Superior Energy Services Inc.’s U.S. land revenue fell sharply in the second quarter after the Houston company elected to operate fewer Permian Basin pressure pumping fleets in West Texas.
The global oilfield services and equipment specialist reported resilience in its Drilling Products and Production Services business during 2Q2019, but there are warning signs for the U.S. onshore, CEO David Dunlap said.
“With respect to our market outlook, we are approaching the U.S. land market as if it is fully recovered and have no expectations for increased activity levels in the near future,” Dunlap said during a conference call Wednesday. “Maintaining capacity or cost on behalf of our customers with the hope of increased utilization at some point in the future is no longer acceptable, particularly in the most fragmented competitively disadvantaged service lines.”
Superior remains “laser focused on operational efficiency, controlling costs and rationalizing assets and locations, which are likely to remain challenged from a profitability perspective,” he added.
In the U.S. onshore and overseas, the markets “seem poised to continue to experience gradually increasing activity levels,” Dunlap said. “Again, this isn’t aspirational, but based on interactions we have been and continue to have with a variety of customers.”
In the U.S. land segment, revenue fell by 30% year/year and was off by 14% sequentially to $263 million, all related to stacking fracturing equipment in the Permian Basin.
Operationally, the Lower 48 market is experiencing “varying degrees of fragmentation and oversupply on the service side, as well as continually evolving customer behavior,” Dunlap said. “More specifically, hydraulic fracturing continues to face significant challenges.”
Superior exited the second quarter running six operational fleets, down from nine in the first quarter.
“In doing so, we expect these fleets to operate for a more consistent mix of customers at or above cash breakeven economics,” Dunlap said. “This may come as a surprise to market observers who believe us to be a ‘pressure pumping company,’” but that business contributed less than 5% of adjusted quarterly profits.
Superior’s business is global in nature, Dunlap noted, “and our future opportunities aren’t contingent on near-term spending patterns in the Permian Basin. For context, we estimate that 23% of our revenue was related to Permian Basin spending in the second quarter, down from a high of 34% in the third quarter of last year. It would be inaccurate to assume that increased U.S. land spending particularly in the Permian Basin is our path to improve returns margins and free cash flow.”
Most of Superior’s other U.S. land service lines met expectations despite the declining rig count and “customer hesitancy” to increase activity.
In the Gulf of Mexico segment, however, “results improved sharply as our completion tool business executed on projects that we had previously indicated had shifted from the first quarter to the second quarter.”
The U.S. offshore segment’s revenues climbed by 15% year/year and were 20% higher sequentially at $83 million.
Management expects to be in a “period of strong completion activity mix in the Gulf of Mexico for the remainder of the year. Our business has a robust backlog of customer orders that we will deliver on over the next several quarters.”
International revenue was mixed at $90.3 million, down by 2% sequentially but 3% higher than a year ago.
In the Drilling Products segment, 2Q2019 revenue came in at $100.7 million, a slight decrease from 1Q2019 but up by 7% year/year. In the U.S. arm, land revenue declined by 2% sequentially, while domestic offshore revenue was off by 3%; international revenue increased by 6%.
Revenue in the Onshore Completion and Workover Services segment fell to $163.5 million, down by 41% year/year and by 20% from 1Q2019. Revenue in the Production Services segment was flat sequentially and up by 1% year/year at $103 million; U.S. land revenue was down by 5% while offshore revenue jumped by 11%.
During the quarter, Superior divested its drilling rigs service line, which included 12 U.S. land-based drilling rigs, receiving $74 million in cash proceeds. Through the first half of 2019, the service line generated $32.8 million in revenue, incurred $6.4 million in depreciation expense and had operating losses of $2.6 million.
“Our primary focus is on cash generation, and during the second quarter our cash balance improved significantly,” Dunlap said. “Improved operational performance and continued capital spending discipline resulted in positive free cash flow.
“The second quarter demonstrates that there are opportunities to build our cash position, and we will continue our concerted efforts to improve the company’s capital structure over time.
Net losses from continuing operations totaled $71.1 million (minus 46 cents/share) in 2Q2019, versus a year-ago loss of $25.4 million (minus 16 cents).
The company reported a pre-tax expense of $31.4 million in the quarter, primarily from an impairment of onshore completion/workover services assets. Cash flow losses totaled $118.8 million in the latest quarter, versus a year-ago loss of $86 million.