RPC Inc (RES) 2008 Q4 法說會逐字稿

Good morning and thank you for joining us for RPC, Inc.'s fourth quarter 2008 conference call. Today's call will be hosted by Rick Hubbell, President and CEO, and Ben Palmer, Chief Financial Officer. Also present we have Jim Landers, (inaudible) Vice President 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. (Operator Instructions). I would like to advise everyone that this conference call is being recorded. Jim will get us started by reading the forward-looking disclaimer.

Thank you and good morning. Before we begin our call today, I want to remind you that in order to talk about our Company, we are going to mention a few things that are not historical facts. Some of the statements that we have 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 2007 10-K and other public filings that outline those risks, all of which can be found on our website at www.rpc.net.

I also need to inform you that in today's earnings release and conference call, we will be referring to EBITDA which is 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 GAAP financial measure. So I invite you to review that disclosure if you are interested in seeing how it is calculated. If you have not received our press release, please call us at 404-321-2140 and we will provide 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, 2008. 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.

First, the fourth quarter of 2008 was characterized by our relatively high although decreasing activity levels and increasing competitive pressures. While the equipment we added during the past several years has allowed RPC to generate record revenues, higher material costs and a difficult pricing environment are increasingly impairing our ability to maintain historical proppant levels.

As I stated during our last quarterly conference call, current macroeconomic factors including the credit crisis, the steep decline in oil and gas prices and the depressed economy are impacting our Company. Like every other industry throughout the country, we face very uncertain economic times.

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

Thanks, Rick. For the quarter ended December 31, 2008, revenues increased 22.4% to $227.8 million compared to the prior year. This increase was due primarily to more revenue producing equipment. EBITDA for the fourth quarter was $67.2 million, an increase of 14.6%. Operating profit for the quarter was $36.7, compared to $34.7 million in the prior year.

Operating profit includes an increase in depreciation of $7.8 million compared to the prior year. Net income was $20.4 million or $0.21 diluted earnings per share, both of which were comparable to 2007. Cost of revenue for the fourth quarter was 57.5% of revenues compared to 54.3% in the prior year. This increase as a percentage of revenues was primarily due to lower pricing coupled with the high cost of critical materials and supplies, partially offset by positive leverage on higher utilization of our work force.

Our selling, general and administrative expenses during the quarter increased 5.5% from $28.6 million last year to $30.1 million this year because of increased personnel and other costs to support higher activity levels. As a percentage of revenues, however, these costs decreased from 15.3% last year to 13.2% due primarily to leverage of these costs over the higher revenues.

Depreciation and amortization increased from $23.7 million last year to $33.5 million this year due to the large amount of equipment placed in service during 2008. Our technical services segment revenues increased 19.5% due to higher capacity and a favorable job mix. Operating profit, however, decreased 25.1% from $29.2 million to $23.4 million this year because of intense pricing pressures and higher cost of proppants.

Revenues in our support services segment which is comprised mainly of our rental tool service line increased 38.3% and operating profit increased 112% compared to the prior year. This revenue increase was due to higher capacity and utilization in rental tools, although pricing has continued to trend downward compared to the prior year.

RPC's fourth-quarter 2008 sequential financial results more accurately reflect the increasing challenges facing the oil and gas services industry. Our consolidated revenues during the quarter decreased sequentially consistent with the domestic rig count decrease of 3.8% primarily due to lower utilization and pricing.

Fourth quarter cost of revenues as a percentage of revenues increased from 56.9% in the third quarter to 57.5% in the fourth quarter, also due to lower revenues.

SG&A expenses as a percentage of revenues increased 70 basis points to 13.2% as a result of the fixed nature of these expenses. RPC's sequential EBITDA decreased 9.5% to $67.2 million in the fourth quarter compared to $74.3 million in the third quarter.

