RPC Inc (RES) 2004 Q3 法說會逐字稿

Good morning and thank you for joining us for RPC's third-quarter 2004 earnings conference call. Today's call will be hosted by Rick Hubbell, President and CEO, and Ben Palmer, CFO. Also present, we have Jim Landers of the Corporate Finance an Investor Relations Department.

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 call is being recorded. Jim will get us started by reading the following statement.

Good morning. 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 things that are not historical facts and some of these statements that will be made on this call will be forward-looking in nature, and they reflect a number of known and unknown risks. I'd like to refer you to our press release issued today, along with our 10-K and other public filings that outline these risks, all of which can be found on our Web site at www.RPC.net. If you have not received our press release for any reason, please call us at 404-321-2140 and we will fax or e-mail one to you immediately.

Also, in order to let everyone hear the call and start their workday on time, we are going to try to limit this call to 30 minutes.

I will now turn the call over to our President and CEO, Rick Hubbell.

Jim, thanks a lot.

We issued our earnings press release for the third quarter ended September 30, 2004 this morning. Ben Palmer will talk in more detail in a few minutes about the financial results. At this time, I'd like to provide you with our operational highlights.

Revenue for the third quarter was higher than the previous year by 28 percent. Our revenues remain high due to our strong activity levels, increase in pricing, growth in capacity and our success with international business developments. Our increased revenues in West Africa and Kuwait, along with our new fishing tool service line, also had positive results on our revenues.

The average domestic rig count during the third quarter was 1,228, a 13 percent increase over the previous year. We have continued to focus on investments to enhance and maintain our fleet of equipment and to increase our operating capacity, which has enabled us to grow at a higher rate than the rig count.

A series of recent hurricanes in the Gulf of Mexico and surrounding areas has curtailed our activities in support of offshore oilfield drilling and production activities. As we mentioned in the press release, we estimated that our revenues were negatively impacted in the range of 3 to 5 percent and our net income was negatively impacted in the range of 5 to 10 percent. However, we believe that the negative impact is temporary and we hope to benefit by providing a repair and production-enhancement services to our clients in the near future.

I will also briefly discuss the performance of our two reporting segments, Technical Services and Support Services. Technical services are our service lines that utilize people and equipment to perform value-added services directly to a customer's well. This includes pressure pumping, oil tubing, snubbing, and well control service lines. Support Services includes our service lines that provide equipment for our customers' use or to assist customers' operations, which includes various service lines such as rental tools and oilfield pipe handling. Both Technical Services and Support Services experienced stronger results due to the increased drilling rig count and related customer activity levels.

Technical Services' revenues rose almost 37 percent for the quarter compared to the prior year. This was driven by higher activity levels and pricing increases. Support Services revenues rose by 17 percent during the quarter, compared to the prior year. This increase was driven by an increase in utilization and pricing and rental tools, which is our largest service line in this segment. Revenues in this segment grew by a lesser degree than in Technical Services, however due to lower pricing and utilization of our marine lift boats.

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

Thanks, Rick.

Before I get started and reviewing the financial results, I wanted to first thank our employees companywide for their continued dedication and hard work. There's no way we could be where we are today without each every one of them and we thank them for their efforts and keep up the good work!

From a financial standpoint for the quarter, revenues increased 28.1 percent to 88.7 million. This compares to 69.2 million last year. Operating income for the quarter was 13 million compared to 3.9 million in the prior year. Net income was 10.2 million, or 35 cents diluted earnings per share, compared to 2.6 million, or 9 cents diluted per share last year.

Our cost of services rendered in goods sold increased to 50.2 million. That's 56.6 percent of revenues, compared to $43 million, or 62.8 percent in the prior year. The cost increase was due to a variety of expenses that vary with changes in revenues, including our equipment rental expense from third parties, our materials and supplies expenses, maintenance and repairs, fuel costs of course went up, and also incentive and other compensation. However, as a percentage of revenues, these costs decreased because of improved pricing and higher equipment and personnel utilization.

Our Selling, General & Administrative expenses increased from 13.4 million last year to 16.9 million this year. This was due primarily to three areas. The first was increase in our salaries and wages; this is due to workload demands. Our incentive compensation has increased, and this is consistent with the profitability increases. Bad debt expense has increased with the higher revenues and associated Accounts Receivable. As a percentage of revenues, though, these costs decreased from 19.4 percent last year to 19.1 percent this year.

