10-K
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Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

 

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2022

Or

 

 

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Transition Period from ________ to _______

 

Commission File No. 001-34037

Commission Company Name: SUPERIOR ENERGY SERVICES INC

 

 

SUPERIOR ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

87-4613576

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

1001 Louisiana Street, Suite 2900

 

 

Houston, TX

 

77002

Address of principal executive offices)

 

(Zip Code)

 

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

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol

Name of each exchange on which registered

None

N/A

None

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

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

 

 

 

Large accelerated filer

 

Accelerated Filer

Non-accelerated filer

 

Smaller reporting company

 

 

Emerging growth company

 

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes No

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).

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

There is no market for the registrant’s securities.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No

 

The number of shares of the registrant's Class A common stock outstanding on March 1, 2023 was 19,998,695

The number of shares of the registrant's Class B common stock outstanding on March 1, 2023 was 152,030

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Not applicable.

 

 

 

 


Table of Contents

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

Page

PART I

 

 

 

 

 

 

 

Item 1

Business

5

 

Item 1A

Risk Factors

10

 

Item 1B

Unresolved Staff Comments

22

 

Item 2

Properties

22

 

Item 3

Legal Proceedings

22

 

Item 4

Mine Safety Disclosures

23

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

24

 

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

Item 7A

Quantitative and Qualitative Disclosures about Market Risk

35

 

Item 8

Financial Statements and Supplementary Data

37

 

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

75

 

Item 9A

Controls and Procedures

75

 

Item 9B

Other Information

76

 

Item 9C

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10

Directors, Executive Officers and Corporate Governance

77

 

Item 11

Executive Compensation

78

 

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

95

 

Item 13

Certain Relationships and Related Transactions, and Director Independence

96

 

Item 14

Principal Accounting Fees and Services

97

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15

Exhibits, Financial Statement Schedules

98

 

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FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K (the “Form 10-K”) and other documents filed by us with the Securities and Exchange Commission (the “SEC”) contain, and future oral or written statements or press releases by us and our management may contain, forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Generally, the words “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks” and “estimates,” variations of such words and similar expressions identify forward-looking statements, although not all forward-looking statements contain these identifying words. All statements other than statements of historical fact included in this 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 their 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:

 

risks and uncertainties regarding the continuing effects of residual bankruptcy proceedings on us and our various constituents; attendant risks associated with restrictions on our ability to pursue our business strategies;
the difficulty to predict our long-term liquidity requirements and the adequacy of our capital resources;
restrictive covenants in the Credit Facility (as defined below) could limit our growth and our ability to finance our operations, fund our capital needs, respond to changing conditions and engage in other business activities that may be in our best interests;
the conditions in the oil and gas industry;
U.S. and global market and economic conditions, including impacts relating to inflation and supply chain disruptions;
the effects of public health threats, pandemics and epidemics, and the adverse impact thereof on our growth, operating costs, supply chain, labor availability, logistical capabilities, customer demand and industry demand generally, margins, utilization, cash position, taxes, the price of our securities, and our ability to access capital markets;
the ability of the members of Organization of Petroleum Exporting Countries (“OPEC+”) to agree on and to maintain crude oil price and production controls;
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;
the possibility of not being 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 uncertainties associated with our international operations 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;
risks to our operations from potential 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 likelihood that the interests of our significant stockholders may conflict with the interests of our other stockholders;
the risks associated with owning our Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”), for which there is no public market; and
the likelihood that our stockholders agreement may prevent certain transactions that could otherwise be beneficial to our stockholders.

 

These risks and other uncertainties related to our business are described in detail below in Part I, Item 1A of this 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

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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.

 

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PART I

 

Item 1. Business

 

General

 

Superior Energy Services is a global oilfield products and services company with a portfolio of premier rental and well servicing brands providing customers with robust inventory, expedient delivery, engineered solutions and expert consultative service — all aligned with enterprise-wide Shared Core Values for safe, sustainable operations, corporate citizenship and a commitment to free cash flow generation and value creation.

 

From drilling equipment rentals to oilfield services, our portfolio of global companies provides highly specialized solutions for maintaining safety, efficiency, profitability, and ESG compliance.

 

Products and Services

 

Combining financial discipline with corporate services expertise, Superior maintains a strategy focused on businesses critical to our customers' success. We support our portfolio of brands with the necessary resources and leadership so they can add value to our customers’ operations with an emphasis on quality, safety, and sustainability.

 

Rentals

 

Our rentals services brands offer value-added products and services to meet a wide range of project needs. With a long history of delivering maximum value, these brands help customers and vendor partners achieve safety, efficiency and sustainability goals. Our rental segment operates with low labor intensity and a substantial catalog of product offerings.

The products and service offerings of Rentals are;

Engineering and design services;
Rental of premium downhole tubulars, drill pipe and handling accessories;
manufacturing and rental of bottom hole assembly accessories;
rentals of offshore accommodation units.

 

Well Services

 

Our Well Services brands provide specialized solutions for drilling, production, completion and decommissioning. They have a proven track record of meeting operators’ expectations and delivering the products and expertise success demands. Among our customers and vendor partners, these brands have a history of strong, collaborative relationships.

The products and service offerings of Well Services are

 

Risk management, well control and training solutions;
Hydraulic workover and snubbing services;
Engineering and manufacturing of premium completion tools;
Cementing, wireline, and coil tubing services with operations in Latin America and Kuwait.

 

Emergence from Voluntary Reorganization under Chapter 11

 

On December 7, 2020, certain of our direct and indirect wholly-owned domestic subsidiaries (the “Affiliate Debtors”) filed petitions for reorganization under the provisions of Chapter 11 of the Bankruptcy Code and, in connection therewith, filed the proposed Joint Prepackaged Plan of Reorganization (as amended, modified or supplemented from time to time, the “Plan”). On February 2, 2021 (the “Emergence Date”), the conditions to the effectiveness of the Plan were satisfied and we emerged from Chapter 11.

 

On the Emergence Date, we qualified for and adopted fresh start accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 852 – Reorganizations, which specifies the accounting and financial reporting requirements for entities reorganizing through Chapter 11 bankruptcy proceedings. The application of fresh start accounting resulted in a new basis of accounting and we became a new entity for financial reporting purposes. As a result of the implementation of the Plan and the application of fresh start accounting, our historical financial statements on or before the Emergence Date are not a reliable indicator of our results of operations for any period after our adoption of fresh start accounting.

 

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As used herein, “Superior,” “we,” “us,” “our” and similar terms refer to (i) prior to the Emergence Date, SESI Holdings, Inc. (formerly known as Superior Energy Services, Inc.) (“Predecessor”) and its subsidiaries and (ii) after the Emergence Date, Superior Energy Services, Inc. (formerly known as Superior Newco, Inc.) and its subsidiaries (“Successor”). Additionally, the use the following terms refer to our operations:

 

"Predecessor Period"

January 1, 2021 through February 2, 2021

"Successor Period"

February 3, 2021 through December 31, 2021

 

Customers

 

Our customers are 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 2022, 2021 or 2020. A reduction in sales to any of our existing large customers could have a material adverse effect on our business and operations.

 

Competition

 

We provide products and services worldwide in highly competitive markets, with competitors comprised of both small or regionally focused companies in our Rentals segment, and large or international companies in our Well services segment. Our revenues and earnings can be affected by several factors, including but not limited to changes in competition, fluctuations in drilling and completion activity, perceptions of future prices of oil and gas, government regulation, disruptions caused by factors such as weather, pandemics, and geopolitics, 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 $200 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.

 

Government Regulation

 

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.

 

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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.

 

Environmental Matters

 

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.

