RPC Inc (RES) 2004 Q4 法說會逐字稿

Thank you for joining us for the RPC fourth-quarter 2004 earnings conference call. Today's call will be hosted by Rick Hubbell, President and CEO, and Ben Palmer, CFO, and also present we have Jim Landers of the Corporate Finance and Investor Relations department. At this time all participants are in 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 forward-looking statement.

Before we begin our call today I want to remind you that in order to talk about our Company we're going to mention a few things that are not historical facts. And 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. In order to understand those risks I'd like to refer you to our press release issued today along with our 2003 10-K and other public filings that outline those risks. And all of these filings can be found on our website which is located at www.RPC.net.

If you have not received our press release for any reason please call us at 404-321-2140 and we'll fax or email one to you right away. Also, in order to let everyone here the call and start their workday on time we're going to try to limit this call to 30 minutes. I will now turn the call over to our President and Chief Executive Officer, Rick Hubbell.

This morning we issued our earnings press release for the fourth quarter ended December 31, 2004. Ben Palmer will talk in more detail in a few minutes about the financial results. And at this time I would like to provide you with our operational highlights.

Revenues for the fourth quarter were higher than a previous year by 23 percent; our results reflect continued high activity levels, an increase in pricing and growth in our capacity. Although it was a strong revenue quarter, our revenues were negatively impacted by bad weather which particularly impacted several of our pressure pumping markets. Also international revenues for the fourth quarter were slightly lower than last year.

The average domestic rig count during the fourth quarter was 1,248 -- 13 percent higher than the same period in 2003. Our domestic revenues grew at a higher rate than the rig count because of our continuing investment in our operating capacity and a shift in our focus from the weaker Gulf of Mexico region to the relatively stronger mid-continent region. Also we sold our domestic liftboat fleet during the quarter and intend to use the proceeds from the sale to invest in oilfield assets that will produce higher financial returns.

As we announced on January 25th, our Board of Directors has improved a 3 for 2 stock split, the first split since 1997 and a 100 percent dividend increase. Both of these actions will reward our current shareholders and we also believe that they will increase the liquidity and investment appeal of our common stock.

I will also briefly discuss the performance of our two operating segments, first technical services and support services. Technical services are the service lines that utilize people and equipment to perform value added services directly to a customer's well. This includes pressure pumping; coiled tubing, snubbing and well control service lines. The support services include those services that provide equipment for a customer's use and to assist customer operations which includes rental tools and oilfield pipe handling.

Both of these service lines experienced stronger results due to increased drilling rig count and related customer activities. Technical service revenues rose over 22 percent for the quarter compared to the prior year which was driven by pricing increases, additional capacity and higher activity levels in the majority of these service lines. Support service revenues rose by 54 percent during the quarter compared to the prior year. This increase was driven by increased utilization in rental tools which is the largest service line in this segment. The strong increase was slightly offset by lower pricing and utilization within our Marine division and then the elimination of activity within this segment after we sold the domestic liftboats.

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

Before I get started I'd first like to think our employees who've been working really, really hard over the last year. I'd also like to thank all of our managers who have been doing an excellent job managing the growth that we're experiencing in our business. We're confident that they'll continue to do a great job going forward.

Now for the financial overview -- for the quarter ended December '04 our revenues increased 22.8 percent, that was to 85.6 million compared to 69.7 million last year. Operating income for the quarter was 12.1 million, an increase of 154 percent compared to 4.8 million in the prior year. Net income was 11.3 million, which was 39 cents diluted earnings per share. This included an after-tax gain of about 2.2 million or 7 cents per share on the sale of the domestic liftboats. In the fourth quarter last year our net income was 3.3 million or 11 cents diluted earnings per share.

Our cost of services rendered and goods sold increased to 47.1 million which is 55 percent of revenues compared to 43 million or 61.6 percent in the prior year. This increase in cost was due to the variable nature of a lot of the costs that are in this income statement line including incentive compensation, maintenance of our equipment and also higher fuel costs. However, as a percentage of revenues these costs decreased because of the improved pricing that Rick referred to and higher equipment and personnel utilization and also because the mix of our service lines is a little bit better at this point than it was a year ago.

