RPC - Q4 2023
January 25, 2024
Transcript
Operator (participant)
Good morning, and thank you for joining us for RPC, Inc.'s fourth quarter 2023 conference call. Today's call will be hosted by Ben Palmer, President and CEO, and Mike Schmidt, Chief Financial Officer. At this time, all participants are in a listen-only mode. Following the presentations, 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'll now turn the call over to Mr. Schmidt.
Mike Schmit (CFO)
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 2022 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'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. Our press release issued today 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 (President and CEO)
Thank you, Mike, and thank you for joining our call this morning. We closed out the year with strong sequential fourth quarter revenues and EBITDA increases, as expected, following a soft third quarter. For the year, we delivered adjusted EBITDA of $374 million and free cash flow of $214 million. We also completed the acquisition of Spinnaker to strengthen and diversify our business, and we are still able to end the year debt-free. We have a solid balance sheet that can support both investments in our business and consistent returns of capital to shareholders. To elaborate further on the fourth quarter, we started off strong but felt the impact of falling oil prices later in the quarter.
During our third quarter call, we noted that with oil above $80, we and our customers should have a favorable environment for activity and utilization. At that time, we had indications from our customers that there would be a limited holiday slowdown. Obviously, oil fell below $80 in early November and dipped below $70 in early December. This decline caused completion postponements and more holiday downtime than originally anticipated. While the fourth quarter financial results did show a substantial improvement from a very soft third quarter, the December lull prevented us from delivering even higher growth. Our pressure pumping activities increased sharply from the third quarter, but still below our expectations. Regarding pricing discipline, as expected, we were able to secure work at more attractive pricing in the fourth quarter than certain opportunities we opted to forgo during the third quarter.
As for our workforce, our 10 horizontal fleets, plus our two vertical fleets, remain staffed, but we are monitoring conditions closely and will implement contingent cost actions as appropriate. Spinnaker acquisition was an important strategic decision for RPC, growing our cementing business, increasing our scale, and expanding our customer relationships. Performance remained solid despite a softer environment. Integration on all fronts has gone well, and we are excited about its future. Mike will now discuss the quarter's financial results.
Mike Schmit (CFO)
Thanks, Ben. I'll start with a few quick financial highlights for the year and then go into some more detail about the fourth quarter. For the full year 2023, revenues were $1.6 billion, increasing 1% versus last year. Diluted EPS was $0.90, which included a $0.07 negative impact from pension settlement costs in the first half of the year. So adjusted EPS was $0.97, and adjusted EBITDA was essentially flat at $374 million. We generated strong operating free cash flow in 2023. Operating cash flow was $395 million, and after CapEx of $181 million, free cash flow was $214 million. Recall, we spent nearly $79 million to acquire the Spinnaker cementing business in early Q3.
For the year, we spent $21 million on share repurchases, of which $19 million was through our buyback program. We also paid $35 million in dividends, thus returning more than $50 million of capital to our shareholders. Our strong financial position of $223 million at year-end, as well as our projected future cash generation, will continue to support organic investments in our business, potential M&A activities, and further capital returns to our shareholders, while also providing a solid cash buffer in an uncertain market. We are proud of our continued strong financial position, a function of our ongoing discipline and consistent conservative approach. Now I'll cover our fourth quarter results with sequential comparisons to the third quarter of 2023. Revenues increased 19% to $395 million, driven by a significant increase in pressure pumping revenues....
Last quarter, we signaled a strong sequential rebound, and that's what we experienced. Breaking down our operating segments, Technical Services revenues increased 22%, driven by growth in pressure pumping activity, our largest service line in that segment. Technical Services represented 94% of our total fourth quarter revenues, while our Support Services segment revenues were down 14% and represented 6% of our total revenues in the quarter. The following is a breakdown of our fourth quarter revenues for our top five service lines. Pressure pumping was 47.2% of revenues. Downhole tools, 23.3%. Coiled tubing, 9.4%. Cementing, 6.5%, and rental tools, 4.4%. Together, these top five service lines accounted for 91% of our revenues.
