March 20, 2005
Analyst: Raymond Kwan Ian Madsen, MBA, CFA, Editor
1-800-767-3771, x417;
www.zackspro.com 155 North Wacker Drive l Chicago, IL 60606
Superior Energy Services, Inc. (SPN-NYSE) – $18.31
Overview
Superior Energy Services, Inc. is a provider of specialized oilfield services and equipment focused on serving the production-related needs of oil and gas companies in the Gulf of Mexico. The Company provides a full range of products and services for its customers, including well intervention services, marine services, rental tools and other oilfield services. Superior Energy's customers are oil and gas companies operating on the United States continental shelf. As of December 31, 2003, sales to ChevronTexaco accounted for approximately 11% of its total revenue primarily in the well intervention and other oilfield services segment. The Company’s head office is located in Harvey, LA with employees totaling 3,150. Additional information about the company can be found at www.superiorenergy.com
Analysts have identified the following factors for evaluating investment merits of SPN.
Key Positive Arguments / Key Negative Arguments· Strong wireline activity in the Gulf of Mexico (GOM) and a large well control project in Egypt boosted Company’s well intervention 4Q’04 revenues to $62.8 MM, up 26% YoY and 5% QoQ.
· Management indicated production activity in the shallow GOM is improving and deepwater drilling is moving ahead after Hurricane Ivan.
· Company’s oilfield rentals division experienced strong demand for its stabilizer and downhole tubulars, on-site accommodations, and drill pipe.
· Company’s well intervention and oilfield rentals segments generated sequential 4Q gross margin improvements of 380 and 220 basis points, respectively.
· Management has pushed forward international expansion plans for its oilfield rentals unit that should garner additional market share.
· Average fleet liftboat utilization rates have jumped 1000 basis points to 77% from a year prior, while average liftboat dayrates have improved 4% sequentially in 4Q’04. / · SPN Resources’ production totaled 289,400 Boe in the 4Q’04 down 46,490 Boe QoQ due to a shut-in at South Pass 60.
· Typically, offshore-related work is highly seasonal and therefore earnings can be “lumpy.”
· Drilling activity is highly dependent on commodity prices; lower oil and gas prices may temper drilling activity.
Superior Energy Services, Inc. posted solid 4Q’04 results. EPS was $0.16 per share, exactly inline with the Street Consensus of $0.16 per share. Revenues jumped 3.5% QoQ to $158MM, while EBITDA increased 6% sequentially to $43MM. The strong results were attributed to robust remedial and production related work at the Company’s Well Intervention and Marine segments as well as higher demand for rental tools. Offsetting these positive items was lower production numbers at SPN Resources due to weather-related deferrals. Going forward, most analysts have raised their FY’05 EPS estimates in anticipation of continued strength in SPN’s Well Intervention and Rental Tools segments. Overall, analysts believe the Company’s should be trading markedly higher over the next 12-18 months.
Revenues
Total Revenues
Fiscal Year Ends: December$ in millions / FY2004A / 1Q05E / 2Q05E / 3Q05E / 4Q05E / FY2005E
Digest High / 564.4 / 170.1 / 178.3 / 186.1 / 178.5 / 711.0
Digest Low / 564.0 / 163.2 / 174.8 / 175.9 / 168.1 / 688.8
Digest Average / 564.2 / 166.7 / 176.6 / 181.0 / 173.3 / 702.0
Digest Average YoY Growth / 12.67% / 43.08% / 28.38% / 18.68% / 9.81% / 24.41%
Analysts are forecasting double-digit revenue growth for FY2005 due to continued demand for coiled tubing and pressure testing at the Well Intervention group as well as downhole tubulars and on-site accommodations at the Oilfield Rental segment. Management also anticipates production levels for SPN Resources to return to more normalized levels of ~7,000 Boe/day in the 1Q’05. Notably, the Company’s production level is only mildly hedged (~31%), which should allow for higher price realization going forward.
Please refer to Zacks Research Digest spreadsheet for specific revenue estimates.
Margins
FY2004A / FY2005E / FY2006E / Trend(up/down)
Operating Profit Margins / 13.52% / 19.97% / 21.18% / UP
Operating profit margins for FY2005 are expected to jump 645 basis points from ’04 levels. Increased production related bundle service offerings, rising liftboat utilization rates, and tight domestic rig count are the main drivers attributed to the higher expected margins for FY’05/06. According to one analyst (Raymond James), liftboat utilization rates that are higher than 75% will typically result in pricing improvements.
Please refer to Zacks Research Digest spreadsheet for more details on margin estimates.
Earnings Per Share
Fiscal Year Ends: December$ in millions / FY2004A / 1Q05E / 2Q05E / 3Q05E / 4Q05E / FY2005E
Digest High EPS / 0.47 / 0.22 / 0.26 / 0.29 / 0.32 / 1.00
Digest Low EPS / 0.47 / 0.18 / 0.22 / 0.27 / 0.22 / 0.98
Digest Average / 0.47 / 0.20 / 0.25 / 0.28 / 0.27 / 1.00
Digest Average YoY Growth / 14.63% / 304.00% / 105.00% / 85.33% / 66.25% / 111.91%
Please refer to Zacks Research Digest spreadsheet for more extensive EPS figures.
Target Price/Valuation
Target prices for SPN range from $20.00 to $23.00 with an average model price of $21.50. The upper bound is established by a combination of discounted cash flow, 20x P/E multiple, and 8x EBITDA multiple. The lower end of the range is determined by a combination of 7.4x 12 month forward EBITDA and 8x historical average estimate.
Please refer to Zacks Research Digest Spreadsheet for further details on valuation.
Long-Term Growth
Long-term growth for SPN should be in the double-digit range going forward. Over the medium term, analysts believe strong demand for its rental tools and well intervention products will continue to bolster top and bottom line results due to sustained storm related workover activities, higher commodity prices, and improvements in production related activity in the shallow water GOM. Over the longer term, management has been focusing on expanding its international presence in the Oilfield Rentals division. Specifically, SPN plans to further expand into the North Sea, Middle East, and West Africa as well as into new areas such as Mexico and Bay of Campeche. According to most analysts, this international diversification will generate positive returns for the Company going forward and further improve SPN’s market share. For SPN Resources, analysts believe the Company will resort to additional property acquisitions. In particular, management has commented on two potential and large properties in the GOM.
Individual Analyst Opinions
POSITIVE
Bear, Stearns & Co, Inc – The stock is rated OUTPERFORM with a $22.00 price target. Analyst applauds SPN’s performance over the past 2 years given the adverse market environment. Analyst further acknowledges the Company’s strong rental division as well as management’s keen ability to realize SPN Resources into commercial reality.
First Albany Capital – The stock is rated BUY with a $20.00 price target. Analyst believes SPN’s wide array of services and products coupled with its resource segment offers investors a more diversified oilfield company.
Hibernia Southcoast Capital – The stock is rated BUY with a $21.00 price target. Analyst believes the Company’s Rental Tools and Well Intervention segments will account for 65% and 67% of the SPN’s total gross profit for FY2005 and FY2006, respectively.
Johnson Rice & Company – The stock is rated OVERWEIGHT with no given price target. Firm views the Company’s strong US land and international growth as a positive catalyst going forward. Additionally, the analyst forecasts oil prices for 2005 and 2006 to average $42 and $37, respectively.
Raymond James – The stock is rated STRONG BUY-1 with a $23.00 price target. Analyst believes strong well intervention, rising liftboat dayrates, and higher production volumes at SPN Resources will buoy FY’05 EPS above consensus.
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