Q3 2021 RPC Inc Earnings Call

Okay.

Okay.

Good morning, and thank you for joining us for the RPC Inc's third quarter 2021 financial earnings Conference call.

Call will be hosted by Rick Hubbell, President and CEO and Dan Palmer Chief Financial Officer also present is Jim Landers, Vice President of corporate services. At this time, all participants are in listen only mode.

One of 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.

I would like to advise everyone that this conference call is being recorded.

Jim will get us started by reading the forward looking disclaimer.

Yeah.

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 we've 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 2020 10-K and other public filings that outline those risks all of which can be found on rpc's website at RPC dot net.

In today's earnings release and conference call, we refer to several non-GAAP measures of operating performance. These non-GAAP measures our adjusted net loss adjusted loss per share EBITDA and adjusted EBIDTA. We're using these non-GAAP measures today, because they allow us to compare performance consistently over various periods with.

Regard to nonrecurring items. In addition, RPC is required to use EBITDA to report compliance with financial covenants under our credit facility.

Our press release and our website contain reconciliations of these non-GAAP financial measures too.

So our net loss loss per share and net income which are the nearest GAAP financial measure. Please review. These disclosures. If you were interested in seeing how they are calculated.

If you've not received our press release for any reason please visit our website again at RPC net for a copy.

I'll now turn the call over to our President and CEO Rick Hubbell.

Thanks, Jim.

This morning, we issued our earnings press release for Rpc's third quarter of 2021.

During the third quarter of 2021 oilfield drilling and completion.

<unk> increased as exploration and production companies responded to higher commodity prices.

RPC was ready to meet increased demand with equipment and crews are revenues increased in RPC generated quarterly net income for the first time in more than two years.

As the quarter progressed commodity prices continued to increase and near term industry forecasts.

Addicted, so supply demand dynamics favorable to our industry.

We begin the fourth quarter of 2021 with a new state of the art pressure pumping fleet and net.

Pricing traction.

And most of our service lines offset to these favorable dynamics include supply chain supply chain constraints and increasing cost pressures.

Which we will continue to manage as we move forward in this industry up cycle.

CFO, Ben Palmer will discuss this and other financial results in more detail after which I will provide some closing comments.

Thank you Rick.

For the third quarter of 2021 revenues increased to $225 3 million compared to $116 6 million in the third quarter of the prior year.

Revenues increased due primarily to higher activity levels and improved pricing compared to the third quarter of the prior year.

Operating profit for the third quarter was $8 million compared to an operating loss of 31 8 million in the same quarter of the prior year.

EBITDA for the third quarter was $26 5 million.

Impaired to EBITDA of negative $12 3 million in the same same quarter of the prior year.

Our diluted earnings per share for the third quarter were two cents compared to an eight cents loss per share in the same quarter of the prior year.

Cost of revenues cost of revenues during the third quarter of 2021 was $176 million or <unk> 75, 7% of revenues compared to $109 million or 86, 5% of revenues during the third quarter of 2020.

Cost of revenues increased primarily due to expense and increases in expenses consistent with higher activity levels, such as materials and supplies expense maintenance and repairs costs and fuel costs.

Cost of revenues as a percentage of revenues decreased primarily due to the leverage of higher revenues over direct employment cost that increased at a lower rate than the increase in revenues.

During the quarter RPC recorded a cares act tax credit that was largely offset by the resolution of a long term contractual dispute with vendors.

Selling general and administrative expenses were 31 4 million in the third quarter of 2021 compared to $32 4 million in the third quarter of the prior year.

Selling general and administrative expenses decreased from 27, 8% of revenues in the third quarter of last year to 14% of revenues in the third quarter of 2021.

Due to leverage of higher revenues over cost that are relatively fixed.

Depreciation was $18 1 million in the third quarter of <unk> 21, compared to $18 7 million in the same quarter of the prior year.

Technical services segment revenues for the third quarter were $211 8 million compared to $109 3 million in the same quarter last year due to significantly higher activity and some pricing improvement.

