RPC Inc (RES) 2013 Q3 法說會逐字稿

Good morning, and thank you for joining us for the RPC's third-quarter 2013 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 would like to advise everyone that this call is being recorded today. Jim, will you get us started by reading the forward-looking disclaimer?

Thank you, Mary. Good morning, everybody. 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 the statements that we 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 2012 10-K and other public filings that outline those risks, all of which can be found on RPC's website at www.RPC.net. Also in today's earnings release and conference call, we have referred and 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, the nearest GAAP financial measure. Please review that disclosure if you're interested in seeing how it's calculated. If you have not received our press release for any reason, please visit our website www.RPC.net to view a copy.

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 RPC's third quarter of 2013. Following my comments, Ben Palmer will discuss our financial results in more detail. In this highly competitive environment, we are pleased to report a 4% year-over-year increase in RPC's third-quarter revenues. The third quarter of 2013 marked our first year-over-year revenue increases since the second quarter of 2012. Our quarter was highlighted by strong operational execution and service-intensive completion activities, which resulted in higher utilization of our personnel and equipment.

A lackluster natural gas drilling environment has created a geographical concentration of service providers in active basins and continues to pressure pricing for our services. Our CFO, Ben Palmer, will now review our financial results in detail for the third quarter of 2013.

Thank you, Rick. Year-over-year results are covered in the press release. I'll just focus my comments now on the sequential results.

RPC's third-quarter consolidated revenues increased from $457.6 million in the second quarter to $491.1 million, an increase of 7.3%, due to higher activity levels in our larger service lines. Our earnings per share for the third quarter were $0.25 compared to $0.19 in the second quarter. Cost of revenues increased from $287.6 million in the prior quarter to $303.7 million, due to increased activity levels and corresponding increases in materials and supplies expense and employment costs. Cost of revenues as a percentage of revenues improved from 62.8% in the second quarter to 61.8% in the third quarter, due primarily to higher utilization and improved job mix.

SG&A expenses as a percentage of revenues were 9.6% in the third quarter, an improvement compared to 10.4% in the second quarter. This decrease was due primarily to leverage of higher revenues over fixed costs coupled with sequentially lower bad debt expense. RPC's sequential EBITDA increased 16.5% from $120.4 million in the second quarter to $140.3 million in the third quarter. Our EBITDA margin improved from 26.3% to 28.6%.

Our technical services segment generated revenues of $458.2 million, 8.1% higher than revenues of $424 million in the prior quarter. Operating profit of $86.2 million compared to $66.1 million in the second quarter. Our operating margin in this segment increased from 15.6% of revenues in the second quarter to 18.8%.

Many of our service lines within this segment experienced improved utilization, however, the pricing environment remained challenging. Revenues in our support services segment decreased 1.7%, due primarily to highly competitive pricing within our rental tools business. Support services operating profit decreased to $6 million in the third quarter compared to $7.1 million in the second quarter. Our operating margin in this segment decreased from 21.1% of revenues in the second quarter to 18.3%.

RPC's pressure-pumping fleet during the quarter increased by 30,000 hydraulic horsepower to approximately 710,000. This equipment did not generate revenue during the third quarter, but is prepared to work in the fourth quarter in the Permian basin and the Bakken.

Third-quarter 2013 capital expenditures were $51.4 million, a decrease of $4.1 million compared to the second quarter. Currently, we expect capital expenditures for full-year 2013 to be approximately $225 million. A significant portion of our total capital expenditures continues to be directed towards capitalized maintenance of our pressure-pumping fleet and other operating and support equipment.

RPC's outstanding debt under its credit facility at the end of the third quarter was $51.4 million. The balance decreased by $15.8 million compared to the end of the second quarter. Our ratio of debt-to-total capitalization is 5.1%, which is the lowest level in the 7 years that we have utilized outside capital.

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

Thank you, Ben. Our customers continue to drill and complete increasingly service-intensive wells. This provides greater opportunities for our equipment and personnel to remain on the job sites for longer periods and provide more services. As we have discussed before, the service industry is currently burdened by over-capacity. However, we believe the pace of new equipment additions has slowed significantly and many of our aggressively capitalized competitors cannot afford to adequately maintain their equipment. Until these developments influence day-to-day pricing negotiations, it is unrealistic to expect RPC to generate consistently improving sequential results.

