UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

Form 10-K

(Mark One)

 

Or

 

 

Commission File No. 001-34037

 

SUPERIOR ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (713) 654-2200

 

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ☒  No ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes  ☐  No ☒

 

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  ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒  No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 ☒

 

As of June 30, 2014, the aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant was $5.41 billion.  As of February 17, 2015, there were 149,785,368 shares of the registrant’s common stock outstanding. 

 

DOCUMENTS INCORPORATED BY REFERENCE

Certain information called for by Items 10, 11, 12, 13 and 14 of Part III is incorporated by reference from the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A.

 

 

 

 

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SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES

Annual Report on Form 10-K for

the Fiscal Year Ended December 31, 2014

TABLE OF CONTENTS

 

 

 

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and other documents filed by us with the Securities and Exchange Commission (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 Annual Report on Form 10-K or such other materials regarding 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 uncertainties include, but are not limited to: the cyclicality and volatility of the oil and gas industry, including changes in prevailing levels of exploration, production and development activity; changes in prevailing oil and gas prices or expectations about future prices; operating hazards, including the significant possibility of accidents resulting in personal injury or death, property damage or environmental damage for which we may have limited or no insurance coverage or indemnification rights; the effect of regulatory programs and environmental matters on our operations or prospects, including the risk that future changes in the regulation of hydraulic fracturing could reduce or eliminate demand for our pressure pumping services; risks associated with the uncertainty of macroeconomic and business conditions worldwide; changes in competitive and technological factors affecting our operations; the potential shortage of skilled workers; risks inherent in acquiring businesses; risks associated with business growth outpacing the capabilities of our infrastructure and workforce; political, economic and other risks and uncertainties associated with our international operations; our continued access to credit markets on favorable terms; the impact that unfavorable or unusual weather conditions could have on our operations; and the risks inherent in long-term fixed-price contracts. These risks and other uncertainties related to our business are described in detail below in Part I, Item 1A of this Annual Report on Form 10-K. 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.

 

 

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PART I

Item 1. Business

General

 

We provide a wide variety of services and products to the energy industry related to the exploration, development and production of oil and natural gas.  We serve major, national and independent oil and natural gas companies throughout the world.  Our operations are managed and organized by business units, which offer products and services within the various phases of a well’s economic life cycle. We report our operating results in four business segments: Drilling Products and Services; Onshore Completion and Workover Services; Production Services; and Technical Solutions (formerly, Subsea and Technical Solutions).  Given our history of growth and long-term strategy of expanding geographically, we also provide supplemental segment revenue information in three geographic areas:  U.S. land; Gulf of Mexico; and  International.

 

For information about our operating segments and financial information by operating segment and geographic area, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of this Annual Report on Form 10-K and note 11 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.  For information about our recent acquisitions, refer to note 4 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

 

Products and Services

 

We offer a wide variety of specialized oilfield services and equipment generally categorized by their typical use during the economic life of a well.  A description of the products and services offered by each of our four segments is as follows:

 

 

 

 

 

 

 

 

 

 

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The Technical Solutions segment also includes revenues from oil and gas production related to our 51% ownership interest in the Bullwinkle platform and related assets. 

 

Customers

 

Our customers are the major and independent oil and gas companies that are active in the geographic areas in which we operate.  There were no customers that exceeded 10% of our total revenues in 2014. However, EOG Resources, Inc. (EOG Resources) accounted for approximately 10% and 13% of our revenues in 2013 and 2012, respectively, primarily within the Onshore Completion and Workover segment.  Our inability to continue to perform services for a number of our large existing customers, if not offset by sales to new or other existing customers, could have a material adverse effect on our business and operations.

 

Competition

 

We provide products and services worldwide in highly competitive markets, with competitors comprised of both small and large companies.  Our revenues and earnings can be affected by several factors, including changes in competition, fluctuations in drilling activity, perceptions of future prices of oil and gas, government regulation, disruptions caused by weather and general economic conditions.  We believe that the principal competitive factors are price, performance, product and service quality, safety, response time and breadth of products and services.

 

We believe our primary competitors include Weatherford International, Ltd., Baker Hughes Incorporated, Halliburton Company and Schlumberger N.V.  We also compete with various other regional and local providers within certain geographic markets for products and services.

 

Potential Liabilities and Insurance

 

Our operations involve a high degree of operational risk and expose us to significant liabilities.  An accident involving our services or equipment, or the failure of a product sold by us, could result in personal injury, loss of life, and damage to property, equipment or the environment.  Litigation arising from a catastrophic occurrence, such as fire, explosion, well blowout or vessel loss, may result in substantial claims for damages. 

 

As is customary in our industry, our contracts generally provide that we will indemnify and hold harmless our customers from any claims arising from personal injury or death of our employees, damage to or loss of our equipment, and pollution emanating from our equipment and services.  Similarly, our customers generally agree to indemnify and hold us harmless from any claims arising from personal injury or death of their employees, damage to or loss of their equipment, and pollution caused from their equipment or the well reservoir (including uncontained oil flow from a reservoir).  Nonetheless, our indemnification arrangements may not protect us in every case.

 

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We maintain a liability insurance program that covers against certain operating hazards, including product liability, property damage and personal injury claims, as well as certain limited environmental pollution claims for damage to a third party or its property arising out of contact with pollution for which we are liable, but well control costs are not covered by this program.  These policies include primary and excess umbrella liability policies with limits of $350 million per occurrence, including sudden and accidental pollution incidents. All of the insurance policies purchased by us contain specific terms, conditions, limitations and exclusions and are subject to either deductibles or self-insured retention amounts for which we are responsible.  There can be no assurance that the nature and amount of insurance we maintain will be sufficient to fully protect us against all liabilities related to our business.

 

Government Regulation

 

Our business is significantly affected by Federal, State and local laws and other regulations.  These laws and regulations relate to, among other things:

 

 

 

 

 

Numerous permits are required for the conduct of our business and operation of our various facilities and equipment, including our underground injection wells, marine vessels, trucks and other heavy equipment.  These permits can be revoked, modified or renewed by issuing authorities based on factors both within and outside our control.

 

We cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings in the future.  We also cannot predict whether additional laws and regulations will be adopted, including changes in regulatory oversight, increase of federal, state or local taxes, increase of inspection costs, or the effect such changes may have on us, our businesses or our financial condition.

 

Environmental Matters

 

Our operations, and those of our customers, are subject to extensive laws, regulations and treaties relating to air and water quality, generation, storage and handling of hazardous materials, and emission and discharge of materials into the environment.  We believe we are in substantial compliance with all regulations affecting our business.  Historically, our expenditures in furtherance of our compliance with these laws, regulations and treaties have not been material, and we do not expect the cost of compliance to be material for 2015.

 

Raw Materials

 

We purchase various raw materials and component parts in connection with delivering our products and services.  These materials are generally, but not always, available from multiple sources and may be subject to price volatility.  While we generally do not experience significant long-term shortages of these materials, we have from time to time experienced temporary shortages of particular raw materials.  We are always seeking ways to ensure the availability of resources, as well as manage costs of raw materials.

 

Seasonality

 

Seasonal weather and severe weather conditions can temporarily impair our operations and reduce demand for our products and services.  Examples of seasonal events that negatively affect our operations include high seas associated with cold fronts during the winter months and hurricanes during the summer months in the Gulf of Mexico, and severe cold during winter months in the U.S. land market area. 

 

Employees

 

As of December 31, 2014, we had approximately 14,300 employees.  Approximately 7% of our employees are subject to union contracts, all of which are in international locations.  We believe that we have good relationships with our employees.  

 

Facilities

 

Our principal executive offices are located at 1001 Louisiana Street, Suite 2900, Houston, Texas, 77002.  We own or lease a large number of facilities in the various areas in which we operate throughout the world.

 

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Intellectual Property

 

We seek patent and trademark protections throughout the world for our technology when we deem it prudent, and we aggressively pursue protection of these rights.  We believe our patents and trademarks are adequate for the conduct of our business, and that no single patent or trademark is critical to our business.  In addition, we rely to a great extent on the technical expertise and know-how of our personnel to maintain our competitive position.

 

Other Information

 

We have our principal executive offices at 1001 Louisiana Street, Suite 2900, Houston, Texas 77002.  Our telephone number is (713) 654-2200.  We also have a website at http://www.superiorenergy.com.  Copies of the annual, quarterly and current reports we file with the SEC, and any amendments to those reports, are available on our website free of charge soon after such reports are filed with or furnished to the SEC.  The information posted on our website is not incorporated into this Annual Report on Form 10-K.  Alternatively, you may access these reports at the SEC’s website at http://www.sec.gov/.

 

We have a Code of Conduct (Our Shared Core Values at Work), which applies to all of our directors, officers and employees.  This Code of Conduct is publicly available on the investor relations page of our website at http://www.superiorenergy.com.  Any waivers granted to directors or executive officers and any material amendment to our Code of Conduct will be posted promptly on our website and/or disclosed in a current report on Form 8-K.

