Ranger Energy Services, Inc. (NYSE:RNGR) Q3 2023 Earnings Call Transcript

Ranger Energy Services, Inc. (NYSE:RNGR) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Good day and welcome to the Ranger Energy Third Quarter 2023 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Justin Whitley, Ranger’s General Counsel. Please go ahead.

Justin Whitley: Thank you, operator and welcome to Ranger Energy Services third quarter 2023 results conference call. Before the market opened today, Ranger issued a press release summarizing operating and financial results for the third and nine months ended September 30, 2023. The press results — press release, together with accompanying presentation materials, are available in our Investor Relations section of our website at www.rangerenergy.com. Today’s discussion may contain forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today’s forward-looking statements due to various risks and uncertainties including risks described in our periodic reports filed with the Securities and Exchange Commission.

Except as required by law, we undertake no obligation to update our forward-looking statements. Further please note non-GAAP financial measures may be disclosed during this call. A full reconciliation to non-GAAP measurements is available in our latest quarterly earnings release with an conference call presentation. With that I would like to now turn the conference call over to Stuart Bodden, Ranger’s CEO; and Melissa Cougle, Ranger’s CFO for their prepared remarks.

Stuart Bodden: Thank you, Justin and good morning everyone. Thank you for joining us today. I’m pleased to share our third quarter 2023 financial and operational results. Results that reflect Ranger’s resilience and ability to succeed, despite a lower US onshore drilling activity experienced this year and sustained weakness in natural gas basins. I will begin with a summary of our third quarter performance by segment, followed by our thoughts to the macro set as we head into our 2024 planning cycle. As we reflect on our business this year, we are incredibly proud of the hard work of our teams and the resilience demonstrated by our business. At a consolidated level, Ranger has seen sequentially increasing revenue, adjusted EBITDA, and adjusted EBITDA margin each quarter in 2023, despite US rig count dropping by more than 15% since the end of last year.

We talk frequently about our production-focused business model and our differentiation in service quality and safety performance and this year, we saw that differentiation in action. To elaborate, we do have 30% to 40% of our revenues exposed to completion activity in some of our assets in gassier basins. We saw some of those exposed assets get released during the spring and early summer. Due to the hustle of our operation teams and strong collaboration across regions along with a strong reputation for service quality and safe operations, we were able to redeploy idle assets efficiently to keep revenue moving in the right direction in the high-specification rig segment this year. We did have to contend with more white space than anticipated due to rig redeployment in the third quarter, but having the bulk of our assets allocated to production focused work in earlier basins allowed us to limit churn and turn over to keep our baseline activity largely unaffected.

Our ability to hold our revenue level and even increase them in some segments despite the decline in overall onshore activity this year should provide clear evidence about the flexibility and robustness of our production-focused business model and strong operational teams. Finally, and as further support of our strong operational performance, we are pleased to have signed a new customer agreement with a major integrated onshore operator this quarter that provides for significant market share of the well service work in their onshore US asset portfolio. This agreement and commitment for work provides us with higher confidence in our 2024 plan and opportunities for further growth from an already strong base of revenue with this customer. We have talked in the past about our positioning with larger customers and vendor consolidation momentum.

And it is encouraging to realize the first of what we hope will be a series of similar agreements. Stated already, but worth reiterating, is the fact that our highest quality customers are willing to get stickier in their agreements with Ranger which is a testament to the commitment and service reliability of our teams and the industry-leading quality of our assets. Moving on to our third quarter specifics, we reported net revenue of $164.4 million, the second highest revenue quarter in Ranger’s history. Looking at trends in our business, I’m pleased that although down from our record third quarter of last year, we have been able to provide steadily increasing results across 2023. Net income on a year-to-date basis is $21.7 million or triple that of the $7.5 million, reported over the same period in 2022.

