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Executives

Greg Rosenstein - Vice President of Investor Relations

Terry Hall - Chairman and Chief Executive Officer

Analysts

James Rollyson - Raymond James

Joe Agular - Johnson Rice

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc.

Mark Thomas - Simmons & Company

Mark Brown - Pritchard Capital

Joe Gibney - CapitalOne Southcoast

Superior Energy Services Inc. (SPN) Q3 2009 Earnings Call October 29, 2009 11:30 AM ET

Operator

Good Morning, ladies and gentlemen. Thank you for standing by. Welcome to the Superior Energy Third Quarter Earnings Conference Call. During today's presentation all participants are in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Thursday, October 29, 2009.

I will now like to turn the conference over to Greg Rosenstein. Please go ahead sir.

Greg Rosenstein

Alright thank you. Good morning everyone and thank you everyone for joining today's conference call. Joining me today are Chairman and CEO, Terry Hall; Company's President and Chief Operating Officer, Ken Blanchard and our Chief Financial Officer, Robert Taylor.

Before, I turn it over to Terry, let me remind everyone that during this conference call, management may make forward-looking statements regarding future expectations about the company's business, management's plans for future operations or similar matters. The company's actual results could differ materially due to several important factors including those described in the company's filings with the Securities and Exchange Commission.

And finally during this call, management will refer to EBITDA, which is a non-GAAP financial measure. And in accordance with Regulation G, the company provides a reconciliation between net income and EBITDA on this website.

And with that, I will now turn it over to Terry Hall.

Terry Hall

Good Morning. Thanks for dialing in. To recap the quarter, our revenue was 386 million, EBITDA was a 103 million and excluding the charges mentioned in our release, our core earnings were 28.4 million or $0.36 per diluted share.

Our performance were driven by several factors. First, international revenue increased 30% over the second quarter was well intervention of 46% and new service of 17%. Big drivers to this increase for well controlled projects, sales of well controlled equipment in Africa and sales of accommodation units in the Middle East. We also experience increased demands for hydraulic workover and snubbing in Continental Europe and drill pipe rentals in South America.

Secondly, while the Mexico revenue increased 3% due to a 15% increase in marine revenue and 4% increase in well invention revenue. The lack of hurricanes this summer meant that we had more ways to work in what is traditionally is the busiest season for shallow water, Gulf of Mexico activity.

Thirdly, our revenue in the domestic land markets was down 4%, with rental tools down 14% and well intervention up slightly. The bottoming and I know I’ve taken a lot of grief about that term but just bear with me on it, the bottoming process continues in the land markets.

Although the rig count on land increased during the third quarter, it was higher and primarily oil related drilling regions were rigs were being put to work by smaller private AMP companies that are not necessarily users of our equipments.

It is worth noting that we did experience an increase in accommodation rentals on-shore with revenue declines coming from stabilization and drill pipe rentals both of which are more closely tied to gas related drilling.

Turing to the report on the segment basis, well intervention being first. In that segment revenue was 354 million and income from ops was 31.6 million which represents an increase of 10% and 14% sequentially.

On the international front, revenue in the segment was 51 million or 46% higher than the prior quarter. Well controlled projects in Africa and incremental demand for (inaudible) where the key drivers.

We also had increased activities for our project from the coast of Angola. In the Gulf of Mexico, well intervention revenues 155 million, an increase of 4% from second quarter. The sequential growth is due to activity outside the BP (inaudible) project and services such as goal tending, (inaudible) engineering, project management as well as (inaudible).

A positive weather environment in our traditional busy season was also a key factor. On the domestic land front, revenue was up slightly to 49 million, we really did not experienced any material pricing changes.

Incremental activity for hydraulic workover and snubbing was offset by decreased demand from mechanical and case wire line.

In the Rental Tool segment, revenues 100.8 million and income from ops was 17.9 million. This represents a 2% decrease in revenue and an 11% decrease in income from operations from the second quarter.

The increase in international rental's revenue is almost enough to offset the declines in the domestic land and Gulf of Mexico market. International revenue from rentals was 39 million a 17% increase from the second quarter as we experienced increase Rentals and drill pipe in Brazil and Columbia.

We are really encouraged about the outlook in Latin America, specially Brazil, where we work to several different customers. We are going out of our rental location there and we recently purchased 15 acres and we build a facility there in 2010.

