RPC, Inc. (RES) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for RPC, Inc.'s Fourth Quarter and Year-End 2022 Financial Earnings Conference Call. Today's call will be hosted by Ben Palmer, President and CEO; and Mike Schmit, Chief Financial Officer. Also hosting is Jim Landers, Vice President of Corporate Services. [Operator Instructions] 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 2021 10-K and other public filings that outline those risks, all of which can be fetch from RPC's website at www.rpc.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're 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, which is 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 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. 2022 was an exceptional year, and we finished the year with very strong results in the fourth quarter. I would like to start by thanking our employees for an outstanding 2022. Their hard work and dedication in overcoming many challenges made our success possible. We look forward to building on our achievements and expect continued success in 2023. RPC's fourth quarter financial results showed very little impact from weather-related or holiday downtime. Furthermore, our customers continue to work throughout the fourth quarter with no evidence of budget exhaustion. Although, oil prices have recently moderated from their highs, they remain above levels sufficient to motivate our customers to drill and complete new wells. While pressure pumping is certainly a core business for RPC, we are much more than just a pure play pressure pumper. In fact, we are one of the very few companies that can provide nearly all the services required to complete oil or gas wells. This diversification represents a competitive advantage for RPC and adds value as a leading provider of completion services for our customers. Our CFO, Mike Schmit, will discuss this and other financial results in more detail, after which I will provide some closing comments.

Thanks, Ben. I'll start with the fourth quarter 2022 sequential financial overview. Fourth quarter revenues increased by 4.9% to $482 million from $459.6 million in the prior quarter due to improved pricing in most of our service lines and higher equipment utilization, supported by a full quarter of operation for our most recently reactivated pressure pumping fleet. Cost of revenues during the fourth quarter decreased slightly to $308.6 million from $309.8 million in the prior quarter. As a percentage of revenues, cost of revenues improved to 64% from 67.4% in the prior quarter, due to improved job mix and continued strong pricing for our services. Selling, general and administrative expenses were $38.2 million in both the fourth and third quarters of 2022. During the fourth quarter of 2022, RPC also recorded a $2.9 million defined benefit pension plan charge related to a lump sum settlement offered to plan participants. During Q1 2023, we expect to record a settlement charge of approximately $22.5 million associated with the final termination of this plan. Also in connection with the transfer of the planned liability to a third party, RPC expects to make an approximately $10 million cash contribution also in the first quarter of '23. Operating profit during the fourth quarter increased by 21.9% to $112.3 million from $92.2 million in the prior quarter. EBITDA increased by 19.8% to $135.5 million from $113 million in the prior quarter. Our Technical Services segment revenues increased by 5.1% to $458.1 million. This segment generated $110.5 million of operating profit compared to $89.5 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 revenue-producing equipment. Support Services revenues were unchanged during the fourth quarter of 2022 compared to the prior quarter. Operating profit though was $6.7 million compared to $5.3 million in the prior quarter. Now I'll discuss our current year -- sorry, our current quarter results compared to the same quarter in the prior year. Revenues increased to $482 million from $268.3 million. Operating profit increased to $112.3 million from $20.1 million. EBITDA increased to $135.5 million from $39.4 million. These increases were driven by higher customer activity levels, improved pricing, resulting in our diluted earnings per share improving to $0.40 compared to $0.06 in the same quarter of the prior year. Our Technical Services segment revenues increased 80.1% to $458.1 million and segment operating profit increased $110.5 million -- to $110.5 million from $20.5 million in the same quarter of the prior year. Our Support Services segment revenues increased 73.1% to $23.9 million, and segment operating profit increased to $6.7 million from an operating loss of $373,000 in the same quarter of the prior year. Now I'll briefly discuss our capital expenditures and horizontal pressure pumping fleet count. Capital expenditures were $49.3 million in the fourth quarter. We currently estimate full year 2023 capital expenditures to be approximately $250 million to $300 million, including a new Tier 4 dual-fuel fleet we plan to place into service during the second quarter, at which time we expect to take down an existing fleet for refurbishment. During the fourth quarter, we operated 10 highly utilized horizontal pressure pumping fleets. We expect to continue operating 10 horizontal fleets throughout 2023. I will now turn it back over to Ben for some closing remarks.

