Q3 2022 RPC Inc Earnings Call
Good morning, and thank you for joining us for RPC, Inc. 's third quarter 2022 financial earnings Conference call today's call will be hosted by Ben Palmer, President and CEO and Mike Smith, Chief Financial Officer also hosting is Jim Landers, Vice President of corporate services.
Yes.
At this time all participants are in a listen only mode.
During 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 Jim will get us started by reading the forward looking disclaimer.
Thank you and good morning, before we begin our call today I want to remind you that in order to talk about our company.
And I mentioned, 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.
Like to refer you to our press release issued today, along with our 2021 10-K and other public filings that outline those risks all of which can be found on rpc's website at www Dot RPC dot net.
In today's earnings release and conference call, we'll be referring to EBITDA, which is a non-GAAP measure of operating performance RPC uses EBITDA as a measure of operating performance because it allows us to compare performance consistently over various periods without regard to changes in our capital structure.
We are also required to use EBITDA to report compliance with financial covenants under our revolving credit facility.
Our press release today, and our website provide a reconciliation of EBITDA to net income the nearest GAAP financial measure. Please review that disclosure if you're interested in seeing how it's calculated.
If you've not received our press release for any reason please visit our website again at RPC net for a copy.
I will now turn the call over to our President and CEO Ben Palmer.
Jim Thanks, and thank you all for joining our call. This morning.
Rpc's third quarter financial results reflect continued improvement in both utilization and pricing.
We are achieving operating leverage over our fixed costs.
We believe this cycle currently has room to run due in large part to the multi year period of low investment coupled with the fact that this is shaping up as a margin rather than a build cycle.
Although oil prices declined quarter over quarter, they remain at levels that motivate our customers to drill and complete new wells further supported by high natural gas prices.
Given our favorable view of the operating environment, we will allocate capital over the next several quarters to enhance the service effectiveness of our various service lines, while improving our ESG profile.
We've also made several small opportunistic and strategic investments that will improve our competitive position.
We are pleased to manage a comprehensive completion oriented business. We cover nearly every aspect of the process of completing the oil and gas wells something very few service companies can claim.
From tubing conveyed perforating to hydraulic fracturing to our industry, leading milling and clean out services as well as many services in between.
RPC is the full service provider for our customers' completion needs.
And then when customers need to work Workover existing wells, we have that covered too.
Finally, as wells near the end of their life, we can handle the plugging and abandonment process in a safe and environment environmentally friendly way managed by our well control expertise.
I would like to thank all our employees for their dedication working through the many operating challenges taking advantage of opportunities and executing well in the current environment.
Our CFO , Mike Smith will discuss this in our financial results in more detail after which I'll provide some closing comments.
Thanks, Ben I'll start with the third quarter 2022 sequential financial overview.
Third quarter revenues increased by 22, 4% to $459 $6 million from 375 with $5 million in the prior quarter due to highly higher customer activity levels and pricing improvements as well as increasingly favorable job mix.
Cost of revenues during the third quarter increased by 18, 7% to $309 $8 million from $269 million in the prior quarter.
As a percentage of revenues cost of revenues improved to 67, 4% from 69, 5% in the prior quarter due to the leverage of direct employment costs over higher revenues, coupled with improved pricing for RPC services.
Selling general and administrative expenses during the third quarter increased by six 6% to $38 $2 million from $35 9 million in the prior quarter, primarily due to employment related costs, including variable incentive compensation consistent with improved operating performance.
Operating profit during the third quarter increased by 52, 6% to 92 point.
$2 million from $64 million in the prior quarter. This was due to some large revenue improvements coupled with our ability to pass along some inflationary cost increases while effectively controlling our SG&A expenses.
EBITDA increased by 43% to $113 million from $86 million in the prior quarter.
Our technical services segment revenues increased by 22, 4% to $435 $8 million. This segment generated an $89 $5 million operating profit compared to $59 $8 million in the prior quarter. The improvements in operating results were driven by higher.
Customer activity levels improved pricing and a larger active fleet of pressure pumping equipment.
Our support services segment also improved with revenues, increasing by 22, 8% to $23 8 million operating profit was $5 3 million compared to $3 $3 million in the prior quarter, largely driven by our rental tools service line.
I will now discuss our current quarter results compared to the same quarter in the prior year.
Revenues increased to $459.6 million from $225 $3 million, while operating profit increased to $92 $2 million from $8 million and EBITDA increased to $113 million from $26 5 million.
These increases were driven by higher customer activity levels and improved pricing, resulting in diluted earnings per share improving to 32 cents compared to <unk> in the same quarter the prior year or.
Our technical services segment revenues increased 105, 7% to $435 $8 million, resulting in a segment operating profit of $89 5 million compared to $8 3 million in the same quarter of the prior year.
