Original Notes Indenture, which notes shall accrue interest from the Termination Exchange Date at a rate of 7.125% per year (the “Termination Exchange”). Accordingly, if the Termination Exchange occurs, (i) the 9.750% Senior Second Lien Secured Notes due 2025 will not be issued by Arita Energy, Inc., the 8.750% Senior Second Lien Secured Notes due 2026 will not be issued by SESI, the $6.35 million in cash constituting the total consent payment will not be made and the Proposed Amendment will not become operative and (ii) eligible holders of New Notes that were issued in exchange for Original Notes in the Exchange Offer will receive, pursuant to the Termination Exchange, an aggregate principal amount of Original Notes equal to the Exchange Consideration (as defined in the Offering Memorandum).
COVID-19 Pandemic and Market Conditions
The Company’s operations were disrupted due to the circumstances surrounding the COVID-19 pandemic including, but not limited to, suggested and mandated social distancing and stay at home orders, resulting in the Company having to modify its business practices. The Company experienced delays in the preparation of its financial statements as a result of the COVID-19 pandemic and availed itself of the SEC’s order (Release No. 34-88318) under Section 36 of the Securities Exchange Act of 1934, as amended (the Exchange Act), granting exemptions from specified provisions of the Exchange Act and certain rules thereunder, as amended by Release No. 34-88465 issued on March 25, 2020 to extend the original deadline of May 11, 2020 for the filing of this Quarterly Report. Management of the Company believes it has proactively addressed many of the known operational impacts of the COVID-19 pandemic to the extent possible and will strive to continue to do so, but there can be no guarantee the measures will be fully effective.
Furthermore, the oil and gas industry has experienced unprecedented price disruptions during 2020, due in part to significantly decreased demand as a result of the COVID-19 pandemic and the announcement by Saudi Arabia of a significant increase in its maximum crude oil production capacity as well as the announcement by Russia that previously agreed upon oil production cuts between members of the Organization of the Petroleum Exporting Countries and its broader partners (OPEC+) would expire on April 1, 2020. On April 12, 2020, members of OPEC+ agreed to certain production cuts; however, these cuts are not expected to be enough to offset near-term demand loss attributable to the COVID-19 pandemic. Activity declined in the face of depressed crude oil pricing, with the average U.S. land rig count dropping 25% in the first quarter of 2020 as compared to the first quarter of 2019. The global rig count has continued to decline during the beginning of the second quarter of 2020 as well. These market conditions have significantly impacted the Company’s business, with a more severe impact to the North American business in the first quarter of 2020. As customers continue to revise their capital budgets in order to adjust spending levels in response to lower commodity prices, the Company has experienced significant pricing pressure for its products and services. The Company expects such pricing pressure to continue during the remainder of 2020 if the economic climate in the United States and abroad continues to deteriorate.
Ransomware Attack
On March 31, 2020, the Company detected a ransomware attack on its network that temporarily disrupted access to some systems. The Company immediately took steps to isolate affected systems and contain disruption to the Company’s information technology infrastructure. The Company also implemented measures to prevent additional systems from being affected, including taking systems offline as a precaution. The Company engaged third party information technology experts to restore and recover those affected systems to full functionality as quickly as possible. The Company believes there has not been any material impact to its operating activities or its controls over financial reporting. The Company does not believe that this incident will have a long-term material adverse impact on its business, results of operations or financial condition. The Company has implemented enhanced security features and monitoring procedures to mitigate the likelihood of similar future events.
New York Stock Exchange Notice
On March 30, 2020, the Company received a written notice from the New York Stock Exchange (the NYSE) notifying the Company that it was not in compliance with the continued listing standards set forth in Section 802.01B of the NYSE Listed Company Manual because the average global market capitalization of the Company’s common stock over a consecutive 30 trading-day period was less than $50 million and, at the same time, its stockholders’ equity was less than $50 million (the $50 Million Standard).
In response to the significant volatility in the financial markets caused by the COVID-19 pandemic, on April 21, 2020, the SEC approved, with immediate effectiveness, the NYSE’s proposal to permit a longer cure period for NYSE-listed companies to regain compliance with the $50 Million Standard by tolling their respective compliance periods through June 30, 2020 (the Tolling Order). Under the NYSE rules, the Company would normally have 18 months to cure the noncompliance (the 18-Month Cure Period). However, in accordance with the Tolling Order, the Company’s 18-Month Cure Period will be paused through June 30, 2020, and will resume on July 1, 2020. On May 14, 2020, the Company submitted its plan (the Plan) to cure the deficiency and regain compliance with the $50 Million Standard.
If the NYSE accepts the Company’s Plan, the Company’s common stock will continue to be traded on the NYSE during the 18-Month Cure Period, as extended by the Tolling Order, subject to the Company’s compliance with the Plan and other continued listing requirements.
