Superior Energy Services: Corporate Performance Analysis

Subject: Company Analysis
Pages: 16
Words: 4170
Reading time:
15 min
Study level: College

Background of Superior Energy Services

Superior Energy Services was formed in 1989. The company operates in the oil & gas equipment and services industry. The products and services of the company are divided into a number of segments. The first segment consists of products and services that deals with drilling. Examples of product in this segment are drill pipe, handling tools, stabilizers and hole openers among others. The second category has products and services that deal with onshore completion and workover.

In only 3 hours we’ll deliver a custom Superior Energy Services: Corporate Performance Analysis essay written 100% from scratch Get help

Examples of products and services in this category are cementing, hydraulic fracturing and fluid disposal among others. The third segment focuses on production services. In this category, the company provides pressure control tools and sick-line among others. The final category is sub-sea and technical solutions. In this category, the company provides services that are related to rigless production.

Superior Energy Services started with approximately125 employees 1989. The revenue earned during this period was about $12 million. At the moment, the sales revenue stands at $4.6billion while the number of employees is 14,000. The results show that the company started from humble beginning and it has grown tremendously over the years. This rapid growth can be attributed to the growth and expansion strategies used by the company.

First, after the company went public, it acquired a number of small and medium companies. This sparked off growth in the company. A major business combination that the company did in its early years was the merger with Cardinal Services. This company provided mechanical wire-line services. Secondly, the company expanded its operations in the international markets. In this line, it acquired Premier Oilfield Services. This enabled it to access other international markets such as West Africa, Europe and North Sea. In 2006, the company focused on onshore expansion. In this line, the company acquired Warrior Energy Services.

This company focused on the production of natural gas and other products. The acquisition improved the appearance of company in North America. In 2008, the company concentrated on growing its fleet, especially in offshore markets. The company bought a number of sophisticated machinery and equipment. In the same year, the company expanded into new markets such as Singapore, New Zealand, and Kazakhstan among others. The hiring of a new CEO in 2010 also improved the performance of the company. In 2012, the company focused on diversifying growth by expanding the international markets. This was achieved by merging its operations with complete production services and selling the fleet of lift-boats. Therefore, it is evident that the company has used several strategies to facilitate growth (Superior Energy Services, 2014b).

Competitive advantage

As mentioned above, the company operates in the oil & gas equipment & services industry. Some of the competitors of the Superior Energy Services are Baker Hughes Incorporated, Parker Drilling Company, and Schlumberger Limited. The table presented below shows a summary of data for the competitors and the industry.

Superior Energy Services Baker Hughes Incorporated Parker Drilling Company Schlumberger Limited Industry
Market capitalization 2.93B 24.45B 396.16M 109.17B 677.09M
Employees 14,500 61,100 3,395 123,000 2.21K
Revenue 4.72B 23.78B 968.79M 47.84B 467.51M
Gross Margin 0.37 0.19 0.32 0.23 0.28
EBITDA 1.09B 4.27B 268.24M 13.00B 90.73M
Operating Margin 0.09 0.1 0.13 0.19 0.1
Net Income -126.16M 1.30B 25.87M 7.00B N/A
EPS -0.78 2.96 0.21 5.17 0.11

In terms of market capitalization, employees, revenue, and earnings before interest and tax Superior Energy Services comes in third. Further, it can be observed that the company had the highest gross profit margin. The table above also shows that the company had the least net income when compared to the three other companies. The pie chart presented below shows the position of the company in the market in terms of revenue.

Academic experts
available
We will write a custom Company Analysis essay specifically for you for only $16.00 $11/page Learn more

Revenue

Therefore, it can be observed that Superior Energy Services comes in third with 6.11% after Schlumberger Limited and Baker Hughes Incorporated.

Strength and weaknesses

Strengths

First, the company has an expansive market both locally and internationally. These markets were acquired though acquisitions and mergers. The large market increases the demand for the company’s product and services. The second strength is the diversity of the products. The company is in a position to offer a wide range of products within the industry. This encourages innovation and expansion. Thirdly, the overhead cost of operation is predictable. This enhances budgeting and planning. The fourth strength is that the possibility of new firms entering the market is difficult due to the massive initial capital investment required. This reduces the possibility of more competition (Superior Energy Services, 2014a).

Weaknesses

The company has a number of weaknesses. First, the recent market trends show that people are switching to green energy. This trend is likely to affect the future of the oil & gas industry. Thus, the industry is not sustainable. The second weakness is the market dynamics. The forces of demand and supply are quite volatile in the oil and gas industry. The volatility of the oil prices also affects the oil & gas equipment and services industry. The third weakness is environmental sustainability. There are many laws on environmental sustainability that negatively affect the oil and gas industry. In the case of violation of these laws, the companies operating in these industries may face stringent litigation charges that may lead to closure.

