RPC Inc (RES) 2007 Q2 法說會逐字稿

Good morning and thank you for joining us for RPC's second 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, VP of Corporate Finance. 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, operator, and good morning. 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 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 10-K and our other public filings, all of which outline these risks, and they can be found on our website at www.RPC.net. I would also like to inform you, in today's earnings release and conference call, we'll be referring to EBITDA, which is a non-GAAP financial measure. RPC uses EBITDA as a measure of operating performance, because it allows us to compare performance consistently over various periods, without regard to changes in our capital structure.

We are also required to use EBITDA to report compliance with financial covenants under our revolving credit facility. Our press release today and our website show a reconciliation of EBITDA to net income, the nearest non-GAAP financial measure. So I invite you to review that if you'd like to.

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

Jim, thank you, and good morning to everybody. This morning we issued our earnings press release for the second quarter ended June 30, 2007. 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.

During the second quarter we saw continued high activity levels, driven by high commodity prices and other positive industry fundamentals. Demand for our services continued to be strong throughout most of our domestic geographic locations. We are pleased by the sequential revenue growth in our snubbing, flow tubing nitrogen and rental tool service lines.

The second quarter results, however, reflected several operational challenges, including competitive pricing pressures, lower than anticipated equipment utilization in pressure pumping and inclement weather. Recent capacity additions and the competitive reaction to them have negatively impacted RPC's pressure pumping prices.

During the second quarter, the revenue in our pressure pumping service line declined approximately 10% sequentially. Despite the fact we took delivery of approximately 24,000 additional hydraulic horsepower during the second quarter, competitive pressures and equipment delivery delays have hurt our ability to utilize this new equipment as rapidly as planned.

Consistent with our competitors operating in the mid-continent, weather also negatively impacted RPC's operations. Our operating locations in Oklahoma and certain Texas markets experienced significant loss of revenue days. We estimate RPC lost revenues of approximately $5 million during the quarter due to the customer postponements and the inability to access work sites.

Both technical services and support services experienced higher revenues compared to the prior year. Technical services revenue increased 17.2% for the quarter compared to the prior year, driven by increased capacity. Support services revenues increased 16.4% for the quarter compared to the prior year, also driven by increased capacity.

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

Thank you, Rick and good morning everyone. For the current quarter revenues increased 17.1% to $171 million. Operating profit for the quarter was $38.7 million. This compares to $44.4 million in the prior year. Net income was $23.8 million or $0.24 diluted earnings per share compared to $27.6 million or $0.28 diluted earnings per share last year.

The cost of services rendered and goods sold for the second quarter increased to 51.6% of revenues compared to 47.7% in the prior year. The increase in the dollars is consistent with what you'd expect with higher revenues and higher business activity levels. As a percentage of revenues, these costs also increased primarily due to pricing declines, higher unemployment costs and higher materials and supplies expenses.

Our selling, general and administrative expenses during the quarter increased 20.9% from $22.4 million last year to $27.1 million this year. This was also due primarily to increased costs consistent with higher activity levels. Our SG&A as a percentage of revenues increased slightly from 15.3% last year to 15.8% this year.

Depreciation and amortization increased significantly, from $11.6 million last year to $18.7 million this year. This 61.2% increase is, of course, due to the large amount of capital expenditures we've made, especially during the last nine months.

While operating profit decreased 12.7% from the $44.4 million last year to $38.7 million this year, EBITDA increased slightly from $56.1 million last year to $57.9 million this year.

Now a few comments regarding our second quarter sequential financial results. Second quarter consolidated revenues were flat compared to a domestic rig count increase of only 1%. Our revenues were positively impacted by increased capacity and stable pricing and utilization in most of our service lines. These positive results were offset, however, by lower prices in pressure pumps, which as you probably know is our largest service line.

Second quarter cost of services rendered and goods sold as a percentage of revenues was flat to up slightly, while SG&A as a percentage of revenues increased less than 1 percentage point. Second quarter depreciation rose by 22.5% and represented 10.9% of revenues in the second quarter compared to 8.9% of revenues in the first quarter. Again, due to the large amount of recent capital expenditures.

As we did last quarter, I'd like to provide you an update on the status of RPC's pressure pumping capacity increase. At yearend '06 we had a total of 148,000 hydraulic horsepower. At the end of the second quarter our capacity had increased to approximately 225,000 horsepower. And by the end of '07 we currently expect capacity will increase to approximately 250,000 horsepower.