Goodwill impairment exists when the estimated fair value of the reporting unit is below the carrying value. In estimating the fair value of the reporting units, the Company uses a combination of an income approach and a market-based approach.
Income approach – The Company discounts the expected cash flows of each reporting unit. The discount rate used represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in the Company’s operations and cash flows and the rate of return an outside investor would expect to earn.
Market-based approach – The Company uses the guideline public company method, which focuses on comparing the Company’s risk profile and growth prospects to select reasonably similar publicly traded companies.
The Company weighs the income approach 80% and the market-based approach 20% due to differences between the Company’s reporting units and the peer companies’ size, profitability and diversity of operations. In order to validate the reasonableness of the estimated fair values obtained for the reporting units, a reconciliation of fair value to market capitalization is performed for each unit on a standalone basis. A control premium, derived from market transaction data, is used in this reconciliation to ensure that fair values are reasonably stated in conjunction with the Company’s capitalization. The Company uses all available information to estimate fair value of the reporting units, including discounted cash flows. A significant amount of judgment is involved in performing these evaluations given that the results are based on estimated future events.
The result of the goodwill impairment assessment indicated that the fair value of the Drilling Products and Services segment exceeded its net book value and, therefore, no goodwill impairment was recorded. The Company will continue to evaluate the Drilling Products and Services segment for potential goodwill impairment in the second quarter of 2020 as market conditions evolve.
(11)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 (the Eligible Participants). Under the stock incentive plans, the Company may grant incentive 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 $3.6 million and $8.0 million for the three months ended March 31, 2020 and 2019, respectively, which is reflected in general and administrative expenses.
(12) Income Taxes
On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), a substantial tax relief and spending package intended to provide economic stimulus to address the impact of the COVID-19 pandemic. The CARES Act allows corporations with net operating losses generated in 2018, 2019 and 2020 to elect to carryback those losses for a period of five years and relaxes the limitation for business interest deductions for 2019 and 2020. Under the provisions of the CARES Act, the Company anticipates receiving a refund of approximately $30.0 million during the second half of 2020.
The Company had $13.2 million of unrecorded tax benefits as of each of March 31, 2020 and December 31, 2019, all of which would impact the Company’s effective tax rate if recognized. It is the Company’s policy to recognize interest and applicable penalties, if any, related to uncertain tax positions in income tax expense.
(13) Earnings per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock 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 shares of common stock that could have been outstanding assuming the exercise of stock options and the conversion of restricted stock units.
The Company incurred a loss from continuing operations for the three months ended March 31, 2020 and 2019; therefore the impact of any incremental shares would be anti-dilutive.
(14) Contingencies
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.
A subsidiary of the Company is involved in legal proceedings with two employees regarding the payment of royalties for a patentable product developed by them. On April 2, 2018, the employees filed a lawsuit in the Harris County District Court alleging that the royalty payments they had received since 2010 should have been higher. In May 2019, the jury issued a verdict in favor of the plaintiffs. On October 25, 2019, the court issued a final judgment against the Company. The Company strongly disagrees with the
verdict and believes the district court committed several legal errors that should result in a reversal or remand of the case by the Court of Appeals. The ultimate resolution of this matter could result in a loss of up to $7.4 million in excess of amounts accrued.
(15) Supplemental Guarantor Information
SESI, L.L.C. (the Issuer), a 100% owned subsidiary of Superior Energy Services, Inc. (the Parent), has $500 million of 7.75% senior unsecured notes due 2024 (the SESI 2024 notes). The Parent, along with certain of its direct and indirect 100% owned domestic subsidiaries (the subsidiary guarantors, and together with the Parent, the guarantors), have entered into guarantees of the outstanding SESI 2024 notes (the guarantees). All guarantees provided by the guarantors are full and unconditional, joint and several, except that the guarantee of any subsidiary guarantor may be released under certain customary circumstances, including (i) in connection with a sale or other disposition of all or substantially all of the assets of the applicable subsidiary guarantor (including by way of merger or consolidation) to a person that is not the Issuer, Parent or a subsidiary of the Issuer; (ii) in connection with a sale or other disposition of all of the capital stock of such subsidiary guarantor to a person that is not the Parent or Issuer or their respective subsidiaries; and (iii) upon legal defeasance or satisfaction and discharge of the indenture governing the SESI 2024 notes. The Parent will be released from its guarantee only in connection with any legal defeasance or satisfaction and discharge of the indenture.
With respect to each guarantor, each guarantee is a general unsecured senior obligation of such guarantor and
ranks equally in right of payment with all existing and future senior unsecured indebtedness of such guarantor;
is senior in right of payment to any future subordinated obligations of such guarantor; and
is effectively subordinated to existing and future secured indebtedness of such guarantor to the extent of the value of the assets securing that indebtedness.
