Executive Summary / Key Takeaways

• Strategic Transformation Complete: Oil States International has fundamentally repositioned from a U.S. land-exposed service provider to an offshore and international project-driven manufacturer, with 75% of Q3 2025 revenue generated from these higher-margin markets, creating a more resilient and profitable business model.
• Margin Inflection Underway: The company's aggressive U.S. land optimization—exiting underperforming service lines and consolidating facilities—has transformed the Completion and Production Services segment from a 12% EBITDA margin in Q4 2024 to a 29% margin in Q3 2025, demonstrating that revenue sacrifice is generating disproportionate profit gains.
• Backlog Quality Drives Visibility: Offshore Manufactured Products backlog reached a decade-high $399 million in Q3 2025 with a 1.3x book-to-bill ratio, providing revenue visibility into 2026 and insulating the company from short-term commodity price volatility that plagues land-based peers.
• Tariff Headwind is Manageable but Real: While Downhole Technologies faces material cost pressure from 88-98% tariffs on imported gun steel, management's mitigation strategies—including Batam facility production, alternate sourcing, and customer price adjustments—should restore segment profitability by early 2026, making the current EBITDA loss temporary.
• Capital Allocation Prioritizes Shareholders: With net debt approaching zero and $102.8 million of convertible notes maturing in April 2026, management has explicitly prioritized share repurchases over cash accumulation, buying back $16.2 million in shares through Q3 2025 while maintaining strong liquidity.

Setting the Scene: From Land Services to Offshore Manufacturing

Oil States International, incorporated in 1995 and headquartered in Houston, Texas, operates through three segments that reflect a deliberate strategic evolution. The company has spent the past 18 months executing a radical transformation, exiting commoditized U.S. land services while doubling down on technology-driven offshore manufactured products. This fundamentally changes the company's earnings power—from short-cycle, price-sensitive services to long-cycle, project-based manufacturing with embedded intellectual property.

The oilfield services industry is bifurcating. U.S. land activity has become increasingly volatile and commoditized, with frac spreads declining 11% sequentially in Q3 2025. Meanwhile, offshore and international markets demonstrate resilience, driven by multi-year capital investments from major operators seeking lower decline curves and more stable production. Oil States recognized this divergence early, initiating a restructuring program in 2024 that accelerated through 2025. The company integrated short-cycle consumables from Offshore Manufactured Products into Downhole Technologies, exited the flowback and well testing service offering, closed six leased facilities, and sold an idled facility for $24.8 million in cash proceeds.

This strategic repositioning places Oil States in a fundamentally different competitive category. While peers like NOV Inc. and Oceaneering International compete across broad service portfolios, Oil States has narrowed its focus to high-engineering-content products where it can command pricing power. The company's value chain position has shifted from labor-intensive services at the wellsite to capital-light manufacturing of critical components for offshore infrastructure. This creates a more defensible moat, as engineering specifications and safety certifications create switching costs that pure service providers cannot replicate.

Technology, Products, and Strategic Differentiation

Oil States' competitive advantage rests on two pillars: proprietary offshore connector technology and integrated downhole consumables. The Offshore Manufactured Products segment generates approximately 90% of its sales from project-driven products for exploratory drilling, greenfield production infrastructure, and subsea pipeline systems. These projects span multiple years, creating revenue predictability that short-cycle land services cannot match. The segment's flagship flex joint deepwater riser connector and conductor connector products command premium pricing due to their proven reliability in extreme environments.

The company's managed pressure drilling (MPD) systems represent a technology breakthrough with tangible commercial impact. Receiving customer approval for South America operations in Q4 2024 opened a new market for these systems, which enhance safety and drilling efficiency. MPD systems carry higher margins than standard equipment and position Oil States at the forefront of drilling automation trends. The technology's market acceptance validates management's R&D investments and creates a pathway for incremental revenue growth independent of rig count cycles.

In Downhole Technologies, Oil States manufactures consumable engineered products including perforating systems, frac plugs, and elastomer products for zonal isolation . While this segment faces near-term tariff headwinds, its technology differentiation remains intact. The Tempress product line is a market-leading technology for drill-out of plugs during completion operations. Consumables generate recurring revenue streams and customer stickiness—once operators qualify a perforating system, switching costs rise due to operational risk aversion.

The new Batam, Indonesia facility, expected to complete in Q3 2025, directly addresses tariff concerns while expanding international capacity. By manufacturing gun assemblies in Batam, Oil States can serve international markets with lower tariff exposure. This transformation turns a cost disadvantage into a geographic advantage, potentially allowing the company to take market share from competitors who remain dependent on Chinese steel imports. The six-month implementation timeline suggests the segment should return to positive EBITDA by early 2026.

