RPC Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 6 speakers on the call.

Operator

Good morning and thank you for joining us for RPC Inc. 2nd Quarter 2024 Conference Call. Today's call will be hosted by Ben Palmer, President and CEO and Mike Schmidt, 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.

Operator

Instructions will be provided at that time for you to queue up for questions. I will 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 2023 10 ks and other public filings that outline those risks, all of which can be found on RPC's website at 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 will now turn the call over to our President and CEO, Ben Palmer.

Speaker 2

Thanks, Mike, and thank you for joining our call. This morning we reported 2nd quarter results that reflected resilient performance across many of our service lines, while pressure pumping results remains challenged. Though we understand that pressure pumping is our largest service line and sometimes used as the barometer for the health of our business, we want to underscore the diversity of our operations and customer base. Our non pressure pumping areas performed solidly in the quarter, balancing out our results. Due to sequential growth in many service lines, our overall sales were only down modestly with EBITDA growing sequentially.

Speaker 2

We are not satisfied with these results and we'll continue to push further on efficiencies and cost controls, but we're certainly encouraged by profit growth in a difficult environment. Our total revenues declined 4% with pressure pumping down 17% and other service lines in aggregate up 8%. The frac market remains highly competitive and while our pricing is stabilizing, general activity in the spot and semi dedicated market has been soft. Our utilization is below ideal operating levels with white space arising in the calendar, sometimes on short notice. While tempting to quickly redeploy assets at lower price points to drive utilization, we remain disciplined in our approach and continue to idle certain crews rather than chase economically unattractive business.

Speaker 2

With respect to our frac assets, our Tier 4 DGB fleets have been highly utilized with strong demand from semi dedicated customers. As anticipated, we have deployed a new Tier 4 DGB fleet bringing us to 3 in total. Our crews are delivering gas substitution rates that we believe are among the best in the industry and our customers are pleased with our efficiency and performance on-site with these assets. Our intention is to continue upgrading our fleet without adding to our fleet count. To summarize the pressure pumping outlook, we continue to feel the competitive impact of frac crews in the Permian that were previously in gassy basins.

Speaker 2

This frac supply coupled with ongoing operating efficiency gains continue to keep pump hour capacity in the Permian ahead of demand. Ultimately, we believe these challenging conditions could force less well capitalized smaller players out of the market, but it may take some time to reduce supply in that fashion. On the demand side, the rig count remains soft with hopes of stabilizing near term and rig count growth potentially not coming until next year. In this environment, we are working diligently to control costs, evaluating additional efficiency actions and will maintain a disciplined operating and financial approach. The health of our balance sheet and diversity of our service lines should serve us well in the near term to navigate these pressures, while giving us the flexibility to invest in high quality and demand equipment.

Speaker 2

Pivoting to our non pressure pumping service lines, we were very pleased with top line performance. We saw our best quarter over the past year in downhole tools with solid 7% growth putting that unit back in the range of 100,000,000 dollars in quarterly revenues. This is our 2nd largest service line and we continue to be an innovation leader in this area. We recently have been testing a new product with initial success, a larger downhole motor, which is delivering high performance plug drill outs with lower pressure drop, improved M and R efficiencies and is especially effective in increasingly longer laterals. Customer interest is high and we look forward to continued rollout of this product in the coming quarters and are optimistic we can build off of this early positive momentum.

Speaker 2

Full tubing, our next largest service line also grew nicely in the quarter, up 18%. We're picking up traction in some specialized plug and abandonment work using proprietary directional drilling and magnetic ranging. While regulatory processes and administrative tasks in California have been timing obstacles, our technology and execution on this P and A work has created an opportunity to expand this business with a large E and P likely next year. In the meantime, we're doing similar work for other customers in other regions with positive results. Lastly, both cementing and rental tools delivered solid quarters with cementing up 1% sequentially and rental tools up about 9%.

Speaker 2

Each of these 4 service lines we highlighted also showed margin improvement during the quarter. The key takeaway is our non pumping activities performed well in the quarter, demonstrating the strength of our total portfolio of services and diversity of our customers even in a landscape marked by customer consolidation. Mike will now discuss the quarter's financial results.

