# DEAR FELLOW
STOCKHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-equipment-services/NYSE_OIS_2017/NYSE_OIS_2017.mmd` · pages 3-9_

---

DEAR FELLOW
STOCKHOLDERS,

___

# As you well know, our industry is highly cyclical. During 2017, market trends began to inflect in a more positive direction, particularly in land basins in the United States.

Commodity prices improved, thereby giving customers the necessary comfort to increase their spending. We saw an acceleration of U.S. land-based drilling and completion-related activity, which was offset by continued underinvestment in deepwater. Oil States benefited directly from the strengthening of the onshore shale markets during 2017 as improvements in completions-related activity translated into positive results for both of our reporting segments.

Considering market conditions, we delivered solid results across our major business lines. Total company revenues for 2017 were \(671 million and Adjusted Consolidated EBITDA was \)38 million \( ^{[1]} \) . When you combine our U.S. Well Site Services segment results with the domestic sales of our short-cycle manufactured products, over half of our full year consolidated revenues were driven by U.S. land completions related activity.

We focused significant time and effort in pursuit of strategic acquisitions and announced three during 2017. In January, we purchased assets and intellectual property that are complementary to our own crane manufacturing and service lines. In April, we purchased the assets and intellectual property for riser testing, inspection and repair services that also complement our offerings. Later in December, we announced the transformational acquisition of GEODynamics, Inc., a provider of oil and gas perforation systems and downhole tools in support of completion, intervention, wireline and well abandonment operations. The GEODynamics acquisition closed in January 2018.

In late August, the impacts of Hurricane Harvey caused widespread damage and logistical challenges in Houston and the surrounding region. Oil States was temporarily impacted by lower revenues and under-absorption of manufacturing facility costs in the third quarter and suffered field-level downtime due to employee dislocations across south Texas resulting from the storm. We operate five manufacturing facilities in the Houston area and employ approximately 500 individuals in the region. The people of Houston were resilient and we recovered fairly quickly with little adverse impact to the Company.

<--- Page Split --->

Higher commodity prices, anticipated increases in customer spending onshore and offshore, along with growing well complexity, position Oil States to benefit from continued market recovery in 2018.

姓名：___  
性别：___  
年龄：___  
地址：___  
电话：___  
邮箱：___  
紧急联系人：___  
紧急联系电话：___  
医疗记录：___  
过敏史：___  
药物使用情况：___  
手术史：___  
家族病史：___  
生活习惯：___  
工作单位：___  
职位：___  
教育背景：___  
紧急联系人关系：___  
备注：___

In 2017, we added a new member to our Board of Directors, Robert "Bob" L. Potter. Bob has assumed his new role as a Director of Oil States and we look forward to his leadership and strategic insight. Bob's extensive energy industry and manufacturing experience will provide meaningful benefits to Oil States in the years to come.

## Macroeconomic Environment and Outlook

The macroeconomic environment for the energy sector saw improvements in 2017. OPEC members, along with some non-members, agreed to maintain production cuts into December 2018, helping global crude oil supplies and demand to get closer to equilibrium. U.S. crude inventories declined during 2017 and are almost back in-line with the five-year average resulting in increased commodity prices, improved activity levels and a more positive customer sentiment.

Average WTI and Brent crude oil prices traded at \(51 per barrel and \)54 per barrel in 2017, up 17% and 24%, respectively, compared to 2016 average prices. The average U.S. rig count for 2017 improved 72% compared to the 2016 average. With higher commodity prices, operator cash flow is expected to expand which should translate into increased spending. For 2018, analysts anticipate a 14% year-over-year increase in drilling and completion spending and a 16% increase in the average U.S. rig count. Stage counts are expected to continue to outpace well counts in 2018 with a 15% year-over-year improvement projected. Other trends, such as longer average lateral lengths and tighter stage spacing, are expected to be adopted by operators that are catching up to leading-edge completions.

With the downturn in energy prices over the past few years, there has been meaningful underinvestment in the deepwater sector. During this time, customers have looked to make their major deepwater projects more economic at lower commodity breakeven prices by re-bidding projects, identifying advancements in technology, and reducing overall project costs with equipment standardization. Major deepwater project sanctions have been extremely weak over the last three years, but are beginning to look modestly brighter. The expectation for floating production facility sanctions over the next three years has improved somewhat and is forecasted to average 8-10 projects per year through 2020.

Higher commodity prices, increases in customer spending onshore and offshore, along with growing well complexity, position Oil States to benefit from the continued market recovery in 2018.

BAKER HUGHES U.S. RIG COUNT

![](images/4_0.jpg)

<--- Page Split --->

![](images/5_0.jpg)

Tempress' Hydropull™ tool milled a record 71 composite bridge plugs from a horizontal lateral almost 11,000 ft. long to a total measured depth of 21,240 ft. in the Midland Basin.

