Superior Energy Services, Inc. Q1 2008 Earnings Call Transcript

Superior Energy Services, Inc. (SPN)

Q1 FY08 Earnings Call

May 02, 2008, 11:00 AM ET

Executives

Greg Rosenstein - VP of IR

Terry Hall - Chairman and CEO

Ken Blanchard - President and COO

Robert Taylor - EVP and CFO

Analysts

James Rollyson - Raymond James

Joe Gibney - CapitalOne Southcoast

Byron Pope - Tudor, Pickering, Holt & Co., LLC

Michael Marino - Johnson Rice & Company LLC

Thomas Escott - Pritchard Capital Partners, LLC

Stewart Glickman - Standard & Poor's

William Sanchez - Howard Weil

Presentation

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Superior Energy's First Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [Operator Instructions]. This conference call is being recorded today, Friday, May 2nd of 2008.

I would now like to turn the conference over to Greg Rosenstein, VP of Investor Relations. Please go ahead, sir.

Greg Rosenstein - Vice President of Investor Relations

All right. Good morning and thank you for joining today's conference call. Joining me today are Chairman and CEO, Terry Hall; President and COO, Ken Blanchard; and our Chief Financial Officer, Robert Taylor. Before I turn the call over to Terry, let me remind everyone that during the call management may make forward-looking statements regarding future expectations about the company's business, management's plan 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. Also during the 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 its website.

And with that, I’ll now turn the call over to Terry Hall.

Terry Hall - Chairman and Chief Executive Officer

Good morning, everyone. To recap our first quarter results, revenue was $441.4 million, EBITDA $171.6 million, net income of $102 million, $1.24 per share. After backing out non-recurring gains and expenses, adjusted net income was $74.5 million, $0.91 diluted earnings per share.

A few factors drove this performance. First, activity in the domestic land markets increased as the quarter progressed. This is reflected in an improvement in our coiled tubing and hydraulic workover businesses as compared to the fourth quarter. Also, we saw a 6% increase in the rentals of stabilization equipment on land. As you’ve heard me say many times, this business is our barometer of productivity, because this is a proxy for drilling and subsequently production-related services.

We are encouraged that this business continues to grow and it bodes well for our outlook in the domestic land markets. Secondly, during the quarter we started work on the wreck removal project that we announced in January. We completed the required paperwork with the MMS and some of our project planning ahead of schedule. As a result, we were able to put two vessels to work in March. Given the sensitive nature of this project, we are not going to provide a lot of detailed financial results.

Going forward, we will tell you if we are ahead of schedule or on schedule and we’ll tell you if we are achieving the margins we expected or achieving better margins. But that's about all. In the event we fall behind on the schedule or on margin attainment, we will tell you. Otherwise, there is a lot of competitive factors going on here. This work is not unlike work we do everyday around the world. It's just well intervention work, it involves many of our services and the skill set that we put together over a long period of time. So, the only thing unusual about this work is the fact that there was a contract. So, we really aren't going treat it any differently other than to give you the information, I think, you are certainly entitled to, which is are you achieving the margins you thought you would and are you on schedule. We will certainly keep you up-to-date on that. In any event, we fall behind, we will tell you. Thirdly, the sale of 75% of SPN Resources closed on March 14. The equity income line on the income statement reflects 25% of SPN Resources for the last two weeks of the quarter in addition to our ongoing 40% interest in Beryl Oil and Gas.

I will now review the operating highlights by segment, make comparisons to the fourth quarter of '07. In the Well Intervention segment, revenue was $234 million. Income from operations is $50.8 million. Activity increased in all three of our major geographic market areas; domestic land, Gulf of Mexico, and international markets. Revenue from the domestic land markets increased as a result of additional coil tubing and hydraulic workover and snubbing activity. Gulf of Mexico revenue increased due to the commencement of work on the wreck removal project. International revenue increased as a result of an increase in hydraulic workover and snubbing activity in Europe and Latin America. Our operating margin percentage increased a couple of percentage points over the fourth quarter, as we were able to hold some of our operating cost relatively flat.

In the Rental Tools segment, revenue was $130.3 million, income from ops was $45.8 million. The revenue decrease was primarily due to the substantial completion of the sale of accommodations to a customer in the Rocky Mountain market area in the fourth quarter. Rentals of our stabilization equipment increased in the domestic land markets, as the drilling count was higher. Stabilization and drill pipe rentals also increased in the Gulf of Mexico market area. This was offset by a decrease in drill pipe rentals internationally and production-related rentals in the Gulf of Mexico. One of the reasons for the lower international drill pipe rentals was poor weather in the North Sea. Despite the lower revenue, our gross profit margin percentage increased slightly as a result of business mix. The sale of those accommodations that occurred in the fourth quarter was at a much lower margin than our typical rental margin.

