Superior Energy Services (NYSE: SWK)
Q3 2017 Earnings Conference Call
October 24, 2017, 9 00 a.m. ET
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Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks
Operator
Good day, and welcome to the Superior Energy Services Third Quarter 2017 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Paul Vincent, Vice President of Investor Relations. Please go ahead, Sir.
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Paul Vincent — Superior Energy Services, Inc. — Vice President of Investor Relations
Good morning, and thank you for joining Superior Energy Third Quarter 2017 Conference Call. With me today are Superior’s President and Chief Executive Officer, Dave Dunlap, and our CFO, Robert Taylor. During this conference call, management may make forward-looking statements regarding future expectations about the company’s business, management’s plans for future operations, or similar matters. The company’s actual results could differ materially due to several important factors, including those described in the company’s filings with the Securities and Exchange Commission. Management will refer to non-GAAP financial measures during this call. In accordance with Regulation G, the company provides a reconciliation of these measures on its website. With that, I’ll turn the call over to Dave Dunlap.
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Thank you, Paul, and good morning to everyone listening to the call today. We’ll begin with a brief review of our third quarter activity, Robert will discuss segment results, and I’ll wrap up with thoughts on strategy and outlook before turning the call over to Q&A.
For the third quarter of 2017, Superior Energy generated revenue of $506 million, adjusted EBITDA, $63 million, and a net loss from continuing operations of $57 million or $0.37 per share.
Operationally, we delivered during the quarter in what clearly remains a challenging market for oilfield services. The pace of acceleration in the US land market slowed during the quarter as average rig count increased only 7%. After peaking mid-quarter, rig count has declined steadily. In both the Gulf of Mexico and international markets, activity levels have remained trepid, with no indications of a change in the near-term. Against this backdrop, our consolidated results reflect an 8% sequential revenue improvement with a 61% incremental EBITDA margin.
Additionally, Superior Energy, along with everyone else in the Houston area, confronted Hurricane Harvey during the quarter. Fortunately, the impact to our business was minimal but the storm did impede our operational momentum. We estimate that hurricane-related interruptions impacted pre-tax losses by approximately $5 million.
In the US land market, our revenue growth of 4% slightly lagged a sequential increase in rig count due to a combination of factors. In our Pressure Pumping business, revenue did not grow to the degree we expected. Although sand volumes increased in July, we saw a decrease in higher volume zipper frac operations in August and September, coupled with less urgency, in general, around the pacing completions. This resulted in lower volumes of sand being pumped sequentially. We view this changing customer behavior as transitory. Our sand volumes have increased in the fourth quarter and completion pace has accelerated.
We feel this pace should continue throughout the quarter — however, it is too early to gauge how Pressure Pumping utilization will be impacted by holiday schedules, which can vary year to year. The Pressure Pumping market is undersupplied and we continue to win price increases in the fourth quarter and feel confident that trend will continue into 2018. Pressure Pumping was also most impacted by Hurricane Harvey with about $3 million of the estimated $5 million impact to pre-tax losses occurring in this business. A note for listeners that, although we did not add any horsepower during the quarter and, despite the slower pace of revenue growth I discussed, Pressure Pumping EBITDA margins did expand as a result of pricing increases and cost discipline.
What has continued unabated is our customer’s drilling intensity and pursuit of longer laterals. As a result, we saw strong growth in premium drill pipe and rental tool demand in US land markets. Coil tubing and well test utilization also continued along a strong growth trajectory. Highlighting just how far our customers are pushing lateral lengths, one of our CATS automated service rigs recently drilled out 46 plugs and a lateral length of greater than 17,000 feet in south Texas. Not only are we proud of the accomplishment, but we believe this unique technology will continue to gain favor as customers seek efficiency improvement in the longest laterals. This is truly a differentiated technology for Superior Energy.
Our Well Service business saw a pickup in utilization in the Rockies. Labor remains extremely tight in this service line and pricing gains are also challenging, given significant industry overcapacity. Gulf of Mexico performance improved sequentially, driven by our Completion Services business reaching peak activity on a number of projects during the quarter. Although this activity will moderate during the fourth quarter and there were interruptions caused by Hurricane Nate, we expect to deploy our Sub-C Well Intervention technology during the quarter to begin a plug-and-abandonment campaign.
International activity picked up during the quarter after a slow first half of the year. This growth was driven by an improving environment in Latin America for our Well Intervention businesses, Well Control activity in Africa, and increased hydraulic workover and snubbing projects in Europe and Australia. These improvements led to revenue increasing approximately 22% with solid incremental margins. Although business conditions are steadily improving and it is pleasing to report sequential growth, this recovery remains tenuous. Our focus is on returning return profile through disciplined investment, to best secure businesses that will not be competitive for capital allocation and recovery, continued cost structure enhancement, and repeatable, reliable execution in the field.
I’ll now turn the call over to Robert for our third quarter financial review.
Robert S. Taylor — Superior Energy Services, Inc. — Chief Financial Officer
Thank you, Dave. In discussing our operating segments, all sequential comparisons are being made to our second quarter 2017 results. Third quarter results are adjusted to include the impact of special items which were disclosed in our earnings release. Drilling Products and Services segment of revenue increased 12% to $77 million with a loss from operations of $3 million, compared to a loss from operations of $15 million in the second quarter of 2017. US land revenue increased 22% to $34 million as utilization and pricing increases outpaced rig count addition. Gulf of Mexico revenue increased 5% to $23 million and international revenue increased 7% to $20 million.
In the Onshore Completions and Workover Services segment, which is comprised of product lines that exclusively served US land markets, revenue remained flat at $249 million. The segment reported an adjusted loss from operations of $32 million, compared to loss from operations of $29 million in the second quarter. While Hurricane activity in the third quarter affected all segments, the most significant impact was in this segment. We estimate that weather-related disruptions impacted the pre-tax loss in this segment by approximately $3 million. Continued tightening of supply chains and logistics channels also resulted in elevated non-productive time.
