RPC Inc (RES) 2016 Q2 法說會逐字稿

Good morning and thank you for joining us for RPC Inc.'s second-quarter 2016 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. At this time all participants are in a listen-only mode.

(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 are going to mention a few things that are not historical facts. Some of the statements that will be made on this call could be forward-looking in nature and reflect a number of known and unknown risks.

I would like to refer you to our press release issued today, along with our 2015 10K and other public filings that outline those risks, all of which can be found on RPC's website at www.RPC.net. In today's earnings release and conference call we will be referring to EBITDA, which is a non-GAAP measure of operating performance. RPC uses EBITDA as a measure of operating performance because it allows us to compare performance consistently over various periods without regards 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 are interested in seeing how it is calculated.

If you have not received a copy of 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 Hubble.

Jim, thank you.

This morning we issued our earnings press release for RPC's second quarter of 2016. Industry activity continued to decline during the second quarter and the rig count once again fell to a record low.

The oversupply of service capacity provided larger service companies an opportunity to lower prices to gain market share and forced distressed companies to secure work at even lower prices. We continue to price our work to achieve minimum projected contribution levels.

While revenues declined roughly in line with the rig count, our operating loss for the quarter was similar to the first quarter's operating loss due to the effective cost management. Our CFO Ben Palmer will now review our financial results in more detail, after which I will have a few additional comments.

Thank you, Rick.

In the second quarter, revenues decreased to $143 million compared to $297.6 million in the prior year. EBITDA for the second quarter was negative $19.1 million, compared to a positive $17.6 million for the same period last year.

Operating loss for the quarter increased to $75.2 million compared to a loss of $52.3 million in the prior year. Our loss per share was $0.23, compared to a loss per share of $0.16 in the prior year. Cost of revenues decreased in the second quarter to $127 million, compared to $241.6 million in the same period last year.

This was due primarily to lower costs resulting from lower activity levels and reduced headcount. Cost of revenues as a percentage of revenues increased from 81.2% in the prior year to 88.8%, due to competitive pricing for our services and lower activity levels.

Selling, general and administrative expenses decreased in the second quarter to $36.5 million compared to $40.2 million in the same period last year, due to lower total employment costs from headcount reductions, a decrease in several administrative costs, including lower travel and entertainment costs. SG&A expenses as a percentage of revenue increased from 13.5% last year to 25.5% this year, primarily due to significantly lower revenues.

Depreciation and amortization was $56.3 million during the second quarter, a decrease of 19.4%, compared to $69.8 million in the same period last year. Depreciation continues to decline as capital expenditures have remained low.

Our technical services segment revenues for the second quarter decreased 52.4% compared to the same period last year. Segment operating loss was $65.7 million, compared to a loss of $49.3 million in the same period last year. Revenues and operating results decreased due to declines in activity and pricing.

Our sports services segment revenues for the quarter decreased 45.8%, and operating loss was $7.2 million compared to a loss of $1.5 million in the same period last year. Now, I will discuss our sequential results. RPC second quarter revenues decreased to $143 million from $189.1 million in the prior quarter. The decrease in revenues was primarily due to declines in activity levels and slightly lower pricing. Cost of revenues as a percentage of revenues increased from 85.3% in the prior quarter to 88.8% due to lower revenues. SG&A expenses decreased by $7.1 million or 16.3%, due to lower bad debt expense, and a nonrecurring contingent professional fees that I mentioned last quarter.

As a percentage of revenues, SG&A expenses increased from 23% in the prior quarter to 25.5% this quarter. RPC's consolidated operating loss in the second quarter of $75.2 million was approximately the same as the prior quarter. RPC's sequential EBITDA declined from negative $14.1 million in the first quarter to negative $19.1 million in the second quarter.

As a reminder, the first quarter of 2016 income tax benefit reflects the impact of a favorable resolution of a state tax issue. This increased the first quarter tax benefit by $15.7 million. Our technical services segment generated revenues of $131.2 million, 25.2% lower than revenues of $175.5 million in the prior quarter.

Operating loss was $65.7 million, compared to the loss of $63.3 million in the prior quarter, a 3.8% increase. Revenues in our sports services segment declined 13.5% due to decreased activity and pricing. Our sports services segment incurred an operating loss of $7.2 million in the second quarter, compared to a loss of $6.6 million in the first quarter, a 7.9% increase.

As of the end of the second quarter, RPC's pressure pumping fleet totaled 927,000 hydraulic horsepower, of which 51% is unmanned but available to work. This compares to 40% at the end of the first quarter, due to a decrease in headcount to manage our cost in response to lower activity levels. As of June 30, RPC's total headcount was approximately 20% lower than at the end of 2015 and approximately 30% lower compared to one year ago.

Capital expenditures during the second quarter were $8.7 million, and we expect full-year 2016 capital expenditures to be approximately $35 million. During the quarter, we amended our credit facility to ensure we will have sufficient access to capital in the event of a significant improvement in our business. We continue to remain focused on maintaining a strong balance sheet and ensuring our equipment is adequately maintained and ready to work.

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

Thank you, Ben. The rig count has increased for several consecutive weeks. Activity levels in several of our service lines began to show signs of improvement during June.

As we begin the third quarter, we are seeing more customer activity and preparing for higher activity levels. While many believe the domestic oil and gas industry has finally reached a cyclical trough, the lack of clear positive trends in oil prices reduces our confidence in the strength of a near-term recovery. Although these are challenging times and the downturn has lasted longer than expected, RBC is well-positioned to prosper when industry conditions improve.