 

Numerous federal, state and local governmental agencies, such as the U.S. Environmental Protection Agency (the “EPA”), issue laws and regulations that often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may require the acquisition of a permit before commencing operations, restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with our operations, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas and other protected areas, require action to prevent or remediate pollution from current or former operations, such as plugging abandoned wells or closing pits, result in the suspension or revocation of necessary permits, licenses and authorizations, require that additional pollution controls be installed and impose substantial liabilities for pollution resulting from our operations or related to our owned or operated facilities. Liability under such laws and regulations is often strict (i.e., no showing of “fault” is required) and can be joint and several. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly pollution control or waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as the oil and natural gas industry and infrastructure industry in general. We have not experienced any material adverse effect from compliance with these environmental requirements. This trend, however, may not continue in the future.

 

Climate Change

 

In recent years, federal, state and local governments have taken steps to reduce emissions of carbon dioxide, methane and other greenhouse gases, collectively referred to as greenhouse gasses (“GHGs”). For example, the Inflation Reduction Act of 2022 (“IRA”) includes billions of dollars in incentives for the development of renewable energy, clean hydrogen, clean fuels, electric vehicles, investments in advanced biofuels and supporting infrastructure and carbon capture and sequestration. These incentives could accelerate the transition of the economy away from the use of fossil fuels towards lower- or zero-carbon emissions alternatives, which could decrease demand for oil and gas and consequently adversely affect the business of our customers thereby reducing demand for our services. In addition, the IRA imposes the first ever federal fee on the emission of GHGs through a methane emissions charge. Specifically, the IRA amends the Clean Air Act to impose a fee on the emission of methane that exceeds an applicable waste emissions threshold from sources required to report their GHG emissions to the EPA, including sources in the offshore and onshore petroleum and natural gas production and gathering and boosting source categories. The methane emissions charge would start in calendar year 2024 at $900 per ton of methane, increase to $1,200 in 2025 and be set at $1,500 for 2026 and each year after. Calculation of the fee is based on certain thresholds established in the IRA.

 

The EPA has also finalized a series of GHG monitoring, reporting and emissions control rules for the oil and natural gas industry, and almost half of the states have already taken measures to reduce emissions of GHGs primarily through the development of GHG emission inventories and/or regional GHG cap-and-trade programs. Also, states have imposed increasingly stringent requirements related to the venting or flaring of gas during oil and gas operations. While we are subject to certain federal GHG monitoring and reporting requirements, our operations currently are not adversely impacted by existing federal, state and local climate change initiatives.

 

At the international level, in December 2015, the United States participated in the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of GHGs. The Agreement went into effect on November 4, 2016. The Paris Agreement establishes a framework for the parties to cooperate and report actions to reduce GHG emissions. Although the United States withdrew from the Paris Agreement effective November 4, 2020, President Biden issued an executive order on January 20, 2021 to rejoin the Paris Agreement, which went into effect on February 19, 2021. On April 21, 2021, the United States announced that it was setting an economy-wide target of reducing its greenhouse gas emissions by 50 to 52 percent below 2005 levels in 2030. In November 2021, in connection with the 26th Conference of the Parties in Glasgow, Scotland, the United

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States and other world leaders made further commitments to reduce greenhouse gas emission, including reducing global methane emissions by at least 30% by 2030. Furthermore, many state and local leaders have stated their intent to intensify efforts to support the international commitments.
 

 

Restrictions on emissions of methane or carbon dioxide that may be imposed could adversely affect the oil and natural gas industry by reducing demand for hydrocarbons and by making it more expensive to develop and produce hydrocarbons, either of which could have a material adverse effect on future demand for our services. At this time, it is not possible to accurately estimate how potential future laws or regulations addressing GHG emissions would impact our business.
 

 

In addition, there have also been efforts in recent years to influence the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations and ability to access capital. Furthermore, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals or public entities may seek to enforce environmental laws and regulations against certain energy companies and could allege personal injury, property damages or other liabilities. While our business is not a party to any such litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition.

 

Moreover, climate change may cause more extreme weather conditions such as more intense hurricanes, thunderstorms, tornadoes and snow or ice storms, as well as rising sea levels and increased volatility in seasonal temperatures. Extreme weather conditions can interfere with our productivity and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations.
 

 

Raw Materials

 

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.

 

Seasonality

 

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.

 

Human Capital

 

As of December 31, 2022, we had approximately 2,200 employees. Our employees in Argentina are subject to union contracts which represents approximately 22.0% of our total employee base. We believe that we have good relationships with our employees. We strive to employ a dynamic workforce to complement our core values. Our hiring policy forbids the discrimination in employment on the basis of age, culture, gender, national origin, sexual orientation, physical appearance, race or religion. We are an inclusive company with people of various backgrounds, experience, culture, styles and talents. We are committed to the health, safety and wellness of our employees, and we pride ourselves on workplace safety. We track and maintain several key safety metrics, which senior management reviews periodically and are included in the determination of their compensation and we evaluate management on their ability to provide safe working conditions on job sites and to create a safety culture.

 

Facilities

 

We own or lease a large number of facilities in the U.S. and in various other countries throughout the world. Our international operations are primarily focused in Latin America, Asia-Pacific and the Middle East/North Africa regions. As of December 31, 2022, we owned 9 properties classified as held for sale.

 

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Other Information

 

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.

 

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.

 

Copies of the annual, quarterly and current reports we file with or furnish to the SEC, and any amendments to those reports, as well as our Code of Conduct, 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/.

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Item 1A. Risk Factors

 

The following information should be read in conjunction with the section entitled “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:

 

Risks Related to the Chapter 11 Cases

 

Despite having emerged from bankruptcy on February 2, 2021, we continue to be subject to the risks and uncertainties associated with residual Chapter 11 bankruptcy proceedings.

 

As discussed below (see Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations), we emerged from bankruptcy on the Emergence Date. It is possible that having filed for bankruptcy could adversely affect our business and relationships with customers, vendors, employees, service providers and suppliers. Due to uncertainties, many risks exist, including the following:

 

vendors or other contract counterparties could terminate their relationship or require financial assurances or enhanced performance;
the ability to renew existing contracts and compete for new business may be adversely affected;
the ability to attract, motivate and/or retain key executives and employees may be adversely affected;
employees may be more easily attracted to other employment opportunities; and
competitors may take business away from us, and our ability to attract and retain customers may be negatively impacted.

 

Because of the residual risks and uncertainties associated with the Chapter 11 Cases, the ultimate impact that events that occurred during, or that may occur subsequent to, these proceedings will have on our business, financial condition and results of operations cannot be accurately predicted or quantified. While we believe the passage of time will reduce these risks, we cannot assure you that having been subject to bankruptcy protection will not adversely affect our operations going forward.

 

Risks Related to Our Business

 

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 of, and the corresponding capital spending 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 and are likely to continue to be volatile. 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. Price volatility continued throughout part of 2022, primarily due to the impact of Russia's invasion of Ukraine and the macroeconomic effects resulting from the related sanctions. In addition, oil prices are particularly sensitive to actual and perceived threats to global political stability and to changes in production from OPEC+ member states. The ongoing conflict, and the continuation of, or any increase in, the conflict between Russia and Ukraine, has led and may continue to lead to an increase in the volatility of global oil and gas prices, which could have a corresponding negative impact on the capital expenditure of oil and gas companies as a result of the higher perceived risk. In addition, the imposition of comprehensive sanctions against Russia (including in relation to the Russian energy sector) as well as the announcement of prohibitions on Russian oil and gas imports by certain members of the European Union, the United Kingdom, the United States, and certain other countries, as of March 2022, including additional countries that may enforce prohibitions of a similar nature in the future, has led to and is expected to continue to lead to an increase in the price of global oil and gas prices. 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 up to a point. Our customers may also consider the volatility of oil and natural gas prices and other risk factors and require 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

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affect the level of capital spending by our customers and in turn could have a material effect on our business, results of operations, financial condition and cash flow.