Our Production Services segment revenue increased 10% to $97 million, resulting in a loss from operations of $18 million, compared to a loss from operations of $20 million in the second quarter. US land revenue increased 22% to $40 million as demands for coil tubing and well tests increased. Gulf of Mexico revenue decreased 18% to $16 million as pressure control and coil tubing activity was moderately lower. Gulf of Mexico results were also slowed by hurricane-related interruptions. International revenue increased 14% to $41 million, as most of our Well Intervention services experienced increased demand.
In the Technical Solutions segment, revenue increased 31% to $83 million, resulting in adjusted income from operations of $9 million, compared to a loss from operations of $3 million in the second quarter. US land revenue increased 14 percent to $9 million. Gulf of Mexico revenue increased 24% to $52 million on higher completion tools activity. International revenue increased 62% to $22 million, primarily due to increased well control activity in Africa.
Turning to the balance sheet, our debt-to-capital ratio at the end of the quarter was approximately 54% and our total–debt at quarter end remains $1.3 billion. We ended the quarter with $167 million in cash. During the quarter, we issued $500 million at 7 and 3/4% senior notes due 2024 and redeemed $500 million at 6 and 3/8% senior notes due 2019. We incurred additional interest expense to the total of approximately $6 million, primarily related to the write–off of unamortized debt issuance costs and the timing of the redemption of the 2019 notes.
Subsequent to quarter-end, we extended our revolving credit facility maturity to a 2022 with $300 million asset base revolving credit facility. We also recorded pre-tax charge of $9.9 million for reduction in value of assets during the third quarter. Capital expenditures during the quarter were approximately $53 million. For the year, we expect CapEx to be approximately $150 million.
Before turning the call back over to Dave, here are a few modeling-related items. G&A for the quarter was $74 million, slightly below the lower end of our guidance, primarily as a result of lower compensation in insurance-related expenses. We expect fourth quarter G&A to be in the range of $74 million to $78 million. We expect DD&A to be in the range of $109 million to $114 million. Fourth quarter interest expense, which includes a full quarter of interest for our new senior notes, is expected to be in the range of $25 million to $27 million. Our expected income tax rate for the third quarter 2017 was 33% and we expect the rate for 2017 to remain in the range of 32% to 33%.
Thank you, and I’ll turn the call back over to Dave for closing comments.
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Okay. Thanks, Robert. As we enter the final quarter of 2017, we’re a much healthier company and industry fundamentals have greatly improved from last year. With that said, we remain in a challenging environment. Uncertainty around oil prices, uncertainty around our customer’s spending plans for 2018, and uncertainty of long-term oil demand growth have cast a pall over our industry despite the fundamental business improvements that we are experiencing. Against that backdrop, we have very clearly strategic goals for this recovery. These are to improve our return profile and reduce debt levels. After a prolonged downturn, the business has capital requirements in the early days of recovery, but we will continue to be cautious about capital spending and continue to seek cost improvement. We believe there will be very strong momentum in pricing improvement in the Pressure Pumping market through 2019.
Capital spending in Pressure Pumping will be directed toward maintaining the 750,000-horsepower that will be deployed by first quarter 2018. There may be opportunities to deploy some expansion capital in premium drill pipe, bottom hole assemblies, or CATS rigs, all of which are product lines whose performance has a strong correlation to lateral length. However, as much uncertainties exist in the market today, expect us to remain cautious with our use of cash. In the fourth quarter, we expect the US Land Completions market to remain strong and expect pricing in our Pressure Pumping business to increase throughout the quarter. We also expect our CATS rigs to be productive in the quarter, offsetting, to some degree, the typical seasonal activity declines we usually observe in our high–spec Well Service business.
During 2017, we expect our Permian Basin revenue to approximately double and our overall Pressure Pumping revenue to approximately triple over 2016 levels. This incredible surge in activity is clearly creating inefficiencies in the supply chain. As customers continue to learn more about the optimal techniques to drilling complete wells and extremely heterogeneous reservoirs, persistent challenges with labor and less miles in transport remain the background. I believe that activity in the Permian Basin will continue to increase, but likely at a more measured pace than we have observed during the past 12 months. A measured pace of increase should allow the supply chain and our customers to become more efficient and for outcomes to become more predictable.
In the Gulf of Mexico, we expect performance to decline as a portion of our Completion Services activity rolls off after peaking the third quarter. Additionally, we expect normal seasonality and interruptions related to Hurricane Nate. Our work in the gulf during Q3 was skewed toward Completions–oriented projects and our premium drill pipe business and we expect this to revert to a more balanced mix between Drilling and Completions in Q4. This mix–shift will be offset, somewhat, by the commencement of a Sub-C plug-and-abandonment project utilizing our proprietary subsidy intervention technology.
International revenue may be a bit weaker in the fourth quarter as we don’t anticipate further Well Control work to repeat. Excluding that, our expectations is for relatively flat activity levels, particularly in our Productions Services segment and margins that continue to be substantially improved from the first half of 2017.
Looking ahead to 2018, we’re anticipating entering the year with a capital spending level similar to our 2017 program. Much of this will be allocated toward US land businesses with improving return profiles. At this point, any expansionary investment would be restricted to premium drill pipe and CATS rigs. As occurred this year, should business results improve ahead of expectations, we will post a new board to stand our businesses up to meet growing market demands.
