UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q | ||
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020March 31, 2021
or
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File No. 001-34037
Commission Company Name: SUPERIOR ENERGY SERVICES INC
SUPERIOR ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
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Delaware | 75-2379388 | |||
(State or other jurisdiction of | (I.R.S. Employer | |||
incorporation or organization) | Identification No.) | |||
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1001 Louisiana Street, Suite 2900 | 77002 | |||
Houston, TX | (Zip Code) | |||
(Address of principal executive offices) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered |
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(1) On September 17, 2020, our common stock was suspended from trading on the New York Stock Exchange (the NYSE). On September 18, 2020, our common stock began trading on the OTCQX Marketplace maintained by the OTC Markets Group, Inc. under the symbol “SPNX.” On October 2, 2020, the NYSE filed a Form 25 with the Securities and Exchange Commission (the SEC) to delist our common stock from trading on the NYSE and to remove it from registration under Section 12(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act). The delisting became effective 10 days after the filing of the Form 25. In accordance with Rule 12d2-2 of the Exchange Act, the de-registration of our common stock under Section 12(b) of the Exchange Act will become effective 90 days, or such shorter period as the SEC may determine, from the date of the Form 25 filing.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x¨ No ¨x
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer ¨ | Accelerated | |
Non-accelerated filer | Smaller reporting company ¨ | |
Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No x
The number of shares of the registrant’s Class A common stock outstanding on November 3, 2020September 28, 2021 was 14,826,906.19,998,695.
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q for
the Quarterly Period Ended September 30, 2020March 31, 2021
TABLE OF CONTENTS
Page | ||
PART I. | FINANCIAL INFORMATION | |
Item 1. | Unaudited Condensed Consolidated Financial Statements and Notes | |
3 | ||
5 | ||
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) | 5 | |
6 | ||
Unaudited Consolidated Statements of Changes in Stockholders' Equity (Deficit) | 7 | |
Notes to Unaudited Condensed Consolidated Financial Statements | 8 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. | OTHER INFORMATION | |
Item 1. |
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Item 1A. |
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Item 2. |
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Item 6. |
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46 |
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements and Notes
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES | SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES | SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES | |||||||||
Condensed Consolidated Balance Sheets | Condensed Consolidated Balance Sheets | Condensed Consolidated Balance Sheets | |||||||||
(in thousands, except share data) | (in thousands, except share data) | (in thousands, except share data) | |||||||||
(unaudited) | (unaudited) | (unaudited) | |||||||||
September 30, 2020 | December 31, 2019 | Successor | Predecessor | ||||||||
ASSETS | March 31, 2021 | December 31, 2020 | |||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 207,781 | $ | 272,624 | $ | 197,307 | $ | 188,006 | |||
Accounts receivable, net of allowance for doubtful accounts of $18,414 and $12,156 at | 181,666 | 332,047 | |||||||||
Restricted cash - current | 16,751 | - | |||||||||
Accounts receivable, net of allowance for doubtful accounts of $0 and $24,629 at March 31, 2021 and December 31, 2020, respectively | 182,519 | 183,964 | |||||||||
Income taxes receivable | 4,119 | 740 | - | 8,891 | |||||||
Prepaid expenses | 42,465 | 49,132 | 41,666 | 36,651 | |||||||
Inventory and other current assets | 108,639 | 117,629 | 105,772 | 96,141 | |||||||
Assets held for sale | 51,748 | 216,197 | 41,881 | 47,635 | |||||||
Total current assets | 596,418 | 988,369 | 585,896 | 561,288 | |||||||
Property, plant and equipment, net of accumulated depreciation and depletion of | 574,588 | 664,949 | |||||||||
Property, plant and equipment, net | 612,597 | 542,090 | |||||||||
Operating lease right-of-use assets | 56,198 | 80,906 | 45,965 | 50,192 | |||||||
Goodwill | 137,142 | 137,695 | - | 138,677 | |||||||
Notes receivable | 71,472 | 68,092 | 73,677 | 72,612 | |||||||
Restricted cash | 80,175 | 2,764 | 80,056 | 80,178 | |||||||
Intangible and other long-term assets, net of accumulated amortization of $24,675 | 58,253 | 50,455 | |||||||||
Intangible and other long-term assets, net | 25,649 | 56,042 | |||||||||
Total assets | $ | 1,574,246 | $ | 1,993,230 | $ | 1,423,840 | $ | 1,501,079 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 60,042 | $ | 92,966 | $ | 61,543 | $ | 55,873 | |||
Accrued expenses | 159,395 | 182,934 | 162,063 | 130,332 | |||||||
Income taxes payable | 1,561 | - | |||||||||
Current portion of decommissioning liabilities | 3,735 | 3,649 | 358 | 3,765 | |||||||
Liabilities held for sale | 5,760 | 44,938 | 1,177 | 4,079 | |||||||
Total current liabilities | 228,932 | 324,487 | 226,702 | 194,049 | |||||||
Long-term debt, net | 1,289,288 | 1,286,629 | |||||||||
Decommissioning liabilities | 137,315 | 132,632 | 174,224 | 138,981 | |||||||
Operating lease liabilities | 38,649 | 62,354 | 29,416 | 40,258 | |||||||
Deferred income taxes | 3,599 | 3,247 | 54,473 | 5,288 | |||||||
Other long-term liabilities | 126,199 | 134,308 | 72,969 | 125,356 | |||||||
Total non-current liabilities | 331,082 | 309,883 | |||||||||
Liabilities Subject to Compromise | - | 1,335,794 | |||||||||
Total liabilities | 557,784 | 1,839,726 | |||||||||
Stockholders’ equity (deficit): | |||||||||||
Preferred stock of $0.01 par value. Authorized - 5,000,000 shares; NaN issued | - | - | |||||||||
Common stock of $0.001 par value | |||||||||||
Authorized - 25,000,000, Issued - 15,799,318, Outstanding - 14,826,906 at September 30, 2020 | 16 | 16 | |||||||||
Authorized - 25,000,000, Issued - 15,689,463, Outstanding - 14,717,051 at December 31, 2019 | |||||||||||
Predecessor common stock $0.001 par value; Authorized - 25,000,000, Issued - 15,799,318, Outstanding - 14,826,906 at December 31, 2020 | - | 16 | |||||||||
Successor Class A common stock $0.01 par value; Authorized - 50,000,000 shares 19,995,581 shares issued and outstanding at March 31, 2021 | 200 | - | |||||||||
Additional paid-in capital | 2,756,031 | 2,752,859 | 902,486 | 2,756,889 | |||||||
Treasury stock at cost, 972,412 shares at September 30, 2020 and December 31, 2019, respectively | (4,290) | (4,290) | |||||||||
Predecessor Treasury stock at cost, 972,412 shares at December 31, 2020 | - | (4,290) | |||||||||
Accumulated other comprehensive loss, net | (72,534) | (71,927) | - | (67,947) | |||||||
Accumulated deficit | (2,928,959) | (2,627,085) | (36,630) | (3,023,315) | |||||||
Total stockholders’ equity (deficit) | (249,736) | 49,573 | 866,056 | (338,647) | |||||||
Total liabilities and stockholders’ equity (deficit) | $ | 1,574,246 | $ | 1,993,230 | $ | 1,423,840 | $ | 1,501,079 | |||
See accompanying notes to condensed consolidated financial statements. | |||||||||||
See accompanying notes to unaudited condensed consolidated financial statements. | See accompanying notes to unaudited condensed consolidated financial statements. | ||||||||||
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES | SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES | SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES | ||||||||||||||||||
Condensed Consolidated Statements of Operations | Condensed Consolidated Statements of Operations | Condensed Consolidated Statements of Operations | ||||||||||||||||||
(in thousands, except per share data) | (in thousands, except per share data) | (in thousands, except per share data) | ||||||||||||||||||
(unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||
Successor | Predecessor | |||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | For the period February 3, 2021 through March 31, | For the Period January 1, 2021 through February 2, | Three Months Ended March 31, | ||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2021 | 2020 | ||||||||||||||
Revenues: | ||||||||||||||||||||
Services | $ | 97,001 | $ | 211,540 | $ | 367,846 | $ | 689,248 | $ | 69,801 | $ | 30,189 | $ | 180,236 | ||||||
Rentals | 42,562 | 99,771 | 196,006 | 282,819 | 32,915 | 15,123 | 100,105 | |||||||||||||
Product sales | 27,365 | 45,274 | 108,426 | 117,230 | 26,379 | 11,335 | 41,156 | |||||||||||||
Total revenues | 166,928 | 356,585 | 672,278 | 1,089,297 | 129,095 | 56,647 | 321,497 | |||||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of services | 81,535 | 162,469 | 303,134 | 510,075 | 58,473 | 25,182 | 140,199 | |||||||||||||
Cost of rentals | 22,879 | 39,119 | 83,904 | 119,656 | 14,280 | 6,724 | 40,043 | |||||||||||||
Cost of sales | 11,819 | 30,339 | 69,684 | 71,781 | 16,945 | 8,056 | 31,444 | |||||||||||||
Cost of revenues (exclusive of depreciation, depletion, amortization and accretion) | 116,233 | 231,927 | 456,722 | 701,512 | 89,698 | 39,962 | 211,686 | |||||||||||||
Depreciation, depletion, amortization and accretion - services | 20,400 | 26,646 | 61,584 | 96,594 | 28,516 | 5,564 | 23,159 | |||||||||||||
Depreciation, depletion, amortization and accretion - rentals | 9,145 | 15,500 | 32,633 | 46,958 | 13,466 | 2,834 | 12,820 | |||||||||||||
Depreciation, depletion, amortization and accretion - sales | 5,627 | 3,016 | 19,096 | 9,224 | 10,825 | 2,100 | 5,376 | |||||||||||||
General and administrative expenses | 54,966 | 60,866 | 178,543 | 203,015 | 20,937 | 12,164 | 65,157 | |||||||||||||
Restructuring expense | 25,746 | - | 27,033 | - | ||||||||||||||||
Restructuring and other expenses | 8,383 | 1,270 | - | |||||||||||||||||
Reduction in value of assets | 2,929 | 9,571 | 19,451 | 17,128 | - | - | 16,522 | |||||||||||||
Income (loss) from operations | (68,118) | 9,059 | (122,784) | 14,866 | ||||||||||||||||
Loss from operations | (42,730) | (7,247) | (13,223) | |||||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense, net | (24,794) | (24,505) | (74,677) | (74,275) | ||||||||||||||||
Interest income (expense), net | 215 | 204 | (25,134) | |||||||||||||||||
Reorganization items, net | - | 335,560 | - | |||||||||||||||||
Other income (expense): | (1,399) | (3,353) | (4,810) | (4,476) | (2,845) | (2,104) | (4,232) | |||||||||||||
Loss from continuing operations before income taxes | (94,311) | (18,799) | (202,271) | (63,885) | ||||||||||||||||
Income taxes | 4,990 | 1,708 | (11,772) | 7,707 | ||||||||||||||||
Net loss from continuing operations | (99,301) | (20,507) | (190,499) | (71,592) | ||||||||||||||||
Loss from discontinued operations, net of income tax | (58,003) | (17,934) | (111,375) | (85,604) | ||||||||||||||||
Net loss | $ | (157,304) | $ | (38,441) | $ | (301,874) | $ | (157,196) | ||||||||||||
Income (loss) from continuing operations before income taxes | (45,360) | 326,413 | (42,589) | |||||||||||||||||
Income tax (expense) benefit | 7,852 | (59,901) | 10,254 | |||||||||||||||||
Net income (loss) from continuing operations | (37,508) | 266,512 | (32,335) | |||||||||||||||||
Income (loss) from discontinued operations, net of income tax | 878 | 2,265 | (47,129) | |||||||||||||||||
Net income (loss) | $ | (36,630) | $ | 268,777 | $ | (79,464) | ||||||||||||||
Basic and diluted loss per share: | ||||||||||||||||||||
Net loss from continuing operations | $ | (6.70) | $ | (1.31) | $ | (12.87) | $ | (4.60) | ||||||||||||
Loss from discontinued operations | (3.91) | (1.15) | (7.53) | (5.49) | ||||||||||||||||
Net loss | $ | (10.61) | $ | (2.46) | $ | (20.40) | $ | (10.09) | ||||||||||||
Income (loss) per share -basic | ||||||||||||||||||||
Net income (loss) from continuing operations | $ | (1.87) | $ | 17.96 | $ | (2.18) | ||||||||||||||
Income (loss) from discontinued operations | 0.04 | 0.15 | (3.18) | |||||||||||||||||
Net income (loss) | $ | (1.83) | $ | 18.11 | $ | (5.36) | ||||||||||||||
Weighted average shares outstanding | 14,827 | 15,657 | 14,795 | 15,581 | ||||||||||||||||
Income (loss) per share - diluted: | ||||||||||||||||||||
Net income (loss) from continuing operations | $ | (1.87) | $ | 17.88 | $ | (2.18) | ||||||||||||||
Income (loss) from discontinued operations | 0.04 | 0.15 | (3.18) | |||||||||||||||||
Net income (loss) | $ | (1.83) | $ | 18.03 | $ | (5.36) | ||||||||||||||
Weighted-average Class A shares outstanding - basic | 19,996 | 14,845 | 14,809 | |||||||||||||||||
Weighted-average Class A shares outstanding - diluted | 19,996 | 14,905 | 14,809 | |||||||||||||||||
See accompanying notes to condensed consolidated financial statements. | See accompanying notes to condensed consolidated financial statements. | |||||||||||||||||||
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES | |||||||||||
Condensed Consolidated Statements of Comprehensive Loss | |||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Net loss | (157,304) | (38,441) | (301,874) | (157,196) | |||||||
Change in cumulative translation adjustment, net of tax | 4,216 | (2,967) | (607) | (3,810) | |||||||
Comprehensive loss | $ | (153,088) | $ | (41,408) | $ | (302,481) | $ | (161,006) | |||
See accompanying notes to condensed consolidated financial statements. | |||||||||||
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES | ||||||
Condensed Consolidated Statements of Cash Flows | ||||||
(in thousands) | ||||||
(unaudited) | ||||||
Nine Months Ended September 30, | ||||||
2020 | 2019 | |||||
Cash flows from operating activities: | ||||||
Net loss | $ | (301,874) | $ | (157,196) | ||
Adjustments to reconcile net loss to net cash provided by operating | ||||||
Depreciation, depletion, amortization and accretion | 113,313 | 225,044 | ||||
Deferred income taxes | 352 | - | ||||
Reduction in value of assets | 19,451 | 40,952 | ||||
Reduction in value of assets held for sale | 109,591 | - | ||||
Right-of-use assets amortization | 14,738 | 16,341 | ||||
Stock-based compensation expense | 6,074 | 14,155 | ||||
Other reconciling items, net | (3,537) | (9,340) | ||||
Changes in operating assets and liabilities: | ||||||
Accounts receivable | 126,439 | 68,239 | ||||
Prepaid expenses | 352 | (20,012) | ||||
Inventory and other current assets | 15,380 | (19,966) | ||||
Accounts payable | (35,828) | (8,221) | ||||
Accrued expenses | (26,409) | (25,054) | ||||
Income taxes | (3,114) | 3,314 | ||||
Other, net | (16,331) | (11,752) | ||||
Net cash provided by operating activities | 18,597 | 116,504 | ||||
Cash flows from investing activities: | ||||||
Payments for capital expenditures | (37,408) | (105,393) | ||||
Proceeds from sales of assets | 44,097 | 90,696 | ||||
Net cash provided by (used in) investing activities | 6,689 | (14,697) | ||||
Cash flows from financing activities: | ||||||
Delayed draw term loan commitment fee | (11,700) | - | ||||
Tax withholdings for vested restricted stock units | (208) | (1,677) | ||||
Other | (432) | 621 | ||||
Net cash used in financing activities | (12,340) | (1,056) | ||||
Effect of exchange rate changes on cash | (378) | (1,857) | ||||
Net change in cash, cash equivalents, and restricted cash | 12,568 | 98,894 | ||||
Cash, cash equivalents, and restricted cash at beginning of period | 275,388 | 163,748 | ||||
Cash, cash equivalents, and restricted cash at end of period | $ | 287,956 | $ | 262,642 | ||
See accompanying notes to condensed consolidated financial statements. | ||||||
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES | |||||||||
Condensed Consolidated Statements of Comprehensive Income (Loss) | |||||||||
(in thousands) | |||||||||
(unaudited) | |||||||||
Successor | Predecessor | ||||||||
For the period February 3, 2021 through March 31, 2021 | For the Period January 1, 2021 through February 2, 2021 | Three Months Ended March 31, 2020 | |||||||
Net income (loss) | (36,630) | 268,777 | (79,464) | ||||||
Change in cumulative translation adjustment, net of tax | - | 67,947 | (4,538) | ||||||
Comprehensive income (loss) | $ | (36,630) | $ | 336,724 | $ | (84,002) | |||
See accompanying notes to unaudited condensed consolidated financial statements. | |||||||||
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES | |||||||||||
Condensed Consolidated Statements of Cash Flows | |||||||||||
(in thousands) | |||||||||||
(unaudited) | |||||||||||
Successor | Predecessor | ||||||||||
For the period February 3, 2021 through March 31, 2021 | For the Period January 1, 2021 through February 2, 2021 | Three Months Ended March 31, 2020 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | (36,630) | $ | 268,777 | $ | (79,464) | |||||
Adjustments to reconcile net loss to net cash provided by | |||||||||||
Depreciation, depletion, amortization and accretion | 52,807 | 10,498 | 41,355 | ||||||||
Deferred income taxes | (5,051) | 54,322 | 3,882 | ||||||||
Amortization of debt acquisition costs | 82 | - | 16,522 | ||||||||
Reduction in value of assets held for sale | - | (2,654) | 46,358 | ||||||||
Assets held for sale | (71) | - | - | ||||||||
Right-of-use assets amortization | 2,544 | 1,372 | 4,373 | ||||||||
Reorganization items, net | - | (354,279) | - | ||||||||
Retirement and deferred compensation plans expense, net | (2,007) | 260 | 3,584 | ||||||||
Bad debt | (4,398) | (210) | - | ||||||||
Gain on sale of assets and businesses | (2,673) | 58 | - | ||||||||
Other reconciling items, net | (710) | (307) | 1,776 | ||||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable | 2,414 | 3,602 | (3,448) | ||||||||
Prepaid expenses | (4,625) | (340) | 4,129 | ||||||||
Inventory and other current assets | 2,496 | (221) | (2,077) | ||||||||
Accounts payable | 4,592 | (2,365) | (17,086) | ||||||||
Accrued expenses | 9,857 | 24,425 | (20,540) | ||||||||
Income taxes | 5,134 | 340 | (28,479) | ||||||||
Operating lease liabilities and other, net | (2,360) | 2,105 | (3,125) | ||||||||
Net cash provided by (used in) operating activities | 21,401 | 5,383 | (32,240) | ||||||||
Cash flows from investing activities: | |||||||||||
Payments for capital expenditures | (4,119) | (3,035) | (18,563) | ||||||||
Proceeds from sales of assets | 7,148 | 775 | 33,045 | ||||||||
Net cash provided by (used in) investing activities | 3,029 | (2,260) | 14,482 | ||||||||
Cash flows from financing activities: | |||||||||||
Credit facility costs | (14) | (1,920) | - | ||||||||
Tax withholdings for vested restricted stock units | - | - | (208) | ||||||||
Net cash used in financing activities | (14) | (1,920) | (208) | ||||||||
Effect of exchange rate changes on cash | - | 311 | (2,428) | ||||||||
Net change in cash, cash equivalents, and restricted cash | 24,416 | 1,514 | (20,394) | ||||||||
Cash, cash equivalents, and restricted cash at beginning of period | 269,698 | 268,184 | 275,388 | ||||||||
Cash, cash equivalents, and restricted cash at end of period | $ | 294,114 | $ | 269,698 | $ | 254,994 | |||||
See accompanying notes to unaudited condensed consolidated financial statements. | |||||||||||
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES | ||||||||||||||||||||
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) | ||||||||||||||||||||
Nine Months Ended September 30, 2020 | ||||||||||||||||||||
(in thousands, except share data) | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Accumulated | ||||||||||||||||||||
Common | Additional | other | ||||||||||||||||||
stock | Common | paid-in | Treasury | comprehensive | Accumulated | |||||||||||||||
shares | stock | capital | stock | loss, net | deficit | Total | ||||||||||||||
Balances, December 31, 2019 | 15,689,463 | $ | 16 | $ | 2,752,859 | $ | (4,290) | $ | (71,927) | $ | (2,627,085) | $ | 49,573 | |||||||
Net loss | - | - | - | - | - | (79,464) | (79,464) | |||||||||||||
Foreign currency translation adjustment | - | - | - | - | (4,538) | - | (4,538) | |||||||||||||
Stock-based compensation expense, | ||||||||||||||||||||
net of forfeitures | - | - | 2,527 | - | - | - | 2,527 | |||||||||||||
Transactions under stock plans | 108,965 | - | (208) | - | - | - | (208) | |||||||||||||
Balances, March 31, 2020 | 15,798,428 | $ | 16 | $ | 2,755,178 | $ | (4,290) | $ | (76,465) | $ | (2,706,549) | $ | (32,110) | |||||||
Net loss | - | - | - | - | - | (65,106) | (65,106) | |||||||||||||
Foreign currency translation adjustment | - | - | - | - | (285) | - | (285) | |||||||||||||
Stock-based compensation expense, | ||||||||||||||||||||
net of forfeitures | - | - | 2,374 | - | - | - | 2,374 | |||||||||||||
Transactions under stock plans | 611 | - | - | - | - | - | - | |||||||||||||
Balances, June 30, 2020 | 15,799,039 | $ | 16 | $ | 2,757,552 | $ | (4,290) | $ | (76,750) | $ | (2,771,655) | $ | (95,127) | |||||||
Net loss | - | - | - | - | - | (157,304) | (157,304) | |||||||||||||
Foreign currency translation adjustment | - | - | - | - | 4,216 | - | 4,216 | |||||||||||||
Stock-based compensation expense, | ||||||||||||||||||||
net of forfeitures | - | - | (1,521) | - | - | - | (1,521) | |||||||||||||
Transactions under stock plans | 279 | - | - | - | - | - | - | |||||||||||||
Balances, September 30, 2020 | 15,799,318 | $ | 16 | $ | 2,756,031 | $ | (4,290) | $ | (72,534) | $ | (2,928,959) | $ | (249,736) | |||||||
See accompanying notes to condensed consolidated financial statements. | ||||||||||||||||||||
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES | SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES | SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES | ||||||||||||||||||||||||||||||||||||
Consolidated Statements of Changes in Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) | Consolidated Statements of Changes in Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||||||||||||||
(in thousands, except share data) | (in thousands, except share data) | (in thousands, except share data) | ||||||||||||||||||||||||||||||||||||
(unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||
Common | Additional | other | Common | Additional | other | |||||||||||||||||||||||||||||||||
stock | Common | paid-in | comprehensive | Accumulated | stock | Common | paid-in | Treasury | comprehensive | Accumulated | ||||||||||||||||||||||||||||
shares | stock | capital | loss, net | deficit | Total | shares | stock | capital | stock | loss, net | deficit | Total | ||||||||||||||||||||||||||
Balances, December 31, 2018 | 15,488,542 | $ | 155 | $ | 2,735,125 | $ | (73,177) | $ | (2,371,364) | $ | 290,739 | |||||||||||||||||||||||||||
Balances, December 31, 2020 (Predecessor) | 15,799,318 | $ | 16 | $ | 2,756,889 | $ | (4,290) | $ | (67,947) | $ | (3,023,315) | $ | (338,647) | |||||||||||||||||||||||||
Net income | - | - | - | - | - | 268,777 | 268,777 | |||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | 67,947 | - | 67,947 | |||||||||||||||||||||||||||||||
Extinguishment of unrecognized compensation expense | - | - | 988 | - | - | - | 988 | |||||||||||||||||||||||||||||||
Stock-based compensation expense, | - | |||||||||||||||||||||||||||||||||||||
net of forfeitures | - | - | 935 | - | - | - | 935 | |||||||||||||||||||||||||||||||
Restricted stock units vested | 48,903 | - | - | - | - | - | - | |||||||||||||||||||||||||||||||
Shares withheld and retired | (14,701) | - | - | - | - | - | - | |||||||||||||||||||||||||||||||
Cancellation of Predecessor equity | (15,833,520) | (16) | (2,758,812) | 4,290 | - | 2,754,538 | - | |||||||||||||||||||||||||||||||
Issuance of Successor Class A common stock | 19,995,581 | 200 | 902,486 | - | - | - | 902,686 | |||||||||||||||||||||||||||||||
Balances, February 2, 2021 (Predecessor) | 19,995,581 | 200 | 902,486 | - | - | - | 902,686 | |||||||||||||||||||||||||||||||
Balances, February 3, 2021 (Successor) | 19,995,581 | 200 | 902,486 | - | - | - | 902,686 | |||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | (36,630) | (36,630) | |||||||||||||||||||||||||||||||
Balances, March 31, 2021 (Successor) | 19,995,581 | $ | 200 | $ | 902,486 | $ | - | $ | - | $ | (36,630) | $ | 866,056 | |||||||||||||||||||||||||
Balances, December 31, 2019 (Predecessor) | 15,689,463 | 16 | 2,752,859 | (4,290) | (71,927) | (2,627,085) | 49,573 | |||||||||||||||||||||||||||||||
Net loss | - | - | - | - | (47,705) | (47,705) | - | - | - | - | - | (79,464) | (79,464) | |||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | 1,073 | - | 1,073 | - | - | - | - | (4,538) | - | (4,538) | |||||||||||||||||||||||||
Stock-based compensation expense, | ||||||||||||||||||||||||||||||||||||||
net of forfeitures | - | - | 5,625 | - | - | 5,625 | - | - | 2,527 | - | - | - | 2,527 | |||||||||||||||||||||||||
Transactions under stock plans | 107,118 | 1 | (1,667) | - | - | (1,666) | 108,965 | - | (208) | - | - | - | (208) | |||||||||||||||||||||||||
Balances, March 31, 2019 | 15,595,660 | $ | 156 | $ | 2,739,083 | $ | (72,104) | $ | (2,419,069) | $ | 248,066 | |||||||||||||||||||||||||||
Balances, March 31, 2020 (Predecessor) | 15,798,428 | $ | 16 | $ | 2,755,178 | $ | (4,290) | $ | (76,465) | $ | (2,706,549) | $ | (32,110) | |||||||||||||||||||||||||
Net loss | - | - | - | - | (71,050) | (71,050) | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | (1,916) | - | (1,916) | ||||||||||||||||||||||||||||||||
Stock-based compensation expense, | ||||||||||||||||||||||||||||||||||||||
net of forfeitures | - | - | 4,650 | - | - | 4,650 | ||||||||||||||||||||||||||||||||
Transactions under stock plans | 11,637 | - | (10) | - | - | (10) | ||||||||||||||||||||||||||||||||
Shares issued under Employee Stock Purchase Plan | 50,019 | 1 | 650 | - | - | 651 | ||||||||||||||||||||||||||||||||
Balances, June 30, 2019 | 15,657,316 | $ | 157 | $ | 2,744,373 | $ | (74,020) | $ | (2,490,119) | $ | 180,391 | |||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements. | See accompanying notes to unaudited condensed consolidated financial statements. | |||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | (38,441) | (38,441) | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | (2,967) | - | (2,967) | ||||||||||||||||||||||||||||||||
Stock-based compensation expense, | ||||||||||||||||||||||||||||||||||||||
net of forfeitures | - | - | 4,104 | - | - | 4,104 | ||||||||||||||||||||||||||||||||
Transactions under stock plans | 41 | - | - | - | - | - | ||||||||||||||||||||||||||||||||
Balances, September 30, 2019 | 15,657,357 | $ | 157 | $ | 2,748,477 | $ | (76,987) | $ | (2,528,560) | $ | 143,087 | |||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements. | ||||||||||||||||||||||||||||||||||||||
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2020
(1)Basis of Presentation
Certain information and footnote disclosures normally in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP)(“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC)“SEC”); however, management believes the disclosures that are made are adequate to make the information presented not misleading.
As used herein, the “Company,” “we,” “us” and similar terms refer to (i) prior to the Emergence Date (as defined below), SESI Holdings, Inc. (formerly known as Superior Energy Services, Inc.) (the “Former Parent”) and its subsidiaries and (ii) after the Emergence Date, Superior Energy Services, Inc. (formerly known as Superior Newco, Inc.) and its subsidiaries.
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, 2019,2020. As described below, as a result of the application of fresh start accounting and Management’s Discussion and Analysisthe effects of Financial Condition and Resultsthe implementation of Operations herein.our Plan (as defined below), the financial statements after the Emergence Date are not comparable with the consolidated financial statements on or before that date. Refer to Note 3 – “Fresh Start Accounting” below for additional information.
The financial information of Superior Energy Services, Inc. and its subsidiaries (the Company) for the three and nine months ended September 30, 2020 and 2019 has not been audited. However, inIn the opinion of management,the Company, the accompanying unaudited condensed financial statements contain all adjustments, consisting primarily of normal recurring adjustments, necessary to present fairly thefor a fair statement of its financial position as of March 31, 2021, and its results of operations for the periods presented have been included therein. Certain previously reported amounts have been reclassified to conformthree months ended March 31, 2021 and 2020, and cash flows for the three months ended March 31, 2021, and 2020. The condensed balance sheet at December 31, 2020, was derived from audited annual financial statements but does not contain all the footnote disclosures from the annual financial statements. See “Changes in Accounting Policies” below for further information. The year-end condensed consolidated balance sheet for the Predecessor (as defined below) was derived from audited financial statements but does not include all disclosures required by GAAP.
