RPC Inc (RES) 2009 Q3 法說會逐字稿

Good morning, and thank you for joining us for RPC, Incorporated's Third Quarter 2009 Earnings 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. (Operator Instructions.) I'd like to advise everyone that this call is being recorded. Jim will get us started by reading the forward-looking disclaimer.

Thank you, Clayton, and good morning, everybody. 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 that in today's earnings release and conference call we may 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, so that's why we use that.

Our press release today and our website provide a reconciliation of EBITDA to net income, which is 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 Hubbell.

Thank you, Jim. This morning we issued our earnings press release for the third quarter ended September 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 third quarter of 2009 marked the first quarter in over a year in which RPC's consolidated net revenues and EBITDA increased over the previous quarter. While the North American rig count is still down approximately 50% from the highs seen one year, average rig count during the third quarter did increase approximately 4% over the average rig count during the second quarter. The rig count at the end of the third quarter was 11% higher than at the beginning of the quarter.

While no one knows for certain if we have seen the bottom of this industry wide downturn, the fact that pricing for our services appear to be stabilizing and the rig count is increasing provides some optimism that better times are ahead for the oil and gas services industry.

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

Thank you, Rick. For the quarter ended September 30, 2009, revenues decreased to 132.2 million, which was a 44.3% decline compared to the prior year. As in the previous several quarters, this decrease was due primarily to lower pricing coupled with lower utilization of our equipment and personnel. EBITDA for the quarter was 19 million, a decrease of almost 75%. RPC experienced an operating loss for the quarter of 14.9 million, compared to an operating profit of 44.2 million in the prior year. Our net loss was 10.4 million or $0.11 per diluted share.

Cost of revenues fell in the third quarter from 134.9 million in the prior year to 90.4 million in the current year. This decrease was due to the impact of lower activity levels, including lower materials and supplies, employment costs, and fleet and transportation, coupled with numerous cost reduction measures implemented throughout 2009. However, cost of revenues as a percentage of revenues increased from 56.9% last year to 68.4% in 2009. This increase was primarily due to lower pricing for our services and to a lesser extent negative leverage related to lower activity levels.

Selling, general, and administrative expenses during the quarter decreased 23% from 29.6 million last year to 22.8 million this year, primarily because of lower employment costs. Despite our cost reduction efforts, SG&A cost as a percentage of revenues increased from 12.5% last year to 17.3% due to significantly lower revenues.

Depreciation and amortization increased 9.3% from 30.4 million last year to 33.3 million this year due to additional equipment placed in service during the prior 12 months. Our technical services segment revenues decreased 42.8% primarily due to lower pricing for our services coupled with lower utilization. This segment experienced an operating loss of 9.5 million, compared to an operating profit of 34.6 million in 2008.

Revenues in our support services segment, which is comprised mainly of our rental tool service line, decreased 53.1%. This segment generated an operating loss of 1.8 million, compared to an operating profit of 10.3 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.

RPC's third quarter of 2009 sequential results reflect an improvement compared to the second quarter. RPC's consolidated revenues during the third quarter increased to 132.2 million from 127 million in the second quarter, a 4% increase, which is consistent with the average sequential rig count increase. Generally, revenues increased due to higher activity levels rather than improved pricing.

Third quarter cost of revenues as a percentage of revenues decreased 4.6% from 71.7% in the second quarter to 68.4% in the third quarter as a result of continued cost reductions coupled with improved leverage on our revenues.

SG&A expenses declined 529,000, or 2.3%, from the prior quarter. SG&A as a percentage of revenues decreased from 18.4% to 17.3% as the full impact of the cost cutting measures implemented throughout 2009 took effect. RPC's sequential EBITDA increased 40.7% to 19 million in the third quarter, compared to 13.5 million in the second quarter.

Our technical services segment revenues increased 5.8% to 116.3 million and the segment incurred an operating loss of 9.5 million, compared to a loss of 15.2 million in the prior quarter. This improvement came primarily from our snubbing, pressure pumping, and downhole tool service lines.

