SUPERIOR ENERGY SERVICES, INC. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. In addition, the following discussion and analysis and information contains forward-looking statements about our business, operations and financial performance based on our current expectations that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors. including, but not limited to, those identified below and those discussed in the sections titled "Risk Factors" and under the heading "Information Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q. Executive Summary General
We serve major, national and independent oil and natural gas exploration and production companies around the world and offer products and services with respect to the various phases of a well's economic life cycle.
Historically, we provided a wide variety of services and products to many markets within the energy industry. Our core businesses focus on products and services that we believe meet the criteria of:
•
being critical to our customers' oil and gas operations,
•
limits competition from the three largest global oilfield service companies,
•
requires deep technical expertise through the design or use of our products or
services, such as premium drill pipe and drilling bottom hole assembly accessory
rentals,
•
unlikely to become a commoditized product or service to our customers, and
•
provide strong cash flow generation capacity and opportunities.
The result of this approach is a portfolio of business lines grounded in our
core mission of providing high quality products and services while maintaining
the trust and serving the needs of our customers, with an emphasis on free cash
flow generation and capital efficiency.
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Industry Trends
The oil and gas industry is both cyclical and seasonal. The level of spending by oil and gas companies is highly influenced by current and expected demand and future prices of oil and natural gas. Changes in spending result in an increased or decreased demand for our services and products. Rig count is an indicator of the level of spending by oil and gas companies. Our financial performance is significantly affected by the rig count in theU.S. land and offshore market areas as well as oil and natural gas prices and worldwide rig activity, which are summarized in the tables below. Three months ended
Six months ended
June 30, 2022 March 31, 2022 % Change June 30, 2022 June 30, 2021 % Change
Worldwide Rig Count
(1)
U.S.:
Land 704 621 13.4% 663 409 62.1%
Offshore 15 15 0.0% 15 14 7.1%
Total 719 636 13.1% 678 423 60.3%
International (2) 816 823 (0.9%) 819 716 14.4%
Worldwide Total 1,535 1,459 5.2% 1,497 1,139 31.4%
Commodity Prices
(average)
Crude Oil (West Texas
Intermediate) $ 108.83 $ 95.18 14.3% $ 102.01 $ 62.24 63.9%
Natural Gas (Henry
Hub) $ 7.48 $ 4.66 60.5% $ 6.07 $ 3.25 86.8%
(1)
Estimate of drilling activity as measure by the average active drilling rigs
based on Baker Hughes Co. rig count information
(2)
Excludes Canadian rig count
Comparison of the Results of Operations for the Three Months Ended
We reported net income from continuing operations for the three months endedJune 30, 2022 (the "Current Quarter ") of$43.6 million on revenue of$224.6 million . This compares to a net income from continuing operations for the three months endedMarch 31, 2022 (the "Prior Quarter") of$24.0 million on revenues of$197.9 million . Net income from continuing operations for theCurrent Quarter includes an$17.4 million gain from revisions to estimates related to our decommissioning liability and$13.5 million of expense primarily related to foreign currency losses during the quarter totaling$10.5 million and both realized and unrealized losses, net of$4.1 million on our investment in equity securities of Select Energy Services, Inc ("Select"). Three months ended Change March 31, June 30, 2022 2022 $ % Revenues: Rentals$ 103,729 $ 88,756 $ 14,973 16.9% Well Services 120,911 109,174 11,737 10.8% Total revenues 224,640 197,930 26,710 Cost of revenues: Rentals 35,860 31,752 4,108 12.9% Well Services 85,108 80,628 4,480 5.6% Total cost of revenues (exclusive of depreciation, depletion, amortization and accretion) 120,968
112,380 8,588
Depreciation, depletion, amortization and accretion 23,346
34,085 (10,739 ) (31.5%)
General and administrative expenses 30,231
32,018 (1,787 ) (5.6%)
Restructuring expenses 1,663 1,555 108 6.9% Other (gains) and losses, net (18,013 )
1,147 (19,160 ) **
Income (loss) from operations 66,445
16,745 49,700
Other income (expense):
Interest income, net 1,459 1,179 280 23.7% Other income (expense) (13,471 )
13,947 (27,418 ) **
Income (loss) from continuing operations before income taxes 54,433
31,871 22,562
Income tax (expense) benefit (10,871 )
(7,884 ) (2,987 ) 37.9%
Net income (loss) from continuing operations 43,562
23,987 19,575
Income (loss) from discontinued operations, net of income tax (1,944 ) 1,739 (3,683 ) (211.8%) Net income (loss)$ 41,618 $ 25,726 $ 15,892
** Not a meaningful percentage
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Revenues and Cost of Revenues