Cost of revenues, excluding depreciation and amortization during the fourth quarter, grew to $279.4 million, from $239.1 million, or a 17% increase. We did see some operating leverage in the quarter, particularly on fixed labor costs. SG&A expenses were $38.1 million, down from $42 million. The reduction in SG&A expenses was due to a variety of discretionary cost controls, coupled with lower incentive compensation. Diluted EPS was $0.19 in the fourth quarter, up from $0.08 in the third quarter. There were no non-GAAP, GAAP adjustments to those EPS figures. Adjusted EBITDA increased 53% to $79.5 million, with adjusted EBITDA margin increasing 440 basis points to 20.1%. Now I'll discuss our 2023 and expected 2024 capital spending.
As mentioned, capital expenditures were $181 million for 2023, below our expected range of $200 million-$250 million. Given market conditions that evolved in the latter half of the year, we tightly managed capital expenditures, and the completion of some projects were delayed into early 2024. For the coming year, we again project capital expenditures to be in the range of $200 million-$250 million. A key element of this plan is the delivery of a new Tier 4 DGB fleet, which we expect to place into service by the end of the second quarter. I'll now turn it back over to Ben for some closing remarks.
Ben Palmer (President and CEO)
Thank you, Mike. So bottom line, we rebounded sharply from the third quarter air pocket. However, falling oil prices and customer indications of budget exhaustion late in the quarter curbed the magnitude of that bounce back. Build visibility is of course, limited, and January weather has been a challenge, but we are getting signals from our customers for general near-term stability and potential for growth as the year progresses. As Mike referenced, our capital spending plans for 2024 include a new Tier 4 DGB fleet, which will replace a Tier 2 diesel fleet. Thus, we won't be adding pressure pumping capacity to the marketplace. Consistent with previous comments, we're taking a patient and disciplined approach to upgrading our pressure pumping assets to more attractive dual fuel and lower emission equipment.
With the addition of this Tier 4 DGB fleet, we will have 3 in total, plus two Tier 2 DGB fleets and three Tier 4 diesel fleets. Additionally, we are operating two Tier 2 diesel vertical fleets. So in total, 8 of our 10 horizontal fleets will be ESG-friendly. We remain on the sidelines with respect to electric fleets until there are solutions we feel make economic sense for our business and customers. Lastly, with Spinnaker integration essentially complete, we're looking for additional strategic acquisitions to strengthen our business. While RPC currently offers a wide variety of services required by both large and small E&Ps, we see opportunities to increase our scale and broaden our customer relationships. We are patient buyers and believe a potential silver lining to current industry conditions will be the availability of attractive acquisition targets.
In the meantime, our balance sheet is quite strong, supporting our $0.04 per share quarterly cash dividend, which our board just approved, together with opportunistic share buybacks. I'd like to thank our employees across the company for another year of dedication and resilience. We're especially proud that Thru Tubing Solutions, our downhole tools company, has been recognized as a 2023 Top Workplace by The Oklahoman. This prestigious accolade is a testament to our commitment to fostering a vibrant and inclusive work environment. You'll be able to read more about our values as well as other corporate initiatives, as we plan to issue RPC's first sustainability report very soon. In closing, I want to re-reiterate that in an often volatile market, our discipline remains consistent. Our focus on financial stability and long-term shareholder returns.
Thanks for joining us this morning, and at this time, we're happy to address any questions.
Operator (participant)
We will now begin the question and answer session. In order to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster.
... Your first question comes from the line of Stephen Gengaro with Stifel. Please go ahead.
Stephen Gengaro (Managing Director, Equity Research)
Thanks. Good morning, everybody.
Ben Palmer (President and CEO)
Good morning.