Adjusted EBITDA for the core was $24.0 million and adjusted EBITDA margin has increased from 12.8% at the beginning of this year to 14.6% in the third quarter. We realized higher EBITDA quarter-over-quarter in all segments and feel this sequential growth quarter-over-quarter will prove rare across North American onshore service providers. Our High Specification Rigs business has been a consistent source of stability and strength for us this year. We’ve talked a lot about Ranger’s production focus and how it helps us weather energy sector volatility. And this segment’s performance this year is Exhibit A. Despite unexpected white space in the schedule due to several rig change outs that created some additional labor costs, rig hours held steady quarter-over-quarter with slight pricing improvements.

Moving on to our Wireline business, the North region which is our largest contributor to this segment substantially improved its margins this quarter, by focusing on strong execution and efficiency. However, the South region continues to experience significant competition and price destruction and completion services, operating much of the progress we made last year. We’re continuing to make a strategic focus — a strategic shift to focus on production and pump-down oriented wireline work within the South region, while choosing not to bid at breakeven levels or below. This work better aligns with Ranger’s production focus and comes with higher margins as well. And we expect this realignment will result in stronger segment contribution, as we move into 2024 and provide for more seasonal resilience.

Relative to the fourth quarter of 2022, we’ve grown revenue by 10%, despite the decline in US drilling and completion activity and we’ve also more than doubled operating income over the same period and increased adjusted EBITDA by 57%. Finally, with our ancillary services business, we have achieved modest sequential improvements largely across the board into 2023. Our P&A business has grown by double digits this year which has been an intentional effort on our part and our Coil and Rentals businesses have held steady despite activity declines. We have seen some pricing declines both within our Coil business as well as our Rentals business, because of new competition that migrated from gas basins this year which has affected our year-to-date margins.

We’re hard at work to maintain growth momentum in our P&A business and also restart growth in our Rentals and Coil business. We have achieved steady albeit, moderated growth this year, despite significantly lower-than-expected customer activity. The activity declines on the completion side certainly throughout our original much more ambitious growth plans for the year, and we have aggressively reacted to those activity declines by redeploying assets, pursuing operating efficiencies, and reorganizing where appropriate. The great news is that the challenges we’ve experienced in 2023 have made our fundamental business stronger today than it was a year ago, with higher margins and more streamlined operations. You saw in our earnings release this morning that we adjusted our full year guidance to calibrate year-to-date results, and I’m disappointed to pull back our expectations.

Our team has handled the market challenges this year remarkably well, and is poised to hit the ground running in 2024. We’re also still on track to convert 60% of our adjusted EBITDA to free cash flow this year, which has been an important differentiator for Ranger, and influences our capital return strategy. The latter part of 2022 and early part of this year has been evaluating developing and ultimately rolling out a capital return framework. The framework we announced included returning at least 25% of free cash flow to shareholders through a quarterly dividend and/or share repurchases. No other small-cap well full service company has the fundamental strength and confidence in its business to be able to offer this kind of share order returns program.

In the third quarter, we paid out the first quarterly dividend in Ranger history of $0.05 per share. Additionally, I’m pleased to report that year-to-date, we have repurchased approximately 781,000 shares for approximately $0.6 million reflecting our belief that Ranger shares traded at a compelling discount to their intrinsic value. We have approximately $26 million of authorization remaining or 14% of our current float and intend to opportunistically deploy that capital to buy back shares should conditions be supportive, although, we remain mindful of liquidity. Through the end of the third quarter, we have already exceeded our 25% annual shareholder return commitment. Looking ahead, we hold a similar view to other industry observers who believe the rig count is close to its bottom and we anticipate increased activity levels in 2024, as cut budgets reset.

The tight global supply and demand balance suggests a constructive oil and gas market and our early conversations with customers have been positive. Furthermore, the recent major consolidation announcements in E&P indicate both a positive long-term view of North American resource development and an opportunity for the highest-quality service providers to continue to gain market share. We are observing an increasingly prevalent trend among our customers to consolidate their service providers which holds positive implications for Ranger’s business particularly as we look forward to recovery in rig activity going into 2024. In conclusion, while we have faced unexpected headwinds this year our ability to adapt, innovate and focus on efficiency has allowed us to not just weather the storm, but to thrive.

