RPC Inc (RES) 2007 Q1 法說會逐字稿

Good morning, and thank you for joining us for RPC's first quarter 2007 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. [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 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 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 2006 10K, and our other public filings that outline those risks, all of which can be found on our website at www.RPC.net.

I also need to let you know this morning that we're going to be using a non-GAAP financial measure this morning called EBIDTA. We used it in the earnings release, and we'll be talking about it in the conference call today. RPC uses EBIDTA as a measure of operating performance because it allows us to compare our performance consistently over various periods without regard to changes in our capital structure. We are also required to use EBIDTA to report compliance with financial covenants under our revolving credit facility.

Our press release today and our website show a reconciliation of EBIDTA to net income, which is the nearest non-GAAP financial measure. So I invite you to review that disclosure if you're interested in seeing how it's calculated.

If you've not received our press release for any reason, please call us at 404-321-2140, and we will fax or email one to you immediately. We have a lot of updates to give you this morning, but we'll try to get through them as quickly as possible.

I'll now turn our call over to our President and CEO, Rick Hubbell.

Jim, thank you. This morning, we issued our earnings press release for the first quarter ended March 31, 2007. Ben Palmer will discuss the financial results in more detail in a few minutes.

At this time, I would like to provide you with a few operational highlights. On a year over year basis, we had a strong first quarter. Revenues increased 26%, due to increased capacity, pricing, and continued high activity levels, despite the negative impact of severe January weather in several of our mid-continent service areas. Our revenue growth was significantly higher than the 14% increase in the rig count.

Our results also reflected our success in the development of new service areas and the unconventional drilling plays, such as the Fayetteville Shale in Arkansas. We received a significant amount of equipment during the first quarter, but later than originally planned. As a result, our operating margins were negatively impacted by depreciation and personnel costs associated with ramping up our operations.

We are monitoring our execution plans, and will adjust our [thoughts], if necessary, to better align them with revised equipment delivery schedules.

Now I'll turn it back over to Jim for a brief review of our segment performance.

Thank you, Rick. Let me talk about our segments very briefly before we move on to a more detailed financial review.

Support services revenues increased by approximately 36% during the quarter compared to the prior year, due primarily to increased capacity and improved pricing in rental tools, which is the largest service line within the segment.

Operating margins increased approximately 9 percentage points year over year. This increase was due primarily to the effect of higher capacity and the resulting operational leverage in this high fixed cost segment.

Technical services revenues increased 24% for the quarter compared to the prior year, driven by increased capacity and higher pricing. However, operating margins declined approximately 7 percentage points year over year, due to inefficiencies caused by facilities, personnel, and other infrastructure costs that were put in place to utilize equipment that either arrived later than expected or has not yet been delivered.

We expect operating margins will improve in this segment, as revenues grow with higher capacity.

Now I'm going to turn it over to Ben Palmer, who's our Chief Financial Officer, to provide a financial overview.

Thank you, Jim. For the quarter ended March 31, revenues increased 25.7%, and that was up to $171 million. Diluted earnings per share increased $0.16, to $0.29, compared to $24.9 million or $0.25 diluted earnings per share last year.

Our cost of services rendered and goods sold for the first quarter was 51.1% of revenues. This compared to 48.3% in the prior year. Of course, the increase in dollars in consistent with what we would expect, with higher revenues and higher business activity levels. But as a percentage of revenues, these costs also increased.

As Jim mentioned just a moment ago, part of our growth plan includes personnel, facilities, and other infrastructure to manage the equipment that we're purchasing under our long-term growth plan. We've been progressing with the plan, but with equipment having arrived later than planned in the quarter, and continuing to be delayed to a degree, we naturally had some inefficiencies and lower direct cost leverage up to this point.

Our selling, general, and administrative expenses during the quarter increased 22.5% from $21.1 million last year to $25.8 million. This was due primarily to increased costs consistent with higher activity levels in the implementation of our plan.

