant transactions.

 

 
12

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

 

Under the Company's Credit Agreement, the occurrence of specified change of control events involving our Company would constitute an event of default that would permit the banks to, among other things, accelerate the maturity of the facility and cause it to become immediately due and payable in full.

 

As of June 30, 2016, we had $80.4 million outstanding under the Credit Agreement and an additional $32.5 million of outstanding letters of credit, leaving $283.2 million available to be drawn under the revolving credit facility. The total amount available to be drawn under our revolving credit facility was less than the lender commitments as of June 30, 2016, due to the maximum leverage ratio covenant in our revolving credit facility which serves to limit borrowings, and such availability is expected to be further reduced as our trailing twelve months EBITDA moves lower in 2016.

 

8.

FAIR VALUE MEASUREMENTS

 

The Company’s financial instruments consist of cash and cash equivalents, investments, receivables, payables, bank debt and foreign currency forward contracts. The Company believes that the carrying values of these instruments on the accompanying consolidated balance sheets approximate their fair values.

 

9.

CHANGES IN COMMON STOCK OUTSTANDING

 

Shares of common stock outstanding – January 1, 2016

    50,953,149  

Shares issued upon granting of restricted stock awards, net of forfeitures

    550,437  

Shares issued upon exercise of stock options

    16,714  

Shares withheld for taxes on vesting of restricted stock awards and transferred to treasury

    (160,210 )

Shares of common stock outstanding – June 30, 2016

    51,360,090  

 

On September 6, 2013, the Company announced an increase in its Board-authorized Company share repurchase program from $200 million to $500 million providing for the repurchase of the Company’s common stock, par value $.01 per share. On July 29, 2015, the Company’s Board of Directors approved the termination of our then existing share repurchase program and authorized a new program providing for the repurchase of up to $150 million of the Company’s common stock, par value $.01 per share. The new program was originally set to expire on July 29, 2016, however on July 27, 2016, our Board of Directors extended our share repurchase program for one year to July 29, 2017. During the first half of 2016, there were no repurchases of our common stock made under our current program. The amount remaining under our current share repurchase authorization as of June 30, 2016 was $136.8 million. Subject to applicable securities laws, such purchases will be at such times and in such amounts as the Company deems appropriate.

 

10.

STOCK-BASED COMPENSATION

 

The following table presents a summary of stock option award and restricted stock award activity for the six months ended June 30, 2016.

 

   

Stock

Options

   

Restricted

Stock

Awards

 
   

Number of Shares

 

Outstanding at January 1, 2016

    770,181       1,171,884  

Granted

    --       587,586  

Options Exercised/Stock Vested

    (16,714 )     (466,015 )

Cancelled

    (10,160 )     (37,149 )

Outstanding at June 30, 2016

    743,307       1,256,306  

 

Stock-based compensation pre-tax expense recognized in the three month periods ended June 30, 2016 and 2015 totaled $5.5 million and $5.0 million, respectively. Stock-based compensation pre-tax expense recognized in the six month periods ended June 30, 2016 and 2015 totaled $10.6 million and $10.7 million, respectively.

 

 
13

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

 

In February 2016, the Company granted performance-based stock awards totaling 86,462 shares valued at a total of approximately $3.3 million using a Monte Carlo simulation model. These performance-based awards may vest in an amount that will depend on the Company’s achievement of specified performance objectives. These performance-based awards have a performance criteria that will be measured based upon the Company’s achievement of specified levels of relative total shareholder return compared to our peer group of companies for the three year period commencing January 1, 2016 and ending December 31, 2018.       

 

At June 30, 2016, $39.3 million of compensation costs related to unvested stock options and restricted stock awards attributable to vesting conditions had not yet been recognized.

 

11.

INCOME TAXES

 

Income tax expense for interim periods is based on estimates of the effective tax rate for the entire fiscal year. The Company’s income tax provision for the three and six months ended June 30, 2016 was an income tax benefit of $6.4 million, or 35.5% of pretax losses, and $14.5 million, or 36.7% of pretax losses, respectively, compared to income tax expense of $1.4 million, or 19.0% of pretax income, and $14.7 million, or 36.5% of pretax income, respectively, for the three and six months ended June 30, 2015. The effective tax rate for the six months ended June 30, 2015 included a $2.3 million deferred tax adjustment in the first quarter of 2015 for certain prior period non-deductible items, partially offset by reduced domestic income in 2015 due to the impact of the industry downturn in activity. 

