RPC Inc (RES) 2011 Q1 法說會逐字稿

Good morning and thank you for joining us for RPC, Inc.' s first quarter 2011 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 those 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 David and good morning. Before we begin our call today, I want to remind you that in order to talk about our Company, we're going to mention a few things that are not historical facts. Some of these 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 2010 10-K and our other public filings, all of which outline those risks, and they can be found on our website at www.Rpc.net.

In today's earnings release and conference call, we will be referring to EBITDA, which is a non-GAAP measure of operating performance. RPC uses EBITDA as a measure of operating performance because it allows us to compare performance consistently over various periods without regard to changes in our capital structure. We are also required to use EBITDA to report compliance with financial covenants under our revolving credit facility. Our press release today and our website provide a reconciliation of EBITDA to net income, which is the nearest GAAP financial measure. Please review that disclosure if you are interested in seeing how it is calculated. If you have not received our press release this morning and would like one, please call us at 404-321-2140 and we'll provide one to you immediately. I'm now going to turn the call over to our President and CEO, Rick Hubbell.

Jim, thank you. This morning we issued our earnings press release for RPC's first quarter ended March 31, 2011. Following my comments, Ben Palmer will discuss our financial results in more detail. During the first quarter of 2011 RPC's employees once again generated record revenues, profits and EBITDA. The first quarter's results reflect continued benefits from increases in horizontal drilling activity and a higher number of stages per well, in addition to accelerating growth in oil rich formations. We are fortunate to have strategically recognized these trends early in the current cycle and have been able to take advantage of the opportunities presented in most of our service lines.

As most of you are aware, many of our competitors are continuing to invest in new equipment. While we too are increasing capacity, the majority of our capital expansion is targeted to meet specific customer opportunities. Despite our large scale capital expansion plans, we strive to balance this growth with financial and operational discipline. We believe that we have been successful in meeting this goal as RPC continues to achieve outstanding results both in terms of return on capital employed and operational margins. With that overview, Ben Palmer, our CFO, will provide some financial details.

Thanks Rick. For the quarter ended March 31, 2011 revenues increased to $381.8 million, a 79.1% increase compared to the prior year. These higher revenues resulted from our work in unconventional formations together with capacity increases, improved pricing and utilization. EBITDA for the first quarter was $146.2 million compared to $55.2 million at the same period last year. And operating profit for the quarter of $106.3 million compared to $22.6 million in 2010. Our net income during the current quarter was $65.5 million or $0.45 diluted earnings per share.

Cost of revenues increased from $129.6 million in the prior year to $201.3 million in the current year. This increase in cost resulted from the higher business activity levels and associated costs including materials and supplies, federal employment costs, and maintenance and repairs. Cost of revenues for the first quarter as a percentage of revenues decreased from 60.8% in the prior year to 52.7% due to improved operational leverage resulting from higher revenues.

Selling, general and administrative expenses during the quarter were $36.1 million, an increase of 29.5% over the prior year of $27.8 million. However, because of our ability to leverage these fixed costs over higher revenues, SG&A cost as a percentage of revenues decreased from 13.1% last year to 9.4%.

Depreciation and amortization was $39.5 million for the first quarter, an increase of $7.3 million over the prior year. This increase is a result of the higher capital expenditures to meet customer demand.

Our technical services segment revenues increased 82.5% due to improved utilization of a larger fleet of equipment and improved pricing. Operating profit was $99.9 million compared to $25 million in the prior year. This improvement was due to higher revenues and the associated leverage of fixed costs.

Revenues in our support services segment, which is comprised mainly of our rental tool service line, increased 48.8%. This segment generated operating profit of $10.5 million compared to $1.9 million last year, primarily due to higher utilization of our rental tools.

For seven consecutive quarters, RPC has generated improved revenues, operating profits and EBITDA.

And now just some sequential comments. In the first quarter of 2011 RPC's consolidated revenues for increased from $328.1 million in the fourth quarter to $381.8 million, a 16.4% increase. Revenues increased from higher activity levels, additional equipment being placed into service and to a lesser extent, improving pricing.