Our selling, general and administrative expenses increased from 13.7 million last year to 17.7 million this year. This was due to increased personnel headcount needed with our increased activity levels and also higher public company compliance costs and it also includes higher incentive compensation costs which is consistent, of course, with the improved profitability. As a percentage of revenues these costs increased slightly from 19.6 percent last year to 20.6 percent this year.

Other income again includes the pre-tax gain of approximately 3.3 million related to the sale of the liftboats that we referred to earlier. Also our effective income tax rate was 34.8 percent in the fourth quarter this year compared to 38 percent a year ago. This lower rate is due to higher foreign tax credit utilization and also some adjustments that we made to our foreign tax accruals. Our capital expenditures, which we made to improve existing fleet of equipment as well as to purchase new equipment, totaled approximately 13 million during the fourth quarter of '04.

Our balance sheet remains very strong; the ratio of our current plus long term debt to shareholders equity is still less than 3 percent and all of this debt is seller financed acquisition debt. The balance sheet reflects approximately $30 million in cash and cash equivalents. As mentioned earlier, our Board doubled the quarterly dividend to 6 cents per share based on the pre-split shares. This totals about 6.9 million per year based on the current shares outstanding.

A couple of balance sheet highlights, briefly, comparing the year end '04 balance sheet to 1 year ago. You'll notice that our accounts receivable and accounts payable are both higher but we expect that to be the case given our increased business activity levels. Also our intangibles increased; this is due to the estimated 2004 earn out payments that we'll make on certain acquisitions. These payments will be made in '05. They total about 4.2 million and they are reflected in current liabilities. The long-term debt decreases are all due to scheduled principal payments and also pension liabilities decreased to some extent.

We made a 4.2 million cash contribution to be defined benefit plan in the first quarter of 2004 and we expect that number is going to come down to something closer to 1.6 million in 2005. With that I'll turn it back over to Rick.

As a final comment we will continue to focus on the investments that have made us successful in the past including our mid-continent expansion, international business development and our top performing service lines. We are continuing to make investments that we believe will yield high financial returns but we are always mindful of the volatility in this industry and we will continue to maintain a conservative capital structure.

We are pleased by this quarter's results and, based on the best information we have at this time, we remain optimistic regarding the near-term outlook in 2005. I will also reiterate that, as we have stated in the past, we do not issue earnings guidance and neither confirm nor deny the validity of any published analyst estimates.

Thanks for joining us and at this time we'd be happy to entertain any questions that you may have.

(OPERATOR INSTRUCTIONS) Dan Pickering (ph), Pickering Engineering.

A couple quick questions; first just housekeeping on the liftboats. What was the actual cast received? You talked to the gain but how much money did you actually get?

Around $10 million, Dan.

And what was the contribution during the fourth quarter, both revenue and operating income, of those assets?

It's pretty small.

So effectively de minimus then?

Yes.

Yes.

And then what would the other -- I guess there's a million 7 -- a couple million bucks in the other income that was not related to the sale of the liftboats. Is that a recurring item or were those some special things?

We typically have, all things being equal or recurring, we normally have some gain on sale of equipment to some customers -- usually rental equipment if it's lost or damaged, that's normal. But there's also some other things in there like some legal settlements and a couple of sale on some miscellaneous land parcels as well.

Okay. So we ought to think about that number down in more the $0.5 million range, not the $2 million range?

That's probably right -- maybe a little north of half -- half to a million I'd say.

Okay, so 500 to a million. Rick, I was hoping you could talk a little bit about the technical services business. You gave us a rundown year-over-year on what was going on, but we did see a down tick of about $3.5 to $4 million on the top line sequentially. Can you quantify for us the weather impacts in Texas and Oklahoma?

I don't have that right here in front of me. It was as far as service lines primarily in snubbing and coal tubing. And then also in -- I'd say the biggest change was in international business year-over-year.

Okay. I'm talking about sequentially though, from the third quarter to the fourth quarter revenues were down. Were they down internationally as well then?

Yes.

I guess I'm trying to quantify it because it sounds like you're getting a little bit of pricing in your business right now. That's being offset with some weather and some international. I'm just trying to understand if international was two-thirds of the drop, half, a quarter?

Dan, this is Jim. Pressure pumping sequentially was about 4 million in revenue of the drop (multiple speakers).

