Oil States International (NYSE:OIS) reports Q4 earnings Thursday. Analysts expect revenue of $176.76 and eps of -$0.22. The revenue estimate implies a 1% decline sequentially. Investors should focus on the following key items.

Land Drilling Performance Should Be Stellar ...

Results from Oil States' land drilling operations will likely be stellar. Q3 revenue from the segment increased 14% sequentially as animal spirits returned to the oil patch. I expect a repeat performance this quarter. The North America rig count was up by over 20% during the quarter. Competitors such as Core Labs (NYSE:CLB), Baker Hughes (NYSE:BHI) and Halliburton (NYSE:HAL) showed outperformance in North America this quarter. That bodes well for Oil States.

The company receives about 26% of its revenue from Wellsite Services. The lion's share of its customers are located in the Permian basin where drilling activity has been robust. Another double-digit revenue increase would not be out of the question. There are still thousands of drilled, yet uncompleted wells. If oil prices remain robust then Wellsite Services could have a strong first half of 2017.

... While Offshore Would Likely Disappoint

The company's offshore segment will likely disappoint again. Offshore sustained the company during the oil price rout. However, its revenue fell 2% sequentially last quarter. That was likely a bad omen. Oil States' long-term offshore contracts might be expiring at a time when oil prices do not justify additional investment in the sector.

Experts believe offshore will not rebound until 2018 or 2019. That's problematic as the segment now represents over 75% of total revenue. Another single-digit decline by Offshore could trigger a revenue miss. A weak outlook from management could sink the stock.

Will EBITDA Margins Hold Up?

Oil States' EBITDA margins have ranged from 7%-8% over the past few quarters. Management has done a yeoman's job of cutting costs to stem losses and cash burn. However, if its largest segment takes a turn for the worst it could be difficult to maintain EBITDA margins. Moreover, if the company pares costs any further it might cut into muscle and hurt efficiency.

Conclusion

Growth in land drilling revenue will not likely be robust enough to offset the decline in Offshore. I also expect weak guidance for Q1 2017 due to Offshore's demise.

Disclosure: I am/we are short BHI, HAL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Will Offshore Stymie Oil States? - Seeking Alpha