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SPN > SEC Filings for SPN > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for SUPERIOR ENERGY SERVICES INC

Form 10-Q for SUPERIOR ENERGY SERVICES INC


5-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve risks and uncertainties. Generally, the words "expects," "anticipates," "targets," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions identify forward-looking statements, although not all forward-looking statements contain these identifying words. All statements other than statements of historical fact included in this section regarding our financial position and liquidity, strategic alternatives, future capital needs, business strategies and other plans and objectives of our management for future operations and activities are forward-looking statements. These statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current market and industry conditions, expected future developments and other factors it believes are appropriate under the circumstances. Such forward-looking statements are subject to uncertainties that could cause our actual results to differ materially from such statements. Such uncertainties include, but are not limited to: risks inherent in acquiring businesses, the effect of regulatory programs and environmental matters on our performance, including the risk that future changes in the regulation of hydraulic fracturing could reduce or eliminate demand for our pressure pumping services; risks associated with business growth outpacing the capabilities of our infrastructure and workforce; risks associated with the uncertainty of macroeconomic and business conditions worldwide; the cyclical nature and volatility of the oil and gas industry, including the level of exploration, production and development activity and the volatility of oil and gas prices; changes in competitive factors affecting our operations; political, economic and other risks and uncertainties associated with international operations; the impact that unfavorable or unusual weather conditions could have on our operations; the potential shortage of skilled workers; our dependence on certain customers; the risks inherent in long-term fixed-price contracts; and, operating hazards, including the significant possibility of accidents resulting in personal injury or death, property damage or environmental damage. These risks and other uncertainties related to our business are described in detail in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Investors are cautioned that many of the assumptions on which our forward-looking statements are based are likely to change after our forward-looking statements are made, including for example the market prices of oil and natural gas and regulations affecting oil and gas operations, which we cannot control or anticipate. Further, we may make changes to our business plans that could or will affect our results. We undertake no obligation to update any of our forward-looking statements and we do not intend to update our forward-looking statements more frequently than quarterly, notwithstanding any changes in our assumptions, changes in our business plans, our actual experience, or other changes. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Executive Summary

For the three months ended June 30, 2014, revenue was $1,107.6 million and income from continuing operations was $79.1 million, or $0.50 diluted earnings per share. Net income was $75.2 million, or $0.47 diluted earnings per share.

Second quarter 2014 revenue in our Drilling Products and Services segment increased 3% sequentially to $226.0 million, as compared to $220.2 million in the first quarter of 2014. On a sequential basis, U.S. land market revenue increased 21% to $81.7 million, which was offset by a 9% decline in Gulf of Mexico market revenue to $92.8 million. International market revenue remained unchanged at $51.5 million. U.S. land market revenue was higher due to increased demand for premium drill pipe and bottom hole assemblies. The primary reason for lower Gulf of Mexico market revenue was lower premium drill pipe rentals, which was partially offset by an increase in accommodations rentals.

Revenue for the three months ended June 30, 2014 in our Onshore Completion and Workover Services segment increased 2% sequentially to $398.1 million, as compared to $389.9 million in the first quarter of 2014. All of this segment's revenue is derived from the U.S. land market area. On a sequential basis, demand for well service rigs and pressure pumping services increased, which was partially offset by a decline in fluid management services.

Second quarter 2014 revenue in our Production Services segment increased 7% sequentially to $343.9 million, as compared to $321.2 million in the first quarter of 2014. Revenue in the Gulf of Mexico market area increased 11% to $38.4 million due to increased demand for wireline and pressure control services. U.S. land market revenue increased 6% sequentially to $214.6 million primarily due to increased activity for coiled tubing, remedial pumping and pressure control services. Revenue from international market areas increased 8% sequentially to $90.9 million primarily due to an increase in demand for hydraulic workover and snubbing activity and pressure control services.

