Ranger Energy Services, Inc. (NYSE:RNGR) Q4 2023 Earnings Call Transcript

Ranger Energy Services, Inc. (NYSE:RNGR) Q4 2023 Earnings Call Transcript March 5, 2024

Ranger Energy Services, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you, and welcome to Ranger Energy Services Fourth Quarter and Full Year 2023 Results Conference Call. Ranger has issued a press release summarizing operating and financial results for the three and 12 months ended December 31, 2023. This press release, together with accompanying presentation materials are available in the 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 the 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 that non-GAAP financial measures may be disclosed during this call. A full reconciliation of GAAP to non-GAAP measurements are available in our latest quarterly earnings release and conference call presentation. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. With that, I would now like to 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, and good morning, everyone. I’m pleased to welcome you to our fourth quarter and full year 2023 earnings call. 2023 was a year of significant milestones and achievement for Ranger. Before we delve into the specifics of our fourth quarter and full year 2023 financial and operational performance, I’d like to take a moment to reflect on the journey we’ve undertaken, the strategic decisions that have shaped our path, and a few highlights from the year. In 2023, Ranger achieved the highest annual earnings in our company’s history, despite facing headwinds stemming from macroeconomic conditions and industry-wide challenges, which resulted in a 20% decline in drilling rig count, which delivered revenue of $636.6 million, marking a 5% increase from the prior year.

This growth trajectory was supported by our unwavering commitment to safety, superior service quality and our production cycle focus, which continues to prove resilient to market fluctuations. Notably, our net income surged to $23.8 million or $0.95 per fully diluted share, up from $15.1 million or $0.65 per share in the previous year. Our success in 2023 underscores the strength of our business model and the dedication of our team members. Throughout the year, we remain steadfast in our commitment to maximizing shareholder value, guided by our four strategic pillars, maximizing cash flow, fortifying our balance sheet, returning capital to our shareholders and exploring growth through acquisitions. Ranger continued to prioritize cash flow generation throughout 2023, leveraging our capitalization business model and strong operating leverage.

We generated $84.4 million in adjusted EBITDA, reflecting a 6% increase from the prior year and thanks to consistent price discipline in the pace of activity declines, we achieved free cash flow of $54.3 million, or 64% of adjusted EBITDA. Converting cash at these levels is a market differentiation for Ranger and resulted in free cash flow per share of approximately $2.30, providing for a more than 20% free cash flow yield per share at recent trading levels. Maintaining a robust balance sheet is essential for navigating uncertainties and seizing opportunities in our dynamic industry landscape. In the second quarter of 2023, we achieved a significant milestone of effectively becoming debt free, paying off nearly $80 million since the first quarter of 2022, when our debt peak after our 2021 string of acquisitions.

We have remained debt free and ended 2023 with over $85 million in liquidity. We believe that minimal debt is crucial for maximizing shareholder returns and preserving optionality free cycles, and we remain committed to preserving and growing our balance sheet strength. With our balance sheet targets in place in the first half of the year, we turned our attention to capital returns for our shareholders. In 2023, we announced the company’s first dividend and repurchased approximately 1.8 million shares, and those repurchases have continued into 2024. As of today, we have now repurchased over 10% of Ranger’s outstanding shares. When we discuss acquisitions and strategic opportunities, we are keenly aware that our own stock remains one of the most attractive uses of capital available to us, and any M&A must compete against it.

When we launched our shareholder returns program in the second quarter, we committed to returning at least 25% of annual cash flows to shareholders through dividends and share repurchases, and I’m pleased to report that we far exceeded that commitment in 2023 by returning 40% of free cash flow back to our shareholders, reaffirming our dedication to creating long-term value, delivering meaningful returns to our shareholders will remain a top priority for Ranger. We also intend to increase Ranger size and scale, and throughout 2023, we remain actively engaged in evaluating strategic opportunities for growth through acquisitions. Our disciplined approach ensures that any potential transactions are value creating and accretive for our shareholders.

