RPC Inc (RES) 2014 Q3 法說會逐字稿

Good morning and thank you for joining us for RPC Inc.' s third-quarter 2014 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 conference 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're going to mention a few things that are not historical facts. Some of the statements that we will make 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 2013 10-K and 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 tell 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're 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're interested in seeing how it's calculated.

If you've not received our press release for any reason please visit our website, again, at www.rpc.net, for a copy. I will now turn the call over to our President and CEO, Rick Hubbell.

Thanks, Jim. This morning we issued our earnings press release for RPC's third quarter of 2014.

Our revenues, which represented a quarterly record for RPC, increased due to higher activity levels in service intensity in our major service lines and a slightly larger fleet of revenue-producing equipment. RPC's revenues for the quarter increased 26% compared to the third quarter of 2013, and more than 6% sequentially. Third-quarter operating profit and net income in EBITDA all improved. Both sequentially and year-over-year. Yesterday the Board of Directors declared a regular quarterly dividend of $0.105 per share. Earlier this month we announced the repurchase of RPC shares in the open market during the third quarter. In light of the current stock market conditions in the oil and gas service sector, we are monitoring RPC's stock price closely and stand ready to repurchase more shares.

Our CFO, Ben Palmer, will now review our financial results in more detail.

Thanks, Rick.

For the third quarter, revenues increased to $620.7 million compared to $491.1 million in the prior year. These higher revenues resulted primarily from increased activity levels in our major service lines, increasing service intensity in pressure pumping, and a slightly larger fleet of revenue-producing equipment. EBITDA for the third quarter increased by 16.5% to $163.4 million compared to $140.3 million for the same period last year. Operating profit for the quarter increased 24.3% to $106.7 million compared to $85.8 million in the prior year. Our diluted earnings per share were $0.30 compared to $0.25 in the prior year.

Our record revenues during the quarter were driven by a continued increase in activity levels in service-intensive work. Pressure pumping stage counts and profit volumes per stage continue to increase significantly. A trend that has benefited RPC's results. Cost of revenues increased from $303.7 million in the third quarter of the prior year to $398.3 million. Cost of revenues as a percentage of revenues increased from 61.8% in the prior year to 64.2% due to increased materials and supplies expenses; maintenance and repair expenses; and fuel costs resulting from higher activity levels.

Selling, general, and administrative expenses increased from $47.1 million in the third quarter of the prior year to $50.8 million in the third quarter this year. SG&A expenses as a percentage of revenues decreased from 9.6% last year to 8.2% this year. Due to leverage of relatively fixed costs over higher revenues. Depreciation and amortization were $57.2 million during the third quarter of 2014, an increase of 7.5% compared to $53.2 million in the prior year. Net loss on disposition of assets increased from $1.3 million in the third quarter of the prior-year to $7.7 million. This increase was caused primarily by damage to components due to a more service intensive job mix in RPC's pressure pumping service line.

As RPC's completion work continues to transition from vertical to horizontal, with more stages, longer pump times, and higher volumes of proppant pump per stage, we are wearing out some components at a faster pace. We anticipate these changes will continue. However, we are taking actions to address this issue including examining proposed job designs more closely and evaluating new types of components that will perform better under these circumstances.

Our Technical Services segment revenues for the quarter increased 25.9% compared to the prior year. Operating profit increased 19.3% to $102.8 million or 17.8% of revenues compared to $86.2 million or 18.8% of revenues in the prior year. Revenues increased primarily due to higher activity levels. Operating profit increased primarily due to improved equipment and personnel utilization coupled with SG&A cost leverage.

Our third-quarter Support Services segment revenues increased 32.8% and our operating profit increased 144.7% compared to the same period in the prior year. This improvement was due primarily to higher activity levels and improved job mix within the rental tool service line as well as higher activity levels in the other service lines which comprised this segment. On a sequential basis, RPC's third-quarter revenues increased to $620.7 million from $582.8 million in the second quarter.

Cost of revenues increased from $374.3 million to $398.3 million due to increased activity levels and growing service intensity. Cost of revenues as a percentage of revenues was unchanged at 64.2% in the second and third quarters. SG&A expenses as a percentage of revenues were also unchanged from the prior quarter at 8.2%. RPC's effective tax rate decreased slightly to 38.6% in the third quarter compared to 39%. RPC's sequential EBITDA increased to $163.4 million in the third quarter from $160.4 million in the second quarter. While the EBITDA margin decreased 26.3% from 27.5%.

Our Technical Services segment generated revenues of $576.9 million, 6% higher than revenues of $544.4 million in the prior quarter. Operating profit was $102.8 million compared to $99.7 million in the second quarter. Our operating margin in this segment decreased to 17.8% of revenues from 18.3% in the second quarter. Revenues increased primarily due to higher activity levels in the service lines within the segment. And, operating profit margin decreased due to higher transportation costs and increased employee headcount related to our upcoming equipment additions.