Effective as of February 2, 2021 (the “Emergence Date”), the entity now known as Superior Energy Services, Inc. (formerly known as Superior Newco, Inc.) became the successor reporting company to the Former Parent pursuant to Rule 15d-5 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Between December 7, 2020 presentation. The results(the “Petition Date”) and the Emergence Date, the Company operated as a debtor-in-possession under the supervision of operationsthe United States Bankruptcy Court for the first nine monthsSouthern District of Texas Houston Division (the “Bankruptcy Court”). For financial reporting purposes, close of business on February 2, 2021 represents the date of the year are not necessarily indicative ofCompany’s emergence from bankruptcy. As used herein, the results of operations that might be expected forfollowing terms refer to the entire year.Company and its operations:
"Predecessor" | The Company, prior to the Emergence Date |
"Current Predecessor Period" | The Company's operations, January 1, 2021 – February 2, 2021 |
"Prior Predecessor Quarter" | The Company's operations, January 1, 2020 - March 31, 2020 |
"Successor" | The Company, after the Emergence Date |
"Successor Period" | The Company's operations, February 3, 2021 - March 31, 2021 |
The Company evaluates events that occur after the balance sheet date but before the financial statements are issued for potential recognition or disclosure.
Recent Developments
Voluntary Reorganization Under Chapter 11 of the U.S. Bankruptcy Code
Superior Energy Services, Inc.On December 4, 2020, the Former Parent and certain of its direct and indirect wholly-owned domestic subsidiaries (collectively,(together with the Debtors) planFormer Parent, the “Affiliate Debtors”) entered into an Amended and Restated Restructuring Support Agreement (the “Amended RSA”) that amended and restated in its entirety the Restructuring Support Agreement, dated September 29, 2020, with certain holders of SESI, L.L.C.’s (“SESI”) outstanding (i) 7.125% senior unsecured notes due 2021 (the “7.125% Notes”) and (ii) 7.750% senior unsecured notes due 2024 (the “7.750% Notes”). The parties to filethe Amended RSA agreed to the principal terms of a proposed financial restructuring of the Affiliate Debtors, which was implemented through the Plan (as defined below).
On December 7, 2020, the Affiliate Debtors filed voluntary petitions (the Chapter 11 Cases) for relief (the Bankruptcy Filing)“Chapter 11 Cases”) under Chapter 11 of Title 11 of the United States Code (the Bankruptcy Code)“Bankruptcy Code”) in the United States Bankruptcy Court, and, in connection therewith, the Affiliate Debtors filed with the Bankruptcy Court the proposed Joint Prepackaged Plan of Reorganization under the Bankruptcy Code (as amended, modified or supplemented from time to time, the “Plan”).
On January 19, 2021, the Bankruptcy Court entered an order, Docket No. 289, confirming and approving the Plan. On the Emergence Date, the conditions to effectiveness of the Plan were satisfied or waived and we emerged from Chapter 11.
On the Emergence Date, the Company qualified for and adopted fresh start accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 852 – Reorganizations (ASC 852), which specifies the Southern Districtaccounting and financial reporting requirements for entities reorganizing through Chapter 11 bankruptcy proceedings. The application of Texas (the Bankruptcy Court). The Debtors plan to commencefresh start accounting resulted in a solicitationnew basis of accounting and the Company becoming a new entity for acceptancefinancial reporting purposes. As a result of their prepackaged planthe implementation of reorganization (the Plan) by causing the Plan and the corresponding disclosure statementapplication of fresh start accounting, these unaudited condensed consolidated financial statements after the Emergence Date are not comparable to be distributedthe consolidated financial statements before that date and the historical financial statements on or before the Emergence Date are not a reliable indicator of its financial condition and results of operations for any period after the Company’s adoption of fresh start accounting.
The accompanying unaudited condensed consolidated financial statements have been prepared as if the Company is a going concern and in accordance with ASC 852.
During the Current Predecessor Period, the Predecessor applied ASC 852 in preparing the unaudited condensed consolidated financial statements, which requires distinguishing transactions associated with the reorganization separate from activities related to certain creditorsthe ongoing operations of the business. Accordingly, pre-petition liabilities that could have been impacted by the Chapter 11 Cases were classified as liabilities subject to compromise. Additionally, certain expenses, realized gains and losses and provisions for losses that were realized or incurred during and directly related to the Chapter 11 Cases, including fresh start valuation adjustments and gains on liabilities subject to compromise were recorded as reorganization items, net in the condensed consolidated statements of operations in the Current Predecessor Period. See Note 2 – “Emergence from Voluntary Reorganization under Chapter 11” for more information on the events of the Chapter 11 Cases as well as the accounting and reporting impacts of the reorganization during the Current Predecessor Period.
Use of Estimates — In preparing the accompanying financial statements, the Company shortly beforemakes various estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities reported as of the dates of the balance sheets and the amounts of revenues and expenses reported for the periods shown in the income statements and statements of cash flows. All estimates, assumptions, valuations and financial projections related to fresh start accounting, including the fair value adjustments, the enterprise value and equity value projections, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, we cannot assure you that the estimates, assumptions, valuations or financial projections will be realized, and actual results could vary materially. For information about the use of estimates relating to fresh start accounting, see – Note 3 – “Fresh Start Accounting” below.
Due to the lack of comparability with historical financials, the Company’s unaudited consolidated condensed financial statements and related footnotes are presented with a “black line” division to emphasize the lack of comparability between amounts presented as of and after February 2, 2021 (the “Fresh Start Reporting Date”) and amounts presented for all prior periods. The Successor’s financial results for future periods following the application of fresh start accounting will be different from historical trends and the differences may be material.
Changes in Accounting Policies
Accounting policies are disclosed in the Predecessor Company’s Annual Report on Form 10-K. As of the Emergence Date, the amounts for these accounts have been recorded at fair value. After the Emergence Date, the Company will continue to follow the accounting policies within the Predecessor Company’s Annual Report on Form 10-K except for the policies discussed below. As part of the adoption of fresh start accounting and effective upon emergence from bankruptcy, the Company has adopted new presentations for certain items within our condensed consolidated balance sheets and statement of operations. The presentation changes are described below:
The functional currency of certain international subsidiaries changed from the local currency to US dollars. This brings alignment so that the entire Company’s functional currency is US dollars. Management considered the economic factors outlined in FASB ASC Topic No. 830 - Foreign Currency Matters in the determination of the functional currency. Management concluded that the predominance of factors support the use of the Successor parent’s currency as the functional currency and resulted in a change in functional currency to US dollars for all international subsidiaries.
The reportable segments were changed to Global and North America. Reportable segments in the Predecessor Company’s Annual Report on Form 10-K were Drilling Products and Services, Onshore Completion and Workover Services, Production Services and Technical Solutions.
The Predecessor recognized bad debt expense and gains/losses on sales of assets within general and administrative expenses. The Successor recognizes these expenses within cost of revenues. See Note 3 – “Fresh Start Accounting” for additional information.
Additional Detail of Account Balances
Restricted Cash — The restricted cash balance included in current assets as of March 31, 2021 reflects the Professional Fees Escrow and General Unsecured Creditors Escrow balance of $16.8 million that will be released as amounts are paid in accordance with the Plan. Restricted cash as of March 31, 2021 primarily represents cash of $77.4 million held in a collateral account for the payment and performance of secured obligations including the reimbursement of letters of credit, and $2.6 million relates to cash held in escrow to secure the future decommissioning obligations related to the sole oil and gas property.
(2)Emergence from Voluntary Reorganization under Chapter 11
Plan of Reorganization under Chapter 11 of the Bankruptcy Filing. DuringCode
On December 7, 2020, the Affiliate Debtors commenced the Chapter 11 Cases as described in Note 1 – “Basis of Presentation” above. After commencement of the Chapter 11 Cases, the Affiliate Debtors will continuecontinued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
Upon filing the Chapter 11 Cases, the Debtors will request that the Bankruptcy Court grant certain relief to ensure a seamless transition of operations through the Chapter 11 Cases. As a result, the Debtors expect to be able to conduct their business operations in the ordinary course of business. During the pendency of the Chapter 11 Cases, all transactions outside the ordinary course of business will require the prior approval of the Bankruptcy Court.
Automatic Stay
Subject to specific exceptions under the Bankruptcy Code, the filing of the Chapter 11 Cases will automatically stay all judicial or administrative actions against the Debtors and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to claims arising prior to the Bankruptcy Filing. Absent an order from the Bankruptcy Court, if the Bankruptcy Filing is made, substantially all of the Debtors’ liabilities prior to the Bankruptcy Filing will be subject to settlement under the Bankruptcy Code.
Executory Contracts
Subject to certain exceptions, under the Bankruptcy Code, the Affiliate Debtors may, upon filing of the Chapter 11 Cases,could assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtorsdebtors from performing their future obligations under such executory contract or unexpired lease. However, such rejectionlease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Counterparties to rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against the Debtors estate for such damages. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtors, including, where applicable, a quantification of the Debtors’ obligations under any such executory contract or unexpired lease of the Debtors, is qualified by any overriding rejection rights the Debtors expect to have under the Bankruptcy Code.
Restructuring Support AgreementBankruptcy Claims
During the Chapter 11 Cases, the Affiliate Debtors filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of each of the Affiliate Debtors, subject to the assumptions filed in connection therewith. Certain holders of pre-petition claims that were not governmental units were required to file proofs of claim by the bar date of January 7, 2021. As previously disclosedof September 24, 2021, the Affiliate Debtors’ have received approximately 646proofs of claim, primarily representing general unsecured claims, for an amount of approximately $1.7 billion. The Bankruptcy Court does not allow for claims that have been acknowledged as duplicates. Approximately 562 claims totaling approximately $1.4 billion have been withdrawn, disallowed or are pending approval to be disallowed. Differences in amounts recorded and claims filed by creditors are currently being investigated and resolved, including through filing objections with the Bankruptcy Court, where appropriate. The Company may ask the Bankruptcy Court to disallow claims that the Company believes are duplicative, have been later amended or superseded, are without merit, are overstated or should be disallowed for other reasons. In light of the substantial number of claims filed, the claims resolution process may take considerable time to complete and is continuing even after the Affiliate Debtors emerged from bankruptcy. As a result of the ongoing claims resolution process post-emergence, the Affiliate Debtors agreed to allow certain claims in the Company’s Current Reports on Form 8-K filed on September 30, 2020amount of $232.0 million classified per the Plan of Reorganization as Class 6 General Unsecured Claims against the Parent. Each holder of a Class 6 claim receives their pro rata share of the $125,000 general unsecured claim cash pool described below. Per ASC 852-10, liabilities are measured at their allowed claim amount, and October 28, 2020, on September 29, 2020, the Company entered into that certain restructuring support agreement (as amended, modified, or supplementedresult of allowing these claims increased liabilities subject to compromise prior to emergence. The resolution of these Class 6 claims is considered in the $125,000 cash pool as part of the emergence transaction.
date,
On the RSA) with certain holders (collectively,Emergence Date, the Ad Hoc Noteholders Group)conditions to effectiveness of 7.125% senior unsecured notes due 2021 (the 2021 Notes)the Plan were satisfied or waived and 7.750% senior unsecured notes due 2024 (together with the 2021 Notes, the Prepetition Notes), both issued by SESI, L.L.C.Company emerged from Chapter 11.
UnderOn the terms of the RSA, the DebtorsEmergence Date and the Ad Hoc Noteholder Group agreed to a series of deleveraging transactions (the Restructuring) that will eliminate approximately $1.30 billion of funded debt obligations of the Debtors through the Plan. Specifically, the Restructuring contemplates, among other things, the equitization of all amounts outstanding under the Debtors’ Prepetition Notes. In exchange for equitizing all of their funded debt, holders of Prepetition Notes (the Prepetition Noteholders) will receive 98% of the new common stock to be issued by the reorganized Company (the New Common Stock). Holders of existing prepetition equity will receive 2% of the New Common Stock and five-year warrants to purchase 10.0% of the New Common Stock (the New Warrants), subject to and in accordance with the terms set forth in the RSA. General unsecured creditors will remain unimpaired and be paid in the ordinary course of business.
The RSA further provides, in pertinent part, as follows:
All holders of Prepetition Notes that are accredited investors or qualified institutional buyers, will have the opportunity, but not the obligation, to exercise the subscription rights to purchase New Common Stock. The proceeds of the Equity Rights Offering will be used exclusively to fund the Cash Payout provided to Prepetition Noteholders electing the Cash Payout, in full and final satisfaction of such Holders’ Prepetition Notes Claims, which will be released and discharged pursuant to the Plan. Consummation of the Equity Rights Offering is contingent upon the consent of the Required Consenting Noteholders under the RSA;
Eligible holders of the Prepetition Notes Claims that do not elect to participate in the Equity Rights Offering may receive a cash distribution of an amount yet to be determined (the Cash Payout). The proceeds from the Equity Rights Offering will be used to fund the cash distributions under the Cash Payout, provided that the total Cash Payout distribution amount will not exceed the total amount of the proceeds of the Equity Rights Offering. Any remaining portion of such holder’s Prepetition Notes Claims that is not satisfied through the Cash Payout will receive the treatment such holder would receive if such holder elected to participate in the Equity Rights Offering. The Cash Payout is contingent upon the consent of the Required Consenting Noteholders under the RSA;
The board of directors of the reorganized Company (the New Board) will be authorized to implement a management incentive plan (the New Management Incentive Plan) that provides for the issuance of equity-based compensation to the management and directors of the Company and its subsidiaries. Up to 10% of the New Common Stock, on a fully diluted basis, will be reserved for issuance in connection with the New Management Incentive Plan, with the actual amount to be reserved as determined by the New Board; and
In consideration for entry into the RSA, each Prepetition Noteholder that became a party to the RSA (a Consenting Noteholder) prior to a deadline set forth in the RSA was paid a premium payable in cash equal to the accrued interest outstanding as of the RSA effective date under the Notes held by each Consenting Noteholder. These expenses, as well as various advisory and professional fees related to the restructuring of the Company, are recorded under the caption “Restructuring expense” on the condensed consolidated statements of operations. Restructuring expenses totaled approximately $25.7 million and $27.0 million for the three and nine months ended September 30, 2020, respectively. Also included in this line item is $15.6 million related to the RSA premium paid to certain Consenting Noteholders pursuant to the RSA.
Under the Plan, certain classes of claims are expected to receive the following treatment:Plan:
Administrative expense claims, priority tax claims, other priority claims and other secured claims were paid or will be paid in full in the ordinary course (or receive such other treatment rendering such claims unimpaired);
Claims on account of the Company’s asset-based revolving credit facility (the Prepetition Credit Agreement), other than those claims related to any outstanding letters of credit, will be paid in full in cash;
Contingent claims arising from outstanding letters of credit under the Prepetition Credit Agreement that remain undrawn upon consummation of the Chapter 11 Cases will either (i) be 105% cash collateralized, (ii) be deemed outstanding under an asset-based revolving exit credit facility, if any, or (iii) receive such other treatment as may be acceptable to the Debtors, the agent and lenders under the Prepetition Credit Agreement, and at least three unaffiliated Consenting Noteholders holding at least 66.6% of the aggregate principal amount of the Prepetition Notes;
General unsecured creditors will remainfor the Affiliate Debtors remained unimpaired and are to receivereceived payment in cash, in full, in the ordinary course;
General unsecured creditors for the Former Parent receive their pro rata share of a cash pool in the amount of $125,000;
Eligible holders of the claims arising as a result of holding either the 7.125% Notes or the 7.750% Notes against the Affiliate Debtors received their pro rata share of:
A payment equal to 2% of the principal amount of 7.125% Notes or 7.750% Notes held by all holders who did not opt of receiving a cash payout; or
Solely to the extent that such a holder timely and validly elected to opt out of receiving the cash payout, (A) 100% of the Class A common stock issued and outstanding on the Emergence Date, subject to dilution, and (B), to the extent such holder was an “accredited investor” or “qualified institutional buyer” within the meaning of the SEC’s rules, subscription rights to participate in an equity rights offering (the “Equity Rights Offering”);
The Company’s existingAffiliate Debtors conducted the Equity Rights Offering through an offering of subscription rights for the purchase of Class A common stock on a pro rata basis; and
Prior parent equity will beinterests and common stock of the Affiliate Debtors were cancelled and exchanged for (i) 2.0%new Class A common stock was issued to settle claims arising as a result of holding either the 7.125% Notes or the 7.750% Notes, as noted above.
The costs of efforts to restructure the Company’s capital, prior to and during the Chapter 11 Cases, along with all other costs incurred in connection with the Chapter 11 Cases, have been material.
On the Emergence Date, pursuant to the terms of the New Common Stock (subject to dilution on accountPlan, the Company filed an amended and restated certificate of (x) New Common Stock issued upon exerciseincorporation (the “Certificate of Incorporation”) and a certificate of amendment of the New Warrantsamended and (y) New Common Stock issued underrestated certificate of incorporation (the “Certificate of Amendment”).
Also, on the New Management Incentive Plan)Emergence Date, and (ii)pursuant to the New Warrants;terms of the Plan, the Company adopted amended and restated bylaws (the “Bylaws”). The descriptions of the Certificate of Incorporation and the Bylaws are qualified in their entirety by reference to the full texts of the Certificate of Incorporation, Bylaws, and Certificate of Amendment.
(3)Fresh Start Accounting
Fresh Start Accounting
In connection with the emergence from bankruptcy and in accordance with ASC 852, the Company qualified for and adopted fresh start accounting on the Emergence Date because (1) the holders of the then existing common shares of the Predecessor received less than 50 percent of the new common shares of the Successor outstanding upon emergence and (2) the reorganization value of the Predecessor’s assets immediately prior to confirmation of the Plan of $1,456.8 million was less than the total of all post-petition liabilities and allowed claims of $2,076.1 million.
In accordance with ASC 852, upon adoption of fresh start accounting, the reorganization value derived from the enterprise value as disclosed in the Plan was allocated to the Company’s assets and liabilities based on their fair values (except for deferred income taxes) in accordance with FASB ASC Topic No. 805 - Business Combinations (ASC 805) and FASB ASC Topic No. 820 - Fair Value Measurements (ASC 820). The reorganization value represents the fair value of the Successor’s assets before considering certain liabilities and is intended to represent the approximate amount a willing buyer would pay for the Company’s assets immediately after reorganization. The amount of deferred income taxes recorded due to the fair value adjustments to assets and liabilities was determined in accordance with FASB ASC Topic No. 740 - Income Taxes.
Reorganization Value
The reorganization value represents the fair value of the Successor’s total assets before considering certain liabilities and is intended to approximate the amount a willing buyer would pay for the Successor’s assets immediately after restructuring. The Plan confirmed by the Bankruptcy Court estimated a range of enterprise values between $710.0 million and $880.0 million.
Eligible holders of the Prepetition Notes who elect to participate in the Equity Rights Offering will receive their pro rata share of (i) 98% of New Common Stock (subject to dilution on account of (x) New Common Stock issued upon exercise of the New Warrants and (y) New Common Stock issued to management of the Reorganized Debtors under the New Management Incentive Plan) and (ii) rights to participate in the Equity Rights Offering; and
Eligible holders of the Prepetition Notes who elect cash instead of participating in the Equity Rights Offering will receive their pro rata share of cash in an aggregate amount equal to a percentage of the amount due under the Prepetition Notes to all such holders.
The RSA contains certain covenants bindingfollowing table reconciles the Companyenterprise value to the reorganization value of Successor’s assets that has been allocated to the Company’s individual assets as of the Fresh Start Reporting Date (in thousands):
Fresh Start Reporting Date | |||
Selected Enterprise Value within Bankruptcy Court Range | $ | 729,918 | |
Plus: Cash and cash equivalents | 172,768 | ||
Plus: Liabilities excluding the decommissioning liabilities | 380,496 | ||
Plus: Decommissioning liabilities | 173,622 | ||
Reorganization Value | 1,456,804 | ||
Management determined the enterprise and corresponding equity value of the Consenting Noteholders,Successor using various valuation methods, including limitations(i) discounted cash flow analysis (“DCF”), (ii) comparable company analysis and (iii) precedent transaction analysis. The use of each approach provides corroboration for the other approaches.
In order to estimate the enterprise value using the DCF analysis approach, management’s estimated future cash flow projections, plus a terminal value which was calculated by applying a multiple based on the parties’ abilityCompany’s internal rate of return (“IRR”) of 17.6% and a perpetuity growth rate of 3.0% to pursue alternative transactions, commitmentsthe terminal year’s projected earnings before interest, tax, depreciation and amortization (“EBITDA”). These estimated future cash flows were then discounted to an assumed present value using our estimated weighted-average cost of capital, which is represented by the Consenting Noteholders to vote in favor of the Plan, and commitments of the Company and the Consenting Noteholders to cooperate in good faith to finalize the documents and agreements contemplated by the RSA and the associated term sheet.Company’s IRR.
The RSA also sets forth certain milestonescomparable company analysis provides an estimate of a Company’s value relative to ensure thatother publicly traded companies with similar operating and financial characteristics, by which a range of EBITDA multiples of the Company emerges from bankruptcy as swiftly as practicable.comparable companies was then applied to management’s projected EBITDA to derive an estimated enterprise value.
Although the Company intends to pursue the Chapter 11 Cases in accordance with the terms set forth in the RSA, there can be no assurance that the Company will be successful in completing the transactions outlined in the RSA, whetherPrecedent transaction analysis provides an estimate of enterprise value based on the same or different terms.
Delayed-Draw Term Loan Commitment Letter
As previously disclosed in the Company’s Current Report on Form 8-K filed on September 30, 2020, on September 29, 2020, the Company entered into a Commitment Letter (the Delayed-Draw Term Loan Commitment Letter) with certain of the Consenting Noteholders (such Consenting Noteholders, the Backstop Commitment Parties). Pursuant to the terms of the RSA, in connection with confirmation of the Plan, the Company will use reasonable efforts to obtain ABL Financing Commitments (as defined in the RSA). In the event that all or a portion of the ABL Financing Commitments is not obtained, the Backstop Commitment Parties have committed to provide a delayed draw term loan facility (the Delayed-Draw Term Loan Facility) in an aggregate principal amount not to exceed $200 million, upon the Company’s emergence from bankruptcy on the terms and subject to the conditions of the Delayed-Draw Term Loan Commitment Letter.
As consideration for the commitment to provide the Delayed-Draw Term Loan Facility, the Company paid $11.7 million to the Backstop Commitment Parties. The transactions contemplated by the Delayed-Draw Term Loan Commitment Letter are conditioned upon the satisfaction or waiver of customary conditions forrecent sale transactions of this nature.
Going Concern
Recent developments discussed above have negatively impactedsimilar companies, by deriving the Company's financial condition and the Company's current forecast gives doubtimplied EBITDA multiple of those transactions, based on sales prices, which was then applied to the Company's available liquidity to repay its outstanding debt or meet its obligations. The Company’s bond and share price declines, as well as the Company’s credit rating, have over time increased the level of uncertainty in the Company’s business and impacted various key stakeholders, including the Company’s employees, customers, suppliers and key lenders. These conditions and events indicate that there is substantial doubt about the Company's ability to continue as a going concern.
As noted above, in response to these developments, the Debtors expect to make the Bankruptcy Filing. Although the Company anticipates that the Chapter 11 Cases, if commenced, will help address its liquidity concerns, there are a number of risks and uncertainties surrounding the Chapter 11 Cases, including the uncertainty remaining over the Bankruptcy Court's approval of the Plan, which are not within the Company's control. Therefore, management has concluded that management’s current actions and plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.
As of September 30, 2020, the Company’s unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. In addition, the Company’s unaudited condensed consolidated financial statements do not reflect any adjustments related to bankruptcy or liquidation accounting.
COVID-19 Pandemic and Market Conditionsprojected EBITDA.
The Company’s operations continueenterprise value and corresponding equity value are dependent upon achieving the future financial results set forth in our valuations, as well as the realization of certain other assumptions. All estimates, assumptions, valuations and financial projections, including the fair value adjustments, the enterprise value and equity value projections, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, we cannot assure you that the estimates, assumptions, valuations or financial projections will be disrupted duerealized, and actual results could vary materially.
Valuation Process
The reorganization value was allocated to the circumstances surroundingSuccessor’s reporting segments using the COVID-19 pandemic.discounted cash flow approach. The significant business disruption resulting fromreorganization value was then allocated to the COVID-19 pandemic has impacted customers, vendorsSuccessor’s identifiable assets and suppliersliabilities using the fair value principle as contemplated in all geographical areas whereASC 820. The specific approach, or approaches, used to allocate reorganization value by asset class are noted below.
Inventory
The fair value of the Company operates. The closureinventory was determined by using both a cost approach and income approach. Inventory was segregated into raw materials, spare parts, work in process (“WIP”), and finished goods. Fair value of non-essential business facilitiesraw materials and restrictions on travel put in place by governments around the world have significantly reduced economic activity. Also, the COVID-19 pandemic has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, the proper functioning of financial and capital markets, foreign currency exchange rates, and interest rates. For example, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which increasesspare parts inventory were determined using the cost approach. Fair value of capitalfinished goods and adversely impacts accessWIP inventory were determined by using the net realizable value approach. The fair value of finished goods was measured using an estimate of the costs to capital. Additionally, recognized health risks associated withsell or dispose of the COVID-19 pandemic have alteredinventory plus a reasonable profit allowance on those efforts adjusted for holding costs. The fair value of WIP was measured using an estimate of the policiescosts to complete and sell or consume the inventory plus a reasonable profit allowance on those efforts adjusted for holding costs.
Property, Plant and Equipment
Real Property
The fair values of companies operating aroundreal property locations were estimated using the world, resulting in these companies instituting safety programs similar to what both domesticsales comparison (market) approach and international governmental agencies havecost approach. As part of the valuation process, information was obtained on the Successor’s current usage, building type, year built, and cost history for all properties valued. In determining the fair value and remaining useful life for real property assets, functional and economic obsolescence was considered and taken as an adjustment at the asset level.
implemented, including stay at home orders, social distancing mandates,
Tangible Assets Excluding Real Property and other community oriented health objectives. Oil and Gas Assets
The Company is complying with all such ordinances in its operations across the globe. Managementfair values of the Company believes it has proactively addressed manyCompany’s tangible assets were calculated using either the cost or market approach. For most tangible asset categories, a cost approach was utilized relying on purchase year, historic costs, and industry/equipment based trend factors to determine replacement cost new of the known operational impactsassets. Readily available market transaction data was used and adjusted for current market conditions for asset categories with active secondary markets such as heavy trucks and computer equipment. In both approaches, consideration was made for the effects of physical deterioration as well as functional and economic obsolescence in determining both estimates of fair value and the remaining useful lives of the COVID-19 pandemic to the extent possible and will strive to continue to do so, but there can be no guarantee the measures will be fully effective.assets.
Furthermore, theOil and Gas Assets
The oil and gas industry has experienced unprecedented price disruptions during 2020, due in part to significantly decreased demandassets were valued as a resultof January 31, 2021, for the purposes of the COVID-19 pandemic, as activity declined in the face of depressed crude oil pricing. The U.S. oil and gas rig count fell by more than 60% in the second quarter of 2020 and by more than 30% in the third quarter of 2020. The number of oil and gas rigs outsideFebruary 2, 2021 condensed consolidated balance sheet, using estimates of the U.S.reserve volumes and Canada fell by more than 10% in the third quarter of 2020 to an average of 731 rigs from 834 rigs in the second quarter of 2020. These market conditions have significantly impacted the Company’s business, with third quarter 2020 revenue decreasing to $166.9 million, as compared to $356.6 million in the third quarter of 2019, or 53%. As customers continue to revise their capital budgets in order to adjust spending levels in response to lower commodity prices, the Company has experienced significant pricing pressure for its productsassociated income data based on escalated price and services.cost parameters.
LowDecommissioning Liabilities
In accordance with FASB ASC Topic No. 410 – Asset Retirement and Environmental Obligations (“ASC 410”), the asset retirement obligations associated with the Successor’s oil prices and industry volatility are likelygas assets were valued using the income approach. Estimates were used for future retirement costs and the expected time to continue throughretirement, then adjusted for an estimated inflation rate over the neartime period prior to retirement and long-term. discounted future cash outflows by a credit adjusted risk-free rate of 5.6%. As such, the global outbreakSuccessor changed its presentation to consolidate the fair value of the COVID-19 pandemic continuesPredecessor’s decommissioning liabilities previously recorded to rapidly evolve, management expects it to continue to materially and adversely affectother long-term liabilities into the Company’s revenue, financial condition, profitability, and cash flow for an indeterminate period of time.Successor’s decommissioning liabilities.
Internally-Developed Software
New York Stock Exchange DelistingInternally-developed software was valued using the cost approach in which a replacement cost was estimated based on the software developer time, materials, and other supporting services required to replicate the software.