In the Marine segment, revenue was $23.1 million and income from operations was $2.6 million. Utilization was 49% as compared to 70% in the fourth quarter. It's worth noting that utilization of our larger boats, those with legs of 200 feet and greater, was 62% while utilization for the remaining boats was 42%. Idle days increased significantly in the first quarter primarily due to weather in the Gulf, typically these boats can only mobilize if seas are less than five feet. The number of days that seas exceeded five feet doubled from the same period a year ago. I think many people forgot just how seasonal liquid [ph] market in the Gulf of Mexico can be. Typically, it is very seasonal. Prior to '06, the norm was to see higher liftboat utilization for seven months and lower utilization during the winter months. I think we're back to that normal pattern. In the last week, we have seen activity tick up, as our average daily revenues increased about 30% from where it was in early April.

The Oil and Gas segment, this will be our last report on this segment. Revenue was $55.1 million and income from operations was $64.6 million. This segment includes only 74 days of consolidated financial performance. Income from operations was significantly higher due to non-recurring items that are included in first quarter '08 results. Excluding non-recurring gains and expenses related to the sale of 75% of SPN Resources, income from operations would have been $25.2 million for those 74 days.

We recently announced a liftboat investment. We have purchased a 50% interest in two 265-foot class liftboats from Moreno Energy, Inc. We've also entered into contracts with Moreno Energy to jointly construct on a 50/50 basis two additional 265-foot class liftboats. Total cost for the 50% interest in the four liftboats will be approximately $52 million. Under the terms of the arrangement, Superior will market and operate the liftboats. Construction of the first two boats is scheduled to be completed in the third and fourth quarter of '08, while construction of the last two boats is scheduled to be complete in late '09. These boats will be certified to work in international waters, as they will be built to meet U.S. Coast Guard, American Bureau of Shipping, and SOLAS standards. In addition, each liftboat will have two cranes, 200 ton and a 70 ton, 8,500 square feet of clear deck space, and accommodations for up to 40 people. This will significantly enhance our position to compete in the international liftboat market. Currently we've only got two boats that can work internationally. These liftboats have the characteristics of our 245-foot class liftboats, but can work in deeper water. They can work in 200 feet of water, that makes these boats very unique. The day rates on the new boats should be between the rates we get on our 245 and our 250 class boats. We expect that rate to be in the range of $35,000 to $40,000.

Turning to capital expenditures. In the first quarter, there were… $88.9 million expansion CapEx represented about 85% of that number. We expect CapEx in the second quarter to be about $130 million to $140 million, inclusive of estimated milestone payments on the liftboat investment.

On the G&A side, G&A increased by $3.3 million over the fourth quarter. There is a $4.5 million G&A expense related to the sale of SPN Resources. Recurring G&A was actually lower than in the fourth quarter. We expect second quarter G&A to be in the range of $64 million to $66 million. DD&A increased... decreased, I'm sorry, $12 million, down to $41.9 million. This is due to the sale of SPN Resources. We believe DD&A of $39 million to $42 million is a good run rate for the second quarter.

Looking at the balance sheet. We have approximately $716 million in debt. It breaks down as follows: $400 million in convertible notes, $300 million in senior notes exclusive of discounts, $16 million in merit [ph] for a total of $716 million. Debt to EBITDA at the end of the fourth quarter was 1.07 to 1. Debt-to-total cap is 40%.

From an outlook standpoint, we feel very good about what we see in the domestic land markets for our services and rental tools. Internationally, we think our opportunities will increase as the year progresses. In the Gulf of Mexico, this is the time of year that activity should begin to ramp up to liftboats and other production-related services. We are beginning to see that and we certainly look for it to happen as we go forward, as it will have a significant impact on our second and third quarter. Given that outlook, I still feel confident that we are on track to meet the consensus estimates that are currently published, which I believe are $4.04 for 2008. I do not think you should get ahead of yourselves and start ramping up the numbers. We are encouraged by industry data points such as rig count, drilling, workable permits, and of course commodity prices. But I still think we need to look and see what happens over the next few months in the Gulf of Mexico, and then we may be in a better position to look at moving numbers around.

