Oil States International OIS became a pure-play oil services company after spinning off its accommodation services division, Civeo Corporation CVEO, in Q2 2014. The company now has two divisions – Wellsite Services (28% of revenue) and Offshore Products (72% of revenue).

A year ago revenue was split nearly evenly between the two segments. The oil rout and cuts to the rig count by North American land drillers has punished Wellsite Services. The unit’s revenue fell 22% sequentially in Q4, while Offshore Products revenue was only off 3%.

Source: Shock Exchange

Oil States Is Worth $15

Analysts expect Q1 2015 revenue to decline about 17% from the $235 million reported last quarter. Build into the estimate is a double-digit drop in revenue from Offshore Products. A sharp decline in the company’s top line could hurt EBITDA margins due to a loss of scale.

Revenue

The starting point for the valuation is run rate revenue. I simply took Q4 2015 results and annualized them to derive a run rate of $938 million. This builds in a certain level of optimism given the expected decline in revenue in Q1 2016.

EBITDA

EBITDA equates to Q4 2015 results annualized. The margin of 17.2% is probably optimistic. The company’s margins could fall sharply in Q1 if revenue declines by double digits as expected. If quarterly revenue declines continue unabated, at some point margins could break support. I expect the loss of economies of scale to hurt sentiment for OIS going forward.

EBITDA Multiple

A multiple of 5.0x-7.0x is appropriate for a company with cyclical revenue and earnings in decline. I previously valued OIS at the top end of the range. Oil prices are expected to remain lower for longer, and 2016 looks like it could be a tough year for the oilfield services sector. Not only is EBITDA not expected to grow, it will likely decline.

Secondly, with only $35 million in cash on hand, Oil States’ liquidity (or lack thereof) is becoming a glaring weakness. It may have to tap credit lines in order to stay afloat. Given the industry contraction and company-specific risks, I believe the low-end of the valuation range is now appropriate.