At the end of the second quarter our long-term debt was $125.2 million under our credit facility and our ratio of long-term debt to total capitalization is approximately 25%. Our year-to-date capital expenditures were $134 million. Approximately $55 million of this was spent on pressure pumps and supporting equipment.

For the full year, RPC anticipates spending a total of approximately $250 million. With that, I'll turn it back over to Rick.

Ben, thank you. We remain optimistic about the industry's long-term fundamentals and our strategies in our key service lines. Our long-term strategy of focusing selected equipment, personnel and locations in unconventional drilling plays is continuing to generate positive results. Industry statistics show that unconventional drilling as a percentage of total domestic drilling is growing and is expected to remain a significant part of the industry.

We still believe that we are executing a plan designed to build long-term value for our shareholders. I'd like to thank you for joining us on this conference call this morning and at this time we'd be happy to entertain any questions you may have.

(OPERATOR INSTRUCTIONS) Stacy Nieuwoudt with Pickering Energy Partners.

On pumping, with top line down sequentially, despite the fact that you guys added pretty significant capacity year-to-date, could you walk me through the magnitude of the utilization and pricing declines sequentially? I think you mentioned weather cost you $5 million or roughly $0.02 a share. Can you kind of walk me through each of the other two components of that?

We believe that pricing -- there will be a lot of questions about pricing. Pricing is down 10% sequentially, between first quarter and second quarter. That's part of it. The other part of it is that we got about 24,000 hydraulic horsepower, as Rick mentioned or has been mentioned, so it grew during the quarter. However, due to customer delays and just kind of the friction of getting things implemented with customers who had something else going on, or we weren't able to meet their needs at that time, basically that 24,000 hydraulic horsepower was idle.

We're still seeing, Jim, as we indicated, high activity levels. Any indication or discussion of down-utilization is really more just the process of getting the new equipment operational and getting it started up and getting that integrated with the new customers. And we think that's just a timing difference working through an obstacle and the weather, certainly competitive factors are making that more difficult than we had hoped that it would do. But still, overall activity levels remain very very high and we're still optimistic.

And Stacy, one follow-up answer. We mentioned the loss due to weather and certainly that was -- pressure pumping was a big part of that, because those are big pressure pumping markets for us. But the comment about the $5 million is a compilation of lost revenue days in all of our service lines that were impacted, so not just pressure pumping. That's my point on that.

That's helpful. Can you kind of walk me through what utilization was for your assets during Q2 versus Q1? Just again, trying to quantify the impact sequentially.

Well Stacy, as we indicated also, other than factoring the other of our large service lines actually did pretty well sequentially. I'd say utilization and pricing was comparable from first to second quarter. So we had some positive developments in some of those other service lines. And again, we think the results for the second quarter, certainly as we indicated, we're disappointed. That's a really really strong word. I mean obviously we would prefer that the equipment were working sooner than it is. But we're going to continue to be patient and work through it and expect we'll be able to get the equipment working.

So, to measure utilization on equipment that's just coming in and whether that's because there wasn't work available or whether, again, it's just timing to getting it started up, as you can imagine is a difficult equation to kind of work through.

Absolutely. Maybe an easier way to answer it is, could you actually quantify kind of the average horsepower working out in the field during Q2 versus Q1?

Well, we don't really track it between it's here and not working in the field or not available. We look at it more conservative. If it's here and it's available, we count it in our utilization. I mean, that's just our conservative nature. We don't necessarily track, again, that it's here, right next to the field or whatever. We don't really track it that way.

Well, do you have the utilization numbers for the fleet for Q2 versus Q1 on pressure pumping?

Again, if we've taken no deliveries in the second quarter, the utilization absent the weather impact, was still very strong. Except for one situation that we had that we worked through, again, utilization was very very high. What we were impacted by in the second quarter is it was slow getting the new capacity working. So that's what impacted our overall utilization. And we think that will correct itself as that is in place and gives us time to get it working.

That's very helpful. Could you also maybe quantify -- you mentioned in the press release incremental startup costs. Could you quantify the impact of that during the quarter? I know you also had significant startup costs last quarter with also new equipment deliveries.

We haven't quantified it. We're not prepared to disclose that. But I will say that I think in the second quarter that was less of an impact than it was first quarter. I think we made some adjustments to hiring and things, as it relates to equipment delivery, so I think the "startup costs" were a bit less. We mentioned in our press release that there is one particular location where we are that, again, has been a slower startup than we had anticipated. So that continues to have a relative impact on our results. But really I think second quarter compared to first it was actually lower.