Thank you, Mike. Our confidence in the current industry outlook, along with our view of how that should translate to our financials, has encouraged us to make investments in our completion-oriented businesses. Previous up cycles have resulted in our industry, adding significant capacity inevitably outpacing demand. In contrast, our current focus is on long-term investments to maintain and selectively improve our current productive capacity. Also to generate leading industry-leading returns on invested capital and leverage technology to perform our services in an environmentally friendly manner. Through a combination of dividends and open market share repurchases, RPC has returned over $536 million to shareholders over the last decade. As evidence of our confidence in the strength of the current cycle and commitment to our shareholders, we announced this morning an increase in our regular quarterly cash dividend from $0.02 to $0.04 per share. Thank you for joining us this morning. And at this time, we're happy to address any questions you may have.

[Operator Instructions] And we'll take our first question from Stephen Gengaro at Stifel.

So a few things for me, if you don't mind. I guess the first is, when you look at the current pressure pumping market and what you see in the industry dynamics? We think -- and I think there's a lot of people out there who are sort of sensing a much different approach by operators as far as adding assets, et cetera. In the field, what do you see? Like is your experience similar to that? And maybe talk a little bit about how you think about new build economics right now.

Stephen, you talked about operators adding assets. Stephen, I think you mean us, not our customers.

Yes. I mean, I mean -- sorry, pressure pumpers in general, yes.

Yes.

Well, Stephen, this is Ben. I think that there is investment that's taking place, I think, more than whether there's investment taking place is ultimately what the overall capacity equation is going to look like. We're working really hard to -- or we're committed to a plan to, as I indicated in my comments, we're trying to more or less maintain our existing capacity, but we're upgrading that. We're making investments where we need to, to make sure that we can continue to provide a quality service, but we want to utilize our existing equipment, and get as much out of it as we can if it can generate adequate returns and provide a quality service, so we don't want to take it out of service too quickly. But then we have the long lead times for new equipment. So getting the timing right between when existing fleet will be ready to retire or lay down. That's tricky and that's not something we're trying to necessarily say those are going to happen on precisely the same date. But we're really looking at -- we're committed to trying to generate free cash flow during this particular cycle. As I indicated, we've returned a lot of cash to shareholders over time. Our history shows that we've done that, and we continue to be committed to that. So our -- in return, you asked about our returns and the way we think about that. The return profile or what one would reasonably expect 12 or 14 months ago versus where we are today, obviously, it's completely different. So we don't all of a sudden wake up and say, well, today or last month or last quarter, the return indications are unbelievable so we should ramp our spend or our investment. We're trying to -- we expect to remain disciplined. We want to go on an appropriate pace, having a longer-term plan and try to execute against that plan and allow us to take advantage of the opportunities, be there and provide services to our customers, maintain our existing capacity -- more or less selectively grow, but maintain our capacity and focus on that continuing to return excess cash to shareholders. So hopefully, that's responsive, and if anybody else has any other additional comments on that.

Yes. This is Mike. I'll just add one thing to think about, too. When you order new equipment and pressure pumping right now, this could be up to a year lead time. So you're making a huge financial commitment and betting on what the market is going to be a year from now. So that's the other kind of consideration as we're thinking about capital allocation to CapEx.

And Stephen, one last thing. We have been in a period of underinvestment for a very long time, probably since 2015. At this time, the market for -- the drilling rigs and the completion demand has pretty much soaked up the available frac spreads, and back to Mike's comment, it's going to take a while to catch up with that. And people do seem to be being disciplined at this point. That's always subject to change in our industry, but there is a level of discipline that we haven't seen before. Nobody stood up in the canoe yet. So we're -- we believe that we've got a good runway here.

Great. No, that's very helpful. The other two quick ones. You mentioned the delivery of the new Tier 4 DGB, and then their -- I think you said, you're going to take an existing fleet out and refurbish it. Is that fair? Will that go back to work? Or is it just depend on timing and demand? And has there been any trouble getting the necessary parts to refurb the asset?