In spite of these increases and some of the transitional inefficiencies inherent in our ramp-up, we did achieve some fixed cost leverage, as SG&A as a percentage of revenues fell from 15.5% last year to 15.1% this year.

Depreciation and amortization increased from $10.7 million last year to $15.3 million this year. This is a 43% increase, and is of course due to the large amount of capital expenditures we've made, especially during the last six months.

As a percentage of revenues, depreciation and amortization were 8.9%, compared to 7.9% last year.

Operating profit increased 11.3% from $39.5 million last year to $44 million this year. Our EBIDTA increased 19%, from $50.5 million to $60.1 million this year.

Now I'd like to provide just a few comments comparing our fourth quarter '06 and first quarter '07 sequential results. First quarter revenues increased by 7%, as compared to a domestic rig count increase of slightly less than 1%. This increase was due to our success in generating additional revenues from the new equipment, and steady utilization and pricing from existing equipment. These increases were achieved in spite of the negative impact of winter weather in several of our service areas, especially the mid-continent areas.

Support services revenues and operating profit margin were comparable in the first quarter and the fourth quarter. Technical services revenues increased approximately 7% quarter over quarter from equipment additions, while operating margins declined approximately 5 percentage points. Again, this decline was due to ramp-up expenses, inclement weather, and mix of service.

Earnings per share declined $0.01, compared to the $0.30 we generated in the fourth quarter.

As we did last quarter, I'd like to give a brief update on where we are with our pressure pumping and hydraulic horsepower capacity. At year end '06, we had a total of 148,000 hydraulic horsepower. At the end of March, our capacity was approximately 200,000, which is a 35% increase from year end. By the end of '07, we expect our pressure pumping capacity will have increased to approximately 290,000 horsepower, or 44% higher than at the end of the first quarter of '07.

We ended the quarter with $123 million in working capital, compared to $98 million at this time last year. As expected, we've experienced an increase in accounts receivable, due to the overall increase in revenues, but our collections remain very strong.

We continue to draw, as expected, on our bank facility that was closed in September of last year. At the end of the quarter, we had over $79 million drawn on this line.

Now with that, I'll turn it back over to Rick briefly.

Ben, thank you. Excuse me. Drilling and production costs in our industry have increased sharply. We believe we will be successful by continuing to focus on our efforts on helping our customer earn a higher return on their investments by providing reliable equipment, engineered solutions, and high quality services delivered on a timely basis.

We remain optimistic about the current operating environment. Like everybody else in the industry, we are watching commodities prices, natural gas storage levels, weather conditions, and other key indicators. We are keenly aware of the amount of new oil field equipment being built for the North American market, and the discussions within our industry about the potential for short-term over-capacity. We acknowledge this sentiment, and the possibility that that may affect our near-term results.

As we consider the long-term fundamentals of the domestic oil and gas industry, we still believe that we are executing a plan that will build long-term value for our shareholders.

I'd like to thank you for joining us this morning. And at this time, we will be happy to entertain any questions you might have.

[Operator Instructions] Your first question comes from Robert Mackenzie with FBR.

Good morning, guys.

Good morning.

I was wondering if you could go down for me kind of in order of weakness or price competition, where the most price competition is, and what kind of pricing erosion you've seen, and work all the way up to the strongest product line and region?

That's a big matrix, Rob. This is Jim.

I'll start with pressure pumping. Clearly we've heard issues with the Rockies. What else is weak, and where is it strongest?

It's strongest for us in the Fayetteville Shale, Rob, where we've been. It's been a nice situation. We're just starting there, and about 15% of our capacity is in Arkansas in the Fayetteville Shale. So that's probably the best for us.

We don't really have much of a presence in the Rockies yet, with our pressure pumping equipment. It's just gotten there. So I'm -- so it's kind of hard to speak to that pricing, that area. Other than that, there are just pockets where it seems to be -- just isolated pockets of higher discounts, and others where it's been fine. On the whole, we've been fine with pricing in the first quarter.