Would we like to do another transformational corporate transaction? Absolutely, but we are committed to maximizing value and we will not overpay. As a result of the unfavorable bid at spread in 2023, we pivoted to evaluating smaller asset acquisitions that folded into our current operations portfolio. In the third quarter, we successfully closed a modest acquisition of pump down assets and support equipment, further enhancing our operational capabilities. We have the balance sheet and the resources to execute quickly on these types of opportunities and will continue to be nimble in evaluating both large and small deals on behalf of our shareholders. While our full year results demonstrated our resilience and growth trajectory, the fourth quarter did present some unique challenges.

We experienced the impact of falling oil prices, customer budget exhaustion and early weather shutdowns in addition to our typical holiday slowdown. Despite these headwinds, our high specification rigs business demonstrated stability, reflecting its production cycle focus, which is less tied to the ups and downs of U.S. land rig count, not to mention our ongoing dedication to service quality and strong customer relationships. Our wireline segment faced more significant weakness than expected in Q4, driven by frac slowdowns and seasonal factors, particularly in the Northern region where our business is strongest. Finally, our Processing Solutions and Ancillary Services segment increased revenues year-over-year in most business lines, but adjusted EBITDA declined due to higher operating costs and operational and scheduling inefficiencies that creep into certain service lines during the year due to the overall market slowdown.

Looking ahead in the near-term, the first quarter has started slower than we planned similar to many of our peers, given macro uncertainties and continued pressure in gas markets, our E&P customers have been cautious with their activity levels to start the year. We have also experienced customer driven shutdowns this quarter related to a safety incident of other service providers that caused stand downs across all service providers. On the positive side, we are already seeing activity levels pick back up in the back half of February, paving the way for a stronger second quarter. Regarding full year 2024, we built a budget assuming a slight year-over-year improvement underpinned by relatively stable customer demand. Given the puts and takes I mentioned at the start of the year, we expect demand to be stronger in the second half of the year and we remain optimistic about our ability to grow our business in the medium and long-term.

We are encouraged that the well services space has already shown resilience to weaker activity levels, providing a reliable floor to our business. We also feel there are upsides to the year that are not fully yet realized, such as the expanded work associated with the key customer agreement we signed in 2023. We think this is a model for future customer relationships and continue to have encouraging conversations with our customers. We continue to be encouraged that our highest quality customers are willing to commit additional operating dollars to Ranger. We fully stand behind our ability to convert approximately 60% of our EBITDA free cash flow, even under flattish conditions, and have shown diligence in deploying these cash flows in the most accretive way possible for our shareholders.

Today, we have spent more than $25 million of our original $35 million of repurchase authorization announced one year ago, which has resulted in the repurchase of over 10% of the company’s outstanding shares. Given our belief in the underlying value of our stock and our continued commitment to returning capital in the most efficient way possible, the board has increased our share repurchase authorization by an additional $50 million, resulting in total share repurchase capacity of $85 million. Along with all of the notable financial achievements, the entire Ranger team is proud to announce the release of our first ever sustainability report. This report reflects our commitment to operating responsibly and underscores our efforts to promote environmental, social and governance initiatives.

We remain dedicated to fostering culture of safety and sustainability across all aspects of our operations. As we embark on the New Year, Ranger is well positioned for continued strong performance and value creation. Our strategic priorities for 2024 center on driving toward growth, the challenging market conditions and targeted acquisitions. We will focus on high quality and safe execution to differentiate ourselves with a relentless commitment to customer satisfaction, all the while remaining fully committed to providing meaningful capital returns to our shareholders. Our acquisition strategy will be complemented by ongoing dividends and share repurchases, reflecting our confidence in the long-term prospects of our business. In conclusion, I want to express my gratitude to our dedicated team members whose hard work and dedication have been instrumental in our success.

As we navigate the year ahead, I am confident in Ranger’s ability to deliver sustainable growth and value for our shareholders. With that, let me turn the call over to Melissa to review our key financial results.

