UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Commission File No.
Commission Company Name: SUPERIOR ENERGY SERVICES INC
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At June 30, 2019, the aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant was $
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 2019
TABLE OF CONTENTS
This Annual Report on Form 10-K and other documents filed by us with the Securities and Exchange Commission (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 Annual Report on Form 10-K 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;
our outstanding debt obligations and the potential effect of limiting our ability to fund future growth;
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, or property 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 and environmental matters on our operations or prospects;
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;
our operations may be subject to cyber-attacks;
counterparty risks associated with reliance on key suppliers;
challenges with estimating our potential liabilities related to our oil and natural gas property;
risks associated with potential changes of Bureau of Ocean Energy Management (BOEM) security and bonding requirements for offshore platforms;
the consummation of the Combination (as defined herein) and the timing thereof;
expenses incurred in connection with the Combination;
failure to complete the Combination could negatively impact our business and financial results;
business uncertainties and contractual restrictions related to the Superior Energy U.S. Business (as defined herein) until the Combination closes;
the Combination may distract management personnel and other key employees;
future potential litigation against us or Forbes could prevent the completion of the Combination or result in the payment of damages;
the interests of some of our executive officers in the Combination may differ from the interests of our stockholders generally; and
failure to achieve the anticipated return on our investment in Newco (as defined herein);
These risks and other uncertainties related to our business are described in detail below in Part I, Item 1A of this Annual Report on Form 10-K. 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, 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.
Item 1. Business
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 we 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. Given our long-term strategy of geographic expansion, we also provide supplemental segment revenue information in three geographic areas: U.S. land; U.S. offshore; and International.
For information about our operating segments and financial information by operating segment and geographic area, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of this Annual Report on Form 10-K and note 8 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
On December 18, 2019, we entered into a definitive merger agreement (the Merger Agreement) to divest our U.S. service rig, coiled tubing, wireline, pressure control, flowback, fluid management and accommodations service lines (the Superior Energy U.S. Business) and combine them with Forbes Energy Services Ltd.’s (Forbes) complimentary service lines to create a new, publicly traded consolidation platform for U.S. completion, production and water solutions (the Combination).
Following the completion of the Combination, which is expected to close in the second quarter of 2020, we will remain a globally diversified oilfield services company built around the following key product and service lines: premium drill pipe, bottom hole assemblies, completion tools and products, hydraulic workover, snubbing and production services and well control services.
Under the terms of the Merger Agreement, the Superior Energy U.S. Business and Forbes will be merged into a newly formed company (Newco). At the closing of the Combination, we will receive 49.9% of Newco’s issued and outstanding voting Class A common stock (the Class A Stock) and 100% of Newco’s issued and outstanding non-voting Class B common stock (the Class B Stock), which will collectively represent an approximate 65% economic interest in Newco. Our and Forbes’ economic interests in Newco are subject to adjustment within certain parameters based on Forbes’ net debt position calculated at closing pursuant to the terms of the Merger Agreement. In addition, certain lenders under Forbes’ existing term loan (the Forbes Term Loan) will exchange their portion of the aggregate principal amount outstanding under the Forbes Term Loan for approximately $30.0 million in newly issued mandatory convertible preferred shares of Newco (the Preferred Shares), which will be entitled to cash dividends at a rate of 5% per annum, payable semi-annually, and, on the third anniversary of the closing of the Combination will be subject to mandatory conversion into shares of Newco’s Class A Stock. After giving effect to such conversion, we would own an approximate 52% economic interest in Newco and Forbes’ existing stockholders would own an approximate 48% economic interest in Newco.
The Combination has been unanimously approved by our and Forbes’ Boards of Directors as well as the special committee of the Board of Directors of Forbes. Newco filed a joint proxy statement/prospectus on February 12, 2020, pursuant to which Forbes will solicit proxies of its stockholders to approve the Combination at a special meeting of stockholders. However, certain stockholders of Forbes who will collectively own a majority of Forbes’ common stock on the record date for Forbes’ special meeting have committed to vote the shares they beneficially own in favor of the Combination and have the ability to approve the Combination without the vote of any other stockholder of Forbes.
Related Financing Transactions
As a condition of the Combination, SESI, L.L.C. (SESI), our wholly owned subsidiary, consummated an offer to exchange (the Exchange Offer) up to $635.0 million of SESI’s previously outstanding $800.0 million aggregate principal amount of 7.125% Senior Notes due 2021 (the Original Notes) for up to $635.0 million aggregate principal amount of SESI’s 7.125% Senior Notes due 2021 (the New Notes) and conducted a concurrent consent solicitation (the Consent Solicitation) to amend the liens covenant in the indenture governing the Original Notes (the Original Notes Indenture) to permit the issuance of the Superior Secured Notes described below (the Proposed Amendment) upon the terms and subject to the conditions set forth in SESI’s offering memorandum and consent solicitation statement,
dated as of January 6, 2020 (as amended by the press releases dated January 16, 2020, January 22, 2020, January 31, 2020, February 14, 2020, February 18, 2020, February 19, 2020, February 20, 2020 and February 24, 2020 issued by the Company and Supplement No. 1 to the Offering Memorandum and Consent Solicitation, dated as of January 31, 2020 (the Offering Memorandum)). A supplemental indenture by and among SESI, the guarantors party thereto and the Bank of New York Mellon Trust Company, N.A., as trustee, related to the Proposed Amendment was executed on February 14, 2020. The Original Notes outstanding after the Exchange Offer are governed by the Original Notes Indenture, as amended by the Proposed Amendment, provided that the Proposed Amendment will only become operative immediately prior to the occurrence of the Combination.
The Exchange Offer expired at 5:00 p.m., New York City time, on February 21, 2020, and $617.9 million aggregate principal amount of outstanding Original Notes were validly tendered for exchange and not withdrawn, representing 77.24% of the aggregate principal amount of Original Notes outstanding upon commencement of the Exchange Offer. SESI accepted all validly tendered Original Notes and issued $617.9 million aggregate principal amount of New Notes pursuant to an indenture dated February 24, 2020 by and among SESI, the guarantors party thereto and UMB Bank, N.A., as trustee (the New Notes Indenture).
Substantially concurrently with the consummation of the Combination, eligible note holders will receive, in exchange for $617.9 million aggregate principal amount of New Notes, on a pro rata basis: (1) $243.3 million aggregate principal amount of 9.750% Senior Second Lien Secured Notes due 2025 to be issued by Newco (the Newco Secured Notes), (2) $243.3 million aggregate principal amount of 8.750% Senior Second Lien Secured Notes due 2026 to be issued by SESI (the Superior Secured Notes), (3) $131.3 million in cash and (4) $6.35 million in cash constituting the total consent payment (the Combination Exchange). The indentures governing the Newco Secured Notes and the Superior Secured Notes will each contain restrictive covenants customary for issuances of high-yield secured notes of this type. On February 20, 2020, we entered into an amendment to the Merger Agreement (the Amendment). The Amendment amends certain covenants, among other things, to account for the amended terms of the Exchange Offer.
Exit and Discontinuation of the Hydraulic Fracturing Service Line
On December 10, 2019, our indirect, wholly owned subsidiary, Pumpco Energy Services, Inc. (Pumpco), completed its existing hydraulic fracturing field operations, and we determined to discontinue, wind down and exit Pumpco’s hydraulic fracturing operations. We intend to maintain an adequate number of employees to efficiently wind down Pumpco’s business and divest Pumpco’s assets over time. The financial results of Pumpco’s operations have historically been included in our Onshore Completion and Workover Services segment. Pumpco’s business is reflected as discontinued operations for each of the years ended December 31, 2019, 2018 and 2017 and its assets are in the process of being divested. See note 12 to our consolidated financial statements for further discussion of discontinued operations. Discontinuing hydraulic fracturing aligns with our strategic objective to divest assets and service lines that do not compete for investment in the current market environment. Net proceeds from the divestiture of Pumpco’s assets will be used to reduce debt.