 

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 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 futures 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;
technological advances affecting energy exploration, production and consumption;
raw material inflation and availability;
availability of funds for exploration and development due to increased dividend payments and share repurchase programs. Numerous EP companies have increased the amount of their dividend payments and share repurchase programs, causing reduced available funds for exploration and development

 

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. Sustained lower oil and natural gas prices have led to a significant decrease in spending by our customers over the past several years, which have led to significantly decreased revenues. Further decreases in oil and natural gas prices could lead to further cuts in spending and potential lower revenues for us. 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. We expect continued volatility in both crude oil and natural gas prices (including the possibilities that such prices could remain at current levels or decline further for an extended period of time), as well as in the level of drilling and production related activities as a result of decisions of OPEC+ and other oil exporting nations regarding production, and the other factors listed above. Any of these events have affected, and could further affect, the demand for oil and natural gas and has and could further have a material adverse effect on our business, results of operations, financial condition and cash flow.

 

Our business may also be affected by new sanctions and export controls targeting Russia and other responses to Russia’s invasion of Ukraine.

 

As a result of Russia’s invasion of Ukraine, certain members of the European Union, the United Kingdom and the United States, among others, have developed coordinated sanctions and export-control measure packages.

 

Based on actions taken and other public statements to date, these packages may include:

 

comprehensive financial sanctions against certain state-owned enterprises and Russian banks (including SWIFT cut-off);
a prohibition on transactions related to the Russian Central Bank;
additional designations of Russian individuals with significant business interests and government connections;
designations of individuals and entities involved in Russian military activities;
restrictions on investment in the Russian energy sector;
enhanced export controls and trade sanctions targeting Russia's import of certain goods and technology; and

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closure of airspace to Russian aircraft.

 

As the invasion of Ukraine continues, there can be no certainty regarding whether such governments or other governments will impose additional sanctions, export-controls or other economic or military measures against Russia. Although, we have minimal operational exposure in Russia, representing less than $0.1 million of our revenues for the year ended December 31, 2022, and we do not intend to commit further capital towards projects in Russia, the impact the invasion of Ukraine, including economic sanctions and export controls or additional war or military conflict, as well as potential responses to them by Russia, is currently unknown and they could adversely affect oil and gas companies, including many of which are our customers, as well as the global supply chain. In addition, the continuation of the invasion of Ukraine by Russia could lead to other disruptions, instability and volatility in global markets and industries, which could have a material adverse effect on our business, results of operations, financial condition and cash flow.

 

Our long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time.

 

While we have a significant cash balance currently, we face uncertainty regarding the adequacy of our liquidity and capital resources over the long-term and have extremely limited, if any, access to additional financing. We cannot assure you that cash on hand, letters of credit under the Credit Facility, and cash flow from operations will be sufficient to continue to fund our operations over the long-term.

 

Furthermore, turmoil in the credit and financial markets could adversely affect financial institutions, inhibit lending and limit our access to funding through borrowings under the 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. In addition, there has been a relatively recent increased focus of debt and equity capital providers on environmental, social and governance (“ESG”) investing, and the energy industry faces growing negative sentiment in the market. This volatility, as well as this increased focus on ESG investing and growing negative sentiment, 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.

 

Restrictive covenants in the Credit Facility could limit our growth and our ability to finance our operations, fund our capital needs, respond to changing conditions and engage in other business activities that may be in our best interests.

 

The Credit Facility imposes operating and financial restrictions. Unless all loans are paid off and letters of credit outstanding are cash collateralized and the Credit Agreement terminated, these restrictions limit the ability to, among other things, subject to permitted exceptions:

 

incur additional indebtedness;
make investments or loans;
create liens;
consummate mergers and similar fundamental changes;
make restricted payments;
make investments in unrestricted subsidiaries; and
enter into transactions with affiliates.

 

The restrictions contained in the Credit Facility could:

 

limit the ability to plan for, or react to, market conditions, to meet capital needs or otherwise to restrict our activities or business plan; and
adversely affect the ability to finance our operations or to engage in other business activities that would be in our interest.

 

The Credit Facility includes provisions that require mandatory prepayment of outstanding borrowings and/or a borrowing base redetermination when there are asset dispositions over a certain threshold, which could limit the ability to generate liquidity from asset sales. Also, the Credit Facility requires compliance with a specified financial ratio if triggered by an event of default or availability beneath specified thresholds. The ability to comply with this ratio may be affected by events beyond our control and, as a result, this ratio may not be met in circumstances when it is tested. This financial ratio restriction could limit the ability to obtain future financings, make needed capital expenditures, withstand a continued downturn in our business or a downturn in the economy in general or otherwise conduct necessary corporate activities. Declines in oil and natural gas prices could result in failure to meet one or more of the financial

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covenants under the Credit Facility, which could require refinancing or amendment of such obligations resulting in the payment of consent fees or higher interest rates or require a capital raise at an inopportune time or on terms not favorable.

 

A breach of any of these covenants or the inability to comply with the required financial ratios or financial condition tests could result in a default under the Credit Facility. A default under the Credit Facility, if not cured or waived, could result in acceleration of all indebtedness outstanding thereunder and/or a requirement to cash collateralize letters of credit issued thereunder.
 

 

Our business may be materially and adversely impacted by U.S. and global market and economic conditions, including impacts relating to inflation and supply chain disruptions.

 

Our revenue is derived from the services and products that we offer to major, national and independent oil and natural gas exploration and production companies around the world for the various phases of their respective well’s economic life cycles. Given the concentration of our business activities in the oil and gas industry, we will be particularly exposed to certain economic downturns. United States and global market and economic conditions have been, and continue to be, disrupted and volatile due to many factors, including the ongoing COVID-19 pandemic, component shortages and related supply chain challenges, geopolitical developments such as the conflict between Ukraine and Russia, and increasing inflation rates and the responses by central banking authorities to control such inflation, among others.

 

General business and economic conditions that could affect us and our customers include fluctuations in economic growth, debt and equity capital markets, liquidity of the global financial markets, the availability and cost of credit, investor and consumer confidence, and the strength of the economies in which we and our customers operate. A weak economic environment could result in significant decreases in demand for our products and services, including the delay or cancellation of current or anticipated projects. In particular, rising inflation rates in the United States have begun to affect businesses across many industries, including ours, by increasing the costs of labor, equipment, parts, consumables and shipping. A high inflationary environment may also cause customers to defer or decrease their expenditures on the services and products that we provide. In addition, supply chain disruptions and delays, could adversely affect our ability to provide our services and deliver our products in a timely manner, which could impair our ability to meet customer demand and result in lost sales, increased supply chain costs or damage to our reputation. Any of foregoing these economic conditions could have a material adverse effect on our business, financial condition, and results of operations.

 

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. While our personnel has decreased significantly as a result of divestitures in connection with the Transformation Project, 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. Our insurance also may not cover losses associated with pandemics such as the COVID-19 pandemic. 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, or at all. 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

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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.

 

The credit risks of our customer base could result in losses.

 

Many of our customers are oil and gas companies that from time to time face liquidity constraints as the commodity price environment changes. 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 the assessment of monetary penalties, imposition of remedial requirements, permit revocations, requirements for additional pollution controls, and injunctions limiting or prohibiting some or all of our operations.

 

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 or incentivizing zero-carbon energy sources 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, environmental advocacy groups and technological initiatives aimed at reducing the use of hydrocarbons. In response, additional costly requirements and restrictions have been imposed on the oil and gas industry to regulate and reduce the emission of GHGs and transition to a global low carbon economy.

