UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q |
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File No. 001-34037
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SUPERIOR ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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75-2379388 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
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1001 Louisiana Street, Suite 2900 |
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77002 |
Houston, TX |
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(Zip Code) |
(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (713) 654-2200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ |
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Accelerated filer ☐ |
Non-accelerated filer ☐ |
(do not check if smaller reporting company) |
Smaller reporting company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s common stock outstanding on October 30, 2014 was 152,171,006.
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q for
the Quarterly Period Ended September 30, 2014
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Page |
PART I. |
FINANCIAL INFORMATION |
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Item 1. |
3 | |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
16 |
Item 3. |
20 | |
Item 4. |
21 | |
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PART II. |
OTHER INFORMATION |
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Item 2. |
22 | |
Item 6. |
23 |
2
PART I. FINANCIAL INFORMATION
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES |
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Consolidated Balance Sheets |
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September 30, 2014 and December 31, 2013 |
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(in thousands, except share data) |
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9/30/2014 |
12/31/2013 |
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(unaudited) |
(audited) |
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ASSETS |
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Current assets: |
||||||
Cash and cash equivalents |
$ |
320,042 |
$ |
196,047 | ||
Accounts receivable, net of allowance for doubtful accounts of $27,366 and |
||||||
$31,030 as of September 30, 2014 and December 31, 2013, respectively |
967,943 | 937,195 | ||||
Income taxes receivable |
- |
5,532 | ||||
Deferred income taxes |
27,024 | 8,785 | ||||
Prepaid expenses |
72,072 | 70,421 | ||||
Inventory and other current assets |
185,613 | 258,449 | ||||
Assets held for sale |
285,759 |
- |
||||
Total current assets |
1,858,453 | 1,476,429 | ||||
Property, plant and equipment, net of accumulated depreciation and depletion of $2,159,166 and $1,827,011 as of September 30, 2014 and December 31, 2013, respectively |
2,702,532 | 3,002,194 | ||||
Goodwill |
2,456,522 | 2,458,109 | ||||
Notes receivable |
25,560 | 23,708 | ||||
Intangible and other long-term assets, net of accumulated amortization of $110,115 and $84,567 as of September 30, 2014 and December 31, 2013, respectively |
420,873 | 450,867 | ||||
Total assets |
$ |
7,463,940 |
$ |
7,411,307 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
$ |
207,242 |
$ |
216,029 | ||
Accrued expenses |
367,476 | 376,049 | ||||
Income taxes payable |
37,417 |
- |
||||
Current maturities of long-term debt |
20,344 | 20,000 | ||||
Current portion of decommissioning liabilities |
- |
27,322 | ||||
Liabilities held for sale |
76,849 |
- |
||||
Total current liabilities |
709,328 | 639,400 | ||||
Deferred income taxes |
729,246 | 736,080 | ||||
Decommissioning liabilities |
87,443 | 56,197 | ||||
Long-term debt, net |
1,630,834 | 1,646,535 | ||||
Other long-term liabilities |
165,379 | 201,651 | ||||
Stockholders’ equity: |
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Preferred stock of $0.01 par value. Authorized - 5,000,000 shares; none issued |
- |
- |
||||
Common stock of $0.001 par value. |
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Authorized - 250,000,000, Issued - 153,958,963, Outstanding - 154,019,882 as of September 30, 2014 Authorized - 250,000,000, Issued - 158,976,784, Outstanding - 159,158,022 as of December 31, 2013 |
154 | 159 | ||||
Additional paid in capital |
2,724,777 | 2,873,579 | ||||
Accumulated other comprehensive loss, net |
(25,067) | (17,500) | ||||
Retained earnings |
1,441,846 | 1,275,206 | ||||
Total stockholders’ equity |
4,141,710 | 4,131,444 | ||||
Total liabilities and stockholders’ equity |
$ |
7,463,940 |
$ |
7,411,307 | ||
See accompanying notes to condensed consolidated financial statements. |
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3
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES |
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Consolidated Statements of Operations |
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Three and Nine Months Ended September 30, 2014 and 2013 |
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(in thousands, except per share data) |
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(unaudited) |
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Three Months |
Nine Months |
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2014 |
2013 |
2014 |
2013 |
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Revenues: |
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Services |
$ |
935,560 |
$ |
848,941 |
$ |
2,574,565 |
$ |
2,552,792 | ||||
Rentals |
273,466 | 247,471 | 803,431 | 721,621 | ||||||||
Total revenues |
1,209,026 | 1,096,412 | 3,377,996 | 3,274,413 | ||||||||
Costs and expenses: |
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Cost of services (exclusive of items shown separately below) |
597,992 | 581,556 | 1,704,165 | 1,706,188 | ||||||||
Cost of rentals (exclusive of items shown separately below) |
123,700 | 90,076 | 319,425 | 263,742 | ||||||||
Depreciation, depletion, amortization and accretion |
170,154 | 152,028 | 493,437 | 446,432 | ||||||||
General and administrative expenses |
154,859 | 147,364 | 457,631 | 440,812 | ||||||||
Income from operations |
162,321 | 125,388 | 403,338 | 417,239 | ||||||||
Other income (expense): |
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Interest expense, net |
(24,169) | (25,564) | (72,610) | (81,610) | ||||||||
Other income (expense) |
(2,051) | (1,697) | (1,480) | 41 | ||||||||
Loss on early extinguishment of debt |
- |
- |
- |
(884) | ||||||||
Income from continuing operations before income taxes |
136,101 | 98,127 | 329,248 | 334,786 | ||||||||
Income taxes |
50,358 | 30,658 | 121,822 | 112,620 | ||||||||
Net income from continuing operations |
85,743 | 67,469 | 207,426 | 222,166 | ||||||||
Income (loss) from discontinued operations, net of income tax |
(5,886) | 2,366 | (15,735) | (20,045) | ||||||||
Net income |
$ |
79,857 |
$ |
69,835 |
$ |
191,691 |
$ |
202,121 | ||||
Earnings (loss) per share information: |
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Basic: |
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Continuing operations |
$ |
0.55 |
$ |
0.42 |
$ |
1.33 |
$ |
1.40 | ||||
Discontinued operations |
(0.03) | 0.02 | (0.10) | (0.13) | ||||||||
Basic earnings per share |
$ |
0.52 |
$ |
0.44 |
$ |
1.23 |
$ |
1.27 | ||||
Diluted: |
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Continuing operations |
$ |
0.55 |
$ |
0.42 |
$ |
1.31 |
$ |
1.38 | ||||
Discontinued operations |
(0.04) | 0.01 | (0.10) | (0.12) | ||||||||
Diluted earnings per share |
$ |
0.51 |
$ |
0.43 |
$ |
1.21 |
$ |
1.26 | ||||
Cash dividends per share |
$ |
0.08 |
$ |
- |
$ |
0.24 |
$ |
- |
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Weighted average common shares used in computing |
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earnings (loss) per share: |
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Basic |
154,530 | 159,326 | 156,424 | 159,204 | ||||||||
Incremental common shares from stock based compensation |
1,806 | 1,557 | 1,644 | 1,600 | ||||||||
Diluted |
156,336 | 160,883 | 158,068 | 160,804 | ||||||||
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES |
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Consolidated Statements of Comprehensive Income |
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Three and Nine Months Ended September 30, 2014 and 2013 |
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(in thousands) |
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(unaudited) |
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Three Months |
Nine Months |
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2014 |
2013 |
2014 |
2013 |
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Net income |
$ |
79,857 |
$ |
69,835 |
$ |
191,691 |
$ |
202,121 | ||||
Unrealized net gain (loss) on available-for-sale securities, net of tax |
- |
1,007 |
- |
(448) | ||||||||
Reclassification adjustment, net of tax |
- |
- |
1,153 |
- |
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Change in cumulative translation adjustment, net of tax |
(14,439) | 10,942 | (8,720) | (2,203) | ||||||||
Comprehensive income |
$ |
65,418 |
$ |
81,784 |
$ |
184,124 |
$ |
199,470 | ||||
See accompanying notes to condensed consolidated financial statements. |
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4
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES |
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Consolidated Statements of Cash Flows |
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Nine Months Ended September 30, 2014 and 2013 |
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(in thousands) |
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(unaudited) |
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2014 |
2013 |
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Cash flows from operating activities: |
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Net income |
$ |
191,691 |
$ |
202,121 | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation, depletion, amortization and accretion |
494,801 | 462,627 | ||||
Loss on early extinguishment of debt |
- |
884 | ||||
Deferred income taxes |
(15,767) | 113,207 | ||||
Stock based compensation expense |
32,899 | 26,788 | ||||
Amortization of debt issuance costs |
6,126 | 6,819 | ||||
Other reconciling items, net |
(20,884) | (6,562) | ||||
Changes in operating assets and liabilities, net of acquisitions: |
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Accounts receivable |
(60,611) | 140 | ||||
Inventory and other current assets |
29,495 | (54,924) | ||||
Accounts payable |
30,198 | 7,085 | ||||
Accrued expenses |
36,802 | 24,721 | ||||
Income taxes |
43,214 | (183,420) | ||||
Other, net |
(3,653) | 36,627 | ||||
Net cash provided by operating activities |
764,311 | 636,113 | ||||
Cash flows from investing activities: |
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Payments for capital expenditures |
(438,349) | (466,831) | ||||
Sale of available-for-sale securities |
10,622 |
- |
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Acquisitions of businesses, net of cash acquired |
(2,380) | (23,797) | ||||
Cash proceeds from insurance settlement |
- |
22,650 | ||||
Other |
20,575 | 2,709 | ||||
Net cash used in investing activities |
(409,532) | (465,269) | ||||
Cash flows from financing activities: |
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Proceeds from revolving line of credit |
14,736 | 561,771 | ||||
Payments on revolving line of credit |
(14,736) | (561,771) | ||||
Principal payments on long-term debt |
(15,000) | (165,000) | ||||
Purchase and retirement of common stock |
(185,552) |
- |
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Cash dividends |
(37,586) |
- |
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Proceeds from exercise of stock options |
10,554 | 5,551 | ||||
Other |
(89) | (9,924) | ||||
Net cash used in financing activities |
(227,673) | (169,373) | ||||
Effect of exchange rate changes on cash |
(3,111) | (2,019) | ||||
Net increase (decrease) in cash and cash equivalents |
123,995 | (548) | ||||
Cash and cash equivalents at beginning of period |
196,047 | 91,199 | ||||
Cash and cash equivalents at end of period |
$ |
320,042 |
$ |
90,651 | ||
See accompanying notes to condensed consolidated financial statements. |
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5
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2014
(1)Basis of Presentation
Certain information and footnote disclosures normally in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission; however, management believes the disclosures that are made are adequate to make the information presented not misleading. These financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in Superior Energy Services, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013, and Management’s Discussion and Analysis of Financial Condition and Results of Operations herein.