Having said that, I’ll open it up for questions.

Question and Answer

Operator

Thank you, sir. [Operator Instructions]. And our first question comes from the line of Jim Rollyson with Raymond James. Please go ahead.

James Rollyson - Raymond James

Good morning, Terry.

Terry Hall - Chairman and Chief Executive Officer

Good morning.

James Rollyson - Raymond James

How are you doing today?

Terry Hall - Chairman and Chief Executive Officer

Good.

James Rollyson - Raymond James

One quick question here. You raised $165 million plus or minus from the sale of the 75% of SPN Resources, obviously spent about $52 million of that with the announced liftboat investment, thoughts or plans for the remaining cash?

Terry Hall - Chairman and Chief Executive Officer

Well. We have plans, but we have no comment.

James Rollyson - Raymond James

Okay. We'll stay tuned for that. One of your competitors in the Gulf liftboat market has been probably pretty negative on the outlook there. I'm not sure if that's just a function of the seasonal nature or maybe just kind of trying to get your thoughts for the outlook beyond the seasonal thing. You guys have always done a better job of providing utilization and whatnot on liftboats because you have all the stuff that goes on it, is that… do you think it's a differentiation between those two strategies or something else going on?

Terry Hall - Chairman and Chief Executive Officer

Well, I think that’s a differentiation in the strategies, number one, and then it’s a differentiation in the fleet. Our fleet tends to be more heavily tilted towards a newer, longer legged boats, so that certainly helps. And again, every time it seems like we have a couple of competitors that compete with us in a very small percentage of our business, and every time one of them announces something that's a little off, everybody wants to knock our stock down. And I just... we're just a highly diversified company. We just put up some results in a horrible liftboat market. We expect that market to get better this summer. We needed to get better clearly to do a lot better, but we'll wait and see what happens. We are not solely dependent on liftboats nor we solely dependent on plug and abandonment work for example. It's just… we've just got to hopefully help this market understand just how diversified we are and the ability that we have to weather the softness in one or more of our service lines in any given time. We work very hard to build a lot of balance into our business, to build a backlog of business, to try to take us through seasonal and cyclical downturns. That's our focus. Knock on wood we've been successful and holding on to it thus far and we'll continue to try to do so. So, again we expect the liftboat market to get better. If it does, obviously there's nothing, but opportunity for us on liftboats, just look at the numbers. We think it's better. If it gets anywhere near where it was a year or two ago, well that's going to bode very well for us. But even if it doesn't, we're still doing pretty good.

James Rollyson - Raymond James

Absolutely. Your results show it and congratulations.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

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

Joe Gibney - CapitalOne Southcoast

Good morning everybody. I know we are in the last stages of updating here on SPN Resources, just curious in the quarter, how did production come in and realized prices here on a last operational update within the segment?

Terry Hall - Chairman and Chief Executive Officer

No, we [inaudible] it will be getting into that at all now. We converted that to an investment. Their actual production was, I think, somewhere around 10,000 a day for the quarter. But to be... I don't have that right in front of me, if you call back after the call, we'll happy to give it to you though.

Joe Gibney - CapitalOne Southcoast

Okay. I appreciate it. And just wanted to follow-up on the decomp side, just exiting your current job that you're on now, but just a sense of that broader market as we look at the back half of the year. I know you've talked about there still being significant opportunities out there, just give us your 30,000-foot view, I guess, on how decomp is shaking up and how the MSS is playing into that? I appreciate it.

Terry Hall - Chairman and Chief Executive Officer

Well, I’ve heard a lot about the MMS ramping up enforcement activities and putting a little more pressure on our operators. But I’ve heard that before, we'll have to wait and see how that plays out. In terms of the market for our types of services and type of work that we do in this arena is very, very strong right now. We are involved in or looking at or expect to be involved in many, many projects all around the world, which is not unusual for us really. I've tried to make the point that the job we're on now is hurricane related, but you shouldn't think this is necessarily a hurricane deal. We’re getting ready, to go to work on a project that's a result of a missile hurting something and we have projects related to that, we have projects related to vessel hitting platforms, rollouts. We have activity going on all around the world, we're doing engineering work on. So, I don’t expect our participation in this market to only grow and there will be more work in the Gulf of Mexico of this type as well. But we're really... I would like to make the point that this is not a Gulf of Mexico deal, this is very much an international initiative and we are very engaged in projects all around the world and none of those are the result of [inaudible].