On September 17, 2020, the Company was notified by the New York Stock Exchange (the NYSE) that the Company is no longer in compliance with the NYSE continued listing standards set forth in Section 802.01B of the NYSE Listed Company Manual due to the Company’s failure to maintain an average global market capitalization over a consecutive 30-day trading period of at least $15 million and accordingly, the NYSE had determined to commence proceedings to delist the Company’s common stock from the NYSE.Intangible Assets
Trading ofIntangible assets were identified apart from goodwill using the Company’s common stock onguidance provided in ASC 805. Intangible assets that were identified as either separable or arose from contract or other legal rights were valued using either the NYSE was suspended effective as of approximately 4:00 p.m. Eastern Time on September 17, 2020. On September 18, 2020,cost or income approaches. The principal intangible assets identified were trademarks and patents. Trademarks and patents were valued using the Company’s common stock commenced trading onrelief from royalty method in which the OTCQX marketplace under the trading symbol “SPNX.” On October 2, 2020, the NYSE appliedsubject intangible asset is valued by reference to the SECamount of royalty income it could generate if it was licensed in an arm’s length transaction to delist the Company’s common stock from trading on the NYSE and to remove it from registration under Section 12(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act). The delisting became effective 10 days after the filing of the Form 25. In accordance with Rule 12d2-2 of the Exchange Act, the de-registration of the Company’s common stock under Section 12(b) of the Exchange Act will become effective 90 days, or such shorter period as the SEC may determine, from the date of the Form 25 filing.
a third party.
(2)Lease Liabilities and Right of Use Assets
The fair value of lease liabilities was measured as the present value of the remaining lease payments, as if the lease were a new lease as of the Fresh Start Reporting Date. The Successor used its incremental borrowing rate of 5.3% commensurate with the Successor's capital structure as the discount rate in determining the present value of the remaining lease payments.
Consolidated Successor Balance Sheet
The adjustments included in the following fresh start consolidated condensed balance sheet as of February 2, 2021 reflect the effects of the transactions contemplated by the Plan and executed by the Successor on the Fresh Start Reporting Date (reflected in the column Reorganization Adjustments), and fair value and other required accounting adjustments resulting from the adoption of fresh start accounting (reflected in the column Fresh Start Adjustments). The explanatory notes provide additional information with regard to the adjustments recorded, the methods used to determine the fair values and significant assumptions.
The consolidated condensed balance sheet as of the Fresh Start Reporting Date was as follows (in thousands):
As of February 2, 2021 | ||||||||||||||
Predecessor | Reorganization Adjustments | Fresh Start Adjustments | Successor | |||||||||||
ASSETS | ||||||||||||||
Current assets: | ||||||||||||||
Cash and cash equivalents | $ | 194,671 | $ | (21,903) | (1) | $ | - | $ | 172,768 | |||||
Restricted cash - current | - | 16,751 | (2) | - | 16,751 | |||||||||
Accounts receivable, net of allowance for doubtful accounts | 180,525 | 11 | (3) | - | 180,536 | |||||||||
Income taxes receivable | 9,146 | - | (170) | (16) | 8,976 | |||||||||
Prepaid expenses | 37,041 | - | - | 37,041 | ||||||||||
Inventory and other current assets | 99,843 | - | 8,426 | (17) | 108,269 | |||||||||
Assets held for sale | 47,120 | - | (2,126) | (18) | 44,994 | |||||||||
Total current assets | 568,346 | (5,141) | 6,130 | 569,335 | ||||||||||
Property, plant and equipment, net of accumulated depreciation and depletion | 533,147 | - | 125,120 | (19) | 658,267 | |||||||||
Operating lease right-of-use assets | 48,733 | - | 1,785 | (20) | 50,518 | |||||||||
Goodwill | 138,934 | - | (138,934) | (21) | - | |||||||||
Notes receivable | 72,967 | - | - | 72,967 | ||||||||||
Restricted cash - non-current | 80,179 | - | - | 80,179 | ||||||||||
Intangible and other long-term assets, net of accumulated amortization | 55,105 | (10,080) | (4) | (19,487) | (22) | 25,538 | ||||||||
Total assets | $ | 1,497,411 | $ | (15,221) | $ | (25,386) | $ | 1,456,804 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||
Current liabilities: | ||||||||||||||
Accounts payable | $ | 55,546 | $ | (700) | (5) | $ | - | $ | 54,846 | |||||
Accrued expenses | 143,697 | 9,812 | (6) | 2,026 | (23) | 155,535 | ||||||||
Current portion of decommissioning liabilities | 3,776 | - | (3,418) | (24) | 358 | |||||||||
Liabilities held for sale | 552 | 844 | (7) | - | 1,396 | |||||||||
Total current liabilities | 203,571 | 9,956 | (1,392) | 212,135 | ||||||||||
Decommissioning liabilities | 139,503 | - | 33,761 | (25) | 173,264 | |||||||||
Operating lease liabilities | 32,735 | - | (405) | (26) | 32,330 | |||||||||
Deferred income taxes | 4,853 | 3,100 | (8) | 51,569 | (27) | 59,522 | ||||||||
Other long-term liabilities | 122,691 | - | (45,824) | (28) | 76,867 | |||||||||
Total non-current liabilities | 299,782 | 3,100 | 39,101 | 341,983 | ||||||||||
Liabilities subject to compromise | 1,572,772 | (1,572,772) | (9) | - | - | |||||||||
Total liabilities | 2,076,125 | (1,559,716) | 37,709 | 554,118 | ||||||||||
Stockholders’ equity (deficit): | ||||||||||||||
Predecessor common stock $0.001 par value | 16 | (16) | (10) | - | - | |||||||||
Predecessor Additional paid-in capital | 2,757,824 | (2,757,824) | (11) | - | - | |||||||||
Predecessor Treasury stock at cost | (4,290) | 4,290 | (12) | - | - | |||||||||
Successor Class A common stock $0.001 par value | - | 200 | (13) | - | 200 | |||||||||
Successor Additional paid-in capital | - | 902,486 | (14) | - | 902,486 | |||||||||
Accumulated other comprehensive loss, net | (67,532) | - | 67,532 | (29) | - | |||||||||
Accumulated deficit | (3,264,732) | 3,395,359 | (15) | (130,627) | (30) | - | ||||||||
Total stockholders’ equity (deficit) | (578,714) | 1,544,495 | (63,095) | 902,686 | ||||||||||
Total liabilities and stockholders’ equity (deficit) | $ | 1,497,411 | $ | (15,221) | $ | (25,386) | $ | 1,456,804 | ||||||
Reorganization Adjustments (in thousands)
(1)Changes in cash and cash equivalents included the following:
Payment of debtor in possession financing fees | (183) |
Payment of professional fees at the Emergence Date | (2,649) |
Payment of lease rejection damages classified as liabilities subject to compromise | (400) |
Transfers from cash to restricted cash for Professional Fees Escrow and General Unsecured Creditors Escrow | (16,751) |
Payment of debt issuance costs for the Credit Facility | (1,920) |
Net change in cash and cash equivalents | (21,903) |
(2)Changes to restricted cash - current included the following:
Transfer from cash for Professional Fee Escrow | 16,626 |
Transfer from cash for General Unsecured Creditors Escrow | 125 |
Net change in restricted cash - current | 16,751 |
(3)Changes of $11 to accounts receivable reflect a receivable from the solicitor for excess proceeds received during the Rights Offering.
(4)Changes to intangibles and other long-term assets included the following:
Write-off of deferred financing costs related to the Delayed-Draw Term Loan | (12,000) |
Capitalization of debt issuance costs associated with the Credit Facility | 1,920 |
Net change in intangibles and other long-term assets | (10,080) |
(5)Changes to accounts payable included the following:
Payment of professional fees at the Emergence Date | (2,649) |
Professional fees recognized and payable at the Emergence Date | 1,949 |
Net change in accounts payable | (700) |
(6)Changes in accrued liabilities include the following:
Payment of debtor in possession financing fees | (183) |
Accrual of professional fees | 6,500 |
Accrual for transfer taxes | 1,900 |
Reinstatement of lease rejection liabilities to be settled post-emergence | 1,470 |
Accrual of general unsecured claims against parent | 125 |
Net change in accrued liabilities | 9,812 |
(7)Changes in liabilities held for sale reflect the fair value reinstatement of rejected leases claims related to PumpCo to be settled post-emergence.
(8)Changes in deferred income taxes are due to reorganization adjustments.
(9)The resulting gain on liabilities subject to compromise was determined as follows:
Prepetition 7.125% and 7.750% notes including accrued interest and unpaid interest | 1,335,794 |
Rejected lease liability claims | 4,956 |
Allowed Class 6 General Unsecured Claims against Parent | 232,022 |
Liabilities subject to compromise settled in accordance with the Plan | 1,572,772 |
Reinstatement of accrued liabilities for lease rejection claims | (1,470) |
Reinstatement of liabilities held for sale for Pumpco lease claims | (844) |
Payment to settle lease rejection claims | (400) |
Cash proceeds from rights offering | 963 |
Cash payout provided to cash opt-in noteholders | (952) |
Cash Pool to settle GUCs against Parent | (125) |
Issuance of common stock to prepetition noteholders, incremental to rights offering (par value) | (193) |
Additional paid-in capital attributable to successor common stock issuance | (869,311) |
Successor common stock issued to cash opt-out noteholders in the rights offering (par value) | (7) |
Additional paid-in capital attributable to rights offering shares | (33,175) |
Gain on settlement of liabilities subject to compromise | 667,258 |
The Equity Rights Offering generated $963 in proceeds used to settle $952 in Cash Opt-in Noteholder claims. The Equity Rights Offering shares were offered at a price of $1.31/share to Cash Opt-out Noteholders. As such, the Equity Rights Offering
shares generated the $963 in cash proceeds from the share issuance as well as an implied discount to the Cash Opt-in claimants of $32.2 million, recorded as a loss on share issuance in reorganization items, net. The loss on the Equity Rights Offering share issuance is offset by the gain on share issuance of $32.2 million implied by the issuance of shares to settle Cash Opt-out Noteholder claims at a value of $46.82/share compared to the reorganization value implied share price of $45.14/share.
(10)Changes of $16 in Predecessor common stock reflect the cancellation of the Predecessor’s common stock.
(11)Changes in Predecessor additional paid-in capital (APIC) include the following:
Extinguishment of APIC related to Predecessor's outstanding equity interests | (2,758,812) |
Extinguishment of RSUs for the Predecessor's incentive plan | 988 |
Net change in Predecessor's additional paid-in capital | (2,757,824) |
(12)Reflects $4.3 million cancellation of Predecessor treasury stock held at cost.
(13)Changes in the Successor’s Class A common stock include the following:
Issuance of successor Class A common stock to prepetition noteholders, incremental to rights offering (par value) | 193 |
Successor Class A common stock issued to cash opt-out noteholders in the rights offering (par value) | 7 |
Net change in Successor Class A common stock | 200 |
(14)Changes in Successor additional paid-in capital include the following:
Additional paid-in capital (Successor Class A common stock) | 869,311 |
Additional paid-in capital (rights offering shares) | 33,175 |
Net change in Successor additional paid-in capital | 902,486 |
(15)Changes to retained earnings (deficit) include the following:
Gain on settlement of liabilities subject to compromise | 667,258 |
Accrual for transfer tax | (1,900) |
Extinguishment of RSUs for Predecessor incentive plan | (988) |
Adjustment to net deferred tax liability taken to tax expense | (3,100) |
Professional fees earned and payable as a result of consummation of the Plan of Reorganization | (8,449) |
Write-off of deferred financing costs related to the Delayed-Draw Term Loan | (12,000) |
Extinguishment of Predecessor equity (par value, APIC, and treasury stock) | 2,754,538 |
Net change in retained earnings (deficit) | 3,395,359 |
Fresh Start Adjustments (in thousands)
(16)Changes of $170 in income tax receivable reflects the decrease to current deferred tax assets due to the adoption of fresh start accounting.
(17)Changes in inventory and other current assets included the following:
Fair value adjustment to inventory - North America Segment | 1,097 |
Fair value adjustment to inventory - Global Segment | 12,137 |
Adjustment to Predecessor decommissioning balances due to the adoption of fresh start accounting | (3,498) |
Fair value adjustment to other current assets | (1,310) |
Net change in inventory and other current assets due to the adoption of fresh start accounting | 8,426 |
(18)Changes of $2.1 million in assets held for sale reflect a fair value adjustment to real property.
(19)Changes of $125.1 million to property, plant and equipment reflect the fair value adjustment.
Successor Fair Value | Predecessor Book Value | |
Land, Buildings, and Associated Improvements | 150,089 | 281,989 |
Machinery and Equipment | 374,643 | 1,605,074 |
Rental Services Equipment | 92,861 | 617,762 |
Other Depreciable or Depletable Assets | 35,762 | 49,242 |
Construction in Progress | 4,912 | 4,912 |
658,267 | 2,558,979 | |
Less: Accumulated Depreciation and Depletion | - | (2,025,832) |
Property, Plant and Equipment, net | 658,267 | 533,147 |
(20)Reflects $1.8 million due to the fair value adjustment increasing operating lease right-of-use assets.
(21)Changes of $138.9 million to goodwill reflect the derecognition of the Predecessor’s goodwill due to the adoption of fresh start accounting.
(22)The fair value changes of $0.2 million to intangibles assets are reflected in the table below:
Successor Fair Value | Predecessor Net Book Value | |
Customer Relationships | - | 4,455 |
Trade Names | 4,898 | 2,268 |
Patents | 2,120 | 447 |
Intangible Assets, Net | 7,018 | 7,170 |
Reduction of other long-term assets was due to the adoption of fresh start accounting and include $19.3 million in decommissioning liabilities related to Predecessor long-term assets fair valued and presented in the Successor’s property, plant, and equipment.
(23)Changes of $2.0 million to accrued expenses reflect the fair value adjustment increasing the current portion of operating lease liabilities.
(24)Reflects the $3.4 million fair value adjustment decreasing the current portion of decommissioning liabilities.
(25)Reflects the $33.8 million fair value adjustment increasing the non-current portion of decommissioning liabilities.
(26)Reflects the $0.4 million fair value adjustment decreasing the non-current portion of operating lease liabilities.
(27)Reflects the $70.4 million increase of deferred tax liabilities netted against an $18.8 million increase in realizable deferred tax assets due to the adoption of fresh start accounting.
(28)Changes of $45.8 million in other long-term liabilities reflects the reclassification of amounts associated with the Predecessor’s decommissioning liability balances that were fair valued and presented in the Successor’s decommissioning liabilities, as well as an increase in FIN48 liabilities of $1.5 million.
(29) Changes to accumulated other comprehensive loss reflect the elimination of Predecessor currency translation adjustment balances
due to the adoption of fresh start accounting on Predecessor currency translation adjustment balances.
(30)Changes reflect the cumulative impact of fresh start accounting adjustments discussed above and the elimination of the Predecessor’s accumulated other comprehensive loss and the Predecessor’s accumulated deficit.
Fresh start valuation adjustments | (77,376) |
Adjustment to net deferred tax liability taken to tax expense | (53,251) |
Net impact to accumulated other comprehensive loss and accumulated deficit | (130,627) |
Reorganization Items, net
The Predecessor incurred costs associated with the reorganization, primarily unamortized debt issuance costs, expenses related to rejected leases and post-petition professional fees. In accordance with applicable guidance, costs associated with the Chapter 11 Cases have been recorded as reorganization items, net within the accompanying consolidated statement of operations for the Current Predecessor Period ended February 2, 2021. Reorganization items, net was 0 for the Successor Period, with 0 cash used in operating activities during the Successor Period. Reorganization items, net was $335.6 million for the Current Predecessor Period, with $3.1 million representing cash used in operating activities during the Current Predecessor Period, $2.7 million and $0.4 million paid for professional fees and to settle lease rejection damages, respectively.
Predecessor | |||
For the Period January 1, 2021 through February 2, 2021 | |||
Gain on settlement of liabilities subject to compromise | $ | 667,258 | |
Allowed claim adjustment for Class 6 claims | (232,022) | ||
Fresh Start valuation adjustments | (77,376) | ||
Professional fees | (16,005) | ||
Predecessor lease liabilities rejected per the Plan | 13,347 | ||
Write off of deferred financing costs related to the Delayed-Draw Term Loan | (12,000) | ||
Lease rejection damages | (4,956) | ||
Extinguishment of RSU's for the Predecessor's incentive plan | (988) | ||
Other items | (1,698) | ||
Total reorganization items, net | $ | 335,560 |
Restructuring and other expenses
The Company has embarked on a transformation project as part of its emergence from bankruptcy to reconfigure its operations and organization to maximize shareholder value and margin growth. The project is focused around three sequential phases:
Business Unit Review – Analyzing strategic changes that emphasize product optimization and margin enhancement to maximize the cash flow profile of the Company’s business units and focus on the Company’s core competencies;
Geographic Focus – Review the Company’s footprint and improve capital efficiency by focusing on low-risk, high reward geographies to maximize returns; and
Right Size Support – Streamline support to match optimized business units that represent the Company’s core portfolio and consolidate its operational footprint to align the size of the Company’s operations with current demand to provide a superior value proposition and exhibit capital discipline.
In connection with this initiative, during the three months ended March 31, 2021, we incurred costs of $8.4 million in the Successor Period and $1.3 million in the Current Predecessor Period, which primarily relate to professional fees and separation costs related to former executives and personnel.
(4)Revenue
Revenue Recognition
Revenues are recognized when performance obligations are satisfied in accordance with contractual terms, in an amount that reflects the consideration the Company expects to be entitled to in exchange for services rendered, rentals provided, and products sold. Taxes collected from customers and remitted to governmental authorities and revenues are reported on a net basis in the Company’s financial statements.
Performance Obligations
A performance obligation arises under contracts with customers to render services, provide rentals or sell products, and is the unit of account under FASB Accounting Standards Update (ASU) 2014-09 - Revenue from Contracts with Customers (Topic 606). The Company accounts for services rendered and rentals provided separately if they are distinct and the service or rental is separately identifiable from other items provided to a customer and if a customer can benefit from the services rendered or rentals provided on its own or with other resources that are readily available to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. A contract’s standalone selling prices are determined based on the prices that the Company charges for its services rendered, rentals provided, and products sold. The majority of the Company’s performance obligations are satisfied over time, which is generally represented by a period of 30 days or less. The Company’s payment terms vary by the type of products or services offered. The term between invoicing and when the payment is due is typically 30 days.
Services Revenue: primarily represents amounts charged to customers for the completion of services rendered, including labor, products and supplies necessary to perform the service. Rates for these services vary depending on the type of services provided and can be based on a per job, per hour or per day basis.
Rentals Revenue: primarily priced on a per day, per man hour or similar basis and consists of fees charged to customers for the use of the Company’s rental equipment over the term of the rental period, which is generally less than twelve months.
Product Sales Revenue: products are generally sold based upon purchase orders or contracts with the Company’s customers that include fixed or determinable prices but do not include right of return provisions or other significant post-delivery obligations. The Company recognizes revenue from product sales when title passes to the customer, the customer assumes risks and rewards of ownership, collectability is reasonably assured and delivery occurs as directed by the customer.
The Company expenses sales commissions when incurred because the amortization period would be one year or less.
Disaggregation of revenueRevenue
The following table presents the Company’s revenues by segment disaggregated by geography (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
U.S. land | |||||||||||
Drilling Products and Services | $ | 10,458 | $ | 46,590 | $ | 66,652 | $ | 142,073 | |||
Onshore Completion and Workover Services | 21,559 | 75,973 | 103,957 | 273,727 | |||||||
Production Services | 9,777 | 32,620 | 51,541 | 112,095 | |||||||
Technical Solutions | 4,694 | 7,283 | 13,997 | 32,589 | |||||||
Total U.S. land | $ | 46,488 | $ | 162,466 | $ | 236,147 | $ | 560,484 | |||
U.S. offshore | |||||||||||
Drilling Products and Services | $ | 26,242 | $ | 33,895 | $ | 92,053 | $ | 91,048 | |||
Onshore Completion and Workover Services | - | - | - | - | |||||||
Production Services | 6,630 | 18,295 | 24,292 | 58,977 | |||||||
Technical Solutions | 15,740 | 40,771 | 70,884 | 95,195 | |||||||
Total U.S. offshore | $ | 48,612 | $ | 92,961 | $ | 187,229 | $ | 245,220 | |||
International | |||||||||||
Drilling Products and Services | $ | 19,301 | $ | 30,700 | $ | 68,639 | $ | 79,825 | |||
Onshore Completion and Workover Services | - | - | - | - | |||||||
Production Services | 39,948 | 47,872 | 136,519 | 134,167 | |||||||
Technical Solutions | 12,579 | 22,586 | 43,744 | 69,601 | |||||||
Total International | $ | 71,828 | $ | 101,158 | $ | 248,902 | $ | 283,593 | |||
Total Revenues | $ | 166,928 | $ | 356,585 | $ | 672,278 | $ | 1,089,297 | |||
Successor | Predecessor | ||||||||
For the Period February 3, 2021 through March 31, 2021 | For the Period January 1, 2021 through February 2, 2021 | Three Months Ended March 31, 2020 | |||||||
U.S. land | |||||||||
Global | $ | 11,660 | $ | 7,472 | $ | 41,376 | |||
North America | 24,819 | 11,543 | 93,302 | ||||||
Total U.S. land | $ | 36,479 | $ | 19,015 | $ | 134,678 | |||
U.S. offshore | |||||||||
Global | $ | 28,010 | $ | 11,894 | $ | 59,114 | |||
North America | 11,815 | 3,673 | 20,942 | ||||||
Total U.S. offshore | $ | 39,825 | $ | 15,567 | $ | 80,056 | |||
International | |||||||||
Global | $ | 51,152 | $ | 21,512 | $ | 104,296 | |||
North America | 1,639 | 553 | 2,467 | ||||||
Total International | $ | 52,791 | $ | 22,065 | $ | 106,763 | |||
Total Revenues | $ | 129,095 | $ | 56,647 | $ | 321,497 | |||
The following table presents the Company’s revenues by segment disaggregated by type (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Services | |||||||||||
Drilling Products and Services | $ | 11,130 | $ | 18,835 | $ | 38,719 | $ | 52,997 | |||
Onshore Completion and Workover Services | 20,461 | 67,022 | 94,277 | 245,055 | |||||||
Production Services | 44,550 | 85,188 | 167,081 | 262,658 | |||||||
Technical Solutions | 20,860 | 40,495 | 67,769 | 128,538 | |||||||
Total Services | $ | 97,001 | $ | 211,540 | $ | 367,846 | $ | 689,248 | |||
Rentals | |||||||||||
Drilling Products and Services | $ | 38,786 | $ | 78,714 | $ | 161,188 | $ | 221,306 | |||
Onshore Completion and Workover Services | 1,098 | 8,951 | 9,680 | 28,672 | |||||||
Production Services | 2,246 | 9,216 | 16,106 | 25,068 | |||||||
Technical Solutions | 432 | 2,890 | 9,032 | 7,773 | |||||||
Total Rentals | $ | 42,562 | $ | 99,771 | $ | 196,006 | $ | 282,819 | |||
Product Sales | |||||||||||
Drilling Products and Services | $ | 6,085 | $ | 13,636 | $ | 27,437 | $ | 38,643 | |||
Onshore Completion and Workover Services | - | - | - | - | |||||||
Production Services | 9,559 | 4,383 | 29,165 | 17,513 | |||||||
Technical Solutions | 11,721 | 27,255 | 51,824 | 61,074 | |||||||
Total Product Sales | $ | 27,365 | $ | 45,274 | $ | 108,426 | $ | 117,230 | |||
Total Revenues | $ | 166,928 | $ | 356,585 | $ | 672,278 | $ | 1,089,297 | |||
Successor | Predecessor | ||||||||
For the Period February 3, 2021 through March 31, 2021 | For the Period January 1, 2021 through February 2, 2021 | Three Months Ended March 31, 2020 | |||||||
Services | |||||||||
Global | $ | 44,586 | $ | 19,203 | $ | 91,313 | |||
North America | 25,215 | 10,986 | 88,923 | ||||||
Total Services | $ | 69,801 | $ | 30,189 | $ | 180,236 | |||
Rentals | |||||||||
Global | $ | 27,063 | $ | 12,920 | $ | 79,824 | |||
North America | 5,852 | 2,203 | 20,281 | ||||||
Total Rentals | $ | 32,915 | $ | 15,123 | $ | 100,105 | |||
Product Sales | |||||||||
Global | $ | 19,173 | $ | 8,755 | $ | 33,646 | |||
North America | 7,206 | 2,580 | 7,510 | ||||||
Total Product Sales | $ | 26,379 | $ | 11,335 | $ | 41,156 | |||
Total Revenues | $ | 129,095 | $ | 56,647 | $ | 321,497 | |||
(5)Inventory
Inventories are stated at the lower of cost or net realizable value. The Company applies net realizable value and obsolescence to the gross value of the inventory. Cost is determined using the first-in, first-out or weighted-average cost methods for finished goods and work-in-process.WIP. Supplies and consumables primarily consist of products used in our services provided to customers. The components of the inventory balances are as follows (in thousands):
Successor | Predecessor | ||||||||||||
September 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | ||||||||||
Finished goods | $ | 42,180 | $ | 45,127 | $ | 44,282 | $ | 44,123 | |||||
Raw materials | 15,633 | 16,130 | 8,474 | 11,345 | |||||||||
Work-in-process | 6,329 | 9,360 | |||||||||||
WIP | 5,936 | 6,185 | |||||||||||
Supplies and consumables | 33,723 | 33,322 | 38,789 | 25,070 | |||||||||
Total | $ | 97,865 | $ | 103,939 | $ | 97,481 | $ | 86,723 | |||||
(4)(6)Notes Receivable
Notes receivable consist of a commitment from the seller of an oil and gas property acquired by the Company related to costs associated with the abandonment of the acquired property. Pursuant to an agreement with the seller, the Company invoices the seller an agreed upon amount at the completion of certain decommissioning activities.activities for the offshore platform. The gross amount of thisthe seller’s obligation to the Company totals $115.0 million and is recorded at present value, usingwhich totaled $73.2 million as of March 31, 2021. The related discount, which is based on an effective interest rate of 6.58%. The related discount, is amortized to interest income based on the expected timing of completion of the decommissioning activities. The CompanySuccessor recorded interest income related to notes receivable of $3.4 million and $3.1$0.7 million for the nine months ended September 30, 2020Successor Period. The Predecessor recorded interest income related to notes receivable of $0.4 million and 2019,$1.2 million for the Current Predecessor Period and the Prior Predecessor Quarter, respectively.
Interest receivable is considered paid in kind and is compounded into the carrying amount of the note.
(5)Debt(7) Property, Plant and Equipment
The Company’s outstanding debtProperty, plant and equipment are stated at cost, except for assets for which reduction in value is recorded during the period and assets acquired using purchase accounting and through fresh start accounting, which are recorded at fair value as of the date of acquisition. Depreciation on acquired assets is computed using the straight-line method over the estimated useful lives of the related assets as follows:
Machinery and equipment | 3-20 years | |||||
Buildings, improvements and leasehold improvements | 10-30 years | |||||
Automobiles, trucks, tractors and trailers | 4-7 years | |||||
Furniture and fixtures | 3-10 years |
A summary of property, plant and equipment is as follows (in thousands):
September 30, 2020 | December 31, 2019 | ||||||
Stated Interest Rate (%) | Long-term | ||||||
Senior unsecured notes due September 2024 | 7.750 | $ | 500,000 | $ | 500,000 | ||
Senior unsecured notes due December 2021 | 7.125 | 800,000 | 800,000 | ||||
Total debt, gross | 1,300,000 | 1,300,000 | |||||
Unamortized debt issuance costs | (10,712) | (13,371) | |||||
Total debt, net | $ | 1,289,288 | $ | 1,286,629 | |||
Successor | Predecessor | |||||
March 31, 2021 | December 31, 2020 | |||||
Machinery and equipment | $ | 459,973 | $ | 2,228,539 | ||
Buildings, improvements and leasehold improvements | 106,790 | 227,828 | ||||
Automobiles, trucks, tractors and trailers | 8,523 | 12,395 | ||||
Furniture and fixtures | 20,644 | 34,246 | ||||
Construction-in-progress | 5,375 | 4,793 | ||||
Land | 43,734 | 53,952 | ||||
Oil and gas producing assets | 19,067 | 15,117 | ||||
Total | 664,106 | 2,576,870 | ||||
Accumulated depreciation and depletion | (51,509) | (2,034,780) | ||||
Property, plant and equipment, net | $ | 612,597 | $ | 542,090 | ||
Depreciation expense (excluding depletion, amortization and accretion) for the Successor Period, Current Predecessor Period and Prior Predecessor Quarter was $50.9 million, $9.5 million and $28.6 million, respectively.
As discussed above, in connection with the valuation process under fresh start accounting, certain fully depreciated assets were assigned an estimated fair value of approximately $282.1 million and remaining useful life of less than 36 months. Depreciation
expense for the remainder of 2021 is expected to be approximately $203.8 million and approximately $86.9 million and $50.0 million for the years ended December 31, 2022 and 2023, respectively. See Note 3 – “Fresh Start Accounting” for additional information.