On that topic, Jim, what would you say pricing is down in the aggregate from the fourth quarter?

It actually is not. In the aggregate, we don't think it's down.

Rob, the only thing -- this is Ben. The only thing we've really experienced, again, are just sort of specific isolated instances of competitors making a shot at trying to get a customer or whatever. We've not seen any widespread weakness at this point.

Okay. And then following up to that, given the massive amount of capacity you are adding, at least on a relative basis, is your margin -- you've added to your margin then by the rest of the year another 90,000 horsepower. Have you changed how you're thinking about where you're going to deploy that? And just in the aggregate, where is that new capacity going, regionally?

Well, at this point, we haven't rethought or reallocated it differently than our initial plan. We've made some minor adjustments due to the timing of when the equipment has come in, but we're still, in the intermediate term, still planning to go into the same areas we were before.

On a percentage basis, the largest increases are going to be in our new locations that we talked about before in Arkansas and then in Colorado. But we're also spreading pretty evenly the remaining of the -- the remainder of the capacity across our existing service areas. So we're -- we, at this point, have not seen the need to, again, reallocate it differently than our original plan.

Okay. And then I guess my last question for now is among your other product lines, have you noticed any pricing pressure and/or where has the push-back on pricing been the strongest over the past month or two?

Rob, it's Jim again. Western Oklahoma, there's been some competition coming in. So if there were any things that were relatively not as good, Western Oklahoma is one we'd mention, on the service line. And that's really all that comes to mind at this point.

What about from a service line basis, Jim? Rental tools versus snubbing versus nitrogen, coiled tubing, etcetera? Is any one stronger than the others? More price competition?

Well, rental tools is strong for us. It's kind of hard to say on a relative basis, since we've grown that a lot, with some capital expenditures that started three or so years ago. But rental tools, with the [recount] continuing to be strong and some of the new equipment we have for rental equipment, has been pretty strong.

The other areas continue to be -- coiled tubing's pretty strong. Probably a little more -- probably a little more pressure in snubbing, from a pricing point of view. But again, nothing that -- no over-arching areas that are worth talking about.

Okay. And then if I could have one more. I apologize. I'd lied to you. What do you guys see in the acquisition market right now? Are prices coming down? Are things more interesting? And do you think it's possible we could see some further consolidation in the industry in the next couple of months?

I don't see any yet. We just kind of see the same things you see. It's kind of funny. Private companies seem to be selling for higher multiples than public companies. So we haven't seen anything yet. We haven't seen any changes in the private market.

Okay. Thanks. I'll turn it back.

All right. Thanks, Rob.

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

Good morning, guys.

Good morning.

Last quarter, you mentioned that you're not assuming any margin compression in your 2007-2008 CapEx plans. With margins down sequentially in pressure pumping for the last two quarters, and areas of isolated price competition, any change to your 2007 or 2008 CapEx plans? And at what point do you think about rethinking these plans if pricing pressure continues to grow?

Stacy, this is Ben. We may have said don't expect margin pressure -- I guess maybe -- I don't know if that's what we said exactly. I think we're assuming no pricing declines. I think if we said margins, then I think probably pricing would have been a more relevant comment.

At this point, we still, as Rick indicated earlier, still are very, very confident on the -- even the near term, but certainly the long term for oil field services in North America. So therefore, we do not -- we are not currently -- we're certainly mindful of. We're going through call it contingency planning. We're constantly reevaluating our plans. But at this point, we're not making any changes to those plans at this very moment.

As you know, there's a very long lead time on the equipment, and -- but we're not going to make what might be deemed rash decisions with those long lead times. We're going to let things play out. We still feel good about where we are and where we're going at this point. And we expect that the margins will improve from here, due to sort of absorbing those employees and other costs that we hired in front of the equipment coming on board.

