Superior Well Services' 2Q Revenues Hit by Decrease in Drilling

Superior Well Services has announced a net loss excluding non-cash goodwill impairment, a non-GAAP financial measure, of $17.7 million or a $0.79 loss per diluted share. Net loss excluding non-cash goodwill impairment excludes the impact of a $20.2 million after-tax ($33.2 million pre-tax) non-cash goodwill impairment charge recognized in the second quarter of 2009. Net loss as reported for the second quarter of 2009 was $38.7 million, or a $1.66 loss per diluted share, compared to net income of $9.6 million, or $0.41 per diluted share, in the same period in 2008. The second quarter's diluted loss per share compares to net loss per share of $0.67 in the previous quarter.

Revenue in the second quarter of 2009 was $90.5 million, a 26.0% decrease from the $122.3 million reported in the previous quarter and a 24.4% decrease from the $119.7 million reported in the second quarter of 2008. Operating loss for the second quarter, which includes the goodwill impairment charge was $59.2 million compared to $19.1 million of operating loss reported in the previous quarter and $16.6 million of operating income reported in the second quarter of 2008. Adjusted EBITDA, a non-GAAP financial measure, totaled $(7.3) million, as compared to $(1.1) million reported in the previous quarter and $26.7 million reported in the second quarter of 2008. For our definition of Adjusted EBITDA, please see footnote 1. For a reconciliation of Adjusted EBITDA to net income (loss), please see the Non-GAAP financial measure tables included in this press release.

David Wallace, Chief Executive Officer, said, "The current economic recession and credit environment has lowered demand for energy resulting in significantly lower prices for crude oil and natural gas. North American drilling activity declined rapidly in the first six months of 2009 with the U.S. rig count dropping 47% over this period. This decrease in activity, coupled with increased price competition, has led to higher sales discounts across our operating regions negatively impacting our operating margins.

The extent and duration of this cyclical downturn is uncertain. We have responded to this environment by implementing cost control measures including:

  • reducing our workforce by 44% to approximately 1,460 as compared to 2,589 as of December 31, 2008;
  • initiating compensation and benefit reductions;
  • focusing on material cost reductions;
  • limiting discretionary spending by utilizing the relative young age of our fleet; and
  • repositioning employees and equipment to take advantage of areas with higher activity levels.

"While it is challenging to predict the movements and extent of this cycle, demand for our services increased modestly in the month of June and we believe pricing has stabilized in most of our markets."

Stimulation, cementing, nitrogen, down-hole surveying, completion and fluid logistics revenue represented 67.2%, 12.0%, 6.0%, 6.0%, 3.7% and 5.1%, respectively, of our total revenue of $90.5 million in the second quarter of 2009. Each of our operating regions had revenue decreases compared to the previous quarter. The year-over-year revenue decline was primarily due to lower demand for our services, partially offset by revenue from the Diamondback asset acquisition and increased activity levels at new service centers that were established within the last twelve months ("New Centers"). The operations we acquired in the Diamondback asset acquisition represented approximately $32.9 million of our revenue for the second quarter of 2009 and increased activity from New Centers represented approximately $4.0 million of our revenue during the same period.

Demand for our services was impacted by the decline in drilling rig activity during the first half of 2009 as well as the weakened economic and credit markets. As a result, we experienced severe pricing erosion in all of our service offerings during the second quarter of 2009 compared to the second quarter of 2008. As a percentage of gross revenue, sales discounts increased 14.3% in the second quarter of 2009 as compared to the second quarter of 2008 due to increased capacity and increased competition in our operating regions that resulted in significant downward pressure on our prices. All of our operating regions experienced substantially higher sales discounts for the second quarter of 2009 compared to the second quarter of 2008. Our stimulation, nitrogen and cementing services continue to see the greatest downward pricing pressure. During the second quarter of 2009 we also saw the negative impact from the elimination of fuel surcharges that we were receiving from our customers during the second quarter of 2008.