Revenues in our Support Services segment increased 13.9% due to improved activity in all service lines within this segment. Support Services operating profit increased to $14.7 million in the third quarter compared to $9 million in the second quarter. Our operating margin in this segment was 33.7% in the third quarter compared to 23.4% in the second quarter. RPC's pressure pumping fleet grew to 751,000 hydraulic horse power. Some of this equipment went to work in the Eagle Ford Shale and in the Permian Basin and is working during the fourth quarter.

Third quarter 2014 capital expenditures were $124.7 million. A large percentage of these capital expenditures were directed towards our pressure pumping service line. RPC's projected full-year 2014 capital expenditures remain at $375 million. We anticipate placing in service, the bulk of the equipment related to our previously announced pressure pumping expansion plan, in early 2015. At the completion of this expansion, our total available horsepower will be 920,000.

RPC's outstanding debt under its credit facility at September 30, 2014 was $152 million, an increase of $20.6 million compared to the end of the second quarter. This increase was due to working capital requirements associated with higher activity levels and capital expenditures during the third quarter. Our ratio of debt to total capitalization was 12.5%. We will remain conservatively capitalized, both by our historical standards and relative to our peers. We have plenty of capacity for our fleet expansion and additional working capital requirements.

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

Thank you, Ben.

As we all know the price of oil has fallen almost 25% since July. The current price could be approaching levels that make some exploration and production work in the United States uneconomical. Oil's near-term price direction and the duration of any price changes are no clearer now than they have ever been. At this time we are unaware of any decrease in our customers' plans. Overall, our view of the domestic completion market continues to support our pressure pumping expansion plan.

In addition, we remain focused on critical elements of our operations. Including sourcing of raw materials and improving logistic processes; and attracting and retaining the right people. We remain committed to our share repurchase program as a way to return capital to our shareholders. We've repurchased approximately 209,000 shares of our stock during the third quarter. And, have $4.1 million shares remaining under the current authorization. Capital strength and a conservative balance sheet are important elements of a successful oilfield service company. Especially, in the current uncertain environment. RPC will continue to use its financial strength to seize opportunities and bolster its success.

I'd like to thank you for joining us for RPC's conference call this morning. At this time, we will open up the lines to answer questions.

Thank you.

(Operator Instructions)

And, we'll go to our first question, from Neal Dingmann with SunTrust.

Good morning, guys; good color. Say, but -- Jim, for you guys just wondering obviously out there with the market environment. Your thoughts about, number one, just supply in different areas?

I know, I guess, my first question is where you're going to bring, where you'll add that new equipment? And, then, just your thoughts overall about capacity and your various regions.

Neal, so, you're talking about capacity additions in pressure pumping? It's -- when it gets finished, when our additions get finished, it's going to look pretty much like the profile now from a percentage point of view. So, said another way, we're going to have a lot of the equipment coming to the Permian and Eagle Ford.

The market there is good; is great. Then there's more equipment coming to the other regions where we'll be working. I think right now, the mid-continent for us, is not as good as the other areas. The Marcellus still has work to do, so, that's where we're going. We've talked a lot about increasing service intensity. And, to put any color on this quarter, this quarter was demonstration at RPC that this work is hard on equipment.

And, so, we talk about that discussion later. But, we do think there's demand for the equipment at current activity levels. And, as Rick just said, we don't know the direction of oil prices any more than we ever do. But, we feel good about activity levels right now.

And, then, what about just pricing in general, Jim, for you or Ben and the guys. Are you able to pass --did you pass anything through?

I'm just wondering again, you mentioned besides, obviously, equipment and the higher cost because of that. Are you just seeing raw materials cost go up? Are you able to pass pricing on, at least, to cover that?

Neal, this is Ben. We have had some success in doing that. I wouldn't say that it's been as easy, obviously, as we would like it to be. But, we are pushing where we can. Trying as much as we can. We did, as I said, have some success during the quarter.

More of it, probably, late in the quarter. So, we feel good about that. We think that will bear some fruit for us. And, hopefully, will help margins a bit. But, it is a challenge. There's a lot of demand for a lot of the vendor services that we use be it for proppant; be it for trucking, and those other things. So, it's something we'll just have to continue to work on.

Relationships with customers have always been important. Certainly, with vendors too. But, it's even more important today to work really hard day to day to try to extract the most benefit as possible for both sides of the party. But, it is a challenge. It's something that we're --

Then, with that logistics would you increase -- I know you have owned some of your own sand on a mine. Would you increase some of those raw materials into other products? Would you want to get larger into that business?

Larger in other businesses?

Well, more into the logistics.

Into logistics? No, I think, again, leveraging off relationships, I think is still where we're pointed.

I think more capital again will flow into these areas where there's extreme demand. And, at least my personal preference is, that that be somebody else's capital, rather than mine (laughter).

Okay, and then, lastly, Jim. Could you just give me an idea of, just the breakdown within the technical services? How that, sort of, fared for third quarter?

Sure, Neal, I'll give you the percentages we usually disclose on this call. And, this is a percentage of consolidated RPC revenue. So, pressure pumping was 58.2% of consolidated RPC revenue for the third quarter. ThruTubing solutions was 15.6% of consolidated RPC revenue. Coil tubing was 7.9% of consolidated revenue. Rental tools was 4.8% of consolidated revenue.

