RPC Q4 2023 Earnings Call Transcript

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January 25, 2024

There are 5 speakers on the call.

Operator

Good morning and thank you for joining us for RPC Incorporated's 4th At this time, all participants are in a listen only mode. Following the presentations, we will conduct a question and answer session. I would like to advise everyone that this conference call is being recorded. I'll now turn the call over to Mr. Schmidt.

Speaker 1

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 ks and other public filings that outline those risks, all of which can be found on RPC's website atwww.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.

Speaker 1

Our press release issued today and our website contain 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.

Speaker 2

Thank you, Mike, and thank you for joining our call this morning. We closed out the year with Strong sequential 4th quarter revenues and EBITDA increases, as expected, following a soft third quarter. And for the year, we delivered adjusted EBITDA of $374,000,000 and free cash flow of 214,000,000 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. To elaborate further on the Q4, we started off strong, but felt the impact of falling oil prices later in the quarter.

Speaker 2

During our Q3 call, we noted that with oil above 80, we and our customers should have a favorable environment for activity and utilization. At that time, we had indications from our customers that there would be a limited holiday slowdown. Obviously, oil fell below 80 below 70 in early December. This decline caused completion postponements and more holiday downtime than originally anticipated. While the 4th quarter financial results did show a substantial improvement from a very soft third quarter, the December low prevented us from delivering even higher growth.

Speaker 2

Our pressure pumping activities increased sharply from the 3rd quarter, but still below our expectations. Regarding pricing discipline, as expected, we were able to secure work at more attractive pricing in the 4th quarter and certain opportunities we opted to forego during the Q3. As for our workforce, our 10 horizontal fleets plus our 2 vertical fleets remain staffed, We are monitoring conditions closely and we'll implement contingent 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 remains solid despite a softer environment.

Speaker 2

Integration on all fronts has gone well and we are excited about its future. Mike will now discuss the quarter's financial results. Thanks, Ben. I'll start with a few quick financial highlights for the year and then

Speaker 1

go into some more detail about the Q4. For the full year 2023, revenues were $1,600,000,000 increasing 1% versus last year. Diluted EPS was $0.90 which included a $0.07 negative impact from pension settlement costs in the first half of the year. So adjusted EPS was $0.97 And adjusted EBITDA was essentially flat at $374,000,000 We generated strong operating Free cash flow in 2023. Operating cash flow was $395,000,000 and after CapEx of $181,000,000 Free cash flow was $214,000,000 Recall, we spent nearly $79,000,000 to acquire the Spinnaker Cementing business early Q3.

Speaker 1

For the year, we spent $21,000,000,000 on share repurchases, of which $19,000,000 was through our buyback program. We also paid $35,000,000 in dividends. Thus returning more than $50,000,000 of capital to our shareholders. Our strong financial position Of $223,000,000 at year end, as well as our projected future cash generation, we'll continue to for organic investments in our business, potential M and 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 discipline and consistent conservative approach.

Speaker 1

Now I'll cover our 4th quarter results with sequential comparisons to the Q3 of 2023. Revenues increased 19% to $395,000,000 driven by a significant increase pressure pumping revenues. Last quarter, we signaled a strong sequential rebound and that's what we experienced. Breaking down our operating segments, technical services revenues increased 22%, driven by growth in pressure pumping activity, our largest service line in that segment. Technical Services represented 94% of our total 4th quarter revenues, While our Support Services segment revenues were down 14% and represented 6% of our total revenues in the quarter.

Speaker 1

The following is a breakdown of our 4th quarter revenues for our top five service lines. Pressure pumping was 47.2% of revenues downhole tools 23.3% Coiled tubing 9.4 percent cementing 6.5% and rental tools 4.4%. Together, these top 5 service lines accounted for 91% of our revenues. Cost of revenues, Excluding depreciation and amortization during the Q4 grew to $279,400,000 from $239,100,000 or a 17% increase. We did see some operating leverage in the quarter, particularly on fixed labor costs.

Speaker 1

SG and A expenses were 38 $100,000 down from $42,000,000 The reduction in SG and A expenses was due to a variety of discretionary cost controls coupled with lower incentive compensation. Diluted EPS was $0.19 in the 4th quarter, up from $0.08 in the 3rd quarter. There were no non GAAP adjustments to those EPS figures. Adjusted EBITDA increased 53 percent to $79,500,000 with adjusted EBITDA margin increasing 4 40 basis points to 20.1%. Now I'll discuss our 2023 and expected 2024 capital spending.

