SUPERIOR ENERGY SERVICES INC SPN
October 17, 2011 - 3:51pm EST by
quads1025
2011 2012
Price: 26.62 EPS N/A $4.11
Shares Out. (in M): 155 P/E N/A 6.5x
Market Cap (in $M): 4,158 P/FCF N/A N/A
Net Debt (in $M): 1,777 EBIT 0 1,048
TEV ($): 5,935 TEV/EBIT N/A 5.7x

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Description

EXECUTIVE SUMMARY

Superior Energy Services, Inc. ("Superior Energy") appears to be an attractive, event-driven opportunity.  The Company has signed a definitive agreement to merge with Completed Production Services, Inc. ("Complete Production")(CPX) in a cash and stock transaction.  The transaction, scheduled to close by the end of 2011, is highly strategic, should be accretive to Superior Energy's earnings, and the pro forma company should benefit from trends in the oil service sector.  By my calculations, the pro forma entity is trading at an undemanding valuation of 3.9x 2012E EBITDA.  Placing a more appropriate 5.0x multiple on this EBITDA equates to a $38 price target, ~40% higher than the Company's current trading price.

Please note that all the figures presented above (including share count, market cap, net debt and EBIT are all pro forma for the merger).

COMPANY DESCRIPTION

  • Superior Energy is a diversified provider of specialized oilfield services and equipment. The Company focuses on serving (i) the drilling-related needs of oil and gas companies through its drilling products and services segment and (ii) the production-related needs of oil and gas companies through its subsea and well enhancement, drilling products and marine segments. The Company has three operating segments:
  • o Subsea and Well Enhancement (66% of 2010 Revenues) - provides services that are used to build out oil and gas production infrastructure, stimulate oil and gas production, plug and abandon uneconomic or non-producing wells and decommission offshore oil and gas platforms. These services include integrated subsea and engineering services, coiled tubing, electric line, pumping and stimulation, gas lift, well control, hydraulic workover and snubbing, mechanical wireline, recompletion, stimulation and sand control equipment and services, well evaluation, offshore oil and gas tank and vessel cleaning, decommissioning and plug and abandonment.
  • o Drilling Products and Services (28% of 2010 Revenues) - manufactures, sells and rents specialized equipment for use with offshore and onshore oil and gas well drilling, completion, production and workover activities.
  • o Marine Services (6% of 2010 Revenues) - owns and operates a fleet of 25 liftboats that is complementary to the Company's subsea and well enhancement services. A liftboat is a self-propelled, self-elevating work platform with legs, cranes and living accommodations.

INVESTMENT THESIS

  • Transformational Merger with Complete Production - On October 10, 2011 Superior Energy announced the signing of a definitive agreement to merge with Complete Production, an oilfield service provider focused on the completion and production phases of oil and gas wells. This is a transformational merger for Superior Energy as it (i) will create the premier diversified "mid-cap" oilfield services company and (ii) double the size of Superior Energy in terms of revenues and EBITDA. The main aspects of the transaction are:
  • o Consideration - Superior Energy is merging with Complete Production through a cash and stock transaction in which Complete Production shareholders will receive $7.00 in cash and 0.945 shares of Superior Energy for each share of Complete Production owned. The transaction is not subject to financing.
  • o Transaction Rationale - The combination of Superior Energy with Complete Production will create the premier "mid-cap" diversified oilfield services company with the products, technology and scale to better serve oil and gas companies, particularly in unconventional fields in North America. Superior Energy and Complete Production's product and service lines have some overlap but are highly complementary, enabling the combined enterprise to benefit from cross-selling and revenue diversification. Superior Energy's strength lies in drilling, production, and decomissioning while Complete Production strength lies in completion and specific production services. The combination of the two companies will enable the pro forma entity to service wells across their life-cycle.
  • o Closing Conditions - The transaction is subject to the approval of both Superior Energy's and Complete Production's stockholders as well as other customary closing conditions and regulatory approvals.
  • o Timing - The transaction is expected to close by the end of 2011.
  • o Financial Impact - Management expects the merger to be accretive to Superior Energy's EPS and cash flow per share in 2012. Internal analysis indicates that the transaction will be ~20% accretive to Superior Energy's 2012 EPS. Further, management expects the transaction will be balance sheet neutral as measured by key leverage ratios and will ultimately result in an overall credit profile enhancement given the significant increase in scale and diversity provided by the combination. Management does not expect the transaction to result in significant synergies through cost reductions, particularly in employees, as management expects it will need all the current employees of both companies to satisfy current customer demand.