Operating results for our subsea construction and conventional decommissioning businesses are reported in discontinued operations. Previously those operating results were reported within the Technical Solutions segment, which was then named the Subsea and Technical Solutions segment. Second quarter 2014 revenue in our Technical Solutions segment increased to $139.6 million, which represents a 7% sequential increase from first quarter 2014 revenue of $130.1 million. U.S. land market revenue increased 24% sequentially to $27.0 million primarily due to an increase in demand for completion tools and products and increase in well control work. Gulf of Mexico market revenue increased 7% sequentially to $80.4 million primarily due to an increase in demand for completion


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tools and products. International market revenue decreased 4% sequentially to $32.2 million as a result of a decrease in demand for well control work.

Comparison of the Results of Operations for the Three Months Ended June 30, 2014 and 2013

For the three months ended June 30, 2014, our revenues were $1,107.6 million, resulting in income from continuing operations of $79.1 million, or $0.50 diluted earnings per share from continuing operations. Net income was $75.2 million, or $0.47 diluted earnings per share. For the three months ended June 30, 2013, revenues were $1,091.1 million and income from continuing operations was $74.1 million, or $0.46 diluted earnings per share from continuing operations. Net income was $68.6 million, or $0.43 diluted earnings per share.

The following table compares our operating results for the three months ended June 30, 2014 and 2013 (in thousands, except percentages). Cost of services and rentals excludes depreciation, depletion, amortization and accretion.

                                      Revenue                               Cost of Services and Rentals
                          2014           2013         Change        2014       %        2013       %       Change
Drilling Products
and Services          $   225,982    $   205,422    $  20,560    $  72,737    32%    $  66,984    33%    $   5,753
Onshore Completion
and
Workover Services         398,048        398,216         (168)     274,907    69%      262,057    66%       12,850
Production Services       343,876        369,066      (25,190)     231,119    67%      252,324    68%      (21,205)
Technical Solutions       139,646        118,425       21,221       71,530    51%       65,339    55%        6,191
Total                 $ 1,107,552    $ 1,091,129    $  16,423    $ 650,293    59%    $ 646,704    59%    $   3,589

The following provides a discussion of our results on a segment basis:

Drilling Products and Services Segment

Revenue from our Drilling Products and Services segment increased 10% to $226.0 million for the three months ended June 30, 2014, as compared to $205.4 million for the same period in 2013. Cost of services as a percentage of revenue decreased to 32% of segment revenue for the three months ended June 30, 2014, as compared to 33% in the same period in 2013. Revenue from our Gulf of Mexico market area increased approximately 23% due to increased demand in most of our product lines within this segment, particularly premium drill pipe and accommodations. Revenue generated from our U.S. land market area increased 10% primarily due to increases in accommodations rentals and bottom hole assemblies. These increases were partially offset by an 8% decrease in revenue derived from our international market area primarily due to a decreased demand in rentals of accommodations.

Onshore Completion and Workover Services Segment

Revenue from our Onshore Completion and Workover Services segment remained unchanged at $398.1 million for the three months ended June 30, 2014. All of this segment's revenue is derived from the U.S. land market area. Revenue declined for our pressure pumping businesses, which was offset by a revenue increase for our fluid management businesses. Cost of services as a percentage of revenue increased to 69% for the three months ended June 30, 2014 as compared to 66% in the same period in 2013. The decline in revenue and increase in cost of services percentage is a result of competitive pressures existing in the U.S. land markets.

Production Services Segment

Revenue from our Production Services segment for the three months ended June 30, 2014 decreased by 7% to $343.9 million, as compared to $369.1 million for the same period in 2013. Cost of services as a percentage of revenue decreased to 67% from 68% in the second quarter of 2013. Revenue derived from the Gulf of Mexico market area decreased 28% due to decreased demand for pressure control, hydraulic workover and snubbing services. Revenue from the U.S. land market area decreased 7% as we experienced declines in coiled tubing, remedial pumping, and hydraulic workover and snubbing activity. The declines in the U.S. land market activities is attributable to a decline in general market conditions. Revenue from international market areas increased 8% primarily due to an increase in hydraulic workover and snubbing activity and an increase in demand for remedial pumping services in Latin America.