Very good, thank you all.

All right, thanks, Neal.

And, we'll go to our next question from Rob MacKenzie with Iberia Capital.

Good morning, guys.

Rob.

I guess, my first question comes -- centers around some of the increased logistics costs. Again, to hit the same topic, I guess, a little bit, that you mentioned came in late in the quarter. How do we see those progressing into the fourth quarter and beyond? Is this something that was, just related to an unusual job mix this quarter that's going to flip back? Or, do we expect to see some of these pressures continue going forward?

Rob, this is Jim. There's a combination of answers there. We did -- and we've, sort of, had this every five or six quarters, I think. We did have some unexpected logistical issues in the quarter, late in the quarter, and had to use trucking. So, not only was it unexpected, but, as you know trucking is a lot more expensive than rail. And, because it was unexpected and late in the game, that was not a cost we could pass on to customers. So, that was a negative.

That is an occasional occurrence, unpleasant, but also occasional. And, we're -- don't feel like that's going to be repeated anywhere within our expectations right now, within our expectations. Little bit of a margin drag, a small one, on new employees that have been hired, who are being trained. And, so, that'll continue in probably fourth and first quarter. But, that's a normal growing pain that we experience when we have done our various expansions over the past eight years or so. So, those -- that's how to characterize those kinds of expenses I think.

Okay, thanks, Jim. And, then, on the $7.7 million, if you will, impairment. -- recognize that's much higher than we normally expect to see. It sounds like that's being driven by much bigger mix of slick water fracs that tear up the equipment a lot faster than you'd modeled. If I'm right, do you expect that mix of jobs to continue? And, what measures specifically, that you guys reference in the press release, are you taking to mitigate that somewhat?

Rob, this is Jim again. There's a two-part answer to that. One, was that we had one new customer, now, former customer, that we did a lot of work for in the third quarter and, the job design involved what you're talking about and it was 100 mesh proppant. And, it tore the equipment up beyond what we modeled. I mean, we're just in a new world where there's a whole lot of volume. And, you don't always get those calculations right. So, that's part of it.

Another part of it is -- and, so that's part of the outsized loss of disposition. The other one, and that won't continue, excuse me, for keep going back. The other part of it does relate to the continuing shift from vertical to horizontal and the tremendously higher volumes of proppant being pumped. Those -- that issue is ongoing to -- certainly, to an extent.

Regarding the first issue, we're talking -- that has to do with customer selection and higher and better scrutiny of job design. And, looking at how things are going to work if you have a certain kind of proppant with a whole lot of volume. We're -- got to pay close attention to that. On the second issue, we're looking at different kinds of components that wear better. And, certainly making sure that we price those losses in and, just elevate everybody's awareness as to how much proppant we're now pumping and, how much that impacts things.

Right, so, and in terms of the trend, 100 mesh. This particular job or group of jobs had a tremendous amount of 100 mesh. But,100 mesh has been sort of a trend in the last quarter or two. And, will that continue? I'm not sure. Customers constantly are tweaking their formulas and, what combination of customers we work for. But, as Jim said, we hope to make sure we are all fully aware of, and do the best we can, to price in that eventual or possible increased chance of damage to the equipment.

So, it's easier said than done. But, something to focus on and, try to -- again, relationships with your customers and things like that. To try to be open and communicate well so that, if and when those opportunities or those situations arise, there's an opportunity to work through that, hopefully, again. For the -- it'll be a win-win situation for ourselves and the customer. So, it's an ongoing challenge. Pricing certainly factors into that. The pricing environment, some of the pass-throughs we have been able to handle, as I indicated. The equipment pass-throughs, damage to equipment, passing those throughs, were certainly part of what we had.

And, we had the contracts a couple, three years ago. But, that's a little bit more of a difficult discussion at this point. So, it has to be more priced in upfront and anticipated upfront. So, it's a challenge.

Okay, thank you. And, my final question comes around your view of the kind -- how the market develops here in the lower commodity price environment.

In 2011, you guys were very successful at deploying all of the new capacity you delivered. Effectively, driving substantial stock price outperformance.

What gives you confidence? And, how can we think about RPC putting all of the equipment to work this time around, just like you did last time?

Well, Rob, it's the same company and the same people. So, we did it three years ago. We planned to do it again. Did it four years ago. We planned to do it again. We -- assuming oil doesn't go to 55 in the next few months, our customers are busy with very service intensive work.

I think a lot of our peers in this quarter have reported that they pumped record amounts of proppant, and that sort of thing, and so did we. So, that right now in its current configuration is the business. Service intensive pressure pumping jobs pumping a lot of proppant and there's a lot of requirement for that. We won't get into the whole macro issue of whether or not there's new -- all the new equipment. Or, maybe it's not a lot that's coming on the market. Startups, all that sort of thing. But, it doesn't seem like too much equipment is coming on the market for the demand that we believe is out there. Which isn't that's the best answer.

Okay, thanks, Jim. I'll turn it back.

All right, Rob, thanks.

And, we'll go to our next question from Marc Bianchi with Cowen and Company.

Hey, guys.

Hey, Marc.