First quarter cost of revenues as a percentage of revenues decreased slightly from 53.2% in the fourth quarter to 52.7% in the first quarter. As we have previously stated, our operating leverage and margins will be impacted by increased costs associated with salaries and wages, materials and supplies, maintenance and repairs, and most recently fuel.

SG&A expenses as a percentage of revenues decreased slightly from 9.6% to 9.4%. Our SG&A as a percentage of revenues has continued to achieve improved leverage over higher revenues. RPC's sequential EBITDA increased 16.8% from $125.2 million in the fourth quarter to $146.2 million in the first quarter, while our EBITDA margin increased slightly to 38.3%.

Our technical services segment revenues increased 18.5% to $349.4 million and generated an operating profit of a $99.9 million compared to an operating profit of $80.6 million in the prior quarter. While most of our service lines within this segment experienced some utilization and pricing improvements, our pressure pumping business generated the majority of the increases from capacity placed in service during the quarter.

Despite the first quarter strong results, our results were negatively impacted by, among others, the weather, some unexpected customer imposed downtime and new fleet startup inefficiencies. During the first quarter, our support services segment experienced a 5.6% sequential revenue decline due to lower demand in our rental tools business, primarily due to weather. Support services operating profits were $9.9 million compared to $10.5 million in the first quarter.

During the first quarter, RPC's pressure pumping fleet in service grew 13% from 413,000 to 465,000 hydraulic horsepower. We expect to have an additional 135,000 horsepower placed in service before the end of calendar year 2011, resulting in total horsepower of approximately 600,000. Almost all of the incremental equipment to be received is either under already under contract or committed to our E&P partners.

First quarter 2011 capital expenditures were $92.3 million and we anticipate spending approximately $350 million for the full year. RPC's outstanding debt under its credit facility at the end of the first quarter was $149.8 million, despite record capital expenditures, increased dividend payouts to our shareholders and the repurchase of 810,000 shares during the current quarter. Our ratio of total debt to total capitalization fell from 21.4% at March 31, 2010 to 20.5% at the end of the current quarter. With that, I'll turn it back over to Rick for a few closing remarks.

Thanks Ben. We are very proud of our first quarter results. Managing RPC's rapid growth is a very difficult task. We are fortunate to have a group of talented and dedicated operational managers, all of whom have been with the company for more than a decade. Their knowledge, foresight and efforts have been indispensible in providing quality services to our customers and effectively managing our risks. These are among the key components for maintaining our high return on capital over a long period.

I'd like to thank you for joining us on this conference call this morning. And at this time, we'll be open to answer any questions you may have.

(Operator instructions) Our first question is from Rob MacKenzie with FBR Capital Markets.

Question for you on the cost front. You mentioned costs were likely to go up due to wages, supplies, fuel, etc. How much of your cost structure either due to contracts or whatever else, is something that ends up getting passed through with a markup to your customers versus you have to force the price increases to absorb that?

We do have that ability, sometimes immediately, sometimes only periodically, but we do have that ability. To give you an exact percentage of how much that is or whatever is a bit difficult. Currently there's probably about 60% of our pressure pumping fleet is under arrangements where that could be the case, where there are provisions to be able to pass through or recognize those price increases or cost increases.

Separately, in terms of tightness of supplies, consumables, what's tighter now, is it sand or is guar perhaps tighter and how do you see that shaping out in terms of availability?

They're both tight. I'm kind of going through the regions and I don't want to expand that too much. I think at this point guar is probably tighter; it depends on the kind of proppant and stuff you're talking about, if you want to make that comparison. But I think guar is tighter for us.

I think to elaborate a little bit, to this point we've not had any significant impact on our results, but we're clearly having to work hard to ensure a steady supply of both of those items. We think we made some nice progress and feel pretty good about it, but I believe it will be an ongoing issue for everybody.

How much have you seen your customers attempt to pre-buy or create buffer stockpiles of proppant and perhaps guar, given the shortages?

Rob, in terms of our customers, no changes this quarter. No trends to report there.

Is that something you're aware is happening or are you just not really seeing it?

I don't believe we're seeing it.