In addition to Rental Tools we intend to have services to the Brazil market over the next 12 months. Domestic land revenue is 22 million, down 14% in the second quarter.

As I mentioned that earlier, rentals of stabilization equipment drill pipe were down while accommodations increase. A decrease to the stabilization drill pipe were primarily in East and South Texas while the increase in accommodations was due to our entry in the Marcelos and Boton plays.

Total revenue in the Gulf of Mexico is 40 million, down 8% in second quarter, most of the decrease associated with reduced amount of drill pipes especially tubular stabilization equipment and accommodation.

We expect most of the decline was temporary because it was from the deep water markets where several projects where in transition during the latter part of the quarter. Our operating margin decreased to 18% and 20% due mainly to business mix with a large percentage of revenues coming from accommodation versus specialty tubular and stabilizers.

In the Marine segment revenue was 31.3 million and income from ops was 5.1 million, a 14% increase in revenue and 4% decrease and income from ops. Seasonal increases drove higher utilization from most of our lift boats and we had a full quarter contribution from new 265 class boat.

G&A increased to 63.4 million due primarily increases with insurance, we saw small increases in bad debt expense as well. In the third quarter, we expect G&A to be in the range of 61 to 63.

In the D&A front, we believe D&A is 52 to 54 is a good run rate for the third quarter. Turning to CapEx cash during the third quarter was 92.3 million. Expansion CapEx represented 89% of the spending there. Year to date, our CapEx is clearly 42 million, we expect our CapEx in the fourth quarter to be in a range of 45 to 50 million.

Looking at the balance sheet, at the end of the third quarter the face value of our debt exclusive of our discounts is approximately 772 million, up from 770 million at the end of the second quarter. Our net debt is 737 million, debt to EBITDA at the end of the third quarter was 1.48 and our net debt to EBITDA was 1.41. Debt to total cap was 37.4, down from 37.8 at the end of the second quarter.

At quarter end, we are 57.2 million drawn in our revolver, as of yesterday however, we have only 26 million drawn on the line. We collected $53 million in cash subsequent quarters end and we anticipate collecting an additional 55 million by year end and of remaining 338 million due under the BT contracts by May 2010. There are no issues that we aware of with the collections of any of this money.

But an outlook standpoint. As I mentioned on our last earnings call, we were beginning to see this domestic landmark bottom. I'm not prepared to say that's it's actually hit bottom I think in some areas it has hit bottom in other areas it just isn’t there yet. Our base is stabilizing and we expect seasonal factors including weather and holidays to bring down activity in the winter month across all geographic regions.

We anticipate that the seasonal decline will be exaggerated this year as customers significantly curtail spending in this type of environment. Most customers are reluctant to spend their cash, particularly during the budget transition period where current year budgets have ended and next year spending will be delayed as long as possible.

And with that said, we expect earnings in the fourth quarter of '09, and the first quarter of 2010 to represent the cycle troth and I will now open the line for the questions.

Question-and-Answer Session

Operator

Thank you sir, we will now begin the question and answer session. (Operator Instructions). And our first question comes from the line Jim Rollyson with Raymond James. Please go ahead. Please go ahead.

James Rollyson - Raymond James

Good morning, Terry.

Terry Hall

Good morning, Jim.

James Rollyson - Raymond James

Your BP project is wrapping up over the next two, three quarters, we probably asked you this before, but I fear I would ask it again. Any leads on filing the gap, I mean, I guess the way this works as your equipments going to be back up to work in the normal call out market like you would have been otherwise. And so you guys have a little work to do just to fill the gap, but kind of how you see that playing out at this stage?

Terry Hall

Well Jim, there is lot of other work on the horizon and very similar to BP, hurricane recovery work is still an on-going process in the Gulf of Mexico. There is an awful lot of platforms that are going to be take it down and largely decommissioning projects undertaken over the next couple of years in Gulf with or without any additional hurricane damage. So, I'm not really concerned about BP finishing up.

We're already involved and looking at other projects that I think will take the place of it. They may not be of the same type of nature, they may not be turn key, but I'm not worried about keeping that equipment busy.

And as we tried to point out in the past, we stand a great deal of CapEx over the last couple of years while we were undertaking the BP project, building up our capacity. So, I'd ask you to focus on really the fact that we've got a far greater regular earnings capacity today then we did when we started the BP project. As a result of the CapEx we've spend.

