Superior Energy Services, Inc. (NYSE: SPN) announced a net loss for Q2 2018 of $25.4 million on revenue of $535.5 million, much improved from Q1’s loss of $59.9 million on revenue of $482.3 million.
Superior reports that most of this quarter’s improvement is due to activity in the U.S., where the company has a large hydraulic fracturing business line. Superior activated additional hydraulic horsepower this quarter, bringing the active size of its pressure pumping fleet to 750,000 HHP.
The new fleets combined with higher utilization levels, resulting in a 25% increase in sand pumped. The acceleration of frac activity also benefited from the resolution of Q1’s sand supply chain issues, which impacted Superior like almost every other major frac provider.
In the Gulf of Mexico, another major area for Superior, demand was roughly flat overall. While drill pipe demand grew, workover and completions were down. Superior reports hydraulic workover activity is up significantly internationally, a development that boosted results.
Superior Energy Close to Breakeven
“I’m proud of the way the men and women of Superior Energy have met the challenges we’ve faced during the recent industry downturn. As a result of their hard work, and our purpose driven culture, we approached breakeven operating income, and EBITDA grew by 35% over first quarter adjusted EBITDA” said David Dunlap, president and CEO of Superior Energy.
Q&A
Selected Q&A from Superior Energy Services 2Q call:
Q: Thanks. Good morning, Dave. Two questions from me. One is with regard to the headroom for a drill pipe growth. You mentioned a pretty compelling scenario with regard to a burgeoning interest internationally with regard to drill pipe. Do you have the inventory to meet the demand? And I recognize the fact that you were not fully deployed in the second quarter. And secondly, do the very strong incremental margins that you ‘ve been gardening in Drilling Products and Services continue?
SPN President and CEO, David D. Dunlap: Yeah. So, Bill, really most of the growth that we have seen to this point during the year in Drilling Products and Services has been in the U.S. land market. And we’ve seen that in bottomhole assemblies, we’ve seen it in premium drill pipe. We deployed additional assets in the first half of 2018, and I would expect that we continue to see opportunities to deploy more premium drill pipe and bottomhole assemblies in the U.S. market through 2019. It’s been driven by lateral length, and I don’t think it’s going to get any less.
But the best opportunity for us with premium drill pipe and, to a certain extent, with bottomhole assemblies exist in
2019 and beyond as we begin to see some recovery in global offshore. And you know that premium drill pipe is always a product line that is levered to a directional well. That’s a relatively new opportunity for us over the last seven or eight years in the U.S. land market.
Every offshore well is drilled in the world is a candidate and likely customer for premium drill pipe. And so, I get a lot more optimistic about revenue growth in the offshore market today as we begin to see some rigs being contracted to begin in 2019. So, there’s a long – this recovery has long legs to it.
Q: So, Dave, as we discussed really strong results internationally, can you maybe talk a little bit about where you’re seeing pricing stabilize versus where it’s still kind of soft? And just thinking about some of the large integrated awards to the diversifieds, do they have any impact on how you look at those markets or Superior’s strategy?
SPN President and CEO, David D. Dunlap: Yes. So, I mean, I think that really what we’ve seen in decline in international margin over the course of the last several years has been a lot more driven by utilization that has been by price. There’s clearly been and was some price deterioration that occurred fairly early on in the down cycle. But our earnings reduction during the course of this downturn on international revenue driven much more by utilization than by price. I think there will be opportunities to improve price as we go forward, but I can’t say that we’ve seen pure evidence of price improvement in the international markets at this point in time.
As for the contract awards that you hear with some of the larger – our large cap peers, largely integrated type contracts involving multiple service lines, we occasionally get an opportunity to participate in these as a subcontractor. I can’t say that it’s a upfront strategy of ours internationally to be one of these overall providers in the larger integrated contracts, but I would also tell you that the bulk of the international market is not made up of those larger integrated contracts but instead discrete contracts for particular service lines. And that’s really where we see the best opportunity for our growth.
Q: Thinking about frac profitability in the back half, if you leave aside Permian takeaway concerns, it sounds like the read on your customer base is okay for now. Is there more risk of increased year-end seasonality in the fourth quarter compared to what we saw last year, just given completion budget seems to be consistently running ahead, there isn’t much incentive for E&Ps to keep cruise running through year-end? How do we think about that risk towards the frac profitability metrics that you highlighted?
SPN President and CEO, David D. Dunlap: Yeah. I mean, I don’t know. Normally what we see in year-end behavior is more related to weather than anything else. I mean, I think that from an overall cash flow standpoint, our operators are doing much better than they anticipated doing from a commodity price standpoint as they entered the year. So, I’ll be a little bit surprised if we see unusual reduction in completions activity and completions urgency in Q4.
The wild card in Q4 is always weather. And we’ve had a couple of years here where weather hasn’t been a huge impact in the fourth quarter. 2017 was like that. We’ve got other years in history where weather has been a big problem from late November all the way through the end of December. So, it’s always a wild card. I can’t say that we’ve heard specifically from any of our customers that we should expect to see a change in completions activity in the fourth quarter at this point.
Q: How much more can you realistically squeeze out of your frac fleet, Dave? Maybe kind of give us some perspective on that for the second half of 2018, and then as you think forward for 2019?
SPN President and CEO, David D. Dunlap: Yeah, Kurt. I would tell you that overall, I mean, this would be getting to hypothetical max. There’s at least 25% or 30% overall efficiency gain that could be made on our average fleet. That’s on an average fleet.
I don’t think you’d ever expect anything in an operation our size to operate at maxed out 100% efficiency. If we did, the number would be even higher. I mean, there is still a lot of room we see out there for our fleets and for industry to gain efficiency.
And I’d say it’s particularly the case in the Permian Basin, which the Permian basin has come along in the last
year-and-a-half, to become a more efficient basin to operate in. But there’s still a lot of inefficiencies that exist there, and we see that and we see directly, where in the Eagle Ford where we actually run greater utilization and greater efficiency through our frac fleets than we do in the Permian Basin. That’s basin inefficiency, and over time basin inefficiency in the Permian is going to get better.
Q: You bring another good point on that though. I mean, what’s driving the basic inefficiency differential between the Permian and Eagle Ford?
SPN President and CEO, David D. Dunlap: So, I mean, if you think about the massive increase and change in activity that we had in the Permian Basin beginning in kind of late 2016 versus where we are today, we haven’t seen that same kind of buildup in activity in any other basin. And of course, you just think through the last six or seven quarters and the things that service companies talked about.
So last summer, we were talking about trucks in the Permian Basin, lack of trucks – trucking inefficiency. We’ve talked about sand delivery problems in the Permian Basin. We talked about how hard it is to hire drivers. We talked about the distances that we have to cover in the Permian Basin; the changes in customer behavior related to white sand and brown sand in the Permian Basin.
All of these are things that get discussed about the Permian Basin that seldom do you hear people discuss in the
Mid-Continent or in South Texas or even the Bakken or DJ Basin or Marcellus. And it’s strictly driven by the massive change in activity that we had in a very short period of time in the Permian. Now, I don’t think that resolves itself next quarter, but I do believe that those inefficiencies have improved from where we were a year ago in the basin. And I think a year from now, they’re even better.