Our support services segment experienced a sequential revenue decline of 7% to 15.8 million and an operating loss of 1.8 million during the third quarter, compared to an operating loss of 1.6 million in the second quarter. At the end of the third quarter, our pressure pumping capacity remained unchanged at approximately 284,000 hydraulic horsepower.

RPC's outstanding debt at the end of the third quarter was 101.9 million under its credit facility, which matures in September of 2011. This balance is 72.6 million lower than the debt outstanding at the end of '08. Our ratio of long term debt to total capitalization was 19.6% at the end of the third quarter, which is a significant decrease compared to 30% at September 30, 2008.

During the quarter, RPC and its banking syndicate entered into an agreement to amend two key components of RPC's credit facility. First, the total commitment was reduced from 296.5 million to 200 million. Second, the numerator of the interest coverage ratio, one of two financial covenants, was changed from EBIT to EBITDA. All other substantive aspects of this facility remained unchanged, including pricing.

2009 year-to-date capital expenditures were 58.7 million, compared to 136.9 million, during the first nine months of '08. We expect capital expenditures in the remainder of 2009 to be almost exclusively of a maintenance nature.

During the bulk of 2009, RPC has been working hard to align its costs with the reduced level of revenues without materially impacting our ability to meet customer needs. Average headcount during the third quarter is now 20% lower than the same period last year and 6% lower than the second quarter. Operating equipment has been strategically relocated to improve business opportunities and the logistics in pricing for some of our key materials, including propants, are improving.

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

Ben, thank you. As Ben mentioned, during the third quarter we renegotiated the terms of our revolving credit facility. This event coupled with RPC's continued focus on reducing the outstanding debt balance provides RPC with adequate liquidity. We believe our capital structure is a strong point for RPC in the current environment. While we have started to see some signs of improvement in the industry, it would be unreasonable of me to tell everybody listening to this call that the downturn is over. The reality is that no one knows for certain when results will get significantly better. However, the downturn has had a real impact on RPC's employees and their families. We greatly appreciate their dedication and sacrifice as we manage through these challenging times.

I'd like to thank you for joining us for RPC's conference call this morning. And at this time, we'll open up the lines to answer any questions you may have.

Thank you. (Operator Instructions.) The first question comes from Jeff Tillery with Tudor Pickering Holt.

Hi. Good morning.

Hey, Jeff.

The press release mentions specifically some international projects. I'm just wondering if you could provide more color on that. Was that a well control issue? Was it snubbing? Just wanted some color on maybe order of magnitude as well as whether you see that recurring in the fourth quarter.

Hey, Jeff. This is Jim. That was a snubbing project that started during the third quarter in New Zealand and it did contribute to our sequential revenue growth. Probably--it was mentioned in the press release because it needed to be, but probably not overly material. It is continuing right now and will continue in the fourth quarter. But our international projects, especially in snubbing and well control, the timing of them is very difficult to figure out. So it was nice to have in the third quarter, will continue in the fourth quarter, but will not be hugely material for us.

In technical services the revenues are up 6% or so sequentially, so obviously other things domestically improved as well. Could you just highlight what business lines are up sequentially?

Sure. We can talk about that in broad terms. Working harder in pressure pumping, but pricing is still down, so that contributed a little bit. Certainly, the international project and snubbing. Our downhole tools and motor service line was helpful. And those kind of highlights.

Okay. In the Fayetteville, did you see any impact on completion activity from some of the pipeline issues that were going on there? Any sort of noticeable change in completion activity in the quarter?

According to our field managers that we discussed that with specifically, the answer is no.

Right. And then, my last question just on the tax rate going forward. The tax benefit was a little lower this quarter than I had modeled. What's the expectation going forward for the rest of this year, and then an early look at 2010?

Well, the full year this year will probably be around 33%. And for next year, historic--and yes, as you know, it's very difficult to predict and it depends on the level of profitability and of taxable income and/or loss based on your permanence and so forth. So historically, recently I guess we've been in the 37 or 38% range. So I'm not giving you a very good answer, but I would say it's going to be from 33 to 38% probably.