Reverse Stock Split
At a special meeting of stockholders held on December 18, 2019, our stockholders voted to approve a proposal authorizing our Board of Directors to effect a reverse stock split of our issued and outstanding common stock (the Reverse Stock Split) and to proportionately reduce the number of our authorized shares of common stock. Following the special meeting of stockholders, our Board of Directors approved a 1-for-10 Reverse Stock Split.
As a result of the Reverse Stock Split, each 10 pre-split shares of common stock outstanding immediately prior to the Reverse Stock Split automatically were converted to one issued and outstanding share of common stock without any action on the part of our stockholders. No fractional shares of common stock were issued as a result of the Reverse Stock Split. Instead, any stockholder who would have been entitled to a fractional share received a cash payment in lieu of such fractional shares. The total number of shares of common stock that the Company is authorized to issue has also been reduced by the same ratio.
Unless otherwise indicated, the number of shares of common stock outstanding and per-share amounts in the consolidated financial statements and accompanying notes contained in Part II, Item 8 of this Annual Report on Form 10-K have been retroactively adjusted to reflect the effect of the Reverse Stock Split. The par value of our common stock remains at $0.001 per share.
Resumption of Trading on the New York Stock Exchange
On September 26, 2019, the New York Stock Exchange (the NYSE) suspended trading of our common stock and commenced delisting proceedings due to our “abnormally low” stock price. Following the NYSE’s suspension of trading of our common stock, we appealed the NYSE staff’s determination. On September 27, 2019, our common stock commenced trading on the OTC Markets and, on October 4, 2019, our common stock also commenced trading on the OTCQX Best Market, operated by OTC Markets Group Inc. The NYSE formally withdrew the delisting determination, and, on December 26, 2019, our common stock resumed trading on the NYSE under the ticker symbol “SPN.”
Products and Services
We offer a wide variety of specialized oilfield services and equipment generally categorized by their typical use during the economic life of a well. A description of the products and services offered by each of our four segments is as follows:
Drilling Products and Services – Includes downhole drilling tools and surface rentals.
Downhole drilling tools – Includes rentals of tubulars, such as primary drill pipe strings, landing strings, completion tubulars and associated accessories, and manufacturing and rentals of bottom hole tools, including stabilizers, non-magnetic drill collars and hole openers.
Surface rentals – Includes rentals of temporary onshore and offshore accommodation modules and accessories.
Onshore Completion and Workover Services – Includes fluid management and workover services.
Fluid management – Includes services used to obtain, move, store and dispose of fluids that are involved in the exploration, development and production of oil and gas, including mobile piping systems, specialized trucks, fracturing tanks and other assets that transport, heat, pump and dispose of fluids.
Workover services – Includes a variety of well completion, workover and maintenance services, including installations, completions, sidetracking of wells and support for perforating operations.
Production Services – Includes intervention services.
Intervention services – Includes services to enhance, maintain and extend oil and gas production during the life of the well, including coiled tubing, cased hole and mechanical wireline, hydraulic workover and snubbing, pressure control services, production testing and optimization.
Technical Solutions – Includes products and services that generally address customer-specific needs with their applications, which typically require specialized engineering, manufacturing or project planning expertise. Most operations requiring our technical solutions are generally in offshore environments during the completion, production and decommissioning phase of an oil and gas well. These products and services primarily include completion tools and services, well control services and subsea well intervention.
Completion tools and services – Provides products and services used during the completion phase of an offshore well to control sand and maximize oil and gas production, including sand control systems, well screens and filters, and surface-controlled sub surface safety valves.
Well control services – Resolves well control and pressure control problems through firefighting, engineering and well control training.
The Technical Solutions segment also includes revenues from oil and gas production related to our 51% ownership interest in our sole federal offshore oil and gas property (which we refer to in this Annual Report on Form 10-K as the oil and gas property) and related assets.
Our customers are the major and independent oil and gas companies that are active in the geographic areas in which we operate. There were no customers that exceeded 10% of our total revenues in 2019, 2018 or 2017. A reduction in sales to our existing large customers could have a material adverse effect on our business and operations.
We provide products and services worldwide in highly competitive markets, with competitors comprised of both small and large companies. Our revenues and earnings can be affected by several factors, including changes in competition, fluctuations in drilling and completion activity, perceptions of future prices of oil and gas, government regulation, disruptions caused by weather and general economic conditions. We believe that the principal competitive factors are price, performance, product and service quality, safety, response time and breadth of products and services.
Potential Liabilities and Insurance
Our operations involve a high degree of operational risk and expose us to significant liabilities. An accident involving our services or equipment, or the failure of a product sold by us, could result in personal injury, loss of life, and damage to property, equipment or the environment. Litigation arising from a catastrophic occurrence, such as fire, explosion, well blowout or vessel loss, may result in substantial claims for damages.
As is customary in our industry, our contracts generally provide that we will indemnify and hold harmless our customers from any claims arising from personal injury or death of our employees, damage to or loss of our equipment, and pollution emanating from our equipment and services. Similarly, our customers generally agree to indemnify and hold us harmless from any claims arising from personal injury or death of their employees, damage to or loss of their equipment or property, and pollution caused from their equipment or the well reservoir (including uncontained oil flow from a reservoir). Nonetheless, our indemnification arrangements may not protect us in every case.
We maintain a liability insurance program that covers against certain operating hazards, including product liability, property damage and personal injury claims, as well as certain limited environmental pollution claims for damage to a third party or its property arising out of contact with pollution for which we are liable, but well control costs are not covered by this program. These policies include primary and excess umbrella liability policies with limits of $350 million per occurrence, including sudden and accidental pollution incidents. All of the insurance policies we purchase contain specific terms, conditions, limitations and exclusions and are subject to either deductibles or self-insured retention amounts for which we are responsible. There can be no assurance that the nature and amount of insurance we maintain will be sufficient to fully protect us against all liabilities related to our business.
Our business is significantly affected by Federal, State and local laws and other regulations. These laws and regulations relate to, among other things:
worker safety standards;
the protection of the environment;
the handling and transportation of hazardous materials; and
the mobilization of our equipment to, and operations conducted at, our work sites.
Numerous permits are required for the conduct of our business and operation of our various facilities and equipment, including our underground injection wells, trucks and other heavy equipment. These permits can be revoked, modified or renewed by issuing authorities based on factors both within and outside our control.
We cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings in the future. We also cannot predict whether additional laws and regulations will be adopted, including changes in regulatory oversight, increase of federal, state or local taxes, increase of inspection costs, or the effect such changes may have on us, our businesses or our financial condition.
Our operations, and those of our customers, are subject to extensive laws, regulations and treaties relating to air and water quality, generation, storage and handling of hazardous materials, and emission and discharge of materials into the environment. We believe we are in substantial compliance with all regulations affecting our business. Historically, our expenditures in furtherance of our compliance with these laws, regulations and treaties have not been material, and we do not expect the cost of compliance to be material in the future.
We purchase various raw materials and component parts in connection with delivering our products and services. These materials are generally, but not always, available from multiple sources and may be subject to price volatility. While we generally do not experience significant long-term shortages of these materials, we have from time to time experienced temporary shortages of particular raw materials. We are always seeking ways to ensure the availability of resources, as well as manage costs of raw materials.
Seasonal weather and severe weather conditions can temporarily impair our operations and reduce demand for our products and services. Examples of seasonal events that negatively affect our operations include high seas associated with cold fronts during the winter months and hurricanes during the summer months in the Gulf of Mexico, and severe cold during winter months in the U.S. land market area.
At December 31, 2019, we had approximately 5,200 employees. Approximately 6% of our employees are subject to union contracts, all of which are in international locations. We believe that we have good relationships with our employees.
Our principal executive offices are located at 1001 Louisiana Street, Suite 2900, Houston, Texas, 77002. We own or lease a large number of facilities in the various areas in which we operate throughout the world.
