Superior Energy Services (SPN) David D. Dunlap on Q1 2016 Results - Earnings Call Transcript

| About: Superior Energy (SPN)

Superior Energy Services, Inc. (NYSE:SPN)

Q1 2016 Earnings Call

April 29, 2016 11:00 am ET

Executives

Paul Vincent - Vice President-Investor Relations

David D. Dunlap - President, Chief Executive Officer

Robert S. Taylor - Chief Financial Officer, Treasurer & Executive Vice President

Analysts

J. Marshall Adkins - Raymond James & Associates, Inc.

Sean C. Meakim - JPMorgan Securities LLC

Blake Allen Hutchinson - Scotia Howard Weil

James Wicklund - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Judson E. Bailey - Wells Fargo Securities LLC

Ole H. Slorer - Morgan Stanley & Co. LLC

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Ken Sill - Seaport Global Securities LLC

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Darren Gacicia - KLR Group LLC

Operator

Greetings and welcome to the Superior Energy Services First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Paul Vincent, Vice President of Investor Relations. Thank you, Mr. Vincent. You may begin.

Paul Vincent - Vice President-Investor Relations

Good morning and thank you for joining Superior Energy's first quarter 2016 conference call. With me today are Superior's President and CEO, Dave Dunlap; and CFO, Robert Taylor.

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.

Management will refer to non-GAAP financial measures during this call. In accordance with Regulation G, the company provides a reconciliation of these measures on its website.

With that, I'll turn the call over to Dave Dunlap.

David D. Dunlap - President, Chief Executive Officer

Okay. Thank you, Paul, and good morning to everyone listening to our call today. We'll begin with a brief review of our first quarter activity, Robert will discuss the segment results, and I'll wrap up with some thoughts on strategy and outlook before turning the call over to Q&A.

For the first quarter of 2016, Superior Energy generated revenue of $413 million, adjusted EBITDA of $40 million and an adjusted loss from continuing operations of $74 million or $0.49 per share after excluding special items. The market deteriorated significantly during the first quarter as we experienced new lows for the drilling rig count and crude oil prices. Customer activity levels also rapidly declined as oil prices dropped below $30 per barrel.

Although commodity prices have rebounded off of lows made in January and February, we have yet to observe any increase in spending levels or activity from our customers. What should also be clear from our first quarter financial results is that our focus on cost reduction, internal reorganization and product and service line integration has yielded real results. I'll discuss these efforts in more detail a bit later on, but it is important to emphasize that Superior Energy will be a much different organization structurally upon exiting this downturn than when it began with a greatly improved ability to generate earnings.

We believe our ability to reduce our cost structure far beyond head count measures can't be ignored and distinguishes us from many of our competitors. Our well services business reorganized in 2015 is now a significantly more efficient platform from an operational and commercial standpoint. We continue to see opportunities to optimize our costs and to provide packaged services which is very appealing to central procurement groups.

Our hydraulic fracturing business continues to attract the type of high-quality customers that place the greatest value on efficient fracturing services. Although overcapacity continues to pressure pricing, we are protecting our position with our concentrated customer base. We also continue to maintain our equipment, including replacement and expense of major components, we are not cannibalizing the equipment. Instead, we maintain approximately 40% of our total capacity including some new or like new capacity on the fence in preparation for a market upturn. I fully expect that, as the market recovers, we will be called upon early to activate idle equipment and we will see opportunities to expand beyond our current capacity of 20 fleets.

Operationally, activity levels were lower across the board during the first quarter. Drilling and completion operations in the U.S. land market reacted most aggressively to extremely low oil and gas prices in January and February, resulting in reduced revenue across all segments, most notably in production services and drilling products and services.

In the Gulf of Mexico, activity is down, but holding up better than any geographic region. Our strategy in the Gulf primarily with our premium drill pipe rental business has been to defend our sizable market share, which we did successfully during the quarter. Historically, this has been a highly profitable business line and we will aggressively defend market share.

Our offerings in the area of premium drill pipe and landing strings include high-quality, pristine equipment in addition to an engineering and technical service capacity that is unmatched. Competitors in this arena are unable to compete based on quality and can only utilize price and lower quality assets to offset our premium services. We will not be displaced, and instead, we'll utilize this market environment to strengthen our long-term competitive position.

The first quarter is usually a seasonal low for most well service businesses in the Gulf of Mexico. But due to the deployment of a prototype subsea plug and abandonment application during the quarter, the revenue from these service lines were relatively unchanged when compared with the fourth quarter. We expect to have more to say about the potential market and opportunities for this unique, sub-sea technology and future updates. Internationally, Latin America, particularly Colombia, followed by Argentina and Brazil, has experienced significant reductions in spending and activity as these regions respond more forcefully to lower commodity pricing. With fewer cost reduction opportunities in this region than in the U.S., we expect results primarily on our production service related businesses to weaken further over the near term.

Our approach in Latin America is reflective of our overall international strategy. We've been selective in where we choose to operate, avoiding problematic countries like Venezuela and positioning ourselves to participate in regions with growth and upside potential like we see in Argentina with their emerging shale play.

A primary facet of our international expansion is the ability to continually expand product and service offerings in regions where we operate. Towards the end of the first quarter, we activated fracturing equipment in India, a new offering for us in that country and are actively conducting stimulation work. Increased revenue from this work in 2016 should help offset some activity declines in other regions internationally.