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

(Operator Instructions)

Rob MacKenzie, IBERIA Capital.

Good morning, guys.

Good morning, Rob.

First question for you, I guess in terms of your crystal ball and what you are seeing right now, there's been a number of E&P companies that have talked about putting more rigs back to work. We have seen the rig count tick up. We've heard from others so far this earnings season that they're hearing more conversations from their clients.

Can you talk about what you guys are seeing specifically? Especially in the context of being so heavy in the Permian where most of the incremental activity seems to be poised to be coming from?

Rob, this is Ben. Yes, we too are seeing that there's certainly lots of discussion, and as we indicated, we are seeing some increased activity ourselves. I think we have really focused on trying to hold the line on our pricing, and I think the fact that we have secured some additional work here recently, that's an indication that pricing has improved a little bit.

I wouldn't say that we said it's headed immediately higher from here, but certainly we feel good about the direction it is taking here in the short term. So we will continue to monitor that. I don't know that I have any other crystal ball in mind.

We're certainly planning for, looking for, hoping for, increased activity, but I wouldn't say that we've taken any firm, hard, definitive action in terms of severely or significantly cranking up our hiring activities or anything like that, but we are planning accordingly. We expect at some time in the not-too-distant future that we will see some increased activity, but will not react ahead of time to that. We going to remain cautious.

Great, thanks. On your pricing comment, would you say the pricing increase you've seen is primarily just offsetting inflation or is there some net benefit there?

Well, for -- I think for us it would be a net benefit. I mean, it's achieving our minimal, again, contribution thresholds that we've been seeking. So, we've been bidding recently fairly consistently. I think the prices have come up, so now we're winning a few more jobs because our bids are securing the work.

So, clearly, it's a net benefit to us because it is work that we are willing to do at those particular prices, at this particular point in time.

Great, that's very helpful. And then, on your strategy here to be ready for the upturn, have excess capacity in the market -- what kind of incremental margins do you expect we should see when you more fully utilize your equipment people that are already in the field?

Well, this is Ben again, I would, clearly, they could be -- they'll be very strong incremental margins but there are so many variables that go into that, I think, to throw out definitive percentages would be not very smart. But, clearly, I think they would be strong. It depends on whether it's coming from activity, whether it's coming from pricing, or activity and pricing; it depends on lots of things.

But I think, clearly, with the cost structure we have in place today, and with any sort of improvement, incrementals could be quite nice.

Okay, and one more strategic question? How do you see the market this next upcycle being different from the last cycle? Is it your competitors from bankruptcy? What's changed? How do you see the cycle being different than prior cycles?

Rob, this is Jim. The next upcycle -- cloudy crystal ball, but we certainly think that higher service intensity is an enduring feature of the oil field service business. That probably means a lower rig count, but it will probably also mean -- a lower next peak rig count, but it also means the equipment will be working harder.

So there's some operational dynamics that change -- logistics become even more important. Equipment quality becomes even more important. We think those are certainly features of the next upcycle.

As bankruptcies or insolvencies work their way through the system, depending on how kind the Capital Markets are, that will tell you how much of the equipment and people remain, and we will just have to see. The oil field service market will always overbuild. We would just hope that next time it will overbuild a little more slowly than previous times.

And, certainly, some of the outside capital backers who have gotten involved in the business this time, because some of their institutional imperatives about the lives of their funds and everything, may have gotten burned enough this time that they will not jump back in so quickly next time. But understand, that is a hope as much as an expectation on our part.

Great, thank you. Thank you.

[I'm through.] (multiple speakers)

Marc Bianchi, Cowen and Company.

Thank you. Just back on the pricing conversation? It sounds like the low end of pricing, where pricing was at, perhaps a loss for some of the jobs that you weren't participating in, has gone away.

One, is that correct, or the right way to frame the pricing situation? And, two, is this larger players or smaller players that have sort of changed the way that they are behaving? Can you provide any color on that?

This is Ben. We've certainly heard that our two largest competitors are talking as if they are pushing pricing, and I think, that's probably showing up in some of our success in winning some additional business. I think that what is going to be a differentiator, as well is, I think the more distressed players and whether they'll have the ability to effectively be able to execute jobs on the well site.

It's difficult if you don't have well maintained equipment to consistently deliver quality services. And we're hoping in the next sub cycle that's going to be another differentiator for us. Again, it's something we have very much focused on - the maintenance of our equipment.

Clearly, you could see based on our comments that we are nowhere near fully staffed, but the equipment is in good shape. The next phase when we make that decision will be to add the people to be able to put that quality equipment to work, and we think that will be a differentiator for us

Okay, okay, thank you for that. On the equipment topic, we've heard some other companies talk about water issues in the Permian, using recycled water, briny water that may be causing some increased wear and tear on the equipment. Is that something you are seeing?

And also curious -- thoughts on what it may cost to reactivate all the idle capacity that you have?

Mark, this is Jim. On the first question, we use a lot of produced water, including in the Permian. It has very high salt content, it also has very high iron oxide content. My understanding from spending time with our operations people is that there is nothing new about excess briny water and having -- being hard on the equipment. It does make -- it does make the chemistry difficult and it makes it sometimes harder to make the gel hold together with the proppant and then break at the right time in longer laterals, but that, as far as I'm aware, does not have anything to do with equipment wear and tear.

In terms of -- in terms of how much it is going to cost to get an idle fleet back to work, what we've been saying and to continue to say and believe is that we have maintained our equipment, including the idle equipment, and so a lot of those costs are behind us. So, reactivation of our idle fleets would not be -- it's not going to cost all that much money, however, it's created from an accounting point of view.