We seek patent and trademark protections throughout the world for our technology when we deem it prudent, and we aggressively pursue protection of these rights. We believe our patents and trademarks are adequate for the conduct of our business, and that no single patent or trademark is critical to our business. In addition, we rely to a great extent on the technical expertise and know-how of our personnel to maintain our competitive position.
We have our principal executive offices at 1001 Louisiana Street, Suite 2900, Houston, Texas 77002. Our telephone number is (713) 654-2200. We also have a website at http://www.superiorenergy.com. Copies of the annual, quarterly and current reports we file with or furnish to the SEC, and any amendments to those reports, are available on our website free of charge soon after such reports are filed with or furnished to the SEC. The information posted on our website is not incorporated into this Annual Report on Form 10-K. Alternatively, you may access these reports at the SEC’s website at http://www.sec.gov/.
Our Shared Core Values at Work (Code of Conduct) applies to all of our directors, officers and employees. This Code of Conduct is publicly available on the Corporate Governance page in the About Us section of our website at http://www.superiorenergy.com. Any waivers granted to directors or executive officers and any material amendment to our Code of Conduct will be posted promptly on our website and/or disclosed in a current report on Form 8-K.
Investors should be aware that while we do, at various times, communicate with securities analysts, it is against our policy to selectively disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by an analyst with respect to our past or projected performance. To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
The following table indicates the names and ages of our executive officers, including all offices and positions held by each in the past five years:
Name and Age
Offices Held and Term of Office
David D. Dunlap
President and Chief Executive Officer, since February 2011
Westervelt T. Ballard, Jr.
Executive Vice President, Chief Financial Officer and Treasurer, since March 2018
Executive Vice President of International Services, from February 2012 to February 2018
James W. Spexarth
Chief Accounting Officer, since March 2018
Vice President and Corporate Controller, from August 2013 to February 2018
A. Patrick Bernard
Executive Vice President, since April 2016
Senior Executive Vice President, from July 2006 to March 2016
Brian K. Moore
Executive Vice President of Corporate Services, since April 2016
Senior Executive Vice President of North America Services, from February 2012 to March 2016
William B. Masters
Executive Vice President and General Counsel, since March 2008
Item 1A. Risk Factors
The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of this Annual Report on Form 10-K, the consolidated financial statements and related notes contained in Part II, Item 8 of this Annual Report on Form 10-K and the matters contained under the caption “Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K.
The following discussion of “risk factors” identifies the most significant risks or uncertainties that could (i) materially and adversely affect our business, financial condition, results of operations, liquidity or prospects, as well as the market value of our securities, or (ii) cause our actual results to differ materially from our anticipated results or other expectations. These risks are not the only risks that we face. Our business operations could also be affected by additional factors that apply to all companies operating in the U.S. and globally, as well as other risks that are not presently known to us or that we currently consider to be immaterial to our operations. These risks include:
Our business depends on conditions in the oil and gas industry, especially oil and natural gas prices and capital expenditures by oil and gas companies.
Our business depends on the level of oil and natural gas exploration, development and production activity by oil and gas companies worldwide. The level of exploration, development and production activity is directly affected by trends in oil and natural gas prices, which historically have been volatile and difficult to predict. Oil and natural gas prices are subject to large fluctuations in response to relatively minor changes in supply and demand, economic growth trends, market uncertainty and a variety of other factors beyond our control. Lower oil and natural gas prices generally lead to decreased spending by our customers. While higher oil and natural gas prices generally lead to increased spending by our customers, sustained high energy prices can also be an impediment to economic growth and can therefore negatively impact spending by our customers. Our customers may also take into account the volatility of energy prices and other risk factors by requiring higher returns for individual projects if there is higher perceived risk. Any of these factors could significantly affect the demand for oil and natural gas, which could affect the level of capital spending by our customers and in turn could have a material effect on our results of operations.
The availability of quality drilling prospects, exploration success, relative production costs, expectations about future oil and natural gas demand and prices, the stage of reservoir development, the availability of financing, and political and regulatory environments are also expected to affect levels of exploration, development, and production activity, which would impact the demand for our services. Any prolonged reduction of oil and natural gas prices, as well as anticipated declines, could also result in lower levels of exploration, development, and production activity.
The demand for our services may be affected by numerous factors, including the following:
the cost of exploring for, producing and delivering oil and natural gas;
demand for energy, which is affected by worldwide economic activity, population growth and market expectations regarding future trends;
the ability of Organization of Petroleum Exporting Countries (OPEC) and other key oil-producing countries to set and maintain production levels for oil;
the level of excess production capacity;
the discovery rate of new oil and natural gas reserves;
domestic and global political and economic uncertainty, socio-political unrest and instability, terrorism or hostilities;
weather conditions and changes in weather patterns, including summer and winter temperatures that impact demand;
the availability, proximity and capacity of transportation facilities;
oil refining capacity and shifts in end-customer preferences toward fuel efficiency;
the level and effect of trading in commodity future markets, including trading by commodity price speculators and others;
demand for and availability of alternative, competing sources of energy;
the extent to which taxes, tax credits, environmental regulations, auctions of mineral rights, drilling permits, drilling concessions, drilling moratoriums or other governmental regulations, actions or policies affect the production, cost of production, price or availability of petroleum products and alternative energy sources; and
technological advances affecting energy exploration, production and consumption.
The oil and gas industry has historically experienced periodic downturns, which have been characterized by significantly reduced demand for oilfield services and downward pressure on the prices we charge. Moreover, weakness in the oil and gas industry may adversely impact the financial position of our customers, which in turn could cause them to fail to pay amounts owed to us in a timely manner or at all. Any of these events could have a material adverse effect on our business, results of operations, financial condition and prospects.
We have outstanding debt obligations that could limit our ability to fund future growth and operations and increase our exposure to risk during adverse economic conditions.
At December 31, 2019, we had $1.3 billion in outstanding debt obligations, $800.0 million of which matures in December 2021. Pursuant to the Exchange Offer, on February 24, 2020, $617.9 million of outstanding $800.0 million of 7.125% Senior Notes due 2021 were exchanged for $617.9 million of newly issued 7.125% Senior Notes due 2021 (referred to herein as the New Notes). Many factors, including factors beyond our control, may affect our ability to make payments on our outstanding indebtedness. These factors include those discussed elsewhere in these Risk Factors and those listed in the “Forward-Looking Statements” section included in this Annual Report on Form 10-K.
Our existing debt and associated commitments could have important adverse consequences. For example, these commitments could:
make it more difficult for us to satisfy our contractual obligations;
increase our vulnerability to general adverse economic and industry conditions;
limit our ability to refinance our debt in the future or borrow additional funds;
limit our ability to fund future working capital, capital expenditures, acquisitions or other corporate requirements;
limit our flexibility in planning for, or reacting to, changes in our business and our industry; and
place us at a disadvantage compared to our competitors that have less debt or less restrictive covenants in such debt.
Necessary capital financing may not be available at economic rates or at all.
Turmoil in the credit and financial markets could adversely affect financial institutions, inhibit lending and limit our access to funding through borrowings under our credit facility or obtaining other financing in the public or private capital markets on terms we believe to be reasonable. Prevailing market conditions could be adversely affected by the ongoing disruptions in domestic or overseas sovereign or corporate debt markets, low commodity prices or other factors impacting our business, contractions or limited growth in the economy or other similar adverse economic developments in the U.S. or abroad. Instability in the global financial markets has from time to time resulted in periodic volatility in the capital markets. This volatility could limit our access to the credit markets, leading to higher borrowing costs or, in some cases, the inability to obtain financing on terms that are acceptable to us, or at all. Any such failure to obtain additional financing could jeopardize our ability to repay, refinance or reduce our debt obligations, or to meet our other financial commitments.
The price of our common stock has been volatile and may continue to fluctuate substantially.
