Q4 2023 RPC Inc Earnings Call
Good morning, and thank you for joining us for RPC Incorporated's fourth quarter 2023 conference call.
Today's call will be hosted by Ben Palmer, President and CEO.
And Mike Smith, Chief Financial Officer.
At this time all participants are in a listen only mode.
Following the presentation, we will conduct a question and answer session.
Instructions will be provided at that time for you to queue up for questions.
Mike Smith: I would like to advise everyone that this conference call is being recorded.
I'll now turn the call over to Mr. Mr. Schmidt.
Yeah.
Thank you and good morning.
Before we begin I want to remind you that some of the statements that will be made on this call could be forward looking in nature and reflect a number of known and unknown risks.
Please refer to our press release issued today, along with our 2022 10-K and other public filings that outline those risks.
All of which can be found on Rpc's website at www RPC net.
In today's earnings release and conference call, we'll be referring to several non-GAAP measures of operating performance and liquidity.
We believe these non-GAAP measures allow us to compare performance consistently over various periods.
Our press release issued today and our website.
Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures.
I'll now turn the call over to our President and CEO Ben Palmer.
Thank you Mike and thank you for joining our call. This morning.
Okay.
We closed out the year with strong strong sequential fourth quarter revenues and EBITDA increases as expected following a soft third quarter and for the year, we delivered adjusted EBITDA of 374 million free cash flow of $214 million.
We also completed the acquisition of spinnaker to strengthen and diversify our business and we are still able to end the year debt free.
We have a solid balance sheet that can support both investments in our business and consistent returns of capital to shareholders.
During our third quarter call, we noted that with all above 80, we and our customers should have a favorable environment for activity and utilization.
Mike Smith: At that time, we had indications from our customers that there would be a limited holiday slowdown.
Obviously oil fell below 80 in early November and dip below 70 in early December.
<unk> cost completions, postponements and more holiday downtime that originally anticipated.
While the fourth quarter financial results did show a substantial improvement from a very strong third quarter.
Assembled law prevented us from delivering even higher growth.
Our pressure pumping activities increased sharply from the third quarter, but still below our expectations.
Mike Smith: Guarding pricing discipline as expected, we were able to secure work at more attractive pricing in the fourth quarter and certain opportunities we opted to forego during the third quarter.
As for our workforce, our 10 horizontal fleet plus our two vertical fleets remain staffed.
But we are monitoring conditions closely and will implement contingency cost actions as appropriate.
Spinnaker acquisition was an important strategic decision for RPC.
Growing our cementing business, increasing our scale and expanding our customer relationships.
Performance remained solid despite a softer environment.
Integration on all fronts has gone well we are excited about its future.
Mike will now discuss the quarter's financial results.
Mike Smith: Thanks Ben.
I'll start with a few quick financial highlights for the year and then go into some more detail about the fourth quarter.
Mike Smith: For the full year 2023 revenues were $1 6 billion.
Increasing 1% versus last year.
Mike Smith: Diluted EPS was <unk> 90 cents.
Which included a 7% negative impact from pension settlement costs in the first half of the year.
Mike Smith: So adjusted EPS was <unk> 97.
And adjusted EBITDA was essentially flat at $374 million.
We generated strong operating free cash flow in 2023.
Operating cash flow was $395 million after capex of $181 million free cash flow was $214 million.
Recall, we spent nearly $79 million to acquire the spinnaker cementing business early Q3.
For the year, we spent $21 million on share repurchases of which $19 million, but through our buyback program.
We also paid $35 million in dividends.
Thus returning more than $50 million of capital to our shareholders.
Our strong financial position of $223 million at year end.
As well as our projected future cash generation.
We will continue or organic investments in our business potential M&A activities and further capital returns to our shareholders. While also providing a solid cash buffer in an uncertain market.
We are proud of our continued strong financial position a function of our ongoing disciplined and consistent conservative approach.
Now I'll cover our fourth quarter results with sequential comparisons to the third quarter of 2023.
Revenues increased 19% to $395 million driven by a significant increase in pressure pumping revenues.
Last quarter, we signaled a strong sequential rebound and that's what we experienced.
Technical services represented 94% of our total fourth quarter revenues.
Our support services segment revenues were down 14% and represented 6% of October revenues in the quarter.
The following is a breakdown of our fourth quarter revenues.
Top five service lines.
Pressure pumping was 47, 2% of revenues.
<unk> tools 23, 3%.