Financial Performance & Segment Dynamics: Evidence of Strategy Working

Consolidated Q3 2025 revenue of $165.4 million declined 5% year-over-year, but this headline masks the strategic transformation's success. Exiting underperforming operations reduced revenue by $12.6 million in Completion and Production Services and $3.0 million in Downhole Technologies, yet consolidated product revenues increased 6% driven by Offshore Manufactured Products. This demonstrates the company is successfully trading low-margin revenue for high-margin revenue, a classic recipe for earnings power expansion.

The Offshore Manufactured Products segment delivered $108.6 million in Q3 2025 revenue, up 6% year-over-year, with adjusted segment EBITDA of $22 million at a 21% margin. Backlog grew to $399 million, a decade-high, with $145 million in Q3 bookings achieving a 1.3x book-to-bill ratio. This provides revenue visibility into 2026 and validates that the segment's growth is sustainable, not just a quarterly fluctuation. Management expects 16% of backlog to convert to revenue in Q4 2025 and an additional 37% in 2026, creating a clear earnings trajectory.

Completion and Production Services exemplifies successful restructuring. Q3 2025 revenue of $27.5 million appears weak, down 31% year-over-year, but excluding exited operations, revenue actually increased 16%. More importantly, adjusted segment EBITDA margin reached 29%, up from 12% in Q4 2024. This proves the optimization thesis: eliminating low-margin land-based services has transformed a breakeven segment into a consistent cash generator. Management expects go-forward margins in the high twenties to low thirties, suggesting this improvement is structural.

Downhole Technologies faces temporary challenges, with Q3 2025 revenue of $29.0 million down 9% and an adjusted EBITDA loss of $1 million. Tariffs on imported gun steel increased costs materially, while weak plug demand provided insufficient offset. This segment represents the only one not executing on the strategic plan, but the headwind is external and temporary. Management's mitigation efforts—alternate sourcing, Batam production, and customer price increases—should restore profitability within six months. The segment's breakeven performance in Q4 2024 and early 2025 demonstrates its underlying earnings power when not impacted by trade policy.

Cash flow generation validates the strategy's effectiveness. Q3 2025 operating cash flow of $30.7 million increased 105% sequentially, driving free cash flow of $22.0 million. For the first nine months of 2025, operating cash flow reached $55 million versus $27.7 million in the prior year period. This demonstrates the company is converting its strategic repositioning into actual cash, not just accounting earnings. The $9 million positive cash flow in Q1 2025 reversed a historical trend of negative Q1 cash flow, showing improved working capital management.

Outlook, Management Guidance, and Execution Risk

Management maintained full-year 2025 EBITDA guidance of $88-93 million despite lowering revenue guidance to $685-700 million to reflect U.S. land streamlining. This signals confidence that margin expansion will offset revenue headwinds, a key tenet of the investment thesis. Q4 2025 guidance calls for 8-13% sequential revenue growth and adjusted EBITDA of $21-22 million, implying full-year achievement of the target range.

The company's backlog composition supports optimism. Offshore Manufactured Products backlog of $399 million includes production infrastructure awards in Brazil, where Petrobras leads global offshore investment. Deepwater projects are less susceptible to short-term commodity price fluctuations, providing earnings stability. Management noted that "development drilling programs that are milkier in nature don't depend on short-term movements up and down in the commodity price," highlighting the segment's defensive characteristics.

Execution risk centers on two variables: tariff mitigation timeline and Batam facility ramp. Management expects six months to implement Batam gun assembly production and secure alternate steel sources. Any delay extends Downhole Technologies' EBITDA losses and could impact 2026 earnings. However, competitor analysis suggests all perforating system providers face similar tariff exposure, creating industry-wide pricing power that should enable cost pass-through.

Capital allocation priorities remain clear. With $102.8 million of convertible notes maturing in April 2026 and net debt approaching zero, management has prioritized share repurchases, buying back $16.2 million through Q3 2025. This signals management believes the stock is undervalued and that debt repayment is not a concern. The $50 million repurchase authorization through October 2026 provides continued support.

Risks and Asymmetries: What Could Break the Thesis

Tariff escalation represents the most immediate risk. While management expects to pass through cost increases, the 88-98% tariff rates on gun steel are unprecedented. If alternate sourcing proves more expensive than anticipated or customers resist price increases, Downhole Technologies margins could compress further. The segment's breakeven performance is critical to consolidated EBITDA growth, and prolonged losses would erode the overall margin expansion story.

Supply chain disruption from the October 10, 2025 explosion at a major U.S. explosive powder supplier creates near-term operational risk. Oil States obtains a majority of its perforating charge powders from this supplier. While management is seeking alternative sources, any disruption could impact Q4 2025 and Q1 2026 production. This could delay the Downhole Technologies recovery timeline and create customer delivery issues, potentially damaging relationships in a segment where reliability is paramount.

U.S. land activity weakness could persist longer than expected. While Oil States has reduced its land exposure to just 11-12% of Completion and Production Services, further frac spread count declines would still impact results. The segment's margin improvement assumes a stable revenue base; additional volume declines could offset cost savings and prevent margin expansion from reaching the targeted high twenties.