CONSOLIDATED REVENUES
(in millions)

$288.7
Well Site Services
43%

![](images/5_1.jpg)

$381.9
Offshore/Manufactured
Products
57%

# Our Business Segments

## WELL SITE SERVICES

Our 2017 Well Site Services segment results benefited from the recovery in North American drilling and completions activity. Total segment revenues of $289 million increased 56% year-over-year and EBITDA margins averaged 8%.

In our Completion Services business, incremental Adjusted EBITDA margins averaged 43% in 2017 as we realized the benefits of expanded activity in the U.S. following the trough reached in May 2016. During 2017, we saw a 26% increase in the number of completion services jobs performed along with a 14% increase in revenue per completion service job primarily as a result of more complex wells being completed and the corresponding product and service mix shift to higher-end equipment. We witnessed an increase in demand for our higher-end proprietary completions equipment such as our isolation tools and Tempress Hydropull™ tool used in extended reach applications. Regions that experienced strong activity during the year included the Permian Basin, the Mid Continent, the Rockies and the Northeast.

Activity levels for 2018 appear to be trending favorably as customer capital spending budgets and commodity prices are estimated to be up with wells growing in complexity which should continue to favor our higher-end equipment.

Utilization of our land drilling rigs increased to average 29% in 2017 compared to 12% in 2016. As of December 31, 2017, we had 10 land drilling rigs working out of our total fleet of 34. Our land drilling rigs are very efficient and cost effective for operators who have kept them busy drilling vertical wells, setting surface casing and drilling salt water disposal wells.

## OFFSHORE/MANUFACTURED PRODUCTS

Since the downturn in the energy industry began in late 2014, the majority of deepwater development projects have been deferred, adversely impacting our Offshore/Manufactured Products' operations and backlog. We began 2017 with low backlog levels relative to history and also experienced reduced demand for service and repair work. As a result, total segment revenue was $382 million, which was down 25% year-over-year, and we reported average EBITDA margins of 16% compared to 22% in 2016. These lower results were caused by a 57% decline in major project revenues while our short-cycle product sales increased 67% for the year, partially compensating for the deepwater declines. Our short-cycle product revenues, whose demand is largely generated by U.S. land-based activities, comprised 39% of the segment's revenues during 2017.

<--- Page Split --->

Our Offshore/Manufactured Products segment currently enjoys a greater weighting toward short-cycle products, much of which is driven by land-based activity in the U.S.

Orders booked during 2017 totaled \(364 million, equating to a book-to-bill ratio of 0.95x. Noteworthy backlog additions exceeding \)10 million were limited and included standard casing and conductor connectors destined for the Caspian Region and a multi-year services contract for a customer in Latin America. Given delays in several anticipated project awards in the fourth quarter, our backlog declined 16% year-over-year totaling \(168 million at December 31, 2017. We believe that our backlog is at or very near trough levels, and expect to receive additional awards associated with major project sanctions in 2018. Demand for our short-cycle products is expected to remain steady and could increase given the outlook for U.S. land completions activity for 2018.

We believe that major deepwater projects which are focused on production infrastructure will ultimately be sanctioned. The expectation for floating production facility sanctions over the next three years has improved somewhat and is forecasted to average 8-10 projects per year through 2020. Our short-cycle and service exposure today should help buffer current low levels of major project backlog until additional awards are received.

## DOWNHOLE TECHNOLOGIES

Our Downhole Technologies segment is comprised of the GEODynamics operation we acquired in January 2018. GEODynamics was founded in 2004 as a researcher, developer and manufacturer of consumable engineered products used in completion applications and has achieved significant growth in recent years. The company is headquartered in Millsap, Texas (west of Fort Worth, Texas) on a campus which supports the company's engineering, product testing, manufacturing, sales and administrative functions. GEODynamics employs over 370 personnel in 14 locations. Their product innovation is internally driven by its experienced engineering personnel, who are located on site with the manufacturing and testing facilities. GEODynamics maintains collaborative relationships with E&P operators, allowing it to advance its products to respond to the needs of our customers. GEODynamics currently holds over 40 issued patents with a number of patents pending.

GEODynamics has established itself as a technology leader for oil and gas well perforating systems, and they also provide downhole completion, intervention, and wireline conveyed solutions. Demand drivers include continued trends toward longer lateral lengths, increased frac stages and more perforation clusters to target increased unconventional well productivity.

GEODynamics' product offerings fall into three categories: first, is their Engineered Perforating Solutions. GEODynamics has pioneered advancements in perforation technology by using patented and proprietary systems combined with advanced modeling and analysis tools. Their expertise has led to the optimization of perforation hole size, depth, and quality of tunnels, which are key factors for maximizing

![](images/6_0.jpg)

20" vertical integral collet connector for offshore Brazil.

![](images/6_1.jpg)

<--- Page Split --->

## With the acquisition of GEODynamics, we created a third business segment called "Downhole Technologies."

GEODYNAMICS PRODUCT OFFERING

• Engineered Perforating Solutions

• Completion Products and Technology

• Legacy \( ^{®} \)  Oil Tools

GEODynamics \( ^{®} \) 

"We are very excited to be part of Oil States and the growth opportunities Oil States provides with its people, technology, global footprint and access to capital."

