RPC - Q3 2024
October 24, 2024
Transcript
Operator (participant)
Good morning, and thank you for joining us for RPC, Inc.'s Third Quarter 2024 Conference Call. Today's call will be hosted by Ben Palmer, President and CEO, and Mike Schmit, Chief Financial Officer. 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. I will now turn the call over to Mr. Schmit.
Mike Schmit (SVP, CFO, Corporate Secretary and Treasurer)
Thank you, and good morning. Before we begin, I want to remind you that 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. Please refer to our press release issued today, along with our 2023 10-K and other public filings that outline all 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'll be referring to several non-GAAP measures of operating performance and liquidity. We believe these non-GAAP measures allow us to compare performance consistently over various periods. Today's press release and our website contain reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. I'll now turn the call over to our President and CEO, Ben Palmer.
Ben Palmer (Director, President, and CEO)
Thanks, Mike, and thank you for joining our call. This morning, we reported third quarter results that reflect the continuing challenges of the OFS market. It remains highly competitive, with limited near-term visibility heading into the winter season as customers face budget exhaustion and limited incentive to increase activity amidst current oil prices. Consistent with recent performance, our pressure pumping business is facing relatively more headwinds than our other service lines. The spot and semi-dedicated market has ample supply of horsepower capacity seeking to be deployed, with pricing remaining under pressure as many of our peers seem motivated to maintain utilization. Our other service lines in aggregate were more resilient, posting a modest sequential revenue decline, indicative of the more diversified customer base, which includes larger Tier 1 customers spread across more basins.
To illustrate this contrast, our pressure pumping revenues were down 12%, while all of our other businesses in total were down just 4%. The frac market remains highly competitive, and there's definitely a downward pricing bias with calendar white space in the spot market. We've remained disciplined, opting to idle assets rather than burn them without adequate returns. We do see a difference in demand within our frac assets for our Tier 4 DGBs, where we see solid demand and have better visibility with dedicated customers. We have commitments for these fleets several quarters out, and in some cases, through the end of 2025. Our crews are delivering gas substitution rates that we believe are among the best in the industry, and our customers are pleased with our efficiency and performance on-site with these assets.
On the other hand, demand is more challenged with our legacy diesel equipment, as those fleets lack the ability to take advantage of low-price natural gas fuel. Thus, these assets must be priced even more aggressively to compensate for higher fuel costs if we want them utilized to fill the calendar. We remain committed to upgrading our fleet over time and pulling older equipment out of service so as not to add capacity to an already well-supplied marketplace. We also mentioned in our release the impact of E&P consolidation. As you know, this can be a win some, lose some scenario. But beginning in the third quarter, we began to feel a more tangible negative impact. Specifically, we had one meaningful pressure pumping customer that was acquired, and they informed us the acquiring company's incumbent frac supplier will be taking over the business.
While we had an outstanding relationship with this customer and delivered excellent service, this was an unfortunate case of it being out of our and their hands. We've worked hard to replace these revenues and continue to make progress backfilling our business pipeline. In response to these challenging conditions, and without a clear catalyst for near-term rebound, we took additional cost actions during the quarter. These were mostly headcount reductions to bring our cost structure down and align more with current and near-term expected demand. While we don't want to overreact to market slowdowns and hurt our ability to capitalize on quick positive turns in the market, we felt these actions were prudent, and we will evaluate further actions as appropriate. Looking at our non-pressure pumping service lines, we were encouraged, though not satisfied, with their relative resilience on the top line.
Rental tools revenue was flat, while cementing and downhole tools were down slightly. While not large businesses, we saw nice gains in snubbing, nitrogen, and tubular services. Our newly launched 3.5-inch downhole motor is gaining traction, and we're optimistic about demand for this lower pressure, high-rate motor. We're also coming to market with a new innovative solution to reduce reliance on bridge plugs. Our unique and proprietary technology can substitute the bridge plugs with a release of pods that plug each individual perforation, using well pressure to their advantage as they are forced into the openings and sealing each perforation. There are many efficiency and cost benefits of this newly developed technology. We have proven its effectiveness, and we're beginning to market it to our customers. Response to recent trials has been impressive, and we look forward to rolling out this technology more broadly in the coming quarters.
