RPC - Q3 2023

Transcript

Operator (participant)

Good morning, and thank you for joining us for RPC, Inc's Third 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 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 that this conference call is being recorded. Mike will get us started by reading the forward-looking disclaimer.

Mike Schmit (CFO)

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 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 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 are using these non-GAAP measures today because they allow us to compare performance consistently over various periods. In addition, 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 are interested in seeing how they are calculated. If you have not received a copy of 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, Mike. Thank you for joining our call this morning. As you can see from our earnings release, it was a challenging third quarter. The softness in the period was an air pocket in our business, and we believe we responded with appropriate discipline and patience. We currently see a strong improvement in our frac calendar for the fourth quarter. We're off to a solid start and expect a significant sequential increase in EBITDA to close out the year.

In addition, I would highlight that while pressure pumping, our largest service line, drove the weakness, our other service lines demonstrated stable, resilient performance. Regarding Spinnaker, our newly acquired cementing business, integration is progressing well, and we were pleased with their financial performance. And from a long-term strategic perspective, we believe a more diversified business is better positioned to offset potential volatility in pressure pumping or other market dynamics.

As we indicated on our last call, in the face of competitive pricing pressure, our bias was to idle assets. This soft pricing environment was driven by lower oil prices during the second and into the third quarter, which caused several of our customers to delay completions. While there were near-term cost absorption impacts for idling assets, we think this was the right call. Discipline and financial conservatism underpin our ability to deliver sustainable cash flows over full energy cycles. Pricing remains competitive in the spot market, where we primarily participate, and we have given some concessions. However, our fourth quarter pricing is expected to be more attractive than the temporarily low levels in the marketplace during the third quarter.

Further, not participating in projects at particularly low pricing and margins can extend the life of our equipment, push out maintenance and repairs, and maximize the lifetime return of our assets. Bottom line, as it looks now, our fleet should be well utilized in the fourth quarter, which is again consistent with our comments in July. We began removing some costs late in the second quarter and early in the third quarter.

However, as calendar visibility and market dynamics improved, we decided to limit workforce reductions. We began to hire back employees to position ourselves to be service-ready and capitalize on the rebound in fourth quarter activity. Overcorrecting on costs might have left us unable to meet current demand. Although we do not provide financial guidance, I can offer you a directional comment in light of our third quarter results.

We think fourth quarter results are likely to look more like second quarter than third quarter. I'll caveat that by saying that, that's our current view, which is, of course, subject to unpredictable market shifts and currently anticipated minimal holiday slowdown. Mike Schmit, our CFO, will now discuss the quarter's financial results, and after that, I'll have a few closing comments.

Mike Schmit (CFO)

Thanks, Ben. I'll start with the third quarter 2023 sequential financial overview. Third quarter revenues decreased to $330.4 million from $415.9 million in the prior quarter. This was largely driven by the decrease in pressure pumping activity, as Ben discussed. The following is a breakdown of our revenue percentages for the third quarter for our top service lines. Pressure pumping was 33.5%, downhole tools was 29.1%. Coiled tubing was 11.1%, cementing was 8.1%, rental tools was 6.1%, and nitrogen was 3.7%. Cost of revenues, excluding depreciation and amortization during the third quarter, also decreased to $239.1 million from $265.8 million.

As a percentage of revenues, cost of revenues in the third quarter was 72.4%, compared to 63.9% in the prior quarter. Selling, general, and administrative expenses decreased to $42 million in the third quarter of 2023, compared to $43.6 million in the second quarter. This decrease was due to a settlement charge of $4.5 million that was paid out at the beginning of Q2, which was offset by some incremental SG&A from the acquisition of Spinnaker. Operating profit during the third quarter decreased by 72.4% to $22.7 million, from $82.4 million in the prior quarter. Adjusted operating profit was $22.7 million in the third quarter, a 72.7% decrease compared to $83.3 million in the prior quarter.

Adjusted EBITDA also decreased by 52.9% to $51.9 million from $110.1 million in the prior quarter. Our Technical Services segment revenues decreased 22.3% to $303.1 million, and segment operating profit decreased to $18.9 million from $77 million. Our Support Services segment revenues increased 5.8% to $27.3 million, and segment operating profit decreased to $6.9 million from $7.9 million. I'll now discuss our capital expenditures.

Capital expenditures were $44.3 million in the third quarter. We currently estimate full-year 2023 capital expenditures to remain between $200 million-$250 million, excluding the purchase of Spinnaker. As a reminder, we are also expecting to receive a U.S. federal tax refund of approximately $47 million in the first quarter of 2024. I'll now turn it back over to Ben for some closing remarks.