For the remainder of 2013, we believe our industry will remain in a mild cyclical downturn categorized by flat rig count, competitive pricing, and a seasonal slowdown. We are encouraged by higher well counts, increased net footage, and greater service intensity, all of which positively impact business prospects. The quality of RPC's equipment and personnel allows us to successfully compete and benefit from these market trends.

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

(Operator Instructions)

Neal Dingmann, SunTrust.

I'd say nice quarter.

Thanks, Neal.

I was wondering, guys, obviously we know there's still, the capacity that's out there. I know you guys have been pretty opportunistic as far as when you added that one spread not long ago. My question would be if you continue to see deals like that, number one, is that something you're interested in? Would have to be equipment that's already being put to work? I'm just wondering your thought process when you look at some of this maybe potential equipment that's out there?

I think, Neal, -- this is Ben. At the right price, certainly, we're interested. I don't believe that equipment would become available that would be working on any sort of consistent basis. I don't think that would be factored into our decision about whether we would buy it or not. Yes, if it's at a good price and there are, as we've kind of alluded to here, there have been other opportunities presented, small groups of equipment, spreads of equipment over here and there, and we are looking at those opportunities.

Okay. Then, obviously, you all have an obviously a great reputation -- I'm talked to operators such as in the Eagle Ford that will only use you guys now. I'm wondering, as you go to other areas, like if you would look at Utica or some areas where you don't have as big a presence, would you only grow if you would move there with an operator that you're already using? Or would you guys would like one of these spreads or some of this equipment that you're adding, would you just decide to up and go there without having to a contract in place?

Neal, this is Jim. Our preference, our strong preference, is to go somewhere where we have a customer waiting for us who is going to use us. Historically, that's always work better for us. I appreciate your comment about a reputation. We hope and believe that that spreads throughout the oil-field, but is still a very regionalized business from a customer point of view. So, you really do have to prove yourself if you go in without a strong customer relationship. Our preference is to have a customer relationship.

Okay.

This is Ben, again. With pricing and conditions as competitive as they are, it's very difficult to lock up long-term relationships. I'm not sure we'd want to do that on a fixed-price basis at this point. Hopefully, we're bottoming out, and we certainly wouldn't want to commit for the long term unless it was an attractive price, which, again, in this environment would be difficult to attain. It continues to be very, very competitive. We are very pleased with our results and are glad that we have had some improvement, sequentially and year over year, but it's still tough out there.

Okay. Last question, if I could? A smaller unit -- I know you guys been pretty decent in the snubbing side and I know some of these we continue to hear about more and more wells with higher pressure. I'm just wondering, just the snubbing business in general, Ben, what you view as far as the outlook for that? Has it changed much, in your opinion, from what you can see? It just seems like operators that I talk to, whether it's a TMS or Utica, some of these newer players are mentioning that, again, when they pull the fracs and do some of these things they're now thinking they're just going to go in and use snubbing initially. I'm just wondering if you're starting to see that yet, or if that's something that we potentially could see more of a 2014 event?

We haven't seen it to any significant degree. Snubbing recently has shown a little bit of an improvement and we're encouraged by that. I think it's more from trying to focus on larger, more special situations rather than just making the equipment available. Snubbing, in many cases, is an alternative to other solutions and many times it's not the cheaper solution.

I think we're trying to focus on specialized applications, which are much more suited, I think, to our -- we think we have a very experienced, very capable group of people within our snubbing service line. I think those specialty opportunities are what's really going to carry snubbing for a while. We're certainly available and willing and would love to and do some of the type of work you're referring to. Yet, it has not yet taken hold to be something that's producing any consistent business for us.

Great, guys, appreciate the comments.

John Daniel, Simmons & Company.

Hey, guys, good quarter.

Thanks, John.

First, just want to get a sense on the equipment utilization for your frac fleet. How do you guys measure it internally? Where's that rate today? Just as a follow up, what percent of the frac fleet did not work at all in Q3? Anything there would be helpful?

Hey, John, this is Jim. As you know, measurement of utilization is difficult with pressure pumping equipment given the changing nature of the business over the past seven years. We all know that, bust just as a baseline. But, got to give you an answer. If 3Q of 2011 was effectively 100% utilization, we probably got down to 70% and now we're back up to 80%. The numerator and the denominator there are just determined by the benchmarking of a good peak time, so that's where we are. We didn't have any equipment that didn't work during the quarter. However, the Marcellus did slow down a good bit towards the end of the quarter.

Okay. So, if everything effectively worked at some point, does that give you confidence to think that the 30,000 horsepower you got in Q3 will go to work in Q4? If so, do you already have a crew lined up for that?