Morning.

I guess, first question from me on the support services business. You posted some really nice improvement there. I think we have to go back to the beginning of 2012 to see similar margins in that business. How should we think about that business going forward? You mentioned mix being part of the impact, but, is there a sustainability to that mix going forward? Or, should we expect it to go back to, kind of, the mid-20s where it was in recent quarters?

Marc, we -- thanks for the comment on that. We believe that it is sustainable. But, growth in support services comes from rental tools. You know this, but just to remind everybody, it's our biggest service line within support services. We entered a new market, the Permian Basin, a little over a year ago. And, so, we've gotten going there pretty well.

So, there are some easy comps, to be honest. With job mix, we were early in certifying and upgrading blowout preventers. And, so, that's helped us some, we think. So, we don't see any reason that the current level of activity shouldn't continue. But, do recognize that because we're -- we entered a new market a year ago right now, the year-over-year comps are good. In a few quarters, the year-over-year comps will be more difficult at the sustained level, so.

Okay, thanks for that. And, then, just briefly on the corporate expense. I noticed that kicked down sequentially here. Is there anything unusual in that sequential change? Or, is that a new baseline going forward?

And, that's on the segment reporting you are looking at?

Yes.

Yes, that's just corporate -- more corporate, yes? Yes, that does have the benefit. Our supplemental retirement plan, with the market moving down, had a positive impact on that line. You can see down in the other income line that it's better. So, that's kind of an offset.

Okay, I think I got it. Okay, I'll turn it back, guys.

Sure.

All right, thanks, Marc.

Corporate went down.

And, we'll go to our next question from James West with ISI Group.

Hey, good morning, guys.

Hey, James, morning.

Rick, you mentioned or, maybe it was Ben you mentioned pricing increases into the quarter. But, it was, you're not as easy to get as one might've hoped. What do you think the -- well, what is the main kind of pushback from your customer base? Given that a lot of the price increases you're trying to put through are really related to cost. It's more of a cost recovery than net pricing?

Oh, that's -- James, this is Ben. I agree with you again. I get back to, I think it's a customer relationship issue and, our people are very good at executing jobs and making customers happy.

Yes.

And, sometimes we have to get a little more firm. I guess, with customers in terms of making them aware of the challenges with some of these variable costs. That are depending upon circumstances that are oftentimes completely out of our control. And, we need to come up with a way to try to share in that pain. Again, where it's a win-win for us and them. I think that's something that we're trying to work on.

Is that a -- I don't know that that's a technique or a huge change in business operating procedures. But, I think it's just something that we're all trying to become more aware of. That, I think we have to get a little bit firmer with our customers. Because the demand, and therefore the cost, of some of these services can shift very quickly.

And, when you're making longer-term commitments to a customer, it's really not reasonable. It's very difficult to manage over a period of time. So, I think we have to evolve our models and relationships in discussions with the customers to be able to entertain those situations to where we can more easily recover some of that cost increase. I think that's what we're working with.

And we're always chasing it after the fact. And, that's harder to chase it if we're trying to do a better job in anticipating those. So, then, we're not having to chase it after the fact and everybody's aware of us and the customer.

On the front end, that's right.

Okay, that makes sense. You guys are being too nice, I guess (laughter).

That's actually true. But, we want to make our customers happy. Until we start losing money, then we quit.

Right, right, of course. And, then, how long do you think, so, as you're kind of changing the strategy or being more direct and more firm with your customers, how long do you see this persisting of the not -- I guess not achieving margins? I guess we would expect it or you would've probably expected going into this quarter. I mean, is this a couple quarter event? Is it going to be longer-term? Do you think you can resolve this as we go into 2015?

James, this is -- yes, well it's hard to say. I answered a question a few moments ago about a few temporary items. The business is evolving a lot. It -- we think with more scale that will help. One thing is that proppant of various kinds is becoming much more available than it was.

So, the, just the raw cost of proppant at the mine, I think, has been going down and probably will continue to go down. So, that is -- that's going to assist margins for people like us going forward. So, that's a positive.

But, I think the fact that we're focused on it. I mean, it's been something that's been evolving and getting -- it's become an even bigger issue over the last quarter or two, again. With the increased service intensity and much larger volumes of proppant and things like that. But, it's something we're focused on. So, I expect we will enjoy, all things being equal, some incremental improvement because we're focused on it.

Yes, we just -- yes, we think we're getting smarter about it all the time. And, we'll just see how well we're able to execute that.

That's right.

Okay, got it. Thanks, guys.

Sure, thank you.

And, we'll go to our next question from John Daniel with Simmons & Company.

Hey, guys.

Hey, John.

Yes, good morning. Can you guys just tell us what pieces of equipment were damaged in that $7.7 million? Are you -- is there any need to change the depreciable lives going forward that might of increased wear and tear? And, then, given that we are in sort of a new normal with more proppant per well. We've been adding these things by these charges back. But, is this a new norm or this will be persisting? It's just a cost of doing business.

This is Ben. We have adjusted the lives over time. We are looking at that. It may be that the right decision going forward is to -- we're looking at it. May begin to expense it rather than depreciate it. Obviously, as you picked up on, that means there's been more that is not reaching the end of its useful life.

