RPC Inc (RES) 2016 Q4 法說會逐字稿

Good morning, and thank you for joining us for RPC Inc's fourth-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.

(Operator Instructions)

I would like to advise everyone that this conference call is being recorded. Jim will get us started by reading the forward-looking disclaimer.

Thank you, 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'd like to refer you to our press release issued today, along with our 2015 10-K 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 regard to changes in our capital structure. We're also required to use EBITDA to report compliance with financial covenants under our 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 our press release for any reason 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.

Thank you, Jim. This morning, we issued our press release for RPC's fourth quarter of 2016. While 2016 was a historically bad year, we saw continued signs of industry improvement during the fourth quarter. RPC achieved improved financial results due to increasing activity and slightly higher pricing. We benefited from our well-maintained and staffed equipment, which was positioned to meet the increased demand. Our CFO Ben Palmer will review our financial results in more detail, after which I will have a few closing comments.

Thank you, Rick.

For the fourth quarter, revenues decreased to $221 million compared to $268.1 million in the prior year. Revenues decreased due to lower industry activity levels, equipment utilization and pricing for our services. EBITDA for the fourth quarter increased to $15.7 million compared to $9 million for the same period last year, due in part to a gain on an asset sale in the fourth quarter of 2016, which I will discuss in more detail a bit later.

Operating loss for the quarter decreased to $32.2 million compared to $57.4 million in the prior year. Our loss per share was $0.10 compared $0.18 loss per share in the prior year. Cost of revenues decreased from $217.4 million in the fourth quarter of the prior year to $173 million in the year, due primarily to lower activity. Cost of revenues as a percentage of revenues decreased from 81.1% in the prior year to 78.3%.

Selling, general and administrative expenses decreased from $36.6 million in the fourth quarter of the prior year to $35.8 million this year. SG&A expenses as a percentage of revenues increased from 13.7% last year to 16.2% this year, due to lower revenues in the current year.

Depreciation and amortization was $48.4 million during the fourth quarter of 2016, a decrease of 26.9% compared to $66.2 million in the prior year. This was due to minimal capital expenditures. Net gain on disposition of assets was $4 million in the fourth quarter of 2016, resulting primarily from the sale of operating equipment related to our oilfield pipe inspection business, contrasted by a net loss on disposition of assets of $5.3 million in the fourth quarter of the prior year.

Our Technical Services segment revenue for the quarter decreased 16.2% compared to the fourth quarter of the prior year. Operating loss decreased to $26.2 million compared to $45.4 million in the prior year. This was primarily due to cost-reduction efforts. RPC Support Services segment revenues for the quarter decreased 37%, and operating loss increased to $6.7 million compared to $3 million in the fourth quarter of the prior year.

And now I will review some of our sequential results. RPC's fourth-quarter revenues increased 25.6% to $221 million from $175.9 million in the prior quarter. Cost of revenues during the fourth quarter of 2016 increased by $26.4 million, or 18%, due to higher activity levels. Cost of revenues as a percentage of revenues improved from 83.4% in the prior quarter to 78.3% this quarter, due to operational leverage from higher activity levels, coupled with modest improvement in pricing for our services.

Selling general and administrative expenses during the fourth quarter of the current year increased by $968,000, or 2.8% compared to the third quarter, primarily due to higher bad debt expense. SG&A expense as a percentage of revenues decreased 19.8% in the prior quarter to 16.2% this quarter, due to higher revenues over relatively fixed costs.

RPC's consolidated operating loss of $32.2 million in the fourth quarter was a $24.2 million improvement over the $56.4 million operating loss in the prior quarter. Our sequential EBITDA improved $20.1 million, from a negative $4.4 million to a positive $15.7 million, in the fourth quarter.

Our Technical Services segment generated revenues of $209.6 million, 28.3% higher than revenues of $163.3 million in the prior quarter. This was due to increases in many of our major service lines in this segment. Operating loss was $26.2 million, a 46% improvement in the fourth quarter compared to a loss of $48.6 million in the prior quarter.

Revenues in our Support Services segment decreased 9.5% and incurred an operating loss of $6.7 million compared to a loss of $5.5 million in the third quarter. As of the end of the fourth quarter, our pressure-pumping fleet still totaled 927,000 hydraulic horsepower, of which approximately half is unmanned but available to work on a relatively short notice. The amount of manned and active equipment has remained unchanged.

As of December 31, RPC's total headcount was 4.5% higher than at the end of the third quarter, which has allowed us to perform more 24-hour work. RPC's total 2016 capital expenditures were $33.9 million, and we expect 2017 expenditures to be primarily maintenance-related and subject to activity levels.

With that, I will now turn it back over to Rick for closing remarks.

Thank you, Ben.

Industry conditions continued to improve during the fourth quarter of 2016. Despite the recent severe downturn, we are well-positioned with our people, equipment and capital structure, to meet customer demands for our service. Recent activity levels have increased and we been able to obtain some pricing improvements. We expect this trend to continue. While there are many positive developments, we remain cautiously optimistic about our future results. Thank you for joining us for RPC's conference call this morning.

At this time, we will open up the lines for your questions.

Thank you.

(Operator Instructions)

Jim Wicklund, Credit Suisse.

