SPNX - Superior Energy Services Inc. (SPNX) Q4 2022 Earnings Call Transcript

2023-03-21 12:15:03 ET

Superior Energy Services, Inc. (SPNX)

Q4 2022 Results Conference Call

March 21, 2023 10:00 AM ET

Company Participants

Jamie Spexarth - CFO

Brian Moore - CEO

Presentation

Operator

Good day and welcome to the Superior Energy 2022 Fourth Quarter Earnings Conference Call and Webcast. All participants will be in a listen-only mode. Please note that this call is being recorded.

And 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

Thank you and good morning. Thank you all for joining Superior Energy's fourth 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 2022 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. I'm extremely proud of our team's execution during the quarter, delivering a strong finish to an outstanding 2022 for Superior. Our leadership's commitment to free cash flow generation and operational excellence enabled us to achieve our transformative strategic objectives and close the year with a debt-free balance sheet and strong competitive positions especially in our rental segment.

Additionally, we followed through on our commitment to creating shareholder value by completing a $250 million distribution to shareholders in December and recognizing the worthless stock deduction. While we certainly benefited from a more favorable commodity price environment, our less labor intensive businesses and solid market positions enabled our experienced and knowledgeable teams to effectively mitigate inflation and supply chain challenges.

A disciplined approach to our businesses and processes continues to deliver exceptional sustainable performance through our industry cycles. Superior participates in land and offshore markets and in 2022, our U.S. land businesses accounted for just over 21% of total revenue and led our overall revenue growth and margin expansion, outpacing offshore markets activity growth both internationally and in the Gulf of Mexico.

For Superior, 85% of U.S. land revenues were generated by premium drill pipe and bottom hole assembly accessories. As 2023 progresses, we believe work stream to offshore premium drill pipe rental business will benefit from higher drilling and completion activity. Expectations for U.S. onshore are becoming less optimistic given the recent pullback of natural gas prices. The LNG export capacity expansion is expected to increase demand, but likely not in the near term.

For context, in February of 2023, gas directed rigs accounted for 153 or 20% of the total U.S. onshore rig count of 758. Our execution of the transformation initiative set forth in 2021 and completed in 2022 continued to be validated with positive results. Our product offerings are now focused on businesses critical to our customer's oil and gas operations. These businesses have limited competition with the three largest global oil field service companies, or less labor intensive, required deep technical expertise and have strong cash flow generating capacity.

2022 results were led by work strings and stable drill to name only two. Work streams depth of inventory resulting from consistent capital investments through the cycles, season field experience, in-house engineering expertise and longstanding relationships with strategic suppliers enables customer relationships that make it a leading provider in the U.S. offshore and international markets.

With a focus on continued innovation that is difficult to replicate. Stabil Drill's large tool inventory has also been built over time and is complemented by in-house manufacturing, repair services, and efficient fleet management practices, which have enabled and sustained leading market positions in U.S. land and select Latin American regions.

With that, I'll 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 fourth quarter 2022 to the third quarter 2022, as well as full year 2022 results.

The Company reported net income from continuing operations of $175 million on revenue of $239.1 million in the fourth quarter of 2022. This compares to net income from continuing operations of $48.5 million on revenues of $222.3 million for the third quarter of 2022.

Net income from continuing operations for the fourth quarter of 2022 includes a tax benefit of $110.5 million, primarily driven from the recognition of a worthless stock deduction in the U.S. related to deductible outside basis differences in certain domestic subsidiaries.

For the year end of December 31, 2022, the Company's net income from continuing operations was $291 million on revenues of $884 million. This compares to net income from continuing operations of $147 million in the combined year of 2021 on revenue of $694.7 million. The combined year of 2021 includes $335.6 million of income related to reorganization items.

The Company's adjusted EBITDA a non-GAAP measure was $79.9 million for the fourth quarter of 2022, an increase of 6% compared to $75.1 million in the third quarter of 2022. For the full year adjusted EBITDA was $282.1 million compared to $126.2 million in the combined year of 2021.

Let's start today's discussion by looking at the Company's geographic breakdown. U.S. land revenue was $49.4 million in the fourth quarter of 2022, which was flat to the third quarter result of $49.5 million. For the full year U.S. land revenue was $185.3 million, which was a substantial increase over the 2021 result of $115.9 million.

As Brian mentioned in the opening, U.S. land revenue accounted for roughly 21% of our total 2022 revenue. The increase year-over-year in the primary component of our U.S. land revenue is our rental segment through the delivery of premium drill pipe and bottom hole assembly accessories.