I would say yes -- it will [increase] the spin. There shouldn't be much capital cost involved other than normal. We continue to maintain the equipment so we've included some of the capital cost to replace component parts, and we continue to be -- not 100% caught up but we are right where we normally are with normal down equipment and equipment that needs to be brought back up to spec.

So the cost to us is simply going to be, by and large, to get the equipment from wherever it is to where we want it to be, hire the crews, get them trained and get them put in place. So the cost of the equipment itself will not be very much.

Got it, okay. Just one more, if I could. It's really impressive decremental margins holding the cost line, I suppose, here in the second quarter for technical services. If activity is up, say 10% or so in the third quarter, what sort of incremental margins should we see in this business?

Marc, this is Jim. Maybe I'll -- Ben answered a similar question a few moments ago. It's still a very good question, one we puzzle over.

Depends on when pricing comes back. Keep in mind that at breakeven profitability or below profitability, additional activity at current pricing doesn't help you a whole lot, and you kind of have seen the reverse of that in second quarter. There will definitely be some incremental margins -- they won't -- in the coming quarter, the coming months, you won't see the same incrementals at RPC, probably, that we saw at the beginning of the last upcycle in 2010. Those were in the 40% to 50% range. So, somewhere between 0% and 40%, and I'm sorry I can't be more specific.

Understood, thank you. I'll turn it back.

Thank you, Marc.

Tom Curran, FBR Capital Markets.

Good morning, guys.

Hi, Tom.

Ben or Jim, when it comes time to start restaffing the available but unmanned horsepower, what mechanisms do you have in place to ensure that you are going to be able to do that as efficiently as possible, while adhering to your standards for experience and quality? And do you expect those mechanisms to be an advantage for you competitively? Especially given your concentration, not just in the Permian, but in the state of Texas?

This is Ben. In terms of some of the things we're going to do, we don't have any magic formulas. I think it's being well-coordinated across the organization. We have tried to take advantage of, and have been working on taking further advantage of some technology to try to speed up or to decrease the time it takes to get new employees onboarded, and into our system.

That's always a challenge when you are geographically diversified. So from that point, you know, if all of the growth came in only a few areas, that makes it a little bit easier because there's concentration of effort, communication improves and all of those other things. I don't know that I will call it a competitive advantage, per se, but I think it's just something we concentrate on.

We've gone through, I'm sure you are familiar, we've gone through a number of growth spurts in prior years. And so we've had to gear up and design and implement processes to be able to get the onboarding taking place. First getting the recruiting, the job fairs, and getting people onboarded and after the interview process.

So we've been through it a number of times. It's always a difficult process, but one that I think we'll do better this time than we have in the past; and I think -- I expect it to go reasonably smooth. And I think when the time comes, we'll be able to get up to speed as quickly as just about anybody.

Okay. So I'm not hearing to much concern there about friction, or potential bottlenecks.

I think -- I don't want to say -- again, I said it's not going to be simple. I think it'll be a challenge.

Right.

I think we've got a number of things we've been kicking around -- some ideas about how to jump start the process when the time comes. And, clearly, I think the type of people we can get, whether we can get experienced people or people that are brand-new to the oil field; that can make a big difference. Those will be things that we make decisions about and implement specific steps to try to take advantage of those opportunities where we see.

Thank you for that, Ben. Jim, in the past, you've shared some telling and insightful anecdotes about the secondary market for frac horsepower. How has that market evolved since the last call?

Tom, I think the fair market, if you want to call it fair market value -- because it's a distressed sale, so it may not be fair market. Fair market value as a percentage of replacement costs during a normal cycle, stays at around 20% of fair market value, somewhere -- or 20% replacement costs, excuse me. We haven't seen too many transactions in the past month or so.

One thing that's kind of interesting now is that we are seeing -- have seen some fairly new equipment. In other words, it only has a few hours on the pumps which means it's never been used on a job that's been for sale at maybe 30% or 40% of replacement cost -- new. So, if you are in the market for new equipment, you would buy a few of those pumps before you buy the rest of the fleet.

We have not seen too many offers or really any in the past month or so for distressed sale equipment. I don't know exactly what that means. We also know, one, merchant bank on the west coast that has been acquiring distressed, frac, and other oil field service equipment and selling it -- selling it in another secondary market, when the time is right. Really, not a lot of change recently. We haven't seen many transactions, or many potential transactions recently either.

Okay. Last one for me, two-part housekeeping question? Jim, could you give us the standard breakdown for technical services revenue by segment? Also tell us what your sequential change was in profit consumption per frac stage?

Yes, sure thing. So, this is in descending order of size, and as a percentage of solid revenue. Pressure pumping was 41.8% of revenue for the quarter. Through tubing solutions was 24.5% of revenue for the quarter. Coil tubing was 9.8% of revenue for the quarter. Nitrogen was 5.6% of revenue. Patterson tubular services, which is our pipe handling storage and inspection business along the Gulf Coast, was 4.2% of revenue also -- was 4.2% of revenue.

Then sequentially, our amount of proppant per stage, which is our proxy, our measure of service intensity, increased by a little less than 4%.

Great. Thank you for the answers, guys.

Great, thank you, Tom.

Jim Wicklund, Credit Suisse.

Good morning, guys.

Hello, Jim.

