RPC Inc (RES) 2009 Q2 法說會逐字稿

Good morning and thank you for joining us for the RPC, Inc.'s second quarter 2009 conference call. Today's call will be hosted by Rick Hubbell, 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 need 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'd 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 which can be found on RPC's website at www.rpc.net.

I also need to inform you in today's earnings release and conference call, we'll 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 provide a reconciliation of EBITDA to net income, the nearest GAAP financial measure. 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 provide one to you immediately.

I will now turn the call over to our President and CEO, Rick Hubble.

Thanks, Jim. This morning, we released our earnings press release for the second quarter that ended June 30, 2009. In a few minutes, Ben Palmer will discuss our financial results in more detail. At this time, I'd like to provide you with a few operational highlights.

The second quarter of 2009 can best be summarized as a continual -- a continued deterioration in the oilfield service industry. Over the last three quarters, the North American rig count has continued to trend downward from 1,721 working rigs at the end of 2008 to 1,039 at the end of the first quarter, and to 917 at the end of the second quarter.

As the number of working rigs continued to decline, the demand for our service fell accordingly. RPC's business has also been negatively impacted by competitive forces that continue to drive higher discounts. While there is recent evidence that pricing in the rig count have begun to stabilize, it is impossible to know exactly when the oilfield service industry will experience improved sequential results.

As I mentioned in the last quarter's conference call, we undertook numerous steps to lessen the impact of this downturn. While these actions did not offset our steep revenue decline, they did help to lessen the impact and increase our cash flow.

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

Thanks, Rick. For the quarter ended June 30, '09, revenues decreased to $127 million, a 40.8% decline compared to the prior year. As in the previous quarter, this decrease was primarily due to lower pricing coupled with lower utilization of our equipment and our personnel.

EBITDA for the second quarter was $13.5 million, a decrease of almost 80%. RPC experienced an operating loss for the quarter of $19.5 million compared to a profit of $37.8 million in the prior year.

Our net loss was $11.6 million, or $0.12 per diluted share. Cost of revenues fell in the second quarter from $120.2 million in the prior year to $91.1 million in the current year. This decrease was due to lower activity levels, lower employment costs, and numerous cost reduction measures instituted during the quarter. However, costs of revenues as a percentage of revenues, increased from 56% last year to 71.7% in '09. This increase was primarily due to lower pricing for our services.

Selling, general and administrative expenses during the quarter decreased 19.4% from $29 million last year to $23.4 million this year because of lower incentive compensation, as well as the impact of our cost reduction efforts. As a percentage of revenues, however, these costs increased from 13.5% last year to 18.4%.

Depreciation and amortization increased 11% from $29.2 million last year to $32.4 million this year due to the additional equipment placed in service during the prior 12 months.

Our Technical Services segment revenues decreased 40.6% primarily due to lower pricing for our services. This segment experienced an operating loss of $15.2 million compared to an operating profit of $32 million in '08.

Revenues in our Support Services segment, which is comprised mainly of our rental tool service line, decreased 42.1%. This segment generated an operating loss of $1.6 million compared to an operating profit of $6.8 million last year. This revenue decrease was due to the lower demand and pricing for our drill pipe and associated tools compared to the prior year, which is consistent with a low rig count.

RPC's second quarter 2009 sequential results reflected a continuation of the trends discussed during last quarter's conference call. RPC's consolidated revenues during the second quarter decreased to $127 million from $176.3 million in the first quarter, which is a 27.9% decline, which is slightly better than the rig count decline of 30.5%. The decline in revenues continues to be the direct result of lower activity levels and the fact that significant discounts have been required to retain our customer business.

Second quarter cost of revenues as a percentage of revenues increased from 62.4% in the first quarter to 71.7% in the second 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 expenses.

All SG&A expenses were reduced by $4.2 million or 15.3% from the prior quarter. SG&A as a percentage of revenues increased from 15.7% to 18.4% as revenues decreased at a faster rate. Our sequential EBITDA decreased 66.8% to $13.5 million compared to $40.6 million in the first quarter.

Our Technical Services segment revenues decreased 27.2% to $110 million and this segment incurred an operating loss of $15.2 million. This revenue decrease was due declines in almost all of our Technical Service lines.

Our Support Services segment experienced a sequential revenue decline of 32.4% to $17 million and an operating loss again of $1.6 million.

Revenues for our rental tools business decreased 36.4% and accounted for the largest portion of the decrease. The decline in the North American rig count led to a significant decrease in the demand for our drill pipe and related handling tools.

