date, the RSA) with certain holders (collectively, the Ad Hoc Noteholders Group) of 7.125% senior unsecured notes due 2021 (the 2021 Notes) and 7.750% senior unsecured notes due 2024 (together with the 2021 Notes, the Prepetition Notes), both issued by SESI, L.L.C.
Under the terms of the RSA, the Debtors and the Ad Hoc Noteholder Group agreed to a series of deleveraging transactions (the Restructuring) that will eliminate approximately $1.30 billion of funded debt obligations of the Debtors through the Plan. Specifically, the Restructuring contemplates, among other things, the equitization of all amounts outstanding under the Debtors’ Prepetition Notes. In exchange for equitizing all of their funded debt, holders of Prepetition Notes (the Prepetition Noteholders) will receive 98% of the new common stock to be issued by the reorganized Company (the New Common Stock). Holders of existing prepetition equity will receive 2% of the New Common Stock and five-year warrants to purchase 10.0% of the New Common Stock (the New Warrants), subject to and in accordance with the terms set forth in the RSA. General unsecured creditors will remain unimpaired and be paid in the ordinary course of business.
The RSA further provides, in pertinent part, as follows:
All holders of Prepetition Notes that are accredited investors or qualified institutional buyers, will have the opportunity, but not the obligation, to exercise the subscription rights to purchase New Common Stock. The proceeds of the Equity Rights Offering will be used exclusively to fund the Cash Payout provided to Prepetition Noteholders electing the Cash Payout, in full and final satisfaction of such Holders’ Prepetition Notes Claims, which will be released and discharged pursuant to the Plan. Consummation of the Equity Rights Offering is contingent upon the consent of the Required Consenting Noteholders under the RSA;
Eligible holders of the Prepetition Notes Claims that do not elect to participate in the Equity Rights Offering may receive a cash distribution of an amount yet to be determined (the Cash Payout). The proceeds from the Equity Rights Offering will be used to fund the cash distributions under the Cash Payout, provided that the total Cash Payout distribution amount will not exceed the total amount of the proceeds of the Equity Rights Offering. Any remaining portion of such holder’s Prepetition Notes Claims that is not satisfied through the Cash Payout will receive the treatment such holder would receive if such holder elected to participate in the Equity Rights Offering. The Cash Payout is contingent upon the consent of the Required Consenting Noteholders under the RSA;
The board of directors of the reorganized Company (the New Board) will be authorized to implement a management incentive plan (the New Management Incentive Plan) that provides for the issuance of equity-based compensation to the management and directors of the Company and its subsidiaries. Up to 10% of the New Common Stock, on a fully diluted basis, will be reserved for issuance in connection with the New Management Incentive Plan, with the actual amount to be reserved as determined by the New Board; and
In consideration for entry into the RSA, each Prepetition Noteholder that became a party to the RSA (a Consenting Noteholder) prior to a deadline set forth in the RSA was paid a premium payable in cash equal to the accrued interest outstanding as of the RSA effective date under the Notes held by each Consenting Noteholder. These expenses, as well as various advisory and professional fees related to the restructuring of the Company, are recorded under the caption “Restructuring expense” on the condensed consolidated statements of operations. Restructuring expenses totaled approximately $25.7 million and $27.0 million for the three and nine months ended September 30, 2020, respectively. Also included in this line item is $15.6 million related to the RSA premium paid to certain Consenting Noteholders pursuant to the RSA.
Under the Plan, certain classes of claims are expected to receive the following treatment:
Administrative expense claims, priority tax claims, other priority claims, and other secured claims will be paid in full (or receive such other treatment rendering such claims unimpaired);
Claims on account of the Company’s asset-based revolving credit facility (the Prepetition Credit Agreement), other than those claims related to any outstanding letters of credit, will be paid in full in cash;
Contingent claims arising from outstanding letters of credit under the Prepetition Credit Agreement that remain undrawn upon consummation of the Chapter 11 Cases will either (i) be 105% cash collateralized, (ii) be deemed outstanding under an asset-based revolving exit credit facility, if any, or (iii) receive such other treatment as may be acceptable to the Debtors, the agent and lenders under the Prepetition Credit Agreement, and at least three unaffiliated Consenting Noteholders holding at least 66.6% of the aggregate principal amount of the Prepetition Notes;
General unsecured creditors will remain unimpaired and are to receive payment in cash, in full, in the ordinary course;
The Company’s existing equity will be cancelled and exchanged for (i) 2.0% of the New Common Stock (subject to dilution on account of (x) New Common Stock issued upon exercise of the New Warrants and (y) New Common Stock issued under the New Management Incentive Plan) and (ii) the New Warrants;
Eligible holders of the Prepetition Notes who elect to participate in the Equity Rights Offering will receive their pro rata share of (i) 98% of New Common Stock (subject to dilution on account of (x) New Common Stock issued upon exercise of the New Warrants and (y) New Common Stock issued to management of the Reorganized Debtors under the New Management Incentive Plan) and (ii) rights to participate in the Equity Rights Offering; and
Eligible holders of the Prepetition Notes who elect cash instead of participating in the Equity Rights Offering will receive their pro rata share of cash in an aggregate amount equal to a percentage of the amount due under the Prepetition Notes to all such holders.
The RSA contains certain covenants binding the Company and the Consenting Noteholders, including limitations on the parties’ ability to pursue alternative transactions, commitments by the Consenting Noteholders to vote in favor of the Plan, and commitments of the Company and the Consenting Noteholders to cooperate in good faith to finalize the documents and agreements contemplated by the RSA and the associated term sheet.
The RSA also sets forth certain milestones to ensure that the Company emerges from bankruptcy as swiftly as practicable.
Although the Company intends to pursue the Chapter 11 Cases in accordance with the terms set forth in the RSA, there can be no assurance that the Company will be successful in completing the transactions outlined in the RSA, whether on the same or different terms.
Delayed-Draw Term Loan Commitment Letter
As previously disclosed in the Company’s Current Report on Form 8-K filed on September 30, 2020, on September 29, 2020, the Company entered into a Commitment Letter (the Delayed-Draw Term Loan Commitment Letter) with certain of the Consenting Noteholders (such Consenting Noteholders, the Backstop Commitment Parties). Pursuant to the terms of the RSA, in connection with confirmation of the Plan, the Company will use reasonable efforts to obtain ABL Financing Commitments (as defined in the RSA). In the event that all or a portion of the ABL Financing Commitments is not obtained, the Backstop Commitment Parties have committed to provide a delayed draw term loan facility (the Delayed-Draw Term Loan Facility) in an aggregate principal amount not to exceed $200 million, upon the Company’s emergence from bankruptcy on the terms and subject to the conditions of the Delayed-Draw Term Loan Commitment Letter.