 

12.

SEGMENT AND RELATED INFORMATION

 

In accordance with current accounting standards regarding disclosures about segments of an enterprise and related information, the Company has identified the following reportable segments: well site services and offshore products. The Company’s reportable segments represent strategic business units that offer different products and services. They are managed separately because each business requires different technologies and marketing strategies. Most of the businesses were initially acquired as a unit, and the management at the time of the acquisition was retained. Subsequent acquisitions have been direct extensions to our business segments. Separate business lines within the well site services segment have been disclosed to provide additional information for that segment.

  

 
14

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

 

Financial information by business segment for each of the three and six months ended June 30, 2016 and 2015 is summarized in the following table (in thousands).

 

   

Revenues

from

unaffiliated

customers

   

Depreciation

and

amortization

   

Operating

(loss)

income

   

Equity in

(losses)

earnings of

unconsolidated

affiliates

   

Capital

expenditures

   

Total

assets

 

Three months ended June 30, 2016

                                               

Well site services –

                                         

Completion services

  $ 36,824     $ 17,615     $ (21,466 )   $ -     $ 2,129     $ 489,750  

Drilling services

    3,869       5,902       (5,951 )     -       246       87,001  

Total well site services

    40,693       23,517       (27,417 )     -       2,375       576,751  

Offshore products

    135,156       5,611       21,676       (97 )     5,583       877,609  

Corporate and eliminations

    -       287       (11,420 )     -       160       28,476  

Total

  $ 175,849     $ 29,415     $ (17,161 )   $ (97 )   $ 8,118     $ 1,482,836  

 

   

Revenues

from

unaffiliated

customers

   

Depreciation

and

amortization

   

Operating

income

(loss)

   

Equity in

(losses)

earnings of

unconsolidated

affiliates

   

Capital

expenditures

   

Total

assets

 

Three months ended June 30, 2015

                                               

Well site services –

                                               

Completion services

  $ 69,421     $ 19,145     $ (10,969 )   $ -     $ 12,616     $ 559,211  

Drilling services

    16,703       6,962       (4,342 )     -       2,119       114,340  

Total well site services

    86,124       26,107       (15,311 )     -       14,735       673,551  

Offshore products

    183,134       5,967       34,836       54       15,273       965,157  

Corporate and eliminations

    -       358       (10,801 )     -       450       42,276  

Total

  $ 269,258     $ 32,432     $ 8,724     $ 54     $ 30,458     $ 1,680,984  

 

   

Revenues

from

unaffiliated

customers

   

Depreciation

and

amortization

   

Operating

(loss)

income

   

Equity in

(losses)

earnings of

unconsolidated

affiliates

   

Capital

expenditures

   

Total

assets

 

Six months ended June 30, 2016

                                               

Well site services –

                                         

Completion services

  $ 77,773     $ 35,558     $ (45,801 )   $ -     $ 6,667     $ 489,750  

Drilling services

    6,641       12,424       (14,056 )     -       499       87,001  

Total well site services

    84,414       47,982       (59,857 )     -       7,166       576,751  

Offshore products

    261,090       11,265       44,987       (119 )     10,974       877,609  

Corporate and eliminations

    -       570       (22,396 )     -       258       28,476  

Total

  $ 345,504     $ 59,817     $ (37,266 )   $ (119 )   $ 18,398     $ 1,482,836  

 

   

Revenues

from

unaffiliated

customers

   

Depreciation

and

amortization

   

Operating

income

(loss)

   

Equity in

(losses)

earnings of

unconsolidated

affiliates

   

Capital

expenditures

   

Total

assets

 

Six months ended June 30, 2015

                                               

Well site services –

                                               

Completion services

  $ 187,531     $ 38,588     $ 1,499     $ -     $ 35,378     $ 559,211  

Drilling services

    40,382       13,644       (6,881 )     -       8,670       114,340  

Total well site services

    227,913       52,232       (5,382 )     -       44,048       673,551  

Offshore products

    378,704       12,067       71,377       3       24,166       965,157  

Corporate and eliminations

    -       712       (23,511 )     -       526       42,276  

Total

  $ 606,617     $ 65,011     $ 42,484     $ 3     $ 68,740     $ 1,680,984  

 

 

 
15

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

13.

