Q2 2023 RPC Inc Earnings Call

July 26, 2023

Good morning, and thank you for joining us for RPC, Inc. Second quarter 2023 financial earnings Conference call.

Today's call will be hosted by Dan Palmer, President and CEO and Mike Smith, Chief Financial Officer also hosting is Jim Landers, Vice President of corporate services.

At this time all participants are in listen only mode. Following the presentation. We will conduct a question and answer session and 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, we're going to mention a few things that are not historical facts some of.

The statements that will be made on this call could be forward looking in nature and reflect a number of known and unknown risks.

I'd like to refer you to our press release issued today, along with our 2022 10-K and other public filings that outline those risks all of which can be found on rpc's website at RPC dot net.

In today's earnings release and conference call, we'll be referring to several non-GAAP measures of operating performance piece.

These non-GAAP measures or adjusted net income adjusted diluted earnings per share adjusted operating profit EBITDA and adjusted EBITDA.

We're using these non-GAAP measures today, because they allow us to compare performance consistently over various periods.

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

Our press release from this morning in our website contain reconciliations of these non-GAAP measures to operating income net income and diluted earnings per share, which are the most directly comparable GAAP measures.

Please review this review these disclosures if you're interested in seeing how they are calculated.

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

I will now turn the call over to our President and CEO Ben Palmer.

Thanks, Jim.

And thank you for joining our call this morning.

As we announced several weeks ago RPC acquired spinnaker, a leading provider of oilfield cementing services in the Permian and mid continent basins.

As we began the integration of <unk> into our operations, we continue to be impressed with the quality of spend occurs management employees and operations.

They bring us some additional relationships with customers that should enable us to deepen existing relationships and improve our marketing efforts and other service lines.

Seneca runs a great business that can benefit from some of our buying power as well as operating synergies we can provide.

Turning to a discussion of RPC second quarter business began much like the first quarter finished but ended with a very challenging Jamie.

That's a large percentage of our hydraulic fracturing is spot or partially dedicated work we were impacted by some customers deferring planned activity to later in the year.

This resulted in lower utilization during June and has carried forward into the first part of the third quarter.

However, we have already seen signs of improvement on our Frac calendar later in the year.

While our other business lines have seen some recent pockets of weakness predominantly in gassy basins.

They too are expecting activity to improve.

Our participation in the entire suite of completion services provides us with a diversity in both number of customers and customer profile that balances the more heavily concentrated exposure of our fracturing business.

I would like to point out that RPC has initiated the digital transformation designed to improve the company's operating and cost efficiencies.

This extensive and multiyear undertaking aims to change the way, we manage maintenance personnel and equipment as well as our back office functions.

We expect this effort will greatly improve our decision, making by providing access to better and more extensive data on a more timely basis.

Our CFO , Mike Smith, who will discuss the quarter's financial results after which I'll provide some closing comments.

Thanks, Dan.

I'll start with our second quarter 2023 sequential financial overview.

Second quarter revenues decreased to $415 9 million from $476 7 million in the prior quarter.

The decrease in revenues was largely driven by.

Pressure pumping customers postponing or curtailing their drilling and completion activities as Ben mentioned.

This was combined with weaker activity levels and the natural gas directed basins impacting many of Rpc's other service lines.

Cost of revenues during the second quarter also decreased to $265 8 million from $305 3 million in the prior quarter.

As a percentage of revenues cost of revenues in the second quarter was 63, 9%, which was relatively the same as the 64% in the prior quarter.

Selling general and administrative expenses increased to $43 $6 million in the second quarter compared to $42 2 million in the first quarter.

This increase included costs of the settlement of a vendor dispute and costs associated with the <unk> acquisition, partially offset by a reduction in payroll tax related costs.

In connection with the termination of our pension plan RPC recorded a noncash pension settlement charge of $911000 in the second quarter compared to a $17 4 million charge in the prior quarter, we do not anticipate any remaining significant charges in the future quarters associated.

With the pension plan termination.

Operating profit during the second quarter decreased by nine 1% to $82 $4 million from $90 7 million in the prior quarter.

Adjusted operating profit was $83 3 million in the second quarter, a 22, 9% decrease compared to $108 million in the prior quarter.

Adjusted EBITDA also decreased by 17, 2% to $110 1 million from $132 $9 million in the prior quarter.