Financial highlights

The table presented below shows a summary of financial performance of the company for the past five years.

2009 2010 2011 2012 2013
Revenue 1,320,641 1,563,043 1,964,332 4,568,068 4,611,824
Net income (Loss) (102,323) 81,817 142,554 365,935 (111,418)
Total assets 2,516,665 2,907,533 4,048,145 7,802,886 7,411,307
Stockholders’ equity 1,178,045 1,280,551 1,453,599 4,231,079 4,131,444

In the table above, it can be observed that the value of revenue increased from $1,320,061 in 2009 to $4,611,824 in 2013. This shows that revenue has more than doubled over the past five years. The increase is equivalent to 249.21%. Net income rose from ($102,323) in 2009 to $365,935 in 2012. However, in 2013, net income dropped by a large margin that is, from $365,935 to ($111,418). There was a significant increase in total assets, that is, from $2,516,665 in 2009 to $7,411,307 in 2013. The increase is equivalent to 194.49%. Finally, the stockholder’s equity rose from $1,178,045 in 2009 to $4,131,444 in 2013, an equivalent of 250.70%. A growth in the value of total assets and stockholder’s equity should result to growth of revenue and subsequent growth in the value of net income (Superior Energy Services, 2014a).

Aim of the paper

The paper seeks to carry out a comprehensive corporate analysis of Superior Energy services, Inc. The paper will focus on developing a Pro Forma income statement and balance sheet for two years. Ratio analysis will also be carried out for the year 2013. Finally, there will be a discussion of various policies of the company.

15% OFF Get your very first custom-written academic paper with 15% off Get discount

Financial Statement Review

Pro Forma financial statements

Balance sheet

The ProForma balance sheet will be prepared for a period of two years. All the items that depend on sales will grow at 10% annually.

Superior Energy Services. Pro Forma balance sheet. For the year 2014 and 2015

2014 2015
Assets
Current assets
Cash
Cash and cash equivalents 215.6 237.16
Total cash 215.6 237.16
Receivables 1030.7 1133.77
Inventories 283.8 312.18
Deferred income taxes 9.9 10.89
Prepaid expenses 77 84.7
Other current assets 6.6 7.26
Total current assets 1623.6 1785.96
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 5311.9 5843.09
Accumulated Depreciation -2009.7 -2210.67
Net property, plant and equipment 3302.2 3632.42
Equity and other investments
Goodwill 2703.8 2974.18
Intangible assets 400.4 440.44
Other long-term assets 121 133.1
Total non-current assets 6528.5 7181.35
Total assets 8152.1 8967.31
Liabilities and stockholders’ equity
Liabilities
Current liabilities
Short-term debt 22 24.2
Accounts payable 237.6 261.36
Deferred income taxes
Taxes payable
Accrued liabilities 413.6 454.96
Other current liabilities 29.7 32.67
Total current liabilities 702.9 773.19
Non-current liabilities
Long-term debt 1811.7 1992.87
Deferred tax liabilities 809.6 890.56
Other long-term liabilities 283.8 312.18
Total non-current liabilities 2904 3194.4
Total liabilities 3608 3968.8
Stockholders’ equity
Common stock
Additional paid-in capital 3161.4 3477.54
Retained earnings 1402.5 1542.75
Accumulated other comprehensive income -19.8 -21.78
Total stockholders’ equity 4544.1 4998.51
Total liabilities and stockholders’ equity 8152.1 8967.31

The table above shows that the total current asset will rise from $1,623.6 million in 2014 to $1,785.9 million in 2015. The non-current assets will grow from $6,528.5 million to $7,181.35 million. The total assets are expected to increase from $8,152.1 million to $8,967.31 million. The total liabilities are also expected to grow from $3,608 million to $3,968.8 million. Finally, the total equity will increase to $4,998.51 million in 2015.

Income statement for the next 2 years

The Pro Forma income statement will also be prepared for a period of two years. The other expenses that will grow at 7%. There will be no change in interest expense and other income. The table presented below shows the Pro Forma income statement.

