RPC Inc (RES) 2009 Q4 法說會逐字稿

Good morning and thank you for joining us for RPC Incorporated's fourth quarter and year-end 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.

At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to advise everyone that this conference call is being recorded.

Jim will 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 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 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'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, which is the nearest GAAP financial measure. I invite you to review that disclosure if you're interested in seeing how it's calculated.

If you have not received our press release, please call us at 404-321-2140. We'll 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, 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 fourth quarter of 2009 marked another quarter in which RPC's consolidated revenues and EBITDA increased compared to the previous quarter. While the North American rig count is still down approximately 42% from this time a year ago, the average rig count during the quarter increased sequentially by approximately 14%.

The rig count increases thus far in 2010, including the latest sequential increase along with higher utilization of our equipment and personnel and firmer pricing in selected markets indicate to us that the oilfield has started a gradual but steady up cycle. We are still concerned about the weakness in the price of natural gas and the large amount of oilfield equipment operating in the market, which we believe will limit pricing increases for our services, at least in the near-term.

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

Thank you, Rick. For the quarter ended December 31, 2009, our revenues decreased to $152.4 million, which is a 33.1% 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 fourth quarter was $26.1 million, a decrease of 61.2%. RPC reported an operating loss for the quarter of $7 million compared to an operating profit of $36.7 million in the prior year. Our net loss was $5.2 million or $0.05 loss per share.

Cost of revenues fell in the fourth quarter from $130.9 million in the prior year to $102.3 million in the current year. This decrease was due to lower activity levels and the impact of our cost reduction efforts over the past year. However, cost of revenues as a percentage of revenues increased from 57.5% last year to 67.1% in 2009. This increase was primarily due to lower pricing for our services and higher costs for certain materials and supplies and fuel, as well as negative leverage on personnel costs.

Selling, general and administrative expenses during the quarter decreased 20.9% from $30.1 million last year to $23.9 million this year, primarily because of lower employment costs. Despite our cost reduction efforts, SG&A costs as a percentage of revenues increased from 13.2% last year to 15.6%, due to significantly lower revenues.

Depreciation and amortization increased 4.6% from $31.5 million last year to $32.9 million this year due to additional equipment placed in service during the prior 12 months.

Our Technical Services segment revenues decreased 27.7%, primarily due to lower pricing for our services coupled with lower utilization. This segment experienced an operating loss of $1.7 million compared to an operating profit of $23.4 million during the same quarter in 2008.

Revenues in our Support Services segment, which is comprised mainly of our rental tools service line, decreased 58.5%. This segment generated an operating loss of $2 million compared to an operating profit of $13.6 million last year. This revenue decrease was primarily due to the lower demand and pricing for our drill pipe and associated tools compared to the prior year.

RPC's fourth quarter 2009 results reflect the continued sequential improvement that began during the third quarter. And now I'll provide just a few sequential comments. Our consolidated revenues during the fourth quarter increased to $152.4 million from $132.2 million in the third quarter; that's a 15.3% increase. And it's a slightly higher than the average sequential rig count increase.

Revenues increased due to higher activity levels, improved job mix and firmer pricing, especially in selected unconventional plays. Fourth quarter cost of revenues as a percentage of revenues decreased from 68.4% in the third quarter to 67.1% in the fourth quarter as a result of leverage of personnel expenses on the higher revenues. SG&A expenses increased $1 million or 4.4% from the prior quarter. However, SG&A as a percentage of revenues decreased from 17.3% to 15.6%, due to leverage from the higher revenues.

Our sequential EBITDA increased 37.4% to $26.1 million in the fourth quarter compared to $19 million in the prior quarter.

Our Technical Services segment revenues increased 16.8% to $135.9 million, and the segment incurred an operating loss of $1.7 million compared to a loss of $9.5 million in the prior quarter. This improvement came primarily from our pressure pumping and downhole tools service lines and coiled tubing as higher equipment and personnel utilization and firmer pricing narrowed the operating loss.