So in the short term, we did have some margin compression, and that's what we would -- we obviously would prefer that not to happen, but I think realistically, that's probably to be expected. But we feel good. The employees that we have on board are very well-trained at this point, and are ready to go. And we look forward to putting them to work and generating a lot of additional revenue.

Yes. That's helpful. You mentioned long lead times. With some of your competitors perhaps pulling back on some of their CapEx plans, have you seen any compression in the long lead time items?

No, Stacy. Not yet. Somebody else must be getting it.

And can you kind of walk me through how much of your 2007 and 2008 CapEx plans have already been ordered?

Everything that Ben quoted that's coming in '07 has been ordered. Some of the stuff that's coming in early '08 has been ordered -- has been ordered. But I'd say the majority of what we discussed for months now that was coming in '08 has not yet been firmly ordered. And by that, we mean a commitment placed where there'd be some sort of penalty if we cancelled the order.

We still have a lot of flexibility over '08.

We may have reserve slots in production, but without a financial commitment.

Okay. That's very helpful. You gave us a Q1 and year end '07 horsepower. Could you kind of give us what you think the delivery schedule looks like for the end of Q2?

Let's see. We're tired of trying to do short-term forecasts. We just, as a general rule, I think we expect fairly steady deliveries over the next three quarters.

Okay. That's helpful. And then what are you doing to try to tighten up your supply chain logistics, and managing personnel with delivery schedules?

It's just continued communication and reviewing our plans, and timing -- the coordination of hiring of personnel and the deliver schedules. And just basis blocking and tackling. Just making sure that there's communication up and down the organization. I think everybody's done a good job with that. I think that there's really no way to achieve a perfect timing of hiring and delivery, but I think we've done about as well as we can.

But we're just continuing to focus on that through, again, constant discussion with vendors and constant discussion between the people who are responsible for going out and recruiting, and those that are responsible for taking delivery of equipment and getting it ready to work. So I think just more of that. Just good communication.

Okay. Great. And just one last question, if I can. Balance sheet, you've added significant debt versus your pristine balance sheet over the last year. What kind of level of debt to cap are you comfortable with going forward?

We've always talked about -- comfortable with? Certainly you can get 30%. 25%, 30% is not unheard of. We would not be uncomfortable with that. I would expect, based on what we see going forward, I think we'll be well below that.

Okay. That's very helpful. Thanks for your time. I'll turn it back over.

Sure.

Okay. Thanks, Stacy.

Your next question comes from Mike Drikamer with Morgan Keegan.

Hey. Good morning, guys.

Good morning, Mike.

Ben, you commented that you received about 52,000 hydraulic horsepower during the first quarter. How was that actually received? What was the timing of it? Was it front-end loaded? Or maybe was it more back-end loaded? Because you talked about the delays.

It was really more back end. I think on the fourth quarter, I think we talked about by the end of February, most of it would come in. I think that was about right. There may have been a slight delay from there. But more of it came on the back half rather than the front half.

Okay. So if you look at an average, the average is probably closer to like a 160,000 than say a 170,000, if you received it steadily over the quarter?

That logic works.

Yes.

Okay.

[Inaudible]. And Mike, just to clarify, our pressure pumping capacity increased 35% between 12/31/06 and 3/31/07.

Okay.

[50%]. So it's more like 35%.

Okay. How well stepped up are you now for the remainder of this 90,000 horsepower still to be received? Are you going to have to add more people and more infrastructure? Or are you pretty well stepped up now?

We will have to add some more. Again, though, the trick though is where -- looking at where we are and where we need to be -- you would need to be as the new equipment comes in. But we don't have everybody we need for the remainder of the year.

Okay. So maybe a better question then would be the timing. When would you have to start adding additional people? Do you have enough capacity now to handle equipment deliveries through say the second quarter into third quarter?

That's probably a reasonable statement.

Okay. So all else equal, we should see some margin improvements then in the second quarter. Correct?

We are -- yes. We're expecting that.

