Q3 2023 RPC Inc Earnings Call
Good morning, and thank you for joining us for RPC, Inc. 's third quarter 2023 financial earnings conference call. It.
Today's call will be hosted by Dan Palmer, our 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.
I would like to advise everyone that this conference call is being recorded.
Mike 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 would like to refer you to our press release issued today, along with our 2022 10-K and other public filings to 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.
These non-GAAP measures or adjusted net income.
Adjusted diluted earnings per share.
Adjusted operating profit EBITDA and adjusted EBITDA.
We are using these non-GAAP measures today because we.
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 issued today and 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 these disclosures if you're interested in seeing how they are calculated.
If you have not received a copy of our press release for any reason please visit our website at RPC dot net for a copy.
I will now turn the call over to our President and CEO Ben Palmer. Thanks, Mike.
Thank you for joining our call this morning.
As you can see from our earnings release, there was a challenging third quarter.
The softness in the period was an air pocket in our business and we believe we responded with appropriate discipline and patience.
We currently see a strong improvement in our Frac calendar for the fourth quarter.
We're off to a solid start and expect a significant sequential increase in EBITDA to close out the year.
In addition, I would highlight the well pressure pumping our largest service line drove the weakness our other service lines demonstrated stable resilient performance.
Regarding spinnaker unduly acquired submitting business integration is progressing well.
We were pleased with their financial performance.
And from a long term strategic perspective, we believe a more diversified business is better positioned to offset potential volatility and pressure pumping or other market dynamics.
As we indicated on our last call in the face of competitive pricing pressure, our bias was to idle assets.
The soft pricing environment was driven by lower oil prices during the second and into the third quarter.
Which caused several of our customers to delay completions.
While there were near term cost absorption impacts for idling assets. We think this was the right call.
Discipline and financial conservatism underpin our ability to deliver sustainable cash flows over a full energy cycles.
Pricing remains competitive in the spot market, where we primarily participate and we have given some concessions.
However, our fourth quarter pricing is expected to be more attractive than the temporarily low levels in the marketplace during the third quarter.
Further not participating in projects at particularly low pricing and margins can extend the life of our equipment.
Push out maintenance and repairs and maximize the lifetime return of our assets.
Bottom line as it looks now our fleet should be well utilized in the fourth quarter, which is again consistent with our comments in July.
We began removing some costs late in the second quarter and early in the third quarter.
However, as calendar visibility and market dynamics improved we decided to limit workforce reductions, we began to hire back employees to position ourselves to be serviced ready to capitalize on the rebound in fourth quarter activity.
Over correcting on costs might have less left us unable to meet current demand.
Although we do not provide financial guidance I can offer you a directional comment in light of our third quarter results.
We think fourth quarter results are likely to look more like second quarter than third quarter.
I'll caveat that by saying that that's our current view.
Which is of course subject to unpredictable market shifts and currently anticipated mental holiday slowdown.
Mark Smith, our CFO will now discuss the quarter's financial results and after that I'll have a few closing comments.
Thanks, Dan.
I'll start with the third quarter 2023 sequential financial overview.
Third quarter revenues decreased to $334 million from $415 $9 million in the prior quarter.
This was largely driven by the decrease in pressure pumping activity has been discussed.
The following is a breakdown of our revenue percentages for the third quarter for our top service lines.
Pressure pumping.
Was 33, 5%.
Downhole tools was 29, 1%.
Coiled tubing was 11, 1%.
<unk> was eight 1% rental tools was six 1% and nitrogen was three 7%.
Cost of revenues, excluding depreciation and amortization during the third quarter also decreased to $239 1 million from $265 8 million.
As a percentage of revenues cost of revenues in the third quarter was 72, 4% compared to 63, 9% in the prior quarter.
Selling general and administrative expenses decreased to $42 million in the third quarter of 2023 compared to $43 6 million in the second quarter.
This decrease was due to a settlement charge of $4 $5 million that was paid out at the beginning of Q2, which was offset by some incremental SG&A from the acquisition of spinnaker.
Operating profit during the third quarter decreased by 72, 4% to $22 7 million from $82 4 million in the prior quarter.