The financial information of Superior Energy Services, Inc. and subsidiaries (the Company) for the three and nine months ended September 30, 2014 and 2013 has not been audited. However, in the opinion of management, all adjustments necessary to present fairly the results of operations for the periods presented have been included therein. The results of operations for the first nine months of the year are not necessarily indicative of the results of operations that might be expected for the entire year. Certain previously reported amounts have been reclassified to conform to the 2014 presentation.
Due to the nature of the Company’s business, the Company is involved, from time to time, in routine litigation or subject to disputes or claims regarding its business activities. Legal costs related to these matters are expensed as incurred. In management’s opinion, none of the pending litigation, disputes or claims is expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.
The Company evaluates events that occur after the balance sheet date but before the financial statements are issued for potential recognition or disclosure. Based on the evaluation, the Company determined that there were no material subsequent events for recognition or disclosure other than those disclosed herein.
(2)Discontinued Operations
During the first quarter of 2014, the Company conducted a strategic review and analysis of its subsea construction business. As of September 30, 2014, the Company was committed to sell the assets of and exit its subsea construction business. The disposition of assets is expected to be completed by the end of the first half of 2015.
During the first quarter of 2014, the Company also made a decision to discontinue its conventional decommissioning business. As of September 30, 2014, the Company was committed to sell the assets of and exit its conventional decommissioning business. The disposition of the assets is expected to be completed by the end of the first half of 2015.
Both of the subsea construction business and conventional decommissioning business were included in the Technical Solutions segment, formerly referred to as the Subsea and Technical Solutions segment. As of September 30, 2014, the assets and liabilities of these businesses were classified as held for sale. For the three and nine months ended September 30, 2014 and 2013, the results of operations of these businesses are reported as discontinued operations in the consolidated statements of operations.
The following summarizes certain financial information of the businesses reported as discontinued operations (in thousands):
Three Months Ended September 30, |
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2014 |
2013 |
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Revenues |
$ |
34,210 |
$ |
92,203 | ||
Income/(loss) from discontinued operations, net of tax benefit of $4,063 and |
(5,886) | 2,366 | ||||
Nine Months Ended September 30, |
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2014 |
2013 |
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Revenues |
$ |
111,735 |
$ |
209,394 | ||
Loss from discontinued operations, net of tax benefit of $10,131 and |
(15,735) | (20,045) | ||||
6
The following summarizes the assets and liabilities related to the businesses reported as discontinued operations (in thousands):
September 30, 2014 |
December 31, 2013 |
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Accounts receivable, net |
$ |
25,415 |
$ |
26,858 | ||
Prepaid expenses |
5,810 | 8,164 | ||||
Inventory and other current assets |
30,891 | 63,618 | ||||
Current assets |
$ |
62,116 |
$ |
98,640 | ||
Property, plant and equipment, net |
219,223 | 217,089 | ||||
Intangible and other long-term assets, net |
4,420 | 4,854 | ||||
Long-term assets |
$ |
223,643 |
$ |
221,943 | ||
Accounts payable |
21,478 | 13,449 | ||||
Accrued expenses |
37,362 | 52,133 | ||||
Current liabilities |
$ |
58,840 |
$ |
65,582 | ||
Other long-term liabilities |
$ |
18,009 |
$ |
21,801 |
Assets and liabilities held for sale include a capital lease for a dynamically positioned subsea vessel. Such amounts are recorded at the present value of the lease payments. The vessel’s gross asset value under the capital lease was approximately $37.6 million at inception and accumulated depreciation through September 30, 2014 and December 31, 2013 was approximately $17.4 million and $16.4 million, respectively. As of September 30, 2014, $18.0 million of other long-term liabilities and $4.5 million of accounts payable related to this capital lease are included in the liabilities held for sale. As of December 31, 2013, $21.4 million of other long-term liabilities and $4.2 million of accounts payable related to this capital lease are included in the liabilities held for sale.
(3)Acquisitions
In March 2013, the Company acquired all of the equity interests in a company that provides cementing services in Colombia. The Company paid approximately $20.4 million at closing and repaid $3.0 million of the acquired company’s debt. During the nine months ended September 30, 2014, the Company paid $2.4 million as a result of a post-closing process to reconcile the net working capital of the acquired company and settlement of certain liabilities. The Company will pay up to an additional $1.3 million during the first half of 2015, subject to the settlement of certain liabilities. Goodwill of approximately $15.1 million was recognized as a result of this acquisition and was calculated as the excess of the consideration paid over the net assets recognized and represents estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. None of the goodwill related to this acquisition will be deductible for tax purposes. All of the goodwill was assigned to the Production Services segment.
In October 2014, the Company acquired all of the equity interests in a company that provides well testing and slickline services in India. The purchase price of the acquisition was approximately $25.0 million.
(4)Accelerated Share Repurchase Program
In March 2014, the Company entered into an accelerated share repurchase program with a third-party financial institution to purchase $75.0 million aggregate amount of shares of the Company’s outstanding common stock. The Company paid $75.0 million and received and retired an initial delivery of 1,899,055 shares that represented approximately 75% of the total number of shares repurchased under the agreement. In April 2014, the accelerated share repurchase program was completed and the Company received and retired 633,485 additional shares.
(5)Earnings per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional common shares that could have been outstanding assuming the exercise of stock options and the conversion of restricted stock units.
Stock options for approximately 284,000 and 1,100,000 shares of the Company’s common stock for the three months ended September 30, 2014 and 2013, respectively, and approximately 1,054,000 and 1,210,000 shares of the Company’s common stock for the nine months ended September 30, 2014 and 2013, respectively, were excluded in the computation of diluted earnings per share for these periods as the effect would have been anti-dilutive.
7
(6)Stock-Based Compensation Plans
The Company maintains various stock incentive plans that provide long-term incentives to the Company’s key employees, including officers, directors, consultants and advisors (Eligible Participants). Under the stock incentive plans, the Company may grant incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, other stock-based awards or any combination thereof to Eligible Participants. The Company’s total compensation expense related to these plans was approximately $33.5 million and $27.7 million for the nine months ended September 30, 2014 and 2013, respectively, which is reflected in general and administrative expenses.
(7)Inventory and Other Current Assets
Inventory and other current assets includes approximately $164.0 million and $162.9 million of inventory as of September 30, 2014 and December 31, 2013, respectively. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out or weighted-average cost methods for finished goods and work-in-process. Supplies and consumables consist principally of products used in our services provided to customers. The components of the inventory balances are as follows (in thousands):
September 30, 2014 |
December 31, 2013 |
|||||
Finished goods |
$ |
66,340 |
$ |
65,621 | ||
Raw materials |
33,281 | 20,764 | ||||
Work-in-process |
18,445 | 20,064 | ||||
Supplies and consumables |
45,936 | 56,470 | ||||
Total |
$ |
164,002 |
$ |
162,919 | ||
As of December 31, 2013, inventory and other current assets also included approximately $8.8 million of available-for-sale securities recorded at fair value. These available-for-sale securities consisted of approximately 1.4 million shares of SandRidge Energy, Inc. (SandRidge) common stock held by the Company. During the second quarter of 2014, the Company sold all of the remaining shares of SandRidge common stock for approximately $10.6 million. In connection with the sale, the Company reversed approximately $1.2 million of previously recorded unrealized losses, of which approximately $1.8 million was reclassified out of accumulated other comprehensive loss, net of tax benefit of approximately $0.6 million. During the nine months ended September 30, 2013, the Company recorded an unrealized loss related to the fair value of these securities of approximately $0.7 million, of which approximately $0.5 million was reported within accumulated other comprehensive loss, net of tax expense of approximately $0.2 million.