Speaker 1

As mentioned, capital expenditures were $181,000,000 for 2023, below our expected range of $200,000,000 to $250,000,000 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 $200,000,000 to $250,000,000 A key element of this plan is the delivery of a new Tier 4 DGV fleet, which we expect to place in the service by the end of the second quarter. I'll now turn it back over to Ben for some closing remarks.

Speaker 2

Thank you, Mike. So bottom line, we rebounded sharply from the 3rd quarter air pocket. However, following oil prices and customer indications of budget exhaustion late in order curve the magnitude of that bounce back. Bill visibility is, of course, limited and January weather has been a challenge, but we are getting signals from our customers general near term stability and potential for growth as the year progresses. As Mike referenced, our capital spending plans 2024 include a new Tier 4 DGV fleet, which will replace a Tier 2 diesel fleet, thus we won't be adding pressure pumping capacity to the marketplace.

Speaker 2

Consistent with previous comments, we're taking a patient and disciplined approach to upgrading our pressure pumping assets to more attractive dual fuel and lower emission equipment. With the addition of this Tier 4 DGB fleet, we will have 3 in total, plus 2 Tier 2 DGB fleets and 3 Tier 4 diesel fleets. Additionally, we are operating 2 Tier 2 diesel vertical fleets. So in total, 8 of our 10 horizontal fleets will be ESG friendly. We remain on the sidelines with respect to electric fleets Atilare solutions we feel make economic sense for our business and customers.

Speaker 2

Lastly, with Spinnaker integration essentially complete, We're looking for additional strategic acquisitions to strengthen our business. While RPC currently offers a wide variety of services required by both large and small E and Ps, we see opportunities to increase our scale and broaden our customer relationships. We are 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 $0.04 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.

Speaker 2

We're especially proud that Through Tubing Solutions, our downhole tools company has been recognized as a 2023 Top Workplace by the Oklahoman. This prestigious accolade is a testament to our commitment to fostering the Vibram and inclusive work environment. You'll be able to read more about our values as well as other corporate initiatives as we plan to issue RPC's 1st sustainability report very soon. In closing, I want to reiterate that in an often volatile market, our discipline remains consistent. Our focus on financial stability long term shareholder returns.

Speaker 2

Thanks for joining us this morning. And at this time, we're happy to address any questions.

Operator

Your first question comes from the line of Stephen Gengaro with Stifel. Please go ahead.

Speaker 3

Thanks. Good morning, everybody.

Speaker 1

Good morning.

Speaker 3

So a couple of things for me. What I would start with is On the Pressure Pumping side, can you give us a sense for how many horizontal frac fleets you ran on average in the quarter and kind of How you see that evolving as the year progresses?

Speaker 2

Well, Stephen, all were staffed as we indicated. They all did some work during the quarter, but it varied, of course. And I think the way we would expect that to evolve In 2024 is they will either become more busy or we'll make the decision to maybe reduce the number of fleets Right now, we're confident with the way things are going in the Q1 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 action if it doesn't pan out that way.

Speaker 3

Okay, thanks. And then and that actually leads into my other question, which was you On the technical services side, you clearly had your margin doubled, right, sequentially on the operating income line. And despite, I think it sounds like carrying costs and having maybe more staff fleets that actually work the whole quarter. But How does that play out into kind of margin trajectory and or incremental margins in Technical Services As we go forward, I know it's going to vary based on revenue, etcetera, but kind of is there any parameters you can give us to sort of think about How the incremental margin performs given the costs that are in place?

Speaker 2

Reasonable question. Obviously, the incrementals this quarter were tremendous because of the large increase in revenue, and that's Quite typical. I would say yes, and obviously, it depends on the amount of revenues and job mix and a lot of different things. Clearly, we're not going to see we would not expect to see that percentage of incremental margins going forward. But with revenue gains and increases, we would expect to see something in the teens, mid teens to Perhaps 20%.

Speaker 4

Okay. But the

Speaker 2

Q1, again, starting off with the way it is. I mean, 4th quarter is kind of a reasonable base to kind of say, what's the Q1 going to look like? We don't know exactly, but starting off okay. And I think like many other people have said, It's a little bit slow. It's always when we slow down late in Q4, it takes a little bit of time for it to crank back up.

Speaker 2

So we'll have to deal with that.

Speaker 3

Just to clarify, thank you. The margin coming mid to high teens or 20s, is that's And absolute margin over time, is that or is that an incremental margin you were referring to?

Speaker 2

I was actually referring to Obviously, it depends on the amount of revenue growth. So we're not expecting anything outsized or unusual.

Operator

Your next question comes from the line of Derek Poudhaser with Barclays. Please go ahead.