Speaker 1

Thanks, Ben. 2nd quarter results with sequential comparisons to the Q1 of 2024 are as follows. Revenues decreased 4% to $364,000,000 driven primarily by lower pressure pumping activity as all of our other key service lines were up in the quarter. Breaking down our operating segments, technical services, which represented 94% of our total 2nd quarter revenues decreased 4%, also driven by pressure pumping. Support services were up 6% and represented 6% of our total second quarter revenues.

Speaker 1

The following is a breakdown of our 2nd quarter revenues for our top 5 service lines. Pressure Pumping was 40.4%, downhole tools, 27.6 percent oiled tubing, 10.7% cementing 7.7 percent rental tools 4.8%. Together these top 5 service lines accounted for 91% of our total revenues. Cost of revenues, excluding depreciation and amortization during the 2nd quarter, decreased by $14,300,000 to $262,300,000 or a 5% decrease, a point higher than the revenue decline. The lower cost of revenues stem primarily from lower fuel costs, which are essentially a function of activity and pass throughs to our customers and lower material and supplies such as sand.

Speaker 1

SG and A expenses were $37,400,000 down from 40,100,000 This decrease was due to lower employment costs including incentive compensation. Diluted EPS was $0.15 in the 2nd quarter, up from $0.13 in the 1st quarter. There were no non GAAP adjustments to our EPS. EBITDA was $68,500,000 up 9% from $63,100,000 with EBITDA margins increasing 210 basis points sequentially to 18.8%. Again, there were no adjustments made to these measures for unusual items either.

Speaker 1

For the quarter, operating cash flow was $127,900,000 and after CapEx of 75,000,000 free cash flow was $52,900,000 We note that the 2nd quarter had a large CapEx spend as we made final payments and accepted delivery of our new Tier 4 DGB fleet. Our year to date CapEx was $128,000,000 and our expected full year CapEx range of $200,000,000 to $250,000,000 remains unchanged. During the quarter, we paid $8,600,000 in dividends. We maintained a strong balance sheet, including a cash position of $261,500,000 atquarterend. As we mentioned on our last call, early in the Q2, we received a $53,000,000 tax refund related to past tax years.

Speaker 1

As a result of this refund, we trued up the related tax accruals. These one time true ups in conjunction with our normal quarterly tax adjustments resulted in a 17.8% effective tax rate for the quarter, which is lower than our usual tax rate. We do not expect our rate to be this low in future quarters. I will now turn it back over to Ben for some closing remarks.

Speaker 3

Thank you, Mike.

Speaker 2

So as we wrap things up, I just want to share our views allocation and potential investments in the business. For starters, our discipline and strong cash generation has given us the flexibility and ample liquidity to make strategic investments in the business. 2 of our most likely areas of potential future investment to deploy significant capital are upgrades to our frac fleet and acquisitions. We have and will likely continue to invest in Tier 4 DGB equipment given the growing preference for dual fuel fleets from certain customers. And you have heard us say before that we will be patient with respect to electric fleets as technology and customer preferences evolve.

Speaker 2

While some of our competitors are already offering electric fleets, we are confident that over time we can acquire similar assets and capabilities and that we will be able to compete successfully. The other area of potential investment is M and A, including businesses in our non pressure pumping service lines such as coal tubing, downhole tools, wireline and cementing. We are very pleased with our purchase of Spinnaker a year ago, which brought scale and new customers and regions to our cementing operations. With integration complete, we've been increasingly seeking out other opportunities. Our thesis that a challenging market might present attractive opportunities for patient buyers such as ourselves could prove out and allow us to make another meaningful investment in the business.

Speaker 2

As usual, I'll close by reiterating that in an often volatile market, our discipline remains consistent with a focus on financial stability and long term shareholder returns. I also want to thank all our employees who work tirelessly to deliver high levels of service and value to our customers. Thanks for joining us this morning and at this time we are happy to address any questions.

Operator

Thank you. The floor is now open for questions. Your first question comes from the line of Stephen Gengaro of Stifel. Your line is open.

Speaker 3

Thanks. Good morning, gentlemen. Thanks for taking the question. So a couple of things for me. I think the first is and I'm not sure how to ask this exactly, but when you think about M and A in the U.

Speaker 3

S. Market, what are kind of the key either products and or even just financial parameters that you're looking for when you're kind of considering M and A versus buying your own stock, for example?