As consideration for the commitment to provide the Delayed-Draw Term Loan Facility, the Company paid $11.7 million to the Backstop Commitment Parties. The transactions contemplated by the Delayed-Draw Term Loan Commitment Letter are conditioned upon the satisfaction or waiver of customary conditions for transactions of this nature.
Going Concern
Recent developments discussed above have negatively impacted the Company's financial condition and the Company's current forecast gives doubt to the Company's available liquidity to repay its outstanding debt or meet its obligations. The Company’s bond and share price declines, as well as the Company’s credit rating, have over time increased the level of uncertainty in the Company’s business and impacted various key stakeholders, including the Company’s employees, customers, suppliers and key lenders. These conditions and events indicate that there is substantial doubt about the Company's ability to continue as a going concern.
As noted above, in response to these developments, the Debtors expect to make the Bankruptcy Filing. Although the Company anticipates that the Chapter 11 Cases, if commenced, will help address its liquidity concerns, there are a number of risks and uncertainties surrounding the Chapter 11 Cases, including the uncertainty remaining over the Bankruptcy Court's approval of the Plan, which are not within the Company's control. Therefore, management has concluded that management’s current actions and plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.
As of September 30, 2020, the Company’s unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. In addition, the Company’s unaudited condensed consolidated financial statements do not reflect any adjustments related to bankruptcy or liquidation accounting.
COVID-19 Pandemic and Market Conditions
The Company’s operations continue to be disrupted due to the circumstances surrounding the COVID-19 pandemic. The significant business disruption resulting from the COVID-19 pandemic has impacted customers, vendors and suppliers in all geographical areas where the Company operates. The closure of non-essential business facilities and restrictions on travel put in place by governments around the world have significantly reduced economic activity. Also, the COVID-19 pandemic has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, the proper functioning of financial and capital markets, foreign currency exchange rates, and interest rates. For example, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which increases the cost of capital and adversely impacts access to capital. Additionally, recognized health risks associated with the COVID-19 pandemic have altered the policies of companies operating around the world, resulting in these companies instituting safety programs similar to what both domestic and international governmental agencies have
implemented, including stay at home orders, social distancing mandates, and other community oriented health objectives. The Company is complying with all such ordinances in its operations across the globe. Management of the Company believes it has proactively addressed many of the known operational impacts of the COVID-19 pandemic to the extent possible and will strive to continue to do so, but there can be no guarantee the measures will be fully effective.
Furthermore, the oil and gas industry has experienced unprecedented price disruptions during 2020, due in part to significantly decreased demand as a result of the COVID-19 pandemic, as activity declined in the face of depressed crude oil pricing. The U.S. oil and gas rig count fell by more than 60% in the second quarter of 2020 and by more than 30% in the third quarter of 2020. The number of oil and gas rigs outside of the U.S. and Canada fell by more than 10% in the third quarter of 2020 to an average of 731 rigs from 834 rigs in the second quarter of 2020. These market conditions have significantly impacted the Company’s business, with third quarter 2020 revenue decreasing to $166.9 million, as compared to $356.6 million in the third quarter of 2019, or 53%. As customers continue to revise their capital budgets in order to adjust spending levels in response to lower commodity prices, the Company has experienced significant pricing pressure for its products and services.
Low oil prices and industry volatility are likely to continue through the near and long-term. As the global outbreak of the COVID-19 pandemic continues to rapidly evolve, management expects it to continue to materially and adversely affect the Company’s revenue, financial condition, profitability, and cash flow for an indeterminate period of time.
New York Stock Exchange Delisting
On September 17, 2020, the Company was notified by the New York Stock Exchange (the NYSE) that the Company is no longer in compliance with the NYSE continued listing standards set forth in Section 802.01B of the NYSE Listed Company Manual due to the Company’s failure to maintain an average global market capitalization over a consecutive 30-day trading period of at least $15 million and accordingly, the NYSE had determined to commence proceedings to delist the Company’s common stock from the NYSE.
Trading of the Company’s common stock on the NYSE was suspended effective as of approximately 4:00 p.m. Eastern Time on September 17, 2020. On September 18, 2020, the Company’s common stock commenced trading on the OTCQX marketplace under the trading symbol “SPNX.” On October 2, 2020, the NYSE applied to the SEC to delist the Company’s common stock from trading on the NYSE and to remove it from registration under Section 12(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act). The delisting became effective 10 days after the filing of the Form 25. In accordance with Rule 12d2-2 of the Exchange Act, the de-registration of the Company’s common stock under Section 12(b) of the Exchange Act will become effective 90 days, or such shorter period as the SEC may determine, from the date of the Form 25 filing.
(2)Revenue
Revenue Recognition
Revenues are recognized when performance obligations are satisfied in accordance with contractual terms, in an amount that reflects the consideration the Company expects to be entitled to in exchange for services rendered, rentals provided, and products sold. Taxes collected from customers and remitted to governmental authorities and revenues are reported on a net basis in the Company’s financial statements.
Performance Obligations
A performance obligation arises under contracts with customers to render services, provide rentals or sell products, and is the unit of account under Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). The Company accounts for services rendered and rentals provided separately if they are distinct and the service or rental is separately identifiable from other items provided to a customer and if a customer can benefit from the services rendered or rentals provided on its own or with other resources that are readily available to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. A contract’s standalone selling prices are determined based on the prices that the Company charges for its services rendered, rentals provided, and products sold. The majority of the Company’s performance obligations are satisfied over time, which is generally represented by a period of 30 days or less. The Company’s payment terms vary by the type of products or services offered. The term between invoicing and when the payment is due is typically 30 days.
Services Revenue: primarily represents amounts charged to customers for the completion of services rendered, including labor, products and supplies necessary to perform the service. Rates for these services vary depending on the type of services provided and can be based on a per job, per hour or per day basis.
Rentals Revenue: primarily priced on a per day, per man hour or similar basis and consists of fees charged to customers for the use of the Company’s rental equipment over the term of the rental period, which is generally less than twelve months.
The Company weighs the income approach 80% and the market-based approach 20% due to differences between the Company’s reporting units and the peer companies’ size, profitability and diversity of operations. In order to validate the reasonableness of the estimated fair values obtained for the reporting units, a reconciliation of fair value to market capitalization is performed for each unit on a standalone basis. A control premium, derived from market transaction data, is used in this reconciliation to ensure that fair values are reasonably stated in conjunction with the Company’s capitalization. The Company uses all available information to estimate fair value of the reporting units, including discounted cash flows. A significant amount of judgment is involved in performing these evaluations given that the results are based on estimated future events.