Superior Energy Services. Pro Forma balance sheet. For the year 2014 and 2015

2014
Million
2015
Million
Revenue 5073.2 5580.52
Cost of revenue 3192.2 3511.42
Gross profit 1881 2069.1
Operating expenses
Sales, General and administrative 678.38 725.8666
Other operating expenses 1118.15 1196.421
Total operating expenses 1796.53 1922.287
Operating income 84.47 146.8129
Interest Expense 107 107
Other income (expense) 5 5
Income before taxes -27.53 34.8129
Provision for income taxes 44 48.4
Net income from continuing operations -71.53 -13.5871
Net income from discontinuing ops
Net income -71.53 -13.5871
Net income available to common shareholders -71.53 -13.5871
Earnings per share
Basic -0.77 -0.847
Diluted -0.77 -0.847
Weighted average shares outstanding
Basic 174.9 192.39
Diluted 174.9 192.39
EBITDA 727.1 799.81

The Pro Forma statement above shows that the revenue will increase from $5,073.2million in 2014 to $5,580.52 million in 2015. The increase in revenue will cause an increase in operating income from $84.47 million in 2014 to $146.82 million in 2015. However, the company will have negative net profit at the end of the two years.

Ratio analysis

The reported financial statements do not give a thorough analysis of the strengths and weaknesses of the company. Therefore, it is necessary to carry out an in depth analysis of the financial statements so as to have a better view of the company. Further, analysis of the company helps in making informed decision. Ratio analysis breaks down the financial data into various components for better understanding. Some of the common categories of ratios are the liquidity, profitability, financial leverage and asset management (Atrill, 2009). These ratios measures different attributes in the financial health of a company. The table presented below shows the ratios for the year 2013.

Get your customised and 100% plagiarism-free paper on any subject done for only $16.00 $11/page Let us help you
Ratios 2013
Profitability
Net Margin -2.42%
Return on Assets -1.46%
Return on Equity -2.66%
Return on Invested Capital -0.71%
Liquidity
Current Ratio 2.31 times
Quick Ratio 1.78 times
Leverage
Debt/Equity 0.4
Interest Coverage 0.33 times
Financial Leverage 1.79
Asset management
Days Sales Outstanding 77.74 days
Days Inventory 24.84 days
Payables Period 29.46 days
Receivables Turnover 4.7 times
Inventory Turnover 14.69 times
Fixed Assets Turnover 1.47 times
Asset Turnover 0.61 times
Market ratios
Price/Sales
Superior Energy Services 0.9
S&P 500 1.7
Price/Cash Flow
Superior Energy Services 4.7
S&P 500 11.2

Discussion

Profitability

Analysis of profitability of a company is quite vital. It shows the earning level of a company. Most stakeholders are interested in the profitability of the company. The gross profit margin was 32%. Gross profit margin gives information on how a company manages the prices and quantity sold. The value is relatively high and it shows that the company is efficient. The net profit margin was (2.42%).

Return on assets was (1.46%), return on equity was (2.66%) while return on invested capital was (0.71%). The four ratios were negative. It shows that the company does not efficiently manage the assets and capital. Besides, the management is not efficient in managing the cost of operation. Even though the company reported an increase in revenue from the previous year’s result, the cost of sales and operations rose drastically. This had an impact on the profits. Besides, the interest expense is quite high. In summary, the overall profitability of the company is dismal.

Liquidity

The liquidity ratios inform the users of the financial statements on the overall financial strength of the company. The current ratio for the year was 2.31 while the quick ratio was 1.78. The ratios show that the current assets and liquid assets exceeded the current liabilities. This implies that the company can pay the current obligations using current and liquid assets with ease. The liquidity ratios are high and it means that the company has a satisfactory financial strength.

Financial leverage

A stakeholder will be able to tell the level of debt in the capital structure using the leverage ratios. The debt to equity ratio for the year was 0.40. This shows that the proportion of debt to equity in the capital structure is fourty percentage. The high amount of debt can be explained by the industry in which the company operates in. The oil & gas equipment and services industry is extremely capital extensive. Considering the level of operation of the company, the high amount of debt is detrimental to the bottom line because the high balance of interest expense leads to negative profit. Therefore, the company will not be able to attract new investors.

The interest coverage ratio is 0.33. This shows that the earnings before interest and tax can cover only 33% of a unit of interest expense. The low value is an indication that the company is at the risk of solvency. The overall financial leverage was 1.79. The three ratios show that Superior Energy Services is highly levered. This increases the risk level of equity capital, and it has the effect of increasing the cost of equity and weighted average cost of capital.

Asset management

The asset management ratios give information on the level of efficiency of the company. The day’s sales outstanding ratio was high (77.74). This shows that the debtors take a long period time to pay their debt. It shows that the company is experiencing difficulties in collecting debt. The ratio corresponds to the low receivable turnover ratio of 4.7. The day’s inventory was 24.84. The value means that the company replenished stock in every 24.84 days. It corresponds with the high value of inventory turnover ratio of 14.69. A low value of this ratio is suitable. Further, the payable period was 29.46 days. It implies the company paid its creditors in every 29.46 days.