We think again, we think this quarter was larger than normal and won't repeat. I think the number will be larger than it has been historically if we don't change the method of accounting. Just because, we have more equipment and there's a lot more service intensity. I think we're working hard to try to figure out ways to minimize the impact. Again, whether we capitalize it or whether it gets expensed as M&R. Either way, it's a cost of doing business and, we have to try to manage it as well as we can. But, so we -- you may see a change going forward with that.

The components specifically are the fluid ends, or, the fluid ends of the pump.

Yes, that's by far the most significant item is the fluid ends.

Okay, fair enough. I want to come back to a question Marc asked earlier on the support services and the sustainability. Jim, it sounded like when you are answering the question, you were referring to the revenue and top line. And, I think, what's a -- the margin improvement was pretty substantial. I'm just curious if the margin that you generated in Q3, if that is sustainable?

Yes, for the same reasons that I discussed with Marc Bianchi. We discussed --

All right, my impression was that it was -- that you were talking about revenue, okay. And then --

Well, the one thing I let -- this hasn't come up yet, but let me mention that I think it's sustainable too. But, we haven't touched on yet what the fourth quarter's going to look like. And, certainly, we don't give guidance other than saying that in most of the prior few years, there's been fourth-quarter slowdown with holidays and things like that. And, I've not heard anything different. So, I think, in looking at that margin, I would say over the next three to four quarters, I think, all things being equal, it's a reasonable level. There's not any special items in there, I guess, is another way to say it.

Fair enough, okay. Last one for me. In 751,000 horsepower as of today, going to 920. Can you just give us the cadence in terms of what comes in Q4 an Q1. And, then, lastly, how much of your frac would you say is tier 4 compliant? And, that's it for me.

Oh, answer to the first question is that everything will be here. We now believe -- and of course we're in the fourth quarter, everything will be here and ready to work and generating revenue in January. How much of the fleet is tier 4 compliant? I'm going to have to get back to you on that one. I understand the question, but I don't know the answer.

Okay, thanks, guys.

Thanks.

And, we'll go to our next question from Mark Brown with Global Hunter Securities.

Hi, guys, good morning.

Hey, Mark.

I was wondering, the need for backup horsepower at the wellsite. Has that been increasing? And, has -- is that given the risk of component damage with these high volumes of materials? Is that likely to make requirements for even more backup horsepower at the wellsite in the future?

Yes, Mark this is Jim. The answer to the first part of the question is yes, and, the answer to the second part of the question is probably. We have seen in some of these, when you are talking about higher volumes of proppant per stage, we are working longer, but not necessarily harder. Meaning -- by that I mean not having to have more horsepower to pump at higher pressures. But, we are having to pump at higher volumes.

So, it's not the same step change that we saw when we went from vertical oil wells to the natural gas shales in places like the Haynesville Shale. But, yes, there is an impact we are going to have -- where we have that, I think we'll continue to have to have more redundant horsepower at the site.

I think that's -- this is Ben. I think I would echo that and say I think there will be some of that. I think that, again, could be a net net benefit from the wear and tear on the equipment. But, just like with the cost pass-throughs on these variable costs, same sort of thing. We're going to be pushing for higher prices. Make sure everybody recognizes that we understand more equipment, more cost, more capital allocated. We've got to -- we have to make more money.

Well, thank you. You mentioned in -- earlier in the call that you incurred higher transportation costs due to resorting to trucking as opposed to rail. I was just wondering what percentage of your supply is through rail versus trucking? And, what the cost differential is between rail and trucking?

This is Ben. We don't have that information readily available. It's such a mixture. I think what we referred to earlier in terms of the trucking, it was sort of, a last minute -- we had an opportunity or the customer switched something up and, we had to react in such a way that was very much out of the norm.

So, sand was not available. So, we did whatever the heck we had to do to meet the customers' demands. And, it wasn't necessarily on that particular project in that particular opportunity. It wasn't great for our results. So, but, we met the customers' demands. And, we hope in the long term that'll be a good thing. But, we've already had the discussion about what we need to do about recovering higher costs.

So, a reasonable question. But, I don't know. Certainly, rail -- we do order a fair amount of our sand directly from the various mines but, a lot of it we buy locally as well. So, you now, if the sand supplier railed it in, certainly, the price is going to be better than it would be if it had to be trucked. But, there's a -- the price differential if you have to truck at any distance is significantly higher.

Okay. And, then, my last question is just, it seemed like some of your competitors have cited issues with the severe rain in the Permian Basin. And, I don't remember if you mentioned that. But, was that an issue for you? And, it -- or, were you able to just, work through that despite the difficult weather conditions?

Yes, Mark. We didn't mention it because it wasn't huge for us. We did have some impact from -- and for everyone else who is listening, the rain in West Texas late in the third quarter, it was pretty -- well, West Texas and by extension, the Permian Basin which includes Mexico. Yes, we missed a few jobs at pressure pumping and also at Thru Tubing Solutions. But, it wasn't -- it did have an impact, but it wasn't huge. Good question, thanks for reminding us.