Revenues from our Rentals segment increased$15.0 million , or 16.9%, in theCurrent Quarter as compared to the Prior Quarter. Cost of revenues increased$4.1 million , or 12.9%, in theCurrent Quarter as compared to the Prior Quarter. The increase in revenues was due to an increase in both average rig count and commodity prices when compared to the Prior Quarter, which drove increases in utilization and pricing of both premium drill pipe and bottom hole assembly accessories. These factors contributed to slight increase in gross margin which was 65.4% for theCurrent Quarter as compared to 64.2% in the Prior Quarter. Revenues from our Well Services segment increased$11.7 million , or 10.8%, in theCurrent Quarter as compared to the Prior Quarter. Cost of revenues increased$4.5 million , or 5.6%, in theCurrent Quarter as compared to the Prior Quarter. Gross margin for theCurrent Quarter increased to 29.6% as compared to 26.1% for the Prior Quarter due to changes in revenue mix in our completions applications, increases in service revenues with higher margins and a reduction in pass through and mobilization projects with lower margins. Additionally, the strategic shift of our more labor-intensive service businesses toU.S. offshore and international operations reduces our exposure to the most significant wage inflation pressures in this segment given our lowerU.S. land headcount. Both segments are experiencing supply chain tightness and inflation, particularly for raw materials associated with downhole completion and drilling bottom hole accessory components. This primarily impacts our ability to bring new tools to market in late 2022 and beyond as we experience long delivery lead times and increased pricing for capital expenditures.
Depreciation, Depletion, Amortization and Accretion
Depreciation, depletion, amortization and accretion expense for theCurrent Quarter decreased$10.7 million , or 31.5%, as compared to the Prior Quarter. Depreciation expense for the Prior Quarter was impacted by the valuation process under fresh start accounting, where certain fully depreciated assets were assigned a new estimated fair value and a new remaining useful life of less than 36 months. Depreciation, depletion, amortization and accretion expense for 2022 is expected to be approximately$102.8 million as compared to$228.2 million for the full year 2021.
General and Administrative Expenses
General and administrative expenses for theCurrent Quarter decreased$1.8 million , or 5.6%, as compared to the Prior Quarter. The decrease is primarily related to professional fees for accounting and consulting services as well as declines in employee related costs, including benefits and incentive compensation.
Other gains and losses
Other gains for theCurrent Quarter were$18.0 million compared to$1.1 million in losses for the Prior Quarter. Other gains and losses primarily relate to charges recorded as part of our strategic disposal of low margin assets in line with our efforts to reconfigure our organization both operationally and financially (the "Transformation Project ") and includes gains/losses on asset sales, as well as impairments primarily related to long-lived assets. Other gains and losses for theCurrent Quarter include a gain of$17.4 million from revisions in estimates related to our decommissioning liability.
Other Income (Expense)
Other income (expense) primarily relate to re-measurement gains and losses associated with our foreign currencies and realized and unrealized gains and losses on our investment in equity securities. Losses on foreign currencies during theCurrent Quarter were$10.5 million and primarily related to our operations inBrazil . Losses on foreign currencies during theCurrent Quarter include an expense of$2.7 million which represents a correction of an immaterial error relating to a period prior to our emergence from bankruptcy. Gain on foreign currencies during the Prior Quarter were$5.6 million primarily related to our operations inBrazil . Unrealized losses on our investment in equity securities for theCurrent Quarter were$5.9 million . Unrealized gains on our investment in equity securities for the Prior Quarter were$6.5 million . During theCurrent Quarter , we disposed of 0.7 million shares for$6.0 million , and recognized gains totaling$1.9 million in connection with these transactions. During the Prior Quarter, we disposed of 1.0 million shares for$7.4 million , and recognized gains totaling$1.8 million in connection with these transactions.
Income Taxes
The effective tax rate for theCurrent Quarter and Prior Quarter was 20.0% and 24.7%, respectively, on income from continuing operations. The effective tax rate for theCurrent Quarter is different from theU.S. federal statutory rate of 21% primarily from non-deductible items, foreign tax rates that differ from theU.S. federal statutory rate, the release of valuation allowance based on current period income in certain jurisdictions and foreign losses for which no tax benefit is being recorded. The tax rate for the Prior Quarter is 26
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different from the
Unrecognized tax benefit as of theCurrent Quarter and Prior Quarter was$15.7 million and$15.1 million , respectively, all of which would impact our effective tax rate if recognized except for$1.6 million offset in deferred income taxes. It is reasonably possible$3.4million of unrecognized tax benefits could be settled in the next twelve months due to the conclusion of tax audits or statutes of limitations expiration. It is our policy to recognize interest and applicable penalties, if any, related to uncertain tax positions in income tax expense.
