RPC - Q1 2023
April 26, 2023
Transcript
Operator (participant)
Good morning, and thank you for joining us for RPC, Inc.'s first quarter 2023 financial earnings conference call. Today's call will be hosted by Ben Palmer, President and CEO, and Mike Schmit, Chief Financial Officer. Also hosting is Jim Landers, Vice President of Corporate Services. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to advise everyone this conference call is being recorded. Jim will get us started by reading the forward-looking disclaimer.
Jim Landers (VP of Corporate Services)
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 2022 10-K and other public filings that outline those risks, all of which can be found on RPC's website at rpc.net. In today's earnings release and conference call, we'll also be referring to several non-GAAP measures of operating performance. These non-GAAP measures are adjusted net income, adjusted diluted earnings per share, adjusted operating profit, EBITDA and adjusted EBITDA.
We're using these non-GAAP measures today because they allow us to compare performance consistently over various periods. RPC is required to use EBITDA to report compliance with financial covenants under our revolving credit facility. Our press release issued today and our website contain reconciliations of these non-GAAP measures to operating income, net income and diluted earnings per share, which are the most directly comparable GAAP measures. Please review these disclosures if you're interested in seeing how they're calculated. If you've not received our press release for any reason, please visit our website at rpc.net for a copy. I'll now turn the call over to our President and CEO, Ben Palmer.
Ben Palmer (President and CEO)
Thanks, Jim, and thank you for joining our call this morning. RPC's first quarter financial results reflect a strong operating environment similar to the fourth quarter. Although oil and natural gas prices declined earlier this year, demand for our services remained tight by historical standards. The multi-year period of underinvestment by exploration and production companies, coupled with industry discipline, leaves us constructive on the length of the current cycle. The vast majority of service companies have been using the recovery to replace equipment that was wearing out rather than adding net new capacity. It is our view that this is necessary for the long-term health of the oilfield services industry. We expect to allocate capital over the next several quarters to enhance the service effectiveness of our various lines of businesses while also improving our ESG profile.
Our CFO, Mike Schmit, will discuss the quarter's financial results, after which I will provide some closing comments.
Mike Schmit (CFO)
Thanks, Ben. I'll start with the first quarter 2023 sequential financial overview. First quarter revenues decreased slightly to $476.6 million from $482 million in the prior quarter. The nominal decrease in revenues was primarily caused by weather disruptions and a change in job mix in pressure pumping, RPC's largest service line. Cost of revenues during the first quarter also decreased slightly to $305.3 million from $308.6 million in the prior quarter. As a percentage of revenues, cost of revenues remained the same as 64% compared to the prior quarter. Selling, general and administrative expenses increased to $42.2 million in the first quarter of 2023, compared to $38.2 million in the fourth quarter of 2022.
This increase was driven by higher expenses that are typically incurred in the first quarter, including payroll taxes and 401(k) employer match. During the first quarter of 2023, RPC also recorded a $17.4 million defined benefit pension plan termination charge. During Q2 2023, we expect to record an additional settlement charge of approximately $1.2 million associated with the final termination of this plan. In connection with the transfer of the plan's liabilities to a third party, RPC made a $4 million cash contribution during the first quarter. Operating profit during the first quarter decreased by 19.3% to $90.7 million from $112.3 million in the prior quarter.
adjusted operating profit was $108 million in the first quarter, a 6.3% decrease compared to $115.2 million in the prior quarter. adjusted EBITDA also decreased slightly by 3.9% to $132.9 million from $138.4 million in the prior quarter. Our Technical Services segment revenues decreased by 1.3% to $452 million. This segment generated $103.5 million of operating profit, comparing to $110.5 million in the prior quarter. Support Services revenues increased by 3.3% during the first quarter of 2023 compared to the prior quarter. Operating profit was $6.6 million compared to $6.7 million in the prior quarter.
I'll now discuss our current quarter results compared to the same quarter in the prior year. Revenues increased to $476.7 million from $284.6 million. Adjusted operating profit increased to $108 million from an operating profit of $23 million. Adjusted EBITDA increased to $132.9 million from EBITDA of $43 million. These increases were driven by higher customer activity levels and improved pricing, resulting in our adjusted diluted earnings per share improving to $0.39 compared to $0.07 in the same quarter of the prior year.
Our Technical Services segment revenues increased 69.7% to $452 million, and segment operating profit increased to $103.5 million from $21.8 million in the same quarter of the prior year. Our Support Services segment revenues increased 35% to $24.7 million, and segment operating profit increased to $6.7 million from $2.8 million in the same quarter of the prior year. I'll discuss our capital expenditures in the horizontal pressure pumping fleet count. Capital expenditures were $65.3 million in the first quarter. We currently estimate full year 2023 capital expenditures to be between $250 million and $300 million.