Thank you.

Thanks, Mark.

And, we'll go to our next question from Byron Pope with Tudor, Pickering, Holt.

Morning, guys.

Hey, Byron.

So, you guys have started crewing up for the incremental 170,000 horsepower that will be ready to work come January. With a lot of that going to, it sounds like the Permian and Eagle Ford. I would think that you guys have line of sight to that horsepower going to work for specific customers and specific basins at this point. And, so, I just wanted to test that notion. And, if so, realize that take or pay contracts are a thing of the past. But, are we likely to see agreements that have adjustable pricing clauses in it to cover you guys for these escalating sand and other costs that seem to crop up, what seems like, on an increasingly consistent basis?

Byron, the answer is yes. But, we do have, you now, line of sight to use your phrase on where -- who -- none of where it's going to go, but, for whom it's going to work. And, as I think Ben or Rick mentioned some of the new horsepower has started to work and is working. And, I've seen it work in those places. So, it is working there.

The current customer dynamic and everything else is pretty dynamic. Excuse me for using the same word twice. So, it's hard to predict. You know that we don't have the take or pay contracts that we had in 2010, 2011, 2012. So, it's hard to say what sort of customer relationships are going to have to evolve out of the current work --

And, Byron, this is Ben. I would go back to what I said earlier. Obviously the -- it would be helpful for it to be written in the contract. That doesn't always make it be the case. I think, more importantly again, is the relationship with the customer. Whether it's verbal, eye-to-eye, handshake. Frequent discussions keeping everybody updated.

Making decisions together about whether we move forward or don't move forward. Or, how we execute based on the way costs may be escalating. That maybe, in the current environment, just, or more -- or even more effective than, like you can negotiate hard for a phrase or provision in the contract. So, we'll do everything we can to try to make it as secure or probable as possible that we recover some of the costs escalation. But, it's just an ongoing issue and something we try to work on.

I think, by and large, we've found our customers are for the most part reasonable in those discussions.

Okay. And, then, just thinking about this, going back to this issue of the equipment losses during the quarter in the context of what you expense versus capitalize. In ballpark terms, could you frame for us what percentage repair and maintenance expenses are? That, as a percentage of your pressure pumping operations -- realize you don't break out details. I'm just trying to get a sense of the order of magnitude of the R&M percentage as it pertains to your direct operating costs for that service line.

Let's see. Well, you're right that we don't break out (laughter). Byron, of our direct costs, our cost of revenues at RPC, it's the third largest and it's probably 13% of RPC's total cost of revenues and that's not telling you the pressure pumping answer. But, it's that order of magnitude.

Okay, that's it for me, thanks.

All right, thanks.

And, we'll go to our next question from Tom Curran with FBR Capital Markets.

Good morning, guys.

Hey, Tom.

Jim or Ben, if you were to look back over the entire past year. Whenever you've had a surprise logistical problem like the one that arose in 3Q pop up that required abnormal expensive measures to tackle. Where has CUD consistently been in countering those issues in terms of the basins? And, what are you tracking to stay on top of when you should start to see some relief? Especially, based on what the secular up trend looks like in those areas for job size?

Understand the question?

Well, in terms of where it's happened, it's happened in several locations. It seems like it's been at different locations at different times. So, it's not concentrated in any one or two locations. I'm not sure I understand the second part of the question.

Well, just, so, I think what you're saying, Tom, is if and when there are logistical issues and now job sizes are getting bigger. How much of that is amplified with the bigger job? I think that's your question.

Exactly, yes.

Yes, some things are self-correcting and some are more thornier problems. I mean, some of the issues that we've had when they've happened over the past year, past year-and-a-half, have been because of a, just a shortage of proppant. The proppant we wanted wasn't available. That's not a problem anymore. Free markets tend to fix problems like that. And, I think that is getting fixed.

But, they're not building any more railroad infrastructure in this country. And, in places like the Marcellus, where you don't have roads in various, I'm not saying you don't have roads, but it's not as well developed as, say, West Texas. That's where you have more problems and that's for those problems continue. And, it's kind of hard to see an answer, more in the Northeast than in some other areas.

Yes, and given that, I'm just trying to understand, sort of, what you're focusing on. Part of it's understandable, in that, you continue to emphasize you're confident that capital will flow in to increase the supply of trucks if the rail infrastructure is not going to be there. And, presumably, you are seeing that.

But, are there also measures you're taking in terms of expanding the number of trucking companies you're working with? Or, taking a different approach to how you source the transportation needs? Or, contract for them; anything like that?

Yes, Tom, absolutely. In fact, we are increasing the number of suppliers that we use just to diversify away some of that risk of rail or trucking shortages. So, that's something that we're doing. We're having a -- we've had a lot of success with that. And, then, our model is more to have a larger number of suppliers to whom we can outsource things rather than try to have a much larger fleet of railcars, for example. So, that's what we've been doing and have had some success with it. They're just tend to be spotty periodic shortages of things. And, because of the high volumes of raw materials you need, those issues become amplified when they happen.

