RPC Inc (RES) 2006 Q4 法說會逐字稿

Good morning and thank you for joining us for RPC's fourth quarter 2006 earning conference call. Today's call is being 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. [OPERATOR INSTRUCTIONS]

Jim will begin by reading our forward-looking statement.

Thank you, operator, and good morning. Before we begin our call today I need 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 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 2005 10-K and other public filings that outline those risks. All of these can be available on our website at www.rpc.net. If you've 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. We have a lot of updates to give you this morning, but we'll try to go through them as quickly as possible in order to allow as much time as we can for questions.

Now I'll turn will call over to President and CEO, Rick Hubbell.

Thank you Jim. This morning we issued our earnings press release for the fourth quarter ended December 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. Our strong activity levels continued in the fourth quarter. Revenues were higher than the previous year by 36%, reflecting improved pricing and growth in our capacity. This revenue increase compares favorably with the 16% increase in the rate count. All of our business units continue to generate strong results. The first quarter of 2007 should be very good, as it will reflect the recent capacity additions, especially in pressure pumping. We have taken delivery of several pumps that are currently working in our pressure pumping locations, including new geographic locations in Arkansas and Colorado.

We are continuing with implementation of the growth plan that we announced in July of last year. We have experienced delays in receiving some of the original equipment on order, but we should be back on our plan soon. Jim Landers will talk more about that in a few minutes. Both technical and support services experienced stronger results compared to the prior year. First, technical services increased revenues 33% for the quarter compared to the prior year, driven mostly by pricing increases, although there were some increases from new capacity. The largest increases were generated within the pressure pumping service line. Secondly, support service revenues increased by approximately 58% during the quarter compared to the prior year due to the additions of high-demand drill pipe coupled with improved pricing in the rental tool service line, which is the largest part of support services. Lastly, our board approved a three-for-two stock split and a 50% increase in the quarterly dividends, which is in response to our strong earnings and the board's confidence in our long-term growth. The stock split took effect in December.

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

Thanks, Rick. I'll first go through the financial highlights, and then have Jim Landers talk about the growth plan in a little more detail, and then I'll wrap up a few other financial comments. For the latest quarter revenues increased 36.4% to $160 million. Operating profit for the quarter was $47.3 million, which compares to $27.3 million in the prior year. That income was $29.5 million or $0.030 diluted earnings per share compared to $21.5 million or $0.22 diluted earnings per share last year. For the 12 months ending 2006 revenues increased 39.5% compared to $428 million last year. Net income increased 66.6% to $110.8 million, which is $1.13 diluted earnings per share, which compares to net income of $66.5 million or $0.67 diluted earnings per share last year.

We achieved very strong bottom line growth primarily due to higher pricing -- this was through price book increases and lower discounts -- and leverage of direct and fixed costs. But please, as you think about our year-over-year performance, please remember that our earnings per share results for 2005 included an after-tax gain on certain assets that we sold in the third quarter '05 and also a discrete tax adjustment. The gain contributed $0.07 diluted earnings per share to 2005 and the discrete tax adjustments contributed about $0.04 per share.

Our cost of services rendered and goods sold for the fourth quarter was 48.4% of revenues compared to 51% in the prior year. The increase in the dollar cost is consistent with what you would expect with the higher revenues and higher business activity levels. Notable increases were personnel costs, maintenance and repair costs, material and supplies and of course fuel costs. As a percentage of revenues, however, these costs decreased primarily because of the positive impact of the improved pricing year over year 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 21% from $19.9 million to $24.1 million this year. This was due primarily to an increase in personnel head count and related compensation and included other increases in operational expenses consistent with the higher activity levels. This included higher incentive compensation consistent with the higher profitability. But through our success in leveraging these fixed costs, SG&A as a percentage of revenues declined by 190 basis points from 16.9% to 15% this year. And we're very pleased to continue this recent trend of lower SG&A cost as a percentage of revenues and this is something that we've been focused on as part of our strategic plan.