We remain steadfast in our commitment to create value for our shareholders, the steps we’ve taken, including accretive acquisitions, share repurchases and the initiation of a quarterly dividend showcase our dedication to delivering value to our shareholders. Before I turn the call over to Melissa, I want to mention our other press release issued this morning. As part of our Board’s succession process, we initiated a search earlier this year for two new Board members and we are happy to announce that Carla Mashinski and Sean Woolverton have agreed to join the Ranger Board starting in the New Year. They both bring a wealth of industry-related experience and fresh perspectives to our Board that we are excited to have available to us. As part of these changes Bill Austin, who has been our Chairman; and Dick Agee, who merged his private wealth service company into Ranger before the IPO will both be exiting their seats at the end of this year.

Both have helped nurture and guide Ranger for these past several years and have been instrumental in the growth experienced since 2021. Because of their leadership and guidance, Ranger has successfully completed multiple acquisitions, simplified its capital structure, achieve net debt zero and implementing a capital returns program. We could not have done this without them and we wish them well, as they take on new endeavors. As part of this transition, Michael Kearney will assume the role of Chairman in 2024. Mike has been Chairman of two other publicly traded companies, and brings not only the deep knowledge of Ranger having served on the Board for several years, but also his wealth of knowledge from prior experiences. It’s an exciting time at Ranger.

We are successfully navigating the headwinds in 2023, and positioning the company for continued growth and to benefit from E&P consolidation. With that, I’d like to turn the call over to Melissa to discuss our financial results and outlook.

Melissa Cougle: Thank you, Stuart. Good morning, everyone. I’ll now provide further insights into our financial performance for the Third Quarter. In the Third Quarter of 2023, our revenue was $164.4 million, marking a 1% increase from the second quarter of this year. As Stuart mentioned, we experienced some unexpected white space early in the quarter in our high-spec rig business, which resulted in lower growth than expected. Year-to-date our revenue was $485.1 million, marking a 7% increase from the prior year. Our net income for the quarter was $9.4 million or $0.38 per fully diluted share. This is a significant improvement from the $6.1 million or $0.24 per share in the Second Quarter of this year. Our continued focus on operational efficiency has contributed to this increase.

Year-to-date net income stands at $21.7 million or $0.86 per fully diluted share, a significant improvement from $7.5 million or $0.33 per share in the prior year. We achieved an adjusted EBITDA of $24 million in the third quarter, representing a 10% increase from the Second Quarter of this year. This performance underscores our commitment to controlling what we can control. We achieved an adjusted EBITDA of $66 million year-to-date, representing a 14% increase from the prior year. During the quarter, we repurchased $2.7 million worth of shares under our existing share repurchase authorization, bringing the total repurchases year-to-date to $8.6 million. We also initiated a $0.05 per share quarterly dividend during the quarter, and announced today that the Board has approved our fourth quarter dividend as well.

On the growth side, during the quarter, we closed on our acquisition of pump-down assets for our Wireline business paying approximately $7.25 million, with some of those assets already working and the remainder undergoing upgrades and refurbishments to bring them up to Ranger standard. We remain a screening acquisition and consolidation opportunities, but have committed to being very disciplined in our approach. The pump assets proved a great fit, given their relatively easy pull-through in our existing service lines and too good to pass up from a valuation perspective with payback economics of less than two years. We would call attention to the increase in capital expenditures this quarter, as not only were the pumps treated as CapEx as well as their ongoing refurbishment, but we also spent some capital dollars in support of the contract that Stuart mentioned earlier.

We expect capital costs may remain a bit elevated in the next couple of quarters driving us to the high end of our guidance range as these certifications and refurbishments re completed and additional equipment on order is delivered. To conclude, our review of the financials, let me touch briefly on the balance sheet. Our liquidity was $70 million at the end of the quarter. We ended the quarter with approximately $10.3 million in debt and $8.2 million of cash. Financially, Ranger is as strong as it’s ever been, with near zero net debt and over double liquidity it had one year ago. Free cash flow for the quarter was affected by the accounting treatment of the pump down assets that were treated as capital expenditures and some build in working capital, which is already trending in the right direction in the fourth quarter once more.