In coiled tubing, we're looking forward to an emerging opportunity in California to perform specialized plug and abandonment work. We discussed last quarter that we had completed a similar project in Texas to prove out the technology, though the revenues did not repeat in the third quarter. We expected this ramp-up would be lumpy, driving a sequential decline in coiled tubing, but are looking forward to scaling this proprietary technology and service for a large customer in California next year. As mentioned, these non-pressure pumping service lines in aggregate have a diverse customer base, servicing large and small E&Ps across many basins, and exhibit significantly less volatility than our frac operations. We believe these non-pumping service lines help balance our business, positioning us as a diversified OFS player with many capabilities and ways to service the extensive E&P customer pool.
Mike will now discuss the quarter's financial results.
Mike Schmit (SVP, CFO, Corporate Secretary and Treasurer)
Thanks, Ben. Shifting to the third quarter financial results with sequential comparisons to the second quarter of 2024. Revenues decreased 7% to $338 million, driven primarily by lower pressure pumping activity. Breaking down our operating segments, technical services, which represents 93% of our total third quarter revenues, decreased 8%, driven primarily by pressure pumping. Support services were up 7% and represented 7% of our total third quarter revenues. The following is a breakdown of third quarter revenues by our top five service lines. Pressure pumping was 38.4%, downhole tools, 29%, coiled tubing, 8.8%, cementing, 8%, rental tools, 5.2%. Together, these five accounted for 89% of our total revenues.
Cost of revenues, excluding depreciation and amortization, during the third quarter decreased by $14.8 million to $247.5 million, or a 6% decrease, a point less than the revenue decline. The lower cost of revenues stemmed primarily from lower equipment costs, sorry, lower employment costs. We closed a small pumping location and reduced the headcount of this and other operating locations. Cost of revenues also decreased due to lower maintenance and repair expenses and materials and supplies, reflecting lower activity levels. SG&A expenses were $37.7 million, up slightly from $37.4 million, largely reflecting the fixed costs of our support functions. Diluted EPS was $0.09 in the third quarter, down from $0.15 in the second quarter. There are no non-GAAP adjustments to either EPS figures.
EBITDA was $55.2 million, down from $68.5 million, with EBITDA margin decreasing 240 basis points sequentially to 16.4%. For the quarter, operating cash flow was $70.7 million, and after CapEx of $51.7 million, free cash flow was $19 million. On a year-to-date basis, operating cash flow was $255.2 million, and after CapEx of $179.5 million, our free cash flow was $75.7 million. We know that while year-to-date free cash flow is down from 2023, and will be lower for the full year, as industry conditions have been more challenging. There were some timing benefits, especially in CapEx and working capital, that boosted last year's free cash flow at the expense of this year.
All told, despite a tough environment, we still expect strong cash flow this year and that our trailing two-year average would still be quite robust. We still expect CapEx to finish 2024 within our guided range of $200 million to $250 million. During the quarter, we paid $8.6 million in dividends, and we maintained a strong balance sheet, including a cash position of $277 million at quarter end. I'll now turn it back over to Ben for some closing remarks.
Ben Palmer (Director, President, and CEO)
Thank you, Mike, so as we wrap things up, I just want to reiterate our views on capital allocation and potential investments in the business. Historically strong cash generation and long-term financial discipline afford us the opportunity to make strategic investments, specifically equipment upgrades and potential acquisitions. Beyond organic investments in our frac fleet and supporting new products and service innovation, introductions across the business, we are aggressively looking at M&A, and are primarily focused on growing our non-pressure pumping service lines. We think rebalancing our portfolio over time to be less impacted by the swings in the frac market and more driven by a diverse set of oil field services for a broad customer base, will ultimately, ultimately deliver more attractive and consistent financial results and returns for our investors.
We believe there are ample opportunities and targets in the marketplace to execute that rebalancing, and look forward to building a track record of acquiring and integrating high-quality companies, and generating solid returns. Spinnaker was a good start along that path, and we look forward to potential future transactions over time.... I'll close by reiterating that in an often volatile market, our discipline remains consistent, with a focus on financial stability and long-term shareholder returns. I also want to thank all of our employees who work tirelessly to deliver high levels of service and value to our customers. Thanks for joining us this morning, and at this time, we're happy to address any questions.
