UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2019



or



☐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)







Registrant’s telephone number, including area code: (713) 654-2200



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  ☒  No ☐



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.





If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐  No ☒ 



The number of shares of the registrant’s common stock outstanding on April 19, 2019 was 155,956,938.



 

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SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q for

the Quarterly Period Ended March 31, 2019



TABLE OF CONTENTS



 



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PART I.  FINANCIAL INFORMATION



Item 1. Condensed Consolidated Financial Statements and Notes















 







 





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SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Three Months Ended March 31, 2019



(1)Basis of Presentation



Certain information and footnote disclosures normally in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC); however, management believes the disclosures that are made are adequate to make the information presented not misleading.  These financial statements and notes 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, 2018, and Management’s Discussion and Analysis of Financial Condition and Results of Operations herein.



The financial information of Superior Energy Services, Inc. and its subsidiaries (the Company) for the three months ended March 31, 2019 and 2018 has not been audited.  However, in the opinion of management, all adjustments necessary to present fairly the results of operations for the periods presented have been included therein.  The results of operations for the first three months of the year are not necessarily indicative of the results of operations that might be expected for the entire year. 



Due to the nature of the Company’s business, the Company is involved, from time to time, in routine litigation or subject to disputes or claims regarding its business activities. Legal costs related to these matters are expensed as incurred.  In management’s opinion, none of the pending litigation, disputes or claims is expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.



The Company evaluates events that occur after the balance sheet date but before the financial statements are issued for potential recognition or disclosure.  Based on the evaluation, the Company determined that there were no material subsequent events for recognition or disclosure.

 



(2)Revenue



Revenue Recognition



Revenues are recognized when performance obligations are satisfied in accordance with contractual terms, in an amount that reflects the consideration the Company expects to be entitled to in exchange for services rendered or rentals provided.  Taxes collected from customers and remitted to governmental authorities and revenues are reported on a net basis in the Company’s financial statements.



Performance Obligations



A performance obligation arises under contracts with customers to render services or provide rentals, and is the unit of account under Topic 606.  The Company accounts for services rendered and rentals provided separately if they are distinct and the service or rental is separately identifiable from other items provided to a customer and if a customer can benefit from the services rendered or rentals provided on its own or with other resources that are readily available to the customer.  A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.  A contract’s standalone selling prices are determined based on the prices that the Company charges for its services rendered and rentals provided.  The majority of the Company’s performance obligations are satisfied over time, which is generally represented by a period of 30 days or less.  The Company’s payment terms vary by the type of products or services offered.  The term between invoicing and when the payment is due is typically 30 days.



Services revenue primarily represents amounts charged to customers for the completion of services rendered, including labor, products and supplies necessary to perform the service.  Rates for these services vary depending on the type of services provided and can be based on a per job, per hour or per day basis.



Rentals revenue is, primarily priced on a per day, per man hour or similar basis and consists of fees charged to customers for use of the Company’s rental equipment over the term of the rental period, which is generally less than twelve months.



The Company expenses sales commissions when incurred because the amortization period would have been one year or less.



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Disaggregation of revenue



The following table presents the Company’s revenues by segment disaggregated by geography (in thousands):









The following table presents the Company’s revenues by segment disaggregated by type (in thousands):







Impact of adoption of Accounting Standards Update (ASU) 2016-02, Leases (Topic 842)



Services revenue:



In connection with adoption of Topic 842, the Company determined that certain of its services revenue contracts contain a lease component.  The Company elected to adopt a practical expedient available to lessors, which allows the Company to combine the lease and non-lease components and account for the combined component in accordance with the accounting treatment for the predominant

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component.  Therefore, the Company combined the lease and service components for certain of the Company’s service contracts and continues to account for the combined component under Topic 606, Revenue from Contracts with Customers.



Rentals revenue:



The Company determined that its rentals revenue contracts represent short-term operating leases.  Therefore, the adoption of the ASU 2016-02 did not result in any changes in the timing or method of revenue recognition for the Company’s rental revenues.