Segment operating profit in the third quarter of 2021 was $8 3 million compared to a $24 9 million operating loss in the third quarter of the prior year.

Our support services segment revenues for the third quarter of this year were $13 5 million compared to $7 3 million in the same quarter last year.

Segment operating loss in the third quarter was 55000 compared to an operating loss of $3 8 million in the third quarter of the prior year.

On a sequential basis Rpc's third quarter revenues increased 19, 4% to $225 3 million from $198 8 million in the prior quarter. This was due to activity increases in all of our service lines as well as slight net pricing improvement in several of our larger <unk>.

<unk> lines.

Cost of revenues during the third quarter of 2021 increased 17% to $170 6 million compared.

Compared to $145 8 million in the prior quarter.

As a percentage of revenues cost of revenues decreased slightly from 77, 2% in the second quarter of this year to 75, 7% in third quarter of 2021, reflecting some pricing improvement and operating expense leverage.

Selling general and administrative and administrative expenses during the third quarter of 2021 increased six 9% to $31 4 million from $29 4 million in the prior quarter, resulting in positive operating expense leverage.

As a result of these improvements operating profit during the third quarter of 'twenty, one was $8 million compared to an operating loss of $1 2 million in the prior quarter.

Rpc's EBITDA was $26 5 million in the third quarter compared to EBITDA of $17 3 million in the prior quarter.

Our technical services segment revenues increased by $35 7 million or 23% in the third quarter due to increased activity levels and some pricing improvement in the segment service lines.

Rpc's Technical services segment generated $8 3 million operating profit in the current quarter compared to an operating profit of $1 4 million in the prior quarter.

Our support services segment revenues increased by six 6% to $13 5 million in the third quarter operating loss was 55000 in the current quarter compared to an operating loss of $2 4 million in the prior quarter.

Yeah.

During the third quarter RPC operated seven horizontal pressure pumping fleets.

Also during the quarter, we made the strategic decision to add a tier four dual fuel fleet.

Heavily influencing this decision was an opportunity to partner with caterpillar and the testing of new controls technology aimed at often not optimizing fuel burn minimizing emissions and lowering maintenance costs.

In.

<unk>, we are working the fleet for a large A&P on a dedicated contract.

This equipment was added late in the third quarter and is reflected as a finance lease on our balance sheet with a balloon payment due at the end of 12 months.

Third quarter 2021 capital expenditures were $19 million, excluding the equipment acquired under a finance lease in the third quarter.

We currently estimate full year 2021 capital expenditures, excluding lease financed equipment to be approximately $65 million.

<unk>, primarily of capitalized maintenance for existing equipment and selected growth opportunities.

With that I'll now turn it back over to Rick for some closing remarks, well. Thank you Ben.

It became clear this quarter that many e&ps and including those among our customer base, who are private operators are beginning to respond with conviction to higher commodity prices and forecast of global energy.

<unk>.

Our calendars are filling up and we are optimistic about the fourth quarter.

Spite of the traditional holiday related slowdown at this time of the year. We are also looking forward to a stronger 2022.

As we operate in this improving environment, we're closely watching emerging challenges in our business chemicals components and labor shortages together with cost increases in third party logistics are all developing as operational issues. In addition, we are also monitoring.

Ports of shortages of tubular goods and other items used by our customers, which could cause delays in the need for our services.

The continued volatile environment in which we operate makes forecasting difficult, but I'm pleased.

But our financial strength has allowed us to remain competitive as we begin to realize the benefits of higher commodity prices and an improving operating environment.

At the end of the third quarter Rpc's cash balance was approximately $81 million and we remain debt free I'd like to thank you for joining US for this conference call. This morning and at this time, we'll open up the lines for your questions.

To ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Please standby, while we compile the Q&A roster.

Your first question comes from the line of Stephen Chin with.

With Stifel.

Thanks, and good morning, gentlemen.

Thanks, David.