Operator (participant)
If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And your first question comes from the line of Don Crist with Johnson Rice. Please go ahead.
Don Crist (Equity Research Analyst)
Good morning, guys. How are y'all this morning?
Ben Palmer (Director, President, and CEO)
Morning, Don.
Good.
Hope you're well.
Don Crist (Equity Research Analyst)
Ben, I wanted to ask about the downhole technology. I've heard some field reports that it's pretty revolutionary and didn't know if you could expand on kind of what advances you're making in that. Any kind of color you can provide around that, and what kind of opportunity that can provide specifically in California going forward in the next year?
Ben Palmer (Director, President, and CEO)
Don, the California opportunity is with coiled tubing with some plug and abandonment work, where there's been some wells that have been impacted by seismic shifts. So that takes advantage of some of our steerable tool technology working with coiled tubing. The frac technology that we talked a lot about are these pods that we have used in the past, and quite successfully. Just very briefly, the improvement that we've recently made is on how to deliver those pods downhole. We've come up with a way to do that. We believe it's much more effective and straightforward and believe that's gonna create an opportunity for customers if they are comfortable again to displace bridge plugs. There's a number of other benefits with that particular technology.
You know, it's a nice niche, and I'm sure you're aware it's a pretty big market, and we're encouraged about it. We actually have a test going on today with a number of customers that are gonna be out at our downhole tool facility in Newcastle, Oklahoma.
Don Crist (Equity Research Analyst)
Okay. I appreciate that, and on the M&A front, how is the bid-ask spread going? Because I know, you know, there's a lot of pressure out there from the small mom-and-pop operators that have been around for a long time, and didn't know if that bid-ask spread is narrowing versus, you know, the last six to nine months or so.
Ben Palmer (Director, President, and CEO)
Yeah, we, we've talked about that in the past. It's all relative. I think you know, everybody is settling in to the fact or realize and can see that you know, just looking at public valuations, I think privates and others do recognize that you know, people can't pay a substantially higher multiple for private companies than they're trading at. So I think spreads have compressed a bit. I don't know, quite honestly, that I could say that we've looked at a large enough sample and gotten far enough along with targets to be able to say definitively that they're narrowing. But that is the case. It has narrowed. I really can't you know, quantify on what that might be.
Don Crist (Equity Research Analyst)
I appreciate that color. I'll let somebody ask some questions, hop back in queue. Thank you.
Ben Palmer (Director, President, and CEO)
Thank you, Don.
Operator (participant)
Your next question comes from the line of John Daniel with Daniel Energy Partners. Please go ahead.
John Daniel (Founder)
Hey, good morning. Thank you. I'm gonna follow along, Don's questions, if that's all right. On the acquisition opportunities, what's your willingness to use cash, and what's the willingness of potential sellers to take stock?
Ben Palmer (Director, President, and CEO)
Discussing stock is, let's see. You know, I think sellers, typically, there's a range of things that a seller, this is just experience over the years, right? A number of things that people look at over time, and it has to be something that works with both parties. You know, we're lucky enough to have a decent cash balance and a nice, strong balance sheet.
John Daniel (Founder)
Yes.
Ben Palmer (Director, President, and CEO)
It gives us flexibility to go either way. You know, we believe our stock is, you know, our stock is valuable to us, so we-
John Daniel (Founder)
Sure
Ben Palmer (Director, President, and CEO)
... we tend to, you know, try to be prudent and not let too much of that go at too low of a price. So it just varies. It varies.
John Daniel (Founder)
Okay.
Ben Palmer (Director, President, and CEO)
You know, cash oftentimes for private sellers are the preference, but there are other opportunities where stock can be a more natural fit. So-
John Daniel (Founder)
Right
Ben Palmer (Director, President, and CEO)
... we have both of those available to us, of course.
John Daniel (Founder)
Okay, thank you. And then, on the frack side of the business, I don't know if you'd be willing to answer, so I'll ask anyways. Let's say the U.S. completion market just stays stable for a year or two, right? You know, a little bit of volatility in cube work or seasonality and all that normal stuff, but what's the optimal fleet size for you guys from a marketed perspective? You know, I think you used to have, like, 10 or 11 fleets on a regular, you know, back, say, a year ago?