Our technical services segment revenues decreased by 13, 7% to $390 million. This segment generated $77 million of operating profit compared to $103 5 million in the prior quarter.

Support and services revenues increased by four 7% during the second quarter.

Operating profit was $7 9 million compared to $6 6 million in the prior quarter.

Now I'll discuss our current quarter results compared to the same quarter in the prior year.

Results increased to $415 9 million from $375 5 million.

Adjusted operating profit increased to $83 $3 million from an operating profit of $64 million.

Adjusted EBITDA increased to $110 $1 million from EBITDA of $86 million.

These increases were driven by higher customer activity levels and improved pricing, resulting in our adjusted diluted earnings per share improving to 30.

Compared to 22 in the same quarter last year.

Our technical services segment revenues increased nine 5% to $398 million and our segment operating profit increased to $77 million from $59 8 million.

Our support services segment revenues increased 28, 7% to $25 8 million and segment operating profit increased to $7 9 million from $3 3 million.

Now I'll discuss our capital expenditures and horizontal pressure pumping fleet count.

Capital expenditures were $39 2 million in the second quarter. This includes new tier four dual fuel equipment that was placed into service during the quarter, while a similar amount of older older equipment was set out for refurbishment. We currently estimate full year 2023 capital expenditures to be bid.

200 $250 million, excluding the purchase of spinnaker.

In the latter part of the second quarter, we implemented cost reductions, including a small scale layout and other cost control measures.

This lay off is not expected to significantly impact our ability to respond to customer needs and we remain staffed to operate 10 horizontal frac frac fleets.

During this period of reduced activity, we intend to closely monitor and manage our cost structure.

Now I'll turn it back over to Dan for some closing remarks.

Thanks, Mike.

Although we've encountered a near term air pocket, we are optimistic for the future if oil prices remain firm.

We are already observing encouraging indications from both our frac calendar in our sales teams and other service lines, both point towards a resurgence of activity as the year progresses.

This morning, we announced our regular quarterly cash dividend of <unk> <unk> per share as we continue to maintain a conservative capitalization and shareholder friendly capital return practices.

During the second quarter, we did not repurchase any RPC stock because of our self imposed trading blackout pending the closing of the <unk> transaction.

We financed this acquisition with cash which has been building on our balance sheet for several quarters.

Notwithstanding the acquisition of <unk>, we will continue to assess our capital allocation alternatives, including share repurchases dividends capital expenditures and acquisitions as methods to maximize our returns on invested capital as well as reward our shareholders for their investment in RPC.

Thanks for joining us this morning and at this time, we are happy to address any questions.

Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

We'll go first to John Daniel Daniel Energy Partners.

Hey, good morning, guys. Thank you for including Us.

I was just wondering with the activity.

Possible.

Can you say, how many fleets you're running today.

And then were based off the calendar how many fleets you would expect to be running back half of the year.

Well John this is Ben relative to the back half of the year again, where staff. We're fully staffed for Oh, we have not reduced we were able to staff all of our equipment as we have in the last couple of quarters and we expect to require that later in the year.

In the current yes.

Don't want to provide specific guidance, but that's okay.

In terms of where we are right now we have had a number of customers that have.

Deferred some of their.

Completion activities until later in the year for various reasons, we've had some impact by some acquisitions, where some of our customers have.

Reassessing their plans and again pushing their activity later in the year. So that we feel we do feel good about that but feel good about the frac calendar later in the year, we've had a lot of discussions.

Field. It there are reasons for the delays, but commit to us from our customers that they are going to resume their activity.

Fair enough Tonight on this next question I'm sure you probably will avoid the granularity which is fine but broadly speaking.

As you talk to some people in the COPD here of some fairly significant spot market pricing pressures and my question is just how broad based are those across the various service lines.

And.

Concessions have been made.

How quickly can you recover those concessions.

Just your thoughts.

The concessions within.

Fracturing has been more significant than the other service lines. There are there are some service lines given little to no concessions some have given minor concessions, but as I indicated fracturing has been.

More significantly impacted here in the short term in terms of regaining that.

It's very hard to say with oil prices.

The remaining firm in may be strengthening.

Yeah.

Perhaps we'll have a assembler.

Types of strengthening that we had in the early part of 'twenty. Two early part of 'twenty to the mid 'twenty, two and I am hopeful, but but we're not counting on it but hope that maybe it will firmed back up.

