e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
Commission File No. 001-34037
SUPERIOR ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
(State or other jurisdiction of
incorporation or organization)
|
|
75-2379388
(I.R.S. Employer
Identification No.) |
|
|
|
601 Poydras, Suite 2400
New Orleans, Louisiana
(Address of principal executive offices)
|
|
70130
(Zip Code) |
Registrants telephone number, including area code: (504) 587-7374
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares of the registrants common stock outstanding on October 31, 2008 was
77,528,245.
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q for
the Quarterly Period Ended September 30, 2008
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 2008 and December 31, 2007
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
9/30/08 |
|
|
12/31/07 |
|
|
|
(Unaudited) |
|
|
(Audited) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
128,169 |
|
|
$ |
51,649 |
|
Accounts receivable, net |
|
|
383,813 |
|
|
|
343,334 |
|
Current portion of notes receivable |
|
|
|
|
|
|
15,584 |
|
Prepaid expenses |
|
|
19,888 |
|
|
|
19,641 |
|
Other current assets |
|
|
110,403 |
|
|
|
40,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
642,273 |
|
|
|
471,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
1,055,310 |
|
|
|
1,086,408 |
|
Goodwill |
|
|
483,266 |
|
|
|
484,594 |
|
Notes receivable |
|
|
|
|
|
|
16,732 |
|
Equity-method investments |
|
|
108,153 |
|
|
|
56,961 |
|
Intangible and other long-term assets, net |
|
|
133,880 |
|
|
|
141,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,422,882 |
|
|
$ |
2,257,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
78,394 |
|
|
$ |
69,510 |
|
Accrued expenses |
|
|
158,489 |
|
|
|
177,779 |
|
Income taxes payable |
|
|
50,592 |
|
|
|
7,520 |
|
Current portion of decommissioning liabilities |
|
|
|
|
|
|
36,812 |
|
Current maturities of long-term debt |
|
|
810 |
|
|
|
810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
288,285 |
|
|
|
292,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
198,584 |
|
|
|
163,338 |
|
Decommissioning liabilities |
|
|
|
|
|
|
88,158 |
|
Long-term debt, net |
|
|
711,110 |
|
|
|
711,151 |
|
Other long-term liabilities |
|
|
26,578 |
|
|
|
21,492 |
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock of $.01 par value. Authorized,
5,000,000 shares; none issued |
|
|
|
|
|
|
|
|
Common stock of $.001 par value. Authorized,
125,000,000 shares; issued
and outstanding, 79,453,092 shares at September
30, 2008, and 80,671,650
shares at December 31, 2007 |
|
|
79 |
|
|
|
81 |
|
Additional paid in capital |
|
|
357,826 |
|
|
|
401,455 |
|
Accumulated other comprehensive income (loss), net |
|
|
(5,521 |
) |
|
|
9,078 |
|
Retained earnings |
|
|
845,941 |
|
|
|
570,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,198,325 |
|
|
|
980,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
2,422,882 |
|
|
$ |
2,257,249 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2008 and 2007
(in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Oilfield service and rental revenues |
|
$ |
490,282 |
|
|
$ |
347,228 |
|
|
$ |
1,334,256 |
|
|
$ |
1,021,712 |
|
Oil and gas revenues |
|
|
|
|
|
|
51,696 |
|
|
|
55,072 |
|
|
|
136,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
490,282 |
|
|
|
398,924 |
|
|
|
1,389,328 |
|
|
|
1,158,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of oilfield services and rentals |
|
|
236,610 |
|
|
|
159,683 |
|
|
|
649,839 |
|
|
|
465,085 |
|
Cost of oil and gas sales |
|
|
|
|
|
|
18,954 |
|
|
|
12,986 |
|
|
|
55,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of services, rentals and sales
(exclusive of items shown separately below) |
|
|
236,610 |
|
|
|
178,637 |
|
|
|
662,825 |
|
|
|
520,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, amortization and accretion |
|
|
44,842 |
|
|
|
49,881 |
|
|
|
128,675 |
|
|
|
133,967 |
|
General and administrative expenses |
|
|
68,379 |
|
|
|
57,150 |
|
|
|
204,411 |
|
|
|
161,833 |
|
Gain on sale of businesses |
|
|
|
|
|
|
7,483 |
|
|
|
40,946 |
|
|
|
7,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
140,451 |
|
|
|
120,739 |
|
|
|
434,363 |
|
|
|
349,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(7,593 |
) |
|
|
(7,402 |
) |
|
|
(22,665 |
) |
|
|
(22,635 |
) |
Earnings (losses) from equity-method investments, net |
|
|
23,167 |
|
|
|
1,395 |
|
|
|
19,359 |
|
|
|
(2,447 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
156,025 |
|
|
|
114,732 |
|
|
|
431,057 |
|
|
|
324,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
56,169 |
|
|
|
39,682 |
|
|
|
155,181 |
|
|
|
115,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
99,856 |
|
|
$ |
75,050 |
|
|
$ |
275,876 |
|
|
$ |
209,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
1.24 |
|
|
$ |
0.92 |
|
|
$ |
3.42 |
|
|
$ |
2.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
1.22 |
|
|
$ |
0.91 |
|
|
$ |
3.36 |
|
|
$ |
2.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used
in computing earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
80,538 |
|
|
|
81,470 |
|
|
|
80,691 |
|
|
|
81,053 |
|
Incremental common shares from stock-based
compensation |
|
|
1,307 |
|
|
|
1,323 |
|
|
|
1,350 |
|
|
|
1,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
81,845 |
|
|
|
82,793 |
|
|
|
82,041 |
|
|
|
82,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2008 and 2007
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
275,876 |
|
|
$ |
209,156 |
|
Adjustments to reconcile net income to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
Depreciation, depletion, amortization and accretion |
|
|
128,675 |
|
|
|
133,967 |
|
Deferred income taxes |
|
|
35,716 |
|
|
|
32,459 |
|
Non-cash stock-based and performance share unit compensation
expense |
|
|
9,466 |
|
|
|
8,995 |
|
(Earnings) losses from equity-method investments, net of cash
received |
|
|
(2,121 |
) |
|
|
2,447 |
|
Amortization of debt acquisition costs and note discount |
|
|
2,762 |
|
|
|
2,669 |
|
Gain on sale of businesses |
|
|
(40,946 |
) |
|
|
(7,483 |
) |
Changes in operating assets and liabilities, net of acquisitions
and dispositions: |
|
|
|
|
|
|
|
|
Receivables |
|
|
(96,741 |
) |
|
|
(35,028 |
) |
Accounts payable |
|
|
10,391 |
|
|
|
(861 |
) |
Accrued expenses |
|
|
1,633 |
|
|
|
28,496 |
|
Decommissioning liabilities |
|
|
(6,160 |
) |
|
|
(2,303 |
) |
Income taxes |
|
|
43,273 |
|
|
|
5,817 |
|
Other, net |
|
|
(55,282 |
) |
|
|
6,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
306,542 |
|
|
|
385,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Payments for capital expenditures |
|
|
(324,318 |
) |
|
|
(325,868 |
) |
Acquisitions of businesses, net of cash acquired |
|
|
(4,487 |
) |
|
|
(79,624 |
) |
Cash proceeds from sale of businesses, net of cash sold |
|
|
155,312 |
|
|
|
18,100 |
|
Other |
|
|
(1,332 |
) |
|
|
8,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(174,825 |
) |
|
|
(378,411 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Principal payments on long-term debt |
|
|
(405 |
) |
|
|
(405 |
) |
Payment of debt acquisition costs |
|
|
|
|
|
|
(83 |
) |
Proceeds from exercise of stock options |
|
|
4,274 |
|
|
|
8,422 |
|
Tax benefit from exercise of stock options |
|
|
5,411 |
|
|
|
9,135 |
|
Proceeds from issuance of stock through employee benefit plans |
|
|
1,191 |
|
|
|
324 |
|
Purchase and retirement of stock |
|
|
(64,203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(53,732 |
) |
|
|
17,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(1,465 |
) |
|
|
747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash |
|
|
76,520 |
|
|
|
24,839 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
51,649 |
|
|
|
38,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
128,169 |
|
|
$ |
63,809 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2008 and 2007
(1) Basis of Presentation
Certain information and footnote disclosures normally in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission; however, management believes
the disclosures which are made are adequate to make the information presented not misleading.
These financial statements and footnotes should be read in conjunction with the consolidated
financial statements and notes thereto included in Superior Energy Services, Inc.s Annual Report
on Form 10-K for the year ended December 31, 2007 and Managements Discussion and Analysis of
Financial Condition and Results of Operations.
The financial information of Superior Energy Services, Inc. and subsidiaries (the Company) for the
three and nine months ended September 30, 2008 and 2007 has not been audited. However, in the
opinion of management, all adjustments (which include only normal recurring adjustments) necessary
to present fairly the results of operations for the periods presented have been included therein.
The results of operations for the first nine months of the year are not necessarily indicative of
the results of operations that might be expected for the entire year. Certain previously reported
amounts have been reclassified to conform to the 2008 presentation.
(2) Stock-Based and Long-Term Compensation
The Company maintains various stock incentive plans that provide long-term incentives to the
Companys key employees, including officers and directors, consultants and advisers (Eligible
Participants). Under the incentive plans, the Company may grant incentive stock options,
non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights,
other stock-based awards or any combination thereof to Eligible Participants.
Stock Options
The Company has issued non-qualified stock options under its stock incentive plans. The options
generally vest in equal installments over three years and expire in ten years. Non-vested options
are generally forfeited upon termination of employment. The Companys compensation expense related
to stock options for the nine months ended September 30, 2008 and 2007 was approximately $2.0
million and $1.1 million, respectively, which is reflected in general and administrative expenses.
Restricted Stock
The Company has issued shares of restricted stock under its stock incentive plans. Shares of
restricted stock generally vest in equal annual installments over three years. Non-vested shares
are generally forfeited upon the termination of employment. Holders of shares of restricted stock
are entitled to all rights of a stockholder of the Company with respect to the restricted stock,
including the right to vote the shares and receive any dividends or other distributions declared
thereon. The Companys compensation expense related to shares of restricted stock outstanding for
the nine months ended September 30, 2008 and 2007 was approximately $3.7 million and $1.9 million,
respectively, which is reflected in general and administrative expenses.
Restricted Stock Units
The Company has issued restricted stock units (RSUs) to its non-employee directors under its stock
incentive plans. Annually, each non-employee director is issued a number of RSUs having an
aggregate dollar value determined by the Companys Board of Directors. A RSU represents the right
to receive from the Company, within 30 days of the date the director ceases to serve on the Board,
one share of the Companys common stock. The Companys expense related to RSUs for the nine months
ended September 30, 2008 and 2007 was approximately $0.6 million and $0.7 million, respectively,
which is reflected in general and administrative expenses.
6
Performance Share Units
The Company has issued performance share units (PSUs) to its employees as part of the Companys
long-term incentive program. There is a three year performance period associated with each PSU
grant date. The two performance measures applicable to all participants are the Companys return
on invested capital and total stockholder return relative to those of the Companys pre-defined
peer group. The PSUs provide for settlement in cash or up to 50% in equivalent value in the
Companys common stock, if the participant has met specified continued service requirements. The
Companys compensation expense related to all outstanding PSUs for the nine months ended September
30, 2008 and 2007 was approximately $5.9 million and $5.2 million, respectively, which is reflected
in general and administrative expenses. The Company has recorded a current liability of
approximately $5.4 million and $5.9 million at September 30, 2008 and December 31, 2007,
respectively, for outstanding PSUs, which is reflected in accrued expenses. Additionally, the
Company has recorded a long-term liability of approximately $6.3 million and $5.9 million at
September 30, 2008 and December 31, 2007, respectively, for outstanding PSUs, which is reflected in
other long-term liabilities. During the nine month period ended September 30, 2008, the Company
paid approximately $2.9 million in cash and issued approximately 74,400 shares of its common stock
to its employees to settle PSUs for the performance period ended December 31, 2007.