We've not heard an anecdotal evidence of it. It wouldn't surprise me at all that some customers are at least planning forward.

Also on the proppant side, what are you guys seeing in terms of ceramic proppant availability? We've heard some scattered anecdotes that some operators are going to ceramics because they have trouble sourcing sand in some cases. Does that sound realistic?

Don't know that it would be unrealistic. At this point we're not using much in the way of ceramic proppant. That's obviously the customers' choice and we've not run into that so far to any great extent.

Your next question is from Max Barrett with Tudor, Pickering, Holt.

Nice quarter. March was a strong month for your competitors and it appears that that was also the case for you guys. Just curious if you could tell us where technical service EBIT margins exited March?

In commenting on the quarter, yes, March was clearly stronger than January and February. Some of that is the weakness in the earlier months due to the weather. That was weak. March, some of it was we and our customers trying to make up for the slow periods in January and February, so that certainly contributed to March's strength. But we think otherwise there was a lot of fundamental strength throughout the quarter. So clearly margins were much better in March and unfortunately I'm not sure we're going to disclose the intra-quarter margin percentage.

Fair enough, but sticking with technical services margins, kind of given your expectations for pricing and cost inflation, do you now think that peak EBIT margins we saw in 2006 will be achievable this year?

It's certainly possible.

We talked about these price increases and there's a lot of dynamics going on right now but we're achieving obviously very very good leverage on our fixed costs, that's as planned, as expected. On the other side, we may see some gross margin as we define it. Obviously we don't have a gross margin that we disclose on our P&L, but revenues to cost of revenues may go down a bit, but we think clearly margins have improved recently. We think there's every opportunity for that to continue to be the case. But what we're as much focused on, again, is our cash flow as compared to our investment and that is clearly performing very very well, better than prior peaks, so that's the thing we're most focused on is our cash flow against our investment as opposed to our P&L margin. So we're pleased with P&L margins; that's certainly an indicator and something that we focus on as well, but we're more interested in our return on capital and that's clearly at record levels.

Okay and last one from me. You mentioned the $350 million full year CapEx; are there any additional coil tubing units embedded in that number?

Yes Max, there are. Right now it looks like we might add about 4 more, we think. But that depends on timing of deliveries and a few other things.

Your next question is from Neal Dingmann with SunTrust.

A couple of questions, first, obviously you said that a lot of the gain or the majority of the gain was on the pressure pumping side. Just trying to get an idea of when you look at the rental tools or the coil tubing, what type of margin expansion you're seeing there or what you saw late in March and as you're seeing currently on those other segments?

Margin expansion is your question?

Yes sir, on the other segment, like the rental tools and coil tubing. I think we have a pretty good idea of the way you framed it of what we're seeing on pressure pumping. Just kind of curious on some of these other segments, maybe even including rental tools and downhole tools as well as coil tubing, what kind of expansion you're seeing there?

Again, sort of intra-quarter is sort of hard to say from the end of February to the end of March here's what we experienced. Clearly, the results were better with the additional revenues. Sequentially on the quarter basis, those service lines performed well, but not necessarily incrementally a lot better and some of that's very hard to analyze and look at, because of weather and other things. Not giving that as an excuse, but the quarter had a lot of dynamics to it. We're certainly comfortable. We think things are as good and have the opportunity to get better at this point, but I don't know that I would venture so far to know or be able to comment about a specific end of quarter acceleration of margin in those particular services.

But things are still strong, demand is still very strong. There are selected opportunities for pricing improvement, but I think the most important thing is they continue to perform very very well, very strong.

Then turning to pressure pump, I think you said that of the 600,000 you feel you'll have total that most of that is accounted for, then I think one of your competitors even mentioned this morning about the frac supply will not meet the higher demand this year. With all that said, are you now considering putting in additional orders for additional frac horsepower and if so, is that horsepower that would come on then in 2012, are you starting to look at that point?

It's sort of more of an ongoing process that we're going through and again, we're focused, as we indicated, on specific opportunities as you referenced. That's going to drive our thinking much more than trying to guesstimate at what point the overall industry is going to be oversupplied. We're comfortable with our current plans; everything is on schedule with where we anticipated it to be and we're continuously evaluating other opportunities.

