RPC Inc (RES) 2009 Q1 法說會逐字稿

Good morning, and thank you for joining us for RPC Inc.'s first-quarter 2009 conference call. Today's call will be hosted by Rick Hubble, President and CEO, and Ben Palmer, Chief Financial Officer. Also present is Jim Landers, Vice President of Corporate Finance. 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 have 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 2008 10-K and our other public filings that outline those risks. All of these 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 our 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 reconciliation of EBITDA to net income, which is 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 and would like one, please call us at 404-321-2140, and we will provide one to you immediately.

Now I'm going to turn the call over to our President and CEO, Rick Hubble.

Jim, thank you. This morning, we issued our earnings press release for the first quarter ended March 31, 2009. 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.

The first quarter of 2009 can best be summarized as a period of accelerated reduction in oilfield activities. As the historically rapid rig count decline continued, the demand for our services fell accordingly. Competitive pressures brought on by the decreased customer activity resulted in lower prices for all of our services.

We are now at a point in this downturn where we encounter competitive bids under which we would not recover our variable costs. Unfortunately, there is no certainty in respect to how long this downturn will last and whether business will continue to deteriorate from existing levels.

We take no comfort in the fact that the uncertain times we face are not unlike those of our competitors and other businesses throughout the US economy. We have implemented numerous proactive steps to lessen the impact of this situation as much as possible in an effort to right-size our business. I will discuss these changes following Ben's comments.

With that overview, Ben Palmer, our CFO, will provide some financial details.

Thank you, Rick. For the quarter ended March 31, 2009, revenues decreased 10.6% compared to the prior year to $176.3 million. This decrease was primarily due to lower utilization of equipment and services, coupled with lower pricing for many of those same services.

EBITDA for the first quarter was $40.6 million, a decrease of 23.1%. Operating profit for the quarter was $8.4 million compared to $25.4 million in the prior year. Operating profit includes an increase in depreciation of $4.7 million compared to the prior year.

Net income was $4.5 million, or $0.05 diluted earnings per share, which were both approximately 70% less than the prior year. Cost of revenues for the first quarter were 62.4% of revenues compared to 59.7% in the prior year. This increase as a percentage of revenues was primarily due to pricing falling at a faster rate than direct payroll expenses and materials and supplies, as well as increased maintenance and repair expenses.

Selling, general and administrative expenses during the quarter decreased 2.5% from $28.3 million last year to $27.6 million this year because of lower incentive compensation, cost reduction efforts and lower activity levels. As a percentage of revenues, however, these costs increased from 14.4% last year to 15.7%.

Depreciation and amortization increased from $27.3 million last year to $32 million this year due to the large amount of equipment placed in service during the prior 12 months.

Our Technical Services segment revenues decreased 10.7% due to lower equipment utilization and overall lower pricing. Operating profit decreased 70.3% from $20.7 million to $6.1 million this year, primarily because of accelerated pricing pressure from competition and increased depreciation.

Revenues in our Support Services segment, which is comprised mainly of our rental tools service line, decreased 10%, and operating profit decreased 36.7% compared to the prior year. This revenue decrease is due to the lower demand and pricing for our drill pipe and associated tools compared to the prior year.

RPC's first quarter of 2009 sequential financial results unfortunately reflect the challenges facing the oil and gas services industry. RPC's consolidated revenues during the quarter decreased 22.6%. While this decline was less than the domestic rig count decrease of 29% during the same period, the rate of decline is still very high.

First-quarter cost of revenues as a percentage of revenues increased from 57.5% in the fourth quarter to 62.2% in the first quarter as a result of the pricing and demand for our services falling at a faster rate than direct employment costs, maintenance and repairs and materials and supplies.

SG&A expenses as a percentage of revenues increased from 13.2% to 15.7%, also a result of decreasing revenues. RPC sequential EBITDA decreased 39.6% to $40.6 million in the first quarter compared to $67.2 million in the fourth quarter.