   



(3)Inventory



Inventories are stated at the lower of cost or net realizable value.  The Company applies net realizable value and obsolescence to the gross value of the inventory.  Cost is determined using the first-in, first-out or weighted-average cost methods for finished goods and work-in-process.  Supplies and consumables primarily consist of products used in our services provided to customers.  The components of the inventory balances are as follows (in thousands):



 



(4)Notes Receivable



Notes receivable consist of a commitment from the seller of an oil and gas property acquired by the Company related to costs associated with the abandonment of the acquired property.  Pursuant to an agreement with the seller, the Company will invoice the seller an agreed upon amount at the completion of certain decommissioning activities.  The gross amount of this obligation totals $115.0 million and is recorded at present value using an effective interest rate of 6.58%.  The related discount is amortized to interest income based on the expected timing of completion of the decommissioning activities.  The Company recorded interest income related to notes receivable of $1.0 million for each of the three months ended March 31, 2019 and 2018.

 



(5)Debt



The Company’s outstanding debt is as follows (in thousands):





Credit Facility



The Company has an asset-based revolving credit facility which matures in October 2022.  The borrowing base under the credit facility is calculated based on a formula referencing the borrower’s and the subsidiary guarantors’ eligible accounts receivable, eligible inventory and eligible premium rental drill pipe less reserves.  Availability under the credit facility is the lesser of (i) the commitments, (ii) the borrowing base and (iii) the highest principal amount permitted to be secured under the indenture governing the 7 1/8% senior unsecured notes due 2021.  At March 31, 2019, the borrowing base was $240.8 million and the Company had $73.2 million of letters of credit outstanding that reduced its borrowing availability under the revolving credit facility.  The credit agreement contains various covenants, including, but not limited to, limitations on the incurrence of indebtedness, permitted investments, liens on assets, making distributions, transactions with affiliates, merger, consolidations, dispositions of assets and other provisions customary in similar types of agreements.

   

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Senior Unsecured Notes



The Company has outstanding $500 million of 7 3/4% senior unsecured notes due September 2024.  The indenture governing the 7 3/4% senior unsecured notes due 2024 requires semi-annual interest payments on March 15 and September 15 of each year through the maturity date of September 15, 2024.



The Company also has outstanding $800 million of 7 1/8% senior unsecured notes due December 2021.  The indenture governing the 7 1/8% senior unsecured notes due 2021 requires semi-annual interest payments on June 15 and December 15 of each year through the maturity date of December 15, 2021. 

 









(6)Decommissioning Liabilities



The Company’s decommissioning liabilities associated with an oil and gas property and its related assets include liabilities related to the plugging of wells, removal of the related platform and equipment, and site restoration.  The Company reviews the adequacy of its decommissioning liabilities whenever indicators suggest that the estimated cash flows and/or relating timing needed to satisfy the liability have changed materially.  The Company had decommissioning liabilities of $131.6 million and $130.1 million at March 31, 2019 and December 31, 2018, respectively.





(7)  Leases



Adoption of ASU 2016-02, Leases



The Company adopted the new standard on January 1, 2019 and used the effective date as the date of initial application.  Therefore, prior period financial information has not been adjusted and continues to be reflected in accordance with the Company’s historical accounting policy.  The standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months.



The standard provides a number of optional practical expedients in transition.  The Company elected the “package of practical expedients,” which, among other things, allows the Company to carry forward its historical lease classification.



The adoption of this standard resulted in the recording of operating lease assets and operating lease liabilities of approximately $100.0 million as of January 1, 2019, with no related impact on the Company’s condensed consolidated statement of equity or condensed consolidated statement of operations.  Short-term leases have not been recorded on the balance sheet.



Accounting Policy for Leases



The Company determines if an arrangement is a lease at inception.  All of the Company’s leases are operating leases and are included in ROU assets, accounts payable and operating lease liabilities in the condensed consolidated balance sheet.



ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligations to make lease payments arising from the lease.  Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.  The Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.  The Company’s lease terms may include options to extend or terminate the lease.



