Oil States’ Taylor sees pick-up in OFS business in deepwater and international sectors

Interview with Cindy Taylor, CEO and President, Oil States International, Inc. 

At OTC in Houston during early May, World Oil Editor-in-Chief Kurt Abraham visited with Oil States International CEO and President Cindy Taylor for an exclusive interview. What follows is Ms. Taylor’s assessment of not only her own company’s performance and direction but also where the OFS sector as a whole is headed. 

World Oil (WO): From your vantage point, how do you think things are going for your business overall?  

Cindy Taylor (CT): It's a tale of two cities to a certain degree. And I always say short cycle investments, largely land U.S. Number one, they're easier to get to first production. Number two, that AFP is lower dollars. Everybody benefited from the recovery coming out of Covid pretty significantly last year. And that led our results and our free cash flow generation. We knew that the deep water, more international and global spending would come, particularly at higher crude prices. We didn't need crude over $100; in fact, it was probably detrimental last year. But prices are certainly at good levels to incentivize investment. And we are now bidding on a significant amount of deepwater opportunities, with a lot of those coming from Brazil—largely Petrobras—and Guyana, but also even broader-based, still around Southeast Asia, the Gulf of Mexico, and maybe a bit of work in the North Sea. 

I always say that my talented, brilliant leadership and engineers, while they were idle during Covid, spent a good amount of time trying to come up with new technologies, new product, and utilize the available engineering capacity that we had through what was—I don't want to call it a down cycle—because it was far worse than that. 

The good thing that came out of it is why we're all here today, because we got some new product introductions that often, when you're extraordinarily busy and your engineers are working on projects, you don't necessarily have the free time to invest in some of the product development. So, both those things happened. Now, of course, I’m thinking a little bit with a market hat, and thinking that U.S. shale is plateauing, and there's a whole lot more emphasis around spending internationally and in deep water.  

We are fortunate, because we have both exposures. I will say, on the deepwater international side, we're more differentiated. There are a lot more barriers to entry. We've been around as long as deep water has existed and actually been at this show about as long. Thus, our products are well-recognized for established technology. When we expand these new bids and quotes, we're obviously always in the mix for that. So. we're very optimistic. At the same time, while we may say that shale is plateauing, it's not going away. I think there will be a solid good base of business driven by land U.S.   

WO: You had not one but two OTC Spotlight on Technology winners, although each item is quite different from the other. Can you talk a little bit about those two items and how the are benefiting the industry?

CT: Yes, we also had two last year, so we set a new standard. To our team, there's a new standard. Last year, it was our MPD system and our high-pressure riser system. And the great thing about both of those, we're now into commercial sales of those products.  

So, I do appreciate, number one, that this recognition is here for our past and future technologies, because it does help us move towards commercialization of some of them. The two today are vastly different in a lot of ways. One we can probably start on is the Active Seat Gate Valve (Fig. 1), but I'll say the commonality to all these things is trying to address customer needs and changes or things that they're seeing in the field. Right now, at least initially, the Active Seat Gate Valve is really developed for land applications. That doesn't mean it won't have future offshore applications, but it originally came out of land.  

Fig. 1. The Active Seat Gate Valve provides game-changing sealing performance in the field. It dramatically reduces the amount of heavy grease required during operations by hundreds of pounds per well. Image: Oil States International.

Again, think back to what I said—short cycle recovery first—and based on what you hear from the customers, and if you've ever seen a land location, I don't know how accidents don't occur every day. They're complex. There is equipment everywhere. These are fairly highly technical setups, if you will. So, simplifying the well site is part of it. We call it the red zone, which is any zone of dangerous operations, trying to get people out of the red zone, reducing downtime from an efficiency standpoint, that's another key.  

All of those things come together to say, “what can we do to improve our equipment to address those needs?” In this case, on a lot of the frac equipment, whether they're regular frac heads, frac set-ups or isolation tools, you have multi-zone completions that require we go in periodically, stop work, inspect the zones, grease them for protection, if you will, of the valves. That creates downtime for the operator. From an environmental perspective, more greasing occurs. From my standpoint, you also have wear-and-tear on the equipment and just expense. And you obviously have people in the red zone. So, think of all of that.  

