Description

Summary: Superior Energy Services (SPN or Superior) is an under the radar, unlisted small-cap oilfield service company that just emerged from a prepackaged chapter 11 in February 2021. The new equity is trading at $39 / share, a massive discount to peers on depressed EBITDA despite its pristine balance sheet (~$14 of cash), results that are obfuscated by a money losing “BadCo”, and up to 50% EBITDA upside from a basic cost-cutting exercise due to a bloated operating expense structure. I think SPN is worth ~$70 / share before modelling further improvements in the OFS market, and potentially $90+ / share.

Investment Ideas:

Money Losing BadCo: Before COVID hit, SPN was planning on doing a spin-merge transaction to separate its lower quality, commoditized, and more capital intensive BadCo from its core value add OFS. The BadCo operates in a fragmented and commoditized OFS market, which simply relies on "balance sheet" capacity from owning the PP&E, and is oversupplied. It is comprised of rigs, fluid management, wireline, etc. and was doing ~$70mm of EBITDA in 2019 but due to COVID was losing $10-15mm in EBITDA. On the other hand, their core business sells engineered products such as bottom hole, sand control, and downhole tubulars with typically only 2-3 players in each vertical. The BadCo has since recovered to just barely breakeven (run rate 2020 exit). I think at this price we are getting a free option on the BadCo recovering. Even if the business never recovers and is just running at breakeven, it should have a liquidation value of $110-160mm or $5-8 / share just based on its A/R, PP&E, and inventories.

Corp Cost Reduction: SPN is an amalgamation of 4-5 different businesses and management never really integrated the administrative functions of the different pieces. SPN’s G&A is high relative to peers (26% of revenue vs peer average of 18%). The company had planned on reducing G&A by ~$15-25mm from low hanging cost-out initiatives including reductions in HR, F&A, and legal, business unit rationalizations, and reduction in 3^rd party spending. As an example, SPN operates with a matrix organization structure with multiple office admins, finance and accounting, and HR staff for every business unit and for every geography, on top of back-office functions at the corporate level. Beyond the $15-25mm cost out planned by management, I think there are additional opportunities from various buckets e.g. real estate consolidation and T&E reductions among others. I think they should be able to extract another $20-30mm.

Downside protection: GoodCo as of Q4 2020 generated EBITDA - Cx ~$55mm, which at the current stock price implies ~14x EBITDA-Cx, which is a discount to peers (18x). However, on top of that SPN has net cash of $14 / share out of $39 share price. Liquidation of money losing/barely breaking even BadCo adds ~$8 / share. And they have net NOL of ~$7 / share. The value of their working capital, NPV of NOL, and cash should give us floor value of ~$30 / share.

Management Change and Disciplined Board: Post emergence, the entire management team was kicked out by the new distressed debt sponsors: Goldentree and Monarch. While management has done a decent job navigating through the downturn, I have not been that impressed by their cost-cutting discipline. I think the yet-to-be-announced new management team will be more aggressive trimming costs and bringing the business closer to larger OFS comps like HAL, SLB, BKR.

Risk:

·         Decline in commodity price and OFS activity

·         Lack of permanent management team hurting the business

·         Prolonged cash burn at BadCo

Valuation: I value BadCo and GoodCo based on the lower end of peer level valuations.

Catalyst

- Hiring of new management team

- Uplisting to a major US exchange