Employee Stock Purchase Plan
In the third quarter of 2007, the Company adopted employee stock purchase plans under which an
aggregate of 1,250,000 shares of common stock were reserved for issuance. Under these stock
purchase plans, eligible employees can purchase shares of the Companys common stock at a discount.
The Company received $1.2 million and $0.3 million related to shares issued under these plans
for the nine month period ended September 30, 2008 and 2007, respectively. For the nine months
ended September 30, 2008 and 2007, the Company recorded compensation expense of approximately
$200,000 and $60,000, respectively, which is reflected in general and administrative expenses.
Additionally, the Company issued approximately 32,600 and 10,200 shares for the nine month period
ended September 30, 2008 and 2007, respectively, related to these stock purchase plans.
(3) Earnings per Share
Basic earnings per share is computed by dividing income available to common stockholders by the
weighted average number of common shares 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 common shares that could have been outstanding
assuming the exercise of stock options that would have a dilutive effect on earnings per share
using the treasury stock method and the conversion of restricted stock units into common stock.
In connection with the Companys outstanding 1.50% senior exchangeable notes, there could be a
dilutive effect on earnings per share if the average price of the Companys stock exceeds the
initial exchange price of $45.58 per share for the reporting period. In the event the Companys
common stock exceeds the initial exchange price of $45.58 per share, for the first $1.00 the price
exceeds $45.58, the dilutive effect can be as much as 188,400 shares. The senior exchangeable
notes did not have a dilutive effect for the three or nine months ended September 30, 2008.
(4) Stockholders Equity
In September 2007, the Companys Board of Directors authorized a $350 million share repurchase
program that expires on December 31, 2009. Under this program, the Company can purchase shares
through open market transactions at prices deemed appropriate by management. In September 2008,
the Company purchased 1,520,000 shares of its common stock at an average price of $36.45, or
approximately $55.4 million in the aggregate. For the nine months ended September 30, 2008, the
Company purchased a total of 1,770,000 shares of its common stock at an average price of $36.27, or
approximately $64.2 million in the aggregate
Subsequent to September 30, 2008, the Company purchased an additional 1,947,000 shares of its
common stock at an average price of $20.33, or approximately $39.6 million in the aggregate.
7
(5) Acquisitions and Dispositions
On March 14, 2008, the Company completed the sale of 75% of its interest in SPN Resources, LLC (SPN
Resources). As part of this transaction, SPN Resources contributed an undivided 25% of its working
interest in each of its oil and gas properties to a newly formed subsidiary and then sold all of
its equity interest in the subsidiary. SPN Resources then effectively sold 66 2/3% of its
outstanding membership interests. These two transactions generated cash proceeds of approximately
$168.1 million and resulted in a pre-tax gain of approximately $37.1 million. SPN Resources
operations constituted substantially all of the Companys oil and gas segment. Subsequent to March
14, 2008, the Company accounts for its remaining 33 1/3% interest in SPN Resources using the
equity-method within the oil and gas segment. The results of SPN Resources operations through
March 14, 2008 were consolidated.
Additionally, the Company retained preferential rights on certain service work and entered into a
turnkey contract to perform well abandonment and decommissioning work associated with oil and gas
properties owned and operated by SPN Resources at the closing. The turnkey contract covers only
routine end of life well abandonment and pipeline and platform decommissioning for properties owned
and operated by SPN Resources at the date of closing and has a remaining fixed price of
approximately $147.4 million as of September 30, 2008. Based on current estimates, the work is
expected to be performed between 2008 and 2022, with over 90% performed after 2009.
As part of SPN Resources acquisition of its oil and gas properties, the Company guaranteed SPN
Resources performance of its decommissioning liabilities. In accordance with FASB Interpretation
No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (as amended), the Company has assigned an estimated
value of $2.9 million related to decommissioning performance guarantees, which is reflected in
other long-term liabilities. The Company believes that the likelihood of being required to
perform these guarantees is remote. In the unlikely event that SPN Resources defaults on the
decommissioning liabilities existing at the closing date, the total maximum potential obligation
under these guarantees is estimated to be approximately $117.1 million, net of the contractual
right to receive payments from third parties, which is approximately $30.3 million, as of September
30, 2008. The total maximum potential obligation will decrease over time as the underlying
obligations are fulfilled by SPN Resources.
In August 2007, the Company sold the assets of a non-core rental tool business for approximately
$16.3 million in cash and $2.0 million in an interest-bearing note receivable. As a result of the
sale of these assets, the Company recorded a pre-tax gain on the sale of the business of
approximately $7.5 million in 2007. As certain conditions were met during the nine months ended
September 30, 2008, the Company received cash of approximately $6.0 million, which resulted in an
additional pre-tax gain on the sale of the business of approximately $3.3 million.
In April 2007, the Company acquired Advanced Oilwell Services, Inc. (AOS) for approximately $24.2
million in cash consideration. Additional consideration, if any, will be based upon the average
earnings before interest, income taxes, depreciation and amortization expense of the business over
a three year period, and will not exceed $7.4 million. AOS is a provider of cementing and pressure
pumping services primarily operating in the East Texas region. The acquisition has been accounted
for as a purchase, and the results of operations have been included from the acquisition date.
In January 2007, the Company acquired Duffy & McGovern Accommodation Services Limited (Duffy &
McGovern) for approximately $47.5 million in cash consideration. Duffy & McGovern is a provider of
offshore accommodation rentals operating in most deep water oil and gas territories with major
operations in Europe, Africa, the Americas and South East Asia. The acquisition has been accounted
for as a purchase, and the results of operations have been included from the acquisition date.
The Company made other business acquisitions, which were not material on an individual or
cumulative basis, for cash consideration of $4.1 million in the nine months ended September 30,
2008 and $43.3 million in the year ended December 31, 2007. SPN Resources acquired additional oil
and gas producing assets in December 2007 for approximately $12.8 million consisting of $8.0
million in cash consideration and exchanged other oil and gas producing assets with a fair value
and net book value of approximately $4.8 million. The Company also sold the assets of its field
management division in 2007 for approximately $1.8 million in cash. As certain conditions were
8
met
during the nine months ended September 30, 2008 in conjunction with the sale of this division, the
Company received cash of $0.5 million, which resulted in an additional pre-tax gain on the sale of
the business.
Several of the Companys prior business acquisitions require future payments if specific conditions
are met. As of September 30, 2008, the maximum additional contingent consideration payable was
approximately $28.8 million and will be determined and payable through 2012. In the nine months
ended September 30, 2008, the Company capitalized and paid additional consideration of
approximately $0.4 million as a result of prior acquisitions.
(6) Segment Information
Business Segments
The Company has four reportable segments: well intervention, rental tools, marine, and oil and gas.
The well intervention segment provides production-related services used to enhance, extend and
maintain oil and gas production, which include mechanical wireline, hydraulic workover and
snubbing, well control, coiled tubing, electric line, pumping and stimulation and well bore
evaluation services, well plug and abandonment services, and other oilfield services used to
support drilling and production operations. The rental tools segment rents and sells stabilizers,
drill pipe, tubulars and specialized equipment for use with onshore and offshore oil and gas well
drilling, completion, production and workover activities. It also provides onsite accommodations
and bolting and machining services. The marine segment operates liftboats for production service
activities, as well as oil and gas production facility maintenance, construction operations and
platform removals. The oil and gas segment acquires mature oil and gas properties and produces and
sells any remaining oil and gas reserves. During the nine months ended September 30, 2008, the
Company sold 75% of its interest in SPN Resources (see note 5). SPN Resources operations
constituted substantially all the oil and gas segment. Oil and gas eliminations represent products
and services provided to the oil and gas segment by the Companys three other segments. Certain
previously reported amounts have been reclassified to conform to the presentation in the current
period.