A low value of this ratio is preferred. The fixed asset turnover ratio was 1.47. It shows that the company was able to generate only 1.47 units of sales from a unit of fixed asset. The value is quite low. It could be an indication that the fixed assets are not productive. The total asset turnover ratio was 0.61. It means that the company was able to generate 0.61 of sales from a unit of total assets. The low values of fixed asset and total asset turnover can be explained by the high cost of the assets used in this industry. The asset management ratios show that the efficiency level of the company is low. The low efficiency also contributed to the low profitability.

Market value

The price earnings ratio could not be calculated due to the negative value of net profit. The value of this ratio was 1. The ratio compares the market price and the book value of the stock. The value of the ratio of this company is low. It could be an indication that the shares are undervalued or the company is experiencing financial problems. The price to book ratio of S&P 500 index was 2.6. The price to sales ratio was 0.9.

The ratio compares the make price of the shares to the sales of the company. Price to sales ratio for Superior Energy Services was lower than that of the S&P 500 index (1.7). Finally, the price to cash flow ratio gives information on the relationship between the market price of the shares and the cash flow of the company. The value of this ratio for the (4.7) was lower than the market index (11.2). All the market value ratios were fairly low. Besides, the valuation ratios were lower than those of the S&P 500 index. This could be an indication that the company is experiencing financial difficulties.

DuPont Analysis

DuPont analysis breaks return on equity into three components. These components are asset turnover, leverage factor and profit margin. It is a quick way of checking strengths and weaknesses of a business. It shows efficiency in the use of inputs to generate profits, use of capital to generate gross revenue and how a business leverages debt capital. Return on assets gives information on net income, sales and total assets. Return on equity gives information on net profit, equity, pretax profit, EBIT, sales, and assets. A summary of the computations of these three components is shown below.

Return on Equity = Net Profit Margin (Net profit / sales) * Total Asset Turnover (Sales / Assets) * Equity Multiplier (Assets / Equity)

Return on Assets = Net Income or Net Margin (Net Income / sales) * Total Assets or Total Asset Turnover (Sales / total assets)

Return on equity = -2.42% * 0.61 * 180.19 = (2.66%)

Thus, the use of the DuPont system to break down the return on equity yields (2.66%).

Economic Value added

The ratio puts together the net operating profit after tax, weighted average cost of capital and book value of capital employed in one value. Therefore, it gives the true economic profit of a company. The ratio measures the amount by which the earnings exceed or fall short of the minimum required rate of return by capital providers (debt and equity providers). The calculation of economic value added is presented below.

Economic value added = net operating profit after taxes (NOPAT) – weighted average cost of capital * capital

Operating income = 31

Taxes = 10.54

NOPAT

= 31 – 10.54

= $20.46 million

Total capital = 6,991.38 million

Weighted average cost of capital = 13.21%

Economic value added

= $20.46 – (6,991.38 * 13.21%)

= ($903.10 million)

The economic value added for the Superior Energy Services is negative $903.10 million. The negative value implies that the company is not creating value for the shareholders. The shareholder’s wealth is damaged and it is advisable to shut down the business. The company needs to put in place turn around measures that that can help in increasing profitability.

Soundness of policies

Capital structure

Several studies have been carried out to explain an optimal capital structure of the company. The most popular theory is the Miller and Modigliani model. The model asserts that in the absence of transaction cost, the capital structure of a company has no effect on the value of the firm. Therefore, the capital mix that a firm uses is of no importance. The theory further asserts that the capital structure of a company is irrelevant. However, various scholars have criticized this theory. They argue that the Miller- Modigliani model is based on unrealistic assumptions of absence of taxes, efficient market, absence of agency cost, and perfect information (Huang & Ritter, 2009).

In the contemporary business world, these assumptions are quite unrealistic and do not hold. For instance, Aswath Damodaran argues that capital structure has an impact on the value of the firm. Damodaran argues that the amount of debt in the capital structure of a company affects cash flow. Thus, altering the amount of debt changes cash flows and equity because cash flow is attained from assets, after repayment of debt and making reinvestment for future growth (Huang & Ritter, 2009). Further, as the amount of debt increases, equity becomes more risky and the cost of equity increases. Therefore, analyzing the capital structure of a company is of utmost importance because it determines the rate at which the company grows.