Stephen Gengaro (Managing Director, Equity Research)
So a couple things for me. What I would start with is on the pressure pumping side, can you give us a sense for how many horizontal frack fleets you ran on average in the quarter, and kinda how you see that evolving as the year progresses?
Ben Palmer (President and CEO)
Well, Stephen, you know, they all, all were staffed, as we indicated. They all did some work during the quarter, but, you know, it varies, of course. And, and I think the way we would expect that to evolve in 2024 is they will either become more busy, or, or we'll make the decision to maybe reduce the number of fleets we have in the field. Right now, we're confident with the way things are going in the first quarter, that we need to keep all of those fleets appropriately staffed. And, so for the time being, that's what we expect, and we're counting on, but, but we'll take the appropriate action if it doesn't, if it doesn't pan out that way.
Stephen Gengaro (Managing Director, Equity Research)
Okay, thanks. And then, and that actually leads into my other question, which was: you, on the technical services side, you, and you clearly had a... You know, your margin doubled, right, sequentially on the operating income line. And you, you know, despite, I think, it sounds like carrying costs and, and having maybe, you know, more staffed fleets that actually worked the whole quarter. But how does, how does that play out into kind of margin trajectory and/or incremental margins in technical services as, as we go forward? I know it's gonna vary based on revenue, et cetera, et cetera, but kinda, is there any parameters you can give us to sort of think about, you know, how the incremental margin performs given the, the, the costs that are in place?
Ben Palmer (President and CEO)
You know, reasonable question. Obviously, the incrementals this quarter were tremendous because of the large increase in revenue, and that's, that's quite, quite typical. I would say, yeah, and obviously, it depends on the amount of revenue, the job mix, and a lot of different things, but clearly, we're not gonna see—we would not expect to see that percentage of incremental margins going forward. But, but, but with revenue gains and increases, we, we would expect to see something in the, you know, the teens, mid-teens to perhaps 20%.
Stephen Gengaro (Managing Director, Equity Research)
Okay.
Ben Palmer (President and CEO)
But the first quarter, again, starting off with the way it is, I mean, you know, it's, you know, fourth quarter is kind of a reasonable base to kind of say, "Hey, you know, what's the first quarter gonna look like?" We don't know exactly, but we're starting off okay. And I think like many other people have said, it's a little bit slow. It's always when we slow down late in the fourth quarter, it takes a little bit of time for it to crank back up. So, we'll have to deal with that.
Stephen Gengaro (Managing Director, Equity Research)
Just to clarify, thank you. The margin comment made high teens or twenties, is it... That's an absolute margin over time, is that, or is that an incremental margin you were referring to?
Ben Palmer (President and CEO)
I was actually referring to incremental. Obviously, it depends on the amount of revenue growth, so-
Stephen Gengaro (Managing Director, Equity Research)
Okay
Ben Palmer (President and CEO)
... we're not, you know, expecting anything outsized or unusual. So.
Stephen Gengaro (Managing Director, Equity Research)
Got it. Great. Thanks for the details.
Ben Palmer (President and CEO)
Sure. Thank you, Steve.
Operator (participant)
Your next question comes from the line of Derek Podhaizer with Barclays. Please go ahead.
Derek Podhaizer (VP, Equity Research)
Hey, good morning, guys. Hoping you can maybe expand on the types of services you're looking to increase for scale and enhance your growth outlook. You mentioned some potential acquisitions. Just maybe some more color around what types of services or products you're looking to get into.
Ben Palmer (President and CEO)
Good question. You know, pressure pumping obviously is our largest service line, but it's by far the largest market, right, in the oil field. So there's a big market out there to go after. Many of our other service lines, downhole tools, coiled tubing, you know, many of the larger ones that we've referenced here, we have meaningful market share. Cementing, we have, you know, decent market share, especially with cementing, in the regions where we operate. We have very strong market share in those particular regions, and we hope to achieve the same with cementing and teaming up with Spinnaker in our South Texas market, where we've been operating for a number of years.