Good morning, guys.

Good morning.

That was impressive as hell, I have to tell you.

We appreciate that.

Well, considering that several other people have reported that they decided not to pursue market share but to pursue margins, and it seems that you pursued both better than any of them.

You're very kind.

No, that's impressive. Let me ask you, you talk about how you've got about half your horsepower ready to go to work on short notice, but unmanned. There has been a question as to how much it costs to reactivate a crew. Since it is unmanned but ready to go to work on short notice, one would assume that your reactivation costs for incremental spreads would be de minimus. Can you talk a little bit about that?

Hey, Jim, this is Jim Landers. Sure, happy to talk about it. Maybe the best way to phrase it is, it has to do with capital expenditures and then operating expenses. We believe, based on the state of readiness of our equipment and our having maintained it, most of it maintained in a central location with people whose sole job is to maintain it, keep the warranties in place, make sure everything is running, et cetera.

We believe that capital expenditures to reactivate the idle fleet will be minimal, so we're calling it less than $10 million. The operating expenses to move it from a maintenance facility in Arkansas to West Texas would involve fuel and personnel to drive it, and it would not take that long. So we think that will be minimal as well.

We're in the process of hiring. We been recruiting fairly actively since late August. That's going fairly well. It's not a question you asked, but you get into a cost per hire for new employees, and in that training time. So that will cost something, but that's just sort of in the normal course of business for us, the whole recruiting, screening, hiring, training process. It takes a number of months, but we're working on it now.

It has been mentioned we hired some employees, many of whom have oil field experience, during the fourth quarter. So we are moving ahead with that. But we don't think it's going to negatively impact operations if we do a good job -- continue to do a good job with our recruiting efforts.

Okay. And in looking at equipment, I know that Gardner Denver and SPM have both come out with their QM and QEM 3000 heavy-duty continuous operations pumps, basically the equivalent of Halliburton's Q10 pump. And we know that they kind of sold out in December. Are you guys upgrading the pumps on your frac fleets?

Are we going with the equipment that you had before? And can you talk about the pros and cons of the re-equipping of equipment with modern pumps, with higher horsepower pumps?

This is Ben. There has been very little discussion about trying to upgrade our equipment. Much of what is currently unmanned is very new or brand-new, so that has not been a discussion for us thus far.

Clearly the equipment we have is generating very nice results right now. We expect it will be able to continue to that.

Decisions to upgrade will be based on analysis in the future when we feel like we need more capacity, and we don't think we are -- so that has not been a discussion yet, because we are no where near that point in this cycle. So reasonable question, but just something we're not discussing at the current time.

It looks like you are doing just fine with what you've got, there's no question there. You mentioned slightly higher pricing. Are we correct in thinking that pricing for pressure pumping should continue to move up through the course of at least the first half of this year?

Jim, that's what we anticipate. We have gotten some pricing improvements during the fourth quarter, but they have been minimal. And so as supply and demand gets in the balance, or comes closer to being into balance, we anticipate and certainly hope for pricing improvements in the near-term.

The economics of this business are still not self-sustaining, so we have a long way to go before we can continue to provide more services and quality services, and in an increasingly service-intensive environment. So yes, we think pricing is going to continue to rise.

Okay, gentlemen, impressive quarter. Thank you very much.

Thank you.

Chase Mulvehill, Wolfe Research.

Hey, good morning, fellas.

Hey, Chase.

So I'm going to ask a question about 1Q. Could we talk about the progression of 1Q from a top-line and maybe an incrementals perspective? The last couple quarters, you've been growing top line at plus or minus 25%.

Do think you can kind of continue with that pace, given the increases in rig count we've seen so far this year? And then can we sustain 30% above incrementals?

Go ahead, Jim.

Yes, Chase, it's Jim. We think incrementals -- I'll start with the easier answer. We think incrementals will continue to be strong, given everything we know right now. And we think we will probably be with the rig count, in terms of sequential increases, in the first quarter. It's just hard to say right now. You know, it's a very dynamic situation. Hard to say.

Okay.

I was just going to comment on the earlier comment about market share. Market share is not something we are strategically trying to strive for, it is just a result of our efforts. So we are going to continue to try to seek pricing improvements. We think we will be successful in that regard.

We will continue to hire employees, and so the results will be what they are historically. Our revenue growth has correlated very closely to the rig counts. I expect that there won't be any significant deviation from that. But that's all I have to say on that.

So given what you've seen so far, how confident are you that you would be able to generate double-digit EBITDA margins in the first quarter?

Double-digit as a percentage of revenue?

Yes.

It's certainly possible. Don't pin us down, but --

Okay, all right. And I guess a question on capital allocation. How are you guys thinking about acquisitions? And then when would you start thinking about reinstating the dividends?

This is Ben. I wouldn't say that's an ongoing discussion, but obviously we're feeling good about the direction of things and have plenty of cash on the balance sheet. So it's something that we will continue to discuss, but the timing at this point is uncertain. I think we will want to see some additional improvement and forward momentum before we do that. But the exact timing of that, I can't tell you at this point.

Okay. Any thoughts on acquisitions?

