RPC Inc (RES) 2007 Q3 法說會逐字稿

Good morning and thank you for joining us for RPC's third-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 a listen-only mode. Following the presentation, we will conduct the 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. Please go ahead.

Thanks, operator 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 would like to refer you to our press release issued today along with our 2006 10-K and other public filings that outline those risks, all of which can be found on our website, www.rpc.net.

I would also like to inform you in today's earnings release and conference call, we will be referring to EBITDA, a non-GAAP measure of operating performance. 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 invite you to review that disclosure if you are interested in seeing how it is calculated.

If you have not received our press release for any reason and would like, one please call us at area code 404-321-2140 and we will fax or e-mail one to you immediately. I will now turn the call over to Rick Hubbell, our President and CEO.

Jim, thank you. This morning, we issued our earnings press release for the third quarter ended September 30, 2007. In a few minutes, Ben Palmer will discuss our financial results in more detail.

At this time, I would like to provide you with our operational highlights. Overall, we were very disappointed with our third-quarter results. While we are still very confident in RPC's strategic direction, we faced three significant factors negatively impacting our results. First, increased competition, decreased pricing and operational execution.

In all of our operating regions, we were facing increased competition in the form of new startups and additional capacity by existing competitors. As a direct result of industrywide capacity increases, we were seeing price pressures in most of our service lines and regions. On average, companywide pricing has declined 5% sequentially and 8% year-over-year. While revenues increased 5% year-over-year due to our capacity increases, sequentially revenues fell 6% as we had only a small capacity increase during the third quarter.

Pressure pumping, our largest service line, has experienced the biggest pricing decline, which is approximately 13%. Operationally, we continue to be impacted by equipment delivery delays, the high cost of hiring and retaining qualified personnel and sourcing critical materials.

Also in our increasingly competitive markets, our businesses are trying to manage utilization in an unpredictable pricing environment. With that overview, I will turn it over to our CFO, Ben Palmer.

Thanks, Rick. For the quarter ended September 30, revenues increased 5% to $161.9 million. Operating profit for the quarter was $24.6 million compared to $46.6 million in the prior year. Net income was $14.8 million or $0.15 diluted earnings per share compared to $28.7 million or $0.29 diluted earnings per share last year.

Cost of services rendered and goods sold for the third quarter was 56.5% of revenues compared to 48% in the prior year. This percentage increase is due to the effect of revenues on the -- is due to the effect of revenues -- I'm sorry -- the effect on revenues of decreased pricing, increased labor costs, increased material and supplies cost and increased maintenance and repair expense. The impact of these items was partially offset by a decrease in equipment subrental expense. With our increase in capacity, we have become less dependent on other service companies to supplement our equipment base.

Our selling, general and administrative expenses during the quarter increased 12.1% from $23.5 million last year to $26.3 million this year. This was due primarily to increased costs of new operational locations and higher activity levels. Our SG&A as a percentage of revenues increased from 15.2% last year to 16.3% this year.

Depreciation and amortization increased significantly from $11.6 million last year to $20.8 million this year. This 80% increase in depreciation and amortization was due to the large amount of capital expenditures we have made during the last 12 months.

I would also like to provide a few comments regarding our third-quarter '07 sequential financial results. Third-quarter consolidated revenues were down 5.6% compared to a domestic rig count increase of approximately 2%. As Rick mentioned earlier, this revenue decrease was primarily the result of lower pricing experienced during the third quarter.

Third-quarter cost of services rendered in goods sold as a percentage of revenues increased five percentage points. This increase was also due to pricing declines during the quarter. SG&A costs as a percentage of revenues were relatively flat. Third-quarter depreciation increased by 11.5%, representing 12.9% of revenues in the third quarter compared to 10.9% of revenues in the second quarter.

