Notes to Unaudited Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2013
(1)
|
Basis of Presentation
|
Certain
information and footnote disclosures normally in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission; however, management believes the disclosures that are made are adequate to make the information presented not misleading. These financial statements and notes should be read in conjunction with the consolidated financial
statements and notes thereto included in Superior Energy Services, Inc.s Annual Report on Form 10-K for the year ended December 31, 2012, and Managements Discussion and Analysis of Financial Condition and Results of Operations
herein.
The financial information of Superior Energy Services, Inc. and subsidiaries (the Company) for the three and nine months ended
September 30, 2013 and 2012 has not been audited. However, in the opinion of management, all adjustments necessary to present fairly the results of operations for the periods presented have been included therein. The results of operations for
the first nine months of the year are not necessarily indicative of the results of operations that might be expected for the entire year. Certain previously reported amounts have been reclassified to conform to the 2013 presentation.
Complete Production
Services, Inc.
On February 7, 2012, the Company acquired Complete Production Services, Inc. (Complete) in a cash and stock merger
transaction valued at approximately $2,914.8 million. Complete focused on providing specialized completion and production services and products that help oil and gas companies develop hydrocarbon reserves, reduce costs and enhance production.
Completes operations were located throughout the U.S. and Mexico. The acquisition of Complete substantially expanded the size and scope of the Companys services. Completes legacy businesses are currently reported in the Onshore
Completion and Workover Services and the Production Services segments.
Pursuant to the merger agreement, Complete stockholders received 0.945
of a share of the Companys common stock and $7.00 cash for each share of Completes common stock outstanding at the time of the acquisition. In total, the Company paid approximately $553.3 million in cash and issued approximately
74.7 million shares of its common stock valued at approximately $2,308.2 million (based on the closing price of the Companys common stock on the acquisition date of $30.90). Additionally, the Company paid $676.0 million, inclusive of a
$26.0 million prepayment premium, to redeem $650 million of Completes 8.0% senior notes. The Company also assumed all outstanding stock options and shares of non-vested and unissued restricted stock beneficially owned by Completes
employees and directors at the time of acquisition.
Acquisition related expenses totaled approximately $33.3 million, of which approximately
$28.8 million was recorded in the nine months ended September 30, 2012. The remainder was recorded in the three months ended December 31, 2011. These acquisition related costs include expenses directly related to acquiring Complete and
were recorded in general and administrative expenses in the consolidated statements of income.
Other Acquisitions
In March 2013, the Company acquired 100% of the equity interest in a company that provides cementing services to oil and gas companies in Colombia. This
acquisition provides the Company with a platform for continued expansion in the South American market area. During the three months ended September 30, 2013, the Company recorded adjustments to the initial purchase price allocation to
reflect new information obtained about facts and circumstances that existed as of the acquisition date. The Company paid approximately $20.4 million at closing and will pay an additional $3.6 million over the next two years, subject to the
settlement of certain liabilities. Goodwill of approximately $15.1 million was recognized as a result of this acquisition and was calculated as the excess of the consideration paid over the net assets recognized and represents estimated future
economic benefits arising from other assets acquired that could not be individually identified and separately recognized. None of the goodwill related to this acquisition will be deductible for tax purposes. All of the goodwill was
assigned to the Production Services segment.
In August 2012, the Company acquired 100% of the equity interest in a company that provides
mechanical wireline, electric line and well testing services to the oil and gas exploration and production industry in Argentina. The Company paid approximately $37.6 million in cash related to this acquisition, including approximately $6.5 million
of contingent consideration paid in April 2013 based upon achievement of certain performance metrics.
6
On February 15, 2012,
the Company sold one of its derrick barges and received proceeds of approximately $44.5 million, inclusive of selling costs. The Company recorded a pre-tax loss of approximately $3.1 million, inclusive of approximately $9.7 million of goodwill,
during the nine months ended September 30, 2012 in connection with this sale. This business was previously reported in the Companys former Subsea and Well Enhancement segment. The operations and loss on the sale of this disposal group
have been reported within loss from discontinued operations in the condensed consolidated statement of income.
On March 30, 2012, the
Company sold 18 liftboats and related assets comprising its former Marine segment. The Company received cash proceeds of approximately $138.6 million, inclusive of working capital and selling costs. In connection with the sale, the Company repaid
approximately $12.5 million in U.S. Government guaranteed long-term financing. As a result of the repayment, the Company paid approximately $4.0 million of make-whole premiums and wrote off approximately $0.7 million of unamortized loan costs. The
Companys total pre-tax loss on the disposal of this segment was approximately $56.1 million, which includes a $46.1 million write off of long-lived assets and goodwill recorded in the fourth quarter of 2011 in order to approximate the
segments indicated fair value, and an additional loss of $10.0 million recorded in the first quarter of 2012, comprised of an approximate $3.6 million loss on sale of assets and approximately $6.4 million of additional costs related to the
disposition.