 

For example, the Inflation Reduction Act of 2022 (“IRA”) includes billions of dollars in incentives for the development of renewable energy, clean hydrogen, clean fuels, electric vehicles, investments in advanced biofuels and supporting infrastructure and carbon capture and sequestration. These incentives could accelerate the transition of the economy away from the use of fossil fuels towards lower- or zero-carbon emissions alternatives, which could decrease demand for oil and gas and consequently adversely affect the business of our

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customers, thereby reducing demand for our services. In addition, the IRA imposes the first ever federal fee on the emission of GHGs through a methane emissions charge. Specifically, the IRA amends the Clean Air Act to impose a fee on the emission of methane that exceeds an applicable waste emissions threshold from sources required to report their GHG emissions to the EPA, including sources in the offshore and onshore petroleum and natural gas production and gathering and boosting source categories. The methane emissions charge would start in calendar year 2024 at $900 per ton of methane, increase to $1,200 in 2025 and be set at $1,500 for 2026 and each year after. Calculation of the fee is based on certain thresholds established in the IRA.

 

The EPA has also finalized a series of GHG monitoring, reporting and emissions control rules for the oil and natural gas industry, and almost half of the states have already taken measures to reduce emissions of GHGs primarily through the development of GHG emission inventories and/or regional GHG cap-and-trade programs. Also, states have imposed increasingly stringent requirements related to the venting or flaring of gas during oil and gas operations. While we are subject to certain federal GHG monitoring and reporting requirements, our operations currently are not adversely impacted by existing federal, state and local climate change initiatives.

 

At the international level, in December 2015, the United States participated in the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of GHGs. The Agreement went into effect on November 4, 2016. The Paris Agreement establishes a framework for the parties to cooperate and report actions to reduce GHG emissions. Although the United States withdrew from the Paris Agreement effective November 4, 2020, President Biden issued an executive order on January 20, 2021 to rejoin the Paris Agreement, which went into effect on February 19, 2021. On April 21, 2021, the United States announced that it was setting an economy-wide target of reducing its greenhouse gas emissions by 50 to 52 percent below 2005 levels in 2030. In November 2021, in connection with the 26th Conference of the Parties in Glasgow, Scotland, the United States and other world leaders made further commitments to reduce greenhouse gas emission, including reducing global methane emissions by at least 30% by 2030. Furthermore, many state and local leaders have stated their intent to intensify efforts to support the international commitments.

 

Restrictions on emissions of methane or carbon dioxide that may be imposed could adversely affect the oil and natural gas industry by reducing demand for hydrocarbons and by making it more expensive to develop and produce hydrocarbons, either of which could have a material adverse effect on future demand for our services.

 

In addition, 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.

 

In addition, there have also been efforts in recent years to influence the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations and ability to access capital. Furthermore, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals or public entities may seek to enforce environmental laws and regulations against certain energy companies and could allege personal injury, property damages or other liabilities. While our business is not a party to any such litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition.

 

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 GHG emission proposals will be adopted, or what other actions may be taken by domestic or international regulatory bodies. The potential passage of climate change laws or regulations 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.

 

Continuing or worsening inflationary pressures and associated changes in monetary policy have resulted in and may result in additional increases to our operating costs, which in turn have caused and may continue to cause our capital expenditures and operating costs to rise.

 

The U.S. inflation rate increased in 2021 and 2022 and may continue to increase in 2023. These inflationary pressures have resulted in and may result in additional increases to our operating costs, which in turn have caused and may continue to cause our capital expenditures and operating costs to rise. Sustained levels of high inflation have likewise caused the Federal Reserve and other central banks to increase interest rates, which could have the effects of raising the cost of capital and depressing economic growth, either of which - or the combination thereof - could hurt the financial and operating results of our business.

 

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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, especially in light of our emergence from bankruptcy, 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 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. Furthermore, these internal and external factors may also be impacted by our recent emergence from bankruptcy, the uncertainties currently facing us and the business environment and changes we may make to the organizational structure to adjust to changing circumstances.

 

We face significant competition in attracting and retaining talented employees. Further, managing succession for, and retention of, key executives is critical to our success, and our failure to do so could adversely affect our future performance.

 

Our ability to attract and retain qualified and experienced employees is essential to meet our current and future goals and objectives. There is no guarantee we will be able to attract and retain such employees or that competition among potential employers will not result in increased salaries or other benefits. If we are unable to retain existing employees or attract additional employees, we could experience a material adverse effect on our business and results of operations. We may not be able to locate or employ on acceptable terms qualified replacements for key executives if their services are no longer available. Furthermore, our business could be affected adversely if suitable replacement personnel are not recruited quickly or effectively. Our failure to adequately plan for succession of senior management and other key management roles or the failure of key employees to successfully transition into new roles could have a material adverse effect on our businesses and results of operations.

 

Our international operations and revenue are affected by political, economic and other uncertainties worldwide.

 

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, deprivation, confiscation or nationalization of assets, or other governmental actions;
inflation;
deprivation of contract rights;
increased operating costs;
inability to collect receivables and longer receipt of payment cycles;
social 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, such as the COVID-19 pandemic, 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;
trade and economic sanctions or other restrictions imposed by the European Union, the United States or other regions or countries;

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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;
theft of, or lack of sufficient legal protection for, proprietary technology and other intellectual property;
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.

 

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 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, supply chain disruptions, inferior quality and a potential inability to obtain an adequate supply in a timely

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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 (“OCS”) 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 mid-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.

 

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.

 

On October 16, 2020, BOEM published a proposed rule addressing OCS oil and gas decommissioning costs (BOEM-2018-0033). The proposed rule contains updated criteria for determining decommissioning costs. Under the proposed rule, BOEM would only require additional security when (1) a lessee or grant holder poses a substantial risk of becoming financially unable to meet its obligations; (2) there is no co-lessee, co-grant holder or predecessor that is liable for those obligations with sufficient financial capacity; and (3) the property is at or near the end of its productive life. BSEE would typically issue orders to predecessors in title in a reverse chronological order. The proposed rule would also require that a party appealing any final decommissioning decision or order provide a surety bond to ensure that funding for decommissioning is available if the order is affirmed and the liable party then defaults. Based on the proposed framework, BOEM estimates its amount of financial assurance would decrease from $3.3 billion to $3.1 billion, although BOEM expects the rule would provide greater protection as the financial assurance would be focused on the riskiest properties.

 

We cannot predict when these laws and regulations may be adopted or change in the future. If BOEM withdraws the October 2020 rule proposal and proceeds to implement a rule or other regulatory action requiring additional security similar to the Notice to Lessees issued in July 2016 and we are unable to obtain the additional required bonds or post other acceptable security to secure of decommissioning obligations, 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.

 

Moreover, under existing BOEM and BSEE rules relating to assignment of offshore leases and other legal interests on the OCS, assignors of such interests may be held jointly and severally liable for decommissioning of OCS facilities existing at the time the assignment was approved by BOEM, in the event that the assignee or any subsequent assignee is unable or unwilling to conduct required decommissioning.

 

Risks Related to Our Class A Common Stock

 

There may be circumstances in which the interests of our significant stockholders could conflict with the interests of our other stockholders.

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On the Emergence Date, in order to implement certain transactions contemplated by the Plan, the Stockholders Agreement was executed with each stockholder pursuant to the Plan (constituting all of the stockholders on the Emergence Date) and all other stockholders from time to time, to provide for certain of our governance matters. As of March 1, 2023, two groups of these stockholders currently hold approximately 61.6% of our Class A Common Stock. Furthermore, pursuant to the Stockholders Agreement, these two groups of stockholders have appointed three of our six directors.

 

Circumstances may arise in which these groups of stockholders may have an interest in pursuing or preventing acquisitions, divestitures or other transactions, including the issuance of additional shares or debt, that, in their judgment, could enhance their investment in us, and their interests may not in all cases be aligned with our interests.

