RPC Inc (RES) 2006 Q1 法說會逐字稿

Good morning, and thank you for joining us for RPC's first-quarter 2006 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 the 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 begin by reading our forward-looking statement.

Good morning. Before we begin our call today I want to remind everyone that in order to talk about our company we're going to mention a few things that 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 would like to refer you to our press release which we issued this morning along with our 2005 10-K which was filed recently and other public filings that outline those risks. And all these can be found on our website, which is 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 get one to you immediately. Now I'm going to turn the call over to our CEO, Rick Hubbell.

Jim, thank you. This morning we issued our earnings press release for the first quarter ended March 31, 2006. 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 operational highlights. Revenue for the first quarter were higher than the previous year by over 47%. Our results continue to reflect high activity levels and increase in pricing and growth in our capacity. The domestic side of our business performed very well this quarter. We also experienced a substantial increase in our international business, which was highlighted by increased business in the Middle East, Turkmenistan and Argentina. All of the industry indicators helped to create positive results for RPC.

The average domestic rig count during the first quarter was over 1500, 18% higher than the same period in 2005. In comparison to last year the prices of oil and gas increased and remained at levels that supported continued high customer activity levels. 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 the domestic markets in which we operate. Both technical services and support services experienced stronger results due to the increased drilling rig count and related customer activity levels. Technical service revenues rose over 47% for the quarter compared to the prior year. This was driven by pricing increases, additional capacity and higher domestic and international activity levels. We have realized a significant amount of this increase within our pressure pumping division results.

This segment performed well but its revenue increase compared to the prior year was slightly lower than the overall average because of some business units that we sold last August which were included in that category. Support service revenue increased by 48% during the quarter compared to the prior year. This increase was due to the increased capacity and improved pricing in the rental tools service line which is the largest part of support service. With that overview I will hand it over to our CFO, Ben Palmer.

Thanks, Rick. Before I get into the numbers I personally like to thank our employees who have been working very, very hard to produce these results and also on our future growth plans. For the quarter ended March 31 our revenues increased again 47.3% to $136 million which compared to $92.3 million last year. Operating profit for the quarter was $39.5 million compared to $14.9 million in the prior year. Net income was $24.9 million or $0.38 diluted earnings per share compared to $9.9 million or $0.15 diluted earnings per share last year. These increases were greater than 150%. Cost of services rendered and goods sold was $65.8 million or 48.3% revenues compared to $50.4 million or 54.6% in the prior year.

The dollar increase was due to those costs that vary with revenues and higher activity levels including personnel expenses like salaries and incentive compensation, maintenance and repairs expenses, materials and supplies expenses and fuel costs. As a percentage of revenues these costs decreased primarily because of improved pricing, but also higher equipment and personnel utilization and our ability to leverage the fixed costs in this category over higher revenues. Our selling, general and administrative expenses increased from 18.4 million last year to 21.1 million this year. This was due primarily to higher salary and wage expenses as we added some administrative personnel with higher activity levels and additional incentive compensation. (technical difficulty)

Ladies and gentlemen, please hold. The conference will resume momentarily. Sir, you may resume your conference.

We apologize for that. I had just gone through SG&A saying it was $18.4 million compared to $21.1 million last year or this year. This was primarily due to higher salary and wage expenses as we added some administrative personnel and also additional incentive compensation. Capital expenditures to improve our existing fleet of equipment as well as purchases of new equipment were approximately $26 million during the first quarter. We continue to focus our capital expenditures toward our largest and most profitable service lines. Our balance sheet remains very strong although we ended the quarter with less cash than at this time last year. This was due to working capital requirements related to our revenue increases and the higher capital expenditures. As you may have noticed this morning, RPC's Board of Directors declared a quarterly cash dividend of $0.05 per share. And with that I will turn it back over to Rick.

Ben, thank you. As we have discussed, RPC's first quarter was very strong. We were very pleased with the effect of our price book increases in the third quarter of last year and the beginning of this year. As we stated in our conference call in February, we are optimistic about the current environment. And as we have reported this morning, we demonstrated this confidence by making over $26 million in capital expenditures during the quarter. We expect to continue to add new revenue producing equipment during 2006 and beyond as long as market conditions continue to be favorable.

The high demand for some of this equipment we are ordering makes precise forecasting difficult, but we expect to invest more than $100 million in new equipment this year. RPC is off to a good start this year, and our plans for the remainder of this year are to capitalize on the favorable industry conditions. In spite of our optimism and continued investment in our business we are aware that the domestic oil field is a cyclical industry, and we are closely monitoring all applicable indicators that could cause an overall decline in the economy ultimately resulting in less favorable industry conditions. At which point we would take the appropriate measures to ensure that RPC remains profitable and in business for the long run. I will 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 this morning and at this time we would be happy to entertain any questions that you may have.