The guarantee obligations of the Parent and each subsidiary guarantor is limited as necessary to prevent the guarantee from constituting a fraudulent conveyance under applicable law. If a guarantee were rendered voidable, it could be subordinated by a court to all other indebtedness (including guarantees and other contingent liabilities) of the applicable guarantor, and, depending on the amount of such indebtedness, such guarantor’s liability on its guarantee could be reduced to zero.
The SESI 2024 notes and the guarantees are structurally subordinated to all indebtedness and other obligations of any of the subsidiary guarantors that do not guarantee the SESI 2024 notes (the non-guarantor subsidiaries). Such non-guarantor subsidiaries have no obligation, contingent or otherwise, to pay amounts due under the SESI 2024 notes or to make funds available to pay those amounts, whether by dividends, distributions, loans or other payments.
The following summarized financial information presents the financial information of the Parent, Issuer and the subsidiary guarantors (collectively, the Obligor Group), on a combined basis, after elimination of (i) intercompany transactions and balances among the Parent, Issuer and the subsidiary guarantors and (ii) equity in earnings from and investments in any subsidiary of the Parent that is not the Issuer or a subsidiary guarantor.
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|
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|
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|
OBLIGOR GROUP
|
|
Summarized Balance Sheets Information
|
|
(in thousands)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Current assets
|
$
|
693,625
|
|
$
|
789,562
|
|
Noncurrent assets
|
|
1,087,934
|
|
|
1,134,238
|
|
Total assets
|
$
|
1,781,559
|
|
$
|
1,923,800
|
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
191,968
|
|
$
|
261,743
|
|
Noncurrent liabilities
|
|
2,044,725
|
|
|
2,039,138
|
|
Total liabilities
|
$
|
2,236,693
|
|
$
|
2,300,881
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this Quarterly Report) and other documents filed by us with the SEC contain, and future oral or written statements or press releases by us and our management may contain, forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Generally, the words “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks” and “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 Quarterly Report or such other materials regarding our financial position, financial performance, liquidity, strategic alternatives, market outlook, future capital needs, capital allocation plans, 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 prevailing circumstances on the date such statements are made. Such forward-looking statements, and the assumptions on which they are based, are inherently speculative and are subject to a number of risks and uncertainties that could cause our actual results to differ materially from such statements. Such risks and uncertainties include, but are not limited to:
the conditions in the oil and gas industry;
the effects of public health threats, pandemics and epidemics, like the COVID-19 pandemic, and the adverse impact thereof on our business, financial condition, results of operations and liquidity, including, but not limited to, our growth, operating costs, supply chain, labor availability, logistical capabilities, customer demand and industry demand generally, margins, utilization, cash position, taxes, the price of our securities, and our ability to access capital markets;
the ability of the members of OPEC+ to agree on and to maintain crude oil price and production controls;
our outstanding debt obligations and the potential effect of limiting our ability to fund future growth;
necessary capital financing may not be available at economic rates or at all;
volatility of our common stock;
operating hazards, including the significant possibility of accidents resulting in personal injury or death, or property damage for which we may have limited or no insurance coverage or indemnification rights;
we may not be fully indemnified against losses incurred due to catastrophic events;
claims, litigation or other proceedings that require cash payments or could impair financial condition;
credit risk associated with our customer base;
the effect of regulatory programs and environmental matters on our operations or prospects;
the impact that unfavorable or unusual weather conditions could have on our operations;
the potential inability to retain key employees and skilled workers;
political, legal, economic and other risks and uncertainties associated with our international operations;
laws, regulations or practices in foreign countries could materially restrict our operations or expose us to additional risks;
potential changes in tax laws, adverse positions taken by tax authorities or tax audits impacting our operating results;
changes in competitive and technological factors affecting our operations;
risks associated with the uncertainty of macroeconomic and business conditions worldwide;
potential impacts of cyber-attacks on our operations;
counterparty risks associated with reliance on key suppliers;
challenges with estimating our potential liabilities related to our oil and natural gas property;
risks associated with potential changes of the Bureau of Ocean Energy Management’s security and bonding requirements for offshore platforms;
the potential failure to consummate the Combination (as defined herein);
the amount of the costs, fees, expenses and charges related to the Combination, including pursuant to the Merger Agreement;
failure to complete the Combination could negatively impact our business and financial results;
failure of management to focus on alternative opportunities as a result of the Combination.