COMMITMENTS AND CONTINGENCIES

 

In the ordinary course of conducting our business, we become involved in litigation and other claims from private party actions, as well as judicial and administrative proceedings involving governmental authorities at the federal, state and local levels. During 2014 and 2015, a number of lawsuits were filed in Federal Court, against the Company and or one of its subsidiaries, by current and former employees alleging violations of the Fair Labor Standards Act (FLSA). The plaintiffs seek damages and penalties for the Company’s alleged failure to: properly classify its field service employees as “non-exempt” under the FLSA; and pay them on an hourly basis (including overtime). The plaintiffs are seeking recovery on their own behalf as well as on behalf of a class of similarly situated employees. Settlement of the class action against the Company was approved and a judgment was entered November 19, 2015. The Company has settled the vast majority of these claims and is evaluating potential settlements for the remaining individual plaintiffs’ claims which are not expected to be significant.

 

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 indemnity or insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

 

 
16

 

 

Cautionary Statement Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. “Forward-looking statements" can be identified by the use of forward-looking terminology including "may," "expect," "anticipate," "estimate," "continue," "believe," or other similar words. 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 known material factors that could affect our results, please refer to “Part II, Item 1A. Risk Factors” in this report and "Part I, Item 1A. Risk Factors" and the financial statement line item discussions set forth in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our 2015 Form 10-K filed with the Commission on February 22, 2016. Should one or more of these risks or uncertainties materialize, or should the assumptions prove incorrect, actual results may differ materially from those expected, estimated or projected. Our management believes these forward-looking statements are reasonable. However, you should not place undue reliance on these forward-looking statements, which are based only on our current expectations and are not guarantees of future performance. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the foregoing. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise any of them in light of new information, future events or otherwise.

 

In addition, in certain places in this quarterly report, we refer to reports published by third parties that purport to describe trends or developments in the energy industry. The Company does so for the convenience of our stockholders and in an effort to provide information available in the market that will assist the Company’s investors in a better understanding of the market environment in which the Company operates. However, the Company specifically disclaims any responsibility for the accuracy and completeness of such information and undertakes no obligation to update such information.

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion and analysis together with our condensed consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and notes to those statements included in the 2015 Form 10-K.

 

Macroeconomic Environment

 

We are a technology-focused, energy services company. We provide a broad range of products and services to the oil and gas industry through our offshore products and well site 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 invest capital in the exploration for and development of crude oil and natural gas. Our customers’ capital spending programs are generally based on their cash flows and their outlook for near-term and long-term commodity prices, economic growth, commodity demand and estimates of resource production. As a result, demand for our products and services is largely sensitive to expected commodity prices, principally related to crude oil and natural gas.

 

 
17

 

 

In the past few years, crude oil prices have been volatile due to global economic uncertainties, the level of global production, and inadequate regional well site transportation infrastructure. Significant downward crude oil price volatility began early in the fourth quarter of 2014 and has continued into the first half of 2016, with a partial recovery during April and May 2016 offset by a subsequent decline in prices during June and July 2016. The material decrease in crude oil prices since 2014 can primarily be attributed to high levels of global crude oil inventories resulting from significant production growth in the U.S. shale plays, the strengthening of the U.S. dollar relative to other foreign currencies, and the Organization of Petroleum Exporting Companies (OPEC) increasing its production. OPEC demonstrated throughout 2015, and to date in 2016, an unwillingness to cut its production, as it has done in previous years, in an effort to protect their market share. These production increases have been offset somewhat by increases in global crude oil demand. The combination of these factors caused a global supply and demand imbalance for crude oil which, along with concerns regarding the potential effects on energy demand stemming from the diminished growth outlook in China and other emerging markets, and the anticipation of potential supply increases related to the lifting of sanctions against Iran (sanctions were lifted in January 2016), resulted in materially lower crude oil prices in 2015 and the first half of 2016. Non-OPEC production, particularly in the U.S., began to decline in 2015 due to substantially reduced investment in drilling and completion activity by our customers leading to some crude oil price improvements in late 2015 and in the first half of 2016. The average price of West Texas Intermediate (WTI) crude oil increased from an average price of $42 per barrel in the fourth quarter of 2015 to an average of $45 per barrel in the second quarter of 2016. These data points compare to an average price of $58 per barrel in the second quarter of 2015. The average price of Intercontinental Exchange Brent (Brent) crude increased from an average price of $44 per barrel in the fourth quarter of 2015 to an average of $46 per barrel in the second quarter of 2016. These data points compare to an average price of $62 per barrel in the second quarter of 2015. WTI crude oil prices temporarily increased to over $50 per barrel in early June 2016. However, with the vote in late June 2016 by the United Kingdom to leave the European Union, crude oil prices have again retreated based upon renewed concerns around the global demand outlook for crude oil. As of July 25, 2016, WTI crude oil traded at approximately $42 per barrel while Brent crude traded at approximately $44 per barrel. The magnitude of the supply/demand imbalance, and the resultant build in global crude oil inventories, has created a market concern that crude oil prices could decline further or remain at their currently low level for the foreseeable future. The current and expected price for WTI crude oil will continue to influence our customers’ spending in U.S. shale play developments, such as the Permian, Bakken, Niobrara, and Eagle Ford basins. Spending in these regions will influence the overall drilling and completion activity in the area and, therefore, the activity of our well site services segment. The price for Brent crude will influence our customers’ spending related to global offshore drilling and development and, thus, the activity of our offshore products segment.