(8)Goodwill
Goodwill is tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value. During the third quarter of 2014, the Company changed its annual goodwill impairment testing date from December 31 to October 1 of each year. Management considers this accounting change preferable because it allows the Company additional time to complete the annual goodwill impairment test. This change does not accelerate, delay, avoid, or cause an impairment charge, nor does this change result in adjustments to previously issued financial statements. The Company will complete its annual goodwill impairment test during the fourth quarter of 2014.
(9)Debt
Credit Facility
The Company has a $1.0 billion bank credit facility, comprised of a $600 million revolving credit facility and a $400 million term loan. The principal balance of the term loan is payable in installments of $5.0 million on the last day of each fiscal quarter, which began on June 30, 2012. As of September 30, 2014, the Company had $350 million outstanding under the term loan and had no amounts outstanding under the revolving portion of its credit facility. The Company also had approximately $48.2 million of letters of credit outstanding that reduce the Company’s borrowing availability under the revolving portion of the credit facility.
All amounts outstanding under the bank credit facility are due on February 7, 2017. Amounts borrowed under the credit facility bear interest at LIBOR plus margins that depend on the Company’s leverage ratio. Indebtedness under the credit facility is secured by substantially all of the Company’s assets, including the pledge of the stock of the Company’s principal domestic subsidiaries.
8
Senior Unsecured Notes
The Company has outstanding $500 million of 6 3/8% unsecured senior notes due 2019. The indenture governing the 6 3/8% senior notes requires semi-annual interest payments on May 1st and November 1st of each year through the maturity date of May 1, 2019.
The Company also has outstanding $800 million of 7 1/8% unsecured senior notes due 2021. The indenture governing the 7 1/8% senior notes requires semi-annual interest payments on June 15th and December 15th of each year through the maturity date of December 15, 2021.
(10)Decommissioning Liabilities
The Company records estimated future decommissioning liabilities in accordance with the authoritative guidance related to asset retirement obligations, which requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred, with a corresponding increase in the carrying amount of the related long-lived asset. Subsequent to initial measurement, the decommissioning liability is required to be accreted each period to present value.
The Company has decommissioning liabilities associated with its Bullwinkle platform and related assets that consist of costs related to the plugging of wells, the removal of the related facilities and equipment, and site restoration. Whenever practical, the Company utilizes its own equipment and labor services to perform well abandonment and decommissioning work. When the Company performs these services, all recorded intercompany revenues and related costs of services are eliminated in the condensed consolidated financial statements. The recorded decommissioning liability associated with a specific property is fully extinguished when the property is abandoned. The recorded liability is first reduced by all cash expenses incurred to abandon and decommission the property. If the recorded liability exceeds (or is less than) the Company’s total costs, then the difference is reported as an increase or decrease in revenue during the period in which the work is performed.
The Company reviews the adequacy of its decommissioning liabilities whenever indicators suggest that the estimated cash flows needed to satisfy the liabilities have changed materially. During the fourth quarter of 2013, as a result of an increase in third party drilling activity in the vicinity of the Bullwinkle platform, the Company believed new economic opportunities existed for additional production handling agreements with those third party production companies utilizing the Bullwinkle platform. As a result, the Company revised its estimates relating to the timing of decommissioning work on its Bullwinkle assets, including a 10 year postponement of the platform decommissioning to an estimated date of 2038. This change in estimate resulted in a reduction in the present value of decommissioning liabilities. Further, as of December 31, 2013, the Company anticipated that it would be able to decommission several depleted wells that are part of the Bullwinkle assets based on the estimates received from engineers regarding platform availability during 2014. As a result, as of December 31, 2013, the decommissioning liabilities associated with those wells were classified as current liabilities on the consolidated balance sheet. Based on revised estimates received during the second quarter of 2014, the Company does not anticipate decommissioning any of the wells during the next twelve months. As a result, all of the decommissioning liabilities were classified as long-term liabilities on the consolidated balance sheet as of September 30, 2014.
The following table summarizes the activity for the Company’s decommissioning liabilities for the nine months ended September 30, 2014 and 2013 (in thousands):
Nine Months Ended September 30, |
||||||
2014 |
2013 |
|||||
Decommissioning liabilities, December 31, 2013 and 2012, respectively |
$ |
83,519 |
$ |
93,053 | ||
Liabilities acquired and incurred |
866 | 360 | ||||
Liabilities settled |
- |
(87) | ||||
Accretion |
3,324 | 4,269 | ||||
Revision in estimated liabilities |
(266) |
- |
||||
Total decommissioning liabilities, September 30, 2014 and 2013, respectively |
$ |
87,443 |
$ |
97,595 | ||
(11) Notes Receivable
Notes receivable consist of a commitment from the seller of an oil and gas property acquired by the Company towards costs associated with the abandonment of the acquired property. Pursuant to an agreement with the seller, the Company will invoice the seller an agreed upon amount at the completion of certain decommissioning activities. The gross amount of this obligation totals $115.0 million and is recorded at present value using an effective interest rate of 6.58%. The related discount is amortized to interest income based on the expected timing of completion of the decommissioning activities. The Company recorded interest income related to notes receivable of $1.2 million and $2.2 million for the nine months ended September 30, 2014 and 2013, respectively.
9
(12) Segment Information
Business Segments
The Drilling Products and Services segment rents and sells bottom hole assemblies, premium drill pipe, tubulars and specialized equipment for use with onshore and offshore oil and gas well drilling, completion, production and workover activities. It also provides on-site accommodations and bolting and machining services. The Onshore Completion and Workover Services segment provides pressure pumping services used to complete and stimulate production in new oil and gas wells, fluid handling services and well servicing rigs that provide a variety of well completion, workover and maintenance services. The Production Services segment provides intervention services such as coiled tubing, cased hole and mechanical wireline, hydraulic workover and snubbing, production testing and optimization, and remedial pumping services. It also provides specialized pressure control tools used to manage and control pressure throughout the life of a well. The Technical Solutions segment provides services typically requiring specialized engineering, manufacturing or project planning, including well control services, well containment systems, stimulation and sand control services and well plug and abandonment services. It also includes production handling arrangements and the production and sale of oil and gas.
For the three and nine months ended September 30, 2014 and 2013, operating results for the Company’s subsea construction and conventional decommissioning businesses are reported in discontinued operations (see note 2). Previously those operating results were reported within the Technical Solutions segment, which was named the Subsea and Technical Solutions segment.
The Company evaluates the performance of its reportable segments based on income or loss from operations. The segment measure is calculated as follows: segment revenues less segment operating expenses, depreciation expense and allocated general and administrative expenses. General and administrative expenses are allocated to the segments based primarily on specific identification and, to the extent that such identification is not practical, other methods which the Company believes to be a reasonable reflection of the utilization of services provided. The Company believes this segment measure is useful in evaluating the performance of its reportable segments because it highlights operating trends and aids analytical comparisons.