The following table summarizes the components of loss from discontinued operations, net of tax for the nine months ended
September 30, 2012 (in thousands):
|
|
|
|
|
Revenues
|
|
$
|
16,231
|
|
Loss from discontinued operations, net of tax benefit of $1,771
|
|
|
(6,478
|
)
|
Loss on disposition, net of tax benefit of $2,391
|
|
|
(10,729
|
)
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(17,207
|
)
|
|
|
|
|
|
(4)
|
Stock-Based Compensation and Retirement Plans
|
The Company maintains various stock incentive plans that provide long-term incentives to the Companys key employees, including officers, directors, consultants and advisors (Eligible Participants).
Under the incentive plans, the Company may grant incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, other stock-based awards or any combination thereof to Eligible Participants.
The Companys total compensation expense related to these plans was approximately $27.7 million and $30.0 million for the nine months ended September 30, 2013 and 2012, respectively, which is reflected in general and administrative
expenses.
(5)
|
Inventory and Other Current Assets
|
Inventory and other current assets includes approximately $159.6 million and $136.5 million of inventory at September 30, 2013 and December 31,
2012, respectively. The Companys inventory balance at September 30, 2013 consisted of approximately $64.0 million of finished goods, $17.6 million of work-in-process, $22.1 million of raw materials and $55.9 million of supplies and
consumables. The Companys inventory balance at December 31, 2012 consisted of approximately $63.7 million of finished goods, $6.0 million of work-in-process, $5.0 million of raw materials and $61.8 million of supplies and consumables.
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out or weighted-average cost methods for finished goods and work-in-process. Supplies and consumables consist principally of products used in our
services provided to customers.
On April 17, 2012, SandRidge Energy Inc. (NYSE: SD) (SandRidge) completed its acquisition of Dynamic
Offshore Resources, LLC (Dynamic Offshore), at which time the Company received approximately $34.1 million in cash and approximately $51.6 million in shares of SandRidge common stock (approximately 7.0 million shares valued at $7.33 per share)
as consideration for its 10% interest in Dynamic Offshore. In accordance with authoritative guidance related to equity securities, the Company is accounting for the shares received in this transaction as available-for-sale securities. The
changes in fair values, net of applicable taxes, on available-for-sale securities are recorded as unrealized holding gains (losses) on securities as a component of accumulated other comprehensive loss in stockholders equity.
The fair value of the approximately 1.5 million shares of SandRidge common stock held by the Company at September 30, 2013 was approximately
$8.5 million. During the nine months ended September 30, 2013, the Company recorded an unrealized loss related to the fair value of these securities of $0.7 million, of which $0.5 million was reported within accumulated other comprehensive
loss, net of tax benefit of $0.2 million. During the nine months ended September 30, 2012, the Company recorded an unrealized loss related to
7
the fair value of these securities of $1.0 million, of which $0.6 million was reported within accumulated other comprehensive loss, net of tax benefit of $0.4 million. The Company evaluates
whether unrealized losses on investments in available-for-sale securities are other-than-temporary, and if it is believed the unrealized losses are other-than-temporary, an impairment charge is recorded. There were no other-than-temporary impairment
losses recognized during the nine months ended September 30, 2013 and 2012.
In May 2013, the Company redeemed
the remaining $150 million aggregate principal amount of its 6 7/8% unsecured senior notes due 2014 at 100% of face value using proceeds from the revolving portion of its credit facility. The redemption resulted in a loss on early extinguishment of
debt of approximately $0.9 million related to the writeoff of unamortized debt acquisition costs and note discount.
Credit Facility
The Company has a $1.0 billion bank credit facility, comprised of a $600 million revolving credit facility and a $400 million term loan.
The principal balance of the term loan is payable in installments of $5.0 million on the last day of each fiscal quarter, which began on June 30, 2012. At September 30, 2013, the Company had $370 million outstanding under the term loan. At
September 30, 2013, the Company had no amounts outstanding under the revolving portion of its credit facility. The Company also had approximately $56.0 million of letters of credit outstanding, which reduce the Companys borrowing
availability under this portion of the credit facility.
Any amounts outstanding on the revolving portion of the credit facility and the term
loan are due on February 7, 2017. Amounts borrowed under the credit facility bear interest at LIBOR plus margins that depend on the Companys leverage ratio. Indebtedness under the credit facility is secured by substantially all of the
Companys assets, including the pledge of the stock of the Companys principal domestic subsidiaries. The credit facility contains customary events of default and requires that the Company satisfy various financial covenants. It also
limits the Companys ability to pay dividends or make other distributions, make acquisitions, make changes to the Companys capital structure, create liens or incur additional indebtedness. At September 30, 2013, the Company was in
compliance with all such covenants.
Senior Unsecured Notes
The Company has outstanding $500 million of 6 3/8% unsecured senior notes due 2019. The indenture governing the 6 3/8% senior notes
requires semi-annual interest payments on May 1
st
and
November 1
st
of each year through the maturity date
of May 1, 2019. The indenture contains certain covenants that, among other things, limit the Company from incurring additional debt, repurchasing capital stock, paying dividends or making other distributions, incurring liens, selling
assets or entering into certain mergers or acquisitions. At September 30, 2013, the Company was in compliance with all such covenants.