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

RPC's outstanding debt at the end of the second quarter was $123.6 million under its credit facility, which matures in the third quarter of 2011. This balance is $50.9 million lower than the debt outstanding at the end of '08. Our ratio of long-term debt to total capitalization was 22.3% at the end of the second quarter.

2009 year-to-date capital expenditures were $43.2 million compared to $101.3 million during the first six months of '08. We expect capital expenditures during the remainder of '09 to be almost exclusively related to maintenance of our existing equipment.

During our first quarter conference call, we discussed head count and other employment cost reductions. I'd like to briefly summarize those results now. We've reduced head count by 18% or approximately 400 employees during the first six months of 2009, the majority of which occurred during the second quarter. Total employment costs in the second quarter decreased 20%, or approximately $13.6 million compared to the first quarter.

And with that, I'll turn it back over to Rick for a few closing comments.

As we announced this morning, the Board of Directors reduced RPC's quarterly dividend from $0.07 to $0.04. This decision reflects our commitment to maintain a liquid balance sheet and strong capital structure that's allowing us to reduce our debt even more in the upcoming quarters. We believe that this is a prudent action given that several comparably sized peers with more aggressive capital structures are struggling in the current operating environment.

Everyone associated with the oil and gas industry understands that the business is cyclical. RPC and its business managers have operated in these cycles for nearly 30 years. As such, we have the experience and commitment to implement whatever steps are necessary to further align our business model with the industry activity levels.

The oil and gas service industry is in a down period. The impact on RPC and its employees continues to be significant. As always, we greatly appreciate our employees' hard work and sacrifice.

I'd like to thank you for joining us on the conference call this morning. And at this time we're available to entertain any questions you may have.

(Operator instructions) Your first question comes from Mike Drickamer with Morgan Keegan.

Hey, good morning, guys.

Good morning.

Ben, thanks for the update on the capital spending. But can you perhaps give us a little more guidance on perhaps what do you expect maintenance CapEx to be for the rest of the year?

We believe that CapEx for the full year's probably going to be $60 million to $70 million.

Okay. I'm not sure you even want to take this one, but when you look at your falling utilization levels, is it a function of your losing bids to other competitors? Or is it a function more of there's just no work out there?

Actually probably a little bit of both. We have several examples where some of our competitors are bidding at what we believe are ridiculously low levels. Maybe some people -- I don't know if it's some combination of people are desperate or they don't understand their costs. We're spending a lot of time trying to make sure we do understand our costs and we are bidding appropriately. Obviously always have to keep in mind in customer relationships and trying to appropriately safeguard your market share.

But we're not going to chase it down into the levels where we're losing cash. And I think there are some people out there that are doing that. And they may not -- probably don't realize it. Or they won't be able to continue to do that very long.

Do you have a sense as to which competitors you're losing the bids to? Is it the larger players in the industry that perhaps have the capital structure where they can maybe squeeze out some players in the market by lower pricing? Or is it smaller competitors who are just trying to stay active?

Mike, this is Jim Landers. It is a larger competitor or two who have a market share gaining strategy. And then it's smaller competitors who either don't understand their costs and trust the market price or are just working in desperation. So, it's really sort of a barbell. It's one or two big ones and a lot of small ones.

And it varies market-to-market.

Yes, correct.

Okay. The press release mentioned that margins were negatively impacted by higher materials requirements for some service intensive work. Is this really a product mix issue, where if you look perhaps you have more of the longer -- larger horsepower fracs, longer stage fracs than previous quarters?

Yes, exactly. It's material costs for the more service intensive pressure pumping work.

Okay. And then I hope you guys can appreciate how challenging our job is in trying to forecast your margin. I can certainly appreciate how hard it is on your side to try to give guidance on it. But is there any sense you can provide us as to where margins may be going here in the third quarter?

Well, let's see now. We don't give much guidance. But I will say we're comfortable in saying that at this very point that things were better at the latter part of the quarter than they were at the beginning of the quarter. And clearly there's no -- there are no clear signs that things are getting better quick for sure. But at least it seems that it has stabilized and maybe gotten -- become slightly better. But that's only a marginal comfort.

So, we're watching it very closely. We hope we found the bottom. We think there may be, as we indicated otherwise, we think there may be some indication of stability in pricing in some cases, but clearly during the quarter there was some crazy discounting going on. So again, maybe we're finding a bottom. Whether and how quickly revenue's going to increase of course is very difficult to predict as we mentioned.

Now, when you say things were better, is it because of -- you got your operating costs finally under control? Or is it because pricing finally started to level off?

That plus activity also being decent -- relatively decent.

All right, guys. That's enough questions for me. Thank you.

All right, Mike. Thank you. We appreciate it.