Right, and then, just two more on this topic, Ben. The first would be, as part of the changes you're considering when it comes to the wear and tear being exerted on the fluid ends. Are you also evaluating the potential change in your vendor mix or, is there an upgrading you might consider to more durable models? Would be the first question.

And, then the second would be, in an environment in which you don't end up seeing any net pricing traction, do you still think you can get to a 20% EBIT margin for technical services? And, if not, sort of, what's the new ceiling you think is achievable as you continue to improve process management?

Well, let me take the first one. Yes, there's a variety of things were doing. There's discussion about stainless steel fluid ends. Obviously, they're more expensive; they're more durable. You've got to kind of study those and see if the extended life of those outweighs the additional costs. That's a possibility.

Looking at other vendors, sure. I mean, we always do that in terms of -- it'd be great if somebody could come up with a good solution to the issue. And, there may be other things that can be done to try to minimize the damage or lengthen the life of some of the fluid ends. Jim, you want to take the other one?

Yes, well, with more equipment and more critical mass, we should not only have more revenue, that's a given but, more leverage over our costs. So, that should improve things and, even in an environment of -- if we were in an environment of no net pricing improvement. And, also just managing these nickels and dimes a lot more closely.

Ben, and I'll elaborate on that. I think that your question about can we get back to 20% EBITDA margins. I think that's clearly possible. But, the industry, our customers, and our competitors recognize that if the trends continue, it's going to be all about lower revenues and lower margins. But, hopefully, similar dollars and similar returns on capital. So, that's the evolution that I think we're all being forced to go through right now.

Sure, I'm going to give you more work, but, it's got to be lower prices and so forth. So, that's what we're going through right now and, where that will shake out. What the appropriate level will be is ever-changing. But, it's like Jim said, I think it's -- we have to get better at managing nickels and dimes. I think we have to get better about not subjecting ourselves to these variable costs that are so subject to supply and demand. That has to be, at some point [faired] with the customer. That can't fall on the service companies in my opinion.

Right, agreed; it makes sense. All right, thanks for the thoughtful answers, guys. I'll turn it back.

All right, thank you.

And, we'll go to our next question from Scott Gruber with Citi.

Morning, gentlemen.

Morning, Scott.

Earlier you discussed being more direct with your customers regarding recouping costs and pushing pumping rates up. But you're also in a situation where you have a slug in new equipment entering the market and crude prices are down. How do you balance the push for margin enhancement via better pricing and terms against possibly being more selective with your customer exposure? And, trying to find customers that will drill through a period of commodity price weakness? How do you balance that?

Well, that's what we do, try to balance it. It's not easy. I think one of the things is we talked about our -- one of our focus areas, one of the things we are known as is giving great service. And, I think that's something we have to fight try to get paid for. Again, difficult in this type of environment. It's difficult when new equipment it's coming on the market but that additional, what we believe is a high-quality service.

Again, comes at a cost and there's a benefit to the customer. And, we just, we have to do a good job of trying to demonstrate that and sell that to the customer. And, have that be, somehow or another reflected in our pricing and our ability to get more favorable terms on these -- again, on some of the things that are more difficult to predict. So, easier said than done, but it is a balance. It's a constant balance to be -- try to find the right customers who, that you can enjoy a good relationship with. Where you can establish that win-win situation and where we're not, again, so exposed to some of the fluctuating cost.

And, were prepared.

That goes back -- go ahead.

I was going to say at the -- and were prepared at the end of the day to walk away from particular jobs or particular customers. Because you -- it has to be a partnership. And, as Ben said before it has to be a win-win for both of us, so.

And, I'll just chime in with one final thing. There's a lot of experimentation going on out there. So, some of this is -- nothing's easy but, some of these are more simple conversations as we accumulate experience in the new environment of high volumes. We can say, Mr. Customer this doesn't work, let's try something else. We've done this before and it didn't work. Some of that evolution can help us as well.

Has the macro backdrop changed your approach to those negotiations? Or, did you feel like there's still sufficient demand growth where you have the leverage now?

Scott, not at the present time. I mean, what we're doing works at $80 oil. Rick mentioned earlier that we don't where the price of oil is going and neither does anybody else.

The conversation may be different tomorrow than it is today.

Yes, yes, so, we can't take actions today on something that may or may not happen in the future. Or, in a direction we don't know.

And, as you've gone out and canvassed your customer base trying to get an early read on their activity plans for next year. Do you hear the same story, the same narrative from large cap E, public EMPs, small cap EMPs, and private's or, does it differ across those different buckets?

We don't know anything that would give you a meaningful answer to those three tiers of people. I'm sure what you're thinking about is capital availability among the EMPs and debt levels. And, where they're comfortable. We're not aware of any different answers or any different things that are being told to us among those three groups, so.

Bad question, then.

Thanks, Scott.

And, we'll go to another question from Marc Bianchi with Cowen and Company.

Hey, guys, thanks for sliding me back in. You mentioned that proppant availability is getting better. And, the raw cost at the mines is going down and will continue to go down. If we were to just look at raw frac sand, would that same statement apply? And, maybe you could offer some more color on that. Is that a like-for-like comment or is there some, maybe you took on some longer-term contracts and that was part of the reason for the lower pricing? I'm just hoping to have a little more commentary around that comment.