U.S. offshore revenue was $72.3 million for the fourth quarter of 2022, an increase of 18% compared to revenue of $61.4 million in the third quarter of 2022. Full year U.S. offshore revenue was $263.7 million for an increase of 24% over the 2021 result of $212.6 million. Both of our segments operate in the U.S. offshore market.

The key drivers of improved performance in 2022 were from premium drill pipe within our rental segment and completion services within our well services segment. International revenue was 117.4 million in the fourth quarter of 2022, an increase of 5% compared to revenue of $111.4 million in the third quarter of 2022.

For the full year, international revenue was $434.9 million, an increase of 19% over the 2021 result of $366.2 million. Latin America and the Middle East were the two biggest contributors of growth in 2022. Latin America was boosted by increased premium drill pipe rentals and completion services deliveries, as well as improved land performance in Argentina. Middle East revenue was driven by improved results from our land operations, most notably in Kuwait.

In summary, we feel very positive about our 2023 potential in both U.S. offshore and international markets. Combined, these two markets make up 79% of our 2022 activity, and we look for that to grow in 2023. We are cautious on the U.S. land market as we await more clarity regarding the U.S. natural gas directed activity. While we like our market positions, our caution relates to the overall uncertainty on levels of activity on U.S. land particularly in the back half of 2023.

Now let's move to discuss segment results. The rental segment revenue in the fourth quarter of 2022 was $105.9 million, which was flat compared to revenue of $104.6 million in the third quarter of 2022. Adjusted EBITDA of $62.6 million contributed 69% of the Company's total adjusted EBITDA before including corporate costs. Fourth quarter adjusted EBITDA margin, a non-GAAP measure within rentals was 59%, a 2% decrease from the third quarter margin of 61%.

Overall, the rental segment was fairly flat quarter over quarter as U.S. land remained steady and timing issues on projects offset between decreases in U.S. offshore and increases in international. The well services segment revenue in the fourth quarter of 2022 was $133.2 million, a 13% increase compared to revenue of $117.7 million in the third quarter of 2022.

Adjusted EBITDA for the fourth quarter of 2022 was 28.7 million, which was an increase of $3.6 million versus the third quarter. Adjusted EBITDA margin for the fourth quarter was 22% roughly equal to the third quarter. The big driver of improved results in the fourth quarter were from the completion services business, which had significant deliveries in the U.S. offshore market.

Now let's move to discuss capital expenditures and liquidity. Capital expenditures in the fourth quarter were $22.9 million, taking full year expenditures to $65.8 million, which comes in at the low end of our guidance from the third quarter as some deliveries of equipment moved into 2023. Our expectation for 2023 is that capital spending will come in at a range of $75 million to 90 million.

Free cash flow, cash from operations less capital expenditures for the full year was $109.6 million with the fourth quarter accounting for $30.5 million. In looking at free cash flow, it should be noted that we had a good deal of revenue come in very late in the fourth quarter, which pushed up working capital. As we stand right now, the first quarter is looking to be a very strong free-cash flow quarter as the levels of working capital are converting to cash as expected.

Total cash proceeds received during the fourth quarter of 2022 from the disposal of all of our remaining shares of Select Energy Services were $21.3 million. We also received $4 million in the proceeds from the sale of non-core assets. For the year ended December 31, 2022 proceeds from the sale of non-core assets were $50.4 million. Additionally, we received 34.7 million from the sale of our select shares for the full year.

As you will note from a review of our assets held for sale line item on the balance sheet, our asset sales will be slowing down significantly in 2023 as we liquidate the final real estate holdings of our divested U.S. land businesses. As of December 31, 2022, the Company had cash, cash equivalents and restricted cash of approximately $339.1 million. This cash balance reflects the payment of the special dividend on December 28, 2022 of $250 million.

As I mentioned in the free cash flow discussion earlier in my comments, the first quarter is off to a strong start on the cash front, through the first two months of 2023, our total cash balance has increased by over $40 million. In closing, I would like to discuss guidance for 2023. In looking at first quarter, it needs to be bifurcated between the two segments. We expect the first quarter 2023 results of our rental segment to be in line with the fourth quarter 2022 results.

Our well services segment, on the other hand, will be down based on a non repeat of a very strong fourth quarter from our completion services business unit and the usual seasonality for these businesses, particularly in the international space.

Our current expectation is that first quarter revenue will come in between $210 million and $220 million. First quarter adjusted EBITDA should be between $62 million and $72 million. As we look to full year 2023, we expect revenue to come in at a range of $750 million to $850 million with EBITDA in a range of $260 million to $330 million.