Summarized financial information for the Company’s segments for the three and nine months ended September 30, 2014 and 2013 is shown in the following tables (in thousands):
Three Months Ended September 30, 2014 |
||||||||||||||||||
Onshore |
||||||||||||||||||
Drilling |
Completion |
|||||||||||||||||
Products and |
and Workover |
Production |
Technical |
Consolidated |
||||||||||||||
Services |
Services |
Services |
Solutions |
Unallocated |
Total |
|||||||||||||
Revenues |
$ |
239,204 |
$ |
470,849 |
$ |
348,793 |
$ |
150,180 |
$ |
- |
$ |
1,209,026 | ||||||
Cost of services and rentals |
||||||||||||||||||
(exclusive of items shown separately below) |
76,277 | 317,433 | 248,567 | 79,415 |
- |
721,692 | ||||||||||||
Depreciation, depletion, amortization |
47,904 | 59,009 | 41,225 | 22,016 |
- |
170,154 | ||||||||||||
General and administrative expenses |
36,913 | 39,625 | 45,627 | 32,694 |
- |
154,859 | ||||||||||||
Income from operations |
78,110 | 54,782 | 13,374 | 16,055 |
- |
162,321 | ||||||||||||
Interest expense, net |
- |
- |
- |
404 | (24,573) | (24,169) | ||||||||||||
Other expense |
- |
- |
- |
- |
(2,051) | (2,051) | ||||||||||||
Income (loss) from continuing operations |
$ |
78,110 |
$ |
54,782 |
$ |
13,374 |
$ |
16,459 |
$ |
(26,624) |
$ |
136,101 | ||||||
10
Three Months Ended September 30, 2013 |
||||||||||||||||||
Onshore |
||||||||||||||||||
Drilling |
Completion |
|||||||||||||||||
Products and |
and Workover |
Production |
Technical |
Consolidated |
||||||||||||||
Services |
Services |
Services |
Solutions |
Unallocated |
Total |
|||||||||||||
Revenues |
$ |
215,523 |
$ |
398,016 |
$ |
359,722 |
$ |
123,151 |
$ |
- |
$ |
1,096,412 | ||||||
Cost of services and rentals |
||||||||||||||||||
(exclusive of items shown separately below) |
73,873 | 275,676 | 251,575 | 70,508 |
- |
671,632 | ||||||||||||
Depreciation, depletion, amortization |
42,390 | 52,576 | 45,554 | 11,508 |
- |
152,028 | ||||||||||||
General and administrative expenses |
35,864 | 37,216 | 46,735 | 27,549 |
- |
147,364 | ||||||||||||
Income from operations |
63,396 | 32,548 | 15,858 | 13,586 |
- |
125,388 | ||||||||||||
Interest expense, net |
- |
- |
- |
743 | (26,307) | (25,564) | ||||||||||||
Other expense |
- |
- |
- |
- |
(1,697) | (1,697) | ||||||||||||
Income (loss) from continuing operations |
$ |
63,396 |
$ |
32,548 |
$ |
15,858 |
$ |
14,329 |
$ |
(28,004) |
$ |
98,127 | ||||||
Nine Months Ended September 30, 2014 |
||||||||||||||||||
Onshore |
||||||||||||||||||
Drilling |
Completion |
|||||||||||||||||
Products and |
and Workover |
Production |
Technical |
Consolidated |
||||||||||||||
Services |
Services |
Services |
Solutions |
Unallocated |
Total |
|||||||||||||
Revenues |
$ |
685,396 |
$ |
1,258,774 |
$ |
1,013,904 |
$ |
419,922 |
$ |
- |
$ |
3,377,996 | ||||||
Cost of services and rentals |
||||||||||||||||||
(exclusive of items shown separately below) |
216,166 | 876,575 | 706,911 | 223,938 |
- |
2,023,590 | ||||||||||||
Depreciation, depletion, amortization |
140,265 | 174,995 | 123,213 | 54,964 |
- |
493,437 | ||||||||||||
General and administrative expenses |
117,026 | 114,604 | 138,058 | 87,943 |
- |
457,631 | ||||||||||||
Income from operations |
211,939 | 92,600 | 45,722 | 53,077 |
- |
403,338 | ||||||||||||
Interest expense, net |
- |
- |
- |
1,167 | (73,777) | (72,610) | ||||||||||||
Other expense |
- |
- |
- |
- |
(1,480) | (1,480) | ||||||||||||
Income (loss) from continuing operations |
$ |
211,939 |
$ |
92,600 |
$ |
45,722 |
$ |
54,244 |
$ |
(75,257) |
$ |
329,248 | ||||||
Nine Months Ended September 30, 2013 |
||||||||||||||||||
Onshore |
||||||||||||||||||
Drilling |
Completion |
|||||||||||||||||
Products and |
and Workover |
Production |
Technical |
Consolidated |
||||||||||||||
Services |
Services |
Services |
Solutions |
Unallocated |
Total |
|||||||||||||
Revenues |
$ |
614,924 |
$ |
1,222,215 |
$ |
1,096,185 |
$ |
341,089 |
$ |
- |
$ |
3,274,413 | ||||||
Cost of services and rentals |
||||||||||||||||||
(exclusive of items shown separately below) |
205,502 | 819,472 | 756,954 | 188,002 |
- |
1,969,930 | ||||||||||||
Depreciation, depletion, amortization |
125,768 | 158,021 | 133,361 | 29,282 |
- |
446,432 | ||||||||||||
General and administrative expenses |
104,002 | 116,786 | 143,349 | 76,675 |
- |
440,812 | ||||||||||||
Income from operations |
179,652 | 127,936 | 62,521 | 47,130 |
- |
417,239 | ||||||||||||
Interest expense, net |
- |
- |
- |
2,195 | (83,805) | (81,610) | ||||||||||||
Other income |
- |
- |
- |
- |
41 | 41 | ||||||||||||
Loss on early extinguishment of debt |
- |
- |
- |
- |
(884) | (884) | ||||||||||||
Income (loss) from continuing operations |
$ |
179,652 |
$ |
127,936 |
$ |
62,521 |
$ |
49,325 |
$ |
(84,648) |
$ |
334,786 | ||||||
11
Identifiable Assets |
||||||||||||||||||
Onshore |
||||||||||||||||||
Drilling |
Completion |
|||||||||||||||||
Products and |
and Workover |
Production |
Technical |
Consolidated |
||||||||||||||
Services |
Services |
Services |
Solutions |
Unallocated |
Total |
|||||||||||||
September 30, 2014 |
$ |
1,282,129 |
$ |
3,012,785 |
$ |
2,123,888 |
$ |
1,045,138 |
$ |
- |
$ |
7,463,940 | ||||||
December 31, 2013 |
$ |
1,245,501 |
$ |
2,973,916 |
$ |
2,176,785 |
$ |
1,015,105 |
$ |
- |
$ |
7,411,307 |
As of September 30, 2014, the Technical Solutions segment included $285.8 million of identifiable assets of the subsea construction and conventional decommissioning businesses that were classified as assets held for sale on the consolidated balance sheet.
Geographic Segments
The Company attributes revenue to various countries based on the location of where services are performed or the destination of the drilling products or equipment sold or leased. Long-lived assets consist primarily of property, plant and equipment and are attributed to various countries based on the physical location of the asset at the end of a period. As of September 30, 2014, the assets of the subsea construction and conventional decommissioning businesses were classified as assets held for sale on the consolidated balance sheet. The Company’s revenue by geographic area for the three and nine months ended September 30, 2014 and 2013 and long-lived assets by geographic area as of September 30, 2014 and December 31, 2013 are as follows (in thousands):
Revenues: |
||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
2014 |
2013 |
2014 |
2013 |
|||||||||
United States |
$ |
1,024,919 |
$ |
932,686 |
$ |
2,850,179 |
$ |
2,783,756 | ||||
Other Countries |
184,107 | 163,726 | 527,817 | 490,657 | ||||||||
Total |
$ |
1,209,026 |
$ |
1,096,412 |
$ |
3,377,996 |
$ |
3,274,413 | ||||
Long-Lived Assets: |
||||||||||||
September 30, 2014 |
December 31, 2013 |
|||||||||||
United States |
$ |
2,343,365 |
$ |
2,476,792 | ||||||||
Other Countries |
359,167 | 525,402 | ||||||||||
Total, net |
$ |
2,702,532 |
$ |
3,002,194 | ||||||||
(13) Fair Value Measurements
The Company follows the authoritative guidance for fair value measurements relating to financial and nonfinancial assets and liabilities, including presentation of required disclosures herein. This guidance establishes a fair value framework requiring the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets and liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2: Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical assets or liabilities in inactive markets; or model-derived valuations or other inputs that can be corroborated by observable market data.
Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
12
The following tables provide a summary of the financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 (in thousands):
Fair Value Measurements at Reporting Date Using |
||||||||||||
September 30, 2014 |
Level 1 |
Level 2 |
Level 3 |
|||||||||
Intangible and other long-term assets, net |
||||||||||||
Non-qualified deferred compensation assets |
$ |
11,830 |
$ |
342 |
$ |
11,488 |
- |
|||||
Interest rate swaps |
$ |
2,642 |
- |
$ |
2,642 |
- |
||||||
Accounts payable |
||||||||||||
Non-qualified deferred compensation liabilities |
$ |
2,667 |
- |
$ |
2,667 |
- |
||||||
Other long-term liabilities |
||||||||||||
Non-qualified deferred compensation liabilities |
$ |
14,052 |
- |
$ |
14,052 |
- |
||||||
December 31, 2013 |
Level 1 |
Level 2 |
Level 3 |
|||||||||
Inventory and other current assets |
||||||||||||
Available-for-sale securities |
$ |
8,817 |
$ |
8,817 |
- |
- |
||||||
Intangible and other long-term assets, net |
||||||||||||
Non-qualified deferred compensation assets |
$ |
13,731 |
$ |
2,330 |
$ |
11,401 |
- |
|||||
Interest rate swap |
$ |
337 |
- |
$ |
337 |
- |
||||||
Accounts payable |
||||||||||||
Non-qualified deferred compensation liabilities |
$ |
1,944 |
- |
$ |
1,944 |
- |
||||||
Other long-term liabilities |
||||||||||||
Non-qualified deferred compensation liabilities |
$ |
14,986 |
- |
$ |
14,986 |
- |
||||||
As of December 31, 2013, available-for-sale securities was comprised of approximately 1.4 million shares of SandRidge common stock. The securities were reported at fair value based on the closing price of the shares as reported on the New York Stock Exchange (see note 7).
The Company’s non-qualified deferred compensation plans allow officers, certain highly compensated employees and non-employee directors to defer receipt of a portion of their compensation and contribute such amounts to one or more hypothetical investment funds. The Company entered into separate trust agreements, subject to general creditors, to segregate assets of each plan and reports the accounts of the trusts in its condensed consolidated financial statements. These investments are reported at fair value based on unadjusted quoted prices in active markets for identifiable assets and observable inputs for similar assets and liabilities, which represent Levels 1 and 2, respectively, in the fair value hierarchy.
The Company has three interest rate swap agreements related to its fixed rate debt maturing in 2021 for notional amounts of $100 million each, whereby the Company is entitled to receive semi-annual interest payments at a fixed rate of 7 1/8% per annum and is obligated to make semi-annual interest payments at floating rates, which are adjusted every 90 days, based on LIBOR plus a fixed margin. The swap agreements, scheduled to terminate on December 15, 2021, are designated as fair value hedges of a portion of the Company’s 7 1/8% senior notes, as the derivatives have been tested to be highly effective in offsetting changes in the fair value of the underlying note. As these derivatives are classified as fair value hedges, the changes in the fair value of the derivatives are offset against the changes in the fair value of the underlying note in interest expense, net (see note 14).
The fair value of the Company’s cash equivalents, accounts receivable and current maturities of long-term debt approximates their carrying amounts. The fair value of the Company’s long-term debt was approximately $1,753.2 million and $1,789.0 million as of September 30, 2014 and December 31, 2013, respectively. The fair value of these debt instruments is determined by reference to the market value of the instruments as quoted in over-the-counter markets, which are Level 1 inputs.