The Active Sea Gate Valve is intended to reduce the number of times that you have to stop operations, re-inspect, and reinject grease. I was reading an operations report, and the amount of sand that we have run through the Active Seat Gate Valves already is mind-boggling. My understanding is that we've reduced our repair expense for the equipment roughly 70%-plus in the process of introducing the gate valves. Then again, just because you're not stopping work and having to grease, you've done two things: create efficiencies for the operator and then reduce the grease disposal, which, from an ESG perspective, is also one of the checks in the box.

Meanwhile, we newly introduced the valve last year to one of the majors, and they love it. Now they're saying, “we'd like for you to deploy these on a more broad basis into various basins in the United States,” something that's on us. How much CapEx do we have to spend, how much time do we have in our own shops to develop these valves and get them deployed? I also should mention, it's patented technology that we have a market differentiation for. Again, for us, if we can redeploy that equipment quicker, obviously our utilization is better than if it's broken down in the shop, and you have to do major rework on it.  

WO: The other OTC Spotlight winner is the FTLP™, the Floating Wind Platform (Fig. 2). Tell us about that item.  

Fig. 2. The FTLP™ Floating Wind Platform (or “Fixed TLP”) developed under Oil States’ OSI Renewables brand offers the benefits of a highly stable fixed platform structure to the floating wind market. Image: Oil States International.

CT: It's exciting. I've always said, I think it's our industry that will expand the technology into alternative applications. We've got the engineering talent, the metallurgists, the manufacturing facilities and—maybe not as directly—the key sites, the installation vessels, and the ROV vessels. You just think about everything this industry has to offer. We were in the early stages of deep water probably 50 years ago. So, I'll say five decades of experience doing this type of work. 

In this job, I always I talk to everybody, including a lot of private equity players. And I think the one thing we don't fully understand yet is the overall economics of a lot of these applications, whether it's hydrogen, CCU, etc. [Occcidental Petroleum Chairman and CEO] Vicki Hollub was on [CBS program] 60 Minutes, and she was talking about direct air capture. So, there are plenty of things out there. Our strategy is trying to stay within our core competencies, but then expand those into new markets. It's as simple as that. 

We do have the mineral riser system that's geared towards a lot of these poly-metallic metals that will be needed, particularly for our battery technology. But the same thing applies to wind. We have done just like the oil and gas industry as it matured, we did shallow-water-type activities with fixed structures to the seabed. We do that for wind now. It's just not that big of a revenue ticket for us, not something that we put on our earnings script or conference call. But we believe, much like the conventional oil and gas business, we think you'll go into deeper water depths, mid-water depths. When you do that, you'll need a floating solution, in our opinion, as the infrastructure builds out.  

We also have spent most of the R&D dollars and conducted the testing, thus far, out of our facility in the Heartlands area of Scotland, because it is so far ahead of permitting and leasing of a lot of acreage for wind than the United States. The U.S. will follow, with some element of it still to be proven. But we're trying to target an area of expertise. I'll call it mid-water depths. So, it's new technology; everybody's trying to experiment with a solution.  

What we do know about offshore wind are a few major facets. Number one, it has to be a smaller footprint, a smaller design, just from a cost perspective. The important thing is that it has to be secure. Obviously, it has to be stable enough to handle the constant running of larger and larger blades on the platform. So, we are at the stage again, where we've got the technology, and it's patent pending—we’ve submitted it.  

We're working with local universities and doing prototypes and tank tests to simulate stresses, particularly wave stresses, and all the things that you would do to prove up stability of the platform. These include differing weights and sizes of the blades that would be attached to it, and we’ve had several successes. We made probably two or three modifications, to date. Out ultimate goal is to find an operator that has the lease, build a true prototype, and put it out in the water for ultimate testing and preparation for some of the presentations and various analyst investor conferences.   

Westwood Global Energy Group, in particular, projected that the industry—I don't remember if it's over five years or eight years—is going to attempt to install 26,500 floating wind platforms. That is a mind-boggling number that, again, no one has looked through the practical realities of where you source the materials, where the engineering comes from, where the manufacturing facilities are, and where the key sites are. As an example, what is the vessel of choice to install these? NOV has developed a kit for future installations, but it's going to be a grand challenge.  

What we do know is we will invest money. I can't tell you today that that money will be invested economically. I think that's true for many of the alternative energy applications that we have. But we'll figure it out as we go. You can get hung up and say, “well, for that reason, these are never going to move forward.” Yet, even in the United States, the IRA (Inflation Reduction Act) is creating quite a lot of funding for things that are not yet commercial. The same is true for other sovereign entities and governments. It will move forward, and we want to be part of that process. I look at it as revenue expansion and being responsive to where the world is going. So, there will be some activity, and I think we're in good stead to be part of it. I could talk about challenges all day long, particularly for a company of our size, of being able to compete with the amount of money that's flowing into a lot of these special-purpose vehicles and SPACs (special purpose acquisition companies), which have no background in technology.  