Our support services segment revenues increased 76, 9% to 23 8 million.
Resulting in a segment operating profit of $5 3 million compared to an operating loss of $55000 in the same quarter the prior year.
I'll briefly discuss our fleets and capital expenditures.
During the third quarter, we operated nine highly utilized horizontal pressure pumping fleets.
Capital expenditures were $39 $6 million in the third quarter. We currently estimate full year 2022 capital expenditures to be approximately $150 million, including the cost to refurbish an existing fleet that will be placed into service in 2023.
Additionally, as the fourth quarter began we made an approximately $20 million final payment on a finance lease for pressure pumping fleet placed into service in 2021.
Now I'll turn it back over to Ben for some closing remarks, Thank you Mike.
Discussions about fossil fuel based energy had been prominent this year with several opposing viewpoints seeking to dominate the conversation.
These many voices that caused the confusion public policy response that combined with a potential near term recession.
Uncertainty for U S E&ps their service companies and external capital sources.
We look through this noise and believe that carbon based energy will remain the dominant source of the globe's power for the foreseeable future.
It is produced and used responsibly it as a complement to alternative energy.
And considering the world's hydrocarbon energy sources, there is no more stable geography with abundant resources in North America.
For these reasons our industry should enjoy a strong operating environment for some time that we know hydrocarbon pricing is volatile and downturns in our industry are likely to occur.
Our understanding of this unpredictability is one reason RPC has thrived longer than most of our peers have existed.
This view informs our decision to maintain a strong balance sheet.
And continue our focus on capital allocation and profitability withdraw.
Which drives financial returns and positions us to take advantage of opportunities without needing to rely on external capital.
We believe this approach benefits our long term shareholders swell.
Thanks for joining us this morning and at this time, we are happy to discuss any questions.
At this time I would like to remind everyone in order to ask a question. Please press star one well pause for just a moment to compile the Q&A roster.
Our first question comes from Don Crist with Johnson Rice. Your line is open.
Good morning, gentlemen, how are you all today.
Good dog good afternoon.
I wanted to ask about supply chain number one I mean, I know you have equipment on order.
Which is supposed to be delivered here in the fourth quarter or early in 'twenty. Three I just wanted to know if those delivery times are still kind of on track and just if you could just expand on the greater supply chain and if things are getting better or worse from call. It six months ago.
This has been I would say by and large.
The receipt of a refurbished fleet in the fourth quarter is generally on time.
Maybe a little bit extended.
The receipt of the new fleet that we ordered several months ago is scheduled for.
Late first quarter or early second quarter, which is not far off of what our original plans were so at this point, we're not hearing of any significant delays.
We're certainly not hearing.
Vendors say that it's kind of a year sooner than they had planned right.
It continues to be a challenge and one that we have to work through.
Each and every day and try to plan ahead and we've.
Worked with our vendors to try to.
Commit to in place orders in advance to try to address some of the disruption that results from from that.
But we are experiencing some challenges with.
Routine or large repairs that are required not reefers, but large repairs on pumps.
That's causing.
Some challenges here and there to meet the.
The requirement for having sufficient pumps, where we're comfortable with where we are but it's but it's an ongoing challenge to try to get.
The pump repairs turned around as quickly as we would like to so everybody still citing that as Oh.
A challenge.
But and maybe maybe it's improving a little bit, but I wouldn't say, there's been a big change. It's still it's still something that we have to work on work on every day.
And just to be clear thats, lakehead, or Warren cat or somebody like that just kind of delayed for everybody.
Right that's correct.
And my second question I mean, obviously, you're you're going to generate a lot of free cash flow as we move into 'twenty. Three after you get past. These capex items for these two fleets.
You put the dividend in place, but can you give us just broader thoughts on shareholder returns and.
Putting money back to shareholders, whether it be Stockholm.
Buybacks or anything like that just broader comments on what youre going to do with cash as we move into 'twenty three.
Sure sure. That's a great question, Yeah, we did reinstate last quarter.
We've held the dividend steady as you've seen this morning for this quarter.
You are correct, we are expecting at this point to generate a lot of free cash flow.
Certainly over the next couple of years 'twenty three 'twenty four.
We will have some slightly higher spending on capex, probably next year compared to this year.
But that's to be expected, but it should result in a lot of free cash flow, we certainly have a history of.
Returning cash to shareholders through a combination of dividends I would expect that's something we look at and discussed with the board each quarter.
No.
I expect with with as we've discussed a free cash flow will improve I expect that will be something we'll take a very hard look at and I would expect some increases there.
Havent bought any stock back in quite a while I think that's certainly a possibility depending upon.
Looking at the return profile and looking at the.
Share price relative to our spec our expectations of value that certainly is an alternative.
And but we too we will continue to maintain our equipment mainly.