Your next question comes from Jeff Tillery with Tudor, Pickering, Holt.

Hi, good morning.

Good morning.

Maybe just to stay on the topic in terms of sequential progression through the quarter for a second. You said the end of the quarter better than the beginning. Is that top line and/or margin percentage? Or both? I'm just curious kind of what that means. Are you looking at overall profitability? Are you looking kind of percentage of revenue? Or is it did revenue actually improve in June versus where it was in April or May?

Jeff, this is Jim. A little bit of top line growth but more improvement on the bottom line, however you choose to measure that, simply as a result of our cost control efforts, which started in the second quarter and really had taken hold more -- gotten more traction here in the end of the quarter.

And as you look at the third quarter, could you give us a feel for kind of order magnitude of cost saves that you'll see the full benefit in the third quarter that you didn't see the full benefit of in the second quarter? Kind of however you want to look at that in either basis points on margin or kind of raw dollars.

That is a hard one because there's some things that we aren't completely sure of what the impact is going to be. On the SG&A side, our current plans are that there will be perhaps some more incremental savings but not a lot more. We are looking for more efficiencies on the cost of revenue side simply because of some of the streamlining that we've got going on right now. So, it will not be huge. I think you'll see it more in the cost of services than SG&A.

I think that's right. I think our focus right now is we feel like we took those pretty dramatic steps early in the second quarter. We're right now continuing to pursue and chip away at any particular problem areas. But we think we're at a pretty good level right now as long as things stay the same or improve.

But we clearly have plans to gather -- very detailed plans to gather that if things take another turn down, we'll implement more steps. But implement those contingency plans that I have mentioned. So, right now, so we're looking for more top line improvement, I guess, to bring our results -- to achieve some improvement in our results going forward at this point.

And my last question to know is recognize that the last three or four quarters have progressed, Arkansas' become a very important market for you guys. Given kind of some of the pipeline issues going on day-to-day, are you seeing any increase in wells drilled but not completed in that area particularly? Or are you seeing that those pipeline issues have any impact on your business in that region?

Our field people are telling us that the number of wells being drilled but not completed is a factor, but not necessarily a huge factor. And that it's not -- it has not changed over the past number of quarters. That's kind of the best answer I have for that.

Okay, thank you very much.

Thank you, Jeff.

Your next question comes from Tom Escott with Pritchard Capital.

Good morning, fellows.

Hey, Tom.

With the big bulk of your 18% head count reduction happening during Q2, it seems logical that the financial benefit of that will largely start to show up here in Q3. So, my question is that with as you describe it, business showing some signs of stabilization, plus the benefit of the big head count reduction in Q3, is it possible or logical that Q3 numbers could be better? The loss could be smaller or less than it was in Q2?

Tom, this is Ben. All things being equal, yes. But most of those actions were taken pretty early in the second quarter. So, I would not expect any -- all things being equal yes, but I wouldn't expect there to be significant cost reduction in the third quarter relative to the second quarter.

It sounds like you're saying that you really did get most of the benefit of that already in the second quarter.

For the most part, yes.

I see. Okay. And then you talked about pricing being -- can you put an order of magnitude as you said ridiculous discounts. Is that -- is pricing by some of these companies, is it down like 40%, 50% off of from a year ago?

There are examples of that, yes. I mean the discounts are significant in many cases.

Can you -- from looking at it, do you feel like that the discounts are no worse today than they were one month, two months, or three months ago?

They're worse today.

I'm trying to get a feel if pricing indeed is stabilizing or if it's continuing to go down.

I think we commented and said that we believe there are signs that it has begun to stabilize a bit. So, I think you can say they're no worse today than they were a month or two ago.

Okay, thank you.

Sure.

Thanks, Tom.

Your next question comes from Doug [Garffer] with RBR Capital Market. Doug, your line is open.

Sorry, guys. Had it on mute. Good morning.

Good morning, Doug.

I wanted to follow up on the pricing issue and kind of see which services, whether it's pressure pumping, or coil tubing, or rentals was kind of seeing the most pressure and which one was holding up a little bit better maybe.

Doug, this is Jim. I would say that the pricing issues in pressure pumping are well known. And so that's certainly a highlight. So, pricing in pressure pumping's gotten very harsh. Less so in some of the other ones.

I think recently but not currently pricing in rental tools has gone down, but we have -- we refuse to bid on some of those jobs, so we just sort of know anecdotally but it wouldn't show up in our P&L that pricing in rental tools is especially bad.

So, that's -- that kind of summarizes it. Pressure pumping, rental tools. Those are the areas.