The market price of our common stock may be highly volatile in the future. Some of the factors that could affect the price of our common stock are quarterly increases or decreases in revenue or earnings, changes in revenue or earnings estimates by the investment community and speculation in the press or investment community about our financial condition or results of operations. General market conditions and U.S. or international economic factors and political events unrelated to our performance may also affect our stock price. For these reasons, investors should not rely on recent trends in the price of our common stock to predict the future price of our common stock or our financial results.
There are operating hazards inherent in the oil and gas industry that could expose us to substantial liabilities.
Our operations are subject to hazards inherent in the oil and gas industry that may lead to property damage, personal injury, death or the discharge of hazardous materials into the environment. Many of these events are outside of our control. Typically, we provide products and services at a well site where our personnel and equipment are located together with personnel and equipment of our customer and other service providers. From time to time, personnel are injured or equipment or property is damaged or destroyed as a result of accidents, failed equipment, faulty products or services, failure of safety measures, uncontained formation pressures or other dangers inherent in oil and natural gas exploration, development and production. Any of these events can be the result of human error or purely accidental, and it may be difficult or impossible to definitively determine the ultimate cause of the event or whose personnel or equipment contributed thereto. All of these risks expose us to a wide range of significant health, safety and environmental risks and potentially substantial litigation claims for damages. With increasing frequency, our products and services are deployed in more challenging exploration, development and production locations. From time to time, customers and third parties may seek to hold us accountable for damages and costs incurred as a result of an accident, including pollution, even under circumstances where we believe we did not cause or contribute to the accident. Our insurance policies are subject to exclusions, limitations and other conditions, and may not protect us against liability for some types of events, including events involving a well blowout, or against losses from business interruption. Moreover, we may not be able to maintain insurance at levels of risk coverage or policy limits that we deem adequate or on terms that we deem commercially reasonable. Any damages or losses that are not covered by insurance, or are in excess of policy limits or subject to substantial deductibles or retentions, could adversely affect our financial condition, results of operations and cash flows.
We may not be fully indemnified against losses incurred due to catastrophic events.
As is customary in our industry, our contracts generally provide that we will indemnify and hold harmless our customers from any claims arising from personal injury or death of our employees, damage to or loss of our equipment, and pollution emanating from our equipment and services. Similarly, our customers generally agree to indemnify and hold us harmless from any claims arising from personal injury or death of their employees, damage to or loss of their equipment or property, and pollution caused from their equipment or the well reservoir (including uncontained oil flow from a reservoir). Our indemnification arrangements may not protect us in every case. For example, from time to time we may enter into contracts with less favorable indemnities or perform work without a contract that protects us. In addition, our indemnification rights may not fully protect us if we cannot prove that we are entitled to be indemnified or if the customer is bankrupt or insolvent, does not maintain adequate insurance or otherwise does not possess sufficient resources to indemnify us. In addition, our indemnification rights may be held unenforceable in some jurisdictions.
Our customers’ changing views on risk allocation could cause us to accept greater risk to win new business or could result in us losing business if we are not prepared to take such risks. To the extent that we accept such additional risk, and insure against it, our insurance premiums could rise.
From time to time, we are subject to various claims, litigation and other proceedings that could ultimately be resolved against us, requiring material future cash payments or charges, which could impair our financial condition or results of operations.
The size, nature and complexity of our business make us susceptible to various claims, both in litigation and binding arbitration proceedings. We may in the future become subject to various claims, which, if not resolved within amounts we have accrued, could have a material adverse effect on our financial position, results of operations or cash flows. Similarly, any claims, even if fully indemnified or insured, could negatively impact our reputation among our customers and the public, and make it more difficult for us to compete effectively or obtain adequate insurance in the future.
The credit risks of our customer base could result in losses.
Many of our customers are oil and gas companies that are facing liquidity constraints in light of the current commodity price environment. These customers impact our overall exposure to credit risk as they are also affected by prolonged changes in economic and industry conditions. If a significant number of our customers experience a prolonged business decline or disruptions, we may incur increased exposure to credit risk and bad debts.
We are subject to environmental and worker health and safety laws and regulations, which could reduce our business opportunities and revenue, and increase our costs and liabilities.
Our business is significantly affected by a wide range of environmental and worker health and safety laws and regulations in the areas in which we operate, including increasingly rigorous environmental laws and regulations governing air emissions, water discharges and waste management. Generally, these laws and regulations have become more stringent and have sought to impose greater liability on a larger number of potentially responsible parties. The Macondo well explosion in 2010 resulted in additional regulation of our offshore operations, and similar onshore or offshore accidents in the future could result in additional increases in regulation. Failure to comply with these laws and regulations may result in a variety of administrative, civil and criminal enforcement measures, including assessment of monetary penalties, imposition of remedial requirements and issuance of injunctions as to future compliance.
Environmental laws and regulations may provide for “strict liability” for remediation costs, damages to natural resources or threats to public health and safety as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior owners or operators or other third parties. Strict liability can render a party liable for damages without regard to negligence or fault on the part of the party. Some environmental laws provide for joint and several strict liability for remediation of spills and releases of hazardous substances. For example, our well service and fluids businesses routinely involve the handling of significant amounts of waste materials, some of which are classified as hazardous substances. We also store, transport and use radioactive and explosive materials in certain of our operations. In addition, many of our current and former facilities are, or have been, used for industrial purposes. Accordingly, we could become subject to material liabilities relating to the containment and disposal of hazardous substances, oilfield waste and other waste materials, the use of radioactive materials, the use of underground injection wells, and to claims alleging personal injury or property damage as the result of exposures to, or releases of, hazardous substances. In addition, stricter enforcement of existing laws and regulations, new domestic or foreign laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require us to incur costs or become the basis of new or increased liabilities that could reduce our earnings and our cash available for operations.
In addition, we and our customers may need to apply for or amend facility permits or licenses from time to time with respect to storm water or wastewater discharges, waste handling, or air emissions relating to manufacturing activities or equipment operations, which subjects us and our customers to new or revised permitting conditions that may be onerous or costly to comply with.
Climate change legislation or regulations restricting emissions of greenhouse gases (GHGs) could result in increased operating costs and reduced demand for the oil and natural gas our customers produce.
Increasing concerns that emissions of carbon dioxide, methane and other greenhouse gases (GHGs) may endanger public health and produce climate changes with significant physical effects, such as increased frequency and severity of storms, floods, droughts and other climatic events, have drawn significant attention from government agencies and environmental advocacy groups. In response, additional costly requirements and restrictions have been imposed on the oil and gas industry to regulate and reduce the emission of GHGs.
Specifically, the EPA has adopted regulations under existing provisions of the federal Clean Air Act (CAA) which increase operational costs by requiring the monitoring and annual reporting of GHG emissions from oil and gas production, processing, transmission and storage facilities in the United States. Although, the U.S. Congress has considered legislation to reduce emissions of GHGs, significant legislation has not yet been adopted to reduce GHG emissions at the federal level. In the absence of such federal climate legislation, a number of state and regional efforts have emerged that are aimed at tracking and/or reducing GHG emissions through the completion of GHG emissions inventories and through cap and trade programs that typically require major sources of GHG emissions to acquire and surrender emission allowances in return for emitting GHGs. Given the long-term trend towards increasing regulation, future federal GHG regulations of the oil and gas industry remain a possibility. Additionally, in December 2015, the United States joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France that proposed an agreement requiring member countries to review and “represent a progression” in their intended nationally determined contributions, which set GHG emission reduction goals every five years beginning in 2020. This agreement was signed by the United States in April 2016 and entered into force in November 2016. The United States is one of over 120 nations having ratified or otherwise consented to the agreement; however this agreement does not create any binding obligations for nations to limit their GHG emissions, but rather includes pledges to voluntarily limit or reduce future emissions. In June 2017, President Trump announced that the United States intended to withdraw from the Paris Agreement and to seek negotiations either to reenter the Paris Agreement on different terms or a separate agreement. In August 2017, the U.S. Department of State officially informed the United Nations of the intent of the United States to withdraw from the Paris Agreement. The Paris Agreement provides for a four-year exit process beginning when it took effect in November 2016, which would result in an effective exit date of November 2020. The United States’ adherence to the exit process and/or the terms on which the United States may re-enter the Paris Agreement or a separately negotiated agreement are unclear at this time.