Despite activity and revenue declines across all segments, we've remained disciplined financially, generating free cash flow of $25 million and maintaining steady margins. Managing cash flow is a focal point with a primary goal of being cash flow neutral for the year. As we near the two-year point of this downturn, I'd like to thank our employees and leadership team for their hard work, long hours and the shared sacrifice it has taken to maintain and improve our organization throughout what appears to be the worst downturn any of us have experienced professionally.

I'll now turn the call over to Robert for our first quarter financial review.

Robert S. Taylor - Chief Financial Officer, Treasurer & Executive Vice President

Thank you, Dave. In discussing our operating segments, all sequential comparisons have been adjusted to exclude the impact of special items that were disclosed in our earnings release. Drilling Products and Services segment's revenues decreased 14% to $97 million, with an adjusted loss from operations of $15 million, compared to an adjusted loss from operations of $8 million in the fourth quarter of 2015. U.S. land revenue decreased 31% to $20 million due to a combination of pricing pressure and lower utilization as a result of further reductions of customer activity and spending.

Gulf of Mexico revenue decreased 9% to $46 million, primarily as a result of pricing reductions related to the company's strategy to protect market share. International revenue experienced a moderate decline of 5% to $31 million due to lower down hole rental revenue.

In the Onshore Completion and Workover Services segment, revenue decreased 14% to $132 million and the segment recorded an adjusted loss from operations of $66 million compared to an adjusted loss from operations of $65 million in the fourth quarter. All service lines in this segment experienced declines with well service rigs and fluid management having the most pronounced decline.

Our horizontal well fracturing business experienced a slight decrease in utilization during the quarter and we now have approximately 40% of our horsepower working primarily in South Texas and in the Permian Basin. Our Production Services segment revenue decreased 29% to $97 million, which resulted in an adjusted loss from operations of $18 million, an improvement from a loss of $22 million in the fourth quarter as structural cost improvements made during the third and fourth quarters of 2015 are beginning to be realized.

U.S. land revenue decreased 43% to $28 million due to general declines in activity and the discontinuation of product and service offerings in markets presenting limited breakeven cash opportunities. Our well services reorganization in 2015 has made it more practical to discontinue certain products and service lines without exiting a geographic area entirely, allowing us to resume offering these discontinued services in the future with minimal startup expenses.

Gulf of Mexico revenue increased 16% to $16 million as well services activity, which includes coil tubing, electric line, slick line and snubbing, was slightly higher during the quarter. International revenue decreased 28% to $53 million as activity in all product and service lines was lower, led by declines in Latin America. In the Technical Solutions segment, revenue decreased 39% to $87 million, resulting in adjusted income from operations of $1.8 million.

During the fourth quarter of 2015, the primary customer of our marine technical services business discontinued its Arctic exploration program and a contract termination fee of approximately $23 million was recorded. This fee, which was included in segment revenues for the fourth quarter and was included geographically in our Gulf of Mexico results, naturally did not recur in the first quarter. Additionally, the marine technical service business itself has been discontinued and did not contribute meaningfully to first quarter revenue and will generate no revenue in the future periods.

U.S. land revenues decreased 17% to $10 million due to lower well control activity. Gulf of Mexico revenue decreased 51% to $51 million due to the previously noted one-time contract termination fee and business discontinuation, as well as overall lower levels of activity. International revenue of $26 million was slightly lower quarter-over-quarter.

Turning to the balance sheet, at the end of the fourth quarter, our debt-to-capital ratio was 44% and our total debt at quarter-end remained at $1.6 billion. Net debt remained unchanged at $1.1 billion as our cash balance of $559 million was relatively unchanged. Free cash flow for the quarter was $25 million after capital expenditures of $38 million. We are pleased with this result, but still expect challenges in generating free cash flow moving forward. Given these challenges, our near-term objectives are to preserve our current liquidity without compromising our financial or operational flexibility.

Listeners may have noticed a decrease in our assets held for sale category. We've reclassified $26 million of property, plant and equipment related to the conventional decommissioning business back to continuing operations. These assets continue to be actively marketed and all costs and expenses associated with these assets will be reflected in the Technical Solutions segment.

During the first quarter, as noted with our fourth quarter results, we successfully amended and extended our credit facility, pushing our nearest debt maturity out to 2019. Also during the quarter, we eliminated our dividend, which will keep approximately $48 million of cash per year on our balance sheet going forward.

As this downturn persists, we are focused on our balance sheet and we are committed to take an action necessary to achieve our goals, reduce costs and preserve cash. During the quarter, we recorded a pre-tax expense of $15 million for restructuring costs related to our ongoing cost reduction initiative. Additionally, we've implemented further salary reduction measures across the organization, including reductions in the executive team compensation.

Of the $15 million of special items in the quarter, about $8 million was in G&A, bringing adjusted G&A to about $95 million. We expect second quarter G&A to fall between $93 million and $95 million. We expect DD&A to be in the range of $130 million to $135 million for the second quarter.

Our expectations for full year capital expenditures remain at $100 million or less. Second quarter interest expense should be in the range of $25 million to $27 million, our second quarter effective income tax rate is expected to be approximately 34%.

With that, I will now turn the call back over to Dave for closing comments.

David D. Dunlap - President, Chief Executive Officer

Okay. Thank you, Robert. We intend to remain stubbornly in the camp of refusing to believe the market has bottomed until pricing and activity stopped declining and customer spending levels pick up or what some would call actual evidence of a bottom.

Visibility from our customers remains low and competition remains at levels that are unsustainable given the operating environment. Neither of these conditions indicate we reach what we would be – what would consider a market bottom. While, we're not at bottom yet, the signs are beginning to appear that one may be near, yet customers have maintained their discipline and given little indication that they will increase activity despite market conditions. As we've discussed for over a year now, our organizational structure has afforded opportunities to reduce cost beyond head count reduction and facility closures.

