RPC Inc (RES) 2015 Q3 法說會逐字稿

Good morning and thank you for joining us for RPCs Incorporated third-quarter 2015 financial 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 will be made on this call could be forward-looking in nature and reflect a number of known and unknown risks. I would like to refer you to our press release issued today along with our 2014 10-K and other public filings that outline those risks, all of which can be found on RPCs website at www.RPC.net.

In today's earnings release and our 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're also required to use EBITDA to report compliance with financial covenants under our revolving credit facility. Our press release this morning 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's calculated.

If you have not received our press release and would like one, please visit our website at www.RPC.net for a copy. I will now turn the call over to our President and CEO, Rick Hubbell.

Jim, thank you. This morning, we issued our earnings press release for RPCs third quarter of 2015. Third-quarter 2015 can best be summarized as a continued deterioration of the operating environment in the oil field services industry. Over the last three quarters, the US domestic rig count has declined from 1,875 rigs at the end of 2014 to 838 at the end of the third quarter. A decline of 55%.

As the number of rigs continued to decline, the demand for our services fell accordingly. RPCs business has also been negatively impacted by increasingly competitive forces that continue to drive lower pricing. Despite the deteriorating conditions, our quarterly results were relatively flat on a sequential basis because of the increased service intensity of our operations. Our CFO, Ben Palmer will now review our financial results in more detail after which I will have a few comments about the current, difficult market conditions.

Thank you, Rick. For the third quarter revenues decreased to $291.9 million compared to $620.7 million in the prior year. These lower revenues resulted from decreased activity levels in pricing in almost all of our service lines. EBITDA for the third quarter decreased by 90.6% to $15.4 million compared to $163.4 million for the same period last year.

Operating loss for the quarter was $51.5 million compared to operating profit of $106.7 million in the prior year. Our diluted losses per share were $0.16 compared to earnings per share of $0.30 in the prior year. Cost of revenues decreased from $398.3 million in the third quarter of the prior year to $234.6 million in the current year, due primarily to lower activity levels, partially offset by higher service intensity.

Cost of revenues as a percentage of revenues increased from 64.2% in the prior year to 80.4% due to lower pricing for our services and higher maintenance and repair expense. In addition, RPC recognized $3.8 million in costs due to write-downs in the value of the materials and supplies, which were slow-moving or could no longer be effectively utilized in providing services to our customers. Selling general and administrative expenses decreased from $50.8 million in the third quarter of prior year to $35.9 million this year due primarily to decreased employment costs. SG&A expenses, as a percentage of revenue, increased from 8.2% last year to 12.3% this year due to negative leverage resulting from lower revenues.

Depreciation and amortization were $69 million during the third quarter 2015, an increase of 20.7% compared to $57.2 million in the prior year. Depreciation and amortization increased due to assets placed in service over the last year as we completed our recent pressure pumping expansion. That loss on disposition of assets was $3.8 million in third-quarter 2015 compared to a loss of $7.7 million during the third quarter of 2014, primarily due to a change in accounting estimate. As we discussed last quarter, the cost of certain components of our pressure pumping equipment that were previously capitalized, are now being recorded in cost of revenues as maintenance expense upon replacement.

Our Technical Services segment revenues for the quarter decreased 53% compared to the third quarter in the prior year. Operating loss was $44.2 million compared to an operating profit of $102.8 million in the prior year. Revenues and operating results decreased due to declines in activity and pricing, partially offset by increasing service intensity.

Our Support Services segment revenues for the quarter also decreased 53%. Operating loss was $1.9 million compared to an operating profit of $14.7 million in the third quarter of the prior year. On a sequential basis, RPCs third quarter revenues decreased to $291.9 million from $297.6 million in the prior quarter, a decrease of 1.9%. The decrease in revenues was due to slightly lower activity levels, partially offset by increased service intensity.

Cost of revenues decreased from $241.6 million to $234.6 million due primarily to lower activity levels and a reduction in employment costs, despite the $3.8 million inventory write down. Cost of revenues, as a percentage of revenues, also decreased slightly from 81.2% in the prior quarter to 80.4% this quarter. SG&A expenses decreased by $4.5 million or 11.1%. As a percentage of revenues, these expenses decreased from 13.6% in the prior quarter to 12.3% this quarter.

RPCs operating loss narrowed from $52.5 million in the second quarter of 2015 to a loss of $51.5 million in the third quarter. RPCs sequential EBITDA decreased from $17.6 million to $15.4 million in the third quarter and the EBITDA margin decreased from 5.9% to 5.3%.

