RPC Inc (RES) 2004 Q2 法說會逐字稿

Good morning and thank you for joining us for the RPC second quarter 2004 earnings conference call. Participating on the call will be Rick Hubbell, President and CEO, and Ben Palmer, CFO. Also present we have Jim Landers of the Corporate Finance and Investor Relations. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. I would like to advise everyone that this conference is being recorded.

Jim will get us started by reading the forward-looking statement.

Good morning and thanks for joining us. Before we begin our call today I want to remind you that in order to talk about our company, we’re going to be discussing some things that are not historical facts. Some of the statements that will be made on this call will be forward-looking in nature and reflect a number of known and unknown risks.

I’d like to refer you to our press release, which we issued this morning and our 10-K and other public filings that outline these risks, all of which can be found on our website on the internet at www.RPC.net. If you’ve not received our press release for any reason, please call us at 404-321-2140 and we’ll fax or email one to you immediately. Also, in order to let everyone hear the call and start their workday on time, we’re going to try to limit this call to 30 minutes.

Now I’ll turn the call over to Rick Hubbell, who’s our President and Chief Executive Officer.

Thank you, Jim. We issued our earnings press release for the second quarter ended June 30 this morning. I trust that you all have it. Ben Palmer will talk in more detail about the financial results, but I would like to give you some operational highlights.

Revenues for the first quarter were higher than in the prior year, by 21%. Our revenues increased due to higher customer activity levels, some pricing increases and a shift in the mix of pressure pumping work towards higher revenue jobs. Pressure pumping is our largest service line. Revenues also increased compared to last year, because of our new work in Kuwait. And it included the fishing tool operation, which we started in the first quarter of this year.

The average domestic rig count during the second quarter was 1,163, 13% higher than the same period in 2003. As we have reported in the past few quarters, we have continued to see strength in most of our service line. We are also beginning to see some improvements in pricing. However, we are continuing to experience weakness in the Gulf of Mexico market, where the rig count at the end of the quarter was 11% lower than last year.

I will also briefly discuss the performance of our two reporting segments, which are technical services and support services. Technical services are our service lines, which utilize peoples and equipment on value added services directly to the customer’s well. That includes pressure pumping, coil tubing, snubbing and well control service lines, among others.

The four services include our service line that provide equipment for a customer’s use or to assist customer operations and that includes various service lines, including rental tools and oilfield pipe handling. Both technical and support services experienced stronger results due to the increased building rig count and related customer activity levels. Technical service revenues rose 21.6% for the quarter, which was driven by higher overall pricing and activity levels and the favorable job mix shift in pressure pumping.

The four service revenues rose by almost 30% during the quarter compared to the prior year. This relatively higher increase was due to strong performance in rental tools, which is the largest service line within support services.

With that overview, I will hand it over to our CFO, Ben Palmer.

Thank you, Rick. Before I get into the financial overview, I’d first just like to acknowledge our dedicated employees across the company, who really are working as a really effective team. And they are all responsible for generating these much-improved results and we thank all of them for their very hard work.

During the second quarter, ended here June 30th, 2004, our revenues increased 21%, to 85.4m, which compares to 70.9m last year. Our operating income for the quarter was 11.5m, which compares to 6.9m in the prior year. Net income was 7.5m, or 26 diluted earnings per share, compared to 4.7m, or 16 cents diluted earnings per share last year.

Our cost of services rendered and goods sold as a percentage revenues, decreased 57.6%, compared to 59.8% in the prior year. This improvement was due to the improved operating environment and a better mix of revenues. Our selling general and administrative expenses increased from 13.2m last year, to 16.2m this year. As a percentage of revenues, SG&A expenses increased from 18.6% last year, to 18.9% this year. So just a very small increase there. These costs increased due to higher personnel headcount, especially in the field safety related areas. We did have higher bad debt expense year over year. And that’s due to the growth in our accounts receivable, consistent with the growth in revenues and also due to the variable incentive compensation.

During the second quarter of this year we sold Anchor Crane, which is a non-oilfield business unit, reported in the other business segment. That generated about 4m in cash for us, which we expect to reinvest in oilfield assets, which we believe will produce higher returns than we were able to generate with Anchor Crane. This transaction did not materially affect our operating income or other income in any of the reported period.

Capital expenditures during the current quarter were approximately 16m. We continue to be very selective. We seem to have a lot of good opportunities right now to evaluate. So we are trying to position ourselves to take advantage of specific new business opportunities and the improved industry conditions that exist right now. Of course we continue to maintain a very strong balance sheet and despite these higher capital expenditures we ended the quarter with total cash and cash equivalents of 12.5m, which is a slight increase over one year ago.

