Superior Energy Services, Inc. (OTCPK:SPNX) Q2 2022 Earnings Conference Call August 9, 2022 10:00 AM ET
Company Participants
Jamie Spexarth – Chief Financial Officer
Brian Moore – President and Chief Executive Officer
Conference Call Participants
Operator
Good day, and welcome to the Superior Energy 2022 Second Quarter Earnings Conference Call and Webcast. All participants’ will be in a listen-only mode. [Operator Instructions] Please note this call is being recorded.
I would now like to turn the conference over to Mr. Jamie Spexarth, Chief Financial Officer. Mr. Spexarth, the floor is yours, sir.
Jamie Spexarth
Good morning. Thank you for joining Superior Energy’s Second Quarter 2022 Conference Call. Joining me today is Superior’s Chief Executive Officer, Brian Moore.
During this conference call, management may make forward-looking statements regarding future expectations about the company’s business, management’s plans for future operations or similar matters. The company’s actual results could differ materially due to several important factors, including those described in the company’s filings with the Securities and Exchange Commission, including without limitation in its 2021 annual report on Form 10-K and Form 10-Qs.
Management will refer to non-GAAP financial measures during the call. In accordance with Regulation G, the company provides a reconciliation of these measures on its website, superiorenergy.com.
With that, I will turn the call over to Brian Moore.
Brian Moore
Thanks, Jamie. Good morning, everyone, and thank you for joining our call. Our continued execution of the transformation initiatives set forth last year have been validated again by positive second quarter results.
We reported an adjusted EBITDA for the second quarter of $74 million, an increase of 40% from the first quarter adjusted EBITDA of $53 million. The second quarter adjusted EBITDA margin was 33%, up from 27% in the first quarter of 2022. This performance in margin expansion demonstrates the strength of our brands, their leaders and teams as well as our strategy. These ongoing efforts have defined our competitive position and focused our operations on businesses with strong market positions, particularly in our Rental segment.
Our commitment to maintaining a sustainable lower cost structure has enabled pricing leverage and high utilization of desirable assets to outpace inflation despite labor market challenges and supply chain costs. We will continue to leverage our sustainable cost structure and leading market positions to deliver compelling margins and returns as we remain focused on converting operating margin to free cash flow generation, with continued discipline in our capital expenditure and market participation decisions.
Our prospects for near-term and long-term market opportunities are encouraging and allow us to be opportunistic in maintaining and enhancing our strong market positions. Our second quarter performance is not only a reflection of a disciplined strategy of focusing on businesses critical to our customers’ operations, but a reflection of the capabilities of our business unit leaders and their teams.
Without the contributions and dedication of our approximately 2,300 employees, this year’s positive momentum would not be possible. Therefore, we continue to implement compensation programs that motivate, reward and retain our people for their outstanding performance and commitment to creating value at Superior.
With that, I will turn the call over to Jamie, who will discuss our financial results.
Jamie Spexarth
Thanks, Brian. Today, we will be comparing our results for the second quarter of 2022 to the first quarter of 2022. The company reported net income from continuing operations for the second quarter of 2022 of $43.6 million or $2.17 per diluted share on revenue of $224.6 million. This compares to a net income from continuing operations of $24 million or $1.20 per diluted share for the first quarter of 2022 on revenues of $197.9 million.
Net income from continuing operations includes a gain of $17.4 million in other gains and losses within the operating income section. This gain is related to revisions to our estimated decommissioning liability in the second quarter, which I will discuss in more detail later in the call. This gain was offset by an expense of $13.5 million in other income and expense primarily related to unfavorable foreign exchange rate changes and the unrealized losses on the value of our stock holdings in Select Energy Services.
Adjusted EBITDA, as Brian mentioned, for the second quarter came in at $74 million, which was a 40% increase over the $53 million in the first quarter. Second quarter adjusted EBITDA margin was 33%, up from 27% in the first quarter of 2022.