All right, thank you. And my other question is just kind of more strategically in terms of the shift in kind of production of natural gas in the states here. Are there any plans to kind of close facilities in one area and maybe open or expand in other areas and move equipment around? How do you guys plan that for the other side of this cycle?

Well, we've done a little bit of the closing. And we've already moved assets around. So, we'll follow the business where it goes as best we can.

All right. Thank you, guys. I'll turn it back.

Thanks, Doug.

Your next question comes from Andrew Halperin with Beaver Capital Corp.

Hi, morning.

Good morning.

I have two questions here. Are you seeing any particular strength -- first question -- are you seeing any particular strength or weakness in any geographical areas? More so than one versus another?

We do have some exposure to some oil basins, especially out in West Texas. And there are some other examples in other places that we have experienced some improvement there as you expect. The rig count I guess is up by the last six weeks and that's probably more concentrated in the oil related basins. But we have enjoyed that.

And my second question is are you seeing any sort of bias in activity or -- where it's -- where oil, for example, is drilling is stronger and drilling for gas is much weaker?

Yes, the oil plays they have become less weak. There has been some pick up in activity and I'd say on the natural gas side again, that's where the majority of the rig count decline has come from is on the natural gas side. So, there's clearly that pressure, clearly operators are trying to make that decision about when and how much to drill. And I think that's primarily focused on the gas plays.

Would you say that the decline in drilling for natural gas has bottomed out? Are you seeing any signs of stabilization there?

Just looking at the rig count, I would say that it has -- it probably has stabilized at the moment. That doesn't mean it couldn't continue to go down from here. That's part of what we're monitoring very closely. So, we realize that it could take another downturn from here. But we still like at this point, it does -- there seems to be some stabilization.

Thanks very much.

Thank you.

Your next question comes from John Daniel with Simmons & Company.

Good morning, guys.

Hey, John.

I've got two quick ones for you. The first one has to do with capacity. Several of the larger companies have talked about removing capacity from the market. First, do you think that this -- that those actions are a permanent reduction of capacity? And is there something that you guys -- is that something you guys are considering doing as well?

Hey, John, this is Jim. It's hard to say exactly if what the competitors have announced is going to be quote/unquote permanent or not. One thing I would say is that there's less capital coming into this business. We all know that. So, certainly among the smaller and private equity funded people, you wouldn't expect to see a whole raft of new pressure pumping capacity coming from outside capital sources. So, that may serve to keep the fleet a little -- the overall fleet a little more rational. So, that's a possibility.

We are not currently planning to idle any capacity. I mean you know our Company pretty well and know that we have a relatively new fleet. So, it wouldn't be idled due to obsolescence or anything of that nature. Only if the industry really turned down a lot more.

Okay, fair enough. One question that hopefully you guys can comment on. But in the press release you mentioned about some of the companies struggling to remain viable. Presumably a lot of those are the private companies. Can you tell us if you've been shopping any of those companies at this point? And if so, quantify how many are being shopped to you. Obviously without naming names.

Yes. I would characterize it as a small handful, but not that many. We just hear through friends in banking and in oilfield that a lot of -- not a lot, but a number, and perhaps a small number, but a number of companies are struggling because of their aggressive capital structures.

But presumably you would think you'd start to see more of those opportunities in the coming months. Is that fair?

Yes, probably fair. Yes.

All right. Okay, thanks, guys.

Thank you, John.

Your next question comes from Bill Dezellem with Tieton Capital Management.

Thank you. I'd like to start by following up on that last question. What is your interest in acquiring some of these smaller, struggling competitors?

Bill, right now we're not going to be aggressive by any means in trying to buy any of those. If we were able to buy some equipment, maybe at a very attractive discount, we might do that. But certainly not buying any struggling businesses, some of which may be losing cash. That's not something we would be interested in doing at this point. So again, we would not be aggressive in that regard.

And is it your sense that there is equipment that is being idled in the industry? And if so, what's your perspective on just how significant that is?

Just as someone commented on earlier, there's a couple of our larger competitors that have publicly announced that they are doing that. We don't really -- other than what they've announced, we don't have any insight on that. So, I don't know. And we haven't heard many stories from our field personnel of people actually doing that in any significant way at this point.

Okay. That's more what I was looking for is kind of the reality view from the ground rather than just press releases. And then, relative to the technical services lines. I thought in your opening remarks or in response to a question, we heard you say or maybe imply that some of those lines held up reasonably well. And maybe were even near flat. Was that correct? And if so, would you dive into that a bit more, please?