We think there's a great opportunity down there to bring some of Spinnaker's customer relationships and capabilities to bear down there. So, that's an opportunity. Cementing, coiled tubing, we have a good market share. That's a good business. That's something that we've brought along in the last couple of years. And downhole tools, you know, there might be some opportunities to expand there. So we're looking to expand for the most part. Yeah, we're looking to, you know, some of those particular service lines that I'm representing are with some of the larger customers that have a lot of activity, and so we are looking to expand on that.
Those particular service lines I've referenced are the ones where we have good scale and good market share now, and those would be the ones we would focus on primarily.
Derek Podhaizer (VP, Equity Research)
Got it. That's helpful. And then just on the pumping, is that more of, like, an equipment comment, like, looking to bolster your equipment base or maybe services around the frack pump, more of those ancillary services like wireline, proppant, logistics, you know, power solutions, things of that nature?
Ben Palmer (President and CEO)
... The ones I refer to are not directly tied to pressure pumping. I think the commitment and the requirement to internally develop, of course, you know, some of those capabilities could be acquired. You know, a lot of our larger peers, some of these systems and capabilities they have beyond wireline. You know, we have a small wireline business, so we do wireline. It's just not something that's that we've talked about because it's pretty small. And wireline is used for a lot of different things, not just for the completion of the well. But you know, we'll be selective. We think with our very good market share with some of these other service lines, that's gonna be the primary focus, but we're certainly open to other opportunities.
Our larger peers with some of the larger customers, you know, that's getting a lot of attention right now. But there are many other customers other than the ones that can benefit from, you know, a fully integrated, you know, tremendous infrastructure to bring out to... You know, not every customer has the type of number of wells and the type of fields that require that type of setup, and that would benefit from that type of capability. There are plenty of customers who need, you know, need the breadth of services that we offer. So that's where we're aligned, and that's where we're set up. That's where we have our historical relationships, and I expect for the time being, that's where we'll focus as it relates to pressure pumping.
Derek Podhaizer (VP, Equity Research)
Got it. That makes sense. And then, just a follow-up from me. Maybe just talk about the competitive landscape in frack among those, those smaller players. You know, the, the privates that we don't get great insight to, many of those, those Tier 2 diesel players. I'm not sure if you come across them, when you bid work or just see them out in the field. But, you know, there's been anecdotes of bankruptcies and, and laying down equipment, but just any insights-
Ben Palmer (President and CEO)
Yeah
Derek Podhaizer (VP, Equity Research)
... that you guys can provide from what you've seen would be helpful.
Ben Palmer (President and CEO)
Right. Not a whole lot specific. Obviously, we see them from time to time and hear that, you know, sometimes when we miss opportunities, it might be to one of those smaller players. Obviously, the pressure pumping equipment to upgrade and continue to invest in that equipment is expensive, and it's not everybody can afford to do that. So hopefully maybe we'll have a shakeout in that regard. Maybe that part of the market will further improve, and we're certainly set up to, you know, take advantage of that. You know, we had. You know, when the market tightened in the first and second quarter of 2023, we had you know tremendous financial results within pressure pumping, and obviously, the market loosened up a bit.
We think some of the smaller players, as you're indicating, I think it will be, you know, difficult, a challenge, as it always is, for them to be able to expand. So hopefully that market will improve a bit. We have certainly, overall, in North America, we have a relatively small market share in pressure pumping. But within the regions and the particular customers that we focus on, again, that don't need all of these massive infrastructure, you know, we're pretty well positioned and do well in that market.
Derek Podhaizer (VP, Equity Research)
Got it. Appreciate all the color. I'll turn it back.
Ben Palmer (President and CEO)
Sure. Thank you.
Operator (participant)
As a reminder, if you would like to ask a question, press star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your next question comes from the line of Stephen Gengaro with Stifel. Please go ahead.