The Company also has outstanding $800 million of 7 1/8% unsecured senior notes due 2021. The indenture governing the 7 1/8% senior notes requires semi-annual interest payments on June 15
th
and December 15
th
of each year through the maturity date of December 15,
2021. The indenture contains certain covenants that, among other things, limit the Company from incurring additional debt, repurchasing capital stock, paying dividends or making other distributions, incurring liens, selling assets or entering
into certain mergers or acquisitions. At September 30, 2013, the Company was in compliance with all such covenants.
Basic earnings per
share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding excludes the shares of non-vested
restricted stock that were assumed by the Company as a result of the Complete acquisition. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of
additional common shares that could have been outstanding assuming the exercise of stock options, conversion of restricted stock units and the vesting of outstanding restricted stock issued in the acquisition of Complete.
Stock options for approximately 1,100,000 and 2,600,000 shares of the Companys common stock for the three months ended September 30, 2013 and
2012, respectively, and approximately 1,210,000 and 1,800,000 shares of the Companys common stock for the nine months ended September 30, 2013 and 2012, respectively, were excluded in the computation of diluted earnings per share for
these periods as the effect would have been anti-dilutive.
(8)
|
Decommissioning Liabilities
|
The Company
records estimated future decommissioning liabilities in accordance with the authoritative guidance related to asset retirement obligations, which requires entities to record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred, with a corresponding increase in the carrying amount of the related long-lived asset. Subsequent to initial measurement, the decommissioning liability is required to be accreted each period to present value.
8
The Companys decommissioning liabilities associated with the Bullwinkle platform and its related
assets consist of costs related to the plugging of wells, the removal of the related facilities and equipment, and site restoration. Whenever practical, the Company utilizes its own equipment and labor services to perform well abandonment and
decommissioning work. When the Company performs these services, all recorded intercompany revenues and related costs of services are eliminated in the condensed consolidated financial statements. The recorded decommissioning liability associated
with a specific property is fully extinguished when the property is abandoned. The recorded liability is first reduced by all cash expenses incurred to abandon and decommission the property. If the recorded liability exceeds (or is less than) the
Companys total costs, then the difference is reported as an increase or decrease in revenue during the period in which the work is performed.
The Company reviews the adequacy of its decommissioning liabilities whenever indicators suggest that the estimated cash flows needed to satisfy the liability have changed materially. The Company reviews
its estimates for the timing of these expenditures on a quarterly basis. As a result of continuing development activities, the Company revised its estimates during the second quarter of 2012 relating to the timing of decommissioning work on
Bullwinkle assets, including a 10 year postponement of the platform decommissioning. This change in estimate resulted in a significant reduction in the present value of decommissioning liabilities.
The following table summarizes the activity for the Companys decommissioning liabilities for the nine month periods ended September 30, 2013
and 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Decommissioning liabilities, December 31, 2012 and 2011, respectively
|
|
$
|
93,053
|
|
|
$
|
123,176
|
|
Liabilities acquired and incurred
|
|
|
360
|
|
|
|
3,573
|
|
Liabilities settled
|
|
|
(87
|
)
|
|
|
(4,624
|
)
|
Accretion
|
|
|
4,269
|
|
|
|
3,260
|
|
Revision in estimated liabilities
|
|
|
|
|
|
|
(34,373
|
)
|
|
|
|
|
|
|
|
|
|
Long-term decommissioning liabilities, September 30, 2013 and 2012 , respectively
|
|
$
|
97,595
|
|
|
$
|
91,012
|
|
|
|
|
|
|
|
|
|
|
Notes receivable
consist of a commitment from the seller of oil and gas properties acquired by the Company towards the abandonment of the acquired property. Pursuant to an agreement with the seller, the Company will invoice the seller an agreed upon amount at the
completion of certain decommissioning activities. The gross amount of this obligation totaled $115.0 million and is recorded at present value using an effective interest rate of 6.58%. The related discount is amortized to interest income based on
the expected timing of the platforms removal. The Company recorded interest income related to notes receivable of $2.2 million and $2.1 million for the nine months ended September 30, 2013 and 2012, respectively.
Business
Segments
During the fourth quarter of 2012, the Company revised the internal reporting structure that is used by the chief operating
decision maker in determining how to allocate the Companys resources and, as a result, divided the Subsea and Well Enhancement segment into three segments that better reflect the Companys product and service offerings throughout the life
cycle of a well: Onshore Completion and Workover Services, Production Services, and Subsea and Technical Solutions. The Drilling Products and Services segment remains unchanged. Accordingly, all prior period segment disclosures have been recast to
reflect this change in reporting structure.