Our Technical Services segment revenues decreased 19.6% to $151.1 million, while operating profits decreased 73.7%. This revenue decrease was primarily due to pressure pumping, coiled tubing and nitrogen.

The operating profit margin fell 66.9% sequentially to 4.1% of revenues. This sharp decline comes on the heels of a 27% decline in the fourth quarter.

Our Support Services segment experienced a sequential revenue decline of 36.7% to $25.1 million and an operating profit decrease of 72.7%. Operating profit margin decreased 56.8% sequentially to 14.7% of revenues.

Revenues for our rental tools and pipe handling and inspection service lines decreased due to a combination of lower activity levels and pricing.

At the end of the first quarter, our pressure pumping capacity remained at approximately 284,000 hydraulic horsepower.

RPC's outstanding debt at the end of the first quarter was $132.5 million under its credit facility, which matures in late 2011. This balance is a reduction of $42 million compared to the end of 2008. Our ratio of long-term debt to total capitalization fell from 28% at the end of '08 to 23% at the end of the first quarter. First-quarter 2009 capital expenditures were $19.4 million versus $33 million in the fourth quarter of '08 and $46 million in the first quarter of '08.

With that, I will turn it back over to Rick for a few closing remarks.

Ben, thank you. As I mentioned earlier, RPC and its managers have taken several significant actions to align costs with the lower level of demand and pricing for our services. Among the steps recently taken that will benefit RPC beginning in the second quarter are a 15% net headcount reduction, pay cuts for most salaried and hourly employees, elimination of all nonessential overtime, restructured job bonus programs, elimination of nonessential vehicles and travel and entertainment, restructured supply contracts and negotiated logistics. Based on the first-quarter run rates, we anticipate these cost reductions will improve our operating margin significantly.

While we are optimistic that these measures will help RPC to remain profitable, we stand vigilant to enact additional measures in the event business continues to deteriorate. These are difficult times. The impact on RPC and its employees has been severe. We appreciate all of our employees' hard work, contributions and sacrifice towards improving the situation.

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

(Operator Instructions) Mike Drickamer, Morgan Keegan.

Rick, did I just hear you say that you expect to remain profitable during this downturn?

Yes -- maybe not quarter to quarter, but for the year, we do.

So you think 2009 will be a profitable year?

We are forecasting that right now.

Okay. And that will come mostly then through cost reductions, correct?

That is correct.

Now, if you look at revenues for the Technical Services division here in the first quarter, certainly it was a challenging quarter, but you guys seem to have fared a little bit better than your competitors. Was there anything special in the quarter, or any reason in particular you can think of why you did better than your competitors in that division?

I think, Mike, that what we've done is we've focused over the last few years on trying to get more exposure to the unconventional plays. And I think we've been successful in doing that. And I think it perhaps maybe -- I'm not familiar in detail with all of our competitors and what they may be doing -- but it may be that we have more exposure to some of those plays and that we realized the benefits of that in the first quarter.

Okay, and then one more. Previous quarters, you've focused on -- did some share buybacks. It seems in the first quarter you focused more on reducing debt. Is that what we should look at going forward or what are your thoughts there?

No -- that is the focus right now, is on trying to reduce the debt.

Thanks, guys. That's it for me.

(Operator Instructions) Tom Escott, Pritchard Capital.

Sort of corollary of that last question on reducing debt. In the quarter, you paid off $40 million, $42 million worth of debt and knocked it down pretty good. But the interest expense was one third of what it was a year ago. It looks like interest dropped way more than the debt had dropped. Is there some glitch in there or some -- you didn't adjust the rate? How did you get the interest down so much more than the debt came down?

Our debt is floating-rate debt. Interest rate -- market interest rates have declined tremendously over the past year.

So it's rate driven, not volume driven?

Mostly, that's correct.

Okay. And has paying off $40 million of debt -- the way things are going now, do you anticipate you are going to be able to knock the debt down at -- that $40 million a clip each quarter here going forward or does that slow down?