And I'd like to point out that I think our managers have done a tremendous job controlling these costs, especially in light of the very tight and competitive labor markets and the rapid growth that we are experiencing. Our fourth quarter effective tax rate was 37.7% compared to 23.9% last year. The '05 rate includes, again, a discrete tax adjustment that I talked about earlier. This is where we captured some tax benefits of some positions taken on prior-year amended returns.

Now I'd like to take just a moment to provide a few comments comparing our third and fourth quarter sequential financial results. The fourth quarter revenues increased by 3.6% and this was despite a slight decline in the U.S. domestic rig count, which went down two and the normal holiday slow down. We achieved these results primarily due to better pricing through lower discounts and improved job mix, and to a lesser extent additional equipment. This increase was led by pressure pumping by benefited from continued firm pricing and some utilization of new equipment received during the quarter, although we will discuss in a minute that not all the equipment was delivered by year end that we had originally scheduled. Also contributing to the good results in the fourth quarter were rental tools and coil tubing.

The fourth quarter cost of goods sold and services rendered increased 5.3% compared to the third quarter, so the direct cost rose from 48% to 48.8%. And this was because of the additions of personnel and the other startup costs that we incurred related to the new locations; Grand Junction, Colorado, and Conway, Arkansas. These employees that we've hired they're on board, they're trained and they're currently working with our equipment. These particular costs were partially offset by improved margins in rental tool service line, which typically generates very high margins during periods of high activity levels.

And with that I'll turn it over briefly to Jim so he can review the status of our growth plan in a bit more detail.

Thank you Ben. I'm going to make a few remarks about our growth plan, and my comments will refer back to the announcement we made in July, as well as the comments we made on this call in October and some of the other things we said during the fourth quarter. Our implementation is proceeding well and it's only slightly behind our internal projections.

By way of background, when we first announced this plan back in July of last year we estimated that we would spend approximately $220 million for the full year of 2006, with the majority effectively spent very late in 2006. In October we announced that we were experiencing some delays in the delivery of equipment due to high demand for key components from a very limited number of high-quality suppliers. We are currently only six to eight weeks behind in our key equipment deliveries. At this point in mid-February, 2007, we received approximately 75% of the pressure pumping equipment that we anticipated late in 2006, with the original year-end 2006 shipments due for delivery over the next two weeks. Additional pumps and other key equipment orders are due during a time period spanning from late in the first quarter through the third quarter of 2007.

The result of these delays can be seen in our 2006 financial statements published today, as we only spent $171 million in capital expenditures during 2006 compared to $220 million that we thought we'd spend. When we factor in the delivery delays in 2006 and our ability to catch up in 2007, we estimate our 2007 capital expenditures will be approximately $275 million. Our long-range plan continues to be cumulative spending of approximately $700 million during 2006, 2007 and 2008. Of course the amounts and timing of the spending will continue to be subject to market conditions and other factors.

Now, with all this as a backdrop I'd like to give you an update on where we are with our pressure pumping hydraulic horsepower capacity. At year-end 2006 we had a total of 148,000 hydraulic horsepower. By March 31st our capacity will be at least 215,000 hydraulic horsepower, which is 95% higher than it was on June 30th of 2006. Therefore, by the beginning of the second quarter of 2007 we will be back on track with our expansion. And by the end of 2007 our pressure pumping capacity will have increased to approximately 288,000 hydraulic horsepower or 90% to 95% higher than it was at the end of 2006, just a few weeks ago.

So with that I'll turn it back over to Ben for a few remarks.

Thanks Jim. So we ended the quarter-- the end of the year at %111.3 million in working capital. This compared to $95.2 million at the same time last year. And as expected we've experienced an increase in our accounts receivable, but our collections, of course, remain very strong. We began to draw dawn on our bank credit facility during the fourth quarter. We closed on that during September of '06. But by the end of year we had about $36 million drawn down on the line and we anticipate, obviously, this will be growing over the coming weeks; could be as much as $100 million at the end of March 31, as we take delivery of this equipment and pay for it. The facility's working grated for us and we would like to extend our gratitude to the group of banks who have taken an interest in our business and supported our financial and expansion efforts.