The result of the goodwill impairment assessment indicated that the fair value of the Drilling Products and Services segment exceeded its net book value and, therefore, no goodwill impairment was recorded. The Company will continue to evaluate the Drilling Products and Services segment for potential goodwill impairment in the fourth quarter of 2020 as market conditions continue to evolve.
(12) Stock-Based Compensation Plans
The Company maintained various stock incentive plans that provide long-term incentives to the Company’s key employees, including officers, directors, consultants and advisors (the Eligible Participants) prior to the Chapter 11 Cases. Under the stock incentive plans, the Company could grant incentive stock options, restricted stock, restricted stock units, stock appreciation rights, other stock-based awards or any combination thereof to Eligible Participants. The Company’s total compensation expense related to these plans was approximately $6.1 million and $13.9 million for the nine months ended September 30, 2020 and 2019, respectively, which is reflected in general and administrative expenses.
On September 28, 2020, the Board of Directors of the Company approved the implementation of a Key Employee Retention Program (the KERP), which is designed to retain key employees of the Company in their current roles over the near term while providing them with financial stability. The KERP payments are in lieu of any outstanding unvested awards under the Company’s long-term equity-based incentive plans (other than any performance share units granted in 2018 and 2019) and any 2020 annual bonuses that would otherwise be payable to the KERP participants. The KERP provided for one-time retention payments equal to approximately $7.3 million in the aggregate to the six executive officers of the Company, including its named executive officers. The KERP further provided for approximately $2.4 million of retention payments to other non-executive employees, which will be made in installments.
(13) Income Taxes
Certain of the restructuring transactions contemplated by the RSA may have a material impact on the Company’s tax attributes, the full extent of which is currently unknown. Cancellation of indebtedness income resulting from such restructuring transactions may significantly reduce the Company’s tax attributes, including but not limited to NOL carryforwards. Further, the Company will experience an ownership change under Section 382 of the Internal Revenue Code of 1986, as amended (the Code), upon confirmation of the Plan by the Bankruptcy Court which will subject certain remaining tax attributes to an annual limitation under Section 382 of the Code. Additionally, if the Company proceeds with the Bankruptcy Filing, the Company will incur additional significant one-time costs associated with the Chapter 11 Cases.
On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), a tax relief and spending package intended to provide economic stimulus to address the impact of the COVID-19 pandemic. The CARES Act allows corporations with net operating losses generated in 2018, 2019 and 2020 to elect to carryback those losses for a period of five years and relaxes the limitation for business interest deductions for 2019 and 2020. Under the provisions of the CARES Act, the Company received a refund of $30.5 million in July 2020.
The Company had $13.2 million of unrecorded tax benefits as of each of September 30, 2020 and December 31, 2019, all of which would impact the Company’s effective tax rate if recognized. It is the Company’s policy to recognize interest and applicable penalties, if any, related to uncertain tax positions in income tax expense.
(14) Earnings per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional shares of common stock that could have been outstanding assuming the exercise of stock options and the conversion of restricted stock units.
The Company incurred a loss from continuing operations for each of the three and nine months ended September 30, 2020 and 2019; therefore, the impact of any incremental shares would be anti-dilutive.
(15) Contingencies
Due to the nature of the Company’s business, the Company is involved, from time to time, in routine litigation or subject to disputes or claims regarding its business activities. Legal costs related to these matters are expensed as incurred.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report and other documents filed by us with the SEC contain, and future oral or written statements or press releases by us and our management may contain, forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Generally, the words “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks” and “estimates,” variations of such words and similar expressions identify forward-looking statements, although not all forward-looking statements contain these identifying words. All statements other than statements of historical fact included in this report or such other materials regarding the Chapter 11 Cases, our financial position, financial performance, liquidity, strategic alternatives, market outlook, future capital needs, capital allocation plans, business strategies and other plans and objectives of our management for future operations and activities are forward-looking statements. These statements are based on certain assumptions and analyses made by our management in light of its experience and prevailing circumstances on the date such statements are made. Such forward-looking statements, and the assumptions on which they are based, are inherently speculative and are subject to a number of risks and uncertainties that could cause our actual results to differ materially from such statements. Such risks and uncertainties include, but are not limited to:
uncertainties if we file the Chapter 11 Cases, including but not limited to: our ability to obtain Bankruptcy Court approval with respect to motions in the Chapter 11 Cases; the effects of the Chapter 11 Cases on us and our various constituents; the impact of Bankruptcy Court rulings in the Chapter 11 Cases; our ability to develop and implement the Plan and whether that Plan will be approved by the Bankruptcy Court and the ultimate outcome of the Chapter 11 Cases in general; the length of time we will operate under the Chapter 11 Cases; attendant risks associated with restrictions on our ability to pursue our business strategies; risks associated with third-party motions in the Chapter 11 Cases; the potential adverse effects of the Chapter 11 Cases on our liquidity; our ability to operate within the restrictions and the liquidity limitations of the planned debtor-in-possession asset based credit facility (the DIP Credit Facility); the potential cancellation of our equity securities, including our common stock in the Chapter 11 Cases; the potential material adverse effect of claims that are not discharged in the Chapter 11 Cases; uncertainty regarding our ability to retain key personnel; and uncertainty and continuing risks associated with our ability to achieve our stated goals and continue as a going concern;
the conditions in the oil and gas industry;
the effects of public health threats, pandemics and epidemics, and the adverse impact thereof on our business, financial condition, results of operations and liquidity, including, but not limited to, our growth, operating costs, supply chain, labor availability, logistical capabilities, customer demand and industry demand generally, margins, utilization, cash position, taxes, the price of our securities, and our ability to access capital markets, including the macroeconomic effects from the continuing COVID-19 pandemic;
the ability of the members of OPEC+ to agree on and to maintain crude oil price and production controls;
our outstanding debt obligations and the potential effect of limiting our ability to fund future growth;
we may not be able to generate enough cash flows to meet our debt obligations;
necessary capital financing may not be available at economic rates or at all;
volatility of our common stock;
operating hazards, including the significant possibility of accidents resulting in personal injury or death, or property damage for which we may have limited or no insurance coverage or indemnification rights;
we may not be fully indemnified against losses incurred due to catastrophic events;
claims, litigation or other proceedings that require cash payments or could impair financial condition;
credit risk associated with our customer base;
the effect of regulatory programs and environmental matters on our operations or prospects;
the impact that unfavorable or unusual weather conditions could have on our operations;
the potential inability to retain key employees and skilled workers;
political, legal, economic and other risks and uncertainties associated with our international operations;
laws, regulations or practices in foreign countries could materially restrict our operations or expose us to additional risks;
potential changes in tax laws, adverse positions taken by tax authorities or tax audits impacting our operating results;
changes in competitive and technological factors affecting our operations;
risks associated with the uncertainty of macroeconomic and business conditions worldwide;
potential impacts of cyber-attacks on our operations;
counterparty risks associated with reliance on key suppliers;
challenges with estimating our potential liabilities related to our oil and natural gas property; and
risks associated with potential changes of the Bureau of Ocean Energy Management’s security and bonding requirements for offshore platforms.