13
(14) Derivative Financial Instruments
From time to time, the Company may employ interest rate swaps in an attempt to achieve a more balanced debt portfolio between fixed and variable interest. The Company does not use derivative financial instruments for trading or speculative purposes.
The Company has three interest rate swaps for notional amounts of $100 million each related to its 7 1/8% senior notes maturing in December 2021. These interest rate swaps are accounted for as fair value hedges since the swaps hedge against the change in fair value of fixed rate debt resulting from changes in interest rates. The Company recorded a derivative asset relating to these swaps of $2.6 million and $0.3 million within intangible and other long term assets in the consolidated balance sheets as of September 30, 2014 and December 31, 2013, respectively.
The changes in fair value of the interest rate swaps are included in the adjustments to reconcile net income to net cash provided by operating activities in the consolidated statement of cash flows. The effect and location of the derivative instruments in the condensed consolidated statement of operations, presented on a pre-tax basis, are as follows (in thousands):
Three Months Ended September 30, |
||||||||||
Effect of derivative instrument |
Location of (gain) loss |
2014 |
2013 |
|||||||
Interest rate swap |
Interest expense, net |
$ |
1,907 |
$ |
(513) | |||||
Hedged item - debt |
Interest expense, net |
(2,639) | 615 | |||||||
$ |
(732) |
$ |
102 | |||||||
Nine Months Ended September 30, |
||||||||||
2014 |
2013 |
|||||||||
Interest rate swap |
Interest expense, net |
$ |
(6,727) |
$ |
7,383 | |||||
Hedged item - debt |
Interest expense, net |
4,422 | (6,886) | |||||||
$ |
(2,305) |
$ |
497 | |||||||
For the nine months ended September 30, 2014 and 2013, approximately $2.3 million of interest income and $0.5 million of interest expense, respectively, was related to the ineffectiveness associated with these fair value hedges. Hedge ineffectiveness represents the difference between the changes in fair value of the derivative instruments and the changes in fair value of the fixed rate debt attributable to changes in the benchmark interest rate.
(15) Income Taxes
The Company follows authoritative guidance with respect to accounting for uncertainty in income taxes. It is the Company’s policy to recognize interest and applicable penalties, if any, related to uncertain tax positions in income tax expense. The Company had approximately $29.9 million of unrecorded tax benefits as of September 30, 2014 and December 31, 2013, all of which would impact the Company’s effective tax rate if recognized.
(16) Related Party Disclosures
The Company purchases services, products and equipment, as well as leases certain facilities, from companies affiliated with an officer of one of its subsidiaries. The Company believes the transactions reflected below with these related parties are on terms and conditions no less favorable to the Company than transactions with unaffiliated parties. For the nine months ended September 30, 2014 and 2013, these purchases totaled approximately $146.8 million and $140.7 million, respectively. For the nine months ended September 30, 2014, approximately $56.7 million was purchased from ORTEQ Energy Services, a heavy equipment construction company which also manufactures pressure pumping equipment, approximately $0.6 million was purchased from Ortowski Construction, primarily related to the manufacture of pressure pumping units, approximately $15.2 million was paid to Resource Transport, LLC, related to the transportation of sand used in pressure pumping activities, approximately $51.6 million was purchased from Texas Specialty Sands, LLC, primarily for the purchase of sand used for pressure pumping activities, approximately $21.1 million was purchased from ProFuel, LLC, primarily related to the purchase of diesel used to operate equipment and trucks, and approximately $1.6 million was related to leasehold improvements and facilities leased from Timber Creek Real Estate Partners. For the nine months ended September 30, 2013, approximately $41.1 million was purchased from ORTEQ Energy Services, approximately $0.1 million was purchased from Ortowski Construction, approximately $11.9 million was paid to Resource Transport, LLC, approximately $64.6 million was purchased from Texas Specialty Sands, LLC, approximately $22.6 million was purchased from ProFuel, LLC and approximately $0.4 million was related to facilities leased from Timber Creek Real Estate Partners.
14
As of September 30, 2014, the Company’s trade accounts payable includes amounts due to these companies totaling approximately $29.0 million, of which approximately $4.6 million was due ORTEQ Energy Services, approximately $4.0 million was due Resource Transport, LLC, approximately $16.2 million was due Texas Specialty Sands, LLC and approximately $4.2 million was due ProFuel, LLC. As of December 31, 2013, the Company’s trade accounts payable includes amounts due to these companies totaling approximately $14.6 million, of which approximately $7.8 million was due ORTEQ Energy Services, approximately $0.9 million was due Resource Transport, LLC, approximately $2.0 million was due Texas Specialty Sands, LLC, approximately $2.6 million was due ProFuel, LLC and approximately $1.3 million was due Timber Creek Real Estate Partners.
The Company’s President and Chief Executive Officer serves as an independent director of the board of Linn Energy, LLC (Linn), an independent oil and gas development company with focus areas in the Rockies, Mid-Continent, the Hugoton Basin, California, the Permian Basin, Michigan, Illinois and east Texas. The Company recorded revenues from Linn and its subsidiaries of approximately $15.3 million and $15.9 million for the nine months ended September 30, 2014 and 2013, respectively. The Company had trade receivables from Linn and its subsidiaries of approximately $1.3 million and $2.9 million as of September 30, 2014 and December 31, 2013, respectively.
(17) Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in GAAP. The guidance in this update requires an entity to recognize the amount of revenue that it expects to be entitled for the transfer of promised goods or services to customers. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the accounting guidance on its ongoing financial reporting.
In April 2014, the Financial Accounting Standards Board issued ASU No. 2014-08, Presentation of Financial Statements and Property, Plant and Equipment, which changes the definition of discontinued operations. The guidance permits only those disposed components (or components held-for-sale) representing a strategic shift that have (or will have) a major effect on operations and financial results to be reported in discontinued operations. The new standard is effective prospectively for disposals (or classifications as held-for-sale) that occur after December 31, 2014. The Company elected not to early adopt the accounting guidance.
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve risks and uncertainties. Generally, the words “expects,” “anticipates,” “targets,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions identify forward-looking statements, although not all forward-looking statements contain these identifying words. All statements other than statements of historical fact included in this section regarding our financial position and liquidity, strategic alternatives, future capital needs, business strategies and other plans and objectives of our management for future operations and activities are forward-looking statements. These statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current market and industry conditions, expected future developments and other factors it believes are appropriate under the circumstances. Such forward-looking statements are subject to uncertainties that could cause our actual results to differ materially from such statements. Such uncertainties include, but are not limited to: risks inherent in acquiring businesses, the effect of regulatory programs and environmental matters on our performance, including the risk that future changes in the regulation of hydraulic fracturing could reduce or eliminate demand for our pressure pumping services; risks associated with business growth outpacing the capabilities of our infrastructure and workforce; risks associated with the uncertainty of macroeconomic and business conditions worldwide; the cyclical nature and volatility of the oil and gas industry, including the level of exploration, production and development activity and the volatility of oil and gas prices; changes in competitive factors affecting our operations; political, economic and other risks and uncertainties associated with international operations; the impact that unfavorable or unusual weather conditions could have on our operations; the potential shortage of skilled workers; our dependence on certain customers; the risks inherent in long-term fixed-price contracts; and, operating hazards, including the significant possibility of accidents resulting in personal injury or death, property damage or environmental damage. These risks and other uncertainties related to our business are described in detail in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Investors are cautioned that many of the assumptions on which our forward-looking statements are based are likely to change after our forward-looking statements are made, including for example the market prices of oil and natural gas and regulations affecting oil and gas operations, which we cannot control or anticipate. Further, we may make changes to our business plans that could or will affect our results. We undertake no obligation to update any of our forward-looking statements and we do not intend to update our forward-looking statements more frequently than quarterly, notwithstanding any changes in our assumptions, changes in our business plans, our actual experience, or other changes. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.
Executive Summary
For the three months ended September 30, 2014, revenue was $1,209.0 million and income from continuing operations was $85.7 million, or $0.55 diluted earnings per share. Net income was $79.9 million, or $0.51 diluted earnings per share.
Third quarter 2014 revenue in our Drilling Products and Services segment increased 6% sequentially to $239.2 million, as compared to $226.0 million in the second quarter of 2014. The primary factor driving the higher sequential revenue in this segment was a 24% increase in international revenue to $63.7 million due to increased rentals of premium drill pipe and accommodations. U.S. land revenue increased 5% sequentially to $85.9 million due to increased rentals of bottom hole assemblies and accommodations. Gulf of Mexico revenue decreased 3% sequentially to $89.6 million due to decreased specialty rentals.
Third quarter 2014 revenue in our Onshore Completion and Workover Services segment increased 18% sequentially to $470.8 million, as compared to $398.1 million in the second quarter of 2014. All of this segment’s revenue is derived from the U.S. land market area. On a sequential basis, the revenue increase was driven by higher demand for pressure pumping services.
Third quarter 2014 revenue in our Production Services segment increased 1% sequentially to $348.8 million, as compared to $343.9 million in the second quarter of 2014. U.S. land revenue increased 5% sequentially to $225.0 million primarily due to increased activity for coiled tubing and wireline. International revenue decreased 5% sequentially to $86.6 million primarily due to decreased activity for hydraulic workover and snubbing services and pressure control tools. Gulf of Mexico revenue decreased 3% sequentially to $37.2 million primarily due to decreased coiled tubing activity.