In addition to governmental regulations, our customers are also requiring additional equipment upgrades to address the growing concerns of GHG emission and climate change which result in higher operational costs for service providers such as us. Despite taking additional
measures to reduce GHG emissions, there is the possibility that the demand for fossil fuels may nevertheless decrease due to such concerns.
At this stage, we cannot predict the impact of these or other initiatives on our or our customers operations, nor can we predict whether, or which of, other currently pending greenhouse gas emission proposals will be adopted, or what other actions may be taken by domestic or international regulatory bodies. The potential passage of climate change regulation may curtail production and demand for fossil fuels such as oil and gas in areas of the world where our customers operate and thus adversely affect future demand for our products and services, which may in turn adversely affect future results of operations.
Adverse and unusual weather conditions may affect our operations.
Our operations may be materially affected by severe weather conditions in areas where we operate. Severe weather, such as hurricanes, high winds and seas, blizzards and extreme temperatures may cause evacuation of personnel, curtailment of services and suspension of operations, inability to deliver materials to jobsites in accordance with contract schedules, loss of or damage to equipment and facilities and reduced productivity. In addition, variations from normal weather patterns can have a significant impact on demand for oil and natural gas, thereby reducing demand for our services and equipment.
Our inability to retain key employees and skilled workers could adversely affect our operations.
Our performance could be adversely affected if we are unable to retain certain key employees and skilled technical personnel. Our ability to continue to expand the scope of our services and products depends in part on our ability to increase the size of our skilled labor force. The loss of the services of one or more of our key employees or the inability to employ or retain skilled technical personnel could adversely affect our operating results. In the past, the demand for skilled personnel has been high and the supply limited. We have experienced increases in labor costs in recent years and may continue to do so in the future.
Our international operations and revenue are affected by political, economic and other uncertainties worldwide.
In 2019, we conducted business in more than 50 countries. Our international operations are subject to varying degrees of regulation in each of the foreign jurisdictions in which we provide services. Local laws and regulations, and their interpretation and enforcement, differ significantly among those jurisdictions, and can change significantly over time. Future regulatory, judicial and legislative changes or interpretations may have a material adverse effect on our ability to deliver services within various foreign jurisdictions.
In addition to these international regulatory risks, our international operations are subject to a number of other risks inherent in any business operating in foreign countries, including, but not limited to, the following:
political, social and economic instability;
potential expropriation, seizure or nationalization of assets;
deprivation of contract rights;
increased operating costs;
inability to collect receivables and longer receipt of payment cycles;
civil unrest and protests, strikes, acts of terrorism, war or other armed conflict;
import-export quotas or restrictions, including tariffs and the risk of fines or penalties assessed for violations;
confiscatory taxation or other adverse tax policies;
currency exchange controls;
currency exchange rate fluctuations, devaluations and conversion restrictions;
potential submission of disputes to the jurisdiction of a foreign court or arbitration panel;
pandemics or epidemics that disrupt our ability to transport personnel or equipment;
embargoes or other restrictive governmental actions that could limit our ability to operate in foreign countries;
additional U.S. and other regulation of non-domestic operations, including regulation under the Foreign Corrupt Practices Act (the FCPA) as well as other anti-corruption laws;
restrictions on the repatriation of funds;
limitations in the availability, amount or terms of insurance coverage;
the risk that our international customers may have reduced access to credit because of higher interest rates, reduced bank lending or a deterioration in our customers’ or their lenders’ financial condition;
the burden of complying with multiple and potentially conflicting laws and regulations;
the imposition of unanticipated or increased environmental and safety regulations or other forms of public or governmental regulation that increase our operating expenses;
complications associated with installing, operating and repairing equipment in remote locations;
the geographic, time zone, language and cultural differences among personnel in different areas of the world; and
challenges in staffing and managing international operations.
These and the other risks outlined above could cause us to curtail or terminate operations, result in the loss of personnel or assets, disrupt financial and commercial markets and generate greater political and economic instability in some of the geographic areas in which we operate. International areas where we operate that have significant risk include the Middle East, Indonesia, Nigeria and Angola.
Laws, regulations or practices in foreign countries could materially restrict our operations or expose us to additional risks.
In many countries around the world where we do business, all or a significant portion of the decision making regarding procuring our services and products is controlled by state-owned oil companies. State-owned oil companies or prevailing laws may (i) require us to meet local content or hiring requirements or other local standards, (ii) restrict with whom we can contract or (iii) otherwise limit the scope of operations that we can legally or practically conduct. Our inability or failure to meet these requirements, standards or restrictions may adversely impact our operations in those countries. In addition, our ability to work with state-owned oil companies is subject to our ability to negotiate and agree upon acceptable contract terms, and to enforce those terms. In addition, many state-owned oil companies may require integrated contracts or turnkey contracts that could require us to provide services outside our core businesses. Providing services on an integrated or turnkey basis generally requires us to assume additional risks.
Moreover, in order to effectively compete in certain foreign jurisdictions, it is frequently necessary or required to establish joint ventures or strategic alliances with local contractors, partners or agents. In certain instances, these local contractors, partners or agents may have interests that are not always aligned with ours. Reliance on local contractors, partners or agents could expose us to the risk of being unable to control the scope or quality of our overseas services or products, or being held liable under the FCPA, or other anti-corruption laws for actions taken by our strategic or local contractors, partners or agents even though these contractors, partners or agents may not themselves be subject to the FCPA or other applicable anti-corruption laws. Any determination that we have violated the FCPA or other anti-corruption laws could have a material adverse effect on our business, results of operations, reputation or prospects.
Changes in tax laws or tax rates, adverse positions taken by taxing authorities and tax audits could impact our operating results.
We are subject to the jurisdiction of a significant number of domestic and foreign taxing authorities. Changes in tax laws or tax rates, the resolution of tax assessments or audits by various tax authorities could impact our operating results. In addition, we may periodically restructure our legal entity organization. If taxing authorities were to disagree with our tax positions in connection with any such restructurings, our effective income tax rate could be impacted. The final determination of our income tax liabilities involves the interpretation of local tax laws, tax treaties and related authorities in each taxing jurisdiction, as well as the significant use of estimates and assumptions regarding future operations and results and the timing of income and expenses. We may be audited and receive tax assessments from taxing authorities that may result in assessment of additional taxes that are ultimately resolved with the authorities or through the courts. We believe these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. Resolution of any tax matter involves uncertainties and there are no assurances that the outcomes will be favorable. If U.S. or
other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operating may be adversely impacted.
If we are not able to design, develop, and produce commercially competitive products and to implement commercially competitive services in a timely manner in response to changes in the market, customer requirements, competitive pressures, and technology trends, our business and results of operations could be materially and adversely affected.
The market for oilfield services in which we operate is highly competitive and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial resources than we do. Contracts are traditionally awarded on the basis of competitive bids or direct negotiations with customers.
The market for our services and products is characterized by continual technological developments to provide better and more reliable performance and services. If we are not able to design, develop, and produce commercially competitive products and to implement commercially competitive services in a timely manner in response to changes in the market, customer requirements, competitive pressures, and technology trends, our business and consolidated results of operations could be materially and adversely affected. Likewise, if our proprietary technologies, equipment, facilities, or work processes become obsolete, we may no longer be competitive, and our business and results of operations could be materially and adversely affected. In addition, we may be disadvantaged competitively and financially by a significant movement of exploration and production operations to areas of the world in which we are not currently active.