As I did last quarter, I would like to provide you an update on the status of RPC's pressure pumping capacity. At year-end '06, we had a total of 148,000 hydraulic horsepower. At the end of the third quarter of '07, our capacity had increased to approximately 238,000 horsepower. And during the next six months, we expect capacity to increase an additional 50,000 horsepower. This will close out all open orders and we have no current plans to make any additional commitments for frac pumps.

At the end of the third quarter, RPC's debt was $148.8 million under its credit facility and our ratio of long-term debt to total capitalization is approximately 28%. Year-to-date capital expenditures were $197 million of which approximately $81 million was spent on pressure pumps and supporting equipment. For full-year '07, RPC anticipates spending a total of approximately $250 million.

While we are still finalizing our '08 plan, we anticipate capital expenditures will be substantially lower than in '07. Based on current estimates, we believe that '08 capital expenditures will be approximately $100 million. '08 capital expenditures will encompass equipment ordered, but not delivered in '07 together with ancillary equipment to support our key assets and maintenance CapEx.

RPC's total growth plan and capital expenditures for the '06 to '08 time period will be approximately $520 million, which is $180 million less than the three-year plan we originally announced in mid '06. Our decision to reduce planned capital expenditures was based on our current view of the projected utilization in pricing for this equipment. With that, I will turn it back over to Rick.

Ben, thank you. I would like to make a few closing remarks. RPC remains optimistic about the industry's long-term fundamentals, but we are keenly aware of the cyclical nature of our business. Our plans are to increase focus on sales and marketing, including capturing cross-selling opportunities, ensuring our operational costs are properly aligned with our expected activity levels, capitalizing on our engineering expertise and exploring additional international opportunities.

While we are closely monitoring our financial results, we do not anticipate making any substantive operational changes unless and until we see a clear indication of a slowdown in drilling and production activity.

And lastly, while 2007 has not met our high expectations, we do expect RPC to continue to deliver above average returns and to create value for its shareholders. I would like to thank you for joining us this morning and at this time, we would be happy to entertain any questions you may have.

(OPERATOR INSTRUCTIONS). Rob MacKenzie, Friedman Billings Ramsey.

Good morning, guys. Rick, one thing you didn't address on the conference call was cost reductions, rationalizing business costs. Can you give us a feel for what actions you guys are taking or plan to take to bring your cost structure more in line with your revenues?

Well, it is unclear what our ongoing cost structure is going to be until we get all this equipment in. We still have inefficiencies in labor because we have crews available for equipment that is not yet working. So we are actively looking at every expenditure we have and taking the appropriate actions. But as far as an overall view, we really won't know until all the equipment is in.

So would it be fair to say then that fourth-quarter costs should be equal to or higher than third-quarter costs?

Yes.

Okay. And on the assets, one of the things that came out in last quarter's call, if I recall correctly, was that you had some of the pumps delivered, but you may not have had all the blenders, enough to put together whole frac packages together. What is the status now? You have got some more equipment delivered. It looks like it is not working. How are you guys going to get all your equipment that you have in the fleet up and working like we are hearing from most of the other pressure pumping guys?

We now have most of those components to be able to work those fleets. So starting say the middle of October, we were more prepared for the larger pump jobs. So most of that is better now.

Okay. One of the things that you mentioned, Rick, in your introductory comments was operational execution being one of the disappointments with third-quarter results. Is there anything of that to do with service quality and job failures that have impacted your results this quarter?

No, we have not seen that at all and it is mainly in the Rockies where we have not executed as planned.

Rob, this is Ben. As we indicated in our plan or in our comments, from an operational standpoint, we are really referring more to again the equipment delivery delays and the impact that that is having on our utilization of people and equipment and the ongoing difficulty of hiring and retaining people and also sourcing critical materials. So it is more that than the failures.

Okay. And then I guess a follow-up question to that and my last one for now. On the equipment delays, you mentioned you are going to have an additional 50,000 horsepower of pumps, etc. delivered within the next six months. Does that include all of the ancillary equipment, etc. required to put out jobs in the field?

Yes. We expect in the next six months that, at that point, we will have substantially everything in place.