Melissa Cougle: Good morning, everyone, and thank you for joining us today. I’m pleased to provide an overview of our financial performance for the full year 2023 and the fourth quarter specifically. Let’s start with a summary of our full year 2023 financial results. Overall, we achieved year-over-year growth and made substantial progress across key financial metrics. Our revenue for the full year totaled $636.6 million, marking a 5% increase from $608.5 million in 2022. This growth was primarily driven by our continued focus on service quality, effectively managing white space in the calendar, and operational efficiency despite encountering challenges in customer activity that dampened our full year performance. Moving on to profitability, our net income for the full year stood at $23.8 million or $0.95 per fully diluted share.

This represents a substantial improvement from the previous year’s net income of $15.1 million or $0.65 per share. Our ability to deliver higher earnings reflects the effectiveness of our business model and underscores its resilience in the face of declining market conditions. Adjusted EBITDA also saw a notable uptick, reaching $84.4 million for the full year compared to $79.5 million in the prior year. This 6% increase demonstrates our ability to generate strong operating cash flows and underscores our commitment to maximizing shareholder value. Furthermore, we are incredibly proud to have achieved free cash flow for the year of $54.3 million, representing over 60% of adjusted EBITDA. This robust free cash flow generation reflects our disciplined approach to capital allocation and underscores our financial strength.

Now, let’s delve into the financial performance for the fourth quarter of 2023. Despite encountering headwinds during this period, we remained – we maintained our focus on operational excellence and remained agile in responding to market dynamics. For the fourth quarter, our net income totaled $2.1 million or $0.09 per fully diluted share. While this represents a decrease from the prior year, it’s important again to note the broader market challenges in the fourth quarter, the customer budget exhaustion and a notable holiday slowdown during this period. Despite these challenges, we remained resilient and focused on optimizing our operations. Adjusted EBITDA for the fourth quarter was $18.4 million, with the lion’s share of the year’s free cash flow coming in and totaling $29.1 million.

Turning to our balance sheet and liquidity position, I’m pleased to report that Ranger’s balance sheet strength continues to improve. We ended the year with $85.1 million in liquidity, consisting of $69.4 million of capacity on our revolving credit facility and $15.7 million of cash on hand. This represents a significant improvement from the previous year, underscoring our commitment to financial discipline and improving capital management. We would call attention to what we expect will be our typical first quarter declines in cash flows, largely due to compensation commitments at the start of every year. Our total debt at the end of December was virtually zero to reflect our commitment to maintaining the highest degree of financial flexibility to seize on opportunities in the future.

Our ability to achieve these results amidst the challenging operating environment highlights the effectiveness of our strategic initiatives and underscores our commitment to creating long-term value for our shareholders. In conclusion, I’d like to reiterate that despite the challenges we face in 2023 that have continued into 2024, we remain confident in not only the resilience and strength of our business, but also the longevity of the U.S. onshore market and Ranger’s ability to provide through cycle returns in its backdrop. We will continue to focus on executing our strategic priorities, driving operational excellence and delivering value for our shareholders. Thank you for your attention and I will now turn the call back over to the operator for the question-and-answer session.

Operator: We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Luke Lemoine of Piper Sandler. Please go ahead.

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Q&A Session

Luke Lemoine: Hey, good morning.

Stuart Bodden: Good morning, Luke.

Luke Lemoine: Hey, good morning. Stuart, all the large operator market consolidation should really help you guys the high spec we’re excited with your focus on safety relative to smaller peers. I know this doesn’t kick up in a linear manner, and there might be some pauses as operators kind of determine and sort out plans. But could you just speak to the change in the operator market structure and how this could benefit you, probably in the back part of the year?

Stuart Bodden: Sure. Thanks for the question, Luke. We do think it has helped us and will continue to help us, because of our focus on, as you said, maintaining equipment, training crews, and on safety as well. So we do think it’s going to help us. I think we’re conscious that sometimes when the E&Ps consolidate, one plus one doesn’t equal two, it equals 1.7. And so sometimes that could be a negative. But what we’re seeing right now and the conversations we’re having with the largest players, we certainly think it’s going to benefit us, that we think that we’ll get additional work and we think that it’ll start to shake itself out as the year progresses.