Before opening the lines to questions, I’ll note the third quarter consolidated revenue was 55% greater than our 2016 third quarter and our $63 million of EBITDA compared favorably to the negative $14 million in Q3 last year. We appreciate that investors are concerned about the extent of this recovery. We are, too. I just remind everyone that we’ve come a long way in 12 months and expect continued improvement over the next 12 months. Patience and discipline will be rewarded and, from the boardroom to the field, everyone at Superior is committed to the discipline and values required to achieve our long-term strategic goals.
And, with that, Operator, we’ll please open the line up for Q&A.
Questions and Answers
Operator
Thank you. If you would like to ask a question, please signal by pressing Star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up question to give others opportunities to ask their questions. Again, press star 1 to ask a question. Our first question is from Wokhar Zayed from Goldman Sachs.
Wokhar Zayed — Goldman Sachs
Thank you. David, the P&A campaign that seems to be starting in the first quarter, how long is this going to last? How many wells campaign is that?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Well, it’s multiple wells. We expect it to last into the first quarter, but continue to try and build a book of business to fill in behind that. We’ve been really inactive with Sub-C P&A work during 2018 and our belief is that we’ll see that overall utilization, both in the Gulf of Mexico and internationally, pick up during 2018. We’ve had some time now to go market the technology and the uptake seems pretty good so we’re optimistic about a more complete book of business in 2018.
Wokhar Zayed — Goldman Sachs
And, for the second unit, where do you expect that to be on jobs?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Yeah, so the second system is being finalized now. We expect that it will be ready for deployment during 2018.
Wokhar Zayed — Goldman Sachs
Okay. And do you have any view on which quarter or not yet?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Not yet. I think if we get better visibility on the book of business building, we’ll be sure to let you guys know that.
Wokhar Zayed — Goldman Sachs
Okay. Thank you and much success on that.
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Thanks.
Operator
And we’ll take our next question from Will Herbert with Simmons & Company.
William Herbert — Simmons & Company International — Head of Energy Research, Oil Service
Thanks. Good morning, Dave. I was curious as to whether you could talk about just the runway for margin improvement within frac. You had in Onshore Completions, EBITDA margins in second quarter 6.7%, so is frac accreted to that margin, first of all? Secondly, what kind of runway do we have left for frac margin improvement are what are the levers for margin improvement?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
The answer is, yeah, there is room for margin improvement there and I think it continues to build. I think that we’ll continue to see price improvement opportunities, I guess, first off. Primarily, they’re related to frac in that segment. The Well Service rig pricing opportunities seem rather minimal at this point, although we get some price improvements with things like CATS but most of the price improvement we see in that segment will be related to fracturing. And we’ll see price improvement in the fourth quarter — we saw a bit in the third quarter. I think it would have been more apparent if our sand volumes would have been higher in the third quarter and they were lower than we expected.
As I commented, we had significantly fewer zipper frac operations that we were on in the third quarter than what we had in the second quarter and that has an impact on volume. And, when that volume diminishes, as it did for us in August and September, it clearly had an effect on our expectations for what third quarter frac results would be. So, I think you can relate that to utilization, so pricing and utilization are two of those levers and then there’s cost.
So, some of the inefficiencies that we experienced during the third quarter included trucking — trucking was difficult for us during the third quarter and I think for others. There’s clearly been a shortage of trucking to deliver that last mile of sand transport, particularly in the Permian Basin. We’ve already seen improvement on that front as we enter into the fourth quarter so I think this is just a function of the market catching up with activity.
And there’s a whole range of inefficiencies that are out there, as well, Bill. We’ve been delayed on locations as things like perforating guns didn’t fire or as other parts of the completion supply chain has been less efficient than normal. So, I think a lot of that is just related to the extreme ramp-up that we’ve had in the Permian Basin over a short period of time and I think what happens is we move forward as we see overall supply chain operating more efficiently. We’re beginning to see evidence of that today so those are, really, the three primary things that I think cause margin improvement to continue in the fracturing business.
William Herbert — Simmons & Company International — Head of Energy Research, Oil Service
Okay, and then one more from me. If there’s going to be a tendency to get more varied and more balanced with regard to E&T capital spending, how do you think that plays out with regard to runway for continued pricing improvement in frac and the deconsolidated nature of the DITMOS? And the market being relatively close to imbalanced, obviously, incremental capacity coming on, you make a good point with regard to an ongoing wear and tear of the frac and the rebuild commitment going forward, but how do you think about pricing in an environment in which E&T capital spending is more balanced and less frenzied?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Yeah, I think that, as certainly, then the price increase and price improvement opportunities become a bit less frenzied, as well. And I think expectations should be that price increases occur on something that’s a bit more of a moderate pace than what we saw between Q4 ’16 and Q4 ’17, which I say that was a much more rapid pace increase. So, I don’t think that we’ll see a repeat of the pace of price increase that we saw from Q1 to Q2 but I think moderate increase opportunities are available throughout our customer base. And, yeah, although fracturing supply and demand, it’s impossible for me to know. I can’t tell so I don’t know how you can tell how far out of balance the market is. It still feels like there is a bit less demand than there is supply and I personally believe that that continues to be pressured in 2018 as a result of attrition. And so, I think that continues to keep the market in a bit of an undersupply situation, which provides the momentum for moderate price increases moving forward.
William Herbert — Simmons & Company International — Head of Energy Research, Oil Service
Okay. Thank you.
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
You’re welcome.
Operator
We’ll take our next question from Marshal Atkins with Raymond James.