Summarized financial information concerning the Companys segments for the three and nine months
ended September 30, 2008 and 2007 is shown in the following tables (in thousands):
Three Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well |
|
Rental |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Intervention |
|
Tools |
|
Marine |
|
Oil & Gas |
|
Unallocated |
|
Total |
|
|
|
Revenues |
|
$ |
319,798 |
|
|
$ |
136,600 |
|
|
$ |
33,884 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
490,282 |
|
Cost of services, rentals and sales
(exclusive of items shown separately below) |
|
|
168,903 |
|
|
|
46,422 |
|
|
|
21,285 |
|
|
|
|
|
|
|
|
|
|
|
236,610 |
|
Depreciation and amortization |
|
|
18,424 |
|
|
|
23,533 |
|
|
|
2,885 |
|
|
|
|
|
|
|
|
|
|
|
44,842 |
|
General and administrative expenses |
|
|
42,122 |
|
|
|
23,017 |
|
|
|
3,240 |
|
|
|
|
|
|
|
|
|
|
|
68,379 |
|
Income from operations |
|
|
90,349 |
|
|
|
43,628 |
|
|
|
6,474 |
|
|
|
|
|
|
|
|
|
|
|
140,451 |
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,593 |
) |
|
|
(7,593 |
) |
Earnings from equity-method
investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,167 |
|
|
|
|
|
|
|
23,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
90,349 |
|
|
$ |
43,628 |
|
|
$ |
6,474 |
|
|
$ |
23,167 |
|
|
$ |
(7,593 |
) |
|
$ |
156,025 |
|
|
|
|
9
Three Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil & Gas |
|
|
|
|
Well |
|
Rental |
|
|
|
|
|
|
|
|
|
Eliminations |
|
Consolidated |
|
|
Intervention |
|
Tools |
|
Marine |
|
Oil & Gas |
|
& Unallocated |
|
Total |
|
|
|
Revenues |
|
$ |
202,807 |
|
|
$ |
118,918 |
|
|
$ |
26,323 |
|
|
$ |
51,696 |
|
|
$ |
(820 |
) |
|
$ |
398,924 |
|
Cost of services, rentals and sales
(exclusive of items shown separately below) |
|
|
111,775 |
|
|
|
35,142 |
|
|
|
13,586 |
|
|
|
18,954 |
|
|
|
(820 |
) |
|
|
178,637 |
|
Depreciation, depletion, amortization and accretion |
|
|
12,979 |
|
|
|
18,115 |
|
|
|
1,986 |
|
|
|
16,801 |
|
|
|
|
|
|
|
49,881 |
|
General and administrative expenses |
|
|
30,440 |
|
|
|
21,698 |
|
|
|
2,603 |
|
|
|
2,409 |
|
|
|
|
|
|
|
57,150 |
|
Gain on sale of business |
|
|
|
|
|
|
7,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,483 |
|
Income from operations |
|
|
47,613 |
|
|
|
51,446 |
|
|
|
8,148 |
|
|
|
13,532 |
|
|
|
|
|
|
|
120,739 |
|
Interest income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311 |
|
|
|
(7,713 |
) |
|
|
(7,402 |
) |
Earnings from equity-method
investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,395 |
|
|
|
|
|
|
|
1,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
47,613 |
|
|
$ |
51,446 |
|
|
$ |
8,148 |
|
|
$ |
15,238 |
|
|
$ |
(7,713 |
) |
|
$ |
114,732 |
|
|
|
|
Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil & Gas |
|
|
|
|
Well |
|
Rental |
|
|
|
|
|
|
|
|
|
Eliminations |
|
Consolidated |
|
|
Intervention |
|
Tools |
|
Marine |
|
Oil & Gas |
|
& Unallocated |
|
Total |
|
|
|
Revenues |
|
$ |
850,804 |
|
|
$ |
401,700 |
|
|
$ |
82,964 |
|
|
$ |
55,072 |
|
|
$ |
(1,212 |
) |
|
$ |
1,389,328 |
|
Cost of services, rentals and sales
(exclusive of items shown separately below) |
|
|
462,783 |
|
|
|
131,857 |
|
|
|
56,411 |
|
|
|
12,986 |
|
|
|
(1,212 |
) |
|
|
662,825 |
|
Depreciation, depletion, amortization and accretion |
|
|
51,981 |
|
|
|
66,558 |
|
|
|
7,337 |
|
|
|
2,799 |
|
|
|
|
|
|
|
128,675 |
|
General and administrative expenses |
|
|
117,211 |
|
|
|
69,701 |
|
|
|
8,719 |
|
|
|
8,780 |
|
|
|
|
|
|
|
204,411 |
|
Gain on sale of businesses |
|
|
500 |
|
|
|
3,332 |
|
|
|
|
|
|
|
37,114 |
|
|
|
|
|
|
|
40,946 |
|
Income from operations |
|
|
219,329 |
|
|
|
136,916 |
|
|
|
10,497 |
|
|
|
67,621 |
|
|
|
|
|
|
|
434,363 |
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,665 |
) |
|
|
(22,665 |
) |
Earnings from equity-method
investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,359 |
|
|
|
|
|
|
|
19,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
219,329 |
|
|
$ |
136,916 |
|
|
$ |
10,497 |
|
|
$ |
86,980 |
|
|
$ |
(22,665 |
) |
|
$ |
431,057 |
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil & Gas |
|
|
|
|
Well |
|
Rental |
|
|
|
|
|
|
|
|
|
Eliminations |
|
Consolidated |
|
|
Intervention |
|
Tools |
|
Marine |
|
Oil & Gas |
|
& Unallocated |
|
Total |
|
|
|
Revenues |
|
$ |
570,280 |
|
|
$ |
358,834 |
|
|
$ |
97,351 |
|
|
$ |
136,889 |
|
|
$ |
(4,753 |
) |
|
$ |
1,158,601 |
|
Cost of services, rentals and sales
(exclusive of items shown separately below) |
|
|
316,730 |
|
|
|
109,676 |
|
|
|
43,432 |
|
|
|
55,845 |
|
|
|
(4,753 |
) |
|
|
520,930 |
|
Depreciation, depletion, amortization and
accretion |
|
|
34,592 |
|
|
|
49,971 |
|
|
|
6,379 |
|
|
|
43,025 |
|
|
|
|
|
|
|
133,967 |
|
General and administrative expenses |
|
|
83,168 |
|
|
|
63,508 |
|
|
|
7,719 |
|
|
|
7,438 |
|
|
|
|
|
|
|
161,833 |
|
Gain on sale of business |
|
|
|
|
|
|
7,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,483 |
|
Income from operations |
|
|
135,790 |
|
|
|
143,162 |
|
|
|
39,821 |
|
|
|
30,581 |
|
|
|
|
|
|
|
349,354 |
|
Interest income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
924 |
|
|
|
(23,559 |
) |
|
|
(22,635 |
) |
Losses from equity-method
investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,447 |
) |
|
|
|
|
|
|
(2,447 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
135,790 |
|
|
$ |
143,162 |
|
|
$ |
39,821 |
|
|
$ |
29,058 |
|
|
$ |
(23,559 |
) |
|
$ |
324,272 |
|
|
|
|
10
Identifiable Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well |
|
Rental |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Intervention |
|
Tools |
|
Marine |
|
Oil & Gas |
|
Unallocated |
|
Total |
|
|
|
September 30, 2008
|
|
$ |
1,272,173 |
|
|
$ |
781,288 |
|
|
$ |
235,813 |
|
|
$ |
107,397 |
|
|
$ |
26,211 |
|
|
$ |
2,422,882 |
|
|
|
|
December 31, 2007
|
|
$ |
996,946 |
|
|
$ |
687,944 |
|
|
$ |
200,623 |
|
|
$ |
344,667 |
|
|
$ |
27,069 |
|
|
$ |
2,257,249 |
|
|
|
|
Geographic Segments
The Company attributes revenue to countries based on the location where services are performed or
the destination of the sale of products. Long-lived assets consist primarily of property, plant
and equipment and are attributed to the United States or other countries based on the physical
location of the asset at the end of a period. The Companys information by geographic area is as
follows (in thousands):
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
United States |
|
$ |
411,373 |
|
|
$ |
320,506 |
|
|
$ |
1,153,141 |
|
|
$ |
934,174 |
|
Other Countries |
|
|
78,909 |
|
|
|
78,418 |
|
|
|
236,187 |
|
|
|
224,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
490,282 |
|
|
$ |
398,924 |
|
|
$ |
1,389,328 |
|
|
$ |
1,158,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
United States |
|
$ |
903,032 |
|
|
$ |
912,376 |
|
Other Countries |
|
|
152,278 |
|
|
|
174,032 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,055,310 |
|
|
$ |
1,086,408 |
|
|
|
|
|
|
|
|
(7) Long-Term Contracts
In December 2007, the Companys wholly-owned subsidiary, Wild Well Control, Inc. (Wild Well),
entered into contractual arrangements pursuant to which it will decommission seven downed oil and
gas platforms and related well facilities located offshore in the Gulf of Mexico for a fixed sum of
$750 million, which is payable in installments upon the completion of specified portions of work.
The contract contains certain covenants primarily related to Wild Wells performance of the work.
The work is expected to take up to three years to complete and began in the first quarter of 2008.
The contract for decommissioning these downed platforms and well facilities is recorded on the
percentage-of-completion method utilizing costs incurred as a percentage of total estimated costs.
Included in other current assets at September 30, 2008 is approximately $63.9 million of costs and
estimated earnings in excess of billings related to this contract.
In connection with the sale of 75% of its interest in SPN Resources, the Company retained
preferential rights on certain service work and entered into a turnkey contract to perform well
abandonment and decommissioning work associated with oil and gas properties owned and operated by
SPN Resources at the closing. This contract covers only routine end of life well abandonment,
pipeline and platform decommissioning for properties owned and operated by SPN Resources at the
date of closing and has a remaining fixed price of approximately $147.4 million as of September 30,
2008. The turnkey contract will consist of numerous, separate billable jobs estimated to be
performed between 2008 and 2022. Each job is short term in duration and will be individually
recorded on the percentage-of-completion method utilizing costs incurred as a percentage of total
estimated costs.
In July 2006, the Company contracted to construct a derrick barge for a third party for
approximately $53.7 million. The contract to construct the derrick barge to the customers
specifications was recorded on the percentage-of-
11
completion method. This derrick barge was
delivered and accepted by the third party in June 2008. As such, there were no billings in excess
of costs and estimated earnings related to this contract as of September 30, 2008. Included in
accrued expenses at December 31, 2007 is approximately $25.0 million of billings in excess of costs
and estimated earnings related to this contract.
(8) Equity-Method Investments
Investments in entities that are not controlled by the Company, but where the Company has the
ability to exercise influence over the operations, are accounted for using the equity-method. The
Companys share of the income or losses of these entities is reflected as earnings or losses from
equity-method investments on its Condensed Consolidated Statements of Operations.
The Company, where possible and at competitive rates, provides its products and services to assist
SPN Resources and Beryl Oil and Gas L.P. (BOG), investments that are accounted for by the Company
using the equity-method, in producing and developing their oil and gas properties. The Company
also reduces its revenue and its investment in SPN Resources and BOG for its respective ownership
interest when products and services are provided to and capitalized by SPN Resources and BOG. The
Company records these amounts in revenue as SPN Resources and BOG record the related depreciation
and depletion expenses. Prior to the sale of 75% of its interest in SPN Resources, the Company
provided operating and administrative support services to BOG and received reimbursement for
general and administrative and direct expenses incurred on behalf of BOG.
On March 14, 2008, the Company sold 75% of its original interest in SPN Resources (see note 5).
The Companys equity-method investment balance in SPN Resources is approximately $47.6 million at
September 30, 2008. The Company recorded earnings from its equity-method investment in SPN
Resources of approximately $16.5 million from the date of sale through September 30, 2008. The
Company also received $17.0 million of cash distributions from its equity-method investment in SPN
Resources from the date of sale through September 30, 2008. The Company has a receivable from SPN
Resources of approximately $2.4 million at September 30, 2008. The Company also recorded revenue
of approximately $12.0 million from SPN Resources from the date of sale through September 30, 2008.
The Company recorded a net decrease in revenue and its investment in SPN Resources of
approximately $0.5 million from the date of sale through September 30, 2008.
The Company owns a 40% interest in BOG. The Companys total cash contribution for its
equity-method investment in BOG was approximately $57.8 million. The Company has not made
additional contributions since its initial investment. The Companys equity-method investment
balance in BOG is approximately $59.8 million
at September 30, 2008 and $56.0 million at December 31, 2007. The Company recorded earnings from
its equity-method investment in BOG of approximately $2.8 million for the nine months ended
September 30, 2008. During the nine month period ended September 30, 2007, the Company recorded
approximately $2.5 million of losses from its equity-method investment in BOG. The Company has a
receivable from BOG of approximately $40,000 at September 30, 2008 and $1.9 million at December 31,
2007. The Company offset its general and administrative expenses by approximately $0 and $3.5
million for the reimbursements due from BOG for the nine months ended September 30, 2008 and 2007,
respectively. The Company also recorded revenue of approximately $0.7 million and $7.6 million
from BOG for the nine months ended September 30, 2008 and 2007, respectively. The Company recorded
a net increase in revenue and its investment in BOG of approximately $0.1 million for the nine
months ended September 30, 2008. For the nine months ended September 30, 2007, the Company
recorded a net reduction in revenue and its investment in BOG of approximately $0.9 million.
Also included in equity-method investments at September 30, 2008 and December 31, 2007 is
approximately a $0.8 million investment for a 50% ownership in a company that owns an airplane.
Earnings from the equity-method investment in this company were not material for the nine months
ended September 30, 2008 or 2007. The Company also received $0.2 million of cash distributions
from its equity-method investment in this company for the nine months ended September 30, 2008.
The Company recorded approximately $0.2 million in expense to lease the airplane (exclusive of
operating costs) from this company for the nine months ended September 30, 2008 and 2007.
12
(9) Debt
The Company has a $250 million bank revolving credit facility. Any amounts outstanding under the
revolving credit facility are due on June 14, 2011. At September 30, 2008, the Company had no
borrowings under the revolving credit facility, but it had approximately $25.6 million of letters
of credit outstanding, which reduce the Companys borrowing availability under this credit
facility. Amounts borrowed under the credit facility bear interest at a LIBOR rate plus margins
that depend on the Companys leverage ratio. Indebtedness under the credit facility is secured by
substantially all of the Companys assets, including the pledge of the stock of the Companys
principal subsidiaries. The credit facility contains customary events of default and requires that
the Company satisfy various financial covenants. It also limits the Companys ability to pay
dividends or make other distributions, make acquisitions, make changes to the Companys capital
structure, create liens or incur additional indebtedness. At September 30, 2008, the Company was
in compliance with all such covenants.