Comparison of the Results of Operations for the Six Months Ended
The period fromFebruary 3, 2021 throughJune 30, 2021 (the "Successor Period") and the period fromJanuary 1, 2021 throughFebruary 2, 2021 (the "Predecessor Period") are distinct reporting periods as a result of our emergence from bankruptcy. References in these results of operations to changes in comparison to the six months endedJune 30, 2022 (the "Current Period)" combine the Successor Period and Predecessor Period results for the six months endedJune 30, 2021 (the "Combined Period") in order to provide some comparability of such information. While this combined presentation is not presented according to generally accepted accounting principles inthe United States of America ("GAAP") and no comparable GAAP measures are presented, management believes that providing this financial information is the most relevant and useful method for making comparisons to the Current Period as reviewing the Successor Period results in isolation would not be useful in identifying trends in or reaching conclusions regarding our overall operating performance. We reported net income from continuing operations for the Current Period of$67.5 million on revenue of$422.6 million . This compares to net income from continuing operations for the Combined Period of$210.3 million on revenues of$317.7 million . Successor Predecessor Non-GAAP Change For the Period February 3, 2021 For the Period For the For the Six through January 1, 2021 Combined Six Months Ended June 30, through Months Ended June 30, 2022 2021 February 2, 2021 June 30, 2021 $ % Revenues: Rentals$ 192,485 $ 109,685 $ 18,339$ 128,024 $ 64,461 50.4% Well Services 230,085 162,050 27,589 189,639 40,446 21.3% Total revenues 422,570 271,735 45,928 317,663 104,907 Cost of revenues: Rentals 67,612 42,795 7,839 50,634 16,978 33.5% Well Services 165,736 128,287 21,934 150,221 15,515 10.3% Total cost of revenues (exclusive of depreciation, depletion, amortization and accretion) 233,348 171,082 29,773 200,855 32,493 Depreciation, depletion, amortization and accretion 57,431 99,048 8,358 107,406 (49,975 ) (46.5%) General and administrative expenses 62,249 50,746 11,052 61,798 451 0.7% Restructuring expenses 3,218 15,821 1,270 17,091 (13,873 ) (81.2%) Other (gains) and losses, net (16,866 ) 365 - 365 (17,231 ) ** Income (loss) from operations 83,190 (65,327 )
(4,525 ) (69,852 ) 153,042
Other income (expense):
Interest income, net 2,638 747 202 949 1,689 178.0% Reorganization items, net - - 335,560 335,560 (335,560 ) (100.0%) Other income (expense) 476 (275 ) (2,105 ) (2,380 ) 2,856 ** Income (loss) from continuing operations before income taxes 86,304 (64,855 ) 329,132 264,277 (177,973 ) Income tax (expense) benefit (18,755 ) 6,032
(60,003 ) (53,971 ) 35,216 (65.2%)
Net income (loss) from continuing operations 67,549 (58,823 ) 269,129 210,306 (142,757 ) Income (loss) from discontinued operations, net of income tax (205 ) (28,806 )
(352 ) (29,158 ) 28,953 (99.3%)
Net income (loss)$ 67,344 $ (87,629 ) $
268,777
** Not a meaningful percentage
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Revenues and Cost of Revenues
Revenues from our Rentals segment increased$64.5 million , or 50.4%, in the Current Period as compared to the Combined Period. Cost of revenues increased$17.0 million , or 33.5%, in the Current Period as compared to the Combined Period. This increase was due to an increase in both average rig count and commodity prices when compared to the Combined Period. During the Current Period, we experienced increases in utilization and pricing of both premium drill pipe and bottom hole assembly accessories, which contributed to an increase in gross margin which was 64.9% for the Current Period as compared to 60.4% in the Combined Period. Revenues from our Well Services segment increased$40.4 million , or 21.3%, in the Current Period as compared to the Combined Period. Cost of revenues increased$15.5 million , or 10.3%, in the Current Period as compared to the Combined Period. The increase in cost of revenues was driven by the increase in overall segment revenues, and gross margin for the Current Period increased to 28.0% as compared to 20.8% for the Combined Period due to changes in revenue mix in our completions applications, increases in service revenues with higher margins and a reduction in pass through and mobilization projects with lower margins. Additionally, the strategic shift of our more labor-intensive service businesses toU.S. offshore and international operations reduces our exposure to the most significant wage inflation pressures in this segment given our lowerU.S. land headcount.
Depreciation, Depletion, Amortization and Accretion
Depreciation, depletion, amortization and accretion expense for the Current Period decreased$50.0 million , or 46.5%, as compared to the Combined Period. Depreciation expense for the Combined Period was impacted by the valuation process under fresh start accounting, where certain fully depreciated assets were assigned a new estimated fair value and a new remaining useful life of less than 36 months. Depreciation, depletion, amortization and accretion expense for 2022 is expected to be approximately$102.8 million as compared to$228.2 million for the full year 2021.