A capital structure shows the composition of funding for such company. A company should maintain an optimum mix of various sources of funds. The choice of capital structure of a company is likely to have a serious impact on the bottom line and the overall financial health of the company. Currently, the company has a credit facility that is secured with a substantial amount of assets of the company. The facility is also secured using a pledge of the company’s stock. Further, the credit facility also restricts the company’s ability to pay dividends, make acquisitions or even make changes to the capital structure. The table presented below shows the composition of the capital structure of Superior Energy Services.

Source of finance Amount Proportion
Debt 1,666,535 28.74%
Preferred stock 0 0.00%
Common Stock 4,131,444 71.26%
Total 5,797,979

The capital structure of Superior Energy Services is made up of debt worth $1,666,535 thousand and equity worth $4,131,444 thousand. The company does not have other types of stock (Superior Energy Services, 2014a). The proportion of debt in the capital structure is 28.74%, while the proportion of equity is 71.26%. Even though the proportion of debt is higher than the proportion of equity, the company is still considered to be highly levered. The proportion of debt and equity are presented in the pie chart below.

Capital structure

Debt

The company’s policy allows the use of debt to finance capital investment projects. As seen in the section above, the balance of debt for the year ended December 2013 is $1,666,535. The items that make up the long term debt are first, a term loan that is due in 2017. The company also has senior notes that are due in 2019 and 2021. Further, the company has a bank credit facility worth $1.0 billion. Finally, the company has unsecured note worth $500 million that is due in 2019. Therefore, it can be observed that the company uses a variety of debt instruments that have different maturities, interest rate, and risk level (Superior Energy Services, 2014a).

Dividend policy

As at the end of 2013 Superior Energy Services had not paid any dividend since its formation. The first dividend payment was approved in December 2013. The Board of Directors approved the payment of a quarterly dividend of $0.08 for each share (Superior Energy Services, 2014c). This dividend payment will be consistent with the capital allocation policy of the company. The table presented below shows a summary of the dividend payments made by the company since its formation.

Date Dividend payment
January 28th, 2014 $0.08
April 28th, 2014 $0.08
July 29th, 2014 $0.08
October 28th, 2014 $0.08
Annual dividend 2014 $0.32

Therefore, it is expected that the payment of the dividend will increase the value of the firm.

Conclusion and recommendation

The paper carried out a comprehensive corporate analysis of Superior Energy services, Inc. The company operates in the oil & gas equipment and services industry. The company has grown tremendously over the years. It started with one hundred and twenty five employees and revenue earned during this period was twelve million dollars. The company has engaged in several business combinations and expansion. The expansions have been carried out both in the local and international market. These strategies have led to rapid growth. At the moment, the sales revenue stands at $4.6billion while the number of employees is fourteen million.

The key competitors of Superior Energy Services are Baker Hughes Incorporated, Parker Drilling Company, and Schlumberger Limited. In terms of revenue, the company comes in third after Schlumberger Limited and Baker Hughes Incorporated. There has been growth in both the balance sheet and the income statement values over the past five years. However, the net income has been fluctuating due to the volatility in the oil and gas industry. The management also expects that performance will improve in the next two years. From the ratio analysis, it can be noted that the profitability level of the company is dismal. The poor result can be attributed to an increase in the cost of sales, the cost of operations and interest expense.

The financial strength of the company, as indicated by the liquidity ratios, is high. Further, the company has a high leverage level as shown by the high debt to equity ratio. The overall efficiency of the company declined. The low market valuation ratios could be an indication that the shares of the company are undervalued or the company has a serious financial problem. The economic value added was negative and it means that the financial position of the company is devastating.

Review of the capital structure shows that the company has more equity than debt. However, the cost of debt is quite high and the earnings before interest and taxes cannot pay the interest expense. Finally, the company paid dividend for the first time since its establishment in 2014. The financial position of the company is quite uncertain. Besides, the Pro Forma statements show that the position may not improve by a large margin in the future. Therefore, a potential investor should monitor the performance of the company for another five years or more before investing.

References

Atrill, P. (2009). Financial management for decision makers. United States: Pearson Publishers.

Huang, R., & Ritter, J. (2009). Testing theories of capital structure and estimating the speed of adjustment. Journal of Financial and Quantitative Analysis, 44(2), 237-271.

Superior Energy Services. (2014a). Annual reports. Web.

Superior Energy Services. (2014b). Company history. Web.

Superior Energy Services. (2014c). Superior energy services initiates regular quarterly dividend. Web.

Yahoo Finance. (2014). Superior energy services, Inc. – SPN. Web.