Last year we were all listening to -- there'd be a bid in the Permian, and there will be 37, or 39 people bid, which was ridiculous. How many people are you seeing in tenders now in the Permian when you put a little bit of equipment back to work? How many people are out there bidding these days?

Jim, this is Jim. Many fewer. There are probably -- there are probably twelve potential bidders. How many people show up, fewer than that, so the number of bidders is greatly diminished.

Having said that, there has been a few people like, I can think one, that have come into the Permian from other markets just because it's the least bad in many ways. But, in general, the number of bidders has greatly diminished over the past year.

That's helpful, the number 12 beats the number 37 all day long.

It does.

In your prepared management commentary, you note that prices -- that lower prices that provided larger service companies an incentive to lower pricing and gain market share. We heard about the Big Two doing some predatory business. But you guys also mentioned that your pricing is moving up because the big guys are pushing pricing.

Have the big guys, in your market, have they seemed to have abandoned that incentive lower pricing and gain market share? And they are now sweeping you guys up in the move to higher pricing?

Jim, we have heard that may be coming but we have not yet seen it in financial results. So, we have heard that the bigger people who have the opportunity to do that have said, you know, pricing is unsustainable. We're going to start doing some different things. We have heard that.

And have every reason to believe -- we have no reason not to believe, if you don't mind the double negative. We have not yet seen that in our financial results, or it has not yet materialized in consummated pricing. In other words, pricing that we have won.

(inaudible - multiple speakers)

-- I'll take that. Of the horsepower that you currently have working 50% or so utilization, how much of your spreads are working 24/7 today?

About 40% are configured to work 24/7.

Are they actually working though 24/7? I'm just trying to understand how much capacity you could bring to the market in terms of servicing your customer, by just hiring another shift without actually putting any of your idle horsepower to work?

Yes, and I know that's part of your investment thesis on how the recovery is going to look. Our utilization, Jim, on our marketed fleet is very low. It doesn't surprise you, so when you talk about fleets being configured for 24 hour work, that means they are the right-size and have the appropriate crew size, but they're working at pretty low levels.

So those 24 hour fleets could work more -- you know, more than they are working now. I'm sorry there's not better clarity.

Jim, this is Ben. We did have, though a pretty high percentage of the work during the second quarter was utilizing the 24 hour crews. So I think that, if that's an indicator, that -- maybe that's a trend that will continue and something that we'll take into account as we do our hiring, and configure our crews, and how we prepare them to work.

Okay, for the last question, if I could, and I know this is an open-ended thing. But, when should we expect -- and I realize none of us have crystal balls that work very well -- but it seems obvious if you just let the [future drip] that 2017 will be some piece better than 2016.

And most people believe 2018 will start getting back to almost a normalized market, if there actually is such a thing going forward. When do you know that the rig counts quit going down? When do you think you can get your cost cuts to the point that you can get to breakeven? Is that a 2017 or an 2018 event?

Breakeven P&L, Jim? I assume?

Yes, to breakeven. Just so we get to the point where we're not losing money anymore.

(inaudible - multiple speakers)

-- and all but which year should it be?

I think what you're asking is a combination of revenue increases and our cost structure being in line.

Right, correct.

Just with the caveat that it is a muddy crystal ball --

We won't hold you to anything, I promise.

Yes, it's probably Q3 2017 if things work well, if we gain ten rigs a week for the next nine months or so.

If the market is going to get in a spin -- if the market gets as tight as some people are indicating, as quickly as it could -- if I had to pull a number out of the air too, I would probably throw it out there -- mid-to late 2017. But, as you know, there's so many variables involved.

I know, there's too many moving parts, but just an idea, so that's helpful. Let me sneak one more in. There was a question asked earlier about hiring people? Most of your operations are so centered in the Permian and Midland doesn't have a whole lot of competing industries.

How long do you think it would take to go out and hire and train another shift to go to work on one of your spreads? Is that five weeks, or is that five months?

One incremental crew?

One incremental group?

Yes.

Four or five weeks. We just asked the question? Yes, as long as it's one crew.

Thank you much.

John Daniel, Simmons & Company.

Just have a few for you today. Can you speak to the sequential change in stage counts, as well as the monthly stage count evolution during Q2?

John, this is Jim. We knew you'd ask that question. June was the best of the three months, May was the worst. June was the best month of the quarter, but it wasn't a marked big difference. But, June was definitely the best month for the quarter.

And is July shaping up to be better than June?

It is. Incrementally, yes.

Probably top-line up, mid-to-high single digits quarter for quarter?

That -- John, that's fair. Quarter to date, the rig count is up sequentially by a little over 7%. I hope that we can get what the rig count gives us, and it may be a little bit more so, I think that's fair.

Okay. You mentioned that you've recently secured additional work, is that incremental crews going back? Or just better utilization for existing fleets?

Better utilization of existing crews.

A couple of more quick ones here. When companies do emerge from the bankruptcy process, or the debt restructuring process, and have clean balance sheets like yours, are you concerned that competition may potentially become even more intense than it is today?

John, this is Ben. I think there's debate about that. On one hand, to say it seems unfair for a distressed company to quote-unquote snap their fingers and pre-package bankruptcy, and come out and they have a nice line of credit, all of those other things.

And we fear and need too, certainly be cognizant of what they may be capable of doing. But I just have to imagine, haven't obviously been invited into any of those companies' corporate offices, or field locations to see what the attitudes are like, and what the condition of their equipment is like. If people have a working capital loan, but their equipment has been ravaged and not maintained, and cannibalized, how hard is it going to be to effectively to get that equipment back and working, in working order, mechanical order?

