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Superior Energy Positions Permian Over Pennsylvania as Completions Activity Dominates

Global completions expert Superior Energy Services Inc. is reactivating pressure pumping equipment and relocating business to the Permian Basin from Pennsylvania as onshore activity in West Texas and southern New Mexico continues to escalate.

The Houston-based oilfield services operator provides subsea and well enhancement services offshore and onshore, in overseas markets and throughout the United States, Canada and Mexico. As has been the dominating theme throughout the fourth quarter conference calls, Superior's U.S. land segment lifted all business segments as exploration companies returned to work.

Activity began to build late in the third quarter, as exploration companies began calling for more fracturing equipment and more horsepower to pull oil and gas out of the ground, CEO David Dunlap said during a conference call Wednesday.

"During the quarter, our customers gradually increased their activity levels and began to project a bias toward spending growth in 2017," he said. "Our activation of idle equipment began in the third quarter of 2016 and accelerated in the fourth quarter," and continued its positive trajectory into the new year.

"Throughout the downturn, we conserved cash, retired debt, reduced our cost structure and positioned certain businesses to be responsive early in a recovery," he said. "In addition to the competitive advantages of responding early, the ongoing expense associated with reactivating stacked equipment that can return to service is expected to decrease over time and be concluded during the second quarter of 2017.

"The extended downturn our industry just experienced won't reverse in one or two quarters, but it definitely seems that we have entered the early days of the next upcycle in U.S. land markets." As costs have risen to reactivate equipment, Superior is increasing its prices, a track expected to continue this year, Dunlap said.

"The rate of pricing momentum is based on local supply dynamics," he said. "The pace of pricing increases has been quicker than expected, driven by service quality and field execution as the rate of recovery extends," which in turn supports the company's "pursuit of pricing."

As pricing discussions with customers began in the fourth quarter, initial talks centered on cost recovery, followed by service price increases, Dunlap said. Most of the revised service agreements were reached by the end of the year, but the higher price impact won't be evident until the end of the first quarter, he said. "Pricing conversations are ongoing," he added.

"In our well fracturing business, we activated approximately 100,000 hp during the quarter," the CEO said. Revenue in the business grew roughly 32% sequentially and accounted for about 23% of total revenue in the final three months.

"We elected to spend more on reactivation cost during the quarter as activity accelerated and pricing potential became increasingly evident. We have consistently indicated that we would activate equipment early in a recovery, and we'll continue to do so as long as we experience increases in pricing and utilization. As a result, we are now in a position to expand with our existing customers as their spending levels grow...

"The faster than expected pace of recovery will cause us to have additional activation cost in the first half of 2017 as we bring idled equipment back online. As we approach 600,000 hydraulic hp deployed, we will begin to rebuild the final 150,000 hp we currently have available to us. Rebuild of this equipment will be capitalized and will be a larger dollar amount on a per fleet basis as it requires more extensive work then the engine replacements we have."

Within its onshore completion and workover services segment, revenue in 4Q2016 jumped 20% sequentially to $150.6 million. More than 75% of the revenue increase from the third quarter followed higher pressure pumping utilization from increased completion activity in the Permian Basin, Dunlap said.

Superior spent $14.7 million related to capacity enhancement of its pressure pumping fleet, fleet start-up costs, and to demobilize and relocate equipment to the Permian following a facility closure in Pennsylvania.

In the second half of 2016, the operator spent almost $23.1 million to expand and reactivate pressure pumping capacity because of "current and anticipated increases in current customer demand," Dunlap said.

"Elsewhere, our businesses operating in the Gulf of Mexico (GOM) and internationally held up relatively well sequentially, despite continued low levels of customer activity. The forward outlook for recovery in these areas remains subdued with limited recovery expected to occur during 2017. Accordingly, we intend to deploy capital selectively and maintain our focus on service quality in these markets.

"Each phase of a cycle presents unique challenges, and we believe we are entering a period in which our emphasis on field level reliability and execution will be increasingly valued and recognized by our customers to the benefit of our stakeholders."

Superior recorded a net loss from continuing operations in 4Q2016 of $166.3 million (minus $1.10/share) on revenue of $354.4 million. In 3Q2016 net losses totaled $113.9 million (minus 75 cents/share) on revenue of $326.2 million, while in 4Q2015, net losses were $214.5 million (minus $1.43).

As activity ramped up late in 2016, Superior had to spend to reactivate and rebuild equipment that has been stacked during the two-year downturn. A pre-tax expense of $73.2 million in 4Q2016 related to reducing the value of assets and charges that included $36.0 million impairment of long-lived assets, a $20.8 million writedown of inventory and $16.4 million of restructuring costs.

The resulting adjusted net loss from continuing operations was $111.6 million (minus 74 cents/share) in the final period, versus a sequential loss of $110.9 million (minus 73 cents) and a year-ago loss of $61.3 million (minus 41 cents). For the year, Superior lost $833.3 million net (minus $5.50/share), compared with a net loss in 2015 of nearly $1.808 billion ($12.02).

U.S. land revenue, mostly derived from completions activity, jumped 18% sequentially and year/year in the fourth quarter to $200.3 million. Meanwhile, GOM revenue fell 2% from 3Q2016 and 58% year/year to $71.6 million. Dunlap said it likely may take sustained oil prices above $55/bbl before GOM business would accelerate.

Within its drilling products and services segment, revenue rose 16% sequentially to $69.3 million but was off 34% from a year ago. U.S. land revenue increased 17% sequentially to $17.7 million as activity increased throughout the quarter. GOM revenue climbed 14% sequentially to $25.8 million.

The production services segment's revenue was 5% higher than in the third quarter at $81 million, but it was off 43% from 4Q2015. U.S. land revenue increased 4% sequentially to $20.0 million because of increased activity for coiled tubing and well testing. GOM revenue increased 22% sequentially to $22.2 million as hydraulic workover and snubbing/electric line activity were both higher.

In the technical solutions segment, fourth quarter revenue fell 17% overall and 63% from a year ago to $53.5 million. However, U.S. land operations saw revenue rise 13% to $12 million as well control activity and completion tools and products orders increased. GOM revenue decreased 28% sequentially, primarily from an expected decline in subsea intervention revenue following the conclusion of a successful campaign during 3Q2016.

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