These risks and other uncertainties related to our business are described in detail in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Investors are cautioned that many of the assumptions on which our forward-looking statements are based are likely to change after such statements are made, including for example the market prices of oil and gas and regulations affecting oil and gas operations, which we cannot control or anticipate. Further, we may make changes to our business strategies and plans (including our capital spending and capital allocation plans) at any time and without notice, based on any changes in the above-listed factors, our assumptions or otherwise, any of which could or will affect our results. For all these reasons, actual events and results may differ materially from those anticipated, estimated, projected or implied by us in our forward-looking statements. We undertake no obligation to update any of our forward-looking statements for any reason and, notwithstanding any changes in our assumptions, changes in our business plans, our actual experience, or other changes. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.
Executive Summary
General
We provide a wide variety of services and products to the energy industry. We serve major, national and independent oil and natural gas exploration and production companies around the world and offer products and services with respect to the various phases of a well’s economic life cycle. We report our operating results in four business segments: Drilling Products and Services; Onshore Completion and Workover Services; Production Services; and Technical Solutions.
Recent Developments
Voluntary Reorganization Under Chapter 11
We and certain of our subsidiaries plan to file the Chapter 11 Cases with the Bankruptcy Court. The Debtors plan to commence a solicitation for acceptance of the Plan by causing the Plan and the corresponding disclosure statement to be distributed to certain creditors of the Company shortly before the Bankruptcy Filing. During the Chapter 11 Cases, the Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
For the duration of the Chapter 11 Cases, the Debtors are expected to be able to conduct normal business activities and pay all associated obligations for the period following the Bankruptcy Filing. The Debtors are also expected to be authorized to pay employee wages and benefits, and vendors and suppliers in the ordinary course of business for goods and services provided prior to the Bankruptcy Filing. During the pendency of the Chapter 11 Cases, all transactions outside of the ordinary course of business will require the prior approval of the Bankruptcy Court.
For the duration of the Chapter 11 Cases, our operations and ability to develop and execute our business plan will be subject to the risks and uncertainties associated with the Chapter 11 process as described in Part II, Item 1A, “Risk Factors.” As a result of these risks and uncertainties, the number of our shares of common stock and stockholders, assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases, and the description of our operations, properties and capital plans included in this report may not accurately reflect our operations, properties and capital plans following the Chapter 11 Cases.
For the duration of the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the Bankruptcy Filing. In addition, we have incurred significant professional and advisory fees and other costs in connection with preparation for the Chapter 11 Cases and expect that we will continue to incur significant professional and advisory fees and costs throughout the pendency of the Chapter 11 Cases.
See Part I, Item 1, “Financial Statements – Note 1 – Basis of Presentation” of this Quarterly Report for a complete discussion of the Chapter 11 Cases.
COVID-19 Pandemic and Market Conditions
Our operations continue to be disrupted due to the circumstances surrounding the COVID-19 pandemic. The significant business disruption resulting from the COVID-19 pandemic has impacted our customers, vendors and suppliers in all geographical areas where we operate. The closure of non-essential business facilities and restrictions on travel put in place by governments around the world have significantly reduced economic activity. Additionally, recognized health risks associated with the COVID-19 pandemic have altered the policies of companies operating around the world, resulting in these companies instituting safety programs similar to what both domestic and international governmental agencies have implemented, including stay at home orders, social distancing mandates, and other community oriented health objectives. We are complying with all such ordinances in our operations across the globe. Management believes it has proactively addressed many of the known operational impacts of the COVID-19 pandemic to the extent possible and will strive to continue to do so, but there can be no guarantee the measures will be fully effective.
Furthermore, the oil and gas industry has experienced unprecedented price disruptions during 2020, due in part to significantly decreased demand as a result of the COVID-19 pandemic, as activity significantly declined in the face of depressed crude oil pricing. The U.S. oil and gas rig count fell by more than 60% in the second quarter of 2020 and by more than 30% in the third quarter of 2020. The number of oil and gas rigs outside of the U.S. and Canada fell by more than 10% in the third quarter of 2020 to an average of 731 rigs from 834 rigs in the second quarter of 2020. These market conditions have significantly impacted our business, with third quarter 2020 revenue decreasing to $166.9 million, as compared to $356.6 million in the third quarter of 2019, or 53%. As customers continue to revise their capital budgets in order to adjust spending levels in response to lower commodity prices, we have experienced significant pricing pressure for our products and services.
Low oil prices and industry volatility are likely to continue through the near and long-term. In the second quarter of 2020, OPEC+ reached a supply curtailment agreement of up to 10 million barrels per day, which drove expectations for future hydrocarbon supply lower. However, on July 15, 2020, an alliance of certain OPEC nations led by Saudi Arabia agreed to increase oil production starting in August 2020, citing theoretically increased demand due to the relaxing of COVID-19 pandemic restrictions. As the global outbreak of the COVID-19 pandemic continues to rapidly evolve, management expects it to continue to materially and adversely affect our revenue, financial condition, profitability, and cash flow for an indeterminate period of time.
New York Stock Exchange Delisting
On September 17, 2020, we were notified by the NYSE that due to our failure to maintain an average global market capitalization over a consecutive 30-day trading period of at least $15 million, pursuant to Section 802.01B of the NYSE Listed Company Manual, the NYSE had determined to commence proceedings to delist the Company’s common stock from the NYSE.
Trading of our common stock was suspended effective as of approximately 4:00 p.m. Eastern Time on September 17, 2020. Effective September 18, 2020, our common stock commenced trading on the OTCQX marketplace under the trading symbol “SPNX”. On October 2, 2020, the NYSE applied to the SEC to delist or common stock from trading on the NYSE and to remove it from registration under Section 12(b) of the Exchange Act. The delisting became effective 10 days after the filing of the Form 25. In accordance with Rule 12d2-2 of the Exchange Act, the de-registration of our common stock under Section 12(b) of the Exchange Act will become effective 90 days, or such shorter period as the SEC may determine, from the date of the Form 25 filing.