Now let’s move to discuss segment results. The Rental segment revenue in the second quarter of 2022 was $103.7 million, a 17% increase compared to revenue of $88.8 million in the first quarter of 2022. Rental revenue was up across all geographies, with U.S. land driving the most significant increase as both our premium drill pipe and downhole assemblies businesses were able to realize high utilizations with increased pricing.
Adjusted EBITDA for the Rental segment in the second quarter was $61.1 million for a margin of 59%. This is versus a first quarter 2022 adjusted EBITDA of $49.8 million with a margin of 56%. The Rental segment’s second quarter was driven by increased utilization and pricing on U.S. land from both premium drill pipe and bottom hole assemblies. Additionally, a strong quarter from premium drill pipe in the U.S. offshore area also drove the results.
Now let’s discuss the Well Services segment. Well Services segment revenue in the second quarter of 2022 was $120.9 million, an 11% increase, compared to revenue of $109.2 million in the first quarter of 2022. The revenue increase was driven by increased offshore activity from our sand control completion services business and our Argentina service business. Adjusted EBITDA for the second quarter was $25.4 million for an adjusted EBITDA margin of 21%. This is versus a first quarter 2022 adjusted EBITDA of $16.5 million with a 15% margin.
The previously mentioned revenue increases in completion services in Argentina helped drive EBITDA higher in the quarter. Additionally, there was also increased EBITDA from our well control business unit, which had some high-margin activity offshore in the quarter. This is an example of the result of our work on the transformation project, which started in 2021 and has continued in 2022. The Well Services segment has been a significant beneficiary as we have worked through cost reductions and exhibited a laser focus on targeting the right business opportunities that generate returns and cash flow for the company.
To wrap up the quarterly results, I would like to highlight the changes we made to our decommissioning liability. In the second quarter of 2022, the company changed its decommissioning program whereby we intend to convert the offshore platform to an artificial reef or a reef in place and no longer expect to fully decommission the platform. Based on this change, the company revised the timing and cost estimates for decommissioning under the reef in place program, resulting in a decrease of $53 million in our decommissioning liability.
While the end result created a financial statement benefit, this change was a commercial decision that was the result of a lengthy journey the company went through. The journey involves consultations with industry experts, regulatory authorities and detailed consultations with our auditors. A great deal of effort went into this change which results in an improved strategic direction for the company.
Now let’s move to discuss capital expenditures and liquidity. Capital expenditures in the second quarter were $9.2 million, taking expenditures year-to-date through second quarter to $20.5 million. The company expects total capital expenditures for 2022 to be approximately $75 million to $85 million, with the remaining spend being highly concentrated in the third quarter and weighted heavily towards our Rental businesses.
As we mentioned in our first quarter call, our Board of Directors approved 2023 capital expenditures of up to $45 million for long-lead items, primarily within our Rental segment. The company has moved forward with these expenditures with orders of approximately $34 million in place which we expect to be delivered in early 2023. Our business unit leadership continues to be focused on managing a challenging supply chain, both from an availability and cost standpoint, to strive for continued strong results in future periods. This initiative is a prime example of our efforts to address this challenge.
Free cash flow, cash from operations less capital expenditures for the three months ended June 30th was $23.9 million, which added to our results from the first quarter taking free cash flow year-to-date through second quarter to $47.7 million. As noted above, we expect the majority of our capital expenditure spend to hit in the third quarter, which will impact free cash flow for that period. The company continues to be focused on cash conversion and will balance capital expenditures with an eye towards real returns from those expenditures.
As of June 30th, 2022, the company had cash, cash equivalents and restricted cash of approximately $470.8 million. As we mentioned in the earnings release last week, the company now expects to move forward with distribution and return of capital to shareholders in the second half of 2022.
In closing, I would like to provide some updated guidance ranges for 2022. Based on our strong performance in the second quarter and increased visibility into the remainder of 2022, we now expect revenue to come in between $840 million and $900 million. Full-year EBITDA, a non-GAAP measure, is now expected to be in the range of $250 million to $280 million.