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

Ben, thank you. In summary, we remain optimistic about the current operating environment. Like everyone else in the industry we are watching the winter weather, natural gas storage and commodity prices. We have seen many down turns in the past. We are keeping our business as flexible as possible to be prepared to react whenever the next one comes, but 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. As we just reviewed with you we are continuing to move forward with our expansion plans. We have successfully explan -- expanded our pressure pumping capacities to serve Arkansas and Colorado, and today are providing services in both of these locations. These new locations will be two of the largest recipients of the new equipment scheduled for delivery in early 2007.

I'd like to thank you for joining us this morning. We reviewed lots more information than usual, and at this time we would be happy to entertain any questions that you may have.

Thank you. [OPERATOR INSTRUCTIONS] Your first question comes from Robert MacKenzie of Friedman, Billings, Ramsey.

Morning guys.

Hey, Rob.

I wanted to question you in more depth about your continued commitment to spending the $700 million in CapEx over the next -- from last year through the next two years, given the amount of capacity, the sheer amount of growth and pressure pumping capacity we've seen and capacity in other segments of the market. Do you still think that's prudent to do that?

Rob, this is Ben. We do. We've done our strategic planning, we know that people again, right now short term, are concerned about capacity, but we think, again, long term and even short term, intermediate term, we think that there's a lot of opportunities. We're a small player and we think we have the ability to take some market share, so we still feel real good about it.

Okay. In your analysis of that what kind of price drop or margin compression are you assuming happens as the new horsepower rolls into the market?

In our assumptions we're not assuming any. Certainly if commodity prices continue to -- or not continue to, but if commodity prices fall certainly there'll be some pressure on pricing, but for right now the demand for pressure pumping's going up with the addition of -- with more horizontal wells being drilled and lots of rigs are working. Lots of our customers are still interested in staying busy and increasing their production, so we're seeing things stay very firm at this point and we feel very confident about it.

Okay. Related question, because I guess this is topic of interest to me. Is -- there've been a number of scattered anecdotal comments about one or more players cutting price to gain share. Have you seen much of that?

No.

Okay. Fair enough. I'll let someone else have a chance.

Thanks Rob. Appreciate it.

Your next question comes from Stacy Nieuwoudt of Pickering Energy Partners.

Good morning guys.

Morning Stacy.

Pressure pumping margins down sequentially, you talked about increased cost and people cost to fund the new equipment that didn't arrive. Anything else in that margin deterioration?

Nothing of note. Of course, just like everyone in the industry there is some personnel cost pressures. We think we've done a great job of bringing people on board and maintaining our current work force, but certainly there continues to be -- there's no spike, no neg -- severe negative trend there. But overall, no, I think it's just we've had to add a large number of people to be able to work the equipment that we have coming on board and it's just a timing issue. Like I said, we're just six to eight weeks behind where we thought we would be, and they're in position to work the new equipment that is here now and coming in the next couple weeks.

Okay, great. We've heard anecdotally of some pumping price pressure in a few of the markets you operate in. Have you seen any impact of that or any softening of the price book increases that you tried to push through?

At this point no. Certainly when the natural gas price dipped a few weeks ago, certainly there was rumors or discussion of that, but I've heard -- not heard any of that lately.

Okay, great. Any additional service locations that you're planning on opening in 2007?

No, Sta -- this is Jim. No, just the ones that we have talked about before; Grand Junction, Colorado, Conway, Arkansas. We are moving a few things around in Louisiana, things of that nature, but there's no news there necessarily.

Okay, great. Thanks guys, I'll turn it back over.

All right, thanks Stacy.

Your next question comes from Mike Drickamer of Morgan Keegan.

Good morning guys.

Good morning.

Following up on Stacy's question here about the margin compression in pressure pumping in the fourth quarter, understand with additional people needed, the equipment and with the delays you had some pressure on the margins there. With the six to eight week delay should you been able to make up that margin you lost in the fourth quarter in the first quarter or is that going to be closer to the second before we see that margin recover?

Mike, you were cutting out a little bit, but I think I understood your question, something about can we make up that margin in the first quarter.

Right.