Our technical services segment revenues decreased 7.6% to $188 million while operating profits decreased 32.6%. This revenue decrease was primarily due to pressure pumping, oil tubing, and nitrogen. Operating profit margin fell 27% sequentially to 12.4% of revenues. The sharp decline in operating profits highlights our continued need to manage the business in an environment of decreasing activity levels and further price erosion.

Our Support Services segment experienced a sequential revenue increase of 18% to $39.8 million and an operating profit increase of 31.2%. Operating profit margin rose 11.1% sequentially to 34% of revenues. Revenues for our rental tools and the pipe handling and the inspection service lines increased due to higher activity levels. At the end of the fourth quarter, our pressure pumping capacity remained at approximately 290,000 hydraulic horsepower.

RPC's outstanding debt at year-end was $175 million under its credit facility which matures in late 2011. Our ratio of long-term debt to total capitalization is approximately 28%, which is similar to the last several quarters. And during 2008, RPC repurchased 1.26 million shares of its common stock including 400,000 shares during the fourth quarter. Fourth 2008 capital expenditures were $33 million. Full year '08 expenditures were $170 million compared to $249 million in '07. We expect capital expenditures in 2009 will be significantly less than 2008.

With that, I will turn it back over to Rick.

Ben, thank you. In summary, while the natural gas spot price averaged $9.13 in '08, the price of natural gas averaged only $5.99 in December. Also during the past six months, the average monthly price of West Texas Intermediate has fallen from $133 per barrel in July to $41 in December. These lower commodity prices coupled with the global economic crisis make it difficult to secure financing for new projects or the investment necessary to address accelerated decline rates in existing wells.

Our economy in the oil and gas industry face a catch 22. If the current conditions in the markets lead to a period of underinvestment in the oilfield, then even a short-lived economic downturn could have much longer-term implications. The end result could be a return to tighter commodity supplies and significantly higher prices.

As a result of the economic situations we face, our managers are refocusing their efforts to operate our service lines as efficiently as possible and to implement contingency plans in the event demands and/or pricing deteriorate much further. RPC is committed to being a long-term value-added service provider and we remain vigilant in this uncertain environment.

We are proud of our employees and their performance during 2008. Their dedication and hard work is the reason for our success. I'd like to thank you for joining us this morning for the conference call and at this time, we are happy to entertain any questions you may have.

(Operator Instructions) Jeff Tillery, Tudor, Pickering, Holt.

Good morning. As you think about the first quarter, obviously US activity is going to be down considerably. Just thinking about your regions, West Texas and Oklahoma being significant regions for you guys, and overall US recount down more than 20%, is there any reason your activity would perform much differentially either better or worse than activity?

Jeff, this is Jim. Probably not. I mean, you outlined some important regions for us. You know, what we didn't talk about necessarily in the press release and the conference call script is that as you point out, activity levels are down. Unconventional activity is down somewhat less and as you know we have a presence in some of those areas. So if you mix all that together, you'd probably get us performing about where the rig count is.

Okay, that's helpful. Can you talk a little bit more about pricing? Just where would pricing for -- I know you guys have been reticent in the past to talk about specific businesses but just for RPC in aggregate, where would you put pricing currently versus where it averaged in Q4?

Currently as in the end of January?

Yes, just where we are today.

So we are talking about -- I realize it is the end of January. That is kind of hard to say. I think, you know, it definitely is down some. I'm not able to put -- to quantify it.

I think it's trying to find its place obviously with activity levels changing and declining, you know, everybody is trying to find the right point. So difficult to quantify at this point.

Okay and the support services segment has been a positive surprise versus what I would have expected the last couple quarters. Can you just talk about what drove the increase in the fourth quarter as well as do you think Q4 is the baseline we should be looking at from which '09 declines?

Jeff, just by way of reminder and for others, the majority of Support Services is our rental tools business and it has performed well, so thanks for noticing that. We've got some people who are working hard and we've increased the capacity over the years and it's done well. That business moves with the rig count because it relates more to drilling activity. So I think -- I'm not sure I'd call fourth quarter of '08 a baseline. I think I would think about our Support Services segment more as moving with the rig count fluctuations.