The balance sheet remains well capitalized, as I’ve indicated. Our total debt to shareholders equity is still only 3%. And all of this relates to seller financed debt, related to prior acquisitions. The board of directors, you may have seen, we’ve maintained the quarterly dividend of 3 cents per share. We’ll continue to conservatively manage the company to ensure that we remain well capitalized. And that allows us the flexibility to pursue these attractive strategic growth alternatives.

Now I’ll touch on just a few balance sheet highlights, comparing the June 30, ’04 balance sheet to the balance sheet one year ago. You’ll notice that our accounts receivable and accounts payable are both higher. Of course this is due to the increased business activity levels that we’re experiencing. Our intangibles, you’ll note, it increased. That’s due to earn outs that were recorded at the end of 2003, based on the 2003 results related to prior year acquisitions. These were paid during the second quarter of 2004.

Our long term debt decreased slightly and that was due to the scheduled payments and we did not incur any new debt, any long term debt during this quarter. You’ll notice that our pension liability did increase also. This is consistent with the first quarter and this relates to recording the additional minimum pension liability that we were required to record, again, at the end of 2003. And it also includes deferrals by our employees of compensation into the non-qualified plan. The pension liabilities also were decreased by the 4.2m pension contribution we made during the first quarter of this year. So with that I’ll turn it back over to Rick.

Ben, thanks. We are continuing to execute the strategies that we have discussed in the recent past, including international business development opportunities and starting up new service lines such as fishing tools. We only pursue opportunities that we believe can provide acceptable, expected returns on investment and diversify our operations in other markets and service.

We are pleased by this quarter’s result and hopeful about the outlook for the rest of 2004, based on the best information we have at this time. I’d like to thank you for joining us on this conference call and now we’d like to discuss any questions that you may have.

(Caller instructions.) Your first question comes from the line of Rob Mackenzie, of Friedman Billings Ramsey.

Good morning, guys. A question for you on pricing. When did you guys implement your price hike and how successful has that been, how much has it diffused throughout your product lines, how much is left to go and what’s the outlook from here?

Well, we didn’t have a price increase per se, we’ve just simply been reducing the discounts to our price book. And that’s been gradual and it’s varied geographically and according to service line. So it’s not as if we put in one broad price increase. But, I’d say across the board, our discounts have decreased.

So in terms of how much higher your pricing is now versus a year ago, could you kind of give us some feel for that?

Hey, Rob, it’s Jim Landers. It's certainly less than 10%. As Rick mentioned, we’ve been reducing discounts. We had a favorable mix shift in pressure pumping, but that shouldn’t be construed as a price increase. It was just higher revenue jobs. So, say less than 10%, averaged everything out.

Okay, fair enough. And that trend continues today?

Yes.

Kuwaiti revenue is down this quarter. Can you give us a feel for the overall contribution and some kind of guidance for how we should view that business going forward?

Rob, this is Ben. I’ll touch on that briefly. Actually, we have numerous international contracts that are out and many of them kind of have starts and stops. Our customers in different regions will accumulate jobs for us to perform and they may or may not happen every month. There can be numerous months of delays between contracts coming on and off.

When we started up in Kuwait we hoped that that was going to be a very steady contract, but the revenue, as we indicated earlier and you acknowledged, is down slightly from the prior quarter. But it was nice then that our total foreign revenue this quarter was actually higher than last quarter. We had some, again, other of these contracts with employees that kicked in. And these things are not necessarily predictable, only that now is a time of pretty strong activity levels and we would expect to continue to produce some nice international revenues for us.

Relative to Kuwait, at this point, it is not clear exactly when we will get back to doing meaningful work in Kuwait. As we’d indicated, things just sort of – they can sort of start and stop.

Okay. What were your foreign revenues this quarter?

That’s not anything that we’ve previously disclosed.

Okay, fair enough. Gulf of Mexico has remained weak and I know you’ve got a big portion of Gulf of Mexico in Patterson. That led – the surprise there, to be somewhat surprising to me. Can you give us some color as to what else drove Patterson revenues and margins this quarter?

Rob, are you saying that you think the increase is surprising because of the lack of activity in the Gulf?

Yes.

Well, we’ve had to go where the work is and that’s in the mid-continent. And primarily in Oklahoma. They’ve taken up the slack and grown. So we just moved assets into the mid-continent region. And we’re seeing some signs, at least for us, some of the Gulf of Mexico work is starting to come back.

Okay. Can you give us some color on those signs?

Well, we have one particular job that starts during the third quarter on a deep water platform that we’ve not had previously. So I think that’s fairly secure that we’ll start that during the third quarter. So that will be the first time in quite a few months that we’ve been on a deep-water front.

Your next question comes from the line of Dan Pickering, of Pickering Energy Partners.