Ben Palmer (President and CEO)

Thanks, Mike. To wrap up, the quarter really boiled down to one key element: a temporary lull in our pressure pumping business, driven in part by our decision to idle assets until pricing and activity conditions improved. As we stand today, we are currently encouraged by improved market dynamics and expected fourth quarter pricing and utilization. This view is supported by heightened activity among privates, especially in the Permian Basin, where we are well positioned to capture incremental demand.

As you know, increasing capital discipline among large E&Ps can create opportunities for smaller companies, and if oil remains comfortably above $80, we and our customers should have a favorable near-term operating environment. Shifting to capital allocation, our healthy, debt-free balance sheet is key to maintaining financial flexibility and strategic optionality. We successfully added an attractive business this year with the cash acquisition of Spinnaker, and our board of directors just approved our regular $0.04 per share quarterly dividend.

With respect to capital investments and trend of newer pressure pumping technologies, I would again say we will take a conservative and disciplined approach. While there is increasing customer interest in the use of alternative fuels to operate equipment, we will prudently invest in a transition of our equipment when justified. Furthermore, I would like to reiterate, while we will replace older equipment, we do not intend to add pressure pumping capacity to an already competitive marketplace.

While we operate in an often volatile market, our approach and strategy will remain consistent, with a focus on financial stability and long-term shareholder returns. Lastly, we'd like to thank our employees for their continued dedication, staying focused during a difficult operating environment, working on our digital transformation programs, and helping with the integration of Spinnaker into our company. Thanks for joining us this morning, and at this time, we'd be happy to address any questions.

Operator (participant)

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll take our first question from John Daniel at Daniel Energy Partners.

John Daniel (Founder and President)

Hey, guys. Thank you for including me. I need your... I need your tax guy, by the way. There are a ton of—as you guys know, there's a ton of small operators in the Permian, a lot of whom, you know, run a rig for short-term programs. And I presume some of those people don't—obviously, they wouldn't have enough work for a dedicated crew, so, you know, the rise in spot services. I guess knowing that Q—you just said Q4 is better, but can you speak to your visibility into the demand from these, what I'm gonna call, micro operators, for next year? Just, you know, do you see them, many of them, seeking to add rigs and then eventually need a frac crew in 2024?

Just how quickly do you think that spot market could tighten next year?

Ben Palmer (President and CEO)

Yeah, John, this is Ben. Or Jim, you wanna take that?

Jim Landers (VP of Corporate Services)

Yeah, I mean, let me, let me at least start, John. Good, good question, good question, because we are in the spot market, and the idea would be that if these smaller operators start working again, they don't have the wherewithal to get a dedicated crew, and, and that's kind of where we, where we try to play. Some of the small companies that have been purchased over the past year are, are coming back in.

We know a couple of examples. They've got to get the management groups together and get capital that's easier and faster at $90 oil than $70 oil. So, you know, on the other side of it, there are people who might be, might be hesitant. We think there might be similar spot customer trends as what we've seen in prior years, you know, adding rigs incrementally. But you know, your question is really about visibility. We probably have a lack of visibility because these smaller players make plans and add rigs quickly.

So that's good. It's good to do it quickly, but it doesn't necessarily tell us that in February of 2024, we're gonna have some great spot work coming up. You know, a lot of these operators, as you know, as we all know, only operate about one rig at this point. So anyway, that's I think part of, and perhaps most of the answer we have for you today. I don't know what Ben and Mike might want to add.

Ben Palmer (President and CEO)

Yeah. I'll add, John, it's a very good question. You know, we talk a lot about, people talk about spot market and not spot market, right? It's not black and white, right? And we don't work just for what some people would term spot customers. You know, at the—you know, when you talk about somebody that has a rig or less than a fully equivalent rig for a full year, you know, we—if we're working for them, we're working for them, you know, for a few weeks. You know, there are some customers, a lot of which, a lot of our business has come from customers that we work on for several months, right?

Then there are the larger players, and there are many fewer of them. They do comprise, you know, a half or so of the market in the Permian, that are typically willing to sign, you know, a year-plus contract. We've worked for some of those folks, but we tend to focus on, and we're most well-positioned to work for the spot market players and what we call kind of the partially dedicated players, right?

Jim Landers (VP of Corporate Services)

Right.

Ben Palmer (President and CEO)

So spot market being people that we work for for a few weeks, then there are a lot of customers and a lot of work for customers we can work for, for a few months. And then, you know, and a lot of the, you know, the big players that are operating 10+ rigs, they're the ones that, that want a lot of the technology that they're talking about in terms of... you know, energy, fuel, delivery, alternatives, and things like that. And, and we don't own that technology. We're not developing that technology. We're not investing today-

Jim Landers (VP of Corporate Services)

Right.

