RPC Inc (RES) 2007 Q4 法說會逐字稿

Good morning, and thank you for joining us for RPC's fourth-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. At this time, all participants are in a 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. Please go ahead, sir.

Thank you and good morning, everyone. 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 would like to refer you to our press release issued today along with our 2006 10-K and other public filings outlining those risks, all of which 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 will be referring to EBITDA, which is a non-GAAP financial 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, which is the nearest non-GAAP financial measure. So I invite you to review that disclosure if you are interested in seeing how it's calculated. If you have not received our press release, please call us at 404-321-2140 and we will fax or e-mail one to you immediately. I will now turn the call over to our President and CEO, Rick Hubbell.

Jim, thank you. This morning, we issued our earnings press release for the fourth quarter ended December 31, 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 a few operational highlights.

We are relatively pleased in our fourth-quarter 2007 results, especially when compared to the third quarter. During the quarter, we placed in service more equipment, including key ancillary components, which helped us generate increased revenues and cash flows in most of our top service lines. In spite of our improved sequential results, we still face a very challenging operating environment. Increased competition, lower prices for our services, and higher cost for labor and materials all continue to negatively impact our financial results.

While discounting appeared to level out during the end of the fourth quarter, we still continue to see increased competition in selected markets and service lines. As most of you know, pressure pumping continues to experience softness as the market absorbs additional capacity. Despite these issues, we believe our employees have made great strides toward integrating both the new equipment and new locations acquired as part of our long-term growth plan. It has been a challenging process in an increasingly difficult environment.

With that overview, I will turn it over to our CFO, Ben Palmer.

Thanks, Rick. For the fourth quarter, our revenues increased 16.1% to $186 million, primarily due to utilizing our capacity added during the year. Operating profit for the quarter was $34.7 million compared to $47.3 million in the prior year. Net income was $20.3 million or $0.21 diluted earnings per share compared to 29.5 million or $0.30 diluted earnings per share last year.

EBITDA for the fourth quarter was $58.7 million. Cost of services rendered and goods sold for the quarter fourth quarter was 54.3% of revenues compared to 48.4% in the prior year. That's of course an improvement. This percentage of revenue increase is due to the -- I'm sorry, that's a negative. The percentage of revenue increase is due to the negative effects of decreased pricing, increased personnel costs and the increased cost of materials and supplies.

Our SG&A expenses during the quarter increased 18.6% from $24.1 million last year to $28.6 million this year, and this is primarily due to increased cost of new operational locations and the higher activity levels.

Depreciation and amortization increased significantly from $12.8 million last year to $23.7 million this year due to the large amount of equipment placed in service during the last 12 months.

At this point I would like to provide a few comments regarding our fourth-quarter '07 sequential financial results. Despite a flat sequential domestic rig count during the fourth quarter, our consolidated revenues were up 15%. As we mentioned earlier, this revenue increase was primarily the result of more efficiently capturing new business with our capacity added during recent quarters. Fourth-quarter cost of services rendered and goods sold as a percentage of revenues decreased a little over 2 percentage points due to greater efficiency in the utilization of our operational personnel.

SG&A costs as a percentage of revenues decreased 1 percentage point sequentially to 15.3% as a result of leveraging these costs over the higher revenues. Despite fourth-quarter depreciation increasing 13.7% as a percentage of revenues, it declined 20 basis points to 12.7% of revenues.

Sequentially, our EBITDA improved to 28.4% from $45.7 million in the third quarter to $58.7 million in the fourth quarter.

Our Technical Services segment revenues increased 16.7% to $157 million while operating profits grew 42%. These increases were primarily driven by growth in pressure pumping, coiled tubing and snubbing.

Our Support Services segment revenues increased 6.1% to $28.8 million, while its operating profits grew 15.6%, fueled by our rental tools business, the largest service line in this particular segment. By the end of the fourth quarter, our pressure pumping capacity had increased to 271,000 hydraulic horsepower. This represents an 83% increase over where we were at the end of '06 when we were at 148,000. During the next couple of months, we will receive a few more pumps and some ancillary equipment like sand [hocks] and blenders. We have no plans to make any further pumping capacity commitments at this time.

At the end of the fourth quarter, our debt was $156.4 million under our credit facility and our ratio of long-term debt to total capitalization remained about 28%. Our full-year '07 capital expenditures were $249 million, of which approximately 40% or $100 million was spent on pressure pumps and supporting equipment. The remaining capital expenditures were primarily spent on our rental tools, coil tubing, and nitrogen service lines. Currently, our '08 capital expenditures are expected to be approximately $100 million.