And then just the attitudes of the people and their ability to attract quality personnel into a company that still is pretty distressed and that kind of thing. So, I think, clearly, the fact that they don't go completely away is certainly something to be aware of, and to keep our eyes open to. But I think there's going to be a lot of challenges for those players, and that's something, again, alluding back to what I said earlier, could be very difficult for them to consistently provide quality services. And I hope will be able to take advantage of those situations and try to capitalize on our consistency and quality of service.

And this is John, another element is that we're seeing a lot of these distressed companies are treating their suppliers so badly that their suppliers are mad at them. That's also impacted the customer because in some cases, the second-tier suppliers are putting liens on the customers' wells. The debate is, how long is people's -- how long are people's memories and I don't have an answer to that.

But, certainly, the reputation of the individuals is bad. I think if during these really, really bad times, you know, you get stiffed by one of your customers, if you are a trucking company or a sand provider, I think, you will remember those people when times get better the next time around. So, we're hopeful that there's still some justice for people who have good capital discipline and good business practices. And that is how we are going forward.

Right, two quick ones and I'll turn back over. What would you like to do with your cash position? Specifically, how actively are you looking at acquisitions right now?

This is Ben. We, for the last several months, again, try to keep our ears open. We've reached out to a number of folks but nothing that's really hit us.

I guess, today, given there's been, obviously, a few weeks here of rig count increases. We feel a little bit better about our business and the opportunity to maybe look for a nice tuck-in acquisition. But there's nothing on the horizon.

But, again, we would love to find something small. I think were confident enough at this point, again, something small that could really add something to our service offerings would be nice. But there's nothing right before us at this time.

And at last one from me and I will jump back in. What's the utilization and outlook for your sand operation?

Presently, very low. And outlook, it just depends. A lot of people talk about sand tightness, and part of our thesis is service intensity increasing, so we are -- we're ready and looking forward to more sand demand but it's not there now.

Thank you, guys.

Thank you, John.

Byron Pope, Tudor, Pickering, Holt.

Good morning, guys.

Hello, Byron.

I just have one question in thinking about the revenue and the breakdown that you gave, Jim. A little bit different as we've gone through this downturn with tubing solutions having slightly higher percentage of the mix than at the prior cycle peak. Maybe for the three largest segments, pressure pumping through tubing solutions, coil tubing?

Can you remind us, at a high level, the nature of the cost structure as you think about it in terms of fixed versus variable? I'm trying to think through as the next upcycle unfolds, how to think about the potential margin improvement associated with those three largest service lines from a revenue dollar perspective?

Byron, in general, pressure pumping is a higher variable cost, lower fixed cost business. So pressure pumping is a higher variable cost. Through tubing solutions, kind of the same way, through tubing solutions has a high personnel cost, employment cost component in its cost structure.

Coil tubing, maybe a little bit less on the variable cost part of things. So that's a pretty decent way to characterize it.

Yes, most variable pumping, next coil tubing and last, through tubing. The big driver for through tubing, a lot of that is their technology and innovation, which is driven by a lot of other things. Strength of pricing and so forth is the demand for some of the techniques that they have.

Okay, and a quick follow on related to that. So during this downturn, I'm assuming that at least some element of fixed costs have been taken out of the structure, and it should benefit during the next upcycle. Is it fair to think that those might be more skewed toward pressure pumping, or would you say its more balanced across the service lines in terms of where you might have been able to take some fixed costs out of the system?

I think this may answer your question. We talked about headcount reductions, that was consolidated headcount reductions, and there have been more that have come in pressure pumping then the other service lines.

Okay, that's very helpful. Thanks, guys appreciate it.

Okay, Byron, thank you.

Matthew Johnston, Nomura.

Good morning, gentlemen.

Hi, Matt.

I was just wondering if you could talk a little bit about how you think you are positioned on the logistics front, your ability to move sand, other proppant, chemicals, fluids, et cetera, from point to point? You probably stack up pretty well versus your peers today. But if the next upcycle is going to be characterized by higher service intensity and higher volumes for everything getting pumped down hold and presumably the industry infrastructure is going to be stressed. How do you think you stack up today? Do you think you'll need to make some more investments as the recovery unfolds on the logistics front?

Matt, this is Jim. We have a good position in the Permian Basin, and I think our logistics capabilities are strong and intact there. I think that's, that's a positive for us.

I think, in some other basins, I think, in the Midcon we're pretty well-positioned. The Eagleford has historically been a little bit difficult, but I think were pretty well-positioned there. If activity -- if and when activity really comes back in the Bakkan, and for us in the Marcellus, we're going to have some work to do, just because those areas have not been strong for us. We don't have great logistics capability.

One thing we've learned in the last cycle and over the past six years of expansion is, I think we've learned some lessons about how to have logistics in place, how to work with the trucking companies for the last mile, how to manage transload facilities, and just as importantly, playing defense, how to price work when you know that your logistics may not be as good in one basin as another.

So I think we've got some learnings from the next upcycle, which is not exactly answering your question, but I think we're well-positioned in the Permian. We'll have to think about some things in the Marcellus and the Bakkan, as things come back there.

Okay, got it. Thanks for that. That's great. Maybe just one quick follow-up, Jim, maybe you could just lend us your insight on the most up-to-date view on oversupply for hydraulic horsepower capacity throughout the industry? Any updated views on fleet attrition throughout the industry?

Still oversupplied. The US land market for hydraulic horsepower right now is probably 4.5 million hydraulic horsepower. In terms of the fleet that is out there that could go to work, and not counting personnel issues, we're just talking about equipment and equipment readiness.