Ben Palmer (President and CEO)

Significantly in that technology. But that's, you know, that's half the market, right? So there's half the market that we're certainly very well positioned to work in and have worked in, and we'll be working in, you know, with, with those players in the, in the fourth quarter and into, into 2024. So there's a lot of work.

Jim Landers (VP of Corporate Services)

Okay.

Ben Palmer (President and CEO)

A lot of work. Yeah.

Jim Landers (VP of Corporate Services)

That's helpful. And my follow-up, and I hate to be that guy, but I missed the revenue breakdown when you went through the prepared remarks.

Ben Palmer (President and CEO)

I knew that was gonna be the case. I'm sure. I knew that was gonna be-

Jim Landers (VP of Corporate Services)

Well, I was drinking my coffee. I wasn't ready for it. Yeah.

Mike Schmit (CFO)

Sure. This is Mike. I can give you that. John, pressure pumping was 33.5%.

Jim Landers (VP of Corporate Services)

Okay.

Mike Schmit (CFO)

Downhole tools was 29.1%. Coiled tubing was 11.1%. Cementing was 8.1%. Rental tools was 6.1%, and nitrogen was 3.7%.

Jim Landers (VP of Corporate Services)

Perfect. Thank you, and sorry about that.

Mike Schmit (CFO)

No problem, no problem.

Operator (participant)

We'll move next to Don Crist at Johnson Rice.

Don Crist (Senior Research Analyst)

Good morning, gentlemen.

Ben Palmer (President and CEO)

Good morning.

Jim Landers (VP of Corporate Services)

Hey, Don.

Don Crist (Senior Research Analyst)

Obviously, a challenging quarter, but I wanted to ask, you know, just from a fleet count, obviously, you were at about 10, the first quarter of the year. Do you think that you can get back close to that in the fourth quarter, or do you think it'll be a little bit less than that? Just kinda driving, kinda what John was asking on the demand side. I mean, what does the demand look like out there for y'all?

Ben Palmer (President and CEO)

Well, a couple of ways to characterize that. You know, I'm sure people have already done the math that, you know, pressure pumping is down about 50%, so that pretty much correlates, I guess, to the effective utilization of our fleets. So the question of can we get back to 10, you know, once the quarter is over, I don't know that we would say that all 10 fleets were fully utilized during the fourth quarter. But we still think it's appropriate for us to have held on to, and we're pleased with the fact that we have all of those, you know, 10+ fleets are staffed up and available to work in the fourth quarter and moving into early 2024.

You know, we indicated that, you know, fourth quarter is gonna look more like the second quarter than the third quarter. We were, you know, pretty well utilized with all of our fleets in the second quarter. Obviously, you know, as the quarter ended, it was less fully utilized, but we needed all of that capacity to be able to service the business that we had the opportunity to work on.

Mike Schmit (CFO)

Yeah, and our frac calendar would say that they are... We're gonna be a lot closer to using all of those, so that-

Don Crist (Senior Research Analyst)

Okay. I appreciate that color. And we've been hearing some anecdotes of equipment moving back into the Haynesville and other gas-type basins. Are you moving any assets kind of out of the Permian into, you know, chasing some of that gas work that people are doing into year-end?

Ben Palmer (President and CEO)

At this point in time, we are not.

Don Crist (Senior Research Analyst)

Okay. And just one final one from me. On the Spinnaker acquisition, it sounds like that is already starting to contribute positively to financials. How... Any comments around how that integration's going?

Ben Palmer (President and CEO)

Yeah, eventually, it's going very, very well, you know, as planned. You know, leading up to the closing, obviously, we did a lot of planning, and we've got some post-closing integration activities from a system perspective and things like that. But otherwise, you know, a great company with a lot of great infrastructure and capability, and so it's, you know, nothing complex at all about bringing them into our company. As you know, we were already in the cementing business, so we knew the business, so we're not having to, you know, start from scratch and learn more about it. You know, seeing some benefits of now being diversified into a third basin, or, you know, going from one basin, South Texas, to now being in the MidCon and the Permian.

So we think that's gonna create a lot of opportunities. Spinnaker has tremendous customer relationships that we expect to be able to leverage, not only within cementing but hopefully within some of our other service lines as well.

Mike Schmit (CFO)

Yeah, and I'll just add, you know, the team on Spinnaker has just been a great cultural fit, even operationally and from the finance side. It's just been one of the smoothest integrations I've seen, so I've, we've been very pleased.

Don Crist (Senior Research Analyst)

I appreciate the color. Thanks, guys.