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Technical Solutions Segment

Revenue from our Technical Solutions segment increased 18% to $139.6 million for the three months ended June 30, 2014, as compared to $118.4 million for the same period in 2013. Cost of services decreased to 51% of segment revenue from 55% in the second quarter of 2013. Revenue in our international market areas increased 67% as a result of an increase in completion tools and products. Revenue in our U.S. land market area increased 36% primarily due to an increase in demand for completion tools and products. Revenue in our Gulf of Mexico market area increased 2% primarily due to an increase in demand for completion tools and products.

Depreciation, Depletion, Amortization and Accretion

Depreciation, depletion, amortization and accretion increased to $161.0 million in the three months ended June 30, 2014 from $149.4 million for the same period in 2013. Depreciation and amortization expense increased for our Drilling Products and Services segment by $5.3 million, or 13%, due to 2013 and 2014 capital expenditures. Depreciation and amortization expense for our Onshore Completion and Workover Services segment increased by $3.8 million, or 7%, due to 2013 and 2014 capital expenditures. Depreciation and amortization expense for our Production Services segment decreased by $5.7 million, or 13% as a result of certain assets being fully depreciated. Depreciation, depletion, amortization and accretion expense for our Technical Solutions segment for the three months ended June 30, 2014 increased by approximately $8.2 million, or 83%, primarily due to 2013 and 2014 capital expenditures.

General and Administrative Expenses

General and administrative expenses were $146.9 million for the three months June 30, 2014 as compared to $147.6 million for the same period in 2013.

Discontinued Operations

Discontinued operations include operating results for both our subsea construction and conventional decommissioning businesses. Losses from discontinued operations, net of tax, were $3.9 million for the three months ended June 30, 2014, as compared to $5.5 million for the same period in 2013.

Comparison of the Results of Operations for the Six Months Ended June 30, 2014 and 2013

For the six months ended June 30, 2014, our revenues were $2,169.0 million, resulting in income from continuing operations of $121.7 million, or $0.76 diluted earnings per share from continuing operations. Net income was $111.8 million, or $0.70 diluted earnings per share. For the six months ended June 30, 2013, revenues were $2,178.0 million and income from continuing operations was $154.7 million, or $0.96 diluted earnings per share from continuing operations.
Net income was $132.3 million, or $0.82 diluted earnings per share.

The following table compares our operating results for the six months ended June 30, 2014 and 2013 (in thousands, except percentages). Cost of services and rentals excludes depreciation, depletion, amortization and accretion.

                                       Revenue                                 Cost of Services and Rentals
                           2014           2013         Change         2014        %         2013        %       Change
Drilling Products
and Services           $   446,192    $   399,401    $  46,791    $   139,889    31%    $   131,629    33%    $   8,260
Onshore Completion
and
Workover Services          787,925        824,199      (36,274)       559,142    71%        543,796    66%       15,346
Production Services        665,111        736,463      (71,352)       458,344    69%        505,379    69%      (47,035)
Technical Solutions        269,742        217,938       51,804        144,523    54%        117,494    54%       27,029
Total                  $ 2,168,970    $ 2,178,001    $  (9,031)   $ 1,301,898    60%    $ 1,298,298    60%    $   3,600

The following provides a discussion of our results on a segment basis:

Drilling Products and Services Segment

Revenue from our Drilling Products and Services segment increased 12% to $446.2 million for the six months ended June 30, 2014, as compared to $399.4 million for the same period in 2013. Cost of services as a percentage of revenue decreased to 31% of segment revenue for the six months ended June 30, 2014, as compared to 33% in the same period in 2013. Revenue from our Gulf of Mexico market area increased approximately 34% due to increases in most of our product lines within this segment, particularly premium drill pipe and accommodations.
Revenue generated from our U.S. land market area increased 1% primarily due to increases in revenue from


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rentals of accommodations, which was partially offset by decreased demand for premium drill pipe. These increases were partially offset by a 3% decrease in revenue generated from our international market areas, which was due to decreases in rentals of accommodations.