Cost of revenue increased 11.0% or $10.2 million for the second quarter of 2009 compared to the second quarter of 2008. The operations we acquired in the Diamondback asset acquisition represented approximately $36.6 million of our cost of revenue for the second quarter of 2009 and increased activity from New Centers represented approximately $5.0 million of our cost of revenue during the same period. As a percentage of net revenue, cost of revenue increased to 113.4% for the second quarter of 2009 from 77.2% for the second quarter of 2008 due primarily to sales discounts on materials, lower labor utilization due to the drop in drilling activity and higher depreciation expenses. As a percentage of net revenue, material costs, labor expense and depreciation increased in the second quarter of 2009 compared to the second quarter of 2008 by 11.8%, 8.0%, and 11.7%, respectively. Material costs as a percentage of gross revenue remained flat between the second quarter of 2009 compared to the second quarter of 2008.

However, the year-over-year increase in material costs as a percentage of net revenue was due to higher sales discounts on materials. Labor expenses as a percentage of net revenue increased 8.0% to 27.6% in the second quarter of 2009 compared to the second quarter of 2008 because of lower utilization due to rapidly declining demand for our services. Depreciation expense as a percentage of net revenue increased 11.7% in the second quarter of 2009 compared to the second quarter of 2008 due to additional assets acquired in the Diamondback asset acquisition, as well as an overall drop in equipment utilization due to a drop in the demand for our services. Additionally, the substantially higher level of sales discounts during the second quarter of 2009 compared to the second quarter of 2008 impacts the comparability of the year-over-year increases for materials, labor and depreciation.

SG&A expenses increased 30.6% or $3.3 million for the second quarter of 2009 compared to the second quarter of 2008. As a percentage of revenue, SG&A expenses increased by 6.5% to 15.4% for the second quarter of 2009 from 8.9% for the second quarter of 2008 due to higher costs and a lower revenue base. Labor, professional services and rent expense increased $2.0 million, $0.4 million and $0.5 million, respectively, in the second quarter of 2009 as compared to the second quarter of 2008. These increases are primarily related to the Diamondback asset acquisition that was completed in the fourth quarter of 2008. The operations we acquired in the Diamondback asset acquisition accounted for approximately $3.6 million of our SG&A expenses in the second quarter of 2009. As a percentage of revenue, the portion of labor expenses included in SG&A expenses increased 3.9% to 9.5% in the second quarter of 2009 compared to the second quarter of 2008 due to personnel added in connection with the Diamondback asset acquisition. Additionally, the substantially higher level of sales discounts during the second quarter of 2009 compared to the second quarter of 2008 impacts the comparability of the year-over-year increases for labor.

In the second quarter of 2009, we recorded a non-cash charge of $33.2 million for impairment of the goodwill associated with our technical services and fluid logistic business segments.

Operating loss was $59.2 million for the second quarter of 2009 compared to operating income of $16.6 million for the second quarter of 2008, a decrease of $75.9 million. As a percentage of revenue, operating loss was 65.5% in the second quarter of 2009 compared to operating income of 13.9% in the second quarter of 2008. New Centers and the Diamondback asset acquisition decreased operating income by approximately $1.3 million and $7.2 million, respectively, in the second quarter of 2009 compared to the second quarter of 2008.

Additionally, during the three months ended June 30, 2009, operating loss was increased due to a $33.2 million writeoff of goodwill.

Adjusted EBITDA decreased $33.9 million in the second quarter of 2009 compared to the second quarter of 2008 to $(7.3) million.

For the second quarter of 2009, we made capital expenditures of approximately $8.5 million to purchase new and upgrade existing pumping and down-hole surveying equipment and for maintenance on our existing equipment base. We plan to continue to focus on minimizing our discretionary spending and limiting our capital expenditures given the current operating environment.

At June 30, 2009, we had $8.2 million of cash and cash equivalents and total long-term debt was $229.5 million, with $149 million outstanding on our $250 million syndicated credit facility. Our syndicated credit facility matures in March 2013 and we are currently in compliance with our debt covenants. While we fully expect to see improvement in our Adjusted EBITDA, if our Adjusted EBITDA maintains its current levels, we project we will violate the financial covenants in the syndicated credit facility as of the end of the third quarter of 2009. In order to address this situation, we have begun discussions with our lenders in the syndicated credit facility to amend the facility so that the covenants are more in line with our current operating results.
 

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