RPC Inc (RES) 2006 Q3 法說會逐字稿

My name is Vanessa and I will be your conference operator today. Thank you for joining us for RPC's third-quarter 2006 earnings conference call. Today's call will be hosted by Rick Hubbell, President and CEO, and Ben Palmer, CFO. Also presently 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 begin by reading our forward-looking statement.

Thank you, Vanessa. Good morning, everybody. 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. Some of the statements that will be made on the call today 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 which was issued today along with our 2005 10-K 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 really received our press release for any reason, please call us at 404-321-2140 and we will fax or you e-mail one to you immediately. I'll now turn the call over to our President and CEO, Rick Hubbell.

Jim, thank you. This morning we issued our earnings press release for the third quarter ended September 30, 2006. Ben Palmer will discuss our financial results in more detail in a few minutes. At this time I'd like to provide you with our operational highlights.

First, revenue for the third quarter was higher than the previous year by 33%. Our results continue to reflect increased pricing and growth in our capacity. All of our business units performed very well this quarter. The rate count increased by 20% during the quarter compared to the previous year and the price of oil increased by about 11%. Our revenues increased due to higher industry activity, but increased at a greater rate due to the factors I cited above.

The price of natural gas decreased 41% during the quarter compared to the extraordinarily high prices experienced last year due to production disruptions caused by Hurricane Katrina. We had a strong third quarter and our fourth quarter looks very good at this point, but we are watching for any indications of change in our customers' activity.

We are continuing with the implementation of the long-term strategic plan that we announced earlier this year. The equipment we ordered as part of our expansion plan will begin to be delivered late in the fourth quarter. Both technical services and support services experienced stronger results compared to the prior year. Technical service revenue increased 29% for the quarter compared to be previous year driven by pricing increases and to a lesser extent by additional capacity. A significant amount of this increase came from our pressure pumping division.

Technical services performed very well this quarter even considering that the growth was partially offset by the elimination of some revenue related to service lines that were sold in the third quarter of 2005. Support services revenue increased by approximately 58% during the quarter compared to the prior year. This increase was due to increased capacity and improved pricing in the rental tool service line which is the largest part of support services.

Our Board approved a three-for-two stock split which is in response to our strong earnings and the Board's confidence in our long-term growth. With that overview I'll hand it over to our CFO, Ben Palmer.

Thanks a lot, Rick. For the current quarter revenues increased 33% to $154.2 million. Our operating profit for the quarter was $46.6 million which compared to $36.3 million in the prior year. Net income was $28.8 million or $0.44 diluted earnings per share compared to $23.1 million or $0.35 diluted earnings per share last year. As you think about our performance year-over-year, please keep in mind that last year the results included an after-tax gain of $0.11 diluted EPS on the sale of certain assets that we sold in August of '05.

Cost of goods services rendered and goods sold was $74 million or 48% of revenues compared to $61.4 million or 53% in the prior year. This increase in dollars was due to the fact that these costs vary with revenues and the higher business activity levels and this includes personnel expenses, M&R expenses, materials and supplies and fuel costs among others. However, 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 base of revenues.

Our SG&A expenses during the quarter increased from $19 million last year to $23.5 million this year. This was due primarily to higher compensation and some other operational expenses consistent with higher activity levels along with additional incentive compensation which is consistent with higher profitability. Because of our ability to leverage these fixed costs however, SG&A as a percentage of revenues declined by 120 basis points from 16.4% last year to 15.2% this year.

In order to support our previously disclosed expansion plans, the capital expenditures during the third quarter were $55.5 million and this compared to $21.3 million a year ago. We've been making investments to improve our existing fleet by adding new equipment. We estimate that our capital expenditures for the year will be approximately $220 million which is equal to the amount that we have spent on capital expenditures over the previous five years.

Almost 50% of our 2006 capital expenditures relate to pressure pumping with the remainder being invested to support and expand our other large and more profitable service lines. The amount of CapEx will ultimately depend on the timing of the deliveries, but at this point we expect to be substantially on our original schedule with deliveries through year-end and into the first quarter of 2007.