Marshall Adkins — Raymond James & Associates, Inc. — Director of Energy Research
Hi, Dave. How do these logistics issues — you just gave us a little more color on — how long does it take those to subside? Is this a one-quarter deal or a full year deal?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Well, Marshall, it’s not a one-quarter deal. Trucking in the Permian Basin has been a challenge since we started ramping up activity about this time last year and so I think what we see are intermittent challenges from day-to-day, but we’re also seeing more trucks show up in the basin as rates have gone up and so… You know how this game gets played when the trucking supply is tight, then their prices go up and that attracts drivers and trucks from other parts of the US. And so, we did see a rate increase that occurred between Q2 and Q3 and, already, what we’re seeing is a bit more balance in the trucks that are available to move sand in the Permian. This has been a big ramp-up in the demand over a short period of time and I do see that… We already see that improving today. I think it continues to improve as time goes on.
Marshall Adkins — Raymond James & Associates, Inc. — Director of Energy Research
Fair enough. And then, it sounds like you certainly perceive a modestly underbalanced market for the foreseeable future. I assume that means you’re fully booked, No. 1, and, No. 2, just remind us where you stand on your reactivations, and thoughts on new builds, and all that stuff?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Yeah, so we reached our 600,000-horsepower current capacity mid-point of the second quarter. We haven’t added any additional capacity since then. We have 150,000-horsepower that is currently in some stage of capital rebuild. We expect all of that horsepower to be available as we get into the first quarter — it’s all on-track and on-schedule — and so that’ll take us to 750,000-horsepower at some point, I think early Q1. Our intention, based on what we see in the marketplace today is to hold steady at 750,000-horsepower. We’ll have some capital associated with that maintenance in 2018, but I know, what I’ve talked publicly about and still feel is the right call for Superior, is any expansion for fracturing capacity in our business would really have to be driven by change in the commodity price outlook. I don’t feel real good about making a commitment on fracturing expansion until we see a better oil price.
Marshall Adkins — Raymond James & Associates, Inc. — Director of Energy Research
Is there any drag on margins from what you’re doing an additional 150,000 right now or is that mainly capital?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
It’s mainly capital. As we activate those additional fleets, there’ll be moderate cost inefficiency to bring the labor on-board, but I can’t say that’s an impact on the third quarter.
Marshall Adkins — Raymond James & Associates, Inc. — Director of Energy Research
Thank you.
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
You’re welcome.
Operator
We’ll take our next question from Brad Handler with Jefferies.
Brad Handler — Jefferies & Company — Managing Director, Equity Research
Thanks. Good morning. Well, why don’t we switch gears? Let’s make sure we cover a couple of other divisions. And you turned a very nice profit improvement in Drilling Products and Services on the margin side, particularly, relative to, certainly, revenues were not so dissimilar from our estimate. And, if our math is close, then it was incremental margins, sequentially, of well over 100% so, presumably, there’s some beneficial mix in there. So, maybe you could just shed a little more color on that profit improvement in Q3 and then maybe extend that into the sustainability of current margin levels, please?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Yeah, I think it’s probably unrealistic to always expect to have incremental margins that are over 100 percent. We did have some nice mix. We commented in our prepared remarks that a good mix from the Gulf of Mexico, which was largely Completions-related worked, probably reverting in the fourth quarter into something that’s a more normal mix in premium drill pipe rentals between Completion and Drilling. We did see our US land revenue for our premium drill pipes increase.
We are seeing pretty extreme wear and tear on our premium drill pipe and some of these long horizontals. When we have damage to the drill pipe, then the customer buys it. And, depending on the depreciated life of that pipe, that can be a pretty good margin product so… Although, of course, we don’t have the pipe to rent next time, so we’ve got to go out and replace it. I think it was a favorable mix, overall, and I don’t think it’s something you can count on every quarter but, clearly, the US growth in those downhole rental-related product lines continues to be very strong. And I think that it’s really driven by lateral length, more so than just rig count.
Brad Handler — Jefferies & Company — Managing Director, Equity Research
Okay. I guess just, if we think about the fourth quarter, then, maybe a little directional help? It sounds like, perhaps, we would look for a little bit of revenue decline. Should we expect EBIT margins to fall back, to decline, in the fourth quarter, again, just that reversion in the Gulf of Mexico or are there some other factors that might help keep it at those levels?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
I think that’s probably a reasonable assumption. I would expect revenue, certainly, to be down just a bit in the fourth quarter, just from third quarter and DPS, and margins probably reducing somewhat from where we saw them in the third quarter but it’s moderate. It’s not extreme by any means.
Brad Handler — Jefferies & Company — Managing Director, Equity Research
Okay. If I could… If I’m going to count that as one question, maybe, then my follow up… And maybe I’ll sidestep to something on the balance sheet. Robert, could you just help us understand the new revolver a little bit better? Where does the fixed charged covered ratio stand today and what is availability on the revolver, in total, based on the assets today?
Robert S. Taylor — Superior Energy Services, Inc. — Chief Financial Officer
The availability today is about $285 million and the fixed charge coverage really comes into question when we get down to availability of less than $50 million so that really doesn’t come into play in any of our forecasts at all.
Brad Handler — Jefferies & Company — Managing Director, Equity Research
Sure. Okay. I understand. Okay. Very good. Thank you, guys. I’ll turn it back.
Operator
We’ll take our next question from Vaibhav Vaishnav with Cowen & Co.
Vaibhav Vaishnav — Cowen & Co. LLC — Research Associate, Oils Equity Research
Good morning and taking for taking the question. I guess it seems like Pressure Pumping revenues were flattish. There were some one-time issues, seems like, in third quarter. How should we think about fourth quarter, given you’re not adding any more capacity but this third quarter inefficiency could actually clawback? So, if you could please help us with any kind of quantification of how much we should expect for Pressure Pumping revenues?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Yeah, I’m not going to quantify. What I would say is that our revenue was clearly less than we expected and it was mainly driven by a mix that was a lot fewer zipper fracs than what we did in the second quarter. Zipper fracs have a very strong correlation to overall revenue. These are the types of Completions that generate the highest number of hours that we work in a given day with any frac fleet and so, fewer zipper fracs in August and September certainly caused revenue in Pressure Pumping to be less than I thought they would be in the third quarter.
