Houston-based Superior Energy Services Inc. saw a 49% increase in U.S. pressure pumping revenue in the first quarter as operators accelerated their onshore activity, marking a "massive cyclical transition," CEO David Dunlap said.
The global oilfield completions specialist provides a portfolio of tools and technologies for exploration and production (E&P) companies, with domestic onshore services that include pressure pumping, fluid handling and well servicing rigs.
"The first quarter of 2017 marked a period of massive, cyclical transition in U.S. land markets," said Dunlap during a conference call Wednesday morning. "The land rig count growth of approximately 25% during the first quarter resulted in rapidly accelerating supply chain activation levels, particularly as it relates to completion related services.
“This led to our U.S. land revenue growing by 29% sequentially, driven by a 49% increase in pressure pumping revenue."
As the year began, costs related to increasing activity levels "continued to impede margin growth," he said, including significant increases in sand pricing, costs associated with reactivating equipment and increased hiring/training costs. During the quarter, Superior spent $7.2 million to reactivate its pressure pumping fleet and for fleet start-up costs.
"As the quarter progressed,” Dunlap said, “we gained momentum in our conversations with customers, which focused on balancing these higher costs with increased demand and activity levels."
U.S. Land Revenue Up 29% Sequentially
By the end of March, Superior was "in a much more favorable position as it relates to these factors than when the quarter began. As rig count growth slows and equipment reactivation costs are fully absorbed, transitional inefficiency should be significantly diminished.”
Nearly all of Superior's sequential revenue increase resulted from improved U.S. land activity, which now comprises 65% of total revenue. The pressure pumping business accounted for about 30% of the first quarter total.
U.S. land revenue jumped 29% sequentially to nearly $259 million and was 36% higher year/year, while Gulf of Mexico (GOM) revenue rose 5% sequentially to $74.9 million but fell by one-third from a year ago. International revenue declined 18% sequentially and 39% year/year.
"U.S. land markets continued to experience activity increases throughout the quarter, which is ultimately very positive for the outlook of our business," said the CEO. "Over the near-term, the pace of drilling and completion activity has increased, and we'll continue to cause equipment cost and equipment start-up related inefficiencies in the second quarter, although we do see those inefficiencies diminishing as the second quarter progresses."
The priority to provide high-quality services and execution "is challenged during periods such as we are in now, not only by the day-to-day difficulties of our business, but also by transitory inefficiencies caused by rapidly expanding input and last mile costs, as well as low service pricing. All of these issues must be overcome before meaningful margin expansion can occur."
In the first three months, the "largest single item weighing on our business was the rapid increase of sand prices, which actually began during the fourth quarter. Sand prices have increased along with customer demand for pressure pumping and at a faster rate than we have been able to pass those increases on to our customers. While the situation is improving, it has impacted margins as we work through to resolve it.
"Highlighting the magnitude of this transitory issue, approximately 35% of our sequential increase in pressure pumping revenue during the quarter was associated with increased sand sales. From the beginning of the quarter through today, we work very closely with our customers to reach a point where input costs such as sand are being incorporated into the price of a completion, which is what we have referred to as cost recovery. We believe that at the end of the first quarter, we were in a much more favorable position related to sand price recovery as compared to the beginning of the quarter."
Exacerbating transitory and efficiency issues has been E&P customer expansions, particularly in the Permian Basin, said Dunlap. Initial estimates for operating costs in rapidly escalating production areas, commonly referred to as the "last-mile cost" have proved to be too low, he said, which has led to customer discussions related to recovering the shortfall.
"While our customers have been very helpful in adapting to the economic realities of their operations, these types of discussions around input and cost recovery take time to achieve. We also need to increase our service pricing to achieve acceptable margins on the work we perform. Again, we believe we achieved a vital improvement in this area, but the impact of any service pricing increases will be reflected more so in the second quarter and third quarter," as the "realities of a tightening supply chain" become evident.
Controlling costs and eliminating inefficiencies "have clearly been our focus early in this recovery, but make no mistake -- we believe the market for U.S. land completion services has tighten significantly and that reasonable price increases over the coming months can lead to acceptable margin sometime in 2018, and perhaps toward the end of this year."
550,000 HP Deployed in U.S.
At the end of March, Superior's deployed pressure pumping fleet in the United States was 550,000 hp, with about 35% more proppant used than in the fourth quarter. The stage count rose 64% in the West Texas portion of the Permian and was 31% higher in South Texas, where operators are working the Eagle Ford Shale.
Meanwhile, E&P customers are committing to higher levels of spending, in part because of stronger crude prices than a year ago, Dunlap said.
"Despite the near-term noise associated with market transition, everything we are observing from a fundamental perspective is moving in the direction necessary to create a path to increased growth and profitability," Dunlap said. "We are as hopeful as anyone in the market will continue to recover, and that conditions will improve, but as I've made clear, hope is not our strategy…
“We will remain disciplined in controlling our costs, and we won't hesitate to retreat from markets and businesses that proved to be fundamentally unsound from an economic perspective."
Net losses in 1Q2017 from continuing operations totaled $89.7 million (minus 59 cents/share) on revenue of $401 million, versus a year-ago loss of $85 million (minus 56 cents) on revenue of $413 million, and sequential losses of $166.3 million (minus $1.10/share) on revenue of $354 million.
In the onshore completion and workover services segment, revenue increased across all product lines, led by a 49% sequential increase in U.S. pressure pumping. Revenue overall climbed 36% sequentially and was 55% higher year/year to $205 million. Revenue in the drilling products and services segment fell 1% sequentially and 23% year/year to $68 million, but again, U.S. land drilling segment revenue jumped 20% from the fourth quarter.
Production services revenue was off 15% sequentially and 35% lower than a year ago to $68.6 million, but U.S. land revenue jumped 17% from 4Q2016 on increased coiled tubing activity. In the technical solutions segment, revenue rose 10% from the fourth quarter but fell 33% year/year.