Adjusted operating profit was $22 $7 million in the third quarter, a 72, 7% decrease compared to $83 3 million in the prior quarter.
Adjusted EBITDA also decreased by 52, 9% to $51 9 million from $110 1 million in the prior quarter.
Our technical services segment revenues decreased 22, 3% to $303 1 million and segment operating profit decreased to $18 9 million from $77 million.
Our support services segment revenues increased five 8% to $27 $3 million in segment operating profit decreased to $6 $9 million from $7 9 million.
I will now discuss our capital expenditures.
Capital expenditures were $44 $3 million in the third quarter we.
We currently estimate full year 2023 capital expenditures to remain between 200 $250 million, excluding the purchase of spinnaker.
As a reminder, we are also expecting to receive a U S. Federal tax refund of approximately $47 million in the first quarter of 2024.
I'll now turn it back over to Ben for some closing remarks, thanks, Mike.
To wrap up the quarter really boil down to one key element a temporary low in our pressure pumping business driven in part by our decision to idle assets until pricing and activity conditions approved.
As we stand today, we are currently encouraged by improved market dynamics and expected fourth quarter pricing and utilization.
This view is supported by heightened activity among private, especially in the Permian basin, where we are well positioned to capture incremental demand.
As you know increasing capital discipline, among large e&ps can create opportunities for smaller companies.
<unk> remains comfortably above $80, we and our customers should have a favorable near term operating environment.
Shifting to capital allocation, our healthy debt free balance sheet is key to maintaining financial flexibility and strategic optionality.
We successfully added enough attractive business this year with the cash acquisition of spinnaker.
And our board of directors just approved our regular four cents per share quarterly dividend.
With respect.
<unk> capital investments and trend newer pressure pumping technologies I would again say, we will take a conservative and disciplined approach while there is increasing customer interest in the use of alternative fuels to operate equipment.
We will prudently invest in our transition of our equipment when justified.
Furthermore, I would like to reiterate while we will replace older equipment, we do not intend to add pressure pumping capacity to an already competitive marketplace.
Well, we operate and often volatile market our approach and strategy will remain consistent with our focus on financial stability and long term shareholder returns.
Lastly, we'd like to thank our employees.
For their continued dedication staying focused during a difficult operating environment.
Working on our digital transformation programs and helping with the integration of spinnaker into our company.
Thanks for joining us this morning and at this time, we'd be 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 will take our first question from John Daniel Daniel Energy Partners.
Hey, guys. Thank you for including me I need your needs.
I need to tax guy by the way.
There are.
As you guys know, there's a ton of small operators in the Permian a lot of whom you know run a rig for short term programs.
Some of those people don't obviously, they wouldn't have enough work for a dedicated crews.
Horizon spot services.
I guess and knowing that you just said Q4 is better but can you speak to your visibility into the demand from these micro micro operators.
For next year, just do you see them many of them seeking to add rigs and then eventually need a frac crew at.
24, and then just.
How quickly do you think that spot market could tighten next year.
Okay.
Yes, John this is Pat.
Jimmy I'll take that.
Let me start John Good. Good question. Good question, because we are in the spot market and the idea would be that at the smaller operators start working again they don't have.
The wherewithal to get a dedicated crew and that's kind of where we were we tried to play.
Some of the small companies that have been purchased over the past year.
Are coming back in.
A couple of examples.
They've got to get the management groups together and get capital that's easier and faster at $90 oil then $70 oil.
So the only other side of it there are people who might be it might be hesitant.
We think there might be similar spot customer trends as what we've seen in prior years.
You know, adding adding rigs incrementally.
Your question is really about visibility.
Probably lack of visibility, we probably have a lack of visibility because the smaller players make plans and add rigs quickly.
And so that's good it's good to do it quickly, but it doesn't doesn't necessarily tell us that in February of 2024, we're going to have some great spot.
Spot work coming up.
And a lot of these operators as you know as we all know only operate about one rig at this point.
So.
Anyway that's.
I think part of and perhaps most to be answer we have for you today I don't know, what Ben and Mike might want to add.
Yes.
I'll add John that's a very good question.