FUNDAMENTAL ANALYSIS

  • Summary - The fundamental outlook for the pro forma Superior Energy and Complete Production combined company is quite favorable and should help propel the stock upward independent of events and catalysts.
  • Positive Shift in North American Land Drilling Market from Natural Gas to Oil - The North American land market has shifted dramatically from natural gas to oil and liquids over the past few years. In particular, liquid-rich shale plays including the Bakken, Eagle Ford, Granite Wash and Niobrara are key areas of focus for many E&P's. Rig activity is now being driven by different factors: natural gas markets are often a function of natural gas storage levels in the United States and degree days whereas oil markets are a function of global oil supply and demand dynamics. Further, integrated oil companies play a major role in the oil markets and have more consistent spending patterns. Accordingly, North America has not only become a more resilient market but also a less cyclical one. This increased stability should have a positive impact on oil service companies in terms of earnings predictability and potential valuation multiple expansion.
  • Growing Rig Activity Supporting a Strong Service Market - The North American land service market is quite strong as measured by the Baker Hughes rig count which grew 34% from 1,446 to 1,940 in 2010 and another 31% YTD in 2011 from 1,940 to a current 2,535. The rig count is expected to grow at least another 10% in 2012. In contrast to the increase in rig activity that took place from 2005-2008 which then experienced a stunning collapse as the natural gas supply rapidly expanded, rig demand is now being driven by the oil market and should be much more resilient. According to a sell-side survey, 50% of E&P operators see service capacity as "tight and getting tighter" which suggests that oil field service companies will be able to successfully push through price increases.  Please note that one can pull up the Baker Hughes rig data on Bloomberg by typing in "RIG" <Go>.  Further, the shift in rig activity from gas to oil can clearly be seen by pulling up the historical chart of the oil rig index on Bloomberg by typing in BAKEOIL <index> GP and comparing to the gas rig index on Bloomberg by typing in BAKEGAS <index> GP.  Looking at the chart ranges from 2004 through the current date really shows the shift.
  • Favorable Secular Trends toward Unconventional Resources - Secular trends in the North American oilfields continue to support growth in the US services sector. Specifically, the shift toward drilling in unconventional resources, mainly shale, has not only increased the per well service intensity but also has generated higher demand for high specification equipment. This is beneficial to the oilfield service companies, particularly those leveraged toward completion and production (as opposed to drilling) like the pro forma Superior Energy and Complete Production company. The reason the completion and production stages of a well's life cycle are garnering greater attention than drilling is the underlying efficiency gains in drilling technology (improvements in rig designs, drill bits and fluids) which have been cutting the time it takes to drill a well. It is estimated that drilling times have been reduced by 15% over the last year. On the other hand, longer well lengths and more frac stages have mean that an increasing amount of time and cost are spent on completion and production. Pressure pumping especially is being driven by the following trends:
  • o Fracing - Fracing through pressure pumping is an integral part of bringing shale gas and shale oil wells into production at economical rates. More wells drilled in unconventional resource plays means more fracing demand.
  • o Longer Well Lengths - Increasingly, wells are being drilled with longer horizontal laterals. These longer sections require larger amounts of horsepower to generate sufficient fracing force. Accordingly, the horsepower requirement per well dramatically increases.
  • o More Fracing Stages Per Well - The development of unconventional resources is gravitating toward more frac stages per well. Liquid rich plays are requiring 15-20 frac stages compared to gas-oriented plays which use 8-12 frac stages, thereby increasing pressure pumping demand.
  • o Deeper Horizon Discoveries - New unconventional resource discoveries are being made in deeper horizons. These deeper formations tend to have higher pore pressures and would therefore need more horsepower to frac than a similar well in more shallow formations.