David S. Wesson, President of GEODynamics

GEODYNAMICS BY THE NUMBERS

• 370+ personnel

• 14 locations across the U.S.

• 40+ patents

INSTITUTION OF THE
EXPLORATION AND
EXPLORATION
EXPLORATION

GEODYNAMICS MISSION

To help our customers drill and complete better wells.

GEODynamics is a global leader in testing in natural rock, recording critical data to help operators improve well performance.

<--- Page Split --->

We believe that the GEODynamics acquisition is a unique opportunity with meaningful growth potential.

___

the effectiveness of hydraulic fracturing. Second is Completion Products and Technology. These offerings include proprietary toe valve and frac plug products which are focused on zonal isolation for hydraulic fracturing of horizontal wells. And third is Legacy \( ^{®} \)  Oil Tools. These tools offer a broad range of consumable products used in completion, intervention and decommissioning applications, such as setting tools and bridge plugs.

We believe that the GEODynamics acquisition is highly strategic and possesses meaningful growth potential that combines technology with downhole completion consumables. Oil States is focused on driving revenue synergies with this acquisition and expects the acquired technology and products to benefit from our U.S. and global footprint, operating excellence and strong balance sheet which we believe will enhance the growth potential of the business. GEODynamics' highly complementary products should provide opportunities for incremental revenue and an expanded customer base, which bring accretive margins and generates strong free cash flow. We will also benefit from a management team that has a combined 100 years of industry experience. This combination provides a strong strategic and cultural fit for Oil States. The GEODynamics mission is to "help our customers drill and complete better wells." This is a core tenet that we should never forget.

## Delivering on our Strategy

Since the downturn began in late 2014, protecting our balance sheet and preserving our liquidity position have been top priorities for us. During 2017, we generated $95 million of cash flow from operations, which we used to repay $42 million of debt during the year and repurchased $16 million of our common stock. Our focus on maintaining a strong financial position through incredibly volatile energy industry cycles positioned us well and we were able to close on a strategic acquisition like GEODynamics.

Financing for the GEODynamics acquisition included the issuance of 8.66 million shares of Oil States stock valued at \(295 million at closing, the payment of \)295 million in cash, and the issuance of a $25 million unsecured note payable to the seller, for total consideration of $615 million at closing.

Subsequent to closing the transaction, we entered into a more permanent financing structure. In January of 2018, we sold to qualified institutional investors $200 million principal amount of 1.50% convertible senior notes due 2023. In conjunction with the issuance of the convertible notes, our revolving credit facility was further amended and extended. Total lender commitments under the amended revolving credit facility are $350 million and the maturity date was extended to January 30, 2022, providing ample liquidity for continued growth.

![](images/8_0.jpg)

GEODynamics maintains a strict Quality Assurance/Quality Control program to ensure best performance of its equipment downhole.

<--- Page Split --->

![](images/9_0.jpg)

Cindy B. Taylor
President and Chief Executive Officer

![](images/9_1.jpg)

姓名：___  
性别：___  
年龄：___  
地址：___  
电话：___  
邮箱：___  
紧急联系人：___  
紧急联系电话：___  
医疗记录：___  
过敏史：___  
药物使用情况：___  
手术历史：___  
家族病史：___  
其他备注：___

We intend to invest between \(60 million and \)70 million in capital expenditures during 2018. This capital will be spent on expanding and maintaining our higher-end completion services equipment deployed to service the active U.S. shale plays along with growth capital for the recently acquired GEODynamics business. In our Offshore/Manufactured Products segment, ongoing Brazil facility expansions are long-term investments that will provide additional capacity and efficiencies in a market that is projected to be a major global oil producer for decades to come.

Oil States remains financially well positioned with a strong balance sheet and limited debt maturities before 2022. We remain disciplined in our allocation of capital and are focused on creating long-term stockholder value via strategic growth and returns on invested capital. Our offshore products business should enjoy a recovery as we move into 2019 and 2020 with the expected recovery in deepwater spending.

## Conclusion

The outlook for the energy sector in 2018 is positive. U.S. E&P capex spending is anticipated to increase 10% to 15%, while international capex spending is expected to be up 5%. Well complexity and service intensity are not abating nor are the number of stages completed. We have strategically shifted our focus toward these key industry drivers with our existing base business and with our recent acquisition of GEODynamics.

While the energy industry has faced its share of challenges, as a Company, we achieved some significant and transformational accomplishments in 2017. These successes are due to the hard work and dedication of our employees across the globe. We are finally able to hire again and wages are beginning to improve. As we move into 2018, our priorities are to integrate GEODynamics into Oil States and build upon our collective technologies.

Sincerely,

![](images/9_2.jpg)

Cindy B. Taylor
President and Chief Executive Officer
March 23, 2018