Two things from me and I'll start with you talk you talked about the Frac fleet at seven fleets and Hugh you mentioned technical services pricing and activity improvements.

Can you.

Give us a sense for what youre seeing specifically on the pressure pumping side and how you think that kind of.

Flows through into 2022.

Stephen This is Ben.

<unk>.

We are beginning to see some improvement.

And we're now in the the bidding season that will very much impact next year. So we were trying to.

<unk> and ourselves we're trying to do what we can.

Increased pricing wherever wherever we can and where necessary, we're certainly having the discussions with our customers about.

The the ability to pay for the type of equipment that they desire. So we're watching that very closely and we are we are hopeful that we will experience some of that and pricing improvement next year and as well as some continued.

Strong activity levels. So.

We think its.

Headed in the right direction.

Thanks, and then.

You talked about the tier four DGB fleet and.

We've been hearing for a while there is sort of a at least the utilization premium if not a price premium for these assets, but we've also started to hear pricing moving for the traditional diesel fleets as well or are you seeing that same trend.

Yes, I would say so yes, yes.

There is there is some bifurcation in terms of our customers in terms of their degree of desire for the for the.

Quote unquote ESG friendly equipment.

So.

<unk>.

Expect to continue to have a blend of the older tier two in the newer equipment, we think there'll be a.

Our market for both so it'll take some time for that to.

To evolve but.

Doing everything we can to get as much equipment busy at acceptable pricing as possible.

Thanks, and just one final quick one can you give us the product line breakdown.

Okay.

Steven This is Jim yes, absolutely happy to.

So.

The percentages I'm going to give our the percentage of consolidated RPC revenue that these major service lines comprised so the largest was pressure pump pressure pumping, which was 42, 8% of consolidated RPC revenue for the quarter.

The second largest was our downhole tools service business thru tubing solutions and that was 27, 5% of revenue.

Number three is coiled tubing at 11.9% of revenue.

After that we have nitrogen, which was 4.0% of revenue.

Right behind that is rental tools, which is in our support services segment that was three 8% of revenue.

And thanks for the question Yeah, great. Thank you.

And again, if you would like to ask a question simply press Star then the number one on your telephone keypad.

And again, if he would like to ask a question. Please press Star then the number one on your telephone keypad.

Your next question comes from the line of Waco with.

With <unk> capital markets.

Thank you for taking my question just want to note that this said <unk> is that going to be the eight active fleet in Q4.

We expect to have eight in Q4, yes.

Okay and then.

And then beyond that.

As you look into next year first quarter.

Are you planning on adding additional tier four fleets.

Not there are no plans at this point in time, we don't have any anything else on order, which I guess would be the answer to that question.

Okay, and if you were to order any equipment, what would be the lead time to get deliveries. If you have explored that.

Don't have a specific answer for that certainly a reasonable question, we understand with our supply chain and everything else and in bread anecdotes that.

Frame as is lengthening so to be honest.

We don't have.

Okay.

Just one final question.

In terms of the market dynamics that may be hearing about pricing.

Pricing improvements, but we also had about.

The industry, adding new capacity.

As you get into bids are you still seeing.

A large number of companies bump is bidding into individual jobs are you seeing a little bit more.

Few companies now and it is getting much tighter.

Waqar. This is Jim there are fewer people bidding, but if youre talking about pressure pumping there is still plenty of idle equipment out there.

So pricing is improving activity levels are good but its the.

Pricing and competitive nature is still very very competitive.

Okay.

Thank you very much appreciate the answers.

Thanks Waqar.

And your next question comes from the line of John Daniel with Daniel Energy partner.

Hey, guys, thanks for including me.

Sure John I guess this.

On the on the tier four.

The fleet for the DGB fleet is that it.

It looks like a relatively new concept.

Expands and traction and just speak.

Speak to what the balloon payment would be when it comes due.

I apologize John you were going in and out just a little bit can you repeat that.

Yes.

Sure.

Question is just about the arrangement on the knee.