This includes new Tier 4 dual-fuel equipment that we've recently placed into service, while a similar amount of older equipment has been sent out for refurbishment. Consistent with the prior quarter, we operated 10 highly utilized horizontal pressure pumping fleets during the first quarter of 2023. We expect to continue operating this number of fleets throughout the remainder of the year. I'll now turn it back over to Ben for some closing remarks.
Ben Palmer (President and CEO)
Thanks, Mike. First quarter of 2023 was an excellent quarter for RPC, notwithstanding some minor weather disruptions. While oil and natural gas prices dropped during the quarter, it did not materially impact demand for our services. With oil prices rebounding early in the second quarter, we are optimistic about the ongoing strength of this cycle as the year goes on. A big thank you is warranted to our employees for delivering the results again this quarter. I want to thank our corporate and enterprise services employees, our business unit leaders, our operations managers, and our well site employees. All of them are working tirelessly to provide quality services to our customers every day. RPC looks to continue our tradition of generating industry-leading ROIC and returning capital to our shareholders.
In the first quarter of 2023, we repurchased 1.1 million shares for approximately $9 million and doubled our cash dividend of $0.04 per share, or $8.7 million per quarter. This morning we announced RPC's board approved an increase in our share repurchase authorization and declared another cash dividend of $0.04 per share. Over the last decade, RPC has returned over $554 million to shareholders through a combination of dividends and open market share repurchases. Thanks for joining us this morning, and at this time, we're happy to address any questions.
Operator (participant)
If you would like to ask a question, please press * followed by the 1 on your telephone keypad. If you would like to withdraw your question, again, press the * one. Your first question is from Stephen Gengaro of Stifel. Please go ahead. Your line is open.
Stephen Gengaro (Managing Director, Equity Research)
Thanks. Good morning, everybody.
Ben Palmer (President and CEO)
Good morning.
Stephen Gengaro (Managing Director, Equity Research)
I guess a couple things. You mentioned this, the expectation to continue to operate 10 fleets throughout the year. Can you give us sort of your perspective on the supply, demand, and pricing dynamics in the pressure pumping market right now?
Ben Palmer (President and CEO)
Stephen, this has been, like we indicated, it's staying strong. We have had some discussions with some customers about pricing. We're working with them to minimize, you know, any impact on our results. You know, there are some changes. There are some, as typically happens, you know, we're moving around some fleets and things like that to stay busy and maintain our efficiencies and limit our downtime. We don't see any big changes at this point in time. We think it's still, as we indicated, it's tight by historical standards, and we still feel good about where we are.
Stephen Gengaro (Managing Director, Equity Research)
When you look at what you see in the order book relative to sort of natural attrition of the fleet, are you seeing much net growth in the overall market over the next three or four quarters?
Ben Palmer (President and CEO)
We see various, you know, bits of information that's provided. As I said in my comments, I think our peers across, you know, the oilfield services are doing a pretty good job of trying to not significantly increase capacity. There's certainly new equipment. We're doing the same thing, right, but it's typically to replace existing equipment or to allow us to maintain our fleet level while we send other older equipment out for refurb. The equipment that we're removing now, once it comes back in the coming months, there'll be another fleet that we'll take out of service. So we expect to remain at 10 fleets for the time being, and we're hopeful that others are doing the same thing. We think there's indication that that's the case.
There may be temporary periods of where somebody believes that they have extra capacity, that they can put an additional fleet in the field for a period of time. This equipment is wearing out, and you do have to continue spending to, you know, to maintain your fleet. We're hopeful that that discipline will remain in place going forward.
Speaker 8
Great. Thank you. Just one more quick one. Can you run through the revenue by product line for the first quarter?
Jim Landers (VP of Corporate Services)
Yes, David. Sure. Sorry, this is Jim. The values I'm about to give are the percentage of consolidated RPC revenue that is comprised by each of these service lines. Our largest in the first quarter of 2023 was pressure pumping at 55.6% of revenues. Our second-largest service line was downhole tools and motors, which are Thru Tubing Solutions brand, and that's 22.5% of revenues. Number three is coiled tubing, which is 8.4% of revenues. Number four is rental tools, which is 3.7% of revenues. Comes nitrogen at 2.5% of revenues. Finally, snubbing, which was 1.5% of consolidated RPC revenues for the first quarter. Thanks for that question.