Reasonably quickly as we as we move into 'twenty.

Okay. Thank you and then if I could squeeze one final one then.

Yes go ahead, Jeff.

Hey, John this is Jim.

Anytime there is there was an air pocket or any weakness there are always going to be bad actors.

We were going to price.

Very aggressively we've seen a little bit of that very recently, but for us our bias is more towards being idle been reducing pricing.

Okay.

Fair enough and then the last one from me I'll turn it over with the <unk> acquisition when you start reporting the.

The revenues is it going to be your number two or number 300 before segment can you just throw that out there for us.

Yes, we'll give that in the second it will be for a broker.

Alright, Thank you I'll turn it over.

Sure.

We will take our next question from Stephen <unk> at Stifel.

Thanks, Good morning.

Good morning.

Maybe to start just a follow up on John's question can you give us the segment breakdown and what maybe slot spinnaker and there in some manner.

Sure David Thanks, Thank you for the question.

So I'm going to start with.

Actual second quarter, so what I'm about to describe is the percentage of revenue that are top service lines comprised as a percentage of total consolidated RPC revenues.

Yes actual.

Number one was pressure pumping.

At 50, 55% of revenue.

Number two was downhole tools, which is thru tubing solutions service line that was 24, 4% of revenue.

Number three is coiled tubing at nine 2% of revenue.

Number four is rental tools, which is in our support services segment, but it was four 4% of consolidated RPC revenue.

Number five is nitrogen three 1% of revenue.

Number six is snubbing at one 8% of revenue and number seven is cementing at one 4% of revenue now that does not include spinnaker, because we did not own it during the second quarter.

If we had them spin occurred during the second quarter.

Cementing would've been our number four service lines.

At seven 4% of consolidated revenues.

Great.

That's great color. Thank you.

Sure.

When when we think about the business and I think Jim you might have just mentioned there's been some bad actors in a down.

Downturn, we've seen at least on the pressure pumping side a.

A lot of consolidation a lot of equipment in the hands of the biggest players.

It feels like others have vindicated that behavior has been generally better than prior cycles or youre not seeing that or are you talking about maybe some smaller product lines, where theres been some bad actors I'm just trying to triangulate.

Commentary.

No.

We would agree my comment related to just some anecdotes of Av.

Small small private pressure pumper.

Pricing very aggressively over the past month or so not.

I think we share the opinion everybody else has that market structure is improving in pressure pumping.

And the larger companies are maintaining discipline as again as we are again, we'd rather.

Idled fleets during this time.

And take pricing concessions, we do believe this air pocket is just that as temporary.

And we'd rather bring back fleets at current pricing and take concessions and try to fight that back.

Great. Thank you and then just one final.

On the margin front.

The decrementals in the quarter I think were around 40%.

Companywide, we think Thats, maybe maybe a touch higher for.

Yes, I think that's about right how do we think about like I knew there were some there are some headwinds in the quarter from some cost, but how do we think about the margin profile and the decrementals going forward should they be more normal more normal versus historical levels should they be outsized short term.

How do we think about that.

Well.

These are all reasonable questions I will say too that this has come upon us.

Pretty suddenly.

You said it was kind of mid to late June with a lot of this began.

Unfold.

So.

Exactly where it's all going to lay out we don't know, but again, referring back to the comments about we do have specific customer discussions.

And are quite comfortable that we're going to have better activity in the <unk>.

In the latter half.

Third quarter could be difficult.

We're still working on as we always do but we're working on.

Filling out the white space and preparing for the the more busy fourth quarter.

So the Decrementals were pretty large in a week, we tend to when we schedule out we did have some we were referred to some of our SG&A costs at settlement of that vendors.

Dispute that we didn't schedule that out that was not an insignificant amount.

Even though SG&A it was relatively flat on a sequential basis. It would have been down if not four.

That cost and.

The cost of the spinnaker acquisition, but we didn't schedule that out for EBITDA purposes.

For the way, we do things.

But.

So I think that we don't expect that headwind something like that in the third quarter and if that's not there certainly the decrementals would not be us.

<unk> I'm not answering the question directly, but but anytime you enjoy nice incrementals. When you have a nice revenue of a balance and you.

You are you are impacted by a large decrementals when you have a revenue decline so it'll be it'll be a challenge.

But but where we're looking forward to getting through this little air pocket and on to a little more stable times.