What we've learned through our well services reorganization last year, which was the equivalent of integrating a large acquisition in terms of effort and ultimate savings was that we have the capability to conduct this type of exercise and we have additional opportunities internally to utilize this capability albeit at a smaller scale. Moving forward, we will continue to compress our cost structure at the field segment and corporate levels in ways that will be additive to earnings once we've reached that elusive market bottom and find ourselves in a recovery.

Speaking of recovery, the equity market is clearly beginning to anticipate a recovery. The timing and pace of a recovery in our markets are uncertain. What is certain is that we have positioned Superior Energy to optimize earnings as the recovery unfolds. We've decreased G&A, reduced managerial levels, lowered wages and have fewer facilities in operation.

We have continued to invest in our equipment and position businesses which are experiencing high levels of attrition, such as premium drill pipe and horizontal well fracturing to be in position to capture market share as the cycle picks up.

We also have the financial wherewithal to fund any type of immediate working capital needs that will be required when the activity levels begin to increase. Our best customers, as well as prospective customers with similar business models, are all aware of our capabilities when the time comes and we believe we are in a great position to fully participate in the early stages of an industry upturn. We are optimized for a recovery and will not squander our opportunities by deploying sidelined equipment for low returns and we'll require a combination of increased pricing and utilization before we activate equipment that is parked on the fence. Patience has been a prudent path for the entirety of this downturn and we see no reason for that to change.

That concludes our opening comments so we'll open the line up to questions. Operator?

Question-and-Answer Session

Operator

Thank you. Thank you. Our first question is from the line of Marshall Adkins with Raymond James. Please proceed with your question.

J. Marshall Adkins - Raymond James & Associates, Inc.

Good morning, guys. Hi, Dave, we've heard a lot about the attrition in pressure pumping and industry wide that's been pretty meaningful. Obviously, you all have probably kept your fleets up better than average. I want to talk about the DPS side. There hasn't been in a lot of conversation on that. How as an industry, what do you think is going on with attrition in the rental tools and the premium drill pipe and all that stuff, and then compare that to where you think you stand in the industry?

David D. Dunlap - President, Chief Executive Officer

Yes, sure. And, Marshall, I don't think that there has been a lot of the 3.5 inch and 4 inch drill pipe that is used in the horizontal wells on land that has been replaced in the last couple of years.

We are a significant buyer in the market for those types of assets and our suppliers tell us that it has not been very active. That is pipe that wears out pretty quickly. And in certain cases, like in the Bakken, I mean it's not unusual to see a three or a four year life for that type of asset. So, and I think as we get into a recovery, there's going to be a significant need for additional 3.5 inch and 4 inch pipe in the U.S.

That's probably where most of the attrition has taken place. On the pipe that we use in the Gulf of Mexico and international markets, most of what we do tends to be on these highly deviated offshore wells that tends to be specialized from a design standpoint. It tends to have a longer life, because it doesn't go through the same type of continual wear and tear that pipe in the horizontal wells does. So, I fully expect as we see U.S. land market recovery, there's going to be a shortage of pipe in the U.S.

J. Marshall Adkins - Raymond James & Associates, Inc.

So, where do you stand as a company to take advantage of that, and how does your attrition compare to the industry and facilities? I know you've shut down a lot of facilities. Will that impair your ability to respond in an upturn on the – particularly on the DPS side?

David D. Dunlap - President, Chief Executive Officer

So we've not exited any geographic areas in our premium downhaul rental business. We've had a few of our accommodations, operations that have shut down on the DPS side, but we continue to be in the same markets with premium drill pipe in the U.S. land market that we were entering this downturn. So, I mean I think that, overall, we are probably – we've done a pretty good job in staying away from pricing environments with – with premium drill pipe that don't make sense. And so where we've been very defensive about market share in the Gulf of Mexico with premium drill pipe, we have – we've not accepted, I guess, poor quality work in the U.S. I think we have a fleet that's going to be ready to go work with premium drill pipe when the market improves.

J. Marshall Adkins - Raymond James & Associates, Inc.

Right. Last quick one here, U.S. land margins for that segment versus the offshore or international margins, if you will. Are they about the same or is U.S. land a lot lower?

David D. Dunlap - President, Chief Executive Officer

U.S. land is considerably lower than offshore and international. Offshore and international margins, still in DPS, continue to be the best margins that we have in the company. U.S. land margins have deteriorated and so has revenue. As I said, we've kind of – we've kind of let revenue drop in certain places in the U.S. and let somebody else wear their pipe out at poor prices.

J. Marshall Adkins - Raymond James & Associates, Inc.

But it sounds like that's where the most upside is, as well.

David D. Dunlap - President, Chief Executive Officer

That's where the most – that's where the most upside will be in that business when – when we start to see some rigs go to work.

J. Marshall Adkins - Raymond James & Associates, Inc.

Thanks, Dave.

Operator

Our next question comes from the line of Kurt Hallead with RBC Capital Markets. Please go ahead with your question. Mr. Hallead, your line is open for a question.

David D. Dunlap - President, Chief Executive Officer

It sounds like he's not there, move on.

Operator

Our next question is from Sean Meakim with JPMorgan. Please go ahead with your question.

Sean C. Meakim - JPMorgan Securities LLC

Hey, good morning, guys.

David D. Dunlap - President, Chief Executive Officer

Good morning.