We had $6.6 million in notes payable to banks at the end of the quarter which represents our net drawdowns on our new credit facility. And we are projecting to have approximately $100 million outstanding on the facility at year-end. By early '07 our pressure pumping capacity will be in excess of 200,000 hydraulic horse power, which is approximately 80% higher than it was at the end of 2005. By this time we will have significant capacity increases in other major service lines including nitrogen pumping and snubbing which is also called hydraulic workover services. We will also continue to make large investments in our coil tubing and our rental tool service line.

The expansion plan will provide us with several positive financial benefits. First, the equipment that is being delivered will have greater capacity on average than our existing fleet of equipment and therefore has higher revenue generating capabilities. Secondly, the equipment will have lower M&R requirements because it of course will be new. And thirdly, we will be able to generate additional leverage of our costs over these higher revenues.

We already have the management structure in place now to lead these expansion efforts. At the end of the quarter we had $89.5 million in working capital which compared to $80 million at this time last year. Accounts Receivable has increased consistent with our increase in revenues. You may have also noticed this morning that the Board of Directors declared a quarterly cash dividend of $0.05 per share and that's going to be paid on the pre-split shares. And with that I'll turn it back over to Rick.

Ben, thank you. We remain optimistic about the current operating environment. We continue to believe that we are in a good long-term operating environment in spite of any short-term fluctuations in activity or sentiment and our long-term expansion plans are continuing. Our pressure pumping services are being delivered currently in Arkansas and we will begin working in Colorado before the end of the year. Our new equipment scheduled for delivery in the fourth quarter will be used in our new locations and in several of our existing pressure pumping markets.

We are always mindful that the oilfield service business is cyclical and we will continue to monitor the industry indicators along with work requests from our customers. At this time we continue to get consistent work orders from our customers and within certain divisions we are booked out through the first quarter of 2007. Therefore we remain confident in our ability to execute our expansion plan and continue to generate higher revenues and profits and high returns on capital investments.

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, Pickering Energy Partners.

Good morning, guys. I was wondering, given comments from some of the larger players like Schlumberger, are you seeing competitive action that these guys are taking to protect their marketshare?

At this point we are not seeing any direct action.

Okay. And then we're also seeing delivery slippages across the board in the oil service industry. What are you guys doing to protect your new build delivery schedule?

Well, at this time, as we had indicated, we have a lot of equipment that's scheduled for the fourth quarter. We've had a couple of -- a week or two slippages at this point, but we still think we're substantially on schedule with where we had planned to be. In terms of what to do, I think that comes down to relationships with your vendors and just managing through that process. And we've had people dedicated to this effort for the last several months and we feel confident at this point that we'll remain on schedule.

Stacy, this is Jim. We're talking about an 11 month ordering time period here and the slippage of two or three weeks is not huge.

No, absolutely. And then could you walk me through your contingency plan if U.S. activity falls in '07?

Well, I think that will depend of course on the severity of the decline. We've been through this many, many, many times. The people that we have in place now have been through numerous down cycles, but we have plans -- I won't necessarily go down the list, but each and every year when we go through our planning process we have a list of 10 or 15 things that -- we have a checklist that we go through to perform in the event of a downturn in priority order. I think we'll respond accordingly to whatever happens and we feel confident that we can operate through any softness that might occur.

That's helpful. And then just one more question. You mentioned Q4, some of the new equipment is going to work in Arkansas and Colorado. Can you kind of walk me through '07 on your new deliveries, where that equipment is likely going to be placed?

It's going to be certainly in Arkansas and Colorado, but really spread throughout all of our locations, all locations will see an impact from the new equipment.

Very helpful, thanks for your time.

Mike Drickamer, Morgan Keegan.