A lot of the paydown, we benefited from the fact that working capital decreased, as well. So that -- whatever helped, that contributed to the decrease. So it will depend on where revenue levels go from here. I don't expect we will be able to knock it down $40 million a quarter by any means.

But still and all, you will make a huge dent in this whole debt picture this year then?

Well, that is our hope and our expectation. Obviously, it will depend on the level of cash flow, level of revenues, level of profitability and cash flow. But yes, that is currently our expectation.

You could be nearly getting down to a debt-free company by the end of the year, despite this sloppy year then, couldn't it?

I don't know about that. But I think we will continue to reduce it from here.

Okay, that's it. Thank you.

[Matt Garrett], Tudor, Pickering, Holt.

It's Jeff Tillery here. I just wanted to probe a little bit on the Technical Services division in the quarter. So with revenues down less than 20% sequentially, just listening to your competitors talk on conference calls, pricing for the industry was down about 15% sequentially. So it implies your volumes are more or less flat. Is that consistent with what you guys saw in the quarter?

Our volumes in terms of like number of jobs?

Or utilization on your fleet with the fourth quarter -- compared to the fourth quarter.

It was down, maybe not as much as some of our competitors. But again, some of these unconventional plays maybe have a little bit longer run cycle. So as I indicated earlier, we have benefited from those plays.

And where it's going to go from here, I don't know that anybody knows exactly where the rig count is going to go and how it is going to play out between unconventional and conventional rigs and work. So it's hard to say.

And the comment in the closing remarks on the outlook around margins improving significantly with the cost reductions, that would imply you guys don't see revenues declining in the second quarter very much. Is that how you are thinking about revenues at this point? I'm just curious, with the rig count down around 30% sequentially, I'm just trying to make sure I understand what is going on.

The closing comment about margins and our cost reductions, maybe another way to say that would have been at current run rates, cost reduction efforts that we've taken late in the first quarter and early in the second quarter should have a material impact on our operating margins, again, at current run rates.

Okay, that makes sense.

Yes. So we are not trying to telegraph what we think second-quarter revenues are going to be.

Okay. That makes sense. The cost reduction efforts you have taken to date, could you help us out in terms of how we should think about the dollars associated or percentage associated with fixed costs versus variable costs?

The --

I guess in other words, the cost reductions, has that been facility consolidations, so more or less fixed oriented, or has it been mostly -- and I'm considering labor more of a variable cost --.

Right. Well, it is mostly labor.

Okay.

But labor is in the SG&A line, as well as in direct costs.

Right.

So labor across the board, there have been reductions there.

There's at this point been minimal actual facility impact. Of course, that would be the next thing, depending upon where business activity levels go.

And my last question is just from a product line or a regional standpoint, did you see any -- did anything stand out in the quarter? In other words, did coil have a great quarter relative to pressure pumping, or anything along those lines? Or were the business lines pretty consistent in terms of how they performed relative to each other?

Reasonably consistent. Rental tools probably fell a little faster because it is more directly tied to the rig count. Otherwise, within Support Services, not any meaningful differences.

Okay. Thank you very much, guys.

Rob MacKenzie, FBR Capital.

I thought we had a technical glitch there at the start. On your guidance being profitable this year, can you give us some of the parameters you are assuming within that -- where the rig count ends up, what it does kind of from an industry standpoint?

That -- our forecast of being profitable this year is predicated upon declines in the rig count or industry activity not being too tremendous beyond this point, but continuing to decline some. And it also is predicated on the traction we get on our cost reduction measures, which we feel more certain about our cost reduction measures than we do the rig count, and those have taken place early in the second quarter. So our cost reduction measures, you really wouldn't see in the first-quarter financial results that we published today.

Yes. On those lines, can you give us a feel for kind of either in absolute dollar terms what your initiatives would have helped the first quarter by and/or what margins might have been had these been in place for the full first quarter?