Do you think thats going to be a new a new concept.

Either occupancy or the industry in <unk>.

Perhaps tell us what the balloon payment will be.

Well.

You can look at the balance sheet and see what the liability is the balloon payment would be around $17 million after a year.

And I can't speak to whether it's an industry trend I don't believe it is.

This particular I'll speak maybe a minute to the relationship with cat and what we're doing.

Okay. Caterpillar did have this equipment built but it was purpose built.

<unk> built in a way for them to be able to do this field follow.

Project group, that's what they call it.

And.

And it's my understanding clear understanding that that's not their business is not going to be the manufacturer of equipment like this they did it specifically to be able to test this new technology as we indicated in our comments about maximizing.

Fuel usage controlling emissions and managing maintenance costs. So thats, what we are in the process of testing with them they have some.

Power systems control technology software that they are our testing that they've used in other industries I think mining in particular.

And so they are using us as as an experiment. If you will and we're pleased to do that Theyre, obviously, a world class <unk>.

Company dedicated to the oil and gas industry and.

We're very pleased to be teamed with them with them. We think that will give us a jumpstart we expect I expect and we expect that the technology will work great.

About a year under our belt with that technology and.

I think it will.

So we will have a jumpstart on yet.

If we decide to utilize it ourselves going forward. So we're excited to be teamed up with them.

And it is helping us and a lot of ways as I said, they're very.

Professional World Class company, and we've learned a lot. We think it is helping US also with some of our internal digital initiatives.

And.

So it's just getting started.

The E&P customer as is certainly aware of the testing and the experiment and they they to my understanding day, two we're very very excited and pleased with.

The progress is being made and what the opportunities are so so we're really excited about it.

Fair enough.

On the.

On the pricing front.

As you guys are negotiable more confused was this the close whether they go.

Effective immediately.

Is it a January one concept, where as you start to do the prices go up.

Yes.

John This is Jim it's a little bit of both.

We're in the spot market people, who know us know and so we are gaining.

Gaining some some price increases with the next.

The next completion. This is also contract renewal season, and we're focusing on.

Pricing for it.

Existing msas, but pricing for 2022, so there'll be some more.

We hope on January one.

Got it. Thank you for your time guys.

Yes, John.

And you do have a follow up question from the line of Stephen <unk> with Stifel.

Thanks.

Just curious so we've seen obviously.

When revenues moving around a lot your incremental margins can be kind of funky from quarter to quarter and it seems like youre getting better overhead absorption now and things are.

We're starting to normalize a bit.

You give us a sense of if we thought about 2022.

<unk> versus 'twenty, one what what types of incremental margins, you think would be a reasonable target to be thinking about.

Steven This is Jim so are our incrementals.

<unk> second and third quarter were were respectable, but not characteristic of <unk> in a typical up cycle.

So based on $85 oil in.

$6 Henry hub or whatever it is today.

And the way 2022 books, we would look for.

Sequential to be.

At least approaching what they were in traditional up cycles in the past so that would be higher than today.

But higher than this quarter I should say, but we still have these cost increases were dealing with.

To make it clear that we pass those cost increases along but.

That always takes some management, which again were doing but that.

That causes us to be a little less optimistic about hitting 40 or 45% sequentially.

In the coming year trial.

Okay, great. Thank you and then.

The other just follow up just sort of.

When you think about.

<unk>.

I guess it gets to your capital allocation, but also gets to the pressure pumping business in general how do you think when you make an investment for a new a new asset might let's say to tier four DGB.

What types.

Ill be their contract commitments of returns are you thinking about to justify the investment.

Okay.

This is Ben.

It's a very good question.

Is there a clear runway to appropriate returns or clearer vision or a view or.

Contractual.

Relationship that leads to an appropriate return today note that they are not.

But we.

We and the industry need to.

Be moving in that direction much much sooner than later.

So.

So it's a little bit of.

Whatever you want to call it betting on the come or.