Hi, Thanks, I understand there's a lot of moving pieces, but thanks for the color.

Yes, Thank you savings.

We will take our next question from Don Crist at Johnson Rice.

Good morning, gentlemen, I just wanted to ask a quick question about modeling the spinnaker acquisition.

And I'll give you two options as to how you want to give it to us, but obviously cementing was one 4% of revenue in the second quarter.

Either how many.

Since you had running cementing fleets you had running in the second quarter or kind of what the revenue impact would be per fleet.

The 18 nature, Ed and spinnaker.

Just wherever we can model properly for spinnaker coming in the second quarter.

Yes.

As Mike we had four running in the quarter.

And so that'll increase pretty significantly after that occurs in the next quarter and our existing cementing business.

Performed reasonably comparable I think the larger spend occur we disclosed that they have at 18.

Our ads at the time of the purchase.

They created a little bit more leverage given their size, but the results were and revenue was not not dissimilar per spread.

Yes.

Okay.

And that the majority of those 18 or are running today.

Oh, yes, yes, yes, yes.

Okay.

All I had thank you.

We've not yet seen any impact there to any significant degree cementing tends to.

Not be tends to be a little less volatile than fracking. So that's another benefit of <unk>.

Having that level.

Growth opportunity that we see them remaining pretty strong for the next.

Several months.

We'll go next to Dan Baker at Pinnacle.

Hi, Good morning, just following up on the spinnaker deal just working through the math it looks like that business is.

Okay.

Perhaps a 90 to 100 million dollar a year business is that fair.

That's a good guess.

Okay fair enough good calculation.

Okay. Good.

What's the margin profile of that on an EBIT basis.

I realize theres cyclicality involved but.

Kind of on a go forward basis, what would a reasonable EBIT margin be for that.

Well, either or an EBIT, let me, let me talk EBITDA margin.

It is as we've talked about it's a great business.

If we dig.

They were appropriately staffed I don't want to say firmly staff, but they were appropriately staffed. So we really don't have any opportunities to take any cost out. We think we can bring some operational efficiencies some leverage some of our procurement trucking that kind of.

Activity that we think can provide some level of incremental benefit, but I would say that the the EBITDA margins for this particular cementing business in our existing business had.

Margins that are similar to what we were experiencing overall within technical services say in the second quarter.

It's pretty good and and we like the fact that the.

The capex requirements.

Quite a bit.

Lower from a maintenance Capex perspective, certainly if we grow it will require some capex nothing like fracturing, but.

Our maintenance Capex perspective, it has a very nice free cash flow profile.

Okay, Great that's helpful, what where the EBITDA margins for technical services in the second quarter.

Let's see.

Given the second year John .

Yes.

Okay.

25% to 30% is probably the upper end of that range.

Okay great.

And finally, who was the seller of spinnaker.

Catapult was the direct owner they are not exactly with all the structure, but.

Natural gas partners was the ultimate parent if you will I don't know if thats the right way to describe it or not the catapult.

They were.

Both entities were great to work with they did a great job, creating that company established in 2014, they grown it nicely, especially over the last three years or so.

We're lucky to have glad app.

Okay, Great what was it an auction process.

Yes. It was yes. It was it was an auction process okay great.

Good I appreciate the help.

Thank you thanks, Sean.

And again, if you would like to ask a question. Please press star one.

We'll go next to John Daniel Daniel Energy Partners.

You guys are great great for putting me back in thank you.

Absolutely.

Well.

Early in the morning, Seth gives me something to do on the Capex budget. It looks like you brought it down to 200 to 250 from the original.

Guidance I think of $2 50 to 300, which would make sense.

Fully understand you haven't done your 2020 for budget, yet, but based off what you see today and your expectations would you envision a spend in 'twenty four being higher lower or the same as the current guidance for 2003.

Ballpark.

John .

We're looking at each other here trying to pick that one out.

And I know it can change like 10 times, but I'm just curious.

Yes, probably similar because as you know we are on the schedule of refurbishing frac fleets and that should continue in 2024, So thats gone on for Kevin.

We have a roadmap of our pressure pumping fleet, depending upon the level of usage of it right. When we expect the pumps.

We're completely out or be.

Require the refurbishment.

The swing factor for next year, I think Jim's responses should be similar I think on overall basis, that's probably true the swing factor is going to be if we were to take delivery of a new fleet in 2024 right.