Other Income also increased year-over-year. This is because of sales of equipment to our customers where the equipment was either lost or damaged. We also had a couple of sales of some miscellaneous real estate out parcels that occurred during the quarter.

Our effective tax rate decreased in the third quarter, primarily resulting from an update in our estimates on our foreign tax credit utilization. The full-year effective tax rate is expected to be approximately 35 percent, which is down from 38 percent last year end for the first six months of this year.

Capital Expenditures, as Rick indicated, to improve our existing fleet as well as buying new equipment, were approximately $11 million during the third quarter of this year.

Our balance sheet continues to remain well-capitalized. The current and noncurrent debt to shareholders equity is approximately 3 percent. This still remains all stellar financed acquisition debt. Also, as announced this morning, the Board of Directors maintained the quarterly dividend at 3 cents per share. We intend to continue to conservatively manage the Company so that we can have the flexibility to pursue attractive strategic growth opportunities.

Now, I will take just a couple of minutes or so to cover some balance sheet highlights, comparing the current balance sheet at the end of September this year to the year-ago balance sheet. You will notice that our Accounts Receivable and our Accounts Payable are both higher, and that's due of course to the increase in business activity levels from a year ago, and this includes higher international revenues. Our international Accounts Receivable tend to take a bit longer to collect.

Intangibles increased over the prior year due to the earnouts that we recorded at the end of 2003 related to prior acquisitions. These earnouts were calculated based on the 2003 operating results. Most of these were paid during the second quarter of 2004. Earnouts that will be payable for the current year will be calculated and recorded at the end of 2004 and again will be paid in the second quarter of '05.

Long-term debt decreased, and this is just based on regularly scheduled principal payments. We did not incur any additional long-term debt in the last 12 months.

You'll notice that the pension liabilities increased year-over-year. This is due to the increase in the minimum pension liability that we recorded at the end of 2003 and also includes some additional elective deferrals by employees -- (technical difficulty) -- deferrals of compensation into our nonqualified plan. This amount was also reduced by a $4.2 million pension contribution that we recorded during the first quarter of 2004.

So with that, I will turn it back over to Rick.

Ben, thank you very much.

Just as a wrap-up, we will continue to focus on strategies that we have discussed in the past, primarily our international business development opportunities and top performing service lines, such as fishing tools. These endeavors have proven to be advantageous in the past and we believe they will continue to be profitable. We're very pleased by this quarter's results and based on the best information we have at this time, we remain optimistic regarding the outlook for the rest of 2004.

I'd like to thank you for joining us and at this time, we would be happy to entertain any questions that you might have.

(OPERATOR INSTRUCTIONS). Jon Evans of Coker and Palmer.

Can you guys talk a little bit about pricing in the pressure-pumping area and kind of maybe sequentially -- (technical difficulty) -- what you saw -- how you saw pricing move up?

In the pressure pumping area, prices do continue to move up. It takes a bit of time for that to occur, but I think we mentioned last quarter that we had begun to institute some price increases and we continue to have some success there. The demand for those services continues to be quite high.

Can you talk a little bit about how much you think you got in price, kind of sequentially? Can you also talk -- last quarter, you talked about that you were implementing the prices. Have you gotten the full -- have you realized the full price increases? Should we see more of that in Q4?

We did implement some pricing increases. It's kind of hard to tell, because some of our customers have contracts with us, so we were able to implement pricing increases on non-contract customers. It's really difficult to quantify exactly how that's gone sequentially, so it's really something we haven't disclosed, but pricing in pressure pumping has started to move up.

Okay. Can you talk then -- how many of your clients or customers are on a contract basis? I guess typically when do those contracts start to roll over? Would it all be rolled over by January 1 of next year?

That's a good question, Jon. I'm afraid I don't know.

Okay. Can you talk a little bit about the opportunity in Kuwait and what you're seeing there on the call-out work?

It's been steady; it's not been as much as we originally thought it was going to be but we are optimistic that it will be some better in the fourth quarter and into next year.

Thank you so much.

Rob Mackenzie of FBR.

Hi, guys. I wondered if you could help me with something here. Clearly, you guys had a great quarter. Congratulations! Year-over-year revenues up 28 percent -- could you help characterize for us how much of that is volume versus pricing?

I would say the majority of it is pricing. I would say volume -- we are about at the same volume we were this time last year.

I know. That being the case, why do you think volume for you all has not risen year-over-year?

