RPC Inc (RES) 2005 Q3 法說會逐字稿

Thank you for joining us for RPC's third quarter 2005 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 and 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 this conference call is being recorded. Jim will get us started by reading the forward-looking statement.

Good morning. Before we begin our call today I want to remind you that in order to talk about our Company we are going to mention a few things that are not historical facts. Some of the statements that we made on this call could be forward-looking in nature and reflect a number of known and unknown risks. I'd like to refer you to our press release issued today, along with our 2004 10-K, our second quarter 10-Q and other public filings that outline those risks, all of which can be found on our website 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. I will now turn the call over to Rick Hubbell, our President and CEO.

Jim, thanks. This morning we issued our earnings press release for the third quarter ended September 30, 2005. Ben Palmer will discuss our financial results in more detail in a few minutes. At this time I would like to provide you with our operating highlights. Revenues for the third quarter were higher than the previous year by over 30%. Our results continue to reflect high activity levels, improved pricing and growth in our capacity. The domestic side of the business performed very well but these increases were slightly offset by a decline in international revenues.

Average domestic rig count during the third quarter was 1432 or 17% higher than the same period 2004. In comparison to last year the price of oil increased nearly 45%, the price of natural gas increased 86%. Our domestic revenues grew at a higher rate than the rig count due to the continued investment in our operating capacity and strong performance in the oil producing regions of our domestic markets in which we operate.

Everyone is aware of the two strong hurricanes that took place during the quarter, and the damage that was done to the oil and gas infrastructure in the Gulf. Because of lost work days, customer credits and shortage in certain materials and supplies, we estimate the financial impact of these storms during the third quarter was a 1% reduction in revenues and a 2 to 3% reduction in net income. The industry is undertaking a lot of effort to rebuild the region’s oil and gas infrastructure, and we are positioned to participate in that effort and hope to do so.

However, it is too soon to know the timing or the magnitude of any work that we will do as a result of storm damage. Both technical and support services experienced stronger results due to the increased drilling rig count and related customer activity levels. As far as technical services, revenues rose 35% for the quarter compared to the prior year. This was driven by pricing increases, additional capacity and higher activity levels particularly with our pressure pumping division. As I said before, this increase was slightly offset by our international weakness.

The port services revenue increased by 9.5% during the quarter compared to the prior year. This increase would have been 19% if you exclude the revenues from the lift boat division which was sold during the fourth quarter of 2004. This division had revenues in the third quarter of 2004 but not in 2005. The increase in support services was driven by increased capacity and utilization within rental tools, the largest service line of the segment. With that overview I will hand it over to our CFO, Ben Palmer.

I appreciate that, Rick. First off I would like to thank our employees for an excellent quarter. They really worked hard and demonstrated a lot of dedication, including getting through the storm interruptions. And with that, RPC generated some really tremendous financial results. With that I will do the financial overview. For the current quarter our revenues increased 30.5% to 116 million compared to 88 million in the prior year.

Operating income for the quarter was 25.5 million, an increase of 97% compared to 13 million in the prior year. Net income was 23.1 million or $0.53 diluted earnings per share. If you exclude the gain on the sale of some assets during the quarter that would have been $0.38. This compares to 10.2 million or $0.24 diluted earnings per share last year. Our earnings per share excluding this gain increased 58%.

Cost of services rendered and goods sold was 61.4 million or 53% of revenues compared to 50.2 million or 56.6% in the prior year. The dollar increase was due to these costs that vary with revenues and higher activity levels including our personnel expenses, especially incentive compensation, maintenance and repairs expenses, materials and supplies expenses and of course, fuel costs. As a percentage of revenues, these costs decreased because of our improved pricing, higher equipment and personnel utilization and our ability to leverage our fixed costs over higher revenues.

Our selling, general and administrative expenses increased from 16.9 million last year to 19 million this year. This was due primarily to higher salary and wages expenses as we did add some administrative personnel with these higher activity levels. However, as a percentage of revenues, these costs declined to 16.4% of revenues compared to 19.1% last year.