 

Investors should be aware that while we do, at various times, communicate with securities analysts, it is against our policy to disclose to them selectively any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by an analyst with respect to our past or projected performance. To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

 

Executive Officers of Registrant

 

David D. Dunlap, age 53, has served as our Chief Executive Officer since April 2010 and our President since February 2011.  Prior to joining us, he was employed by BJ Services Company as its Executive Vice President and Chief Operating Officer since 2007.  Mr. Dunlap joined BJ Services in 1984 and held numerous positions during his tenure, including President of the International Division, Vice President for the Coastal Division of North America and U.S. Sales and Marketing Manager.

 

Robert S. Taylor, age 60, has served as our Chief Financial Officer since January 1996, as one of our Executive Vice Presidents since September 2004, and as our Treasurer since July 1999.  He also served as one of our Vice Presidents from July 1999 to September 2004.

 

A. Patrick Bernard, age 57, has served as a Senior Executive Vice President since July 2006 and as one of our Executive Vice Presidents since September 2004.  He served as one of our Vice Presidents from June 2003 until September 2004.  From July 1999 until June 2003, Mr. Bernard served as the Chief Financial Officer of a wholly-owned subsidiary and its predecessor company.

 

Brian K. Moore, age 58, was appointed Senior Executive Vice President of North America Services on February 7, 2012.  From March 2007 until the effectiveness of the acquisition of the Complete Production Services, Inc. (Complete) in 2012, Mr. Moore was President and Chief Operating Officer of Complete.  Mr. Moore joined a predecessor company of Complete as President and Chief Executive Officer in April 2004.

   

Westervelt T. Ballard, Jr., age 43, was appointed Executive Vice President of International Services on February 7, 2012.  Mr. Ballard previously served as Vice President of Corporate Development since joining us in June 2007.  Prior to joining us, Mr. Ballard spent six years working in private equity.

 

L. Guy Cook, III, age 46, has served as one of our Executive Vice Presidents since September 2004.  He has also served as an Executive Vice President of a wholly-owned subsidiary, and previously as a Vice President of a wholly-owned subsidiary and its predecessor company since August 2000. 

 

William B. Masters, age 57, has served as our General Counsel and one of our Executive Vice Presidents since March 2008. He was previously a partner in the law firm Jones Walker LLP for more than 20 years.

 

Danny R. Young, age 59, has served as one of our Executive Vice Presidents since September 2004.  Mr. Young has also served as an Executive Vice President of a wholly-owned subsidiary.  From January 2002 to May 2005, he served as Vice President of Health, Safety and Environment and Corporate Services of a wholly-owned subsidiary.

 

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Item 1A. Risk Factors

 

The following information should be read in conjunction with management’s discussion and analysis of financial condition and results of operations contained in Part II, Item 7 and the consolidated financial statements and related notes contained in Part II, Item 8 of this Annual Report on Form 10-K, as well as, in conjunction with the matters contained under the caption “Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K.

 

The following discussion of “risk factors” identifies the most significant risks or uncertainties that could (i) materially and adversely affect our business, financial condition, results of operations, liquidity or prospects, as well as the market value of our securities, or (ii) cause our actual results to differ materially from our anticipated results or other expectations. These risks are not the only risks that we face. Our business operations could also be affected by additional factors that apply to all companies operating in the U.S. and globally, as well as other risks that are not presently known to us or that we currently consider to be immaterial to our operations.  These risks include:

Our business depends on conditions in the oil and gas industry, especially oil and gas prices and capital expenditures by oil and natural gas companies.

 

Our business depends on the level of oil and gas exploration, development and production activity by oil and gas companies worldwide.  The level of exploration, development and production activity is directly affected by trends in oil and gas prices, which historically have been volatile and difficult to predict.  Oil and gas prices are subject to large fluctuations in response to relatively minor changes in supply and demand, economic growth trends, market uncertainty and a variety of other factors beyond our control.  Lower oil and natural gas prices generally lead to decreased spending by our customers. While higher oil and natural gas prices generally lead to increased spending by our customers, sustained high energy prices can be an impediment to economic growth, and can therefore negatively impact spending by our customers. Our customers may also take into account the volatility of energy prices and other risk factors by requiring higher returns for individual projects if there is higher perceived risk. Any of these factors could significantly affect the demand for oil and natural gas and could have a material effect on our results of operations.

 

The availability of quality drilling prospects, exploration success, relative production costs, expectations about future oil and gas demand, the stage of reservoir development, the availability of financing, and political and regulatory environments are also expected to affect levels of exploration, development, and production activity, which would impact the demand for our services.  Worldwide military, political and economic events have in the past contributed to oil and gas price volatility and are likely to do so in the future.  Any prolonged reduction of oil and gas prices, as well as anticipated declines, could also result in lower levels of exploration, development, and production activity. The demand for our services may be affected by numerous factors, including the following:

 

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Any extended period of low oil and gas prices could depress the level of oil and gas exploration and production activity in our markets, and thus reduce the demand for our products and services.  Moreover, weakness in the oil and gas industry may adversely impact the financial position of our customers, which in turn could cause them to fail to pay amounts owed to us in a timely manner or at all.  Any of these events could have a material adverse effect on our business, results of operations, financial condition and prospects.

There are operating hazards inherent in the oil and natural gas industry that could expose us to substantial liabilities.

Our operations are subject to hazards inherent in the oil and gas industry that may lead to property damage, personal injury, death or the discharge of hazardous materials into the environment. Many of these events are outside of our control. Typically, we provide products and services at a well site where our personnel and equipment are located together with personnel and equipment of our customer and other service providers. From time to time, personnel are injured or equipment or property is damaged or destroyed as a result of accidents, failed equipment, faulty products or services, failure of safety measures, uncontained formation pressures or other dangers inherent in oil and gas exploration, development and production. Any of these events can be the result of human error or purely accidental, and it may be difficult or impossible to definitively determine the ultimate cause of the event or whose personnel or equipment contributed thereto. All of these risks expose us to a wide range of significant health, safety and environmental risks and potentially substantial litigation claims for damages. With increasing frequency, our products and services are deployed in more challenging exploration, development and production environments. From time to time, customers and third parties may seek to hold us accountable for damages and costs incurred as a result of an accident, including pollution, even under circumstances where we believe we did not cause or contribute to the accident. Our insurance policies are subject to exclusions, limitations and other conditions, and may not protect us against liability for some types of events, including events involving a well blowout, or against losses from business interruption.  Moreover, we may not be able to maintain insurance at levels of risk coverage or policy limits that we deem adequate or on terms that we deem commercially reasonable.  Any damages or losses that are not covered by insurance, or are in excess of policy limits or subject to substantial deductibles or retentions, could adversely affect our financial condition, results of operations and cash flows. 

We may not be fully indemnified against losses incurred due to catastrophic events.

As is customary in our industry, our contracts generally provide that we will indemnify and hold harmless our customers from any claims arising from personal injury or death of our employees, damage to or loss of our equipment, and pollution emanating from our equipment and services.  Similarly, our customers generally agree to indemnify and hold us harmless from any claims arising from personal injury or death of their employees, damage to or loss of their equipment, and pollution caused from their equipment or the well reservoir (including uncontained oil flow from a reservoir).  Our indemnification arrangements may not protect us in every case. For example, from time to time we may enter into contracts with less favorable indemnities or perform work without a contract that protects us. In addition, our indemnification rights may not fully protect us if we cannot prove that we are entitled to be indemnified or if the customer is bankrupt or insolvent, does not maintain adequate insurance or otherwise does not possess sufficient resources to indemnify us.  In addition, our indemnification rights may be held unenforceable in some jurisdictions.

Our customers’ changing views on risk allocation could cause us to accept greater risk to win new business or could result in us losing business if we are not prepared to take such risks.  To the extent that we accept such additional risk, and seek to insure against it, our insurance premiums could rise.

Lower capital spending by our customers could affect demand and pricing for our services which could adversely affect our results of operations.

Our business is directly affected by changes in capital expenditures by our customers, and reductions in their capital spending will generally reduce demand for our services and products.  The steep decline in oil prices in late 2014 has caused several of our customers to announce capital spending or production cuts or to delay their planning regarding future spending or production.  The rate of economic growth in the U.S. and worldwide has not reached the levels experienced since before the 2008 economic downturn.  Prolonged periods of little or no economic growth will likely decrease demand for oil and gas and increase pricing pressure for our services and products.  In addition, if a significant number of our customers experience a prolonged business decline or disruptions, we may incur increased exposure to credit risk and bad debts.

Increased regulation of or limiting or banning hydraulic fracturing could reduce or eliminate demand for our pressure pumping services.