Our Support Services segment experienced a very small sequential revenue increase and incurred an operating loss of $2 million during the fourth quarter compared to a loss of $1.8 million in the third quarter. Our rental tools business generated higher activity, but pricing in this service line remains weak.

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

Now turning a little bit to the balance sheet, our outstanding debt at the end of the fourth quarter was $90.3 million under our credit facility, which matures in September of 2011. This balance is $84.2 million lower than the debt outstanding at the end of '08 and $11.6 million lower than at the end of the third quarter.

Our ratio of long-term debt to total capitalization was 18% at the end of the fourth quarter compared to 28% a year ago.

We are very pleased about achieving our goal of continuing to strengthen our balance sheet during a very difficult part of this oilfield cycle.

Fourth-quarter capital expenditures were only $9.1 million and were almost exclusively maintenance capital expenditures. 2009 CapEx was $67.8 million or 60.2% lower than '08, and we anticipate the 2010 CapEx will be similar to '09 unless we find or create opportunities with extraordinary financial return potential.

During '09 RPC worked to align our costs with the reduced level of revenues without materially impacting our ability to meet customer needs, to strengthen our balance sheet and to prepare for the next up cycle in the industry. Average headcount at the end of the fourth quarter is now 22% lower than at the end of last year and is unchanged from the end of the third quarter. Our operating equipment has been strategically moved to improve or capture specific business opportunities, and we continue to work on our logistics and pricing for some of our key materials and, including proppants.

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

Thanks, Ben. During the last part of 2008 and during the middle of 2009, we experienced the steepest annualized downturn in the domestic oilfield history. It was clearly a time for prudent capital and operational management, and although we reported a loss for the full year, we strengthened our capital position and maintained our operational readiness to participate in what we continue to believe is a business with strong long-term potential. The industry has started to improve, and we are pleased to report incrementally better results and to observe improving industry conditions.

Although the economic recovery appears to be anemic and the prices of oil and natural gas are always volatile, our internal operational metrics give us reason to be optimistic about the near-term. However, we will always be selective about opportunities we pursue and we'll continue to proactively monitor our business.

Thank you for joining us for RPC's conference this morning. At this time we will open up the lines to answer your questions.

(Operator instructions) Jeff Tillery, Tudor Pickering Holt.

The revenue performance for the Company in Q4 was able to keep up with the increase in rig count in the US, sort of a roughly 15% increase for both. Any reason to think that revenue over the next couple of quarters won't similarly track rig count?

Jeff, it has, for -- I think we've done pretty well tracking it or slightly beating it, and we would anticipate that to continue.

And some of the larger players in the stimulation business have talked about selective pricing increases. Could you give us a feel for what you guys are seeing in the field, and just how widespread is it, and what sort of order of magnitude of pricing improvement are you able to experience?

We are probably a little more conservative on comments about that. Activity levels increase before pricing, and we are seeing firmer pricing. To say that there's an across-the-board pricing increase just wouldn't be supportable at this point. I think first quarter looks a lot better for pricing than fourth quarter did. So it's incremental; but, as we've always said, we probably lag the big guys on pricing increases.

I'll follow up on that. I think what we are seeing a lot of is our guys are really getting after it and going out and finding opportunities. Some of them we've already begun to experience in the first quarter. Other of them we are currently evaluating, and certainly we would not pursue them, move equipment or whatever, unless it resulted in better pricing. So we are seeing opportunities. Never does it occur that all opportunities you are presented with come your way and you win them, but we have a lot that we're looking at. And we're going to have opportunities to I think either move our equipment to capture those opportunities or be able to hopefully leverage that, at least if not in the short term, in the intermediate term with our existing customers in the areas where our equipment is located.

How would you characterize the pricing dynamics in the other pieces of technical services, either nitrogen or coil or wireline?