What we witnessed already at the beginning of fourth quarter is reversion back to a similar job next to what we had in Q2 on zipper fracs. So, at this point, I would expect Q4 revenue to have the same type of balance of zipper fracs that we saw in the second quarter. That means the revenue’s going to be up. How much is the revenue going to be up fracturing? I don’t know. Probably a good benchmark would be somewhere in the 5% to 8% range.
Vaibhav Vaishnav — Cowen & Co. LLC — Research Associate, Oils Equity Research
That’s very helpful. And you guys have been putting up very strong incrementals — 60% plus in 3Q, around 55% in 2Q — can we mention this 55% plus incrementals in the near time or something about that?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
I think this relates to a number of things. One, we did see utilization increase dramatically from first quarter to second quarter. Those incrementals were less driven by price than they were by utilization. I think that, in the third quarter, we saw a bit of utilization increase but, for the most part, it was more price. And I think, in incrementals from third to fourth quarter will be impacted more by price and some of these inefficiencies that I spoke of, particularly, in sand transport and Permian Basin begin to work their way out, more so than utilization.
We’re not expecting any significant changes across the board in utilization from Q3 to Q4, particularly, in fraction because we’re not deploying more equipment. And so, Q1, you’re right, I do think we’ll continue to see utilization in coil tubing improve. I think CATS utilization will continue to be strong. Our Well Testing and Flow Back business, I think as we’ve seen, increase utilization and so there’s certainly parts of our US business that I would expect to see utilization continue to improve, but not so much in fracturing — we haven’t deployed any more assets.
Vaibhav Vaishnav — Cowen & Co. LLC — Research Associate, Oils Equity Research
If I may ask just one last question, just I want to understand how the pricing point works in Pressure Pumping. If you look at, a better way of asking, how much is the lag between pricing and when it runs through your income statement? In other words, if you look at a pricing running through your Pressure Pumping in 3Q, is that more reflective of pricing that you guys discussed in first quarter, second quarter, or is that more real-time third quarter?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Yeah, so it’s a good question. Most of our pricing in the third quarter was set at one point during the second quarter. There was some that was set during July, but I’d say most of it was agreed to with customers in the second half of Q2. And I’d say the same on Q4 pricing — it’s part of what gives us confidence is you know most of our fracturing business is with long-term, committed customers and so those are pricing discussions which generally are occurring at least a couple months in advance of pricing and making changes. What we see for pricing in the fourth quarter is all stuff that was agreed to in, I think, August or September.
Vaibhav Vaishnav — Cowen & Co. LLC — Research Associate, Oils Equity Research
That’s very helpful. Thank you for taking my question.
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
You’re welcome.
Operator
We’ll take our next question from Jim Wicklund with Credit Suisse.
James Wicklund — Credit Suisse Securities, LLC — Managing Director, Equity Research
Good morning, guys. David, they say you went to 600,000-horsepower in Q2 and so the average in Q3 would be a little higher. I’m just curious, what percentage of your Pressure Pumping revenues are sand? And I know that at least 75% of Completions in the Permian are zipper fracs — do you see that changing any? I’m just still trying to figure out the short ball in both of those and, relative to our model, Pressure Pumping, Onshore Completion, and Workover was about $30 million light and that just seems like an awful lot of sand and logistics disruption. I’m just trying to understand the magnitude of sand in that revenue stream.
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Sure. So, overall, sand revenue — and it will vary from quarter to quarter Jim — but think in the range of 30%, 35%, 40% of overall revenue in any given quarter. That’s approximately what our overall sand revenue would be. And, listen, I was surprised by the sand volume in the third quarter, as well, and we heard some of our competitors speak of lesser sand volumes in the second quarter, which we didn’t experience — we saw higher sand volumes per stage, higher sand volumes well into the second quarter. So, I was a bit surprised by what we saw in the third quarter, as well. And some of this is just a mix in what customers are doing. I’ll tell you this, we did see customers in the third quarter that — I won’t say that they slowed their pace — but they seemed to be grabbing a realization of what pace is possible based on overall restrictions in the supply chain.
And that doesn’t necessarily cause a pause, by any means, but it did seem to be a bit of a slow-down in overall utilization during third quarter. They’re all being… their pace seems to change quite a bit as we get into the fourth quarter — there seems to be a bit of, I think, concern around reaching production targets so we’ve seen some companies that have added some frac fleets in the marketplace over the course of the last couple of months to hit production targets in Q4 but… So, those were some things that were surprising to us in the third quarter. I think you can’t ignore the fact that we did have some Texas fracturing fleets that were shut down for between five and seven days during the quarter, as well, so that certainly was an impediment to revenue.
James Wicklund — Credit Suisse Securities, LLC — Managing Director, Equity Research
Okay. And Well Control issues in Africa while Well Control Boots and Coots — we’ve followed those guys in the past — and a 62 percent increase in technical was fabulous. What built you up and how much of that will repeat in Q4 — because situations like that are episodic, as opposed to ongoing — can you help us understand what that was?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Well, listen, the Well Control visits is one of the most difficult for us to budget and predict that we have. It is episodic and, with the exception of some extremely public Well Control problems, we tend not to speak specifically about Well Control jobs in interest of protecting that information for our customers’ benefit, but it was a real good quarter for Well Control. It was also a real good quarter, as we pointed out, for Completion Tools and we’ve been very active in the Gulf of Mexico.
Q3 was a peak for us on the Stampede Project with Hess, which has been a great Gulf of Mexico completion tool project for us and we’ve alerted you guys over time, we thought Q3 would be a peak. So, Well Control and Completions Tools were really the primary contributor to very strong segment performance scores. I should point out, since you’ve asked the question, listen, it’s one of the benefits that I’ve spoken of within Superior Energy Services for a long time. That diversity in product line and exposure to markets outside the Permian Basin frac market help us in quarters like this. It did this quarter, no question there.