Said another way, there's nothing unusual in the fourth quarter. It's just continued strong performance by many of the service lines that are in that segment. So from that perspective certainly that's a good base number from which to project from.

So with the increase in top line in that segment in the fourth quarter kind of approaching 20%, is that attributable to capacity being added or is it just you guys in a new area or just the current kind of footprint running better?

A little bit of all that. There was not a significant increase in capacity during the quarter. I think it's been fairly steady. I think it was just again normal progression. There was, again, nothing unusual about it in particular.

Than my last question, you mentioned, Ben, CapEx down significantly in '09. I think on the last call you talked about $65 million to $75 million as being a range for maintenance CapEx. Should we think about your CapEx going all the way down to maintenance levels or something in between there and where you were in 2008?

Right now we are trying to manage it down to maintenance CapEx or something just above that. And I think it will be closer to the lower number than certainly where we were in 2008.

Okay, thank you very much.

Mike Drikamer, Morgan Keegan.

Rick, you mentioned in your prepared comments that your managers are refocusing on as efficient as possible operations. Can you kind of discuss what steps are being taken with that? Are you guys closing bases? Are you guys reducing headcount? What's going on with that?

We've done all those things. Primarily we are shifting our equipment to other locations. We haven't closed any base per se. We have reduced the capacity in a few. And then we have reduced headcount.

Now if we geographically look at where you are moving capacity out of, is this areas like the Rocky Mountains? Are you moving it more towards the resource plays? What's going on geographically?

No, you are exactly right. We are moving out of the Rockies into other areas.

Okay, that was my questions, guys. Thanks a lot.

Rob MacKenzie, FBR Capital Markets.

A question for you. If I was to say to you that north of -- US revenues will be down 30% in 2009 from 2008, how should we think about margin compression for each of your different service lines or more specifically just the two main categories you report in that environment?

That would put us at revenues somewhere of $150 million in round numbers.

Right, my question was how should we think about margin compression?

I understand. It's a good question. It depends on why revenue goes down. We're not trying to dodge the question. We probably don't have a great answer for you at this point. The answer will come as we see what first quarter looks like and not just what revenue is but why revenue changes and what kind of cost control measures we're able to put in place. It may not sound all that relevant, but it is. We have been working a lot on our materials and supplies costs, working on profit, which is such a big deal for us in pressure pumping, and are making some successes there.

You know, we had some positive variances in the fourth quarter because fuel prices are going down. So none of those things answer your questions, Rob. I think things are just too fluid now to really --

I think on the Support Services side, clearly that's a much more fixed-price business. That's one reason for the rapid expansion in the operating profit percentage especially sequentially from third to fourth quarter. So I would expect if the revenues declined that much in Support Services, you are going to see a much more significant decline in the margin. And again, the technical services segment is going to depend much on our -- in the mix of the business and types of jobs we are getting. Sorry to be elusive but --

Sure, to try and get closer to an answer, can you give us a feeling for how much of your cost structure you've taken out so far with your initiatives and how much more you have currently planned in terms of reducing your cost base?

We don't really have that quantified in front of us and probably wouldn't share that. You know, a lot of our compensation is variable. Clearly if profitability goes down, that can be -- that certainly will reduce our costs. We are looking at all aspects of the business. We're looking at all aspects of our compensation programs. And as Rick indicated, there are some movement of equipment around and some people have been let go. I think we are in the very, very early throes of it. We have our plans and how much we cut will be dependent upon -- we're going to look at it regularly. But we are not making a decision right now. We don't have a list and the number and saying that is what we are going to do and we're going to do it in 90 days. We are going to try to be prudent about it and not get ahead of ourselves, be aggressive enough but not just try to hit a particular number.

This has been a pretty rapid downturn and we have been through these before. This is not new to us, so unfortunately we have kind of a checklist we go through. But as Ben said, we don't want to do too much and on the other side, we don't want to do too little. So it's a --

Is delicate. It's a balancing process.