As we indicated, by the end of the first quarter our capacity will be 90% to 95% higher than it was at the end of June. Pressure pumping represents about -- a little under 40% of our revenues. You can see that that's a substantial increase to our Company. So yes, we feel very -- we feel that that equipment will go to work and will generate a tremendous amount of revenue and provide us the opportunity to leverage our fixed cost even more than we have up to this point.

Is there anything in that margin line affected the fourth quarter that will not be made up in the first quarter, and therefore you may not get back to -- back to that 31% range?

Mike, this is Jim. The only thing that's gone on has just been the timing of having new people coming on and just some of the inherent inefficiencies of having people before equipment and some equipment before other equipment. There may be some of that in the first quarter, as we continue to take delivery of all this, but that's really the only thing. First quarter looks good from that point of view. If there's any continued inefficiency it'll be rung out by the end of first quarter.

Okay.

The margin -- the margin we would expect to recover. But even if it's down slightly, as it is at this point, the revenue enhancement significant.

Okay. The question de jour seems to be on the pricing pressure and everything like that. Let me try to ask it a different way. Are you guys currently seeing any geographic pockets of strength and/or weakness, perhaps strength in a resource place versus elsewhere?

No, Mike, what Ben alluded to a moment ago is when natural gas dipped a little bit. Some of the things we heard from customers were, if it goes much below or something like that we're going to have to think about -- we're going to have to think about our cost. And those tended to be in the wells and the plays with higher lifting costs, so just a clear financial decision there. So it tended to be in the almost particular wells that just, for whatever reason, had a lot of water in them or something like that, and those were ones where you heard ramblings about it it. But I wouldn't call that a geographic issue as much as just a site-specific kind of issue.

Yes, just some more -- some selected more complex wells due to the nature of them, like I said a lot of water or whatever that had to be dealt with. For us in particular talking about areas of strength, certainly in Colorado and Arkansas that's new to us, we are operating in those locations, so that in and of itself is going to be incremental and strong for us relative to the market itself. Our customers there are still going very strong and still indicating that they're going to be very, very active in 2007.

Okay, guys. Last question. Some more clarity on CapEx, $275 million for 2007, is correct to assume that it's going to be front-end loaded and to what degree is that front-end loaded?

It's probably 60% to 65% in the first six months.

Perfect, that's what I'm looking for. Thanks a lot, guys. I'll turn it back.

All right. Thanks, Mike.

Your next question comes from Thomas Escott of Pritchard Capital.

Good morning, fellows.

Good morning, Tom.

Two things. You're obviously ramping up a lot of equipment here pretty rapidly and apparently a lot of the new equipment so far has already gone into your two new operating areas. The question is, as that equipment's been delivered over the last two months into there, is that -- all that stuff now working at, quote, capacity levels now? Does it all have jobs to go do or is a lot of the stuff being delivered and is seeing some idle time?

Tom, this is Ben. As the equipment's delivered of course we have to test it, make sure it's ready to work and up to our standards, so there's a few days that are built into that. And then otherwise, it's usually just a matter of days. Yes, I mean, we have been planning for quite a while and getting commitments from customers. We ordered all this equipment and we have not necessarily firm commitments in hand, except in some situations, but demand, again, continues to be very strong. Our customers, esp -- one instance is with the -- with the weather that took place in the first quarter in mid-continent there were some jobs missed by us and some other of our competitors, as well, and some of our customers. And with this additional equipment we ought to be able to help them make up where they may have gotten behind on some of their plans. So I actually think this is a good opportunity for us. Again where slots may not be open to some of our competitors at this point we could be able to jump in there and fill those quite rapidly now.

Okay. So that's putting a little color on the opening comments in this, I think, when Rick said the first quarter should be very strong with all this new capacity being delivered. Does that imply that -- can you state that you think first quarter then is going to be sequentially higher than fourth quarter despite the nasty weather that -- you know, icing in Oklahoma for a week, and then the startup on all the new equipment being delivered?

Yes, again our capacity will be up 90% to 95%. So yes, I would -- yes, that is a safe assumption.

Yes, you expect first quarter to be up sequentially. Okay.