Coiled tubing nine 4%.
Cementing.
Speaker Change: Six 5% and rental tools four 4%.
Together these top five service lines accounted for 91% of our revenues.
Cost of revenues, excluding depreciation and amortization during the fourth quarter grew to 279 $4 million from $239 $1 million or a 17% increase.
Mike Smith: We did see some operating leverage in the quarter and particularly on fixed labor costs.
Mike Smith: SG&A expenses were 38 one.
Mike Smith: $1 million down from $42 million.
Mike Smith: Reduction in SG&A expenses was due to a variety of discretionary cost controls coupled with lower incentive compensation.
Diluted EPS was <unk> 19 in the fourth quarter up from eight in the third quarter.
There were no non-GAAP GAAP adjustments to those EPS figures.
Adjusted EBITDA increased 53% to $79 5 million.
Mike Smith: With adjusted EBITDA margin, increasing 440 basis points to 21%.
Now I'll discuss our 2023 and expected 2020 for capital spending.
As mentioned capital expenditures were $181 million for 2023 below our expected range of $200 million to $250 million.
Given market conditions that evolved in the latter half of the year, we tightly managed capital expenditures and the completion of some projects were delayed into early 2024.
For the coming year, we again project capital expenditures to be in the range of $200 million to $250 million.
A key element of this plan is the delivery of a new tier four DGB fleet, which we expect to place into service by the end of the second quarter.
I'll now turn it back over to Ben for some closing remarks.
Thank you Mike.
So bottom line, we rebounded sharply from the third quarter Air pocket. However.
However, fallen oil prices and customer indications of budget exhaustion late quarter curb the magnitude of that bounce back.
Visibility is of course limited in January weather has been a challenge, but we're getting signals from our customers for general near term stability.
Mike Smith: Potential for growth as the year progresses.
As Mike referenced our capital spending plans for 2024 include a new tier four DGB fleet.
Which will replace a tier two diesel fleet, thus, we won't be adding pressure pumping capacity to the marketplace.
Consistent with previous comments, we're taking a patient and disciplined approach to upgrading our pressure pumping assets more attractive dual fuel lower emission equivalent.
With the addition of this tier four DGB fleet, we will have three in total.
Two tier two DGB fleets and three tier four diesel fleets.
Additionally, we are operating two tier two diesel vertical fleets.
So in total eight of our 10 horizontal fleets will be ESG friendly we remain on the sidelines with respect to electric fleets until their solutions, we feel make economic sense for our business and customers.
Lastly, with spinnaker integration essentially complete we're looking for additional strategic acquisitions to strengthen our business.
RPC currently officer offers a wide variety of services required by both large and small e&ps.
We see opportunities to increase our scale and broaden our customer relationships.
We're patient buyers and believe a potential silver lining to current industry conditions will be the availability of attractive acquisition targets.
In the meantime, our balance sheet is quite strong supporting our <unk> per share quarterly cash dividend, which our board just approved together with opportunistic share buybacks.
I'd like to thank our employees across the company for another year of dedication and resilience.
Mike Smith: We're especially proud that thru tubing solutions, our downhole tools company has been recognized as a 2023 top workplace by the Oklahoma.
This prestigious accolade is a testament to our commitment to fostering a vibrant and inclusive work environment.
Youll be able to read more about our values as well as other corporate initiatives as we plan to issue Rpc's first sustainability sustainability report very soon.
Mike Smith: In closing I want to reiterate that in and often volatile market discipline remains consistent.
Focus on financial stability and long term shareholder returns.
Thanks for joining us this morning and at this time, we're happy to address any questions.
Mike Smith: Okay.
We will now begin the question and answer session in order to ask a question Press Star then the number one on your telephone keypad.
We will pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Steven <unk> with Stifel.
Please go ahead.
Yes.
Hi, Thanks, good morning, everybody.
Good morning.
So a couple of things from me.
I would start with is.
On the pressure pumping side can you give us a sense for how many horizontal frac fleets. You you ran on average in the quarter and kind of how you see that evolving as the year progresses.
Well Stephen Yes, they are.
All of our staff as we indicated.
Mike Smith: All did some work during the quarter, but it varies of course.
And I think the way, we would expect that to evolve in 2024.
As they will either become.
More busy or we'll make the decision to maybe reduce the number of fleets. We have in the field right now we're confident with quite thing Sir.
<unk> in the first quarter that we need to keep all of those fleets.