I think the quicker it goes down, the harder it goes down, the more strong it's going to come back when that occurs. So we don't want to cut off our nose to spite our face.

Sure, and then I guess my next question follow-up is can you comment on pricing pressure, the magnitude of it in the various product lines? Obviously we have heard a lot about pricing pressure in the pressure pumping market, the stimulation market. Can you go through what you're seeing there and elsewhere please?

Clearly pressure bumping is the one that is having the most pressure. Many of our other ones have actually held up reasonably well. There's a general downward pressure, but the most erosion has occurred in pressure pumping in terms of quantifying it. Jim, do you want to give any color to that?

Yes, it's kind of hard to say because so much of it is business mix, Rob. But the general industry trends we have all heard of apply to us as well, which is, you know, I think what we're seeing right now is sort of a 15% plus pricing decrease, which comes in our operations through increased discounts on our price book. I think that's about what it nets out to.

One opportunity for us -- actually, Jim, referred to this sourcing of some of our critical proppants. We've made some nice progress in that regard. We are being able to get our hands on some high demand proppant. We have actually been able to get what we think will be some decent pricing, so that should provide some support on the margin side for us and so we are pleased about that.

And we've seen some competitors in some areas drop out, too.

That was actually interesting. You mentioned that as well. That was one of my other questions is on proppant, that was something particularly for high strength or ceramic proppants have been very, very tight. What are you seeing there in terms of supply of that loosening up?

Not really seeing anything domestically yet, a little bit. There's a little bit of that that's available. I'm not sure it's necessarily because it's freeing up or whether we've just been able to secure some sources -- find some sources that we previously didn't have. But we are trying to get creative and again, I think we've had some successes and are looking forward to what that can do for us.

Yes, that's a bright spot for us. We made some progress there, so we are happy about that.

Okay, thanks, guys. I will turn it back.

(Operator Instructions) Tom Escott, Pritchard Capital.

Good morning, I am following up on a couple points that were touched on here. The proppant issue you just mentioned, you said you've been getting better pricing on some proppant. I mean are you buying -- is this imported resin-coated that you are getting coming in and is it you're getting like 10% off, 20% off where you were last fall? Help us get an order of magnitude.

Tom, this is Jim. I think we have to leave the comments vague for competitive reasons. We -- it's not so much decreased price as increased availability of high demand stuff. And as you know, many times today winning a job in pressure pumping, one of the items on the checklist is do you have the proppant, not are you trying to get it but do you have it? So that's what we are referring to.

Overall the bottom line is going to be enhanced from what it otherwise would be due to our efforts. I'm afraid I'd just rather not share specifics of where it's coming from and what we are getting.

Thanks, also you mentioned you've got a lot of I think you call it contingency plans in place. Have you already cut headcount already? And then in addition to that, what is your plans to cut headcount in let's say the next 90 days?

Tom, we have cut a little bit, not much. We'll just address -- we don't have any set number that we are trying to hit. We'll just see how business unfolds and we will manage our workforce to whatever that level is.

Hubbell: We are taking a hard look at the business. There has been some reductions that have taken place. You can see on our SG&A line -- the layoffs that Rick has referred to primarily are more location specific, operating location specific. Some on the support SG&A side have occurred to date.

Again, if you look at -- we are talking earlier if you go back to just like four years ago, I think our SG&A as a percentage of revenues was certainly the very high teens and even 20% or 21% of revenues. This latest quarter we are down at 13%. So that indicates we've gotten a lot of good leverage on our increased revenues. That doesn't mean there aren't additional opportunities in that line. But the question is going to be again, how far art is this thing going to fall? How long is it going to stay down and we don't want to get ahead of ourselves.

But we clearly, our managers have been looking and we will continue to apply the pressure for them to look at reducing -- finding every opportunity to reduce costs, be it headcount, be it other types of costs that we have that might be considered variable or unnecessary. That is what we are more focused on right now than just trying to find heads to go.