Our hydraulic fracturing services are subject to a range of applicable federal, state and local laws.  Our hydraulic fracturing services are designed and operated to minimize the risk, if any, of subsurface migration of hydraulic fracturing fluids and spillage or mishandling of hydraulic fracturing fluids.  However, a proven case of subsurface migration of hydraulic fracturing fluids or a case of spillage or mishandling of hydraulic fracturing fluids during these activities could potentially subject us to civil or criminal liability and the

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possibility of substantial remediation costs, depending on the circumstances of the underground migration, spillage, or mishandling, the nature and scope of the underground migration, spillage, or mishandling, and the applicable laws and regulations.

The practice of hydraulically fracturing formations to stimulate the production of natural gas and oil remains under increased scrutiny from federal, state and local governmental authorities.  Various federal legislative and regulatory initiatives have been undertaken which could result in additional requirements or restrictions being imposed on hydraulic fracturing operations. For example, the U.S. Department of Interior has issued proposed regulations that would apply to hydraulic fracturing wells subject to federal oil and gas leases that would impose requirements to disclose chemicals used in the fracturing process as well as certain prior approvals to conduct hydraulic fracturing.  In addition, a few states and municipalities have banned fracturing operations in their jurisdictions, and others are contemplating similar actions. Moreover, certain other states have adopted laws and regulations requiring additional disclosure regarding chemicals used in the fracturing process, and other states are evaluating the adoption of legislation or regulations governing hydraulic fracturing. Possible legislation or regulation could impose further requirements or limitations, such as restrictions on the use of certain chemicals or prohibitions on hydraulic fracturing in certain areas, which could affect our operations. The adoption of any future federal, state or local laws or regulations could adversely affect our hydraulic fracturing business.

Adverse and unusual weather conditions may affect our operations.

Our operations may be materially affected by severe weather conditions in areas where we operate.  Severe weather, such as hurricanes, high winds and seas, blizzards and extreme temperatures may cause evacuation of personnel, curtailment of services and suspension of operations, inability to deliver materials to jobsites in accordance with contract schedules, loss of or damage to equipment and facilities and reduced productivity.  In addition, variations from normal weather patterns can have a significant impact on demand for oil and gas, thereby reducing demand for our services and equipment.

Any capital financing that may be necessary may not be available at economic rates or at all.

Turmoil in the credit and financial markets could adversely affect financial institutions, inhibit lending and limit our access to funding through borrowings under our credit facility or newly created facilities in the public or private capital markets on terms we believe to be reasonable. Prevailing market conditions could be adversely affected by the ongoing disruptions in domestic or overseas sovereign or corporate debt markets, low oil prices or other factors impacting our business, contractions or limited growth in the economy or other similar adverse economic developments in the U.S. or abroad. Instability in the global financial markets has from time to time resulted in periodic volatility in the capital markets. This volatility could limit our access to the credit markets, leading to higher borrowing costs or, in some cases, the inability to obtain financing on terms that are acceptable to us, or at all. Any such failure to obtain additional financing could jeopardize our ability to repay, refinance or reduce our debt obligations, or to meet our other financial commitments.

Our inability to retain key employees and skilled workers could adversely affect our operations.

Our performance could be adversely affected if we are unable to retain certain key employees and skilled technical personnel.  Our ability to continue to expand the scope of our services and products depends in part on our ability to increase the size of our skilled labor force.  The loss of the services of one or more of our key employees or the inability to employ or retain skilled technical personnel could adversely affect our operating results.  Over the past several years, the demand for skilled personnel has been high and the supply limited.  We have experienced increases in labor costs in recent years and may continue to do so in the future. 

Our international operations and revenue are affected by political, economic and other uncertainties worldwide.

In 2014, we conducted business in more than 70 countries, and we intend to expand our international operations. 

Our foreign operations are subject to varying degrees of regulation in each of the foreign jurisdictions in which we provide services. Local laws and regulations, and their interpretation and enforcement, differ significantly among those jurisdictions, and can change significantly over time. Future regulatory, judicial and legislative changes or interpretations may have a material adverse effect on our ability to deliver services within various foreign jurisdictions.

In addition to these international regulatory risks, our international operations are subject to a number of other risks inherent in any business operating in foreign countries, including, but not limited to, the following:

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These and the other risks outlined above could cause us to curtail or terminate operations, result in the loss of personnel or assets, disrupt financial and commercial markets and generate greater political and economic instability in some of the geographic areas in which we operate. International areas where we operate that have significant risk include the Middle East, Colombia, Indonesia, Kazakhstan, Nigeria, Mexico and Azerbaijan.

Laws, regulations or practices in foreign countries could materially restrict our operations or expose us to additional risks.

In many countries around the world where we do business, all or a significant portion of the decision making regarding procuring our services and products is controlled by state-owned oil companies. State-owned oil companies or prevailing laws may (i) require us to meet local content or hiring requirements or other local standards, (ii) restrict with whom we can contract or (iii) otherwise limit the scope of operations that we can legally or practically conduct. Our inability or failure to meet these requirements, standards or restrictions may adversely impact our operations in those countries. In addition, our ability to work with state-owned oil companies is subject to our ability to negotiate and agree upon acceptable contract terms, and to enforce those terms. In addition, many state-owned oil companies may require integrated contracts or turnkey contracts that could require us to provide services outside its core business. Providing services on an integrated or turnkey basis generally requires us to assume additional risks.

Moreover, in order to effectively compete in certain foreign jurisdictions, it is frequently necessary or required to establish joint ventures or strategic alliances with local operators, partners or agents.  In certain instances, these local operators, partners or agents may have interests that are not always aligned with ours.  Reliance on local operators, partners or agents could expose us to the risk of being unable to control the scope or quality of our overseas services or products, or being held liable under the FCPA or other anti-corruption laws for actions taken by our strategic or local partners or agents even though these partners or agents may not themselves be subject to the FCPA or other applicable anti-corruption laws.  Any determination that we have violated the FCPA or other anti-corruption laws could have a material adverse effect on our business, results of operations, reputation or prospects.

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Changes in tax laws or tax rates, adverse positions taken by taxing authorities and tax audits could impact our operating results.

We are subject to the jurisdiction of a significant number of domestic and foreign taxing authorities. Changes in tax laws or tax rates, the resolution of tax assessments or audits by various tax authorities could impact our operating results. In addition, we may periodically restructure our legal entity organization. If taxing authorities were to disagree with our tax positions in connection with any such restructurings, our effective tax rate could be impacted. The final determination of our income tax liabilities involves the interpretation of local tax laws, tax treaties and related authorities in each taxing jurisdiction, as well as the significant use of estimates and assumptions regarding future operations and results and the timing of income and expenses. We may be audited and receive tax assessments from taxing authorities that may result in assessment of additional taxes that are ultimately resolved with the authorities or through the courts. We believe these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. Resolution of any tax matter involves uncertainties and there are no assurances that the outcomes will be favorable.

We are subject to environmental laws and regulations which could reduce our business opportunities and revenue, and increase our costs and liabilities.

Our business is significantly affected by a wide range of laws and regulations in the areas in which we operate, and increasingly rigorous environmental laws and regulations governing air emissions, water discharges and waste management.  Generally, these laws have in recent years become more stringent and have sought to impose greater liability on a larger number of potentially responsible parties. The Macondo well explosion in 2010 resulted in additional regulation of our offshore operations, and similar onshore or offshore accidents in the future could result in additional increases in regulation.

We incur, and expect to continue to incur, capital and operating costs to comply with these laws and regulations. The technical requirements of these laws and regulations are becoming increasingly complex and expensive to implement. For instance, a variety of regulatory developments, proposals or requirements have been introduced by various domestic, foreign or international regulatory bodies that are focused on restricting the emission of carbon dioxide, methane and other greenhouse gases, which could impose restrictions in greenhouse gas emissions. These proposals include, among others, various “cap and trade,” carbon tax and sequestration initiatives.  Recently, the U.S. Environmental Protection Agency (EPA) has issued rules regulating greenhouse emissions by oil and gas operators.  At this stage, we cannot predict the impact of the EPA’s recent rulemaking on our operations, nor can we predict whether, or which of, other currently pending greenhouse gas emission proposals will be adopted, or what other actions may be taken by domestic, foreign or international regulatory bodies. The potential passage of climate change regulation may curtail production and demand for fossil fuels such as oil and gas in areas of the world where our customers operate and thus adversely affect future demand for our products and services, which may in turn adversely affect future results of operations.

Further, environmental laws may provide for “strict liability” for remediation costs, damages to natural resources or threats to public health and safety. Strict liability can render a party liable for damages without regard to negligence or fault on the part of the party. Some environmental laws provide for joint and several strict liability for remediation of spills and releases of hazardous substances.  For example, our well service and fluids businesses routinely involve the handling of significant amounts of waste materials, some of which are classified as hazardous substances. We also store, transport and use radioactive and explosive materials in certain of our operations. In addition, many of our current and former facilities are, or have been, used for industrial purposes. Accordingly, we could become subject to material liabilities relating to the containment and disposal of hazardous substances, oilfield waste and other waste materials, the use of radioactive materials, the use of underground injection wells, and to claims alleging personal injury or property damage as the result of exposures to, or releases of, hazardous substances. In addition, stricter enforcement of existing laws and regulations, new domestic or foreign laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require us to incur costs or become the basis of new or increased liabilities that could reduce our earnings and our cash available for operations.