Joe Gibney - CapitalOne Southcoast

I appreciate it. Thanks guys. I'll turn it back.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Byron Pope with Tudor, Pickering, Holt. Please go ahead.

Byron Pope - Tudor, Pickering, Holt & Co., LLC

Good morning guys.

Terry Hall - Chairman and Chief Executive Officer

Good morning, Byron.

Byron Pope - Tudor, Pickering, Holt & Co., LLC

Terry, it sounded like here is a normal seasonality in the North Sea. Wanted to get your take or I think activity there is stocking [ph] around, but then more broadly speaking on the international side for rentals, how do you see things shaping out in the North Sea and then some of your other international markets there?

Terry Hall - Chairman and Chief Executive Officer

North Sea has definitely had some weather issues in the first quarter. And then we all have the knowledge about things getting a little soft there. I think we see some softness in the market. I think we’ll have a lot better idea of what’s going on in the North Sea as the second quarter plays out. We'll see just how much of this is softness versus how much of it is weather, but I mean the market has definitely been off there in the first quarter. In other international markets, I think we're doing very well, we expect to see nice growth in our business.

Byron Pope - Tudor, Pickering, Holt & Co., LLC

Okay. And then given… and we are fairly constructive on U.S. rig count activity for the back half and kind of reminder that's not to get out in front of ourselves. But just remind us of your suite of well intervention services, which ones tend to be more leveraged to increase in U.S. [inaudible] activity?

Terry Hall - Chairman and Chief Executive Officer

Well, clearly coil tubing, hydraulic workover, rig assist type work. But from your standpoint, roll on, coil tubing, pressure pumping.

Byron Pope - Tudor, Pickering, Holt & Co., LLC

Okay. All right. Thanks guys.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Next question comes from the line of Michael Marino with Johnson Rice. Please go ahead.

Michael Marino - Johnson Rice & Company LLC

Good morning, Terry.

Terry Hall - Chairman and Chief Executive Officer

Good morning, Mike.

Michael Marino - Johnson Rice & Company LLC

My question is, I was wondering if you could update us on your CapEx plans for the full year, and maybe give some more color around what's your plan has been in the international markets and then also U.S. land market, maybe, by product line and you want to give the dollar number to that will be great?

Terry Hall - Chairman and Chief Executive Officer

Mike, you may have to call back to get more color on that. But we’ve got a budget out there of $340 million. Internally, we've been working on some things, so I would say that you should expect that number to go up. We will be directing more dollars to the international market than we had initially indicated when we released the $340 million budget. It's also tilted to the rental side more than the well intervention side, but most part is probably on the order of 45%, 35%, something like that in terms of percentages. I think there will be more to come on this as we go forward, but again we've made some changes in our budgets and our CapEx budget and I think you'll see it go up. And a great deal of that will be related to international markets in rentals.

Michael Marino - Johnson Rice & Company LLC

Okay, great. That's helpful. Thanks.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions]. And our next question comes from the line of Tom Escott with Pritchard Capital. Please go ahead.

Thomas Escott - Pritchard Capital Partners, LLC

Good morning, fellows.

Terry Hall - Chairman and Chief Executive Officer

Good morning, Tom.

Thomas Escott - Pritchard Capital Partners, LLC

I think you said earlier, you had seen some pick up in the period in the tool rental business, and specifically with stable drill, was that… I guess that’s probably primarily on land rather than offshore related. Is that fair?

Terry Hall - Chairman and Chief Executive Officer

Yes. That's what I tried. That's correct.

Thomas Escott - Pritchard Capital Partners, LLC

And what about pricing? We hear various stories, there’s a lot of misinformation around. But has pricing been soft in some of these rental tools or has that really held pretty well?

Terry Hall - Chairman and Chief Executive Officer

Our pricing has held... held up very nicely in rental tools, in particular in stabilization, I mean. We are the dominant player in that market.

Thomas Escott - Pritchard Capital Partners, LLC

So, it's just a matter of getting utilization up to get to profitability or flow through to the bottom line.

Terry Hall - Chairman and Chief Executive Officer

That's correct.

Thomas Escott - Pritchard Capital Partners, LLC

Okay. Thank you.

Terry Hall - Chairman and Chief Executive Officer

Thank you, Tom.

Operator

Thank you. Next question comes from the line of Stewart Glickman with Standard & Poor's. Please go ahead.