As Ben mentioned part of it's going to the Permian and we are very confident that it will work in the fourth quarter. The other part that's going to the Bakken is going to generate revenue. We expect to generate revenue. It will supplement an existing fleet there. It will make an existing fleet bigger, which will allow us to compete more effectively for some bigger and more important jobs. We have employees for both of those collections of assets.

Okay. That incremental equipment, does that help -- I know you don't want to hang your hat too much on this continued sequential gains in revenue given the choppiness, but does that incremental fleet addition or equipment need to better revenues in Q4? Or does the seasonality offset that?

We are -- John, this is Ben. From listening to our customers, we think there is going to be a seasonal impact this year. There was last year. In this type of environment where things are not solidly and absolutely progressing forward, my experience says that in that environment, and based on what we are hearing, and it lead that I think there will be a fourth-quarter slowdown. I think last year, first-quarter 2013 did not come back as quickly as many people expected, including us. We're more confident that our customers will get back to work early in 2014. I think there is some bit of momentum, but it's just not so strong that everybody's says, well, we can't slowdown now. I think they will slowdown in the fourth quarter, but they'll be prepared to start back up early next year.

Okay. Last quick one for me. What percent of the frac fleet today is dual-fuel capable? What are doing going forward in terms of adding more kits or so forth to add that capability? Thank you

John, this is Jim again. A minimal amount of our pressure-pumping fleet is dual-fuel capable. We did it at the request of a customer and are glad that we did it. Future conversions to dual-fuel capability will be at the request of and in cooperation with the customer. We anticipate that to be small, at this point.

Okay. Thanks, guys.

Luke Lemoine, Capital One Securities.

Jim, could you give us the splits of revenues between pressure pumping and coil tubing?

Sure, Luke, glad to. This is for the third quarter. Pressure pumping was a little over 55% of revenue, 55.3%. Coil tubing was a 8.8% of revenue, and Thru Tubing Solutions, our down hole motors and tools division, was 15.4% of revenue.

Okay. Then on the pressure pumping increase, it looks like revenues increased about $22 million here. You talked about better scheduling, better job mix. What portion of that was better job mix and just better scheduling?

Well, better job mix accounted for not quite half of that. The rest of it was probably better scheduling, higher utilization kind of thing.

Okay. Then, do you still have to crews on 24/7?

Available for 24/7, yes. Don't infer from that that they are working 24 hours a day all the time. They are available for it.

Okay. So, the job mix was mainly maybe Permian going from vertical to horizontal, more so?

That was one of them we also had a nice quarter in the Eagle Ford as well, and in the mid continent we did a lot better in third quarter than we've done in previous quarters.

I think one of the things -- let me comment on that. One of the things I think we pride ourselves on is trying to tell it like it is. People, I think it was John earlier, referred to the choppiness of the business right now and that's what we've been talking a lot about and I think that's the way it is. We did have, obviously by our results, had some nice successes during the quarter. Again, wish I could say that those were long-term commitments and they were locked in and we had backlogs of work and everything else that are guaranteed going forward, and that is not the case. So, the work is still very choppy. We referred in our press release about the geographical concentration of equipment with service companies in these active basins.

It's important to point out, too, that even within the geographical locations, there's concentration of the work because of the multi-well pads. It just makes it very difficult, especially in this competitive environment, because of the concentration it's very difficult to be absolutely confident that you're going to have steady and steadily improving utilization. Now, we're out there competing every day. Again, this indicates that we've done well. We're pleased with it. Compared to some others people that have reported, I think the results are good. But, it's still, it's a real challenge. We recognize that and continuing to work on trying to address those issues and position ourselves as well as possible to be able to obviously win as much of that work as possible and be as highly utilized as we can be. Again, it still remains very competitive.

Okay, got it. Then, in the Permian, how many crews do you have that are from time to time doing horizontal work?

This is Jim. That is a great question. I don't have a really good answer, but it is substantial. It is probably mirrors the basin at this point, which would be in the 40% range. I may come back to you with a different answer during our conversation here, but yes that's about right.

Okay. Then the new 30,000 horsepower in 4Q, should we model that coming in around mid 4Q? Is that a fair assumption?

Yes, I think that's fair. Fourth quarter is a bad time to put equipment to work, especially in North Dakota with the winter issues, but, yes, we've got to step up and say it's going to generate revenue. Mid quarter is fine.

Okay. Great. Thank you.

Michael Cerasoli, Goldman Sachs.