Well, we've had -- it has risen some but the revenue increase has been more weighted to pricing than it has utilization. Even in down years, we continue to work at roughly the same level. Just from peak to Valley of the cycles, it tends to be all pricing.

Okay. With that in mind, clearly pressure pumping is one area where pricing has been strong. Would you rank your other segments in order of strength of your pricing power year-over-year?

I would say that rental tools probably has had the best improvement in pricing, and then I would say the rest of them -- snubbing, coiled tubing -- I would say coiled tubing has probably had the least, and then snubbing and pressure pumping are in the middle.

I got it, okay. Other questions for you -- you know, sequentially, you were impacted by the storms. One of your big clients pulled back. I was quite surprised at the level of revenues. With all of the sequential gain, pricing power -- and if so, what's the current pace of pricing gains? Should we expect similar improvement in revenues and incremental margins in the fourth quarter?

Activity levels remain strong. Of course, the ability to -- the combination of mix of jobs is very, very difficult to predict, but we think, you know, that the hurricanes did impact us and it impacted us not only in and around the Gulf; it tended to slow things done everywhere -- (multiple speakers) -- it's hard to absolutely quantify that, but things seem to be back to normal and going well. We, at this point, see no end in sight, but we are keeping our eyes out and mindful that things could change.

Okay. Was some of your 5 to 10 percent earnings hit from the storms product sales that you expect to catch up on in the fourth quarter?

Probably not, probably some jobs were justly temporarily, probably into the fourth quarter. We do hope to pick up, as everyone I'm sure will say -- everyone in our industry who has exposure in the Gulf -- that they expect to pick up some incremental revenues in helping to do some repair work in the Gulf.

Okay. In terms of your international work, could you give us a status update there? You cited that in the press release but didn't provide much color on how much that can do and where we see growth in the coming quarters.

The largest areas continue to be -- our areas and/or opportunities can just -- continue to be Kuwait, West Africa and then we are in a number of other markets as well. Again, I hate to keep repeating it, but they tend to be -- some of it tends to be sort of call-out type work and so we're sort of at the -- you know, impacted by our customers and the timing of their desire to have the services performed. But we think we're in the number of very attractive markets. We're doing some work in Mexico; we think that has the opportunity to continue to grow. I know that Pemex has delayed some of that work due to some of their capital constraints, have reduced their spending some, but if that gets back on track, that will be a nice contributor. But I would expect, again, Kuwait and West Africa will continue to be the largest contributors there. Again, as it stands right now, that looks really good and there's a couple of other really good potential Middle East opportunities for us as well that we're looking at.

We have a number of tender that are outstanding, and a couple of them could be awarded in the fourth quarter. We just don't know.

Could you share with us what percentage of your revenues came from outside of North America in the third quarter?

It was down some from the second quarter, but it's sort of in the mid single digits and I would say the high single digits for the first couple of quarters, high to mid and then around the midpoint here in the third quarter.

Great. In terms of your tax savings, does any that come from the corporate tax reduction bill recently signed by the President? As a corollary to that, do you have any foreign earned retained earnings that you could repatriate at a low tax rate here?

Most of our foreign-source income comes from branches rather than corporations, so that tax bill directly would probably not have a large positive impact on RPC. The effect, therefore, does not reflect any of the benefit from the legislation that was passed.

Brad Suddock (ph) of Friedman, Billings, Ramsey.

Good morning, guys. Just a few housekeeping questions -- did you all repurchase any shares during the quarter?

We did not.

I take it not from the press release. I noticed that CapEx declined a bit sequentially although it's up year-over-year. You know, it was up pretty strong second quarter and down a little bit here. Are you guys wrapping up projects there, or what kind of capital needs do you expect, going forward?

We've been looking for opportunities and are continuing to spend. What you'll see in the 10-Q is that we've -- we're going to spend a good 58, 60 million this year, we believe, so we're going to spend more in the fourth quarter -- (multiple speakers) -- just the lead-time on getting these things done.

Sure, I got you. Most of that is directed towards just internal pressure pumping equipment, some other internal equipment that you are funding?

Yes, we are adding strength to the service lines where we are already strong and then it could sink (ph) like pressure pumping and snubbing and things like that.

Okay. SG&A was a little bit higher as well although, you have explained most of the increases. Do you have guidance for us, going forward? Should it remain roughly this level, continue to increase, or --?

SG&A?

Yes.

On a percentage basis, it should remain in the same range. I don't see anything driving it higher or lower at this point.