<unk> talked a lot about and people talk about spot market and not spot market right, it's not it's not black and white.
Don't work just for what some people would term spot customers.
When you talk about somebody who has a rig or less than <unk>.
Fully fully equivalent rig for a full year.
We're working for them, we're working for them for a few weeks.
There are some customers a lot of which a lot of our business has come from customers that we.
Work on for several months and then there is a larger play in there there are many fewer of them they do comprise.
No.
Half or so of the market and in the Permian.
That.
Are typically willing to sign a year plus contract and we've worked for some of those folks, but we tend to focus on and we're most well positioned to work for the spot market spot market players in what we call kind of the partially dedicated players right. So the spot market.
People that we work for for a few weeks and there are a lot of customers and a lot of work for customers. We can work for for a few months.
And then and a lot of the.
The big players that are operating 10 plus rigs they.
They are the ones that want a lot of the technology that are talking about in <unk>.
Yeah.
Energy fuel delivery alternatives and things like that and we don't own that technology, we're not developing that technology, we're not investing today right.
Significantly in that technology, but that's that's half the market right. So there's half the market that we are certainly very well positioned.
To work in and have worked in and we will be working in.
With those players in the in the fourth quarter and into 2024, so there's a lot of way.
Yes.
That's helpful and my follow up.
And I hate to be that guy, but I missed the revenue breakdown during the prepared remarks.
Okay.
Breaking my coffee I wasn't ready for it yet.
Sure.
Mike I can give you that.
John pressure pumping was 33, 5%.
Downhole tools.
It was 29, 1%.
Coiled tubing was 11, 1%.
The man team was eight 1% rent.
Rental tools was six 1% and nitrogen was three 7%.
Perfect. Thank you and sorry about that.
Now profitable.
Okay.
Well move next to Don Crist at Johnson Rice.
Good morning, gentlemen.
Obviously, you had a challenging quarter, but I wanted to ask just from a fleet count obviously you were at about 10.
First quarter of the year do you think that you can get back.
Back close to that in the fourth quarter do you think it'll be a little bit less than that just kind of driving kind of what John was asking on the demand side I mean, what does the demand look like out there for you all.
Well a couple of ways to characterize that.
Sure people have already done the math that pressure pumping is down about 50% so that pretty much correlates I guess to be effective.
Utilization of our fleets. So the question of can we do.
Get back to 10.
Once the quarters over I don't know that we would say that all 10 fleets were.
Fully utilized during the fourth quarter, but we think it's still think it's appropriate for us to have held on to and we're pleased with the fact that we have all of those.
10, plus fleets are staffed up and available to work in the fourth quarter and moving into early 2024. So.
We indicated that.
Fourth quarter is going to look more like the second quarter than the third quarter.
And we were.
We were pretty well utilized with all of our fleets in the second quarter obviously.
As the quarter ended it was less fully utilized but but but we needed to we needed all of that capacity to be able to service the business that we had.
Opportunity to the world.
Yes.
Caliber would say that they are.
We're going to be a lot closer to using all of those sales.
Okay.
I appreciate that color and.
We've been hearing some anecdotes of equipment moving back into the Haynesville and other gas basins are are you move any assets kind of out of the Permian into.
Chasing some of that gas work that people are doing into year end.
At this point in time, we are not.
Okay, and just one final one for me on the Spinnaker acquisition it sounds like that is already starting.
To contribute positively to financials.
Any comments around how that integration is going.
Yes, we mentioned that is going very very well.
As planned leading up to the closing obviously, we did a lot of planning and we've got some post closing integration activities from a system perspective, and things like that but otherwise yes.
Great company with a lot of great.
Infrastructure and capability and so its nothing complex at all about bringing bringing them into our company.
As you know we were already in the cementing business. So that we knew the business. So we're not having to.
Start from scratch and learn more about it.
Seeing some benefits of now being diversified into a third basin.
Going from one basin, South Texas to to now being in the mid Con and the Permian. So we think that's going to create a lot of opportunities spinnaker has.
Tremendous customer relationships that will we expect to be able to leverage that.
Not only within cementing, but hopefully within some of our other service lines as well.
I'll just add to that.
