Koil Energy Solutions Inc. (KLNG)

[SageWise]

Here's another article on why DPDW's business should be relatively stable. DPDW is somewhat in the same boat as OIS.

http://community.investopedia.com/news/IA/2009/Oil-States-Is-A-Play-On-Three-Trends-OIS0120.aspx?partner=YahooSA

Oil States Is A Play On Three Trends (OIS)
January 20, 2009 | By Eric Fox


Oil States International (NYSE:OIS) is exposed to three growth trends in the energy sector, including the continued development of the Canadian oil sands, deep offshore oil and gas fields, and various North American unconventional resource plays. This leverage may move the shares higher once the economy recovers and the credit crisis eases.

Oil States is an oil services company with three business segments - well site services, offshore products and tubular services.

Well Site Services
This is the company's largest segment and it includes drilling services, rental equipment, workforce accommodations and catering and logistics. The accommodations business is set up to service the growth in developing the Canadian oil sands in Alberta. Oil States owns four lodges in the area with a capacity of nearly 5,000 per day. The company also has a mobile fleet of camp and rig accommodations that can serve smaller areas. This segment has seen growth trail off a bit as several projects have been delayed by the fall in oil prices.

The company had EBITDA of $513 million in the last 12 months ending September 30, and 60% of the total came from this segment. (For more on this metric, check out A Clear Look At EBITDA and EBITDA: Challenging The Calculation.)

Offshore Products
Oil States manufactures several products for use in offshore drilling projects including subsea blowout preventers and pipelines, winches and lifting systems, bearings and others. Business is tied to offshore development of oil and gas fields. Projects here are long term and take years to develop; thus they are not cut back so quickly during downturns. The company had a $420.5 million backlog at the end of the third quarter. This segment provided 18% of the last 12 months' EBITDA.

Tubular Services
This segment distributes casing and tubing to the energy industry. The company doesn't manufacture, as it purchases product directly from U.S. Steel (NYSE:X) and then sells it to the ultimate customer. Its two largest customers in 2007 were Chesapeake Energy (NYSE:CHK) and ConocoPhillips (NYSE:COP).

This type of business is directly tied to the level of drilling, specifically the total footage of wells drilled. The industry saw activity decline last year, and this will probably continue in 2009. However, the amount of drilling in unconventional areas continues to grow long term, which will feed demand for casing and tubing. In addition, the number of horizontal wells continues to increase, which further increases demand for these products.

Credit Markets May Restrict Acquisitions
Another risk for Oil States is that its business strategy has been to grow rapidly through acquisitions the last few years. Since 2003, the company has spent $346 million to acquire other companies. Since the credit markets have become more restrictive, the company may not be able to access capital to continue this strategy. (To read more on this industry, see Oil And Gas Industry Primer.)

Financials
Oil States had $55 million in cash and $416 million in total debt as of September 30. The company classified $180 million of this debt as short term on its balance sheet. While this might raise the issue of rollover risk, most of the short-term debt is a convertible issue. The company has to classify it as a short-term liability because the issue is puttable based on the stock price at which Oil States was trading at the end of the Q3.

Bottom Line
Oil States business is leveraged to three growth trends in the energy sector – development of the Canadian oil sands, continued exploration in deep water and increased onshore drilling in unconventional shale areas in North America. The stock might get an extra boost once the economy recovers.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which is the manager of the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at the Stock Market Prognosticator and Under the Buttonwood Tree. At the time of writing Eric Fox did not own shares in any of the companies mentioned in this article.