Onshore Completion and Workover Services Segment

Revenue from our Onshore Completion and Workover Services segment decreased by 4% to $787.9 million for the six months ended June 30, 2014, as compared to $824.2 million for the same period in 2013. All of this segment's revenue is derived from the U.S. land market area. Revenue declined for our well service rig and pressure pumping businesses. These declines were partially offset by a revenue increase in our fluid management businesses. Cost of services as a percentage of revenue increased to 71% for the six months ended June 30, 2014 as compared to 66% in the same period in 2013. The decline in revenue and increase in cost of services percentage is a result of competitive pressures existing in the U.S. land markets.

Production Services Segment

Revenue from our Production Services segment for the six months ended June 30, 2014 decreased by 10% to $665.1 million, as compared to $736.5 million for the same period in 2013. Cost of services as a percentage of revenue remained unchanged at 69% of segment revenue. Revenue derived from the Gulf of Mexico market area decreased 32% due to decreased demand for pressure control, hydraulic workover and snubbing and wireline services. Revenue from international market areas decreased 3% primarily due to a decline in hydraulic workover and snubbing activity, partially offset by an increase in demand for remedial pumping services in Latin America. Revenue from the U.S. land market area decreased 7% as we experienced declines in coiled tubing, remedial pumping, and hydraulic workover and snubbing activity. The decline in U.S. land market revenue is attributable to a decline in general market conditions.

Technical Solutions Segment

Revenue from our Technical Solutions segment increased 24% to $269.7 million for the six months ended June 30, 2014, as compared to $217.9 million for the same period in 2013. Cost of services remained unchanged at 54% of segment revenue. Revenue in our international market areas increased 66% as a result of an increase in demand for well control work and completion tools and products. Revenue in our Gulf of Mexico market area increased 9% year over year primarily due to an increase in demand for completion tools and products. Revenue in our U.S. land market area increased 35% primarily due to an increase in demand for completion tools and products.

Depreciation, Depletion, Amortization and Accretion

Depreciation, depletion, amortization and accretion increased to $323.3 million in the six months ended June 30, 2014 from $294.4 million for the same period in 2013. Depreciation and amortization expense increased for our Drilling Products and Services segment by $9.0 million, or 11%, due to 2013 and 2014 capital expenditures. Depreciation and amortization expense for our Onshore Completion and Workover Services segment increased by $10.5 million, or 10%, due to 2013 and 2014 capital expenditures. Depreciation and amortization expense for our Production Services segment decreased by $5.8 million, or 7% as a result of certain assets being fully depreciated. Depreciation, depletion, amortization and accretion expense for our Technical Solutions segment for the six months ended June 30, 2014 increased by approximately $15.2 million, or 85%, primarily due to 2013 and 2014 capital expenditures.

General and Administrative Expenses

General and administrative expenses were $302.8 million for six months ended June 30, 2014, as compared to $293.4 million for the same period in 2013. The increase is primarily attributable to an increase in employee-related expenses and expanding infrastructure.

Discontinued Operations

Discontinued operations include operating results for both our subsea construction and conventional decommissioning businesses. Losses from discontinued operations, net of tax, were $9.8 million for the six months ended June 30, 2014 as compared to $22.4 million for the same period in 2013.