We are affected by global economic factors and political events.
Our financial results depend on demand for our services and products in the U.S. and the international markets in which we operate. Declining economic conditions, or negative perceptions about economic conditions, could result in a substantial decrease in demand for our services and products. World political events could also result in further U.S. military actions, terrorist attacks and related unrest. Military action by the U.S. or other nations could escalate and further acts of terrorism may occur in the U.S. or elsewhere. Such acts of terrorism could lead to, among other things, a loss of our investment in the country, impairment of the safety of our employees, extortion or kidnapping, and impairment of our ability to conduct our operations. Such developments have caused instability in the world’s financial and insurance markets in the past, and many experts believe that a confluence of worldwide factors could result in a prolonged period of economic uncertainty and slow growth in the future. In addition, any of these developments could lead to increased volatility in prices for oil and gas and could affect the markets for our products and services. Insurance premiums could also increase and coverages may be unavailable.
Uncertain economic conditions and instability make it particularly difficult for us to forecast demand trends. The timing and extent of any changes to currently prevailing market conditions is uncertain and may affect demand for many of our services and products. Consequently, we may not be able to accurately predict future economic conditions or the effect of such conditions on demand for our services and products and our results of operations or financial condition.
Our operations may be subject to cyber-attacks that could have an adverse effect on our business operations.
Like most companies, we rely heavily on information technology networks and systems, including the Internet, to process, transmit and store electronic information, to manage or support a variety of our business operations, and to maintain various records, which may include information regarding our customers, employees or other third parties, and the integrity of these systems are essential for us to conduct our business and operations. We make significant efforts to maintain the security and integrity of these types of information and systems (and maintain contingency plans in the event of security breaches or system disruptions). However, we cannot provide assurance that our security efforts and measures will prevent security threats from materializing, unauthorized access to our systems, loss or destruction of data, account takeovers, or other forms of cyber-attacks or similar events, whether caused by mechanical failures, human error, fraud, malice, sabotage or otherwise. Cyber-attacks include, but are not limited to, malicious software, attempts to gain unauthorized access to data, unauthorized release of confidential or otherwise protected information and corruption of data. The frequency, scope and sophistication of cyber-attacks continue to grow, which increases the possibility that our security measures will be unable to prevent our systems’ improper functioning or the improper disclosure of proprietary information. Any failure of our information or communication systems, whether caused by attacks, mechanical failures, natural disasters or otherwise, could interrupt our operations, damage our reputation, or subject us to claims, any of which could materially adversely affect us.
We depend on particular suppliers and are vulnerable to product shortages and price increases.
Some of the materials that we use are obtained from a limited group of suppliers. Our reliance on these suppliers involves several risks, including price increases, inferior quality and a potential inability to obtain an adequate supply in a timely manner. We do not have long-term contracts with most of these sources, and the partial or complete loss of certain of these sources could have a negative impact on our results of operations and could damage our customer relationships. Further, a significant increase in the price of one or more of these materials could have a negative impact on our results of operations.
Estimates of our potential liabilities relating to our oil and natural gas property may be incorrect.
Actual abandonment expenses may vary substantially from those estimated by us and any significant variance in these assumptions could materially affect the estimated liability recorded in our consolidated financial statements. Therefore, the risk exists we may underestimate the cost of plugging wells and abandoning production facilities. If costs of abandonment are materially greater than our estimates, this could have an adverse effect on our financial condition, results of operations and cash flows.
Potential changes of Bureau of Ocean Energy Management security and bonding requirements for offshore platforms could impact our operating cash flows and results of operations.
Federal oil and natural gas leases contain standard terms and require compliance with detailed Bureau of Safety and Environmental Enforcement (BSEE) and BOEM regulations and orders issued pursuant to various federal laws, including the Outer Continental Shelf Lands Act. In 2016 BOEM undertook a review of its historical policies and procedures for determining a lessee’s ability to decommission platforms on the Outer Continental Shelf and whether lessees should furnish additional security, and in July 2016, BOEM issued a new Notice to Lessees requiring additional security for decommissioning activities. In January 2017, BOEM extended the implementation timeline for properties with co-lessees by an additional six months, and in June 2017 announced that the Notice to Lessees would be stayed while BOEM continued to review its implementation issues and continued industry engagement to gather additional information on the financial assurance program. We cannot predict whether these laws and regulations may change in the future, particularly in connection with the transition of presidential administrations.
During the second half of 2016, BSEE increased its estimates of many offshore operator’s decommissioning costs, including the decommissioning costs at our sole federal offshore oil and gas property, in which our subsidiary owns a 51% non-operating interest. In October 2016, BOEM sent an initial proposal letter to the operator of the oil and gas property, proposing an increase in the supplemental bonding requirement for the property’s sole fixed platform that was eight to ten times higher than the revised supplemental bonding requirement requested for any other deep-water fixed platform in the U.S. Gulf of Mexico. Both the operator and our subsidiary submitted formal dispute notices, asserting that the estimates in the October 2016 proposal letter may be based on erroneous or arbitrary estimates of the potential decommissioning costs, and requesting in-person meetings to discuss the estimate. We asked that BSEE and BOEM reduce the estimate to an amount that more closely approximates actual decommissioning costs, consistent with estimates identified by BSEE and BOEM for similar deep-water platforms. BSEE and BOEM have not yet responded to our dispute notice. If BOEM ultimately issues a formal order and we are unable to obtain the additional required bonds or assurances, BOEM may suspend or cancel operations at the oil and gas property or otherwise impose monetary penalties. Any of these actions could have a material adverse effect on our financial condition, operating cash flows and liquidity.
Risks Relating to the Combination
There can be no assurances when or if the Combination will be completed.
Although we expect to complete the Combination in the second quarter of 2020, there can be no assurances as to the exact timing of completion of the Combination or that the Combination will be completed at all. The completion of the Combination is subject to customary approvals and conditions, many of which are outside of our control, including, among others, (i) the consummation of the Combination Exchange, (ii) entrance into an asset-based loan facility by Newco, (iii) the absence of a material adverse effect on the Superior Energy U.S. Business or Forbes, (iv) the accuracy of the representations and warranties of the parties to the Merger Agreement in all material respects, (v) material compliance by the parties with their respective covenants and agreements under the Merger Agreement and (vi) amending our existing credit facility.
There can be no assurance that the conditions required to complete the Combination will be satisfied or waived on the anticipated schedule, or at all. If the Merger Agreement is terminated under certain circumstances, we may be obligated to pay Forbes a termination fee.
If the Combination does not close, we will not benefit from the expenses incurred in connection therewith.
The Combination may not be completed. If the Combination is not completed, we will have incurred substantial expenses for which no ultimate benefit will have been received. We have incurred out-of-pocket expenses in connection with the Combination for investment
banking, legal and accounting fees and financial printing and other costs and expenses, much of which will be incurred even if the Combination is not completed.
Termination of the Merger Agreement or failure to otherwise complete the Combination could negatively impact our business and financial results.
Termination of the Merger Agreement or any failure to otherwise complete the Combination may result in various consequences, including the following:
our business may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Combination, without realizing any of the anticipated benefits of completing the Combination.
our management has and will continue to expend a significant amount of capital and time and resources on the Combination, and a failure to consummate the Combination as currently contemplated could have a material adverse effect on our business and results of operations;
the market price of our common stock may decline to the extent that the market price prior to the closing of the Combination reflects a market assumption that the Combination will be completed;
we may be required, under certain circumstances, to pay Forbes a termination fee of up to $5.0 million under the Merger Agreement, which could adversely affect our financial condition and liquidity; and
negative reactions from the financial markets may occur if the anticipated return on our investment in Newco is not realized.
If the Combination is not consummated, we cannot assure our stockholders that the risks described above will not negatively impact our business or financial results.
We are subject to business uncertainties with respect to the operation of the Superior Energy U.S. Business until the Combination closes.