Sean C. Meakim - JPMorgan Securities LLC

Dave, I was hoping if you could just maybe give us a sense of comparison your recent conversations with customers versus the conversations you'd had close to a year ago, the last time we were on this potential road to recovery. Is the urge to get it – to get back to drilling stronger or are folks more reticent and there are even more caveats to inquiries about activity?

Yeah. I mean, to this point, I think our customers have been communicating with us in the same way that they communicate with their inventors. And what we've heard widely from our customers over the course of the last few months is that, they did not believe we should – they would increase spending in the U.S. until they saw a price that was closer to $50 a barrel.

So – and I think they are going to need to have some confidence that, that price is going to stay at that type of level before they start spending more. So, maybe like, last year at this time, we all got caught in a bit of the head fake, and I think that they're sensitive to that, the customer base is sensitive to that, and I think what we should expect is, is that, they are going to require a bit more certainty before they start spending more.

Sean C. Meakim - JPMorgan Securities LLC

Okay. That's fair. And then internationally, given the pattern of IOC and NOC budgets, is there any sense that kind of – as we wrap up the first half, pricing discussions start to abate a bit, or do you expect to have kind of a steady clip of renegotiations or further pressure on pricing as we wrap through the rest of 2016?

David D. Dunlap - President, Chief Executive Officer

Yeah. I don't know. I mean, I would expect that the pace of those types of conversations related to price concessions is something that is going to – is leveling out. That doesn't mean it goes away, but it does mean it levels out some. I mean, it's been a pretty dramatic downturn on the international side, bigger downturn in 2015 than what we thought we would see. And in the first quarter, we saw a pretty good drop in international activity in certain countries as well.

So, I don't know, it feels like we ought to see some leveling out at some point as we reach kind of mid-year on the international side.

Sean C. Meakim - JPMorgan Securities LLC

Got it. Okay. Great. Thanks, Dave.

Operator

Thank you. Our next question is from the line of Blake Hutchinson with Howard Weil. Please go ahead with your question.

Blake Allen Hutchinson - Scotia Howard Weil

Good morning.

David D. Dunlap - President, Chief Executive Officer

Hi, Blake.

Blake Allen Hutchinson - Scotia Howard Weil

Normally I stay away from the kind of pressure pumping inquiry on this call, but I think I heard you in your opening statement talk a little bit about the potential and with some confidence expanding beyond your 20 fleets in a pending upcycle. Is this more of, A, is that correct? And secondly or A and B, is that more a confidence in your customer base and efficiency or your assessment right now of how depleted the competitive base is?

David D. Dunlap - President, Chief Executive Officer

Yeah. It's kind of all of the above, I guess. I think that as – we entered this fracturing business with our acquisition of Complete in 2012. The complete frac business was designed, as I saw it, as kind of a niche business. It catered to the most efficient horizontal well operators. And in 2012 and 2013, in reality, that was a fairly limited part of the customer base. The broad market was not considered a highly efficient group of customers. I think one of the things that we learned in 2014 is that that group of customers was getting larger, and our business model is particularly appealing to the most efficient horizontal well operators.

So, I would have thought in August or September 2014 that we had the opportunity to expand that business, and of course, things got bad after that. I think as we think about a recovery, I do believe that our business model is going to be desirable to a larger customer base as recovery occurs. And so, I do think that's – the fleet expansion is something that we will be considering, and when we get into a market recovery, we've got a bunch of equipment to put back to work first, but I think overall, I do believe that's a business model that can expand for us.

Blake Allen Hutchinson - Scotia Howard Weil

Great. And then – and also from kind of your opening commentary, you – it sounds like you're not getting too caught up in a return to immediate prosperity. But maybe to help us out in terms of what you're seeing in the market today, probably the best indicator is whether you're going through kind of another round of discontinuing services and product offerings somewhere else in the States. Is that something we should expect to see in 2Q in a major way? Or do you feel like maybe at least that – those machinations are behind us at this point?

David D. Dunlap - President, Chief Executive Officer

Yeah. I mean, I think that's – it's a reasonable point, Blake. I mean, we saw the market dive down pretty good in the first quarter. And clearly, just using rig count as a barometer, that activity abatement is beginning to slow. And so, I mean I think we do pay attention to the product lines, on a very regular basis, daily basis, weekly basis and when we have certain product offerings that are being challenged from a cash generation standpoint i.e., product lines that we can't operate at breakeven, our new structure affords us the ability to stop doing those things, without exiting the market.

And that's really important, because when you've got a service line and it's a single service line run out of a shop, a single shop in a geographic area, to exit that service line and shut it down completely means you're effectively leaving the market, setting yourself up for a big cost in an upturn to get back in there.

The way we've combined things from a well services standpoint, those are a lot easier decisions for us to make. And we can literally make those decisions on a real time basis as we see a particular product line struggle in a geographic area. But it does not inhibit our ability to reactivate that product line if we see a better market opportunity. So we'll keep looking at those things. I would expect that as long as we're in this type of market environment, that we'll see certain product lines that get stressed and when they do, we're going to stop doing them.

Blake Allen Hutchinson - Scotia Howard Weil

Great. Appreciate the time. I'll turn it back.

Operator

Thank you. Our next question is from the line of Jim Wicklund with Credit Suisse. Please go ahead with your questions.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Good morning, guys.

David D. Dunlap - President, Chief Executive Officer

Hi, Jim.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Last weekend, I was up in Denton and I saw a whole bunch of Pumpco equipment behind a locked gate. It looked brand new. So I can see that you're ready to go back to work. Though I have to say in the Gainesville yard, it was completely empty except for the cooking truck, the little trailer that you all compete in chili cook-offs with and I almost took a picture to send to you, but the yard was too empty.