But even a lot of my private equity friends are coming to us now, saying, “can you help us find the locations, the key sites, the manufacturing facilities, the supply chain aspects of all of this?” So, there's a lot to learn, but I feel very, very good. I should also mention that we have DNV certification. I used to work for a drilling company, back in the day, and that was the penultimate, to get DNV approval on anything.  

WO: Beyond these two Spotlight winners, are there any specific products or systems in your existing portfolio that you feel are standouts at the moment?  

CT: Well, how could I not talk about our flex joint technology that's been around for 40 years now, and to my knowledge, is probably on every floating drilling rig in the world. And then a lot of the FPSOs obviously utilize the technology now for import and export lines off of the hang-off facility. So, that would be certainly a key one. Our Connector technology has been in the marketplace since the late ‘80s early ‘90s, and I would say it has good market acceptance and differentiation.  And then, on land—there's more competition on land—I do feel like our experience in the frac space and with our isolation tools is exceedingly strong.  

Our extended-reach technology is well-accepted as best in class, I would say, of the alternatives that are out there. It's branded as our Tempress product line, but it's extended-reach technology for drill-out applications, Fig. 3. We also have a whole suite of downhole consumables. Like many, it's a pretty competitive market. But those are some of the key technologies that we have across the space.  

Fig. 3. Oil States’ extended-reach technology is branded as the Tempress product line, offering technology for drill-out applications. Image: Oil States International.

And we've been doing this a long time. Interestingly, people think about MPD systems as one of many. Obviously, what we're trying to do is improve on the technology and address many things that our customers need. Some of these needs are a lighter piece of equipment, ease of change-out, those types of things. So, I don't look at this as just one other MPD system to compete and drive down price of all the totality, which that's the question you get. We believe that this is a better mousetrap. Then what's out in the market today. 

WO: You touched a bit on supply chain issues. How much of a problem is it still for you?   

CT:  A lot of what we're talking about is what we see in the future. We do have pockets of supply chain challenges, not surprisingly, and it probably won't shock you when you talk about steel as an example. But in the case of our downhole business, we're relying on gunpowder.   

So, think war in the Ukraine and demands for gunpowder, as the explosives labor. While it's not supply chain, it's a huge issue for this industry, and I think it's going to limit the collective ability to scale from where we are. That's just a fact. I really do think about what does the “go forward” look like, because we've talked about the increasing demand and the funding and support of a lot of these transitional types of energy technologies, but it’s going to ultimately compete with the installed base, the people, the engineers and conventional applications. 

So, our revenue last year grew 29%. And our revenue this year should grow at 15+%. And there's no reason to think that 2024 and 2025 won't grow, particularly with the uplift that is coming from deep water and international, meaning all of the existing infrastructure is going to be challenged for conventional applications. But now we're going to add on these whole new investments and alternatives. And, I always say my favorite expression is “the whole alternative space is aspirational,” but at one point it's got to become tactical; and nobody's really looking at the tactical elements that are supply chain-driven, and it's early stages. So, some of that is normal, but you're going to end up drawing on the same base of supplies and materials and labor that we have today, which just means probably inflation, probably delays. You know, just this whole concept of 26,500 floating wind platforms is mind-boggling.   

WO: Are there any particular product lines for which you see the upstream demand increasing further in the next couple of years? 

CT: Well, for for us, the upstream is largely deep water, where we've had this void of spending. Quite frankly, we've done limited exploration work, and most of that's been done in the pre-salt of Brazil and Guyana. But now, it's time to invest in the development infrastructure. To me, the next major wave of spending is on the development side. I do think people will realize, with decline curves what they are, that we're going to have to start doing some exploratory work. But I'm really more focused on the production infrastructure and the field development expenditures that are necessary.  