Ben Palmer (Director, President, and CEO)
Yeah.
John Daniel (Founder)
Is there any color you could say? 'Cause that obviously has implications to CapEx and everything else.
Ben Palmer (Director, President, and CEO)
... Yeah. Yeah, yeah, yeah. I, you know, if it remains stable, being where it is now, it's obviously going to be lower than that 10 or 11, and that's where we are now.
John Daniel (Founder)
Yeah.
Ben Palmer (Director, President, and CEO)
You know, we're and as you know, trying to define and say, you know, how many are being marketed and all that, if you're anything less than all, it's sort of hard to, you know, to give a guide. But I think it's lower. It's gonna be more, you know, the mix and the and we're, we continue to be committed to the frac market, right? We're just trying to be prudent-
John Daniel (Founder)
Right.
Ben Palmer (Director, President, and CEO)
and trying to rebalance our portfolio as we've talked about. And you never know, you never know what's gonna happen around the corner. I guess we do know there's gonna be volatility.
John Daniel (Founder)
Right.
Ben Palmer (Director, President, and CEO)
But we are committed to continue to, you know, upgrade prudently over time, and so it's probably a lower number just because of the efficiencies that are lower for us.
John Daniel (Founder)
Right.
Ben Palmer (Director, President, and CEO)
It'd be nice if it was lower for the overall industry. If the discipline can remain overall, that would help everybody, but for us, it's probably lower, and I think with the continued upgrade of our fleet, we could actually net end up in a better place, right?
John Daniel (Founder)
Yeah.
Ben Palmer (Director, President, and CEO)
But that's the question we're trying to ask now. You know, we're going through our planning process for next year and, of course, looking at our long-term plans. So, we're still contemplating that question. It's a good question.
John Daniel (Founder)
Okay, and I got one more, if I may. Going back to acquisitions, and I know you have to speak in general terms with this, but you alluded to a lot of opportunities. Would you say that those are more characterized by PE firms trying to finally get out of their investments, or are these distressed opportunities where you can step in, or is something else, or all of the above?
Ben Palmer (Director, President, and CEO)
A combination.
John Daniel (Founder)
Okay.
Ben Palmer (Director, President, and CEO)
I'd say a combination. Yeah, just thinking through kind of the backlog. Yeah, combination.
John Daniel (Founder)
Not a clear theme is what I guess I'm saying. It's kind of-
Ben Palmer (Director, President, and CEO)
Right. Right.
John Daniel (Founder)
Yeah.
Ben Palmer (Director, President, and CEO)
Right.
John Daniel (Founder)
All right. That's all I have. Thank you for including me.
Ben Palmer (Director, President, and CEO)
Very good. Thanks, John.
Operator (participant)
Your next question comes from the line of Stephen Gengaro with Stifel. Please go ahead.
Stephen Gengaro (Managing Director of Oilfield Services)
Thanks. Good morning, everybody.
Ben Palmer (Director, President, and CEO)
Good morning, Stephen.
Stephen Gengaro (Managing Director of Oilfield Services)
So two for me, and maybe I'll stay on the M&A side, and I apologize if I missed a little bit of this. But one of the things we've seen kind of over the last about twenty plus years, but clearly over the last ten, was the lack of kind of interest from investors around some of the smaller... and some very small oil service players. And what I'm-
Ben Palmer (Director, President, and CEO)
Mm-hmm.
Stephen Gengaro (Managing Director of Oilfield Services)
The reason I bring it up is because I'm thinking about, you know, consolidation being kind of a key driver, maybe of success and, you know, creating larger businesses. But when you think about consolidation, how do you balance sort of the, you know, maybe buying something or a couple of businesses that could be a little more commoditized, but kind of create critical mass in those businesses, versus making sure you're buying something that's kind of differentiated or unique in some way?
Ben Palmer (Director, President, and CEO)
Yeah. And you're talking about-
Stephen Gengaro (Managing Director of Oilfield Services)
I guess what I'm asking is, can you create value by kind of rolling up some kind of more commoditized businesses or not? And how do you think about that?