In connection with the pendency of the Combination, it is possible that some customers, suppliers and other persons with whom we have a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationships with us, as the case may be, as a result of the Combination, which could negatively affect our revenues, earnings and cash flows, as well as the market price of our common stock, regardless of whether the Combination is completed. Such risks may be exacerbated by delays or other adverse developments with respect to the completion of the Combination.
Furthermore, the historical financial information we have included in this Form 10-K has been derived from our consolidated financial statements and does not necessarily reflect what our financial position, results of operations and cash flows would have been as a separate, stand-alone entity during the periods presented if the Combination had been consummated.
Uncertainties associated with the Combination may distract management personnel and other key employees and divert their attention away from growing our business, which could adversely affect our future business and operations.
We are dependent on the experience and industry knowledge of our officers and other key employees to execute our business plans. In connection with the Combination, it is expected that some of our executive officers will resign from their roles within our business to become executive officers of Newco. Prior to completion of the Combination, as a result of our expected management changes, our current and prospective employees may experience uncertainty about their roles following the completion of the Combination, which may have an adverse effect on our ability to attract or retain key management and other key personnel.
Furthermore, in connection with the Combination, we will enter into various agreements, including a separation agreement and transition services agreement with Newco, to effect the separation of the Superior Energy U.S. Business from our other businesses and provide a framework for our relationship with Newco after the Combination. The performance of these agreements following the closing of the Combination will require significant amounts of our management’s time and effort, which may divert management’s attention from operating and growing our remaining business.
Potential litigation against us or Forbes could result in an injunction preventing the completion of the Combination or a judgment resulting in the payment of damages.
Stockholders of our company and/or Forbes may file lawsuits against us or Forbes, respectively, and/or the directors and officers of such companies in connection with the Combination. As of the date of this filing, there have been no such lawsuits filed against either Forbes or us. However, if filed in the future, these lawsuits could prevent or delay the completion of the Combination and result in significant costs to us, including any costs associated with the indemnification of directors and officers. The defense or settlement of any lawsuit or claim against us that remains unresolved at the time the Combination is completed may adversely affect our business, financial condition, results of operations and cash flows.
Some of our executive officers have interests in the Combination that are different from the interests of our stockholders generally.
Some of our executive officers have interests in the Combination that are different from, or are in addition to, the interests of our stockholders generally. These interests may include their expected designation as directors and/or executive officers of Newco following the completion of the Combination.
If the Combination is completed, we may not achieve the anticipated return on our investment in Newco.
The success of our investment in Newco as a result of the Combination will depend, in part, on Newco’s ability to realize the anticipated benefits and cost savings from combining the Superior Energy U.S. Business and Forbes’ business. There can be no assurance that the Superior Energy U.S. Business and Forbes will be able to successfully integrate, which may negatively impact our investment in Newco. Difficulties in integrating the Superior Energy U.S. Business and Forbes may result in Newco performing differently than expected, in operational challenges, or in the failure to realize anticipated expense-related efficiencies that may have a negative impact on our investment in Newco.
Furthermore, we may not be able to achieve the full strategic and financial benefits expected from the Combination. Following the Combination, our business will be less diversified than our business prior to the Combination and the actions required to separate the Superior Energy U.S. Business from the remaining businesses, including an internal restructuring to effectuate the Combination, could disrupt our operations.
Item 1B. Unresolved Staff Comments
Item 2. Properties
Information on properties is contained in Part I, Item 1 of this Annual Report on Form 10-K.
Item 3. 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. See note 10 to our consolidated financial statements for further information.
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on the New York Stock Exchange under the symbol “SPN.” At February 25, 2020, there were 15,798,428 shares of our common stock outstanding, which were held by 26 record holders.
The following graph compares the yearly percentage change in cumulative total stockholder return on our common stock for the five years ended December 31, 2019 with the cumulative total return on the Standard & Poor’s 500 Index (the S&P 500 Index) and our Self-Determined Peer Group, as described below, for the same period. The information in the graph is based on the assumption of a $100 investment on January 1, 2015. The comparisons in the graph are required by the SEC and are not intended to be a forecast or indicative of possible future performance of our common stock. The following performance graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (the Exchange Act), except to the extent that we specifically incorporate it by reference into such filing.
Superior Energy Services, Inc.
S&P 500 Index
The lines represent monthly index levels derived from compounded daily returns that reflect the reinvestment of all dividends.
The indexes are reweighted daily, using the market capitalization on the previous trading day.
If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
The index level for all securities was set to $100.00 on December 31, 2014.
Our Self-Determined Peer Group consisted of 12 companies whose average stockholder return levels comprised part of the performance criteria established by the Compensation Committee of our Board of Directors under grants made in 2019 as part of our long-term incentive compensation program: Basic Energy Services, Inc., C&J Energy Services, Ltd., Halliburton Company, Helix Energy Solutions Group, Inc., Key Energy Services, Inc., Nabors Industries Ltd., Nine Energy Services, Inc., Oil States International, Inc., Patterson-UTI Energy, Inc., RPC, Inc., Schlumberger N.V. and Weatherford International plc.
Equity Compensation Plan Information
Information required by this item with respect to compensation plans under which our equity securities are authorized for issuance is incorporated by reference from Part III, Item 12 of this Annual Report Form 10-K, which will be contained in our definitive proxy statement to be filed pursuant to Regulation 14A and is incorporated herein by reference.
Common Stock Repurchases
The following table provides information about shares of our common stock repurchased during each month for the three months ended December 31, 2019.
October 1 - 31, 2019
November 1 - 30, 2019
December 1 - 31, 2019
(1) On October 1, 2019, our Board of Directors authorized a program to repurchase up to $15.0 million of our common stock, which will expire on March 31, 2020.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with both “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K in order to understand factors which may affect the comparability of the Selected Financial Data.
(in thousands, except per share data)
Income (loss) from operations
Net loss from continuing operations
Loss from discontinued operations, net of tax
Net loss from continuing operations per share:
Basic and diluted
Net loss from discontinued operations per share:
Basic and diluted
Net loss per share:
Basic and diluted
Cash dividends declared per share
Long-term debt, net
Decommissioning liabilities, less current portion
For 2019, 2018, 2017, 2016 and 2015 net loss from continuing operations included $17.2 million, $322.7 million, $10.4 million, $436.0 million and $1,391.5 million, respectively, of reduction in value of assets.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our consolidated financial statements and applicable notes to our consolidated financial statements and other information included elsewhere in this Annual Report on Form 10-K, including risk factors disclosed in Part I, Item 1A. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, our actual results may differ from those expressed or implied by the forward-looking statements. See “Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K.
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 we offer products and services with respect to the various phases of a well’s economic life cycle. We currently report our operating results in four business segments: Drilling Products and Services; Onshore Completion and Workover Services; Production Services; and Technical Solutions. Given our long-term strategy of geographic expansion, we also provide supplemental segment revenue information in three geographic areas: U.S. land; U.S. offshore; and International.
On December 18, 2019, we entered into the Merger Agreement to divest the Superior Energy U.S. Business and combine it with Forbes’ complimentary service lines to create a new, publicly traded consolidation platform for U.S. completion, production and water solutions.
Following the completion of the Combination, which is expected to close in the second quarter of 2020, we will remain a globally diversified oilfield services company built around the following key product and service lines: premium drill pipe, bottom hole assemblies, completion tools and products, hydraulic workover, snubbing and production services and well control services.