Appropriately staffed and so for the time being that's what we expect.
And we're counting on but we'll take the appropriate actions if it doesn't.
That one.
Okay. Thanks, and then.
That actually leads into my other question, which was.
On the technical services side, you and you clearly have your margin doubled sequentially on the operating income line.
Mike Smith: Despite it sounds like carrying costs and having maybe.
More staff fleets that actually work the whole quarter, but how does how does that play out as the kind of <unk>.
Margin trajectory slack <unk> incremental margins in technical services is as we go forward I know, it's going to vary based on revenue et cetera, but kind of is there any parameters you can give us to sort of think about.
Mike Smith: How the incremental margin performs given the costs that are in place.
Mike Smith: Reasonable question, obviously, the Incrementals this quarter were tremendous because of the large increase in revenue and Thats why quite.
Quite typical.
I would say, yes, and obviously it depends on the amount of revenue and job mix a lot of different things, but clearly we're not going to say, we would not expect to see.
That percentage.
Incremental margins going forward.
But with revenue gains and increases we would expect to see something in the teens mid teens.
Mike Smith: Perhaps 20%.
Mike Smith: But first quarter again, starting off with the way it is not the fourth.
Fourth quarter is kind of a reasonable base.
What's the first quarter and we don't know exactly.
Okay, and I think like many other people have said it's.
It's a little bit slow it's always when we slowdown late in late in the fourth quarter. It takes a little bit of time for it to crank back up so so we'll have to deal with that.
Mike Smith: And just to clarify thank you.
The margin coming maybe high teens or twenties.
And absolute margin overtime as that or is that an incremental margin you're referring to.
Mike Smith: I was actually referring to incremental obviously it depends on the amount of revenue growth. So okay.
We're not expecting anything outsized or unusual.
Okay.
Got it great. Thanks, thanks for the detail.
Mike Smith: Sure. Thank you Steve.
Your next question comes from the line of Derrick pod Taser with Barclays. Please go ahead.
Hey, good morning, guys, hoping you can maybe expand on the types of services you are looking to increase for scale and enhance our growth outlook. You mentioned some potential acquisitions, just maybe some more color around what types of services or products you are looking to get into.
Yeah.
Good question.
We have.
In pressure pumping obviously is our largest service line, but it's by far the largest market for either new oilfield. So there's a big market out there to to.
So after many of our other service lines downhole tools coal tubing in many of the larger ones that we've referenced here.
We have meaningful market share cementing we have.
Decent market share, especially with cementing in the regions, where we operate we have very strong.
<unk> share in those particular regions and we hope to achieve the same with cementing and teaming up with spit it spend occur in our south Texas market, where we've been operating for a number of years, we think theres, great opportunity down there to bring some of them.
Spend occurs customer relationships and capabilities to bear down there. So that's an opportunity.
Coil tubing, we have a good <unk>.
Market share.
Good business, that's something that we brought along in the last couple of years.
And downhole tools there.
Might be some opportunities to expand there. So so we're looking to expand for the most part.
Yes.
We're looking to some of those particular service lines that I'm, representing or with some of the larger customers that have a lot of activity.
And so we are looking to expand on that and those particular service lines have referenced are the ones, where we have good scale on that market share now and then.
Mike Smith: This will be the ones, we would focus on primarily.
Got it that's helpful and then just on the pumping.
Mike Smith: Is that more of like an equipment comment like locally looking to bolster your equipment base or maybe services around the frac pump more of those ancillary services like wireline proppant logistics power solutions things of that nature.
The ones that I've referred to are not directly tied to pressure pumping.
I think the commitment and the requirement to internally develop of course.
Some of those capabilities can be acquired.
Yes, a lot a lot of our larger peers. Some of these systems and capabilities. They have the on wireline we have a small wireline business that we do wireline is just awesome.
Yes.
That we've talked about is pretty pretty small.
In wireline was used for a lot of different things not just for the completion.
Well.
<unk>.
But.
We'll be.
Mike Smith: Selective we think with our very good market share with some of these other service lines, that's going to be the primary focus, but we're certainly open to other opportunities are larger peers with some of the larger customer just getting a lot of attention right now, but there are many other customers other than the ones that can benefit from.
Mike Smith: Our fully integrated.
Tremendous infrastructure to bring out not every customer has the type of number of wells and the type of deals that require that type of setup.
Setup and that would benefit from that type of capability, there plenty of customers, who who need.
Mike Smith: Need.