Well, one number I guess we have is just on the pay cut side, based on first-quarter run rates, we estimate that it would have improved operating margins about 3% to 4%. And that is just on salary and wage cuts.

Okay.

So --

And that includes the headcount reduction, as well?

Correct. Salary -- that's right -- salary cuts and headcount. So that is the personnel changes.

One thing I will say, I guess, in terms of us too, the profitability, one thing that we think is critical is that our oil-based locations probably also declined a little sooner than the natural gas related areas. And we believe -- we've heard that if oil can be perceived to be or expected to be firm at 50 or higher, that there will probably be some increase in activity around that in the areas where -- like West Texas, where we have more exposure to oil. So that is one thing we hope will happen, and I think there is some expectation that will happen.

Any specific operators that you've heard talking about the increasing activity out there in the Permian?

Nobody in particular, no.

Okay. And coming back to my earlier question, Jim, so you guys don't have kind of an idea on where you think rig count bottoms?

No, Rob, it's kind of hard. I mean, if you look at the rig count declines that we've had over the past eight months and annualize it, it is the steepest rig count decline in American history. So I wish I knew.

Okay. On pricing for stimulation work, what are you seeing on the leading edge right now? Is it still falling? We've heard a number of anecdotes about stim pricing say in the Haynesville even falling way off from where its peak was, 60%, 70%. Is that consistent with what you guys are seeing?

The pricing environment is still harsh, yes.

But as we indicated in Rick's comments, we are seeing examples where we are seeing bids from some of our competitors where we could not recover our variable cost. So I think that is just an indication that there are examples of where the pricing is crazy. Maybe that means some of our competitors are under severe stress or they don't understand their costs.

So we are watching those situations closely and not falling into that trap, we hope. And -- but hopefully too, that means there is some irrationality now and maybe it will get a bit more rational here in the near term.

Okay. Great. Thanks, guys, for your time.

Bill Dezellem, Tieton Capital Management.

Would you please describe the pricing trends over the last four months? You've mentioned some of the irrationality now, but walk us through starting through January and bring us up to date in terms of how a graph of that would look, please.

If you were to draw a graph of pricing, it would -- on the left side, it would start higher and on the right side it would end lower than where it started. You know --.

There has been -- as we said in our opening comments, there has been a pretty rapid decline in overall. And I would say pricing has fallen even more rapidly than activity at this point. But it's hard to know where it is going to shake out. But Jim is right. It definitely is a downward sloping curve.

Okay. And I guess what was really looking for is has the slope of that line changed, meaning that it has either flattened out or accelerated as we've moved into the latter part of the last four-month period on this picture graph we are creating here, or what does that line look like?

It's kind of hard to say. We don't think that it has gotten a whole lot worse here in the last few weeks, if that's what you're asking.

Exactly.

The first derivative has not yet hit zero, though, either, so --.

And then relative to the shale plays that you folks are participating in and have a noticeable presence in, are you benefiting simply from the timing of rigs coming down, or are you finding the rig count just either is not declining or is not declining as quickly in the shale plays that you are participating in?

It is probably more that the rig count -- the unconventional rig count has not fallen as quickly. So I think we are benefiting from that. And then there are probably -- maybe that more of our customers are a little more committed or staying in a little bit longer. And I don't know if that means we are smart in picking our customers, but it just happens to be that our customers are either better positioned or required to continue to work or are better hedged or whatever. But I don't know that there is anything specific there to point to.

Bill, the rig count declined in the first quarter, obviously, but the unconventional rig count was over 57% of total. That doesn't mean it increased, but it does mean that it decreased by less. So that's just an overall industry comment that you probably have access to, but I just thought I would bring that up.

Then -- exactly. And what we were looking for is specifically those plays that you are in, trying to dial that in even a little bit tighter.