Speaker 2

Well, certainly identifying areas and there were a few some of which we're already in service lines that we're already in that have nice free cash flow fundamentals. We're looking for acquisitions that are accretive from a cash flow perspective and also from an earnings valuation perspective. And we think we've talked over time that valuation seem to be getting a little more reasonable than they had been in previous years and we think that creates opportunities for people like us that are well capitalized and are attractive and attracting companies that want to become part of our company. I think another key aspect of course is the people that can come along with a good M and A transaction that could come in and become a part of our company and help us move forward. So it's really it's looking for a balance.

Speaker 2

It's not necessarily one versus the other that you didn't say it was, but we're looking for an appropriate balance. And there are some that we're looking at that are quite appealing. We'll see whether they happen. But again, we're going to continue to be patient and expect we'll be successful.

Speaker 3

Okay. Thank you. And the other one, and you mentioned in the press release about the pressure pumping business and the competitiveness of it and I missed a little bit of the gain of the call. So I apologize if I'm asking something you talked about. But when you think about the market dynamics and it feels to us like the pressure pumping business has gotten better, more consolidated over the last 5, 7 years.

Speaker 3

Yet I mean on periods where activity is low, there's going to be competitiveness. What have you seen kind of in this current kind of downdraft in activity that's different or similar to prior markets from just a customer conversation and pricing discussion?

Speaker 2

It's a reasonable question. I don't know that customer conversations are any different right there, putting out bids and quotes and looking for the right combination of quality services and price, it's very competitive. There is frac capacity that's being added to the market, the markets in which we compete, be that in moving in from gassy basins into more oily basins where we have large operations or people bringing on additional eFleet

Speaker 4

capacity.

Speaker 2

And many of our peers, but smaller peers and even larger peers are fiercely competing for business for their incrementally larger equipment. As we've said, our intention is not to add capacity to the market, but net net at least in the short term with again with some of this eFleet capacity coming on board it is creating more capacity in the market so it makes it more challenging. We try to be very disciplined. We don't like to work just to be busy. So we have lost some bidding opportunities as I've indicated to both smaller players that are always very competitive on price.

Speaker 2

But even we've had some peers that have come in and offered what we believe are lower prices than we're willing to work at. So we'll continue to be disciplined, make appropriate adjustments to the business to try to position us to do as well as we can and figure out how to continue to compete successfully in that segment of the market.

Speaker 3

Thanks. And then one final one for me and I know this is a little bit tough. When we think about 2025, like one of the things that we've been honestly a bit surprised by is that the oil activity has been weaker than we thought and clearly M and A is part of that. When you think about going into next year, what do you think that your customers need to see to maybe restart or at least get some momentum in drilling completion activity in the U. S.

Speaker 3

Market?

Speaker 2

Well, with respect to well, let me speak that I guess in terms of the Gassy basins, we are happy that we have basin diversity. So if the gas market were to pick up, we'll even more directly benefit from that. So that's one thing about the gas market. With respect to oil, I guess just like always, right? They want to look and believe that they've got a fair way of oil prices that they can make money at.

Speaker 2

They're looking at their production and they certainly are continuing to remain disciplined. They've got a choice of service providers. So they're continuing to press us on pricing and press us to be ever more efficient. And that can be a good thing. I mean we're all learning to become more efficient.

Speaker 2

But in the short term that can create even additional capacity without obviously without adding equipment. So I think if there's not enough completion activity certainly production will begin to come down. So if demand remains sufficiently high, things should begin to balance out and I would expect activity to pick up some at that point. But you know as well as I do that predicting oil prices is not necessarily directly translate into more activity. So I guess they've got to see both industry wide balance of supply and demand or increase or decrease in 1 or the other that spurs additional activity and and they're watching it.

Speaker 2

And at some point with activity we'll have to pick up. But the timing of that of course is difficult to predict.

Speaker 3

Great. Thank you for all the color.

Speaker 2

Thank you, Steve.

Operator

Your next question comes from the line of John Daniel of Daniel Energy Partners. Your line is open.

Speaker 4

Hey, guys. Just a couple for me this morning. Thanks for including me. When you look around the market, a lot of your competitors have sort of ceased reinvesting in their fleets. I mean, at least as you talk to the OEMs and the fabricators, there's not a lot of rebuild activity and sounds like some of the component parts like engines, etcetera, are stocking up.

Speaker 4

I'm just curious, given your balance sheet and ability to be opportunistic, does it make sense to stock up on things like Tier 4 DGB engines? And could you get them at an attractive price given where the market softness? Good question.