The breadth of services that we offer so that's where we're aligned and Thats where were set up that's where we have our historical relationships and I expect for the time being that's that's where we will focus as it relates to our approach.
<unk>.
Got it that makes sense and then just a follow up from me.
Maybe just talk about the competitive landscape and frac among those smaller players.
The private so we don't get great inside too many of those those tier two diesel players I'm not sure. If you come across them. When you bid work or just to get out in the field, but theres been anecdotes of bankruptcies and then laid out a credit but just any insights that you guys can provide from what <unk> seen it would be helpful.
Alright, not a whole lot specific obviously, we see them from time to time in here.
Sometimes when we miss opportunities it might be to kind of one of those smaller players.
Obviously, the pressure pumping equipment to upgrade and continue to invest in that equipment is expensive and it's not everybody can afford to do that so hopefully maybe we'll have a shakeout in that regard maybe that that part of the market will.
Mike Smith: Further improve and we're certainly set up to take advantage of that we had.
When the market tightened in.
Mike Smith: The first and second quarter of 2023, we had.
We had tremendous.
Financial results within pressure pumping and obviously the market loosened up a bit we think some of the smaller players as youre, indicating.
I think it will be.
Mike Smith: Difficult challenge as it always is for them to be able to expand so hopefully that market will improve a bit and.
And we have certainly <unk>.
Overall in North America, we have a relatively small market share in pressure pumping, but within the regions and the particular customers that we focus on again that don't need all of these.
Mike Smith: Massive infrastructure, yes.
Pretty well positioned.
Do well in that.
Yeah.
Got it appreciate all the color I'll turn it back.
Sure. Thank you.
Mike Smith: As a reminder, if you'd like to ask a question press star one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
The next question comes from the line of Steven <unk> with Stifel.
Mike Smith: Please go ahead.
Thanks Jay.
One follow up thanks.
Sure we've heard a lot about kind of pricing bifurcation in the market between low emission assets in older assets and also kind of difference between sort of spot pricing for <unk>.
Pressure pumping versus sort of contracted or committed.
Arrangements can you comment on that at all.
It's getting more and more complicated.
So.
More fully integrated whatever you want to call. It some of our larger peers to have all this infrastructure to be able to bring to a well site.
Mike Smith: They're obviously getting paid.
Paid something for that but that requires an additional investment so that their investment all things being equal is a lot per fleet. If you will is a lot higher than our investment right. So it's very difficult to the I think to talk about pricing.
But because of those various aspects as you Peel back the various services that are being offered.
Mike Smith: No.
Mike Smith: Again, we have a number of services some of which work.
Mike Smith: From time to time with our pressure pumping fleet and we don't we watch our pressure pumping service line.
We monitor each of the service lines individually there is some opportunity to bundle services, but that's not something that we focus on per se right. We try to be the best we can be at a particular service we're trying to execute.
Clearly it seems that some of the very large e&ps I appreciate.
Of course, that's the word appreciate.
Will will contract will look for some of the service providers that do have multitude of different services to bring but there are a lot of customers who still like to.
Mike Smith: Unbundle customers loved to have competitors.
They're not going to give all of their business to one service company, it's never happened in our stock.
I don't believe it's going to happen in the future.
So we're continuing to improve our fleet.
We're following our roadmap it certainly adjustable, but we have a roadmap that says <unk>.
Our equipment wears out we're going to.
Mike Smith: We're going to.
Best in bond, new equipment, and it certainly will be.
Equipment that is newer has additional capabilities.
Sure.
There are a significant percentage of our fleet today can burn natural gas and that is appealing to some of our customers not every one of our customers.
So we're moving that along and where those decisions that we're making are.
Their financial decisions. They are not decisions just to say we want to have.
Mike Smith: We want to do whatever it takes to have X percentage of our fleet have a particular characteristic by a point in time, we're letting we're leading the market and our customers and the demand dictate when we make those investments so.
Mike Smith: But we're moving that along obviously the ordering of this new tier four fleet moves.
Moves us along that path.
Mike Smith: And again, that's consistent with our roadmap and like I said it is flexible in terms of.
The exact points when we.
Take delivery and pay for that type of equipment that we're executing on that plan for the for the long term.
And we're improving our fleet as we do that.
Mike Smith: Great. That's good color. Thank you.
Sure. Thanks, Steve.
Your next question comes from the line of Derek <unk> with Barclays.
Please go ahead.