(8) Intangibles
Intangible assets consist of the following (in thousands):
Successor | Predecessor | |||||||||||||||||||
March 31, 2021 | December 31, 2020 | |||||||||||||||||||
Estimated | Gross | Accumulated | Net | Gross | Accumulated | Net | ||||||||||||||
Useful Lives | Amount | Amortization | Balance | Amount | Amortization | Balance | ||||||||||||||
Trade Names | 10 | 4,898 | (84) | 4,814 | 9,045 | (6,270) | 2,775 | |||||||||||||
Customer Relationships | 17 | - | - | - | 14,592 | (10,077) | 4,515 | |||||||||||||
Patents | 10 | 2,120 | (35) | 2,085 | - | - | - | |||||||||||||
Non-Compete Agreements | 3 | - | - | - | 3,478 | (3,478) | - | |||||||||||||
Total | $ | 7,018 | $ | (119) | $ | 6,899 | $ | 27,115 | $ | (19,825) | $ | 7,290 | ||||||||
Amortization expense for the Successor Period, Current Predecessor Period and Prior Predecessor Quarter was $0.1 million, $0.1 million and $0.4 million, respectively. Based on the carrying values of intangible assets at March 31, 2021, amortization expense for the next five years (2021 through 2025) is estimated to be $0.5 million for the remainder of 2021 and $0.7 million for the years 2022 through 2025.
See Note 3 – “Fresh Start Accounting” for additional information.
(9)Debt
Credit Facility
The Company has anOn the Emergence Date, pursuant to the Plan, the Former Parent, as parent guarantor, and SESI, as borrower, entered into a Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and letter of credit issuers named therein providing for a $120.0 million asset-based secured revolving credit facility (the “Credit Facility”), which matures in October 2022.provides for revolving loans and is available for the issuances of letters of credit. The Credit Facility will mature on December 9, 2024. The borrowing base under the credit facilityCredit Facility is calculated based on a formula referencing the borrower’sdetermined by reference to SESI’s and theits subsidiary guarantors’ (i) eligible accounts receivable, (ii) eligible inventory, (iii) solely during the period from February 2, 2021 until the earlier of December 9, 2022 and the date that unrestricted cash of SESI and its wholly-owned subsidiaries is less than $75.0 million, eligible premium rental drill pipe and (iv) so long as there are no loans outstanding at such time, certain cash of SESI and its subsidiary guarantors, less reserves. reserves established by the administrative agent in its permitted discretion.
Availability under the credit facilityCredit Facility at any time is equal to the lesser of (i) the aggregate commitments under the Credit Facility and (ii) the borrowing base and (iii) the highest principal amount permitted to be secured under the indenture governing the 7.125% senior unsecured notes due 2021.
At September 30, 2020,at such time. As of March 31, 2021, the borrowing base under the asset-based revolving credit facilityCredit Facility was $97.3approximately $120.0 million and the Company had $48.5$47.5 million of letters of credit outstanding that reduced its borrowing availability under the revolving credit facility. Subject to certain conditions, upon request and with the consent of the participating lenders, the total commitments under the Credit Facility may be increased to $170.0 million. SESI’s obligations under the Credit Facility are guaranteed by the Former Parent and all of SESI’s material domestic subsidiaries, and secured by substantially all of the personal property of the Former Parent, SESI and SESI’s material domestic subsidiaries, in each case, subject to certain customary exceptions.
Borrowings under the Credit Facility bear interest, at SESI’s option, at either an adjusted LIBOR rate plus an applicable margin ranging from 3.00% to 3.50% per annum, or an alternate base rate plus an applicable margin ranging from 2.00% to 2.50% per annum, in each case, on the basis of the then applicable consolidated fixed charge coverage ratio. In addition, SESI is required to pay (i) a letter of credit fee ranging from 3.00% to 3.50% per annum on the basis of the consolidated fixed charge coverage ratio on the aggregate face amount of all outstanding letters of credit, (ii) to the issuing lender of each letter of credit, a fronting fee of no less than 0.25% per annum on the outstanding amount of each such letter of credit and (iii) commitment fees of 0.50% per annum on the daily unused amount of the Credit Facility, in each case, quarterly in arrears.
The credit agreementCredit Facility contains various covenants requiring compliance, including, but not limited to, limitations on the incurrence of indebtedness, permitted investments, liens on assets, making distributions, transactions with affiliates, merger,mergers, consolidations, dispositions of assets and other provisions customary in similar types of agreements. The Credit Facility requires compliance with a fixed charge coverage ratio of 1.0 to 1.0 if either (i) an event of default has occurred and is continuing or (ii) availability under the Credit Facility is less than the greater of $20.0 million or 15% of the lesser of the aggregate commitments and the borrowing base. The covenant and other restrictions of the Credit Facility significantly restrict the ability to incur borrowings other than letters of credit.
On August 5, 2020,May 13, 2021, SESI, SESI Holdings, Inc and the Company amended its asset-based revolving credit facility to permit the Company to use upsubsidiary guarantors party thereto entered into a first amendment and waiver to the lesserCredit Facility (the “First Amendment and Waiver to the Credit Facility”) to, among other things, (i) extend the deadline thereunder
for the delivery of (i) $100 millionthe Company’s consolidated unaudited financial statements for the quarter ended March 31, 2021 to June 1, 2021 and (ii) 105%obtain a limited waiver of the face value of certain third-party letters of credit, surety, judgment, appeal or performance bonds, and similar obligations of the Company, to cash collateralize such obligations. The Company also deposited $25 million in an accountpotential defaults under the lenders’ controlCredit Facility related to further secure its obligations undera delayed public filing of such financial statements after the revolving credit facility. The Company reduced the amountoriginal deadline for delivery of letters of credit issued through the credit facility by using $52.4 million to cash collateralize these obligations. The amendment also prohibits the Company from requesting any loans under the credit facility and also restricts the Company’s flexibility under certain of the investment, indebtedness, junior debt repayment and restricted payment covenants.such financial statements.
Senior Unsecured NotesOn May 28, 2021, SESI, L.L.C., SESI Holdings, Inc. and the subsidiary guarantors party thereto entered into a waiver to the Credit Facility to (i) extend the deadline under the Credit Agreement for the delivery of Superior Energy Services, Inc.’s consolidated unaudited financial statements for the quarter ended March 31, 2021 and the calendar months ending April 30, 2021 and May 31, 2021 to July 15, 2021 and (ii) agree that until the unaudited financial statements and a revised borrowing base certificate in connection therewith are delivered, the lenders will not be required to make any advances requested.
On July 15, 2021, SESI, the Former Parent, and the subsidiary guarantors party thereto entered into a waiver to the Credit Facility with JPMorgan Chase Bank, N.A., as administrative agent and lender, and certain other financial institutions and other parties thereto as lenders to (i) extend the deadline under the Credit Facility for the delivery of the Company’s consolidated unaudited financial statements (x) as of and for the quarter ended March 31, 2021 to September 30, 2021 and (y) as of and for the quarter ended June 30, 2021 and the calendar months ending April 30, 2021, May 31, 2021, July 31, 2021 and August 31, 2021 to October 30, 2021, (ii) obtain a limited waiver of potential defaults under the Credit Facility related to a delayed public filing of the quarterly report on Form 10-Q with respect to the fiscal quarter ended June 30, 2021 (including related financial statements) after the original deadline (and confirmation of such waiver as it pertains to this quarterly report on Form 10-Q with respect to the fiscal quarter ended March 31, 2021), and (iii) agree that until the quarterly unaudited financial statements and a revised borrowing base certificate in connection with each such quarter is delivered, the lenders will not be required to make any advances requested.
Delayed-Draw Term Loan Commitment Letter
On September 29, 2020, the Predecessor entered into a commitment letter (the “Delayed-Draw Term Loan Commitment Letter”) with certain of the consenting noteholders (such consenting noteholders, the “Backstop Commitment Parties”). The Backstop Commitment Parties committed to provide a delayed draw term loan facility (the “Delayed-Draw Term Loan Facility”) in an aggregate principal amount not to exceed $200.0 million, upon the Company’s emergence from bankruptcy on the terms and subject to the conditions of the Delayed-Draw Term Loan Commitment Letter.
The Company hasPredecessor paid $12.0 million of fees in consideration for the commitment by the Backstop Commitment Parties during 2020. On the Emergence Date, the Delayed-Draw Term Loan Commitment Letter terminated in accordance with its terms upon the effectiveness of the Credit Facility without the establishment of the Delayed-Draw Term Loan Facility. The termination resulted in the Predecessor recognizing $12.0 million of reorganization items, net during the Current Predecessor Period.
Debtor-in-Possession Financing
In connection with the Chapter 11 Cases, the Affiliate Debtors filed a motion for approval of a debtor-in-possession financing facility, and on December 8, 2020, the Bankruptcy Court approved such motion and entered into an order approving the financings (the “DIP Order”). In accordance with the DIP Order, on December 9, 2020, the Predecessor, as guarantor, and SESI, as borrower, entered into a $120.0 million Senior Secured Debtor-in-Possession Credit Agreement (the “DIP Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto.
On the Emergence Date, the Credit Facility replaced the DIP Credit Facility and approximately $46.6 million of undrawn letters of credit outstanding $800under the former DIP Credit Facility were deemed outstanding under the Credit Facility. All accrued and unpaid fees and other amounts outstanding thereunder were paid in full as well.
Prepetition Indebtedness
The Predecessor’s outstanding debt was as follows (in thousands) for the periods indicated:
Stated Interest Rate (%) | December 31, 2020 | |||
Senior unsecured notes due September 2024 | 7.750 | $ | 500,000 | |
Senior unsecured notes due December 2021 | 7.125 | 800,000 | ||
Total debt, gross | 1,300,000 | |||
Reclassification to liabilities subject to compromise | (1,300,000) | |||
Unamortized debt issuance costs | - | |||
Total debt, net | $ | - | ||
The Predecessor had outstanding $800.0 million of senior unsecured notes due December 2021. The indenture governing the 7.125% senior unsecured notes due 2021 requiresrequired semi-annual interest payments on June 15 and December 15 of each year through the maturity date of December 15, 2021.
The CompanyPredecessor also hashad outstanding $500$500.0 million of senior unsecured notes due September 2024. The indenture governing the 7.75% senior unsecured notes due 2024 requiresrequired semi-annual interest payments on March 15 and September 15 of each year through the maturity date of September 15, 2024.
IfAt the Debtors filePetition Date, there was pre-petition accrued interest of $35.8 million under the Chapter 11 Cases, the principal and interest due under these debt instruments will become immediately due and payable. However, section 362two issuances of the Bankruptcy Code will stay the creditors from taking any action assenior secured notes. As a result of the default. Any efforts to enforce such paymentautomatic stay from bankruptcy, principal and interest was not paid during the bankruptcy proceedings. On the Emergence Date, obligations under these notes, including principal and accrued interest of $35.8 million, were fully extinguished in exchange for cash and equity in the unsecured notes or other accelerated obligations of the Debtors will be automatically stayed as a result of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the unsecured notes, the credit facility and other accelerated obligations of the Debtors will be subject to the applicable provisions of the Bankruptcy Code.Successor.
(6)(10)Decommissioning Liabilities
The Company accounts for decommissioning liabilities under ASC 410 – Asset Retirement Obligations. The Company’s decommissioning liabilities associated with an oil and gas property and its related assets include liabilities related to the plugging of wells, removal of the related platform and equipment and site restoration. The Company reviews the adequacy of its decommissioning liabilities whenever indicators suggest that the estimated cash flows and/or relating timing needed to satisfy the liability have changed materially. The CompanySuccessor had decommissioning liabilities of $141.1$174.5 million as of March 31, 2021 and $136.3the Predecessor had decommissioning liabilities of $142.7 million at September 30, 2020 andas of December 31, 2019,2020, respectively.
In connection with fresh start accounting, the Company now presents all asset retirement obligations separately as decommissioning liabilities on the balance sheet. Previously, certain of these decommissioning liabilities were included as a component of other long-term liabilities.
(7)(11) Leases
Accounting Policy for Leases
The Company determines if an arrangement is a lease at inception. All of the Company’s leases are operating leases and are included in right-of-use (ROU)(“ROU”) assets, accounts payable and operating lease liabilities in the condensed consolidated balance sheet.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligations to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the respective lease term. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease.
The Company has changed its position regarding exercising certain operating lease renewal options given the current industry conditions related to the COVID-19 pandemic. At September 30, 2020, this change resulted in a decrease to the operating lease ROU assets and liabilities of $10.7 million.
Overview
The Company’s operating leases are primarily for real estate, machinery and equipment, and vehicles. The terms and conditions for these leases vary by the type of underlying asset. Subject to certain exceptions, if the Debtors make the Bankruptcy Filing, under the Bankruptcy Code, the Company may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Total operating lease expense was as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Successor | Predecessor | |||||||||||||||||||
2020 | 2019 | 2020 | 2019 | For the Period February 3, 2021 through March 31, 2021 | For the Period January 1, 2021 through February 2, 2021 | Three Months Ended March 31, 2020 | ||||||||||||||||
Long-term fixed lease expense | $ | 4,032 | $ | 8,942 | $ | 18,043 | $ | 25,507 | $ | 3,782 | $ | 1,824 | $ | 7,473 | ||||||||
Long-term variable lease expense | 85 | 117 | 285 | 298 | 29 | 19 | 124 | |||||||||||||||
Short-term lease expense | 1,652 | 3,346 | 8,175 | 13,216 | 1,616 | 789 | 4,423 | |||||||||||||||
Total operating lease expense | $ | 5,769 | $ | 12,405 | $ | 26,503 | $ | 39,021 | $ | 5,427 | $ | 2,632 | $ | 12,020 | ||||||||
Supplemental Balance Sheet and Cash Flows Information
Operating leases were as follows (in thousands):
Successor | Predecessor | ||||||||||
September 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | ||||||||
Operating lease ROU assets | $ | 56,198 | $ | 80,906 | $ | 45,965 | $ | 50,192 | |||
Accrued expenses | $ | 19,622 | $ | 21,072 | $ | 16,835 | $ | 18,491 | |||
Operating lease liabilities | 38,649 | 62,354 | 29,416 | 40,258 | |||||||
Total operating lease liabilities | $ | 58,271 | $ | 83,426 | $ | 46,251 | $ | 58,749 | |||
Weighted average remaining lease term | 8 years | 9 years | |||||||||
Weighted average discount rate | 6.51% | 6.75% | |||||||||
Weighted-average remaining lease term | 10 years | 9 years | |||||||||
Weighted-average discount rate | 5.33% | 6.35% | |||||||||
Nine Months Ended September 30, | |||||||||||
2020 | 2019 | ||||||||||
Cash paid for operating leases | $ | 20,806 | $ | 26,242 | |||||||
ROU assets obtained in exchange for lease obligations | $ | 3,513 | $ | 21,045 | |||||||
Maturities of operating lease liabilities at September 30, 2020March 31, 2021 are as follows (in thousands):
Remainder of 2020 | $ | 7,265 | ||
2021 | 21,905 | |||
Remainder of 2021 | $ | 13,591 | ||
2022 | 14,546 | 9,863 | ||
2023 | 10,977 | 7,207 | ||
2024 | 8,210 | 4,948 | ||
2025 | 3,844 | |||
Thereafter | 28,780 | 22,140 | ||
Total lease payments | 91,683 | 61,593 | ||
Less imputed interest | (33,412) | (15,342) | ||
Total | $ | 58,271 | $ | 46,251 |
(8)(12) Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs used in determining fair value are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable. The three input levels of the fair value hierarchy are as follows.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 management’s 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 (in thousands):
Fair Value at September 30, 2020 | Successor Fair Value at March 31, 2021 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
Intangible and other long-term assets, net: | ||||||||||||||||||||||||
Non-qualified deferred compensation assets | $ | - | $ | 14,252 | $ | - | $ | 14,252 | $ | - | $ | 15,265 | $ | - | $ | 15,265 | ||||||||
Accounts payable: | ||||||||||||||||||||||||
Non-qualified deferred compensation liabilities | $ | - | $ | 2,741 | $ | - | $ | 2,741 | $ | - | $ | 2,112 | $ | - | $ | 2,112 | ||||||||
Other long-term liabilities: | ||||||||||||||||||||||||
Non-qualified deferred compensation liabilities | $ | - | $ | 19,530 | $ | - | $ | 19,530 | $ | - | $ | 19,068 | $ | - | $ | 19,068 | ||||||||
Total debt | $ | 350,100 | $ | - | $ | - | $ | 350,100 | ||||||||||||||||
Fair Value at December 31, 2019 | Predecessor Fair Value at December 31, 2020 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
Intangible and other long-term assets, net: | ||||||||||||||||||||||||
Non-qualified deferred compensation assets | $ | - | $ | 15,499 | $ | - | $ | 15,499 | $ | - | $ | 15,013 | $ | - | $ | 15,013 | ||||||||
Accounts payable: | ||||||||||||||||||||||||
Non-qualified deferred compensation liabilities | $ | - | $ | 1,372 | $ | - | $ | 1,372 | $ | - | $ | 2,869 | $ | - | $ | 2,869 | ||||||||
Other long-term liabilities: | ||||||||||||||||||||||||
Non-qualified deferred compensation liabilities | $ | - | $ | 23,466 | $ | - | $ | 23,466 | $ | - | $ | 20,697 | $ | - | $ | 20,697 | ||||||||
Total debt | $ | 1,021,300 | $ | - | $ | - | $ | 1,021,300 | $ | 409,050 | $ | - | $ | - | $ | 409,050 | ||||||||
The Company’s 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. 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 andLevel 2 respectively, in the fair value hierarchy. Commencement of the Chapter 11 Cases will automatically staystayed payments under the non-qualified deferred compensation plans. As a result of the consummation of the Plan, restricted stock units issued prior to the Fresh Start Accounting Date under the Company’s stock incentive plans were cancelled for 0 consideration.
The carrying amount of cash equivalents, accounts receivable, accounts payable and accrued expenses, as reflected in the condensed consolidated balance sheets, approximates fair value due to the short maturities. The fair value of the debt instruments is determined by reference to the market value of such instruments as quoted in an over-the-counter market, which represents Level 1 in the fair value hierarchy.
The following table reflects the fair value measurements used in testing the impairment of long-lived assets (in thousands):
Nine Months Ended September 30, | |||||
Impairment | Fair Value | ||||
Property, plant and equipment, net | $ | 19,451 | $ | 13,593 | |
Prior Predecessor Quarter | |||||
Impairment | Fair Value | ||||
Property, plant and equipment, net | $ | 16,522 | $ | 13,593 | |
Fair value is measured as of impairment date using Level 3 inputs. See Note 1014 – “Reduction in Value of Assets” for a discussion of the reduction in value of assets recorded during the nine months ended September 30, 2020.Prior Predecessor Quarter.
While the Company believes that it will continue to operate in the ordinary course during the Chapter 11 Cases and upon emergence from the Chapter 11 Cases, the Company’s estimates of fair values are sensitive to inputs to the valuation approaches, including forecasts of revenues and earnings growth. There can be no assurances that changes to the Company’s inputs would not result in a material impairment of goodwill.
(13) Segment Information
(9) Segment InformationIn connection with our emergence from bankruptcy, the reportable segments were changed to Global and North America. Reportable segments in the Predecessor’s Annual Report on Form 10-K were Drilling Products and Services, Onshore Completion and Workover Services, Production Services and Technical Solutions.
Business Segments
The Drilling ProductsGlobal segment operates in both the domestic and Services segment rentsinternational markets. Its products and sellsservice offerings are provided through its five global brands: Workstrings International, which provides value-added engineering services and high-specification premium drill pipe,downhole tubular and accessory rentals; Stabil Drill, which provides design, engineering, manufacturing and rental of premium bottom hole assemblies, tubularsassemblies; ISS, which provides hydraulic workover and snubbing services; Wild Well Control, which provides engineering, risk management, well control and training solutions; and Superior Completion Services, which provides design, engineering and manufacturing of premium sand control tools. Additionally, through its International Services operations, the Global segment provides intervention services such as coiled tubing, cased hole and mechanical wireline, production testing and optimization and remedial
pumping services. The Global segment also includes the Company’s oil and gas production related to its 51% ownership interest in its sole federal offshore oil and gas property and related assets.
The North America segment provides domestic intervention services such as coiled tubing, cased hole and mechanical wireline, production testing and optimization, and remedial pumping services. It also rents accommodation units 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 machining services. The Onshore Completion and Workover Services segment providesAdditionally, fluid handling, services and 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. The Technical Solutions segment provides services typically requiring specialized engineering, manufacturing or project planning, including well containment systems, stimulation and sand control services andare performed by the production and sale of oil and gas.North America segment.
The Company evaluates the performance of its reportable segments based on income or loss from operations excluding corporate expenses. The segment measure is calculated as follows: segment revenues less segment operating expenses, depreciation, depletion, amortization and accretion expense and reduction in value of assets. The Company uses this segment measure to evaluate its reportable segments because it is the measure that is most consistent with how the Company organizes and manages its business operations. Corporate and other costs primarily include expenses related to support functions, salaries and benefits for corporate employees and stock-based compensation expense.expenses.
Summarized financial information for the Company’s segments is as follows (in thousands):
Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||
Onshore | ||||||||||||||||||||||||||||||
Drilling | Completion | |||||||||||||||||||||||||||||
Successor | Successor | |||||||||||||||||||||||||||||
For the period February 3, 2021 through March 31, 2021 | For the period February 3, 2021 through March 31, 2021 | |||||||||||||||||||||||||||||
Products and | and Workover | Production | Technical | Corporate and | Consolidated | North | Corporate and | Consolidated | ||||||||||||||||||||||
Services | Services | Services | Solutions | Other | Total | Global | America | Other | Total | |||||||||||||||||||||
Revenues | $ | 56,001 | $ | 21,559 | $ | 56,355 | $ | 33,013 | $ | - | $ | 166,928 | $ | 90,823 | $ | 38,272 | $ | - | $ | 129,095 | ||||||||||
Cost of revenues (exclusive of depreciation, depletion, amortization and accretion | 23,714 | 21,943 | 46,115 | 24,461 | - | 116,233 | ||||||||||||||||||||||||
Cost of revenues (exclusive of depreciation, depletion, amortization and accretion) | 57,607 | 32,091 | - | 89,698 | ||||||||||||||||||||||||||
Depreciation, depletion, amortization | ||||||||||||||||||||||||||||||
and accretion | 14,424 | 5,356 | 9,584 | 4,983 | 825 | 35,172 | 36,079 | 15,456 | 1,272 | 52,807 | ||||||||||||||||||||
General and administrative expenses | 12,948 | 3,319 | 6,801 | 9,844 | 22,054 | 54,966 | 10,611 | 3,636 | 6,690 | 20,937 | ||||||||||||||||||||
Restructuring expense | - | - | - | - | 25,746 | 25,746 | ||||||||||||||||||||||||
Reduction in value of assets | - | - | - | 2,929 | - | 2,929 | ||||||||||||||||||||||||
Income (loss) from operations | 4,915 | (9,059) | (6,145) | (9,204) | (48,625) | (68,118) | ||||||||||||||||||||||||
Restructuring and other expenses | - | - | 8,383 | 8,383 | ||||||||||||||||||||||||||
Loss from operations | (13,474) | (12,911) | (16,345) | (42,730) | ||||||||||||||||||||||||||
Interest income (expense), net | - | - | - | 1,122 | (25,916) | (24,794) | 710 | - | (495) | 215 | ||||||||||||||||||||
Reorganization items, net | - | - | - | - | ||||||||||||||||||||||||||
Other income | - | - | - | - | (1,399) | (1,399) | - | - | (2,845) | (2,845) | ||||||||||||||||||||
Income (loss) from continuing operations | ||||||||||||||||||||||||||||||
Loss from continuing operations | ||||||||||||||||||||||||||||||
before income taxes | $ | 4,915 | $ | (9,059) | $ | (6,145) | $ | (8,082) | $ | (75,940) | $ | (94,311) | $ | (12,764) | $ | (12,911) | $ | (19,685) | $ | (45,360) | ||||||||||
Predecessor | ||||||||||||
For the period January 1, 2021 through February 2, 2021 | ||||||||||||
Corporate and | Consolidated | |||||||||||
Global | North America | Other | Total | |||||||||
Revenues | $ | 40,878 | $ | 15,769 | $ | - | $ | 56,647 | ||||
Cost of revenues (exclusive of depreciation, | ||||||||||||
depletion, amortization and accretion) | 24,898 | 15,064 | - | 39,962 | ||||||||
Depreciation, depletion, amortization | ||||||||||||
and accretion | 7,135 | 3,049 | 314 | 10,498 | ||||||||
General and administrative expenses | 5,521 | 1,786 | 4,857 | 12,164 | ||||||||
Restructuring and other expenses | - | - | 1,270 | 1,270 | ||||||||
Income (loss) from operations | 3,324 | (4,130) | (6,441) | (7,247) | ||||||||
Interest income (expense), net | 355 | - | (151) | 204 | ||||||||
Reorganization items, net | 39,416 | (76,238) | 372,382 | 335,560 | ||||||||
Other expense | - | - | (2,104) | (2,104) | ||||||||
Income (loss) from continuing operations | ||||||||||||
before income taxes | $ | 43,095 | $ | (80,368) | $ | 363,686 | $ | 326,413 | ||||
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||||||||
Onshore | Onshore | |||||||||||||||||||||||||||||||||||
Drilling | Completion | Completion | ||||||||||||||||||||||||||||||||||
Products and | and Workover | Production | Technical | Corporate and | Consolidated | Drilling Products | and Workover | Production | Technical | Corporate and | Consolidated | |||||||||||||||||||||||||
Services | Services | Services | Solutions | Other | Total | and Services | Services | Services | Solutions | Other | Total | |||||||||||||||||||||||||
Revenues | $ | 111,185 | $ | 75,973 | $ | 98,787 | $ | 70,640 | $ | - | $ | 356,585 | $ | 103,993 | $ | 61,218 | $ | 101,504 | $ | 54,782 | $ | - | $ | 321,497 | ||||||||||||
Cost of revenues (exclusive of depreciation, depletion, amortization and accretion | 38,663 | 61,338 | 82,556 | 49,370 | - | 231,927 | ||||||||||||||||||||||||||||||
Cost of revenues (exclusive of depreciation, depletion, amortization and accretion) | 34,963 | 52,589 | 82,612 | 41,522 | - | 211,686 | ||||||||||||||||||||||||||||||
Depreciation, depletion, amortization | ||||||||||||||||||||||||||||||||||||
and accretion | 20,168 | 6,853 | 12,063 | 4,909 | 1,169 | 45,162 | 17,790 | 6,313 | 10,838 | 5,345 | 1,069 | 41,355 | ||||||||||||||||||||||||
General and administrative expenses | 14,363 | 8,144 | 2,905 | 14,935 | 20,519 | 60,866 | 14,513 | 5,314 | 7,855 | 13,991 | 23,484 | 65,157 | ||||||||||||||||||||||||
Reduction in value of assets | - | 566 | 1,997 | 7,008 | - | 9,571 | - | - | 4,096 | 12,426 | - | 16,522 | ||||||||||||||||||||||||
Income (loss) from operations | 37,991 | (928) | (734) | (5,582) | (21,688) | 9,059 | 36,727 | (2,998) | (3,897) | (18,502) | (24,553) | (13,223) | ||||||||||||||||||||||||
Interest income (expense), net | - | - | - | 1,051 | (25,556) | (24,505) | - | - | 1,173 | (26,307) | (25,134) | |||||||||||||||||||||||||
Other income | - | - | - | - | (3,353) | (3,353) | - | - | (4,232) | (4,232) | ||||||||||||||||||||||||||
Income (loss) from continuing operations | ||||||||||||||||||||||||||||||||||||
before income taxes | $ | 37,991 | $ | (928) | $ | (734) | $ | (4,531) | $ | (50,597) | $ | (18,799) | $ | 36,727 | $ | (2,998) | $ | (3,897) | $ | (17,329) | $ | (55,092) | $ | (42,589) | ||||||||||||
Nine Months Ended September 30, 2020 | ||||||||||||||||||
Onshore | ||||||||||||||||||
Drilling | Completion | |||||||||||||||||
Products and | and Workover | Production | Technical | Corporate and | Consolidated | |||||||||||||
Services | Services | Services | Solutions | Other | Total | |||||||||||||
Revenues | $ | 227,344 | $ | 103,957 | $ | 212,352 | $ | 128,625 | $ | - | $ | 672,278 | ||||||
Cost of revenues (exclusive of depreciation, | ||||||||||||||||||
depletion, amortization and accretion) | 81,163 | 98,774 | 177,624 | 99,161 | - | 456,722 | ||||||||||||
Depreciation, depletion, amortization | ||||||||||||||||||
and accretion | 48,042 | 17,183 | 30,604 | 14,663 | 2,821 | 113,313 | ||||||||||||
General and administrative expenses | 38,388 | 12,635 | 21,232 | 34,044 | 72,244 | 178,543 | ||||||||||||
Restructuring expense | - | - | - | - | 27,033 | 27,033 | ||||||||||||
Reduction in value of assets | - | - | 4,096 | 15,355 | - | 19,451 | ||||||||||||
Income (loss) from operations | 59,751 | (24,635) | (21,204) | (34,598) | (102,098) | (122,784) | ||||||||||||
Interest income (expense), net | - | - | - | 3,399 | (78,076) | (74,677) | ||||||||||||
Other expense | - | - | - | - | (4,810) | (4,810) | ||||||||||||
Income (loss) from continuing operations | ||||||||||||||||||
before income taxes | $ | 59,751 | $ | (24,635) | $ | (21,204) | $ | (31,199) | $ | (184,984) | $ | (202,271) | ||||||
Identifiable Assets | ||||||||||||
North | Corporate and | Consolidated | ||||||||||
Global | America | Other | Total | |||||||||
March 31, 2021 - Successor | $ | 970,767 | $ | 308,373 | $ | 144,700 | $ | 1,423,840 | ||||
Nine Months Ended September 30, 2019 | ||||||||||||||||||
Onshore | ||||||||||||||||||
Drilling | Completion | |||||||||||||||||
Products and | and Workover | Production | Technical | Corporate and | Consolidated | |||||||||||||
Services | Services | Services | Solutions | Other | Total | |||||||||||||
Revenues | $ | 312,946 | $ | 273,727 | $ | 305,239 | $ | 197,385 | $ | - | $ | 1,089,297 | ||||||
Cost of revenues (exclusive of depreciation, | ||||||||||||||||||
depletion, amortization and accretion) | 118,732 | 217,115 | 240,855 | 124,810 | - | 701,512 | ||||||||||||
Depreciation, depletion, amortization | ||||||||||||||||||
and accretion | 64,684 | 27,940 | 39,375 | 17,198 | 3,579 | 152,776 | ||||||||||||
General and administrative expenses | 44,173 | 24,044 | 18,687 | 46,394 | 69,717 | 203,015 | ||||||||||||
Reduction in value of assets | - | 8,123 | 1,997 | 7,008 | - | 17,128 | ||||||||||||
Income (loss) from operations | 85,357 | (3,495) | 4,325 | 1,975 | (73,296) | 14,866 | ||||||||||||
Interest income (expense), net | - | - | - | 3,104 | (77,379) | (74,275) | ||||||||||||
Other expense | - | - | - | - | (4,476) | (4,476) | ||||||||||||
Income (loss) from continuing operations | ||||||||||||||||||
before income taxes | $ | 85,357 | $ | (3,495) | $ | 4,325 | $ | 5,079 | $ | (155,151) | $ | (63,885) | ||||||
Identifiable Assets | ||||||||||||||||||
Onshore | ||||||||||||||||||
Drilling | Completion | |||||||||||||||||
Products and | and Workover | Production | Technical | Corporate and | Consolidated | |||||||||||||
Services | Services | Services | Solutions | Other | Total | |||||||||||||
September 30, 2020 | $ | 591,152 | $ | 200,101 | $ | 367,944 | $ | 272,893 | $ | 142,156 | $ | 1,574,246 | ||||||
December 31, 2019 | $ | 659,621 | 467,697 | $ | 421,848 | $ | 377,627 | $ | 66,437 | $ | 1,993,230 | |||||||
Drilling Products | Completion and Workover | Production | Technical | Corporate and | Consolidated | |||||||||||||
and Services | Services | Services | Solutions | Other | Total | |||||||||||||
December 31, 2020 - Predecessor | $ | 557,469 | $ | 183,065 | $ | 368,185 | $ | 260,339 | $ | 132,021 | $ | 1,501,079 |
Geographic Segments
The Company attributes revenue to various countries based on the location of where services are performed or the destination of the drilling products or equipment sold or rented. 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 Company’s revenue attributed to the U.S. and to other countries and the value of its long-lived assets by those locations are as follows (in thousands):
Revenues | ||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | Successor | Predecessor | |||||||||||||||||||
2020 | 2019 | 2020 | 2019 | For the period February 3, 2021 through March 31, 2021 | For the Period January 1, 2021 through February 2, 2021 | Three Months Ended March 31, 2020 | ||||||||||||||||
United States | $ | 95,100 | $ | 255,427 | $ | 423,376 | $ | 805,704 | $ | 76,304 | $ | 34,582 | $ | 214,734 | ||||||||
Other countries | 71,828 | 101,158 | 248,902 | 283,593 | 52,791 | 22,065 | 106,763 | |||||||||||||||
Total | $ | 166,928 | $ | 356,585 | $ | 672,278 | $ | 1,089,297 | $ | 129,095 | $ | 56,647 | $ | 321,497 | ||||||||
Long-Lived Assets | ||||||||||||||||||||||
September 30, 2020 | December 31, 2019 | Successor | Predecessor | |||||||||||||||||||
March 31, 2021 | December 31, 2020 | |||||||||||||||||||||
United States | $ | 411,974 | $ | 489,189 | $ | 438,538 | $ | 387,097 | ||||||||||||||
Other countries | 162,614 | 175,760 | 174,059 | 154,993 | ||||||||||||||||||
Total | $ | 574,588 | $ | 664,949 | $ | 612,597 | $ | 542,090 | ||||||||||||||
(10)
(14) Reduction in Value of Assets
During the threefirst quarter of 2020, in line with the rapidly changing market conditions, the Predecessor’s market capitalization deteriorated. The Predecessor determined that the recent events constituted a triggering event that required the Predecessor to review the recoverability of its long-lived assets and nine months ended September 30, 2020,to perform an interim goodwill impairment as of March 31, 2020.