Business Outlook
Demand for our products and services has declined, and will continue to decline, as long as our customers continue to revise their capital budgets downward and adjust their operations in response to lower oil prices and demand due to the COVID-19 pandemic. In addition to the RSA and our preparation for the Bankruptcy Filing, throughout 2020 we have taken actions to mitigate the near and long-term financial impacts on our operating results to ensure adequate liquidity and capital resources are available to maintain our operations until the oil and gas industry and global economic conditions improve. These actions include, but are not limited to:
We implemented continued actions to reduce our payroll costs through a combination of salary reductions, reductions in force and furloughs.
We exited unnecessary facilities and consolidated our operational footprint to align the size of our operations with current demand.
We reduced discretionary expenses and deferred any non-essential capital spending.
We are leveraging governmental relief efforts to defer payroll and other tax payments, which have benefited our future cash flows for 2020, including a tax refund of $30.5 million that was received in July 2020.
We have taken, and will continue to take, other actions to reduce costs and preserve cash in order to successfully navigate the current economic environment, including limiting expected capital expenditures to no more than $50.0 million for the full fiscal year 2020.
The COVID-19 pandemic continues to adversely impact many jurisdictions and continues to disrupt normal economic activities. As a result, the demand for energy continues to be constrained with continued adverse consequences for our customers and for us. Further, there is an increasing number of bankruptcies in our industry. Our collection of receivables could be materially delayed and/or impaired for the duration of the COVID-19 pandemic. The duration and severity of the COVID-19 pandemic and the resulting potential for continued losses subjects us to significant uncertainty and may cause significant variability in our allowance for credit losses in future periods. We expect the negative impacts of the COVID-19 pandemic to be felt throughout 2020 and into 2021. As the nature of the COVID-19 pandemic is inherently uncertain, we are unable to reasonably estimate the duration and ultimate impacts of the COVID-19 pandemic, including the timing or level of any subsequent recovery. We cannot be certain of the degree of impact on our business, result of operations and/or financial position for future periods.
For more information on the Chapter 11 Cases, see Note 1 of the notes to our condensed consolidated financial statements included in Part I, Item 1, “Financial Statements – Note 1 – Basis of Presentation” of this Quarterly Report.
Industry Trends
The oil and gas industry is both cyclical and seasonal. The level of spending by oil and gas companies is highly influenced by current and expected demand and future prices of oil and natural gas. Changes in spending result in an increased or decreased demand for our services and products. Rig count is an indicator of the level of spending by oil and gas companies. Our financial performance is significantly affected by the rig count in the U.S. land and offshore market areas as well as oil and natural gas prices and worldwide rig activity, which are summarized in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
|
2020
|
|
2019
|
|
% Change
|
|
Worldwide Rig Count (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
241
|
|
|
894
|
|
-73%
|
|
|
|
461
|
|
|
961
|
|
-52%
|
|
Offshore
|
|
|
13
|
|
|
26
|
|
-50%
|
|
|
|
16
|
|
|
23
|
|
-30%
|
|
Total
|
|
|
254
|
|
|
920
|
|
-72%
|
|
|
|
477
|
|
|
984
|
|
-52%
|
|
International (2)
|
|
|
731
|
|
|
1,144
|
|
-36%
|
|
|
|
879
|
|
|
1,094
|
|
-20%
|
|
Worldwide Total
|
|
|
985
|
|
|
2,064
|
|
-52%
|
|
|
|
1,356
|
|
|
2,078
|
|
-35%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Prices (average)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil (West Texas Intermediate)
|
|
$
|
40.89
|
|
$
|
56.34
|
|
-27%
|
|
|
$
|
38.04
|
|
$
|
57.04
|
|
-33%
|
|
Natural Gas (Henry Hub)
|
|
$
|
2.00
|
|
$
|
2.38
|
|
-16%
|
|
|
$
|
1.87
|
|
$
|
2.61
|
|
-28%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Estimate of drilling activity as measured by the average active drilling rigs based on Baker Hughes Co. rig count information.
(2) Excludes Canadian Rig Count.
Comparison of the Results of Operations for the Three Months Ended September 30, 2020 and June 30, 2020
For the third quarter of 2020, our revenue was $166.9 million and the net loss was $157.3 million, or a $10.61 loss per share. Included in the results for the three months ended September 30, 2020 was a pre-tax charge of $2.9 million related to the reduction in value of long-lived assets, $4.4 million for inventory write-down, $3.2 million for severance, and $25.7 million of expenses related to restructuring activities. This compares to net loss of $65.1 million, or a $4.39 loss per share, for the second quarter of 2020, on revenue of $183.9 million.
Third quarter 2020 revenue in our Drilling Products and Services segment decreased to $56.0 million, as compared to $67.4 million for the second quarter of 2020. U.S. offshore revenue decreased 8% sequentially to $26.2 million primarily due to a decrease in rentals of premium drill pipe during the quarter. International revenue remained flat at $19.3 million. U.S. land revenue decreased 47% to $10.5 million primarily due to a decrease in rentals of premium drill pipe and bottom hole assemblies.
Third quarter 2020 revenue in our Onshore Completion and Workover Services segment increased 2% sequentially to $21.6 million, as compared to $21.2 million for the second quarter of 2020. The increase in revenue is primarily attributable to an increase in well servicing rigs activity.
Third quarter 2020 revenue in our Production Services segment increased 3% sequentially to $56.3 million, as compared to $54.5 million for the second quarter of 2020. U.S. offshore revenue increased 4% to $6.6 million primarily due to an increase in in hydraulic workover and snubbing activities. U.S. land revenue decreased 12% sequentially to $9.8 million primarily due to a decrease in pressure control activities. Revenue from international market areas increased 8% sequentially to $39.9 million primarily due to an increase in electric line and hydraulic workover and snubbing activities.
Third quarter 2020 revenue in our Technical Solutions segment decreased 19% sequentially to $33.0 million, as compared to $40.8 million in the second quarter of 2020. U.S. offshore revenue decreased 33% sequentially to $15.8 million due to a decrease in completion tools and products. International revenue decreased 11% sequentially to $12.6 million, primarily due to a decrease in in completion tools and products. U.S. land revenue increased 48% sequentially to $4.7 million, primarily due to an increase in demand for well control services.
Comparison of the Results of Operations for the Three Months Ended September 30, 2020 and 2019
For the three months ended September 30, 2020, our revenue was $166.9 million, a decrease of $189.6 million, or 53%, as compared to the same period in 2019. Net loss was $157.3 million, or a $10.61 loss per share. Included in the results for the three months ended September 30, 2020 was a pre-tax charge of $2.9 million related to the reduction in value of long-lived assets, $4.4 million for inventory
write-down, $3.2 million for severance, and $25.7 million of expenses related to restructuring activities. This compares to a net loss for the three months ended September 30, 2019 of $38.4 million, or a $2.46 loss per share.