Speaker 8
Great. That's great. Thank you, Jim.
Jim Landers (VP of Corporate Services)
Thank you, David.
Operator (participant)
Your next question is from Don Crist of Johnson Rice. Please go ahead. Your line is open.
Don Crist (Senior Research Analyst)
Morning, gentlemen. How are y'all?
Ben Palmer (President and CEO)
Doing great.
Speaker 8
Good. Don.
Don Crist (Senior Research Analyst)
I wanted to kinda ask a follow-up as to Steven's question. I know you had a lot of fleets that were, as a percentage of your total fleet count that were dedicated in either the Haynesville or the gas basins. How many of those have kinda moved around or been shifted to more oily basins as, you know, gas has been a little bit weaker in the first quarter?
Jim Landers (VP of Corporate Services)
Hey, hey, Don, this is Jim. Let us correct you a little bit on that. We haven't had fleets working in the Haynesville for a while. What you might be thinking of is last summer, we reactivated a fleet that was in East Texas, but it's been working in West Texas. We really have not moved any fleets around. We've still got, we got two in the Mid-Continent, and the rest are in the Permian. There hasn't been, you know, any geographic movement for a while now.
Don Crist (Senior Research Analyst)
Okay.
Ben Palmer (President and CEO)
Our operating model is that we can move the fleets. As Jim indicated, the fleet from East Texas has done a little bit of work in that area.
Don Crist (Senior Research Analyst)
Yeah.
Ben Palmer (President and CEO)
More of it's been in West Texas. From time to time, depending upon calendar and opportunities and things like that, one or two of the... or one, typically, of the Mid-Con fleets might do some work closer to West Texas. That's something that our managers are and sales team work on all the time is, you know, what's the optimum placement of the fleets, you know, given opportunities that we're evaluating.
Don Crist (Senior Research Analyst)
Okay. My, my mistake there. I was thinking some old data. kind of talking about the supply chain, I think I heard you correctly that you're gonna refurbish, you know, 2 fleets this year. How does that supply chain look? Is inflation kinda subsiding there or lead times coming down? Is it kinda status quo as to the way that it has been over the past, you know, 9 months or so, where it takes 12 months to get an engine?
Ben Palmer (President and CEO)
Well, I think it's a little bit too soon to probably say that it's improved significantly. We think certainly there are signs that that may be the case. You know, some of the very high demand components we've been planning ahead and, you know, making sure that we have that availability before we initiate these refurb programs. It's just something we've had to plan through and coordinate with our, you know, many, very valuable suppliers and things like that. It hasn't been an issue, but, you know, there are long lead times you just have to plan ahead for. We've got a plan that we've laid out, you know, based on expected activity levels and intensity of activity when we think our equipment needs to be, you know, overhauled or refurbished.
We're able to put that planning in place, make the commitments, put the commitments in place to be able to have the key components available when we wanna undertake the refurbishment activity. Even as we, you know, we had to do the same thing leading into this new Tier 4 equipment that we recently received and placed in service. We had to, you know, several months ago, procure the key components to be able to complete parts of that assemblage. Just takes a little bit of planning. I don't know that, again, that we've yet seen any significant letup in the pricing. I, you know, I wouldn't be surprised if there's a little bit given some of the volatility we've seen lately.
Jim Landers (VP of Corporate Services)
Okay. I appreciate the color. I'll turn it back. Thank you.
Ben Palmer (President and CEO)
Thank you.
Mike Schmit (CFO)
Thanks, Don.
Operator (participant)
Your next question is from Derek Podhaizer of Barclays. Please go ahead. Your line is open.
Derek Podhaizer (VP, Equity Research)
Hey. Good morning, guys. I just wanted to go back to that-.
Ben Palmer (President and CEO)
Hi, Derek.
Derek Podhaizer (VP, Equity Research)
... changing Hey. The changing job mix in pressure pumping. Just if we can expand on that comment. Just some more color around, is that a spot market versus dedicated? Is it a customer type, private versus public? Maybe just a little more color on your changing job mix within pressure pumping.
Ben Palmer (President and CEO)
Well, I think you guys and I think we. Well, weather impacted us a little bit, but the job mix too. We had a little bit less fuel that we provided. You know, there's not a whole lot of margin on the fuel, so it, quote-unquote, "impacted revenue," but didn't have as significant an impact on our margins. That was a little bit of, I think that in one case it may have been an existing customer who changed their mind about whether they wanted to provide it or not. It may have been a new customer that we went to. The mix of our customers has not really changed significantly. You know, we do have a lot of, you know, privates as customers, but we have a nice mix between the public and the private.