Overview



The Company’s operating leases are primarily for real estate, machinery and equipment, and vehicles.  The terms and conditions for these leases vary by the type of underlying asset.  Total operating lease expense was $15.7 million and $13.5 million for the three months ended March 31, 2019 and 2018, respectively.  For the three months ended March 31, 2019, a portion of the total operating lease expense relating to short-term leases was $5.4 million.























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Supplemental Balance Sheet Information

 

Operating leases at March 31, 2019 were as follows (in thousands):









Maturities of operating lease liabilities at March 31, 2019 are as follows (in thousands):







At December 31, 2018, future minimum lease payments under long-term leases for the five years ending December 31, 2019 through 2023 and thereafter are as follows:  $30.8 million, $24.3 million, $16.6 million, $9.8 million and $6.9 million and $37.8 million, respectively.





(8)  Fair Value Measurements



Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Inputs used in determining fair value are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable.  The three input levels of the fair value hierarchy are as follows.  



Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.



Level 2: Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical assets or liabilities in inactive markets; or model-derived valuations or other inputs that can be corroborated by observable market data.



Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.



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The following tables provide a summary of the financial assets and liabilities measured at fair value on a recurring basis (in thousands):



The Company’s non-qualified deferred compensation plans allow officers, certain highly compensated employees and non-employee directors to defer receipt of a portion of their compensation and contribute such amounts to one or more hypothetical investment funds.  These investments are reported at fair value based on unadjusted quoted prices in active markets for identifiable assets and observable inputs for similar assets and liabilities, which represent Levels 1 and 2, respectively, in the fair value hierarchy. 



The carrying amount of cash equivalents, accounts receivable, accounts payable and accrued expenses, as reflected in the condensed consolidated balance sheets, approximates fair value due to the short maturities.  The fair value of the debt instruments is determined by reference to the market value of the instrument as quoted in an over-the-counter market.



(9)  Segment Information



Business Segments



The Drilling Products and Services segment rents and sells premium drill pipe, bottom hole assemblies, tubulars and specialized equipment for use with onshore and offshore oil and gas well drilling, completion, production and workover activities.  It also provides on-site accommodations and machining services.  The Onshore Completion and Workover Services segment provides pressure pumping services used to complete and stimulate production in new oil and gas wells, fluid handling services and well servicing rigs that provide a variety of well completion, workover and maintenance services.  The Production Services segment provides intervention services such as coiled tubing, cased hole and mechanical wireline, hydraulic workover and snubbing, production testing and optimization, and remedial pumping services.  The Technical Solutions segment provides services typically requiring specialized engineering, manufacturing or project planning, including well containment systems, stimulation and sand control services, well plug and abandonment services and the production and sale of oil and gas. 



The Company evaluates the performance of its reportable segments based on income or loss from operations excluding corporate expenses.  The segment measure is calculated as follows: segment revenues less segment operating expenses, depreciation, depletion, amortization and accretion expense and reduction in value of assets.  The Company uses this segment measure to evaluate its reportable segments because it is the measure that is most consistent with how the Company organizes and manages its business operations.  Corporate and other costs primarily include expenses related to support functions, salaries and benefits for corporate employees and stock-based compensation expense.















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Summarized financial information for the Company’s segments is as follows (in thousands): 







































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Geographic Segments



The Company attributes revenue to various countries based on the location of where services are performed or the destination of the drilling products or equipment sold or rented.  Long-lived assets consist primarily of property, plant and equipment and are attributed to various countries based on the physical location of the asset at the end of a period.  The Company’s revenue attributed to the U.S. and to other countries and the value of its long-lived assets by those locations are as follows (in thousands):









 



(10)Stock-Based Compensation Plans



The Company maintains various stock incentive plans that provide long-term incentives to the Company’s key employees, including officers, directors, consultants and advisors (Eligible Participants).  Under the stock incentive plans, the Company may grant incentive stock options, restricted stock, restricted stock units, stock appreciation rights, other stock-based awards or any combination thereof to Eligible Participants.  The Company’s total compensation expense related to these plans was approximately $8.0  million and $7.9 million for the three months ended March 31, 2019 and March 31, 2018, respectively, which is reflected in general and administrative expenses.