Okay. Thanks. I will turn it back to someone else.

Thanks, Rob.

Mike Drikamer, Morgan, Keegan.

Good morning, guys. Let me follow up a little bit on Rob's questions here. I mean if you look, going back to when you guys basically started the expansion program, revenues are flat, costs have doubled, and earnings have been cut in half. How much more costs do you think you are going to need to bring in with the equipment that you have already added, especially since you are decreasing the tool amount? I guess you are adding to the $580 million from $700 million. How much more are we going to be looking at in costs here?

Rob, this is Ben. It's a little bit difficult to hear you. I don't know if you're on a cell phone, but I think I understand your question. In terms of an absolute dollar amount, we don't necessarily have that in mind. As Rick indicated, our people are still, even though it is certainly taking us longer than we expected to get the equipment up to the utilization levels that we would be pleased with in this environment, our people are still confident that they can make that happen.

So we are still moving forward to add the crews with plans to add the crews for the equipment that is forthcoming and as Rick said too though, we are very carefully looking at our costs and making decisions about being very careful and prudent as we always have been historically about adding excess costs and also looking at and justifying the costs that are there and we will begin to make cuts as we deem it appropriate, but industry activity levels right now are still very, very high.

Unfortunately, you can tell by our numbers, we are not participating in it as quickly as we would hope, but we are still confident that we will be able to get there.

Okay. And let me go a different direction here also then. You guys talked about pricing and the impact you are seeing from pricing. There has been a lot of discussion about the excess capacity in the market right now. Is all of the concerns or all the impact on pricing coming from the supply side or are there also issues on the demand side? Are you seeing anything where perhaps competitive -- or excuse me -- your customers are waiting to complete wells until we have more pipeline capacity or better commodity prices or is there anything on the demand side at this point?

On the demand side, certainly the Rockies, we have been impacted there with the pipeline capacity issues. I would say probably everywhere else it is more supply base. We are experiencing compared to one year ago when a job gets delayed, not because of anything we have done, a customer delays a job, we are not as able to go out and find a replacement job for that equipment, so the job gets pushed. We end up doing the work, but it gets pushed for a week or so because of some problem at the job site. So that is impacting us and I would expect impacting other people as well.

All right, guys. That's all I have this morning.

Dan Pickering, Tudor, Pickering.

Hi, Jeff Tillery here with Dan.

Hey, Jeff, how are you doing?

Good. In the past, you guys have been a little bit hesitant to talk specifics around utilization, but it is definitely showing up in the past couple of quarter results. Can you kind of walk us through on the pumping side -- and it would appear it is not just pumping kind of where utilization is falling. Can you walk us through kind of specifics around progression over the past couple of quarters?

Jeff, it's Jim Landers here. Your question is a good one. The point is accurate. Utilization of our pressure pumping fleet in the third quarter of '07 as sort of a year-over-year same-store sales kind of concept is down. It is down by roughly a third from what the same fleet or what the fleet was being utilized this time last year.

So Rick and Ben have alluded to some of these things, but there is -- we have got capacity in the Rockies, which hasn't yet worked. The industry no longer has the three or four or six-month wait list, so when a job slips, you will do the job, but you have lost the day and you can't get that time back. So that utilization has been lower for that reason.

Also some ancillary equipment is still not available and tested and assembled with the equipment. So another factor is that we have got equipment that, in some cases, can't work because it doesn't have the ancillary equipment. There is less of that now than there has been in the past because we are doing a better job of getting that together, but still there is just more friction in an environment where you have a lot more supply of equipment and activity levels are basically flat or up in low single digits.

I think -- this is Ben -- I think one reason the utilization is difficult to measure right now is because there is a lot of dynamics going on with equipment coming and everything else. So to just throw out a number or a percent, again it is very dynamic right now and clearly in the next quarter or so, I think it will become much more clear where we can do better comparisons and reporting on utilization.