It really hasn't changed a lot, in the first quarter compared to the fourth quarter last year.
Mike Schmit (CFO)
Yes. That comment is probably more referring, as Ben mentioned, a mix of the services provided. Every single job is slightly different. That's what we're doing. You know, and what we're asked to do and the depths of the wells and everything. Every job's slightly different. Some jobs are more profitable than others. That's probably more rather than, you know, the mix of the type of customer. It's more of a specific type of job.
Jim Landers (VP of Corporate Services)
Derek, this is Jim. I'll jump in too. Another variable is how much sand we provide versus how much our customers provide. That really didn't change Q4 to Q1. Another variable is 24 hour versus 12 hour revenue. We're pretty much maxed out there. That did not change either. As Ben mentioned, it has to do with fuel. There's nothing else that is meaningful from a macro perspective, i.e., private versus public or any change in what customers are doing. It moves around a little bit, but, you know, not a whole lot.
Derek Podhaizer (VP, Equity Research)
Gotcha. Okay. That's very helpful. Then maybe just on spot market versus dedicated. I guess how much percentage of your fleet's on the spot market versus dedicated, and what are the big differences that you're seeing between those two markets? It seems like there's a bit of bifurcation between those two markets right now. Any comments around that would be helpful.
Jim Landers (VP of Corporate Services)
It's, you know, so it's about 50/50 spot versus dedicated. You know, dedicated doesn't mean what it meant a long time ago. It means that we have, you know, six to nine-month commitments. From our perspective, there's not a lot of discernible difference between those two, those two types of relationships.
Derek Podhaizer (VP, Equity Research)
Got it. Okay. That's helpful. Then just my last question. We've been hearing from some of your peers, moving fleets from the Haynesville into the Permian. Just, are you seeing that? Is that putting any pressure on your pricing, on the conversations you have with your customers with the threat of being displaced by a larger peer? Just any color around fleet movements from the Haynesville into the Permian affecting your operations.
Jim Landers (VP of Corporate Services)
I think it's pretty reasonable to say that the natural gas weakness, the weakness in the price of natural gas is certainly gonna slow down some completion. The drilling because of the contracts may not slow down, but the completion will be. You know, we think that we've heard some peers, and you have too, talk about moving some fleets. It's not like we were in the Haynesville doing Haynesville natural gas work anyway, so it's not evident to us on sort of the first order. Certainly at the margin, there's a little less tightness in a place like the Permian, that just manifests itself in, you know, maybe a little more white space in calendars.
To us, it's not material at this time.
Ben Palmer (President and CEO)
Our team does a fabulous job of staying up to date across the market and does a terrific job of being able to minimize that white space when volatility begins to occur. I think there has been, or there has been a little bit more volatility, we're responding to that and we think the impact at this point in time of those changes and the moving around will not be significant.
Derek Podhaizer (VP, Equity Research)
Got it. Have you had to move some fleets around the Permian to different customers yet?
Ben Palmer (President and CEO)
Yes, we have done a little bit of that. We're in the process of doing a little bit of that. Yeah.
Mike Schmit (CFO)
Yeah. I mean, We're always moving.
Ben Palmer (President and CEO)
Right
Mike Schmit (CFO)
I wouldn't say it's significantly more than normal for us right now.
Ben Palmer (President and CEO)
Right
Mike Schmit (CFO)
at least, you know, for the last year or so.
Derek Podhaizer (VP, Equity Research)
Okay. Great. Really appreciate the time and color, guys. I'll turn it back.
Ben Palmer (President and CEO)
Thank you.
Jim Landers (VP of Corporate Services)
All right. Thanks, Derek.
Operator (participant)
Your next question is from John Daniel of Daniel Energy Partners. Please go ahead. Your line is open.
John Daniel (Founder and President)
Thank you. Good morning, guys.
Ben Palmer (President and CEO)
Hey, John.
John Daniel (Founder and President)
I'd like to. Hey, Jim. Just a quick question about businesses besides frac, where you have exposure to, you know, some of the other basins except the Permian, right? Because we tend to focus on the Permian and...
Speaker 8
Frack. Can you walk us through, and I'm not looking for numbers here, but just the visibility in the other basins for your other services, call it today versus what you had three to six months ago.
Jim Landers (VP of Corporate Services)
John, this is Jim. Thanks for asking a question about something other than pressure pumping. Thru Tubing Solutions has a really good market share and a really widespread market presence. There's a, you know, they're a good thing to look at. They've talked about some weakness in East Texas in the Haynesville and a little bit of.