Chase, it's the same story we've told throughout the downturn. We've certainly willing to look, but worn-out equipment is -- almost by definition, the cost to repair it is worth more than its ultimate value. And when you look at a company that is not in operation, the crew is left, so employees are important. And so there's not a lot of value there for us.

Okay, all right. Last one, easy, and I will turn it back over. The pipeline services asset sale -- what kind of impact did that have in the fourth quarter, the Support Services revenue?

It happened to be around $4 million.

So it impacted revenues about $4 million for Support Services?

Actually, it's down to gain, so it did not impact revenues. It was reported as a gain on a disposition, so it's not (multiple speakers).

Oh, okay. So when did you all sell the business? Was it generating revenue?

Well, it wasn't selling -- it was just some equipment that's utilized in that service line, kind of a contractual arrangement with the customer. They had an option to buy the equipment, and so they exercised that option.

Okay. Well then, I guess, help me understand what happened in Support Services and why it was down 10% quarter over quarter?

Chase, unrelated to the sale of equipment that you and Ben were just discussing, we had a major customer in the pipeline-handling business, Patterson Tubular Services, that was just slow during the quarter. That business sometimes works in fits and starts.

So the weakness in Support Services was in the tubular services business. It's just, large customer not working during the quarter.

And it's related to offshore work. And the tubular business actually has been a real strong performer over time, and this was, we hope, an aberration. We expect to understand that they will be getting back to work again.

And some of it is also comes through. We had particularly strong results in Technical Services, but we didn't see as much growth in revenue, and very little pricing improvement in the Support Services service lines, such as rental tools. So that's more drilling-related then production-related, and so that hasn't yet seen the same sort of improvement that we've experienced on the completion side.

Okay, awesome. I will turn it back over. Thank you.

Yes.

Marc Bianchi, Cowen.

Thank you, good morning. I wanted to clarify a couple of things that came out in the Q&A so far. First, on the reactivation cost of less than $10 million -- is that per crew, or is that your whole idle fleet?

That is for the whole idle fleet, Marc.

Okay. Thanks for that, Jim. And then, as we think about the rig count for the first quarter, I guess there's different rig counts you can look at, there's different ways you can think about the comparison. Right now, we show the Baker Hughes rig count tracking to be up about 18% for the first quarter, if nothing changes from here. Is that how you guys are thinking about it, or is there a different number in mind?

This is Ben. We're going to get what we get. We did well in the first quarter. We think that will continue. But again, historically, if you look back, we've typically tracked pretty close to that, or been a little bit better. So that's probably as good a guess as any.

Okay, thanks for that. The fleet that is active, how highly utilized is it? And I think before, you talked about -- I would assume that if everything goes as planned and you track the rig count, that utilization will get pretty tight and you will need to bring some equipment back. How close are you to being able to reactivate equipment at the prices that you like?

Marc, we are still a ways away from that. Pricing needs to improve by a fairly healthy amount before we can do that. And you know the story well, but service intensity is high, wear and tear on the equipment is high. We want to be fully utilized with the equipment that we have in the field, and start to generate nicer margins than we are now.

This is Ben. We will remain very disciplined about that. Our operational folks are in no hurry to try to bring that other equipment out. They are committed in their idea to make sure that we get the existing fleet that, again, is working, that is there in the field and available to work.

We want to fully utilize that, and we have some additional upside there. A lot of the hiring we been doing has allowed us to do more 24-hour work. Obviously that -- so utilization you talk about is, how utilized are we on a 12-hour basis versus utilized on a 24-hour basis?

So there's a fair amount of room for, again, additional utilization on the existing equipment. And that's what we are focused on for the time being and for the foreseeable future.

Okay. Is there a utilization number you can speak to? Is it above 75%? Or any way to give us some help on that?

Marc, it's so hard to measure. It's above 50%. It's just hard to measure.

Yes, we look at it. We're a little reluctant give percentages, because everybody measures it in so many different ways. But I agree with Jim. It's certainly -- well any way you look at it, it's north of 50%.

Okay. Well, thanks a lot. Great quarter. I'll turn it back.

Thank you.

James West, Evercore ISI.

Hey, good morning, gentlemen.

Good morning.

Rick or Jim, in the market now, are you starting to see customers trying to lock you into longer-term contracts? And if so, are they willing to give you an acceptable premium over kind of current spot market rates?

Jim, this is Ben. Certainly people are asking, and asking frequently. And they certainly have not offered anything near what we would be willing to commit to. So we have not had any commitments on a long-term, contractual basis with any customers at this point.

Okay, that's helpful. And then if we think about when you would decide to reactivate equipment, clearly one metric is pricing. Which is not there yet, as you indicated earlier. Is another metric just having visibility on a certain time period of work? Is it six months of work or a series of wells? How are you guys thinking about the pricing versus visibility too?

James, this is Jim. Certainly what you are alluding to is a revenue stream that has less risk to it, visibility. In an isolated sense, we would say that, yes, guaranteed work from a great customer, we would do for lower pricing. But let's not get ahead of ourselves.

Job delays happen, and various things. So it's hard to count on a, quote-unquote, guarantee. So kind of back to Ben's answer, those are kind of hollow promises sometimes without some real financial guarantees, which we haven't seen yet. So we are not looking seriously at any long-term contractual relationships right now.