Okay. Thank you very much, guys.

Sure.

Thanks, Jeff.

Our next question comes from Mike Drickamer with Morgan Freeman--Keegan.

Thanks. Good morning, guys.

Good morning, Mike.

Rick, looking at pricing across the industry one of the things that's concerned me is the amount of equipment out in the market. Can you discuss perhaps even qualitatively what your thoughts are on the amount of capacity out there right now?

Well, I agree with you. There certainly is a lot and certainly probably significantly more than is needed right now. We have seen some change in the competitive environment. We've seen some competitors exit some of our market. We've seen them move equipment around just like we have. I think everybody is trying very hard to work their equipment as best they can, and we're--and it's a struggle for everybody. Certainly, there won't be any new equipment coming into the business. And I think the demand is just going to have to increase for everybody to use what's out there now. I know that's not very responsive, but that's kind of the lay of the land.

Okay. Yes. And then, one of the issues that has been kind of bullish for the pressure pumping companies is the backlog of wells that's perceived to be out there. It would be great if you could quantify how many wells you think are out there in just backlog of wells drilled but not yet completed. But if not, can you perhaps qualitatively speak about what you think about the backlog of wells?

Well, no, I don't know specifically the exact numbers on the backlog. We are beginning to see some positive things. We're beginning to see some of our schedules fill out for future pumping jobs and that's something we've not seen in a while. So if that's indicative of the demand increasing, I think that is a good sign.

All right. And last one for me, it seems that things are getting better across the industry. What is your mindset at this point? Are you still in a--the industry tended to be in a preservation mode for quite a while there. Are you now looking at the recovery and how to position for the recovery or what's your mindset at this point?

We're certainly not bullish by any means. We had a very aggressive--or at least for us a very aggressive growth plan and we have completed that. And I think we're pleased with how we've been able to work that equipment up to now. So we're just going to take it day to day, month to month, on how we employ that new equipment and certainly have no plans to significantly increase any CapEx or anything like that.

All right. Thanks a lot, guys.

Thanks, Mike.

Our next question comes from John Daniel with Simmons and Company.

Good morning, guys.

Hey, John.

Good morning.

Just a quick follow on from Mike's question. I understand you don't have any plans right now to ramp up your 2010 capital budget. But to the extent that you did have some growth CapEx next year, where would you allocate that money?

Well, just like always, I mean, we'll--in response to the opportunities we see before us, we will--I think as Rick said, we're not currently bullish. I think we're going to continue to focus on blocking and tackling and making tweaks to our business, controlling our costs, trying to get the equipment where we think it can generate the highest cash flow, and continuing to aggressively pursue opportunities. And as they come available, we'll evaluate them and move on them. But we're not going to--we're not going to have any speculative CapEx ahead of where we think the markets or particular service lines are going to move, certainly not past that.

Okay, fair enough. Well, then, my last question is we've heard several of your competitors talk about closing facilities. I don't think you guys have. But to the extent that you operate in an area where a competitor has closed a facility, can you just tell us sort of what's happened in that environment as they leave the market? What--has there been any firming, if you will, in terms of utilization at least and perhaps even pricing? That's it for me.

Hey, John, this is Jim. It's kind of hard to say. I mean, we've--kind of covering the waterfront, with our regions we hear all those same things and know that it's happening. It is probably too soon to tell whether activity is going to firm up. I think activity might be firming up a little bit in some of those areas where competitors have left. But they left for a reason. And they may be more aggressively capitalized than us and they may have had to leave. So I think you're going to see activity maybe firming up, other things equal. But pricing is not yet--and I'll just underline that--pricing is not increasing anywhere due to that or any other factors at this point.

Yes. Said another way, it may be that those people that are moving--sort of paraphrase on what Jim's saying--is I think it's the really marginal players or players who have a very marginal location that are moving out, that they probably weren't doing much work at all. So--.

--Okay.