Doing what we feel like we need to do I mean, we're working on a road map in terms of what it's going to look like or need to look like.

Over the next say.

Say.

Two or three years for us to continue to.

Replace by.

Modify whatever our equipment. So that's something we've been working on and will continue to work on to try to.

Draw that out that we can have decision points with particular financial returns in mind before we.

Pull the trigger we all know that there are long lead times on equipment. There is uncertainty about what future business conditions might look like including pricing in particular, so you have to make judgments and take risks.

So, adding this new tier four DGB is a risk, but but there are lots of benefits to being partnered up with caterpillar.

So again that that was a.

That was certainly a significant factor in us.

Making this particular commitment I mean, it lined up well with what we're trying to accomplish and what we see as our roadmap going forward.

But but.

It didn't hurt that.

The nature of the arrangement with the with the with the finance lease and all of that obviously it allowed us to.

And then it was really caterpillars choice, but we were fine with that that allowed us to defer the payment for a substantial portion of the cost of the equipment. So so that worked out OK worked out well also.

So anyway. So we're trying to look at that roadmap, we're trying to establish and establish our targets and our returns.

Clearly we're all we.

In terms of what overall returns we need to achieve and what returns we want to achieve over time, we're honing in on that too in terms of what we believe the <unk>.

Industry, and we can achieve and we'll build that road map around that and we will execute on that as we move forward.

Great. Thank you for the color gentlemen.

Sure. Thanks, David.

And again, if you would like to ask a question simply press Star then the number one on your telephone keypad. Your next question comes from the line of Dan <unk>.

Not.

With Coker and Palmer.

Hey, good morning, gentlemen, and thank you for including me.

Okay.

Just a quick maybe just two quick questions one on the tier four DGB and Newbuild will it be used as deno.

I think one would need to be broken down into several fleets.

Definitely in the first year with this partnership with Caterpillar it will be maintained together.

Okay. That's helpful.

And.

As we think about it.

We will maintain pricing and as we think about that versus seasonality or holidays in 14.

Is it fair to think in terms of EBITDA per fleet it could be modestly higher because of the deal for DDB, but outside that how should I think about.

EBITDA per fleet, increasing pumps beautiful game.

Beds that particular question is difficult to answer let's speak to Q4, though.

Obviously, there is theres always seasonality in our business in Q4 weather is not predictable.

But there are holidays and that sort of thing we believe based on looking at our calendars right now that we are not going to experience. The same level of seasonality. This Q4 that we that we typically do plus we're in an improving environment.

So.

EBITDA per fleet or Rpc's results in general.

At this point look kind of flattish sequentially.

Also bears mentioning that the two.

Giving us on Thursday, but Christmas and new year's come on a Saturday. So that's modestly helpful. As well. So we just don't think we're gonna experienced the same level of seasonality that we normally do.

EBITDA per fleet is not something we talk about because everybody calculates it differently.

Okay, and maybe one last quick one if I could.

Yes.

About.

Upgrades I think you've talked about maybe days not 99 point, another new build but.

How are you thinking about more upgrades.

DGB.

Well, that's part of our roadmap again, we're going through and evaluating the different options we have for the.

Shipment, we have today and what the options are for trying to.

What returns again, we need to have in hand or be expecting to generate as we move forward I mean, it's a good question. We have we have some opportunity we've done some upgrading of our tier four.

Tier two equipment, we have not.

Yet upgraded any tier two.

Equipment to tier four but that is an option.

And it is one of the things that we are evaluating about whether we put that on our road map or not.

That's helpful and thank you for taking my questions.

Sure. Thanks apps.

And again, if you would like to ask an audio question simply press Star then the number one on your telephone keypad.

And at this time there are no further audio questions. We will now turn the call back over to Mr. Jim Landers for closing remarks.

Thank you and thanks to everybody who called in and for the questions. We enjoyed the discussion and we look forward to talking to everyone. Soon have a good day.

And thank you and thank you for your participation. This concludes today's conference call you may now disconnect.

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