James Wicklund — Credit Suisse Securities, LLC — Managing Director, Equity Research
Okay. Thank you, David.
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
You’re welcome.
Operator
We’ll take our next question from David Anderson with Barclays.
David Anderson — Barclays Capital, Inc — Senior Equity Analyst, Oilfield Services & Equipment
Alright. Good morning, Dave. Hey, I want to get back to the question on the zipper fracs. Was there a change in your customer base this quarter and new customer aren’t doing the same zipper fracs? I guess I’m just curious as to why you’re seeing the change in Completions and Designs. I would have thought that zipper fracs would have been the most efficient means for producing these formations so what is actually changing here? You highlighted earlier these changes in Well Designs. Can you just dig into that a little bit more for us?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Yeah, I would not characterize what we saw as changes in Well Design. It was a change in the wells that we were fracturing. We didn’t have change in the customer base, either, so where our waiting of number of fracs that were zipper fracs compared to non-zipper fracs was just different. And it was different with a couple different customers during the quarter and there’s not a strong explanation for it so… It is something that is reverted back in Q4 — part of that is because we’ve gone to those customers and said, “We need a little bit different exposure on your zipper fracs,” which they’ve accommodated. Not every well is a zipper frac and, in the Permian Basin, we see continued variation in Completion Design and Completion Technique with customers as they continue to learn what works best in their rock.
But, yeah, I’d also point out, we had customers that experienced challenges from frac-heads during the course of the third quarter so it’s just another example of us, as an industry, learning how to do things most efficiently. We had a couple of frac fleets that were shut down for a few days as a customer was getting frac-heads on a wall that they were drilling. So, all of those things, I attribute to basic inefficiencies that are out there in the supply chain that were certainly abundant during the third quarter and are change in mix from away from zipper fracs during the third quarter was part of our inefficiency in generating frac revenue.
David Anderson — Barclays Capital, Inc — Senior Equity Analyst, Oilfield Services & Equipment
So, your expectations of inefficiencies could largely be resolved by fourth quarter?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Yeah, we’ve certainly seen, already, in this quarter, our overall fleets in the Permian shifted more toward zipper fracs and that’s a similar mix to what we saw in the second quarter. I’m not trying to represent every frac that we do is a zipper frac — that wouldn’t be accurate — but the mix today seems much more similar to what the mix was in the second quarter and that does have a revenue impact for us.
David Anderson — Barclays Capital, Inc — Senior Equity Analyst, Oilfield Services & Equipment
Alright. Thanks, Dave, and just one last quick question on the sand side. Can you just help us understand…? It was great to understand how much of your volumes on the jobs are sand and I think we got a clear view of that. How do we think about the margins on sand versus the margins on your core Pressure Pumping business? Is it lucrative, is it in-line, is it a little worse? Can you just roughly point us in the right direction there?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Margins on sand, specifically?
David Anderson — Barclays Capital, Inc — Senior Equity Analyst, Oilfield Services & Equipment
Right. Is it incremental…? When you say you’re losing the volumes — you didn’t have those — I’m just curious how we think about the margins on those sand versus the margins on, say, your core Pressure Pumping business.
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
I think the way you really need to think about this is not so much about a margin on sand, but clearly, there is margin associated with every pound of sand that we put through a pump and so sand going through the pump is what drives utilization and revenue. And so that’s what’s driving the margin — it’s not necessarily associated with the pound of sand that we pump. Does that make sense? Does that help with that…?
David Anderson — Barclays Capital, Inc — Senior Equity Analyst, Oilfield Services & Equipment
Yeah. Thanks, Dave.
Operator
Our next question is Kurt Hallead from RBC.
Kurt Hallead — RBC Capital Markets — Managing Director & Co-head of Global Energy Research
Hey, good morning.
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Morning.
Kurt Hallead — RBC Capital Markets — Managing Director & Co-head of Global Energy Research
Hey, Dave, you brought a lot of good color here, maybe an opportunity to spend a little bit of time on the international dynamics. And, when you think about 2018 on the international front, what countries, what areas, what opportunities do you see for growth for Superior?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Yeah, so I think we are focused on individual countries that I’ll speak to — not so much geographical areas — but let me start out with Latin America. We do think that Argentina is a market where we will continue to see really good growth opportunities in 2018. Like a lot of people, we are really optimistic about election results there and how a more business-friendly government is going to track foreign investment for further development of Vaca Muerta, which we’re very exposed to and think that Argentina is going to be a great growth environment in 2018.
We think the Middle East is also going to be a growth environment for us and, specifically, in Saudi Arabia and Kuwait. We’ve got some product lines that are working in Saudi now, but we’ve been very active in getting things qualified in Saudi and Kuwait over the last year, 18 months, and I think that we’ll begin to see some fruits of that labor during 2018. We’re still bullish on India in 2018. India’s been a bit disappointing for us in the second half of ’17. We thought we’d see some increases in activity and it’s really been relatively flattish. But we’ve positioned ourselves with fracturing assets, and coil tubing assets, as well as Well Services business in India and think that 2018 will be a good opportunity for us in India.
We’ve also seen some general improvement for us in the North Sea and we do have our rental tool product line, as well as our hydraulic workover and snubbing business that has activity in the North Sea. So, I think, in general, we’re feeling favorable about international in 2018. I don’t know that you’ll see the same kind of right-angle recovery in the international markets that we experienced in the last 12 months in the US, but I think the recovery, nonetheless, will be apparent.