Sure, Marc, this is Jim. And, that was a forward-looking statement when we said that price of proppant will continue to decline. If we, in fact, said that. So, if the SEC's listening. It's a good question about mix. That was not a -- that wasn't in the back of our mind, in the back of my mind, when I said that the price of raw proppant was declining.

Proppant in all areas, the price is either flat or decline. You watch the PPI every quarter. You've seen that the rate of increase is decreased. In fact, maybe has in fact decreased a little bit. There are a lot of new sand mines that have been opening up. And, we think that supply, that -- it's a raw supply, but, raw sand supply just at the mine is increasing a lot and that's what's helping us from a price point of view.

Yes, and the ultimate cost of the proppant, there's lots of different ways to measure it. We don't buy everything at the mine. A lot of it's bought regionally. So, the price is obviously different based on transportation and local supply and demand, so forth and so on. There's also again, how close you buy the sand or you're able to procure the sand? How close it is to your wellsite.

So, at the end of the day the all in cost is really what we focus on at the end of the day. A component of that is the raw sand cost. And, as Jim said, I think that's what we believe. We believe there is a lot more sand coming on the market. Obviously, the volumes continue to go up as well, but there doesn't seem to be a steady escalation. The bigger, always has been and continues to be -- the bigger cost of the proppant is the transportation. And, that's where the most exposure and variability in cost is coming into play.

I see, so, would you, as we roll forward here and the overall market is not quite as strong presumably with lower oil prices. How much of a decrease or how long do you think it would take to realize some meaningful decrease at the actual wellsite level to the customer? So, I guess the idea is, when could that show up in your margins as you're pricing out your frac jobs?

Well, again, we talked about the fact that we think we've been successful passing through some of the increased costs. All things equal, that should help some. But in terms of oil prices or whatever, what impact that has, that's not perfectly clear to me at this point.

But, I think too, I mean, transportation is a big piece of it. And, there's not only the cost of the service from the customer. But, there's just again how effectively we're able to execute working with the customer; working with the trucking company. So, that's also a component of it as well. Hate to throw additional variables into it, but there's a lot that goes into it.

Sure, certainly is. Thanks a lot, guys. Appreciate it.

Sure.

All right, Marc, thanks.

(Operator Instructions)

And, we'll go to another question from Tom Curran with FBR Capital Markets.

Thanks for let me jump back in, guys. I have a follow up on M&A. Jim, in looking -- or Ben, at the deal pipeline. If we were to go back to the middle of the summer, there was already what sounded like a meaningful number of private equity backed struggling startups shopping themselves around. And, it seemed as if the main obstacle to potentially picking one or more of those off or purchasing some assets was unrealistic valuation expectations. Any signs that some of those companies have started to buckle when it comes to their [risk]? Or, that they soon might?

Tom, this is Jim. I think there have been -- well, there have been some publicly announced transactions of the kind that you're talking about that I think were reasonable. I think they were good. So, I think valuation expectations are reasonable. We also continue to see a lot of potential transactions coming up as we did back in the summer. And, I'm -- it's possible that they'll be purchased by other players.

So, there -- those transactions are getting done. So, that means the market clearing price has hit. The obstacles that remain are things like not knowing the condition of the equipment. And, that's the, yes, build versus buy kind of transaction. Also, whether or not you, or, how you attribute value to the workforce in place or the customer base. But, the market is clearing I think and, there are plenty -- there are many or several transactions left to look at.

And, based on that, how would you categorize your overall appetite right now? And, how would you rank by your existing businesses where you'd have the most interest in potentially making an acquisition?

Well, Tom, as you know we're governed by this return on investment capital metric. And, we've found that organic growth in businesses we're in has higher returns than making acquisitions. So, I think our bias is still towards organic growth as would be evidenced by the -- .

Yes, organic growth in service lines where we already exist. Historically, we have grown through acquisition at this geographic or into a new service line. So, those would be more attractive to us as a potential opportunity than again within an existing service line.

Like Jim alluded to, the quality of the equipment always is a big question. And, where that equipment in the workforce is located may not be in a very favorable place from our view.

Okay, thanks, guys. Appreciate the additional color.

All right, Tom.

Yes, thanks.

And, it appears there are no further questions at this time. I would like to go ahead and turn the conference back to Jim Landers for any additional or closing remarks.

Okay, thank you. We appreciate everybody calling in and appreciate the dialogue; appreciate the interest. I do have one quick follow-up. John Daniel asked a few minutes ago about our tier 4 compliance on our pressure pumping fleet. Just so that everybody can hear it to the extent that it's of interest. About 25% of our pressure pumping fleet before the expansion was tier 4 compliant.

All the new equipment that's coming is tier 4 compliant. There are other things that are tier 2 compliant but that's-- we're able to work with that existing equipment. So, just to leave that comment for everybody. So, thanks a lot. Everybody have a good day.

And that concludes today's RPC, Inc conference. As a reminder today's conference will be replayed on www.rpc.net within two hours following the completion of today's call.