As you may have seen from our other press release this morning, our Board of Directors increased RPC's quarterly dividend by 20% from $0.05 to $0.06 per share. We view this as a sign of confidence in our cash-flow generating ability as we complete the final implementation of our long-term growth plan.

So with that, I will turn it back over to Rick.

Ben, thank you. In summary, we reported a fairly good fourth quarter and experienced some operational improvements. Despite this, we still have progress to make. In my opening comments, I mentioned some external forces that have negatively impacted our financial results. In 2008, we will address these issues by focusing on managing our business lines without the distraction of executing a major capital expansion plan. This includes taking steps to make our new locations fully viable, enhance our sales and marketing efforts and manage our expenses effectively. Additionally, we will continue to focus on capturing cross-selling opportunities, ensuring our operational costs are properly aligned with our expected activity levels, capitalizing on our engineering expertise and expanding our international business.

In closing, we have been in the oilfield service business for over 30 years and are quite mindful of the cyclical nature of our business. We are very aware of the current economic environment and the negative impact a recession could have on domestic oilfield production. As in previous cycles, we are prepared to adjust our cost structure in order to maximize profitability and returns.

I would like to thank you for joining us for this conference call this morning, and at this time, we would be happy to entertain any questions you may have.

(OPERATOR INSTRUCTIONS). Robert MacKenzie, FBR.

A question for you on the comments you made about the incremental pressure pumping capacity, a little bit less coming this quarter. Can you give us a feel for kind of what your average you say operating horse power was during the fourth quarter and where you expect that to be and end in the first quarter?

Well, relative to the first quarter of next year, again, we have just a very, very few pumps. I think we will probably max out at like 276, so obviously the average will be somewhere just north of 270. So relative to the fourth quarter, Jim, do you --?

Yes, Rob, the average was around -- the average hydraulic horse power was around 260,000, I think.

In the fourth quarter?

Yes. That's correct.

So you ended the quarter with 2 -- because you ended the third quarter at 238, I thought.

Right. And we ended the fourth quarter at 271, and I'm just looking at some statistics here. The average was around 260 for the fourth quarter.

Okay, great. And then I thought you said you were going to end the first quarter here 276. I thought previously you guys were going to 293,000 horsepower.

Yes, Rob, we may have misspoke on that. By the end of the first quarter, we -- and just to clarify, we will have taken delivery on everything. And it's around 290,000 hydraulic horsepower by the end of the first quarter of '08.

Okay. I'm glad I wasn't wrong on that. And so is that -- when do you expect delivery? Is most of that coming towards the end of the quarter?

Kind of hard to say. Let's just say that to be safe. Also there's the issue of ancillary equipment that supports it and makes it operational, so yes -- you might -- if you want to do an average, you might weight it towards the end of the first quarter.

Okay. Can you comment further then, guys, on pricing trends that you're seeing in your coiled tubing business right now? A little bit of a different question for you. What are you seeing there in that market vis-a-vis the competitive nature in pricing?

Well, Rob, this is Jim again. I know that seems to be the question of the day in the industry about coiled tubing and is it the next pressure pumping. We have not seen it yet. We have seen some good utilization among some of our new coiled units, which are two-inch diameter. They have some applications in horizontal and directional drilling which are useful. So you've got a whole -- you've got a fleet of equipment that's different ages; it's in different regions and has different applications. So it's hard to make a blanket comment, but the blanket comment is that we don't see any pricing problems in coiled tubing at this point.

How would you guys think about reacting if you were to suddenly see a surge of new capacity from some of your competition there and substantially lower prices? How would you respond to that?

Well, we don't have a whole lot of coiled tubing capacity coming this year, very little in fact. But if we could cancel anything, we would, I guess. But we just hunker down and manage costs. That's the best answer we can give you.

We would handle it the way we have in the past in downturns, that we would utilize the equipment up to the point that we think it's not -- if we're not receiving a price that's commensurate with the wear and tear on the equipment, we would just park it then.

Okay. Going back to pressure pumping real quick, Jim, can you tell us what percentage of your revenues pressure pumping was in the fourth quarter?

Sure. It was around 40%. Let me give you a better number. 40%.

Great. Okay. That does it for me. Thank you. I'll turn it back.

Mike Drickamer, Morgan Keegan.

Good morning, guys. It's been a long time since I could tell you guys good quarter, so good quarter on that.

Thank you. We still have a ways to go, but we appreciate it.

Well, at least we're seeing progress and there's a lot to be said for that.