The Company has $15.4 million outstanding at September 30, 2008, in U.S. Government guaranteed
long-term financing under Title XI of the Merchant Marine Act of 1936, which is administered by the
Maritime Administration (MARAD), for two 245-foot class liftboats. The debt bears interest at
6.45% per annum and is payable in equal semi-annual installments of $405,000, on every June
3rd and December 3rd through the maturity date of June 3, 2027. The
Companys obligations are secured by mortgages on the two liftboats. In accordance with the
agreement, the Company is required to comply with certain covenants and restrictions, including the
maintenance of minimum net worth, working capital and debt-to-equity requirements. At September
30, 2008, the Company was in compliance with all such covenants.
The Company has $300 million of 6 7/8% unsecured senior notes due 2014. The indenture governing
the senior notes requires semi-annual interest payments on every June 1st and December
1st through the maturity date of June 1, 2014. The indenture contains certain covenants
that, among other things, limit the Company from incurring additional debt, repurchasing capital
stock, paying dividends or making other distributions, incurring liens, selling assets or entering
into certain mergers or acquisitions. At September 30, 2008, the Company was in compliance with
all such covenants.
The Company also has $400 million of 1.50% unsecured senior exchangeable notes due 2026. The
exchangeable notes bear interest at a rate of 1.50% per annum and decrease to 1.25% per annum on
December 15, 2011. Interest
on the exchangeable notes is payable semi-annually on December 15th and June
15th of each year through the maturity date of December 15, 2026. The exchangeable
notes do not contain any restrictive financial covenants.
Under certain circumstances, holders may exchange the notes for shares of the Companys common
stock. The initial exchange rate is 21.9414 shares of common stock per $1,000 principal amount of
notes. This is equal to an initial exchange price of $45.58 per share. The exchange price
represents a 35% premium over the closing share price at date of issuance. The notes may be
exchanged under the following circumstances:
|
|
|
during any fiscal quarter (and only during such fiscal quarter) commencing after March
31, 2007, if the last reported sale price of the Companys common stock is greater than or
equal to 135% of the applicable exchange price of the notes for at least 20 trading days in
the period of 30 consecutive trading days ending on the last trading day of the preceding
fiscal quarter; |
|
|
|
|
prior to December 15, 2011, during the five business-day period after any ten
consecutive trading-day period (the measurement period) in which the trading price of
$1,000 principal amount of notes for each trading day in the measurement period was less
than 95% of the product of the last reported sale price of the Companys common stock and
the exchange rate on such trading day; |
|
|
|
|
if the notes have been called for redemption; |
|
|
|
|
upon the occurrence of specified corporate transactions; or |
|
|
|
|
at any time beginning on September 15, 2026, and ending at the close of business on the
second business day immediately preceding the maturity date. |
In connection with the exchangeable note transaction, the Company simultaneously entered into
agreements with affiliates of the initial purchasers to purchase call options and sell warrants on
its common stock. The Company may exercise the call options it purchased at any time to acquire
approximately 8.8 million shares of its common
13
stock at a strike price of $45.58 per share. The
owners of the warrants may exercise the warrants to purchase from the Company approximately 8.8
million shares of the Companys common stock at a price of $59.42 per share, subject to certain
anti-dilution and other customary adjustments. The warrants may be settled in cash, in shares or
in a combination of cash and shares, at the Companys option. Lehman Brothers OTC Derivatives,
Inc. (LBOTC) is the counterparty to 50% of the Companys call option and warrant transactions. On
or about October 3, 2008, LBOTC filed for bankruptcy protection, which is an event of default under
the contracts relating to the call option and warrant transactions. The Company has not terminated
these contracts and continues to carefully monitor the developments affecting LBOTC. Although the
Company may not retain the benefit of the call option due to LBOTCs bankruptcy, the Company
does not expect that there will be a material impact, if any, on the
financial statements or the results of operations. The call option and warrant transactions
described above do not affect the terms of the outstanding exchangeable notes.
(10) Other Comprehensive Income
The following tables reconcile the change in accumulated other comprehensive income (loss) for the
three and nine months ended September 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Accumulated other comprehensive income (loss), June 30,
2008 and 2007, respectively |
|
$ |
(7,775 |
) |
|
$ |
12,746 |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
Hedging activities: |
|
|
|
|
|
|
|
|
Unrealized gain on equity-method investments hedging
activities, net of tax of $11,127 |
|
|
18,947 |
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(16,693 |
) |
|
|
3,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
2,254 |
|
|
|
3,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss), September 30,
2008 and 2007, respectively |
|
$ |
(5,521 |
) |
|
$ |
15,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Accumulated other comprehensive income, December 31,
2007 and 2006, respectively |
|
$ |
9,078 |
|
|
$ |
10,288 |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
Hedging activities: |
|
|
|
|
|
|
|
|
Unrealized gain on equity-method investments hedging
activities, net of tax of $332 |
|
|
564 |
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(15,163 |
) |
|
|
5,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(14,599 |
) |
|
|
5,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss), September 30,
2008 and 2007, respectively |
|
$ |
(5,521 |
) |
|
$ |
15,942 |
|
|
|
|
|
|
|
|
14
(11) Income Taxes
The Company adopted the provisions of FASB Interpretation No. 48 (FIN 48) on January 1, 2007. As a
result of the implementation, the Company recognized no material adjustment to the liability for
unrecognized income tax benefits that existed as of December 31, 2006.
It is the Companys policy to recognize interest and applicable penalties, if any, related to
uncertain tax positions in income tax expense.
The Company files income tax returns in the U.S. federal and various state and foreign
jurisdictions. The number of years that are open under applicable statute of limitations and
subject to audit varies depending on the tax jurisdiction. The Company remains subject to U.S.
federal tax examinations for years after 2003.
The Company had approximately $7.0 million of unrecorded tax benefits at September 30, 2008 and
December 31, 2007, all of which would impact the Companys effective tax rate if recognized. The
unrecorded tax benefits are not considered material to the Companys financial position.
(12) Commitments and Contingencies
From time to time, the Company is involved in litigation and other disputes arising out of
operations in the normal course of business. In managements opinion, the Company is not involved
in any litigation or disputes, the
outcome of which would have a material effect on the financial position, results of operations or
liquidity of the Company.
(13) Fair Value Measurements
Effective, January 1, 2008, the Company partially adopted Statement of Financial Accounting
Standards No. 157 (FAS No. 157), Fair Value Measurements, which refines the definition of fair
value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. The statement applies whenever
other statements require or permit assets or liabilities to be measured at fair value. In February
2008, the FASB issued FASB Staff Position No. 157-2 that provides for a one-year deferral for the
implementation of FAS No. 157 for non-financial assets and liabilities. FAS No. 157 does not
require any new fair value measurements, but rather, it provides enhanced guidance to other
pronouncements that require or permit assets or liabilities to be measured at fair value.
FAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs in which there is little or no market data (Level 3). Level 2 measurements
are inputs that are observable for assets or liabilities, either directly or indirectly, other than
quoted prices included within Level 1.
The following table provides a summary of the financial assets and liabilities measured at fair
value on a recurring basis at September 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|
|
|
|
|
Quoted Prices |
|
Significant |
|
|
|
|
|
|
|
|
in Active |
|
Other |
|
Significant |
|
|
|
|
|
|
Markets for |
|
Observable |
|
Unobservable |
|
|
September 30, |
|
Identical Assets |
|
Inputs |
|
Inputs |
|
|
2008 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Money market funds |
|
$ |
81,448 |
|
|
$ |
81,448 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified
deferred
compensation assets |
|
$ |
8,943 |
|
|
$ |
|
|
|
$ |
8,943 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified
deferred
compensation
liabilities |
|
$ |
9,446 |
|
|
$ |
|
|
|
$ |
9,446 |
|
|
$ |
|
|
15
The Company invests excess cash from its operating cash accounts in money market funds and reflects
these amounts within cash and cash equivalents on the condensed consolidated balance sheet at a net
value of 1:1 for each dollar invested. The Companys non-qualified deferred compensation plan
allows officers and highly compensated employees to defer receipt of a portion of their
compensation and contribute such amounts to one or more investment funds. The Company entered into
a separate trust agreement, subject to general creditors, to segregate the assets of the plan and
reports the accounts of the trust in its condensed consolidated financial statements. These
investments are reported at fair value based on third party broker statements which represent Level
2 in the FAS No. 157 fair value hierarchy. The realized and unrealized holding gains and losses
related to money market funds and non-qualified deferred compensation assets are recorded in
interest expense, net. The realized and unrealized holding gains and losses related to
non-qualified deferred compensation liabilities are recorded in general and administrative
expenses.
(14) Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board issued its Statement of Financial Accounting
Standards No. 162 (FAS No. 162), The Hierarchy of Generally Accepted Accounting Principles. FAS
No. 162 identifies the sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements. FAS No. 162 will be effective 60 days
following the Securities and Exchange Commissions approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles. The Company does not expect the adoption of FAS
No. 162 to have an impact on its results of operations and financial position.
In May 2008, the Financial Accounting Standards Board issued its Staff Position APB No. 14-1 (FSP
APB No. 14-1) Accounting for Convertible Debt Instruments That May Be Settled Upon Conversion
(Including Partial Cash Settlement). FSP APB No. 14-1 requires the proceeds from the issuance of
exchangeable debt instruments to be allocated between a liability component (issued at a discount)
and an equity component. The resulting debt discount will be amortized over the period the
convertible debt is expected to be outstanding as additional non-cash interest expense. The
provisions of FSP APB No. 14-1 are effective for fiscal years beginning after December 15, 2008 and
will require retrospective application. FSP APB No. 14-1 will change the accounting treatment for
the Companys 1.50% senior exchangeable notes and impact the Companys results of operations due to
an increase in non-cash interest expense beginning in 2009 for financial statements covering past
and future periods. The Company is currently evaluating the impact the adoption of FSP APB No.
14-1 will have on its results of operations and financial position.
In April 2008, the Financial Accounting Standards Board issued its Staff Position No. FAS 142-3
(FSP FAS No. 142-3), Determination of the Useful Life of Intangible Assets. FSP FAS No. 142-3
amends the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FAS No. 142, Goodwill and Other
Intangible Assets. The intent of the position is to improve the consistency between the useful
life of a recognized intangible asset under FAS No. 142 and the period of expected cash flows used
to measure the fair value of the asset under FAS No. 141(R) and other GAAP. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating
the impact, if any, that the adoption of FSP FAS No. 142-3 will have on its results of operations
and financial position.
In March 2008, the Financial Accounting Standards Board issued its Statement of Financial
Accounting Standards No. 161 (FAS No. 161), Disclosures about Derivative Instruments and Hedging
Activities. FAS No. 161 is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to better understand
their effects on an entitys financial position, financial performance, and cash flows. FAS No.
161 is effective for fiscal years beginning on or after November 15, 2008. The Company is
currently evaluating the impact, if any, that the adoption of FAS No. 161 will have on its results
of operations and financial position.
In December 2007, the Financial Accounting Standards Board issued its Statement of Financial
Accounting Standards No. 141(R) (FAS No. 141(R)), Business Combinations (as amended). FAS No.