Capital expenditures, which were used to both improve our existing fleet of equipment, as well as purchasing new equipment, were approximately 21 million during the third quarter of this year. These capital expenditures were primarily in our largest and more profitable service lines. We currently expect capital expenditures to be approximately 80 million for the full year of '05 or about 25 million for the fourth quarter.

Our balance sheet remains very strong. We had about 21.6 million in cash and cash equivalents at quarter end and we currently have no long-term debt. This is about a $5 million increase over the prior year despite our capital expenditures that we've made. The goodwill you will notice on the balance sheet has increased year-over-year. This relates to our earnouts that we paid on acquisitions for full year 2004 results, as well as earnouts that we've recorded for short periods that ended during the second quarter. But at this point we would recognize all remaining acquisition related earnouts.

I think you may have noticed this morning as well that the Board of Directors yesterday declared a quarterly dividend of $0.04 per share. With that I will turn it back over to Rick.

Jim thanks. We are optimistic about the near-term prospects for the domestic oilfield given current industry indicators, the utilization of our equipment and people and the impact of our new price book. Based on the best information we have at this time, we remain optimistic regarding RPC's performance for the fourth quarter of 2005. We are paying close attention to our equipment and raw materials suppliers, as well as labor pools to monitor any shortages or inflationary pressures that may constrain our ability to efficiently conduct operations.

We are also aware that increasingly high commodity prices could cause an overall decline in the economy, ultimately resulting in less favorable industry conditions. As many of you may have read in our press release this morning, RPC's Board of Directors also has approved a three for two stock split that will be effective in early December. This split is intended to increase RPC's liquidity and as well to make our Company a more attractive investment opportunity.

I would also reiterate, as we have stated in the past, that we do not issue earnings guidance and can neither confirm nor deny the validity of any published analyst estimates. I would like to thank you for joining us, and at this time we would be happy to entertain any questions that you may have.

(OPERATOR INSTRUCTIONS) Dan Pickering of Pickering Energy Partners.

Nice results. You mentioned in the press release that you are starting to see some pricing improvement. Could you help us with kind of what you are thinking you are seeing in the technical services division, either year-over-year or sequentially, hopefully both?

Dan, this is Jim. Our price book took effect sort of mid to late third quarter. So we didn't see a full quarter of results. It was in pressure pumping, which obviously is a big part of technical services. The price book increase was about 7% effective here during the third quarter. We are considering an additional price book increase later on in the first quarter. So that takes care of pressure pumping. Coiled tubing and nitrogen, which are again technical services, as you know, had a price book increase again in the 7% range but then we bill our personnel separately, and that had about a good bit higher price book increase during the quarter. So that is kind of a little bit of color on it, and that kind of goes throughout technical services. But again, the point is it has gained some traction and done well for us. But in the financial results you saw this morning, you don't see a full quarter of that price book increase.

Okay, so it sounds like not a lot of resistance at this point from the customer base?

That is accurate as far as we understand, yes.

Okay, if we think about -- I know that you guys are adding capacity on the pumping side, that is part of your CapEx program -- talk to us a little bit about are you starting to see your backlog shrink? It is still robust demand? There have been some industry concerns about overcapacity in pumping. What do you guys think?

Well the backlog for our large track jobs is currently about 60 days right now.

I would say that at this point we are not seeing any letup.

Okay. And that 60-day track backlog, that is pretty consistent with where it has been?

I think we are probably improved some actually.

Okay, all right. And then you mentioned in your prepared remarks that the international business was a little bit softer versus the prior quarter. Could you quantify -- I mean is that a big number, a small number, and what regions were softer?

Overall international is mid single digits for us, so it is not a real tremendous number. And therefore weakness in any particular area -- again we’ve talked in the past about how it's very difficult to predict when that work is going to start and what the duration is going to be. But at this point I will say that we do believe that there will be some additional work that is starting up in the fourth quarter. So that's positive, but again, the duration of that is difficult to determine at this point.