David D. Dunlap - President, Chief Executive Officer

We're not competing in any chili cook-off these days, Jim.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

I'm not surprised. David, today, you have a somewhat de minimis position in pressure pumping because pressure pumping has a de minimis position. In three years, how much of your revenues will be pressure pumping?

David D. Dunlap - President, Chief Executive Officer

Jim, you know, that's a difficult question to answer when I'm not sure what oil prices will be or what the market looks like...

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Three years from now, it will be $75, that's easy.

David D. Dunlap - President, Chief Executive Officer

I think, rather than try and get specific about that since it's something I really can't get specific with, I just – what I would lean on is that – is kind of similar to the prior question. I think that we have room to be a bigger market participant and by market participant I mean, market share in hydraulic fracturing. I think that the business model that we have which is very conducive to the efficient horizontal well operators is one that is going to be attractive and give us opportunities to grow in the future. And I would not have a problem at all, if we're fracturing to become a bigger percentage of our total revenue than it was, say, in 2014.

If we – what we witnessed with that business in 2014 was a business that performed from a margin and return standpoint at – in a range that was well better than what the industry in total saw. And it was at every turn that would inspire us to make greater investment. And I'll remind you, 2014 was not a great pricing environment. So – I mean, I think it speaks...

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

The price didn't move up for years, right?

David D. Dunlap - President, Chief Executive Officer

It didn't. I think it speaks clearly to the point – to my point that I think this is a business that we feel very good about expanding because it will drive better than average returns.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Okay. Let me ask you this. Are you a mid-cap pressure pumping company with international exposure or are you a mid-cap oilfield service company who also is in domestic pressure pumping as well as everything else? How would you describe yourself to a new investor in this market?

David D. Dunlap - President, Chief Executive Officer

Diversified global service company. And I think what that means is that we are – our core strategy is to become more globally diversified. We want to participate in more overall global markets. I know that long term, investors pay a premium for those companies whose earnings are generated from a wide diverse geographic area.

But I think as well, we're going to make decisions as time goes on that drive a higher return. And I think there will be moments in time where fracturing is a great investment that drives a higher return and that's where we want to be concentrated from an investment standpoint. There will be moments in time where fracturing may not be generating as high a return and there's moments in time we will take a smaller market share and invest less. I mean, I think, diversification gives us the opportunity to pull a lot of different triggers as markets evolve. And you know as well as I do that's what happens. None of these were ever static. And so we want to be diverse so that we can make decisions that are additive to us from an earnings standpoint and continue to drive return up.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Perfect. Thank you very much. I appreciate it.

David D. Dunlap - President, Chief Executive Officer

You're welcome.

Operator

Our next question is coming from the line of Jud Bailey with Wells Fargo. Please go ahead with your questions.

Judson E. Bailey - Wells Fargo Securities LLC

Thanks. Good morning.

David D. Dunlap - President, Chief Executive Officer

Good morning.

Judson E. Bailey - Wells Fargo Securities LLC

Dave, could you maybe talk a little bit about maybe any differences you're seeing in some of your businesses within the U.S. land segment? It sounds like depending on which company you talk to, workover may be doing a little bit better than some others. Obviously pressure pumping is depressed, we'd be curious to get your perspective on how you kind of see some of your different business lines in the U.S., and then, how they could evolve over the next kind of three months to six months?

David D. Dunlap - President, Chief Executive Officer

It's interesting that you bring up workover rigs and I don't want to – I don't want to jump into the camp that we're seeing green shoots in any of our product lines in the U.S. because we're not. But it is interesting to note that beginning in March, we started to get phone calls from a few customers that wanted us to activate workover rig assets to carry out P&As. And so, we've actually seen a bit of an increase in P&A activity on land in the course of the last, I don't know, six weeks or so maybe. This is not something that I would characterize as being an indicator of market movement up, plugging wells, but I think, it's an indicator that our customers are trying to get done some of the regulatory things that they need to do and do it in such a way that's cost efficient.

That's good news for us because we can send out an entire package of equipment to execute on a plug and abandonment opportunity in the U.S. We'd send a service rig, we'd send a cementing asset, we'd send everything that they need to accomplish this and I won't describe it as a huge needle mover from an activity standpoint, but it's been something positive.

Judson E. Bailey - Wells Fargo Securities LLC

Okay. And then what about in pressure pumping, obviously more depressed, are you getting any or having any more – I don't know, in detailed discussions with operators on perhaps putting equipment back or is it still pretty quiet on that front?

David D. Dunlap - President, Chief Executive Officer

Quite on that front. I mean I think what we – what we did see was more negative overall in the market on fracturing utilization in the first quarter. We did see some utilization swing on operators that really start to slowing things down. We've got fewer fleets that are working on 24-hour operations in the first quarter versus the fourth. And there also seems to be just a general lack of urgency, I guess, with even some of the most efficient customers that we have, they slow things down during the course of the first quarter. I think when we begin to see optimism with our customers around commodity prices, one of the first things that happens is that we put more equipment on 24/7. That has not happened yet.

Judson E. Bailey - Wells Fargo Securities LLC

Okay. All right. And my follow-up there is, trying to think about your cost structure. When a recovery does happen, you guys have done a good job cutting cost, reorganizing, just creating an overall leaner cost structure. Is there a way to help us to think about how much activity you could – I guess how much of an increase you can accommodate with your current cost base as it is now before you have to start really hiring a lot of people back. Is there a way to think about that?