Third quarter 2014 revenue in our Technical Solutions segment increased to $150.2 million, which represents an 8% sequential increase from second quarter 2014 revenue of $139.6 million. U.S. land revenue increased 20% sequentially to $32.4 million primarily due to an increase in demand for completion tools and products and an increase in well control services. Gulf of Mexico revenue increased 4% sequentially to $84.0 million primarily due to an increase in well control services, which was partially offset by a decline in demand for completion tools and products. International revenue increased 5% sequentially to $33.8 million as a result of an increase in well service activity. Operating results for our subsea construction and conventional decommissioning businesses are reported in discontinued operations. Previously those operating results were reported within the Technical Solutions segment, which was named the Subsea and Technical Solutions segment.
16
Comparison of the Results of Operations for the Three Months Ended September 30, 2014 and 2013
For the three months ended September 30, 2014, our revenues were $1,209.0 million, resulting in income from continuing operations of $85.7 million, or $0.55 diluted earnings per share. Net income was $79.9 million, or $0.51 diluted earnings per share. For the three months ended September 30, 2013, revenues were $1,096.4 million and income from continuing operations was $67.5 million, or $0.42 diluted earnings per share. Net income was $69.8 million, or $0.43 diluted earnings per share.
The following table compares our operating results for the three months ended September 30, 2014 and 2013 (in thousands, except percentages). Cost of services and rentals excludes depreciation, depletion, amortization and accretion.
Revenue |
Cost of Services and Rentals |
|||||||||||||||||||||
2014 |
2013 |
Change |
2014 |
% |
2013 |
% |
Change |
|||||||||||||||
Drilling Products and Services |
$ |
239,204 |
$ |
215,523 |
$ |
23,681 |
$ |
76,277 | 32% |
$ |
73,873 | 34% |
$ |
2,404 | ||||||||
Onshore Completion and |
||||||||||||||||||||||
Workover Services |
470,849 | 398,016 | 72,833 | 317,433 | 67% | 275,676 | 69% | 41,757 | ||||||||||||||
Production Services |
348,793 | 359,722 | (10,929) | 248,567 | 71% | 251,575 | 70% | (3,008) | ||||||||||||||
Technical Solutions |
150,180 | 123,151 | 27,029 | 79,415 | 53% | 70,508 | 57% | 8,907 | ||||||||||||||
Total |
$ |
1,209,026 |
$ |
1,096,412 |
$ |
112,614 |
$ |
721,692 | 60% |
$ |
671,632 | 61% |
$ |
50,060 | ||||||||
The following provides a discussion of our results on a segment basis:
Drilling Products and Services Segment
Revenue from our Drilling Products and Services segment increased 11% to $239.2 million for the three months ended September 30, 2014, as compared to $215.5 million for the same period in 2013. Cost of services as a percentage of revenue decreased to 32% of segment revenue for the three months ended September 30, 2014, as compared to 34% in the same period in 2013, primarily due to an increase in revenues from a more favorable product mix. Revenue from our Gulf of Mexico market area increased approximately 15% due to increased activity in most of our product lines within this segment, particularly premium drill pipe and accommodations. Revenue generated from our U.S. land market area increased 18% primarily due to increases in accommodations rentals and bottom hole assemblies. These increases were partially offset by a 2% decrease in revenue derived from our international market area primarily due to a decreased activity in rentals of bottom hole assemblies.
Onshore Completion and Workover Services Segment
Revenue from our Onshore Completion and Workover Services segment increased 18% to $470.8 million for the three months ended September 30, 2014, as compared to $398.0 million for the same period in 2013. All of this segment’s revenue is derived from the U.S. land market area. The increase in revenue was driven by higher demand for pressure pumping services and fluid management. Cost of services as a percentage of revenue decreased to 67% of segment revenue for the three months ended September 30, 2014 as compared to 69% in the same period in 2013, primarily due to the improved cost efficiencies in our pressure pumping activities.
Production Services Segment
Revenue from our Production Services segment for the three months ended September 30, 2014 decreased by 3% to $348.8 million, as compared to $359.7 million for the same period in 2013. Cost of services as a percentage of revenue increased to 71% from 70% in the third quarter of 2013. Revenue derived from the Gulf of Mexico market area decreased 29% due to decreased activity for pressure control and hydraulic workover and snubbing services. Revenue from the U.S. land market area remained flat for the three months ended September 30, 2014 as compared to the same period in 2013, as increases in revenue from coiled tubing and wireline services were offset by a decrease in revenue from remedial pumping activity. Revenue from international market areas increased 6% primarily due to an increase in hydraulic workover and snubbing activity and increased activity for remedial pumping services in Latin America.
Technical Solutions Segment
Revenue from our Technical Solutions segment increased 22% to $150.2 million for the three months ended September 30, 2014, as compared to $123.2 million for the same period in 2013. Cost of services decreased to 53% of segment revenue from 57% in the third quarter of 2013, primarily due to an increase in revenues from a more favorable product mix. Revenue in our international market areas increased as a result of an increase in completion tools and products. Revenue in our U.S. land market area increased 45% primarily due to an increase in demand for completion tools and products. Revenue in our Gulf of Mexico market area remained flat for the three months ended September 30, 2014, as compared to the same period in 2013.
17
Depreciation, Depletion, Amortization and Accretion
Depreciation, depletion, amortization and accretion increased to $170.2 million for the three months ended September 30, 2014 from $152.0 million for the same period in 2013. Depreciation and amortization expense for our Drilling Products and Services segment for the three months ended September 30, 2014 increased by $5.5 million, or 13%, due to 2013 and 2014 capital expenditures. Depreciation and amortization expense for our Onshore Completion and Workover Services segment for the three months ended September 30, 2014 increased by $6.5 million, or 12%, due to 2013 and 2014 capital expenditures. Depreciation and amortization expense for our Production Services segment for the three months ended September 30, 2014 decreased by $4.3 million, or 10%, as a result of certain assets being fully depreciated. Depreciation, depletion, amortization and accretion expense for our Technical Solutions segment for the three months ended September 30, 2014 increased by approximately $10.5 million, or 91%, primarily due to 2013 and 2014 capital expenditures.
General and Administrative Expenses
General and administrative expenses were $154.9 million for the three months September 30, 2014, as compared to $147.4 million for the same period in 2013. The increase is primarily attributable to an increase in employee-related expenses and expanding infrastructure to support our growth in both U.S. and international markets.
Discontinued Operations
Discontinued operations include operating results for both our subsea construction business and our conventional decommissioning business. Loss from discontinued operations, net of tax, was $5.9 million for the three months ended September 30, 2014, as compared to an income from discontinued operations, net of tax of $2.4 million for the same period in 2013.
Comparison of the Results of Operations for the Nine Months Ended September 30, 2014 and 2013
For the nine months ended September 30, 2014, our revenues were $3,378.0 million, resulting in income from continuing operations of $207.4 million, or $1.31 diluted earnings per share. Net income was $191.7 million, or $1.21 diluted earnings per share. For the nine months ended September 30, 2013, revenues were $3,274.4 million and income from continuing operations was $222.2 million, or $1.38 diluted earnings per share. Net income was $202.1 million, or $1.26 diluted earnings per share.
The following table compares our operating results for the nine months ended September 30, 2014 and 2013 (in thousands, except percentages). Cost of services and rentals excludes depreciation, depletion, amortization and accretion.
Revenue |
Cost of Services and Rentals |
|||||||||||||||||||||
2014 |
2013 |
Change |
2014 |
% |
2013 |
% |
Change |
|||||||||||||||
Drilling Products and Services |
$ |
685,396 |
$ |
614,924 |
$ |
70,472 |
$ |
216,166 | 32% |
$ |
205,502 | 33% |
$ |
10,664 | ||||||||
Onshore Completion and |
||||||||||||||||||||||
Workover Services |
1,258,774 | 1,222,215 | 36,559 | 876,575 | 70% | 819,472 | 67% | 57,103 | ||||||||||||||
Production Services |
1,013,904 | 1,096,185 | (82,281) | 706,911 | 70% | 756,954 | 69% | (50,043) | ||||||||||||||
Technical Solutions |
419,922 | 341,089 | 78,833 | 223,938 | 53% | 188,002 | 55% | 35,936 | ||||||||||||||
Total |
$ |
3,377,996 |
$ |
3,274,413 |
$ |
103,583 |
$ |
2,023,590 | 60% |
$ |
1,969,930 | 60% |
$ |
53,660 | ||||||||
The following provides a discussion of our results on a segment basis:
Drilling Products and Services Segment
Revenue from our Drilling Products and Services segment increased 11% to $685.4 million for the nine months ended September 30, 2014, as compared to $614.9 million for the same period in 2013. Cost of services as a percentage of revenue decreased to 32% of segment revenue for the nine months ended September 30, 2014, as compared to 33% in the same period in 2013, primarily due to an increase in revenues from a more favorable product mix. Revenue from our Gulf of Mexico market area increased approximately 27% due to increases in rentals of premium drill pipe and accommodations. Revenue generated from our U.S. land market area increased 6% primarily due to increases in revenue from rentals of accommodations and bottom hole assemblies. These increases were partially offset by a 3% decrease in revenue generated from our international market areas, which was due to decreases in rentals of accommodations and premium drill pipe.