Good morning, guys. Rick, you commented that your indications (technical difficulty)

Mike, this is Jim. Can you repeat your question and get a little bit closer to the phone? We're missing you.

I'm sorry, guys. Is that better?

Perfect.

I was just commenting that you say you're looking for indications of a change, I know on our side of the street we're looking at things like the rate count. What are you guys looking at on your side of the street that may give you pause?

Mike, there's nothing that gives us pause right now. What we monitor in addition to the rig count, which comes out every Friday, is customer activity, if there's any concern about pricing or they move back on some jobs or things like that, that's what we'll watch for operationally in addition to the more macro indicators like rig count.

Okay. So we're seen several announcements where E&P companies are shutting in production or delaying completion. Are you guys seeing any impact? I guess not if you're saying that you're not seeing any slippage in customer orders.

We've not seen any direct impact at this point. And I think with what we're executing here with our plan, we're not going to -- we certainly if and when we experience softness we will react to that. I can't tell you right now what that reaction will be, but we will react to it. But that being said, until we see some sort of meaningful change we're going to continue ahead with our plans. We're not going to vacillate based on any future expectations or what people think might happen in the future. We're going to continue with our plans until that point in time that we feel that we need to change that decision. But right now we're still going full ahead.

Looking at the income statement a little bit here, technical service margins did improve slightly here in the quarter. What are you looking for there for the margins going forward? Are we continuing to see price improvement and leverage of fixed costs where perhaps we may see margin improvement in the fourth quarter or is it going to continue to be flat here?

Mike, this is Jim. We've had some us improvement because of our pricing increases that we've had. What you see in the third quarter includes something we did in July and something we did at the beginning of the year as well. There is -- ordinarily we might say that we've plateaued here a little bit. But with the new equipment coming on you get a couple of things. You get additional leverage through your existing locations because we have a lot of equipment coming but only two new locations. So the income statement reacts favorably there.

And then as Ben mentioned earlier, a lot of this equipment has higher capacity or is new and gets better rates for what it's doing. So to summarize, I think that sort of same-store pricing may not increase a whole lot in the future, but the new equipment that we're getting will give us both leverage, operating leverage, and perhaps high revenue because of its operating capacity.

Great, that's a good way to put it. Ben, last quarter guidance for '07 CapEx was roughly about $300 million, is that still intact?

Yes, stands at the same.

How about a shot at the change in D&A then, depreciation for next year? Any early blush what that might be?

No, that's not anything that we've really published. So much of that's going to be of course based on the timing and we have pretty firm schedules in place, but it will be what it is. I don't have that projected number in front of me here and typically we don't provide those projections. But the CapEx will be generally fairly evenly spread over '07.

Thanks a lot, guys. That's all I have.

(OPERATOR INSTRUCTIONS). Rob MacKenzie, FBR.

The horse isn't quite dead yet, so I'm going to beat it one more time, to steal a phrase used by one of my competitors on an earlier call. North American, particularly U.S. land activity, where in your business would you expect to see weakness first if there is the start of a downturn?

You mean as far as geographically?

Either geographic, productline -- really productline is what I'm trying to get at. What productline, what service would you tend to see the operators cut back on first if they start cutting back activity?

This is Jim. Just a quick answer about our rental tools business which is 10 or 12% of revenue. Obviously that is drilling related so that would come first. Geographically any areas where we have more exposure to gas relative to oil I guess would go first. If we have a downturn it's going to be natural gas related. So as you know, we're in West Texas, I would expect that to whole up better in the event of a downturn.

So with support services, will you expect to see that turn down before technical services and if there were a downturn?

Yes.

Okay. In that regard, we saw it decline sequentially from the second quarter, both revenues, operating income and operating margins. Can you walk us through what happened there and is that the first sign of a downturn?