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, 2019. 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 such statements are made, including for example the market prices of oil and gas and regulations affecting oil and gas operations, which we cannot control or anticipate. Further, we may make changes to our business strategies and plans (including our capital spending and capital allocation plans) at any time and without notice, based on any changes in the above-listed factors, our assumptions or otherwise, any of which could or will affect our results. For all these reasons, actual events and results may differ materially from those anticipated, estimated, projected or implied by us in our forward-looking statements. We undertake no obligation to update any of our forward-looking statements for any reason and, 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
General
We provide a wide variety of services and products to the energy industry. We serve major, national and independent oil and natural gas exploration and production companies around the world and offer products and services with respect to the various phases of a well’s economic life cycle. We report our operating results in four business segments: Drilling Products and Services; Onshore Completion and Workover Services; Production Services; and Technical Solutions.
Recent Developments
Combination
On December 18, 2019, we entered into a definitive merger agreement (as amended on February 20, 2020, the Merger Agreement) to divest our U.S. service rig, coiled tubing, wireline, pressure control, flowback, fluid management and accommodations service lines (the Superior Energy U.S. Business) and combine them with Forbes Energy Services Ltd. (Forbes) to create a new consolidation platform for U.S. completion, production and water solutions (the Combination).
While we and Forbes have worked diligently to complete the Combination, the significant reduction in crude oil prices caused primarily by the COVID-19 pandemic has resulted in a significant decline in demand for services provided by the Superior Energy U.S. Business and Forbes. While management continues to believe that the Company should be separated into two distinct companies as contemplated by the Combination, the COVID-19 pandemic and oil price decline have made it impractical to complete the Combination on the terms originally contemplated. As a result, we expect the Merger Agreement will be terminates in accordance with its terms on May 31, 2020.
Related Financing Transactions
As a condition of the Combination, SESI, L.L.C. (SESI), our wholly owned subsidiary, consummated an offer to exchange (the Exchange Offer) up to $635.0 million of SESI’s previously outstanding $800.0 million aggregate principal amount of 7.125% Senior Notes due 2021 (the Original Notes) for up to $635.0 million aggregate principal amount of SESI’s 7.125% Senior Notes due 2021 (the New Notes) and conducted a concurrent consent solicitation (the Consent Solicitation) to amend the liens covenant in the indenture (the Proposed Amendment) governing the Original Notes (the Original Notes Indenture) to permit the issuance of the 8.750% Senior Second Lien Secured Notes due 2026 (the Superior Secured Notes) to be issued by SESI upon the terms and subject to the conditions set forth in SESI’s offering memorandum and consent solicitation statement, dated as of January 6, 2020 (as amended by the press releases dated January 16, 2020, January 22, 2020, January 31, 2020, February 14, 2020, February 19, 2020 and February 20, 2020 issued by the Company and Supplement No. 1 to the Offering Memorandum and Consent Solicitation, dated as of January 31, 2020 (the Offering Memorandum)). A supplemental indenture by and among SESI, the guarantors party thereto and the Bank of New York Mellon Trust Company, N.A., as trustee, related to the Proposed Amendment was executed on February 14, 2020. The Original Notes outstanding after the Exchange Offer are governed by the Original Notes Indenture, as amended by the Proposed Amendment, provided that the Proposed Amendment will only become operative immediately prior to the consummation of the Combination.
The Exchange Offer expired at 5:00 p.m., New York City time, on February 21, 2020.
If the Combination is not consummated by May 31, 2020 or is earlier terminated or abandoned, the New Notes issued in the Exchange Offer will be automatically exchanged for an equal principal amount of Original Notes to be issued as “Additional Notes” under the Original Notes Indenture, which notes shall accrue interest from the Termination Exchange Date at a rate of 7.125% per year (the “Termination Exchange”). Accordingly, if the Termination Exchange occurs, (i) the 9.750% Senior Second Lien Secured Notes due 2025 will not be issued by Arita Energy, Inc., the 8.750% Senior Second Lien Secured Notes due 2026 will not be issued by SESI, the $6.35 million in cash constituting the total consent payment will not be made and the Proposed Amendment will not become operative and (ii) eligible holders of New Notes that were issued in exchange for Original Notes in the Exchange Offer will receive, pursuant to the Termination Exchange, an aggregate principal amount of Original Notes equal to the Exchange Consideration (as defined in the Offering Memorandum).
COVID-19 Pandemic and Market Conditions
The Company’s operations were disrupted due to the circumstances surrounding the COVID-19 pandemic including, but not limited to, suggested and mandated social distancing and stay at home orders, resulting in the Company having to modify its business practices. The Company experienced delays in the preparation of its financial statements as a result of the COVID-19 pandemic and availed itself of the SEC’s order (Release No. 34-88318) under Section 36 of the Securities Exchange Act of 1934, as amended (the Exchange Act), granting exemptions from specified provisions of the Exchange Act and certain rules thereunder, as amended by Release No. 34-88465 issued on March 25, 2020, to extend the original deadline of May 11, 2020 for the filing of this Quarterly Report. Management of the Company believes it has proactively addressed many of the known operational impacts of the COVID-19 pandemic to the extent possible and will strive to continue to do so, but there can be no guarantee the measures will be fully effective.