Stephen Gengaro (Managing Director, Equity Research)
Thanks. I just wanted to follow up. Thanks.
Ben Palmer (President and CEO)
Sure.
Stephen Gengaro (Managing Director, Equity Research)
We've heard a lot about kind of pricing bifurcation in the market between low-emission assets and older assets, and also kind of the difference between sort of spot pricing for pressure pumping versus sort of contracted or committed arrangements.
Ben Palmer (President and CEO)
Yeah.
Stephen Gengaro (Managing Director, Equity Research)
Can you comment on that at all?
Ben Palmer (President and CEO)
It's getting more and more complicated. You know, the more fully integrated, whatever you wanna call it, some of our larger peers that have all this infrastructure to be able to bring to a well site, they're obviously getting paid something for that, but that requires an additional investment, right? So their investment, all things being equal, is a lot per fleet, if you will. It's a lot higher than our investment, right? So it's very difficult, too, to talk about pricing because of those various aspects, as you peel back the various services that are being offered. You know, again, we have a number of services, some of which work from time to time with our pressure pumping fleet, and we don't... You know, we watch our pressure pumping service line.
We monitor, you know, each of the service lines individually. There is some opportunity to bundle services, but that's not something that we focus on per se, right? We try to be the best we can be at a particular service we're trying to execute. Clearly, it seems that some of the, you know, very large E&Ps appreciate, of course, that's the word, appreciate, will contract, will look for some of the service providers that do have a multitude of different services to bring. But there are a lot of customers who still like to unbundle. Customers love to have competitors. They're not gonna give all their business to one service company. It's never happened, and I don't believe it's gonna happen in the future.
So, we're continuing to improve our fleet. You know, we're following our roadmap. It's certainly adjustable, but we have a roadmap that says, you know, as our equipment wears out, we're gonna invest and buy new equipment, and it certainly will be equipment that is newer, has additional capabilities. A significant percentage of our fleet today can burn natural gas, and that is appealing to some of our customers, not every one of our customers. So we're moving that along, and those decisions that we're making are, you know, they're financial decisions. They're not decisions just to say, "We wanna have...
You know, we wanna do whatever it takes to have X% of our fleet have a particular characteristic by a point in time. We're letting, you know, we're letting the market and our customers and the demand dictate when we make those investments. So, but we're moving that along. Obviously, the ordering of this new Tier 4 fleet moves us along that path. That's, again, consistent with our roadmap, and like I said, it is flexible in terms of, you know, the exact points when we take delivery and pay for that type of equipment. But we're executing on that plan for the long term, and we're improving our fleet as we do that.
Stephen Gengaro (Managing Director, Equity Research)
Great. No, that's good color. Thank you.
Ben Palmer (President and CEO)
Sure. Thanks, Steve.
Operator (participant)
Your next question comes from the line of Derek Podhaizer with Barclays. Please go ahead.
Derek Podhaizer (VP, Equity Research)
Hey, guys, just wanted to ask about your exposure to a couple of basins, primarily the Haynesville, MidCon, and Eagle Ford. I mean, these basins were the ones that came under the most pressure as gas started to capitulate. I mean, gas has been pretty lethargic here, pushed out to 2025. So can you maybe take some time for those three basins and give us a sense of what you're seeing as far as activity and customer conversations?
Ben Palmer (President and CEO)
Yeah. You said three basins, Haynesville, what was the third?
Derek Podhaizer (VP, Equity Research)
Haynesville, MidCon. Yeah, Haynesville, MidCon, Eagle Ford.
Ben Palmer (President and CEO)
Oh, MidCon, MidCon, MidCon. Yeah, yeah. Haynesville, we have historically had pressure pumping in South Texas and the Haynesville. We've not been there for many years, since probably 15, 16. We've moved out of those basins. Haynesville, in particular, is very intensive work, very, very high pressure, and it's just something that we've not focused on in the last few years. Many of our other service lines, downhole tools in particular, that's not as sensitive to those types of pressures. We have a very good business in the Haynesville, in South Texas, and certainly the MidCon. We still have pressure pumping that we do in the MidCon. The South Texas, we've done some work in South Texas.