Nitrogen and coil are, by and large in these unconventional plays, are more supportive of pressure pumping. So I think the pricing there is going to probably more follow pressure pumping than really lead, in those two examples.

My last question, just on equipment maintenance -- obviously, the higher horsepower intensity of some of these plays is chewing through equipment faster. Could you give us a feel for what that's doing to your required maintenance spending? And, I think you guys have been clear in the past that you're basically going to spend such that you are able to maintain capacity. Is that still the case?

I'll try to speak to that a little bit. I'll answer the last question first. We fully intend to maintain all of our equipment. We've got plenty of capital to do that, and we think that sets us apart from some of our more aggressively capitalized peers. So we've got the capital to maintain our pressure pumping fleet.

In some of the unconventional plays that you're referring to, some of the ancillary components do get torn up more quickly than they would otherwise. And a very, very ballpark figure is that as a percentage of the pressure pumping unit, capital expenditures are maybe 10% of that total cost, 10% to 12% to 14% of that total cost every year and a half or so. And so that's the incremental capital that you are talking about to keep a pressure pumping unit running in a high-pressure, high pumping rate environment.

Matt Beeby, Morgan Keegan.

You guys had some pretty nice operating margin growth in the technical services segment. I guess that's mostly driven on the cost side, if you are not seeing really much pricing improvement. Do you all anticipate that there are more cost cuts to go, or have we right-sized the cost structure at this point?

If I could just respond quickly, operating margin improvements or cuts in the loss, if you will, come from -- mainly from higher activity in the quarter that we just reported. So it's higher activity first.

We believe we right-sized the business, unless the oilfield takes another downturn. We've done some painful things over the past year. They haven't been fun, but we think they were necessary. And so we've got probably a pretty good cost structure for the current level of activity at this point.

We've created, on to our cost of revenues, our appreciation and our SG&A -- sequentially, there was a lot of leverage that was created off the higher revenues. We didn't have to add a significant number of employees. Certainly, our operating capacity has not changed significantly, and we didn't have much change in the SG&A line. So we were getting positive leverage from, as Jim said, the higher activity, which resulted in increased revenues.

So definitely a larger percentage of that margin improvement was from higher activities, more revenues, less of it from pricing improvement in the fourth quarter.

And you guys, I think, briefly mentioned looking at ways to improve your costs related to proppants. Can you talk about that a little bit more in detail?

Well, maybe not super-detailed, but I think it's just an ongoing effort on our part to establish relationships and getting the logistics, the movement of proppant and so forth in the right places at the right time and coordinating with our customers. So it's really an ongoing effort. There's nothing necessarily immediately on the horizon that's going to have a tremendous impact on our financial results. But it's something that we are making progress with and we'll be focused on it because, as you probably know, there is a tremendous amount of activity that goes into conducting these jobs, especially the unconventional jobs -- again, a lot of logistics, a lot of movement, a great deal of proppant. And so it takes an ongoing focus, and you can just extract some efficiencies in going through that process. But they will be small and incremental, but over time we believe they'll really benefit us.

And then the rental tool business seems to be lagging a little bit. Can you talk about that a little bit more? And is that a function of too much capacity or maybe too much competition?

Activity is up, but pricing is still hard in the rental tool business. It probably is a continued function of capacity in the overall fleet. Activity is up, and it's up as we are going into the first quarter here. But there's just a lot of competition in that business.

And some of it's mix. I guess quarter-over-quarter sequentially, it was pretty flat. But we hope the mix is going to improve. And as the rig count continues to increase, we should capture our fair share of that.

(Operator instructions) Ole Slorer, Morgan Stanley.

I wonder whether you could elaborate a little bit more on the dynamics of the market. Is it uniform, what you see in terms of pricing traction across the various regions where you operate, or is there other certain pockets of strength and relative pockets of weakness if you talk about, let's say, Marcellus versus what's going on in the rest of the North American continent [they're] positioned?