Rick, real quickly, I wanted to make sure I understand what you were saying in your part of the presentation here. Did I understand you correctly when you said pricing leveled out at the end of the quarter?

It did. And that's an overall comment across all of our service lines. We didn't see the decreases that we have seen either earlier in the quarter or in the third quarter.

Okay. The quarter ended up being better than I expected, so with your comments about pricing leveling out at the end of the quarter, what I'm wondering about is how the quarter progressed. Was December higher than October? Or did we see a really strong October and then decreasing throughout the quarter? I recognize there was holidays and weather and everything else in the quarter.

Actually each month was sequentially better. November better than October and December better than November.

Have we seen that trend continue in January?

Well, we are just a little over halfway through and --

At this point -- this is Ben -- no appreciable change one way or the other. Of course, you know, as we've said before, we are not the price setters in the market, so we will be subject to some of the larger players and what they do. But at this point, they seem to be reasonably stable.

Okay. Kind of changing gears here and thinking more kind of macro here, looking at ways for companies to improve margins and deliver value in 2008, do you believe we're going to see a lot of consolidation in the industry in 2008 among your peers and would RPC take part of that one way or another?

Well, we have certainly entertained anything. There very well could be some consolidation, and we would certainly be interested in talking.

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

Jeff Tillery, Tudor Pickering.

(technical difficulty) services revenue improvement sequentially a little bit further. Was there anything kind of onetime-ish and anything with the pressure control business, the fire or the blow-out that aided Q4 results?

Jeff, this is Jim. We missed the first part of your question.

I apologize. It's just regarding the revenue improvement in Technical Services, I just wanted to understand if there was anything onetime-ish like a blowout or fire cud that may have aided Q4?

Not in any significant way, no.

Yes, there were a couple of blowouts we worked on that were -- a fairly high-profile one on I-10 near Lafayette. Another one in Morgan City, but it didn't move the needle enough to -- we're glad for the work; it was good work, but it didn't move the needle the way that (multiple speakers).

Okay. And so with that said, you've got several business lines in there, the pressure to pumping and the coiled tubing and the snubbing and nitrogen businesses. Did you see kind of uniform improvement across all those businesses or was the improvement primarily driven by utilizing the previously under-utilized pumping equipment?

The latter part of your statement is accurate, and, to some extent, with coiled tubing, also. And snubbing had a nice improvement, not quite as much as pressure pumping and coiled tubing.

I think in Q3 snubbing was down about 5% sequentially and coiled was down about 10%. Did those essentially retrace and so you got back to where you were earlier into '07?

Basically, essentially, yes.

Okay, and so the lion's share of the improvement really was the pumping business?

Correct.

I think as of your last call, there was at least one fraq spread in New Mexico sitting idle and there was a Rockies fraq spread that was idle. Essentially all the equipment you've taken delivery of now in the field and working out of utilizations you guys are -- I know it's a tough market, but at a utilization level that you guys are happy with?

We still have more upward opportunity. Every -- no, everything is not working at levels that we are pleased with. That's where we are saying that we think we've made some nice improvements here in the fourth quarter, but there's still additional opportunity.

And I know you guys in the past have been a little bit hesitant to put numbers around utilization, but I think you guys said on the last call that utilization was down a third and your stimulation business. Can you quantify how much you got back? Did you get halfway back to where you were before? Kind of -- can you just help me out just around how much utilization improvement you guys saw?

Jeff, this is Jim. It's a tough question because it's kind of a moving target because of the equipment that's been delivered. To maybe flush out Ben's comment a little bit more, and I hope this is helpful. New Mexico had some nice improvements from the third quarter and we referenced that that wasn't working much. Our new location in Colorado still has a lot of work to go though, so that's where we really have a lot of improvement to make.

In the other regions besides the Rockies were your equipment's utilization significantly below where you guys want it?

No, not really.

And keep in mind that we can move that equipment around even though it was purchased with the thought in mind of being in the Rockies. If we don't have business there, we can move it somewhere else.

And from a growth capital standpoint, you guys -- you spoke about the pressure pumping equipment yet to be delivered. Any other significant capital items in the other business lines from the previous capital -- from the growth capital plan that has yet to be delivered?

As been said, we still have a few coiled tubing units left to go. We have some snubbing units coming in.

Rental tool expenditures and then otherwise it's going to be maintenance and just other opportunities that come up during the year that will fulfill -- if an opportunity comes along that we need new equipment for that can't be anticipated at this time, we will add some items.

And my last question, of the $100 million in capital expenditures for '08, roughly how much of that is maintenance capital?