The Drilling Products and Services segment rents and sells bottom hole assemblies, premium drill
pipe, tubulars and specialized equipment for use with onshore and offshore oil and gas well drilling, completion, production and workover activities. It also provides on-site accommodations and bolting and machining services. The Onshore Completion
and Workover Services segment provides pressure pumping services used to complete and stimulate production in new oil and gas wells, fluid handling services and well servicing rigs that provide a variety of well completion, workover and maintenance
services. The Production Services segment provides intervention services such as coiled tubing, cased hole and mechanical wireline, hydraulic workover and snubbing, production testing and optimization, and remedial pumping services. It also provides
specialized pressure control tools used to manage and control pressure throughout the life of a well. The Subsea and Technical Solutions segment provides services typically requiring specialized engineering, manufacturing or project planning,
including integrated subsea services and engineering services, well control services, well containment systems, stimulation and sand control services and well plug and abandonment services. It also includes production handling arrangements and the
production and sale of oil and gas.
9
Summarized financial information for the Companys segments for the three and nine months ended
September 30, 2013 and 2012 is shown in the following tables (in thousands):
Three Months Ended September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling
Products and
Services
|
|
|
Onshore
Completion
and Workover
Services
|
|
|
Production
Services
|
|
|
Subsea and
Technical
Solutions
|
|
|
Unallocated
|
|
|
Consolidated
Total
|
|
Revenues
|
|
$
|
215,523
|
|
|
$
|
398,016
|
|
|
$
|
359,722
|
|
|
$
|
215,354
|
|
|
$
|
|
|
|
$
|
1,188,615
|
|
Cost of services (exclusive of items shown separately below)
|
|
|
73,873
|
|
|
|
275,676
|
|
|
|
251,575
|
|
|
|
146,928
|
|
|
|
|
|
|
|
748,052
|
|
Depreciation, depletion, amortization and accretion
|
|
|
42,391
|
|
|
|
52,576
|
|
|
|
45,553
|
|
|
|
17,486
|
|
|
|
|
|
|
|
158,006
|
|
General and administrative expenses
|
|
|
37,016
|
|
|
|
36,306
|
|
|
|
46,886
|
|
|
|
37,696
|
|
|
|
|
|
|
|
157,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
62,243
|
|
|
|
33,458
|
|
|
|
15,708
|
|
|
|
13,244
|
|
|
|
|
|
|
|
124,653
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
743
|
|
|
|
(25,207
|
)
|
|
|
(24,464
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
789
|
|
|
|
789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
62,243
|
|
|
$
|
33,458
|
|
|
$
|
15,708
|
|
|
$
|
13,987
|
|
|
$
|
(24,418
|
)
|
|
$
|
100,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling
Products and
Services
|
|
|
Onshore
Completion
and Workover
Services
|
|
|
Production
Services
|
|
|
Subsea and
Technical
Solutions
|
|
|
Unallocated
|
|
|
Consolidated
Total
|
|
Revenues
|
|
$
|
194,882
|
|
|
$
|
421,194
|
|
|
$
|
373,868
|
|
|
$
|
189,721
|
|
|
$
|
|
|
|
$
|
1,179,665
|
|
Cost of services (exclusive of items shown separately below)
|
|
|
61,959
|
|
|
|
277,780
|
|
|
|
237,506
|
|
|
|
131,363
|
|
|
|
|
|
|
|
708,608
|
|
Depreciation, depletion, amortization and accretion
|
|
|
37,784
|
|
|
|
48,108
|
|
|
|
34,509
|
|
|
|
7,759
|
|
|
|
|
|
|
|
128,160
|
|
General and administrative expenses
|
|
|
32,380
|
|
|
|
43,109
|
|
|
|
52,830
|
|
|
|
35,139
|
|
|
|
|
|
|
|
163,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
62,759
|
|
|
|
52,197
|
|
|
|
49,023
|
|
|
|
15,460
|
|
|
|
|
|
|
|
179,439
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
697
|
|
|
|
(29,282
|
)
|
|
|
(28,585
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
467
|
|
|
|
467
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,294
|
)
|
|
|
(2,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
62,759
|
|
|
$
|
52,197
|
|
|
$
|
49,023
|
|
|
$
|
16,157
|
|
|
$
|
(31,109
|
)
|
|
$
|
149,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling
Products and
Services
|
|
|
Onshore
Completion
and Workover
Services
|
|
|
Production
Services
|
|
|
Subsea and
Technical
Solutions
|
|
|
Unallocated
|
|
|
Consolidated
Total
|
|
Revenues
|
|
$
|
614,924
|
|
|
$
|
1,222,215
|
|
|
$
|
1,096,185
|
|
|
$
|
550,483
|
|
|
$
|
|
|
|
$
|
3,483,807
|
|
Cost of services (exclusive of items shown separately below)
|
|
|
205,502
|
|
|
|
819,472
|
|
|
|
756,954
|
|
|
|
385,494
|
|
|
|
|
|
|
|
2,167,422
|
|
Depreciation, depletion, amortization and accretion
|
|
|
125,768
|
|
|
|
158,021
|
|
|
|
133,361
|
|
|
|
45,477
|
|
|
|
|
|
|
|
462,627
|
|
General and administrative expenses
|
|
|
105,180
|
|
|
|
114,747
|
|
|
|
140,970
|
|
|
|
104,138
|
|
|
|
|
|