The refurb -- yes, I mean, we'll refurb it so that it can come back to work, right? Well, when the new -- brand-new fleet comes in around the same time, we'll take down one of our older fleets that we'll spend some money and upgrade it. And once it's upgraded, we expect there'll be -- there are other fleets that need to be either refurbed or otherwise dealt with. So as we indicated, we're expecting still to have 10 horizontal fleets working -- more or less 10 horizontal fleets working throughout 2023. So with the gives and the takes of ones going down for refurb and that sort of thing. Supply chain, still we've been managing through that. We have some good vendor relationships, and it's always a challenge, but we think we're in pretty good shape with that. We won't know, obviously, until it's completed. We are concerned, but we'll stay on top of it and make sure that it gets turned around in the time frame that we're planning on, but we're working through that. And we're confident that our schedule and our plan will allow us, as I said, to continue to operate around 10 horizontal fleets throughout the year.

And then just one other quick one. Jim, do you mind just running through the segment breakdown by the revenue by product line?

Absolutely. Thanks for the question. So I didn't have to do it in closing comment. So for the fourth quarter, the percentages I'm about to give are percentages of each of our largest service lines as a percentage of total or consolidated RPC revenue. So the largest service line, the largest revenue for the fourth quarter was pressure pumping at 56.9%. The second largest was downhole tools at 20.8%. Number three was coiled tubing at 8.4% of consolidated revenues. Our nitrogen service line was 2.3% of consolidated revenues -- I'm sorry, I got out of order there. Our rental tools, which is in our Support Services segment, was 3.6% of consolidated revenues. Let's see I mentioned nitrogen. Snubbing was 1.6% of consolidated revenues for the fourth quarter.

We'll go next to Don Crist at Johnson Rice.

We've seen a little bit of moderation in the gas rig count. I just wondered if that is affecting pressure pumping at all? And to take that a step further, we've heard that there's a little bit of weakness in the gas plays, but the assets are finding home in the oil plays. Can you broadly just talk about your pressure pumping calendar, and kind of is there any shifting between the plays as of late?

Don, this is Jim. Your point is a good one. I would say not yet because there's still so much -- demand is still greater than supply. I would say, if there's anything regarding the natural gas market weakness, it's more an opportunity cost than anything else. I mean when you have no -- we have no white space in the calendar, something that could have -- might have happened in the future, but isn't going to, doesn't impact near-term results.

And I'll add. This is Ben. And a very large percentage of our activity is directed towards oil wells, and it's just been that way. We've not consciously made the shift. We've been talking about it, but have not made a conscious shift to try to move assets or focus on the primarily gas basins as of the...

Yes. I think, right now, we're about 80% oil, a little more.

Okay. I appreciate that color, and one more for me. You called out pricing in the fourth quarter is one of the reasons why you outperformed kind of consensus expectations. How broad-based was that? And was it more skewed to pressure pumping or coil? And can you just kind of run down how pricing has been across two or three of your segments?

Relative to the -- you're talking about the fourth quarter results. I don't know that there was -- I think the increases in pricing has been sort of a steady process over the last quarter or two. There wasn't -- we had some nice wins, especially with the new fleet that we put into service in the fourth quarter. It went to work with a -- at a nice -- it was a good piece of work for us. So there was not a tremendous increase in the fourth quarter. I think the fourth quarter was driven as much by efficiency. The fact, as we indicated, there was no -- there was very little fourth quarter normal slowdown, number one; and number two though, it was just a good job mix that we weren't quite as hard on our equipment, and we were able to be really efficient. There was minimal white space as there has been in earlier quarters, but -- so I think it was just a combination of a good job mix, good efficiency on those jobs that we were working on. Just overall, good execution. The guys have done a tremendous job taking advantage of the opportunities that have been presented.

Okay. And one final one for me. Do you have any major contract roles as we kind of move into the first quarter? I don't know if you had quarterly openers or whatnot on your contracts, but any significant pricing uplift and contract roll expected in the first quarter?

By the nature of kind of our portfolio, no, but we are continuing to work on pricing, but there's no specific whatever event or contract rolling that would have an individually significant impact. But we do see some additional improvement opportunity as we move forward.

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