Okay. And then maybe just a last one for me. Some of the equipment that is coming back into the market, your competitors are suggesting that the pricing for them is enough to incentivize them reactivating equipment. Is there some disparity in terms of what pricing they are able to get versus what you are able to get? Or you guys just don't see that pricing as advantageous to you, given just the wear and tear on the equipment?

James, this is Ben. The decision about when to reactivate and all that, you had some very worthwhile observations or considerations when we work through that and situations will change. And again, it's a constant discussion.

So we haven't established any specific metrics, saying if this, if that, if this. Because so many things can happen, as Jim talked about. You can have a customer schedule you out, and jobs get pushed and everything else, and we are aware of that. So it's more of a gut feel. Again, there have been no intense discussions internally here about trying to bring out equipment in the short term. And what was the other part of his question?

I think I got everything. That's very helpful, Ben. I appreciate it. Thanks, guys.

Sure. Thank you.

Ole Slorer, Morgan Stanley.

Thanks a lot. And again, congratulations with some very strong results here.

Thank you, Ole.

Managing a sand and supply chain is probably going to be important quickly, as the market tightens up again. So can you talk a little bit about how you are thinking about that? Or would you see that as a relative tailwind for you, or a challenge?

Ole, this is Ben. It's always a challenge, but it is something that we've had to deal with in the past. We have relationships in place. We have some of our own logistical capabilities, but we have relationships in place that we feel good about.

But there will continue to be challenges. And we do agree and believe that it will become more difficult, but we believe we will be able to overcome those, as we have in the past. But again, recognize it's something we have to remain focused on.

Is it enough of a challenge right now to maybe pull some real challenges for the smaller companies that might not have their house in order, or is that yet to come, you think?

Ole, this is Jim Landers. Right now, right this moment, we don't believe that it's enough of a challenge for people who have reasonable logistical capabilities in place, relationships with their vendors, et cetera. Right this moment, we don't.

But back to your earlier comment, most reasonable people think that there's going to be a lot of proppant used in the next year or so, so it will pose challenges for them -- and for us as well. It's just another cycle, it's just another up cycle.

Yes, and there are some winners and losers from every cycle. I was impressed with your reactivation costs. What do you think is the main difference that the company that size has much higher costs? It's not as if they are even used as a gain, or anything like that. What do think is the real reason for these huge differences in cost estimates? Are they apples to apples, or are they apples and oranges when we're talking about these numbers?

This is Ben. Perhaps apples and oranges. I believe that it harkens back to the fact that we never have -- never say never, but we don't defer maintenance. So even through the cycle, we kept our equipment maintained.

And keep in mind that much of the pressure-pumping fleet that is stacked and not currently working is almost, and in many cases, is brand-new. That's why the CapEx is so low, because all the equipment is in a ready state. It is ready to work, other than probably sending it through -- giving it a good bath, and driving it to wherever we decide to put into operation. So that's why the capital cost is minimal.

When it comes to the training and hiring, you said you started this process last August. Have you been stepping this effort up lately, or has it been at a steady pace?

Ole, it's Jim again. Again, this isn't our first rodeo. We've seen up cycles before. So we've taken a fairly measured, steady pace. We haven't tried to accelerate it recently, but we were working hard at it back in September. So it's just the process, it's not a fire drill at this point. We're just going through our process, doing what we've learned to do in the past.

Okay. So you started hiring back in September, and you kept it at this little steady, monthly pace since then?

The efforts have been at a steady, monthly pace. The successful hiring has kind of -- it's not always at a steady pace. We've actually done pretty well recently, given some peers who have exited the business.

It's always a challenge, but we are working through it right now.

If we look at the remaining unmanned capacity that you have -- I don't know 350,000, 400,000 horsepower, maybe something in that neighborhood. Will that all have the same reactivation costs when it comes, or into the process of that at some point, it gets higher? You say it's all new, but does that go for the whole idle nameplate capacity, or is it some point maybe you should expect refurbishment of pumps or the bigger capital items?

Ole, all the major costs, whether capital or operating expenses, are behind us. Not all of the fleet is new, not all of the idle capacity -- which is around 450,000 hydraulic horsepower -- is new, never having been used. Probably 130,000 or so is new, never having been new.

But I just have to repeat, we've got a good group of people who have been maintaining it. And we've had the financial wherewithal to do it during this downturn.

This is Ben. Probably the capital -- and we've not done a lot of work on this yet. But the equipment is going to need to be -- have CapEx spent on it is the equipment that we're working right now.

Yes, great point.

And the CapEx that we talked about in the notes, CapEx for 2017 is going to depend on how utilized we are on the equipment that is currently being utilized. The CapEx will not be spent on the equipment that we bring out of stacked status. Any CapEx that we see at this point is going to be on the fleet that is working right now. And we do not anticipate having to do any major rebuilds of that particular equipment.

We, at this point, for the next few quarters, we think that equipment should continue to be operated. We will have ongoing normal-type of maintenance that we will provide on that equipment, but no current plans to do any significant upgrades, as we talked about earlier, or even significant rebuilds of the manned equipment that we have today.