Speaker 4

Hey, good morning guys. Hoping you can maybe expand on the types of services you're looking to increase for scale and enhance your growth outlook. You mentioned some potential acquisitions, just maybe some more color around what types of services or products you're looking to get into?

Speaker 2

Good question. We have in pressure pumping obviously is our largest service line, but it's by far the largest market right in the oil field, so there's a big market out there to go after. Many of our other service lines, downhole tools, Coiled tubing, 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 market share in those regions and we hope to achieve the same with cementing and teaming up with Spinnaker in our South Texas market where we've been operating for number of years.

Speaker 2

We think there's a great opportunity down there to bring some of Spinnaker's customer relationships and capabilities to bear down there. So that's an opportunity cementing. Coiled tubing, we have a good market share. That's a good business. That's something that we've brought along in the last couple of years.

Speaker 2

And downhole tools, There might be some opportunities to expand there. So we're looking to expand for the most part. Yeah. We're looking to some of those particular service lines that I'm representing are 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 I've referenced. So the ones where we have good scale and good market share now, and those would be the ones we would focus on primarily.

Speaker 4

Got it. That's helpful. And then just on the pumping, is that more of like an equipment comment, like looking to bolster your equipment base or maybe Services around the frac pump, more of those ancillary services like wireline, prop and logistics, power solutions, things of that nature?

Speaker 2

The ones I refer to are not directly tied to pressure pumping. I think the commitment and the requirement To internally develop some of those capabilities could be acquired. A lot of our larger peers, Some of these systems and capabilities they have beyond wireline. We have a small wireline business. So we do wireline.

Speaker 2

It's just not something that we've talked about because it's pretty small. And wireline is used for a lot of different things, not just for the completion But we'll be 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. Our larger peers With some of the larger customers, that's getting a lot of attention right now, but there are many other customers other than the ones that can benefit from A fully integrated, tremendous infrastructure to bring out to not every customer has the type of Number of wells and the type of fields that require that type of setup and that would benefit from that type of capability.

Speaker 2

There are plenty of customers who need the breadth of services that we offer. So that's where we're aligned, that's where we're set up, that's where we have our historical relationships. And I expect for the time being, That's where we'll focus as it relates to pressure pumping.

Speaker 4

Got it. That makes sense. And then just a follow-up from me. Maybe just talk about the competitive landscape in frac among those smaller players. The privacy we don't get great insight to, mainly Those Tier 2 diesel players, I'm not sure if you come across them, when you bid work or just see them out in the field, but there's been anecdotes of bankruptcies and laying that Just any insights that you guys can provide from what you've seen will be helpful.

Speaker 2

Right. Not a whole lot specific. Obviously, we See them from time to time and hear that sometimes when we miss opportunities, it might be to one of those smaller players. Obviously, the pressure pumping equipment to upgrade and continue to invest in that equipment is expensive and it's So not everybody can afford to do that. So hopefully, maybe we'll have a shakeout in that regard, maybe that part of the market will further improve and we're certainly set up to take advantage of that.

Speaker 2

We had When the market tightened in the 1st and second quarter of 2023, we had tremendous Financial results within pressure pumping and obviously the market loosened up a bit. We think some of the smaller players as you're indicating, I think it will be difficult, a challenge as it always is for them to be able to expand. So hopefully that market will improve a bit. And we have certainly 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 massive infrastructure, we're pretty well positioned and do well in that market.

Speaker 4

Got it. Appreciate all the color. I'll turn it back.

Speaker 2

Sure. Thank you.

Operator

Your next question comes from the line of Stephen Gengaro with Stifel. Please go ahead.

Speaker 3

Thanks. I just wanted to follow-up. Thanks. We've heard a lot about kind of pricing bifurcation in the market between low emission assets and older assets and also Kind of the difference between sort of spot pricing for pressure pumping versus sort of contracted or committed Arrangements. Can you comment on that at all?

Speaker 2

It's getting more and more complicated. The 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. They're obviously getting paid something for that, but that requires an additional investment, right? So 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, I think, to talk about pricing Because of those various aspects as you peel back the various services that are being offered.

Speaker 2

We have a number of services, some of which work 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.

Speaker 2

Clearly, it seems that some of the Very large E and Ps appreciate, of course, that's the word, appreciate. We'll contract, we'll look for Some of the service providers that do have a multitude of different services to bring, but there are a lot of customers who still like to Unbundle, customers love to have competitors. They're not going to give all their business to one service company. Never happened and I don't believe it's going to happen in the future. So we're continuing to improve our fleet.