OTHER CATALYSTS

  • Q3 Earnings - Estimated to be released 10/26/11.
  • Complete Production Potential Note Redemption - Complete Production's bonds outstanding are not due until 2016 but are callable on December 15, 2011 at $104. As the notes have an 8% coupon, it is likely that they will be refinanced at an attractive rate which should increase the pro forma company's EPS.
  • Sell-Side Analyst Coverage - Few "bulge bracket" investment banks currently cover Superior Energy or Complete Production. As the combined company will be a "mid-cap" player, coverage should increase.

KEY RISKS

  • Superior Bid for Complete Production - It is possible that Complete Production receives a superior bid from another industry participant.  It isn't clear what the likelihood of this is.  There is no mitigant to this risk, but one could set up the trade using a "Texas Hedge", going long both Superior Energy and Complete Production.
  • Sensitivity to Oil Prices - The revenues and earnings of the pro forma Superior Energy and Complete Production company will be impacted by fluctuations in the price of oil. There is no mitigant to this risk but it can be hedged out with a short position in the Oil Services HOLDRS Trust (OIH) or similar instrument.
  • Potential Overcapacity in Pressure Pumping - The pro forma Superior Energy and Complete Production company derived 22% of its LTM revenues from pressure pumping. The oil service industry is adding 2.5-3.0mm horsepower of pressure pumping capacity in over the course of 2011-2012 off a current base of about 10.0mm horsepower. Accordingly, there is fear that the industry might face overcapacity, causing prices to decline. However, this risk is mitigated by two factors. First, pressure pumping capacity is currently the limiting factor for rig count expansion and much of the new capacity being brought on is for replacement of older equipment. Second, supply and demand for pressure pumping isn't expected to be in balance until 2H12, suggesting at least near-term earnings will not be impacted.
SUMMARY FINANCIALS
                           
            2006 2007 2008 2009 2010 2011 2012 2013
                           
SUPERIOR ENERGY SERVICES                    
                           
North American Avg. Rig Count     2,120 2,111 2,261 1,312 1,893 2,308 2,691 2,772
  Growth, %         N.A.   (0.4%) 7.1% (42.0%) 44.3% 21.9% 16.6% 3.0%
                           
Subsea and Well Enhancement                    
Revenues         $ 469.1 $ 761.0 $ 1,155.2 $ 919.3 $ 1,112.7 $ 1,335.4 $ 1,614.7 $ 1,663.2
  Growth, %         N.A.   62.2% 51.8% (20.4%) 21.0% 20.0% 20.9% 3.0%
                           
Cash Cost of Services       269.6 419.8 633.1 616.1 675.4 829.5 1,017.3 1,047.8
  Cash Gross Profit       199.5 341.2 522.1 303.2 437.2 505.9 597.5 615.4
     Margin, %         42.5% 44.8% 45.2% 33.0% 39.3% 37.9% 37.0% 37.0%
                           
General and Administrative Expenses     77.8 118.7 163.6 149.1 221.6 237.5 240.0 240.0
  % of Revenues       16.6% 15.6% 14.2% 16.2% 19.9% 17.8% 14.9% 14.4%
                           
EBITDA         121.7 222.5 358.5 154.1 215.6 268.4 357.5 375.4
  Margin, %         25.9% 29.2% 31.0% 16.8% 19.4% 20.1% 22.1% 22.6%
                           
Drilling Products and Services                    
Revenues         $ 371.2 $ 496.3 $ 550.9 $ 426.9 $ 474.7 $ 584.6 $ 672.8 $ 693.0
  Growth, %         N.A.   33.7% 11.0% (22.5%) 11.2% 23.2% 15.1% 3.0%
                           