141(R) requires an acquiring entity in a business combination to recognize all assets acquired and
liabilities assumed in the transaction
16
and any noncontrolling interest in the acquiree at the
acquisition date fair value. Additionally, contingent consideration and contractual contingencies
shall be measured at acquisition date fair value. FAS No. 141(R) also requires an acquirer to
disclose all of the information users may need to evaluate and understand the nature and financial
effect of the business combination. Such information includes, among other things, a description
of the factors comprising goodwill recognized in the transaction, the acquisition date fair value
of the consideration, including contingent consideration, amounts recognized at the acquisition
date for each major class of assets acquired and liabilities assumed, transactions not considered
to be part of the business combination (i.e., separate transactions), and acquisition-related
costs. FAS No. 141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008 (for any acquisitions closed on or after January 1, 2009 for the Company), and
early adoption is not permitted. FAS No. 141(R) will impact the accounting for business
combinations closed on or after January 1, 2009.
In December 2007, the Financial Accounting Standards Board issued its Statement of Financial
Accounting Standards No. 160 (FAS No. 160), Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51. FAS No. 160 amends ARB No. 51 to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation
of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the consolidated financial
statements. Additionally, this statement requires that consolidated net income include the amounts
attributable to both the parent and the noncontrolling interest. FAS No. 160 is effective for
fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the
impact, if any, that the adoption of FAS No. 160 will have on its results of operations and
financial position.
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking Statements
The following managements discussion and analysis of financial condition and results of operations
contains forward-looking statements which involve risks and uncertainties. All statements other
than statements of historical fact included in this section regarding our financial position and
liquidity, strategic alternatives, future capital needs, 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 its perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate under the circumstances. Such
forward-looking statements are subject to uncertainties that could cause our actual results to
differ materially from such statements. Such uncertainties include but are not limited to the
volatility and cyclicality of the oil and gas industry, including oil and gas prices and the level
of offshore exploration, production and development activity; changes in competitive factors
affecting our operations; risks associated with the acquisition of mature oil and gas properties,
including estimates of recoverable reserves, future oil and gas prices and potential environmental
and plugging and abandonment liabilities; the risks associated with our non-United States
operations, which expose us to additional political, economic and other uncertainties; risks of
adverse weather conditions in the Gulf of Mexico; risks of our growth strategy, including the risks
of rapid growth and the risks inherent in acquiring businesses and mature oil and gas properties;
our dependence on key personnel; our ability to employ and retain skilled workers; our dependence
on significant customers; risks of unforeseen costs not within our control related to terms of our
contracts; risks of material adjustments related to percentage-of-completion accounting for
contracts; operating hazards, including the significant possibility of accidents resulting in
personal injury, property damage or environmental damage; the effect on our performance of
regulatory programs and environmental matters and risks associated with international expansion,
including political and economic uncertainties. These and other uncertainties related to our
business are described in detail in our Annual Report on Form 10-K for the year ended December 31,
2007. 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. You are
cautioned not to place undue reliance on these forward-looking statements, which speak only as of
the date hereof. We undertake no obligation to update any of our forward-looking statements for
any reason.
Executive Summary
During the third quarter of 2008, revenue was $490.3 million, our highest quarterly revenue in
Company history. Income from operations was $140.5 million, net income was $99.9 million and
diluted earnings per share was $1.22. Included in the $23.2 million earnings from equity-method
investments in the third quarter of 2008 is $19.2 million of pre-tax earnings associated with
mark-to-market changes in the value of outstanding derivative contracts put in place by SPN
Resources.
The active hurricane season in the Gulf of Mexico, specifically Hurricanes Gustav and Ike,
significantly reduced our activity levels in that market during the month of September. We
estimate the overall impact from these hurricanes during the third quarter was a reduction in
diluted earnings per share of approximately $0.12 to $0.15.
Well intervention segment revenue was $319.8 million, an 8% increase over the second quarter of
2008, and income from operations was $90.3 million, a 16% increase over the second quarter of 2008.
The increases in revenue and income from operations are primarily due to increases in marine
engineering and project management services associated with work on a large-scale decommissioning
project announced early in the first quarter of 2008. Other factors driving the sequential
increases in revenue and income from operations were higher activity levels for several of our
production-related services, highlighted by coiled tubing, cased hole wireline, hydraulic workover
and snubbing and well control services. Income from operations as a percentage of revenue
increased to 28% from 26% in the most recent quarter due to utilization increases for many of our
services. This increase was partially offset by downtime in the Gulf of Mexico due to hurricanes.
In our rental tools segment, revenue was $136.6 million, a 1% increase compared to the second
quarter of 2008, and income from operations was $43.6 million, an 8% decrease from the second
quarter of 2008. Rentals of our
drill pipe and specialty tubulars, which carry high incremental profit margins, were lower in the
Gulf of Mexico and
18
adversely impacted this segments income from operations as a percentage of
revenue. The Gulf of Mexico was the only one of our three major geographic market areas to post a
decrease in revenue from the second quarter of 2008 for this segment of our business. Revenue in
domestic land markets increased 7% primarily due to an increase in rentals of accommodations and
stabilization equipment. Also, international revenue increased 1% due to an increase in drill pipe
rentals in South America.
In our marine segment, revenue was $33.9 million and income from operations was $6.5 million. This
represents a 30% increase in revenue and a 348% increase in income from operations as compared to
the most recent quarter. Our utilization increased to 81% from 57% in the second quarter of 2008,
which was the primary factor driving the revenue and income from operation increases. The average
dayrate decreased 16% from the second quarter of 2008 largely due to a decrease in dayrates for our
smaller liftboats (145-foot to 170-foot class) as well as the fact that standby rates were charged
at the end of August and in early September as a result of weather-related downtime. Standby rates
are typically 50% of our full dayrates.
Our results include $19.2 million of non-cash unrealized earnings and $19.9 million of non-cash
unrealized losses for the third and second quarter of 2008, respectively, associated with
mark-to-market changes in the value of outstanding hedging contracts put in place by SPN Resources.
Our equity investments performed as expected until late August, when hurricanes forced oil and gas
production to be shut-in. While approximately 50% of production was restored subsequent to the end
of the third quarter, restoration of full production is not expected until the end of the year.
The volatility in the global financial markets has led to increased uncertainty regarding the
outlook for the global economy. The heightened uncertainty and the possibility of a worldwide
decrease in hydrocarbon demand has led to declining commodity prices, which may negatively impact
our operations as these factors cause many oil and gas companies to curtail capital spending.
These events have contributed to a decline in our stock price and corresponding market
capitalization. Given the uncertainty in the macroeconomic environment, it is difficult to predict
to what extent these events will affect our overall activity level in 2009. Our balance sheet
remains healthy, and we have work that is not as sensitive to oil and gas prices including the
decommissioning project announced early this year and additional work resulting from damage caused
to the Gulf of Mexico energy infrastructure from this most recent hurricane season.
Comparison of the Results of Operations for the Three Months Ended September 30, 2008 and
2007
For the three months ended September 30, 2008, our revenues were $490.3 million, resulting in net
income of $99.9 million, or $1.22 diluted earnings per share. Included in the $23.2 million
earnings from equity-method investments is a $19.2 million pre-tax gain associated with
mark-to-market changes in the value of outstanding derivative contracts put in place by SPN
Resources. For the three months ended September 30, 2007, revenues were $398.9 million and net
income was $75.1 million, or $0.91 diluted earnings per share. Included in the results for the
three months ended September 30, 2007 was a $7.5 million pre-tax gain related to the sale of a
non-core rental business. Revenue for the three months ended September 30, 2008 was higher in the
well intervention and rental tools segments as a result of increased production-related activity
and drilling activities worldwide, recent acquisitions, work related to a large-scale
decommissioning project, and continued expansion of our rental tool business. Revenue increased
significantly in our marine segment due to higher utilization as a result of market conditions
resulting in more work in the Gulf of Mexico. No activity was recorded in our oil and gas segment
for the three months ended September 30, 2008 as we sold 75% of our interest in SPN Resources on
March 14, 2008.
19
The following table compares our operating results for the three months ended September 30, 2008
and 2007 (in thousands). Cost of services, rentals and sales excludes depreciation, depletion,
amortization and accretion for each of our four business segments. Oil and gas eliminations
represent products and services provided to the oil and gas segment by our three other segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
Cost of Services, Rentals and Sales |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
% |
|
2007 |
|
% |
|
Change |
|
|
|
|
|
Well Intervention |
|
$ |
319,798 |
|
|
$ |
202,807 |
|
|
$ |
116,991 |
|
|
$ |
168,903 |
|
|
|
53 |
% |
|
$ |
111,775 |
|
|
|
55 |
% |
|
$ |
57,128 |
|
Rental Tools |
|
|
136,600 |
|
|
|
118,918 |
|
|
|
17,682 |
|
|
|
46,422 |
|
|
|
34 |
% |
|
|
35,142 |
|
|
|
30 |
% |
|
|
11,280 |
|
Marine |
|
|
33,884 |
|
|
|
26,323 |
|
|
|
7,561 |
|
|
|
21,285 |
|
|
|
63 |
% |
|
|
13,586 |
|
|
|
52 |
% |
|
|
7,699 |
|
Oil and Gas |
|
|
|
|
|
|
51,696 |
|
|
|
(51,696 |
) |
|
|
|
|
|
|
|
|
|
|
18,954 |
|
|
|
37 |
% |
|
|
(18,954 |
) |
Less: Oil and Gas
Elim. |
|
|
|
|
|
|
(820 |
) |
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
(820 |
) |
|
|
|
|
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
490,282 |
|
|
$ |
398,924 |
|
|
$ |
91,358 |
|
|
$ |
236,610 |
|
|
|
48 |
% |
|
$ |
178,637 |
|
|
|
45 |
% |
|
$ |
57,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following provides a discussion of our results on a segment basis:
Well Intervention Segment
Revenue for our well intervention segment was $319.8 million for the three months ended September
30, 2008, as compared to $202.8 million for the same period in 2007. Cost of services decreased to
53% of segment revenue for the three months ended September 30, 2008 from 55% for the same period
in 2007. Our increase in revenue and profitability is primarily attributable to an increase in
engineering and project management services associated with a large scale decommissioning project.
We also saw an increase in our coiled tubing, electric line services and hydraulic workover and
snubbing services. Accordingly, our largest geographic revenue growth in this segment came from
the Gulf of Mexico, which increased 170% to approximately $196 million for the quarter ended
September 30, 2008 over the same period of 2007.
Rental Tools Segment
Revenue for our rental tools segment for the three months ended September 30, 2008 was $136.6
million, a 15% increase over the same period in 2007. Cost of rentals and sales percentage
increased slightly to 34% of segment revenue for the three months ended September 30, 2008 from 30%
for the same period of 2007. We experienced significant increases in revenue from rentals of our
stabilizers and on-site accommodation units. The increases are a result of expansion of rental
products through capital expenditures and increased activity in the Gulf of Mexico. Our Gulf of
Mexico revenue for the rental tools segment increased 41% to approximately $47 million for the
quarter ended September 30, 2008 over the same period of 2007.