(11)  Income Taxes



The Company had $30.6 million of unrecorded tax benefits as of March 31, 2019 and December 31, 2018, all of which would impact the Company’s effective tax rate if recognized.  It is the Company’s policy to recognize interest and applicable penalties, if any, related to uncertain tax positions in income tax expense. 





(12) 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 and the conversion of restricted stock units.



The Company incurred a loss from continuing operations for the three months ended March 31, 2019 and 2018; therefore the impact of any incremental shares would be anti-dilutive.

 



(13)  Supplemental Guarantor Information



SESI, L.L.C. (the Issuer), a 100% owned subsidiary of Superior Energy Services, Inc. (Parent), has $500 million of 7 3/4% senior unsecured notes due 2024. The Parent, along with certain of its 100% owned domestic subsidiaries, fully and unconditionally guaranteed such senior unsecured notes, and such guarantees are joint and several.



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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



Forward-Looking Statements



This Quarterly Report on Form 10-Q and other documents filed by us with the SEC contain, and future oral or written statements or press releases by us and our management may contain, forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Generally, the words “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks” and “estimates,” variations of such words and similar expressions identify forward-looking statements, although not all forward-looking statements contain these identifying words.  All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q or such other materials regarding our financial position, financial performance, liquidity, strategic alternatives, market outlook, future capital needs, capital allocation plans, 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 prevailing circumstances on the date such statements are made. Such forward-looking statements, and the assumptions on which they are based, are inherently speculative and are subject to a number of risks and uncertainties that could cause our actual results to differ materially from such statements. Such risks and uncertainties include, but are not limited to: the conditions in the oil and gas industry, especially oil and natural gas prices and capital expenditures by oil and gas companies; our outstanding debt obligations and the potential effect of limiting our ability to fund future growth and operations and increasing our exposure to risk during adverse economic conditions; necessary capital financing may not be available at economic rates or at all; volatility of our common stock; operating hazards, including the significant possibility of accidents resulting in personal injury or death, property damage or environmental damage for which we may have limited or no insurance coverage or indemnification rights; we may not be fully indemnified against losses incurred due to catastrophic events; claims, litigation or other proceedings that require cash payments or could impair financial condition; credit risk associated with our customer base; the effect of regulatory programs (including regarding worker health and safety laws) and environmental matters on our operations or prospects, including the risk that future changes in the regulation of hydraulic fracturing could reduce demand for our pressure pumping and fluid management services, or that future changes in climate change legislation could result in increased operating costs or reduced commodity demand globally; the impact that unfavorable or unusual weather conditions could have on our operations; the potential inability to retain key employees and skilled workers; political, legal, economic and other risks and uncertainties associated with our international operations; laws, regulations or practices in foreign countries could materially restrict our operations or expose us to additional risks; potential changes in tax laws, adverse positions taken by tax authorities or tax audits impacting our operating results; changes in competitive and technological factors affecting our operations; risks associated with the uncertainty of macroeconomic and business conditions worldwide; not realizing the benefits of acquisitions or divestitures; our operations may be subject to cyber-attacks that could have an adverse effect on our business operations; counterparty risks associated with reliance on key suppliers; challenges with estimating our potential liabilities related to our oil and natural gas property; and risks associated with potential changes of Bureau of Ocean Energy Management security and bonding requirements for offshore platforms.  These risks and other uncertainties related to our business are described in detail in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018. 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. Investors are cautioned that many of the assumptions on which our forward-looking statements are based are likely to change after such statements are made, including for example the market prices of oil and gas and regulations affecting oil and gas operations, which we cannot control or anticipate. Further, we may make changes to our business strategies and plans (including our capital spending and capital allocation plans) at any time and without notice, based on any changes in the above-listed factors, our assumptions or otherwise, any of which could or will affect our results. For all these reasons, actual events and results may differ materially from those anticipated, estimated, projected or implied by us in our forward-looking statements. We undertake no obligation to update any of our forward-looking statements for any reason and, notwithstanding any changes in our assumptions, changes in our business plans, our actual experience, or other changes. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.