The following table compares our operating results for the three months ended September 30, 2020 and 2019 (in thousands, except percentages). Cost of revenues excludes depreciation, depletion, amortization and accretion for each of our business segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
Cost of Revenues
|
|
|
2020
|
|
2019
|
|
Change
|
|
%
|
|
2020
|
|
%
|
|
2019
|
|
%
|
|
Change
|
|
Drilling Products and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
$
|
56,001
|
|
$
|
111,185
|
|
$
|
(55,184)
|
|
-50%
|
|
$
|
23,714
|
|
42%
|
|
$
|
38,663
|
|
35%
|
|
$
|
(14,949)
|
|
Onshore Completion and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workover Services
|
|
21,559
|
|
|
75,973
|
|
|
(54,414)
|
|
-72%
|
|
|
21,943
|
|
102%
|
|
|
61,338
|
|
81%
|
|
|
(39,395)
|
|
Production Services
|
|
56,355
|
|
|
98,787
|
|
|
(42,432)
|
|
-43%
|
|
|
46,115
|
|
82%
|
|
|
82,556
|
|
84%
|
|
|
(36,441)
|
|
Technical Solutions
|
|
33,013
|
|
|
70,640
|
|
|
(37,627)
|
|
-53%
|
|
|
24,461
|
|
74%
|
|
|
49,370
|
|
70%
|
|
|
(24,909)
|
|
Total
|
$
|
166,928
|
|
$
|
356,585
|
|
$
|
(189,657)
|
|
-53%
|
|
$
|
116,233
|
|
70%
|
|
$
|
231,927
|
|
65%
|
|
$
|
(115,694)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Segments:
Drilling Products and Services Segment
Revenue from our Drilling Products and Services segment decreased 50% to $56.0 million for the three months ended September 30, 2020, as compared to $111.2 million for the same period in 2019. Cost of services and rentals as a percentage of revenue increased to 42% of segment revenue for the three months ended September 30, 2020, as compared to 35% for the same period in 2019. Revenue from the U.S. land market areas decreased 78% primarily as a result of decreases in revenue from rentals of premium drill pipe, bottom hole assemblies, and accommodations. Revenue from the U.S. offshore market area decreased 23% primarily due to a decrease in revenue from rentals of premium drill pipe. Revenue from the international market areas decreased 37%, primarily due to a decrease in demand for rentals of premium drill pipe.
Onshore Completion and Workover Services Segment
Revenue from our Onshore Completion and Workover Services segment decreased 72% to $21.6 million for the three months ended September 30, 2020, as compared to $76.0 million for the same period in 2019. All of this segment’s revenue is derived from the U.S. land market area. Cost of services and rentals as a percentage of revenue increased to 102% of segment revenue for the three months ended September 30, 2020, as compared to 81% for the same period in 2019. The decrease in revenue is primarily attributable to decreased activity in North America, where the average rig count decreased by 73% during the third quarter of 2020.
Production Services Segment
Revenue from our Production Services segment for the three months ended September 30, 2020 decreased by 43% to $56.4 million, as compared to $98.8 million for the same period in 2019. Cost of services and rentals as a percentage of revenue decreased to 82% of segment revenue for the three months ended September 30, 2020, as compared to 84% for the same period in 2019. Revenue from the U.S. land market area decreased 70%, primarily due to a decrease in coiled tubing and pressure control activities. Revenue from the international market areas decreased 17%, primarily due to a decrease in electric line activities. Revenue from the U.S. offshore market area decreased 64%, primarily due to a decrease in pressure control and slickline activities.
Technical Solutions Segment
Revenue from our Technical Solutions segment decreased 53% to $33.0 million for the three months ended September 30, 2020, as compared to $70.6 million for the same period in 2019. Cost of services and rentals as a percentage of revenue increased to 74% of segment revenue for the three months ended September 30, 2020, as compared to 70% for the same period in 2019. Revenue from the U.S. land market area decreased 36%, primarily due to a decrease in demand for completion tools and products. Revenue from the international market areas decreased 44%, primarily due to a decrease in demand for well control services. Revenue derived from the U.S. offshore market area decreased 61% primarily due to a decrease in pressure control activities.
Depreciation, Depletion, Amortization and Accretion
Depreciation, depletion, amortization and accretion decreased to $35.2 million during the three months ended September 30, 2020 from $45.2 million during the same period in 2019. Depreciation and amortization expense decreased for our Drilling Products and Services segment by $5.7 million, or 28%; for our Onshore Completion and Workover Services segment by $1.5 million, or 22%; and for our Production Services segment by $2.5 million, or 21%. Depreciation and amortization expense increased for our Technical Solutions segment by $0.1 million, or 2%. Depreciation expense for Corporate and Other decreased by $0.3 million, or 29%. The decrease in depreciation, depletion, amortization and accretion is primarily due to assets becoming fully depreciated.
Restructuring Expense
Restructuring expense for the three months ended September 30, 2020 totaled $25.7 million. This amount includes all of the advisory and professional expenses related to our restructuring. Also included in this total is $15.6 million related to the RSA premium paid to certain Consenting Noteholders pursuant to the RSA.
Reduction in Value of Assets
The reduction in value of assets recorded during the three months ended September 30, 2020 was $2.9 million related to the reduction in value of long-lived assets within the Technical Solutions segment.
Income Taxes
Our effective income tax rate for the three months ended September 30, 2020 was a 5% expense, as compared to a 9% expense for the same period in 2019.
Discontinued Operations
Loss from discontinued operations, net of tax, was $58.0 million for the three months ended September 30, 2020, as compared to $17.9 million for the same period in 2019. Loss from discontinued operations includes reduction in value of assets of $60.2 million for the three months ended September 30, 2020. See Note 16 to our condensed consolidated financial statements in this Quarterly Report for further discussion of the discontinued operations.
Comparison of the Results of Operations for the Nine Months Ended September 30, 2020 and 2019
For the nine months ended September 30, 2020, our revenue was $672.3 million, a decrease of $417.0 million, or 38%, as compared to the same period in 2019. Net loss was $301.9 million, or a $20.40 loss per share. Included in the results for the nine months ended September 30, 2020 was a pre-tax charge of $19.5 million primarily related to the reduction in value of long-lived assets, $11.8 million for inventory write-down and facility closures, $10.9 million primarily for severance, $12.0 million for merger-related transactions, and $27.0 million of expenses related to restructuring activities. This compares to a net loss for the nine months ended September 30, 2019 of $157.2 million, or a $10.09 loss per share.