Marine Segment
Our marine segment revenue for the three months ended September 30, 2008 increased 29% to $33.9
million over the same period in 2007. Our cost of services percentage increased by 11% for the
three months ended September 30, 2008 from the same period in 2007 primarily due to increased
liftboat maintenance costs and direct expenses. Due to the high fixed costs associated with this
segment, cost of services usually does not fluctuate proportionately with revenue. The fleets average utilization increased to approximately 81% for the third quarter
of 2008 from 62% in the same period in 2007. The fleets average dayrate decreased 17% to
approximately $13,700 in the third quarter of 2008 from $16,500 in the third quarter of 2007 in
spite of higher operating costs.
Oil and Gas Segment
On March 14, 2008, we sold 75% of our interest in SPN Resources for approximately $168.1 million.
SPN Resources represented substantially all of our operating oil and gas segment. Subsequent to
March 14, 2008, we have accounted for our remaining interest in SPN Resources using the
equity-method within the oil and gas segment. Additionally, we retained preferential rights on
certain service work and have a turnkey contract to
20
perform well abandonment and decommissioning
work associated with oil and gas properties owned and operated by SPN Resources on March 14, 2008.
Depreciation and Amortization
Depreciation and amortization decreased to $44.8 million in the three months ended September 30,
2008 from $49.9 million in the same period in 2007. Depreciation and amortization expense related
to our well intervention and rental segments for the three months ended September 30, 2008
increased approximately $10.9 million, or 35%, from the same period in 2007. The increase in
depreciation and amortization expense for these segments is primarily attributable to our 2008 and
2007 capital expenditures. Depreciation expense related to the marine segment for the three months
ended September 30, 2008 increased approximately $0.9 million, or 45%, from the same period in
2007. The increase in depreciation expense for the marine segment is primarily attributable to
increased utilization and the delivery of two new vessels. Due to the fact that we sold 75% of our
interest in SPN Resources on March 14, 2008 and subsequently accounted for our remaining interest
using the equity-method within the oil and gas segment, we did not record any depreciation,
depletion and accretion for our oil and gas segment for the three months ended September 30, 2008.
General and Administrative Expenses
General and administrative expenses increased to $68.4 million for the three months ended September
30, 2008 from $57.2 million for the same period in 2007. General and administrative expense
related to our well intervention and rental segments for the three months ended September 30, 2008
increased $13.0 million, or 25%, from the same period in 2007. The increase in general and
administrative expense is primarily related to increased expenses associated with our geographic
expansion, acquisitions, increased bonus and compensation expenses due to our improved performance
and additional infrastructure to enhance our growth. General and administrative expenses remained
constant at 14% of revenue for the three months ended September 30, 2008 compared to the same
period in 2007.
Comparison of the Results of Operations for the Nine Months Ended September 30, 2008 and
2007
For the nine months ended September 30, 2008, our revenues were $1,389.3 million, resulting in net
income of $275.9 million, or $3.36 diluted earnings per share. The results included a pre-tax gain
of $40.9 million from the sale of businesses. For the nine months ended September 30, 2007,
revenues were $1,158.6 million and net income was $209.2 million, or $2.53 diluted earnings per
share. The results included a pre-tax gain of $7.5 million from the sale of a non-core rental tool
business. Revenue was higher in the well intervention and rental tools segments as a result of
increased production-related activity and drilling activities worldwide, recent acquisitions, work
related to a large-scale decommissioning project, and continued expansion of our rental tool
business. Revenue decreased significantly in our marine segment due to lower utilization as a
result of market conditions resulting in less work in the Gulf of Mexico. Revenues and cost of
sales in our oil and gas segment were significantly lower as we sold 75% of our interest in SPN
Resources on March 14, 2008.
21
The following table compares our operating results for the nine months ended September 30, 2008 and
2007 (in thousands). Cost of services, rentals and sales excludes depreciation, depletion,
amortization and accretion for each of our four business segments. Oil and gas eliminations
represent products and services provided to the oil and gas segment by our three other segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
Cost of Services, Rentals and Sales |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
% |
|
2007 |
|
% |
|
Change |
|
|
|
|
|
Well Intervention |
|
$ |
850,804 |
|
|
$ |
570,280 |
|
|
$ |
280,524 |
|
|
$ |
462,783 |
|
|
|
54 |
% |
|
$ |
316,730 |
|
|
|
56 |
% |
|
$ |
146,053 |
|
Rental Tools |
|
|
401,700 |
|
|
|
358,834 |
|
|
|
42,866 |
|
|
|
131,857 |
|
|
|
33 |
% |
|
|
109,676 |
|
|
|
31 |
% |
|
|
22,181 |
|
Marine |
|
|
82,964 |
|
|
|
97,351 |
|
|
|
(14,387 |
) |
|
|
56,411 |
|
|
|
68 |
% |
|
|
43,432 |
|
|
|
45 |
% |
|
|
12,979 |
|
Oil and Gas |
|
|
55,072 |
|
|
|
136,889 |
|
|
|
(81,817 |
) |
|
|
12,986 |
|
|
|
24 |
% |
|
|
55,845 |
|
|
|
41 |
% |
|
|
(42,859 |
) |
Less: Oil and Gas
Elim. |
|
|
(1,212 |
) |
|
|
(4,753 |
) |
|
|
3,541 |
|
|
|
(1,212 |
) |
|
|
|
|
|
|
(4,753 |
) |
|
|
|
|
|
|
3,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,389,328 |
|
|
$ |
1,158,601 |
|
|
$ |
230,727 |
|
|
$ |
662,825 |
|
|
|
48 |
% |
|
$ |
520,930 |
|
|
|
45 |
% |
|
$ |
141,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following provides a discussion of our results on a segment basis:
Well Intervention Segment
Revenue for our well intervention segment was $850.8 million for the nine months ended September
30, 2008, as compared to $570.3 million for the same period in 2007. The cost of services and
sales percentage decreased to 54% for the nine months ended September 30, 2008 from 56% for the
same period of 2007. Our increase in revenue and profitability is primarily attributable to an
increase in engineering and project management services associated with a large-scale
decommissioning project. We also saw an increase in our coiled tubing services, electric line
services and hydraulic workover and snubbing services. Our Gulf of Mexico revenue for the well
intervention segment increased 103% to approximately $476 million for the nine months ended
September 30, 2008 over the same period of 2007.
Rental Tools Segment
Revenue for our rental tools segment for the nine months ended September 30, 2008 was $401.7
million, a 12% increase over the same period in 2007. Cost of rentals and sales percentage
increased slightly to 33% for the nine months ended September 30, 2008 from 31% for the same period
of 2007. We experienced significant increases in revenue from our stabilizers and on-site
accommodations. The increases are a result of expansion of rental products through capital
expenditures and increased activity worldwide. Our largest geographic revenue improvements were in
the Gulf of Mexico where revenue increased 24% to approximately $142 million for the nine months
ended September 30, 2008 over the same period of 2007.
Marine Segment
Our marine segment revenue for the nine months ended September 30, 2008 decreased 15% over the same
period in 2007 to $83.0 million. Conversely, cost of services increased by 30% for the nine months
ended September 30, 2008 from the same period in 2007 due to lower utilization, increased liftboat
maintenance costs and higher direct costs. The increase in maintenance cost is partially due to
the fact that we use periods of lower utilization as an opportunity to perform required maintenance
to our liftboat fleet. Additionally, cost of services usually does not fluctuate proportionately
with revenue due to the high fixed costs associated with this segment. The fleets average
utilization decreased to approximately 63% for the first nine months of 2008 from 71% in the same
period in 2007. The fleets average dayrate decreased 15% to approximately $15,100 for the first
nine months of 2008 from $17,700 in the same period of 2007 in spite of higher operating costs.
Oil and Gas Segment
During the nine months ended September 30, 2008, we sold 75% of our interest in SPN Resources for
approximately $168.1 million and recorded a pre-tax gain on sale of this business of approximately
$37.1 million. SPN Resources represented substantially all of our operating oil and gas segment.
Subsequent to the sale of our interest on March 14, 2008, we have accounted for our remaining
interest in SPN Resources using the equity-
22
method within the oil and gas segment. Additionally, we
retained preferential rights on certain service work and have a turnkey contract to perform well
abandonment and decommissioning work associated with oil and gas properties owned and operated by
SPN Resources on March 14, 2008.
Oil and gas revenues were $55.1 million in the two and one-half months ended March 14, 2008, as
compared to $136.9 million for the nine months ended September 30, 2007. For the two and one-half
months ended March 14, 2008, production was approximately 793,000 boe, as compared to approximately
2,480,000 boe for the nine months ended September 30, 2007. Cost of sales percentage decreased
significantly to 24% for the two and one-half months ended March 14, 2008 from 41% for nine months
ended September 30, 2007 due to an increase in commodity prices coupled with higher production.
Depreciation, Depletion, Amortization and Accretion
Depreciation, depletion, amortization and accretion decreased slightly to $128.7 million for the
nine months ended September 30, 2008 as compared to $134.0 million in the same period in 2007.
Depreciation and amortization expense related to our well intervention and rental segments for the
nine months ended September 30, 2008 increased $34.0 million, or 40%, from the same period in 2007.
The increase in depreciation and amortization expense for these segments is primarily attributable
to our 2008 and 2007 capital expenditures. Depreciation expense related to the marine segment for
the nine months ended September 30, 2008 increased approximately $1.0 million, or 15%, from the
same period in 2007. The increase in depreciation expense for the marine segment is primarily
attributable to the delivery of two new vessels. Depreciation, depletion and accretion for our oil
and gas segment decreased $40.2 million, or 93%, in the nine months ended September 30, 2008 as
compared to the same period in 2007. As a result of the sale of our 75% interest in SPN Resources
on March 14, 2008, we ceased the depreciation, depletion and accretion for this segment when these
assets were identified as available for sale in January 2008. Subsequent to the sale, we accounted
for our remaining interest using the equity-method within the oil and gas segment.
General and Administrative Expenses
General and administrative expenses increased to $204.4 million for the nine months ended September
30, 2008 from $161.8 million for the same period in 2007. General and administrative expense
related to our well intervention and rental segments for the nine months ended September 30, 2008
increased $40.2 million, or 27%, from the same period in 2007. The increase in general and
administrative expense is primarily related to increased expenses associated with our geographic
expansion, acquisitions, increased bonus and compensation expenses due to our improved performance
and additional infrastructure to enhance our growth. General and administrative expenses increased
slightly to 15% of revenue for the nine months ended September 30, 2008 from 14% for the same
period in 2007.
Liquidity and Capital Resources
The recent and unprecedented disruption in the current credit markets has had a significant adverse
impact on a number of financial institutions. At this point in time, our liquidity has not been
impacted by the current credit environment. We will continue to closely monitor our liquidity and
the overall health of the credit markets. However, we cannot predict with any certainty the impact
of any further disruption in the credit environment.
In the nine months ended September 30, 2008, we generated net cash from operating activities of
$306.5 million as compared to $385.1 million in the same period of 2007. Our primary liquidity
needs are for working capital, capital expenditures, debt service and acquisitions. Our primary
sources of liquidity are cash flows from operations and available borrowings under our revolving
credit facility. We had cash and cash equivalents of $128.2 million at September 30, 2008 compared
to $51.6 million at December 31, 2007.
We made $324.3 million of capital expenditures during the nine months ended September 30, 2008.
Approximately $145.9 million was used to expand and maintain our rental tool equipment inventory,
approximately $47.6 million was spent on our marine segment and approximately $107.9 million was
used to expand and maintain the asset base of our well intervention segment.