Okay, so worth mentioning but not necessarily a big influencer on the results?

That's correct.

And my last question, you mentioned hurricane impact at, I think, I forget the exact wording in the press release now, but I think I calculated it at about a penny. Where would that have been between the divisions?

I think more of it in the technical services group. And it was about 1% sales and 2 to 3% net income. So really it was fairly minor. That was our best estimate. In going out and talking to our field personnel we did not seem to have any direct impact from the storm. But generally it did slow a little bit. It did slow some things down for a few days.

It was mostly snubbing, coiled tubing and nitrogen.

Okay, all right. And then so nothing -- didn't really have much impact on your rental tool business in the offshore?

No, no, offshore in the Gulf has not been a strong area for us in the rental business.

And so would you estimate that 1% sales, 2 to 3% net income, do you think you are back to normal now in those areas offshore?

No, they are still down. As a matter of fact, as you know a lot of those platforms are still damaged, and it’s going to take a while to bring them back into service. So that business is going to be lost for a while, I think. Now when those platforms are rebuilt we think that is going to be a great opportunity in the future.

But I think the good news for us, Dan, in the Gulf for us has not been that strong recently. I think due to there has been some weakness in the Gulf and I think it has not been a focus area for us. But we're pretty excited. We’ve got some teams in place down there, and we've got some new equipment that's going to be coming online, and we're pretty excited about that and think that again longer-term as Rick indicated, will be an opportunity for us to participate in some of the work overwork.

Okay, and any reason to think that what we saw here in the third quarter is not sustainable as we move into Q4 and 2006? I mean it sounds like it is pretty much blocking and tackling, no reason to think there is any seasonality or lumpiness to what we saw in the third quarter.

Other than the extraordinary item of the sale of the assets.

Of course.

Operations, as you said, are just blocking and tackling.

Fantastic. Thanks, guys.

Chris Jarvis, Advest.

Great job on the quarter. I've got two questions for you. Post-hurricane can you elaborate where you are with suppliers, specifically with your acid supplier? And secondly I just wanted to get an update if your new building in the Rock Springs for rental tools will be online in the fourth quarter.

On acid, we had some disruptions as I think everybody did. One of the main sources of supply comes from New Orleans, and the other comes from Houston, roughly speaking. So the first one was knocked out by Katrina and the second by Rita. So we had some shortages, and the prices on the acid that we did get roughly doubled. It didn't have any material impact on the financials in the third quarter unless you think of the opportunity cost of not having some acid supplies that you would have otherwise had.

My understanding is that with the railroad tracks working again and everything else, that the supply of acid has resumed. I'm not sure exactly what the price is, how much higher it is than prehurricane levels at this point, but at least we know supplies have come back.

At Rock Springs, Chris, we do expect that store will be open and operational in the fourth quarter but we will be fully operational and in place during the first quarter of next year.

Do you think that will have a positive impact on your cost structure once that's up and running?

We're hoping early on it will be neutral and then positive going forward, yes.

Great job on the quarter again. Thanks.

Rob Mackenzie of FBR.

Question for you going forward here -- I know you don't give guidance -- but can you give us some form of feel for where your CapEx is going to go in the coming year?

We are right now, we are going through our 2006 planning right now, so we don't really have a final number. But right now given industry conditions, we expect we will continue to spend all of the available cash flow that we have, which has been consistent with what we've done in the past.

So you spend all available cash flow basically on growing the business organically, a little bit on continued share repurchases, is that right?

Correct.

Just some clarifying question -- on the $0.15 gain on share of assets, can you share with us the pre and post tax numbers for that?

It was about 10.7 million pretax and about 6.6 million after-tax.

You talked about pricing on technical services. I missed it. Did you say anything on support services?