The answer is more the latter, the latter of your two premises, because there some regions in which we operate where things are still competitive. Pricing is still tough and it's been alluded to earlier. We are -- our equipment has wheels, and that's a good thing for us because we are moving it to places where there's relatively more strength. We are also finding that in these unconventional plays where there's more stress on the equipment, sometimes you get to show up and compete simply because you have a significantly larger fleet of equipment. So that's an advantage for us and is working for us.

Some of these other regions, prices of natural gas at the well head are still low and lifting costs may be high. So there's not uniform increases in either activity or pricing firmness among the regions in which we operate.

I'll elaborate on that a little bit. I think there are a lot of dynamics going on. I alluded to it a little bit in my comments, that we are being presented with opportunities to look at providing a significant amount of new project work. But our utilization, as evidenced in the fourth quarter, has improved and we only have a certain amount of that available. So the dynamics are, I think there are new opportunities. We have a lot of, I think, skills and experience that is highly desired in some of these unconventional plays, especially as new operators that don't have experience in these plays come into the market. I think we've been successful, or I know we've been successful at convincing them that we can do as good or a better job than the competition. And that is benefiting us.

We expect that that will result, should result in better pricing also because of, as we alluded to earlier, there is a lot of stress put on the equipment. And we're going to need to find -- we're going to have to have, all things being equal, better pricing to be able to pay for those incremental costs and the cost of that maintenance and the CapEx. So that's something we're pushing on. We're trying to evaluate internally the various opportunities that we have, whether that means, again, staying in an existing market, telling our customers that we have other opportunities; we need to increase pricing or we are going to move the equipment.

So it's good in that we have a lot of difficult decisions to be made. It's good that we have a lot of opportunities to look at. It's bad that there will be difficult decisions that we'll have to make. But in the end, we think everything is headed in the right direction and we think we will be able to see some price improvement in the near-term.

And you see some pricing improvements. Can you talk a little bit about, let's say, the visibility now, the level of inquiries that you have now compared to, let's say, before Christmas? Has there been a marked pickup? Have you changed your strategy at all? My sense when I talked to you guys and others before Christmas was still a very aggressive focus of building a certain backlog. Has that changed now? You sound more relaxed about that need and then more focused on getting paid for what you do. Is that -- has there been a change in your bidding strategy?

I would say yes. And sort of to repeat, I would say that the backlog has begun to build. And as you say, we are and will continue to be selective in trying to manage that and trying to extract, obviously, the best return that we can in the near-term and position ourselves for the intermediate term to really improve returns.

How much capacity do you have available for the first quarter? Is the first quarter now more or less fully booked? Are you stretching into the second quarter, or can you give a little color on -- are you trying to hold back on your backlog building? Or is it a different strategy on different regions?

It's sort of region to region. Some regions are pretty full calendars, and some of the ones that aren't completely full -- again, that's under our control, that maybe we are holding back a little bit for some of those out dates. Some regions are a little bit slower, again, where we have opportunities to maybe move equipment if those opportunities present themselves.

So again, as you opened and alluded to earlier, it's very dynamic right now. And hopefully, the first quarter, second quarter there will be a lot more clarity in terms of where things are settling out and it won't be quite so dynamic other than, hopefully, pricing continuing to firm up.

How much of the first-quarter business did you -- or your volume or your capacity did you book before prices started moving?

Good question. I'm not completely sure we know the answer, Ole, but I would say that since we are booked out farther than we were before Christmas, I would say that a fair amount of our fleet is committed at this point.

Is the first quarter going to be a volume recovery over your infrastructure and the second quarter a margin story, or -- from improved pricing? Or how do you see that dynamic playing out?

That's a good question. Clearly, I think the second quarter will be more pricing. I think the first quarter will be a combination of the two and probably more weighted toward, in terms of what we are saying, more weighted toward additional capacity improvement, some pricing. The second quarter will be more pricing.