The company expects Q3 results to be similar to Q2 with key contributions from the Rental segment, but a drop-off in the company’s sand control completion services business. In Q4, the completion services business is expected to start to realize its backlog with significant deliveries scheduled for both the Gulf of Mexico and Brazil. Key risks to the guidance relate to hurricane activity in the Gulf of Mexico and delivery timing on the Q4 completion services orders.
If there are follow-up questions, please e-mail ir@superiorenergy.com. That concludes my prepared remarks. Brian, I’ll turn it over to you for final comments.
Brian Moore
Our solid performance in the second quarter brought very strong incremental margins, free cash flow and was driven by the ongoing execution of our strategy to narrow our focus to businesses and markets in which we have a competitive advantage with products and services critical to our customers and has given us the leverage to increase pricing and utilization of in-demand assets and outpace inflation despite current market challenges.
Within the Rental segment, our U.S. land assets are at full utilization, allowing us to continue to push pricing and to improve other agreement terms. In the Gulf of Mexico and international markets, we have available capacity to respond to increasing activity where pricing agreements are in place with key operators. Gulf of Mexico agreements are typically two to three year terms with negotiations ongoing for extensions with improved commercial terms or new agreements for 2023 and 2024.
Our Well Services segment, in particular, is experiencing labor constraints as we look to hire qualified candidates for open positions. Pricing agreements with national oil companies have multiyear terms, with some having provisions that partially offset inflation.
Our long-standing strategic relationships with critical suppliers who have been mindful of prior commitments and continue to be responsive in controlling costs, managing deliveries and thus far are mitigating the significant disruptions the industry is experiencing.
In Q2, I feel we outpaced inflation, and we’ll certainly see higher labor cost in Q3 as compensation adjustments are currently being implemented in recognition of the significant cost of living inflation affecting our employees, as well as rewarding their consistent outstanding performance and commitment to creating value at Superior. We will continue to make labor inflation an important part of pricing negotiations with our customers who are becoming increasingly aware of supplier constraints.
While our businesses maintain a focus on margin, returns and free cash flow generation, they are just as importantly focused on service quality and safety, conducting our businesses in a sustainable, environmentally and socially responsible way. As we align and coordinate our processes within an established framework of accountability, execution excellence, safety and sustainability, we are moving forward with our ESG materiality assessment with the expectation of a sustainability report with 2023 full-year data to be released with our 2023 annual report.
As a further example of our ongoing commitment to the transformation initiatives and subsequent to our earnings release last Thursday, we closed the sale for cash of our Gulf of Mexico business that provides labor-intensive, basic plug-and-abandonment services on wells on the shelf and inland waters of South Louisiana.
In the first half of 2022, the businesses that were sold contributed under $20 million of revenue and approximately $3 million in EBITDA. Approximately 150 employees went with the asset sale to the buyer and established private energy service and rental company based in South Louisiana.
Today, the businesses remaining in our portfolio are characterized by providing highly engineered and less labor-intensive products and services. These include premium drill pipe, completions and landing strings, bottom hole drilling accessories, other specialized services and our sand control completions business, which is expected to deliver its sand control systems to a major international oil company in Q4 for deployment on multiple wells in deepwater Gulf of Mexico during 2023. This is an example of our capabilities to successfully compete in markets with complex technologies requiring expertise and experience to win competitive awards from the most demanding oil companies.
Our geographic discernment continues as we prioritize our participation in international services markets based on free cash flow generation, liquidity, margins and returns and our value proposition. We have been and will continue to be in dialogue with counterparties as we explore strategic alternatives to grow shareholder value. However, oil service equity markets have created headwinds against meaningful consolidation opportunities for Superior. Nevertheless, we will continue to explore consolidation opportunities, but recognize a prudent use of our existing cash as a return of capital to our shareholders before year-end.
We will continue our commitment to execution with our high-performing portfolio of brands, supported by responsive, but lean corporate services, financial discipline and market leadership where we participate to deliver compelling profitability, returns and value creation for our employees, customers and stakeholders. We look forward to reporting our Q3 results on our next call expected in the first week of November, coinciding with the filing of our 10-Q.
Thank you, operator. That concludes our call.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Question-and-Answer Session
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