Luke Lemoine: Okay. And then on your share repurchases, Stuart, you kind of outlined what you did in 2023 as far as paying down debt. And then you bought back about 10% a share so far. I think with the remaining authorization, you have a little over 20% of your market cap that’s available. Could you just talk about and a lot of free cash flow coming this year, too. Could you just talk about how aggressive you would like to be with that buyback? I know you have the goal of returning at least 25% of free cash flow, but you exceeded that in 2023, and I’m kind of guessing you’ll probably exceed that this year as well.

Stuart Bodden: Again, thanks for the question, Luke. Certainly, we’re committed to returning at least 25% of cash flow, at a minimum, back to shareholders. I think what we saw in 2023, and I think we’ll take the same stance in 2024 was as the stock price came under pressure, we felt like it was a great buying opportunity. So our intention is to kind of take that same stance as we go forward. Again, I think that we do want to grow the company. We want to preserve capital to be able to do that. But we know that anything we do has to compete with our own shares. And what we saw was the value of our own shares was incredibly attractive with no integration risk. Again, I think going forward, you could expect us to take a pretty similar stance, that if we see an opportunity, we’ll get pretty aggressive, and the board is very supportive of that stance as well.

Luke Lemoine: Okay, thanks a lot.

Stuart Bodden: Thanks, Luke.

Operator: The next question comes from Don Crist of Johnson Rice. Please go ahead.

Don Crist: Good morning, guys. I wanted to ask a question on pricing. The per hour rate on the workover rigs and the per stage on the wireline really kind of surprised me this quarter. Is there anything there? Is it more bundling or just not chasing kind of unprofitable work and your average came up? Can you add any details there?

Stuart Bodden: It’s mainly the latter. It’s mainly not chasing unprofitable work. I think that’s the first part I highlight. And then I would say that there is some bundling, meaning more ancillary equipment going out with some of the rigs, which tends to increase kind of the revenue, the overall average revenue per hour.

Melissa Cougle: Yes. The other thing, Don, to probably call attention to is when you look at, I think Stuart’s comments apply really strongly to high spec rigs. One of the dynamics we had in wireline, although challenged as far as a quarter, there were a few jobs that were really productive jobs. So overall activity depressed, but the jobs we had were really productive jobs, which I think kind of drove that stage count pricing up. I think you’ll probably see that’s probably not going to stay there in the first quarter. We’ll see how the year shakes out as kind of frac crews kind of go back to work in the coming months, but I think that will – you’ll see that cool off here in the first quarter from a wireline pricing perspective, I think.

Don Crist: Okay. And just two quick modeling questions for me. CapEx this year, I’m assuming with kind of flat activity, CapEx will come down a little bit from last year.

Melissa Cougle: A little bit. We had kind of suggested last year we were putting a little bit of dollars behind the new customer contract. There’s still a few of those kind of falling through. So I think we think of it mostly as a flattish year as much as a pullback year, but sort of remains to be seen, I think, as we get into the year. Fair enough.

Don Crist: Yes. I’m assuming that the second and third quarters would be the highest growth quarters and highest EBITDA quarters with the first a little bit light and the fourth kind of in the middle. Is that the right way to think about it as well?

Melissa Cougle: That’s the way we’re seeing it.

Stuart Bodden: Yes, exactly.

Don Crist: Okay. I appreciate it. I’ll turn it back.

Stuart Bodden: All right, thanks, Don.

Melissa Cougle: Thank you.

Operator: The next question comes from Derek Podhaizer of Barclays. Please go ahead.

Derek Podhaizer: Hey, maybe just stick it on the wireline theme. Can you talk about maybe the interplay between the different services under that brand? I know you have the completions focus work, production focus work, and then the pump down work. I know there’s different margin profiles and did that affect some of the per stage pricing that we’re seeing, but just thinking about it more from those different verticals under wireline.