While we expect to benefit from higher drilling and completion activities in both the U.S. offshore and international markets, we are mindful of potential challenges facing the U.S. onshore market related to natural gas activity. If there are any follow up questions, please email ir@superiorenergy.com. That concludes my prepared remarks.

Brian, I'll turn it over to you for final comments.

Brian Moore

Thanks, Jamie. Let me elaborate a bit more about how we are thinking about 2023. Our guidance reflects our balanced exposure to U.S. land and offshore markets, both internationally and in the Gulf of Mexico. We continue to believe we have strong competitive market positions with prudent strategies for our post transformation product service lines.

Experienced, established, capable leadership teams, significant inventories of in-demand premium drill pipe and drilling related accessories built over time, and a demonstrated ability to execute that enables us to deliver leading performance relative to opportunities in the markets where we choose to participate.

More specifically, our guidance reflects our well services segment project-based businesses influenced by seasonality and customer scheduling priorities are inherently choppy. Differing from well factory operations, typical in U.S. land our longer-term offshore drilling related activities, which often provide greater visibility on timing of work or deliveries.

For example, our offshore completions business is scheduled to deliver in December 2023, a full well package of our Multizone Single-Trip sand control system to an international oil company for a multi-year deep water project in the Gulf of Mexico. Our guidance reflects the possibility the customer may delay delivery until the first quarter of 2024.

Pertaining to our rentals segment, in U.S. land, we believe we will maintain strong market positions with high spec assets expected to continue to perform well relative to market opportunities. There is some uncertainty about U.S. land activity levels in the back half of 2023, particularly in natural gas plays including the Haynesville, Marcellus, and Eagle Ford, where we participate with premium drill pipe and bottom hole assembly accessory rentals.

In addition to rig counts, we will continue to monitor drilling and completion practices as well designed and casing programs influence drill string configurations and pricing due to product mix. Conversely, we believe work strings benefits from increasing activity levels in the Gulf of Mexico and international offshore markets like Latin America and West Africa as 2023 progressive.

My final comment pertaining to guidance acknowledges the difference in the margin contributed from our well services versus rental segments. Accordingly, our range of revenue and EBITDA not only reflects activity assumptions, but also reflects our view of the relative mix of revenues contributed from our two segments.

Transitioning to the strategic outlook, we continue to explore alternatives to enhanced shareholder value including through potential merger or acquisition opportunities. As part of this process, we remain in and continue to pursue preliminary or exploratory dialogue with various potential counterparties. Resources will be allocated accordingly should strategic alternatives including meaningful consolidation opportunities become actionable in 2023.

Our board has not set a timetable or made any decisions related to further actions or potential strategic alternatives at this time. Additionally, any potential transactions would depend upon entry into definitive agreements with a potential counterparty on terms acceptable to us. There can be no assurance that we will enter any such transaction or consummate or pursue any transaction or other strategic alternative.

In the meantime, we continue our disciplined approach to growth in capital expenditure allocations while ensuring our market leading brands have the support and resources needed to sustain our demonstrated performance and enhance our competitive positions and future opportunities.

We believe capital expenditures in 2023 similar to our 2022 capital expenditures are consistent with our view of future spending needed to maintain our existing fleets, assuming the continuation of current drilling and completion practices for the foreseeable future. The majority of our 2023 CapEx is related to work strings offshore business.

As we strive to build a sustainable future through our commitment to environmental social and governance initiatives, our longstanding shared core values are critical to achieving our ESG goals in helping our customers, suppliers, and business partners achieve theirs. We continue to advance our ESG initiatives for the benefit of stakeholders with plans to publish our 2023 inaugural sustainability report in 2024.

Looking ahead, expect persistent behaviors aligned with efficiency, capital discipline, and sustainable performance characterized by cash flow generation and returns. Safe operations, reliable service delivery in fair, responsible dealings, consistent with our shared core values, central to Superior's culture.

In closing, I would like to thank everyone who helped deliver an exceptional 2022 and especially our dedicated employees and their leaders. We very much appreciate and continue to depend on the support of our customers, strategic suppliers, our board and shareholders, and our chairman, Mike McGovern, whose vision, commitment, and leadership has brought so much to Superior.

We look forward to continued success in 2023. Our next call is expected in early May to report our first quarter results and update our 2023 outlook. Thank you for your interest in Superior Energy.

Operator, this concludes our call.

Question-and-Answer Session

Operator

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