We have, again, our cementing operation is down there, but right now we're not looking to make a significant move into either South Texas or the, or the Haynesville at this point in time. But there have been some opportunities for us that we have pursued in South Texas with pressure pumping. But to reiterate, our downhole tools company has significant market share, and they operate in all the basins around the U.S. Pressure pumping, we're a little more focused, if you will, on the basins where we're in the best position.
Mike Schmit (CFO)
Yeah, rental tools is another one that's kind of in all the bases, but a lot of the service lines that we are spread out are things that we can move easily, you know, to where there is activity and need for that equipment. So, as Ben mentioned, if you think pressure pumping, we're really more Permian. We have little, you know, bits, others, but our other service lines are definitely more spread out. But that's not heavily impacted because we can move that stuff pretty quickly to where the need is.
Derek Podhaizer (VP, Equity Research)
Got it. And then maybe just some thoughts on the E&P consolidation wave that we're starting to see. I mean, you mentioned throughout the call how you work for maybe some of those smaller companies that could be targets of the large caps independents, looking to gain share in shale. I mean, have you had any customers that have been acquired yet? Have you seen an impact to your services? Just maybe some color on how you guys are thinking about that.
Ben Palmer (President and CEO)
We were impacted somewhat in the third quarter with Pressure Pumping. That was a contributing factor to that air pocket. Since that time, we have not. Pressure Pumping has not been impacted. Heretofore, in the last several quarters with some of the consolidation that's taking place, our other service lines have not seen an impact from that consolidation, and we hope and expect that they'll actually be a benefit. Because we do work for. The other service lines that we've referenced do work for many of these large, highly active E&P companies. So if we're working for two high activity, you know, producers, operators, you know, we hope to continue to do that in the future.
If we're already working for both of them, we, we would expect to continue to work for them in the future. So we don't, we've not seen any negative impact other than the third quarter, and we've not seen any further. Any of the recent consolidations have not directly impacted us. And of course, some people have written that they said that, that they think kind of the taking out of some of the smaller to midsize operators may be coming to an end, right? There's a lot of consolidation at that upper end, which might impact kind of the more concentrated, larger pressure pumpers more than it would us, right? So anyway, so that's my take on that.
Derek Podhaizer (VP, Equity Research)
Gotcha. No, that's helpful. Just last one. Just to clarify on your outlook for first quarter, do you expect just top line and profitability to be flat, just given the weather and the slow start from the E&Ps? Or do you see upside, or you're talking about incrementals at the top of the Q&A, or maybe this is a flat to up, how you're thinking about first quarter earnings?
Mike Schmit (CFO)
Yeah, I, I guess I could start. That's probably a good way to think about it, sort of flat to up, you know, with exactly as you described it. The end of the year, you know, winter season kind of slowed, and it was a little bit of a slow start. We had some weather in January, but we have a lot of positive signs coming into the next couple of months. So, similar to what we've heard, you know, some of the other folks that have announced the last couple of days, it's similar, sort of flat to up. No huge increase or decrease we're expecting currently.
Ben Palmer (President and CEO)
Yeah.
Derek Podhaizer (VP, Equity Research)
Got it. Great. Appreciate it, guys. Turn it back.
Ben Palmer (President and CEO)
Thank you, Derek.
Operator (participant)
At this time, there are no further questions. I'll now turn the call back over to Ben Palmer for closing remarks.
Ben Palmer (President and CEO)
Thank you, operator. Appreciate it, and thank you, everybody, for joining our call. Appreciate your interest and attention, and look forward to catching up. Take care. Bye-bye.
Operator (participant)
Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect your lines.