Superior Energy Services, Inc. (OTCPK:SPNX) Q3 2022 Earnings Conference Call November 8, 2022 10:00 AM ET
Company Participants
Jamie Spexarth – CFO
Brian Moore – CEO
Conference Call Participants
Operator
Good day, and welcome to Superior Energy’s 2022 Third Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. Please note this call is being recorded.
I would now like to turn the conference over to Mr. Jamie Spexarth, Chief Financial Officer. Please go ahead.
Jamie Spexarth
Good morning. Thank you for joining Superior Energy’s third 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 this 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.
At the risk of sounding like a broken record, my message hasn’t changed. Our ongoing execution of the transformation initiative set forth last year continues to be validated by positive results quarter-over-quarter.
Our persistent strategy of focusing operations on businesses with solid market positions, along with the strength of their brands, their leaders and teams have proven again by our positive results. Margin expansion and continued strong competitive positions, despite labor market challenges and supply chain cost, we have maintained a lower cost structure that enable pricing leverage, and high utilization of desirable assets to keep pace with inflation.
As we leverage our financial strength, flexibility, and leading market positions on converting operating margins to free cash flow generation, we expect to continue to deliver compelling margins and returns. We will continue to exercise discipline in our capital expenditure and market participation decisions.
Our results in third quarter performance, again, not only reflect a disciplined strategy of focusing on businesses critical to our customers operations, but reflect the capabilities of our business unit leaders and their teams. We will persist in advancing our strategic focus on efficiency, capital discipline, and sustainable performance characterized by cash flow generation, safe operations, reliable service delivery, and fair responsible dealings and alignment with our shared core values that are central to Superior’s culture.
With that, I will turn the call over to Jamie who will discuss our financial results.
Jamie Spexarth
Thank you, Brian.
Today, we will be comparing our results for the third quarter 2022 to the second quarter 2022. The company reported net income from continuing operations for the third quarter of 2022 of $48.5 million or $2.41 per diluted share on revenues of $222.3 million. This compares to a net income from continuing operations of $43.6 million or $2.17 per diluted share for the second quarter of 2022 on revenues of $224.6 million.
Net income from continued operations includes a gain of $13.4 million in other gains and losses within the operating income section. This is primarily related to net gains from divestitures of non-core businesses within our Well Services segment. This gain was offset by an expense of $6.8 million in other income and expense, primarily related to unfavorable foreign exchange rate changes.
Adjusted EBITDA for the third quarter was $75.1 million an increase of 1% from second quarter 2022 adjusted EBITDA of $74 million. Third quarter adjusted EBITDA margin was 34% up from 33% in the second quarter of 2022. The company divested non-core businesses and assets during the third quarter of 2022 for cash proceeds of $31.2 million. The divestitures collectively generated $20.6 million of revenue and $3.4 million of adjusted EBITDA during the first two quarters of 2022, continuing our trend at divesting low margin high labor content businesses.
Now, let’s move to discuss segment results. The Rental segment revenue in the third quarter 2022 was $104.6 million, a 1% increase compared to revenue of $103.7 million in the second quarter of 2022. While revenue was flat overall, there were some differences across geographies in the quarter.
U.S. land total revenue was down roughly 9% due to product sales from Q2 that did not repeat in Q3. However, the rental revenue component of U.S. land in Q3 was up slightly from Q2 as pricing increases contributed to the result. Offsetting the U.S. land decline was a 15% increase in international revenue, which primarily related to increased drill pipe rental activity in Latin America and West Africa.
Looking forward, we are encouraged by the potential growth we are seeing in the international rental activity.
Adjusted EBITDA for the Rental segment in the third quarter was $64.1 million for a margin of 61%. This compares to a second quarter 2022 adjusted EBITDA $61.1 million with a margin of 59%. The margin increase was driven by increased pricing in U.S. land and improved utilization internationally.
Now, let’s discuss the Well Services segment. Well Services segment revenue in the third quarter of 2022 was $117.7 million, a 3% decrease compared to revenue of $120.9 million in the second quarter of 2022. The revenue decrease was primarily in the Gulf of Mexico. It was driven by the divestiture of our shelf-based plug-and-abandonment business and decreases in activity from our completion services business. These declines were partially offset by increased well control work in the U.S. land area.