Obviously, any type of rig completion or intervention work is going to become more and more relevant with mature fields that need to optimize and increase the remaining production, both land and offshore. So, I think intervention work will continue to go up with all of these things, plus environmental regulations. P&A work is going to have to increase. We're seeing a decent lift in the North Sea. We'll see more and more around the U.S., as well. Now, then, I'm a bit bullish on natural gas, and that's really land U.S. right now. We don't invest in LNG facilities nor the design, but it will create ultimate increased demand for natural gas, which I continue to believe that it's one, more environmentally friendly, and two, we’ll just need to learn how to manage methane. Any of the technologies that help you manage methane and reduce carbon emissions in your conventional production will obviously have great application, as well.  

WO: Anything new on the horizon that might be coming out in the next year or two?   

CT: Here are some other things worth mentioning, that are not part of the technology piece. We did win the NOIA final Safety and Cultural Safety award. So, I've been on the NOIA Board in my past life many, many years and chaired the organization, and this award, of all of them—there's two different safety awards—this award, of all of them, means so much to me that the second I heard it, it was awesome. And so, we've done a lot of things, as many companies have done, to improve safety. The next thing that we are investing in is automation. As an example, automation of equipment at the well site. I think that'll be our next phase of success. Whether that qualifies for a future OTC Spotlight Award, I don't know. Another one that has a lot of computer modeling around it is productivity out of the well. We've spent years trying to develop that, particularly on the downhole side. Also, there’s frac optimization and all the things that we're talking about to help the operator improve productivity.  

WO: Meanwhile, you and your colleagues have been active on industry issues and in the relevant associations. How is that going? 

CT: I'll tell you, I was touching on NOIA, and [Executive V.P. and COO] Scott [Moses] has taken over Oil State's relationship with NOIA, where he's on the board. Lloyd [Hajdik] has just come off the Energy Workforce and Technology Council’s board. I, in particular, am now working with the National Petroleum Council, which is the direct Advisory Council to [DOE] Secretary [Jennifer] Granholm. It’s important, as she needs facts and information to make sound decisions at the government and legislative level. So, I am all in to try to spread the message. I do think, though, I don't want to stop there and just say, yes, oil and gas is going to be here for decades and decades to come. I would like to think, and you heard this from Vicki [Hollub], that we can invest in supplemental technologies to make oil and gas competitive for the long term. And, I could talk all day long about ESG reporting and Scope 3, but one of the things to think about is none of these technologies is great. Cradle to grave, none are. But then, how do you compete against the lifecycle of an electric vehicle, as an example? You need to understand.  

Before we spun off a business in 2014, we were exposed to the mining industry. And I always tell this story—I went to look at a potential mining operation in southern Australia called Adelaide. It required seven years of overburden removal before you got to the material and dollar revenue one. So, everybody that's promoting all these things on an aspirational basis, without looking at the tactical lexical, they don't get it. They don't understand. And by the way, mining equipment is run with conventional oil and gas. So, all these things have to, one day, come together. If we can focus our time and attention on decarbonizing existing work, we're all better off in the long run.   

WO: One final question—what is your outlook for the industry through the remainder of this year? And then, your outlook for the first or maybe even second quarter of next year?  

CT: I am seeing a temporary flattening, if you will, of conventional activity. But natural gas prices are sub-$2.50/Mcf. That is just break-even. Economics right now are challenged with natural gas at $2.50. I think most of that was caused by Freeport LNG being offline for an extended period. With existing LNG exports coupled with future increases, natural gas has a long runway. I think crude oil prices, particularly trading in a band of $75 to $85, is incredibly healthy for the long term.  

This year, it's going to flatten out, if not decline, maybe 2% or 3%. I don't see it declining much, and I'm speaking rig count, completion count, most of that driven by natural gas in the Haynesville. And so, I think that is a consensus view, but it's one that I agree with. You know, they're going through earnings reports and estimates and predictions, mostly for land drillers, suggesting a bit of a softening. And I think that's fair, if you're going to drop 30 to 40 rigs, but that's on the margin. What's the current rig count? In the 690s? So, you can put that into perspective.  

Again, I go back to what we have done to date and the need for production infrastructure. I'm just going through the immediate kind of projects that we're bidding and quoting that should be let between now and the end of the year, and then the middle term and longer term. It's a robust portfolio, again tied to conventional oil and gas. Right now, any of the alternative energy activities are only about 5% of our revenue. That excludes, I believe, military, which we do have some military exposure. I do think it grows over time, but you're not going to see that have meaningful dollar impact until the FTLP comes to market, which I think is 2026 and beyond. So, we'll probably be at least 90%-driven by conventional oil and gas globally, with a weighting in the near term towards international and deepwater. I think that's where capital allocation will go initially.