It is probably anywhere from 12 million hydraulic horsepower down to maybe around 10. That is, again, emphasize equipment that is ready to work, whether or not the crew is in place. We're still oversupplied by several turns there.

Got it. Great, thank you, guys. That's it for me.

Okay, Matt, thank you.

We'll now move on to [Praveen Narra] of Raymond James.

Hi, good morning. Just a couple of questions. In terms as we look to the upcycle, how do you think about the CapEx needs as you go forward and need to reactivate your fleets?

This is Ben. We touched on that briefly earlier. I think CapEx needs to reactivate the fleets will be minimal.

More of the incremental costs will be on the interim period between recruiting, hiring, and training, and getting the crews up to speed. That's going to be where the vast majority of the incremental costs are going to be before they can begin to contribute. And we talked earlier about that could take as little as three to four weeks, maybe as much as three to four months to get an incremental crew put in place.

So that's where that is. CapEx needs, not that much. And when we look at, and I'm sure many people have done this before -- if you look at our total horsepower, therefore our capability, we have a lot a brand-new equipment that has never worked before.

It's not been put in the field. We feel that we will not need to have a significant capital investment or expansion activity to be able to get up, if industry conditions allow it to get up to generate significant cash flows again. So, I do not anticipate that we will have, unless there's just a tremendous demand, that we won't need to have a lot of capital investment for an extended period of time.

Okay, perfect. I guess, with the idea that you guys are saying that we're in the cyclical trough and maybe M&A deal flows is -- go to where the opportunities aren't as good? How do you think about revisiting the share repurchase program?

This is Ben. Yes, one of those things we always look at a combination of everything -- share repurchases, dividends. At this point, it's all about maintaining the balance sheet and we'll have to have a lot more visibility and comfort with the direction and the duration and the speed of recovery in the industry before we're doing anything really aggressive.

So, I think we're just trying to preserve the balance sheet and the cash, and we'll know a lot more, again, once we feel like things are sustainable, and we have some comfort level with what the future looks like.

Okay, perfect. Thank you very much, guys.

Jud Bailey, Wells Fargo.

Thank you, good morning.

Hi, Jud.

Follow-up question on the stage count commentary earlier. Jim, did you say, what is your stage count decline, sequentially, in the second quarter? I think I missed that.

No, you didn't, we didn't say it. (laughter) In percentage terms, we sometimes kind of talk around some of these numbers, but it was, as Ben said in his prepared comments, it was responsible for the majority -- activity level declines were responsible for the majority of our revenue decline. And it was in the 30-ish percent range.

30ish percent range, sequentially, okay, got it. And my other question is just a little more broad? If we think about the second half of the year, obviously, activity has started to move up some, inquiries are up, you're having dialogue with customers, it sounds like.

But I guess you're also more cautious because given the recent pullback in oil, which most people are. If oil, let's say, is $45 for the rest of the year, is it reasonable to think that we see on a 5% to 10% increase in connectivity in third quarter and can activity continue to gradually move up in the fourth quarter, or do we slip back down? I guess I'm trying to figure out, do we need $50 to see continued gains through the end of the year? Or can we still move up, even if oil is, say $45? Curious to get your thoughts?

Jud, its probably a matter of degrees but the conversations and the work we are pricing today are for customers who are going to sell their oil in the market for mid $40s. We think $42 has a lower -- if that's where the price is today, it has a lower bias and the trend is not going the right direction. Between $45 and $50, the incremental activity adds that our customers are talking about, I think stay in place.

It doesn't get us back to our -- I alluded to a ten rig per week increase for the next year. That's probably not going to happen. But it still has some sequential improvement in place if we are $45 or north of there.

If you want my crystal ball, this is Ben. I think at $45, I think, we've seen some incremental improvement. I think we will continue to maybe see a little bit, but I think it needs to be up closer to $50 or north of $50.

Otherwise, we are going to be subjected to the holiday slowdowns that sometimes we experience. Then people will be looking to early next year. So, that's the big question in my mind about, ultimately, what the fourth quarter looks like -- does it bump along where it is right now?

The increases will be muted but if it begins to head up, people may feel like we've got to get out there and get the work arranged, and we're not going to take a long holiday, we need to get moving. So, I think it needs to be headed up towards $50, and higher, to really continue the current trends, or increase the pace of growth.

Okay. That's helpful, thanks. And then my follow-up is, can you comment on the next of operators' size you are having discussions with? Is it big E&Ps, or smaller, private? Is it somewhere in-between? Can you comment on that?

Jud, this is Jim. It is our customer base which typically is the large independents. Those are the people we are pricing work for and plan to go to work for more.

Got it. Thank you, I'll turn it back.

Thanks, Jud.

Brad Handler of Jefferies.

Thank you, good morning, guys.

Good morning, Brad.

Hoping, maybe just a little bit of clarifying here for me? I think a lot of the conversation around activity and pricing, related specifically to frac, but just curious about coil, pipe handling, maybe on the rental side, just to name a couple of dynamic competitive markets, as opposed to through tubing, which might have its own dynamic. If we look at revenues for example in coil, its a little hard for us to calibrate because Q1 had some specific variables.

You've recovered a little bit in Q2, and maybe it's now back on par with the market. But if you could just -- what pricing dynamics do you see? Are they comparable to frac in a couple of the markets I mentioned?