Liquidity and Capital Resources

In the six months ended June 30, 2014, we generated net cash from operating activities of $439.7 million, as compared to $345.4 million in the same period of 2013. Our primary liquidity needs are for working capital and to fund capital expenditures, debt service, dividend payments, share repurchases and acquisitions. Our primary sources of liquidity are cash flows from operations and available borrowings under the revolving portion of our credit facility. We had cash and cash equivalents of $201.7 million as of June 30, 2014, compared to $196.0 million as of December 31, 2013. As of June 30, 2014, approximately $103.6 million of our cash balance was held outside the U.S. Cash balances held in foreign jurisdictions can be repatriated to the U.S.; however, they would be subject to federal income taxes,


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less applicable foreign tax credits. The Company has not provided U.S. income tax expense on earnings of its foreign subsidiaries because it expects to reinvest the undistributed earnings indefinitely.

We spent $315.2 million of cash on capital additions during the six months ended June 30, 2014. Approximately $69.2 million, $36.1 million and $46.7 million was used to expand and maintain the asset bases of our Onshore Completion and Workover Services, Production Services and Technical Solutions segments, respectively, and approximately $163.2 million was used to expand and maintain our Drilling Products and Services segment's equipment inventory.

We have a $1.0 billion bank credit facility which is comprised of a $600 million revolving portion and a $400 million term loan. The principal balance of the term loan is payable in installments of $5.0 million on the last day of each fiscal quarter. As of June 30, 2014, we had $355 million outstanding under the term loan. As of June 30, 2014, we had no amounts outstanding under the revolving portion of our credit facility and approximately $48.8 million of letters of credit outstanding, which reduce our borrowing capacity under this portion of the credit facility. As of August 1, 2014, we had no amounts outstanding under the revolving portion of our credit facility, and approximately $49.1 million of letters of credit outstanding. All amounts outstanding under the bank credit facility are due on February 7, 2017. Borrowings under the credit facility bear interest at LIBOR plus margins that depend on our leverage ratio. Indebtedness under the credit facility is secured by substantially all of our assets, including the pledge of the stock of our principal domestic subsidiaries. The credit facility contains customary events of default and requires that we satisfy various financial covenants. As of June 30, 2014, we were in compliance with all such covenants.

We have outstanding $500 million of 6 3/8% unsecured senior notes due 2019. The indenture governing the 6 3/8% senior notes requires semi-annual interest payments on May 1st and November 1st of each year through the maturity date of May 1, 2019. The indenture contains customary events of default and requires that we satisfy various covenants. As of June 30, 2014, we were in compliance with all such covenants.

We also have outstanding $800 million of 7 1/8% unsecured senior notes due 2021.
The indenture governing the 7 1/8% senior notes requires semi-annual interest payments on June 15th and December 15th of each year through the maturity date of December 15, 2021. The indenture contains customary events of default and requires that we satisfy various covenants. As of June 30, 2014, we were in compliance with all such covenants.

We currently believe that we will spend approximately $325 million to $355 million on capital expenditures, excluding acquisitions, during the remaining six months of 2014. We believe that our current working capital and cash generated from our operations will provide sufficient funds for our identified capital projects.

We continue to focus on operational efficiency and returning cash to shareholders. As of August 1, 2014, we have repurchased $174.9 million of our common stock under our existing share repurchase program and paid $25.2 million of dividends to stockholders. In July 2014, we declared a quarterly dividend of $0.08 per share on our outstanding common stock, which will be paid on August 20, 2014.

We intend to continue implementing our growth strategy of increasing our scope of services through both internal growth and strategic acquisitions. We expect to continue to make the capital expenditures required to implement our growth strategy in amounts consistent with the amount of cash generated from our operating activities.

Hedging Activities

We have three interest rate swap agreements for notional amounts of $100 million each related to our 7 1/8% senior notes maturing in December 2021, whereby we are entitled to receive semi-annual interest payments at a fixed rate of 7 1/8% per annum and are obligated to make semi-annual interest payments at variable rates. The variable interest rates, which are adjusted every 90 days, are based on LIBOR plus a fixed margin and are scheduled to terminate on December 15, 2021.

Recently Issued Accounting Pronouncements

See Part I, Item 1, "Financial Statements - Note 16 - Recently Issued Accounting Pronouncements."

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