Reduction in Value of Long-Lived Assets
Long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the Companycarrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is assessed by a comparison of the carrying amount of such assets to their fair value calculated, in part, by the estimated undiscounted future cash flows expected to be generated by the assets. Cash flow estimates are based upon, among other things, historical results adjusted to reflect the best estimate of future market rates, utilization levels, and operating performance. Estimates of cash flows may differ from actual cash flows due to, among other things, changes in economic conditions or changes in an asset’s operating performance. The Company’s assets are grouped by line of business or division for the impairment testing, which represents the lowest level of identifiable cash flows. If the asset grouping’s fair value is less than the carrying amount of the asset grouping, impairment losses are recorded $2.9in the amount by which the carrying amount of asset grouping exceeds the fair value. The estimate of fair value represents the Company’s best estimate based on industry trends and reference to market transactions and is subject to variability.
During the Prior Predecessor Quarter, the Predecessor recorded $16.5 million and $19.5 million, respectively, in connection with the reduction in the value of its long-lived assets. The reduction in value of assets was primarilycomprised of $16.5 million related to long-lived assetsproperty, plant and equipment in the Technical Solutions and Production Services segments.Global segment.
(11)(15) Goodwill
DuringAs part of the third quarter of 2020Successor’s emergence from the Company entered intoChapter 11 Cases, the RSA as further described in “Financial Statements - Note 1 – Basis of Presentation.” Entry into the RSA, along with changing industry conditionsSuccessor adopted fresh start accounting and began reporting as a resultnew accounting entity as of the COVID-19 pandemic constituted a triggering event that required the CompanyFresh Start Reporting Date. Due to perform an interim goodwill impairment review as of September 30, 2020.
The Company performs the goodwill impairment test on an annual basis as of October 1 or more often if events or circumstances indicate there may be an impairment. Goodwill impairment testing is performed at the reporting unit level, which is consistent with the reporting segments. The Company assesses whether any indicators of impairment exist, which requires a significant amount of judgment. Such indicators may include a sustained decrease in the Company’s stock price and market capitalization, a decline in the expected future cash flows, overall weakness in the industry, and slower growth rates.
Goodwill impairment exists when the estimated fair value of the reporting unit is below the carrying value. In estimating the fair value measurement of the reporting units,Company’s assets and liabilities as required by ASC 852, the Company uses a combinationdetermined that the Successor retained 0 goodwill balance based on the assignment of an income approachreorganization value to the Successor’s identifiable assets and a market-based approach.
liabilities. As noted in Note 3 – “Income approach – The Company discountsFresh Start Accounting,” the expected cash flowsPredecessor’s goodwill balance of each reporting unit. The discount rate used represents$138.9 million was eliminated during the estimated weighted average costfresh start adjustments to the consolidated condensed balance sheet as of capital, which reflects the overall level of inherent risk involved in the Company’s operations and cash flows and the rate of return an outside investor would expect to earn.
Market-based approach – The Company uses the guideline public company method, which focuses on comparing the Company’s risk profile and growth prospects to select reasonably similar publicly traded companies.February 2, 2021.
The Company weighs the income approach 80% and the market-based approach 20% due to differences between the Company’s reporting units and the peer companies’ size, profitability and diversity of operations. In order to validate the reasonableness of the estimated fair values obtained for the reporting units, a reconciliation of fair value to market capitalization is performed for each unit on a standalone basis. A control premium, derived from market transaction data, is used in this reconciliation to ensure that fair values are reasonably stated in conjunction with the Company’s capitalization. The Company uses all available information to estimate fair value of the reporting units, including discounted cash flows. A significant amount of judgment is involved in performing these evaluations given that the results are based on estimated future events.
The result of the goodwill impairment assessment indicated that the fair value of the Drilling Products and Services segment exceeded its net book value and, therefore, 0 goodwill impairment was recorded. The Company will continue to evaluate the Drilling Products and Services segment for potential goodwill impairment in the fourth quarter of 2020 as market conditions continue to evolve.
(12)(16) Stock-Based Compensation Plans
The Company maintained variousAs noted in Note 2 – “Emergence from Voluntary Reorganization under Chapter 11,” the Former Parent’s equity interests were cancelled as of the Emergence Date and new Class A common stock was issued to settle claims arising as a result of holding either the 7.125% Notes or the 7.750% Notes. As a result of the consummation of the Plan, restricted stock units issued prior to the fresh start accounting date under the Company’s stock incentive plans that provide long-term incentives towere cancelled for zero consideration. The balance sheet effect of the Company’s key employees, including officers, directors, consultants and advisors (the Eligible Participants) prior to the Chapter 11 Cases. Under the stock incentive plans, the Company could grant incentive stock options, restricted stock, restricted stock units, stock appreciation rights, other stock-based awards or any combination thereof to Eligible Participants. The Company’s total compensation expense related to these plans was approximately $6.1 million and $13.9 million for the nine months ended September 30, 2020 and 2019, respectively, whichcancellation is reflectednoted in general and administrative expenses.Note 3 – “Fresh Start Accounting.”
On September 28, 2020,See Note 23 – “Subsequent Events” for further information on stock-based compensation plans and the Board of Directors of the Company approved the implementation of a Key Employee Retention Program2021 Management Incentive Plan (the KERP), which is designed to retain key employees of the Company in their current roles over the near term while providing them with financial stability. The KERP payments are in lieu of any outstanding unvested awards under the Company’s long-term equity-based incentive plans (other than any performance share units granted in 2018 and 2019) and any 2020 annual bonuses that would otherwise be payable to the KERP participants. The KERP provided for one-time retention payments equal to approximately $7.3 million in the aggregate to the six executive officers of the Company, including its named executive officers. The KERP further provided for approximately $2.4 million of retention payments to other non-executive employees, which will be made in installments.
“Incentive Plan”).
(13)
(17) Income Taxes
CertainThe effective tax rate for the Successor Period and the Current Predecessor Period was 17.3% and 18.4%, respectively, on income from continuing operations. The tax rate in the Successor Period is different from the statutory rate of 21% primarily from non-deductible items and foreign losses for which 0 tax benefit is being recorded. The tax rate in the restructuring transactions contemplated byCurrent Predecessor Period is different from the RSA may have a material impact onstatutory rate of 21% primarily from the Company’s tax attributes,adoption of fresh start accounting during the full extent of which is currently unknown. Cancellation of indebtedness income resulting from such restructuring transactions may significantly reduce the Company’s tax attributes, including but not limited to NOL carryforwards. Further, the Company will experience an ownership change under Section 382 of the Internal Revenue Code of 1986, as amended (the Code), upon confirmation of the Plan by the Bankruptcy Court which will subject certain remaining tax attributes to an annual limitation under Section 382 of the Code. Additionally, if the Company proceeds with the Bankruptcy Filing, the Company will incur additional significant one-time costs associated with the Chapter 11 Cases.period.
OnThe effective tax rate for the three-month ending March 27,31, 2020 was 24.1% on income from continuing operations. The tax rate is different from the President signedstatutory rate of 21% primarily because of the Coronavirus Aid, Relief,impact of the CARES Act legislation which allowed the company to carryback losses from 2018, 2019 and Economic Security2020 to prior periods for refunds of prior year income tax. The CARES Act (the CARES Act), a tax relief and spending packagewas intended to provide economic stimulus to address the impact of the COVID-19 pandemic. The CARES Act allows corporations with net operating losses generated in 2018, 2019 and 2020 to elect to carryback those losses for a period of five years and relaxes the limitation for business interest deductions for 2019 and 2020. Under the provisions of the CARES Act, the Company received a refund of $30.5 million in July 2020.
The CompanySuccessor had $13.2$14.7 million of unrecordedunrecognized tax benefits as of eachMarch 31, 2021 and the Predecessor had $13.2 million of September 30, 2020 andunrecognized tax benefits as of December 31, 2019,2020, all of which would impact the Company’s effective tax rate if recognized. It is the Company’s policy to recognize interest and applicable penalties, if any, related to uncertain tax positions in income tax expense.
As of March 31, 2021, we have a valuation allowance of $97.2 million recorded against our deferred tax assets that relate to US foreign tax credits, US state net operating losses and other non-US deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the carryforward period. The Company assesses the realizability of deferred tax assets quarterly and considers carryback availability, the scheduled reversal of deferred tax liabilities, and tax planning strategies in making this assessment.
(14)
(18) Earnings per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted averageweighted-average number of shares of common stock outstanding during the period. 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 shares of common stock that could have been outstanding assuming the exercise of stock options and the conversion of restricted stock units.
The Company incurredSuccessor Period and Predecessor Prior Quarter did 0t have any potentially dilutive shares as these periods reflected a loss from continuing operations for each of the three and nine months ended September 30, 2020 and 2019; therefore, the impact of any incremental shares would be anti-dilutive.
net loss.
(15)
(19) Contingencies
Due to the nature of the Company’s business, the Company is involved, from time to time, in various routine litigation or subject to disputes or claims or actions, including those commercial in nature, regarding its business activities.activities in the ordinary course of business. Legal costs related to these matters are expensed as incurred. Management is of the opinion that none of the claims and actions will have a material adverse impact on the Company's financial position, results of operations or cash flows.
A subsidiary of the Company is involved in legal proceedings with 2 former employees regarding the payment of royalties for a patentable product paid for by the subsidiary and developed by them.while they worked for the subsidiary. On April 2, 2018, the former employees and their corporation filed a lawsuit (the “First Case) in the Harris County District Court (the “District Court”) alleging that the royalty payments they had invoiced at 25% and for which they received payments since 2010, should have been higher.paid at a rate of 50%. In May 2019, the jury issued a verdict in favor of the plaintiffs. On October 25, 2019, the court issued a final judgment against the Company.Company, which the Company has fully secured with a supersedeas bond. The Company strongly disagrees with the verdict and believes the district courtDistrict Court committed several legal errors that should result in a reversal or remand of the case by the Court of Appeals. The ultimate resolution of this matter could result in a loss of up to $7.5 million in excess of amounts accrued.
Commencement of the Chapter 11 Cases will automatically stay certain proceedings and actions against the Debtors, in addition to actions seeking to collect pre-petition indebtedness or to exercise control over the property of the Debtor’s bankruptcy estates.
(16) Supplemental Guarantor Information
SESI, L.L.C.A second case (the Issuer), a 100% owned subsidiary of Superior Energy Services, Inc. (the Parent), has $500 million of 7.75% senior unsecured notes due 2024 (the SESI 2024 notes). The Parent, along with certain of its direct and indirect 100% owned domestic subsidiaries (the subsidiary guarantors, and together with“Second Case”) was filed in District Court against the Parent, the guarantors), have entered into guarantees of the outstanding SESI 2024 notes (the guarantees). All guarantees provided by the guarantors are full and unconditional, joint and several, except that the guarantee of any subsidiary guarantor may be released under certain customary circumstances, including (i) in connection with a sale or other disposition of all or substantially all of the assets of the applicable subsidiary guarantor (including by way of merger or consolidation) to a person that is not the Issuer, Parent or asame subsidiary of the Issuer; (ii) in connection with a sale or other disposition of allCompany bringing the same claims and seeking damages post judgment from the First Case until discontinuation of the capital stock of such subsidiary guarantor to a person that is not the Parent or Issuer or their respective subsidiaries; and (iii) upon legal defeasance or satisfaction and dischargesale of the indenture governingproduct at issue by the SESI 2024 notes. The Parent will be released from its guarantee only in connection with any legal defeasance or satisfactionsubsidiary. In December 2020, the Court entered a final judgement for the Plaintiffs’ and dischargethe Second Case was stayed for the duration of the indenture.
With respectCompany’s bankruptcy. As of March 31, 2021, the appeal has not yet been perfected in this case. The Company intends to each guarantor, each guarantee isfile an appeal and a general unsecured senior obligation of such guarantor and
ranks equally in right of payment with all existing and future senior unsecured indebtedness of such guarantor;
is senior in right of paymentMotion to any future subordinated obligations of such guarantor; and
is effectively subordinated to existing and future secured indebtedness of such guarantor toAbate the extentSecond Case pending the appeal of the valueFirst Case. As of March 31, 2021, the assets securing that indebtedness.
The guarantee obligations ofCompany has reserved $5.5 million for the Parentjudgements in the First Case and each subsidiary guarantor is limited as necessary to prevent the guarantee from constituting a fraudulent conveyance under applicable law. If a guarantee were rendered voidable, it could be subordinated by a court to all other indebtedness (including guarantees and other contingent liabilities) of the applicable guarantor, and, depending on the amount of such indebtedness, such guarantor’s liability on its guarantee could be reduced to zero.
The SESI 2024 notes and the guarantees are structurally subordinated to all indebtedness and other obligations of any of the subsidiary guarantors that do not guarantee the SESI 2024 notes (the non-guarantor subsidiaries). Such non-guarantor subsidiaries have no obligation, contingent or otherwise, to pay amounts due under the SESI 2024 notes or to make funds available to pay those amounts, whether by dividends, distributions, loans or other payments.
However, the Parent, Issuer and Subsidiary Guarantors are all expected to be Debtors pursuant to the Chapter 11 Cases. See Note 1 of the notes to our condensed consolidated financial statements included in Part I, Item 1, “Financial Statements – Note 1 – Basis of Presentation” of this Quarterly Report for a complete discussion of the Chapter 11 Cases.Second Case.
The following summarized financial information presents the financial information of the Parent, Issuer and the subsidiary guarantors (collectively, the Obligor Group), on a combined basis, after elimination of (i) intercompany transactions and balances among the Parent, Issuer and the subsidiary guarantors and (ii) equity in earnings from and investments in anyAn Indian subsidiary of the Parent thatCompany had entered into a contract with an Indian oil and gas company to provide an off-shore vessel for various types of work. A dispute arose over the performability of the terms of the contract. The potential loss of this possible onerous contract is not the Issuer or a subsidiary guarantor.approximately $7.3 million.
OBLIGOR GROUP | |||||
Summarized Balance Sheets Information | |||||
(in thousands) | |||||
September 30, 2020 | December 31, 2019 | ||||
Current assets | $ | 422,138 | $ | 789,562 | |
Noncurrent assets | 1,086,516 | 1,134,238 | |||
Total assets | $ | 1,508,654 | $ | 1,923,800 | |
Current liabilities | $ | 176,423 | $ | 261,743 | |
Noncurrent liabilities | 2,027,477 | 2,039,138 | |||
Total liabilities | $ | 2,203,900 | $ | 2,300,881 | |
Commencement of the Chapter 11 Cases automatically stayed certain proceedings and actions against the Predecessor. These cases have continued after the Emergence Date.
OBLIGOR GROUP | |||||
Summarized Statements of Operations Information | |||||
(in thousands) | |||||
Nine Months Ended September 30, 2020 | Year Ended December 31, 2019 | ||||
Total revenues | $ | 507,636 | $ | 1,126,456 | |
Cost of revenues | 343,561 | 723,451 | |||
Loss from operations before income taxes | (179,335) | (92,731) | |||
Income taxes | (13,404) | 6,102 | |||
Net loss from continuing operations | (165,931) | (98,833) | |||
Loss from discontinued operations, net of tax | (111,375) | (177,968) | |||
Net loss attributable to the obligor group | $ | (277,306) | $ | (276,801) | |
The same accounting policies as described in “Note 1 – Basis of Presentation” to the consolidated financial statements included in this report are used by the Parent and each of its subsidiaries in connection with the summarized financial information presented above.
(17)(20) Discontinued Operations
On December 10, 2019, the Company’sPredecessor’s indirect, wholly owned subsidiary, Pumpco Energy Services, Inc. (Pumpco), completed its existing hydraulic fracturing field operations and determined to discontinue, wind down and exit its hydraulic fracturing operations. The CompanySuccessor intends to maintain an adequate number of employees to efficiently wind down Pumpco’s business.business on or around December 31, 2021. The financial results of Pumpco’s operations have historically been included in the Company’s Onshore Completions and Workover ServicesPredecessor’s North America segment. The Company intendsSuccessor continued to sell Pumpco’s fixed assets over time during the next twelve months.as of March 31, 2021.
The following table summarizes the components of loss from discontinued operations, net of tax for the three and nine months ended September 30, 2020 and 2019 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
Revenues | $ | 43 | $ | 69,132 | $ | 511 | $ | 239,911 | ||||
Cost of services | 56 | 62,279 | 6,588 | 219,285 | ||||||||
Loss from discontinued operations before tax | (60,864) | (17,276) | (123,659) | (81,050) | ||||||||
Loss from discontinued operations, net of income tax | (58,003) | (17,934) | (111,375) | (85,604) | ||||||||
Successor | Predecessor | |||||||||
For the Period February 3, 2021 through March 31, 2021 | For the Period January 1, 2021 through February 2, 2021 | Three Months Ended March 31, 2020 | ||||||||
Revenues | $ | - | $ | - | $ | 254 | ||||
Cost of services (1) | (1,808) | 210 | 5,459 | |||||||
Income (loss) from discontinued operations before tax | 878 | 2,265 | (59,651) | |||||||
Income (loss) from discontinued operations, net of income tax | 878 | 2,265 | (47,129) | |||||||
(1)As discussed above under “Changes in Accounting Policies” gains and losses from asset sales are included as a component of Cost of services in the Successor period.
For the nine months ended September 30, 2020,Prior Predecessor Quarter, loss from discontinued operations included $109.6$46.4 million in the reduction in value of assets relating to the impairment of property, plant and equipment. Income taxes for the Prior Predecessor Quarter were $12.5 million.
The following summarizes the assets and liabilities related to the Pumpco business reported as discontinued operations (in thousands):
Successor | Predecessor | ||||||||||
September 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | ||||||||
Current assets: | |||||||||||
Accounts receivable, net | $ | - | $ | 25,106 | |||||||
Other current assets | 2,280 | 6,215 | $ | 1,997 | $ | 2,155 | |||||
Total current assets | $ | 2,280 | $ | 31,321 | 1,997 | 2,155 | |||||
Property, plant and equipment, net | 49,259 | 179,144 | 39,863 | 45,397 | |||||||
Operating lease ROU assets | 209 | 5,732 | 21 | 83 | |||||||
Total assets | $ | 51,748 | $ | 216,197 | $ | 41,881 | $ | 47,635 | |||
Current liabilities: | |||||||||||
Accounts payable | $ | 136 | $ | 14,370 | $ | - | $ | 165 | |||
Accrued expenses | 2,869 | 24,751 | 1,177 | 1,326 | |||||||
Total current liabilities | 3,005 | 39,121 | 1,177 | 1,491 | |||||||
Operating lease liabilities | 2,755 | 5,415 | - | 2,588 | |||||||
Other long-term liabilities | - | 402 | |||||||||
Total liabilities | $ | 5,760 | $ | 44,938 | $ | 1,177 | $ | 4,079 | |||
Significant operating non-cash items relating to Pumpco and cash flows from investing activities were as follows (in thousands):
Nine Months Ended September 30, | ||||||
2020 | 2019 | |||||
Cash flows from discontinued operating activities: | ||||||
Depreciation and amortization | $ | - | $ | 72,271 | ||
Reduction in value of assets | 109,591 | 23,824 | ||||
Cash flows from discontinued investing activities: | ||||||
Payments for capital expenditures | $ | - | $ | (36,743) | ||
Proceeds from sales of assets | 14,369 | 1,669 | ||||
Successor | Predecessor | |||||||||
For the Period February 3, 2021 through March 31, 2021 | For the Period January 1, 2021 through February 2, 2021 | Three Months Ended March 31, 2020 | ||||||||
Cash flows from discontinued operating activities: | ||||||||||
Reduction in value of assets | $ | - | $ | - | $ | 46,358 | ||||
Cash flows from discontinued investing activities: | ||||||||||
Proceeds from sales of assets | 5,024 | 486 | 8,449 | |||||||
(21) Supplemental Cash Flow Information
(18)
The table below is a reconciliation of cash, cash equivalents and restricted cash for the beginning and the end of the period for all periods presented:
Successor | Predecessor | |||||||||
For the period February 3, 2021 through March 31, 2021 | For the Period January 1, 2021 through February 2, 2021 | Three Months Ended March 31, 2020 | ||||||||
Cash, cash equivalents, and restricted cash, beginning of period | ||||||||||
Cash and cash equivalents | $ | 172,768 | $ | 188,006 | $ | 272,624 | ||||
Restricted cash-current | 16,751 | - | - | |||||||
Restricted cash-non-current | 80,179 | 80,178 | 2,764 | |||||||
Cash, cash equivalents, and restricted cash, beginning of period | $ | 269,698 | $ | 268,184 | $ | 275,388 | ||||
Cash, cash equivalents, and restricted cash, end of period | ||||||||||
Cash and cash equivalents | $ | 197,307 | $ | 172,768 | $ | 252,221 | ||||
Restricted cash-current | 16,751 | 16,751 | - | |||||||
Restricted cash-non-current | 80,056 | 80,179 | 2,773 | |||||||
Cash, cash equivalents, and restricted cash, end of period | $ | 294,114 | $ | 269,698 | $ | 254,994 | ||||
(22) New Accounting Pronouncements
Recently Issued Accounting Standards
In June 2016, the Financial Accounting Standards Board (the FASB)FASB issued ASU 2016-13 - Measurement of Credit Losses on Financial Instruments.Instruments (ASU 2016-13). This update improves financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope by using the Current Expected Credit Losses model (the CECL).“CECL”) model. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses on financial instruments at the time the asset is originated or acquired. This update will apply to receivables arising from revenue transactions. The new standard is effective for the Company beginning on January 1, 2023. The Company is evaluatinghas concluded that the effectadoption of ASU 2016-13 will not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The capitalized implementation costs of a hosting arrangement that is a service contract will be expensed over the term of the hosting arrangement. The Company adopted the new standard on January 1, 2020 on a prospective basis with respect to all implementation costs incurred after the date of adoption.
In December 2019, the FASB issued ASU 2019-12 - Simplifying the Accounting for Income Taxes. The new standardTaxes (ASU 2019-12). This update simplifies the accounting for income taxes by removing the following exceptions: (1) the incremental approach for intra-period tax allocation when there is effectivea loss from continuing operations and income or a gain from other items; (2) the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the Company beginningyear. The update also (1) requires an entity to recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; (2) requires an entity to evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; (3) specifies that an entity is not required to allocate the consolidate amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; (4) requires an entity to reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date; and (5) makes minor codification improvements for income taxes related to employee stock ownership plans. The Company’s adoption of ASU 2019-12 as of January 1, 2021. The Company is evaluating the effect ASU 2019-12 will have2021 has not had a material impact on its consolidated financial statements.
position, results of operations or cash flows.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform — Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). This update provides an optional expedient and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates (IBORs) and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. In January 2021, the FASB issued ASU No. 2021-01, which clarifies that certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The amendments in these ASUs are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is still evaluating the effect of adopting this guidance.
(23) Subsequent Events
2021 Management Incentive Plan
On June 1, 2021, the Company’s Board of Directors (the “Board”) and the Compensation Committee of the Board (the “Compensation Committee”) approved and adopted the Company’s Incentive Plan), which provides for the grant of share-based and cash-based awards and, in connection therewith, the issuance from time to time of up to 1,999,869 shares of the Company’s Class B common stock, par value $0.01 per share. The accounting and related disclosures will be incorporated into the Company’ Form 10-Q for the period ending June 30, 2021.
Restricted Stock Grants
On June1, 2021, the Board and the Compensation Committee approved the forms of restricted stock award agreements for (i) employee participants (the “Employee Restricted Stock Award Agreement”) and (ii) non-employee directors (the “Director Restricted Stock Award Agreement”).
On June 1, 2021, the Board and the Compensation Committee approved, pursuant to the applicable Employee Restricted Stock Award Agreements and Director Restricted Stock Award Agreements, the issuance (without giving effect to tax withholding) of 113,840 restricted shares of Class B common stock under the Incentive Plan to certain of the Company’s non-employee directors and officers, including 33,519 and 12,649shares to Michael Y. McGovern, the Company’s Executive Chairman of the Board, and James W. Spexarth, the Company’s Executive Vice President, Chief Financial Officer and Treasurer, respectively (the “Restricted Stock Grants”). The Restricted Stock Grants will vest over a period of three years, subject to earlier vesting and forfeiture on terms and conditions set forth in the applicable award agreement. The issuance of the restricted Class B common stock pursuant to the applicable Employee Restricted
Stock Award Agreements and Director Restricted Stock Award Agreements under the Incentive Plan is exempt from registration under the Securities Act pursuant to Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder.