There are certain days where we would say that we believe that we were today much bigger than we are that we could clearly get all the equipment working, but we're trying to balance again our operational execution against our growth rate and opportunities that presents itself, so we're trying to be mindful of that as well. We're comfortable where we are right now but continuing to evaluate new opportunities that come along.

Okay and then last question, maybe sort of around that as well as far as continuing to add in some newer areas; are you still looking at adding Bakken, Marcellus, [Nibor], some of these areas or is that more driven by customer demand in some of those areas or would you, given the tightness and the activity level in some of those key areas, would you bring equipment up there or is that more customer driven?

More the latter, I think on pressure pumping expansion. In other words, you just named some great areas, but we're having a lot of success partnering up with customers so we would need the major customer and the agreement in a new location before we went there.

Got it. Great job guys. Thanks.

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

I want to add a little more to the cost questions. I know the focus is on cash flow and return on capital employed, but at this point are you guys modeling margin compression in 2011 or alternatively, do you believe the industry will see margins compressed this year?

I would not expect margins this year to necessarily compress. I think there's still opportunity. Again, we'll have the headwind of the cost increases in implementing new fleets; there's going to be inefficiency there with hiring of employees ahead of equipment being placed in service and things like that, but I don't think we would expect--.

Okay. One of the things that one of your competitors talked about and others have talked about a lot is just the whole issue with finding crews and clearly with all of the startups, particularly in pressure pumping, we're seeing crews being poached now. Can you walk us through how long it would take for you guys to replace a crew if one of yours happened to be stolen, let's just say, and what the potential revenue impact is? How do we think about that, particularly as you have these contracts with customers, if you lose that crew?

John, do you know something we don't? We'd echo any comments up here makes about how hard it is to find people and we're very focused on it right now. How long does it take to recruit, screen, hire and train a crew? We have a pretty good orientation program we think and then mentorship out in the field. That could be two to five months from soup to nuts on an employee. What you also probably know is that for our major customer agreements you can't have too many green hats, so that exacerbates any situation that might otherwise might be a little more handleable.

Yes, it would be very difficult to go out and immediately replace an entire experienced crew. You'd have to go poach somebody else's crew.

I guess Jim, when you think about it, I understand that obviously the business is great right now and margins likely go higher from here, but clearly you and others are not budgeting crews leaving or being stolen from you, but it seems like we had hiccups with one company in Q4, it sounds like another company here in Q1; isn't it a matter of time? It does seem like a realistic issue for everybody.

John, it is a realistic issue, but it's one of those things - it's not in my forecast that we're going to have this and we're doing our best to make this a good place for people to work. I know as we did our quarterly reviews getting ready for this, one comment that came back a lot was we are working to make sure that our employees, while they're working hard and making a lot of money, get some time off. So, we're trying to address quality of life issues to whatever extent we can.

And to that point, that's part of this increasing costs; there's paying people more, to have more people to give people time off, so we are balancing all those issues and we think doing pretty well at it, but it'll be an ongoing issue, especially during these periods of rapid growth.

Fair enough. Last one from me and I'll turn it over for others. With the new horsepower addition, you mentioned it's an ongoing process; should we take that to mean that there are orders placed for 2012 for frac equipment?

Depending upon the timing. We don't at the current time have any orders placed for equipment to come late in 2012.

There are slots reserved though; is that a fair statement?

Yes, that is fair.

Your next question is from Luke Lemoine with Capital One.

Maybe for Jim, could you just give us the percent of revenues from pumping and coil tubing in Q1?

Sure Luke, glad to. Q1 pressure pumping revenue was [55%] of consolidated RPC revenue; coil tubing was around 10%.

And then on the incremental horsepower you added--.

Luke, I'm sorry, I may have given you a bad number for coil tubing. I was right on those numbers, just didn't pronounce them adequately.

And then on the incremental horsepower that was added during the quarter, what was the timing of that in the quarter; January, February, March?

It was probably earlier rather than later. At this point anticipating the question; we don't have a lot to be received in the second quarter. A lot of the increments we're talking about is more a third and fourth quarter.