Good morning, gentlemen. I jumped on a little bit late, so if I ask a question that’s been asked, I apologize, or if I ask something you already talked about. Obviously, a strong quarter here. I guess I’m looking forward into Q3 and Q4 and trying to assess if we assume that domestic rig count continues to improve or at least holds steady, I’m trying to assess if there was anything in the quarter one time in nature or what not, that doesn’t make sort of this quarter the base level of activity as we look forward, not withstanding what you said about the foreign revenue issue?

No, everything was pretty much just routine business. Typically in the past where we’ve gotten kind of the one-time jobs have been significant well control jobs.

So there wasn’t anything in the quarter along those lines?

No, there was not.

Okay. And when we talked a little bit about Kuwait, you indicated the revenues were down a little bit versus first quarter. Are you working in Kuwait now?

We are not. We have equipment there and we’re waiting for it to be called out. But as of today we’re not working.

Okay. But it sounds like any softness in third quarter or fourth quarter relative to the second may be made up by other foreign work. Is that what I heard Ben say?

That is what I said and that’s what we hope, expect, however you want to say it.

Okay, excellent. And then capital spending expectations for 2004, total?

We spent about 25m year to date and right now we’re projecting 50-55.

Okay. And have you looked or thought about ’05 yet on CapEx?

Not enough to speak publicly about it.

Your next question comes from the line of Robert Baumbach, of [Bapton] Capital Management.

Good morning, guys. I have two questions. Would you be kind enough to repeat what, if anything, you said about the acquisition pipeline? And second, I’m wondering if there’s anything you can or are willing to do about the relative illiquidity of the stock? You’ve made some structural changes over the past few years, which I think in retrospect have been tremendously successful, separating the boat business. But RPC still is a tough trader and I’m wondering if there’s anything you can do there?

Acquisition pipeline, there’s still a number of opportunities that are presented and that we identify that we’re looking at right now. There’s nothing that we’ve announced that’s on the immediate horizon. That always is something, again, we have an active program that’s always evaluating these various opportunities. And something we’d love to do for the right opportunity and have done a few.

Relative to the illiquidity, I think we’re just going to continue doing what we’re doing right now. We know it is an issue with the high insider ownership, and we don’t really have any immediate plans to or any ideas to address that issue, Rob, unfortunately. But we think we’ve done pretty well with that obstacle and we think it’s actually served us well in many ways. But we’ll continue to explore any alternatives that come up.

(Caller instructions.) Your next question comes from the line of John Evans, of Coker & Palmer.

Yes, can you talk a little bit about, in the pressure pumping side, I guess, do you have much turn down work where you go out and – BJ talks about that on their call. And I was curious if you can give us any sense of maybe if that has increased sequentially.

Hey John, this is Jim Landers. Hi. Turned down work as in [indecipherable] or realizing that we don’t have the capacity to take care of the customer or?

Yes, BJ basically talks about that. As they get more and more turn down work, they have the ability to push price more and I was curious to see if you guys track it that way or have any kind of metric that you focus on?

We do track it, but we’ve not seen it as much probably as BJ did.

Okay. And in the markets that you participate in pressure pumping, I guess, can you give us some color on what you’ve seen from BJ trying to push price or reduce their discount?

Well, it varies from market to market. I think they have announced that they would like to push price and we’ll follow them wherever they go. But I’d say it varies market to market.

Well they talked, I think, about 7% roughly. Are you guys trying to push price now or just continue to reduce the discounts? I guess can you give us any insight for the strategy kind of in the third quarter?

I think everybody’s on a discount program. So everybody is increasing prices by in fact either reducing the discount or raising their base price and keeping the discount the same. We have chose simply to reduce the current discount. I don’t think anybody’s charging their book rate, so to speak.

Your next question comes from the line of Terry Raterman, of Kennedy Capital.

Yes, I just want to pick your brain for a second. If you could refresh my memory on how much work you do in the North Sea and then the second question is what do you think of that market right now?

Right now we don’t do any work and historically have not done very much at all.

Okay. Do you intend to?

We’ve looked at it. We’ve been over there. The equipment requirements in the North Sea are significantly more restrictive than anywhere else in the world. And so, a lot of our equipment would not be certified for North Sea work. Where we have tried in the past is simply providing crews or labor for existing equipment. And we bought a company a few years ago that was supplying that labor in the North Sea and when the contract ran out we elected not to renew it, just because the prices weren’t that good. So it has not been a target for us at all.

At this time there are no further questions in queue. Mr. Hubbell, are there any closing remarks?

No, I’d just like to thank everybody for being with us this morning and we appreciate your support. Thank you.

Thank you. This concludes today’s RPC second quarter earnings conference call. You may now disconnect.