David D. Dunlap - President, Chief Executive Officer

I think that if you – if you were to go back to 2014, which was a year where we were obviously quite a bit more utilized and think about the things that we have reorganized in our well services business, the integrated well services businesses today, I think we've improved our overall margins in that business based on 2014 by 400, 500 basis points. We told you guys when we went through this exercise, we were taking $40 million to $50 million in cost off of Q3 2015 cost. So, that's a pretty significant structural change. I also think that our G&A cost will be – cost reductions will be pretty sticky as we move forward. We've brought wages down, we've brought wages down across the board and although there will be some return to wages as the market gets busier, I think a lot of the things we've done with entry level wages in the field, that's going to be pretty sticky as well.

So, and our entry level wages starting point are down about 20% to 25% versus where they were in 2014 and they're not going to jump back up just because we put a few hundred more rigs to work. So, I mean, Jud, the way I like to think about it, there's a lot of what we've done is pretty sticky from a cost standpoint. We will have to add head count when it gets busier and we will have our current head count working a bit more over time. But the structural changes that we've made are, I think, are going to be pretty sticky going forward.

Judson E. Bailey - Wells Fargo Securities LLC

Okay. Great. I appreciate the color. I'll turn it back.

David D. Dunlap - President, Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question is from the line of Ole Slorer of Morgan Stanley. Please go ahead with your questions.

Ole H. Slorer - Morgan Stanley & Co. LLC

Yeah. Thanks a lot for that. Just first of all, on the drill pipe, you highlighted the three to four year of life. So, does that mean, I mean the math doesn't suggest that the demand or the rig count has dropped faster than the speed at which you chew up drill pipe obviously. But, how far into recovery do you see that we need to go before customers need to reorder and you get sort of back to those 50% EBITDA incrementals that you get in drill pipe in the upcycles?

David D. Dunlap - President, Chief Executive Officer

Yeah. I mean I think that some companies will be in a position to order very quickly and others will not. It's going to depend on where your cash position is. Yeah, one of the reasons, Ole, that preserving cash has been so important to us and we've been so vocal about this is that, we're going to need to deploy some cash when the market gets better. Clearly, we'll have some working capital needed to fund, but I think one of the things we'll want to do is get some drill pipe ordered.

And I know, and speaking to the managers in our business, that's important to them, that's going to be important to us. I think there's going to be a – particularly in the U.S. landmark, a very quickly a shortage of premium drill pipe and we want to be in a position to take advantage of that from a cash standpoint. I think a lot of our competitors will not be able to do that.

Ole H. Slorer - Morgan Stanley & Co. LLC

Do you think that'll be the most – or the place where you see the most meaningful margin power or pricing power, incremental margins, whatever you want to talk it, will that be the product line that will drive it, do you think, or are there other product lines that could also be strong?

David D. Dunlap - President, Chief Executive Officer

Yeah. I mean, I think premium drill pipe and pressure pumping are probably the two areas that, because of attrition, that we see pricing and utilization opportunities initially.

Ole H. Slorer - Morgan Stanley & Co. LLC

If I think about your organization, you talked a lot about the restructuring and the other point about the lower entry-level wages, which certainly, initially will be sticky. But should we think about the measures you've done, whether it is on the Production Services segment or elsewhere as something that protects you in a more sustainable way during the down cycle or something that adds to margin and profits in the up cycle?

David D. Dunlap - President, Chief Executive Officer

Yeah. I think it's a bit of both. I mean, clearly, it's protecting us better on the down cycle. But the integration that we carried out in this reorganization, this was an opportunity that existed for us that I think was a good opportunity both operationally and commercially before we hit this down cycle.

And the challenge with this is it would have involved significant disruption in the business and probably would have put some top line at risk, i.e., revenue. And it's always difficult to do that when you're in a busy business environment. So, a lot of what we accomplished, I think, is a bit of pent-up opportunity that we needed the right kind of downturn to go execute on, and so we've done that. It puts us in a better long-term position operationally and commercially to have gone through this integration. And you've heard me speak before, it makes us more attractive to central procurement groups that are trying to do – that are trying to work with fewer vendors. We can supply more on a single ticket than most of our competitors can.

Ole H. Slorer - Morgan Stanley & Co. LLC

So, if the business environment gets back to, as I said, for argument's sake, to a 2014 type climate, again, you delivered $1.2 billion of EBITDA, $1.80 of earnings that year. This restructuring, how should we think about those numbers on a like-for-like basis?

David D. Dunlap - President, Chief Executive Officer

Yeah, good question. I don't know that I've gone through and done specifically the math as to what it would mean for 2014, but I think it's significantly higher. And another way that I'd think about this is, we are in, I think, $1.89 in earnings in 2014, and that was with $4.5 billion in revenue. We're going to need a lot less than $4.5 billion in revenue to generate a $1.89 next time.

Ole H. Slorer - Morgan Stanley & Co. LLC

Thanks for that.

David D. Dunlap - President, Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question is from the line of Scott Gruber with Citigroup. Please go ahead with your questions.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Good morning, gentlemen.

David D. Dunlap - President, Chief Executive Officer

Good morning.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Overall, I applaud the shift in strategy toward domestic fracking and openness to expansion there. Dave, you highlighted a desire to restart your equipment before looking at expansion opportunities, but why not take advantage of the current market stress and buy additional frac fleets before the market begins to heal and as prices potentially rise?

David D. Dunlap - President, Chief Executive Officer

Yeah, I mean, I think that we would be open to this. I mean, I've said very publicly over the course of the last year that we've looked at a lot of different opportunities in this down cycle to acquire. I would not turn our back to anything. Patience in M&A has certainly been important for us because most of those assets would have been a cash drain to us over the course of the last six quarters. And I'm glad we didn't have to fund somebody else's problem.

