Looks like SESI is the pure play for doom and gloom. What the heck, might as well make some money off the carcasses.
Superior Hopes to Clean Up in Tough Times for Oil
By Mavis Scanlon
Staff Reporter
2/22/99 8:57 AM ET
Look no further than Superior Energy Services (SESI:Nasdaq) for an example of the
carnage in the oil-service sector. Superior's stock has been punished thanks to the
company's small size and its recently canceled merger with Parker Drilling
(PKD:NYSE).
Now, ironically, tough times in the patch may actually be a boon for Superior, giving it
the possibility of upside earnings surprises in coming quarters.
Shares of the Harvey, La.-based service firm are trading at about 2, down 83% since
mid-April 1998, when the stock traded at a 52-week high near 12. The Philadelphia
Stock Exchange oil-service index is off more than 50% in that period.
Superior commands roughly 50% of the Gulf of Mexico market for
plugging-and-abandonment services -- industry jargon for cleaning up drilling sites,
plugging wells and removing production platforms.
Activity in this niche, historically deferred in low-price environments, is expected to heat
up this year for three reasons.
First and foremost, this type of work is nearly a necessity when companies sell drilling
properties. And with the public markets virtually closed to oil and gas companies,
cash-strapped firms need to raise money to continue drilling programs or meet debt
obligations, making asset sales more likely.
Banks, tightening loan covenants, could force property sales so borrowers can meet
obligations, marking a big departure from prior low-price environments in which lenders
were generally lenient. And after a prolonged period in which sellers sought last year's
(higher) values for their properties, buyers and sellers may be closer to agreeing on
property values, analysts say.
Second, in re-evaluating projects, more producers are shutting down marginally
profitable or money-losing wells. After a well is closed, the operator has 12 months to
clean up the site, according to Minerals Management Service regulations. The MMS
oversees all offshore drilling activity.
Lastly, there has been a surge in temporary plugging-and-abandoning work as wells are
prepared for work at a later date.
"It makes sense that if you're cleaning up a property for sale, you do [plugging and
abandonment] work," says Steve Smith, an oil and gas analyst at Dain Rauscher
Wessels in Houston. Asset sales "are going to be a big event this year." Smith does not
follow Superior.
In the past three weeks, Superior has seen a big jump in requests for bids for this work,
according to people who follow the company. Granted, all these bids don't turn into
contracts, but even small increases in revenue could generate higher earnings. Superior's
CEO, Terence E. Hall, who handles the bidding process, was unavailable for comment.
Neal McAtee, who follows Superior at Morgan Keegan in Memphis, Tenn., estimates
Superior will earn 20 cents a share this year. He projects revenue from the company's
plug-and-abandonment work of between $25 million and $30 million, about 30% of its
total revenue and roughly flat with 1998. But if its P&A work heats up this year, small
percentage increases in revenue could drive big percentage increases in earnings,
McAtee says.
"As little as $4 million or $5 million more in revenue, or just 5% over current revenue
estimates, could drive Superior's earnings per share to 25 cents from 20 cents," he says.
For the nine months ended Sept. 30, revenue totaled $69.2 million, up from $33.3
million in the year-ago period. Net income rose 66% to $9.5 million, or 32 cents a
share, from $5.7 million, or 28 cents a share, in the 1997 period. Superior's revenue
growth reflects acquisitions. The company is expected to report year-end results in early
March.
McAtee recently raised his rating on Superior to outperform from market perform for
valuation reasons. (Morgan Keegan has not doneunderwriting for Superior.) The stock
is trading well below its book value of $3.31 per share, and while there is potential for a
rally on any good news on oil prices, there is little downside risk. Also, Superior has an
attractive price-to-sales ratio of 0.80.
Superior's valuation has attracted investors. David Nierenberg, general partner of the
D3 Family Fund, a Camas, Wash.-based private investment partnership, began buying
shares of Superior shortly after the company announced the termination of the Parker
merger in January. He says he looks for "the best micro-cap in deeply out-of-favor
industries." Superior, with its market cap of just $58 million and average daily trading
volume of 314,000 shares, fits the bill.
Nierenberg is well aware of the current environment in the patch, but he's willing to wait
out the downturn. Investors with the stomach and the patience could easily see fivefold
or sixfold returns, he says.
Since January, Nierenberg has accumulated 750,000 shares, or roughly 2.5% of the
company. He likes the caliber of management, its clean balance sheet and its acquisition
strategy, as well as the company's ability to remain profitable in light of dismal industry
conditions."
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