Speaker 8
Sure
Jim Landers (VP of Corporate Services)
... weakness in the Northeast and Pennsylvania, where they have a presence. That's one thing we've noted in our, in our operational reviews getting ready for quarter end that, you know, they said there was a little bit of weakness in those places, which we would anticipate.
Ben Palmer (President and CEO)
Just as you'd expect.
Jim Landers (VP of Corporate Services)
Yeah.
Ben Palmer (President and CEO)
With lower natural gas prices.
Speaker 8
Right.
Ben Palmer (President and CEO)
At this point, still nothing significant and similar to pressure pumping, we're able to move around from customer to customer.
Speaker 8
Would you say guys? Let's just pick up, you know, the MidCon or Bakken. Do you enjoy the same type of visibility there as you do in the Permian? Has it been a discernible change, I guess is another way of thinking about it?
Ben Palmer (President and CEO)
I guess not discernible enough to comment.
Speaker 8
Okay.
Ben Palmer (President and CEO)
It's a good question, but not discernible enough.
Speaker 8
Fair
Ben Palmer (President and CEO)
... to comment on at this point in time.
Speaker 8
Okay. Fair enough. If we go back to, you know, six to seven weeks ago when oil prices kinda crapped out, there was a lot of fear in the market. There was a lot of requests from E&Ps, you know, for some price relief, et cetera, some companies made some concessions and others didn't. My question is if when you were going through that process, if you happened to be in the camp that made some concessions, what was the discussion about, "Hey, what if oil prices go back to $80-$85?" How quickly can you recapture that, I guess is the question.
Mike Schmit (CFO)
I mean, I guess I'll just make a comment that we're heavier in the sort of, you know, spot market and we have less long-term contracts than some of our competitors, so we can kind of respond more quickly, to higher prices. We weren't as maybe impacted as some of the others.
Ben Palmer (President and CEO)
Yeah. I think to your point, John, I think, you know, I'm sure that was alluded to. The team's been very good at being appropriately aggressive with pricing.
Speaker 8
Right
Ben Palmer (President and CEO)
... you know, we're ready to, you know, make those adjustments when we deem necessary. We think we're in a, you know, good spot relative to those customers. Many, you know, whatever changes we may have made, we worked really hard with our customers to make it more, maybe change the composition of the job that made it less expensive than really being a distinct cut in price, right? It was more like what can we do to reduce their costs? An example of that might be them providing the fuel rather than us providing the fuel, right?
Speaker 8
Okay. Got it.
Ben Palmer (President and CEO)
That particular item, again, doesn't have a big impact on us. Again, a very, very appropriate question as you always ask. Working through it and certainly mindful, and we all understand that we do need to generate sufficient returns to continue to invest in the business to be able to meet our customers' demand.
Jim Landers (VP of Corporate Services)
Yeah. John, it probably goes without saying, but we better say it anyway. Sentiment today is a whole lot better than it was when prices were lower and going lower, oil prices, than where they are today. We also have the ability, we haven't done this yet, but we've certainly, maybe signaled to some of our suppliers that.
Ben Palmer (President and CEO)
Yeah. That's right.
Jim Landers (VP of Corporate Services)
... would like to, or may need to talk to them about.
Ben Palmer (President and CEO)
Right
Jim Landers (VP of Corporate Services)
... cost reductions on their side, which could help our margins should we, should that come up.
Speaker 8
Fair enough. Okay. Well, thank you for letting me in with you again. I appreciate it.
Ben Palmer (President and CEO)
John, I thought maybe you were calling for some roadside assistance.
Jim Landers (VP of Corporate Services)
Yeah. Really.
Speaker 8
Well, you know, I will say this. You should give him like employee of the year award, because he saves my butt. There's a lot of times. Anyway, thanks so much.
Jim Landers (VP of Corporate Services)
You're on that 20 out there, they go a lot faster. Glad you're okay.
Speaker 8
Yes. Thank you very much. Okay. Take care.
Jim Landers (VP of Corporate Services)
See you, John.
Operator (participant)
Again, if you would like to ask a question, please press * one on your telephone keypad. There are no further questions at this time. I will now turn the call over to Jim Landers for closing remarks.
Jim Landers (VP of Corporate Services)
Okay. Thank you. We appreciate everybody who called in to listen this morning. We appreciate the questions and the conversations. Look forward to talking to everybody soon. Have a good day.
Operator (participant)
This conference call will be replayed on www.rpc.net within 2 hours following the completion of this call. This concludes today's conference call. Thank you for your participation. You may now disconnect.