We're hearing that you're expect this new horsepower to work in 4Q despite the seasonal slowdown. Also, you just made that comment about the Bakken. Then you made the comment earlier about a customer's getting back to work earlier in 2014 then they did last year. Then, the utilization measures you talk to are up from the trough to about 80%.

What does this tell us in terms of the market? Are you guys getting pricing power back? I realize that's not something that's going to happen in the next quarter or two. Using your utilization measures, is this something we need to see sustainably above 80%, or should we be looking for something higher as a threshold?

Mike, this is Jim. I think sustainably above 80% would be a good way to get some pricing power. The other factor, Rick mentioned it in his comments and we've talked about in our discussions, is that new equipment additions are slowing. We do feel, without throwing stones at anybody, that some of our smaller competitors who are more aggressively capitalized cannot maintain their equipment. So, they're having to park it or cannibalize parts from one unit to go somewhere else. We think that's going to help, also, but it's going to take time.

Will we get pricing power back in a couple quarters? Hope so. Some people say it would be sooner than that, but I think a safe assumption might be a couple of quarters, mid 2014. Let us get through the whatever seasonal slowdown we have and get through the first quarter.

We said before, a very definitive thing that would help us is if the demand in the natural gas basins were to pick up at all, I think that will have a tremendous benefit, for everyone, from a pricing perspective.

Okay. Then on that same line of questioning, just thinking about the Permian. Does the Permian, would that be the region's play that gets pricing power pricing power back first? Or is the market still so fluid that equipment could come in from other areas? Or is it still coming in from other areas to hold that market back, and it's one of those things where maybe the less attractive place because the equipment might be leaving, might have the opportunity to get pricing power back before say a more active play like the Permian?

The Permian is probably the place where it would come back first.

Okay. My last question, it would just be on getting a little bit more color and coiled tubing. If you could just give us some little bit more market color on how that asset class is shaping up? Are we -- I guess what you're seeing in terms of demand for the varying diameters as well as for the asset class itself?

Yes, Mike. Sequentially, coiled tubing's revenue change was fairly flat. Job mix helped our revenue per day measure. Utilization was down a touch. We all know that there have been a lot of coiled tubing that's come on the market recently, but there's a lot of needs for coil tubing. That seems to be counteracting it at this point, at least. The demand right now is really for the 2 inch coil tubing units. We have some 2 and 3/8 inch coil tubing units as well that we use, but the demand seems to be for 2 inch coiled tubing units.

Great. Thank you.

Sure, and I'm going to -- this is Jim again. I'm going to add on to Luke Lemoine's question from a little while ago. We stated that 40% was about what we thought we were doing in terms of horizontal completion work, horizontal and directional completion work in the Permian. I want to confirm that. It is about 40%.

Mark Bianchi, Cowen and Company.

Hey guys nice quarter.

Thanks, Mark.

I had a question with respect to the efficiency improvements and the utilization improvements you're seeing in your pressure pumping business. It's clear that you're seeing an uptick there and that's helping margins. How much more margin improvement could you get without pricing, just through operational efficiencies, logistical efficiencies, perhaps more 24/7 work? Just curious how much more room there is to run there?

Marc, it's Jim. That is a great question. The jury is still out on how much more profitability get out of 24-hour work. We aren't doing enough of it to really give you any empirical data. I think, clearly, our team is picking up nickels and dimes wherever they can. We saw some nice efficiency gains here in the third quarter, so that could continue. There's only -- you did point out and mention margin returns.

You might have another 100 basis points or so without pricing, but that would probably be it barring any real decline in the price of profits or anything like that. If customers go to more pad drilling, and we get that work, see that's a feast or famine kind of deal. Pad drilling and 24-hour work, I guess the big word is bifurcation. If you're doing it, it's great. If you're not, it's really bad, so it's good to be doing it. You need to stay on that trend as it's happening. Another 100 basis points or so. I think beyond that it gets difficult.

Got you. Okay. How much of your work right now is pad drilling?

Very little. We are doing some. It's less than 20% for sure.

Okay. Great. That's it for me. Thanks, guys.

Daniel Burke, Johnson Rice

Just to return to the lack of visibility that exists here in the near term, I thought I heard you all say earlier that Marcellus activity had kind of tailed off near the end of Q3 and presumably is still a little lighter here in Q4. I was wondering, the Eagle Ford in the mid cont, highlighted as areas of high utilization. Has that, at least so far, continued in the Q4?

Yes.