As you start to think about a market recovery, then clearly, these are the things we'll continue to look at. And, hey, if we see the right opportunity with the right types of assets, then I think we would consider it. But I also know that when you acquire someone else's assets, you always have challenges. I mean, they don't always integrate well with what you own, they're on different systems from a control standpoint, from a data collection standpoint and maybe with components that are not consistent. So, from an inventory and maintenance standpoint, they complicate things.

And those are all factors you have to take into account. So I don't want to absolutely rule that out, but whether you expand with spending CapEx on organic growth to build the assets that you like or buy someone else's, I think, either way, there's an opportunity for us to be bigger in fracturing as the market recovers and that's something we'll pay close attention to.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

And at this point, would you be willing – or even down the road, would you be willing to issue equity to potentially do a large deal or should we be thinking more about small bolt-on acquisitions?

David D. Dunlap - President, Chief Executive Officer

Yeah, I don't know. I think that we are going to be, as we have been, very careful about investment of the company's cash or investment of the stock that our investors own. So, yeah, I'd prefer not to speculate on that. I've been also quite vocal about being sensitive to diluting shareholders. I'm a shareholder and I don't like the idea of being diluted myself. So, I always like to – if we're going to issue stock, tie it to a very near-term earnings opportunity. And so, we'll just have to asses those opportunities as they come up.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

And just one last one. The mid-tier pumpers that you compete with, several you've talked about in the past, growing their frac fleets towards 1 million horsepower under the thesis that this is where you optimize scale. Does that make sense to you as a longer-term target or is this just reflective of kind of round number thinking and the reality is more nuanced?

David D. Dunlap - President, Chief Executive Officer

I think the reality is way more nuanced than that and that's very round-level thinking. It's not at all the way that we think about the business, I can tell you that. And I mean, I think that clearly people understand economies of scale and – but I believe in that business, basin concentration probably is more important than anything. And, yeah, so, whether you're 0.5 million horsepower or 1 million horsepower, if you could run it all in the same basin, that's where you're most efficient. We've tried to – we've limited to a great extent the basins that we choose to operate in for that very reason.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

We've definitely seen that approach yield better margins. So, I'll turn it back. Thanks.

David D. Dunlap - President, Chief Executive Officer

Okay. Thanks.

Operator

Thank you. Our next question is from the line of Ken Sill at Seaport Global. Please go ahead with your question.

Ken Sill - Seaport Global Securities LLC

Yeah. I want to beat the dead horse on pressure pumping one more time and then have a follow-up. So, you said that utilizations come down, less 24-hour work, but you guys had great incremental margins in your U.S. Onshore Completion and Workover business. So, aside from cost cutting and protecting key customers, was there any element that you guys can point to?

David D. Dunlap - President, Chief Executive Officer

Yeah. Probably the most significant is related – in that segment, we have well service rigs and they were a big beneficiary; that business is a big beneficiary of what we went through with our integration reorganization exercise. So, probably more driven by benefits there than anything else.

Ken Sill - Seaport Global Securities LLC

Okay. That makes sense.

David D. Dunlap - President, Chief Executive Officer

Yeah.

Ken Sill - Seaport Global Securities LLC

And then another topic that hasn't been addressed. Depending on this, the timing and the scale of recovery, you guys redid your credit line, there's a lot of concerns out there about perhaps being in violation of the interest coverage or the total debt coverage on the rolling 12 months EBITDA basis when you get out to kind of December or fourth quarter – first quarter. Could you guys give us any more clarity on some of the add backs that we may not have in our models or how you're viewing that right now?

David D. Dunlap - President, Chief Executive Officer

Yeah. I mean, I think that's a good follow-up to have with Paul on add backs and the various calculations that go into covenants. Let me just make this broad statement. We will pay very close attention to where our bank covenants are; we've always done that. We have extended the credit facility to 2019. We've got a smaller group of banks, but the group of banks that we have is extremely good.

And having a smaller group of banks is actually probably, in the long run, an easier thing to deal with. If we see at some point in time in the future that we're going to come close to breaching a covenant, we will be well out in front of it and speaking to our banks about remedies.

I would like to say this, though. We have $325 million drawn on the facility and we have $560 million cash on the balance sheet. And in my view, that's the nuclear weapon for solving a lending problem. We have cash that we could pay the loan off with. Is that the optimal solution? Probably not, and it's probably not the optimal solution for the banks either. But having the cash available to completely retire the debt should alleviate any concern that anybody has about our bank facility.

Ken Sill - Seaport Global Securities LLC

I appreciate that, Dave, because I've kind of made the same point as if you got $500 million or $600 million in cash and you got a problem with your covenants, what are the banks going to do? But appreciate your color. Thank you.

David D. Dunlap - President, Chief Executive Officer

You're welcome.

Operator

Our next question is coming from the line of Robin Shoemaker with KeyBanc. Please go ahead with your question.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Hey, Dave. Thanks for all the color on the quarter and your strategy. I wanted to ask about – just from a very high level, the 400 basis points or 500 basis points of improvement that comes from the new structure, I mean, in the context of a recovery of course. But Superior has always had this very high margin drilling products and services business and consistent performance and then much lower and inconsistent performance in the other division. So when we think about the margin improvement goal that you've got with the new structure, do you think that will equally apply to all of your businesses?

David D. Dunlap - President, Chief Executive Officer

Well, yeah, I think that what we've done from an integration standpoint applies in both the Onshore Completion segment and in the Production Services segment. And of course it's only to the U.S. land portions of those segments.