 

There is no public market for shares of our Class A Common Stock, and we do not expect there to be a market for shares of our Class A Common Stock.

 

There is no existing trading market for shares of our Class A Common Stock, and no market for our shares may develop in the future. If developed, any such market may not be sustained. In the absence of a trading market, our stockholders may be unable to liquidate an investment in our Class A Common Stock. Upon our emergence from bankruptcy, the Predecessor’s common stock was canceled and we issued new Class A Common Stock. The Class A Common Stock is not currently traded on a national securities exchange. There is no active market in the Class A Common Stock. No assurance can be given that an active market will develop for our Class A Common Stock or as to the liquidity of the trading market for our Class A Common Stock. Our Class A Common Stock may be traded only infrequently, if at all, and reliable market quotations may not be available. Holders of our Class A Common Stock may experience difficulty in reselling, or an inability to sell, their shares. In addition, if an active trading market does not develop or is not maintained, significant sales of our Class A Common Stock, or the expectation of these sales, could materially and adversely affect the market price of our Class A Common Stock. For so long as our Class A Common Stock is not listed on a national securities exchange, our ability to access equity markets, obtain financing and provide equity incentives could be negatively impaired. Furthermore, certain transfers of our Class A Common Stock require an exemption from the registration requirements of the Securities Act and applicable state securities laws.

 

Provisions in the Stockholders Agreement could delay or prevent a change in control.

 

Certain provisions of our Stockholders Agreement may delay, discourage, prevent or render more difficult an attempt to obtain control of us, whether through a tender offer, business combination, proxy contest or otherwise. These provisions include, among other things, those that:

 

permit two groups of our stockholders to elect up to three members of our Board of Directors and limit the removal of such directors; and
restrict certain transfers (including acquisitions and dispositions) of our securities.

 

Our ability to pay dividends on our common stock is restricted.

 

We declared a special dividend of $12.45 per share of our Class A Common Stock that was paid on December 28, 2022 to our stockholders of record as of the close of business on December 16, 2022. Our Board of Directors continuously evaluates opportunities to pay dividends in accordance with our evolving strategic outlook. As a result, our decision to declare or any cash dividends on our Class A Common Stock in the foreseeable future is unknown. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our business prospects, results of operations, financial condition, cash requirements and availability, industry trends and other factors that our Board of Directors may deem relevant. Any such decision will also be subject to compliance with contractual restrictions and covenants in the agreements governing our current and future indebtedness.

 

We do not have a class of our securities registered under Section 12 of the Exchange Act. Until we do, we will not be required to provide certain reports to our stockholders.

 

We do not have a class of our securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Until we do, we will not be required to provide certain reports to our stockholders. We are currently required to file periodic reports with the SEC by virtue of Section 15(d) of the Exchange Act. However, until we register a class of our securities under Section 12 of the Exchange Act, we are not subject to the SEC’s proxy rules, and large holders of our capital stock will not be subject to beneficial ownership reporting requirements under Sections 13 or 16 of the Exchange Act and their related rules. As a result, our stockholders and

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potential investors may not have available to them as much or as robust information as they may have if and when we become subject to those requirements.

 

General Risk Factors

 

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. In addition, during periods of depressed market conditions we may be subject to an increased risk of our customers, vendors, former employees and others initiating legal proceedings against us.

 

Any litigation or 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.

 

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 taxation in a significant number of domestic and foreign jurisdictions. 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.

 

The IRA 2022 imposes a 15% corporate alternative minimum tax (“CAMT”) on the “adjusted financial statement income” of certain large corporations (generally, corporations reporting at least $1 billion average adjusted pre-tax net income on their consolidated financial statements) as well as an excise tax of 1% on the fair market value of certain public company stock repurchases for tax years

beginning after December 31, 2022.

 

Currently, we do not believe the CAMT, or any of the other tax provisions, will have a material impact on us for 2023, however, we will continue to monitor the future impact to us related to this new law. The U.S. Treasury Department, the Internal Revenue Service and other standard-setting bodies are expected to issue guidance on how the CAMT, stock buyback excise tax and other provisions of the IRA 2022 will be applied or otherwise administered that may differ from our interpretations.

 

An ownership change could limit our use of net operating losses arising prior to an ownership change.

 

If we were to experience an “ownership change,” as determined under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), our ability to offset taxable income arising after the ownership change with net operating losses (“NOLs”) arising prior to the ownership change would be limited, possibly substantially. An ownership change would establish an annual limitation on the amount of our pre‑change NOLs we could utilize to offset our taxable income in any future taxable year to an amount generally equal to the value of our stock immediately prior to the ownership change multiplied by the long term tax‑exempt rate. In general, an ownership change will occur if there is a cumulative increase in our ownership of more than 50 percentage points by one or more “5% shareholders” (as defined in the Code) at any time during a rolling three‑year period.

 

We experienced an “ownership change” on February 2, 2021 due to the Plan that subject certain of our tax attributes, including our NOLs and other carryforwards, to an annual limitation under Section 382 of the Code. However, we do not expect the Section 382 limitation to impact our ability to use U.S. tax attributes. Calculations pursuant to Section 382 of the Code can be very complicated and no assurance can be given that upon further analysis, our ability to take advantage of our NOLs may be limited to a greater extent than we currently anticipate. As of December 31, 2022, we had NOLs of $367.9 million. Future changes in our stock ownership could result in an additional ownership change.

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Our ability to remediate the identified material weakness in our internal control over financial reporting.

 

In connection with the preparation of our consolidated financial statements as of and for the year ended December 31, 2022, we identified a material weakness in our internal control over financial reporting as we did not design and maintain effective controls to review the reasonableness of assumptions determined by, and accuracy of calculations performed by, our external tax service providers. If we are not able to remediate the material weakness and otherwise to maintain effective internal control over financial reporting, our financial statements may be materially misstated and investors may lose confidence in the accuracy and completeness of our financial reports. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We are working to remediate the material weakness and are taking steps to strengthen our internal control over financial reporting. While we are undertaking efforts to remediate this material weakness, the material weakness will not be considered remediated until our remediation plan has been fully implemented, the applicable controls operate for a sufficient period of time, and we have concluded, through testing, that the newly implemented and enhanced controls are operating effectively. At this time, we cannot predict the success of such efforts or the outcome of our assessment of the remediation efforts. We cannot assure you that our efforts will remediate this material weakness in our internal control over financial reporting, or that additional material weaknesses will not be identified in the future.

 

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, negative perceptions about economic conditions, energy costs and supply chain disruptions, 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 negatively 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. We have office employees who work remotely. Remote work relies heavily on the use of remote networking and online conferencing services that enable employees to work outside of our corporate infrastructure and, in some cases, use their own personal devices, which exposes us to additional cybersecurity risks, including unauthorized access to sensitive information as a result of increased remote access and other cybersecurity related incidents. 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. It is possible that our business, financial and other systems could be compromised, which could go unnoticed for a prolonged period of time. While various procedures and controls are being utilized to mitigate exposure to such risk, there can be no assurance that the procedures and controls that we implement, or which we cause third party service providers to implement, will be sufficient to protect our systems, information or other property. Additionally, customers as well as other third parties whom we rely on face similar cybersecurity threats, which could directly or indirectly impact our business and operations. 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

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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.

 

Item 1B. Unresolved Staff Comments

 

None.

 

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. However, based on current circumstances, we do not believe that the ultimate resolution of these proceedings, including any such proceedings described in the following two paragraphs hereof, 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 the Notes to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information.