Okay, thanks for clarifying. And just finally, do you see any changes in the pricing strategy at the moment? Are there any disruptive players who are buying market share or have everybody now sort of leaning back, licking their wounds, and behaving more rationally? One of your other competitors said to sort of [start a bar brawl], with intent to win in a fight, is getting a little easier. But how do you see it? (technical difficulties)

Nothing out of the ordinary right now. People are acting more rational. Supply and demand is coming closer into balance, we think. We're actually hopeful that some of the newly public companies who are now going to be subject to the same scrutiny that RPC is under, will have more incentive to behave rationally in a different capital environment, in a different scrutiny kind of environment.

And how long before the animal spirits take over and you actually lean back and feel quite comfortable about losing those, because you know there will be somebody right behind willing to bid higher?

Ole, we are coming off the worst oilfield downturn in American history. I can't see that far. (Laughter)

Well, for every worse downturn, there's also always a pretty good upturn. But anyway, I will hand it back. Thank you.

Thanks.

Rob MacKenzie, Iberia Capital.

Thanks, guys. Jim, I wanted to ask another question in a different way. I guess I'm a little bit surprised that you guys aren't reactivating equipment yet, in the context of some recent anecdotes we've heard about there not being enough active equipment in the Permian to even frac all the wells that are being drilled today.

Is that a fair characterization of the market? And if so, when should we expect to see you guys reactivate equipment?

Rob, that information you got I might want to clarify, is it crews or equipment that is not available?

Active frac spreads, is what we heard.

Then pricing has to get higher for us. This industry hasn't made money in a long time. The reason we're here today is, we've had a little more pricing discipline. If the answer were more complex, we would give it to you, but it isn't.

But I guess with such low reactivation costs for essentially a large chunk of your equipment being brand-new, you know, you're talking about high-single-digit, low-double-digit EBITDA margins. What kind of pricing would you look for before you would reactivate here?

It is just hard to say, but higher than today.

The fourth quarter was nice and strong, we've got a nice full calendar at this point. But we want to see higher pricing and feel that it is sustainable. Again, we don't want to fall victim -- we're going to remain disciplined. We don't want to fall victim of getting ahead of ourselves or the industry getting ahead of itself.

There's been a lot of discussion about some of our competitors maybe reactivating sooner than they should. We certainly don't want to fall into that trap. We're going to remain disciplined.

And just to catch a spot market job, you hotshot equipment around, you move employees and pay for the travel and their accommodations. And things that might have been razor-thin profitability price perfection become negatively profitable, or losing money. So we just don't see it.

Okay, thanks. I wanted to follow up on the comments about some of the newly public companies -- you know, Keane AKA and/or new BJ Services. How have you seen them affect the market so far? How has their behavior, in your mind, affected the market? And do you expect that to change in the next quarter or two?

Rob, we haven't seen anything yet. It is too new to tell.

For either of them?

I'm sorry?

From either Keane or BJ?

Yes.

Okay. And Jim, would you mind going through the percentage revenue for Technical Services?

Rob, more than happy to. So the percentages I'm about to give are percentages of consolidated RPC revenue for the fourth quarter of 2016. Our largest service line is pressure pumping, which generated 49.2% of revenue. Our second largest service line is ThruTubing Solutions, which generated 22.5% of revenues.

Third largest is coiled tubing, which generated 11.1% of revenues. And our fourth largest is nitrogen, which generated 3.9% of revenues. Rental tools, which is in Support Services, it generated 2.5% of consolidated RPC revenues for the fourth quarter.

Great. Thank you Jim. I will turn it back.

Okay, thanks.

Ken Sill, SunTrust.

Hey, guys. Great quarter.

Thank you.

You guys are always good competitors, the kind that everybody would like to have, I would hope.

Jim, just one more question. So tubular services dropped off pretty big sequentially. Do you have what they were as a percentage of revenue, so we can kind of gauge if that is going to rebound, what we might be able to expect there?

Sure. That business, that service line was 2% of revenue in the fourth quarter.

Okay, great. And kind of getting back to the whole utilization question, I find it interesting that you increased headcount to do more 24-hour work. How much, how many, or what percentage of your fleets are working on 24 hours today versus three months ago?

About 80% today versus about 70% three months ago.

So in theory, that means that you've got 20% of your capacity that could go to 24 hours. I don't think you can ever get to 100%. But once you get those guys to 90% on 24-hour work, is that kind of a litmus test?

Or is it more of a backlog? I guess, asking two questions, is, what percentage do you think you can you get to on 24 hours? And then how far out is your book, your calendar, booked right now?

Well, we are booked out through March, so we have visibility through March right now. The question about 24-hour work also relates to the customs in the market. Some markets tend to be 24-hour. The Permian, where we have a big presence, was among the later markets to become 24-hour. And it's what's the traditions in that market.

Some of the others have had more 24-hour work. There's some areas that still aren't doing well when they get to -- when we get to 90% 24-hour, that will be interesting. I'm not sure when it's coming.

But if you are booked through March and we see some more rig count increases like we had last week -- which was just a pretty steady number -- I guess the issue is, at some point, somebody comes to you with the question of: okay, if I cannot get your crew until March, how do I move up the list? But you are not really having those conversations yet?