You didn't miss anything, Rob, because we didn't say anything. But we did have a price book increase in rental tools, as well, roughly during the same period and roughly of the same magnitude.

Okay. Thanks, Jim. Question for you guys -- I know there has been a lot of speculation in the market about acquisitions, M&A type work. Are you inclined to perhaps shift your strategy a little bit from organic growth and maybe snapping up some smaller, maybe private rental tool companies or something else to grow as opposed to adding new capacity?

Our strategy has been certainly to do acquisitions. We tend to -- we believe that we get the highest returns by growing organically where we are already in a service line and in a particular geographic area where it shows a lot of potential, we would prefer to do that. And in this environment we think the multiples are very, very high. So unless it was going to be moving into a new geographic area or a new service line, it is probably less likely that we would actually go out and do an acquisition. But we are constantly looking, and if we can find the company that favors our type of structure, which has the earnouts and so forth, it is something that we would look at doing. But if history has any indication, at these prices we probably will not be real aggressive in that regard.

Fair enough. In terms of future price book increases, and Jim's comment earlier about not apparently seeing a lot of pushback in prices, is there room to become a little bit more aggressive in terms of the pricing you are seeking given that there is pretty much a shortage in most areas of the oilfield for certain products and services?

We discuss and encourage our guys as much as possible to get the prices up, and I think they're doing a very good job with that. I think there is some continued ability. I think Jim referred earlier to the fact that we are already evaluating and probably will come out with an additional price increase, certainly in the pumping area in the coming months. So yes, we are looking to that, and we do think there is opportunity.

And if you could just share with us real briefly, and then I will turn it back, about what the average duration might be of your contracts for your various services? I know there is a big mix, but is it one year, is it six months, could you give us some help there?

Yes, most of them are annual contracts, and so I would say on average at any point in time there is six months’ duration left.

Great. Thanks very much.

(OPERATOR INSTRUCTIONS) Robert Ford, Sterne, Agee & Leach.

A couple questions. If we look at the technical services segment, is it fair to say when we look at sequential revenue growth, fair to say pressure pumping, snubbing, coiled tubing and nitrogen all grew faster than the segment average with the other 5 PSLs growing slower?

That wouldn't be accurate. Snubbing is one of our top five, as you know, and because of some international weakness it did not grow sequentially like the others did.

The rest of the statement would be accurate?

Yes, that's correct.

Okay, and then for support services, same question, rental tools grows faster, the other two PSLs grow slower?

Yes, that's correct.

How long is it going to take from today forward if you decide -- if you put your orders in today for your components for a pumping truck, pumping unit, how long until you can get that unit in the field at this point?

We hear everything from six to nine months.

Okay, transmissions, engines, still the bottleneck?

That is correct.

Can you quantify your pressure pumping price realization increase quarter to quarter? Or year-over-year?

That is kind of hard to do because we have -- we do different kinds of jobs which have different pricing and various things like that. To really give you a good number we can hang our hat on is hard to get at.

Last question, guys. Tax rate, looks like it helped out about a penny or so in the quarter. Am I looking for about 36.5, 37 in the fourth quarter? And for next year as well?

Our estimated rate is probably 38.5, and this concept I always have a difficult time explaining to people but our estimated rate without any discrete items would be about 38.5. We will have in the fourth quarter, as we’ve disclosed in some of our Qs, we are expecting in the fourth quarter but it still may be delayed that we will receive some past refunds that have not been recognized. That could be anywhere from 3.5 to 4 million of unrecognized tax benefit that could be recorded in the fourth quarter.

And if you don't get it in the fourth quarter, then it falls into first quarter?

Again, it is difficult to predict when the IRS is going to finish their review. But we are expecting right now, projecting right now that it will be in the fourth quarter. But we don't record it until it actually comes in. So that could be as much as 3.5 to 4 million. So absent discrete items our rate is probably more like 38.5. You will notice during the current quarter it was 37% and change. So that had a small positive discrete item recorded in there.