Yes.

And then the other thing, so many folks on this call already have focused on one of the negative issues of the sequential margin in the services down -- technical services down from September to December. But I did note in the -- in the support services side of the busy, I guess mainly tool rental, revenue goes up $1.2 million and operating profit goes up $1 million sequentially. You generate some huge incremental margin in that segment. Is that just due to the high fixed cost nature of that tool rental and most of the incremental revenue drops down to the bottom line?

That's correct, that is right on point,. That is the nature of that business and what we -- rental tools is something that we invested in in late '05 and early '06, and so you've seen those revenue increases come to fruition during '06 and we expect to see similar -- maybe not as high of incremental margin growth, but we expect to see similar improvement in increases with the significant investments we have made in technical services here in late '06 and early '07.

Thank you.

Thanks Tom, appreciate it.

[OPERATOR INSTRUCTIONS] Your next question comes from Kevin Wink of [Polymus Capital Management].

Morning.

Good morning.

A couple of questions. The first is since the the expansion plan was announced last July if there's any way to give us a short summary of what you feel has changed in the environment versus what you were looking at at that time when you announced the expansion plan? And I'm not looking for negative stuff here, but just a candid assessment of what changed to make you feel better about the plan since then, what's changed that makes you maybe have some less positive thoughts about the plan?

Well, I hate to give a boring answer, but nothing has changed. The operating environment still seems the same as when we -- we first contemplated this over a year ago, first announced it in July, but clearly we'd been working on it before that. Things have not changed. You can look at the rig count, the rig count tells about the operating environment. Stock prices tell about Wall Street perception. Wall Street's perception have changes, but the operating environment has not.

Okay. In terms of areas or geographic areas that you are planning to add capacity, which of those areas have you seen the greatest competitive capacity added since the original plans were made? It it may not be affecting pricing at this point, but are there any of the geographic areas that you had originally penciled in for we're going to add this amount of capacity to this area, that amount of capacity to that area and so forth that you have seen the greatest competitive capacity additions?

Nothing yet in the competitive landscape has made us change the allocation of equipment one place or the other. We're still kind of on the same plan that we -- that we were on. Clearly you know and everybody else on the call knows that the equipment has wheels, so if it needs to go somewhere else because the environment is better it certainly can. But as of right now we've been very interested in getting into the Fayetteville shale in Arkansas and we're doing that. Very interested into getting into western Colorado, we're doing that. Our plans in Louisiana have continued as well. So really no change at this point. Anybody think --

I will say that western Oklahoma is a location where we do not currently have pressure pumping capacity stored and working, and I know that some of our competitors have been adding there. So that doesn't directly impact us. So that's the only thing I would add that.

Yes, but it might keep us from going there if the competitive environment looks bad for some reason, that's a good point.

It affected some of our other service lines in western Oklahoma where there has been more added capacity.

Okay. And then one other more operating-oriented question. What would be a rough assumption at this point for operating cost increases on the personnel side and just general operating increases on the personnel side and just general operating cost increases, besides personnel, for 2007 over 2006? On a percentage basis, not absolute.

With our personnel cost we tend to -- when we experience increases that you're asking we tend to try to keep those as flexible as possible and do those through an incentive compensation structure so we'd like to think the impact is minimized to some degree in that regard. And in the event of slow down or price decline it doesn't hurt us as bad -- or activity decline. So we don't see it as all that meaningful. Again, we expect to continue to see -- be able to drive down our SG&A costs as a percentage of revenue. We're not seeing a lot of increases in head count there. Historically our SG&A expense have been in the high teens percent. The latest quarter they're in the mid teens and we expect -- we expect that to continue to decline, so we will get some end leverage there and some operating profit leverage from the increased revenues that we're going to experience.

All right, thanks for your help.

Absolutely, thank you.

Yes, thank you. At this point --

Thank you.

Excuse me operator. At this point it's 9:30 on the east coast. so we will probably just go ahead and cut this off. We appreciate everybody's interest, though, and hope everyone has a good day.

Thank you. This concludes today's conference call. You may now disconnect.