The team on Spinnaker has just been a great cultural fit even operationally and from the finance side. It's just been one of the smoothest integrations I've seen so we've been very very pleased.
I appreciate the color thanks, guys.
Great. Thank you.
Thanks, Sean.
And as a reminder, athene you have a question. Please press star one well move next to Alex <unk> at Stifel.
Hi, good morning, everyone and thanks for taking my question.
Good morning.
Good morning, So I just wanted to touch on Capex potentially for next year. If there's any sense you can provide any guidance on that I think.
Previously you had said you expected spending next year to be near.
Near the high end of the range provided for this year and the $200 million to $250 million.
Just wondering if that's still the case or if theres any kind of shift in strategy there.
I can take that one we haven't finalized all of our.
Budgeting for next year, but kind of what we're thinking right now is that probably be in about the same range as what we're expecting a lot of that will depend on the.
The demand in <unk>.
What we need to order in wind right.
Right now that is probably our best guess that we'll probably be in the same range, possibly to the higher end.
Just maybe point out that this particular year, we manage down our capex with part of that being what.
As occurred in the third quarter, certainly with lower activity. We haven't had to spend is won't have to spend as much.
Maintenance, Capex, and <unk>, lower and things like that but.
We don't see any ramp in spending to have significant growth as we indicated we're not going to grow our fleet count.
We will be required to continue to invest in the business as our older equipment wears out we'll need to do refurbishments, we will need to replace some equipment.
And when it becomes economically justified.
The spend that spend that money because the existing equipment is no longer economic or not able to perform adequately or efficiently.
We will then make the appropriate.
Appropriate investments and we'll.
Continue to transition our fleet.
Certainly wherever where we would.
Buy into and probably it would be tier four DGB at this point that will continue.
So again, the transition of our equipment to being.
Even more ESG friendly.
Great great. Thank you for that.
This question might be a little bit more high level, but just out of curiosity referred some.
Some operators shift to lower quality rock away from tier one acreage is service intensity in some of these wells goes up I was just curious if there's any kind of <unk>.
That can be had.
On the spot pricing or maybe higher quality versus low quality assets.
Your standard supply demand on that side, if there is any kind of recruitment could get on that.
Yes, I think it is standard supply.
And demand I think that is an evolving trend.
Not a lot of anecdotes necessarily to share in that regard, but but.
Sure.
We're continuing to see opportunities.
<unk>, especially we're seeing that they are permitting and.
And as we discussed earlier that can move pretty quickly and.
And we expect we expect there'll be some.
Some.
Tightening of the market in those particular players that we're talking about here.
<unk>.
They.
They don't need that specialty fuel.
Delivery.
Systems, they can't afford it is not appropriate for their type of operation. So that we too are we are set up to move quickly ourselves right. Our team our sales team our operations team.
Procurement and logistics teams are expert at moving quickly and leveraging.
Vendor relationships.
We're able to provide some of those players who aren't big enough to economically purchase their own sand and handle their own sand. We're there we're there for them and we can provide very <unk>.
Very effective solution for them.
And we think again over cycles. The third quarter was highly unusual we sit around and talk about it is it was really.
We think just sort of a confluence of things that happened with some mergers we did have.
An example of work being taken away when people significantly discounted work some of it was just <unk>.
Our customers with the timing of their building up their inventory to be completed.
Decided to delay their work and push it out a few months. So it was just it was just a really unusual situation, but but that gave us time to with the low pricing we were able to go back to our vendors.
With our vendors to adjust some of the costs of.
Both of our materials and supplies used to execute jobs and that helped us come back to customers and b be competitive and still.
And up at some terms that.
It's still worked worked well for us.
Great. Thanks for the color and I'll turn it back.
Thank you.
And as a final reminder, if you do have a question. Please press star one we'll pause just a moment.
And at this time, we have no further questions I would like to turn the conference back over to Mike Smith for closing remarks.
Thank you all for joining our call today, we appreciate it and we will now close the call. Thank you very much.
And this concludes today's conference call there will be a replay on www dot RPC dot net within two hours. Following the completion of the call. Thank you for your participation you may now disconnect.
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Sure.
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Okay.
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