Hey, guys just wanted to ask about your exposure to a couple of basins primary the haynesville mid con in Eagle Ford I mean, these basins are the ones that came under the most pressure as gas starting to capitulate and gas has been pretty lethargic care pushed out to 2025. So can you maybe it takes some time for those three basins and give us a sense of what youre seeing as far as activity in <unk>.
Customer conversations.
Yes, you said three basis Haynesville.
Let God Haynesville mid Con Eagle Ford Cosmic Cosmic <unk>.
Haynesville.
<unk>.
We have historically had pressure pumping in south, Texas and the Haynesville, we've not been there for many years and probably 15 16, we've moved out of those.
Mike Smith: Basins the Haynesville in particular is very.
Mike Smith: Intensive work very very high pressure.
It's just something that we have.
Mike Smith: <unk> not focused on in the last few years many of our other service lines downhole tools in particular thats not as sensitive to those types of pressures we have a very good business in the Haynesville in South, Texas and certainly the mid Con we still have pressure pumping that we do in the mid con.
The South Texas, we've done some work in South, Texas, we have in our cementing operations down there but.
But right now we're not looking to make a significant move.
Into.
Either south, Texas or the or the Haynesville at this point in time, but there have been some opportunities for us that we have.
<unk> in South, Texas with pressure pumping, but to reiterate our downhole tools company has significant market share.
And they operate in all the basins around around the U S.
Pressure pumping, we're a little more.
<unk>, if you will on the basins where.
Mike Smith: Where we're the best positioned.
Mike Smith: Rental tools is another one that's kind of in all the base, but a lot of the.
Mike Smith: Service lines that we are spread out or things that we can move easily.
There is.
Activity and need for that equipment. So.
As Ben mentioned, if you think pressure pumping were really more in Permian, we have little bit others, but our other service lines are definitely more spread out but thats.
Not heavily impacted because we can move that stuff pretty quickly to where the need is.
Got it and then maybe just some thoughts on the E&P consolidation wave that we're starting to see I mean, you mentioned throughout the volume or for maybe some of those smaller companies that could be targets of the large caps independents looking.
Looking to gain share in shale I mean have you had any customers that had been acquired yet have you seen an impact to your to your services just maybe some color on how you guys are thinking about that.
Mike Smith:
Mike Smith: We were impacted somewhat in the third quarter with pressure pumping that was a contributing factor to that air pocket since that time, we have not fresh pumping has not been impacted.
Here are two four in the last several quarters with some of the consolidation that's taking place our other service lines.
Not seen an impact from the from that consolidation and we hope and expect that they will actually be a benefit because.
We do work for.
The other service lines that we've referenced do work for many of these large highly active.
Sure.
E&P companies. So we're working for two high activity.
Producers operators.
Mike Smith: We hope to continue to do that in the future. If we're already working for both items, we would expect to continue to work for them in the future. So we don't we've not seen any negative impact other than the third quarter and we've not seen any further any of the recent consolidations are not directly impacted us and of course, some people have written that.
Mike Smith: Thank you.
Kind of taking out of some of the smaller to mid size operators may be coming to an end right. There's a lot of consolidation at that upper end, which Mike which might impact kind of the more concentrated larger pressure pumper is more than it does right. So anyway. So that's my take on that.
Got you no that's helpful and just last one just to just to clarify on your outlook for first quarter do you expect just top line and profitability to be flat just given the given the weather the slow start from the E&ps are do you or do you see upside of that Youre talking about incrementals at the top of the Q&A or maybe this is a flat to up how you're thinking about first quarter earnings.
Yes, I guess I could Scott.
That's probably a good way to think about it sort of flat to up.
Exactly as you described it.
End of the year and the winter season kind of slowed and it was a little bit of a slow start we had some weather in January but we have a lot of positive signs coming into the next couple of months so similar.
Similar to what we've heard.
Mike Smith: Some of the other folks that have announced the last couple of days.
Mike Smith: It's similar sort of flat to up no huge increase or decrease we're expecting currently.
Got it great I appreciate it guys I'll turn it back.
Mike Smith: Thank you there.
At this time there are no further questions I'll now turn the call back over to Ben Palmer for closing remarks.
Thank you operator appreciate it and thank you everybody for joining our call I appreciate your interest and attention.
Thank you Eric.
Right.
Ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect your lines.
Mike Smith: [music].
Yes.
Mike Smith: [music].
Yes.
Yes.
[music].