And anything that you can say about the exit rate pricing relative to what it was when you started the quarter? Have you heard from, let's say, some of the other service majors that the market didn't really start reacting, or price didn't really start reacting to the improved utilization until, say, December time frame. I just want to try to get some color on how you were exiting in December relative to how you came into October.

It probably did not change a whole lot during the quarter. The exit rate on pricing was certainly firmer than it was at the beginning, but what we are talking about today in terms of being able to see increased pricing coming is really more of a first quarter/second quarter story than fourth quarter, I think.

But there are lots -- again, we are seeing lots of opportunities. Now whether, again, we'll win those and exactly where those land -- so we're really encouraged by that. But obviously, it will be what it will be, once we are able to look back and see. But there are, again, there's opportunities. There's opportunities there, so we are very pleased about that.

You talked about a change in your customer mix, or you alluded to it. Are you making reference to some of the European oil majors that are moving into the shales in partnership with local E&Ps, or how is that affecting the way you are planning your business? Or, are you targeting smaller new companies?

We are staying with the same sort of customer base that we've had, which for us is typically the large independents. So not a change in our customer base during the quarter -- during the fourth quarter or right now, either.

Doug Garber, FBR Capital Markets.

I wanted to follow up on the proppant question, when you guys are trying to secure proppant. I wanted to know if that's more of a logistical operation or if you are trying to develop a frame relationship to secure more proppant in case there's scarce proppant down the road.

We're working on all fronts. And no patented trade secrets, but we'd probably rather not disclose some of those ideas right now, if that's okay.

That's fine. And I also wanted to know, right now, are you guys seeing any scarce proppant shortages currently?

Nothing significant, but clearly we are mindful that it could get that way. So again, that's part of our planning and going through our process. But at the moment, nothing.

My other question has to do with deferred wells from earlier in the year that were completed in the fourth quarter. How much of a benefit do you think that was in the fourth quarter, and do you think that will reverse in the first quarter? And how do you think that will play on your business? And in terms of a portion of the work that you do, how much of that, if you guys know, is from deferred wells versus wells that were drilled in the fourth quarter?

That's a good question. We don't have a good answer for you in terms of -- the answer to your question would be, how many wells we fracked in the fourth quarter that had previously been drilled but now are being completed, and we just don't have that level of detail. I've heard all kinds of numbers, and I know you have too, about -- or a wide variety of numbers -- about how money wells have been out there that are drilled and waiting to be completed. And it's a good question, it really is, because it speaks to what the first quarter ought to be like.

For whatever it's worth, we, probably not unlike everyone else -- there's no -- we're not aware of any fields or customers where that's what we were intensely focused on for any extended length of time. So we are probably not unlike anyone else in that regard.

Yes, that's true, good answer.

Okay, that's helpful. I also wanted to touch base on the Rockies and the North Dakota area in terms of moving capacity. Are you guys still moving capacity out of the Rockies into the Bakken area?

We've already moved capacity out of the Rockies into other areas and are working in the Bakken now. We'd certainly like to increase our presence there, but it's not significant at this point.

There's no further movement of equipment out of the Rockies. That was done sometime ago.

Yes, that's true.

Do you guys have a remaining base in the Rockies, you kept it there, I assume?

Yes.

Yes.

[Mark Rogers], Gagnon Securities.

I was just wondering if you guys were starting to get into the fluid treatment business, the recycling of frac water and the treatment of used frac quarter.

Not as a business; no, sir.

(Operator instructions) Gentlemen, there appear to be no further questions. I'll turn the conference back over to Jim Landers for any additional or closing remarks.

We appreciate everybody who called in and listened today to hear about our fourth quarter and appreciate the questions and the dialogue, as always. Everyone have a good day. Thanks.

Ladies and gentlemen, a replay of this call will be available by accessing RPC Incorporated's website. That does conclude today's conference. Thank you for your participation.