Our Technical Services segment generated revenues of $271.3 million, 1.6% lower than revenues of $275.8 million in the prior quarter. We reported a lower operating loss of $44.2 million, compared to a loss of $49.3 million in the second quarter.

Revenues in our Support Services segment declined 5.4% due primarily to decreased activity in pricing in rental tools. Our sports services segment incurred an operating loss of $1.9 million in the third quarter compared to a loss of $1.5 million in the second quarter.

RPCs pressure pumping fleet ended the quarter at 935,000 hydraulic horsepower. Capital expenditures during the third quarter were $15.9 million and we expect to spend only $10 million in the fourth quarter 2015. RPCs full-year 2015 capital expenditures are currently projected to be $165 million.

I am pleased to report that RPCs outstanding debt under its credit facility at September 30 was $19.5 million, a decrease of $205 million since the beginning of the year and a $35 million decrease since June 30. This decrease was due primarily to lower working capital associated with lower activity levels, continued focus on collections, as well as cost control initiatives and managing capital expenditures. With that I will now turn a back over to Rick for some closing remarks.

Thanks, Ben. During the quarter, we continued to focus on cost reduction measures including reducing head count by an additional 6% during the quarter resulting in a 28% reduction year to date. Restructuring activity-based compensation programs, minimizing nonessential overtime, and discretionary spending, and evaluating and repositioning operational locations. We will continue to ensure that our cost structure and business are appropriately scaled and are ready to take additional actions if business conditions continue to deteriorate.

These are difficult times and their impact on RPC and its employees have been severe. We appreciate all of our employees' hard work, contributions, and sacrifice to improving the situation. RPC has been in the oil and gas service business service for over 30 years and encountered multiple downturns during this time. Our strategy of always maintaining a conservative balance sheet has played a long role in our longevity and will help us to survive this downturn and prosper in the future.

Thank you for joining us for RPCs conference call this morning. At this time, we will open up the lines for your questions.

(Operator Instructions)

Byron Pope, Tudor Pickering Holt.

Jim, as you usually do, could you help us out with thinking -- the percentage of revenues. I'm just trying to get a feel for the top line moving pieces. And then a follow-up question is heading into what feels like a potentially dramatic slowdown, how we should be thinking about your respective service lines that might be more or less impacted.

Sure, Byron. First of all, the numbers we are about to give you are as a percentage of consolidated RPC revenues for the third quarter. Pressure pumping was 52.5%, through tubing solutions was 18.6%, that is our second-biggest service line, coiled tubing was 8.3%, nitrogen was 4.3%, rental tools was about 3.4%. Those are the top lines.

The second part of your question relates to sequential revenue. We don't need to repeat everything that people in the industry have been saying. Fourth quarter does look difficult with the various things going on with the MPs, probably a projected holiday slowdown.

We don't see any movements in any of our service lines that will be different from the rest of the trend. In other words, we don't have any indication that pressure pumping, for example, is going to slow down a whole lot compared to other things. They all seem fairly similar at this point.

It's hard to know because we are the spot market and we certainly have indications that customers are going to slow down, but they're still finding out about their bank lines and all of that kind of stuff. It is very hard to know for fourth quarter.

Okay, but as of today things are still holding up reasonably well if I think about October versus the last few months?

Yes, yes. That is correct. Things that we can see on a daily basis are holding up fine. Which, of course is relatively speaking, but are holding up fine.

Last question, quick question, from me is just on the CapEx front. If I think about your Q3 level of spending, as we progress through this downturn, is it reasonable to think that -- you framed the full year CapEx. So, is it reasonable to think as we get into next year that that might be the same? CapEx run rate to think about for you guys close to a maintenance level.

At this point, maintenance, but not $10 million a quarter. We're probably looking at $80 million or $90 million, based on everything we know right now, for maintenance capital expenditures in 2016. As we all know, the work is very service intensive right now so it requires a lot of maintenance.

Thanks, guys. I appreciate it.

(Operator Instructions)

Rob Mackenzie, IBERIA Capital.

Thanks, guys. A couple questions for you. Can you please refresh us where your geographic mix of your fracturing capacity stands today?

It's a really fluid situation right now so we would rather not share that information specifically, which we have in the past. I would say, on the one hand it hasn't changed tremendously, but we're obviously going through a lot of internal reviews and rationalization and I don't want to share that at this point.