Okay, I see you have raised the dividend nearly $1 million a quarter. It seems to be a positive signal amongst all of this difficult gloom and doom outlook. Is that a signal that you are -- regardless of how bad things get you are expecting free cash flow to continue to be let's say ample if you will to cover all obligations despite how bad the downturn is?

Yes.

Yes, we think yes. We believe we will be able to manage the business to cover the dividend and we're looking at it as long term. It's been a pattern that we've developed and we as always, we will adjust to the circumstances, but we still think that long-term our business is well positioned and the oil and gas industry is well positioned. There's going to be a lot of work to be done over the coming years to supply commodity to both the US and the whole world economy. So yes, we still feel good about things in the long term.

And there aren't many things we can do to reward our shareholders. Dividends and stock buybacks are the two that we have chosen.

Okay, thank you.

John Daniel, Simmons & Co.

Just a quick housekeeping question. Can you tell us where your current pumping horsepower is today and how much is coming online in '09? I understand you're cutting CapEx, but are there still deliveries to be received?

290 is where we were at the end of -- which is consistent with third quarter, very little change if any, and in '09 -- there's none specifically planned right now so I wouldn't expect that number to change much.

Okay, thanks.

Bill Dezellem, Tieton Capital Management.

Thank you, we have a group of questions. First of all, you in the past have referenced long-term contracts or bigger contracts that you have tried to win. Did you have anything notable in this quarter on the contract win front?

Well, when we refer to a long-term contract, that is not guaranteed work per se. It's more of a longer-term arrangement where if the customer has the work in a particular area, we might get it. So as our customers cut back, that contract really is not binding. But to answer your question, there were none in the fourth quarter that were significant.

None that would move the needle. Certainly we had some successes, but none individually to discuss.

When you aggregate them together, individually they may not have been significant, but when you aggregate them together, were they in total noteworthy?

Not enough to necessarily give you a number to plug into a model or anything like that.

And then an accounting question. If you have idle equipment or equipment that you park for a period of time, do you change the depreciation rate on that equipment?

No.

I'm sorry, I didn't hear.

No, we do not.

And we have not idled any equipment per se.

Right, and then the (multiple speakers)

Even if we did, we would not stop the depreciation.

I'm sorry, I was starting to ask the next question and wasn't listening. Could you --

Rick indicated that we have not stacked any amount of equipment, which is a true statement. And I indicated that even if we did stack equipment -- I'm just confirming -- if we did stack equipments we would not stop the depreciation.

Great, thank you. The next question I'm asking because I guess I'm a little slow here. I am not fully following. On the cost of goods front in the release, there was a reference to the higher profits costs and when I first read that before the call, my initial thought was that that seems contrary to a lower level of activity. And then here on the call, I think you've referenced some success at lowering your proppants cost. There seems to be some things pointing in different directions here. Would you please try to clear up my misunderstanding.

Sure, probably don't have a misunderstanding. Obviously it's a fluid situation. Proppant costs overall have been increasing in recent quarters because of the high demand. I think that continued during the fourth quarter. But as we indicated, we have had some recent success in being able to source some high demand proppant at better prices.

So I guess to answer your question, that's probably more of a go forward. There was maybe some impact in the fourth quarter. But that's more of a go forward than an impact on the fourth quarter because we really talked mostly beginning last quarter that we were looking for additional sources of supply and those have begun to be delivered. And so we will realize more benefit from that going forward.

But would it be fair to say that the higher cost proppants of the past, those were in inventory and that's what you ultimately pulled out of inventory in the fourth quarter, which led to the higher cost and what you are buying now is essentially creating lower cost inventory that you will run through the cost of goods sold in future quarters?

That's a fair statement.

Great, thank you all.

At this time, there are no questions.

This is Jim Landers. I just want to thank everybody for listening and also for your questions. We enjoyed the discussion. Have a good day and thanks again.

Thank you. This concludes today's RPC, Inc.'s fourth-quarter 2008 conference call. You may now disconnect.