|
|
465,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
178,474
|
|
|
|
129,975
|
|
|
|
64,900
|
|
|
|
15,374
|
|
|
|
|
|
|
|
388,723
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,195
|
|
|
|
(81,141
|
)
|
|
|
(78,946
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,062
|
|
|
|
2,062
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(884
|
)
|
|
|
(884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
178,474
|
|
|
$
|
129,975
|
|
|
$
|
64,900
|
|
|
$
|
17,569
|
|
|
$
|
(79,963
|
)
|
|
$
|
310,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Nine Months Ended September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling
Products and
Services
|
|
|
Onshore
Completion
and Workover
Services
|
|
|
Production
Services
|
|
|
Subsea and
Technical
Solutions
|
|
|
Unallocated
|
|
|
Consolidated
Total
|
|
Revenues
|
|
$
|
582,389
|
|
|
$
|
1,176,239
|
|
|
$
|
1,141,649
|
|
|
$
|
489,544
|
|
|
$
|
|
|
|
$
|
3,389,821
|
|
Cost of services (exclusive of items shown separately below)
|
|
|
191,010
|
|
|
|
766,620
|
|
|
|
680,439
|
|
|
|
328,590
|
|
|
|
|
|
|
|
1,966,659
|
|
Depreciation, depletion, amortization and accretion
|
|
|
111,200
|
|
|
|
119,594
|
|
|
|
99,345
|
|
|
|
36,133
|
|
|
|
|
|
|
|
366,272
|
|
General and administrative expenses
|
|
|
100,875
|
|
|
|
140,453
|
|
|
|
159,645
|
|
|
|
96,025
|
|
|
|
|
|
|
|
496,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
179,304
|
|
|
|
149,572
|
|
|
|
202,220
|
|
|
|
28,796
|
|
|
|
|
|
|
|
559,892
|
|
Interest income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,107
|
|
|
|
(91,057
|
)
|
|
|
(88,950
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
562
|
|
|
|
562
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,294
|
)
|
|
|
(2,294
|
)
|
Gain on sale of equity method investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,880
|
|
|
|
17,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
179,304
|
|
|
$
|
149,572
|
|
|
$
|
202,220
|
|
|
$
|
30,903
|
|
|
$
|
(74,909
|
)
|
|
$
|
487,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling
Products and
Services
|
|
|
Onshore
Completion
and Workover
Services
|
|
|
Production
Services
|
|
|
Subsea and
Technical
Solutions
|
|
|
Unallocated
|
|
|
Consolidated
Total
|
|
September 30, 2013
|
|
$
|
1,158,247
|
|
|
$
|
3,006,588
|
|
|
$
|
2,244,103
|
|
|
$
|
1,438,925
|
|
|
$
|
|
|
|
$
|
7,847,863
|
|
December 31, 2012
|
|
$
|
1,086,804
|
|
|
$
|
3,223,984
|
|
|
$
|
2,185,779
|
|
|
$
|
1,295,134
|
|
|
$
|
11,185
|
|
|
$
|
7,802,886
|
|
Geographic Segments
The Company attributes revenue to various countries based on the location where services are performed or the destination of the drilling products or equipment sold or leased. Long-lived assets consist
primarily of property, plant and equipment and are attributed to various countries based on the physical location of the asset at the end of a period. The Companys revenue by geographic area for the three and nine months ended
September 30, 2013 and 2012, and long-lived assets by geographic area at September 30, 2013 and December 31, 2012 is as follows (in thousands):
Revenues
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
United States
|
|
$
|
960,054
|
|
|
$
|
976,984
|
|
|
$
|
2,849,265
|
|
|
$
|
2,826,544
|
|
Other Countries
|
|
|
228,561
|
|
|
|
202,681
|
|
|
|
634,542
|
|
|
|
563,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,188,615
|
|
|
$
|
1,179,665
|
|
|
$
|
3,483,807
|
|
|
$
|
3,389,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets
:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
|
|
December 31,
2012
|
|
United States
|
|
$
|
2,611,837
|
|
|
$
|
2,684,932
|
|
Other Countries
|
|
|
625,513
|
|
|
|
570,288
|
|
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
3,237,350
|
|
|
$
|
3,255,220
|
|
|
|
|
|
|
|
|
|
|
11
In accordance with
authoritative guidance related to guarantees, the Company has assigned an estimated value of $2.6 million at September 30, 2013 and December 31, 2012 related to decommissioning activities in connection with oil and gas properties acquired
by the Companys former subsidiary SPN Resources, LLC (SPN Resources) prior to its sale to Dynamic Offshore in March 2008. The guarantee is reflected in other long-term liabilities. The Company believes that the likelihood of being required to
perform these guarantees is remote. In the unlikely event of default on any remaining decommissioning liabilities, the total maximum potential obligation under these guarantees is estimated to be approximately $105.1 million, net of the contractual
right to receive payments from third parties, which is approximately $24.6 million, as of September 30, 2013. The total maximum potential obligation will decrease over time as the underlying obligations are fulfilled.