Executive Summary



General



We provide a wide variety of services and products to the energy industry.  We serve major, national and independent oil and natural gas exploration and production companies around the world and offer products and services with respect to the various phases of a well’s economic life cycle.  We report our operating results in four business segments: Drilling Products and Services; Onshore Completion and Workover Services; Production Services; and Technical Solutions. 



Industry Trends



The oil and gas industry is both cyclical and seasonal.  The level of spending by oil and gas companies is highly influenced by current and expected demand and future prices of oil and natural gas. Changes in spending result in an increased or decreased demand for our

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services and products. Rig count is an indicator of the level of spending by oil and gas companies. Our financial performance is significantly affected by the rig count in the U.S. land and offshore market areas as well as oil and natural gas prices and worldwide rig activity, which are summarized in the tables below.









(1) Estimate of drilling activity as measured by the average active drilling rigs based on Baker Hughes, a GE company, rig   count information.

(2) Excludes Canadian Rig Count.



Comparison of the Results of Operations for the Three Months Ended March 31, 2019 and December 31, 2018



For the first quarter of 2019, our revenue was $467.2 million and the net loss was $47.7 million, or a $0.31 loss per share.  This compares to net loss of $750.2 million, or a $4.85 loss per share, for the fourth quarter of 2018, on revenue of $539.3 million.  Net loss for the fourth quarter of 2018 included a pre-tax charge of $743.7 million, primarily related to reduction in value of goodwill and long-lived assets.



First quarter 2019 revenue in our Drilling Products and Services segment decreased 4% sequentially to $101.1 million, as compared to $105.3 million in the fourth quarter of 2018.  U.S. land revenue increased 3% sequentially to $48.2 million due to the increase in rentals of premium drill pipe during the quarter.  International revenue decreased 15% to $23.8 million and U.S. offshore revenue decreased 5% sequentially to $29.1 million primarily due to decrease in rentals of premium drill pipe.



First quarter 2019 revenue in our Onshore Completion and Workover Services segment decreased 20% to $205.0 million, as compared to $255.1 million for the fourth quarter of 2018.  The decrease in revenue is primarily attributable to decreased activity in our pressure pumping business. 



First quarter 2019 revenue in our Production Services segment decreased 6% sequentially to $103.5 million, as compared to $109.9 million in the fourth quarter of 2018.  Revenue from U.S. offshore and international market areas remained flat at $19.3 million and $43.5 million, respectively.  U.S. land revenue decreased 14% to $40.7 million, primarily due to a decrease in coiled tubing activities.

First quarter 2019 revenue in our Technical Solutions segment decreased 17% sequentially to $57.6 million, as compared to $69.0 million in the fourth quarter of 2018.  U.S. land revenue increased 49% sequentially to $11.9 million, primarily due to an increase in demand for well control services.  International revenue increased 20% sequentially to $24.8 million primarily due to an increase in subsea intervention services.  U.S. offshore revenue decreased 48% sequentially to $20.9 million due to a decrease in demand for completion tools and products.



Comparison of the Results of Operations for the Three Months Ended March 31, 2019 and March 31, 2018 



For the three months ended March 31, 2019, our revenue was $467.2 million, a decrease of $15.2 million or 3%, as compared to the same period in 2018.  Net loss was $47.7 million, or a $0.31 loss per share.  This compares to a net loss for the three months ended March 31, 2018 of $59.7 million, or a $0.39 loss per share.



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The following table compares our operating results for the three months ended March 31, 2019 and March 31, 2018 (in thousands, except percentages).  Cost of services and rentals excludes depreciation, depletion, amortization and accretion for each of our business segments. 











Operating Segments:



Drilling Products and Services Segment



Revenue from our Drilling Products and Services segment increased 19% to $101.1 million for the three months ended March 31, 2019, as compared to $85.2 million for the same period in 2018.  Cost of services and rentals as a percentage of revenue increased to 42% of segment revenue for the three months ended March 31, 2019, as compared to 41% for the same period in 2018.  Revenue from the U.S. land market areas increased 18% as a result of increases in revenue from rentals of premium drill pipe and bottom hole assemblies, as demand for these rental products increased along with the increase in U.S. land rig count.  Revenue from the U.S. offshore market area increased 38% primarily due to an increase in revenue from rentals of premium drill pipe and bottom hole assemblies.  The revenue from the international market areas remained flat.     