Okay. I missed -- at the top, you talked about the hurricanes, the storms, and you said 5 to 10 percent income impact but there was also 3 to 5 percent impact on op income, net income?

On revenue.

On revs, okay. That's what I thought. I think that's all I have. Congratulations on a good quarter.

Jason Krauschau (ph) of Braight (ph) Specialized Funds.

Good morning, guys. Nice job! A couple of quick questions here --, first, on the income statement, the -- I guess it was like 1.5 million other -- (technical difficulty)?

That line, some of that is hard to predict. Some of it ends up being gains on sale of equipment to -- or rental equipment to customers when they either lose it or damage it while they are using it. There's a fair amount of that this quarter. That can normally be correlated more to activity levels within the rental service lines, but it also included some gains on sale of a couple of miscellaneous real estate out parcels that we've had for years and years and years that we sold.

Okay. Would you anticipate that number going down in Q4, or is it sort of too hard to predict?

Well, without the real estate gains, all things otherwise being equal, I would say it would good down, but there could be other sales that take place as well.

Okay. The next question would be I know you've been moving assets and continue to do so to the Mid-Continent. Where are you in that process? Will you continue to do so, or when do you anticipate that trend to reverse?

We're constantly looking at where we think we can best utilize our equipment over the long term. We try not to react short-term and constantly move the equipment, but the Mid-Continent has been very, very strong as compared to the Gulf Coast area. We continue to explore and analyze the opportunities that present themselves in Rock Springs. RPC has a presence in Rock Springs now, and we continue to look and are evaluating plans to move into that area a bit more aggressively, but we're still analyzing that at this point.

Okay, and last question would be on the acquisition front. I assume prices are going up. I guess the first question -- is that a fair assessment? If so, does that mean that you guys aren't likely to do something in the next short to medium-term? Could you just give us some sort of color on what's happened on the acquisition side?

Yes. I think you're right that certainly prices are going up. My guess is we will just be sitting on the sidelines on that for awhile.

Dan Pickering of Pickering Energy Partners.

Good morning, guys. I apologize. I jumped on the call late, so I'm going to ask you a couple of things that you may have already answered. If so, just tell me and I will read the transcript or follow-up later. Was there anything in the quarterly financials that you guys would consider non-recurring, other than the Gulf of Mexico storms, which obviously hurt during the quarter?

The effective tax rate decrease certainly affected the tax provision and net income and EPS. We disclosed that; that was about 4 cents. The Other Income line is difficult to predict. That did include a couple of gains on sale of some real estate out parcels. But other than that, it was pretty normal.

So would just the majority of the Other Income line with the real estate?

No. we typically, in high-activity periods, can have some fairly sizable gains on our rental tools, tools lost or damaged by our customers. So, rough numbers, it's kind of half and half.

Okay. So as we look into the remainder of the year, I'm sure you talked about pricing but just, in general, what do you think the pricing opportunity is in the domestic business, both kind of rental tools and the pumping and well-control side?

Dan, this is Jim. It's certainly increased and we talked about that and it's been good sequentially. We think it will at least stay this good during the fourth quarter. That's just very hard for us to tell. As you know, in many of our services, we are a follower rather than a leader because of our measurable but small market share is the way I'd put it.

2005 CapEx plans at this point -- any update there?

We're in our budgeting process right now, so we will be able to update that next call.

Okay, but is the thought generally higher than '04, same as '04? I mean, directionally, What are the opportunities (indiscernible) I guess is my question?

It always depend on the business, because as you know, our philosophy is not to take on too much debt or debt at all, so it's really kind of predicated on our cash flow and where we see the opportunities and that sort of thing. So it's hard to tell. I mean, assuming the business is good, I would anticipate strong Capital Expenditures next year.

Okay. I know that, from an international perspective, you've been looking at some opportunities to in Egypt. Can you give us an update there? Then Kuwait -- it sounds like you expect Kuwait to be at least as good next quarter as it was this quarter.

Yes, I think that's right. Egypt, we just don't know. We've had an outstanding tender and there's a lot of conditions and it may start in the fourth quarter; it may not. We are ready whenever they are. But there are other opportunities, too.

Okay. The Kuwait business, the outlook there in terms of number of wells is at least flattish if not better?

That's what we think, yes.

I will follow-up on some other things I'm sure you talked about.

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

I don't believe so. Thanks to everyone for listening and for giving us your questions. Everyone have a good day.

Thank you. This concludes today's RPC third-quarter 2004 earnings conference call. You may now all disconnect.