That's a hard one. Let's call it 30, 40 million -- somewhere like that.

Okay. Thank you, guys.

Tom Escott, Pritchard Capital.

Two things here. One, you said you had sequential improvement each month during the December quarter. And as we roll forward, can you give us a picture of what your fraq schedule looks like? I know the schedule had gotten down fairly skinny during the fourth quarter, I guess late third quarter. And are you booking jobs out 60 and 90 days out now? Or what has happened with that picture?

Tom, this is Jim. That answer is a regional one. In some cases, we are -- like in the Fayetteville shale, we're working real steadily with a contract and that sort of thing. In other markets, it's a little bit lower. If I had to say an average sort of X the Rockies, we are booked out longer than we were at the end of third quarter when we last had this discussion. I honestly don't know a number, but it's not as skinny, to use your word, as it was last quarter. It's getting better.

And could you attribute this to a lot of operators are just doing well completions that they had deferred from last fall when they were worried about nat gas prices? Or is this -- is there any way you can characterize quantitatively why they're doing that?

That's a hard one. We've been doing some good sales and marketing efforts. So I would like to say and do believe that some of it is just our efforts here in getting that equipment working. That's something we're dedicated towards doing. As for people who have drilled but completed wells, I apologize. It's just hard to characterize that.

No, I understand. And then, most everything has been covered, but I was going to ask if CapEx drops to $100 million in '08, you should have pretty substantial excess cash flow. Is that going to be used to pay down debt?

That's the intention, yes.

Okay, thank you. That's all I had.

Bill Dezellem, Tieton Capital Management.

We had a group of questions. First of all, the sequential revenue increase, was that a function of some large new contracts that you were able to put in place? Or was it just simply an across-the-board improvement in utilization a little bit here and there?

Bill, this is Jim. There was no single thing. We did start some good work in the fourth quarter. Some of it with some master service agreements which is sort of our pricing and contractual agreement. But in general, it was just kind of across the board getting this equipment working.

And given that you started some master service agreements in the fourth quarter, that would imply that the revenue actually should improve, notwithstanding pricing changes in the first quarter relative to the fourth quarter given that you didn't get the full-quarter benefit in the December quarter?

Bill, this is Ben. That's certainly a logical statement. But it's still -- the whole market is still a very fluid situation and very, very competitive. So it's, unfortunately, not quite that simple. We do expect to continue to improve things overall, but it is fluid and as I've said, very highly competitive. But there is some truth to what you have said.

And the MSA is not a contractual agreement that guarantees work. It just states the terms that if they call us for work, it's the terms of what they will pay us.

That's right.

That's helpful. And then sequentially, your revenues were up 15%, but that led to an earnings per share increase of about 50%. Is that type of leverage possible or reasonable going forward?

We certainly have -- again, what we are saying here is we still have the ability -- and it will be a challenge -- but we still have the ability to continue to increase revenues, and we should not have to significantly increase our costs, especially on the SG&A line. And even depreciation certainly will be increasing at a slower rate, so there is that capability, yes.

And then pricing, you had mentioned that it did level off towards the end of the quarter. Curious if you have some perspective as to why the pricing seemed to stabilize at the end of the quarter.

No, Bill, that's a hard one to come up with. Yes, it did stabilize, but we want to emphasize pricing is not going up at this point. Maybe it's just the market seeking equilibrium and maybe finding some equilibrium. Probably also less equipment was probably delivered and put into service in the market in the fourth quarter, although that's very hard to get a good grasp on.

And then lastly, just following up on the last questioner's question relative to debt and debt pay down, would it be appropriate to believe that the $156.4 million of debt that you had at the end of the fourth quarter, that that will be the peak number that we will see externally in terms of a quarter-end number going forward?

That's hard to stay. It's our intention and, again, our belief that we will pay it down this year. Can't guarantee you that the end of the first quarter is going to be a lower debt level than it was at the end of the year. But it is our intention at the end of '08 we will have lower debt on our balance sheet than we did at the end of '07.

Great. Thank you, all.

Mike Drickamer, Morgan Keegan.

I just want to follow up on the operating margins. Trying to make sure I have a reasonable assumption going forward here. You guys had pretty nice sequential improvement in the margins. Has all the easy margin improvement been made as far as just improving utilization? How much easy, we will call it, even though I realize it really isn't, margin improvement is there left?

Good question, but it's a hard one.

Easy can come from pricing improvements.

Which we won't expect that in the next quarter.

Right.

No.