(12)
|
Fair Value Measurements
|
The Company
follows the authoritative guidance for fair value measurements relating to financial and nonfinancial assets and liabilities, including presentation of required disclosures herein. This guidance establishes a fair value framework requiring the
categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets and liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant
management judgment. The three levels are defined as follows:
|
Level 1
:
|
Unadjusted quoted prices in active markets for identical assets and liabilities.
|
|
Level 2
:
|
Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical assets
or liabilities in inactive markets; or model-derived valuations or other inputs that can be corroborated by observable market data.
|
|
Level 3
:
|
Unobservable inputs reflecting managements own assumptions about the inputs used in pricing the asset or liability.
|
The following tables provide a summary of the financial assets and liabilities measured at fair value on a recurring basis at September 30, 2013 and
December 31, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
September 30, 2013
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Inventory and other current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
8,512
|
|
|
$
|
8,512
|
|
|
|
|
|
|
|
|
|
Intangible and other long-term assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified deferred compensation assets
|
|
$
|
13,045
|
|
|
$
|
1,963
|
|
|
$
|
11,082
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
616
|
|
|
|
|
|
|
$
|
616
|
|
|
|
|
|
Accrued Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified deferred compensation liabilities
|
|
$
|
1,944
|
|
|
|
|
|
|
$
|
1,944
|
|
|
|
|
|
Contingent consideration
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
$
|
136
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified deferred compensation liabilities
|
|
$
|
14,050
|
|
|
|
|
|
|
$
|
14,050
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2012
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Inventory and other current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
9,224
|
|
|
$
|
9,224
|
|
|
|
|
|
|
|
|
|
Intangible and other long-term assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified deferred compensation assets
|
|
$
|
11,343
|
|
|
$
|
825
|
|
|
$
|
10,518
|
|
|
|
|
|
Interest rate swap
|
|
$
|
1,286
|
|
|
|
|
|
|
$
|
1,286
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified deferred compensation liabilities
|
|
$
|
125
|
|
|
|
|
|
|
$
|
125
|
|
|
|
|
|
Accrued expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
9,890
|
|
|
|
|
|
|
|
|
|
|
$
|
9,890
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified deferred compensation liabilities
|
|
$
|
13,515
|
|
|
|
|
|
|
$
|
13,515
|
|
|
|
|
|
12
Available-for-sale securities is comprised of approximately 1.5 million shares of SandRidge common
stock that the Company received as partial consideration for its 10% interest in Dynamic Offshore (see note 5). The securities are reported at fair value based on the closing price of the shares as reported on the New York Stock Exchange.
The Companys non-qualified deferred compensation plans allow officers, certain highly compensated employees and non-employee directors
to defer receipt of a portion of their compensation and contribute such amounts to one or more hypothetical investment funds. The Company entered into separate trust agreements, subject to general creditors, to segregate assets of each plan and
reports the accounts of the trusts in its condensed consolidated financial statements. These investments are reported at fair value based on unadjusted quoted prices in active markets for identifiable assets and observable inputs for similar assets
and liabilities, which represent Levels 1 and 2, respectively, in the fair value hierarchy.
In July 2013, June 2013 and April 2012, the
Company entered into interest rate swap agreements related to its fixed rate debt maturing in 2021 for notional amounts of $100 million each, whereby the Company is entitled to receive semi-annual interest payments at a fixed rate of 7 1/8% per
annum and is obligated to make semi-annual interest payments at floating rates, which are adjusted every 90 days, based on LIBOR plus a fixed margin. The swap agreements, scheduled to terminate on December 15, 2021, are designated as fair value
hedges of a portion of the Companys 7 1/8% senior notes, as the derivative has been tested to be highly effective in offsetting changes in the fair value of the underlying note. As these derivatives are classified as fair value hedges, the
changes in the fair value of the derivatives are offset against the changes in the fair value of the underlying note in interest expense, net (see note 13). The Company previously had an interest rate swap agreement for a notional amount of $150
million related to its 6 7/8% senior notes that was designated as a fair value hedge. In February 2012, the Company sold this interest rate swap to the counterparty for approximately $1.2 million.
As of September 30, 2013, the Companys maximum contingent consideration payable as a result of prior acquisitions was approximately $3.5
million. The Company has recorded a current liability of approximately $0.1 million, which represents the Companys estimate of the fair value of the maximum contingent consideration payable. The fair value of the contingent consideration
was determined using a probability-weighted discounted cash flow approach at the acquisition and reporting date. The approach is based on significant inputs that are not observable in the market, which are referred to as Level 3
inputs. The fair value is based on the acquired companies reaching specific performance metrics.