Kurt Hallead — RBC Capital Markets — Managing Director & Co-head of Global Energy Research
Okay. So, given that outlook, Dave, it’s pretty clear that there’s going to be international growth for Superior on a year-on-year basis. Given the fact that you guys are rifle-shot in specific countries and it’s harder for you to peg your growth rates on international in some sort of rig count assumption, any kind of general framework we can think about on revenue growth for international for Superior next year?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
I’d rather wait and talk to you about that. Next quarter, we’ll be going through our budgeting process over the course of the next weeks or so and I think what we’ll try to do is, when we report our fourth quarter earnings, is give you some bookends on what we see as far as the range of growth opportunity to expect in international next year.
Kurt Hallead — RBC Capital Markets — Managing Director & Co-head of Global Energy Research
That’s fair enough. So, Dave, maybe one follow-up here. So, you talked about supply chain challenges — we’ve heard that thematically through a number of different conference calls here — I know I’ve talked to you in the past you mentioned labor being bottleneck, as well. What do you see occurring as you get into ’18? Maybe some of this supply chain dynamics leave but, from a labor standpoint, how does that dynamic change, if at all?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Labor has currently been a challenge during the last 12 months. It’s really been, as much of anything, driven by the extreme increase that we’ve seen in utilization and activity over the last 12 months. I, certainly, have bias to believe that we continue to see activity increase in 2018, but it’s not at the same pace so it causes the access to labor challenge to be, perhaps, a little bit more favorable than what it’s been over the last 12 months. But, that all being said, we can continue to see labor challenges in our Well Service business line and that’s a little bit different type of labor force than what works in fracturing.
Our fracturing hands are generally working 12-hour days, 14 days on, 7 days off, and our Well Service crews tend to work more — other than those who are associated with Completions — tend to be more five-day, 10 to 12-hour day operations. It’s a different labor pool and that one’s been a little bit harder for us to access in recent months, and I would expect it continues to be challenging in 2018.
Now, the reality of this is, with Well Service margins where they are and what have been fairly limited price improvement opportunities, I can’t say we’ve been all that anxious to go activate new rigs and hire new crews but, if we saw a surge in demand for Well Service rigs, that may be a restriction.
Kurt Hallead — RBC Capital Markets — Managing Director & Co-head of Global Energy Research
May I speak one additional… and just a commentary about fracturing demand exceeding supply — we’ve heard that consistently throughout the process and, I don’t know, it seems to be a little bit of a mixed read on pricing because, with all the commentary about demand exceeding supply, you think there’d be a much more significant increase in pricing power, but it’s been more moderate. Right? So, what’s your take? How do we square everything up on that dynamic — demand exceeding supply and, yet, you’re not getting the kind of pricing power that you may have seen in prior situations when demand exceeds supply?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Yeah, I think that… Look, I think that there was a very significant change in pricing that occurred between Q4 ’16 and Q2 of ’17. And I don’t think that type of pace to price increase is something that should be expected to be repeatable, but I think that where we are from Q2 to Q3 and Q3 to Q4, there’s still significant price increase and we need to continue to get significant price increases so, as an industry, we’re generating enough gas to replace its equivalent, which is wearing out very rapidly.
So, I think that there is still, and will continue to be, momentum in the marketplace to get a higher price as we move forward. I don’t think you should be thinking about double-digit quarter-to-quarter price increases but I think that we will experience a time when we’ve got mid-single digit and 6%, 7%, 8% price improvement opportunities from quarter-to-quarter. I think it’s something to reasonably expect as we go through the next several quarters. And, clearly, that will begin to abate as we start to reach a price which is delivered at a replacement-type margin in this business.
Kurt Hallead — RBC Capital Markets — Managing Director & Co-head of Global Energy Research
Okay. Awesome. Thanks for the color, Dave.
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Yeah.
Operator
We’ll take our next question from Chase Mulvehill with Wolfe Research.
Chase Mulvehill — Wolfe Research LLC — Director, Oilfield Service Management
Hey, good morning, Dave.
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Chase.
Chase Mulvehill — Wolfe Research LLC — Director, Oilfield Service Management
I guess, in Onshore Completion and Workover Services, as we look out to the fourth quarter, can we expect to have 10% or greater EBITDA margins?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
So, I think what you can expect in that segment from Q3 to Q4 is think revenue increases that are, again, in the 5%, 6%, 7%, 8% range and I don’t think it’s unreasonable to believe — at least before allocations — that we’ve got EBITDA margins that are, I don’t know, 11% to 13%, 11% to 14%, in that range.
Chase Mulvehill — Wolfe Research LLC — Director, Oilfield Service Management
Okay. And, when we think about 3Q and the impact that non-productive time has across your fleet, can you talk about the main drivers of that and, basically, how much underutilized your fleet was in 3Q because of that?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Yeah, I don’t know that I’ve tried to measure it in terms of how much underutilized we were. I know, in south Texas, we lost five to seven days with four frac fleets as a result of the hurricane and shutdown in south Texas from flooding and the Harvey impact. I don’t know exactly how many days we lost in utilization in the Permian Basin. I can just tell you that, as I talk to our managers in that business, it seemed like, throughout the quarter, there were constantly things that were going on so we were delayed or slowed down on trucking, we were waiting on perforating guns from other suppliers in order to get a well perforated that we need to frac.
I mentioned before the frac-head that we experienced and shut down two frac fleets and the customer tried to figure out what they were going to do going forward as a result of taking frac-heads on a well that they were drilling. I couldn’t tell you exactly how many days it impacted — I just know it was out there. It was noise that was out there during the quarter and I attribute it, just in general, to the inefficiencies we have because of the pace of scale-up that’s gone on in the Permian Basin. I don’t believe that those are things that are necessarily specific to Superior — I think that they’re across the board — and I do expect them to improve as time goes on because, as we get a bit more accustomed to the overall pace of activity, as an industry, in the Permian Basin, we will get more efficient.