It's Dan Pickering here. Just a quick question I guess on listening to BJ talk yesterday on their conference call and Schlumberger and Halliburton earlier last week, they were talking about pricing and kind of maintaining market share. Are you seeing any different competitive behavior from the big guys at this point or are they really not in the markets that you guys are in?

We do run across them. I think one of the stories in second quarter that we didn't anticipate was equipment coming down from Canada and that impacted us in some markets. I know it sounds difficult to say, but we still believe there's plenty of work to go around. But I believe they said their pricing was down 3 to 5%, if I recall, and we're telling you ours is down 10%. So, you know, that tells a story there, I guess.

But we are hearing stories of some of the big guys being more competitive than they have been, yes. That is an impact, yes.

Okay. And then last question from us, and thanks for taking so many. I think last quarter we were looking for maybe yearend horsepower to be somewhere in the 290,000 range and you just indicated it was going to be about 250,000. Is the incremental 40 slipped into 2008 or did you cancel that, have you changed any of your CapEx plans at this point?

We've not changed the plans very much at all over the full term of the plan. We just think those are going to be the delays that we're going to continue to experience and we think that will spill over into '08.

So that's a vendor issue?

Yes. Not say issue, I mean, it's just there's inevitable delays in the delivery and it's been very difficult to predict and I guess at this point we're expecting that there will be further delays. And we still expect to fully utilize all the equipment under this growth plan and we have not scaled that back to any significant degree. It's just going to be the timing of when it comes in.

Mike Drickamer with Morgan Keegan.

I guess like Stacy, I'm just trying to reconcile the sequential decrease we saw in revenues at technical services here, especially given the strength you talked about in the other product lines. Can you remind me what percentage of technical services revenues is pressure pumping?

I guess we think of it in a consolidated fashion.

That would be fine.

It's just under 40% of consolidated revenues.

38%.

So the sequential decline, again, when we get down to it is pricing. If you look at it like the new equipment that we've taken on, again, we're having difficulty getting that to work as quickly as we thought. It was not 100% idle, but it was fairly low. And that equipment was kind of received fairly ratably throughout the quarter, so some of that was received even in June.

So, if you assume that that was relatively idle and we had a pricing decline of 10%, that, coupled with some other glitches in weather and everything else, I think pretty well defines it for us. I mean, we're, again, comfortable that we have not seen any halt in our -- any significant changes in our existing customer base at this point in time, but certainly we're having to compete on price.

Okay. You talked about these difficulties getting the new equipment to work. What difficulties are you having there? Is it something that's specific on your end as far as manning-up the new equipment or what's the issue?

It's not manning so much. I just think, again, in this competitive environment certainly the backlogs are down. I'm sure everybody's talked about that. Our days in backlog are down. So we're just not as readily able to put it to work. You know, as soon as it's ready to go in service we're not able to roll it on a job. So that's taking a little bit longer than we expected. But again, we're comfortable that we're going to get there. We still have confidence that we'll get there.

Okay. We're a month into third quarter. Is that capacity add delivery in the second quarter working yet?

Some of it is. Some of it is, yes.

Just to amplify that answer. Some of this, you might get the pumps in, but you might not have the blender in, so it can't work as a line fleet until you get a component in. So we would take delivery of the pumps, pay for them and they would sit idle until the blender came. So some of that also.

That is a good point. That is also contributing to the ability to get that stuff working.

Okay. So you'd kind of mark it as you took delivery of the equipment, even though you didn't take delivery of all the equipment.

That's correct. Because some of it has to be worked in tandem.

Okay. I'm trying to get back to then how much equipment or how much of this capacity is actually working? You said some of the equipment delivered in Q2 is actually working. Are we talking more than half is actually working, less than half is actually working?

I think it's reasonable to assume that half of it has normal utilization. I mean, again, on our previous fleet it was working very well. Activity levels continue to remain very high. It's just a little bit more difficult to break-in with new equipment, given the capacity adds within the industry and the pricing pressures. It's a little bit more difficult than it would have been, obviously, a year ago.

And Mike, a follow-up on that is -- about the dynamic in the current market is in some ways it's just a customer procurement issue. Specifically what happened for us is we told some customers that we'd have some equipment in March and April, can we come work for you? And they said, let us know when the equipment comes and we'll talk.

Well, March and April came, we didn't have the equipment the way that we said we were going to and they went off with somebody else for a while. So, when the equipment did come, the people we had been counting on to work with were doing something for somebody else. So we kind of had just a little bit of double clutching in that regard.