The oil and gas industry has experienced unprecedented price disruption during 2020, due in part to significantly decreased demand as a result of the COVID-19 pandemic and the announcement by Saudi Arabia of a significant increase in its maximum crude oil production capacity as well as the announcement by Russia that previously agreed upon oil production cuts between members of the Organization of the Petroleum Exporting Countries and its broader partners (OPEC+) would expire on April 1, 2020. On April 12, 2020, members of OPEC+ agreed to certain production cuts; however, these cuts are not expected to be enough to offset near-term demand loss attributable to the COVID-19 pandemic. Activity declined in the face of depressed crude oil pricing, with the average U.S. land rig count dropping 25% in the first quarter of 2020 as compared to the first quarter of 2019. The global rig count has continued to decline during the beginning of the second quarter of 2020 as well. These market conditions have significantly impacted our business, with a more severe impact to the North American business in the first quarter of 2020. As customers continue to revise their capital budgets in order to adjust spending levels in response to lower commodity prices, we have experienced significant pricing pressure for our products and services. We expect such pricing pressure to continue during the remainder of 2020 if the economic climate in the United States and abroad continues to deteriorate.
Ransomware Attack
On March 31, 2020, we detected a ransomware attack on its network that temporarily disrupted access to some systems. We immediately took steps to isolate affected systems and contain disruption to our information technology infrastructure. We also implemented measures to prevent additional systems from being affected, including taking systems offline as a precaution. We engaged third party information technology experts to restore and recover those affected systems to full functionality as quickly as possible. We believe there has not been any material impact to our operating activities or controls over financial reporting. We do not believe that this incident will have a long-term material adverse impact on our business, results of operations or financial condition. We have implemented enhanced security features and monitoring procedures to mitigate the likelihood of similar future events.
New York Stock Exchange Notice
On March 30, 2020, the Company received a written notice from the New York Stock Exchange (the NYSE) notifying the Company that it was not in compliance with the continued listing standards set forth in Section 802.01B of the NYSE Listed Company Manual because the average global market capitalization of the Company’s common stock over a consecutive 30 trading-day period was less than $50 million and, at the same time, its stockholders’ equity was less than $50 million (the $50 Million Standard).
In response to the significant volatility in the financial markets caused by the COVID-19 pandemic, on April 21, 2020, the SEC approved, with immediate effectiveness, the NYSE’s proposal to permit a longer cure period for NYSE-listed companies to regain compliance with the $50 Million Standard by tolling their respective compliance periods through June 30, 2020 (the Tolling Order). Under the NYSE rules, the Company would normally have 18 months to cure the noncompliance (the 18-Month Cure Period). However, in accordance with the Tolling Order, the Company’s 18-Month Cure Period will be paused through June 30, 2020, and will resume on July 1, 2020. On May 14, 2020, the Company submitted its plan (the Plan) to cure the deficiency and regain compliance with the $50 Million Standard.
If the NYSE accepts our Plan, our common stock will continue to be traded on the NYSE during the 18-Month Cure Period, as extended by the Tolling Order, subject to our compliance with the Plan and other continued listing requirements.
Industry Trends
The oil and gas industry is both cyclical and seasonal. The level of spending by oil and gas companies is highly influenced by current and expected demand and future prices of oil and natural gas. Changes in spending result in an increased or decreased demand for our services and products. Rig count is an indicator of the level of spending by oil and gas companies. Our financial performance is significantly affected by the rig count in the U.S. land and offshore market areas as well as oil and natural gas prices and worldwide rig activity, which are summarized in the tables below.
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|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
|
Worldwide Rig Count (1)
|
|
|
|
|
|
|
|
|
|
|
U.S.:
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
764
|
|
|
1,023
|
|
-25%
|
|
|
Offshore
|
|
|
21
|
|
|
21
|
|
0%
|
|
|
Total
|
|
|
785
|
|
|
1,044
|
|
-25%
|
|
|
International (2)
|
|
|
1,074
|
|
|
1,030
|
|
4%
|
|
|
Worldwide Total
|
|
|
1,859
|
|
|
2,074
|
|
-10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Prices (average)
|
|
|
|
|
|
|
|
|
|
|
Crude Oil (West Texas Intermediate)
|
|
$
|
41.00
|
|
$
|
54.82
|
|
-25%
|
|
|
Natural Gas (Henry Hub)
|
|
$
|
1.90
|
|
$
|
2.92
|
|
-35%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Estimate of drilling activity as measured by the average active drilling rigs based on Baker Hughes Co. rig count information.
(2) Excludes Canadian Rig Count.