Most recent updates we have are, no. We've told some people we cannot work for them until April. But my understanding is, they haven't come back and said: well, at what price can you work for me in February? So I just don't think that has happened yet.

Yes, we're going to enjoy it when it happens.

I think a lot of people will. One last question. Sand capacity -- you kind of look at the leading edge. When people are testing the Permian for sand, it's huge. You know, how much more work do you think you guys could do before running up against any kind of logistical issues in sand? And where do think logistics are going to come first? Is it going to be in rails, mines, or last mile?

Boy (laughter).

That's a tough question, sorry.

I wish we knew the answer. Maybe one way to answer, just an easy one, is that, last mile is probably going to be an issue sooner, but that's also a little more fixable -- if that's a word.

Rail is going to be an issue, and that's really hard to fix. We don't think mine capacity is a huge issue, based on what we know about it, being in the sand mine business as well.

And your sand mine is not open yet, right? Is that correct?

It's operating, but not anywhere near full capacity. We're looking at various options there to utilize it, to get as much efficiency out of that as we can. That's going to be a nice help to us. This is Ben, now that I'm all on.

Let me point out that somebody may end up seeing or asking the question about nitrogen. Nitrogen did have a decline from third quarter to fourth quarter. And there was no particular issue, but we just did some turnaround work for nitrogen in the third quarter. That's sort of the seasonal period for that type of work. So you may, again, see in your analysis that nitrogen was down, but there's no particular large issue there. Just, third quarter was pretty nice for them.

And my last question here then is, do you guys actually -- I mean, how do you guys handle the railcar issues? Do you lease railcars, or do you talk to the sand producers on the railcars?

We do have a fleet of railcars. It's not tremendous. I was going to say huge, but that's probably --

(Laughter) [Closely loaded].

And those are used almost exclusively for our mine and our activities there. We don't try to send our cars to other suppliers.

Okay. All right, thank you, guys.

Sure.

John Daniel, Simmons & Company.

Hey, guys, good quarter. Jim, I think if I heard everything correctly, you're not looking to reactivate frac equipment yet. Frac now represents close to half of your overall revenue. You also believe that revenue for the Company should be up in line with rig count. So that would suggest, if you're not reactivating equipment, that most of the growth is coming from pricing. Is that fair, or are we about to see a step change improvement in your other segments?

Great way of looking at that. You know, there will be some pricing improvement in the first quarter, we believe. There will also be some utilization improvement. We also see that our tubular business we've been talking about this morning will do better. And I just mentioned nitrogen.

And there is some utilization improvement opportunity too, with the frac fleet not fully utilized at this point.

Right

Okay. But 80% of those fleets are on 24/7. So you had then holes in the calendar in Q4, which you filled in Q1?

Well, capable of working 24 hours.

Yes. Utilization on the 24-hour fleets is not 100%.

It is just capable staff.

Okay, fair enough. You didn't provide yet -- we will see this in the Q -- but the depreciation by segment. But humor me as I do some math. If I just look quickly at Technical Services, just assume it was the same depreciation as last quarter, your EBITDA margins in that segment would be, call it, 9%. That would suggest to me if the segment EBITDA margins are high-single-digit, then your fleet-level EBITDA margins are probably mid-teens. Is that fair?

Fleet level -- I guess you are talking about like before corporate overhead. That's a little bit high, John. Just for everyone's information, during the fourth quarter, Technical Services depreciation was $41.889 million, and Support was $5.919 million. So if that helps the math a little bit. We've always tried to price, even during this downturn, at least EBITDA breakeven at the field level.

The math isn't too off. It feels like the EBITDA generation per fleet is -- no disrespect -- sufficient to justify reactivating all that equipment.

Well, yes, if you could snap your fingers, and we knew everything in the future that was going to happen, that would be yes.

And if we had 450 employees who had been recruited, screened, hired, trained and ready to go, with gray hats instead of green, that would work. And if we had all the sand we needed, that would work too.

But never say never.

But never say never.

Just two more for me, and then I'll turn it back over. Are you utilizing any of the containerized sand storage solutions today? And if so, how much of your fleet uses them? And how do you see the use of those systems evolving this year?

We have used those on a trial basis in the mid-continent. We are not now.

Okay. Interesting. And then just G&A or depreciation guidance for 2017 would be appreciated.

Well, that assumes we know what our CapEx is going to be.

How about a guess?

With zero CapEx, it will go down $3.5 million a quarter.

It sounds like the reactivation costs are de minimis for you guys.

Correct.

So where then would the CapEx come from? What would it be used for?

To maintain our fleet.

Just the maintenance. Okay, fair enough. Thank you, gentlemen. Good quarter.

Thanks, John. Talk to you soon.

Praveen Narra, Raymond James.

Good morning, guys.

Hey, Praveen.

I wanted to follow up on the reactivation discussion. In terms of the time to reactivate, if you were start today and you were going through the hiring process, at what point could you put a fleet out there?

A single fleet?

It could happen pretty quickly, Praveen, within a month.

I was going to say, a month, six weeks.

Okay. So if we have an outlook to March, even if that starts to fill up when we get to April, you could still have time to do that before the end of the quarter?