If we are not able to design, develop, and produce commercially competitive products and to implement commercially competitive services in a timely manner in response to changes in the market, customer requirements, competitive pressures, and technology trends, our business and results of operations could be materially and adversely affected.

The market for oilfield services in which we operate is highly competitive and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial resources than we do. Contracts are traditionally awarded on the basis of competitive bids or direct negotiations with customers.

The market for our services and products is characterized by continual technological developments to provide better and more reliable performance and services. If we are not able to design, develop, and produce commercially competitive products and to implement commercially competitive services in a timely manner in response to changes in the market, customer requirements, competitive pressures, and technology trends, our business and consolidated results of operations could be materially and adversely affected. Likewise, if our proprietary technologies, equipment, facilities, or work processes become obsolete, we may no longer be competitive, and our business and results of operations could be materially and adversely affected.  In addition, we may be disadvantaged

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competitively and financially by a significant movement of exploration and production operations to areas of the world in which we are not currently active.

We are affected by global economic factors and political events.

Our financial results depend on demand for our services and products in the U.S. and the international markets in which we operate. Declining economic conditions, or negative perceptions about economic conditions, could result in a substantial decrease in demand for our services and products. World political events could also result in further U.S. military actions, terrorist attacks and related unrest.  Military action by the U. S. or other nations could escalate and further acts of terrorism may occur in the U.S. or elsewhere. Such acts of terrorism could lead to, among other things, a loss of our investment in the country, impairment of the safety of our employees, extortion or kidnapping, and impairment of our ability to conduct our operations. Such developments have caused instability in the world’s financial and insurance markets in the past, and many experts believe that a confluence of worldwide factors could result in a prolonged period of economic uncertainty and slow growth in the future.  In addition, any of these developments could lead to increased volatility in prices for  oil and  gas and could affect the markets for our products and services. Insurance premiums could also increase and coverages may be unavailable.

Uncertain economic conditions and instability make it particularly difficult for us to forecast demand trends. The timing and extent of any changes to currently prevailing market conditions is uncertain, and may affect demand for many of our services and products. Consequently, we may not be able to accurately predict future economic conditions or the effect of such conditions on demand for our services and products and resulting results of operations or financial condition.

We may not realize the anticipated benefits of acquisitions or divestitures.

We continually seek opportunities to increase efficiency and value through various transactions, including purchases or sales of assets or businesses.   These transactions are intended to result in the offering of new services or products, the generation of income or cash, the creation of efficiencies or the reduction of risk. Whether we realize the anticipated benefits from an acquisition or any other transactions depends, in part, upon our ability to timely and efficiently integrate the operations of the acquired business, the performance of the underlying product and service portfolio, and the management team and other personnel of the acquired operations.  Accordingly, our financial results could be adversely affected from unanticipated performance issues, legacy liabilities, transaction-related charges, amortization of expenses related to intangibles, charges for impairment of long-term assets, credit guarantees, partner performance and indemnifications.  In addition, the financing of any future acquisition completed by us could adversely impact our capital structure or increase our leverage.  While we believe that we have established appropriate and adequate procedures and processes to mitigate these risks, there is no assurance that these transactions will be successful.  We also may make strategic divestitures from time to time.  These transactions may result in continued financial involvement in the divested businesses, such as guarantees or other financial arrangements, following the transaction.  Nonperformance by those divested businesses could affect our future financial results through additional payment obligations, higher costs or asset write-downs.  Except as required by law or applicable securities exchange listing standards, we do not expect to ask our shareholders to vote on any proposed acquisition or divestiture. Moreover, we generally do not announce our acquisitions or divestitures until we have entered into a preliminary or definitive agreement.

Business growth could outpace the capabilities of our infrastructure and workforce.

We cannot be certain that our infrastructure and workforce will be adequate to support our operations as we expand.  Future growth also could impose significant additional demands on our resources, resulting in additional responsibilities of our senior management, including the need to recruit and integrate new senior level managers, executives and operating personnel.  We cannot be certain that we will be able to recruit and retain such additional personnel.  Moreover, we may need to expend significant time and money in the future to integrate and unify our systems and infrastructure.  To the extent that we are unable to manage our growth effectively, or are unable to attract and retain additional qualified personnel, we may not be able to expand our operations or execute our business plan.

Our operations may be subject to cyber attacks that could have an adverse effect on our business operations.

Like most companies, we rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, to manage or support a variety of our business operations, and to maintain various records, which may include information regarding our customers, employees or other third parties.  We make significant efforts to maintain the security and integrity of these types of information and systems (and maintain contingency plans in the event of security breaches or system disruptions).  We cannot provide assurance that our security efforts and measures will prevent unauthorized access to our systems, loss or destruction of data, account takeovers, or other forms of cyber-attacks or similar events, whether caused by mechanical failures, human error, fraud, malice, sabotage or otherwise.  The frequency, scope and sophistication of cyber-attacks continue to grow, which increases the possibility that our security measures will be unable to prevent our systems’ improper functioning or the improper disclosure of proprietary information.  Any failure of our information or communications systems, whether caused by attacks, mechanical failures, natural disasters or otherwise, could interrupt our operations, damage our reputation, or subject us to claims, any of which could materially adversely affect us.

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We may be exposed to unforeseen costs in some of our projects.

Some of our decommissioning business may be conducted under fixed-price or “turnkey” contracts. Under fixed-price contracts, we agree to perform a defined scope of work or deliver a product for a fixed price. Prices for these contracts are established based largely upon estimates and assumptions relating to project scope and specifications, personnel and material needs.  These estimates and assumptions may prove inaccurate or conditions may change due to factors out of our control resulting in cost overruns.  We may be required to absorb these cost overruns, which could have a material adverse effect on our business, financial condition and results of operations.

Estimates of our oil and gas reserves and potential liabilities relating to our oil and gas properties may be incorrect.

From time to time, we may engage in projects that include the acquisition of oil and gas properties. Acquisitions of these properties require an assessment of a number of factors beyond our control, including estimates of recoverable reserves, future oil and gas prices, operating costs and potential environmental and plugging and abandonment liabilities. These assessments are complex and inherently speculative, and, with respect to estimates of oil and gas reserves, require significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir. In addition, since these properties are typically mature and could be in shallow water, our facilities and operations may be more susceptible to hurricane damage, equipment failure or mechanical problems. In connection with these assessments, we perform due diligence reviews that we believe are generally consistent with industry practices. However, our reviews may not reveal all existing or potential risks or liabilities. In addition, our reviews may not permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. We may not always discover structural, subsurface, environmental or other problems that may exist or arise.

Actual future production, cash flows, development expenditures, operating and abandonment expenses and quantities of recoverable oil and gas reserves may vary substantially from those estimated by us and any significant variance in these assumptions could materially affect the estimated quantity and value of our proved reserves. Therefore, the risk exists we may overestimate the value of economically recoverable reserves or underestimate the cost of plugging wells and abandoning production facilities. If costs of abandonment are materially greater or actual reserves are materially lower than our estimates, this could have an adverse effect on our financial condition, results of operations and cash flows.

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

Information on properties is contained in Part I, Item 1 of this Annual Report on Form 10-K.

 

Item 3. Legal Proceedings

From time to time, we are involved in various legal actions incidental to our business. The outcome of these proceedings is not predictable. However, based on current circumstances, we do not believe that the ultimate resolution of these proceedings, after considering available defenses and any insurance coverage or indemnification rights, will have a material adverse effect on our financial position, results of operations or cash flows.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock and Dividend Information

 

Our common stock trades on the New York Stock Exchange under the symbol “SPN.”  The following table sets forth the high and low sales prices per share of common stock as reported for each fiscal quarter during the periods indicated.

 

 

As of February 17, 2015, there were 149,785,368 shares of our common stock outstanding, which were held by 132 record holders.

 

Dividend Information

 

On January 15, 2015, our board of directors declared a regular quarterly dividend of $0.08 per share, which was paid on February 20, 2015, to our stockholders of record at the close of business on January 30, 2015.  The declaration and payment of any future dividends is at the discretion of our board of directors and will depend on our financial results, cash requirements, future prospects and other factors deemed relevant by our board of directors.

 

Equity Compensation Plan Information

 

Information required by this item with respect to compensation plans under which our equity securities are authorized for issuance is incorporated by reference from Part III, Item 12 of this Annual Report Form 10-K, which will be contained in our definitive proxy statement to be filed pursuant to Regulation 14A and is incorporated herein by reference.

 

Issuer Purchases of Equity Securities

 

The following table provides information about shares of our common stock repurchased and retired during each month for the three months ended December 31, 2014:

 

 

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(1) Through our stock incentive plans, 754 shares were delivered to us by our employees to satisfy their tax withholding requirements upon vesting of restricted stock.