And so let's shift then to utilization of your equipment. And back when business was reasonably strong, that was a challenge that you were having, just due to the issues of bringing up all the new equipment and the timing of those new pieces of equipment coming on. Would you please walk us through how you view your utilization challenges today in light of the environment, and yet having the equipment available, versus when the environment was strong and being challenged to have the right equipment in the right place, please?

Obviously, it is a completely different environment than it was then. I guess net-net, bottom line, the challenges are similar, but just I guess for different reasons. We've had headcount reductions. We are trying to right-size the business. Before, we were trying to have the right equipment and have the employees available to catch the upside. Now, we are trying to have the right number of -- quote, unquote, the right number of employees for the level of activity we are at now, and where we think it is going to be. So it is kind of completely opposite, so it is hard to respond to. I understand your question, but -- both are a challenge, but they are just different types of challenges.

Thank you both for your time.

Let me clarify something that maybe earlier was perceived as guidance on our year. Nine months is a long time in this business, and we have no clue what is going to happen. We can only react to the situation. And the only thing we can do is control our own expenses.

And a profit, if we achieve one this year, is a great goal. If we have a loss, even with the EBITDA we produce, we still will generate a lot of cash. So I don't want to be perceived as guiding that we have great confidence that we'll have a profit this year.

We're trying to get out ahead -- I say ahead of things -- you never can get out ahead of it -- but we are trying to take action as early as possible. We don't want to get too far ahead of things, but we are going to try to react quickly. We have a goal and an expectation right now that we hope we will be able to manage through and remain profitable.

But as Rick said, it will completely depend on activity levels and revenue, how successful we are at keeping our equipment busy, and where it is busy and additional cost cutting measures. So there is a lot of dynamics that go into it. But clearly, that -- as always, our goal is to maximize our profitability, and we hope to be able to remain profitable in 2009. Any further questions?

Mike Drickamer, Morgan Keegan.

Following up a little bit here, one of the reasons you provided for perhaps your performance relative to your peers is your geographic exposure. Can you walk through what your geographic exposure is right now, what shale plays you have more exposure to?

We would just prefer not to, for competitive reasons.

Okay, perhaps I can take it another way. And you guys made a big push into the Fayetteville Shale. Is it fair to say that is perhaps one of your bigger markets?

We work there, yes.

If you look at the product lines you compete in, are there any that were perhaps stronger than average or worse than average during the first quarter, and how have they fared here as we move into the second quarter?

Ben mentioned earlier that our rental tools service line had some declines.

How about like pressure pumping?

Pressure pumping declined as well, maybe by a little bit less. A couple of other service lines that work more in -- that are a little more specialized, a little more people intensive and technically intensive, fared some better, I guess.

How about snubbing?

Snubbing was -- snubbing declined a bit.

Okay. And as you guys focus on balance sheets, do you have any guidance for CapEx for 2009?

We spent about 19 in the first quarter, and we are right now looking at about 80, we think.

80 for all of 2009?

We're going to do everything we can to minimize it, but right now, it is going to be around 80.

Okay. Thanks, guys.

[Matt Garrett], Tudor, Pickering, Holt.

Sorry about that. Do you guys in your Technical Service business have any contracts that guarantee utilization? I'm just trying to understand if -- kind of if there is an ongoing benefit -- differential benefit from rig count for you guys.

In terms of guaranteed utilization. Well, our experience with contracts is it is normally an agreed understanding that they will maintain our utilization as long as they want to maintain our utilization. But -- so it is not guaranteed with respect if they don't want us to work, they are still going to pay us. But we do have some nice contracts that as long as our customer is busy that we will stay reasonably busy.

We have a few smaller international contracts that guarantee utilization.

That's a good point.

Okay. Thank you very much.

(Operator Instructions) There are no further questions. Are there any closing remarks?

I just want to thank everybody for calling in today. We appreciate your interest in our Company and we also appreciate the questions and the dialogue. Everyone have a good day. Thanks.

This concludes today's conference call. You may now disconnect.