Superior Energy Services (SPN)

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Greg Hollander

Superior Energy Services provides specialized oilfield services and equipment to oil and gas companies. In 2007, Superior generated approximately 48% of its revenue through “well intervention,” the process of maintaining and repairing off-shore wells, and earned another 40% from renting out tools (pipes, drills, etc.) and liftboats, oilfield work platforms complete with living accommodations.

Since its founding, Superior has been based largely in the Gulf of Mexico (nearly 85% of revenue in 2004). Beginning in 2003, however, it began diversifying its holdings, and by the end of 2007, the region accounted for only 49% of the company's revenue. Its still considerable presence in the Gulf, however, makes Superior particularly vulnerable to hurricanes. In 2005, for example, a bad hurricane season caused Superior's operating income to drop by over 50%. Demand for the company's services is also highly dependent on oil and natural gas prices. Over 88% of Superior’s revenue comes from services and products provided to oil and gas producers. Lower prices, or even expectations of lower prices, dramatically reduce demand for Superior's services.

Company Overview

Superior’s revenue has increased over 110% from $735 million in 2005 to $1.572 billion in 2007. Operating income has also increased substantially over this time period, growing from $126 million in 2005 to $466 million in 2007. Aided partly by soaring oil prices, these profits have allowed Superior to acquire subsidiary companies around the world (such as Premier Oilfield Rentals in Aberdeen, Scotland) and service international markets. This has both decreased its dependence on the Gulf of Mexico, as well as allowed the firm to expand its “well intervention” and “rental tools” segments (see below) to international waters, generating a revenue increase in these segments of over 200% in during the same two-year span.^[1]

Superior Energy Services has four major business segments:

• Well Intervention Services provides maintenance and repair on wells that have become damaged or ineffective, stimulating oil and gas production for Superior’s customers. This may include mechanical services, part replacement, offshore cleaning, and decommissioning.

• The Rental Tools segment encompasses the manufacture, sale, and renting of specialized equipment both on- and off-shore.

• The Marine Services segment involves Superior’s fleet of 37 liftboats, or oilfield work platforms. Of these liftboats, 10 are used specifically for wireline services (a form of well intervention), and the other 27 are rented to customers through bundled service packages. At the end of 2007, all liftboats are stationed in the Gulf of Mexico, but Superior is exploring international possibilities.

• The Oil and Gas Operations segment represents Superior’s own oil and gas production through mature acquired property. Superior makes these acquisitions to give customers an alternative to the decommissioning process, and uses their own resources to extend the life and production of the properties.

An important facet of Superior’s growth is its increasingly diversified geography. In the early 1990s, Superior was based entirely in the Gulf of Mexico and American Southeast, making it largely dependent on the Gulf’s weather cycles and capacity. Since 2003, Superior has been actively seeking sources of international revenue, and has reduced its exposure to the Gulf.

Trends and Forces

Tropical offshore locations are susceptible to adverse weather conditions – Just under half of Superior’s revenue comes from the Gulf of Mexico, which experiences frequent hurricanes and other extreme weather conditions. Damage from turbulent seas and strong winds can damage Superior’s offshore assets, as well as prevent the company from providing any maintenance services until damages can be repaired. In 2005, for example, a bad hurricane season caused Superior’s operating margin to drop from over 24% to as low as 10%. Since that year, Superior has only been able to obtain partial insurance coverage, further exposing itself to risk from extreme weather.^[4]

Demand for services and products rely on volatile expenditures of oil and gas industry – Over 88% of Superior’s revenue comes from services and products provided to oil and gas producers. However, these producers are part of a volatile industry that is sensitive to even minor changes in oil and gas prices. Lower prices, or even expectations of lower prices, can cause producers to substantially reduce the expenditures on which Superior relies. Oil prices declining to $50/barrel in early 2007, for example, caused service revenue to increase only 7% from the first to second quarters and then decline from the second to third quarters. This came after revenue growth over 10% in every quarter dating back to 2005, including growth of 17% between the last quarter of 2006 and first quarter of 2007.^[5]

Revenue from oil and gas production is sensitive to commodity price risk – In Superior’s “oil and gas production” segment, revenues are generated by the sale of crude oil and natural gas. Prices for these commodities have historically been volatile, and this portion of Superior’s revenue is sensitive to these fluctuations.

Competition

Superior competes with other growing companies such as Helix Energy Solutions Group (HLX) and Global Industries (GLBL), across multiple segments.

Because of their international expansion, Superior faces additional competition from industry giants such as Halliburton Company (HAL), Schlumberger N.V. (SLB), Weatherford International (WFT), and Baker Hughes (BHI).

In the oil and gas production sector, Superior faces competition from these same firms, as well as many more companies – such as Transocean (RIG) and ENSCO International (ESV) – that focus on offshore drilling and oil production.

References

1. ↑ |SPN 2007 10-K, Statement of Operations, pg 29
2. ↑ SPN 2007 10-K, Statement of Operations, pg 29
3. ↑ SPN 2007 10-K, Executive Summary, pg 27
4. ↑ |SPN 2007 10-K, Risks, pg 10
5. ↑ SPN 2Q 2007 10-K, Selected Financial Statements, pg 4
6. ↑ |SPN 2007 10-K, Statement of Operations, pg 29
7. ↑ HLX 2007 10-K, Selected Financial Data, pg 43
8. ↑ SLB 2007 10-K, Selected Financial Data, pg 15
9. ↑ | ESV 2007 10-K, Consolidated Statement of Income, pg 26