Restructuring Expenses
Restructuring expenses for the Current Period decreased of
Other gains and losses
Other gains and losses for the Current Period include a gain of
Other Income (Expense)
Losses on foreign currencies during the Current Period and Combined Period were$4.9 million and$1.8 million , respectively. Losses on foreign currencies during the Current Period include an expense of$2.7 million which represents a correction of an immaterial error relating to a period prior to our emergence from bankruptcy. Realized and unrealized gains on our investment in equity securities for the Current Period were$4.2 million . During the Current Period, we disposed of 1.7 million shares for$13.4 million .
Income Taxes
The effective tax rate for the Current Period and Combined Period was 21.7% and 20.4%, respectively, on income from continuing operations. The effective tax rate for the Current Period is different from theU.S. federal statutory rate of 21% primarily from non-deductible items, foreign tax rates that differ from theU.S. federal statutory rate, the release of valuation allowance based on current period income in certain jurisdictions and foreign losses for which no tax benefit is being recorded. The tax rate for the Combined Period is different from theU.S. federal statutory rate of 21% primarily from non-deductible items, foreign losses for which no tax benefit was recorded and the adoption of fresh start accounting during the period. Unrecognized tax benefit as ofJune 30, 2022 was$15.7 million , all of which would impact our effective tax rate if recognized except for$1.6 million offset in deferred income taxes. It is reasonably possible$3.4 million of unrecognized tax benefits could be settled in the next twelve months due to the conclusion of tax audits or statutes of limitations expiration. It is our policy to recognize interest and applicable penalties, if any, related to uncertain tax positions in income tax expense. 28
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Liquidity and Capital Resources
Cash flows depend, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. Certain sources and uses of cash, such as our level of discretionary capital expenditures and divestitures of non-core assets, are within our control and are adjusted as necessary based on market conditions.
Financial Condition and Liquidity
Our primary sources of liquidity have been cash and cash equivalents, cash generated from our operations and from asset sales, and availability under our Credit Facility. As ofJune 30, 2022 , we had cash, cash equivalents and restricted cash of$470.8 million . During the six months endedJune 30, 2022 net cash provided by operating activities was$68.2 million , and we received$28.5 million in cash proceeds from the sale of assets and equity securities in which we are invested. The primary uses of liquidity are to provide support for operating activities, restructuring activities and capital expenditures. We spent$20.5 million of cash on capital expenditures during the six months endedJune 30, 2022 . The energy industry faces growing negative sentiment in the market which may affect our ability to access capital on terms favorable to us. While we have confidence in the level of support from our lenders, this negative sentiment in the energy industry has not only impacted our customers inNorth America , but also affected the availability and pricing for most credit lines extended to participants in the energy industry. From time to time, we may enter into transactions to dispose of businesses or capital assets that no longer fit our long-term strategy. Debt Instruments On the Emergence Date, pursuant to the Plan, we entered into a Credit Agreement withJPMorgan Chase Bank, N.A ., as administrative agent, and the other lenders and letter of credit issuers named therein providing for a$120.0 million asset-based secured revolving Credit Facility, all of which is available for the issuance of letters of credit (the "Credit Facility"). The issuance of letters of credit reduces availability under the Credit Facility on a dollar-for-dollar basis. The Credit Facility will mature onDecember 9, 2024 .
As of
Unless all loans are paid off and letters of credit outstanding are cash collateralized and the Credit Facility terminated, the Credit Facility requires, subject to permitted exceptions, compliance with various covenants, including, but not limited to, limitations on the incurrence of indebtedness, permitted investments, liens on assets, making distributions, transactions with affiliates, mergers, consolidations, dispositions of assets and other provisions customary in similar types of agreements. The Credit Facility also requires compliance with a fixed charge coverage ratio of 1.0 to 1.0 if (a) an event of default has occurred and is continuing or (b) availability under the Credit Facility is less than the greater of$20.0 million or 15% of the lesser of the aggregate commitments and the borrowing base. We were in compliance with all required covenants as ofJune 30, 2022 .
Other Matters
New Accounting Pronouncements
See Part 1, Item 1, "Unaudited Condensed Consolidated Financial Statements and Notes" - Note 17 - "New Accounting Pronouncements."
Critical Accounting Policies and Estimates
There have been no changes to the critical accounting policies reported in our Annual Report on Form 10-K for the period endedDecember 31, 2021 (the "Form 10-K") that affect our significant judgments and estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Please refer to the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in the Form 10-K.
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