23
During the nine months ended September 30, 2008, we sold 75% of our interest in SPN Resources for
approximately $168.1 million. In connection with the disposition of our controlling interest in
SPN Resources, we retained performance guarantees related to SPN Resources decommissioning
liabilities. Additionally, we retained preferential rights on certain service work and entered
into a turnkey contract to perform well abandonment and decommissioning work associated with oil
and gas properties owned and operated by SPN Resources at the closing. The turnkey contract covers
only routine end of life well abandonment and pipeline and platform decommissioning for properties
owned and operated by SPN Resources at the date of closing and has a remaining fixed price of
approximately $147.4 million as of September 30, 2008. The turnkey contract consists of numerous,
separate billable jobs estimated to be performed between 2008 and 2022. During the nine months
ended September 30, 2008, we received $17.0 million from SPN Resources as a cash distribution.
In connection with the sale of assets of a non-core rental tool business in August 2007 and certain
conditions being met during the nine months ended September 30, 2008, we received approximately
$6.0 million of additional cash consideration, which resulted in an additional pre-tax gain on sale
of business of approximately $3.3 million.
In April 2008, we contracted to purchase a 50% interest in four 265-foot liftboats for
approximately $52 million with scheduled delivery dates through 2010. Through September 30, 2008,
we have spent approximately $36.2 million for our 50% interest in these liftboats.
We currently believe that we will spend approximately $130 to $140 million of capital expenditures,
excluding acquisitions, during the remaining three months of 2008. We believe that our current
working capital, cash generated from our operations and availability under our revolving credit
facility will provide sufficient funds for our identified capital projects.
For the nine months ended September 30, 2008, we repurchased and retired 1,770,000 shares of our
outstanding common stock at an average price of $36.27 per share, or approximately $64.2 million in
the aggregate, in connection with our $350 million share repurchase program that will expire on
December 31, 2009. In October 2008, we purchased an additional 1,947,000 shares of our outstanding
common stock at an average price of $20.33 per share, or approximately $39.6 million in the
aggregate.
We have a $250 million bank revolving credit facility. Any amounts outstanding under the revolving
credit facility are due on June 14, 2011. At September 30, 2008, we had no borrowings under the
bank credit facility, but we had approximately $25.6 million of letters of credit outstanding,
which reduces our borrowing capacity under this credit facility. Borrowings under the credit
facility bear interest at a LIBOR rate plus margins that depend on our leverage ratio. As of
November 3, 2008, we had no borrowings outstanding under this facility. Indebtedness under the
credit facility is secured by substantially all of our assets, including the pledge of the stock of
our principal subsidiaries. The credit facility contains customary events of default and requires
that we satisfy various financial
covenants. It also limits our ability to pay dividends or make other distributions, make
acquisitions, create liens or incur additional indebtedness.
We have $15.4 million outstanding at September 30, 2008 in U.S. Government guaranteed long-term
financing under Title XI of the Merchant Marine Act of 1936, which is administered by the Maritime
Administration (MARAD), for two 245-foot class liftboats. This debt bears an interest rate of
6.45% per annum and is payable in equal semi-annual installments of $405,000 on every June
3rd and December 3rd through the maturity date of June 3, 2027. Our
obligations are secured by mortgages on the two liftboats. This MARAD financing also requires that
we comply with certain covenants and restrictions, including the maintenance of minimum net worth,
working capital and debt-to-equity requirements.
We have $300 million of 6 7/8% unsecured senior notes due 2014. The indenture governing the senior
notes requires semi-annual interest payments on every June 1st and December
1st through the maturity date of June 1, 2014. The indenture contains certain covenants
that, among other things, limit us from incurring additional debt, repurchasing capital stock,
paying dividends or making other distributions, incurring liens, selling assets or entering into
certain mergers or acquisitions.
We also have $400 million of 1.50% senior exchangeable notes due 2026. The exchangeable notes bear
interest at a rate of 1.50% per annum and decrease to 1.25% per annum on December 15, 2011.
Interest on the exchangeable
24
notes is payable semi-annually in arrears on December 15th
and June 15th of each year, beginning June 15, 2007. The exchangeable notes do not
contain any restrictive financial covenants.
Under certain circumstances, holders may exchange the notes for shares of our common stock. The
initial exchange rate is 21.9414 shares of common stock per $1,000 principal amount of notes. This
is equal to an initial exchange price of $45.58 per share. The exchange price represents a 35%
premium over the closing share price at the date of issuance. The notes may be exchanged under the
following circumstances:
|
|
|
during any fiscal quarter (and only during such fiscal quarter) commencing after March
31, 2007, if the last reported sale price of our common stock is greater than or equal to
135% of the applicable exchange price of the notes for at least 20 trading days in the
period of 30 consecutive trading days ending on the last trading day of the preceding
fiscal quarter; |
|
|
|
|
prior to December 15, 2011, during the five business-day period after any ten
consecutive trading-day period (the measurement period) in which the trading price of
$1,000 principal amount of notes for each trading day in the measurement period was less
than 95% of the product of the last reported sale price of our common stock and the
exchange rate on such trading day; |
|
|
|
|
if the notes have been called for redemption; |
|
|
|
|
upon the occurrence of specified corporate transactions; or |
|
|
|
|
at any time beginning on September 15, 2026, and ending at the close of business on the
second business day immediately preceding the maturity date of December 15, 2026. |
In connection with the issuance of the exchangeable notes, we entered into agreements with
affiliates of the initial purchasers to purchase call options and sell warrants on our common
stock. We may exercise the call options we purchased at any time to acquire approximately 8.8
million shares of our common stock at a strike price of $45.58 per share. The owners of the
warrants may exercise the warrants to purchase from us approximately 8.8 million shares of our
common stock at a price of $59.42 per share, subject to certain anti-dilution and other customary
adjustments. The warrants may be settled in cash, in shares or in a combination of cash and
shares, at our option. These transactions may potentially reduce the dilution of our common stock
from the exchange of the notes by increasing the effective exchange price to $59.42 per share.
Lehman Brothers OTC Derivatives, Inc. (LBOTC) is the counterparty to 50% of our call option and
warrant transactions. On or about October 3, 2008, LBOTC filed for bankruptcy protection, which is
an event of default under the contracts relating to the call option and warrant transactions. We
have not terminated these contracts and continue to carefully monitor the developments affecting
LBOTC. Although we may not retain the benefit of the call option due to LBOTCs bankruptcy, we
do not expect that there will be a material impact, if any, on the
financial statements or the results of operations.
The call option and warrant transactions described above do not affect the terms of
the outstanding exchangeable notes.
The following table summarizes our contractual cash obligations and commercial commitments at
September 30, 2008 (amounts in thousands) for our long-term debt (including estimated interest
payments), operating leases and contractual obligations. We do not have any other material
obligations or commitments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
Thereafter |
|
Long-term debt, including
estimated interest
payments |
|
$ |
14,214 |
|
|
$ |
28,388 |
|
|
$ |
28,336 |
|
|
$ |
27,783 |
|
|
$ |
27,231 |
|
|
$ |
27,179 |
|
|
$ |
791,168 |
|
Operating leases |
|
|
2,792 |
|
|
|
12,140 |
|
|
|
8,735 |
|
|
|
5,610 |
|
|
|
3,613 |
|
|
|
1,991 |
|
|
|
16,941 |
|
Vessel construction |
|
|
52,103 |
|
|
|
14,535 |
|
|
|
545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
69,109 |
|
|
$ |
55,063 |
|
|
$ |
37,616 |
|
|
$ |
33,393 |
|
|
$ |
30,844 |
|
|
$ |
29,170 |
|
|
$ |
808,109 |
|
|
|
|
We have no other off-balance sheet arrangements other than operating leases, performance guarantees
related to SPN Resources decommissioning liabilities (see note 5 of financial statements), and the
potential additional consideration that may be payable as a result of the future operating
performances of several acquisitions.
25
At September 30, 2008, the maximum additional consideration
payable for these acquisitions was approximately $28.8 million. We do not have any other financing
arrangements that are required under generally accepted accounting principles to be reflected in
our financial statements.
We intend to continue implementing our growth strategy of increasing our scope of services through
both internal growth and strategic acquisitions. We expect to continue to make the capital
expenditures required to implement our growth strategy in amounts consistent with the amount of
cash generated from operating activities, the availability of additional financing and our credit
facility. Depending on the size of any future acquisitions, we may require additional equity or
debt financing in excess of our current working capital and amounts available under our revolving
credit facility.
New Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board issued its Statement of Financial Accounting
Standards No. 162 (FAS No. 162), The Hierarchy of Generally Accepted Accounting Principles. FAS
No. 162 identifies the sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements. FAS No. 162 will be effective 60 days
following the Securities and Exchange Commissions approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles. We do not expect the adoption of FAS No. 162 to
have an impact on our results of operations and financial position.
In May 2008, the Financial Accounting Standards Board issued its Staff Position APB No. 14-1 (FSP
ABP No. 14-1) Accounting for Convertible Debt Instruments That May Be Settled Upon Conversion
(Including Partial Cash Settlement). FSP ABP No. 14-1 requires the proceeds from the issuance of
exchangeable debt instruments to be allocated between a liability component (issued at a discount)
and an equity component. The resulting debt discount will be amortized over the period the
convertible debt is expected to be outstanding as additional non-cash interest expense. The
provisions of FSP ABP No. 14-1 are effective for fiscal years beginning after December 15, 2008 and
will require retrospective application. FSP ABP No. 14-1 will change the accounting treatment for
our 1.50% senior exchangeable notes and impact our results of operations due to an increase in
non-cash interest
expense beginning in 2009 for financial statements covering past and future periods. We are
currently evaluating the impact the adoption of FSP ABP No. 14-1 will have on our results of
operations and financial position.
In April 2008, the Financial Accounting Standards Board issued its Staff Position No. FAS 142-3
(FSP FAS No. 142-3), Determination of the Useful Life of Intangible Assets. FSP FAS No. 142-3
amends the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FAS No. 142, Goodwill and Other
Intangible Assets. The intent of the position is to improve the consistency between the useful
life of a recognized intangible asset under FAS No. 142 and the period of expected cash flows used
to measure the fair value of the asset under FAS No. 141(R) and other GAAP. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008. We are currently evaluating the
impact, if any, that the adoption of FSP FAS No. 142-3 will have on our results of operations and
financial position.
In March 2008, the Financial Accounting Standards Board issued its Statement of Financial
Accounting Standards No. 161 (FAS No. 161), Disclosures about Derivative Instruments and Hedging
Activities. FAS No. 161 is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to better understand
their effects on an entitys financial position, financial performance, and cash flows. FAS No. 161
is effective for fiscal years beginning on or after November 15, 2008. We are currently evaluating
the impact, if any, that the adoption of FAS No. 161 will have on our results of operations and
financial position.
In December 2007, the Financial Accounting Standards Board issued its Statement of Financial
Accounting Standards No. 141(R) (FAS No. 141(R)), Business Combinations (as amended). FAS No.
141(R) requires an acquiring entity in a business combination to recognize all assets acquired and
liabilities assumed in the transaction and any noncontrolling interest in the acquiree at the
acquisition date fair value. Additionally, contingent consideration and contractual contingencies
shall be measured at acquisition date fair value. FAS No. 141(R) also requires an acquirer to
disclose all of the information users may need to evaluate and understand the nature and financial
effect of the business combination. Such information includes, among other things, a description
of the
26
factors comprising goodwill recognized in the transaction, the acquisition date fair value
of the consideration, including contingent consideration, amounts recognized at the acquisition
date for each major class of assets acquired and liabilities assumed, transactions not considered
to be part of the business combination (i.e., separate transactions), and acquisition-related
costs. FAS No. 141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008 (for any acquisitions closed on or after January 1, 2009), and early adoption is
not permitted. FAS No. 141(R) will impact the accounting for acquisitions closed on or after
January 1, 2009.