Cash Cost of Services       115.9 156.7 178.6 143.8 176.5 213.9 242.2 249.5
  Cash Gross Profit       255.3 339.6 372.4 283.1 298.3 370.7 430.6 443.5
     Margin, %         68.8% 68.4% 67.6% 66.3% 62.8% 63.4% 64.0% 64.0%
                           
General and Administrative Expenses     70.3 87.4 97.6 90.3 107.2 119.7 120.0 120.0
  % of Revenues       18.9% 17.6% 17.7% 21.2% 22.6% 20.5% 17.8% 17.3%
                           
EBITDA         185.0 252.1 274.8 192.8 191.1 251.0 310.6 323.5
  Margin, %         49.8% 50.8% 49.9% 45.2% 40.2% 42.9% 46.2% 46.7%
                           
Marine                        
Revenues         $ 140.1 $ 127.9 $ 121.1 $ 103.1 $ 94.2 $ 101.2 $ 107.1 $ 108.2
  Growth, %         N.A.   (8.7%) (5.3%) (14.9%) (8.6%) 7.4% 5.8% 1.0%
                           
Cash Cost of Services       56.2 60.4 74.8 64.1 66.8 73.3 75.0 75.7
  Cash Gross Profit       83.9 67.5 46.3 39.0 27.4 27.9 32.1 32.5
     Margin, %         59.9% 52.7% 38.2% 37.8% 29.1% 27.6% 30.0% 30.0%
                           
General and Administrative Expenses     11.4 10.6 12.6 19.7 14.1 11.6 12.0 12.0
  % of Revenues       8.2% 8.3% 10.4% 19.1% 14.9% 11.4% 11.2% 11.1%
                           
EBITDA         72.5 56.9 33.7 19.3 13.4 16.4 20.1 20.5
  Margin, %         51.7% 44.5% 27.8% 18.7% 14.2% 16.2% 18.8% 18.9%
                           
Consolidated                        
Revenues         $ 980.4 $ 1,385.2 $ 1,827.3 $ 1,449.3 $ 1,681.6 $ 2,021.2 $ 2,394.7 $ 2,464.4
  Growth, %         N.A.   41.3% 31.9% (20.7%) 16.0% 20.2% 18.5% 2.9%
                           
Cash Cost of Services       441.7 637.0 886.5 824.0 918.7 1,116.7 1,334.5 1,373.0
  Cash Gross Profit       538.7 748.2 940.7 625.3 762.9 904.6 1,060.2 1,091.3
     Margin, %         54.9% 54.0% 51.5% 43.1% 45.4% 44.8% 44.3% 44.3%
                           
General and Administrative Expenses     159.5 216.7 273.8 259.1 342.9 368.8 372.0 372.0
  % of Revenues       16.3% 15.6% 15.0% 17.9% 20.4% 18.2% 15.5% 15.1%
                           
EBITDA         379.2 531.5 666.9 366.2 420.0 535.8 688.2 719.3
  Margin, %         38.7% 38.4% 36.5% 25.3% 25.0% 26.5% 28.7% 29.2%
                           
Depreciation and Amortization     111.0 187.8 175.5 207.1 220.8 250.7 256.0 260.0
                           
EBIT         268.2 343.7 491.4 159.1 199.2 285.1 432.2 459.3
  Margin, %         27.4% 24.8% 26.9% 11.0% 11.8% 14.1% 18.0% 18.6%
                           
            2006 2007 2008 2009 2010 2011 2012 2013
                           
COMPLETE PRODUCTION SERVICES                  
                           
North American Avg. Rig Count     2,120 2,111 2,261 1,312 1,893 2,308 2,691 2,772
  Growth, %         N.A.   (0.4%) 7.1% (42.0%) 44.3% 21.9% 16.6% 3.0%
                           