(OPERATOR INSTRUCTIONS) Tom Escott, Pritchard Capital.

Good morning, fellows. Two questions about these fabulous numbers. One, (inaudible) $0.08 per share or whatever was pretty huge. Can you tell, anyway to quantify how much of that earnings in the period was as a result of the price increases implemented earlier in the year and how much was volume?

Tom, this is Jim. Of the revenue increase and resulting net income increase that we talked about, over half of it was pricing.

Okay, and I guess you heard earlier this week both BJ and Halliburton had both indicated to further pricing initiatives here for first of May. They didn't quantify it, but is it fair to say that you will clearly parallel what Halliburton and BJ do as well in that business?

We will certainly look at it, and it would be -- we would lag them on a price increase but yes, we will certainly look at it.

Okay, thank you. And one of the things you mentioned, clearly takes a long lead time to get this equipment delivered. At this time even with the long delays in getting equipment is there any reason to think that by the end of this calendar year that you wouldn't be able to see this 20% increase in total pressure pumping equipment capacity that you have had projected?

By the end of the year?

I know you're looking for all this equipment really to be delivered in the second half of the year, right, not the first half?

Tom, this is Ben. That's correct. The equipment that we have on order will be received late this year, fourth-quarter and into the first part of next year.

Okay, so it is going to spill over into early '07?

Yes, it will.

Thank you. That's all I had.

Rob MacKenzie, Friedman, Billings, Ramsey.

Good morning, guys. I wanted to get some more clarity on how much international contributed this quarter. You mentioned it briefly in your prepared comments, I believe, but you didn't disclose how much it was.

Rob, this is Jim. International revenue we say it all the time but it is a small percentage of what we do, but it was responsible for some of our revenue increase this year. It increased a whole lot, I mean on the order of -- in the $5 million range is how much it increased. Still a small percent of overall revenue, but the increases were new business in Turkmenistan that we weren't doing in first quarter of last year, Kuwait had a good first quarter although we always reiterate that is -- Kuwait comes and goes, it is very unpredictable. And then we've done some new business in Argentina in our support services area, and that was a big part of it also. So those totals account for about $5 million.

And that $5 million increase was sequential from the fourth quarter, correct?

No, no, that is year-over-year.

Okay, year-over-year. Well, that seems to me if we look at consensus revenue estimates maybe not earnings but revenue estimates, that seems to be the difference probably between what was reported on revenues from what people were expecting about $130 million. How profitable was that work?

Rob, I don't have that in front of me.

Similar to your other productlines, more or less?

Probably on the P&L more profitable. It takes a little bit longer to collect the receivables, but yes, we think of it as diversification as much as anything else. It is mostly snubbing, as you know. And that is pretty good for us.

Given that and given that it is growing year-over-year is there any thought being given to deploying more capital, perhaps borrowing to expand internationally?

To expand internationally? No. We are focused on international, but they're just probably more low hanging fruit here in the domestic market.

We are much more selective internationally. We try to ensure as much as we can that we have in our contract and some level of commitment from our customers, which has been pretty difficult to do. Again, the timing and the duration of those contracts are very difficult to predict.

Okay, fair enough. My last question goes to a lot of the newer and/or smaller entrants into the domestic pressure pumping industry. How are you guys viewing that competition and the amount of capacity industrywide that is being brought on over the next twelve or so months?

We understand there is a lot of the smaller players, including ourselves that are adding to capacity. We have seen reports, we believe that there is undercapacity overall in the industry this year. And likely to be next year as well despite those increases. And we understand that a lot of the majors are focused internationally, and we're not. So we feel pretty good about it and we feel like we are in a good position. We're well-positioned with the equipment we have on order and with our people and their experience and the ability to execute. We're excited about the next few years.

Okay, I lied, I actually do have one more question. One of the largest service companies commented on the possibility of a slowdown in U.S. gas related activity this year. You guys are far more closer to the smaller independents where that might come from. Are you hearing or seeing anything in that regard yet?

No, we've not heard anything like that; certainly it is a possibility. It is certainly a possibility but we're not seeing any indications at this point.

Okay. Thanks, guys.

Mike Drickamer, Morgan Keegan.