And clearly the market will have to return for you to see, the power that's there but again dig into it, I think you;ll see that the story is well. Clearly, we'd like to do more work that’s like BP, that's not what our future is hinged on. Our future is hinged on the CapEx that we build and the infrastructure we've been aggressively building both investment internationally over the last couple of years to give us far greater earnings capacity today than we have started BP.

James Rollyson - Raymond James

Very helpful and as a follow up on the international front, you guys have continued to make great strides in growing that and obviously big percentage this quarter and you got activity you've mentioned going on in Brazil for growth etcetera.

How do you see that it's kind of going forward as a growth vehicle but also as a percentage of your total business with your view of what the U.S. market looks like?

Terry Hall

Well it's hard to predict. Because the U.S. market could come back strong, and if it did it will be very difficult for us to have international appear to be growing very rapidly in a market of the type of the we experienced the last year.

Now, the international growth looks nice as a percentage because all of the other markets have been in state decline. So, I mean I'll almost defer to you on that. I think our international growth will continue, we’ve spent a fair amount of money there, we've got a lot of things going on that will cause that to continue at about the same pace but not accelerate where it is today but how that will impact overall revenues, the percentage contribution is going to be currently very depended over that into the Gulf of Mexico and the land markets.

The growth will continue, you'll see us doing more and more specialty type work. I view us as rapidly becoming a boutique shop for specialized recovery of, unplug and abandonment, and engineering dependent projects around the world. I think we've developed a capability there, a unique ability with our skill sets and our marine assets, and our lubricators and our technology to address a variety of issues all around the world.

Some will be domestic but more and more of them will be I think will be international and that can have a significant impact, it's not unlike our success in our own market internationally was primarily driven by an engineering focus offering engineering solutions.

And I think we've been very busy, engineering solution for all manner of projects around the world for sometime, its beginning to pay off. BP was one but there are many things like that, that occur all over the world and I think we're very focused on getting in that market, which is fairly unique market, its subsea , but it's not necessarily classic sub sea that a lot of people are talking about.

James Rollyson - Raymond James

Thanks for the color, Terry.

Terry Hall

Thank you.

Operator

Thank you. Our next question comes from the line Joe Agular with Johnson Rice. Please go ahead.

Joe Agular - Johnson Rice

Thanks. Terry, I wanted to just follow up on the Brazil question, you mentioned that you are expanding your facility down there and that you are going to look to add services in, I guess 2010, I was just wondering if you could maybe take two questions on that.

One, what type of services and two, are you hampered right now because of in terms of ramping up revenue on the Rental tool side because of lack of space and how building that new facility helps that?

Terry Hall

We clearly have some space issues, and there are other issues. You have got to get into those markets and get on approved lists, do a lot of ground work before you can get in with your services. First we're going to for rentals traditionally we've gotten in there, we're now, approved to work in there.

So I'll think you’ll see us bringing in work over snubbing in the well control down there very quickly. And a lot of that equipment requires a footprint that we simply can’t deal with in our present location. The acquisition of 15 acres, so, we're going to have a fairly substantial facility down there.

Joe Agular - Johnson Rice

As a follow up Terry, you ran to the number of the cash that we've brought since the end of the quarter pretty quickly, did you say I think 52 million so far with another 55 to arrive before the end of quarter.

Terry Hall

You are correct, we took in about 33 cash since quarter end and I think we are going to collect another 55 million by year end and another 338 by mid, you know end of second quarter, third quarter 2010.

Joe Agular - Johnson Rice

Okay, Now that number in total is bigger then the asset on your balance did that go up in the third quarter. I don’t think your Q’s out yet.

Terry Hall

I'm just trying to point out the case that we have this is not all But it does tie back to that other category on the balance sheet.

Joe Agular - Johnson Rice

Okay.

Terry Hall

We are trying to make a point we do generate cash in lot of area,s I'm just trying to give you some color on the strength of our balance sheet going forward and you know and really the strength that we have there.

Joe Agular - Johnson Rice

I guess the bottom line there is that you all should monetize a fair amount of this over the next few quarters as you said before, but I think the number still ends up being some where in that $300 million range or something like that?

Terry Hall

Yeah.

Joe Agular - Johnson Rice

Yeah, okay. Thanks --

Terry Hall

Thank you.

Operator

And for your next question comes from the line of Jeff Tillery, with Tudor, Pickering, Holt & Company. Please go ahead.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc.