The following table compares our operating results for the nine months ended September 30, 2020 and 2019 (in thousands, except percentages). Cost of revenues excludes depreciation, depletion, amortization and accretion for each of our business segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
Cost of Revenue
|
|
|
2020
|
|
2019
|
|
Change
|
|
%
|
|
2020
|
|
%
|
|
2019
|
|
%
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling Products and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
$
|
227,344
|
|
$
|
312,946
|
|
$
|
(85,602)
|
|
-27%
|
|
$
|
81,163
|
|
36%
|
|
$
|
118,732
|
|
38%
|
|
$
|
(37,569)
|
|
Onshore Completion and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workover Services
|
|
103,957
|
|
|
273,727
|
|
|
(169,770)
|
|
-62%
|
|
|
98,774
|
|
95%
|
|
|
217,115
|
|
79%
|
|
|
(118,341)
|
|
Production Services
|
|
212,352
|
|
|
305,239
|
|
|
(92,887)
|
|
-30%
|
|
|
177,624
|
|
84%
|
|
|
240,855
|
|
79%
|
|
|
(63,231)
|
|
Technical Solutions
|
|
128,625
|
|
|
197,385
|
|
|
(68,760)
|
|
-35%
|
|
|
99,161
|
|
77%
|
|
|
124,810
|
|
63%
|
|
|
(25,649)
|
|
Total
|
$
|
672,278
|
|
$
|
1,089,297
|
|
$
|
(417,019)
|
|
-38%
|
|
$
|
456,722
|
|
68%
|
|
$
|
701,512
|
|
64%
|
|
$
|
(244,790)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Segments:
Drilling Products and Services Segment
Revenue from our Drilling Products and Services segment decreased 27% to $227.3 million for the nine months ended September 30, 2020, as compared to $312.9 million for the same period in 2019. Cost of services and rentals as a percentage of revenue decreased to 36% of segment revenue for the nine months ended September 30, 2020, as compared to 38% for the same period in 2019. Revenue from the U.S. land market areas decreased 53% primarily as a result of decreases in revenue from rentals of premium drill pipe, bottom
hole assemblies, and accommodations. Revenue from the U.S. offshore market area remained flat. Revenue from the international market areas decreased 14% primarily as a result of decreases in revenue from rentals of premium drill pipe.
Onshore Completion and Workover Services Segment
Revenue from our Onshore Completion and Workover Services segment decreased 62% to $104.0 million for the nine months ended September 30, 2020, as compared to $273.7 million for the same period in 2019. All of this segment’s revenue is derived from the U.S. land market area. Cost of services and rentals as a percentage of revenue increased to 95% of segment revenue for the nine months ended September 30, 2020, as compared to 79% for the same period in 2019. The decrease in revenue is primarily attributable to decreased activity in North America, where the average rig count decreased by 52% during the first nine months of 2020.
Production Services Segment
Revenue from our Production Services segment for the nine months ended September 30, 2020 decreased by 30% to $212.4 million, as compared to $305.2 million for the same period in 2019. Cost of services and rentals as a percentage of revenue increased to 84% of segment revenue for the nine months ended September 30, 2020, as compared to 79% for the same period in 2019. Revenue from the U.S. land market area decreased 54%, primarily due to a decrease in coiled tubing and pressure control activities. Revenue from the international market areas increased 2%, primarily due to an increase in cementing and stimulation activities offset by a decrease in electric line activities. Revenue from the U.S. offshore market area decreased 59%, primarily due to a decrease in hydraulic workover and snubbing and electric line activities. During the nine months ended September 30, 2020, we recorded $4.1 million in reduction in value of assets.
Technical Solutions Segment
Revenue from our Technical Solutions segment decreased 35% to $128.6 million for the nine months ended September 30, 2020, as compared to $197.4 million for the same period in 2019. Cost of services and rentals as a percentage of revenue increased to 77% of segment revenue for the nine months ended September 30, 2020, as compared to 63% for the same period in 2019. Revenue from the U.S. land market area decreased 57%, primarily due to a decrease in demand for well control services. Revenue from the international market areas decreased 37%, primarily due to a decrease in activity within our well control division. Revenue derived from the U.S. offshore market area decreased 26%, primarily due to a decrease in activity within our well control division and completion tools and products. During the nine months ended September 30, 2020, we recorded $15.4 million in reduction in the value of assets.
Depreciation, Depletion, Amortization and Accretion
Depreciation, depletion, amortization and accretion decreased to $113.3 million during the nine months ended September 30, 2020 from $152.8 million during the same period in 2019. Depreciation and amortization expense decreased for our Drilling Products and Services segment by $16.6 million, or 26%; for our Onshore Completion and Workover Services segment by $10.8 million, or 39%; for our Production Services segment by $8.8 million, or 22% and for our Technical Solutions segment by $2.5 million, or 15%. Depreciation expense for Corporate and Other decreased by $0.8 million, or 21%. The decrease in depreciation, depletion, amortization and accretion is primarily due to assets becoming fully depreciated.
Restructuring Expense
Restructuring expense for the nine months ended September 30, 2020 totaled $27.0 million. This amount includes all of the advisory and professional expenses related to our restructuring. Also included in this total is $15.6 million related to the RSA premium paid to certain Consenting Noteholders pursuant to the RSA.
Reduction in Value of Assets
During the nine months ended September 30, 2020, the Company recorded $19.5 million in connection with the reduction in value of its long-lived assets. The reduction in value of assets was comprised of $4.1 million and $15.4 million related to property, plant and equipment in the Production Services segment and the Technical Solutions segment, respectively. The reduction in value of assets recorded during the nine months ended September 30, 2019 included $17.1 million, primarily related to the reduction in value of long-lived assets within the Onshore Completion and Workover Services and Technical Solutions segments.
Income Taxes
Our effective income tax rate for the nine months ended September 30, 2020 was a 6% benefit, as compared to a 12% expense for the same period in 2019. The effective tax rate for the nine months ended September 30, 2020 was primarily impacted by the filing of the carryback claim under the CARES Act.
Discontinued Operations
Loss from discontinued operations, net of tax, was $111.4 million for the nine months ended September 30, 2020 as compared to $85.6 million for the same period in 2019. Loss from discontinued operations includes reduction in value of assets of $109.6 million and $23.8 million for the nine months ended September 30, 2020 and 2019, respectively. See Note 16 to our condensed consolidated financial statements for further discussion of the discontinued operations.
Liquidity and Capital Resources
Our cash flows depend, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. Certain sources and uses of cash, such as our level of discretionary capital expenditures and divestitures of non-core assets, are within our control and are adjusted as necessary based on market conditions.