But it was primarily weather.

Yes.

So weather cost us almost all of the sequential decline. We got some of it back with pricing and we lost some of it associated with the international business. Is that a fair way to think about Q3 to Q4?

Yes.

Yes.

Okay. And as we look out into first quarter, any reason to think that those bad weather issues wouldn't be recovered? And then help us understand how you guys see the pricing dynamics of this business right now?

Dan, this is Jim again. Weather will not -- well, I can't predict the weather, but we are recovering from the weather downturn in November. We instituted a new price book which has taken hold, so our discounts are down in pressure pumping in the pricing. Discounts are down about 10 percent from where they were a year ago. And we are booked out into the future a lot farther than we were this time last year. So barring any weather impact or anything else, pressure pumping looks pretty good for the first quarter.

So it sounds like you're running it close to full capacity utilization?

Yes, that would be accurate.

Okay. And then, I know you're spending a lot on CapEx, at least a fairly healthy amount in the fourth quarter. What is your '05 CapEx guestimate at this point?

It's at that level or even a little higher.

Okay, so maybe 15 million a quarter or something like that?

Correct.

And given the step-up in CapEx, the focus on redeploying capital to higher producing areas, I guess I'm just curious about -- I'm trying to understand kind of the revenue generating capacity that you'll be -- that will be available to you in '05 versus '04. If we thought about a flat market -- in other words, no change in activity from '05 versus '04 -- what do you think your revenue generating capacity would increase because of the CapEx increases?

Dan, that's a mighty good question, it's a hard one, though. A lot of it depends on the timing of when our new assets come on stream. And there are lag times for ordering and things like that. Again great question, I don't have a good answer that would dignify your question at this point.

Okay. Safe to say you ought to grow faster than rig count, though. It is that fair?

It's what we've done historically.

Yes. And given the capital expenditures we're making, yes.

Alright. Thanks, guys.

Brad Sidar (ph), Friedman Billings Ramsey.

Just another follow-up question on the liftboats. How many liftboats is it you guys have -- I think it was five -- and at what point during the quarter did you guys make that transaction?

Well, the two we sold were the -- well, we sold two in the fourth quarter and they were 200 foot class boats and those are the only ones we had in the Gulf. And I don't remember when they closed (multiple speakers). So it was about the middle of October.

Okay, in October. And that's the end of your liftboat business, that's everything?

We have one left and it's deployed in Venezuela.

Okay, one in Venezuela. A question for you on share repurchases. I notice there was a little bit of cash used there. How many shares did you guys buy back during the quarter? I don't think it was too big.

We didn't have any repurchases during the quarter. (multiple speakers) you would have seen on the press release have been year-to-date, so there was none during the quarter in open market.

And can you quantify where international revenues were for the quarter or maybe as a percentage of revenues?

It's still well below 5 percent, even less than 3.

Okay. That's it for me, guys. Thanks.

Rob Mackenzie here, guys. I wanted to build on one of Scott's questions vis-a-vis capacity. Can you give us a feel for -- maybe say by the fourth quarter of '05 -- what percentage your capacity in some of your different product lines may have increased?

Rob, again, my answer is going to be a lot like the answer I gave to Dan which is it's a good question. It's kind of hard to know in terms of when these things come on stream. I can tell you qualitatively that we're doing a lot of investments in rental tools and pressure pumping and snubbing this year. Is it going to be a quantum percentage increase in capacity? No, it's not going to be huge, but it's going to be -- certainly going to be measurable.

Let me try and ask it one different way then perhaps. Do you know how many horsepower, for example, in pressure pumping you're planning on adding in '05?

Another good question. I really don't know.

Okay. Can we try and follow-up on that off line? I just want to try and get a better handle because I think the question that Scott asked is very germane here because I think all of us have some pretty -- our own detailed overall activity forecast, but I think a key part of what we're looking forward to help forecast RPC is how's your CapEx going to grow you faster than that, what's the rate of that?

That is, again, a very, very reasonable question. There are so many factors that play into how much capacity we add including how -- obviously what the outlook is for the industry and how our business is doing. And I understand, again, they're very, very understandable and reasonable questions but difficult to provide specifics on.