During the nine months ended
September 30, 2013, the Company paid approximately $6.5 million of contingent consideration related to its acquisition of a wireline and well testing company in 2012. The following table summarizes the activity recorded using fair value of
Level 3 liabilities for the nine months ended September 30, 2013 (in thousands):
|
|
|
|
|
Balance as of December 31, 2012
|
|
$
|
9,890
|
|
Settlements
|
|
|
(6,500
|
)
|
Reduction in fair value of liability for additional consideration
|
|
|
(3,254
|
)
|
|
|
|
|
|
Balance as of September 30, 2013
|
|
$
|
136
|
|
|
|
|
|
|
In accordance with authoritative guidance, non-financial assets and non-financial liabilities are remeasured at fair
value on a non-recurring basis. In determining estimated fair value of acquired goodwill, we use various sources and types of information, including, but not limited to, quoted market prices, replacement cost estimates, accepted valuation techniques
such as discounted cash flows, and existing carrying value of acquired assets. As necessary, we utilize third-party appraisal firms to assist us in determining fair value of inventory, identifiable intangible assets, and any other significant assets
or liabilities. During the measurement period and as necessary, we adjust the preliminary purchase price allocation if we obtain more information regarding asset valuations and liabilities assumed. During the nine months ended September 30,
2013, the Company revised its fair value estimate of contingent consideration payable due to changes in certain performance metrics. The adjustment was recorded in general and administrative expense in the consolidated statement of income.
The fair value of the Companys cash equivalents, accounts receivable and current maturities of long-term debt approximates their
carrying amounts. The fair value of the Companys long-term debt was approximately $1,772.8 million and $1,960.0 million at September 30, 2013 and December 31, 2012, respectively. The fair value of these debt instruments is determined
by reference to the market value of the instruments as quoted in over-the-counter markets, which are Level 1 inputs.
(13)
|
Derivative Financial Instruments
|
From
time to time, the Company may employ interest rate swaps in an attempt to achieve a more balanced debt portfolio. The Company does not use derivative financial instruments for trading or speculative purposes.
13
The Company has three interest rate swaps for notional amounts of $100 million each related to its 7 1/8%
senior notes maturing in December 2021. These transactions are designated as fair value hedges since the swaps hedge against the change in fair value of fixed rate debt resulting from changes in interest rates. The Company recorded a derivative
asset of $0.6 million and $1.3 million within intangible and other long term assets in the consolidated balance sheets at September 30, 2013 and December 31, 2012, respectively, relating to these swaps.
The Company previously had an interest rate swap for a notional amount of $150 million related to its 6 7/8% senior notes maturing in June 2014 that was
designated as a fair value hedge. In February 2012, the Company sold this interest rate swap to the counterparty for approximately $1.2 million.
The changes in fair value of the interest rate swaps are included in the adjustments to reconcile net income to net cash provided by operating activities in the consolidated statement of cash flows. The
effect and location of the derivative instruments in the condensed consolidated statement of operations for the three and nine months ended September 30, 2013 and 2012, presented on a pre-tax basis, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Effect of derivative instrument
|
|
Location of (gain) loss
recognized
|
|
Three Months Ended
September 30, 2013
|
|
|
Three Months Ended
September 30, 2012
|
|
Interest rate swap
|
|
Interest expense, net
|
|
$
|
(513
|
)
|
|
$
|
(1,079
|
)
|
Hedged item - debt
|
|
Interest expense, net
|
|
|
615
|
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
102
|
|
|
$
|
(397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2013
|
|
|
Nine Months Ended
September 30, 2012
|
|
Interest rate swap
|
|
Interest expense, net
|
|
$
|
7,383
|
|
|
$
|
(4,235
|
)
|
Hedged item - debt
|
|
Interest expense, net
|
|
|
(6,886
|
)
|
|
|
3,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
497
|
|
|
$
|
(1,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2013 and 2012, approximately $0.5 million of interest expense and $1.0
million of interest income, respectively, was related to the ineffectiveness associated with these fair value hedges. Hedge ineffectiveness represents the difference between the changes in fair value of the derivative instruments and the changes in
fair value of the fixed rate debt attributable to changes in the benchmark interest rate.
(14)
Income Taxes
The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate adjusted for certain discrete items for
the full fiscal year. Cumulative adjustments to the Companys estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined. During the three months ended September 30, 2013, the Company
recorded adjustments to the effective income tax rate to reflect changes resulting from filing its 2012 U.S. federal tax return. As a result, the Company adjusted its effective tax rate from 37% to 35% for the nine months ending
September 30, 2013. The decrease in the rate was primarily as result of U.S. federal income tax credits.
The Company follows
authoritative guidance surrounding accounting for uncertainty in income taxes. It is the Companys policy to recognize interest and applicable penalties, if any, related to uncertain tax positions in income tax expense. The Company had
approximately $27.8 million and $26.4 million of unrecorded tax benefits at September 30, 2013 and December 31, 2012, respectively, all of which would impact the Companys effective tax rate if recognized.
In addition to its U.S. federal tax return, the Company files income tax returns in various state and foreign jurisdictions. The number of years that are
open under the statute of limitations and subject to audit varies depending on the tax jurisdiction. The Company remains subject to U.S. federal tax examinations for years after 2009.