I guess interesting question. I guess there is some easy left, but how much is, as you know, it's uncertain. Again, it's a fluid situation and very competitive, but --

I see Technical --

We still have an opportunity to go further with our utilization. We do still have some additional equipment to be delivered as we talked about, which can create some nice leverage, so there's clearly opportunity. How much of that will actually fall to the bottom line, certainly, obviously it will depend on pricing and mix of business and things like that. But we -- dating back to last year, the last couple of quarters, we have been -- everyone here has been disappointed with where we have performed and this fourth quarter indicates a nice trend upward and we're very pleased with that and we still think we have lots of opportunity from here. So to give you a percentage is difficult, but it -- if we perform equally well in the first quarter, I think we could see similar increases in operating profit margin.

I think another point is we -- managing this capital expansion has been a mammoth job for us, probably more difficult than we expected it to be. So that's consumed a lot of our time. Now that we're past that, then it's more of the blocking and tackling of managing our expenses better, so we could see some improvements from that.

So would it be fair to characterize it then saying that you guys would be surprised if you didn't see further margin improvement in the first quarter?

Certainly disappointed.

Great. Thanks a lot, guys.

Joe Hill, Copia Capital.

Congratulations on a good quarter, guys. Just a couple of quick questions for you. How often does the MSA pricing turn over?

Joe, typically the contracts are a year in length. But what our field is telling us now is that sometimes customers are renewing contracts for a shorter period of time, say 90 days or so in certain markets. And some customers are probably, and I can't say this for certain, but some customers are probably just working in the spot market waiting to see where pricing is going to settle out. So it runs the gamut.

Okay. Is the -- I've heard a couple of your competitors talk a lot about the Fayetteville recently. Is that a market where you guys have a year-long contract or a 90-day type of contract?

That's a longer-term contract.

Good. Okay. And my last question has to do with the number of coil snubbing and nitro units you had at the end of the year.

Okay. Let's see. End of the year we had 30 coiled tubing units.

Okay.

We had -- as we counted, 51 nitrogen units.

Okay.

And we had 32 snubbing units.

Okay, so you have actually taken the number of snubbing units down?

Well, that was domestic. I guess we add a couple for -- I apologize. Adding international, probably 34 or 35.

Okay. And your -- people ask a lot about fraq horse power going up, but in terms of the snubbing coil and nitrogen units moving up, what's -- you she talked about $100 million capital budget for this year. What should we be thinking about in terms of capacity ads in those three service lines?

Okay. Let's see.

Part of the equation on the CapEx versus capacity adds is we've made progress payments primarily in '07 toward a lot of equipment, so a fairly large, so the capacity add will be relatively larger than our CapEx then.

Okay.

Yes. We probably have six or seven coiled tubing units coming. I apologize, I don't have a good number for nitrogen or snubbing. Excuse me, I take that back. For snubbing units, we probably have three more coming in '08.

Okay.

Nitrogen -- I'm sorry, I just don't have a good number right now.

Okay. Well I can circle back with you guys later.

Okay.

In some cases, these won't all be new adds to total capacity because we may retire some older units. So we may end up with the same number of units even though the average age will be younger and probably the capacity of the work they can do will be better.

Okay. Well I'll just circle back around with Jim later and hopefully get a better sense of that.

Okay, Joe.

Thanks a lot, guys.

Frank Saldana, Bonanza Capital.

Good quarter. A couple of quick questions. I think yesterday on the BJ call, I think as it relates to pressure pumping, they spoke about pricing continuing to decline at a -- I think they used the term at an accelerating rate. Wanted to see if you guys would share that viewpoint.

And then secondly, is there any more threat or is there a threat of Canadian horsepower coming down here to look for work? I think one of the big pumpers up there had a big miss the other day and business was, although picking up, still pretty slow. So I just wanted to get your thoughts on those two questions.

Frank, this is Jim. We don't see pricing decreasing at an accelerating rate. We see, as Rick characterized it, pricing decreasing at a decreasing rate and kind of, in fact, leveling off right now. Again, I want to emphasize we don't seek one out though. In terms of Canada, we don't really have a presence in that market -- we don't have a presence at all from a pressure pumping point of view. That certainly hurt us in 2007 when Canadian equipment or equipment that was in Canada came to the United States. And so that -- I guess that continues to be a threat if Canada -- I understand Canada is getting stronger, but if it stays weaker, gets weaker, that will be a threat like it was in '07.

Okay. Thank you, guys.

At this time, there are no further questions. I will turn the call back to Jim Landers for closing remarks.

Thank you, operator. Thanks to everyone for listening in this morning and for your questions. Have a good day.

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