The way we've organized now in the U.S. is the same way that we're organized in our Production Services segment internationally. And so it's a consistent business model in other parts of the company, it's just not the way that we operate it in the U.S. And I mean, I think, over time, it does drive greater consistency in earnings mainly because we're taking some cost out and putting ourselves in a position where I think we will be advantaged with larger customers that are trying to package. So it's improvement commercially, as I said before, improvement operationally. And I think it does provide for greater predictability in the business as we go forward.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Okay. Okay. One other thing just on the state of the market, and you've commented really over the last year about competitors willing to work at cash below cash breakeven or at cash breakeven and wear out their equipment for no margin. Now, do you see any signs that the money supporting that kind of strategy is turning to run low or that people are dropping out of and no longer pursuing that utilization strategy?

David D. Dunlap - President, Chief Executive Officer

I wish I could say yes, but not yet. I mean, we continue to see competitors that are doing things and from a – from an activity standpoint, from a pricing standpoint, it just doesn't make any sense to me. So, I think, listen, you get into an environment like this where we have as much overcapacity as we do that there are going to be bad actors out there, there are going to be people that are willing to do things that we're not willing to do. I don't think that resolves itself until we see an oil price that supports our activity. At some point in time, I guess, they all go away, but it's not yet, there is still plenty of capacity out there.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Okay. Thank you, Dave.

David D. Dunlap - President, Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question is from the line of Darren Gacicia with KLR Group. Please go ahead with your question.

Darren Gacicia - KLR Group LLC

Hey, guys, thanks for taking my question, I appreciate it. It's definitely – I can appreciate some of the commentary so far about kind of the head fake last year and that kind of weighing on people's decision process. It seems that you've not – but the difference this year you have U.S. production is already starting to show decline and it seems like over the course of the last few weeks, concerns about international production have started to increase.

My question here is, as all this is happening and it looks like there is some delta, which pays to be determined going up. I would imagine you need to add people to the equation. How are you thinking about that and how do you think about again across product lines and – because I'm imagining the capacity from equipment is there but the people is going to be the bottleneck, and how do you deal with that view?

David D. Dunlap - President, Chief Executive Officer

Yeah. I mean, I think that's a great question. Well, we have certain of our businesses that are not going to be very dependent on people additions at all. Our premium drill pipe business is a perfect example of that. I mean, it's a business with low fixed costs, it's part of the reason why the decremental margins have been so high over the course of the last year because you don't have the same kind of labor triggers to pull in that business as we do and others. So, I mean, in premium drill pipe and bottom hole assemblies, we're not going to require a whole lot of labor, and we could see those product lines grow without having to add a lot of people.

In some of our other businesses, I would say that in parts of our Onshore Completion segment as well as in our Production Services segment in the U.S., our labor is not working at the same number of hours that they like to work. So, in 2014, that labor force was working steadily from 60 hours to 80 hours a week. And that's where those guys like to be, I mean, that's where they're optimizing overtime and everything else. Those workers today are all working think under 50 hours a week, in some cases, under 40 hours a week.

And so what that says is with the labor force you have today, you can do more. You don't have to go hire people right away. So, our crews in fracturing, they only work in daylight operations. Now, clearly, they can work 24x7, they have before. And so, I think that we've got labor to be able to deal with another 25%, maybe 30% activity increase, and that kind of takes care of early stages of recovery. And as soon as we start to see those laborers begin to accumulate more hours, then I'm sure we'll be in the market looking for additional staff.

I'll speculate here for just a second in that where do we go before we see a labor problem. And I think it's probably in the 700 rig range to 800 rig range. So if you consider where we are today at close to 400 rigs, we can probably get to 500 rigs or 550 rigs really without having to add very many people at all. 550 rigs to call it 750 rigs, we're going to need to add some people and I think we'll be able to access those.

We get above 750 rigs, 800 rigs depending on the slope of the increase, we may have some struggle bringing labor onboard. So it depends on pace, I mean, it just depends on how long does it take us to get to 750 rigs and 800 rigs. If that answer is a year, then it's probably a labor problem we can deal with. If it's three months, then it's probably going to be a challenge.

Darren Gacicia - KLR Group LLC

The numbers are super helpful. One different – one question kind of going down a different path, clearly, a lot of the calls in the last couple quarters have dealt with consolidation, what assets are up for sale and all the rest. Now that that's the equation and some of the underlying assumptions are changing about industry consolidation, do you think that that hurts your business if, say, the Baker-Halli deal for instance doesn't go through from a competition standpoint or does it help or does it change anything at all? I just was kind of curious your look at the competitive dynamics.

David D. Dunlap - President, Chief Executive Officer

Yeah. Well, I mean, the Halliburton and Baker Hughes have been competing separately since their deal was announced in 2014. And so I don't know that the deal not going through changes anything from where we are in the market now. That being said, I've been pretty vocal in saying I really hope this was a deal that would go through. I think the industry consolidation is very helpful to all the participants and having one less competitor in the international markets would be helpful to us. But I guess you can't lose which you never had, right?

Darren Gacicia - KLR Group LLC

Fair enough, fair enough. I appreciate the help. Thank you.

David D. Dunlap - President, Chief Executive Officer

You're welcome.

Operator

Thank you. There are no additional questions at this time. I would like to turn the floor back to management for closing remarks.

David D. Dunlap - President, Chief Executive Officer

Excellent. Thank you all for joining us and we'll talk to you next quarter.

Operator

This concludes today's teleconference. Thank you for your participation, you may now disconnect your lines at this time.

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