Are you doing more bidding work in those areas? I'm sorry for the multipart question here. But then, as it relates to coil and perhaps the other parts of the business, what should we read into some of the production support side of activity and inklings around demand there? Thanks, I can get back to remind you if there were too many parts to that question?

We have short attention spans, Brad.

Believe me, I hear you.

I could speak to a couple of dynamics. This is Jim. Pressure pumping -- pricing for that service has clearly been under the most pressure, forgive the pun, over the past year. There was renewed pricing pressure in second quarter and that was a little bit of a surprise to us, as perhaps to others in the industry.

So pressure pumping has been hurt the worst. Coil tubing's revenue actually increased sequentially, a little bit, and you can read that in the percentages of revenues that it comprised. And we think the supply and demand dynamic might be a little bit different in coil tubing.

Everything is oversupplied right now but coil tubing is probably less oversupplied. It's definitely less oversupplied than pressure pumping, we can just go ahead and say that. In our tubular handling business, that's more a function of volume and the service we are providing. So on a true comparable concept it's hard to say that pricing is down or up. That business just doesn't move that way but coil tubing has been a little bit stronger. Rental tools is drilling related, pricing has declined a lot there.

But in the overall dynamic, pressure pumping has been the worst. Our bidding and our potential work in third quarter that we think is materializing is in the Permian and the Eagleford, and a little bit in the Bakken, believe it or not. There's some discussions there where some work might materialize.

The Marcellus continues to be weak for us at RPC and that may be Company-specific.

I will add. Brad, this is Ben. I think for Patterson Tubular, it's been a pretty nice steady performer during this time period. Some of that is the customers we serve and it happens to be primarily focused offshore.

I know offshore has been a little bit bumpy, but we've been fortunate with some of the technology we have there on the inspection side. We've been able to keep that work fairly steady. It's been a nice contributor throughout this cycle.

Okay. So the paraphrase, just to cherry-pick a couple of things -- and thank you for the broad brush. It was very helpful.

So the pricing in coil hasn't been -- just to pick on that first, pricing coil hasn't been affected that much? But just to clarify, is there some push upwards? Do you have a little bit of latitude, if and as activity is pushing up a little bit in coil in the second half of the year?

Coil tubing pricing has actually improved a little bit towards the end of the second quarter, Brad. Perhaps I neglected to say that, but that's the case.

Okay, all right, that's helpful. And then I got you on the tubular handling and the steadiness of that. That's helpful. Maybe specifically to the exposures you do have to production, to production oriented activities?

Whether it's through tubing or in coil, what inklings are you getting around demand for that from your customers today?

We probably don't have enough exposure or enough deep knowledge about the exposure that we do have to have much to say there. I mean, some of our surface pressure control tools and some of the metering type equipment, we're seeing a little more demand but there's nothing that stands out either positively or negatively, from the rest of our services.

Okay. Got it, understood. Thank you, I'll turn it back.

Okay, thank you, Brad.

Follow-up question from Marc Bianchi.

Thank you. Just back to the idle fleet and what it would take for you to put it back? Some other companies have talked about a certain amount of price increase that they would need.

Is there a number that is sort of a rule of thumb for you? Or something you are thinking about in terms of a price increase that would be required to reactivate a crew for a customer?

Marc, when asked that question recently in conferences and things, we've said anywhere from 15% -- some of our peers have said 20%, 25%, 30%. Unfortunately, the nature of the jobs is just so varied that it's impossible to put a rule of thumb on it. I mean, if a job comes up -- if a new job comes up and pricing may not be great, but it's proppant we have, and a good basin with good crews, that pricing -- that required pricing increase would be lower than if it were in a basin where we didn't have good infrastructure, et cetera. It's just a very wide variety.

This may be obvious, but this is Ben. If there's one particular job that came in and there was some significant price improvement, would we reactivate a crew? I'd say no.

We're just like operators, we're trying to look ahead. We're trying to see what we feel like the trajectory of activity and pricing is. How comfortable are we. What's our feel for what our customers are saying.

We'd be much more likely to initiate and move forward aggressively to add a crew or crews if a customer was making some sort of commitment to us in terms of the amount of work, where the work will occur and, things like that. So we have had, will have those conversations with customers. And how we feel about those conversations will also drive how quickly and aggressively we add crews.

But, clearly, it would have to be -- pricing has improved a bit so some of the pricing we have been submitting at our minimal levels are now hitting. We'll see where pricing goes from here, and how durable we think that is, and what the trajectory is. That'd be a factor in, again, when and how quickly and aggressively we begin to add crews.

Okay. Thank you very much.

Thanks, Marc.

Another follow-up question from John Daniel.

Thanks for putting us back in. Jim, depreciation was down about $4 million this quarter. Can you just walk us through how that should evolve, given the low levels of capital spending?

Sequentially, depreciation should continue to decline by roughly that dollar amount each quarter.

CapEx remains low. Yes, that's kind of that trend.

Fair enough. Okay. Then did Q2 include any severance-related costs built into the segments? If so, can you break that out?

Probably not enough that was significant enough to be notable. But there will be a small incremental benefit moving forward, all things being equal, but not really that big.

A little more WARN Act severance, that sort of thing.

I know you weren't trying to provide specific financial guidance but you mentioned the possibility of being earnings positive during second half 2017, [make it three]. Again, I'm sure that's probably just more than gut than anything, but is that view based off of reviewing a bunch of sell-side rig count and EMP capital spending forecast? Or is that based more on specific discussions with customers regarding their 2017 spending plans?

The collapse in your depreciation expense and the benefit of the cost cuts. Given the lower incrementals coming out of this downturn, it would seem that such a view might be a tad optimistic.

