RPC Inc (RES) 2006 Q2 法說會逐字稿

Good morning and thank you for joining us for RPC's Second 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 Investors Relations Department.

[Operator Instructions] Jim will begin by reading our forward-looking statement.

Thank you and good morning. Before we begin our call today I want to remind that in order to talk about our Company we're going to mention a few things that are not historical facts. Some of the statements that will be 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 releases issued today along with our 2005 10-K and our other SEC filings that outline those risks. And all these filings can be found on our Web site, which is located 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 e-mail one to you immediately.

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

Jim, thank you and good morning everybody on the call. This morning we issued our earnings press release for the second quarter ended June 30, 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. First, revenues for the second quarter were higher than the previous year by over 43%. Our results continue to reflect higher activity levels, an increase in pricing, and growth in our capacity. Substantially, all parts of our business performed very well in this quarter.

All of the industry indicators helped to create positive results for RPC. The average domestic rig count during the second quarter was 1635, or 22% higher than the same period in 2005. And the price of oil has increased as well.

The price of natural gas is lower than it was a year ago and everybody is watching that but it is still high enough to encourage strong activity among our customer base.

Our revenues grew at a higher rate than the rig count due to the continued investment in our operating capacity and pricing increases in most of our service lines, but most notably in pressure pumping.

Both Technical Services and Support Services experienced stronger results compared to the prior year. Technical Services' revenues rose almost 39% for the quarter compared to the prior year driven by pricing increases and, to a lesser extent, additional capacity. A significant amount of this increase came from our pressure pumping division. Technical Services performed very well for the quarter even considering that the growth was partially offset by the elimination of some business units that were sold last August.

Support Services increased by approximately 66% during the quarter compared to the prior year. This increase was due to the increased capacity and improved pricing in the rental tool service line, which is the largest part of Support Services.

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

Thanks a lot Rick. For the quarter June 30, '06, the revenues increased 43% to $146 million compared to $102 million last year. Operating profit for the quarter was $44 million compared to $19 million in the prior year.

Net income was $27.6 million or $0.42 diluted earnings per share, compared to $11.9 million or $0.18 diluted earnings per share last year. Net income and earnings per share both increased more than 130%.

Cost of services rendered and goods sold was $69.7 million or about 48% of revenues compared to $56 million or 55% in the prior year.

The dollar increase was due to those costs of variable revenues, and a higher business activity levels including personnel expenses, maintenance and repairs expenses, materials and supplies and fuel costs.

As a percentage of revenues, these costs decreased primarily because of the positive impact of improved pricing and our ability to leverage the fixed component of these costs over the higher basic level.

Our Selling, General and Administrative expenses during the quarter increased from $18.2 million to $22.4 million this year. This was primarily due to higher salary and wage expenses. We added some administrative personnel because of the higher business activity levels. It also included additional incentive compensations consistent with our higher profitability.

Capital expenditures in the first six months were over $60 million. These investments improved our existing fleet of equipment and also added some new equipment.

Also, as we announced in a separate press release this morning, we plan to invest an additional $160 million in the second half of 2006. Approximately 45% of our 2006 CapEx relate to pressure pumping with the remainder being invested to support and expand our other large and more profitable service lines.

We ended the quarter with a strong balance sheet. Working capital increased due to the higher revenues and we ended the quarter with about $2 million in short term debt.

You may have also noticed this morning that the board of directors declared a regular quarterly cash dividend of $0.05 per share.

With that I'll turn it back over to Rick.

Ben, thank you. We are optimistic about the current operating environment and, as we announced this morning, our long-term strategic plan is to increase our fleet of equipment to achieve a more rapid growth rate than we have had in the past.

We first alluded to this at the end of the first quarter when we began placing orders for equipment included in our growth plans. We expect that a large amount of pressure pumping equipment will be delivered during the fourth quarter of 2006.

We are also arranging for a credit facility to help finance this expansion.