Stewart Glickman - Standard & Poor's

Terry, when the new liftboats that are targeted for international get delivered, any particular reasons you're targeting or where you like those to go to work?

Terry Hall - Chairman and Chief Executive Officer

Well, the target for us to target and I mean there is certain areas that are simply very well suited for, Mexico being one and Venezuela another, and then you’ve got Middle Eastern opportunities, as well as West Africa. The key here is 190 feet of water. In the past, in a lot of our areas we wanted to go into with liftboats. One reason or another, everybody wants to work in a 185 feet, 190 feet of water, which is just very deep for 250-foot leg boats, and even for a lot of the 265-foot legged boats have difficulty with these boats, because they're basically 245 class boats, very long legs on them, and special passes on. They are going to be able to effectively work and they are certified to work in 200 feet of water, which opens up essentially a 20-foot depth sand for us. That will, I think, certainly be attractive and there's some potential in Mexico based again on our experience than few years back. That was one of the big issues we are going down there, was your ability to say you could work in a 190 feet to 200 feet of water. That issue exists in other markets as well. Big issue again is just their ability to certain class specs, which is absolutely essential to take them overseas. So, a lot of things going on with this, defensive moving part, we don't want other people… we'd like to maintain our position as the industry leader in long-legged liftboats. And the key to us to operate these vessels for any number of reasons and I think… well, I would say we expect some opportunities to develop in West Africa, Venezuela, in Mexico that might be particularly suited for these vessels.

Stewart Glickman - Standard & Poor's

Okay, that's helpful. And then one follow-up question. In the well intervention group, you mentioned that there was a little bit lower high-pressure well work and fewer well control projects, are those... is the timing of those projects somewhat inherently lumpy? And if demand for those came back, would you have the capacity to take on more projects?

Terry Hall - Chairman and Chief Executive Officer

We would. Understand, no one plans a well control then. That's an accident almost by definition. So, that work occurs when an accident occurs. So, it tends to come, they're not evenly spaced out. So, you really can't anticipate when that work is going to occur. That's been part of our strategy and trying to expand well controls business into this project management business and ultimately to where we can take responsibility for full projects because their business was fairly unpredictable. First, we expanded into well-controlled school and doing other things to take the lumpiness out of the business. And now we're getting involved in longer projects, that again allows us to take the lumpiness out of the business. So, we've got… we are working on some big projects, we'll continue to work on big projects, we have capacity to take on more and we are, in fact, working into an engineering work like now on several other projects.

Stewart Glickman - Standard & Poor's

Okay. Thanks, Terry.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions]. And our next question comes from the line of Bill Sanchez with Howard Weil. Please go ahead.

William Sanchez - Howard Weil

Good morning, Terry.

Terry Hall - Chairman and Chief Executive Officer

Good morning, Bill.

William Sanchez - Howard Weil

Here I was curious if you could speak to margins in well intervention between the U.S. onshore and Gulf of Mexico. Is there much difference right now in terms of the gross margins you are achieving in those two areas?

Terry Hall - Chairman and Chief Executive Officer

Not really.

William Sanchez - Howard Weil

No. Is it safe to say that as we look at revenue growth '08 versus '07, given you are really starting on the heart of the war acquisition now that revenue growth better... excuse me, better onshore than in the Gulf of Mexico.

Terry Hall - Chairman and Chief Executive Officer

Absolutely.

William Sanchez - Howard Weil

Okay. Last question you commented on full-year earnings, your comfortable consensus, any comment on the second quarter?

Terry Hall - Chairman and Chief Executive Officer

Not really. I just don’t want everybody to get too far ahead of themselves here. Clearly we need to look to improve a little more, as several [inaudible] of opportunity there and we expect it to and we are anticipating that it will. This year it's going to be back-end loaded for any number of reasons. But I just… I think just leave that second quarter where it is. And if we have to give you any guidance on that at some point if we feel it’s necessary we will as we had done in the past.

William Sanchez - Howard Weil

Okay. Thank you, Terry.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. And management there are no further questions, I’ll turn it back to you for closing comments.

Terry Hall - Chairman and Chief Executive Officer

Thank you very much for your interest. Stay tuned.

Operator

Thank you. Ladies and gentlemen, that will conclude today's teleconference. If you would like to listen to reply of today's conference, please dial 303-590-3000 and enter the access code of 11112708 followed by the pound sign. Once again, that number is 303-590-3000 and access code of 11112708 followed by the pound sign. We thank you for your participation and at this time you may disconnect.

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