And kind of staying on pumping for a second, I mean rig count has been basically flattish. Rig efficiencies are going up, so well count is going up, so there is definitely share loss ongoing. What are the factors you attribute that to? I mean obviously there are some ancillary equipment that is not in, so the capacity increase kind of overstates what you could actually do from a revenue perspective, but is your pricing differentially high? Has there been specific regions that the weakness is showing up in? Can you give us some color on that?

Well, I think, in this environment, as we alluded to in our opening comments, is I think part of it is it is more difficult to find where the pricing is. When you are in an environment where it is changing, we are not dictating the price. If others, large competitors are dictating price and if we don't know what that is that takes some extra time to figure that out and get the equipment working.

Our strategy has always been and is continuing to be that we are not going to get a job at any price. We are not out there trying to get -- doing whatever we have to do to get the price. We are not leading the prices down. We are trying to be prudent and patient if you will to try to find the right spot for pricing, but I think we are going to spend more time trying to figure out what that appropriate level is. We are not going to be stubborn and say we are not going to discount below a particular level.

That is certainly not the case, but we don't want to -- we can't do it ourselves alone, but we are not there to drive the pricing down in a particular region. We are going to try to find out what the appropriate level is that we can work at and not just be giving it away and wearing out our equipment.

Hey, Ben. It's Dan Pickering. A quick question. As we look at the third-quarter revenues, $135 million in the Technical Services division, so roughly $45 million a quarter. Did we see any turn kind of month-to-month as we stepped through the quarter? Was the September month the softest month, the strongest month for you guys? I am just trying to sense if there is any sort of turn in the revenue progression here.

Well, as it turns out, September was weak for us. I don't know if -- it is based on other things that we see and have seen. I am not sure if that was a definitive turn, but it was not a good month for us. And there are some things that happened and are happening that I think -- we expect that that is not going to be a continuing trend at this point.

You talked a lot about pressure pumping. Can you talk about the other businesses within Technical Services? Are you seeing weakness in those as well? And then the Support Services segment was down kind of on a percentage basis profit-wise sequentially? Can you give us some color around that? Was that pricing as well? Were there any sort of weather issues, flood or hurricanes that impacted that Support Services segment?

Well, on the Support Services side, again that is sort of a good illustration as well. The largest service line there is rental tools, which has been doing very, very well and still had a good third quarter, but it was down. And that is another indication. There was some pricing softness that we did experience in the third quarter and again it took us a little bit of time to figure out where is the market. So the utilization was down a little bit in the third quarter, but I think we have found that point and we are back at it again.

So that's sort of -- I think that is kind of how we feel that a big factor of what we are seeing is again just finding that pricing equilibrium, what is the right level that we need to be at without giving the work away. So that is really what we are trying to do as good as we can to try to figure that out as quickly as possible to get our utilization up and improve the numbers.

As you look forward to Q4, I think one of the questions earlier addressed the cost side. As you look at Q4 and rig count holds kind of flattish where we are today, do you expect Q4 revenue to be flattish with Q3? Do you have more capacity online, but pricing has weakened, so would you expect those to offset, expect revenue kind of up, flattish or down sequentially?

Jeff, it's Jim Landers. We expect, based on the fact that September was so weak, that fourth quarter will be marginally better than third quarter was from a revenue point of view.

All right. Thank you guys very much.

[Tom Ascot], Pritchard Capital.

Good morning, fellas. You have already taken one big step toward curbing the capacity. I guess you basically cut off the third year of your three-year program for capacity additions, but you've still got 50,000 horsepower yet to be delivered in the next six months. Do you have the opportunity to go in and cancel those, pay a cancellation penalty and basically stop the hemorrhaging in the short term?

Tom, we haven't really looked at that possibility. I understand the question. We look at our numbers and our returns -- the returns are still good, the numbers are still -- they are not bad certainly compared to last year year-over-year and sequentially with the way it turned out. It was not what we expected, but our returns are still quite good. And as we indicated, we are not going to make any huge significant changes until we see industry activity levels decline, so that is sort of where we are. We are not looking to cancel those at this point, so there won't be any penalties or anything that we are incurring. I understand the question, but at this point, no, we are moving ahead with those.