 

A subsidiary of ours is involved in legal proceedings with two former employees regarding the payment of royalties for a patentable product paid for by the subsidiary and developed while they worked for the subsidiary. Those former employees have filed two separate lawsuits in the Harris County District Court, in which the former employees allege that the royalty payments they had invoiced at 25% and for which they received payments in the invoiced amounts since 2010, instead should have been paid at a rate of 50%. The first lawsuit (the “First Case”), filed during the second quarter of 2018, sought to recover alleged unpaid royalties from May 2014 through May 2019. The second lawsuit (the “Second Case”) was filed in the same district court against the same subsidiary of ours, brought the same claims, and sought damages post-judgment from the First Case until the discontinuation of the leasing of the product at issue by the subsidiary at the end of 2019.

 

In both lawsuits, the district court ruled against our subsidiary and entered final judgments, which we fully secured with a bond. We strongly disagreed with the result and believed the district court committed several legal errors that should be corrected by reversal of each of the judgments. Accordingly, we pursued separate appeals in the Fourteenth Court of Appeals

 

In August 2022, in the appeal from the judgment in the First Case, the Fourteenth Court of Appeals (the "Court of Appeals") ruled in favor of our subsidiary on the plaintiffs’ claims for a combined 50% royalty. The Court of Appeals ruled that because the plaintiffs invoiced our subsidiary for a combined 25% royalty and accepted payments in that amount every month since 2010, the plaintiffs forever waived any claim to any royalties in any amount other than a combined 25% royalty, net of expenses. The Court of Appeals reversed the judgment in the First Case and remanded to the district court to assess damages, if any, owed for royalties between January 2018 and May 2019.

 

The appeal from the judgment in the Second Case was abated by the Court of Appeals pending the resolution of the appeal in the First Case.

 

On October 7, 2022, our subsidiary reached a confidential settlement in both the First Case and the Second Case with the plaintiffs to resolve any and all disputes between them. At the request of both parties in the appeals from both the First Case and the Second Case, the Court of Appeals has reversed the respective judgments entered by the district court. The district court has now entered take-nothing judgments in favor of our subsidiary in both cases and has released the supersedeas bonds filed by our subsidiary in both cases. Accordingly, both the First Case and the Second Case are fully and finally resolved.

 

Our Indian subsidiary, SES Energy Services India Pvt. Ltd (“SES India”), entered into a contract with an Indian oil and gas company to provide an offshore vessel for well stimulation. A dispute arose over the performability of the terms of the contract. The contract was terminated by the customer. Any remaining contingency under this contract was terminated in connection with SES India entering into bankruptcy during 2022.

 

In October 2022, we had a hearing before the Washington State Board of Tax Appeals (the “Tax Board”) in relation to a dispute arising in April 2019 pertaining to a use tax assessment from 2016 as a result of the construction of a vessel by one of our subsidiaries. As of December 31, 2022, the assessment, including interest, totaled $26.9 million. While we are confident that the assessment is legally insupportable, if the Tax Board upholds the assessment we will be responsible for payment of the full assessment within thirty days of the decision. Although we are unable to estimate the probability of the outcome of this matter or the range of reasonably possible loss, if any, we have reserved an amount we believe to be adequate to cover any final assessment levied by the state.

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For the disclosure of environmental proceedings with a governmental entity as a party pursuant to Item 103(c)(3)(iii) of Regulation S-K, we have elected to disclose matters where we reasonably believe such proceeding would result in monetary sanctions, exclusive of interest and costs, of $1.0 million or more.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common equity consists of common stock that is privately held and there is no established public trading market. As of March 1, 2023, there were 583 stockholders of record for our Class A common stock and seven stockholders of record for our Class B common stock.

 

Our Board of Directors (the “Board”) and the Compensation Committee of the Board (the “Compensation Committee”) have approved and adopted our Management Incentive Plan, which provides for the grant of share-based and cash-based awards and, in connection therewith, the issuance from time to time of up to 1,999,869 shares of our Class B common stock, par value $0.01 per share.

 

Dividend Policy

 

On November 16, 2022, we announced that our Board declared a special cash dividend of $12.45 per share of our outstanding Class A common stock. Additionally, the Board determined that, in addition to the special cash dividend to shareholders of our Class A common stock, we would make dividend equivalent payments to each holder of unvested restricted stock units. The special dividend was paid on December 28, 2022.

 

Any decision to declare and pay dividends in the future will be made at the discretion of our Board and will depend on, among other things, our business prospects, results of operations, financial condition, cash requirements and availability, industry trends and other factors that our Board may deem relevant. Any such decision will also be subject to compliance with contractual restrictions and covenants in the agreements governing our current and future indebtedness.

 

 

 

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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.

 

Executive Summary

 

General

 

Superior Energy Services is a global oilfield products and services company with a portfolio of premier rental and well services brands providing customers with robust inventory, responsive delivery, engineered solutions, and expert consultative service — all aligned with enterprise-wide Shared Core Values for safe, sustainable operations and corporate citizenship; and committed to free cash flow generation and value creation.

 

Superior Energy Services drives true value to its business units by providing enterprise-wide support, financial discipline, capital strength, and strategic focus. Our experienced, knowledgeable leadership within those businesses has excellent latitude to execute their business strategy, determine pricing, allocate inventory, and develop new products and technology. All with a focus on safety, operational excellence, competitive positioning, and financial performance that entrenches our relationships with our customers and elevates our customers' satisfaction.

 

Our execution of the transformation initiatives set forth in 2021 continued to be validated in 2022 with positive results. The transformation weighted our product offerings toward businesses critical to our customer’s oil and gas operations. These businesses have limited competition with the three largest global oilfield service companies; require deep technical expertise, notably in premium drill pipe and bottom hole assembly rentals; and have strong cash flow generating capacity as was delivered in our 2022 results.

 

Our ongoing strategy of focusing operations on businesses with solid market positions along with the strength of our brands, their leaders, and teams contributed in no small part to our positive performance, margin expansion, and strong competitive position in 2022 overcoming labor market and supply chain challenges and being an early mover on effective pricing strategies to address cost inflation and margin expansion.

 

As we strive to be good stewards of our resources, we paid a $250 million distribution and a return of capital to shareholders in December 2022.

 

Our portfolio of companies operate in two segments, Rentals and Well Services, to provide highly specialized solutions to the upstream oil and gas industry.

 

Rentals Segment

 

Our rental services include premium downhole tubulars and drill pipe, design, engineering and manufacturing of bottomhole assembly accessories, and offshore accommodation units. Collaborating closely with customers and strategic suppliers, we also provide engineered solutions to meet their challenges.

 

Workstrings International ("WSI")

 

WSI is a global leader in oilfield equipment rentals providing high-quality, premium connection drill strings, tubing, completion tubulars, and handling accessories and has one of the industry’s most extensive inventories of highly specialized landing string designed for deep water applications.

 

Workstrings’ long-tenured leadership assures a high level of knowledge and skill in providing quality service and engineering expertise to develop complementary innovation and new technologies for our long-term major customers.

 

WSI is strategically positioned to respond globally with a focus on U.S. Onshore and Offshore Gulf of Mexico, and International Offshore opportunities with a variety of sizes and premium thread configurations complimented by in-house inspection and on-site machining capabilities expediting turnaround and deliveries.

 

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WSIs' depth of inventory resulting from consistent investments through the cycles, seasoned field experience, in-house engineering expertise and long standing relationships with strategic suppliers enables customer relationships that make it a leading provider in the GOM and international markets with a focus on continued innovation that is difficult to replicate. Capital expenditures over the next year to maintain our existing fleet is expected to be similar to our 2022 capital expenditures assuming that the second half 2022 activity levels and current drilling and completion practices continue throughout 2023.

 

Stabil Drill

 

Stabil Drill provides comprehensive Bottom Hole Assembly (BHA) support, ranging from custom component engineering and fabrication to rental drilling tools and repairs. With an inventory of more than 50,000 downhole tools, extensive experience, state-of-the-art facilities, and cutting-edge solutions, Stabil Drill helps operators optimize performance on the most challenging drilling operations.

