Superior Energy Services has over $1 billion liquidity, no near bond maturities, touts IG rating

By Paul Deckelman

New York, June 24 – Superior Energy Services, Inc. has been weathering the oil and natural gas industry downturn so far using what a senior executive called a “relatively simple” three-part strategy – “reduce costs, build cash, and maintain liquidity, not just to survive through a downturn, but to emerge from it in a better, stronger position competitively.”

And, said Paul Vincent, the Houston-based oilfield services company’s vice president for investor relations, “we have done that. We continue to build cash – we’ll grow cash this year on our balance sheet. We’ve reduced leverage over the past several years through debt reduction, and through organic growth. We’ve also improved our cost of capital.”

Vincent told participants at Global Hunter Securities’ GHS 100 Energy Conference on Wednesday in Chicago that as of the end of the 2015 first quarter on March 31, Superior’s balance sheet showed over $1 billion of available liquidity – $415 million of cash and an undrawn $600 million revolving line of credit.

He said that the liquidity figure “will improve during the second quarter.”

Elevation to investment grade

He continued that “the metrics that we’re presenting are very strong and we think we’ll be able to manage this without really having a lot of degradation” in the company’s financial position, despite the still-difficult industry conditions.

“Our balance sheet is something we’re very proud of,” he declared. “You need to be disciplined in your business and we try to reflect that discipline in our business.”

As a result, he said, “as of the fall of last year, we’ve earned an investment-grade credit rating from both rating agencies, indicating financial strength.”

Moody’s Investors Service elevated the ratings on the company’s debt to Baa3 last November, joining Standard & Poor’s, which had already lifted Superior out of junk bond territory back in May 2012 with a BBB- rating. S&P at that time noted the company’s anticipated expansion of its operations in the North American land-based and offshore well-servicing markets following the completion in early 2012 of its $2.7 billion cash-and-stock acquisition of sector peer Compete Production Services, Inc.

Vincent said that the Complete Production deal provided Superior with the kind of size and scale it needed to become one of the top oilfield servicing companies, with the balance sheet bearing that out

At the end of 2010 – the last full year before the Complete Production acquisition – Superior had total debt of $875 million, with $51 million of cash on its balance sheet and annualized EBITDA of $338 million. Its leverage ratio of debt as a multiple of EBITDA stood at 2.59 times. Capitalization was $2.16 billion and its measure of debt as a percentage of capitalization stood at 41%.

Fast-forward to the end of the 2015 first quarter in March. Total debt had nearly doubled to $1.64 billion, consisting of $500 million of 6 3/8% senior notes due 2019 that the company sold in November 2011 – Superior’s closest bond maturity – $800 million of 7 1/8% senior notes due 2021, which it sold in June 2012, and $340 million of term loan debt due in 2017 that the company had entered into in February 2012.

But while debt was up, balance-sheet cash had also jumped to $415 million and annualized EBITDA had more than tripled from late-2010 levels to $1.13 billion, bringing the leverage ratio down to 1.45 times. With the growth in stockholders’ equity to $4.05 billion last quarter from $1.28 billion at the end of 2010, capitalization had likewise expanded to $5.70 billion, dropping the company’s debt as a percentage of capitalization to 29%.

“Looking at the evolution of the balance sheet,” Vincent said, “before we made that acquisition, you can see the size of the business [then] – and where we were at the end of the first quarter. We’ve grown significantly, and we’ve done it without sacrificing our balance sheet, without putting that in jeopardy, and really, it’s given us an opportunity to be aggressive, expanding internationally.”

Eyeing growth possibilities

He said the company is always eyeing potential acquisitions, if such transactions would expand the company’s array of products and services into new areas where it isn’t now and if they would be accretive to earnings – and he said that “we wouldn’t be looking at the types of acquisitions we’re looking at today, if we didn’t have this type of scale, this type of cash position” as a result of the Complete Production deal.

Vincent said that Superior had done no acquisitions since the Complete Production transaction had closed several years ago, preferring instead to focus on growing organically.

He said that the company remains interested in such growth, “to the extent that we can manage that growth,” but he cautioned that “we’re not really looking to lever up to make sizable internal investments, but we do use our internal cash flow to grow the business.”

During the question-and-answer portion of Superior’s conference presentation, one of the attending investors asked what kind of maximum leverage target might the company tolerate in order to pursue a coveted acquisition.

Vincent declined to give a specific answer, saying “that’s not a static question. We would need to understand what exactly the scenario was.”

He explained that “if it was something we thought would increase our free cash flow yield, increase our return on assets, was accretive to the bottom line, it’s certainly something that we would look at, and at our end, we would have that conversation with our stakeholders. We wouldn’t do it in a vacuum.”

With Superior having finally achieved investment-grade status, Vincent said that “the credit rating is important to us. Our liquidity is important to us. So, for us to make that trade, it’s going to have to be a very important opportunity and one that we feel is meaningful to the long-term growth of the business.”

Asked about whether the ratings agencies had outlined any possible “parameters” that Superior would have to remain within in order to keep its high-grade rating, Vincent answered that “there are always parameters, and we have these conversations with the rating agencies.”

However, he added that “things change, though – a year ago, the conversation was totally different, with you [investors], with the credit rating agencies and with all of our stakeholders. We’ll have to see what those metrics are. I’m sure they are not the same as they were a year ago.”

© 2015 Prospect News.
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