Okay. And then a corollary to one of these other questions that was asked. I think Jim's last comment was that given, all things considered, you still think that pressure pumping revenue could be up marginally in the fourth quarter over the third much, but you have already said costs are going to be higher. So realistically, is the legitimate expectation at this point that fourth-quarter earnings necessarily are below the third-quarter level?

This is Jim. That's a hard one also. Depreciation should be a bit higher in the fourth quarter than it was in the third quarter.

One item on the costs is on the direct cost side, there is just a lot of inefficiency right now because of just the dynamic nature of equipment coming, equipment coming, but not being fully operational, that sort of thing. So we have taken steps to try to make that friction, that inefficiency decline somewhat in the fourth quarter. But it is very hard to say. It is very hard to say given the nature of that that an incremental fourth-quarter revenue increase will fall to the bottom line the way we would like it to.

The operating profit margin in the third quarter was 15%. If we were to go back and look at what we have done historically -- again, this is, again as Jim indicated, is a very, very dynamic environment and where it is all going to shake out. We think it is going to get better from here for us.

The timing, of course, is -- we don't know with specificity when that is going to be, but we are comfortable that the industry is going to stay at high activity levels and we feel that we will get the equipment working and we will get it working at "adequate pricing" what the market will bear and at this time last year, our operating profit margin was 30%. This year, it is 15%.

Again, as I said, 15% by historical standards is still quite good. So if we can get it moving in the right direction going from 15% back up toward 20% and then to 30% again hopefully, everything will be all right. So that is what we are looking at. That is why we are not making any dramatic steps yet because really it doesn't look very good year-over-year and we acknowledge that, but we think there is still lots of opportunity for us.

So it may turn up from here, but just may not be this quarter I guess is the takeaway from all of that?

That is certainly reasonable, yes.

Brian Caldwell, Capital One Southcoast.

Good morning, guys. You guys did mention obviously sequentially you saw pricing decline by 5% and I guess away from the pressure pumping side, can you talk a little bit about some of your other business segments?

Hey, Brian. It's Jim Landers. Yes and just to remind everybody since pressure pumping is so big, it really is the thing that leads things. Pricing was down in other areas, but not as much actually -- in coiled tubing, pricing was up slightly. In snubbing, we had some increased discounts, decline in pricing. That was due to some competition in western Oklahoma, which again just to remind everybody, is our biggest market. Our nitrogen -- is our biggest market in fact. Our nitrogen service line was kind of flat, so the others were kind of a mixed bag. Nothing was down as much as pressure pumping was.

And Jim, if you could add some color on -- or Rick also -- of the 50,000 horsepower you are going to get delivered in the six months, do you have an idea of where geographically you're going to have that deployed?

Brian, it is pretty evenly distributed. Just looking at where it is coming, it will be fairly evenly distributed. One thing again to remind everybody is that the equipment does have wheels, so if there is a better place for it to go, it can go there, but eastern Oklahoma is a big market for us. It is going to be there. Some more in East Texas, some more in West Texas. Really no more is slated to go to the Rocky Mountains, but if that market changes, we could move some up there if we needed to.

Jim, last question on the rental tool side. If you can give us a little color on that.

Sure. Utilization declined a bit in the third quarter measured in just pipe joints utilized. Declined a little bit as we were seeking the new pricing equilibrium if you will. I think we found that and things have started to trend back upwards from a utilization point of view.

So utilization declined; pricing is pretty firm?

Pricing was firm because utilization was down. Those two kind of sometimes go -- if you are holding firm on pricing, sometimes you end up losing some jobs and that is what happened a bit third quarter. That is not a, right now at least, is not a huge mover. I mean pricing in rental tools is not a huge mover. We just did have to make an adjustment during the third quarter and that showed up in lower utilization.

We had a couple of big jobs that came in and were in the yard for a week or so before they went back out.