Good morning, Terence.

Terry Hall

Hi, Jeff.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc.

Hey yes. I've noticed you highlighted (inaudible) as this quarter as a contributor, how big a contributor was it relative to the last quarter?

Terry Hall

It was really the same. Very they contribute it turns out in both quarters with pretty good well control projects going on. Sometimes you don’t and that always impacts business mix, sometimes our numbers people can’t understand it. Anytime you get a pretty good well controlled project, its going to drive pretty good margins. You can’t predict them, its been a farily steady amount of that coming our way for some time.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc.

It sounds like you’v got quite a bit of cash coming onto the balance sheet over the next few months, what you think of the acquisition market... I going to, kind of steer away go from international right now just focus on U.S. land, are there any opportunities out there that you think might be appropriate for your company?

Terry Hall

We’ve talked this around a lot internally, you know in most markets that have gotten this ugly, you give a lot of business that are stale, banks let them go and they go down. We are in a marketplace where, it seems that everyone will be safe by package bankruptcy or something like that. So the opportunity that used to exist when things got this bad, don't really seem to be materializing because people are really are able to negotiate relief in a way, as they really haven’t been able to in severe downturn, at least that I have been associated iwth. So it's a little bit different then in the past, people aren't forced to do things that historically they have been.

So, if you referring to that type of opportunity, I think if you follow all that the events gone on in the industry as of late and see all of these package bankruptcies and another thing and that's just an indication that the lenders are being far more flexible and agreeable then they haven't past times which often presented a lot of opportunities.

Having said that, people are not desperate, they are not going to be inclined (ph) to do something they can found relief. I don't see any great opportunities out there to make strategic buys at bargain prices. Clearly I think the land market in many product line is over build. And we are going to have see what happens there it maybe that we will look at this market a year from now and find that the vast majority of all activity is centered around shale plays. All the equipment will hit those areas and I think some consolidation in that marketplace has to take place.

Right now, I don't think we are going to change our focus in turning and try to become consolidater there, I think it makes some more sense for to pursue really our deep new water strategy, international strategy. We got a great presence, we have got the best fleet out there in any product lines, you know, it's ugly right now but when the market turns it will be good for us. Do we need anymore of it right now? I don't think so. I think we will be better served to pursue the strategy we have outlined it. Somebody we’d love to participate in a consolidation if it made sense for our shareholders, but I don't think we are the consolidators.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. And just to follow up the with regards to the shale plays, what stable drills exposure to the Shale relative to more conventional drilling?

Terry Hall

I don't... I mean, I don't know if there is a great deal of difference Jeff.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay, that's fair.

Terry Hall

I don't think, it's much different. I mean it's obviously it's a deviated hole if they are going horizontal they all require stabilization. That most of the wells that are being drilled within shale plays are not deviated holes. So its really not a lot of difference. Other than the fact that it's going to shot these things 20 times as opposed to five or six that just implies that its going fewer wells drilled.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. That fair thanks for the insight, Terry.

Terry Hall

Thank you, Jeff.

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Mark Thomas from Simmons & Company. Please go ahead

Mark Thomas - Simmons & Company

Good morning, Terry.

Terry Hall

Good Morning.

Mark Thomas - Simmons & Company

Just on the seasonality holiday front, could you give us some idea of the magnitude of the decline in activities you expect?

Terry Hall

No.

Mark Thomas - Simmons & Company

I mean if 5 to 10% is it reasonable or as the rig count continues to increase could that offset the seasonality?

Terry Hall

No. I think, I don't know what the percentage would be. But again, and I don't have any real hard data to draw this on. But in a market like this our customers typically like to begin the holiday season early and end it late.

Mark Thomas - Simmons & Company

Okay.

Terry Hall

Now our customers have cash flows, they have got product coming out of the ground, they can sell everyday they have no need to work. And in markets like this they typically have slowed down before Thanksgiving and don't come back to work until February maybe even march.

Over the years, we have talked about, there is a lot there is a lot of seasonality in the Gulf of Mexico. The land market seasonality is a little bit different is more purely weather driven, but I would expect that this year, unless there is a sharp jump in gas pricing and something happens to commodities or something that is done by those people to go out and work through the holiday, that they are not going to work much during the holidays. And so we would see a slowdown and that things will tighten up and it will definitely hurt us with the bottom-line but it will be an indication nothing more than fact that our customers are taking extended holidays.