Onshore Completion and Workover Services Segment
Revenue from our Onshore Completion and Workover Services segment increased by 3% to $1,258.8 million for the nine months ended September 30, 2014, as compared to $1,222.2 million for the same period in 2013. All of this segment’s revenue is derived from the U.S. land market area. The increase in revenue was driven by higher demand for pressure pumping services and fluid management.
18
Cost of services as a percentage of revenue increased to 70% of segment revenue for the nine months ended September 30, 2014, as compared to 67% in the same period in 2013, primarily due to increased repair and maintenance expenses for pressure pumping services.
Production Services Segment
Revenue from our Production Services segment for the nine months ended September 30, 2014 decreased by 8% to $1,013.9 million, as compared to $1,096.2 million for the same period in 2013. Cost of services as a percentage of revenue increased to 70% of segment revenue as compared to 69% in the same period in 2013. Revenue derived from the Gulf of Mexico market area decreased 31% due to decreased activity for pressure control, hydraulic workover and snubbing and wireline services. Revenue from international market areas remained flat for the nine months ended September 30, 2014 as compared to the same period in 2013. Revenue from the U.S. land market area decreased 5% as we experienced declines in coiled tubing, remedial pumping, and hydraulic workover and snubbing activity.
Technical Solutions Segment
Revenue from our Technical Solutions segment increased 23% to $419.9 million for the nine months ended September 30, 2014, as compared to $341.1 million for the same period in 2013. Cost of services as a percentage of revenue decreased to 53% of segment revenue for the nine months ended September 30, 2014 as compared to 55% in the same period of 2013, primarily due to an increase in revenues from a more favorable product mix. Revenue in our international market areas increased 77% as a result of an increase in demand for well control work and completion tools and products. Revenue in our Gulf of Mexico market area increased 6% primarily due to an increase in our oil and gas activities. Revenue in our U.S. land market area increased 39% primarily due to an increase in demand for completion tools and products.
Depreciation, Depletion, Amortization and Accretion
Depreciation, depletion, amortization and accretion increased to $493.4 million for the nine months ended September 30, 2014 from $446.4 million for the same period in 2013. Depreciation and amortization expense for our Drilling Products and Services segment for the nine months ended September 30, 2014 increased by $14.5 million, or 12%, due to 2013 and 2014 capital expenditures. Depreciation and amortization expense for our Onshore Completion and Workover Services segment for the nine months ended September 30, 2014 increased by $17.0 million, or 11%, due to 2013 and 2014 capital expenditures. Depreciation and amortization expense for our Production Services segment for the nine months ended September 30, 2014 decreased by $10.2 million, or 8% as a result of certain assets being fully depreciated. Depreciation, depletion, amortization and accretion expense for our Technical Solutions segment for the nine months ended September 30, 2014 increased by approximately $25.7 million, or 88%, primarily due to 2013 and 2014 capital expenditures.
General and Administrative Expenses
General and administrative expenses were $457.6 million for nine months ended September 30, 2014, as compared to $440.8 million for the same period in 2013. The increase is primarily attributable to an increase in employee-related expenses and expanding infrastructure to support our growth in both U.S. and international markets.
Discontinued Operations
Discontinued operations include operating results for both our subsea construction business and conventional decommissioning business. Losses from discontinued operations, net of tax, were $15.7 million for the nine months ended September 30, 2014, as compared to $20.0 million for the same period in 2013.
Liquidity and Capital Resources
In the nine months ended September 30, 2014, we generated net cash from operating activities of $764.3 million, as compared to $636.1 million in the same period of 2013. Our primary liquidity needs are for working capital and to fund capital expenditures, debt service, dividend payments, share repurchases and acquisitions. Our primary sources of liquidity are cash flows from operations and available borrowings under the revolving portion of our credit facility. We had cash and cash equivalents of $320.0 million as of September 30, 2014, compared to $196.0 million as of December 31, 2013. As of September 30, 2014, approximately $129.9 million of our cash balance was held outside the U.S. Cash balances held in foreign jurisdictions can be repatriated to the U.S.; however, they would be subject to federal income taxes, less applicable foreign tax credits. The Company has not provided U.S. income tax expense on earnings of its foreign subsidiaries because it expects to reinvest the undistributed earnings indefinitely. In October 2014, we acquired all of the equity interests in a company in India using approximately $25.0 million of cash which was held outside of the U.S.
We spent $438.3 million of cash on capital additions during the nine months ended September 30, 2014. Approximately $96.7 million, $64.5 million and $58.3 million were used to expand and maintain the asset bases of our Onshore Completion and Workover Services, Production Services and Technical Solutions segments, respectively, and approximately $218.8 million was used to expand and maintain our Drilling Products and Services segment’s equipment inventory.
19
We have a $1.0 billion bank credit facility which is comprised of a $600 million revolving portion and a $400 million term loan. The principal balance of the term loan is payable in installments of $5.0 million on the last day of each fiscal quarter. As of September 30, 2014, we had $350 million outstanding under the term loan. As of September 30, 2014, we had no amounts outstanding under the revolving portion of our credit facility and approximately $48.2 million of letters of credit outstanding, which reduce our borrowing capacity under this portion of the credit facility. As of October 30, 2014, we had no amounts outstanding under the revolving portion of our credit facility, and approximately $47.7 million of letters of credit outstanding. All amounts outstanding under the bank credit facility are due on February 7, 2017. Borrowings under the credit facility bear interest at LIBOR plus margins that depend on our leverage ratio. Indebtedness under the credit facility is secured by substantially all of our assets, including the pledge of the stock of our principal domestic subsidiaries. The credit facility contains customary events of default and requires that we satisfy various financial covenants. As of September 30, 2014, we were in compliance with all such covenants.
We have outstanding $500 million of 6 3/8% unsecured senior notes due 2019. The indenture governing the 6 3/8% senior notes requires semi-annual interest payments on May 1st and November 1st of each year through the maturity date of May 1, 2019. The indenture contains customary events of default and requires that we satisfy various covenants. As of September 30, 2014, we were in compliance with all such covenants.
We also have outstanding $800 million of 7 1/8% unsecured senior notes due 2021. The indenture governing the 7 1/8% senior notes requires semi-annual interest payments on June 15th and December 15th of each year through the maturity date of December 15, 2021. The indenture contains customary events of default and requires that we satisfy various covenants. As of September 30, 2014, we were in compliance with all such covenants.
We currently believe that we will spend approximately $180 million to $235 million on capital expenditures, excluding acquisitions, during the remaining three months of 2014. We believe that our current working capital and cash generated from our operations will provide sufficient funds for our identified capital projects.
We continue to focus on operational efficiency and returning cash to shareholders. Year to date through October 30, 2014, we have repurchased $242.3 million of our common stock. As of October 30, 2014, $147.0 million was available under our existing share repurchase program. During 2014, we have paid $37.6 million of dividends to stockholders. In October 2014, we declared a quarterly dividend of $0.08 per share on our outstanding common stock, which will be paid on November 19, 2014.
We intend to continue implementing our growth strategy of increasing our scope of services through both internal growth and strategic acquisitions. We expect to continue to make the capital expenditures required to implement our growth strategy in amounts consistent with the amount of cash generated from our operating activities.
Hedging Activities
We have three interest rate swap agreements for notional amounts of $100 million each related to our 7 1/8% senior notes maturing in December 2021, whereby we are entitled to receive semi-annual interest payments at a fixed rate of 7 1/8% per annum and are obligated to make semi-annual interest payments at variable rates. The variable interest rates, which are adjusted every 90 days, are based on LIBOR plus a fixed margin and are scheduled to terminate on December 15, 2021.
Recently Issued Accounting Pronouncements
See Part I, Item 1, “Financial Statements – Note 17 – Recently Issued Accounting Pronouncements.”
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks associated with foreign currency fluctuations and changes in interest rates. A discussion of our market risk exposure in financial instruments follows.
Foreign Currency Exchange Rates Risk
Because we operate in a number of countries throughout the world, we conduct a portion of our business in currencies other than the U.S. dollar. The functional currency for our international operations, other than certain operations in Canada, the United Kingdom and Europe, is the U.S. dollar, but a portion of the revenues from our international operations is paid in foreign currencies. The effects of foreign currency fluctuations are partly mitigated because local expenses of such international operations are also generally denominated in the same currency. We continually monitor the currency exchange risks associated with all contracts not denominated in the U.S. dollar.
Assets and liabilities of certain subsidiaries in Canada, the United Kingdom and Europe are translated at end of period exchange rates, while income and expenses are translated at average rates for the period. Translation gains and losses are reported as the foreign currency translation component of accumulated other comprehensive loss in stockholders’ equity.
20
We do not hold derivatives for trading purposes or use derivatives with complex features. When we believe prudent, we enter into forward foreign exchange contracts to hedge the impact of foreign currency fluctuations. We do not enter into forward foreign exchange contracts for trading purposes. As of September 30, 2014, we had no outstanding foreign currency forward contracts.
Interest Rate Risk
As of September 30, 2014, our debt was comprised of the following (in thousands):
Fixed |
Variable |
|||||
Term loan due 2017 |
$ |
- |
$ |
350,000 | ||
6 3/8 % Senior notes due 2019 |
500,000 |
- |
||||
7 1/8% Senior notes due 2021 |
500,000 | 300,000 | ||||
Other |
1,178 |
- |
||||
Total Debt |
$ |
1,001,178 |
$ |
650,000 | ||
Based on the amount of this debt outstanding as of September 30, 2014, a 10% increase in the variable interest rate would have increased our interest expense for the nine months ended September 30, 2014 by approximately $1.7 million, while a 10% decrease would have decreased our interest expense by approximately $1.7 million.