If you have followed RPC for any periods of time you know that this departs from our tradition of maintaining a balance sheet that has little or no debt. This department deserves a little bit of explanation. We made this decision based on some very careful planning and it is also the results of the confidence in the management team we have built and the strong service lines we have focused on in the past several years.

We also believe that we are in a good long-term operating environment, in spite of any short-term fluctuations in activity or [inaudible].

Having said that, we have not forgotten that the oilfield service business is cyclical. That is why our operating capital structure is going to be conservative as compared with many peers, and why we are arranging a credit facility that is flexible. We have confidence in our ability to execute this plan and generate higher revenues and profits and high returns on capital invested.

I'd like to thank you for joining us this morning and at this time we'd be happy to entertain any questions you may have.

[Operator Instructions] Stacy Nieuwoudt of Pickering Energy Partners.

Good morning guys. Somewhat of an eye opener on your CapEx spend. Was hoping you could kind of walk us through your equipment deliveries in terms of where you hope to put your new equipment that's on order. And also where you hope to end the year in terms of horsepower for your pumping fleet.

This is Ben. We plan to add our equipment in a combination of existing locations and we are going to be expanding as well. We're going to be expanding west toward Grand Junction and to the east into Arkansas. And we're very excited about that so it's going to be a combination.

And with respect to capacity, we expect by the end of this year that we will have increased capacity in pressure pumping by about 90% compared to the prior year.

And we have-- as we indicated in the press release, we have a lot of pressure pumping equipment that's going to be coming in during the fourth quarter so our ability we certainly expect it will generate additional revenue during the fourth quarter because of that delivery. But the actual timing of that will be certainly a bit uncertain. But we're really excited about that.

Great. And obviously 90% growth year-over-year, how much of that do you expect to be delivered during the fourth quarter?

A substantial portion of that. I would say-- Jim what would you say?

This is Jim. Yes, the vast majority of the year-over-year growth Ben mentioned will be delivered in probably November, Stacy. But really all this is backend loaded in fourth quarter.

Great. And in terms of new equipment orders that you place today, what kind of backlog are you looking for and what kind of pricing are your suppliers asking?

Lead times are around-- you'll hear this from everybody, 10, 11, 12 months on equipment that you're ordering today.

Obviously some of these orders have been placed earlier obviously to be able to receive what we're talking about now. And prices were locked in some time ago.

Okay. And then with the recent decline in commodity prices are you seeing any pullback in customer appetite or in your ability to further push pricing?

We actually are seeing no slowdown at all. And as a matter of fact, we have put through an additional pressure pumping price increase effective July 1, and it seems to be taking pretty well.

What was the magnitude of that price increase?

Magnitude? Around 10%.

Okay, great. Thank you so much. I'll turn it back over now.

Mike Drickamer with Morgan Keegan.

Good morning guys. Following up on those questions about the new capital spending here. Is it all going to be primarily new equipment or are there going to be any acquisitions?

No, we have no acquisitions planned. It will all be new fabricated equipment.

So would it be fair to read through then that you're not concerned about the current fears about excess capacity in the market?

Oh, I think we're concerned about it but even after that concern we are excited about doing this.

Mike, I think in terms of excess I don't believe there's excess capacity today. Certainly there's concern about the commodity prices, especially natural gas, at this point in time but we see none of our customers slowing down, they're committed to a lot of their projects, we're talking to a lot of our customers and working with them and coming up with the amount of equipment that we're placing on order here and will receive over the next several months.

And certainly, again as we indicated, the industry is cyclical and we know at some point it could very-- it will cycle down. But we feel very good with our market share. We have a relatively small market share, we've been able to take market share from others and we believe through this plan we'll be able to continue to do that.

Okay. What other challenges do you expect with initiating this capital spending here as far as how about people? Do you expect to be able to get the people to run the equipment?

