The company recorded $2.0 million in after-tax charges ($3.2 million pre-tax) for the reduction in value of oil and gas reserves and assets in the other oilfield services segment. The company took a $1.3 million charge ($2.1 million pre-tax) for the reduction in value of two of its mature properties. Earlier this year the company successfully restored production from wells at the properties after years of being shut-in. However, it was deemed uneconomical to perform additional production enhancement work to maintain production. The company also reduced the value of assets in the other oilfield services segment by $0.7 million ($1.1 million pre-tax) as a result of its decision to close its oil spill containment boom facility due to hurricane-related damage.
Net income without these charges would have been $11.4 million, or $0.14 diluted earnings per share for the third quarter ended September 30, 2005.
For the nine months ended September 30, 2005, revenues were $547.3 million and net income was $51.6 million or $0.65 diluted earnings per share, as compared to revenues of $406.5 million and net income of $23.6 million or $0.31 diluted earnings per share for the nine months ended September 30, 2004.
Third-party demand for most products and services was strong prior to Hurricanes Katrina and Rita. Despite the hurricanes, third quarter revenues increased over the second quarter for the well intervention, marine and rental tools segments. The company estimates the hurricane season resulted in deferred revenue opportunity in the range of $32.0 million and $35.0 million.
The company incurred approximately $6.5 million in hurricane-related expenses, including $2.0 million in relief aid for more than 560 employees; $2.0 million in equipment and facility losses and repairs; $1.5 million in storm-related payroll expenses, temporary lodging and miscellaneous and third-party expenses; and $1.0 million in repairs to oil and gas platforms. The company anticipates an additional $5.0 million to $6.0 million in hurricane-related expenses in the fourth quarter, mainly to complete repairs on the company's oil and gas platforms.
The company estimates the overall impact of the hurricane season was a reduction in net income for the third quarter in the range of $0.20 to $0.22 diluted earnings per share.
CEO Terry Hall Comments
CEO Terry Hall commented, "The hurricanes adversely impacted what would have been a record third quarter for revenues and net income. Prior to the storms, production-related services, liftboats and rental tools in the Gulf of Mexico enjoyed stronger activity levels than the second quarter. Our oil and gas properties were producing on average 7,500 barrels of oil equivalent ("boe") per day on days unaffected by hurricanes, including several days above 8,000 boe. In addition, our rental businesses grew as our international and domestic land activity increased.
"Our earnings power remains strong, but for different market-driven factors. Our focus is now on assisting our customers restore and revive their Gulf of Mexico oil and gas production. Activity levels across our segments are gradually increasing as some customers move from the damage assessment phase to platform and well work, including salvage, repairs and recovery. As we move through the fourth quarter, our oil and gas production should slowly resume as third party pipelines and refineries come on-line.
"In 2006, the Gulf of Mexico market should be very active with a combination of hurricane recovery projects and the resumption of pre-storm, production-related work and drilling activity. In addition, we expect continued market penetration on land and internationally for rental tools and well intervention services."
Well Intervention Group Segment
Third quarter revenues for the Well Intervention Group segment were $63.4 million, a 6 percent increase from the third quarter of 2004 and a 4 percent increase from the second quarter of 2005. Coiled tubing, pumping and stimulation, hydraulic workover and structure removal services all showed sequential revenue increases. The segment's gross profit percentage was lower sequentially due to a change in business mix as a result of less high-margin well control work and higher repair and maintenance expenses, labor costs and third party services.
Demand for production-related and decommissioning services is increasing as the industry moves to well recovery work. Activity has already returned to pre-storm levels for coiled tubing, hydraulic workover, well control, engineering and pumping and stimulation services.
Rental Tools Segment
Revenues for the Rental Tools segment were $61.7 million, 45 percent higher than the third quarter of 2004 and 1 percent higher than the second quarter of 2005. The small sequential improvement was due primarily to an increase in international rentals of drilling-related tools and on-site accommodations and accessories which offset the decline in Gulf of Mexico rentals. International rental revenues were approximately $15.4 million as compared to approximately $11.8 million in the second quarter of 2005.
Gulf of Mexico demand for drilling-related rentals such as drill pipe, stabilizers and specialty tubulars is increasing slowly, and the company believes demand will return to pre-storm levels by the end of the year as customers resume their drilling programs. Rentals of on-site accommodations are exceeding pre-storm levels.
Superior's marine revenues were $18.5 million, a 2 percent increase as compared to the third quarter of 2004 and a 1 percent increase as compared to the second quarter of 2005. Average fleet utilization was 76 percent as compared to 69 percent for the third quarter of 2004 and 73 percent for the second quarter of 2005. Average daily revenue in the third quarter was approximately $200,730, inclusive of subsistence revenue.
In October, liftboat activity has increased dramatically with every available liftboat currently working and dayrates above 2001 peak rates for all classes. Average daily revenue in October was approximately $321,000.
Liftboat Average Dayrates and Utilization by Class Size Three Months Ended September 30, 2005 and One Month Ended October 31, 2005 ($ actual) 3rd Quarter 2005 October 2005 ------------------- ------------------- Class Average Average Liftboats Dayrate Utilization Dayrate Utilization ------------------- --------- ------------------- ------------------- 145-155' 11 $6,270 77.6% $8,511 84.2% 160'-175' 6 8,199 45.3% 11,988 94.6% 200' 4 10,228 91.0% 14,173 100.0% 230'-245' 3 13,993 94.2% 22,711 100.0% 250' 2 17,805 97.8% 25,017 98.4%
Other Oilfield Services Segment
Revenues in this segment were $22.5 million, a 10 percent increase as compared to the third quarter of 2004 and an 8 percent decrease as compared to the second quarter of 2005. Lower revenue is attributable to storm-related activity declines, especially a decline in drilling-related environmental services such as rig cleaning and non-hazardous oilfield waste treatment.
Demand for environmental services will be driven in large part by drilling activity, which is slowly increasing. Contract operations activity is returning to pre-storm levels as customers require personnel to assist in platform recovery and clean-up work.
Oil and Gas Segment
Oil and gas revenues were $21.8 million, a 53 percent increase as compared to the third quarter of 2004 and a 26 percent decrease from the second quarter of 2005. Third quarter production from SPN Resources was approximately 427,000 barrels of oil equivalent, net (boe) as compared to approximately 336,000 boe in the third quarter of 2004 and approximately 662,000 boe in the second quarter of 2005. Third quarter production was lower due to production deferral of approximately 220,500 boe as a result of the hurricanes.
Production at fields where third-party pipelines can accept product started on October 5, at which point the company was producing approximately 200 boe per day. On November 1, 2005, production was approximately 775 boe per day. Repairs continue at South Pass 60 and Ship Shoal 253, and with the exception of one platform at South Pass 60 contributing approximately 600 boe per day, the company expects to have all production on-line by year end.
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