Ben Palmer (Director, President, and CEO)
That wouldn't be our first choice to do that. Clearly, we want to try to find very good businesses, whether it be a quote, unquote, "commoditized service or not." I think that would be more the key for us. And that's our, you know, our focus. And I think in this particular market, as we're sort of alluding to, that I think we're somewhat uniquely positioned, I think, to be a good purchaser. I think we know there's some parties out there that, you know, that they care about where they land, and they care about, you know, based...
You know, earlier on John's question, they care about the consideration they receive, and the culture, and the environment that they come into, and I think we check a lot of those boxes for companies that are looking to exit and find, you know, their next home. So, but to answer your question, we don't want to get bigger just to get bigger. I understand your question. I know that scale, investment scale is very important. That's something that we do want to try to address and think we are positioned to do. And of course, that investment scale, if done correctly, can generate some operational scale and some cost leverage as well. So that's what we're trying to pursue. We're trying to change that.
Consolidation's been discussed for oilfield services for a long time, and there really hadn't been a lot of those transactions yet, but you know, perhaps that'll pick up a bit, and we'll see, but that's our strategy. We'll see what happens.
Stephen Gengaro (Managing Director of Oilfield Services)
Great. Thank you for the details. That's helpful. And then the other question is just kind of back on the frac side. Are you? How are you thinking about the '25 pricing dynamic? I don't know if you mentioned it earlier or not, but we've kind of heard kind of mixed from some of your competitors so far, but how do you think about... What's your view of kind of how pricing evolves next year?
Ben Palmer (Director, President, and CEO)
You know, as we sit here right now, today, you know, we're not going to go into it and spend or do things expecting pricing to improve a significant amount. So we're trying to position ourselves to take advantage if things do improve, but we're trying to be prudent as well. So it just feels like it's more of the same. Hopefully, there's gonna be some discipline. You know, again, we've idled some assets, we've reduced our headcount. If others do that, that would help, and reducing fleet, marketed fleets and things like that. So you know, we're not counting on pricing to be better in 2025. You know, there's certainly that possibility.
The discussion about maybe the improvement in the natural gas market might help a bit. Any sort of improvement like that could help, but we're not counting on it.
Stephen Gengaro (Managing Director of Oilfield Services)
Okay, great. No, thank you for the details.
Ben Palmer (Director, President, and CEO)
Thanks. Thanks, Steve.
Operator (participant)
Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Don Crist with Johnson Rice. Please go ahead.
Don Crist (Equity Research Analyst)
Hey, thanks for letting me back in at the end here. Ben, if you were gonna upgrade another fleet, what kind of decision point would that entail? And kind of how long would that take if you wanted to add another Tier 4 DGB fleet?
Ben Palmer (Director, President, and CEO)
Don, it's probably still, you know, nine months or so to get all of a full fleet in place. But we're looking at a variety of things. We're talking to some of the component manufacturers about some alternative technologies. We're talking to some smaller OEMs. We're looking at a variety of things. Chances are, the next firm commitment that's directly in hand would probably be another Tier 4 fleet for us. But we're looking at a variety of things. There's a lot of different technologies that are available, and so a few months out, but I think we have a little bit of time.
Don Crist (Equity Research Analyst)
Would you require, like, a three-year contract or something to do that, or would you kind of do it more in the spot market?
Ben Palmer (Director, President, and CEO)
At this point, you know, we would not require a long-term contract. I mean, when we place an order for that type of equipment, that just would be because, you know, where we are in our fleet, the evolution of our fleet and the need to replace and to maintain, and things like that. So, we probably would certainly try to pursue that, but at this point in time, we wouldn't require anything like a three-year contract. Certainly, you know, talking to the team, we certainly at least a multi-month contract would be nice and something that certainly would support that decision.
Don Crist (Equity Research Analyst)
I appreciate the call. Thank you.
Ben Palmer (Director, President, and CEO)
Yeah. Thanks, Don.
Operator (participant)
There are no further questions at this time. I will now turn the conference back over to Mr. Ben Palmer for closing remarks.
Ben Palmer (Director, President, and CEO)
All right. Thank you, everybody, for listening in. We appreciate it, and hope you have a good rest of the day. Take care.
Operator (participant)
A recording of today's call will be available on rpc.net within two hours following the completion of the call. This concludes today's call. You may now disconnect.