We expect to be able to but that is-- it's easier to spend the money than it is to find the people to man this equipment. So, it is a very high priority for us and we believe we'll be able to attract the crews to man this equipment.

Always been able to do it and there's a lot of focus on it and that's obviously part of our planning.

Are you gong to have to start training those crews in the say third quarter so maybe we see third quarter margins taking a little bit of a hit in anticipation of fourth quarter?

That might occur, yes.

'Cause we are hiring people now.

How about if I look at Technical Services here during the second quarter, operating margins actually decreased sequentially. What happened during the second quarter?

We think that it's sort of an indication that both the first quarter and second quarter were just tremendous quarters. And I think it's just a function of our capacity. We're operating at very, very high rates in terms of utilization rates. And first quarter was great, second quarter was great too. We don't see any particular problems or issues. We were very pleased with how the quarter turned out.

And I think again, that just is the reason why again we've been planning and we're going to add all this capacity because we think we have the ability to do the same thing with a lot of new equipment.

Okay. Thanks a lot guys. I'll turn it back.

[Operator Instructions] Tom Escott of Pritchard Capital.

Good morning fellas. Obviously all the focus this morning is on this CapEx announcement here and you've talked a lot about it already but a related question to that, you've announced basically a three year plan, which is-- I guess really is a two year, an '07 and '08 plan 'cause '06 was already baked in.

Does it take literally two more years to be able to get all this equipment in place and to open these geographic regions? And is that why you're stepping out for a full two additional year plan to be able to accomplish your goals or what's up with that?

There's a great deal Tom. Obviously '06 there's tremendous CapEx, there's tremendous CapEx in '07, some of that's based on the lead-times. Obviously we were much more focused on what was going to be added when for those time periods because of the lead-times. But we will start very shortly. It's a continuous process but we will begin a very diligent process in the next few months to begin to update our plan as we do every year. And that will encompass additional focus on '08 and even '09 and we'll see what comes out of that. But that's the primary thing, it's just the lead-time on the equipment.

And then related to that, if you're opening in new geographic regions, are you going to need to buy property or secure locations in those areas or do you feel that you've already done that?

We've already done that.

So now it's just a matter of executing the plan and getting the financing in place to do that.

That's exactly right.

That's correct.

Okay, thank you. That's all I have.

David Mitchell of William Blair.

Good morning. Can you talk about with increased share in CapEx, the customer lead times or bookings, I mean do you guys book this stuff or do you have indications of demand from customers for the use of this equipment as you get deliveries into November?

Yes we do.

So you fully expect to get utilization of this stuff as soon as it comes in the door?

We would like to think day one. Course it may take some time to organize and things like that. So it'll be very much back ended in the fourth quarter. But clearly by the beginning of next year we'll be-- we expect to have it very highly utilized.

Okay. When do you expect to have utilization and what's kind of satisfactory and what is it that you're looking to get, like in the 90s kind of level? Is that what we're talking about?

Well, everyone measures capacity a little bit different. We expect to get very similar utilization that we are achieving on our current fleet of equipment by early next year.

Okay, thank you.

Mike Drickamer of Morgan Keegan.

Hey Ben, I just wanted to follow up on the capital spending. You have $160 million played for back half year. How is that going to be broken down between the quarters? I imagine with the deliveries coming primarily in fourth quarter that's when we'll see most effect right?

That is correct. That is correct. It's, yes, a substantial amount. Again, the pressure pumping equipment is the biggest and most of that, as Jim indicated earlier, is coming in November so it's very much back half, fourth quarter focused.

So the $160 million, half, three quarters, more than that in the fourth quarter?

I would say about three quarters to 80%.

Thanks a lot guys.

[Operator Instructions] [Kevin Blank of Polynes Capital Management].

Good morning. I just wondered some of your larger thoughts on making this commitment. What kind of pricing you've assumed over time as you're putting this equipment in place? Just your concerns about what happens in the next downturn, just a little bit more color behind your thoughts in making this commitment.