Speaker 2

We're following our roadmap. It's certainly adjustable, but we have a roadmap that says, as our equipment wears out, we're going Invest and buy new equipment and it certainly will be equipment that is newer, has additional capabilities. 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 those decisions that we're making are, they're financial decisions. They're not decisions just to say we want to have We want to do whatever it takes to have X percentage of our fleet, have a particular characteristic by a point in time.

Speaker 2

We're letting the market and our customers and the demand dictate when we make those investments. But we're moving that along. Obviously, the ordering of this new Tier 4 fleet moves us along that path. 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 We're executing on that plan for the long term and improving our fleet as we do that.

Operator

Your next question comes from the line of Derek Poudhaser with Barclays. Please go ahead.

Speaker 4

Hey guys. Just wanted to ask about your exposure to a couple of basins, primarily the Haynesville, Mid Con and Eagle Ford. I mean these basins were the ones that came under the most pressure As gas started to capitulate, I mean gas has been pretty lethargic here, pushed out to 2025. So can you maybe take some time for those 3 basins And give us a sense of what you're seeing as far as activity and customer conversations?

Speaker 2

Yes. You said 3 basis, Haynesville,

Speaker 4

Haynesville, Mid Con, Eagle Ford?

Speaker 2

Haynesville, We have historically had pressure pumping in South Texas and the Haynesville. We've not been there for many years since probably 2015, 2016. We've moved out of those basins. Haynesville in particular is very intensive work, very high pressure. And it's just something that we've not focused on in the last few years.

Speaker 2

Many of our other service lines, downhole tools in particular, that's 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. South Texas, we've done some work in South Texas. We have again, our cementing operation is down there. But right now, we're not looking to make a significant move into Either South Texas or the Haynesville at this point in time, but there have been some opportunities for us that we have pursued in South Texas with pressure pumping.

Speaker 2

But to reiterate, our downhole tools company has significant market share, And they operate in all the basins around the U. S. Pressure Pumping, we're a little more focused, if you will, on the basins where we're best positioned.

Speaker 1

Yes. Rental tools is another one that's kind of In all the base, but a lot of the service lines that we are spread out are things that we can move easily to where there is activity and need for that equipment. So, as Ben mentioned, if you think pressure pumping, we're really more Permian. We have little bit Others but our other service lines are definitely more spread out, but that's not heavily impacted because we can move that stuff pretty quickly to where the need is.

Speaker 4

Got it. And then maybe just some thoughts on the E and P consolidation wave that we're starting to see. I mean, you mentioned throughout the call you work for maybe some of those smaller companies that could be targets of the large caps independents looking to gain share and shale. I mean, Have you had any customers that have been acquired yet? Have you seen an impact to your services?

Speaker 4

Just maybe some color on how you guys are thinking about that?

Speaker 2

We were impacted somewhat in the Q3 with pressure pumping. That was a contributing factor to that air pocket. Since that time, we have not pressure pumping has not been impacted. Heretofore, in the last several quarters, with Some of the consolidation that's taking place, our other service lines have not seen an impact from that consolidation, and we hope and expect that LX would 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 E and P Companies. So we're working for 2 high activity Producers, operators, we hope to continue to do that in the future.

Speaker 2

If we're already working for both of them, 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 Q3 and we've not seen any further any of the recent consolidations not directly impacted us. And of course, some people have written that they said that they think it's kind of the taking out of some of the Smaller to midsize operators may be coming to an end, right? There's a lot of consolidation at that upper end, which might impact kind of the more concentrated larger pressure pumpers more than it would us, right? So anyway, so that's my take on that.

Speaker 4

Got you. No, that's helpful. Just last one, just to clarify on your outlook for Q1, do you expect just top line and profitability to be Flat just given the weather and the slow start from the E and Ps? Or do you see upside? I know you're talking about the incrementals at the top of the Q and A or maybe this is a flat to up, are you thinking about Q1 earnings?

Speaker 1

Yes, I guess I could start that's probably a good way to think about it sort of flat to up Exactly as you described it, the end of the year, 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 to what we've heard, Some of the other folks that have announced the last couple of days, it's similar sort of flat to up, no huge increase or decrease we're expecting currently.

Speaker 4

Got it. Great. Appreciate it guys. Turn it

Speaker 1

back. Thank you, Derek.

Operator

At this time, there are no further questions. I'll now turn the call back over to Ben Palmer for closing remarks.

Speaker 2

Thank you, operator. Appreciate it. And thank you, everybody, for joining our call. Appreciate your interest and attention and look forward to catching up. Take care.

Speaker 2

Bye bye.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect your lines.

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