Fair enough. And I also wanted to explore again a little bit of the sequential decline in technical services. It all pretty much was in technical services and revenues and operating income. You had a 5 percent sequential decline in revenues, $4 million -- and you mentioned that pressure pumping, Jim, was down 4 million sequentially. However, we heard comments out of the likes of BJ that turndowns were up there to $9 million and it's always been my perception that any time the bigger guys have turndowns, that often flows through as incremental revenue to some of the smaller players such as Cudd. I was wondering, where's the disconnect there in your mind and why didn't that flow through more to RPC than it seems to have?

Rob, to our mind November was just a bad weather month. In East Texas and Kilgore we were down a good bit, in eastern Oklahoma -- it recovered in December and is looking good in January and onward, but November was just very difficult from a weather point of view. We don't measure turndowns but we do measure -- or we do have an idea, at least qualitatively, of how far we're booking orders in the future and that is way up, as I responded to Dan's question earlier.

And in the comparison of BJ, we just don't mirror them in every market they're in. So, it's not unrealistic to say that our markets -- the limited markets we're in did have weather problems.

Okay. Thank you. I will turn it back.

Dan Pickering, Pickering Engineering Partners.

Options, have you looked at FAS 123 and what that's going to mean for you in the second half of the year? Does it have an impact and how big is it?

We've not completed that analysis but don't expect it to be materially different. We have not -- we've moved away from options and are doing more restricted stock grants which will not result in this big of an impact. We're not expecting it to be large, but again we haven't completed that analysis.

Okay. Ben, calculate guidance for '05 at this point, your expectation?

Probably something back up close to the 38 as it's been historically. But now, we did disclose in the third quarter that we do have -- we can always -- there can be special things that happen. We do have some amended returns that are out that may result in some additional special items that flow through, but without those closer to 38.

Okay. And then, Rick, could you give us just an outlook on the international business, where you're working, what your current activity levels are, what we might think about for the first half of the year here?

The only ongoing business we have right now is in West Africa. We have a couple of snubbing units that are in the country in West Africa and that our customers accumulate jobs and then we send people in routinely to work those jobs. So we still have that in place. We are working on other tenders in the Middle East and in Southeast Asia that right now we don't have anything other than those.

Okay. I was thinking maybe you were working in Kuwait.

We have equipment in Kuwait and we had a contract and that has been thrown out to another tender. So we are hopeful that that will happen, but we don't have anything right now. And we're also working in Mexico.

So nothing active in Kuwait right now. Were you -- did you do any Kuwait work in with the fourth quarter?

No, we did not.

But you did in the third quarter, quarter?

In the second and the third.

Okay, alright. Thanks. And then I want to come back to the technical services business again and just think again about where we're trending -- trying to understand the ups and the downs. When I look back at third quarter I think that was a record revenue quarter for the Company in the technical services business at about 73 to 74 million in revenue. Do we think about that as a more normal level of activity as we begin to step through 2005 given what you're seeing, pricing activity, etc.?

Dan, this is Ben. I don't think there was anything "unusual" about the third quarter. November was just -- again, just a really -- it was very shocking, disturbing, but everything came back in December and everything appears to be back on track. So I guess the answer to that question is, yes.

Okay. So any of the business that we did in Kuwait in Q3 we probably now have seen a big enough up tick in U.S. activity that we can offset it. And from a margin perspective, replacing that international business with domestic business, is that a benefit to margins or does it -- is it a negative margin impact? In other words, that 18 percent operating income that we saw in the third quarter, should we be able to expect to meet that level in first and second quarters looking forward?

In international revenue margins are much more difficult to predict, but they are not and can be at times much better and sometimes not. But all things being equal, again, given the size of international relative to our total revenues I would not expect the mix between domestic and international in the near term to have a significant impact on the overall technical services margins.

Okay, that's helpful. And the roughly 60 million in CapEx for 2005, do you have a general breakdown for us directionally between technical services and support services?

No, we really don't.

Alright. Thanks, guys.

(OPERATOR INSTRUCTIONS). At this time there are no further questions. Mr. Landers, are there any closing remarks?

No, we just thank everyone for joining us and for your interest and hope everyone has a good day. Thanks.

This concludes today's conference call. You may all disconnect.