Mark Thomas - Simmons & Company

Okay. And then just from a follow up, can you update on the acquisition of acquiring a vessels on that front..

Terry Hall

We still we got quite few irons in the fire right now on that initiative. I really can't say much more than that but we have not changed our mind, and we haven't changed our mission and our strategy has not changed.

Mark Thomas - Simmons & Company

Is it looking like it will be a purchase rather than a charter?

Terry Hall

We have vessels chartered now.

Mark Thomas - Simmons & Company

Right.

Terry Hall

As I have indicated in the past, we want own a vessel because we can drive utilization with a vessel, we have a lot of work to do utilizing vessels. Now, I don't, I wouldn't anticipate that every job moving on we will have a vessel but we own it, but we would certainly like own one or more vessels because we feel very confident we can keep them fully utilized year around. Not to say we might not also have one or two vessels chartered as well. But we feel that if you are going to be driving the utilization and by that I mean if the customers come to you to solve a problem. I just don't want to be out there solving the problems getting in the well bore and looking at 30% of the revenue while the marine operator and the ROB operator is getting 70% of the revenue, that's makes no sense to us. We don't want leave that on the table. So, we going to end up, with those marine assets, that we could on our job. And we probably also have some charter but we are going to own some.

Mark Thomas - Simmons & Company

Right. And is the development of the larger lubricators are those so progressing well?

Terry Hall

Yes.

Mark Thomas - Simmons & Company

Okay. Thank you very much for your time Terry.

Terry Hall

Thank you.

Operator

Thank you. Our next question comes from the line of Mark Brown with Pritchard Capital. Please go ahead.

Mark Brown - Pritchard Capital

Okay. Pardon me if you have already addressed this, good morning. But in terms your liftboats how is the one in Mexico and do you expect more there or any other markets that you're considering in terms of deploying lift boats over to?

Terry Hall

Well the lift boat in the Mexico, we just got it back. Do we anticipate more lift boat work there? Yes we did. A lot has been going on in Mexico as I'm sure you have heard of that. And I think since things will developed in Mexico after the first few years.

We are looking fairly hard at the Middle East opportunities and Trinidad looks like it maybe a pretty good liftboat opportunity for us. That market had lift boats in it before that they are sort of the familiar with the vessels but the vessels that were there are very old, very tired or gone of together, and really the market is primed for the new generation type boats. We think the opportunities have been pretty good early next year for both Mexico, Trinidad and possibly Middle East.

Mark Brown - Pritchard Capital

Okay. And in Brazil maybe you could just give an update in terms of what kinds work you are doing, is it primarily rental tools or do you have some work overs as well?

Terry Hall

Internal activity now, we’ve done all work the work down there, we don't have anything going on at the moment. But we anticipate having a presence down there with work over snubbing well control.

Mark Brown - Pritchard Capital

Okay. That's it for me. Thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Joe Gibney with CapitalOne Southcoast. Please go ahead.

Joe Gibney - CapitalOne Southcoast

Good morning Terry.

Terry Hall

Good morning Joe.

Joe Gibney - CapitalOne Southcoast

You covered most of the ground here. Just one minor question on the reconciliation side in the Gulf of Mexico. In your release you referrenced to transition downtime for a couple of projects on drill pipe sie. I was curious with the slow down in the shale in general, is the Deep Water mix within that Gulf of Mexico rental business is it getting even more more disproportionate in the deep water. I know it has been roughly 60% of that business previously, is that holding or is that increasing, just kind of curious there?

Terry Hall

I think it's increasing slightly, not dramatically but it's north of 60. And to the extent we see something in transition in the order that doesn't really work because we know that happens from time to time if you followed our calls. This is not the first it has happened. They will go down to two or three weeks while we move to transition and get back on. So, that work will come back. The shallow water gulf work s very poor and has been.

Joe Gibney - CapitalOne Southcoast

Okay, fair enough. I appreciate it guys.

Terry Hall

Thank you.

Operator

Thank you, and at this time there are no further questions, I'd like to turn the call back over to management for any closing remarks?

Terry Hall

Thank you, very much.

Operator

Thank you, ladies and gentlemen. This concludes the Superior Energy third quarter earnings conference call. You may now disconnect. Thank you for using AT&T Conferencing.

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