Yes, absolutely.

In terms of the customer disparity of small versus large, can you give us kind of an idea of how the larger customers are looking at the quality versus price aspect on bidding for jobs, versus the smaller customers?

I don't think we have any useful information in that area, Praveen, to be honest.

Okay, fair enough. If I could ask one more. In terms of when your customers are willing to start locking in work -- not necessarily the length of time, but you mentioned being full through March. Are some willing to schedule into April and May, or does it kind of stop there, given how far out it is?

We think they are still kind of working the phones, trying to find a crew who can accommodate them earlier. That's what we think, but we're not sure. That seems to be the case right now.

Okay, perfect. Thank you very much, guys.

Sure.

Michael LaMotte, Guggenheim.

Thanks, guys. I'm trying to hone in, I guess, on this ability to flex up, and wanted to follow up on the issue of 24 hours and availability. And maybe ask it within the context of efficiency.

Can you give us any metrics in terms of -- or at least, some ranges -- in terms of what you all are doing in stages per fleet per month, and what you think the max rate of a working crew could look like? Where you think over the next six to 12 months you could see improvements in efficiency?

Michael, this is Jim Landers. Those kind of data, in terms of stage counts and stages per fleet or that sort of thing, we just simply don't disclose it. We appreciate the question, and I understand where you're trying to go. I think what you're trying to get to is, how much more can we work than we are working today.

The nature of the work is so different. I know you understand this, but we're still doing a few single-stage vertical jobs in the Permian. And then, as everyone on this call knows, service intensity is increasing tremendously.

Laterals are getting longer and technology is allowing people to understand better parts of the rock to frac, which requires more service, more profit, in each of those fracs. So it's rude to answer a question with a question. But if you ask how much more we can work, our question back would be, what kind of work are we talking about?

This is Ben. Let me add. I think, again, an appropriate question, and there's a lot of dynamics in there. But I would say that we feel fortunate with many of our customer relationships that we have some ability to pick and choose.

A good customer is not only somebody who gives you decent pricing and gives you opportunities to work, but they are customers that allow you to be efficient. They allow you to get the number of stages you hope and expect to get in a particular day. So we're fortunate to be in a position to be able to somewhat pick and choose, you know, in that regard. And that really helps, and it's something we hope to continue to take advantage of.

Understand that, and I appreciate the color. I know it's difficult when you look at a business with just a laundry list of variables, and we try to ask you to distill it down to one.

(Laughter) Thank you.

If I could ask a couple of related follow-ups to the recovery. Jim, you mentioned coming off of the worst downturn in the history of the industry. Are there system-wide efficiencies within your organization, or certainly within the supply chain, that you see as the wheels getting greased, so to speak, over the next six to 12 months as we do start to recover and get the sand out of the gears?

Are you talking about inefficiencies that occurred because activity levels -- (multiple speakers)

As a consequence of the low level of activity, that are more cyclical in nature, as opposed to the structural improvements in efficiency.

Nothing comes to mind, other then the fact, just the financial metric that when utilization is low, your return on your assets, whether you are looking at income statement or some other metric, is not high. Certainly higher utilization of equipment and personnel, it does more for the bottom line. There's just no doubt about that.

Also, with higher activity levels there are some force multipliers in being able to get profit. Because when you have high volumes going, you are able to accept profit that is a good price and has good availability, and use it. Whereas with lower activity levels, you may not have that opportunity, because you don't have a place to store it.

Let me -- again, this is Ben -- add a little more color, I guess, indirectly to your comment. I think something that we are pleased with and feel like -- whether it's moving from the slow times in the downturn or whether it's compared to previous up cycles -- we're much more comfortable with, our ability to price our jobs, estimate our cost. And as much as estimate costs -- people talk about being able to estimate your cost.

You have to estimate the assumptions on the level of activity you are going to be able to capture. Which gets back again to the efficiency and things like that. So we're much more comfortable today with our processes and our people to be able to more accurately price our jobs. That's going to be a net positive, over time, for us.

So think about it as contractual execution as well as field-level execution?

But again, how do you price the job, what's the assumed stages per day -- that sort of thing. You can get yourself caught up if a customer -- and the advent of horizontal drilling and completions or horizontal completions at this point is a few years old. But as all that was increasing, you would have customers tell you: oh, well, count on five stages per day. And then you get out there and you only do one and a half or two, and you get creamed.

So we work real hard with our engineers and our operational personnel and our financial modeling to make sure that we are more comfortable overall today than we have been in the past with that process and that exercise. And that's going to pay a lot of dividends.

And then last one, somewhat related to that, is the idea around adding customers, adding clients, as cyclically low activity or even operators with no activity of late start to come back into the market. What are the kind of strategic alignment elements that you look for in that customer relationship?

Michael, this is Jim. We've made a living over the years serving all kinds of customers. And we don't want to say we're only going to do one type of well or one type of application. So you know, that's how we made our living.

We certainly look at profitability and financial returns for each kind of relationship. We look at credit quality, and we look at the endurance of customers.

And also in the oilfield, on the customer side, you never know when somebody who is only doing a couple wells a year all of a sudden becomes a really big player. So we try to have as many friends in the oilfield as we can. It's no more strategic than that.