Bill, this is Jim Landers. To say held up reasonably well, I think the better way to characterize that would just be declined by less. I think what we were trying to do is describe the fact that our revenue declined, but declined by less than the rig count. And that was just because of a few of the smaller specialty lines that maybe just sort of held their own. But not terribly relevant from a strategic perspective.

That's helpful. And then finally, would you please discuss what changed with the thought process behind the dividend from the increase that you did last quarter when I think you said things were looking a little more difficult at the beginning of last quarter? Or at the beginning of the quarter, versus cutting a dividend now when you're actually seeing some signs of stabilization?

I think clearly things in the second quarter were significantly worse than the first. And we just think that's the prudent step to take at this point is to reduce it back. We do see stabilization, so we haven't cut it back to zero or anything like that. It's just a bit of cushion and a bit of -- we just think it's a good step to take at this point. It's something obviously that the Board looks at each quarter. And we'll take another look at it over the next two or three quarters and adjust it accordingly.

And sorry for belaboring this, but I guess what I'm more focused on is trying to understand what shifted in your mindset from increasing it three months ago to decreasing it today?

Bill, this is Jim. As we really look at the industry and look at ourselves, and our competitors, and our customers, there are things that are strong about your Company and not strong about your Company and the environment you're in. There are also things you can control and things you cannot control.

There are a lot of things that we can't control in the oil and gas industry. But one thing we can control is our capital structure. And added to that we now see that our capital structure, which is more conservative than many of our peers, both private and public, is a strength at this point.

So, our capital structure is something that's both a relevant strength for us and something we can control. And so, that's what the Board looked at and decided that it would be best in the long-term interests of the Company and the shareholders to strengthen our balance sheet rather than pay out cash dividends at this point.

Thank you both.

Sure, thank you.

Sure, thanks, Bill.

(Operator instructions) Your next question comes from Mike Drickamer with Morgan Keegan.

Hey guys. I wanted to follow up. If you look across the product lines, can you specifically talk about which product lines were perhaps bright spots in the industry? Or for the quarter? Perhaps not as weak as you had expected?

Well, let's see. Mike, you know our Company fairly well. You know that we have a nitrogen service line. And we were able to garner some good industrial nitrogen business during the quarter, which is not necessarily oilfield. It's peripherally related to oilfield, but not necessarily to oilfields. So, nitrogen did fairly well.

We have a specialty service line in the downhole motors and tools division, which has performed strongly and was relatively stronger than some of the others. And we have a few of our small businesses that are in support services that performed relatively better than the rig count or than some of our bigger service lines. So, those are kind of the ones.

How about specifically like snubbing or coil tubing?

Let's see.

Up and down more than the average (inaudible)?

Yes, they were kind of in line.

Okay. You guys talked about perhaps there's some strengths geographically. West Texas because of the strength in oil. Can you talk about what your revenue and perhaps operating margin potential is on an oil well versus a gas well?

Mike, that's a great question.

Am I correct to assume that you have more potential on a gas well than on an oil well?

Yes, I mean because the mix of that kind of work is so different. I mean if you look at us, for example, and you ask me about fracing a gas well, that's a -- for us right now that could be a huge multi-stage directional well somewhere in Arkansas or something. In West Texas, the character of that work is that yes, it's very oily. It's also a lot of older wells that require remedial effort and it's not quite as service intensive or takes as long as a multi-stage well that might happen in the Fayetteville Shale or somewhere like that.

So, I guess without being able to quantify it, we just say that we're happy for our presence in West Texas because of oil. Those West Texas rig counts suffered the most, but have shown a little more stability. But it's really hard to say what's more profitable and what it less profitable. I'm sorry. I understand your question, but --

Okay. Well, if I try to take that out perhaps one step further, is it possible then that in the third quarter we see the rig count rise because of an increase in oil drilling where the natural gas count stays flat then perhaps your revenue continues to fall? Or your -- you don't increase by the same bound as the rig count. Your revenue and/or margins will under perform the rig count numbers because of the oil versus gas mix.

But recall that we do have a significant presence in West Texas.

Okay.

So, if West Texas does better because of oil -- the strength in oil price, and strength in drilling, or the strength in work over activity, we fully intend to participate in that. So, if the price of oil rises and places like West Texas do well, I think that would help our financial results in the upcoming quarters.

It's a good question, but I'm not sure we could quantify it. My guess would be that we would do at least as well as the rig counting.

Okay. All right, guys. Thanks a lot.

All right, Mike. Thank you. Appreciate it.

At this time, there are no further questions. I will now turn the call back over to Jim Landers.

Okay, everyone. We appreciate people calling in to listen and for your questions and the discussion. Thanks a lot and everyone have a good day.

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