All right. Maybe, if I can ask it a slightly different way. Given the recent drop in natural gas prices, can you give us a feel for how much of your fleet is exposed to gassy basins like the Marcellus and others versus more oil basins like the Permian, Eagle Ford and the Bakken?

I think the answer is the same. Obviously, there's more work in the oily areas than there is in the gas areas, but I would say the previous response would apply.

Okay, thanks. My next question is on the cost-cutting initiatives you talked about in the third quarter. Can you give us a feel for the dollar impact on structural cost savings you expert to see in the fourth quarter from those initiatives?

6% of the workforce, I don't think it's a big needle mover. We're continuing to rationalize and review locations and headcounts and things like that. Obviously, it takes a little time to show up. We're talking maybe $5 million.

Okay. My next question comes back to the last question, as well. The fourth-quarter expectation that this could be a two-month quarter, what specifically, though, are you guys hearing from your good customers, like Concho and others? Are your customers planning that kind of activity? Or do you expect some of them to hold up better than the overall industry fear?

Rob, I'm sorry, we just don't have great answers. On the one hand, we have just done our operational reviews and just done the forecast, and nobody has specifically said my big customer in my region is going to slow down, is going to quit in November. But we just think it is a reasonable assumption that a lot of people are going to stop at Thanksgiving and just not work during December.

We've got some good working relationships on some projects with people, but in the current environment, they could just send everybody home in mid-to-late November and take December off. I wish we had a more definite answer for you.

No, that's fair, I understand. I just thought I would try. My final question comes to your year-over-year revenue performance. I think revenue down 53% year over year, is interesting. It's similar to some of the big cap names who also have an offshore presence, which has been more defensive. But, more specifically, if you have it, what would be interesting is, of that 53% drop year over year, clearly pricing is down, clearly your job count is down, but the intensity is up. Do you have any numeric intensity metrics you can share with us like proppant per stage, proppant per well, et cetera?

That's a great question. Sequentially -- so, second quarter, third quarter -- I can tell you that service intensity as proppant per stage, not necessarily proppant per well, is up, has increased in the mid teens. That is the offset. You just mentioned activity down, pricing down, service intensity up. So, revenue per job or per stage in fracturing is not down as much as the price book might lead you to believe, and it is simply because of increasing service intensity.

Also, along with that, coiled tubing and through tubing solutions -- they are our second and third biggest service lines -- they have benefited from that increasing service intensity, as well. The pricing declines have been harsh and they are continuing, but the one saving grace has been the increase in service intensity. That is the offset. We just don't have good year-over-year numbers for you.

Okay, thank you very much. I'll turn it back.

Scott Gruber, Citi.

This is [Mike Novellis] sitting in for Scott. I was wondering if you could talk just a little bit about the pressure coming into the fleet in retirements. I believe you had around 70,000 horsepower pre shale. Do you guys still have that around? And going forward, the current fleet, how much do guys expect to scrap of that?

I can't really think of any -- I can't say that there's none, but we would describe it that we have not retired any of our fleet. We have been going through a refurb program in the last two or three years. That continues, albeit at a slightly slower pace. That is the part of the process we're going through right now with, again, rationalizing our locations and equipment, and so forth, and going through that evaluation now. So, I don't really have a number for you. Our expectation right at this point is that we are going to continue to maintain that size of the fleet, but that is something we're going through now and reviewing.

Okay. And a follow-up on the service intensity and the comment on rising proppant per stage. Are you seeing proppant per stage go into individual basins or activities at basins that require more proppant per stage?

Mike, this is Jim. Your question was a little garbled, but I do believe I heard it. That is a consolidated RPC comment. And it does relate to job mix. And it relates to increasing service intensity in basins where we are also doing more work. So, there is a compounding effect there.

That's not a US land kind of comment, that is RPC specific in the basins where we work the most. It is fair to say, in the Permian basin we have gone more from vertical to horizontal, or unconventional. Some of the wells are actually vertical but go through a lot of different layers, so there's a lot more service intensity there. There's a lot more service intensity in the Eagle Ford shale, as well. That is, again, an RPC specific comment.

Great, thanks.

(Operator Instructions)

It appears there are no further questions at this time. I would like to turn the conference back over to Mr. Landers for any additional or closing remarks.

Okay. Thank you very much. We appreciate everyone who called in. We appreciate your questions. We look forward to seeing many of you in the next few months. Hope everybody has a good day. Thank you.

This does conclude today's conference. We thank you for your participation. You may now disconnect.