Although maybe that is strategic in us.

Yes, but it sounds like it's clearly more focused on term and utilization, as opposed to spot, or giving somebody a crew to try them out for a while.

Yes, that's right. As you pointed out, every job has -- or the work has a whole lot of different elements to it, a whole lot of different metrics. And as Ben pointed out, we analyze all those. So it's a complicated answer to a simple question, but there are a lot of things to look at.

Great. Well, thanks for the time, guys. I'll turn it back.

All right, Michael, thanks.

Matthew Johnston, [Internet].

Hey, good morning, guys.

Hey, Matt.

You mentioned some competitor attrition in the press release this morning. Can you talk about where you are seeing that materialize? Is that in the Permian, is it other basins, is it just generally occurring throughout the lower 48?

Matt, this is Jim. I guess the showcase has been in the Bakken in North Dakota, where we, as we noted last quarter, we did some work, and did pretty well, and also in the fourth quarter as well. And some of that was just because we were the last man standing, not that the market got great.

And I think we're seeing that in other areas too. And it's not something that maybe makes headlines, but you hear about a company that couldn't get a fleet out or didn't have a crew to do a job. And it's probably, in a small way, across all the regions where we work.

Got it. Does that include the Permian as well?

Yes, this is Ben. Some of that is occurring in the Permian, but obviously there's plenty of other competition out there. So it's a little bit harder to actually see it happen, see it manifest itself. But it is happening everywhere.

Got it. And then next question for me, I just wanted to ask about the pricing outlook for some of the product lines within Technical Services. As we look beyond 1Q, how should we think about pricing for products like ThruTubing and CT?

Well, coil tubing pricing is improving, especially on the higher-diameter coiled tubing units. Again, it's muted at this point, it's not huge. ThruTubing Solutions has higher utilization and their results are improving. They haven't quite seen the pricing yet. We think that will come.

Got it. Thanks guys. Appreciate it.

Thanks, Matt.

Mark Brown, Seaport Global Securities.

I guess, was curious about one of the questions on the Permian, seeing diminished level of availability there. Are you finding that it's drawing more of your competitors to bring their equipment into that region?

Yes, Mark, certainly that has happened over the past eight months, we've seen a little bit of that.

But you expect that to be continuing, or kind of petering out going forward?

This is Ben. It is logical to assume, yes. It is a strong region, and I wouldn't be at all surprised if some of that does continue. But hopefully, we will see additional pick-up in other basins, and maybe that will lesson the probability or the magnitude. But I would not be surprised if it continues.

Okay. And curious about what are your thoughts on attrition going forward? Obviously you've kept your fleet in very good condition, the stacked fleet, but many of your competitors have not. And it appears to be a time where we're seeing a significant pick-up in activity. At what point do you think that new fleets will be ordered, and what would be the lead time, if that is the case?

Mark, we don't know of any new fleets being ordered, because there's so much existing equipment out there and so much that can be refurbished if you have the money to do it. So since we're not ordering new equipment, we don't know what lead the time would be, we really don't.

We've not tested that market, or tested that question.

Okay, fair enough. And I guess just finally, within coiled tubing, any commentary on -- you spoke a little bit about prices -- but just what type of work you are seeing, and what the trends are -- completions, maintenance work, that sort of thing?

Coiled tubing has evolved to a completion service. We have some small-diameter coiled tubing units who do work in the work-over market. But in general, that's more of a completion service. It has been for a long time.

All right, thank you. Appreciate it.

Thanks, Mark.

Andrew Cosgrove, Bloomberg Intelligence.

Hey, gentlemen, thanks for taking my call.

Sure, Andrew.

Just a quick question with respect to some of the line that you mentioned in the third quarter, with respect to the sand pumped. You guys had mentioned 25% quarter over quarter in 3Q. I was curious in 4Q saw something similar?

In terms of amount of sand pumped?

Is that your question, volume of sand pumped?

Yes. Or even with respect to intensity or anything along those lines?

Well, I think probably the best thing to say is that service intensity did continue to grow a little bit. So total proppant pump was in line with our sequential revenue increase, is probably the most precision we want to give right now.

Okay. And one more along the lines of -- last quarter you had also mentioned that you were competing with some of the more challenged competitors out there. Did that trend somewhat diminish last quarter, or was that competition still there?

I think it's still there. But again, we did see some attrition. I think it sort of speaks to that point. So I guess perhaps on a net-net basis, it's slightly less than it had been.

Okay. And last one with respect to the fleet. So it was $10 million to activate the rest of the idle fleet. How many fleets are idle at the moment right now?

In very round -- well, we have about 450,000 hydraulic horsepower that is idle. In very round numbers, a fleet is about 45,000 hydraulic horsepower. So that is 10.

Okay. That's it for me. Thank you.

Thank you.

I would like to turn the conference back to Jim Landers for closing remarks.

Okay, thank you, operator. Thank you to everyone who called in, and questions. We enjoyed the dialog, and we look forward to seeing everyone soon. Thank you.

Again, that does conclude today's presentation. Today's conference call will be replayed on www.RPC.net within two hours. We thank you for your participation.