Maintain our capacity.
As long as.
The business environment supports it and it certainly does at this point in time, and we expect it will for for the foreseeable future.
Okay I appreciate the color and I'll turn it back.
Thanks, Don.
Again, if you'd like to ask a question. Please press star one.
Next question comes from John Daniel with Daniela Annuity partners. Your line is open.
Hey, good morning, guys.
Okay.
On the housekeeping questions for me.
I think you said nine horizontal fleet averaged in Q3 did you have any vertical fleets. In addition to those nine.
Okay.
Yes, we do have a couple of vertical fleets.
John Yes.
And we do operate.
Right, Yeah, I'll make sure and then you've got the one fleet that will be placed into service in 'twenty three and then the new fleet. So just from a not that I'm modeling you guys, but just a sequence here basically visibility to having 11 horizontal fleets running next year.
Is that right.
Right now.
We have.
We have enough equipment today, and we've done some work trying to put an additional fleet together with older equipment.
With with some of the other challenges that it can be a little bit hit or Miss.
So its not it hasnt been consistently operating yet but.
But we would expect with the spending that we've talked about with the with the refurb and the new fleet next year debt.
It May result in one net additional horizontal fleet. That's what we're planning on at this point in time, but was that to see how things play out.
As our as our referred to some of the pumps trailers that are that are hung up with some of the.
Some of our repair shops, if some of those free up that gives us some more flexibility, but right now we think it will result in just one net add because we will we will need to withdraw another older fleet and probably either retire it depending upon which one it is but.
We would expect to pull another older fleet out and send it or reefer.
During 'twenty three as well.
Fair enough.
You will know we tend to focus a lot on frac here like why do your calls, but you've got a lot of other really good businesses.
From a high level can you just walk us through.
Yeah.
What youre seeing in things like <unk> coil, just visibility, particularly like in coil because you've had some recent industry consolidation any changes there in terms of utilization pricing as the market consolidator.
Alpine if you will on some of the other business units would be appreciated.
Okay.
Ill start the beacon add add to things, but I may leave out Youre right. There has been some consolidation in coiled tubing. We've seen we have seen some improvement there.
It's I think there's still room to make additional improvements but.
Pleased with the progress we've been able to make there.
With our downhole tools, many of which are proprietary in nature.
Very much tied to completion activities, we're seeing nice improvements there.
And some new tools that we've come out with our new versions of existing tools that we come out with that are that are.
Being accepted by the market. So overall all of the businesses some have recovered quicker than others.
Just like many of our peers.
It's gotten off to a really quick start I would say some of our other service lines are a little bit behind and maybe have a little bit of additional room.
To run.
But we have seen improvement.
Okay, and then I guess.
Yes.
Hey, John This is Mike I'll just add.
All of our major service lines.
Proved quarter over quarter from a revenue and profitability.
And also year over year so.
Some some more on a greater percentage, but obviously.
Pumping and through tube solutions are.
Our two largest but we did improve across all service lines.
Okay.
This is Jim I'll come in at the end and just say that we saw some good pricing improvement in coiled tubing. During the quarter. We also have some maintenance to do at coiled tubing. So we saw some good pricing there okay.
Okay.
There's one standout is going to get the license Christmas present this year.
Which one.
Okay.
Okay.
A rising tide lifts all boats.
Got it you guys. Okay. Thank you for your time.
Yes, John Thanks.
Again, if he would like to ask a question. Please press star one.
We have reached the end of the question and answer session I'll now turn the call back over to Jim Landers for closing remarks.
Okay, I would like to provide a little more information and then also give people time to to queue up in case anybody else wants to come in.
I'd like to share with everybody the revenue percentages of our major service lines. So what I'm about to give you his.
The percentage of consolidated RPC revenue that each of the following service lines accounted for in the third quarter third quarter only so our largest service line is pressure pumping, which was 56, 1% of consolidated revenues during the third quarter.
Second largest is downhole tools thru tubing solutions.
Which was 22, 4% of revenues.
Number three was coiled tubing eight 1% of revenues.
Number four was rental tools, which is in our support services.
And that was three 9% of revenues then the last one I'll mention was snubbing snubbing was one 5% of revenues for the third quarter. So just wanted to make sure that everybody had that information for your modeling and.
There is apparently another question so we will.
Look forward to hearing that.
And your next question comes from Simon Wong with Gabelli Your line is open.
Hi, good morning, gentlemen.
And Simon Hey, Simon.
You mentioned in your prepared remarks, you mentioned that you made.
From a few small investments strategic investments can you talk a little bit about that.
Yes Simon.
Yes.
There are a number of them none of them individually significant.
We've been able to.
One case.
A supplier we have been able to acquire the assets of a supplier that we think will be a nice.