Okay. That's my questions, guys. Thanks a lot.

Thanks, Mike.

Your next question comes from Thomas Escott with Pritchard Capital.

Well, these other questions have drilled it down pretty hard so far, and I think a lot of this has been covered. But just to clarify, are deliveries -- equipment deliveries are now on track as of now, here in April. They had been behind plan early in the year, but they're now basically caught up, according to your schedule. Is that a fair statement?

Tom, this is Ben. I think that is a fair statement. That there still is the possibility that there could be other delays for the remainder of the year, but hopefully some of that pressure has been relieved, and hopefully we can stay on plan.

All right. And then I know you touched on this, but so for this Q2 period that we're in -- we're at right now, a month into this, with sufficient equipment in place, are margins going to rebound back to let's say the fourth quarter levels? Are you going to pick up that several percentage points that you lost during the first quarter due to bad weather and the lack of equipment being delivered?

I wish it was that easy. I'd like to think so. But it may be that it may be difficult to get all the way back up to fourth quarter. But that will -- a reasonable question, but hard to forecast. We just think it will begin to improve in the second quarter.

So directionally, second quarter, things will be better. You may not get all the way back to where you'd like to be.

That's reasonable. Yes.

And then shifting off of that for a minute here to a little happier subject, on tool rental, tool rental traditionally has not been an area where there's a lot of pricing power. It's usually utilization, not pricing. But it looks, and tweaking through the numbers, like -- are you -- it looks like you're getting some reasonable amount of pricing improvement. Is that fair, or did I somehow misread that in the data?

I think that's probably true. It may be that we've got a good -- have a good mix of equipment, and the equipment that we've been receiving is -- demands higher prices. So it may be that as much as actual pricing strength.

Tom, this is Rick. We continued to add to our inventory, even during the first quarter. So we've added some inventory.

Okay. Well, that's good. I appreciate it. And the question is you've mentioned that a lot of your equipment deliveries for '08 have still not yet been ordered, pro forma orders. You have kind of a drop dead date in mind where you've got to fish or cut bait on placing the '08 orders? And are you accordingly kind of holding off that decision until the last moment?

Yeah. We've always held it off to the last moment.

We never know when the last moment is.

But no. That's safe to say. We don't really have a drop dead date. And obviously, it depends -- service lines are different. Vendors are different. So it's an ongoing process that we're constantly [going through]. But I would say certainly late second quarter and into the third quarter, it'll be much more clear about what we have done or decisions we've made not to do anything about '08. So that time's not yet here, but I think it will be here in the next three to four months.

All right. That tells me exactly what I'm looking for. Thank you. I appreciate it.

All right, Tom. Thanks.

Thanks, Tom.

[Operator Instructions] Your next question comes from Curtis Trimble with Canaccord Adams.

Good morning. I appreciate the time. I'm trying to work through the numbers here. I was hoping you guys might be able to kind of backtrack and give me maybe a revenue number as if conditions were optimal in the first quarter, and then maybe decompose the differences between that optimal revenue number and the reported revenue number, with the impact of weather, the delivery delays, and then possibly, on the operating profit side, maybe the personnel additions and the headwind created there. And then anything that maybe came out of the depreciation side.

Curtis, this is Jim. I'll take a quick stab at the weather impact. For folks who don't know, there was sort of protracted winter weather in early January, concentrated in some of our service areas in Oklahoma. And that really shut us down for a while. I'm going to call that a 2% to 4% revenue impact, just based on the number of days we were shut down and what we were doing immediately before and immediately after that. We'll call that 2% to 4%.

A little bit harder on the pressure pumping capacity. That's clearly everybody's question. It did not come in -- our new capacity did not come in [inaudible] during the quarter, as we would have hoped and believed. It did -- it was weighted a little more towards the end. It's a reasonable question. It's really hard to quantify what revenue would have been, had hydraulic horsepower come in a little bit sooner. But that's a tough one for us.

