Oil States International, Inc. (NYSE:OIS) is planning to spin off its accommodation business into a standalone company later this year, a special situation that warrants extra attention due to the highly defensive nature of the accommodation business. Oil States’ accommodation business provides an essential service to the oil industry, feeding, housing and providing sanitation facilities for employees in remote regions, a service without which, the industry would find it hard to operate.

Oil States International

Oil States International, Inc. (NYSE:OIS) is a leading provider of accommodation for the oil business, with operations within Australia, Canada and the US shale plays. During 2013 this accommodation business contributed $1.1 billion to Oil States’ top line with the majority of this revenue coming from Canada. With new oil and gas developments emerging around the world in ever more remote locations, it would appear as if this business has plenty of room to expand. Indeed, as a leading provider of accommodation services, Oil States is the go-to-company for the industry. All in all, the accommodation business accounted for 44% of net income, and 39% of Oil States’ revenue during 2013.

Oil States planning to spin off its acquisition business

Oil States International, Inc. (NYSE:OIS)’ plan is to spin the acquisition business off as a C Corp, with the eventual end point begin REIT status, it has been stressed that a REIT conversion will not be possible until the first half of 2015. The details of the spin off are as follows according Oil States’ press release:

Under the separation plan announced in July 2013, Oil States plans to execute a tax-free spin-off of the accommodations business to Oil States shareholders by the end of the second quarter of 2014. In addition to its subsidiary filing the second amendment to its Form 10, Oil States International, Inc. has also received an affirmative IRS ruling regarding the tax free nature of the spin-off transaction. The offshore products and well site services businesses will continue to operate under the “Oil States International” name and continue to trade on the New York Stock Exchange (NYSE) under the symbol “OIS.” Oil States shareholders will own shares in both corporations following the completion of the transaction. The accommodations business intends to have its common stock separately listed on the NYSE under a name yet to be disclosed.

The completion of the spin-off will be subject to market conditions, the receipt of an independent tax opinion, completion of a review by the SEC of the amended Form 10 filed by Oil States International, Inc. (NYSE:OIS) Accommodations SpinCo Inc., the execution of separation and intercompany agreements and final approval of the Oil States board of directors. The spin-off will not be subject to a shareholder vote. Further, progress has been made on establishing a management team for the accommodations business.

Oil States International, Inc. (NYSE:OIS)’s accommodations SpinCo Inc. recently filed a 2nd amendment to its Form 10 (Form 10) with the U.S. Securities and Exchange Commission (SEC) in connection with the spinoff and initial numbers looks appealing.  On a pro forma basis, after the financing and distribution of the SpinCo, based on figures from the end of 2013, the new entity will have $224 million in cash, and long-term debt of $771 million. All in all, net debt will be $547 million, net debt to equity will be around 47%, or 26% of assets, both of which are relatively low gearing figures for what will eventually become a REIT.

Pro forma SpinCo 2013 revenues were $1.04 billion, the gross margin was 53%, the operating margin came in at 25% and net income was $185 million for the period.  Based on these initial numbers, it would appear that the SpinCo is well placed for growth with a clean balance sheet and impressive margins. Further, the SpinCo’s net margin of 18.5% indicates that attractive dividend payouts could be on the cards, even before the conversion to REIT status.

Continued in part two…