 

With significant US Land capabilities deployable to Offshore and International markets, Stabil Drill serves customers worldwide and is poised for growth opportunities with existing customers and through geographic expansion of product offerings.

 

In-house manufacturing, repair services, and efficient fleet management practices effectively mitigated supply chain challenges and maintained leading market share positions in US Land and select Latin American regions.

 

HB Rentals

 

HB Rentals’ offerings span a wide breadth of offshore rentals, from single living quarters to complete multi-module complexes and support infrastructure.

 

Their comprehensive support for offshore services includes initial consulting and design, project management, engineering, custom fabrication, logistics planning, installation, and commissioning. HB Rentals has opportunities for fleet expansion within the US wind market and defense projects along with plug and abandonment (“P&A”) opportunities in GOM.

 

Well Services Segment

 

Our well services include long standing, industry leading brands with a long history of strong, collaborative relationships with customers and suppliers.

 

Services include risk management, well control and training, hydraulic workover and snubbing, engineering, and manufacturing of premium completion tools including the Multi-zone, single trip (MST) sand control system. The Well Services segment also provides cementing, wireline, and coil tubing services with operations in Latin America and Kuwait.

 

Wild Well Control ("WWC")

 

WWC provides advanced engineering solutions, unconventional intervention, personnel, equipment, and well control training. WWC provides IADC well control training for operators and students worldwide. Additional WWC services include assisting operators in risk management, planning, preparedness, prevention, and response services.

 

As a leading global provider of onshore and offshore well control emergency response, pressure control, relief well planning, engineering, and well control training services, with the largest team of dedicated professionals and inventory of well control equipment staged for deployment around the world, WWC responds to the majority of the well control emergency responses worldwide.

 

WWC continues to develop opportunities by leveraging its global Subsea Capping response consortium WellCONTAINED. WWC also continues to pursue additional engineering capabilities and capacity and has brought its well control expertise to consult and advise on future carbon capture projects through its industry relationships with major oil companies.

 

Superior Completion Services

 

Superior Completion Services provides strategic solutions and expertise in downhole completion services primarily focused on offshore sand control applications, including deep water Gulf of Mexico and Brazil projects utilizing its Multi-zone single trip system (“MST”).

 

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Capabilities beyond multi-zone single-trip systems include intelligent completions, gravel and frac pack systems to HPHT packers, screens, flow, and barrier valves.

 

International Snubbing Services ("ISS")

 

Comprised of two geographical operating divisions: USA and Australia, ISS include manufacturing facilities in both locations with operational activity in 2023 shifting to a heavier weighting on P&A, which is seen as a growth market. Additional growth opportunities as Premier fixed-platform and Bass Strait P&A service provider in Australia and increasing well pull work onshore and P&A work in the GOM will be explored in 2023.

 

Strategic Outlook

 

We engaged Evercore as our financial advisor nearly a year ago to assist management and our Board in exploring alternatives to enhance shareholder value, including through potential merger or acquisition opportunities. As part of this process, we remain in and continue to pursue preliminary or exploratory dialogue with various potential counterparties. We are allocating resources accordingly should strategic alternatives to grow shareholder value, including meaningful consolidation opportunities, become actionable in 2023. Such opportunities may include, but are not limited to, an acquisition by or merger with a publicly traded company, one or more acquisitions of or mergers with private energy service companies, or growth through the acquisition of an additional strategic product line, either in connection with or following an exchange listing by us. Our Board has not set a timetable or made any decisions related to further actions or potential strategic alternatives at this time. Additionally, any potential transaction would depend upon entry into definitive agreements with a potential counterparty on terms acceptable to us. There can be no assurance that we will enter any such transaction or consummate or pursue any transaction or other strategic alternative.

 

As we focus our financial strength, flexibility, and leading market position on converting operating margins to free cash flow generation, we expect to continue to deliver what we believe are compelling returns and stewardship. We will maintain focus on executing the final phases of the transformation strategies accomplished in 2022 by reducing our geographic footprint and streamlining our operational support function to align with the current size of our operations. An opportunistic and disciplined approach to growth and strategic capital expenditure allocations are intended to ensure that our market-leading brands have the support and resources needed to meet the industry’s highest expectations and unlock opportunities enterprise-wide, while maintaining the highest standards of excellence and safety.

 

We focus on building a sustainable future through our commitment to Environmental, Social, and Governance (ESG) performance. Our Shared Core Values are critical to achieving our ESG goals and helping our customers, suppliers, and business partners achieve theirs. We continue to advance our ESG performance for the benefit of stakeholders with plans to publish our ESG performance with transparency starting in 2024 with our inaugural 2023 Sustainability Report.

 

We will persist in advancing our strategic focus on efficiency, capital discipline, and sustainable performance characterized by cash flow generation, safe operations, reliable service delivery, and fair, responsible dealings in alignment with our Shared Core Values central to Superior’s culture.

 

 

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Industry Trends

 

The oil and gas industry is both cyclical and seasonal. The level of spending by oil and gas companies is highly influenced by current and expected demand as well as future prices of oil and natural gas. Changes in spending resulted in an increased or decreased demand for our services and products. Rig counts are 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.

 

 

 

 

 

 

 

 

 

 

 

2022 to 2021

 

 

 

 

2021 to 2020

 

 

2022

 

 

 

2021

 

 

% Change

 

2020

 

 

% Change

Worldwide Rig Count (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

 

708

 

 

 

 

464

 

 

52.6%

 

 

417

 

 

11.3%

Offshore

 

 

15

 

 

 

 

14

 

 

7.1%

 

 

16

 

 

(12.5%)

Total

 

 

723

 

 

-

 

 

478

 

 

51.3%

 

 

433

 

 

10.4%

International (2)

 

 

851

 

 

 

 

755

 

 

12.7%

 

 

825

 

 

(8.5%)

Worldwide Total

 

 

1,574

 

 

-

 

 

1,233

 

 

27.7%

 

 

1,258

 

 

(2.0%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity Prices (average)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil (West Texas Intermediate)

 

$

94.90

 

 

 

$

68.14

 

 

39.3%

 

$

39.16

 

 

74.0%

Natural Gas (Henry Hub)

 

$

6.42

 

 

 

$

3.91

 

 

64.2%

 

$

2.03

 

 

92.6%

 

(1)
Estimate of drilling activity as measured by average active drilling rigs based on Baker Hughes Co. rig count information.
(2)
Excludes Canadian rig count.

 

 

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Comparison of the Results of Operations for the Years Ended December 31, 2022 and 2021

 

The Successor Period and the Predecessor Period are distinct reporting periods as a result of our emergence from bankruptcy. References in these results of operations to changes in comparison to year ended December 31, 2022 (the “Current Period") combine the Successor Period and Predecessor Period results for year ended December 31, 2021 (the “Combined Period”) in order to provide some comparability of such information. While this combined presentation is not presented according to generally accepted accounting principles in the United States of America (“GAAP”) and no comparable GAAP measures are presented, management believes that providing this financial information is the most relevant and useful method for making comparisons to the Current Period as reviewing the Successor Period results in isolation would not be useful in identifying trends in or reaching conclusions regarding our overall operating performance.