Ben Palmer (President and CEO)

Great. Thank you.

Don Crist (Senior Research Analyst)

Thanks, Don.

Operator (participant)

As a reminder, if you do have a question, please press star one. We'll move next to Alec Scheibelhoffer at Stifel.

Alec Scheibelhoffer (Equity Research Associate)

Hi, good morning, everyone, and thanks for taking my question.

Ben Palmer (President and CEO)

Morning.

Alec Scheibelhoffer (Equity Research Associate)

Morning. So I just wanted to touch on CapEx, potentially for next year, if there's any sense you could provide or guidance on that. I think, previously, you had said you expected spending next year to be, near the high end of the range provided for this year, in the $200 million-$250 million. I was wondering if that's still the case or if there's any kind of shift in strategy there.

Mike Schmit (CFO)

I can take that one. You know, we haven't finalized all of our budgeting for next year, but kind of what we're thinking right now is that, yeah, we'll probably be in about the same range as what we're expecting. A lot of that will depend on, you know, the demand and, what we need to order and when. But right now, that is probably our best guess, that we'll probably be in the same range, possibly to the higher end.

Ben Palmer (President and CEO)

And just to maybe point out that, you know, this particular year, you know, we've managed down our CapEx with, you know, part of that being what has occurred in the third quarter. Certainly, with lower activity, we hadn't had to spend as much, won't have to spend as much maintenance CapEx, and M&R will be lower and things like that. But we don't see any ramp in spending, you know, to have, you know, significant growth. As we indicated, we're not gonna grow our fleet count. We'll be required to continue to invest in the business. As our older equipment wears out, we'll need to do refurbishments, we'll need to replace some equipment.

And when it becomes economically justified to spend that money because the existing equipment is no longer economic or not able to perform adequately or efficiently, we'll then, you know, make the appropriate investments, and we'll continue to transition our fleet. And certainly, wherever we would buy into, and probably it would be Tier 4 DGB at this point, that will continue the, you know, again, the transition of our equipment to being, you know, even more ESG friendly.

Alec Scheibelhoffer (Equity Research Associate)

Great. Great, thank you for that. And, this question might be a little bit more high level, but just out of curiosity, you know, we've heard some, you know, as some operators shift to lower quality rock away from Tier 1 acreage, just the service intensity in some of these wells goes up. I was just curious if there's any kind of read through that could be had on the spot pricing for maybe higher quality versus lower quality assets, or if that's just, you know, your standard supply-demand on that side, or if there's any kind of read-through you could get on that.

Ben Palmer (President and CEO)

Yeah, I think it is standard supply and demand. I think that is an evolving trend. You know, not a lot of anecdotes necessarily to share in that regard, but you know, we're continuing to see opportunities, you know, the privates especially, you know, we're seeing that they are permitting, and as we discussed earlier, they can move pretty quickly, and we expect... You know, we expect there'll be some tightening of the market. And those particular players that we're talking about here, you know, they don't you know, they don't need that specialty fuel and delivery systems. They can't afford it. It's not appropriate for their type of operation.

So we too are set up to move quickly ourselves, right? Our team, our sales team, our operations team, our procurement and logistics teams are expert at moving quickly and leveraging vendor relationships. We're able to provide some of those players who aren't big enough to economically purchase their own sand and handle their own sand. We're there, we're there for them, and we can provide, you know, a very effective solution for them. And we think, you know, again, over cycles, the third quarter was highly unusual. We sit around and talk about it. It was really, we think, just sort of a confluence of things that happened with some mergers. We did have an example of, you know, work being taken away when people significantly discounted work.

Some of it was just our customers with the timing of their, you know, building up of their inventory to be completed. They decided to delay their work and push it out a few months. So it was just a really unusual situation, but that gave us time, too. With the low pricing, we were able to go back to our vendors, you know, work with our vendors to adjust some of the costs of our materials and supplies used to execute jobs, and that helped us come back to customers and be competitive and still end up at some terms that, you know, that still worked well for us.

Alec Scheibelhoffer (Equity Research Associate)

Great. Thanks for the color, and I'll turn it back.

Ben Palmer (President and CEO)

Thank you.

Operator (participant)

As a final reminder, if you do have a question, please press star one. We'll pause just a moment. At this time, we have no further questions. I would like to turn the conference back over to Mike Schmit for closing remarks.

Mike Schmit (CFO)

Thank you all for joining our call today. We appreciate it, and we'll now close the call. Thank you very much.

Operator (participant)

This concludes today's conference call. There will be a replay on www.rpc.net within 2 hours following the completion of the call. Thank you for your participation. You may now disconnect.