Also impacting our liquidity is the state of the global economy, which impacts oil and natural gas consumption. The COVID-19 pandemic has resulted in travel restrictions, business closures and the institution of quarantining and other restrictions on movement in many communities. As a result, there has been a significant reduction in demand for, and the prices of, crude oil and natural gas. The COVID-19 pandemic, together with other dynamics in the marketplace, has recently significantly increased borrowing costs and, in certain cases, restricted the ability of borrowers to access the capital markets and other sources of financing.
As a result, the COVID-19 pandemic created significant challenges that materialized in the first quarter of 2020 and continue to affect us. These include, but are not limited to, slower collections from customers, pricing pressure from customers, and pressure from suppliers to shorten payment terms or lower credit limits. In order to maintain our liquidity at levels we believed would be sufficient to meet our commitments, we undertook a number of actions, including minimizing capital expenditures and further reducing our recurring operating expenses. Ultimately, we concluded, even after taking these actions, we would not have sufficient liquidity to satisfy our debt service obligations as they came due. As a result, on September 29, 2020 we entered into the RSA which contemplates that the Debtors will file the Chapter 11 Cases and discharge all amounts outstanding under the Debtors’ Prepetition Notes.
Financial Condition and Sources of Liquidity
Our primary sources of liquidity during the period covered by this report have been cash and cash equivalents, cash generated from operations and proceeds from divestiture of non-core assets. As of September 30, 2020, we had cash, cash equivalents and restricted cash of $288.0 million and had approximately $265 million of cash, cash equivalents and restricted cash at the end of October 2020. During the nine months ended September 30, 2020, the net cash provided by operating activities was $18.6 million. During the nine months ended September 30, 2020, we received $44.1 million in cash proceeds from the divestiture of non-core assets.
At September 30, 2020, the borrowing base on our asset-based revolving credit facility was $97.3 million and we had $48.5 million of letters of credit outstanding that reduced our borrowing availability under the revolving credit facility. We reduced the amount of letters of credit issued through the credit facility by using $52.4 million to cash collateralize surety and other obligations in lieu of issuing letters of credit. We also deposited $25 million in an account under the lenders’ control to further secure our obligations under the revolving credit facility. At September 30, 2020, we had no borrowings outstanding on our revolving credit facility.
We believe our cash flow from operations, letter of credit capacity under a potential debtor in possession asset-based credit facility and cash on hand will provide sufficient liquidity during the Chapter 11 Cases.
We believe that our ability to continue as a going concern is contingent on filing the Chapter 11 Cases and the Bankruptcy Court’s approval of the Plan and our ability to successfully implement the Plan and obtain exit financing, among other factors. While operating as debtors-in-possession during the pendency of the Chapter 11 Cases, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the accompanying condensed consolidated financial statements. Further, the Plan if confirmed, could materially change the amounts and classifications of assets and liabilities reported in the condensed consolidated financial statements of this Quarterly Report.
Uses of Liquidity
Our primary uses of liquidity during the period covered by this Quarterly Report were support for our operating activities, restructuring activities, debt service obligations and capital expenditures. We have incurred, and expect to continue to incur significant costs associated with the Chapter 11 Cases, including fees for legal, financial and restructuring advisors to the Company, and certain of our creditors. Therefore, our ability to obtain confirmation of the Plan in a timely manner is critical to ensuring our liquidity is
sufficient during the Chapter 11 Cases. We incurred $27.0 million in restructuring expenses during the nine months ended September 30, 2020. These expenses include $15.6 million related to the RSA premium payable to certain Consenting Noteholders pursuant to the RSA and advisory and professional fees relating to the Chapter 11 Cases. Also related to the RSA is $11.7 million of fees in consideration for the commitment by the Backstop Commitment Parties to provide the Delayed-Draw Term Loan Facility upon our emergence from bankruptcy. We spent $37.4 million of cash on capital expenditures and made $71.2 million of net interest payments during the nine months ended September 30, 2020. Capital expenditures of $17.2 million primarily related to the expansion and maintenance of our equipment inventory for our Drilling Products and Services segment, capital expenditures of $12.6 million primarily related to the expansion and maintenance of equipment inventory at our Production Services segment and the remaining $7.6 million of capital expenditures primarily related to the maintenance of our equipment for our Onshore Completion and Workover Services and Technical Solutions segments.
During the remainder of 2020, we expect to limit additional capital spending to no more than $12.5 million to meet our target of no more than $50.0 million in capital expenditures for 2020. We also plan to adjust our capital spending as necessary in order to adhere to the terms of the RSA and restrictions stemming from the Bankruptcy Court. However, there can be no assurance that we will be able to successfully accomplish the Bankruptcy Filing and implement the Plan.
Debt Instruments
We have outstanding $500 million of 7.75% senior unsecured notes due September 2024. The indenture governing the 7.75% senior unsecured notes due 2024 requires semi-annual interest payments on March 15 and September 15 of each year through the maturity date of September 15, 2024. The indenture contains customary events of default and requires that we satisfy various covenants.
We also have outstanding $800 million of 7.125% senior unsecured notes due December 2021. The indentures governing the 7.125% senior unsecured notes due 2021 require semi-annual interest payments on June 15 and December 15 of each year through the maturity date of December 15, 2021. The indentures contain customary events of default and require that we satisfy various covenants.
The commencement of the Chapter 11 Cases will constitute an event of default under our credit facility and the indentures governing our unsecured notes. However, any efforts to enforce such payment obligations under the credit facility and unsecured notes will be automatically stayed as a result of the Bankruptcy Filing and the creditors’ rights of enforcement will be subject to the applicable provisions of the Bankruptcy Code. For more information on the Chapter 11 Cases, see Note 1 of the notes to our condensed consolidated financial statements included in Part I, Item 1, “Financial Statements – Note 1 – Basis of Presentation” of this Quarterly Report.
Other Matters
Off-Balance Sheet Arrangements and Hedging Activities
At September 30, 2020, we had no off-balance sheet arrangements and no hedging contracts.
Recently Adopted Accounting Guidance
See Part I, Item 1, “Financial Statements – Note 17 – New Accounting Pronouncements.”
Item 3. 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 Rates 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 international operations is paid in foreign currencies. The effects of foreign currency fluctuations are partly mitigated because local expenses of such international operations are also generally denominated in the same currency. We continually monitor the currency exchange risks associated with all contracts not denominated in the U.S. dollar.
Assets and 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 (deficit).
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 or speculative purposes. At September 30, 2020, we had no outstanding foreign currency forward contracts.
Interest Rate Risk
At September 30, 2020, we had no variable rate debt outstanding.
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 natural gas that can economically be produced.
For additional discussion, see Part 1, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Item 4. Controls and Procedures
|
(a)
|
Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation, that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) are effective for ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
|
|
|
|
|
(b)
|
Changes in internal control. There was no change in our internal control over financial reporting during the three months ended September 30, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
|