Sure. How about compared to plan? Say if you'd had it on expectations for the first of February versus early, late February, and prices were static? Is it quantifiable to a 3% to 6% number, do you think? Or is it larger or smaller than that range?

It could be about that. It's probably not a lot larger.

Okay.

To come at it from a different perspective, again, we've seen, on our existing equipment, continued high utilization rates. We've seen pricing be relatively consistent. So if -- certainly the employees -- we always planned for that there would be employees that would have to be hired in front of the equipment. It's just unfortunately been longer for a more protracted time in front of the equipment being delivered because of the delay.

So you expect, on the personnel side, is that like 100 basis points? Or somewhere in that neighborhood, in terms of the margin headwind, and the balance being just on the equipment side, and kind of the logistical dislocation, let's call it?

Say that or probably more. Probably 1 to 2.

Okay. I appreciate it.

Yes.

As we go forward and look at the introduction of new equipment, looking at customer concentration or less customer concentration, have you added new customers as we go forward? Is that something that we look forward going here? Or is continuing to move up with the general names that we all know in Arkansas and then in the Colorado Basin as well?

Curtis, it's more the latter. We're interested in what a lot of potential customers are doing in some of these non-conventional plays. That's just really important to us, and keenly of interest. But right now, it's the same names, just more of it.

As you go forward, would you expect maybe a little bit more price competition as you attempt to diversify that customer base? Or are you simply going to allow quality to kind of walk the walk and talk the talk for you?

Well, everybody's talking about more price competition. We believe, with the new equipment we're going to have on board, that'll put -- that'll give us an advantage. And the equipment's very reliable, obviously being that it's new. We have throughout our company a really good reputation. So we think we can certainly get our foot in the door with existing customers and even new customers.

So we are optimistic. Again, everybody's talking about price competition. We haven't seen it in any significant degree. Will it come? If people keep -- as people continue to talk about it and the big guys talk about it being there, and they begin to react to it, it certainly becomes more -- it can become an issue. But again, we're looking at this as a long-term play. This isn't something that we -- as you realize, we can't turn it on and turn it off. We still feel good about where we're headed long term, and we're going to stick with it until something significantly changes.

Activity levels are still very, very high. Still a lot of demand for services. There may be some short-term pricing impacts that take place. We like where we're going. We like the size we're going to be, and we think we will be able to [inaudible].

Good deal. I appreciate your time.

Thanks, Curtis.

Your next question is a follow-up question from Robert Mackenzie with FBR.

Hey, guys. Just one quick follow-up on pressure pumping. Several months back, pretty much every [frac] spread that went out went out with very little or no redundant horsepower. What's the situation now? Are you sending your frac spreads out with some redundant horsepower? And related follow-up, are the -- how much are the clients willing to pay for that?

Rob, this is Jim. Yes. Part of this is the customers really want reliability and redundant horsepower. So your point is exactly accurate. We are sending -- we do have redundant horsepower available, should something happen. How much more customers are willing to pay for that? It's kind of hard to say. At some point, it's a price of entry. But we do think it enhances the overall value, and we get some better pricing out of it. I can't quantify that for you, though, in terms --

We feel that the margins, especially on the unconventional plays, the very complex jobs, there's probably more redundant capacity there than on the more traditional jobs. And we expect and have experienced, in general, better margins on the unconventional side, just due to the nature of those jobs, and our ability to provide a real strong and high demand service in that area.

And that's really where we -- again, that's where a lot of our focus is in our location expansion. And as everyone knows, unconventional plays are growing tremendously, and that requires an ever-greater demand for pressure pumping equipment. And we're positioning ourselves to take advantage of that.

Okay. Thank you.

Thanks, Rob.

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

Well, we appreciate everyone's interest and questions on the call this morning. If there are no further questions, we will go ahead and hang up. But thank you to everyone for calling in, and have a good day.

Ladies and gentlemen, this concludes today's conference call. 11