Completion & Production Services                    
Revenues         $ 860.6 $ 1,243.5 $ 1,542.3 $ 897.7 $ 1,355.0 $ 2,034.9 $ 2,422.1 $ 2,494.8
  Growth, %         N.A.   44.5% 24.0% (41.8%) 50.9% 50.2% 19.0% 3.0%
                           
Cash Operating Costs       608.0 844.8 1,075.2 731.9 985.2 1,439.4 1,647.0 1,696.4
EBITDA         252.6 398.6 467.1 165.8 369.8 595.5 775.1 798.3
  Margin, %         29.4% 32.1% 30.3% 18.5% 27.3% 29.3% 32.0% 32.0%
                           
Drilling Services                      
Revenues         $ 196.2 $ 214.5 $ 235.0 $ 115.5 $ 173.1 $ 225.3 $ 269.1 $ 277.2
  Growth, %         N.A.   9.3% 9.5% (50.9%) 49.9% 30.2% 19.5% 3.0%
                           
Cash Operating Costs       125.8 153.1 176.2 105.8 134.1 166.0 193.1 194.0
EBITDA         70.4 61.4 58.7 9.6 39.0 59.3 76.1 83.2
  Margin, %         35.9% 28.6% 25.0% 8.3% 22.5% 26.3% 28.3% 30.0%
                           
Product Sales                      
Revenues         $ 69.5 $ 79.6 $ 89.5 $ 52.3 $ 39.8 $ 46.4 $ 49.7 $ 50.2
  Growth, %         N.A.   14.5% 12.4% (41.5%) (24.0%) 16.8% 7.0% 1.0%
                           
Cash Operating Costs       61.0 69.6 76.8 44.4 34.6 39.7 42.2 42.7
EBITDA         8.5 9.9 12.7 8.0 5.2 6.7 7.5 7.5
  Margin, %         12.3% 12.5% 14.2% 15.2% 13.1% 14.4% 15.0% 15.0%
                           
Corporate                        
Intersegment Revenues       ($ 41.7) ($ 42.1) ($ 31.8) ($ 9.1) ($ 6.5) ($ 11.5) ($ 10.0) ($ 10.0)
  Growth, %                        
                           
Cash Operating Costs       (20.8) (14.0) 6.5 25.2 32.6 30.4 32.0 32.0
EBITDA         (20.9) (28.1) (38.3) (34.3) (39.1) (41.9) (42.0) (42.0)
  Margin, %         N.A.   N.A.   N.A.   N.A.   N.A.   N.A.   N.A.   N.A.  
                           
Consolidated                        
Revenues         $ 1,084.6 $ 1,495.4 $ 1,834.9 $ 1,056.4 $ 1,561.4 $ 2,295.1 $ 2,730.9 $ 2,812.2
  Growth, %         N.A.   37.9% 22.7% (42.4%) 47.8% 47.0% 19.0% 3.0%
                           
Cash Operating Costs       773.9 1,053.6 1,334.7 907.3 1,186.5 1,675.5 1,914.3 1,965.1
EBITDA         310.7 441.9 500.2 149.1 374.9 619.6 816.6 847.0
  Margin, %         28.6% 29.5% 27.3% 14.1% 24.0% 27.0% 29.9% 30.1%
                           
Depreciation and Amortization     75.9 131.4 181.2 200.7 181.8 198.6 200.0 200.0
                           
EBIT         234.8 310.5 319.0 (51.7) 193.1 421.0 616.6 647.0
  Margin, %         21.6% 20.8% 17.4% (4.9%) 12.4% 18.3% 22.6% 23.0%
                           
                           
            2006 2007 2008 2009 2010 2011 2012 2013
                           
PRO FORMA CONSOLIDATED                    
                           
Revenues         $ 980.4 $ 1,385.2 $ 1,827.3 $ 1,449.3 $ 1,681.6 $ 2,021.2 $ 5,125.6 $ 5,276.5
  Growth, %         N.A.   41.3% 31.9% (20.7%) 16.0% 20.2% 153.6% 2.9%
                           