(2)    On December 11, 2014, we announced that our Board of Directors authorized a share repurchase program of up to $500 million of our common stock, which will expire on December 31, 2016.  This $500 million share repurchase program replaced the previous $400 million share repurchase program approved by our Board of Directors in October 2013.  As of December 31, 2014, $500 million remained authorized under our new stock repurchase program.    The old share repurchase plan was set to expire in December 2015 and had $89.5 million of remaining authorization for shares repurchases as of December 5, 2014.  From October 1, 2014 through December 5, 2014, we repurchased 4,393,100 shares of our common stock for $114.3 million under the old share repurchase program.  

Performance Graph

 

The following performance graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into such filing. 

 

The following graph compares the yearly percentage change in cumulative total stockholder return on our common stock for five years ended December 31, 2014 with the cumulative total return on the S&P 500 Stock Index and our Self-Determined Peer Group, as described below, for the same period.  The information in the graph is based on the assumption of a $100 investment on January 1, 2010 at closing prices on December 31, 2009.

 

The comparisons in the graph are required by the SEC and are not intended to be a forecast or indicative of possible future performance of our common stock.

 

 

 

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NOTES:

 

Our Self-Determined Peer Group consists of 16 companies whose average stockholder return levels comprise part of the performance criteria established by the Compensation Committee of our Board of Directors under our long-term incentive compensation program:  Baker Hughes, Incorporated, Basic Energy Services, Inc., Cameron International Corporation, FMC Technologies, Inc., Halliburton Company, Helix Energy Solutions Group, Inc., Helmerich & Payne Inc., Key Energy Services, Inc., Nabors Industries Ltd., National Oilwell Varco, Inc., Oceaneering International, Inc., Oil States International, Inc., Patterson-UTI Energy Inc., RPC, Inc., Schlumberger N.V. and Weatherford International, Ltd. 

 

Item 6. Selected Financial Data

We present below our selected consolidated financial data for the periods indicated.  We derived the historical data from our audited consolidated financial statements.

 

The data presented below should be read together with, and are qualified in their entirety by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of this Annual Report on Form 10-K and our consolidated financial statements included in Part II, Item 8 in this Annual Report on Form 10-K.  The financial data is in thousands, except per share amounts.

 

 

 

 

 

 

 

 

 

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and applicable notes to our consolidated financial statements and other information included elsewhere in this Annual Report on Form 10-K, including risk factors disclosed in Part I, Item 1A.  The following information contains forward-looking statements, which are subject to risks and uncertainties.  Should one or more of these risks or uncertainties materialize, our actual results may differ from those expressed or implied by the forward-looking statements.  See “Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K.

 

Executive Summary

 

We provide a wide variety of services and products to the energy industry related to the exploration, development and production of oil and natural gas.  We serve major, national and independent oil and natural gas companies throughout the world.  Our operations are managed and organized by business units, which offer products and services within the various phases of a well’s economic life cycle. We report our operating results in four business segments: Drilling Products and Services; Onshore Completion and Workover Services; Production Services; and Technical Solutions (formerly, Subsea and Technical Solutions).  Given our history of growth and long-term strategy of expanding geographically, we also provide supplemental segment revenue information in three geographic areas:  U.S. land; Gulf of Mexico; and International.

 

Overall, 2014 was a very successful year for our Company.  We experienced strong operational performance and focused our efforts on maintaining capital and cost discipline.  Oil markets remained relatively well-balanced during much of 2014 as increasing global production capacity almost matched increasing demand.  However, late in 2014, oil prices declined dramatically to their lowest levels since 2009. 

 

As we enter a challenging 2015, the reduction in commodity prices, which have resulted principally from the higher marketed supply of oil, raises short-term uncertainty regarding the spending activity levels of our customers.  In this uncertain environment, our focus will be on rationalizing costs during the course of the downturn in demand for our products and services.

 

Overview of our business segments

 

The Drilling Products and Services segment is capital intensive with higher operating margins relative to our other segments as a result of relatively low operating expenses.  The largest fixed cost is depreciation as there is little labor associated with our drilling products and services businesses.  The financial performance is primarily a function of changes in volume rather than pricing.  In 2014, 35% of segment revenue was derived from U.S. land market areas (up from 34% in 2013),  while 41% of segment revenue was from the Gulf of Mexico market area (up from 38% in 2013) and 24% of segment revenue was from international market areas (down from 28% in 2013). Premium drill pipe accounted for more than 50% of this segment’s revenue in 2014, while bottom hole assemblies and accommodations each accounted for more than 20% of this segment’s revenue in 2014.

 

The Onshore Completion and Workover Services segment consists primarily of services used in the completion and workover of oil and gas wells on land. These services include pressure pumping, well service rigs and fluid management services.  All of this segment’s revenue is derived in the U.S. land market areas.  Demand for these services in the U.S. land market can change quickly and is highly dependent on the number of oil and natural gas wells drilled and completed. Given the cyclical nature of these drilling and completion activities in the U.S. land market, coupled with the high labor intensity of these services, operating margins can fluctuate widely depending on supply and demand at a given point in the cycle. In an effort to reduce cyclical margin volatility, we contract our pressure pumping horsepower that is used for horizontal well fracturing when possible. Additionally, the volumes of produced water that we permanently dispose of for our customers generate stable revenue streams as they are primarily a by-product of ongoing oil and gas production from both newly completed and mature wells.

 

Pressure pumping is the largest service offering in this segment, representing more than 45% of this segment’s revenue in 2014.  Fluid management represented more than 25% of this segment’s revenue in 2014, while well service rigs accounted for more than 15% of this segment’s revenue in 2014.

 

The Production Services segment consists of intervention services primarily used to maintain and extend oil and gas production during the life of a producing well, and specialized pressure-control tools used to manage and control pressure throughout the life of a well.  These services are labor intensive and margins fluctuate based on how much capital our customers allocate towards enhancing existing oil and gas production from mature wells.

 

In 2014, 64% of segment revenue was derived from the U.S. land market area (up from 61% in 2013), while 10% of segment revenue was from the Gulf of Mexico market area (down from 15% in 2013) and 26% of this segment’s revenue was from international market areas (up from 24% in 2013). Coiled tubing is the largest service offering in this segment, accounting for more than 25% of segment revenue in 2014. 

 

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The Technical Solutions segment consists of products and services that address customer-specific needs and include offerings such as pressure control services, completion tools and services, end-of-life services, production handling arrangements, the production and sale of oil and gas, and marine technical services. Given the project-specific nature associated with several of the service offerings in this segment and the seasonality associated with shallow water Gulf of Mexico activity, revenue and operating margins in this segment can have significant variations from quarter to quarter. 

 

In 2014, revenue derived from the U.S. land market area was 19% of segment revenue (up from 16% in 2013), while 57% of segment revenue was from the Gulf of Mexico market area (down from 65% in 2013) and 24% of segment revenue was from international market areas (up from 19% in 2013). Well control and associated services represent the largest service offering in this segment, accounting for more than 30% of this segment’s revenue in 2014.

 

Market drivers and conditions

 

The oil and gas industry is highly cyclical and seasonal.  Activity levels are driven by traditional energy industry activity indicators, which include current and expected commodity prices, drilling rig counts, well counts, well completions and workover activity, geologic characteristics of producing wells which determine the number and intensity of services required per well, oil and gas production levels, and our customers’ spending levels allocated towards drilling and production work.

 

Historical market indicators are listed below:

 

(1) Estimate of drilling activity as measured by average active drilling rigs based on Baker Hughes Incorporated rig count information.

 

(2) Excludes Canadian Rig Count.

 

The following table compares our revenues generated from major geographic regions for the years ended December 31, 2014 and 2013 (in thousands).  We attribute revenue to countries based on the location where services are performed or the destination of the rental or sale of products. 

 

 

In 2014, our U.S. land revenue increased 6% to $3,021.8 million as a result of the improved general market conditions in the U.S land market area, including increased activity and resulting higher pricing and utilization.  U.S. land market area revenue from our Technical Solutions segment increased 39%, primarily due to an increase in demand for completion tools and products. Drilling Products and Services segment’s revenue derived from the U.S. land market area increased 12%, primarily due to increases in revenue from rentals of accommodations, bottom hole assemblies and premium drill pipe.  Onshore Completion and Workover Services segment revenue increased by 8% due to higher demand for pressure pumping services and fluid management.  The increases were partially offset by a 2% decrease in Production Services segment revenue from the U.S. land market area, primarily as a result of the decline in market demand for coiled tubing, remedial pumping services and hydraulic workover and snubbing activity. 

 

In 2014, our Gulf of Mexico revenue remained flat at $827.1 million.  The Drilling Products and Services segment, which has significant deepwater Gulf of Mexico exposure, experienced a 20% increase in revenue, primarily due to an increase in revenue from rentals of premium drill pipe and accommodations.  The Technical Solutions segment revenue from the Gulf of Mexico increased 2%.  The increases were partially offset by a 33% decrease in Production Services segment revenue from the Gulf of Mexico, primarily due to decreased activity for pressure control, hydraulic workover and snubbing and wireline services.