In December 2007, the Financial Accounting Standards Board issued its Statement of Financial
Accounting Standards No. 160 (FAS No. 160), Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51. FAS No. 160 amends ARB No. 51 to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation
of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the consolidated financial
statements. Additionally, this statement requires that consolidated net income include the amounts
attributable to both the parent and the noncontrolling interest. FAS No. 160 is effective for
fiscal years beginning on or after December 15, 2008. We are currently evaluating the impact that
FAS No. 160 will have on our results of operations and financial position.
27
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Rates
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 our operations in the United Kingdom, Germany and the Netherlands, is the
U.S. dollar, but a portion of the revenues from our foreign operations is paid in foreign
currencies. The effects of foreign currency fluctuations are partly mitigated because local
expenses of such foreign 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. Any gains or losses associated with such fluctuations have not been material.
We do not hold derivatives for trading purposes or use derivatives with complex features. Assets
and liabilities of our subsidiaries in the United Kingdom, Germany and the Netherlands are
translated at current exchange rates, while income and expense are translated at average rates for
the period. Translation gains and losses are reported as the foreign currency translation
component of accumulated other comprehensive income (loss) in stockholders equity.
When we believe prudent, we enter into forward foreign exchange contracts to hedge the impact of
foreign currency fluctuations. The forward foreign exchange contracts we enter into generally have
maturities ranging from one to six months. We do not enter into forward foreign exchange contracts
for trading purposes. At September 30, 2008, we had entered into foreign currency forward
contracts to hedge exposure to currency fluctuations between the British Sterling Pound and the
Euro. These contracts are not designated as hedges, for hedge accounting, and are marked to market
each period. Based on the exchange rates as of September 30, 2008, we recorded an immaterial loss
to adjust these foreign contracts to their fair market value. The counterparties to the forward
contracts are major financial institutions. In the event that the counterparties fail to meet the
terms of the forward contract, our exposure is limited to the foreign currency rate differential.
Interest Rate Risk
At September 30, 2008, none of our long-term debt outstanding had variable interest rates, and we
had no interest rate risk at that time.
Equity Price Risk
We have $400 million of 1.50% senior exchangeable notes due 2026. The notes are, subject to the
occurrence of specified conditions, exchangeable for our common stock initially at an exchange
price of $45.58 per share, which would result in an aggregate of approximately 8.8 million shares
of common stock being issued upon exchange. We may redeem for cash all or any part of the notes on
or after December 15, 2011 for 100% of the principal amount redeemed. The holders may require us
to repurchase for cash all or any portion of the notes on December 15, 2011, December 15, 2016 and
December 15, 2021 for 100% of the principal amount of notes to be purchased plus any accrued and
unpaid interest. The notes do not contain any restrictive financial covenants.
Each $1,000 of principal amount of the notes is initially exchangeable into 21.9414 shares of our
common stock, subject to adjustment upon the occurrence of specified events. Holders of the notes
may exchange their notes prior to maturity only if (1) the price of our common stock reaches 135%
of the applicable exchange rate during certain periods of time specified in the notes; (2)
specified corporate transactions occur; (3) the notes have been called for redemption; or (4) the
trading price of the notes falls below a certain threshold. In addition, in the event of a
fundamental change in our corporate ownership or structure, the holders may require us to
repurchase all or any portion of the notes for 100% of the principal amount.
We also have agreements with affiliates of the initial purchasers to purchase call options and sell
warrants of our common stock. We may exercise the call options at any time to acquire
approximately 8.8 million shares of our common stock at a strike price of $45.58 per share. The
owners of the warrants may exercise their warrants to
purchase from us approximately 8.8 million shares of our common stock at a price of $59.42 per
share, subject to certain anti-dilution and other customary adjustments. The warrants may be
settled in cash, in shares or in a
28
combination of cash and shares, at our option. Lehman Brothers
OTC Derivatives, Inc. (LBOTC) is the counterparty to 50% of our call option and warrant
transactions. On or about October 3, 2008, LBOTC filed for bankruptcy protection, which is an
event of default under the contracts relating to the call option and warrant transactions. We have
not terminated these contracts and continue to carefully monitor the developments affecting LBOTC.
Although we may not retain the benefit of the call option due to LBOTCs bankruptcy, we
do not expect that there will be a material impact, if any, on the
financial statements or the results of operations.
The call option and warrant transactions described above do
not affect the terms of the outstanding exchangeable notes.
For additional discussion of the notes, see Managements Discussion and Analysis of Financial
Condition and Results of OperationsLiquidity and Capital Resources in Part I, Item 2 above.
Commodity Price Risk
Our revenues, profitability and future rate of growth partially depend upon the market prices of
oil and natural gas. Lower prices may also reduce the amount of oil and gas that can economically
be produced.
Item 4. Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, our Chief Financial
Officer and Chief Executive Officer have concluded, based on their evaluation, that our disclosure
controls and procedures (as defined in rule 13a-15(e) promulgated under the Securities Exchange Act
of 1934, as amended) 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 SECs rules and forms.
There has been no change in our internal control over financial reporting that occurred during the
three months ended September 30, 2008, that has materially affected, or is reasonably likely to
materially affect our internal controls over financial reporting.
29
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about our common stock repurchased and retired during the
three month period ended September 30, 2008 in connection with our $350 million share repurchase
program, announced September 18, 2007, that will expire on December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Dollar Value of |
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Shares that May |
|
|
|
Total Number of |
|
|
|
|
|
|
Purchased as |
|
|
Yet be |
|
|
|
Shares |
|
|
Average Price |
|
|
Part of Publicly |
|
|
Purchased |
|
Period |
|
Purchased |
|
|
Paid per Share |
|
|
Announced Plan |
|
|
Under the Plan |
|
July 1 - 31, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
307,400,000 |
|
August 1 - 31, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
307,400,000 |
|
September 1 - 30, 2008 |
|
|
1,520,000 |
|
|
$ |
36.45 |
|
|
|
1,520,000 |
|
|
$ |
252,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
2008 through September 30, 2008 |
|
|
1,770,000 |
|
|
$ |
36.27 |
|
|
|
1,770,000 |
|
|
$ |
252,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 6. Exhibits
|
(a) |
|
The following exhibits are filed with this Form 10-Q: |
|
|
|
|
|
3.1
|
|
Certificate of Incorporation of the Company (incorporated herein by reference to the
Companys Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996). |
|
|
|
|
|
3.2
|
|
Certificate of Amendment to the Companys Certificate of Incorporation (incorporated
herein by reference to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999). |
|
|
|
|
|
3.3
|
|
Amended and Restated Bylaws of the Company (incorporated herein by reference to
Exhibit 3.1 to the Companys Form 8-K filed on September 12, 2007). |
|
|
|
|
|
31.1
|
|
Officers certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
31.2
|
|
Officers certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.1
|
|
Officers certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.2
|
|
Officers certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
SUPERIOR ENERGY SERVICES, INC.
|
|
Date: November 7, 2008 |
By: |
/s/ Robert S. Taylor
|
|
|
|
Robert S. Taylor |
|
|
|
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
31
EXHIBIT INDEX
|
|
|
|
|
Exhibit
Number |
|
Description |
|
3.1
|
|
Certificate of Incorporation of the Company (incorporated herein by reference to the
Companys Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996). |
|
|
|
|
|
3.2
|
|
Certificate of Amendment to the Companys Certificate of Incorporation (incorporated
herein by reference to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999). |
|
|
|
|
|
3.3
|
|
Amended and Restated Bylaws of the Company (incorporated herein by reference to
Exhibit 3.1 to the Companys Form 8-K filed on September 12, 2007). |
|
|
|
|
|
31.1
|
|
Officers certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
31.2
|
|
Officers certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.1
|
|
Officers certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.2
|
|
Officers certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
exv31w1
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Terence E. Hall, Chairman of the Board and Chief Executive Officer of Superior Energy
Services, Inc., certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of Superior Energy Services, Inc.; |
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
4. |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this report is being prepared; |
|
|
b) |
|
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles; |
|
|
c) |
|
Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and |
|
|
d) |
|
Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and |
5. |
|
The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of registrants board of directors (or persons performing the equivalent
functions): |
|
a) |
|
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and |
|
|
b) |
|
Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting. |
Date: November 7, 2008
|
|
|
|
|
|
|
|
|
/s/ Terence E. Hall
|
|
|
Terence E. Hall |
|
|
Chairman of the Board and Chief Executive
Officer
Superior Energy Services, Inc. |
|
exv31w2
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Robert S. Taylor, Executive Vice President, Treasurer and Chief Financial Officer of
Superior Energy Services, Inc., certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of Superior Energy Services, Inc.; |
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
4. |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this report is being prepared; |
|
|
b) |
|
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles; |
|
|
c) |
|
Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and |
|
|
d) |
|
Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and |
5. |
|
The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of registrants board of directors (or persons performing the equivalent
functions): |
|
a) |
|
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and |
|
|
b) |
|
Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting. |
Date: November 7, 2008
|
|
|
|
|
|
|
|
|
/s/ Robert S. Taylor
|
|
|
Robert S. Taylor |
|
|
Executive Vice President, Treasurer and Chief
Financial Officer
Superior Energy Services, Inc. |
|
exv32w1
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 1350 OF TITLE 18 OF THE U.S. CODE
I, Terence E. Hall, Chairman of the Board and Chief Executive Officer of Superior Energy Services,
Inc. (the Company), certify, pursuant to Section 1350 of Title 18 of the U.S. Code, adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 906), that:
1. |
|
the quarterly report on Form 10-Q of the Company for the quarter ended September 30, 2008
(the Report), as filed with the Securities and Exchange Commission on the date hereof, fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and |
|
2. |
|
the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
This certificate is being furnished solely for purposes of Section 906 and is not being filed as
part of the Report or as a separate disclosure document.
Date: November 7, 2008
|
|
|
|
|
|
|
|
|
/s/ Terence E. Hall
|
|
|
Terence E. Hall |
|
|
Chairman of the Board and Chief Executive
Officer
Superior Energy Services, Inc. |
|
|
A signed original of this written statement required by Section 906 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission
or its staff upon request.
exv32w2
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
SECTION 1350 OF TITLE 18 OF THE U.S. CODE
I, Robert S. Taylor, Executive Vice President, Treasurer and Chief Financial Officer of Superior
Energy Services, Inc. (the Company), certify, pursuant to Section 1350 of Title 18 of the U.S.
Code, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 906), that:
1. |
|
the quarterly report on Form 10-Q of the Company for the quarterly period ended September 30,
2008 (the Report), as filed with the Securities and Exchange Commission on the date hereof,
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and |
|
2. |
|
the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
This certificate is being furnished solely for purposes of Section 906 and is not being filed as
part of the Report or as a separate disclosure document.
Date: November 7, 2008
|
|
|
|
|
|
|
|
|
/s/ Robert S. Taylor
|
|
|
Robert S. Taylor |
|
|
Executive Vice President, Treasurer and Chief
Financial Officer
Superior Energy Services, Inc. |
|
|
A signed original of this written statement required by Section 906 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission
or its staff upon request.