 

 

 

 

Successor

 

 

 

Predecessor

 

 

Non-GAAP

 

 

Change

 

 

Year Ended December 31, 2022

 

 

For the Period
February 3, 2021
through
December 31, 2021

 

 

 

For the Period
January 1, 2021
through
February 2, 2021

 

 

For the Combined Year Ended December 31, 2021

 

 

$

 

 

%

 Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Rentals

 

$

402,942

 

 

$

268,695

 

 

 

$

18,339

 

 

$

287,034

 

 

$

115,908

 

 

40.4%

 Well Services

 

 

481,018

 

 

 

380,059

 

 

 

 

27,589

 

 

 

407,648

 

 

 

73,370

 

 

18.0%

 Total revenues

 

 

883,960

 

 

 

648,754

 

 

 

 

45,928

 

 

 

694,682

 

 

 

189,278

 

 

 

 Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Rentals

 

 

137,626

 

 

 

105,373

 

 

 

 

7,839

 

 

 

113,212

 

 

 

24,414

 

 

21.6%

 Well Services

 

 

339,325

 

 

 

316,879

 

 

 

 

21,934

 

 

 

338,813

 

 

 

512

 

 

0.2%

 Total cost of revenues (exclusive of depreciation, depletion, amortization and accretion)

 

 

476,951

 

 

 

422,252

 

 

 

 

29,773

 

 

 

452,025

 

 

 

24,926

 

 

 

 Depreciation, depletion, amortization and accretion

 

 

98,060

 

 

 

219,859

 

 

 

 

8,358

 

 

 

228,217

 

 

 

(130,157

)

 

(57.0%)

 General and administrative expenses

 

 

128,294

 

 

 

117,575

 

 

 

 

11,052

 

 

 

128,627

 

 

 

(333

)

 

(0.3%)

 Restructuring expenses

 

 

6,375

 

 

 

22,952

 

 

 

 

1,270

 

 

 

24,222

 

 

 

(17,847

)

 

(73.7%)

 Other (gains) and losses, net

 

 

(29,134

)

 

 

16,726

 

 

 

 

-

 

 

 

16,726

 

 

 

5

 

 

**

 Income (loss) from operations

 

 

203,414

 

 

 

(150,610

)

 

 

 

(4,525

)

 

 

(155,135

)

 

 

312,684

 

 

 

 Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Interest income, net

 

 

11,713

 

 

 

2,331

 

 

 

 

202

 

 

 

2,533

 

 

 

9,180

 

 

362.4%

 Reorganization items, net

 

 

-

 

 

 

-

 

 

 

 

335,560

 

 

 

335,560

 

 

 

(335,560

)

 

(100.0%)

 Other income (expense)

 

 

(1,804

)

 

 

(7,128

)

 

 

 

(2,105

)

 

 

(9,233

)

 

 

7,429

 

 

**

 Income (loss) from continuing operations before income taxes

 

 

213,323

 

 

 

(155,407

)

 

 

 

329,132

 

 

 

173,725

 

 

 

(6,267

)

 

 

 Income tax (expense) benefit

 

 

77,719

 

 

 

33,298

 

 

 

 

(60,003

)

 

 

(26,705

)

 

 

104,424

 

 

(391.0%)

 Net income (loss) from continuing operations

 

 

291,042

 

 

 

(122,109

)

 

 

 

269,129

 

 

 

147,020

 

 

 

98,157

 

 

 

 Income (loss) from discontinued operations, net of income tax

 

 

(4,577

)

 

 

(40,069

)

 

 

 

(352

)

 

 

(40,421

)

 

 

35,844

 

 

(88.7%)

 Net income (loss)

 

$

286,465

 

 

$

(162,178

)

 

 

$

268,777

 

 

$

106,599

 

 

$

134,001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 ** Not a meaningful percentage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We reported net income from continuing operations for the Current Period of $291.0 million on revenues of $884.0 million and $147.0 million on revenues of $694.7 million for the Combined Period. Net income from continuing operations for the Combined Period was driven primarily by a $335.6 million gain in reorganization items, net primarily due to debt forgiveness as part of our emergence from bankruptcy.

 

Revenues and Cost of Revenues

 

Revenues from our Rentals segment increased $115.9 million, or 40.4%, in the Current Period as compared to the Combined Period. Cost of revenues also increased $24.4 million, or 21.6%, as compared to the Combined Period. The increase in commodity prices led to an increase in capital expenditures by our customers which had an impact on rig count between periods. Additionally, greater utilization and higher pricing for both premium drill pipe and bottom hole assembly accessories, which allowed for a higher gross margin of 65.8% for the Current Period as compared to 60.6% for the Combined Period.

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Table of Contents

 

 

Revenues from our Well Services segment increased $73.4 million, or 18.0%, in the Current Period. Cost of revenues increased $0.5 million, or 0.2%, in the Current Period as compared to the Combined Period. Gross margin for the Current Period increased to 29.5% as compared to 16.9% for the Combined Period due to changes in revenue mix in our completions applications, increases in service revenues with higher margins and a reduction in pass through and mobilization projects with lower margins. Additionally, the strategic shift from our more labor-intensive service businesses to U.S. offshore and international operations reduces our exposure to the most significant wage inflation pressures in this segment given our lower U.S. land headcount.

 

Depreciation, Depletion, Amortization and Accretion

 

Depreciation, depletion, amortization and accretion expense for the December 31, 2022 decreased $130.2 million, or 57.0%, as compared to the Combined Period. Depreciation expense, primarily in the Combined Period, has been impacted by the valuation process under fresh start accounting, where certain fully depreciated assets were assigned a new estimated fair value and a new remaining useful life of less than 36 months.

 

Restructuring Expenses

 

Restructuring expenses were $6.4 million and $24.2 million during the December 31, 2022 and the Combined Period, respectively. This decrease is a result of severance expenses and costs related to executive officers that resigned during the Combined Period as well as professional fees associated with the Transformation Project (defined below) that were not as prevalent in the Current Period. In addition to Transformation Project costs, Current Period restructuring expenses also include legal and other professional fees related to certain tax and shareholder distribution matters.

 

Other (gains) and losses, net

 

Other gains, net for the Current Period were $29.1 million compared to other losses, net of $16.7 million in the Combined Period. Other (gains) and losses, net primarily relate to charges recorded as part of our strategic disposal of low margin assets in line with our efforts to reconfigure our organization both operationally and financially (the “Transformation Project”) and includes gains and losses on the disposal of assets, as well as impairments related to long-lived assets.

 

In the Current Period, other gains, net includes $23.6 million related to our Well Services segment, including a gain of $17.4 million from revisions to our decommissioning program to a reef-in-place program which significantly reduced the estimated costs associated with decommissioning our oil and gas property and $5.2 million related to our Rentals segment.

 

In the Combined Period, other losses, net comprised $13.1 million related to our Well Services segment, including approximately $11.7 million from exit activities related to SES Energy Services India Pvt. Ltd ("SES India"), and $3.6 million related to our Rentals segment. SES India was admitted into bankruptcy during the Current Period.

 

Interest Income, net

 

Interest income, net for December 31, 2022 was $11.7 million compared to $2.5 million for the Combined Period. The increase in interest income was driven by interest derived on overnight money market accounts primarily in Argentina and the United States.

 

Other income (expense)

 

Other income (expense) primarily relate to re-measurement gains and losses associated with our foreign currencies and realized and unrealized gains and losses on our investment in common stock of Select Energy Services, Inc. (“Select”).

 

Losses on foreign currencies during the Current Period and Combined Period were $12.6 million and $10.9 million, respectively. Losses on foreign currencies during the Current Period include an expense of $2.7 million which represents a correction of an immaterial error relating to a period prior to our emergence from bankruptcy. Gains and losses on foreign currencies are primarily related to our operations in Brazil and Argentina.

 

During the Current Period, we disposed of 4.1 million shares of Select for $34.7 million, and we recognized gains totaling $8.9 million in connection with these transactions. During the Combined Period, we disposed of 0.7 million shares of Select for $4.1 million, and we recognized gains totaling $0.4 million. Unrealized gains during the Combined Period were $2.1 million. As of December 31, 2022, all shares of Select had been disposed.