Do you have visibility that suggests that, at least through Thanksgiving, you'll maintain the work stream in those two areas?

We don't have any indication that we won't. I apologize for the double negative, but it's hard to say that there is strong visibility that we'll just keep on. In an environment without contracts or pricing agreements, which are nice, but not these contracts. It's difficult. And, that's not to say we have a bad outlook on the fourth quarter, it's just cloudy.

Understood. Maybe one, it looks like as you all -- I think it said last quarter that the TTS did have a pretty nice bounce back. I know there were some seasonal impacts in the business in Q2. Anything of note going on in that? It looks like revenue was up $8 million or $10 million, if I did my math right? Anything nonrecurring in that number, or is that trajectory sustainable over the next couple quarters? Or that sort of top line level sustainable?

We feel like that's sustainable, Daniel. You alluded to some things we talked about in second quarter, which were Canadian spring breakup and bad weather in North Dakota, which impacted that service line. Those things did not happen in third quarter, but there was nothing extraordinary about the third quarter. It was good, but not extraordinary, from my point of view.

They will not be immune to the seasonal slowdown.

Right

Okay, understood. I think one of the other things that you all voiced about TTS is some concern about increasing price competition in that business. I'd assume the margins held up pretty well given the volume gains from Q2 to Q3, though?

Right, but we're just trying to look ahead. We see some increasing competition in that business.

Fair enough. Thanks, guys.

(Operator Instructions)

Brian Merrill, Cleveland Research.

Real quick, I know that there was a contract, I think, that came due at the end of September. It was one that we had some concern over, because our belief was that it was struck kind of late 2011, early 2012. You guys are month in here into the fourth quarter. Now, ex that contract, is there any thoughts on how that impacts going forward just from a margin and utilization standpoint? Or is that a piece of the Marcellus slowdown? Just any color around that would be really helpful?

Bryan, this is Jim. Yes, that was a nice contract and a good customer. The contract reached the end of its term in late September and was not renewed, so that equipment is working in the spot market. We will miss it. That's a shame.

The good news is that, that contract was in the Permian basin, and so that equipment working in the spot market with a good crew is working in a good place to be working in the spot market. It will have some impact, but we note that the equipment and the crew are working today. Will revenue and margins be lower for that particular collection of assets? The answer is yes, but we don't think it's going to be a huge deal at this point.

Okay. Great. Thanks.

John Daniel, Simmons & Company.

Just a couple follow ups while I've got you. As you look at the fleets that our in the spot market today, you talked about the pricing challenges, which is widely known. Those fleets specifically in the spot market, as you look at pricing Q2 versus Q3, how much change did you really see in terms of downward pressure?

We didn't see any between Q2 and Q3, so spot, to say it back to you, spot market pricing between Q2 and Q3 did not decline, but it did not get any better.

Fair enough. I'm just trying to differentiate between the blended pricing of contract roles versus what's actually happened in the spot market.

Sure, good question.

Acquisitions have not played a meaningful role for you guys in a long time. In opening remarks, on several occasions, you alluded to the over capacity. Does that give you -- the references to that, does that change your views on acquisitions going forward? Because you should generate good cash flow next year.

It does a little bit. There are several elements to the decision-making process with acquisitions. Sometimes when you make an acquisition, you're helping the market more than you're helping yourself, if you're worried about capacity issues and things like that, capacity issues. There a lot more acquisitions that are being presented now, here in the third quarter and fourth quarter. A lot more, so we are continuing to look. You have the whole issue of how well the equipment's been maintained. Sometimes, when you're looking at a distressed situation, almost by definition a distressed situation is equipment that's not been well maintained. That's a big variable. Then, customer relationships, that sort of thing as well.

Okay. Last one for me, Jim. You guys mentioned in the Q&A that roughly 20% or so of the work, or maybe a little bit less, is on pad. As you look at the grease ford at the field level into Q4 and even Q1, are you seeing more jobs on the board that will be pad projects?

I don't know, but the answer is -- there's probably a bias upward in terms of pad drilling work, pad drilling completion for us.

Okay. Thanks, guys.

That does conclude today's question-and-answer session. I would like to turn the conference back over to Mr. Jim Landers for any additional or closing remarks.

Okay. Thanks, Mary, and thank you to everyone who called in to listen to our results this morning. We also enjoyed the discussion. Hope everybody has a good day, we'll talk to you soon. Bye-bye.

That does conclude today's call. As a reminder, a recording of today's call will be available within two hours on the RPC website. We appreciate your participation and you may now disconnect.