Chase Mulvehill — Wolfe Research LLC — Director, Oilfield Service Management
Okay. I guess, as we move forward and some of these non-productive issues work themselves out as activity growth slows, how should we think about the average number of stages that you complete per day across your day across your fleet in any particular calendar month — I guess, basically, taking into account maintenance, or anything like that? Is it three and a half stages per day per fleet? Is it four? Four and a half stages? How should we think about this?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Yeah, so we haven’t given those specifics as a metric in the business, Chase. What I would expect, though, is that it continues to go up.
Chase Mulvehill — Wolfe Research LLC — Director, Oilfield Service Management
Okay. Alrighty. And then, last one on the zipper fracs, what percentage of your fleet or what percentage of your stages, maybe, were done on zipper fracs in 3Q and then how does that compare to 2Q?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Yeah, so what I can tell you is the amount of zipper fracs we were doing was down about 30% during the quarter.
Chase Mulvehill — Wolfe Research LLC — Director, Oilfield Service Management
Wow.
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
And it caused the overall sand volume to be down during the course of the quarter, as well. We were pretty active with zipper fracs — really didn’t see a mix change until we go to August and September.
Chase Mulvehill — Wolfe Research LLC — Director, Oilfield Service Management
Okay. And was that a function of the types of supply chain or what that just driven by a customer decision to slow down completion?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
It was neither. It was just distribution of work with a customer. So, most customers, we’re not the only frac company that works for them.
Chase Mulvehill — Wolfe Research LLC — Director, Oilfield Service Management
Okay. Alrighty. I’ll turn it back over. War Eagle, Dave.
Operator
We’ll take our next question from Sean Meakim of J.P. Morgan.
Sean C. Meakim — J. P. Morgan Securities LLC — Senior Equity Research Analyst
Thanks, morning.
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Morning.
Sean C. Meakim — J. P. Morgan Securities LLC — Senior Equity Research Analyst
So, obviously, great quarter for premium drill pipe and incrementals for DPS. Could you just maybe give us a little detail on how your inventory looks today across, maybe 4.5 inch or 5.5-inch pipe in the US and are you seeing demand for even larger diameter for that lateral?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
We’re not seeing demand for anything larger than 5.5 inch. Demand for 4.5 inch still well outpaces 5.5-inch demand. And we do not have a lot of available inventory in 4.5-inch pipe today. I think it’s one of the areas you could probably look for us to have a bit of capital directed in 2018 as… It’s a great market environment for 4.5-inch pipe and we’re about sold out so it is very tight, Sean. 5.5-inch pipe, we still have availability for 5.5 inch pipe. I think the uptake on 5.5 inch pipe, it’s been less than what I anticipated it would be, but 4.5 inch has well outpaced it. And there’s not a whole lot of new capacity that’s come into the market so we’ve been in a pretty good position there and about to be sold out of a very high-margin, high-return product line.
Sean C. Meakim — J. P. Morgan Securities LLC — Senior Equity Research Analyst
Got it. Thank you for that. And then, just thinking about cash, what you laid out in terms of capital employment and improvement in utility next year, I’m curious, what are you thinking about the cash flow out, maybe, for the fourth quarter and then into next year?
David D. Dunlap — Superior Energy Services, Inc. — President and Chief Executive Officer
Yeah, so we’ve got… Well, capital spending is a bit higher in the second half of the year than where we were in the first half of the year and, overall, that’s going to result in a bit of negative of free cash flow for Superior in 2017, in total. I think the way we think about it for 2018 is we would like to show at least some moderately positive free cash flow, which could be more significant free cash flow if we see improving commodity prices during 2018. I think our approach to ’18 will be very similar to what we did in ’17 and you may recall there was a lot of uncertainty, at this point, in 2016, about how 2017 was going to shape up and I’d say we’re in a similar position on ’18 today. So, we’ll err with a cautious budget from a capital spend standpoint and one we believe is going to give us a business result that is free cash flow positive for the year and then we’ll flex as we see the business environment change during the year.
Sean C. Meakim — J. P. Morgan Securities LLC — Senior Equity Research Analyst
Got it. That makes sense. Thanks, Dave.
David D. Dunlap — Superior Energy Services, Inc. –– President and Chief Executive Officer
Yeah.
Operator:
It appears there are no further questions at this time. Mr. Vincent, I’d like to turn the conference back to you for any additional or closing remarks.
Paul Vincent — Superior Energy Services, Inc. — Vice President of Investor Relations
Thank you. That concludes the call for today.
Operator:
That concludes today’s call. Thank you for your participation. You may now disconnect.
Duration: 56 minutes
Call participants:
Paul Vincent — Vice President of Investor Relations
David D. Dunlap — President and Chief Executive Officer
Robert S. Taylor –– Chief Financial Officer
Wokhar Zayed — Goldman Sachs
William Herbert — Simmons & Company International — Head of Energy Research, Oil Service
Marshall Adkins — Raymond James & Associates, Inc.– Director of Energy Research
Brad Handler — Jefferies & Company — Managing Director, Equity Research
Vaibhav Vaishnav — Cowen & Co. LLC — Research Associate, Oils Market Equity
James Wicklund — Credit Suisse Securities, LLC — Managing Director, Equity Research
David Anderson –– Barclays Capital, Inc. — Senior Equity Analyst, Oilfields Services&Equipment
Kurt Hallead –– RBC Capital Markets — Managing Director & Co-head of Global Energy Research
Chase Mulvehill — Wolfe Research LLC — Director, Oilfield Service Analyst
Sean C. Meakim — JPMorgan Securities LLC — Senior Equity Research Analyst
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