Okay. You guys talked about 10% price decrease in pressure pumping. Assuming that's on average, where there any markets where you saw particular weakness and maybe any markets you saw particular strength, as far as geographic markets are concerned?

East Texas was particularly weak. We believe that some competitors who had equipment in Canada came down to East Texas and really hurt in that regard. That was a pocket of weakness.

Any pockets of strength?

West Texas still is probably stronger than average. Plenty of work in the Fayetteville Shale, that sort of thing. So, those are probably a little bit better. But East Texas was particularly weak and again, overall decline of around 10%.

All right, last one for me. You talked about the profitability of one of your new locations not yet operating at optimal revenue levels. Is this going to be either the Fayetteville or Rocky facilities you've been opening?

It's the Rocky Mountains, Mike. I mean the new Rocky Mountain location in Colorado.

So how's the Fayetteville Shale facility operating then?

Fine. Activity levels there are still -- are very high.

Okay. And is that an issue that can be addressed near-term and hopefully by the end of third quarter the Rocky Mountains are operating as you had expected?

We hope so. It's certainly with the gas situation in that region and other things, it exasterbates that problem to some degree, but yes, we're working on it diligently and we are hopeful that it will have a positive resolution some time in the third quarter.

Tom Escott with Pritchard Capital.

A lot of these key issues have been covered, but just to clarify for me, did you just say in your two new locations, Fayetteville and the Rockies, that the Fayetteville, the equipment that came in at Fayetteville Shale went to work right away and it's working fine and it's getting good utilization, but the Rockies is not? Is that a fair characterization?

Yes.

Okay. Also you said pricing was down 10% sequential Q1 to Q2. Based on where you are here at late July in Q3, does this look like there's another 10% sequential drop Q2 to Q3? Is it basically stable now from the levels it was during Q2? How can you characterize the evolving pricing picture here one month into the quarter?

That's a hard one. I mean clearly that's the $64 question. Equipment is still coming in. We are hopeful, but I realize hope is not a strategy, but we're hopeful that if Canada gets stronger, some equipment will be utilized in Canada more, so that will relieve some of the pricing pressure here. And obviously the laundry list of variables; weather -- hot temperatures in the summer. So it's hard to say. The bias on pricing is certainly not up. It probably will continue to drift a bit lower. But it's just very hard to say at this point.

Okay. And then lastly, on the continued new equipment deliveries coming in, obviously your two-year, three-year program a lot of equipment was already ordered a long time ago, is in the pipeline and just will be delivered. And then it seems to me that you have options on additional capacity -- options that have not been exercised. Where do you stand on that? Is there still a bunch of equipment options that you can exercise that you've still chosen not to, or where does that stand?

I think we still have some options into the future, but clearly at this point with the market the way it is, we're not as eager to exercise those options at this point in time. So, I see that, again, with our initial plan we still expect over something approximately -- you know, we initially announced a three-year plan that I think we will ultimately at this point, I would not be surprised -- we will spend all of the money and pretty much on what we anticipated spending it on. It may stretch out just a little longer than we anticipated.

So, our options are still available for '08. At this time though, we're looking at things later in '08 and we don't have any firm commitments at this point to any significant amount of equipment for next year. Other than the things, again, that are sort of at this point being naturally deferred into next year.

Right. Okay. And then I know all the discussion on this call has been about the pressure pumping side of the business, but tool rental, has that maintained very steady pricing and very strong utilization through this period or are you seeing any weather-related issues or utilization issues for tool rental?

Rental tools continues to be a good performer for us. Pipe count, which is how we measure utilization, stayed good during the quarter. We had the normal pipes coming in to get cleaned and that sort of thing. But no, rental tools is doing fine.

Bill Desellum with Titan Capital Management.

We have a couple of questions. First of all, circling back to pricing. Would you please walk us through the trend that you saw in pricing throughout the quarter and whether the price pressure accelerated or decelerated as you moved through time? And if it's useful, feel free to go back further than just this quarter.

And then secondarily, the support services segment revenues were up nicely, profitability was essentially flat. Would you please discuss the dynamics there?

I'll touch on the second part of that question first. Again yes, we did have revenue growth from quarter-to-quarter within support services. Profitability was down a little bit. Really that's mostly just kind of timing and mix of services and again, we had a lot of M&R. We did happen to have -- it does happen on occasion there was a large amount of pipe that -- a relatively large amount of pipe came in during the quarter that therefore had to be reworked, but it really wasn't any significant change in demands or anything like that. Pricing remains good and that's still looks to be very positive for us.