Comparison of the Results of Operations for the Three Months Ended March 31, 2020 and December 31, 2019
For the first quarter of 2020, our revenue was $321.5 million and the net loss was $79.5 million, or a $5.36 loss per share. Included in the results for the three months ended March 31, 2020 was a pre-tax charge of $16.5 million primarily related to the reduction in value of long-lived assets, $3.7 million for inventory write-down, $2.3 million, primarily for severance and facility closures and $4.3 million of merger-related transaction costs. This compares to net loss of $98.5 million, or a $6.68 loss per share, for the fourth quarter of 2019, on revenue of $336.1 million.
First quarter 2020 revenue in our Drilling Products and Services segment increased 5% sequentially to $104.0 million, as compared to $98.6 million for the fourth quarter of 2019. U.S. offshore revenue increased 9% sequentially to $37.2 million primarily due to an increase in rentals of premium drill pipe during the quarter. International revenue increased 6% to $30.1 million primarily due to an increase in rentals of premium drill pipe and bottom hole assemblies. U.S. land revenue remained flat at $36.7 million.
First quarter 2020 revenue in our Onshore Completion and Workover Services segment decreased 9% sequentially to $61.2 million, as compared to $67.6 million for the fourth quarter of 2019. The decrease in revenue is primarily attributable to a decline in U.S. land activity.
First quarter 2020 revenue in our Production Services segment increased 1% sequentially to $101.5 million, as compared to $100.6 million for the fourth quarter of 2019. U.S. offshore revenue decreased 23% to $11.3 million primarily due to a decrease in hydraulic workover and snubbing activities. U.S. land revenue increased 17% sequentially to $30.7 million primarily due to an increase in pressure control and hydraulic workover and snubbing activities. Revenue from international market areas remained flat.
First quarter 2020 revenue in our Technical Solutions segment decreased 21% sequentially to $54.8 million, as compared to $69.3 million in the fourth quarter of 2019. U.S. offshore revenue decreased 32% sequentially to $31.5 million due to a decrease in sales of completion tools and products. International revenue increased 15% sequentially to $17.2 million primarily due to an increase in well control services and completion tools and products. U.S. land revenue decreased 21% sequentially to $6.1 million, primarily due to a decrease in demand for well control services.
Business Outlook
Demand for our products and services will continue to decline as our customers revise their capital budgets downward and adjust their operations in response to lower oil prices and demand due to the COVID-19 pandemic and actions of OPEC+ and Russia. We are proactively taking actions to mitigate the near and long-term financial impacts on our operating results, and to ensure adequate liquidity and capital resources are available to maintain our operations until the oil and gas industry and global economic conditions improve. These actions include, but are not limited to:
In March 2020, we implemented actions to reduce our payroll costs through a combination of salary reductions, reductions in force and furloughs.
We are leveraging governmental relief efforts to defer payroll and other tax payments, which are expected to benefit our future cash flows for 2020, including an anticipated tax refund of approximately $30.0 million.
We have taken, and will continue to take, other actions to reduce costs and preserve cash in order to successfully navigate the current economic environment, including limiting expected capital expenditures to no more than $50.0 million for the full fiscal year 2020.
The ultimate impact of the COVID-19 pandemic for the remainder of 2020 and beyond will depend significantly on the duration and potential cyclicality of the health crisis and the related public policy actions, additional initiatives we undertake in response to employee, market or regulatory needs or demands, the length and severity of the global economic slowdown, and whether and how our customers change their behaviors over the longer term.
Comparison of the Results of Operations for the Three Months Ended March 31, 2020 and 2019
For the three months ended March 31, 2020, our revenue was $321.5 million, a decrease of $43.8 million, or 12%, as compared to the same period in 2019. Net loss was $79.5 million, or a $5.36 loss per share. Included in the results for the three months ended March 31, 2020 was a pre-tax charge of $16.5 million primarily related to the reduction in value of long-lived assets, $3.7 million for inventory write-down, $2.3 million primarily for severance and facility closures and $4.3 million of merger-related transaction costs. This compares to a net loss for the three months ended March 31, 2019 of $47.7 million, or a $3.07 loss per share.
The following table compares our operating results for the three months ended March 31, 2020 and 2019 (in thousands, except percentages). Cost of revenues excludes depreciation, depletion, amortization and accretion for each of our business segments.