Under the terms of the Merger Agreement, the Superior Energy U.S. Business and Forbes will be merged into Newco. At the closing of the Combination, we will receive 49.9% of the issued and outstanding voting Class A Stock of Newco and 100% of the issued and outstanding non-voting Class B Stock of Newco, which will collectively represent an approximate 65% economic interest in Newco. Our and Forbes’ economic interest in Newco are subject to adjustment within certain parameters based on Forbes’ net debt position calculated at closing pursuant to the terms of the Merger Agreement. In addition, certain lenders under the Forbes Term Loan will exchange their portion of the aggregate principal amount outstanding under the Forbes Term Loan for approximately $30.0 million in Preferred Shares, which will be entitled to cash dividends at a rate of 5% per annum, payable semi-annually, and, on the third anniversary of the closing of the Combination will be subject to mandatory conversion into shares of Newco’s Class A Stock. After giving effect to such conversion, we would own an approximate 52% economic interest and Forbes’ existing stockholders would own an approximate 48% economic interest in Newco.
The Combination has been unanimously approved by our and Forbes’ Boards of Directors as well as the special committee of the Board of Directors of Forbes. Newco filed a proxy statement/prospectus on February 12, 2020, pursuant to which Forbes will solicit proxies of its stockholders to approve the Combination at a special meeting of stockholders. However, certain stockholders of Forbes who will collectively own a majority of Forbes’ common stock on the record date for the Forbes special meeting have committed to vote the shares they beneficially own in favor of the Combination and have the ability to approve the Combination without the vote of any other stockholder of Forbes.
Related Financing Transactions
As a condition of the Combination, SESI, our wholly owned subsidiary, consummated the Exchange Offer of SESI’s previously outstanding $800.0 million aggregate principal amount of Original Notes for up to $635.0 million aggregate principal amount of New Notes and conducted the Consent Solicitation to amend the liens covenant in the Original Notes Indenture to permit the Proposed Amendment upon the terms and subject to the conditions set forth in SESI’s Offering Memorandum. A supplemental indenture by and among SESI, the guarantors party thereto and the Bank of New York Mellon Trust Company, N.A., as trustee, related to the Proposed Amendment was executed on February 14, 2020. The Original Notes outstanding after the Exchange Offer are governed by the Original Notes Indenture, as amended by the Proposed Amendment, provided that the Proposed Amendment will only become operative immediately prior to the occurrence of the Combination.
The Exchange Offer expired at 5:00 p.m., New York City time, on February 21, 2020, and $617.9 million aggregate principal amount of outstanding Original Notes were validly tendered for exchange and not withdrawn, representing 77.24% of the aggregate principal
amount of Original Notes outstanding upon commencement of the Exchange Offer. SESI accepted all validly tendered Original Notes and issued $617.9 million aggregate principal amount of New Notes pursuant to the New Notes Indenture.
Substantially concurrently with the consummation of the Combination, eligible note holders will receive, in exchange for $617.9 million aggregate principal amount of New Notes, on a pro rata basis: (1) $243.3 million aggregate principal amount of Newco Secured Notes, (2) $243.3 million aggregate principal amount of the Superior Secured Notes, (3) $131.3 million in cash and (4) $6.35 million in cash constituting the total consent payment. The indentures governing the Newco Secured Notes and the Superior Secured Notes will each contain restrictive covenants customary for issuances of high-yield secured notes of this type. On February 20, 2020, we entered into the Amendment which amends certain covenants, among other things, to account for the amended terms of the Exchange Offer.
Exit and Discontinuation of the Hydraulic Fracturing Service Line
On December 10, 2019, our indirect, wholly owned subsidiary, Pumpco, completed its existing hydraulic fracturing field operations and determined to discontinue, wind down and exit its hydraulic fracturing operations. We intend to maintain an adequate number of employees to efficiently wind down Pumpco’s business and divest assets over time. The financial results of Pumpco’s operations have historically been included in our Onshore Completions and Workover Services segment. Pumpco’s business is reflected as discontinued operations for each of the years ended December 31, 2019, 2018 and 2017 and its assets are in the process of being divested. See note 12 to our consolidated financial statements for further discussion of discontinued operations. Discontinuing hydraulic fracturing aligns with our strategic objective to divest assets and service lines that do not compete for investment in the current market environment. Net proceeds from the divestiture of Pumpco’s assets will be used to reduce debt.
Reverse Stock Split
At a special meeting of stockholders held on December 18, 2019, our stockholders voted to approve a proposal authorizing our Board of Directors to effect the Reverse Stock Split and to proportionately reduce the number of our authorized shares of common stock. Following the special meeting of stockholders, our Board of Directors approved a 1-for-10 Reverse Stock Split.
As a result of the Reverse Stock Split, each 10 pre-split shares of common stock outstanding immediately prior to the Reverse Stock Split automatically were converted to one issued and outstanding share of common stock without any action on the part of our stockholders. No fractional shares of common stock were issued as a result of the Reverse Stock Split. Instead, any stockholder who would have been entitled to a fractional share received a cash payment in lieu of such fractional shares. The total number of shares of common stock that we are authorized to issue has also been reduced by the same ratio.
Resumption of Trading on the NYSE
On September 26, 2019, the NYSE suspended trading of our common stock and commenced delisting proceedings due to our “abnormally low” stock price. Following the NYSE’s suspension of trading of our common stock, we appealed the NYSE staff’s determination. On September 27, 2019, our common stock commenced trading on the OTC Markets and, on October 4, 2019, our common stock also commenced trading on the OTCQX Best Market, operated by OTC Markets Group Inc. Subsequently, the NYSE formally withdrew the delisting determination, and, on December 26, 2019, our common stock resumed trading on the NYSE under the ticker symbol “SPN.”
During 2019, we continued to manage challenging market dynamics as a divergence of operating results in the U.S. and international markets remained prevalent. We generated $1,425.4 million of revenue in 2019, which represents a 4% decrease from $1,478.9 million of revenue generated during 2018. The decrease in revenue is largely attributable to our U.S. land market area, in which revenue decreased by 14% during 2019.
In North America, the negative pricing pressures that began during the fourth quarter of 2018 continued to impact the demand for our completion services during 2019. The decrease in revenue generated in the U.S. land market area was primarily due to decreased revenues from our coiled tubing services, fluid management and well servicing rigs. The decrease in revenue is also attributable to the disposition of our land drilling rigs service line during the second quarter of 2019.
Revenue in our international market areas increased 13% during 2019, as compared to 2018, outpacing the 11% increase in international rig count. The increase in revenue generated in our international market areas was primarily driven by increased revenue from rentals of premium drill pipe and bottom hole assemblies, increased revenue from hydraulic workover and snubbing services, electric line and pressure control services. We experienced revenue growth primarily in our Asia-Pacific, Middle East and African regions. Revenue generated from the U.S. offshore market increased 4%, primarily due to increased revenues from rentals of premium drill pipe and bottom hole assemblies and increased revenue from hydraulic workover and snubbing and pressure control services.
Despite the challenging year, we generated $235.4 million in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), which represents a modest decrease of 2% from $241.3 million of adjusted EBITDA generated during 2018. In addition, during 2019, we generated $5.9 million of free cash flow, as compared to a $56.3 million free cash flow deficit generated during 2018. Refer to the “Non-GAAP Financial Measures” section below for a further discussion and a reconciliation of adjusted EBITDA to net loss from continuing operations and a reconciliation of free cash flow to cash flows from operating activities.
During 2019, we focused on growing our cash balance, reducing capital expenditures and divesting non-core assets. Our capital expenditures decreased by 37% during 2019, while our cash balance increased by 72% as of December 31, 2019 compared to December 31, 2018. During 2019, we divested several non-core assets resulting in cash proceeds of $110.0 million. In January of 2020, we received the remaining payment of $24.0 million relating to an asset sale which occurred during the fourth quarter of 2019.
During 2020, we expect 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. Additionally, we intend to carefully manage our liquidity by continuously monitoring cash flow and capital spending and timing of debt retirement. We intend to reduce long-term indebtedness through generation of free cash flow, successful execution of the Combination outlined herein and further divestiture of non-core assets.
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 as well as future prices of oil and natural gas. Changes in spending result in an increased or decreased demand for our 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 count, which are summarized in the table below.
2019 to 2018 Change
2018 to 2017 Change
Worldwide Rig Count (1)