You'll notice with us that we pride ourselves on our high returns on capital invested. That's something we focus on constantly. We've been very successful at doing that. And we believe that continuing to do what we're doing now in creating a lot of leverage with this additional equipment we think we'll be able to achieve similar or better returns over time.

And in terms of the assumptions we used in our model, we used conservative assumptions in that we assumed similar utilization and pricing that we've historically been able to generate. When, in fact, a lot of this equipment we're adding we think could actually in the current environment, in the most recent environment, do even much better than that. 'Cause a lot of it is, of course, newer, a lot of it is higher capacity and we believe going to be performing the type of work that again could generate financial returns.

So we're very, very excited about it. This was not a-- it's not a pie in the sky plan or anything that we've done, it's, we feel, conservative in the current environment.

And with respect to a downturn, if and when one does occur, we'll just have to wait and see what happens and we'll have to react to it. Part of what we also pride ourselves on is trying to plan for downturns and not try to guess when they're going to happen but try to be prepared and have plans about what to do if something were to occur.

So, depending upon severity and the duration of any sort of downturn we'll just have to see and make adjustments as we go along.

Your comments on pricing suggest that your assumptions might be for pricing 5, 10% at least below where they are now. Am I correct in reading that into what you just said?

No, pricing's flat in our forecast.

So pricing's flat from right now?

Yes, even though we are realizing some price increases starting in July.

We've used kind of a- for our purposes a recent average statistical information to do our forecasting. So we don't have our most recent price increase in our inside forecast.

Or any other increases.

That's right.

In terms of the contracts for purchasing the equipment, are there any cancellation penalties or what-- if things do turn down can you-- what are the provisions for canceling future orders?

Many of them do have their standard-- we believe standard contract that we are putting half and are putting some down payments down on the equipment. And to cancel some of them, of course, is more difficult than others. But we feel in the timeframe that we're dealing with right now we're comfortable that, you know, subject to an absolute collapse in the industry we would still move forward with the purchases and or evaluate again where we are depending upon the conditions that exist at the time and what we expect going forward.

So, we feel like market terms and we feel like we're going to be getting them in time that we'll be okay. And we'll just have to evaluate it when it comes, at those critical points in time. But we feel comfortable with the contracts that we have.

But in most of the contracts, if we cancel the order we would forfeit the down payment.

Okay and one final question. To get all of the equipment utilized, how much will you need to be in new geographic areas? You mentioned earlier that you're already prepared and you already have facilities in some new areas. But to get all of the equipment utilized over a two or three year period, I mean how much of your revenues two to three years from now will be from new geographic areas and how much of it will be from new customers?

In terms of the expansion plan?

Yes.

In terms of the expansion plan it's probably-- it's not a significant amount, probably a third, 40% of the new geographic area.

And then on the new customer side?

In any cases, that will be new customers.

Okay, all right, thanks for your help.

I've got a follow-up comment on that. One thing about RPC is that we are small compared to so many of our peers and if you look at our market share from things like Speers and Associates, those kind of industry sources, you'll find that we have very low market share or we are number four, five or number six in some cases of various service lines.

But we've got a lot of room to grow before the number one and number two we're looking to rub shoulders at. So we may be in a market already, such as mid-continent, where we do pretty well by our standards but we could grow a lot more just in that market. It's not like we have 50% market share and are thinking about getting 55%. It's more like we have 10% and are hoping to get 15 to 20%, which is a little bit better position to be in.

But these new geographic areas where we're working with these new customers, you know, they're looking for an alternative and we've been able to hook up with them and we feel excited about the future and the ability to team up with these new customers moving forward.

All right, thanks for your help.

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

Thanks to everyone for listening in this morning. We appreciate your reading our press releases and asking questions. And everyone have a good day. Thank you.

Thank you. This concludes today's RPC Second Quarter 2006 Earnings Conference Call.