On the first question, of course it's difficult to answer, but my sense is that the pricing pressure was probably earlier in the second quarter. I think we feel that there was a more dramatic impact earlier in the quarter. I think it's stabilized at this point to some degree. But as others of our competitors have talked about, we certainly are mindful that it could continue to drift lower, but we're not seeing daily examples of it falling precipitously or anything like that. So, we're hoping -- and as Jim said, that's not a strategy, but we're hoping that it will perhaps stabilize at these levels and in worst case, maybe drift a bit lower.

And would it be fair to say that early in the second quarter you were seeing examples on a daily basis of pricing pressure, using your phrase?

Yes.

That is helpful. And then in the release you specifically mention your competition bringing capacity in place. Would you provide more detail behind that comment, please?

I think the main story is increased capacity and the rig count has been slightly up, but is somewhat flattish. We continue to be encouraged and can't emphasize enough -- we continue to be encouraged about the increased directional drilling that's going on in the domestic market and in a lot of the markets where we operate. I mean, the domestic drilling rig count right now is about 42% horizontal drilling, which is a lot higher than it has been. And there are a lot of those plays left to be looked at. There's a lot of natural gas in those unconventional plays, the technology is improving to get to them. So we continue to be encouraged about that.

Having said that, this quarter was just a time of new capacity coming on line, customers taking advantage of the laws of supply and demand, and also Canada, you know, the Canadian rig count is down so much and equipment has come from Canada down here to the domestic market.

So in terms of more color on that, and of course in the Rocky Mountains with the pipeline capacity not really coming on until January of '08, we know prices per wellhead are very low. We don't do a lot of pressure pumping in the Rocky Mountains, as we've discussed before, but you know, that equipment can move as well. As we always say, the equipment has wheels. So I guess that's the most color we can put on it at this point.

I'll add that we are encouraged by the growth in the unconventional plays. We have some very specific -- and I would say specific, not widespread, thus far successes with enjoying the many benefits of participating in the unconventional plays. We are, we believe strategically aligned to be able to take advantage of that over the coming quarters and years and that is because of, again, the experience and knowledge that we're gaining and have gained over the last six to 12 months, together with the type of equipment that we have taken delivery of and are taking delivery of in the next six to 12 months.

And that, together with our attractive suite of services, you know, with the pressure pumping, the coil tubing, the snubbing, the nitrogen, that's provides a very attractive combination and does appeal to our customer base. And we're just going to need to work to take advantage of that. Again, we have some notable successes in that regard and we're going to continue to build on it.

And if you'd allow one off-the-wall question. To what degree does elasticity of demand come into play with pressure pumping? Meaning, with prices being lower that there ends up being more utilization, therefore, that takes place or equipment being used for wells where pressure pumping is used that otherwise would not have?

I think the slope of the demand curve or the elasticity, as you're referring to, I think that changes based on commodity prices, really. Because an operator, on stimulation of an existing well, an operator is making a very simple financial calculation and part of that financial calculation relates to the price of the underlying commodity that's coming out of the well. So, you know, you may care less about price the higher the price of natural gas -- the price of our services the higher the price of natural gas. I think that's the answer.

Yes, the price of the commodity is much more important relatively than the price of our services. But, your logic is sound, but I'm not sure that that would be a large contributor.

(OPERATOR INSTRUCTIONS) Ron [San] with Tribeca.

I had a question. I'm trying to understand here. When you finish out the workover, what is the difference that you guys see from the first quarter to the second quarter and how much has that increased quarter-over-quarter?

I'm sorry, I'd like to clarify the question. Are you asking about workover work as opposed to drilling work?

Yes.

I don't think we really have any information for commenting on that. A lot of our business at RPC is related to the drilling and completion phase of a well. Rental tools are used to help drill a well. Pressure pumping many times is used at the completion phase. It's also used later on for stimulation.

What I'm looking at is the drilling team, quarter-over-quarter, what has been the increase in the drilling site?

It's kind of hard for us to quantify that. We talk about our service lines. We don't really have good information that we could quantify about how much of our work is relating to drilling versus workover type of work.

I will comment. This may not be directly to your point, but we are seeing some improvement in the Gulf Coast and we believe that is because of finally some of the infrastructure damage from '04 and '05 is being completed and customers are beginning to go back to work there and much of that could be workover type work. So we are seeing improvements there and that may be a direct correlation.

At this time there are no further questions. Are there any closing remarks?

No, we appreciate everyone calling in this morning and we appreciate your interest and your questions. Have a good day.

That concludes today's RPC second quarter 2007 earnings conference call. You may now disconnect.