Divestiture
On July 9, 2021, the Company entered into a Securities Purchase and Sale Agreement (the “Purchase Agreement”) with SES Holdings, LLC (the “Parent”), Select Energy Services, Inc. (the “Buyer”) (solely to the extent stated therein), and Complete Energy Services, Inc. (“Complete”). Pursuant to the Purchase Agreement, the Buyer acquired certain of the Company’s onshore oilfield services operations in the United States through the acquisition of 100% of the equity interests of Complete, for a purchase price of approximately $14.0 million in cash and the issuance of 3.6 million shares of Class A common stock, $0.01 par value, of the Parent, subject to customary post-closing adjustments. The Purchase Agreement also contains certain registration rights of the Company which requires the Parent to file a registration statement with the SEC for the resale of the Class A common stock issued to the Company. The Purchase Agreement contains customary representations, warranties and covenants. The loss on sale was $16.7 million in the Successor Period.
Transformation Project
In connection with the Company’s previously announced transformation project, subsequent to March 31, 2021, we have disposed of certain assets with a net book value of approximately $51 million. Proceeds from the sales of these assets have totaled approximately $57 million through September 28, 2021.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used herein, the “Company,” “we,” “us” and similar terms refer to (i) prior to the Emergence Date (as defined below), SESI Holdings, Inc. (formerly known as Superior Energy Services, Inc.) (the “Former Parent”) and its subsidiaries and (ii) after the Emergence Date, Superior Energy Services, Inc. (formerly known as Superior Newco, Inc.) and its subsidiaries. As used herein, the following terms refer to the Company and its operations:
“Predecessor” | The Company, prior to the Emergence Date |
“Current Predecessor Period” | The Company's operations, January 1, 2021 – February 2, 2021 |
“Prior Predecessor Quarter” | The Company's operations, January 1, 2020 - March 31, 2020 |
“Successor” | The Company, after the Emergence Date |
“Successor Period” | The Company's operations, February 3, 2021 - March 31, 2021 |
Effective as of the Emergence Date, the entity now known as Superior Energy Services, Inc. (formerly known as Superior Newco, Inc.) became the successor reporting company to the Former Parent pursuant to Rule 15d-5 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Critical Accounting Policies and Estimates
Please refer to our Annual Report on Form 10-K for the year ended December 31, 2020, and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the discussion of our Critical Accounting Policies and Estimates. The below is an update to those policies:
Fresh Start Accounting
In connection with the emergence from bankruptcy and in accordance with ASC 852, the Company qualified for and adopted fresh start accounting on the Emergence Date because (1) the holders of the then-existing common shares of the Predecessor received less than
50% of the new common shares of the Successor outstanding upon emergence and (2) the reorganization value of the Predecessor’s assets immediately prior to confirmation of the Plan was less than the total of all post-petition liabilities and allowed claims. See Part 1, Item 1, “Unaudited Condensed Consolidated Financial Statements and Notes” – Note 1 – “Basis of Presentation” and Note 3 – “Fresh Start Accounting” for additional information.
Forward-Looking Statements
This quarterly report on Form 10-Q and other documents filed by us with the SEC contain, and future oral or written statements or press releases by us and our management may contain, forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Generally, the words “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks” and “estimates,” variations of such words and similar expressions identify forward-looking statements, although not all forward-looking statements contain these identifying words. All statements other than statements of historical fact included in this quarterly report on Form 10-Q or such other materials regarding the Chapter 11 Cases, our financial position, financial performance, liquidity, strategic alternatives, market outlook, future capital needs, capital allocation plans, business strategies and other plans and objectives of our management for future operations and activities are forward-looking statements. These statements are based on certain assumptions and analyses made by our management in light of its experience and prevailing circumstances on the date such statements are made. Such forward-looking statements, and the assumptions on which they are based, are inherently speculative and are subject to a number of risks and uncertainties that could cause our actual results to differ materially from such statements. Such risks and uncertainties include, but are not limited to:
risks and uncertainties if we fileregarding the voluntary petitions for relief filed by the Affiliate Debtors (as defined below) on December 7, 2020 (the “Chapter 11 Cases”) under Chapter 11 Cases,of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas Houston Division (the “Bankruptcy Court”), including but not limited to: our ability to obtain Bankruptcy Court approval with respect to motions in the Chapter 11 Cases; thecontinuing effects of the Chapter 11 Cases on us and our various constituents; the impact of Bankruptcy Court rulings in the Chapter 11 Cases; our ability to develop and implement the Plan and whether that Plan will be approved by the Bankruptcy Court and the ultimate outcome of the Chapter 11 Cases in general; the length of time we will operate under the Chapter 11 Cases; attendant risks associated with restrictions on our ability to pursue our business strategies; risks associated with third-party motions in the Chapter 11 Cases; the potential adverse effects of the Chapter 11 Cases on our liquidity; our ability to operate within the restrictions and the liquidity limitations of the planned debtor-in-possession asset based credit facility (the DIP Credit Facility); the potential cancellation of our equity securities, including our common stock in the Chapter 11 Cases; the potential material adverse effect of claims that are not discharged in the Chapter 11 Cases; uncertainty regarding our ability to retain key personnel; and uncertainty and continuing risks associated with our ability to achieve our stated goalsgoals;
the likelihood that our historical financial information may no longer be indicative of our future performance; and continue as a going concern;our implementation of fresh start accounting;
the difficulty to predict our long-term liquidity requirements and the adequacy of our capital resources;
restrictive covenants in the $120.0 million asset-based secured revolving Credit Facility (define below) could limit our growth and our ability to finance our operations, fund our capital needs, respond to changing conditions and engage in other business activities that may be in our best interests;
our ability to prepare and file our quarterly report for the quarter ended June 30, 2021 or deliver other required financial information within the time periods prescribed by our Credit Facility or to obtain additional waivers from our lenders;
the conditions in the oil and gas industry;
the effects of public health threats, pandemics and epidemics, and the adverse impact thereof on our business, financial condition, results of operations and liquidity, including, but not limited to, our growth, operating costs, supply chain, labor availability, logistical capabilities, customer demand and industry demand generally, margins, utilization, cash position, taxes, the price of our securities, and our ability to access capital markets, including the macroeconomic effects from the continuing COVID-19 pandemic;
the ability of the members of Organization of Petroleum Exporting Countries (“OPEC+”) to agree on and to maintain crude oil price and production controls;
our outstanding debt obligations and the potential effect of limiting our ability to fund future growth;
we may not be able to generate enough cash flows to meet our debt obligations;
necessary capital financing may not be available at economic rates or at all;
volatility of our common stock;
operating hazards, including the significant possibility of accidents resulting in personal injury or death, or property damage for which we may have limited or no insurance coverage or indemnification rights;
we maythe possibility of not bebeing fully indemnified against losses incurred due to catastrophic events;
claims, litigation or other proceedings that require cash payments or could impair financial condition;
credit risk associated with our customer base;
the effect of regulatory programs and environmental matters on our operations or prospects;
the impact that unfavorable or unusual weather conditions could have on our operations;
the potential inability to retain key employees and skilled workers;
political, legal, economic and other risks and uncertainties associated with our international operations;
laws, regulations or practices in foreign countries could materially restrict our operations or expose us to additional risks;
potential changes in tax laws, adverse positions taken by tax authorities or tax audits impacting our operating results;
changes in competitive and technological factors affecting our operations;
risks associated with the uncertainty of macroeconomic and business conditions worldwide;
potential impacts of cyber-attacks on our operations;operations may be subject to cyber-attacks;
counterparty risks associated with reliance on key suppliers;
challenges with estimating our potential liabilities related to our oil and natural gas property; and
risks associated with potential changes of the Bureau of Ocean Energy Management’sManagement security and bonding requirements for offshore platforms.platforms;
the likelihood that the interests of our significant stockholders may conflict with the interests of our other stockholders;
the risks associated with owning our Class A common stock, par value $0.01 per share, for which there is no public market;
the likelihood that the Stockholders Agreement (as defined below) may prevent certain transactions that could otherwise be beneficial to our stockholders; and
our ability to remediate the identified material weakness in our internal control over financial reporting.
These risks and other uncertainties related to our business are described in detail in Item 1A of our Annual Report on Form 10-K (the “Annual Report”) for the year ended December 31, 2019 and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Investors are cautioned that many of the assumptions on which our forward-looking statements are based are likely to change after such statements are made, including for example the market prices of oil and gas and regulations affecting oil and gas operations, which we cannot control or anticipate. Further, we may make changes to our business strategies and plans (including our capital spending and capital allocation plans) at any time and without notice, based on any changes in the above-listed factors, our assumptions or otherwise, any of which could or will affect our results. For all these reasons, actual events and results may differ materially from those anticipated, estimated, projected or implied by us in our forward-looking statements. We undertake no obligation to update any of our forward-looking statements for any reason, and, notwithstanding any changes in our assumptions, changes in our business plans, our actual experience, or other changes. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.
Executive Summary
General
We provide a wide variety of services and products to the energy industry. We serve major, national and independent oil and natural gas exploration and production companies around the world and offer products and services with respect to the various phases of a well’s economic life cycle. We report ourThe Successor reports its operating results in fourtwo business segments: Drilling ProductsGlobal and Services; Onshore Completion and Workover Services; Production Services; and Technical Solutions.North America.
Recent Developments
Voluntary Reorganization Under Chapter 11
We and certain of our subsidiaries plan to file the Chapter 11 Cases with the Bankruptcy Court. The Debtors plan to commence a solicitation for acceptance of the Plan by causing the Plan and the corresponding disclosure statement to be distributed to certain creditors of the Company shortly before the Bankruptcy Filing. During the Chapter 11 Cases, the Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
For the duration of the Chapter 11 Cases, the Debtors are expected to be able to conduct normal business activities and pay all associated obligations for the period following the Bankruptcy Filing. The Debtors are also expected to be authorized to pay employee wages and benefits, and vendors and suppliers in the ordinary course of business for goods and services provided prior to the Bankruptcy Filing. During the pendency of the Chapter 11 Cases, all transactions outside of the ordinary course of business will require the prior approval of the Bankruptcy Court.
For the duration of the Chapter 11 Cases, our operations and ability to develop and execute our business plan will be subject to the risks and uncertainties associated with the Chapter 11 process as described in Part II, Item 1A, “Risk Factors.” As a result of these risks and uncertainties, the number of our shares of common stock and stockholders, assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases, and the description of our operations, properties and capital plans included in this report may not accurately reflect our operations, properties and capital plans following the Chapter 11 Cases.
For the duration of the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the Bankruptcy Filing. In addition, we have incurred significant professional and advisory fees and other costs in connection with preparation for the Chapter 11 Cases and expect that we will continue to incur significant professional and advisory fees and costs throughout the pendency of the Chapter 11 Cases.
See Part I,1, Item 1, “Financial“Unaudited Condensed Consolidated Financial Statements and Notes” – Note 1 – “Basis of Presentation” of this Quarterly ReportPresentation” for a complete discussioninformation regarding the Voluntary Reorganization Under Chapter 11 of the Chapter 11 CasesBankruptcy Code.
Fresh Start Accounting
Beginning on the Emergence Date, we applied fresh start accounting, which resulted in a new basis of accounting and we became a new entity for financial reporting purposes. As a result of the application of fresh start accounting and the effects of the implementation of the Plan, the consolidated financial statements after February 2, 2021 are not comparable with the consolidated financial statements on or prior to that date. See Part 1, Item 1, “Unaudited Condensed Consolidated Financial Statements and Notes” – Note 3 – “Fresh Start Accounting” for additional information.
Divestiture
See Part 1, Item 1, “Unaudited Condensed Consolidated Financial Statements and Notes” – Note 23 – “Subsequent Events” for additional information.
Waivers to Credit Agreement
See Part 1, Item 1, “Unaudited Condensed Consolidated Financial Statements and Notes” – Note 23 – “Subsequent Events” for additional information.
Credit Facility
See Part 1, Item 1, “Unaudited Condensed Consolidated Financial Statements and Notes” – Note 9 – “Debt” for additional information.
Stockholders Agreement
On the Emergence Date, in order to implement the governance related provisions reflected in the Plan, the stockholder’s agreement, dated February 2, 2021 (the “Stockholders Agreement”), was executed, to provide for certain governance matters. Other than the obligations related to Confidential Information (as defined in the Stockholders Agreement), the rights and preferences of each stockholder under the Stockholders Agreement will terminate when such stockholder ceases to own any shares of Class A common stock.
The foregoing description of the Stockholders Agreement is qualified in its entirety by the full text of the document, which is incorporated herein by reference.
Amendments to Stockholders Agreement
The Company and stockholders holding a majority of the Company’s Class A common stock entered into that certain amendment to the Stockholders Agreement, effective May 14, 2021, extending the deadline to provide its stockholders unaudited consolidated quarterly financial statements from 45 days after the conclusion of a quarter to 60 days after such quarter (or, if applicable, the first business day thereafter).
The Company and stockholders holding a majority of the Company’s Class A common stock entered into that certain Second Amendment to the Stockholders Agreement, effective May 31, 2021, extending the deadline to provide its stockholders the unaudited consolidated quarterly financial statements for the quarter ended March 31, 2021 to no later than July 15, 2021.
The Company and stockholders holding a majority of the Company’s Class A common stock entered into that certain Third Amendment to the Stockholders Agreement, effective as of July 14, 2021, extending the deadline to provide its stockholders the unaudited consolidated quarterly financial statements for the quarters ended March 31, 2021 and June 30, 2021 to no later than September 30, 2021 and October 31, 2021, respectively.
Departure and Appointment of Directors
Pursuant to the Plan, as of the Emergence Date, the following directors ceased to serve on the Predecessor’s board of directors: Terence E. Hall, Peter D. Kinnear, Janiece M. Longoria, Michael M. McShane, James M. Funk and W. Matt Ralls. All officers immediately prior to the Emergence Date were retained in their existing positions upon the Emergence Date, subject to the terms of the Plan.
Pursuant to the Plan and the Stockholders Agreement, our current Board of Directors (the “Board”) consists of the following six members:
Joseph Citarrella
Daniel E. Flores
Michael Y. McGovern
Julie J. Robertson
Krishna Shivram
Timothy J. Winfrey
Departure of Executive Officers
On March 22, 2021, the Company announced that David Dunlap, the Company’s President and Chief Executive Officer and a member of the Board, and Westy Ballard, the Company’s Executive Vice President, Chief Financial Officer and Treasurer, had each resigned from all positions with the Company effective March 16, 2021 (the “Resignation Date”). Mr. Dunlap and Mr. Ballard resigned from the Company to pursue other opportunities and their departures are not related to any disagreements regarding financial disclosures, accounting matters or other business issues. Each of Mr. Dunlap and Mr. Ballard have entered into a waiver and release agreement which contains, among other things, a release of claims and an acknowledgment that the individuals will continue to be bound by the terms of their existing restrictive covenant agreements with the Company contained in their respective employment agreements, and an acknowledgment that each will receive predetermined amounts under such employment agreements, provided that such individual does not subsequently revoke his waiver and release agreement, as follows: (i) the executive’s base salary through the date of termination, earned and vested benefits under Company long-term incentive and employee benefit plans and programs, and medical or other welfare benefits required by law or the applicable plan (including payment of the executive’s accrued deferred compensation and supplemental retirement plan benefits, as applicable, and the payments, if any, earned under the executive’s previously-disclosed 2018 and 2019 performance share unit awards, provided that any payment under the 2019 performance share unit award will be pro-rated for the portion of the performance period elapsed prior to termination); (ii) a lump sum payment equal to (x) two times the sum of the executive’s annual salary plus target annual bonus, and (y) the executive’s pro-rated target annual bonus for the year of termination, the payments in this clause (ii) resulting in a lump sum cash payment to Mr. Dunlap and Mr. Ballard of approximately $3.7 million and $1.7 million, in each case minus required withholding and deductions, respectively; and (iii) Company-paid healthcare continuation benefits for up to 24 months for the individual and the individual’s spouse and family.
On March 18, 2021, Michael Y. McGovern, the Chairman of the Company’s Board, was appointed Executive Chairman and effective as of the Resignation Date assumed the functions of the Company’s Principal Executive Officer on an interim basis until Mr. Dunlap’s successor is identified, and James Spexarth, the Company’s former Chief Accounting Officer, effective as of the Resignation Date was appointed to also serve as interim Chief Financial Officer of the Company. Effective August 19, 2021, the Board announced the appointment of Mr. Spexarth to serve as the Company’s Executive Vice President, Chief Financial Officer and Treasurer. See the filed 8-K dated August 19, 2021 for further information.
Effective April 21, 2021, William B. Masters, a named executive officer of the Company, resigned from his position as the Company’s Executive Vice President and General Counsel and transitioned to the role of a senior advisor to the Company.
The Company and Mr. Masters entered into a Transition Agreement, dated April 21, 2021 (the “Transition Agreement”), which replaced the June 15, 2013 employment agreement between Mr. Masters and the Company in its entirety except for certain surviving provisions set forth in the Transition Agreement, including the restrictive covenant agreements contained in his employment agreement (other than
the one-year non-compete covenant that otherwise would apply if Mr. Masters voluntarily resigns his employment with the Company with or without good cause).
On July 7, 2021, Blaine Edwards was promoted to Executive Vice President and General Counsel. Mr. Edwards previously served as Assistant General Counsel and has been employed at the Company for ten years.
On September 9, 2021, A. Patrick Bernard, a named executive officer of the Company, and the Company mutually agreed that Mr. Bernard will retire from his position as the Company’s Executive Vice President, effective March 31, 2023. On September 9, 2021, Mr. Bernard was also assigned to serve as President of the Company’s International segment in connection with the transitioning of Mr. Bernard’s duties, in accordance with the terms of the Transition and Retirement Agreement (as defined below).
In connection with his retirement, Mr. Bernard entered into a Transition and Retirement Agreement with the Company on September 9, 2021 (the “Transition and Retirement Agreement”), which was approved by the Board. Pursuant to the terms of the Transition and Retirement Agreement, Mr. Bernard will continue to serve with the Company through the first to occur of March 31, 2023 or his earlier termination of employment. Mr. Bernard’s separation from the Company will deemed to be a termination without Cause under section 5(a)(iv) of his employment agreement with the Company, effective June 15, 2013 (“Employment Agreement”), a composite form of which was previously filed with the SEC. Between September 9, 2021 and March 31, 2023, Mr. Bernard will be paid an amount based on his current annualized base salary of $400,000 (increased as of July 1, 2021 from his previous base of $302,400) bi-weekly, and Mr. Bernard and his family will remain eligible for continued participation in all medical and other welfare benefit plans generally available to the Company’s executive officers. Following March 31, 2023 (or earlier retirement date, if applicable), pursuant to governing law and independent of the Transition and Retirement Agreement, Mr. Bernard may elect COBRA benefit continuation coverage.
Unless earlier terminated, on March 31, 2023, Mr. Bernard will be entitled to, among other things, the severance payments set forth in section 6(c) of his Employment Agreement. Mr. Bernard’s severance payments include a payment equal to two times the sum of the applicable base salary then in effect and the applicable target bonus in the Company’s annual incentive plan for that fiscal year. Under the terms of the Transition and Retirement Agreement, Mr. Bernard has agreed to release the Company from various claims and agrees not to sue the Company for those claims, subject to certain exceptions required by applicable law.
2021 Management Incentive Plan
See Part 1, Item 1, “Unaudited Condensed Consolidated Financial Statements and Notes” – Note 23 – “Subsequent Events” for additional information.
Restricted Stock Grants
See Part 1, Item 1, “Unaudited Condensed Consolidated Financial Statements and Notes” – Note 23 – “Subsequent Events” for additional information.
Senior Notes-Prepetition Indebtedness
As part of the transactions undertaken pursuant to the Plan, the record holders of certain of the 7.125% Notes and the 7.750% Notes contributed all of their allowed claims described in the Plan in exchange for either (i) a cash payout to be entirely funded by the Equity Rights Offering, or (ii) shares of the Class A common stock. See Part 1, Item 1, “Unaudited Condensed Consolidated Financial Statements and Notes” – Note 2 “Emergence from Voluntary Reorganization under Chapter 11” and Note 9 – “Debt” for additional information.
COVID-19 Pandemic and Market Conditions
Our operations continue to be disrupted due to the circumstances surrounding the COVID-19 pandemic. The significant business disruption resulting from the COVID-19 pandemic has impacted our customers, vendors and suppliers in all geographical areas where we operate. The closure of non-essential business facilities and restrictions on travel put in place by governments around the world have significantly reduced economic activity. Also, the COVID-19 pandemic has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, the proper functioning of financial and capital markets, foreign currency exchange rates, and interest rates. For example, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which increases the cost of capital and adversely impacts access to capital. Additionally, recognized health risks associated with the COVID-19 pandemic have altered the policies of companies operating around the world, resulting in these companies instituting safety programs similar to what both domestic and international governmental agencies have implemented, including stay at home orders, social distancing mandates, and other community oriented health objectives. We are complying with all such ordinances in our operations across the globe. Management believes it has proactively addressed many of the known operational impacts of the COVID-19 pandemic to the extent possible and will strive to continue to do so, but there can be no guarantee the measures will be fully effective.
Commodity prices during 2021 will continue to be impacted by the global containment of the virus, pace of economic recovery, as well as changes to OPEC+ production levels. There is increased economic optimism in 2021 as governments worldwide continue to distribute the COVID-19 vaccines. However, although vaccination campaigns are underway, several regions, including areas of the United States,
Furthermore,have been and continue to deal with a rebound in the pandemic. There is also concern about whether vaccines will be effective against different strains of the virus that have developed and may develop in the future. West Texas Intermediate (WTI) oil spot prices have recovered to pre-pandemic levels. OPEC+ continues to meet regularly to review the state of global oil supply, demand and inventory levels. Even though signs of economic recovery centered on COVID-19 mitigation, global vaccine distribution and re-opening efforts make demand for oil and gas industry has experienced unprecedented price disruptions during 2020, due in partdifficult to significantly decreasedproject, we believe demand as a result of the COVID-19 pandemic, as activity significantly declined in the face of depressed crude oil pricing. The U.S. oilis recovering and gas rig count fell by more than 60% in the second quarter of 2020 and by more than 30% in the third quarter of 2020. The number of oil and gas rigs outside of the U.S. and Canada fell by more than 10% in the third quarter of 2020 to an average of 731 rigs from 834 rigs in the second quarter of 2020. These market conditions have significantly impacted our business, with third quarter 2020 revenue decreasing to $166.9 million, as compared to $356.6 million in the third quarter of 2019, or 53%. As customers continue to revise their capital budgets in order to adjust spending levels in response to lower commodity prices we have experienced significant pricing pressure for our products and services.will be positively impacted.
Low oil prices and industry volatility are likely to continue through the near and long-term. In the second quarter of 2020, OPEC+ reached a supply curtailment agreement of up to 10 million barrels per day, which drove expectations for future hydrocarbon supply lower. However, on July 15, 2020, an alliance of certain OPEC nations led by Saudi Arabia agreed to increase oil production starting in August 2020, citing theoretically increased demand due to the relaxing of COVID-19 pandemic restrictions. As the global outbreak of the COVID-19 pandemic continues to rapidly evolve, management expects it to continue to materially and adversely affect our revenue, financial condition, profitability, and cash flow for an indeterminate period of time.
New York Stock Exchange Delisting
On September 17, 2020, we were notified by the NYSE that due to our failure to maintain an average global market capitalization over a consecutive 30-day trading period of at least $15 million, pursuant to Section 802.01B of the NYSE Listed Company Manual, the NYSE had determined to commence proceedings to delist the Company’s common stock from the NYSE.
Trading of our common stock was suspended effective as of approximately 4:00 p.m. Eastern Time on September 17, 2020. Effective September 18, 2020, our common stock commenced trading on the OTCQX marketplace under the trading symbol “SPNX”. On October 2, 2020, the NYSE applied to the SEC to delist or common stock from trading on the NYSE and to remove it from registration under Section 12(b) of the Exchange Act. The delisting became effective 10 days after the filing of the Form 25. In accordance with Rule 12d2-2 of the Exchange Act, the de-registration of our common stock under Section 12(b) of the Exchange Act will become effective 90 days, or such shorter period as the SEC may determine, from the date of the Form 25 filing.
Business Outlook
Demand for our products and services has declined, and will continue to decline, as long as our customers continue to revise their capital budgets downward and adjust their operations in response to lower oil prices and demand due to the COVID-19 pandemic. In addition to the RSA and our preparation for the Bankruptcy Filing, throughout 2020 we have taken actions to mitigate the near and long-term financial impacts on our operating results to ensure adequate liquidity and capital resources are available to maintain our operations until the oil and gas industry and global economic conditions improve. These actions include, but are not limited to:
We implemented continued actions to reduce our payroll costs through a combination of salary reductions, reductions in force and furloughs.
We exited unnecessary facilities and consolidated our operational footprint to align the size of our operations with current demand.
We reduced discretionary expenses and deferred any non-essential capital spending.
We are leveraging governmental relief efforts to defer payroll and other tax payments, which have benefited our future cash flows for 2020, including a tax refund of $30.5 million that was received in July 2020.
We have taken, and will continue to take, other actions to reduce costs and preserve cash in order to successfully navigate the current economic environment, including limiting expected capital expenditures to no more than $50.0 million for the full fiscal year 2020.
The COVID-19 pandemic continues to adversely impact many jurisdictions and continues to disrupt normal economic activities. As a result, the demand for energy continues to be constrained with continued adverse consequences for our customers and for us. Further, there is an increasing number of bankruptcies in our industry. Our collection of receivables could be materially delayed and/or impaired for the duration of the COVID-19 pandemic. The duration and severity of the COVID-19 pandemic and the resulting potential for continued losses subjects us to significant uncertainty and may cause significant variability in our allowance for credit losses in future periods. We expect the negative impacts of the COVID-19 pandemic to be felt throughout 2020 and into 2021. As the nature of the COVID-19 pandemic is inherently uncertain, we are unable to reasonably estimate the duration and ultimate impacts of the COVID-19 pandemic, including the timing or level of any subsequent recovery. We cannot be certain of the degree of impact on our business, result of operations and/or financial position for future periods.
For more information on the Chapter 11 Cases, see Note 1 of the notes to our condensed consolidated financial statements included in Part I, Item 1, “Financial Statements – Note 1 – Basis of Presentation” of this Quarterly Report.
Industry Trends
The oil and gas industry is both cyclical and seasonal. The level of spending by oil and gas companies is highly influenced by current and expected demand and future prices of oil and natural gas. Changes in spending result in an increased or decreased demand for our services and products. Rig count is an indicator of the level of spending by oil and gas companies. OurThe Company’s financial performance is significantly affected by the rig count in the U.S. land and offshore market areas as well as oil and natural gas prices and worldwide rig activity, which are summarized in the tables below.
Three Months Ended September 30, | Nine Months Ended September 30, | March 31, | ||||||||||||||||||||||||
2020 | 2019 | % Change | 2020 | 2019 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||
Worldwide Rig Count (1) | ||||||||||||||||||||||||||
U.S.: | ||||||||||||||||||||||||||
Land | 241 | 894 | -73% | 461 | 961 | -52% | 378 | 764 | -51% | |||||||||||||||||
Offshore | 13 | 26 | -50% | 16 | 23 | -30% | 15 | 21 | -29% | |||||||||||||||||
Total | 254 | 920 | -72% | 477 | 984 | -52% | 393 | 785 | -50% | |||||||||||||||||
International (2) | 731 | 1,144 | -36% | 879 | 1,094 | -20% | 698 | 1,074 | -35% | |||||||||||||||||
Worldwide Total | 985 | 2,064 | -52% | 1,356 | 2,078 | -35% | 1,091 | 1,859 | -41% | |||||||||||||||||
Commodity Prices (average) | ||||||||||||||||||||||||||
Crude Oil (West Texas Intermediate) | $ | 40.89 | $ | 56.34 | -27% | $ | 38.04 | $ | 57.04 | -33% | $ | 58.09 | $ | 41.00 | 42% | |||||||||||
Natural Gas (Henry Hub) | $ | 2.00 | $ | 2.38 | -16% | $ | 1.87 | $ | 2.61 | -28% | $ | 3.50 | $ | 1.90 | 84% | |||||||||||
(1) Estimate of drilling activity as measured by the average active drilling rigs based on Baker Hughes Co. rig count information.
(2) Excludes Canadian Rig Count.
For
The following table sets forth consolidated results of operations for the third quarter of 2020, our revenue was $166.9 millionperiods indicated. The Successor Period and the net loss was $157.3 million, orCurrent Predecessor Period are distinct reporting periods as a $10.61 loss per share. Includedresult of the emergence from bankruptcy on the Emergence Date. References in these results of operations to changes in comparison to the Prior Predecessor Quarter combine the Successor Period and Current Predecessor Period results for the three months ended September 30, 2020 was a pre-tax chargeMarch 31, 2021 in order to provide some comparability of $2.9 million relatedsuch information to the reductionPrior Predecessor Quarter. While this combined presentation is not presented according to generally accepted accounting principles in valuethe United States of long-lived assets, $4.4 millionAmerica (“GAAP”) and no comparable GAAP measures are presented, management believes that providing this financial information is the most relevant and useful method for inventory write-down, $3.2 million for severance, and $25.7 million of expenses relatedmaking comparisons to restructuring activities. This compares to net loss of $65.1 million,the corresponding Prior Predecessor Quarter as reviewing the Successor Period results in isolation would not be useful in identifying trends in or a $4.39 loss per share, for the second quarter of 2020, on revenue of $183.9 million.