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Revenue
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Cost of Revenues
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2020
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2019
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Change
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%
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2020
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%
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2019
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%
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Change
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Drilling Products and
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Services
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$
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103,993
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$
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101,079
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$
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2,914
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3%
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$
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34,963
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34%
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$
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42,205
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42%
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$
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(7,242)
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Onshore Completion and
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Workover Services
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61,218
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103,136
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(41,918)
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-41%
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52,589
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86%
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81,689
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79%
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(29,100)
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Production Services
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101,504
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103,450
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(1,946)
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-2%
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82,612
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81%
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79,881
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77%
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2,731
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Technical Solutions
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54,782
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57,609
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(2,827)
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-5%
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41,522
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76%
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36,278
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63%
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5,244
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Total
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$
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321,497
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$
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365,274
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$
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(43,777)
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-12%
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$
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211,686
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66%
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$
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240,053
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66%
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$
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(28,367)
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Operating Segments:
Drilling Products and Services Segment
Revenue from our Drilling Products and Services segment increased 3% to $104.0 million for the three months ended March 31, 2020, as compared to $101.1 million for the same period in 2019. Cost of services and rentals as a percentage of revenue decreased to 34% of segment revenue for the three months ended March 31, 2020, as compared to 42% for the same period in 2019. Revenue from the U.S. land market areas decreased 24% as a result of decreases in revenue from rentals of premium drill pipe. Revenue from the U.S. offshore market area increased 28% primarily due to an increase in revenue from rentals of premium drill pipe and bottom hole assemblies. Revenue from the international market areas increased 26%, primarily due to an increase in demand for rentals of premium drill pipe and bottom hole assemblies.
Onshore Completion and Workover Services Segment
Revenue from our Onshore Completion and Workover Services segment decreased 41% to $61.2 million for the three months ended March 31, 2020, as compared to $103.1 million for the same period in 2019. All of this segment’s revenue is derived from the U.S. land market area. Cost of services and rentals as a percentage of revenue increased to 86% of segment revenue for the three months ended March 31, 2020, as compared to 79% for the same period in 2019. The decrease in revenue is primarily attributable to decreased activity in North America, where the average rig count decreased by 25% during the first quarter of 2020.
Production Services Segment
Revenue from our Production Services segment for the three months ended March 31, 2020 decreased by 2% to $101.5 million, as compared to $103.5 million for the same period in 2019. Cost of services and rentals as a percentage of revenue increased to 81% of segment revenue for the three months ended March 31, 2020, as compared to 77% for the same period in 2019. Revenue from the U.S. land market area decreased 25%, primarily due to a decrease in coiled tubing activities. Revenue from the international market areas increased 37%, primarily due to an increase in pressure control, cementing and stimulation and hydraulic workover and snubbing activities. Revenue from the U.S. offshore market area decreased 41%, primarily due to a decrease in hydraulic workover and snubbing activities. During the three months ended March 31, 2020, we recorded $4.1 million in the reduction in value of assets.
Technical Solutions Segment
Revenue from our Technical Solutions segment decreased 5% to $54.8 million for the three months ended March 31, 2020, as compared to $57.6 million for the same period in 2019. Cost of services and rentals as a percentage of revenue increased to 76% of segment revenue for the three months ended March 31, 2020, as compared to 63% for the same period in 2019. Revenue from the U.S. land market area decreased 49%, primarily due to a decrease in demand for well control services. Revenue from the international market areas decreased 31%, primarily due to a decrease in demand for subsea intervention services. Revenue derived from the U.S. offshore market area increased 51%, primarily due to an increase in sales of completion tools and products. During the three months ended March 31, 2020, we recorded $12.4 million in reduction in the value of assets.
Depreciation, Depletion, Amortization and Accretion
Depreciation, depletion, amortization and accretion decreased to $41.4 million during the three months ended March 31, 2020 from $56.3 million during the same period in 2019. Depreciation and amortization expense decreased for our Drilling Products and Services segment by $5.2 million, or 23%; for our Onshore Completion and Workover Services segment by $5.3 million, or 46%; for our Production Services segment by $3.3 million, or 23% and for our Technical Solutions segment by $0.9 million, or 15%. Depreciation expense for Corporate and Other remained flat. The decrease in depreciation, depletion, amortization and accretion is primarily due to assets becoming fully depreciated.
Reduction in Value of Assets
During the three months ended March 31, 2020, the Company recorded $16.5 million in connection with the reduction in value of its long-lived assets. The reduction in value of assets was comprised of $4.1 million and $12.4 million related to property, plant and equipment in the Production Services segment and the Technical Solutions segment, respectively.
Income Taxes
Our effective income tax rate for the three months ended March 31, 2020 was a 24% benefit compared to a 13% expense for the same period in 2019. The effective tax rate for the three months ended March 31, 2020 was primarily impacted by the filing of the carryback claim under the CARES Act.
Discontinued Operations
Loss from discontinued operations, net of tax, was $47.1 million for the three months ended March 31, 2020 as compared to $15.1 million for the same period in 2019. Loss from discontinued operations for the three months ended March 31, 2020 includes a $46.4 million reduction in value of assets. See note 16 to our condensed consolidated financial statements for further discussion of the discontinued operations.
Liquidity and Capital Resources
Our cash flows depend, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. Certain sources and uses of cash, such as our level of discretionary capital expenditures, divestitures of non-core assets, issuances and repurchases of debt and of our common stock are within our control and are adjusted as necessary based on market conditions.