Got you. Thank you, guys.

There is lots of good discussion there on the rental tool side and elsewhere about future projects and so forth, so it is still looks pretty good.

Thank you.

Bill Dezellem, Tieton Capital Management.

Thank you. We had a group of questions. First of all, in the past, you have talked about equipment coming from Canada and moving into the US. What are you seeing on that front?

Bill, it has come from Canada. As far as we know, there hasn't been enough that went back to Canada to help our results any.

And from your perspective, has there been incremental equipment that has come from Canada down in the third quarter or did that trend pretty much stop and the equipment that came here stayed?

I am not certain, but we believe it is more the latter. In other words, no additional equipment has come from Canada down here, but none has gone home either.

And then you folks have mentioned that September was a tough month and that there were just a number of things that happened there that you do not believe will be the beginning of a trend. Would you please walk us through what the dynamics were there that you do not anticipate being a trend going forward, please?

Well, there were a few pushed jobs in East Texas, which got pushed into October, which that is a huge pressure pumping market for us. That hurt things. Some work that we were doing out of our new Rocky Mountains location ended and we didn't start back up during September. There were a few more again just operational things in West Texas where jobs were pushed and are moving into October. And rental tools as well, as we just mentioned from the earlier question. So they sound minor, but in the aggregate, they add up. Some people have talked about lost days due to hurricanes or the threat of hurricanes in the Gulf. That impacted us, but not very much, but I guess that goes on the ledger as well.

And then pricing, there has been a fair amount of discussion about some of the pricing that you saw in the quarter. What is your current view as to whether pricing is still declining or whether it has stabilized? Doesn't sound like there is any opportunity it's going up in any of the significant lines anyhow.

No, pricing increases are probably one of the less probable outcomes in the near future. I think -- we don't know. It does seem -- the decline seems to be slowing, but it is hard to say during the fourth quarter, it is hard to say.

And then Rick, I believe in your opening remarks that you made reference to international expansion, that you were going to be looking to either evaluate those plans or maybe accelerate them. Would you please discuss what it is that you are referring to there?

Well, we have a number of tenders out right now. For the most part, our international business has been -- the snubbing service line and some rental tool, so we are looking to maybe move some of our other service lines out internationally and maybe look at more on a call-out basis than contract.

And what is the potential significance of those contract wins if you were to win them?

Well, our international number is pretty small, but it could be a very sizable increase to that small book of business.

Great. Thank you both.

(OPERATOR INSTRUCTIONS). [Andrew Halperin], Beaver Capital Corporation.

Good morning, gentlemen. You talk about weakness in pressure pumping. Is this a weakness in all areas of operation or is it mainly concentrated in the Rockies?

This is Jim Landers. It is pretty much across the board. We are seeing a lot of competition in our market areas, a lot of new entrants into the business, which frankly was a surprise. We have kept our eyes on the bigger players, but there is just a lot of new entrants as well. So it has been pretty much across the board.

Do you think that when the I think it is the Rocky Mountain Express, the new pipeline, comes into -- goes on in I think late December/early January that that is going to offer you a possibility of boosting pressure pumping services in the Rockies?

Yes, it should. With filling the line, it's supposed to get to Missouri at some point, I would hesitate to say it's late December though. We don't know, but I think it is going to be later than late December/early January, but, yes, that should help.

Switching over to your CapEx for 2008, if you are going from I think you said $220 million, $250 million this year to $100 million tentatively for 2008, are you anticipating a reduction also in your cash flow? And if not, how will you expect to use the cash that you are building? Would you use it for debt reduction or dividend increases or stock repurchases?

This is Ben. We are expecting that 2008 will be better than 2007, so our incremental cash flow that we generate would go toward probably debt reduction.

Okay. Thank you.

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

Thank you, operator. Thanks to everybody for joining in on the call this morning. We appreciate it.

This concludes today's RPC third-quarter 2007 earnings conference call. You may now disconnect.