Commodity Price Risk
Our revenues, profitability and future rate of growth significantly depend upon the market prices of oil and natural gas. Lower prices may also reduce the amount of oil and natural gas that can economically be produced.
For additional discussion, see Part 1, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Item 4. Controls and Procedures
a. |
Evaluation of disclosure controls and procedures. As of the end of the period covered by this quarterly report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation, that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) are effective for ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. |
b. |
Changes in internal control. There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. |
21
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period |
(a) |
(b) |
(c) |
(d) |
||||||
July 1 - 31, 2014 |
1,328,937 |
$ |
35.81 | 1,328,437 |
$ |
225,216,717 | ||||
August 1 - 31, 2014 |
627,108 |
$ |
34.29 | 626,300 |
$ |
203,741,093 | ||||
September 1 - 30, 2014 |
1,897 |
$ |
33.93 |
- |
$ |
203,741,093 | ||||
Total |
1,957,942 |
$ |
35.32 | 1,954,737 |
$ |
203,741,093 | ||||
(1) |
Through our stock incentive plans, 3,205 shares were delivered to us by our employees to satisfy their tax withholding requirements upon vesting of restricted stock and restricted stock units. |
(2) |
On October 14, 2013, we announced that our Board of Directors authorized a $400 million share repurchase program of our common stock, which will expire on December 31, 2015. |
22
Item 6. Exhibits
(a) |
The following exhibits are filed with this Form 10-Q: |
Exhibit No. |
Description |
|
3.1 |
Restated Certificate of Incorporation of Superior Energy Services, Inc. (incorporated herein by reference to Exhibit 3.1 to Superior Energy Services, Inc.’s Quarterly Report on Form 10-Q filed August 7, 2013 (File No. 001-34037)). |
|
3.2 |
Amended and Restated Bylaws of Superior Energy Services, Inc. (as amended through March 7, 2012) (incorporated herein by reference to Exhibit 3.1 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed March 12, 2012 (File No. 001-34037)) |
|
4.1 |
Indenture, dated April 27, 2011, among SESI, L.L.C., the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated herein by reference to Exhibit 4.1 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed April 27, 2011 (File No. 001-34037)), as amended by Supplemental Indenture, dated February 29, 2012, by and among SESI, L.L.C., the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed March 1, 2012 (File No. 001-34037)), as further amended by Supplemental Indenture dated May 7, 2012, by and among SESI, L.L.C. the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed May 8, 2012 (File No. 001-34037)), as further amended by Supplemental Indenture dated August 29, 2014, by and among SESI, L.L.C. the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed September 2, 2014 (File No. 001-34037)). |
|
4.2 |
Indenture, dated December 6, 2011, among SESI, L.L.C., the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated herein by reference to Exhibit 4.1 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed December 12, 2011 (File No. 001-34037)), as amended by Supplemental Indenture, dated February 29, 2012, by and among SESI, L.L.C., the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.3 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed March 1, 2012 (File No. 001-34037)), as further amended by Supplemental Indenture dated May 7, 2012, by and among SESI, L.L.C. the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.3 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed May 8, 2012 (File No. 001-34037)), as further amended by Supplemental Indenture dated August 29, 2014, by and among SESI, L.L.C. the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed September 2, 2014 (File No. 001-34037)). |
|
18.1* |
Preferability letter regarding change in accounting policy relating to goodwill. |
|
31.1* |
Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2* |
Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1* |
Officer’s certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2* |
Officer’s certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
101.INS* |
XBRL Instance Document |
|
101.SCH* |
XBRL Taxonomy Extension Schema Document |
|
101.CAL* |
XBRL Taxonomy Extension Calculation Linkbase Document |
|
101.LAB* |
XBRL Taxonomy Extension Label Linkbase Document |
|
101.PRE* |
XBRL Taxonomy Extension Presentation Linkbase Document |
|
101.DEF* |
XBRL Taxonomy Extension Definition Linkbase Document |
*Filed herein
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SUPERIOR ENERGY SERVICES, INC.
Date: |
November 4, 2014 |
By: |
/s/ Robert S. Taylor |
|
|
|
Robert S. Taylor |
|
|
|
Executive Vice President, Treasurer and |
|
|
|
Chief Financial Officer |
|
|
|
(Principal Financial and Accounting Officer) |
|
|
|
|
24
Superior Energy Services, Inc.
Houston, Texas
Ladies and Gentlemen:
We have been furnished with a copy of the quarterly report on Form 10-Q of Superior Energy Services, Inc. and subsidiaries (the Company) for the three and nine months ended September 30, 2014, and have read the Company’s statements contained in note 8 to the condensed consolidated financial statements included therein. As stated in note 8, the Company changed its annual goodwill impairment testing date from December 31 to October 1 and states that the accounting change is preferable in the circumstances because it will allow the Company additional time to complete the impairment test. In accordance with your request, we have reviewed and discussed with Company officials the circumstances and business judgment and planning upon which the decision to make this change in the method of accounting was based.
We have not audited any financial statements of the Company as of any date or for any period subsequent to December 31, 2013, nor have we audited the information set forth in the aforementioned note 8 to the condensed consolidated financial statements; accordingly, we do not express an opinion concerning the factual information contained therein.
With regard to the aforementioned accounting change, authoritative criteria have not been established for evaluating the preferability of one acceptable method of accounting over another acceptable method. However, for purposes of the Company’s compliance with the requirements of the Securities and Exchange Commission, we are furnishing this letter.
Based on our review and discussion, with reliance on management’s business judgment and planning, we concur that the newly adopted method of accounting is preferable in the Company’s circumstances.
Very truly yours,
/s/ KPMG LLP
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, David D. Dunlap, President and Chief Executive Officer of Superior Energy Services, Inc., certify that:
1.I have reviewed this quarterly report on Form 10-Q of Superior Energy Services, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 4, 2014 |
|||
|
|
|
/s/ David. D. Dunlap |
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David D. Dunlap |
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President and Chief Executive Officer |
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Superior Energy Services, Inc. |
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Robert S. Taylor, Executive Vice President, Treasurer and Chief Financial Officer of Superior Energy Services, Inc., certify that:
1.I have reviewed this quarterly report on Form 10-Q of Superior Energy Services, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 4, 2014 |
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/s/ Robert S. Taylor |
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Robert S. Taylor |
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Executive Vice President, Treasurer and Chief Financial Officer |
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Superior Energy Services, Inc. |
CERTIFICATION PURSUANT TO
SECTION 1350 OF TITLE 18 OF THE U.S. CODE
I, David D. Dunlap, President and Chief Executive Officer of Superior Energy Services, Inc. (the “Company”), certify, pursuant to Section 1350 of Title 18 of the U.S. Code, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that:
1.the quarterly report on Form 10-Q of the Company for the quarter ended September 30, 2014 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This certificate is being furnished solely for purposes of Section 906 and is not being filed as part of the Report or as a separate disclosure document.
Date: November 4, 2014 |
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/s/ David. D. Dunlap |
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David D. Dunlap |
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President and Chief Executive Officer |
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Superior Energy Services, Inc. |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO
SECTION 1350 OF TITLE 18 OF THE U.S. CODE
I, Robert S. Taylor, Executive Vice President, Treasurer and Chief Financial Officer of Superior Energy Services, Inc. (the “Company”), certify, pursuant to Section 1350 of Title 18 of the U.S. Code, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that:
1.the quarterly report on Form 10-Q of the Company for the quarter ended September 30, 2014 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This certificate is being furnished solely for purposes of Section 906 and is not being filed as part of the Report or as a separate disclosure document.
Date: November 4, 2014 |
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/s/ Robert S. Taylor |
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Robert S. Taylor |
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Executive Vice President, Treasurer and Chief Financial Officer |
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Superior Energy Services, Inc. |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Debt (Details) (USD $)
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9 Months Ended | |||
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Sep. 30, 2013
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Sep. 30, 2014
Credit Facility [Member]
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Sep. 30, 2014
Unsecured Senior Notes Due 2019 [Member]
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Sep. 30, 2014
Unsecured Senior Notes Due 2021 [Member]
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Debt Instrument [Line Items] | ||||
Credit Facility, Term Loan Amount Outstanding | $ 350,000,000 | |||
Credit facility, total borrowing capacity | 1,000,000,000 | |||
Line of credit facility, revolving borrowing capacity | 600,000,000 | |||
Aggregate principal amount of term loan | 400,000,000 | |||
Line of Credit Facility, Periodic Payment | 5,000,000 | |||
Letters of Credit Outstanding, Amount | 48,200,000 | |||
Senior Notes | 500,000,000 | 800,000,000 | ||
Stated interest rate on unsecured senior notes | 6.375% | |||
Gains (Losses) on Extinguishment of Debt | (884,000) | |||
Line of Credit Facility, Amount Outstanding | $ 0 |
Income Taxes (Details) (USD $)
In Millions, unless otherwise specified |
Dec. 31, 2013
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Income Taxes [Abstract] | |
Unrecorded tax benefits | $ 29.9 |
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