In the belief that its growth and ability to gain market share are tied in with technology, Oil States has pursued a deliberate path of technical innovation that has seen the firm win seven OTC Spotlight on New Technology® awards in recent years.
Interview with CINDY TAYLOR, President and CEO, Oil States
In recent years, Oil States 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, creating scale through profitable growth is a huge focus now, and allocating capital to the most attractive opportunities is part of my strategic role.
I do want to prioritize our R&D investments around new technologies like the ones we are highlighting, but we can't do everything. I'd spend every penny of free cash flow I have, if I did everything. There's always opportunities. When we’ve brought these new technologies 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. As I mentioned, 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, we have established strategic initiatives around these product lines to grow our domestic share as well as expand internationally. 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 reasonable prices 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 existing areas where we work with our Active Seat Valve being a prime example. Our focus is on efficiency, reliability and safety to the operator, which are a keen focus for everybody, because, to some degree, that's your license to operate. You've got to have these standards.
There isn't a single person, I don't think, globally, that does not understand that technology advancement is key to our success. Our management team has to support it, because there is a cost, right? There's a cost with all of this technology from an R&D perspective, until you get the technology commercialized. We have to be very clear, even about patent applications, patent processing and patent defense. At the end of the day, millions of dollars can be spent on these new technology offerings. And so, we have to be confident in the plan, and you've got to sell me your business case, to proceed with some of these projects, because not all projects will get approved.
WO: You're right about the patent action, because we 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 and get the patents, and then not defend them. I go back to a little history with some of our acquisitions. At times, we have inherited a certain amount of litigation, where you didn't develop the technology, and you don't fully know it’s potential in the market. So, I have had to ask myself, "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 analysis performed, even around defending some of the litigation that arises. I was listening to the news recently, and the Federal Trade Commission is all over every industry for anti-competitive reasons. Yet, they actually don't seem to 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 we invest in selective technology that benefits the shale plays of the U.S. as well, which is still a quarter of our business, Fig. 2. However, there are elements of U.S. land work that are highly fragmented and 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, such as the GEODynamics™ technology, downhole consumables space, and Active Seat Valves around our well control equipment, those are still good areas to invest in.
As you mentioned, if you just look at the capital allocation strategies of our customer base, a lot of it is dedicated to offshore and international. From my perspective, we’ve got great history operating in these regions and there are a lot of barriers to entry. It's a 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 to operate solely in the U.S. With a little money and a truck in the Permian, you can have a start-up 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 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 MMbpd, which is near-record levels of shale production in an environment where OPEC or OPEC+ 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 in saying this. For natural gas, the prices are non-economic to develop 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 of how efficiently we're producing the 13.1 MMbpd that I referenced.
Research analysts will tell you that in six of the seven (U.S.) shale basins, net productivity is declining. Okay. So, why are we producing 13.1 MMbpd as a country, up 1.1 MMbpd, year over year? The answer is that technology investments have 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 previously, 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 driver for all the E&P operator consolidation is exactly that. Locking up acreage positions in order to complete the three-mile laterals is a big driver. It's not so much about operators wanting to acquire a great company like Pioneer just to gain their expertise. They also have the adjacent acreage. Crown Quest is another example. All of those acquisitions were specifically targeted. It was recently announced that Oxy is 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 Tier 1 acreage.
There will be growth in the shale basins, as long as quality acreage positions persists.
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, so they likely wouldn’t say that. What we need is higher activity levels and market share gains that we intend to gain through these technology advancements. It's not enough just to ride the activity up and down with the market trends. We need to gain market share, and delivering newer technologies will be an advantage. Now, I will say, we need natural gas prices to improve, because activity in these basins is low. I've got areas, particularly in the Northeast portion of this country and East Texas, that are very inactive right now, because no operator is going to drill, unless they’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 exports, only to have it bottleneck again.
The industry was also impacted by a ban on permitting additional LNG exports, but thankfully, a 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 of Mexico is an interesting place. We’ve been in this business a very long time. In 2001, we had upwards of 200 rigs working in the Gulf and there are approximately 20 working today, given the maturity of the basin. To reach this stage of maturity in the Gulf of Mexico, one of the deepest regions in the world, required us to develop new technologies to meet the requirements of operating in ultra-deep waters.. Permitting and regulatory issues, and the Macondo well blowout in 2010 came close to stopping all activity in the Gulf long-term.
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. However, the rigs and the vessels move to regions that allow them to work. It’s as simple as that. I was on the board of Tidewater for many years, and have seen that the vessels follow the rigs. It's a case of, if you give them an attractive contract in Brazil or Southeast Asia or the UK North Sea or West Africa, 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 reason we've had lower power 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 and most reliable, but it's deemed to be environmentally unfriendly. As a result, we're shutting down coal-fired 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 this transition come at a higher cost, and the average consumer has no idea where their power comes from or what really drives the cost of generation.
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, “yes, but we need to learn how to dispatch power more efficiently and invest in our grid infrastructure.” I also said, “Texas, on average enjoys a 30% discount to national energy prices, and nobody knows it.”
Texas is the number-one power generator from wind in the U.S., number two in solar, and we have a lot of natural gas. But all of that generation ebbs and flows, depending on the wind blowing and the sun shining. However, you’ve got to have dispatch capabilities. And I pointed out this was never a significant issue in the winter previously. Our power demands are normally 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%?" 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, information knowledge is gained, but unfortunately it may come from a disaster. For example, the Russia-Ukraine crisis triggered a lot of learning about affordability and reliability. There was a sudden revelation that reliance on foreign sources for your power could be a negative thing, particularly for Germany, as one example. You can go through the whole analysis and learn a lot, 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, power dip was amazing. We had natural gas to come back in, or we would have had problems, just during that brief period of the eclipse.
Now, the big driving force going forward is data centers and AI-driven technology that all of a sudden is driving significant demand growth. For example, you've got Amazon buying a nuclear power plant in the Northeast, because they know they need 24-7 baseload-reliable power.
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 clarity, 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 pursue our technology, invest in our R&D, support our customers freely and openly, and not worry about things such as this. Access to capital for small cap companies remains a challenge, both from the perspective of scale as well as increasing regulations. Outside the U.S., I hate to say it, but the UK is the most unfriendly place for oil and gas developments—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.
Our approach to overcoming these challenges has, and will continue to be, keeping our focus on technologies and solutions that enable access to energy, both domestically and abroad from traditional as well as newer lower-carbon renewables sources in support of affordable, reliable, and secure multi-source energy mix. WO
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.