 

Given the historical volatility of crude oil prices, there remains a high degree of risk that prices could remain at their current depressed levels or deteriorate further due to relatively high levels of domestic crude oil production (albeit U.S. production has been and continues to decline), slowing growth rates in various global regions, and/or the potential for ongoing supply/demand imbalances. Conversely, if the global supply of crude oil were to decrease due to reduced capital investment by our customers (which is occurring) or government instability in a major oil-producing nation, and energy demand were to continue to increase in the U.S. and countries such as China and India, a recovery in WTI and Brent crude oil prices could occur. In any event, crude oil price improvements will depend upon a rebalancing of global supply and demand, with a corresponding reduction in global inventories, the timing of which is difficult to predict. If commodity prices do not improve, or decline further, demand for our products and services could continue to be weak or could decline further.

 

Prices for natural gas in the U.S. were relatively flat in the second quarter of 2016 averaging $2.15 per mmBtu compared to $2.12 per mmBtu in the fourth quarter of 2015, with an increase to $2.94 per mmBtu as of June 30, 2016 as a result of declining production and increased demand for natural gas to fuel electricity generation. These data points compare to an average price of $2.75 per mmBtu in the second quarter of 2015. Natural gas prices declined during the second quarter of 2016 compared to the second quarter of 2015 largely due to a continued oversupply of natural gas inventories and a warm 2015-2016 winter season. Natural gas prices traded at approximately $2.80 per mmBtu as of July 25, 2016. Strong production and a milder winter this year compared to last year resulted in significant increases in natural gas inventories in the U.S. from 1% above the 5-year average as of the end of the first half of 2015 to 25% above the 5-year average as of the end of the first half of 2016. Customer spending in the natural gas shale plays has been limited due to associated gas being produced from unconventional oil wells in North America and the recent commissioning of a number of new, large, LNG export facilities around the world. As a result of natural gas production growth outpacing demand growth in the U.S., natural gas prices continue to be weak and are expected to remain below levels considered economical for new investments in numerous natural gas fields. If natural gas production growth continues to surpass demand growth in the U.S., and/or if the supply of natural gas were to increase, whether from conventional or unconventional production or associated natural gas production from oil wells, prices for natural gas could remain depressed for an extended period of time and could result in fewer rigs drilling for natural gas.

 

 
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Recent WTI crude oil, Brent crude and natural gas pricing trends are as follows:

 

     

Average Price (1)

 
     

WTI

   

Brent

   

Henry Hub

 

Quarter

 

Crude

   

Crude

   

Natural Gas

 

Ended

 

(per bbl)

   

(per bbl)

   

(per mmBtu)

 

6/30/2016

    $ 45.46     $ 45.57     $ 2.15  

3/31/2016

      33.35       33.84       1.99  

12/31/2015

      41.94       43.56       2.12  

9/30/2015

      46.49       50.44       2.76  

6/30/2015

      57.85       61.65       2.75  

3/31/2015

      48.49       53.98       2.90  

12/31/2014(2)

      73.21       76.43       3.78  

9/30/2014

      97.87