Cash Operating Costs       601.2 853.7 1,160.3 1,083.1 1,261.6 1,485.4 3,620.8 3,710.1
EBITDA         379.2 531.5 666.9 366.2 420.0 535.8 1,504.8 1,566.4
  Margin, %         38.7% 38.4% 36.5% 25.3% 25.0% 26.5% 29.4% 29.7%
                           
Depreciation and Amortization     111.0 187.8 175.5 207.1 220.8 250.7 456.0 460.0
                           
EBIT         268.2 343.7 491.4 159.1 199.2 285.1 1,048.8 1,106.4
  Margin, %         27.4% 24.8% 26.9% 11.0% 11.8% 14.1% 20.5% 21.0%
                           
Superior Energy Services, Inc. (SPN)            
Pro Forma Income Statement                    
($ in millions)                        
                           
            2006 2007 2008 2009 2010 2011 2012 2013
                           
Revenues         $ 980.4 $ 1,385.2 $ 1,827.3 $ 1,449.3 $ 1,681.6 $ 2,021.2 $ 5,125.6 $ 5,276.5
  % Growth         N.A.  41.3% 31.9% (20.7%) 16.0% 20.2% 153.6% 2.9%
                           
Cash COGS         601.2 853.7 1,160.3 1,083.1 1,261.6 1,485.4 3,620.8 3,710.1
EBITDA         379.2 531.5 666.9 366.2 420.0 535.8 1,504.8 1,566.4
  % Margin         38.7% 38.4% 36.5% 25.3% 25.0% 26.5% 29.4% 29.7%
                           
Depreciation         111.0 187.8 175.5 207.1 220.8 250.7 456.0 460.0
  Total Depreciation and Amortization     111.0 187.8 175.5 207.1 220.8 250.7 456.0 460.0
                           
EBIT         268.2 343.7 491.4 159.1 199.2 285.1 1,048.8 1,106.4
  % Margin         27.4% 24.8% 26.9% 11.0% 11.8% 14.1% 20.5% 21.0%
                           
     Total Interest Expense       23.0 33.3 46.7 50.9 57.4 53.4 56.0 54.1
                           
Interest Income       4.0 2.7 3.0 0.9 5.1 0.6 1.2 1.2
Other Income/(Expense)       42.7 119.4 94.6 (269.0) (21.8) 14.1 0.0 0.0
                           
EBT         291.8 432.5 542.4 (159.9) 125.1 246.4 994.0 1,053.5
  Taxes         103.6 151.4 190.9 (57.6) 43.3 88.7 357.8 379.2
  Tax Rate         35.5% 35.0% 35.2% 36.0% 34.6% 36.0% 36.0% 36.0%
  Net Income         $ 188.2 $ 281.1 $ 351.5 ($ 102.3) $ 81.8 $ 157.7 $ 636.2 $ 674.2
                           
  FD Shares Outstanding       81.3 82.4 81.2 78.2 79.7 117.3 154.7 154.7
  FD EPS         $ 2.32 $ 3.41 $ 4.33 ($ 1.31) $ 1.03 $ 1.34 $ 4.11 $ 4.36
  Growth, %       N.A.  47.3% 26.8% (130.2%) (178.4%) 31.0% 205.7% 6.0%

Catalyst

 

  • Completion of the Complete Production Merger - expected at the end of 2011
  • Q3 Earnings - Estimated to be released 10/26/11.
  • Complete Production Potential Note Redemption - Complete Production's bonds outstanding are not due until 2016 but are callable on December 15, 2011 at $104. As the notes have an 8% coupon, it is likely that they will be refinanced at an attractive rate which should increase the pro forma company's EPS.
  • Sell-Side Analyst Coverage - Few "bulge bracket" investment banks currently cover Superior Energy or Complete Production. As the combined company will be a "mid-cap" player, coverage should increase.
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