Onshore Completion and Workover Services Segment



Revenue from our Onshore Completion and Workover Services segment decreased 11% to $205.0 million for the three months ended March 31, 2019, as compared to $231.5 million for the same period in 2018.  All of this segment’s revenue is derived from the U.S. land market area.  Cost of services and rentals as a percentage of revenue increased to 84% of segment revenue for the three months ended March 31, 2019, as compared to 78% for the same period in 2018.  The decrease in revenue is primarily attributable to decreased activity in our pressure pumping and well services businesses. 



Production Services Segment



Revenue from our Production Services segment for the three months ended March 31, 2019 increased by 3% to $103.5 million, as compared to $100.8 million for the same period in 2018.  Cost of services and rentals as a percentage of revenue decreased to 77% of segment revenue for the three months ended March 31, 2019, as compared to 85% for the same period in 2018.  Revenue from the U.S. land market area decreased 22%, primarily due to a decrease in coiled tubing activities.  The revenue from the international market areas increased 41%, primarily due to an increase in hydraulic workover and snubbing activities.  Revenue from the U.S. offshore market area increased 10%, primarily due to an increase in pressure control activities.   



Technical Solutions Segment



Revenue from our Technical Solutions segment decreased 11% to $57.6 million for the three months ended March 31, 2019, as compared to $64.8 million for the same period in 2018.  Cost of services and rentals as a percentage of revenue decreased to 63% of segment revenue for the three months ended March 31, 2019, as compared to 64% for the same period in 2018.  Revenue from the U.S. land market area increased 74%, primarily due to an increase in well control services.  Revenue from the international market areas increased 21%, primarily due to an increase in demand for completion tools and products.  Revenue derived from the U.S. offshore market area decreased 44%, primarily due to a decrease in demand for completion tools and products.  







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Depreciation, Depletion, Amortization and Accretion



Depreciation, depletion, amortization and accretion decreased to $82.4 million during the three months ended March 31, 2019 from $105.7 million during the same period in 2018.  Depreciation and amortization expense decreased for our Drilling Products and Services segment by $6.6 million, or 22%; for our Onshore Completion and Workover Services segment by $9.9 million, or 21%; for our Production Services segment by $5.1 million, or 27%; and for our Technical Solutions segment by $1.4 million, or 18%.  Depreciation expense for Corporate and Other remained flat.  The decrease in depreciation, depletion, amortization and accretion is primarily due to assets becoming fully depreciated.



Income Taxes



Our effective income tax rate for the three months ended March 31, 2019 was a 4% expense compared to a 14% benefit for the same period in 2018.  The change in the effective income tax rate was primarily impacted by discrete items recorded during the three months ended March 31, 2019.  

   

Liquidity and Capital Resources



For the three months ended March 31, 2019, we generated net cash from operating activities of $27.4 million, as compared to cash used in operating activities of $25.0 million for the same period in 2018.  Our primary liquidity needs during the next twelve months are for working capital and capital expenditures.  Our primary sources of liquidity are cash flows from operations and available borrowings under our credit facility.  We had cash and cash equivalents of $151.6 million at March 31, 2019, compared to $158.1 million at December 31, 2018.     



We spent $41.2 million of cash on capital expenditures during the three months ended March 31, 2019.  Approximately $20.2 million was used to expand and maintain our Drilling Products and Services segment’s equipment inventory.  Approximately $18.0 million, $1.3 million and $1.3 million was spent in our Onshore Completion and Workover Services, Production Services and Technical Solutions segments, respectively.  During 2019, we intend to limit capital spending within our operational cash flow levels to generate free cash flow and allocate capital to businesses with higher returns on invested capital.