Also impacting our liquidity is the status of the global economy, which impacts oil and natural gas consumption. The COVID-19 pandemic has resulted in travel restrictions, business closures and the institution of quarantining and other restrictions on movement in many communities. As a result, there has been a significant reduction in demand for and prices of crude oil and natural gas.
As a result, the COVID-19 pandemic, together with other dynamics in the marketplace, has recently significantly increased borrowing costs and, in certain cases, restricted the ability of borrowers to access the capital markets and other sources of financing. In order to provide financial flexibility, we may continue to utilize external financing arrangements that have been or may be affected by these market conditions. However, we believe that our cash on hand, the cash we expect to generate from our operations, and cash from other sources of financing available to us are, and will continue to be, sufficient to meet our ongoing operating, capital expenditure and investing requirements.
Financial Condition and Sources of Liquidity
Our primary sources of liquidity are cash and cash equivalents, availability under our revolving credit facility, cash generated from operations and proceeds from divestiture of non-core assets. As of March 31, 2020, we had cash and cash equivalents of $252.2 million and $97.8 million of availability remaining under our revolving credit facility. During the three months ended March 31, 2020, the net cash used by operating activities was $32.2 million. During the three months ended March 31, 2020, we received $33.0 million in cash proceeds from the sale of assets.
Uses of Liquidity
Our primary uses of liquidity are to provide support for our operating activities, debt service obligations and capital expenditures. We spent $18.6 million of cash on capital expenditures during the three months ended March 31, 2020. Capital expenditures of $11.8 million primarily related to the expansion and maintenance of our equipment inventory at our Drilling Products and Services segment, capital expenditures of $1.7 million primarily related to maintenance of equipment inventory at our Onshore Completion and Workover
Services segment and the remaining $5.1 million of capital expenditures primarily related to the maintenance of our equipment for our Production Services and Technical Solutions segments.
During the remainder of 2020, we expect to limit capital spending within our operational cash flow levels to generate free cash flow and allocate capital to businesses with higher returns on invested capital.
Debt Instruments
We have an asset-based revolving credit facility which matures in October 2022. The borrowing base under the credit facility is calculated based on a formula referencing the borrower’s and the subsidiary guarantors’ eligible accounts receivable, eligible inventory and eligible premium rental drill pipe less reserves. Availability under the credit facility is the lesser of (i) the commitments, (ii) the borrowing base and (iii) the highest principal amount permitted to be secured under the indenture governing the 7.125% senior unsecured notes due 2021. The credit agreement contains various covenants, including, but not limited to, limitations on the incurrence of indebtedness, permitted investments, liens on assets, making distributions, transactions with affiliates, merger, consolidations, dispositions of assets and other provisions customary in similar types of agreements. At March 31, 2020, we were in compliance with all such covenants.
In connection with the Exchange Offer, $617.9 million aggregate principal amount of outstanding Original Notes were validly tendered for exchange and not withdrawn, representing 77.24% of the aggregate principal amount of Original Notes outstanding upon commencement of the Exchange Offer. SESI accepted all validly tendered Original Notes and issued $617.9 million aggregate principal amount of New Notes pursuant to the New Notes Indenture. Following the Exchange Offer, as of March 31, 2020, the Company has outstanding $182.1 million of Original Notes and $617.9 million of New Notes due December 2021. The Original Notes Indenture requires semi-annual interest payments on June 15 and December 15 of each year through the maturity date of December 15, 2021. The New Notes Indenture requires semi-annual interest payments on June 15 and December 15 of each year through the maturity date of December 15, 2021. The Original Notes Indenture and the New Notes Indenture contain customary events of default and require that we satisfy various covenants. At March 31, 2020, we were in compliance with all such covenants.
We have outstanding $500 million of 7.75% senior unsecured notes due September 2024. The indenture governing the 7.75% senior unsecured notes due 2024 requires semi-annual interest payments on March 15 and September 15 of each year through the maturity date of September 15, 2024. The indenture contains customary events of default and requires that we satisfy various covenants. At March 31, 2020, we were in compliance with all such covenants.
Other Matters
Off-Balance Sheet Arrangements and Hedging Activities
At March 31, 2020, we had no off-balance sheet arrangements and no hedging contracts.
Recently Adopted Accounting Guidance
See Part I, Item 1, “Financial Statements – Note 17 – New 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 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 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.
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 or speculative purposes. At March 31, 2020, we had no outstanding foreign currency forward contracts.
Interest Rate Risk
At March 31, 2020, we had no variable rate debt outstanding.
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
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(a)
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Evaluation of disclosure controls and procedures. As of the end of the period covered by this Quarterly Report, 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 SEC’s rules and forms.
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(b)
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Changes in internal control. There was no change in our internal control over financial reporting during the three months ended March 31, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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