John, there is -- no customers have come to us and said -- boy, we've got big plans for 2017 and we need you on board. Some of that is the macro -- some of it is gut, some of its just a macro view. We do believe equipment attrition is understated by some amount.

We do think service intensity is so high that at some point, supply-and-demand of pressure pumping equipment will come into equilibrium. I know how strange that sounds in the current environment -- and that we will get some pricing power at that point. And we've seen, at RPC over the past 15 years, we've seen some drastic improvements and decrementals when things go bad.

So it can certainly turn on a dime. But there are a lot of variables out there. But, no, this is not an average of a bunch of people's forecast and capital plans that have told us July 2017 will be P&L positive.

We could sit down and we do run various scenarios, and at what could happen if this, that, and the other occurred. To your point, depreciation is falling. To my earlier point, we don't expect that we're going to have to have any significant capital expenditures -- without significant capital expenditures we could have significant quantities and capability of equipment to do a tremendous amount of work. So, depreciation is -- I don't expect depreciation is going to increase anytime soon.

Okay. Guys, thank you so much for your help.

Okay. Talk to you later.

(Operator Instructions)

Chase Mulvehill, Wolfe Research.

Good morning, fellows.

Hi, Chase.

Thanks for letting me in the call. I have a couple, few questions. The first question I want to ask about -- horsepower per fleet trends, what you're seeing within the Company?

What is your average horsepower per horizontal fleet today? How does that compared to 2014?

Chase, this is Jim. I'm not sure if I have that right in front of me but the average horsepower for horizontal fleet is probably a little bit higher, call it 10% or 20%. It's kind of hard to do seven eighths of a truck, or something.

But it's a little bit higher just because of higher service intensity requirements. Thinking about fleet requirements as a function of time, it's higher as well because we're getting more efficient and proud of the good job we're doing. But some of these longer laterals, they just take longer. It's the same amount of equipment but it's just on-site longer.

Even in spite of the efficiency gains we're getting. So, 10% or 20%.

Okay, and along those lines if we think about an active fleet and look at the efficiency of those fleets, how does the number of frac stages per day, how has that been trending for your active fleets?

(inaudible - multiple speakers)

So you've been getting better on that side?

We have been getting better, and some of that is a function of slack resources. In other words, it's easier to get certain things, be it proppants or all the other things that go into a frac job that may not be our responsibility -- water, for example, personnel, other things.

So the number of frac stages per day has increased between 2014 and today.

Okay, all right. At today's pricing levels, what do you think gross margins are on a fully utilized 24-hour fleet? And gross margins, not EBITDA margins and not variable margins.

They are low.

They are low? Are they 20% on a fully utilized 24-hour fleet?

No, no. That will be -- this is just a guess -- high single-digits, low teens.

Oh, wow. Okay.

(inaudible - multiple speakers)

And so, if you looked at that, what would you think is a normalized level for a 24-hour fleet on a gross margin basis?

I -- (inaudible - multiple speakers) -- or just general. (inaudible - multiple speakers) I don't have a good enough answer to throw out, to be honest.

Is it 30%, 40%, if SG&A is 10% of revenues?

30% or 40%, EBITDA?

Gross margin. (inaudible - multiple speakers).

I mean, on a normalized basis, it's higher than that. You know, with everything working the way its supposed to and good utilization of your equipment, no equipment breakdowns, logistics working -- the reason it's hard to say is we've never actually seen that.

Okay, okay, all right. Last one and then I'll turn it back over. Internally, do you have target market share gains for the next upcycle?

We don't have target market share gains. We have internally looked at what market share gains we might be able to achieve based on forecasts from you, from many, including you. And some of the other things in our assessment of fleet attrition, that sort of thing.

We have about 4% market share, and the idea would be that we could, perhaps, increase our market share to the 6%, 7% level in an upcycle without to much exuberance from capital sources putting pressure pumping equipment back into the field.

Okay, awesome. That's all I had. Thanks, Jim.

Thank you Chase.

(Operator Instructions)

Rob MacKenzie.

Ben, I had a follow-up for you, if I may. One of your bigger competitors indicated that they're going to apply an NOL carryback, and generate close to $0.5 billion. Any plans on that as a source of cash for RPC? And a second part of that question, how should we think about your book and cash tax rate for the rest of this year?

Wow, okay, yes, $0.5 billion, we're not going to get quite that much. We did a carryback and produced some cash. We did a carryback of 2015 to prior year to generate some cash in 2016.

We will do the same for 2016 and generate some cash early in 2017. We're looking at a few tens of millions that will come back to us. And in terms of effective rates, I don't expect any of that large benefit in the first quarter that kind of throws things off.

Otherwise, we're not looking at any significant changes to the effective tax rate for the year, versus what it was in the second quarter. You know, quarterly, moving forward. Cash versus total tax rate -- have to do the calculation on that.

We -- you can kind of back into it, again, I believe that -- I don't know, I'll get back to you on that in terms of the cash rate. I think we could get, again, tens of millions. Obviously, depends on what happens in the last six months as well.

So, I'd be telling you what I thought the last six months were going to look like if I told you what all those answers were, and maybe why you're asking the question.

Thank you very much.

There are no further questions at this time. I will turn the conference back over to Mr. Landers for any additional or closing comments.

Thank you, and thank you everybody for calling in and asking questions. We enjoyed the discussion. Look forward to seeing everybody soon. Thank you.

That does conclude today's teleconference. Thank you all for your participation.