Third quarter 2020 revenue in our Onshore Completion and Workover Services segment increased 2% sequentially to $21.6 million, as compared to $21.2 million for the second quarter of 2020. The increase in revenue is primarily attributable to an increase in well servicing rigs activity.overall operating performance.
Third quarter 2020 revenue in our Production Services segment increased 3% sequentially to $56.3 million, as compared to $54.5 million for the second quarter of 2020. U.S. offshore revenue increased 4% to $6.6 million primarily due to an increase in in hydraulic workover and snubbing activities. U.S. land revenue decreased 12% sequentially to $9.8 million primarily due to a decrease in pressure control activities. Revenue from international market areas increased 8% sequentially to $39.9 million primarily due to an increase in electric line and hydraulic workover and snubbing activities.
Third quarter 2020 revenue in our Technical Solutions segment decreased 19% sequentially to $33.0 million, as compared to $40.8 million in the second quarter of 2020. U.S. offshore revenue decreased 33% sequentially to $15.8 million due to a decrease in completion tools and products. International revenue decreased 11% sequentially to $12.6 million, primarily due to a decrease in in completion tools and products. U.S. land revenue increased 48% sequentially to $4.7 million, primarily due to an increase in demand for well control services.
Successor | Predecessor | Non-GAAP | Predecessor | |||||||||||||
For the period February 3, 2021 through March 31, 2021 | For the Period January 1, 2021 through February 2, 2021 | For the Combined Three Months ended March 31, 2021 | For the Three Months Ended March 31, 2020 | Change | ||||||||||||
Revenues | $ | 129,095 | $ | 56,647 | $ | 185,742 | $ | 321,497 | $ | (135,755) | ||||||
Cost of revenues | 89,698 | 39,962 | 129,660 | 211,686 | (82,026) | |||||||||||
Depreciation, depletion, amortization and accretion | 52,807 | 10,498 | 63,305 | 41,355 | 21,950 | |||||||||||
General and administrative expenses | 20,937 | 12,164 | 33,101 | 65,157 | (32,056) | |||||||||||
Restructuring and other expenses | 8,383 | 1,270 | 9,653 | - | 9,653 | |||||||||||
Reduction in value of assets | - | - | - | 16,522 | (16,522) | |||||||||||
Loss from operations | (42,730) | (7,247) | (49,977) | (13,223) | (36,754) | |||||||||||
Other income (expense): | ||||||||||||||||
Interest income (expense), net | 215 | 204 | 419 | (25,134) | 25,553 | |||||||||||
Reorganization items, net | - | 335,560 | 335,560 | - | 335,560 | |||||||||||
Other income (expense): | (2,845) | (2,104) | (4,949) | (4,232) | (717) | |||||||||||
Income (loss) from continuing operations before income taxes | (45,360) | 326,413 | 281,053 | (42,589) | 323,642 | |||||||||||
Income tax benefit (expense) | 7,852 | (59,901) | (52,049) | 10,254 | (62,303) | |||||||||||
Net income (loss) from continuing operations | (37,508) | 266,512 | 229,004 | (32,335) | 261,339 | |||||||||||
Income (loss) from discontinued operations, net of income tax | 878 | 2,265 | 3,143 | (47,129) | 50,272 | |||||||||||
Net income (loss) | $ | (36,630) | $ | 268,777 | $ | 232,147 | $ | (79,464) | $ | 311,611 |
ForNet income for the combined three months ended September 30, 2020, our revenueMarch 31, 2021 (the “Combined Current Quarter”) was $166.9$232.1 million, which was driven primarily by recognition of a decrease$335.6 million gain in Reorganization items, net due to debt forgiveness as part of $189.6 million, or 53%, as compared to the same period in 2019. Net loss was $157.3 million, or a $10.61 loss per share. IncludedCompany’s emergence from bankruptcy. Also included in the results for the three months ended September 30, 2020Combined Current Quarter was a pre-tax charge of $2.9$9.7 million related to the reduction in value of long-lived assets, $4.4 million for inventory
write-down, $3.2 million for severance, and $25.7 million of expenses related to restructuring activities. This compares to a net loss for the three months ended September 30, 2019Prior Predecessor Quarter of $38.4 million, or a $2.46 loss per share.$79.5 million.
The following table compares our operating results for the three months ended September 30, 2020Revenues and 2019 (in thousands, except percentages). Cost of revenues excludes depreciation, depletion, amortization and accretion for each of our business segments.
Revenue | Cost of Revenues | ||||||||||||||||||||||
2020 | 2019 | Change | % | 2020 | % | 2019 | % | Change | |||||||||||||||
Drilling Products and | |||||||||||||||||||||||
Services | $ | 56,001 | $ | 111,185 | $ | (55,184) | -50% | $ | 23,714 | 42% | $ | 38,663 | 35% | $ | (14,949) | ||||||||
Onshore Completion and | |||||||||||||||||||||||
Workover Services | 21,559 | 75,973 | (54,414) | -72% | 21,943 | 102% | 61,338 | 81% | (39,395) | ||||||||||||||
Production Services | 56,355 | 98,787 | (42,432) | -43% | 46,115 | 82% | 82,556 | 84% | (36,441) | ||||||||||||||
Technical Solutions | 33,013 | 70,640 | (37,627) | -53% | 24,461 | 74% | 49,370 | 70% | (24,909) | ||||||||||||||
Total | $ | 166,928 | $ | 356,585 | $ | (189,657) | -53% | $ | 116,233 | 70% | $ | 231,927 | 65% | $ | (115,694) | ||||||||
Operating Segments:
Drilling Products and Services SegmentRevenues
Revenue from our Drilling Products and Services segment decreased 50% to $56.0 million for the three months ended September 30, 2020, as compared to $111.2 million for the same period in 2019. Cost of services and rentals as a percentage of revenue increased to 42% of segment revenue for the three months ended September 30, 2020, as compared to 35% for the same period in 2019. Revenue from the U.S. land market areas decreased 78% primarily as a result of decreases in revenue from rentals of premium drill pipe, bottom hole assemblies, and accommodations. Revenue from the U.S. offshore market area decreased 23% primarily due to a decrease in revenue from rentals of premium drill pipe. Revenue from the international market areas decreased 37%, primarily due to a decrease in demand for rentals of premium drill pipe.
Onshore Completion and Workover Services Segment
Revenue from our Onshore Completion and Workover Services segment decreased 72% to $21.6 million for the three months ended September 30, 2020, as compared to $76.0 million for the same period in 2019. All of this segment’s revenue is derived from the U.S. land market area. Cost of services and rentals as a percentage of revenue increased to 102% of segment revenue for the three months ended September 30, 2020, as compared to 81% for the same period in 2019. The decrease in revenue is primarily attributable to decreased activity in North America, where the average rig countCombined Current Quarter decreased by 73% during the third quarter of 2020.
Production Services Segment
Revenue from our Production Services segment for the three months ended September 30, 2020 decreased by 43%42% to $56.4$185.7 million, as compared to $98.8$321.5 million for the same period in 2019.Prior Predecessor Quarter. Cost of services and rentals as a percentage of revenue decreased to 82% of segment revenuerevenues for the three months ended September 30, 2020,Combined Current Quarter decreased by 38%, to $131.2 million, as compared to 84% for the same period in 2019. Revenue from the U.S. land market area decreased 70%, primarily due to a decrease in coiled tubing and pressure control activities. Revenue from the international market areas decreased 17%, primarily due to a decrease in electric line activities. Revenue from the U.S. offshore market area decreased 64%, primarily due to a decrease in pressure control and slickline activities.
Technical Solutions Segment
Revenue from our Technical Solutions segment decreased 53% to $33.0$211.7 million for the three months ended September 30, 2020, as compared to $70.6 million forPrior Predecessor Quarter. Both revenues and cost of revenues were severely impacted by the same periodeffects of COVID-19 on the worldwide economy, and the Company’s results were impacted by a decline in 2019. Costall business lines. The Company experienced a decline in rentals of services and rentals as a percentage of revenue increased to 74% of segment revenue for the three months ended September 30, 2020, as compared to 70% for the same period in 2019. Revenue from the U.S. land market area decreased 36%, primarily due to a decrease in demand for completion tools and products. Revenue from the international market areas decreased 44%, primarily due to a decrease in demand for well control services. Revenue derived from the U.S. offshore market area decreased 61% primarily due to a decrease in pressure control activities.
Depreciation, Depletion, Amortization and Accretion
Depreciation, depletion, amortization and accretion decreased to $35.2million during the three months ended September 30, 2020 from $45.2 million during the same period in 2019. Depreciation and amortization expense decreased for our Drilling Products and Services segment by $5.7 million, or 28%; for our Onshore Completion and Workover Services segment by $1.5 million, or 22%; and for our Production Services segment by $2.5 million, or 21%. Depreciation and amortization expense increased for our Technical Solutions segment by $0.1 million, or 2%. Depreciation expense for Corporate and Other decreased by $0.3 million, or 29%. The decrease in depreciation, depletion, amortization and accretion is primarily due to assets becoming fully depreciated.
Restructuring Expense
Restructuring expense for the three months ended September 30, 2020 totaled $25.7 million. This amount includes all of the advisory and professional expenses related to our restructuring. Also included in this total is $15.6 million related to the RSA premium paid to certain Consenting Noteholders pursuant to the RSA.
Reduction in Value of Assets
The reduction in value of assets recorded during the three months ended September 30, 2020 was $2.9 million related to the reduction in value of long-lived assets within the Technical Solutions segment.
Income Taxes
Our effective income tax rate for the three months ended September 30, 2020 was a 5% expense, as compared to a 9% expense for the same period in 2019.
Discontinued Operations
Loss from discontinued operations, net of tax, was $58.0 million for the three months ended September 30, 2020, as compared to $17.9 million for the same period in 2019. Loss from discontinued operations includes reduction in value of assets of $60.2 million for the three months ended September 30, 2020. See Note 16 to our condensed consolidated financial statements in this Quarterly Report for further discussion of the discontinued operations.
For the nine months ended September 30, 2020, our revenue was $672.3 million, a decrease of $417.0 million, or 38%, as compared to the same period in 2019. Net loss was $301.9 million, or a $20.40 loss per share. Included in the results for the nine months ended September 30, 2020 was a pre-tax charge of $19.5 million primarily related to the reduction in value of long-lived assets, $11.8 million for inventory write-down and facility closures, $10.9 million primarily for severance, $12.0 million for merger-related transactions, and $27.0 million of expenses related to restructuring activities. This compares to a net loss for the nine months ended September 30, 2019 of $157.2 million, or a $10.09 loss per share.
The following table compares our operating results for the nine months ended September 30, 2020 and 2019 (in thousands, except percentages). Cost of revenues excludes depreciation, depletion, amortization and accretion for each of our business segments.
Revenue | Cost of Revenue | ||||||||||||||||||||||
2020 | 2019 | Change | % | 2020 | % | 2019 | % | Change | |||||||||||||||
Drilling Products and | |||||||||||||||||||||||
Services | $ | 227,344 | $ | 312,946 | $ | (85,602) | -27% | $ | 81,163 | 36% | $ | 118,732 | 38% | $ | (37,569) | ||||||||
Onshore Completion and | |||||||||||||||||||||||
Workover Services | 103,957 | 273,727 | (169,770) | -62% | 98,774 | 95% | 217,115 | 79% | (118,341) | ||||||||||||||
Production Services | 212,352 | 305,239 | (92,887) | -30% | 177,624 | 84% | 240,855 | 79% | (63,231) | ||||||||||||||
Technical Solutions | 128,625 | 197,385 | (68,760) | -35% | 99,161 | 77% | 124,810 | 63% | (25,649) | ||||||||||||||
Total | $ | 672,278 | $ | 1,089,297 | $ | (417,019) | -38% | $ | 456,722 | 68% | $ | 701,512 | 64% | $ | (244,790) | ||||||||
Operating Segments:
Drilling Products and Services Segment
Revenue from our Drilling Products and Services segment decreased 27% to $227.3 million for the nine months ended September 30, 2020, as compared to $312.9 million for the same period in 2019. Cost of services and rentals as a percentage of revenue decreased to 36% of segment revenue for the nine months ended September 30, 2020, as compared to 38% for the same period in 2019. Revenue from the U.S. land market areas decreased 53% primarily as a result of decreases in revenue from rentals of premium drill pipe and bottom
hole assemblies and accommodations. Revenue from the U.S. offshore market area remained flat. Revenue from the international market areas decreased 14% primarilyas well as a result of decreasesdecline in revenuerevenues from rentals of premium drill pipe.
Onshore Completion and Workover Services Segment
Revenue from our Onshore Completion and Workover Services segment decreased 62% to $104.0 million for the nine months ended September 30, 2020, as compared to $273.7 million for the same period in 2019. All of this segment’s revenue is derived from the U.S. land market area. Cost ofaccommodation units, slickline services and rentals as a percentage of revenue increased to 95% of segment revenue for the nine months ended September 30, 2020, as compared to 79% for the same period in 2019. The decrease in revenue is primarily attributable to decreased activity in North America, where the average rig count decreased by 52% during the first nine months of 2020.
Production Services Segment
Revenue from our Production Services segment for the nine months ended September 30, 2020 decreased by 30% to $212.4 million, as compared to $305.2 million for the same period in 2019. Cost of servicesplug and rentals as a percentage of revenue increased to 84% of segment revenue for the nine months ended September 30, 2020, as compared to 79% for the same period in 2019. Revenue from the U.S. land market area decreased 54%, primarily due to a decrease in coiled tubing and pressure controlabandonment activities. Revenue from the international market areas increased 2%, primarily due to an increase in cementing and stimulation activities offset by a decrease in electric line activities. Revenue from the U.S. offshore market area decreased 59%, primarily due to a decrease in hydraulic workover and snubbing and electric line activities. During the nine months ended September 30, 2020, we recorded $4.1 million in reduction in value of assets.
Technical Solutions Segment
Revenue from our Technical Solutions segment decreased 35% to $128.6 million for the nine months ended September 30, 2020, as compared to $197.4 million for the same period in 2019. Cost of services and rentals as a percentage of revenue increased to 77% of segment revenue for the nine months ended September 30, 2020, as compared to 63% for the same period in 2019. Revenue from the U.S. land market area decreased 57%, primarily due to a decrease in demand for well control services. Revenue from the international market areas decreased 37%, primarily due to a decrease in activity within our well control division. Revenue derived from the U.S. offshore market area decreased 26%, primarily due to a decrease in activity within our well control division and completion tools and products. During the nine months ended September 30, 2020, we recorded $15.4 million in reduction in the value of assets.
Depreciation, Depletion, Amortization and Accretion
Depreciation, depletion, amortization and accretion decreased to $113.3was $63.3 million during the nine months ended September 30, 2020 from $152.8Combined Current Quarter compared to $41.4 million during the same period in 2019. Depreciation and amortization expense decreased for our Drilling Products and Services segment by $16.6 million, or 26%; for our Onshore Completion and Workover Services segment by $10.8 million, or 39%; for our Production Services segment by $8.8 million, or 22% and for our Technical Solutions segment by $2.5 million, or 15%. Depreciation expense for Corporate and Other decreased by $0.8 million, or 21%.Prior Predecessor Quarter. The decreaseincrease in depreciation, depletion, amortization and accretion is primarily duerelated to both an increase in the carrying value of our assets becoming fully depreciated.and lower average remaining useful lives as a result of the fair value adjustment recorded as a part of fresh start accounting.
General and Administrative Expenses
General and administrative expense was $33.1 million during the Combined Current Quarter compared to $65.2 million during the Prior Predecessor Quarter. The decrease is the result of our continued focus on limiting spending and reducing our cost structure.
Restructuring Expenseand Other Expenses
Restructuring expense forand other expenses were $9.7 million during the nine months ended September 30, 2020 totaled $27.0 million. This amount includes all ofCombined Current Quarter and primarily relate to the advisoryseverance expenses and professional expensescosts related to our restructuring. Also included in this total is $15.6 million related toexecutive officers that resigned during the RSA premium paid to certain Consenting Noteholders pursuant to the RSA.period.
Reduction in Value of AssetsReorganization items, net
During the nine months ended September 30, 2020, the Company recorded $19.5Reorganization items, net were $335.6 million in connection with the reduction in value of its long-lived assets. The reduction in value of assets was comprised of $4.1 million and $15.4 million related to property, plant and equipment in the Production Services segment and the Technical Solutions segment, respectively. The reduction in value of assets recorded during the nine months ended September 30, 2019 included $17.1 million, primarily related to the reduction in value of long-lived assets within the Onshore CompletionCurrent Predecessor Period. See Part 1, Item 1, “Unaudited Condensed Consolidated Financial Statements and Workover Services and Technical Solutions segments.Notes” – Note 3 – “Fresh Start Accounting” for additional information on reorganization items, net.
Contractual interest expense on the Predecessor’s senior unsecured notes was $8.0 million for the Current Predecessor Period, which is in excess of the $0.2 million included in interest expense, net in the condensed consolidated statements of operations because the Predecessor discontinued accruing interest with the commencement of the Chapter 11 Cases in accordance with the terms of the Plan and ASC 852.
Income Taxes
Our effective income tax rate for the nine months ended September 30, 2020 was a 6% benefit, as compared to a 12% expense for the same period in 2019. The effective tax rate for the nine months ended September 30, 2020three-month period ending March 31, 2021 was 18.5% on income from continuing operations. The tax rate is different from the statutory rate of 21% primarily impacted byfrom the filingadoption of fresh start accounting during the carryback claim under the CARES Act.period.
Discontinued Operations
Loss from discontinued operations, net ofThe effective tax was $111.4 millionrate for the nine months ended September 30,three-month ending March 31, 2020 as compared to $85.6 million forwas 24.1% on income from continuing operations. The tax rate is different from the same period in 2019. Loss from discontinued operations includes reduction in valuestatutory rate of assets of $109.6 million and $23.8 million for the nine months ended September 30, 2020 and 2019, respectively. See Note 16 to our condensed consolidated financial statements for further discussion21% primarily because of the discontinued operations.impact of the CARES Act legislation which allowed the company to carryback losses from 2018, 2019 and 2020 to prior periods for refunds of prior year income tax.
Liquidity and Capital Resources
Our cashCash flows depend, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. Certain sources and uses of cash, such as our level of discretionary capital expenditures and divestitures of non-core assets, are within our control and are adjusted as necessary based on market conditions.
Also impacting our liquidity is the state of the global economy, which impacts oil and natural gas consumption. The Company’s operations continue to be disrupted due to the circumstances surrounding the COVID-19 pandemic. The significant business disruption resulting from the COVID-19 pandemic has resultedimpacted customers, vendors and suppliers in travel restrictions,all geographical areas where the Company operates. The closure of non-essential business closuresfacilities and the institution of quarantining and other restrictions on movementtravel put in many communities. Asplace by governments around the world have significantly reduced economic activity. Also, the COVID-19 pandemic has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, the proper functioning of financial and capital markets, foreign currency exchange rates and interest rates. There is increased economic optimism in 2021 as governments worldwide continue to distribute the COVID-19 vaccines. However, although vaccination campaigns are underway, several regions, including areas of the United States, have been and continue to deal with a result, there has been a significant reductionrebound in the pandemic. There is also concern about whether vaccines will be effective against different strains of the virus that have developed and may develop in the future. Even though signs of economic recovery centered on COVID-19 mitigation, global vaccine distribution, and re-opening efforts make demand for and the prices of, crude oil and natural gas. The COVID-19 pandemic, together with other dynamics in the marketplace, has recently significantly increased borrowing costsgas difficult to project, we believe demand is recovering and in certain cases, restricted the ability of borrowers to access the capital markets and other sources of financing.prices will be positively impacted.
As a result, the COVID-19 pandemic created significant challenges that materialized in the first quarter of 2020 and continue to affect us. These include, but are not limited to, slower collections from customers, pricing pressure from customers, and pressure from suppliers to shorten payment terms or lower credit limits. In order to maintain our liquidity at levels we believed would be sufficient to meet our commitments, we undertook a number of actions, including minimizing capital expenditures and further reducing our recurring operating expenses. Ultimately, we concluded, even after taking these actions, we would not have sufficient liquidity to satisfy our debt service obligations as they came due. As a result, on September 29, 2020 we entered into the RSA which contemplates that the Debtors will file the Chapter 11 Cases and discharge all amounts outstanding under the Debtors’ Prepetition Notes.
Financial Condition and Sources of Liquidity
OurThe primary sources of liquidity during the period covered by this quarterly report on Form 10-Q have been cash and cash equivalents, availability under credit facilities, and cash generated from operations and proceeds from divestiture of non-core assets.operations. As of September 30, 2020,March 31, 2021, we had cash, cash equivalents and restricted cash of $288.0 million and had approximately $265 million of cash, cash equivalents and restricted cash at the end of October 2020.$294.1 million. During the nine months ended September 30, 2020,Successor Period and the Current Predecessor Period net cash provided by operating activities was $18.6 million.$21.4 million and $5.4 million, respectively. During the nine months ended September 30, 2020, weSuccessor Period and the Current Predecessor Period, $7.2 million and $0.8 million were received $44.1 million in cash proceeds from the divestiture of non-core assets.sale assets, respectively.
At September 30, 2020,March 31, 2021, the borrowing base on our asset-based revolving credit facilitythe Credit Facility was $97.3$120.0 million and wethe Successor had $48.5$47.5 million of letters of credit outstanding that reduced ourthe borrowing availability under the revolving credit facility. We reduced the amount of letters of credit issued through the credit facility by using $52.4 million to cash collateralize surety and other obligations in lieu of issuing letters of credit. We also deposited $25 million in an account under the lenders’ control to further secure our obligations under the revolving credit facility. At September 30, 2020, we had no borrowings outstanding on our revolving credit facility.Credit Facility.
We believe our cash flow from operations, letter of credit capacity under a potential debtorThe energy industry faces growing negative sentiment in possession asset-based credit facility and cash on hand will provide sufficient liquidity during the Chapter 11 Cases.
We believe that ourmarket which may affect the ability to continue as a going concernaccess appropriate amounts of capital and under suitable terms. While we have confidence in the level of support from our lenders, this negative sentiment in the energy industry has not only impacted our customers in North America, it is contingent on filingalso affecting the Chapter 11 Casesavailability and the Bankruptcy Court’s approval ofpricing for most credit lines extended to participants in the Plan and our abilityindustry. From time to successfully implement the Plan and obtain exit financing, among other factors. While operating as debtors-in-possession during the pendency of the Chapter 11 Cases,time we may sell or otherwisecontinue to enter into transactions to dispose of businesses or liquidatecapital assets or settle liabilities, subject tothat no longer fit the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the accompanying condensed consolidated financial statements. Further, the Plan if confirmed, could materially change the amounts and classifications of assets and liabilities reported in the condensed consolidated financial statements of this Quarterly Report.Company’s long-term strategy.
Uses of Liquidity
OurThe primary uses of liquidity during the period covered by this Quarterly Report wereare to provide support for our operating activities, restructuring activities debt service obligations and capital expenditures. We haveThe Company has incurred and expect to continue to incur significant costs associated with the Chapter 11 Cases, including fees for legal, financial and restructuring advisors to the Company, and certain of ourthe creditors. Therefore, our ability to obtain confirmationDuring the Current Predecessor Period, the Predecessor incurred $18.3 million of the Plan in a timely manner is critical to ensuring our liquidity is
sufficient during the Chapter 11 Cases. We incurred $27.0 million in restructuring expenses during the nine months ended September 30, 2020. These expenses include $15.6 million related to the RSA premium payable to certain Consenting Noteholders pursuant to the RSA and advisory and professional fees relating to the Chapter 11 Cases. Also related to the RSA is $11.7Cases and $12.0 million of fees paid in consideration for the commitment by the Backstop Commitment Parties to provide the Delayed-Draw Term Loan Facility upon ourthe emergence from bankruptcy. Webankruptcy (which ultimately did not occur). The Successor spent $37.4$4.1 million of cash on capital expenditures during the Successor Period and made $71.2the Predecessor spent $3.0 million of net interest paymentscash on capital expenditures during the nine months ended September 30, 2020. Capital expenditures of $17.2 million primarily related to the expansion and maintenance of our equipment inventory for our Drilling Products and Services segment, capital expenditures of $12.6 million primarily related to the expansion and maintenance of equipment inventory at our Production Services segment and the remaining $7.6 million of capital expenditures primarily related to the maintenance of our equipment for our Onshore Completion and Workover Services and Technical Solutions segments.
During the remainder of 2020, we expect to limit additional capital spending to no more than $12.5 million to meet our target of no more than $50.0 million in capital expenditures for 2020. We also plan to adjust our capital spending as necessary in order to adhere to the terms of the RSA and restrictions stemming from the Bankruptcy Court. However, there can be no assurance that we will be able to successfully accomplish the Bankruptcy Filing and implement the Plan.Current Predecessor Period.
Debt Instruments
We haveOn the Emergence Date, pursuant to the Plan, the Former Parent, as parent guarantor, and SESI, as borrower, entered into a Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and letter of credit issuers named therein providing for a $120.0 million asset-based secured revolving credit facility (the “Credit Facility”), which provides for revolving loans and is available for the issuances of letters of credit. The Credit Facility will mature on December 9, 2024. The borrowing base under the Credit Facility is determined by reference to SESI’s and its subsidiary guarantors’ (i) eligible accounts receivable, (ii) eligible inventory, (iii) solely during the period from February 2, 2021 until the earlier of December 9, 2022 and the date that unrestricted cash of SESI and its wholly-owned subsidiaries is less than $75.0 million, eligible premium rental drill pipe and (iv) so long as there are no loans outstanding $500at such time, certain cash of SESI and its subsidiary guarantors, less reserves established by the administrative agent in its permitted discretion. On March 31, 2021 approximately $46.6 million of 7.75% senior unsecured notes due September 2024. The indenture governingundrawn letters of credit were outstanding under the 7.75% senior unsecured notes due 2024 requires semi-annual interest payments on March 15 and September 15 of each year through the maturity date of September 15, 2024. The indenture contains customary events of default and requires that we satisfy various covenants.Credit Facility.
We also have outstanding $800Availability under the Credit Facility at any time is equal to the lesser of (i) the aggregate commitments under the Credit Facility and (ii) the borrowing base at such time. As of March 31, 2021, the borrowing base under the Credit Facility was approximately $120.0 million and the Company had $47.5 million of 7.125% senior unsecured notes due December 2021. The indentures governingletters of credit outstanding that reduced its borrowing availability under the 7.125% senior unsecured notes due 2021 require semi-annualrevolving credit facility. Subject to certain conditions, upon request and with the consent of the participating lenders, the total commitments under the Credit Facility may be increased to $170.0 million. SESI’s obligations under the Credit Facility are guaranteed by the Former Parent and all of SESI’s material domestic subsidiaries, and secured by substantially all of the personal property of the Former Parent, SESI and SESI’s material domestic subsidiaries, in each case, subject to certain customary exceptions.
Borrowings under the Credit Facility bear interest, paymentsat SESI’s option, at either an adjusted LIBOR rate plus an applicable margin ranging from 3.00% to 3.50% per annum, or an alternate base rate plus an applicable margin ranging from 2.00% to 2.50% per annum, in each case, on June 15 and December 15the basis of the then applicable consolidated fixed charge coverage ratio. In addition, SESI is required to pay (i) a letter of credit fee ranging from 3.00% to 3.50% per annum on the basis of the consolidated fixed charge coverage ratio on the aggregate face amount of all outstanding letters of credit, (ii) to the issuing lender of each year throughletter of credit, a fronting fee of no less than 0.25% per annum on the maturity dateoutstanding amount of December 15, 2021. The indentures contain customary eventseach such letter of defaultcredit and require that we satisfy various covenants.(iii) commitment fees of 0.50% per annum on the daily unused amount of the Credit Facility, in each case, quarterly in arrears.
The commencementCredit Facility contains various covenants requiring compliance, including, but not limited to, limitations on the incurrence of the Chapter 11 Cases will constituteindebtedness, permitted investments, liens on assets, making distributions, transactions with affiliates, mergers, consolidations, dispositions of assets and other provisions customary in similar types of agreements. The Credit Facility requires compliance with a fixed charge coverage ratio of 1.0 to 1.0 if either (a) an event of default has occurred and is continuing or (b) availability under our credit facilitythe Credit Facility is less than the greater of $20.0 million or 15% of the lesser of the aggregate commitments and the indentures governing our unsecured notes. However, any efforts to enforce such payment obligations under the credit facilityborrowing base. The covenant and unsecured notes will be automatically stayed as a resultother restrictions of the Bankruptcy FilingCredit Facility significantly restrict the ability to incur borrowings other than letters of credit.
See Part 1, Item 1, “Unaudited Condensed Consolidated Financial Statements and the creditors’ rights of enforcement will be subjectNotes” – Note 23 – “Subsequent Events” for additional information regarding waivers to the applicable provisions ofCredit Facility and our inability to require the Bankruptcy Code. For more information on the Chapter 11 Cases, see Note 1 of the noteslenders to our condensed consolidated financial statements included in Part I, Item 1, “Financial Statements – Note 1 – Basis of Presentation” of this Quarterly Report.make any requested advances
until the conditions described therein are satisfied.