Good morning, guys. Rick, you talked about how you got some long leadtimes for your capital spending here and this equipment to be delivered. Should we assume that this $26 million spent on CapEx in the first quarter, is that a good run rate and we should see a smooth increase like that, or is it going to be more back end loaded, your capital spending?

As far as total we think its a pretty good run rate, but I think we will see it more back loaded into the end of the year.

Can you give us a sense of what kind of magnitude you think its back end loaded?

For this particular calendar year, as we indicated earlier, we have a lot of equipment that is on order that will come in late this year and early next year. So the actual timing is a little bit difficult to say, but the fourth quarter spending will be larger than we experienced here in the first quarter.

Okay. Are you having any other problems in deploying any of the equipment, personnel issues or anything else? Are you finding all the people you need to man this equipment?

We are finding the people for our current equipment, and we have a separate project in addition to having the new equipment built to also find the personnel to man the equipment. And so far our results have been satisfactory. So we expect the timing of the equipment and the work crews to coincide.

Okay, and how about then the operating costs associated with the labor as well as training costs? Are you seeing increases on either one of those fronts?

Yes, both of those.

It is experiencing some increases, but clearly the pricing that we are achieving is in excess of that.

All right. That is all my questions.

(OPERATOR INSTRUCTIONS) Robert Ford, Stern AG.

A couple questions. First on the international, that is lumpy, I know. Do we expect that to continue to be lumpy or can we assume that some of this work will stay around and maybe we can grow the international revenue from here?

Robert, this is Jim. I would consider it to be lumpy. I would consider it to stay lumpy. The business in Kuwait comes and goes and it is difficult. And snubbing almost by its nature is a lumpy revenue stream. So very little of our international revenue is something that we can really count on and take to the bank.

Okay. The rental tools expansion into the Rocky Mountain region, what did that mean for the quarter, and what should that mean going forward on a quarterly basis? In terms of revenue?

Kind of hard to tell, Robert, because we have had rental equipment in the Rockies prior to this, and we have just opened up a store in Rock Springs. A matter-of-fact they are moving in this week. But we have been servicing that out of Oklahoma up until now. So it is not as if we will get a whole lot of new business. It will be a whole lot easier to service, and then we can build from that.

Okay. What would that mean then, obviously we will be a lot more efficient. What does that mean for the margins do you think on a go forward basis in that segment?

I think they will improve because we won't have the trucking and some of the other things.

We believe Robert that is an attractive market for us. But in terms of quantifying the number, that is difficult at this time. We do use our equipment across all of our locations. Clearly we want to have an adequate supply in each of the operating locations that serve the customers in that area. So we do believe this is helping us better utilize the existing fleet of equipment within that business.

Let me come at it from another direction. Your margins, your operating margin in that segment was up 570 basis points sequentially. It was up huge. It was $930 year-over-year. Obviously we shouldn't look for the type of margin expansion going forward, should we?

No.

What was it, was it I guess just the international revenue that really popped the margin this quarter?

A little bit and also we had a relatively speaking not a great fourth quarter in rental tools, which obviously is support services just because of the lack of activity from the hurricanes that happened in August and September. So the Gulf Coast was slow. Rental tools was slow. And so that is why.

So we had some snap-back from that, now where are we at now on the Gulf Coast compared to prehurricane levels? Have we recovered 75% of what we lost, or 100%?

We haven't really received a whole lot of clarity there for us. Again the Gulf for us has been kind of a -- not a big contributor over the last couple years. But it clearly impacted us to some degree in the Gulf. It has come back a little bit but still we are not hearing any rapid improvement in that area.

Okay, and jumping over to technical services, could you talk about which of your product and service lines grew faster than the segment sequentially and which were growing slower?

Sequentially, Robert?

Yes, sir.

Well let's see, sequentially pressure pumping was pretty much the biggest growth there.

All were really good, but pressure pumping was a huge contributor.

And how much of that was -- I know we had some frack slip out of the fourth quarter into the first quarter. Can you quantify how much that impacted the quarter?

I would not say to an appreciable degree.

Yes, that is a good question, because were are pretty (multiple speakers)

Pretty capacity wise or utilization wise we are really pretty high. So it was deferred; it really did not all flow in and benefit the first quarter per se.

Okay, that is all I had. Good job, guys. Appreciate it.

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

No, but just say thank you everybody for joining us. Sorry about the technical problems on our end, and I hope that didn't hold anybody up for their day. So everybody have a good day, and we will talk to you soon. Thanks.

Thank you. This concludes today's RPC first-quarter 2006 earnings conference call. You may now disconnect.