 

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In 2014, our international revenue increased 5% to $707.7 million primarily as a result of increase in demand for well control work and completion tools and products in our Technical Solutions segment.  The Drilling Products and Services segment experienced a  5%  decline in revenue from international market areas due to decreases in rentals of accommodations and premium drill pipe. Production Services segment revenue from international market areas remained flat.

 

Comparison of the Results of Operations for the Years Ended December 31, 2014 and 2013

 

For the year ended December 31, 2014, our revenue was $4,556.6 million and our net income from continuing operations was $280.8 million, or $1.79 diluted earnings per share from continuing operations.    For the year ended December 31, 2013, our revenue was $4,350.1 million and our net income from continuing operations was $45.5 million, or $0.28 diluted earnings per share from continuing operations.  Included in the results for 2013 were pre-tax charges of $300.1 million related to the reduction in value of assets and $5.6 million primarily related to cost savings initiatives in certain of our U.S. land market areas.       

 

The following table compares our operating results for the years ended December 31, 2014 and 2013 (in thousands).  Cost of services and rentals excludes depreciation, depletion, amortization and accretion for each of our business segments. 

 

The following provides a discussion of our results on a segment basis:

 

Drilling Products and Services Segment

 

Revenue for our Drilling Products and Services segment was $923.8 million for the year ended December 31, 2014, a 10% increase from 2013.  Cost of services and rentals decreased to 31% of segment revenue in 2014, as compared to 33% in 2013, primarily due to an increase in revenues from a more favorable product mix.  Revenue from our Gulf of Mexico market increased 20% due to increases in rentals of premium drill pipe and accommodations.  Revenue generated in our U.S. land market area increased 12%, primarily due to increases in revenue from rentals of accommodations and bottom hole assemblies. These increases were partially offset by a 5% decrease in revenue generated from our international market areas, which was due to a decrease in rentals of accommodations and bottom hole assemblies.

 

Onshore Completion and Workover Services Segment

 

Revenue for our Onshore Completion and Workover Services segment was $1,727.9 million for the year ended December 31, 2014, an 8% increase from 2013. Cost of services and rentals increased to 70% of segment revenue in 2014, as compared to 68% in 2013.  The increase is primarily due to higher levels of repair and maintenance expense for pressure pumping services.  The increase in revenue was driven by higher demand for pressure pumping services and fluid management.

 

Production Services Segment

 

Revenue for our Production Services segment was $1,356.1 million for the year ended December 31, 2014, a 6% decline from 2013.  Cost of services and rentals remained at 70% of segment revenue.  Revenue derived from the Gulf of Mexico market area decreased 33% due to decreased activity for pressure control, hydraulic workover and snubbing and wireline services. Revenue from the U.S. land market area decreased 2% as we experienced declines in coiled tubing, remedial pumping, and hydraulic workover and snubbing activity.  Revenue from international market areas remained flat for 2014 as compared to 2013.

 

Technical Solutions Segment

 

Revenue for our Technical Solutions segment was $548.8 million for the year ended December 31, 2014, a 17% increase from 2013.  Cost of services and rentals decreased to 54% of segment revenue in 2014, as compared to 56% in 2013, primarily due to a more favorable product mix.  Revenue in our international market areas increased 48% primarily as a result of an increase in demand for well control work and completion tools and products. Revenue in our Gulf of Mexico market area increased 2%, primarily due to increases in our oil and gas activities. Revenue in our U.S. land market area increased 39% primarily due to an increase in demand for completion tools and products and well control work.

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Depreciation, Depletion, Amortization and Accretion

 

Depreciation, depletion, amortization and accretion increased to $650.8 million for the year ended December 31, 2014 from $604.4 million in 2013.  Depreciation and amortization expense increased for our Drilling Products and Services segment by $18.5 million, or 11%; for our Onshore Completion and Workover Services segment by $18.0 million, or 8%, and for our Technical Solutions segment by $23.2 million, or 56%, primarily due to capital expenditures.  Depreciation and amortization expense for our Production Services segment decreased by $13.3 million, or 7%, as a result of certain assets being fully depreciated. 

 

General and Administrative Expenses

 

General and administrative expenses increased to $624.4 million for the year ended December 31, 2014 from $597.8 million in 2013.    General and administrative expenses increased year over year primarily due to an increase in employee-related expenses and expanding infrastructure to support growth in both U.S. and international markets.

 

Reduction in Value of Assets

 

During the year ended December 31, 2013, we recorded $300.1 million of reduction in value of assets.  The reduction in value of assets expense included $180.3 million related to long-lived assets and certain other assets in our Technical Solutions, Onshore Completion and Workover Services and Production Services segments, $91.0 million related to the write-off of the goodwill balance for our Technical Solutions segment, $14.5 million related to retirement and abandonment of long-lived assets in multiple operating segments and $14.3 million related to reduction in the value of assets related to Venezuela exit activities.  See note 9 to our consolidated financial statements for further discussion of the reduction in value of assets.

 

Income Taxes

 

The decrease in the effective tax rate during 2014 relative to 2013 was primarily due to an increase in operating income from continuing operations in jurisdictions with tax rates lower that the U.S.  The 2013 rate was above normal due to the asset value reductions recorded during the fourth quarter of 2013, which were attributable to foreign jurisdictions with low or zero statutory income tax rates.  The absence of asset value reductions in 2014 caused the effective tax rate to normalize during the year. See note 10 to our consolidated financial statements.

 

Discontinued Operations

 

Discontinued operations include operating results for both our subsea construction business and our conventional decommissioning business.  Losses from discontinued operations, net of tax, were  $23.0 million for the year ended December 31, 2014, as compared to $156.9 million in 2013. 

 

Comparison of the Results of Operations for the Years Ended December 31, 2013 and 2012

 

For the year ended December 31, 2013, our revenue was $4,350.1 million and our net income from continuing operations was $45.5 million, or $0.28 diluted earnings per share from continuing operations.  Included in the results for 2013 were pre-tax charges for $300.1 million related to the reduction in value of assets and $5.6 million primarily related to cost savings initiatives in certain of our U.S. land market areas.  For the year ended December 31, 2012, our revenue was $4,293.3 million and our net income from continuing operations was $383.9 million, or $2.54 diluted earnings per share from continuing operations. Included in the results for 2012 were $32.9 million of acquisition related costs, $2.3 million of loss on early extinguishment of debt, and $17.9 million of gain on the sale of our equity-method investment.       

 

The following table compares our operating results for the years ended December 31, 2013 and 2012 (in thousands).  Cost of services and rentals excludes depreciation, depletion, amortization and accretion for each of our business segments. 

 

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The following provides a discussion of our results on a segment basis:

 

Drilling Products and Services Segment

 

Revenue for our Drilling Products and Services segment was $838.5 million for the year ended December 31, 2013, an 8% increase from 2012.  Cost of services and rentals remained at 33% of segment revenue in 2013.  Revenue from our Gulf of Mexico market increased 30% due to increases in most of our product lines within this segment, particularly due to increases in rentals of premium drill pipe.  Revenue generated from our international market areas increased 23%, primarily due to increase in rentals of bottom hole assemblies and premium drill pipe.  Revenue generated from our U.S. land market area decreased 16%, primarily due to decreases in rentals of premium drill pipe and accommodations.    

 

Onshore Completion and Workover Services Segment

 

Revenue for our Onshore Completion and Workover Services segment was $1,596.7 million for the year ended December 31, 2013, a slight increase from 2012. Cost of services and rentals increased to 68% of segment revenue in 2013, as compared to 65% in 2012.  All of this segment’s revenue is derived from the U.S. land market area by businesses acquired in the February 2012 acquisition of Complete.  This segment’s results were negatively impacted during the year ended December 31, 2013 as a result of the decline in general market conditions in the U.S. land market area, including competitive pressures and resulting lower pricing and utilization.

 

Production Services Segment

 

Revenue for our Production Services segment was $1,445.6 million for the year ended December 31, 2013, a 4% decline from 2012.  Cost of services and rentals increased to 70% of segment revenue, as compared to 62% in 2012.  Market demand for coiled tubing, wireline, hydraulic workover and snubbing, and remedial pumping services in the U.S. land market areas declined,  which were the primary drivers of the decline in revenue and the increase in cost of services and rentals as a percentage of revenue.  Revenue derived from the Gulf of Mexico market area increased 24% due to increases in demand for most of our product lines within this segment.  Revenue from international market areas increased 15% primarily due to our acquisitions of a wireline company and a cementing company in Latin America during 2013.  These increases more than offset the decline in coiled tubing services revenue in Mexico as work slowed down in 2013 in the northern part of the country.