Other Matters
Off-Balance Sheet Arrangements and Hedging Activities
At September 30, 2020, weMarch 31, 2021, the Successor had no off-balance sheet arrangements and no hedging contracts.
Recently Adopted Accounting Guidance
See Part I,1, Item 1, “Financial“Unaudited Condensed Consolidated Financial Statements and Notes” – Note 1721 – “New Accounting Pronouncements.”
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We areThe Company is exposed to market risks associated with foreign currency fluctuations and changes in interest rates. A discussion of our market risk exposure in financial instruments follows.
Foreign Currency Exchange Rates Risk
Because we operate in a numberPrior to the first quarter of countries throughout2021, the world, we conduct a portionfunctional currency of our business in currencies other than the U.S. dollar. Themajority of the international subsidiaries was US dollars and the functional currency for our international operations, other than certain operations in the United Kingdom and Europe, is the U.S. dollar, but a portion of the revenues from our international operations is paid in foreign currencies. The effects of foreign currency fluctuations are partly mitigated becausesubsidiaries was the local expenses of such international operations are also generally denominated in the same currency. We continually monitor the currency exchange risks associated with all contracts not denominated in the U.S. dollar.
Assets and liabilitiesBeginning with the first quarter of 2021, as part of adopting a new accounting policy at fresh start accounting, the functional currency of certain international subsidiaries changed from the local currency to US dollars. This brings alignment so that the entire Company’s functional currency is US dollars. Management considered the economic factors outlined in FASB ASC Topic No. 830 - Foreign Currency Matters in the United Kingdom and Europe are translated at enddetermination of period exchange rates, while income and expenses are translated at average rates for the period. Translation gains and losses are reportedfunctional currency. Management concluded that the predominance of factors support the use of the Successor parent’s currency as the foreignfunctional currency and resulted in a change in functional currency to US dollars for all international subsidiaries.
The change in functional currency is applied on a prospective basis beginning with the first quarter of 2021 and translation adjustments for prior periods will continue to remain as a component of accumulated other comprehensive loss in stockholders’ equity (deficit).loss.
We doThe Company does not hold derivatives for trading purposes or use derivatives with complex features. When we believe prudent, we enterthe Company enters into forward foreign exchange contracts to hedge the impact of foreign currency fluctuations. We doThe Company does not enter into forward foreign exchange contracts for trading or speculative purposes. At September 30, 2020, weMarch 31, 2021, the Successor had no outstanding foreign currency forward contracts.
Interest Rate Risk
At September 30, 2020, weMarch 31, 2021, the Successor had no variable rate debt outstanding.
Commodity Price Risk
OurThe Company’s revenues, profitability and future rate of growth significantly depend upon the market prices of oil and natural gas. Lower prices may also reduce the amount of oil and natural gas that can economically be produced.
For additional discussion, see Part 1, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management has established and maintains a system of disclosure controls and procedures to provide reasonable assurances that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is appropriately recorded, processed, summarized and reported within the time periods specified by the SEC. In addition, our disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. An evaluation was carried out, under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), regarding the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures as of March 31, 2021 were not effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms, and is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding disclosures as a result of the material weakness in our internal control over financial reporting described below. Material Weakness in Internal Control Over Financial Reporting A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness was identified in our internal control over financial reporting as we did not effectively operate control activities to appropriately consider all potential income tax alternatives relating to uncertain tax positions. This material weakness did not result in a misstatement to the consolidated financial statements, however this material weakness could result in a misstatement of the income tax related accounts or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Management’s Plan to Remediate Material Weakness In order to address the material weakness described above under “Material weakness in internal control over financial reporting”, the Company’s management has implemented a remediation plan to address the control deficiency that led to this material weakness, including the following: Reinforcing the Company’s controls for identifying and reviewing potential uncertain tax positions; and Reinforcing the Company’s controls to evaluate, resolve, and document the related conclusions and accounting treatment for uncertain tax positions. Although we have implemented the enhancements described above, the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Based on its evaluation, the controls described above have not had sufficient time for management to conclude that they are operating effectively. Therefore, the material weakness described above existed at March 31, 2021 and will continue to exist until the controls described above have had sufficient time for management to conclude that they are effective. Changes in Internal Control Over Financial Reporting There have been no changes in internal control over financial reporting during the quarter ended March 31. 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we arethe Company is involved in various legal actions incidental to our business. The outcome of these proceedings is not predictable.unpredictable. See Part I,1, Item 1, “Financial“Unaudited Condensed Consolidated Financial Statements and Notes” – Note 1419 – “Contingencies.”
For more information on the Chapter 11 Cases, see Part I,1, Item 1, “Financial“Unaudited Condensed Consolidated Financial Statements and Notes” – Note 1 – “Basis of Presentation” and Part I,1, Item 2, Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 1A. Risk Factors
For information regarding certain risks relating to ourthe Company’s operations, any of which could negatively affect ourthe Company’s business, financial condition, operating results or prospects, see Part I, Item 1A, “Risk Factors” of ourthe Annual Report on Form 10-K for the year ended December 31, 2019 (the Annual Report) and Part II, Item 1A, “Risk Factors” of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 (the Quarterly Reports).Report. There have been no material changes to the risk factors previously disclosed under the caption “Risk Factors” in ourthe Annual Report and Quarterly Reports, except as set forth below.
Additional risks and uncertainties not currently known to us or that we currently deem immaterial may materially adversely affect our business, financial condition or results of operations or result in changes to the risk factors previously disclosed under the caption “Risk Factors” in our Annual Report. The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding any statement in this report or elsewhere. The following information should be read in conjunction with the condensed consolidated financial statements and related notes herein and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report.quarterly report on Form 10-Q.
In connection with the preparation of our consolidated financial statements as of and for the quarter ended March 31, 2021, our previous independent registered public accounting firm identified a material weakness in our internal control over financial reporting related to the design of the Company’s control to engage the appropriate specialists to assist in evaluating the income tax consequences of complex non-routine transactions, such as the Plan. If we makeare not able to remediate the Bankruptcy Filing, the Chapter 11 Cases may have a material adverse impact on our business,weakness and otherwise to maintain an effective system of internal control over financial condition, results of operations and cash flows. In addition, the consummation of the Plan will resultreporting in the cancellation and exchange offuture, our equity securities, including our common stock.
If we make the Bankruptcy Filing, the Chapter 11 Cases could have a material adverse effect on our business, financial condition, liquidity, results of operations and cash flows. During the pendency of the Chapter 11 Cases, our managementstatements may be required to spend a significant amount of timematerially misstated and effort dealing with restructuring matters rather than focusing exclusively on our business operations. Bankruptcy Court protection and operating as debtors-in-possession may also make it more difficult to retain management and the key personnel necessary for the success of our business. In addition, during the pendency of the Chapter 11 Cases, our customers might lose confidence in our ability to reorganize our business successfully and may seek to establish alternative commercial relationships, renegotiate the terms of our agreements, terminate their relationships with us or require financial assurances from us. Customersinvestors may lose confidence in the accuracy and completeness of our abilityfinancial reports. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We are working to provide themremediate the level of service they expect, which may result inmaterial weakness and are taking steps to strengthen our internal control over financial reporting. While we are undertaking efforts to remediate this material weakness, the material weakness will not be considered remediated until our remediation plan has been fully implemented, the applicable controls operate for a significant decline in our revenues, profitability and cash flow.
Other significant risks include or relate to the following:
the effects of the filing of the Chapter 11 Cases on our business and the interests of various constituents, including our stockholders;
Bankruptcy Court rulings in the Chapter 11 Cases, including with respect to relief requested by both the Debtors and non-Debtor parties;
our ability to operate within the restrictions and the liquidity limitations of a potential debtor in possession asset-based credit facility (the DIP Credit Facility) and any related orders entered by the Bankruptcy Court in connection with the Chapter 11 Cases;
our ability to maintain strategic control as debtors-in-possession during the pendency of the Chapter 11 Cases;
the lengthsufficient period of time, and we have concluded, through testing, that we will operate with Chapter 11 protectionthe newly implemented and the continued availability ofenhanced controls are operating capital during the pendency of the Chapter 11 Cases;
increased advisory costs during the pendency of the Chapter 11 Cases;
the risks associated with restrictions on our ability to pursue some of our business strategies during the pendency of the Chapter 11 Cases;
our ability to satisfy the conditions precedent to consummate a Plan;
the potential adverse effects of the Chapter 11 Cases on our business, cash flows, liquidity, financial condition and results of operations;
the ultimate outcome of the Chapter 11 Cases in general;
the cancellation of our existing equity securities, including our outstanding shares of common stock, in the Chapter 11 Cases;
the potential material adverse effects of claims that are not discharged in the Chapter 11 Cases;
uncertainties regarding the reactions of our customers, prospective customers and service providers to the Chapter 11 Cases;
uncertainties regarding our ability to retain and motivate key personnel; and
uncertainties and continuing risks associated with our ability to achieve our stated goals and continue as a going concern.
Because of the risks and uncertainties associated with the Chapter 11 Cases,effectively. At this time, we cannot predict the success of such efforts or quantify the ultimate impact that events occurring during the Chapter 11 Cases may have on our business, cash flows, liquidity, financial condition and results of operations, nor can we provide any assurance as to our ability to continue as a going concern.
If we file the Chapter 11 Cases, realization of assets and liquidation of liabilities will be subject to uncertainty.
If we make the Bankruptcy Filing, delays in the Chapter 11 Cases may increase the risk of us being unable to reorganize our business and emerge from bankruptcy and increase our costs associated with the Chapter 11 Cases.
There can be no assurance that the Plan will become effective in accordance with its terms on the timeline we anticipate, or at all if we make the Bankruptcy Filing. Prolonged Chapter 11 proceedings could adversely affect our relationships with customers and employees, among other parties, which in turn could adversely affect our business, competitive position, financial condition, liquidity and results of operations and our ability to continue as a going concern. A weakeningoutcome of our financial condition, liquidity and results of operations could adversely affect our ability to implement the Plan (or any other Chapter 11 plan). If we are unable to consummate the Plan, we may be forced to liquidate our assets.
If we make the Bankruptcy Filing, we will be subject to the risks and uncertainties associated with our exclusive right to file a plan of reorganization.
At the outset of a Chapter 11 case, the Bankruptcy Code provides debtors-in-possession the exclusive right to file and solicit acceptance of a plan of reorganization for the first 120 daysassessment of the bankruptcy case, subject to extension at the discretion of the court. All other parties are prohibited from filing or soliciting a plan of reorganization during this period. If the Bankruptcy Court terminates that right or the exclusivity period expires, there could be a material adverse effect on our ability to achieve confirmation of a plan in order to achieve our stated goals in the event we make the Bankruptcy Filing. The possible decision of creditors and/or other third parties, whose interest may be inconsistent with our own, to file alternative plans of reorganization could further protract the Chapter 11 Cases, leading us to continue to incur significant professional fees and costs. Because of these risks and uncertainties associated with the termination or expiration of such exclusivity rights, we cannot predict or quantify the ultimate impact that events occurring during the Chapter 11 Cases may have on our business, cash flows, liquidity, financial condition and results of operations, nor can we predict the ultimate impact that events occurring during the Chapter 11 Cases may have on our corporate or capital structure.
Adverse publicity in connection with the proposed Chapter 11 Cases or otherwise could negatively affect our businesses.
Adverse publicity or news coverage relating to us, including, but not limited to, publicity or news coverage in connection with the proposed Chapter 11 Cases, may negatively impact our efforts to establish and promote a positive image after emergence from the Chapter 11 Cases.
The RSA is subject to significant conditions and milestones that may be difficult for us to satisfy.
There are certain material conditions we must satisfy under the RSA, including the timely satisfaction of milestones in the Chapter 11 Cases, which include the consummation of the transactions contemplated by the Plan. Our ability to timely complete such milestones is subject to risks and uncertainties, many of which are beyond our control.
Even if we file the Chapter 11 Cases, the Plan may not become effective.
Even if we file the Chapter 11 Cases and the Plan is confirmed by the Bankruptcy Court, it may not become effective because it is subject to the satisfaction of certain conditions precedent (some of which are beyond our control). There can be no assurance that such conditions will be satisfied and, therefore, that the Plan will become effective and that the Debtors will emerge from the Chapter 11 Cases as contemplated by the Plan. If the effective date of the Plan is delayed, the Debtors may not have sufficient cash available to operate their businesses. In that case, the Debtors may need new or additional post-petition financing, which may increase the cost of consummating the Plan. There can be no assurance of the terms on which such financing may be available or if such financing will be available.
Even if we file the Chapter 11 Cases and a Chapter 11 Plan is consummated, we may not be able to achieve our stated goals.
Even if a Chapter 11 Plan is consummated, we may continue to face a number of risks, such as changes in economic conditions, changes in our industry, changes in demand for our services and increasing expenses. Some of these risks become more acute when a case under the Bankruptcy Code continues for a protracted period without indication of how or when the transactions under a Chapter 11 Plan will close. As a result of these and other risks, we cannot guarantee that if we file the Chapter 11 Cases that a Chapter 11 Plan will achieve our stated goals.
Our long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time.
We face uncertainty regarding the adequacy of our liquidity and capital resources and have extremely limited, if any, access to additional financing. In addition to the cash requirements necessary to fund our ongoing operations, we have incurred significant professional fees
and other costs in connection with preparation for the Chapter 11 Cases and expect that we will continue to incur significant professional fees and other costs throughout the Chapter 11 Cases in the event they are filed.remediation efforts. We cannot assure you that cash on hand, letters of credit under a potential DIP Credit Facility, and cash flow from operationsour efforts will be sufficient to continue to fundremediate this material weakness in our operations and allow us to satisfy our obligations related to the Chapter 11 Cases, if filed.
The Debtors expect to incur senior secured obligations under the DIP Credit Facility after making the Bankruptcy Filing. Upon entry of the interim order in respect of the DIP Credit Facility, letters of credit under the Prepetition Credit Agreement are expected to be deemed to be outstanding letters of credit under the DIP Credit Facility and are expected to be permitted to be extendedinternal control over financial reporting, or renewed. Upon entry of the final order in respect of the DIP Credit Facility the Borrower is also expected to be able to request issuances of new letters of credit under the DIP Credit Facility, subject to its terms and conditions.
Upon our exit from bankruptcy, the DIP Credit Facility is expected to convert into an asset-based revolving credit facility (the Exit ABL Facility). Upon conversion into the Exit ABL Facility, letters of credit under the DIP Credit Facility are expected to be deemed to be letters of credit outstanding under the Exit ABL Facility.
If we make the Bankruptcy Filing, our liquidity, including our ability to meet our ongoing operational obligations, depends on, among other things: (1) our ability to comply with the terms and conditions of any order governing the use of cash collateral that may be entered by the Bankruptcy Court in connection with the Chapter 11 Cases, (2) our ability to maintain adequate cash on hand, (3) our ability to generate cash flow from operations, (4) our ability to consummate the Plan or other alternative restructuring transaction, (5) the cost, duration and outcome of the Chapter 11 Cases, (6) our ability to access credit support in the form of letters of credit under the DIP Credit Facility and (7) our ability to access capital under the Exit ABL Facility and/or the Delayed-Draw Term Loan Facility upon our emergence from bankruptcy.
Under certain limited circumstances, the Chapter 11 Cases may be converted to cases under Chapter 7 of the Bankruptcy Code.
If we make the Bankruptcy Filing, upon a showing of cause, the Bankruptcy Court may convert the Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. We believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to our creditors than those provided for in a plan of reorganization because of: (1) the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than in a controlled manner and as a going concern; (2) additional administrative expenses involved in the appointment of a Chapter 7 trustee; and (3) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of executory contracts in connection with a cessation of operations.
If we file the Chapter 11 Cases, our historical financial information may not be indicative of our future performance, which may be volatile.
During the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the filing of the Chapter 11 Cases. In addition, if we emerge from Chapter 11, the amounts reported in subsequent consolidated financial statements may materially change relative to our historical consolidated financial statements. We also will be required to adopt fresh start accounting, in which case our assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on our historical consolidated balance sheets. Our financial results after the application of fresh start accounting may be different from historical trends.
We may be subject to claims thatmaterial weaknesses will not be dischargedidentified in the Chapter 11 Cases, if we make the Bankruptcy Filing, which could have a material adverse effect on our business, cash flows, liquidity, financial condition and results of operations.
The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from, among other things, substantially all debts arising prior to consummation of a plan of reorganization. With few exceptions, all claims against the Debtors that arise prior to the Petition Date or before consummation of the Plan (i) would be subject to compromise and/or treatment under the Plan and/or (ii) would be discharged in accordance with the Bankruptcy Code and the terms of the Plan. Subject to the terms of the Plan and orders of the Bankruptcy Court, any claims not ultimately discharged pursuant to the Plan could be asserted against the reorganized entities and may have an adverse effect on our business, cash flows, liquidity, financial condition and results of operations on a post-reorganization basis.
The Chapter 11 Cases will limit the flexibility of our management team in running our business.
If we make the Bankruptcy Filing, we will operate our businesses as debtor-in-possession under supervision by the Bankruptcy Court during the pendency of the Chapter 11 Cases, and we will be required to obtain the approval of the Bankruptcy Court, and in some cases certain lenders, prior to engaging in activities or transactions outside the ordinary course of business. Bankruptcy Court approval of non-ordinary course activities entails preparation and filing of appropriate motions with the Bankruptcy Court, negotiation with the various creditors’ committees and other parties-in-interest and one or more hearings. The creditors’ committees, if any, and other parties-in-interest may be heard at any Bankruptcy Court hearing and may raise objections with respect to these motions. This process may delay
major transactions and limit our ability to respond quickly to opportunities and events if we make the Bankruptcy Filing. Furthermore, in the event the Bankruptcy Court does not approve a proposed activity or transaction during bankruptcy proceedings, we would be prevented from engaging in activities and transactions that we believe are beneficial to us.
The pursuit of the RSA and the Chapter 11 Cases has consumed and will continue to consume a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations, and we may experience increased levels of employee attrition as a result of the restructuring.
As the Chapter 11 Cases progress, our management will be required to spend a significant amount of time and effort focusing on the Chapter 11 Cases. This diversion of attention may materially adversely affect the conduct of our business, and, as a result, on our financial condition and results of operations, particularly if the Chapter 11 Cases are protracted.
As a result of the restructuring, we have experienced employee attrition, and during the pendency of the Chapter 11 Cases, our employees may face considerable distraction and uncertaintyand we may experience increased levels of employee attrition. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Further, our ability to engage, motivate and retain key employees or take other measures intended to motivate and incentivize key employees to remain with us through the pendency of the expected Chapter 11 Cases will be limited by certain restrictions on the implementation of incentive programs under the Bankruptcy Code.
Upon emergence from bankruptcy, the composition of our Board of Directors will change.
Our Board of Directors is expected to be replaced following the potential Chapter 11 Cases. Any new directors may have different backgrounds, experiences and perspectives from those individuals who currently serve on our Board of Directors and, thus, may have different views on the issues that will determine the future of our company. As a result, our future strategy and plans may differ materially from those of the past.
Trading in our common stock prior to and during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks.
All of our indebtedness is senior to the existing common stock in our capital structure. The RSA contemplates that our existing equity interests will be canceled in connection with the Chapter 11 Cases. Accordingly, any trading in our common stock prior to and during the pendency of the proposed Chapter 11 Cases is highly speculative and poses substantial risks to purchasers of our common stock.
Our common stock may become subject to the associated risks of trading in an over-the-counter market.
Since September 18, 2020, our common stock has been trading on the OTCQX Marketplace maintained by the OTC Markets Group, Inc. under the symbol “SPNX.” Securities traded in the over-the-counter market generally have significantly less liquidity than securities traded on a national securities exchange, due to factors such as a reduction in the number of investors that will consider investing in the securities and the number of market makers in the securities, reduction in securities analyst and news media coverage and lower market prices than might otherwise be obtained. In addition to those factors, the market for the outstanding shares of our common stock has been adversely affected by the provisions of the RSA that contemplate that our existing equity interests will be cancelled in connection with the Chapter 11 Cases. We can provide no assurance that our common stock will continue to trade on the OTCQX Marketplace, whether broker-dealers will continue to provide public quotes of our common stock on that market, whether the trading volume of our common stock will be sufficient to provide for an efficient trading market or whether quotes for our common stock will continue to be provided on that market in the future.
The COVID-19 pandemic continues to adversely affect our business, and the ultimate effect on our operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.
The COVID-19 pandemic has had, and continues to have, a material impact on businesses around the world and the economic environments in which they operate. A number of jurisdictions in which we operate have implemented severe restrictions on the movement of their respective populations. As a result, there has been a significant reduction in demand for, and prices of, crude oil, which has directly affected our business. If the reduced demand for and price of crude oil continues for a prolonged period, our business, financial condition, results of operation and liquidity may be further materially and adversely affected. Our operations also may be further adversely affected if significant portions of our workforce continue to be unable to work effectively due to illness, quarantines, government actions or other restrictions in connection with the COVID-19 pandemic.
Management expects industry activity levels and spending by customers to remain depressed at least throughout the remainder of 2020 and into 2021 as demand destruction from the COVID-19 pandemic continues. We believe that the well-known impacts described above and other potential impacts include, but are not limited to, the following:
Disruption to our supply chain for materials essential to our business, including restrictions on importing and exporting products;
Customers may attempt to cancel of delay projects or may attempt to invoke force majeure clauses in certain contracts resulting in a decreased on delayed demand for our products and services;
Customers may also seek to delay payments, may default on payment obligations and/or seek bankruptcy protection that could delay or prevent collections of certain accounts receivable;
A need to preserve liquidity and volatility in the financial markets;
Reduction of our global workforce to adjust to market conditions, including severance payments, retention issues, and an inability to hire employees when market conditions improve;
Liabilities resulting from operational delays due to decreased productivity resulting from stay-at-home orders affecting the work force or facility closures resulting from the COVID-19 pandemic;
Liabilities resulting from an inability to perform services due to limited manpower availability or an inability to travel to perform the services;
Other contractual or other legal claims from our customers resulting from the COVID-19 pandemic; and
Infections and quarantining of our employees and the personnel of our customers, suppliers and other third parties.
At this time, it is not possible to quantify these risks, but the combination of these factors could have a further material impact on our financial results. The ultimate extent to which the COVID-19 pandemic adversely affects our business, financial condition, results of operation and liquidity will depend on future developments, which are highly uncertain and cannot be predicted. These future developments include, but are not limited to, the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic. Disruptions and/or uncertainties related to the COVID-19 pandemic for a sustained period of time will result in, and have resulted to date in, delays or modifications to our strategic plans and initiatives and will hinder our ability to achieve our strategic goals. The COVID-19 pandemic, and the volatile regional and global economic conditions stemming from the COVID-19 pandemic, will likely have the effect of heightening many of the other risks described in the “Risk Factors” section included in the Annual Report, as those risk factors are amended or supplemented by subsequent Quarterly Reports on Form 10-Q and other reports and documents filed with the SEC.
Potential changes to Bureau of Ocean Energy Management security and bonding requirements could impact our operating cash flows and results of operations.
Federal oil and natural gas leases contain standard terms and require compliance with detailed Bureau of Safety and Environmental Enforcement (BSEE) and BOEM regulations and orders issued pursuant to various federal laws, including the Outer Continental Shelf Lands Act. In 2016 BOEM undertook a review of its historical policies and procedures for determining a lessee’s ability to decommission platforms on the Outer Continental Shelf (OCS) and whether lessees should furnish additional security, and in July 2016, BOEM issued a new Notice to Lessees requiring additional security for decommissioning activities. In January 2017, BOEM extended the implementation timeline for properties with co-lessees by an additional six months, and in June 2017 announced that the Notice to Lessees would be stayed while BOEM continued to review its implementation issues and continued industry engagement to gather additional information on the financial assurance program.
During the second half of 2016, BSEE increased its estimates of many offshore operator’s decommissioning costs, including the decommissioning costs at our sole federal offshore oil and gas property, in which our subsidiary owns a 51% non-operating interest. In October 2016, BOEM sent an initial proposal letter to the operator of the oil and gas property, proposing an increase in the supplemental bonding requirement for the property’s sole fixed platform that was eight to ten times higher than the revised supplemental bonding requirement requested for any other deep-water fixed platform in the U.S. Gulf of Mexico. Both the operator and our subsidiary submitted formal dispute notices, asserting that the estimates in the October 2016 proposal letter may be based on erroneous or arbitrary estimates of the potential decommissioning costs, and requesting in-person meetings to discuss the estimate. We asked that BSEE and BOEM reduce the estimate to an amount that more closely approximates actual decommissioning costs, consistent with estimates identified by BSEE and BOEM for similar deep-water platforms. BSEE and BOEM have not yet responded to our dispute notice.
On September 17, 2020, BOEM issued a proposed rule addressing OCS oil and gas decommissioning costs (BOEM-2018-0033). The proposed rule contains updated criteria for determining decommissioning costs. Under the proposed rule, BOEM would only require additional security when (1) a lessee or grant holder poses a substantial risk of becoming financially unable to meet its obligations; (2) there is no co-lessee, co-grant holder or predecessor that is liable for those obligations with sufficient financial capacity; and (3) the property is at or near the end of its productive life. BSEE would typically issue orders to predecessors in title in a reverse chronological order. The proposed rule would also require that a party appealing any final decommissioning decision or order provide a surety bond to ensure that funding for decommissioning is available if the order is affirmed and the liable party then defaults. The comment period for the proposed rule is expected to close on December 15, 2020. Based on the proposed framework, BOEM estimates its amount of financial assurance would decrease from $3.3 billion to $3.1 billion, although BOEM expects the rule would provide greater protection as the financial assurance would be focused on the riskiest properties.
We cannot predict when these laws and regulations may be adopted or change in the future, particularly in connection with a potential transition of presidential administrations. If BOEM ultimately issues a formal order and we are unable to obtain the additional required bonds or assurances, BOEM may suspend or cancel operations at the oil and gas property or otherwise impose monetary penalties. Any of these actions could have a material adverse effect on our financial condition, operating cash flows and liquidity.
Moreover, under existing BOEM and BSEE rules relating to assignment of offshore leases and other legal interests on the OCS, assignors of such interests may be held jointly and severally liable for decommissioning of OCS facilities existing at the time the assignment was approved by BOEM, in the event that the assignee or any subsequent assignee is unable or unwilling to conduct required decommissioning.
From 2003 until 2008 we were engaged through a wholly-owned subsidiary in the acquisition of mature shelf oil and gas properties, and we provided parent guarantees for this subsidiary’s acquisitions. While we have sold our equity interest in the subsidiary, our parent guarantees could expose us to material costs for decommissioning liabilities in the event subsequent lessors fail to meet their decommissioning obligations and liability is imposed on the predecessor in title for which we provided a parent guarantee. Such payments could be significant and adversely affect our business, results of operations, financial condition and cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.On the Emergence Date, all existing shares of the Predecessor’s common stock were cancelled pursuant to the Plan, and the Successor issued 19,995,581 shares of Class A common stock to the holders of certain allowed claims arising under the Prepetition Notes (as defined in the Plan). The Class A common stock issued was exempt from registration under the Securities Act, pursuant to Section 1145 of the Bankruptcy Code (which generally exempts from such registration requirements the issuance of securities under a plan of reorganization).
By the Emergence Date, the Company had completed the Equity Rights Offering in accordance with the Plan, which resulted in the issuance of 735,189 shares of Class A common stock to certain Accredited Cash Opt-Out Noteholders (as defined in the Plan). The Class A common stock issued in the Equity Rights Offering was exempt from registration under the Securities Act pursuant to Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder. See Part 1, Item 3. Defaults Upon2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Senior SecuritiesNotes.”
Our proposed Bankruptcy Filing described above would constitute an event of default that accelerate our obligations under our senior credit facility and our unsecured notes. Under the Bankruptcy Code, if we make the Bankruptcy Filing, the creditors under these debt agreements will be stayed from taking any action against us as a result of an event of default after such filing. See Note 1 to the unaudited condensed consolidated financial statements included in Part I, Item 1 “Financial Statements – Note 1 – Basis of Presentation” for additional details about our anticipated Bankruptcy Filing and the Chapter 11 Cases.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
(a) The following exhibits are filed with this Form 10-Q:
First Amended Joint Prepackaged Plan of Reorganization for Superior Energy Services, Inc. and its Affiliate Debtors Under Chapter 11 of the Bankruptcy Code (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K, filed on January 20, 2021 (File No. 001-34037)) |
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10.2 | |
10.3 | |
10.4^* | |
10.5^* | |
10.6^* | |
10.9^ | |
31.1* | Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2* | Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1* | Officer’s certification pursuant to Section 906 of the Sarbanes-Oxley Act of |
32.2* | Officer’s certification pursuant to Section 906 of the Sarbanes-Oxley Act of |
101.INS* | XBRL Instance Document |
101.SCH* | XBRL Taxonomy Extension Schema Document |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document |
*Filed herewith
^Management contract or compensatory plan or arrangement
SIGNATURESIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SUPERIOR ENERGY SERVICES, INC.
(Registrant)
Date: | September 30, 2021 | By: | /s/ |
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Principal Executive | |||
(Duly Authorized Officer) | |||
By: | /s/ James W. Spexarth | ||
James W. Spexarth Chief Financial Officer | |||
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