That's all I had. Congratulations, guys. Good quarter.

Tom Escott, Pritchard Capital.

Just one quick question; I know you said you haven't disclosed your annual capital expenditures for next year. But in more of a qualitative term, for pressure pumping capacity from let's say at this point in time today to the end of '06, if you had your -- if your hopes could be realized, how much additional capacity as a percentage would you add in '06 compared to where we are right now? Could it go up 20%, could it be up 30%? Just some magnitude like that.

Tom, I would say a little bit south of 20% is probably where we would target.

Okay, and is it still slow and/or difficult to get those units built and delivered?

Yes, it is. And that is part of the problem. That is why we are not going to tell you we are going to grow capacity 30% next year because we just couldn't do it, because of the delays of really all the components involved in the pressure pumping.

The other problem is getting it crewed also.

Right. You have a training program for crew, though, don't you?

We do. That is an easier one to control than the equipment itself.

But you got people right now in the training program, working ahead trying to get that bottleneck resolved before you get to that point?

We are thinking about getting people into that process. We don't have it set up yet.

That is all I have. Thank you.

Dan Pickering, Pickering Energy Partners.

A couple of quick follow-ups. The last stock split that you guys did, I think that some of the retail investors that own the stock may be a little bit caught by surprise. We had a bit of a downdraft as folks were kind of confused about why the price is lower. My question here I guess anything different in terms of investor education to sort of avoid the uneducated sticker shock?

You're right about your characterization of the first quarter last year when that happened. I'm sorry, first quarter this year. Time flies. But and we are certainly cognizant of that and we’ll do everything we can to make sure that people understand that. When we have a stock split here I don't know about other companies, but a letter from Rick Hubbell goes out explaining exactly what happened, exactly how to handle things. And we did what we could, but we are going to try to do more to make sure that people aren't confused.

Does that letter go out before or after the split actually happens?

It goes out with your stock certificates that you get.

All right. And then just curious, you've sold a couple of divisions here over the last year. Where are you in that divestiture process? Do you have any other things that you're looking at? Give us an idea if we should expect some other divestitures.

We don't have any planned at this time. We are always opportunistic.

And the business you sold here in the third quarter, what was its contribution in terms of revenue in the third quarter?

It was not huge, and it accounted for -- let's see --

I think a little less than $3 million.

So around 3 million in revenue?

In the prior year probably a little less, probably around 4.

And would we think about that business as more or less profitable than average?

Absolutely. I'm sorry, less.

So I guess on down revenues maybe not a big moneymaker for you guys in the third quarter?

That's right.

Last question, qualitative. Business mix in pumping, I know that you guys have focused on or in some cases done smaller frac jobs, cementing, et cetera. With your new equipment are you finding that you are doing some of the bigger jobs, higher margin jobs? How is business mix changing if at all in the pumping business?

Because of our additional horsepower, Dan, we are able to participate in bigger jobs. We still do a lot of acid work in West Texas and in fraction we are just able to participate in bigger jobs. You mentioned cementing a second ago. Just want to make it clear that we really do very little, if any, cementing at all either now or this time last year.

Perfect. Okay, so some mix benefit. So that is part of the story here, too, I guess is that you are moving into some higher margin frac work versus what you had been doing traditionally?

Yes, higher-priced jobs. Sometimes during very down markets we will give you the equipment without the people there, and that is a fairly low or minimal people, minimal technical expertise goes with the equipment. And that is lower revenue per job and lower profitability type work. We're not doing any of that now. So the job mix -- that is why it is hard to really quantify how much traction we're getting out of price increases because you have other things going on there.

At this time there are no further questions. I would like to turn the conference back over to Jim Landers for any closing remarks.

Okay, thank you operator. We appreciate everyone's participation this morning and your questions. And have a good day. Thanks again.

Thank you, ladies and gentlemen, for participating. You may now disconnect.