We have an asset-based revolving credit facility which matures in October 2022.  The borrowing base under the credit facility is calculated based on a formula referencing the borrower’s and the subsidiary guarantors’ eligible accounts receivable, eligible inventory and eligible premium rental drill pipe less reserves.  Availability under the credit facility is the lesser of (i) the commitments, (ii) the borrowing base and (iii) the highest principal amount permitted to be secured under the indenture governing the 7 1/8% senior unsecured notes due 2021.  At March 31, 2019, the borrowing base was $240.8 million and we had $73.2 million of letters of credit outstanding that reduced our borrowing availability under the revolving credit facility.   The credit agreement contains various covenants, including, but not limited to, limitations on the incurrence of indebtedness, permitted investments, liens on assets, making distributions, transactions with affiliates, merger, consolidations, dispositions of assets and other provisions customary in similar types of agreements.  At March 31, 2019, we were in compliance with all such covenants. 



We have outstanding $500 million of 7 3/4% senior unsecured notes due September 2024.  The indenture governing the 7 3/4% senior unsecured notes due 2024 requires semi-annual interest payments on March 15 and September 15 of each year through the maturity date of September 15, 2024.  The indenture contains customary events of default and requires that we satisfy various covenants.  At March 31, 2019, we were in compliance with all such covenants.



We also have outstanding $800 million of 7 1/8% unsecured senior notes due December 2021.  The indenture governing the 7 1/8% senior notes due 2021 requires semi-annual interest payments on June 15 and December 15 of each year through the maturity date of December 15, 2021.  The indenture contains customary events of default and requires that we satisfy various covenants.  At March 31, 2019, we were in compliance with all such covenants.



Other Matters



Off-Balance Sheet Arrangements and Hedging Activities



At March 31, 2019, we had no off-balance sheet arrangements and no hedging contracts.



Recently Adopted Accounting Guidance



See Part I, Item 1, “Financial Statements – Note 7 – Leases.”









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Item 3.  Quantitative and Qualitative Disclosures about Market Risk



We are exposed to market risks associated with foreign currency fluctuations and changes in interest rates.  A discussion of our market risk exposure in financial instruments follows.



Foreign Currency Exchange Rates Risk



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 certain operations in the United Kingdom and Europe, is the U.S. dollar, but a portion of the revenues from our international operations is paid in foreign currencies.  The effects of foreign currency fluctuations are partly mitigated because local expenses of such international 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. 



Assets and liabilities of certain subsidiaries in the United Kingdom and Europe are translated at end of period exchange rates, while income and expenses are translated at average rates for the period.  Translation gains and losses are reported as the foreign currency translation component of accumulated other comprehensive loss in stockholders’ equity. 



We do not hold derivatives for trading purposes or use derivatives with complex features. When we believe prudent, we enter into forward foreign exchange contracts to hedge the impact of foreign currency fluctuations. We do not enter into forward foreign exchange contracts for trading or speculative purposes.  At March 31, 2019, we had no outstanding foreign currency forward contracts.



Interest Rate Risk



At March 31, 2019, we had no variable rate debt outstanding.



Commodity Price Risk



Our revenues and profitability significantly depend upon the market prices of oil and natural gas.



For additional discussion, see Part 1, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 





Item 4.  Controls and Procedures



 

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PART II.  OTHER INFORMATION



Item 1.  Legal Proceedings



From time to time, we are involved in various legal actions incidental to our business.   The outcome of these proceedings is not predictable.  However, based on current circumstances, we do not believe that the ultimate resolution of these proceedings, after considering available defenses and any insurance coverage or indemnification rights, will have a material adverse effect on our financial position, results of operations or cash flows.



Item 1A.  Risk Factors



For information regarding certain risks relating to our operations, any of which could negatively affect our business, financial condition, operating results or prospects, see Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018.



Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds



Issuer Purchases of Equity Securities

 (1)   Through our stock incentive plans, 431,864 shares were delivered to us by our employees to satisfy their tax withholding requirements upon vesting of restricted stock units.



Item 6.   Exhibits



(a)    The following exhibits are filed with this Form 10-Q:









    *Filed herein

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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.













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