Customer concentration in offshore markets creates dependency risk. The Brazil awards and Petrobras (PBR) relationship, while currently positive, expose Oil States to a single customer's capital allocation decisions. A major project cancellation or shift in Petrobras' strategy could quickly reduce backlog and revenue visibility, undermining the offshore growth thesis.

Competitive Context and Positioning

Oil States occupies a distinct niche among mid-tier oilfield service companies. Compared to NOV Inc. (NOV), which generates $2.18 billion in quarterly revenue, Oil States' $165 million scale is smaller but more focused. NOV's 6.66x EV/EBITDA multiple is comparable to Oil States' 7.44x, yet Oil States generates superior EBITDA margins in its core offshore segment (21% vs. NOV's 8-10% operating margins). This suggests the market is valuing Oil States' specialized manufacturing moat similarly to NOV's broader portfolio, despite Oil States' superior profitability in its focus areas.

Forum Energy Technologies (FET) presents a closer peer comparison at $196 million quarterly revenue. FET's 11.65x EV/EBITDA multiple reflects its subsea umbilical focus and recent margin recovery. Oil States' lower multiple suggests the market has not yet recognized its margin expansion potential. If Oil States executes on its 2026 margin targets, multiple expansion could provide additional upside beyond earnings growth.

Oceaneering International (OII) demonstrates the valuation premium for offshore pure-plays, trading at 7.31x EV/EBITDA with 20% EBITDA margins. Oil States' comparable multiple with inferior consolidated margins suggests the market is pricing in margin recovery. Execution on the optimization plan could close the margin gap and justify valuation parity, implying 20-30% upside from multiple expansion alone.

Innovex International (INVX), the Dril-Quip (DRQ) successor, trades at 8.63x EV/EBITDA with 32% gross margins but negative free cash flow due to merger integration. Oil States' positive free cash flow and lower multiple highlight its capital efficiency advantage. This positions Oil States as a more stable, cash-generative alternative in the offshore equipment space, attractive to value-oriented investors.

Valuation Context: Pricing for Transformation

At $7.09 per share, Oil States trades at an enterprise value of $488.77 million, representing 7.44x TTM EBITDA and 0.75x revenue. The EV/EBITDA multiple is in line with larger peers like NOV (6.66x) and OII (7.31x), despite Oil States being earlier in its margin expansion cycle. The market appears to be valuing the company based on current earnings rather than its targeted 2026 margin profile.

Price-to-operating cash flow of 5.87x compares favorably to OII's 11.81x, though it is higher than NOV's 4.87x, reflecting Oil States' strong cash conversion. This highlights the company's ability to generate cash during a transformation period, validating management's capital allocation strategy. The 13.95x price-to-free-cash-flow ratio, while higher, still represents a reasonable valuation for a company with 105% sequential cash flow growth.

Balance sheet strength supports the valuation. With $67.1 million in cash, no ABL borrowings, and $73.2 million in available liquidity, Oil States has ample resources to fund the Batam facility completion and retire the $102.8 million of 2026 notes. This removes balance sheet risk from the investment equation, allowing investors to focus on operational execution rather than financial distress.

The company's 0.18x debt-to-equity ratio is substantially lower than all direct competitors (NOV: 0.36x, FET: 0.76x, OII: 0.98x). This provides financial flexibility to weather industry downturns and invest in growth initiatives without diluting shareholders. Management's explicit preference for share repurchases over cash accumulation, as stated by CEO Cynthia Taylor—"No shareholder pays us to sit on cash"—signals confidence in the business's durability.

Conclusion: Execution Determines Asymmetric Outcome

Oil States International has completed the strategic pivot from commoditized land services to higher-margin offshore manufacturing, with Q3 2025 results providing clear evidence of success. The Offshore Manufactured Products segment's decade-high backlog and 21% EBITDA margins, combined with Completion and Production Services' transformation from 12% to 29% margins, demonstrate that the restructuring is working. This validates the central thesis: revenue quality matters more than quantity, and margin expansion can drive earnings growth even in a challenging macro environment.

The investment decision hinges on two variables: tariff mitigation timeline and offshore backlog conversion. If management executes on Batam production and alternate sourcing within the six-month target, Downhole Technologies should return to positive EBITDA by Q1 2026, adding $8-10 million in quarterly segment EBITDA. If the $399 million offshore backlog converts on schedule, revenue growth should accelerate into 2026, supporting margin accretion toward the 21-22% target.

The risk/reward profile appears asymmetric. Downside is limited by the company's balance sheet, with net debt approaching zero, $55 million in operating cash flow generation for the first nine months of 2025, and valuation multiples that already price in current earnings. Upside potential from margin expansion, multiple re-rating toward offshore peers, and continued share repurchases could drive 30-50% returns over the next 18 months if execution continues. For investors willing to look through temporary tariff headwinds, Oil States offers a compelling transformation story with tangible evidence of success.