We're certainly pleased to see that they're moving on and should later provide an opportunity. But we certainly haven't seen an immediate pickup in activity because of those exits.

Okay. That's it for me, guys. Thank you.

Thank you.

Thanks, John.

The next question comes from Doug Garber with FBR Capital Markets.

Good morning, guys.

Good morning, Doug.

I guess I wanted to ask a little bit about the different regions. I wanted to know first in the West Texas Permian area, I know that was an area of strength and you guys had some exposure there. Was that also one of the reasons maybe that your revenue was kind of up sequentially? And also, I wanted to know kind of in the Rockies, are you guys moving capacity out of there? And thirdly, in the Gulf of Mexico market, are you guys seeing any activity or an increase in inquiries for activity over there?

Certainly.

Doug, this is Jim Landers. Let's see, kind of covering those areas, West Texas is an area of strength for us. As the price of oil has come back, we've seen some more activity there. It's maybe a little more one off since people are doing workovers on old oil wells and the sustained price of $60 on oil will prompt them to do some things. So that's been an area of strength.

I think, yes--in West Texas I think, too, I don't know that this quarter that there was enough additional activity to really meaningfully move the numbers. But it does continue to be a relatively nice area for us.

Right. Thank you, Ben. East Texas is a little bit better. Rocky Mountains has been very weak, a very weak gas market. We've moved some--we've moved a lot of equipment from the Rocky Mountains to other places.

In previous quarters.

In previous quarters, yes.

Really no major changes during the current quarter.

Yes.

And then, the Gulf of Mexico.

Seems to be picking up, yes.

I mean, there's some discussion of the Eagleford play and there has been additional--a lot of inquiries about that--of our personnel about our equipment availability.

Yes.

Thank you. And one more follow up. A lot of people have been saying how the pressure pump equipment is going to get more wear and tear with the kind of fracs that we're doing. I was hoping you guys could give a little bit more color on kind of what's going to be in that equipment. Are there certain places that the sand is going to kind of erode the equipment? I'm trying to get a kind of--if you can just kind of replace there in parts or if the overall equipment really has a shorter economic life due to the type of work it's doing. So any color there would be helpful.

Yes. Doug, absolutely. And I guess the poster child for that might be the Haynesville and sort of more quickly in East Texas, because of the pressure on those wells. We've got a lot of people taking a lot of equipment to a job. Our philosophy is to--because we're very strong in that area, in that geography, is to have a lot of equipment, run it at a lower speed and preserve things a little more. But, yes, those high pressure wells, you've got people taking just the amount of equipment that they need and no more. And they're running it at very high speeds and that's wearing things out quickly. Absolutely. That's one (inaudible) on that.

The advantage we have is our fleet is fairly new, so I think that will help us in the short term.

Yes. And I think there are some components of the equipment like the fluid ends that are susceptible to wear and tear and I think everybody tries to work with, again, the right formula, as Jim said, of the right amount of equipment to be pumping at the right gears to try to minimize that impact. But certainly, some of those basins and the type of completion work we're doing, it can be pretty damaging on the equipment. But again, it's more critical components than it is the entire unit.

Okay. So would it be fair to say the equipment still has the same economic life, it will just probably require more maintenance and more spare parts?

I would agree with that.

Yes.

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

Sure.

Thanks, Doug.

(Operator Instructions.) As there are no other questions coming in the queue at this time, I'll turn the call back over to Jim Landers for closing.

Okay. Thank you. Clayton. Thanks to everybody for calling in today and for your questions and the discussion. We appreciate it. Hope everyone has a good day. Thanks again.

This does conclude today's conference. A seven-day replay of today's conference will be available starting October 28, 2009 at 12:00 a.m. Eastern time, and will end November 4, 2009 at 12:00 a.m. Eastern time. The phone number to dial to access this replay, 719-457-0820 or 888-203-1112, and the replay passcode is 4690787. Once again, the phones numbers - 719-457-0820 or 888-203-1112, passcode 4690787. Thank you for your participation.