Your next question is from Andrea Sharkey with Gabelli & Company.

To follow on the pressure pumping horsepower, correct me if I'm wrong, because I may have my numbers wrong, but I was expecting that you guys were going to have about 530,000 horsepower by the end of the year and now you're at 600,000. So I was just wondering if you had incrementally added anything in the past quarter?

First thing to say, what we discussed last quarter I'm pretty sure, is that we'd have our 530,000 hydraulic horsepower number at the end of Q3. There's a little bit of difference there. And what we just discussed was what we expect to have by the end of 2011, so by the end of Q4. I think that reconciles your question.

Yes, that's perfect. I think I missed the end of Q4. I was just curious, it seems like everything's on schedule, but are you seeing any bottlenecks in the equipment flow, is it difficult to get engines, transmissions, anything like that that's sort of holding things up at all?

A market participant answer is yes, probably. We ordered this equipment earlier in the cycle, so we aren't having issues right now, although I know issues exist.

And then in terms of maintenance on the pressure pumping equipment, obviously the shale work is a lot tougher on it; what are you seeing in terms of how often do you have to replace things like engines, transmissions, are there particular components that are wearing out faster than others and then maybe just to put some numbers on it, is there a percentage of say the original equipment cost that is annual maintenance or something like that that you could give us?

The components that wear out the fastest are the fluid ends and the power ends and in high pressure shale plays like the Haynesville, they wear out fairly quickly. It's such a moving target. I completely understand your question. What percentage of the value of the equipment that gets eaten up in maintenance every year. I'm afraid I don't have a great answer for that right now.

Yes, fluid ends are the biggest issue and we have addressed and are addressing that with our -- obviously we're on top of that with our accounting. The engines and transmissions themselves are not ongoing and immediate issues, but we're comfortable with the policies that we have around recognizing the wear and tear on that equipment.

And then I guess maybe on the pricing trend, I know you mentioned in your prepared comments that pricing was an improvement in the quarter but was a lesser extent than in the past or than maybe the other moving parts. So could you just give us what you're seeing in terms of pricing; is that sort of flattening out? Are you getting any pushback? What's going on with customers there?

I think actually sequentially, pricing improvement was kind of nice for us. It might have been in fact a little bit better than we expected. I think that's one thing we found from our reviews. It's a little bit harder to measure right now because the change in character of the business because we have this equipment under contract. But, at this point customer discussions don't relate to pricing, they relate to capabilities and quality of service and whether or not you have people there and can be there. So that's more what the discussions are at this point.

Great. And then one last one for me. Are you doing anything or hearing anything from customers about sort of green or environmentally fracing fluids and would that be something that if a customer asked you for -- well first I guess, is that a customer driven request and then if they ask you for it, would you be able to provide something? I'm just trying to figure out if that's something that maybe in the future would be a factor in winning jobs.

I think the answer is, it is customer driven and driven by us. We know we have a responsibility in that area and our customers also know that, so we are looking at alternatives and we feel comfortable with where we are now and we think we're consistent with the industry.

I'll elaborate a bit on that. We have made - nothing significant, but there have been changes made in the last few months and quarters, so some of that's already reflected in our numbers, so it's not like if we make the shift, the impacts we're not going to see on the margins. It's already sort of baked in to the extent those products are available and we're using them and they're already flowing through.

We're testing other products and other equipment.

Your next question is from William Conroy with Pritchard Capital Partners.

First one is, can you give us a sense even in broad terms of what your regional profile will look like in pressure pumping, either today or at the end of the year?

I have the numbers here. It takes a little bit of adding up to get to it. Actually you want to go with your second question and I'll see if I can put something together real quickly on some of these numbers?

Secondly, y'all have talked a couple of times about the amount of contracting that you do or that the capacity coming on is accounted for whether it's a formal contract or not, but obviously the message coming across is that you're not dumping capacity into the spot market. How will your customer concentration look, do you expect, by the end of the year? You had one reportable customer last year. Should we anticipate another one and how does that affect things like pricing, etc. if you've got more concentration?