Right.

We have as we sit here right now and think about what.

What we hope is going to happen later this year and expect into 2024, I would I would suspect that probably the upper end of the current range may be more appropriate I think we probably will acquire a new fleet sometime in 2024.

Got it and then the last one for me is when you think about the Frac market, which is where the most pronounced spot pricing pressures are.

And if you look at the competitive landscape most of the small people that are bringing prices down either.

Two to three fleet type companies I suspect.

Some of them were created with legacy equipment used equipment during coming out of the downturn.

It would seem the viability of some of those businesses is going to get called into question because my gut would say that spot pricing doesn't recover quickly so you've got a bit of a.

For several quarters here.

Which then raises the opportunity set for consolidation is that something you would.

You envision seeing happening and would you be willing to participate in that.

There's certainly a lot of discussion about consolidation in terms of buying up some of the smaller players Thats 50 week, we've obviously had.

Excuse me lots of opportunities for that over the years.

Becomes the condition of the equipment and Thats something that.

We kind of have.

Heartburn over.

Sure.

More consolidation would be helpful.

Obviously, we know we've got the one big one that was announced a month or two ago.

Listen I think will help alright.

Even though.

Announcement, and then beginning to work together to put the two companies together I think that should be a net beneficial for the frac industry.

So we would certainly encourage it.

And whether we participate that's that's hard to know but.

Looking for opportunities and looking for ways to position ourselves such that we can benefit from it let me just mentioned from a pricing perspective.

As we were coming out of the downturn in 2020, one we were bare.

Very disciplined about trying to understand how we were pricing our jobs and the type of contribution we were receiving from those jobs before we committed.

Staff, new fleets and began to market and the fleets right. So we didn't go from.

We didn't want to just.

The staff fleets out there and do whatever we had to do to get them working we tried to be very disciplined about that.

Fleets coming back and that worked very well for us.

We have <unk>.

We implemented a very similar.

Discipline and going the other way right. If we if we are not able to.

Generate a minimum level of return obviously, we have to make judgments about what we think the level of activity is going to be in the future and right. Now we think it's going to be sufficient for us to maintain our current staffing level, but if if we.

Fee based on the pricing opportunities at the pricing opportunities are too low.

We do not have a problem.

Stacking some fleets at this point, we are short on that we're.

We're not working our fleets at.

Whatever price right. We are remaining disciplined, but we will stack fleets if we foresee.

Thanks, Dan we're going to remain.

During that process is likely to be upset.

Yeah, that's the benefit of having no debt and a cash some people don't have that.

Okay guys. Thank you.

Thank you Tom Thanks, Sean.

We will take our next question from Derik part Hazer at Barclays.

Hey, I was wondering if you can give us some examples that give you confidence that activity will recover as the year progresses is it just conversations with your customers or are you seeing fleets, our rigs actually being committed on the calendar.

A good question, it's more firm that we've had.

Specific conversations with customers, giving us reasons, why they've delayed and what and what their plans are to start back up.

Certainly we were we had conversations about that right nobody's customer is not going to tell you three months out.

Yes, three months out from now I'm not going to work I had I have work scheduled and I'm going to tell you in advance are not going to do that so we've had conversations where we're comfortable things could change if oil prices don't remain firm.

We'll reassess their plans, but at this point.

If they remain firm, where we're comfortable that things will recover nicely for us.

Got it that's helpful color.

So for your mix of fleets between diesel and you'll feel how has that changed heading into 2024. So by the end of the year I know you refurbished so by the end of 2024 versus the start of 2023.

The Air Fleet has increased towards that Nextgen dual fuel away from diesel and with this mix shift to lend itself to put more of your fleet on the dedicated market versus spot as we move into 2024.

Good question.

Our progress we are on a spectrum.

<unk>.

Increasing our DGB tier four fleet it has not changed significantly at this point it is a little bit more.

ESG friendly than it was at the beginning of the year, we're going to continue that process and of course with our roadmap, we're not going to get ahead of ourselves right. We're looking at our returns we're looking at the age and condition of the equipment.

We don't want to race to get there we will get there when the economics tell us to get there.

<unk>.

Our experience with many of our customers or is it.

The fuel substitution.

As.

Somewhat important not as important as many people talk about at least for our customers.

At this point, we think that will change we think it will become.

Q2 2023 RPC Inc Earnings Call

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