 

Technical Solutions Segment

 

Revenue for our Technical Solutions segment was $469.3 million for the year ended December 31, 2013, a 14% increase from 2012.  Cost of services and rentals decreased to 56% of segment revenue in 2013, as compared to 59% in 2012.  Revenue in our Gulf of Mexico market area increased 34%, primarily due to increases in well control work and sand control and stimulation services.  Revenue in our international market areas decreased 24%, primarily as a result of a decrease in well control work.  Revenue in our U.S. land market area increased 9%, primarily as a result of increased demand for environmental services.

 

Depreciation, Depletion, Amortization and Accretion

 

Depreciation, depletion, amortization and accretion increased to $604.4 million for the year ended December 31, 2013 from $488.1 million in 2012.  Depreciation and amortization expense increased for our Drilling Products and Services segment by $18.6 million, or 12%, due to capital expenditures.  Depreciation and amortization expense for our Onshore Completion and Workover Services segment increased by $43.7 million, or 25%, some of which was attributable to the fact that the product offerings comprising this segment were acquired in the February 2012 acquisition of Complete and the remainder is attributable to capital expenditures.  Depreciation and amortization expense for our Production Services segment increased by $42.5 million, or 31%, partly because a portion of the product offerings comprising this segment were acquired in the Complete acquisition and the remainder is attributable to other acquisitions and capital expenditures.  Depreciation, depletion, amortization and accretion expense for our Technical Solutions segment increased by $11.6 million, or 39%, primarily due to capital expenditures. 

 

General and Administrative Expenses

 

General and administrative expenses decreased to $597.8 million for the year ended December 31, 2013 from $625.4 million in 2012.    General and administrative expenses declined year over year primarily due to nonrecurring acquisition-related expenses and other expenses incurred during 2012. 

 

Reduction in Value of Assets

 

During the year ended December 31, 2013, we recorded $300.1 million of reduction in value of assets.  The reduction in value of assets expense included $180.3 million related to long-lived assets and certain other assets in our Technical Solutions, Onshore Completion and Workover Services and Production Services segments, $91.0 million related to the write-off of the goodwill balance for our

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Technical Solutions segment, $14.5 million related to retirement and abandonment of long-lived assets in multiple operating segments and $14.3 million related to reduction in the value of assets related to Venezuela exit activities.  See note 9 to our consolidated financial statements for further discussion of the reduction in value of assets.

 

Income Taxes

 

The increase in the effective tax rate during 2013 was primarily due to the asset value reductions recorded during the fourth quarter of 2013, which were attributable to foreign jurisdictions with low or zero statutory income tax rates.  See note 10 to our consolidated financial statements.

 

Discontinued Operations

 

Loss from discontinued operations, net of tax, was $156.9 million for the year ended December 31, 2013 and included operating results for both our subsea construction business and conventional decommissioning business.  Loss from discontinued operations, net of tax, was $18.0 million for the year ended December 31, 2012 and included operating results for both our subsea construction business and conventional decommissioning business and the derrick barge and liftboats that were sold in 2012.

 

Liquidity and Capital Resources

 

In the year ended December 31, 2014, we generated net cash from operating activities of $1,033.0 million as compared to $892.8 million in 2013.  Our primary liquidity needs are for working capital and to fund capital expenditures, debt service, dividend payments, share repurchases and acquisitions.  Our primary sources of liquidity are cash flows from operations and available borrowings under the revolving portion of our credit facility.  We had cash and cash equivalents of $393.0 million as of December 31, 2014 as compared to $196.0 million as of December 31, 2013.   As of December 31, 2014, approximately $172.5 million of our cash balance was held in foreign jurisdictions.  Cash balances held in foreign jurisdictions could be repatriated to the U.S.; however, they would be subject to U.S. federal income taxes, less applicable foreign tax credits.  Our current plans do not demonstrate a need to repatriate these balances to fund our domestic cash requirements.  We have not provided U.S. income tax expense on earnings of our foreign subsidiaries because we expect to reinvest the undistributed earnings indefinitely.  In October 2014, we acquired all of the equity interests in a company in India using approximately $22.0 million of cash which was held outside of the U.S.

 

We spent $616.1 million of cash on capital expenditures during the year ended December 31, 2014.  Approximately $276.6 million was used to expand and maintain our Drilling Products and Services segment’s equipment inventory, and approximately $152.7 million, $88.9 million and $97.9 million was spent to expand and maintain the asset bases of our Onshore Completion and Workover Services, Production Services and Technical Solutions segments, respectively.  

 

During 2015, we currently believe that we will reduce our capital expenditures by at least 35% from 2014.    We intend to limit our 2015 capital expenditures so that we continue to generate net cash from operating activities after considering our capital expenditures.

 

We have a $1.0 billion bank credit facility which is comprised of a $600 million revolving credit facility and a $400 million term loan.  The principal balance of the term loan is payable in installments of $5.0 million on the last day of each fiscal quarter.  As of December 31, 2014, we had $345 million outstanding under the term loan. As of December 31, 2014, we had no amounts outstanding under the revolving portion of our credit facility and $44.2 million of letters of credit outstanding, which reduce our borrowing capacity under this portion of the credit facility.  As of February 17, 2015, we had no amounts outstanding under the revolving portion of our credit facility, and $44.1 million of letters of credit outstanding.  Any amounts outstanding on the bank revolving credit facility and the term loan are due on February 7, 2017.  Borrowings under the credit facility bear interest at LIBOR plus margins that depend on our credit rating. The credit facility contains customary events of default and requires that we satisfy various financial covenants.  As of December 31, 2014, we were in compliance with all such covenants.

 

We have outstanding $500 million of 6 3/8% unsecured senior notes due 2019. The indenture governing the 6 3/8% senior notes requires semi-annual interest payments on May 1st and November 1st of each year through the maturity date of May 1, 2019.  The indenture contains customary events of default and requires that we satisfy various covenants.  As of December 31, 2014, we were in compliance with all such covenants.

 

We also have outstanding $800 million of 7 1/8% unsecured senior notes due 2021.  The indenture governing the 7 1/8% senior notes requires semi-annual interest payments on June 15th and December 15th of each year through the maturity date of December 15, 2021.  The indenture contains customary events of default and requires that we satisfy various covenants.  As of December 31, 2014, we were in compliance with all such covenants.

 

During 2014, credit ratings for our outstanding debt were raised to investment grade with the ratings of Baa3 with Moody’s Investors Service and BBB- with Standard and Poor’s.

 

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The following table summarizes our contractual cash obligations and commercial commitments as of December 31, 2014 (in thousands):    

 

 

The table above reflects only contractual obligations as of December 31, 2014 and excludes, among other things, (i) commitments made thereafter, (ii) options to purchase assets, (iii) contingent liabilities, (iv) capital expenditures that we plan, but are not committed, to make and (v) open purchase orders.

 

We continue to focus on operational efficiency and returning cash to stockholders.  During 2014, we repurchased $299.9 million of our common stock.  As of December 31, 2014, $500 million was available under our existing share repurchase program. During 2014, we paid $49.8 million of dividends to stockholders.  In February 2015, we paid a quarterly dividend of $12.0 million to stockholders of record as of January 30, 2015.

   

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes.  Note 1 of our consolidated financial statements, which is included in Part II, Item 8 of this Annual Report on Form 10-K, contains a description of the significant accounting policies used in the preparation of our financial statements.  We evaluate our estimates on an ongoing basis, including those related to business combinations, long-lived assets, goodwill, income taxes, allowance for doubtful accounts, revenue recognition, long-term contract accounting, self-insurance, and oil and gas properties.  We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances.  Actual amounts could differ significantly from these estimates under different assumptions and conditions.

 

We define a critical accounting policy or estimate as one that is both important to our financial condition and results of operations and requires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain.  We believe that the following are the critical accounting policies and estimates used in the preparation of our consolidated financial statements.  In addition, there are other items within our consolidated financial statements that require estimates but are not deemed critical as defined in this paragraph.

 

Business Combinations -  Purchase Price Allocation. We allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets, and widely accepted valuation techniques such as discounted cash flows. We engage third-party appraisal firms to assist in fair value determination of property, plant and equipment, inventories, identifiable intangible assets, and any other significant assets or liabilities when appropriate. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.

 

Long-Lived Assets.  We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable.  We record impairment losses on long-lived assets used in operations when the fair value of those assets is less than their respective carrying amount.  Fair value is measured, in part, by the estimated cash flows to be generated by those assets.   Our cash flow estimates are based upon, among other things, historical results adjusted to reflect our best estimate of future market rates, utilization levels and operating performance.  Our 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.  Assets are generally grouped by subsidiary or division for the impairment testing, which represent the lowest level of identifiable cash flows.  We have long-lived assets, such as facilities, utilized by multiple operating divisions that do not have identifiable cash flows.  Impairment testing for these long-lived assets is based on the consolidated entity.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less estimated costs to sell.  Our estimate of fair value represents our best estimate based on industry trends and reference to market transactions and is subject to variability.  The oil and gas industry is cyclical and our estimates of the period over which future cash flows will be generated, as well as the predictability of these cash flows, can have a significant impact on the carrying value of these assets and, in periods of prolonged down cycles, may result in impairment charges.