We will have more concentration; it's already happening. We've always historically had though a very very -- Chesapeake is one that we have disclosed the last couple of years. It's hard not for them to be among the biggest just because they're so big relative to the industry. So concentration has begun. It's something obviously that we anticipated and we welcome, because of the strength of the particular partners that we're dealing with. We think that by the time we get to the end of the year, there's a possibility that there may be others that we have to disclose, but again they'd be strong partners and ones we would be proud to disclose, even though we'd rather not, but that's a requirement.

Relative to pricing, again, we're structuring these contracts as hopefully a win-win situation. Obviously we have a little bit more of the upper hand at this point, given where the demand and capacity is right now, but it is structured and managed to be a win-win situation with our selected partners.

If I could follow-up on that pricing comment and some of the earlier commentary, can you say that on a like for like basis that contract pricing continues to increase?

Again, we got into this very very early, so I think it is very safe to say that the more recent contracts and upcoming contracts are more attractively priced than our earlier contracts.

Bill, thanks for your patience. I'm going to come back to you with some sort of rough percentages on say a quarter or two from now and actually the percent distribution doesn't change a whole lot from what you and others might know. But call it 20% each in Haynesville, Permian and Marcellus; another 10% in the Fayetteville; another -- and I hope this adds up to 100 -- another 10 or 20% in the Eagle Ford and at this point no new regions for us from a pressure pumping point of view.

That's exactly what I was looking for, Jim. Thank you.

Your next question is from Dimitry Dayen with Goldman Sachs.

As you're making decisions about how much capacity to add for 2012 and considering the type product lines, we're probably at that time of the year where those conversations are being held. Are you considering adding capacity only if you can get a contract to back that up or considering how tight the market is you would consider adding on spec as well, even in existing areas?

On pressure pumping there'd have to be a very high likelihood, firm discussions with our partners to add anymore at this very point - that's on pressure pumping. On the other service lines, the contracts aren't as firm, as deep, as well-defined as the pressure pumping contracts, so that by definition I guess could be more speculative. But, the same thing, I mean part of our philosophy is we're driven by those conversations with customers. We like to think that we very rarely are speculative in terms of our additions to capacity. That's easy to describe but it really is the case. We like to have pretty firm commitments from customers before we make the type of commitment, especially at this point in the cycle.

And as you speak to your customers, is your sense that they're willing to make those commitments to drive increased capacity for themselves in 2012 or is it too early to tell?

I think present trends continue. I think they're still going to talk about commitments on both sides.

Makes sense. In terms of what you're hearing from your suppliers, is it still about $1,000 a horsepower to build for 2012?

Dimitry, we're a little more conservative because we kind of try to think of an all-in inclusive price and we use more like $1,400 a hydraulic horsepower.

But in terms of change in pricing, it's more the timeframe of delivery than it is price. It's more sensitive to delivery time than it is price at this point.

Got it. One question unrelated maybe on Chesapeake and the Marcellus; are you impacted at all by their temporary pause in fracing activity?

In the Marcellus?

Yes.

No.

Chesapeake is our largest customer, but we don't do frac work for them anymore.

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

Just one quick follow-up. The 135,000 horsepower that is expected to be delivered and I understand frac spreads can be loosey-goosey depending on where you send the equipment, but conceptually at this point, how many frac spreads do you expect that will represent?

It's obviously region specific, John.

I would say about 3, but probably some backup.

Fair enough. Then just on the share repurchase, is that something you guys expect to continue this year or is that more or less a one-off Q1 event?

We view it much more opportunistically. Good question, appropriate question, but I would say it's just that. We're opportunistic in terms of the buying.

We weigh a lot of different factors and current market price of the stock is one of those.

(Operator instructions) We have no further questions in queue at this time. I'd like to turn the conference back over to Mr. Jim Landers for any closing remarks.

Thank you David. I want to thank everybody who joined in on the call this morning. We appreciate your interest and your questions. We enjoyed the discussion. We hope everybody has day. Thank you.

That does conclude today's conference. As a reminder, today's conference will be replayed on our website at www.RPC.net within two hours following the completion of today's call. Thank you for your participation.