Turning to 2023 guidance. As Stuart previewed in his comments, given the lower-than-expected results during the third quarter, we have revised our expectations accordingly for the year. While revenue growth hasn’t been as robust as we had hoped at the beginning of the year, the revised forecast does reflect the resiliency of our business, amid what has been a trough in onshore activity this year. We would stress that our fourth quarter will be dependent on a variety of factors both positive and negative and we expect a lighter quarter before picking back up in 2024. We are already continuing with some early winter effects and talking about holiday planning with customers. Offsetting those challenges, we have continued to deploy new assets during October, which somewhat moderate our seasonality impact.

These adjustments reflect our commitment to transparent communication, delivering value to our shareholders and our dedication to managing our financial performance in an ever-changing environment. We are currently in the process of preparing and reviewing our 2024 budgets and look forward to sharing insights on 2024, and updating our investment community with those insights as part of our year-end report. We remain positive on our market fundamentals and the constructive backdrop for a multiyear growth cycle and we currently expect activity to increase modestly in 2024. Thank you again for your time and interest this morning. We look forward to updating you on our progress next quarter. With that we would like to open the floor to any questions you might have.

Operator, please go ahead.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from John Daniel with Daniel Energy Partners. Please go ahead.

John Daniel: Hey, all. Thank you for having me. And congratulations on the incremental work you guys are getting from the bigger E&P companies. I guess the first question Stuart is there any way that you can provide some quantification as to what the incremental rig opportunities will be? And then just touch on the ability to find people to mine those rigs, or will you just transition rigs from existing customers to take that work?

Stuart Bodden: Good morning, John, thanks for the question. I think it’s going to be a little bit of both. I think there will be some rigs that transition from existing customers. I think there will be some incremental growth as we go into the year. I think on the labor markets, what we’re finding is it still is a tight labor market. But it is certainly better than it was in 2023. So I think we’re confident that if we need to find those trees that we can. But again, I think I would reiterate is I think just sort of depending on how budgets play out, it could be a combination of new rigs or incremental rig adds but also some kind of reshuffling amongst customers.

John Daniel: Okay. And then just two other quick housekeeping. Does the agreement provide for pass-throughs in the event of inflationary labor or other costs, or are you locked in at a certain rate?

Stuart Bodden: No. It allows for pass-throughs.

John Daniel: Okay. And then on the wireline business as you shift to more of a production work. What happens – are you idling some of the completion-oriented units? Did those become candidates to sell, or can you just repurpose them for the production work? That’s my final question.

Stuart Bodden: I appreciate the question, John. They can be repurposed for production work relatively easily. We do through the acquisitions have a fair amount of kind of wireline production-related equipment and tools. So we don’t think we need to really do anything incrementally other than just really kind of put greater emphasis on that.

John Daniel: Okay. Thank you very much.

Stuart Bodden: You bet.

Operator: Our next question comes from Don Crist with Johnson Rice. Please go ahead.

Don Crist: Morning, guys.

Stuart Bodden: Morning, Don.

Don Crist: It looks like the fourth quarter is going to be impacted by normal seasonality. But given that we’re in the RFP season right now, I mean obviously you signed a new contract, but can you give us any indication on 2024 with the caveat that I know it’s still early?

Stuart Bodden: Yeah. I think what we’d say is early and kind of hard to get a definite read. I mean, what I would say is on the rig side and with the contract that we recently signed that pricing was strong so we’re excited about that. I think we are seeing in some RFPs like on the wireline side for instance, there have been some contracts that we won that I think we would say are attractive pricing. And then there have been some that we have lost at pricing that we’ve been really quite surprised at how low they went for from what we understand. So I think it’s a bit of a mixed bag at the moment. And again, I think as you said it’s still kind of early days.

Don Crist: Okay. And on the recent consolidation, obviously, those deals haven’t closed the bigger ones anyway. Do you think that impacts your business any? Do you think there’s any kind of synergies there that maybe you could go or working for those bigger companies now and kind of expand operations, or how do you think that kind of plays out over time?