Adjusted EBITDA for the third quarter was $25.2 million for an adjusted EBITDA margin of 21%, nearly equal to results for the second quarter 2022.
Now, let’s move to discuss capital expenditures and liquidity. Capital expenditures in the third quarter were $22.4 million, taking expenditures year-to-date to $42.9 million. The company expects total capital expenditures for 2022 to be approximately $65 million to $75 million. A reduction of prior guidance as some previously planned spending within the Well Services segment has been canceled or deferred.
Free cash flow, cash from operations, less capital expenditures for the three months ended September 30, was $31.4 million, which added to our result from the previous quarters, taking free cash flow year-to-date to $79.1 million. We expect strong free cash flow moving forward as more moderate revenue growth will require less use of working capital. Our capital spending decisions will remain disciplined and we will continue to optimize our tax position as we utilize our remaining tax credits and carryforwards. As of September 30, 2022, the company had cash, cash equivalents and restricted cash of approximately $533.4 million.
As we mentioned in the earnings release last week, we now expect to pay a distribution and we are pursuing a return of capital with an expected range between $225 million and $250 million payable to shareholders in late December 2022.
In closing, I’d like to provide some updated ranges for guidance for both 2022 and 2023. Based on our performance in the third quarter an increased visibility the remainder of the year, we now expect 2022 full-year adjusted EBITDA to be in the range of $270 million to $290 million, an increase from the prior range of $250 million to $280 million. Revised revenue guidance of $860 million to $900 million is similar to previous guidance.
As we look forward to 2023, we expect activity levels and results to be in a similar range to the second half of 2022, with some moderate growth generated from potential pricing increases in U.S. land rentals and an activity increase from our international rental operations. We also expect capital spending in 2023 to be in line with 2022 levels.
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
Thank you, Jamie.
Consistent with last quarter, our positive performance this quarter brought continued strong incremental margins and free cash flow. Our leverage to increased pricing and utilization of in-demand assets, keeping pace with inflation, despite current market challenges was again driven by the execution of our strategy to narrow our focus to businesses and markets in which we believe we have a competitive advantage with products and services critical to our customers.
Within the Rental segment, we expect our U.S. land assets to remain at full utilization and we continue to push pricing improve other agreement terms. In the Gulf of Mexico and international markets where pricing agreements are in place with key operators, we believe we have the availability and capacity to respond to increasing activity.
Our longstanding strategic relationships with critical suppliers who have been mindful of prior commitments and continue to be responsive in the controlling cost, managing deliveries, and thus far mitigating the significant disruptions the industry is experiencing. We will experience some disruptions to our Argentina well service business in Q4, but expect needed materials to be delivered before Q1 of 2023.
In Q3, we kept pace with inflation, even as we saw higher labor cost as compensation adjustments were 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. Labor inflation is an ongoing and important part of pricing negotiations with our customers who are becoming increasingly aware of supplier constraints. As we advance our strategy of focusing on highly engineered and less labor intensive products and services, we continue our commitment to execution with our high performing portfolio of brands.
Additionally, we will maintain our focus on service quality and safety, conducting our business in a sustainable environmentally and socially responsible way. As we align and coordinate our processes within an established framework of accountability, operational excellence, and safety, we are moving forward with our ESG strategy and greenhouse gas emissions assessment and expect to publish our inaugural Sustainability Report in Q1 2024 reporting 2023 data.
We remain in dialogue with counterparties and are prepared should strategic alternatives to grow shareholder value are meaningful consolidation opportunities for Superior become available. As we strive to be good stewards of our resources and as Jamie indicated earlier, we now expect to pay a distribution and are pursuing a return of capital with an expected range between $225 million and $250 million to shareholders in late December 2022.
I’ll close by stating it should be evident our priorities have not changed, and when the message of positive it bears repeating. Superior will endeavor to advance our focused strategy and positive results in an effort to continue to realize strong margins and free cash flow. We look forward to reporting our Q4 results on our next call early next year coinciding with the filing of our 10-K.
In the meantime, I’d like to wish our stakeholders and especially our very special team of leaders and employees, a safe, happy, and enjoyable holiday season, as we have demonstrated many reasons to look forward to continued success for Superior Energy in 2023. Thank you, Operator. That concludes our call.
Question-and-Answer Session
End of Q&A
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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