Addition, and we expect to result in some cost savings to us over time is as we as we integrate that into our business. It was not significant enough to separately talk about but we're we're excited about it and think it presents a nice opportunity for us also.
There are at least two or three others.
None of which are within pressure pumping there are some of the other service lines that we've talked about this morning, we've been able to pick up.
We haven't had the opportunities to pick up some some additional.
Equipment that fit in nicely and filled some gaps geographic gaps we had where there was some demand so we expect that to.
To help us out here in the next couple of quarters as well.
How much was the investments altogether.
Oh I don't know it may have contributed.
No.
Two our cost are 20 million $25 million.
Okay got it thank you.
Thanks <unk>.
Some of which I'll point out excuse me some of I'll point out that some closed here in the fourth quarter. So they wouldn't be reflected in the <unk>.
Current results.
Again, if you would like to ask a question. Please press star one.
I'd like to make a call.
Comment I'm sure it'll be it's not currently on People's minds will be.
Several of our peers, who have reported.
About increase working capital, we certainly to the experienced an increase in our working capital with the significant rise in revenues, so thats not not unexpected.
But.
Mike do you want to talk a minute about yes. This.
This is Michael just mentioned it is the opportunity for us to focus over the next couple of quarters to get cash and as we do have a lot of capital expenditures planned as Ben mentioned so.
We look at that as an opportunity for us and something that we're focused on that.
It will help us generate some additional free cash flow next year. So we're yes.
The biggest thing.
Our next question comes from Andrew <unk> with Millennium. Your line is open.
Hi, gentlemen, I just wanted to touch on the seasonal slowdown mentioned in the press release I know that this is something we see just about every year and I'm wondering how the dynamic compares to previous years.
Whether budget exhaustion as a motivation versus.
Reluctance to give up hot crew. So just curious if you could talk about that dynamic.
Andrew It's Jim it's always it's always unpredictable. So that's one thing we can guarantee.
We think that this year because capacity is tight we think that e&ps are going to be reluctant to to give up a crew that's running.
And may want to keep them busy between Thanksgiving and new year's just so they don't that crew doesn't go somewhere else because there was a waiting list and.
We want to keep our utilization high so weak.
Our group could.
Could make another selection if we get.
Sidelined for a month and a half also I'll point out I don't think it's that important anymore, but.
Christmas and new year's do fall on a weekend, which is kind of helpful. Having said all that there could be budget exhaustion are e&ps continue to talk about capital discipline. So there could be could be some slowdown and then weather is always the wildcard in the fourth quarter.
And I'll say just.
Talking to our business unit leaders, we are not hearing any discussion about significant downtime so for all the reasons Jim.
Referenced.
Hopeful that.
It'll be relatively mild and that that not only helps the fourth quarter. It helps the first quarter, because we'll be able to get off to a quicker start Ryan Bennett.
<unk> has always been when theres, a relatively hard stop that we've experienced some over the last.
Few times over the last four five years it even affects the first quarter because it takes everybody again disorder.
Time for them to Gen backup.
And began to get active again, so so it should help us roll effectively and efficiently into early 2023.
Great makes sense I appreciate the thoughts.
Sure. Thanks, Andrew.
Our next question comes from Joel <unk> with clearly energy your line is open.
Yeah, Hi, guys. Thanks for taking my question.
Actually wanted to ask about Q4, as well, but I can.
Just ask you the question a bit and so you expect activity to be flattish in Q4 are strong so to speak in terms of pricing can I ask if you are if you have expectations for further.
Net pricing increases into Q4.
Joe This is Jim Yes, we do we believe that.
Supply and demand imbalances in our customers' needs will will allow the market to give us.
Increased net pricing.
Improvements during the fourth quarter and the visibility we have in 2023. So yes, we think pricing is strong but.
But I think it would be clear about the fourth quarter.
As Jim said, I mean pricing theres opportunities for pricing and continued pricing improvement to some degree that will possibly impact the fourth quarter, but but I would not at all be surprised if fourth quarter is a little.
Sure.
Less strong or weaker than the third quarter I mean, that's just that's just to be expected. It's not it's not trudging ahead quickly enough that we would blow past any days off from our from our customers, but but we do expect it to continue to be a very good quarter and we will be able to get started very early in 2023.
Okay, so moderately lower activity, but maybe a slightly higher prices.
Correct.
Very well.
Thanks, so much.
Thanks.
Thanks, Joe.
Again, if you would like to ask a question. Please press star one.
There are no further questions at this time I will turn the call back over to Jim Landers.
Thank you and thanks, everybody, who called in and who listened. We appreciate it and hope everyone has a good day, we will talk to you soon.
As a reminder, today's conference call will be replayed on www Dot RPC dot that within the next two hours. This concludes today's conference call you may now disconnect.
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