Rob, this is Jim. Let me answer that one as succinctly as possible. And for folks who may not be that familiar with it, support services, the majority of that is rental tools. Those who know us well know that we had underinvested in rental tools for a lot of years -- or for several years, but have made a lot of investments in that in the past couple year. So actually our capacity has grown a lot in rental tools and it has -- and so we've had high utilization there. All of our new capacity is utilized. We had lower utilization of blowout preventers this quarter which is basically just a job mix issue, and that impacted pricing a little bit. But it wasn't activity related.

From a drill pipe perspective actually it was about the same or slightly higher. It was more kind of the mix of the business within rental tools. And it was obviously -- last quarter was phenomenal, this quarter is very, very good. So again, it's more of just a timing issue. We're not seeing any weakness there at this point.

I'm just trying to stay ahead of the curve a little bit if I can.

(multiple speakers). We all are, Rob.

Okay. I think that about does me. You answered the CapEx question I had. I'll turn it back.

Henry [Corder], Sterne Agee.

Good morning. Can you talk -- in other conference calls prior to yours we've heard E&P companies talk about shortage -- actually shortages of pressure pumping equipment in certain areas, notably Arkansas. But not just equipment, a shortage of qualified personnel. Can you talk a little big about what you're doing to [aleve] that problem within your company and also any pressures you may be seeing that could cause an increase in your cost personnel wise and whether or not you think you could get some of those costs back with rate increases through the year?

This is Ben. I think we are currently working in Arkansas and are seeing some benefit from the activity over there. We currently have for the most part diverted existing capacity over into that market awaiting the delivery of the equipment we have for the fourth quarter. In terms of qualified personnel, again today we are for the most part diverting resources, but we're just doing basic blocking and tackling in terms of attracting personnel both within that market and outside that market in getting people to move into that area. We believe we've been successful, we will have to continue to work hard at it, but we think we've been doing well with it.

In terms of our personnel costs, we have seen some upward pressure in personnel costs. We are doing some adjustment to incentives and things like that, but we believe, again with the added equipment and the leverage and the additional capacity of that equipment, we don't believe it will meaningfully degrade our margins to any extent at this point. We're not seeing that in the future at this point.

Okay. And just one other follow-up. You talked about a week or two slippage maybe in some deliveries. At this time are you still anticipating that all the equipment that was supposed to come to you by the end of this year will be here?

The slippage impacted us a very minor bit relative to the year end count, but it slipped into very, very early '07. So it's really not meaningful. I don't think it will have a meaningful impact on first quarter next year relative to where we thought we would be.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS). Kevin [Wentz], [Pauly Newlis] Capital Management.

Good morning. With concerns voiced about your expansion plans, one thing that I continually hear, both in areas where resource plays are trying to be exploited and other areas such as East Texas where there's a lot of fracture jobs going on, is there's just not enough capacity. Is there something about an investment community where you feel like they're possibly not appreciating all of the demand that's going on?

I mean, you look at Southwestern's announcement today where they think that -- or not today, but earlier this week where they think they can go from 5,000 wells to 7,000. So what are your thoughts in general on that that this is a trend that you're seeing being in the industry that the investment community has not fully appreciated yet?

Well, we have a lot of friends and valued associates in the investment community and they're welcome to their opinions I guess. I don't know what else to say.

Our guys on the ground are very, very optimistic in the markets where we are with the amount of work that they think is available to us with the equipment that we have coming onboard. So we feel real good about it right now. Of course we are mindful that activity levels could decline from here. But right now we're very, very confident, very comfortable. We are not adjusting, slowing down our plans at all at this point.

And even if there were a temporary decline, we feel that this expansion plan is going to set us up for the long-term to make as just a very -- much larger, stronger company than we are today. So we're positive about it even if there was a short-term weakness, we think it's the right thing to do and we're committed to it and we're still moving ahead on schedule.

Okay. Because I'm continually hearing that people just can't get enough fracturing jobs and so --. Well, thanks for your comments.

At this time there are no further questions. Mr. Landers, will there be any closing remarks?

Yes, and that's just to thank everybody for calling in and for listening and for your questions. We appreciate it. Have a good day.

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