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Commitments and Contingencies
The Companys wholly owned subsidiary, Hallin Marine, is the lessee of a dynamically positioned subsea vessel under a capital lease expiring in 2019 with a two year renewal option. Hallin Marine owns
a 5% equity interest in the entity that owns this leased asset. The lessors debt is non-recourse to the Company. The amount of the asset and liability under this capital lease is recorded at the present value of the lease payments. The
vessels gross asset value under the capital lease was approximately $37.6 million at inception and accumulated depreciation through September 30, 2013 and December 31, 2012 was approximately $15.3 million and $12.2 million,
respectively. As of September 30, 2013 and December 31, 2012, the Company had approximately $22.5 million and $25.6 million, respectively, included in other long-term liabilities, and approximately $4.1 million and $3.9 million,
respectively, included in accounts payable related to the obligations under this capital lease. The future minimum lease payments under this capital lease are approximately $1.0 million, $4.2 million, $4.6 million, $5.0 million, $5.4 million and
$5.9 million for the three months ending December 31, 2013 and the years ending December 31, 2014, 2015, 2016, 2017 and 2018, respectively, exclusive of interest at an annual rate of 8.5%. For the nine months ended September 30, 2013
and 2012, the Company recorded interest expense of approximately $1.8 million and $2.0 million, respectively, in connection with this capital lease.
Due to the nature of the Companys business, the Company is involved, from time to time, in routine litigation or subject to disputes or claims regarding its business activities. Legal costs related
to these matters are expensed as incurred. In managements opinion, none of the pending litigation, disputes or claims is expected to have a material adverse effect on the Companys financial condition, results of operations or liquidity.
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Related Party Disclosures
Subsequent to the acquisition of Complete, the Company purchases services, products and equipment from companies affiliated with an officer of one of its subsidiaries. The Company believes the
transactions reflected below with these related parties are on terms and conditions no less favorable to the Company than transactions with unaffiliated parties. For the nine months ended September 30, 2013 and 2012, these purchases totaled
approximately $140.7 million and $188.0 million, respectively. For the nine months ended September 30, 2013, approximately $41.1 million was purchased from ORTEQ Energy Services, a heavy equipment construction company which also manufactures
pressure pumping equipment, approximately $0.1 million was purchased from Ortowski Construction, primarily related to the manufacture of pressure pumping units, approximately $11.9 million was purchased from Resource Transport, LLC, related to the
transportation of sand used in pressure pumping activities, approximately $64.6 million was purchased from Texas Specialty Sands, LLC primarily for the purchase of sand used for pressure pumping activities, approximately $22.6 million was purchased
from ProFuel, LLC, primarily related to the purchase of diesel used to operate equipment and trucks, and approximately $0.4 million was related to facilities leased from Timber Creek Real Estate Partners. From the date of acquisition of Complete
through September 30, 2012, approximately $90.9 million was purchased from ORTEQ Energy Services, approximately $4.0 million was purchased from Ortowski Construction, approximately $8.0 million was purchased from Resource Transport, LLC,
approximately $70.6 million was purchased from Texas Specialty Sands, LLC, approximately $13.4 million was purchased from ProFuel, LLC, and approximately $1.1 million was related to facilities leased from Timber Creek Real Estate Partners.
As of September 30, 2013, the Companys trade accounts payable includes amounts due to these companies totaling approximately $14.7
million, of which approximately $2.8 million was due ORTEQ Energy Services, approximately $1.3 million was due Resource Transport, LLC, approximately $8.2 million was due Texas Specialty Sands, LLC, and approximately $2.4 million was due ProFuel,
LLC. As of December 31, 2012, the Companys trade accounts payable includes amounts due to these companies totaling approximately $23.2 million, of which approximately $13.4 million was due ORTEQ Energy Services, approximately $1.3 million
was due Resource Transport, LLC, approximately $6.9 million was due Texas Specialty Sands, LLC, and approximately $1.6 million was due ProFuel, LLC. No amounts were due Ortowski Construction and Timber Creek Real Estate Partners as of
September 30, 2013 or December 31, 2012.
In May 2012, the Companys President and Chief Executive Officer was appointed as an
independent director of the board of Linn Energy, LLC (Linn), an independent oil and gas development company with focus areas in the mid-continent, including the Permian Basin, the Hugoton Basin, the Powder River Basin, the Williston Basin,
Michigan, and California. The Company recorded revenues from Linn of approximately $15.9 million and $14.7 million for the nine months ended September 30, 2013 and 2012, respectively. The Company had trade receivables from Linn of
approximately $1.6 million and $3.3 million as of September 30, 2013 and December 31, 2012, respectively.
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Subsequent
Events
The Company has evaluated and disclosed all material subsequent events that occurred after the balance sheet date but before
financial statements were issued.
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Recently Issued Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board issued ASU 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income (ASU 2013-02). ASU 2013-02 is an update to existing guidance on the presentation of comprehensive income. This update requires companies to report the effect of significant reclassifications out of
accumulated other comprehensive income (AOCI) by component. For significant items reclassified out of AOCI to net income in their entirety during the reporting period, companies must report the effect on the line items in the statement where net
income is presented. For significant items not reclassified to net income in their entirety during the period, companies must provide cross references in the notes to other disclosures that already provide information about those amounts. The
Company adopted this update effective January 1, 2013, and it did not have a material impact on the condensed consolidated financial statements.
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