 

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Goodwill.  In assessing the recoverability of goodwill, we make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets.  We test goodwill for impairment in accordance with authoritative guidance related to goodwill and other intangibles, which requires that goodwill, as well as other intangible assets with indefinite lives, not be amortized but instead be tested annually for impairment or when changes in circumstances indicate that the carrying value may not be recoverable.  During the third quarter of 2014, we changed the annual goodwill impairment testing date from December 31 to October 1. We consider this accounting change preferable because it allows us additional time to complete the annual goodwill impairment test. This change does not accelerate, delay, avoid, or cause an impairment charge, nor does this change result in adjustments to previously issued financial statements. Our annual testing of goodwill is based on carrying value and our estimate of fair value as of October 1.  We estimate the fair value of each of our reporting units (which are consistent with our business segments) using various cash flow and earnings projections discounted at a rate estimated to approximate the reporting units’ weighted average cost of capital.  We then compare these fair value estimates to the carrying value of our reporting units.  If the fair value of the reporting units exceeds the carrying amount, no impairment loss is recognized.  Our estimates of the fair value of these reporting units represent our best estimates based on industry trends and reference to market transactions.  A significant amount of judgment is involved in performing these evaluations since the results are based on estimated future events. 

 

Based on the most recent goodwill impairment test at October 1, 2014, the fair values of the Drilling Products and Services and Onshore Completion and Workover Services segments were substantially in excess of their carrying values.  The fair value of the Production Services segment exceeded its carrying value by approximately 9%.  Therefore, no goodwill impairment was recorded.  As a result of our 2013 impairment of the goodwill of the Technical Solutions segment, this segment had no goodwill as of October 1, 2014.  A significant amount of judgment was involved in performing these evaluations since the results are based on estimated future events. 

 

Income Taxes.    We use the asset and liability method of accounting for income taxes.  This method takes into account the differences between financial statement treatment and tax treatment of certain transactions.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Our deferred tax calculation requires us to make certain estimates about our future operations.  Changes in state, federal and foreign tax laws, as well as changes in our financial condition or the carrying value of existing assets and liabilities, could affect these estimates.  The effect of a change in tax rates is recognized as income or expense in the period that the rate is enacted.

 

Allowance for Doubtful Accounts.  We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of some of our customers to make required payments.  These estimated allowances are periodically reviewed on a case by case basis, analyzing the customer’s payment history and information regarding the customer’s creditworthiness known to us.  In addition, we record a reserve based on the size and age of all receivable balances against those balances that do not have specific reserves.  If the financial condition of our customers deteriorates, resulting in their inability to make payments, additional allowances may be required.

 

Revenue Recognition.  Our products and services are generally sold based upon purchase orders or contracts with customers that include fixed or determinable prices.  We recognize revenue when services or equipment are provided and collectability is reasonably assured.  We contract for services either on a day rate or turnkey basis, with a majority of our projects conducted on a day rate basis.  We rent products on a day rate basis, and revenue from the sale of equipment is recognized when the title to the equipment has transferred to the customer. 

 

Long-Term Contract Accounting for Revenue and Profit (Loss) Recognition.  A portion of our revenue is derived from long-term contracts.  For contracts that meet the criteria under the authoritative guidance related to construction-type and production-type contracts, we recognize revenues on the percentage-of-completion method, primarily based on costs incurred to date compared with total estimated contract costs.  It is possible there will be future and currently unforeseeable significant adjustments to our estimated contract revenues, costs and profitability for contracts currently in process.  These adjustments could, depending on the magnitude of the adjustments, materially, positively or negatively, affect our operating results in a reporting period.  To the extent that an adjustment in the estimated total contract cost impacts estimated profit of the contract, the cumulative change to revenue and profitability is reflected in the period in which this adjustment in estimate is identified.  The accuracy of the revenue and estimated earnings we report for fixed-price contracts is dependent upon the judgments we make in estimating our contract performance and contract revenue and costs.

 

Self-Insurance.  We self-insure, through deductibles and retentions, up to certain levels for losses under our insurance programs.  As a result of our growth, we have elected to retain more risk by increasing our self-insurance levels.  We accrue for these liabilities based on estimates of the ultimate cost of claims incurred as of the balance sheet date.  We regularly review our estimates of reported and unreported claims and provide for losses through reserves.  We obtain actuarial reviews to evaluate the reasonableness of internal estimates for losses related to workers’ compensation, auto liability and group medical on an annual basis.  Our financial results could be impacted if litigation trends, claims settlement patterns and future inflation rates are different from our estimates.  

 

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Oil and Gas Properties. Our subsidiary, Wild Well Control Inc. (Wild Well) has oil and gas properties as well as the related well abandonment and decommissioning liabilities.  Wild Well follows the successful efforts method of accounting for its investment in oil and gas properties.  Under the successful efforts method, the costs of successful exploratory wells and leases containing productive reserves are capitalized.  Costs incurred to drill and equip developmental wells, including unsuccessful developmental wells, are capitalized.  Other costs such as geological and geophysical costs and the drilling costs of unsuccessful exploratory wells are expensed.  All capitalized costs are accumulated and recorded separately for each field and allocated to leasehold costs and well costs.  Leasehold and well costs are depleted on a units-of-production basis based on the estimated remaining equivalent oil and gas reserves of the field. 

 

Oil and gas properties are assessed for impairment in value on a field-by-field basis whenever indicators become evident.  We use our current estimate of future revenues and operating expenses to test the capitalized costs for impairment.  In the event net undiscounted cash flows are less than the carrying value, an impairment loss is recorded based on the present value of expected future net cash flows over the economic lives of the reserves.

 

Discontinued Operations.    We classify assets and liabilities of a disposal group as held for sale and discontinued operations when all the following criteria are met: (1) management, with appropriate authority, commits to a plan to sell a disposal group; (2) the asset is available for immediate sale in its current condition; (3) an active program to locate a buyer and other actions to complete the sale have been initiated; (4) the sale is probable; (5) the disposal group is being actively marketed for sale at a reasonable price; and (6) actions required to complete the plan of sale indicate it is unlikely that significant changes to the plan of sale will occur or that the plan will be withdrawn.  Once deemed held for sale, we no longer depreciate the assets of the disposal group.  Upon sale, we calculate the gain or loss associated with the disposition by comparing the carrying value of the assets less direct costs of the sale with the proceeds received.  In the consolidated statements of operations, we present discontinued operations, net of tax effect, as a separate caption below net income from continuing operations.

 

Hedging Activities

 

We have three interest rate swap agreements for notional amounts of $100 million each related to our 7 1/8% senior notes maturing in December 2021, whereby we are entitled to receive semi-annual interest payments at a fixed rate of 7 1/8% per annum and are obligated to make semi-annual interest payments at variable rates.   The variable interest rates, which are adjusted every 90 days, are based on LIBOR plus a fixed margin and are scheduled to terminate on December 15, 2021.

 

Recently Issued Accounting Pronouncements

 

See Part II, Item 8, “Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies – Recently Issued Accounting Pronouncements.”

 

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We are 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 Rate Risk

 

Because we operate in a number of countries throughout the world, we conduct a portion of our business in currencies other than the U.S. dollar.  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 foreign operations is paid in foreign currencies.  The effects of foreign currency fluctuations are partly mitigated because local expenses of such foreign 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 liabilities of certain subsidiaries in the United Kingdom and Europe are translated at end of period exchange rates, while income and expenses are translated at average rates for the period.  Translation gains and losses are reported as the foreign currency translation component of accumulated other comprehensive loss in stockholders’ equity. 

 

We do not hold derivatives for trading purposes or use derivatives with complex features. When we believe prudent, we enter into forward foreign exchange contracts to hedge the impact of foreign currency fluctuations.  We do not enter into forward foreign exchange contracts for trading purposes.  As of December 31, 2014, we had no outstanding foreign currency forward contracts.

 

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Interest Rate Risk

 

As of December 31, 2014, our debt was comprised of the following (in thousands):

 

 

Variable debt of $300 million represents the portion of the $800 million aggregate principal amount of our 7 1/8% senior notes subject to the fixed-to-variable interest rate swap agreements.   Based on the amount of this debt outstanding as of December 31, 2014, a 10% increase in the variable interest rate would increase our interest expense for the year ended December 31, 2014 by approximately $2.1 million, while a 10% decrease would decrease our interest expense by approximately $2.1 million. 

 

Commodity Price Risk

 

Our 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 gas that can economically be produced.  For additional information on the impact of changes in commodities prices on our business and prospects, see Item 1A to this Annual Report.    

 

 

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Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

Superior Energy Services, Inc.:

 

We have audited the accompanying consolidated balance sheets of Superior Energy Services, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014.  In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule II, Valuation and Qualifying Accounts.  These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Superior Energy Services, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.  Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Superior Energy Services, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

KPMG LLP

 

 

Houston,  Texas

February 26, 2015

 

 

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