Speaker 2

Yes, that is an opportunity. We actually have been proactive back when there were supply chain disruptions. And but we had more engines than we would otherwise have. But no, certainly that is an opportunity. I wouldn't say we're playing the market on frac engines, right, and trying to build up on those.

Speaker 2

But certainly, there is an opportunity to take advantage of that. We're hearing the same thing from fabricators. And fortunately, we don't see pricing, fabrication pricings coming down significantly, but incrementally on the margin, it should help us some.

Speaker 4

Okay. And then you touched briefly on M and A. I'm just curious to the extent you're willing to answer. Do you see any actionable opportunities in the second half? And if you can't answer that, as you look at opportunities, do you see them as more tuck in opportunities or transformative?

Speaker 4

Just if you could elaborate what the desires are, that'd be great.

Speaker 2

Well, both. I mean, we're open to both. It takes some time to close on a transaction. I mean, there are some that are that we've been looking at. We've constantly been looking even over the last year since we closed Spinnaker.

Speaker 2

So there are a few that we are looking at. We're hopeful that there's at least one that could be actionable this year, but that's hard to know. We certainly don't count on it, but expecting that. And we don't emphasize tuck ins versus transformational, right? I mean, we're certainly open

Speaker 4

to both. But it does sound like this is a bit more of a priority. Would I be wrong to think of it that way?

Speaker 3

Well, priority

Speaker 2

always a priority, but I think just the timing. The timing may be right. I mean with I think we are an attractive company with our balance sheet. I think people some people are naturally drawn to us in part because of that, right, that we can execute. We do have the funding available to do that with a good balance sheet.

Speaker 2

Certainly, there's not with a if there were another call it transformational transaction to come along. We don't our clean balance sheet doesn't present an opportunity of leverage problematic leverage situation.

Speaker 4

That's right.

Speaker 2

So I think we're well positioned to be able to we would be good merger partner either way.

Speaker 4

Okay. I appreciate that you let me ask some questions. Thanks guys.

Speaker 5

Sure. Thank

Speaker 2

you, John. Appreciate it.

Operator

Your next question comes from the line of Chuck Minervino of Susquehanna. Your line is open.

Speaker 5

Thanks. Good morning.

Speaker 3

Good morning.

Speaker 5

Hey, I was just wondering if you could provide some of your thoughts on kind of the technical services outlook here in 3Q and 4Q. I know it declined there in 2nd quarter and yet pretty stable margin there, pretty flattish. But just kind of curious if you kind of see it 3Q being fairly similar to 2Q levels or if there's anything there we should be aware of?

Speaker 1

Yes. I mean, I think it is we haven't typically given guidance, but I mean, we're looking at Q3 not to be significantly different. As we mentioned, we've had a little bit of disappointment in pressure pumping, but all of our other service lines have done really well and continue to do well. So I think we don't see any significant shift. Obviously, we're hoping pressure pumping returns a little bit, but what we're seeing right now is in the near term anyway looks very similar.

Speaker 5

Got you. And then also in the Support Services segment, kind of the non pressure pumping business lines, really good margin expansion there in the 2nd quarter and growth kind of despite a weaker rig count. Can you just kind of put that into context for us for Q3 or the remainder of the year? Is that margin level kind of a level that you feel like you can hold in the Q2? And do you still think you can kind of outgrow that rig count?

Speaker 5

I know that's kind of tough to do over the long haul, but just kind of curious what your thoughts are there?

Speaker 2

Yes. This is Ben, Chuck. We don't see any particular thing that will would translate directly into continued significant outperformance, but it's well positioned. It's a relatively more steady business. We did have a couple of good things happened during the quarter there, but I see sort of more steady activity there as well.

Speaker 4

Got you.

Speaker 5

All right. That's it for me. Thank

Speaker 2

you. Thanks,

Operator

With no further questions at this time, this concludes the Q and A session. I'll now turn the conference over to Mr. Ben Palmer for closing remarks.

Speaker 2

All right. Thank you very much, operator. Appreciate everybody listening in. I understand or I think I was informed that there was a large acquisition announced this morning and a call got moved to this time slot. So we appreciate those of you who called in to listen to the call this morning and ask some questions.

Speaker 2

We appreciate it and look forward to catching up with you. And I hope you have a good rest of the day.

Operator

This concludes today's conference call. A replay of the conference call will be available on rpc.net within 2 hours following

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