RPC, Inc. (NYSE:RES) Q4 2023 Earnings Call Transcript

RPC, Inc. (NYSE:RES) Q4 2023 Earnings Call Transcript January 25, 2024

RPC, Inc. beats earnings expectations. Reported EPS is $0.19, expectations were $0.18. RES isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and thank you for joining us for RPC Incorporated’s Fourth Quarter 2023 Conference Call. Today’s call will be hosted by Ben Palmer, President and CEO; and Mike Schmit, Chief Financial Officer. At this time, all participants are in a listen-only mode. Following the presentations, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to advise everyone that this conference call is being recorded. I’ll now turn the call over to Mr. Schmit.

Mike Schmit: 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-K and other public filings that outline those risks, all of which can be found on RPC’s website at www.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. 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.

Ben Palmer: Thank you, Mike and thank you for joining our call this morning. We closed out the year with strong sequential fourth quarter revenues and EBITDA increases, as expected, following a soft third quarter. And for the year, we delivered adjusted EBITDA of $374 million and free cash flow of $214 million. 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 fourth quarter, we started off strong, have felt the impact of falling oil prices later in the quarter. During our third quarter call, we noted that with all above [80] [ph], 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, we fell below 80 in early November and dipped below 70 in early December, has declined calls completion postponements, and more holiday downtime than originally anticipated. While the fourth quarter financial results did show a substantial improvement from a very soft third quarter, the December low prevented us from delivering even higher growth. Our pressure pumping activities increased sharply from the third quarter, but still below our expectations. Regarding pricing discipline, as expected, we were able to secure work at more attractive pricing in the fourth quarter, and certain opportunities we opted to forego during the third quarter.

As for our workforce, our 10 horizontal fleets plus our two vertical fleets remain staffed, but 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 remained solid despite a softer environment. Integration on all fronts has gone well, and we are excited about its future. Mike will now discuss the quarter’s financial results.

Mike Schmit: Thanks, Ben. I’ll start with a few quick financial highlights for the year and then go into some more detail about the fourth quarter. For the full year 2023, revenues were $1.6 billion, 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 million. We generated strong operating free cash flow in 2023. Operating cash flow was $395 million. And after a CapEx of $181 million, free cash flow was $214 million. Recall, we spent nearly $79 million to acquire the Spinnaker cementing business in early Q3. For the year, we spent $21 billion on share repurchases, of which, $19 million was through our buyback program.

We also paid $35 million in dividends. Thus, returning more than $50 million of capital to our shareholders. Our strong financial position of $223 million at year end, as well as our projected future cash generation, we’ll continue to support organic investments in our business, potential M&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. Now I’ll cover our fourth quarter results with sequential comparisons to the third quarter of 2023. Revenues increased 90% to $395 million, driven by a significant increase in 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 our segment. Technical Services represented 94% of our total fourth quarter revenues. While our Support Services segment revenues were down 14% and represented 6% of our total revenues in the quarter. The following is a breakdown of our fourth quarter revenues for our top five service lines. Pressure pumping was 47.2% of revenues; downhole tools, 23.3%; coiled tubing, 9.4%; cementing, 6.5%; and rental tools, 4.4%. Together these top five service lines accounted for 91% of our revenues. Cost of revenues, excluding depreciation and amortization during the fourth quarter grew to $279.4 million from $239.1 million or a 17% increase.

We did see some operating leverage in the quarter, particularly on fixed labor costs. SG&A expenses were $38.1 million, down from $42 million. The reduction in SG&A expenses was due to a variety of discretionary cost controls coupled with lower incentive compensation. Diluted EPS was $0.19 in the fourth quarter, up from $0.08 in the third quarter. There were no non-GAAP adjustments to those EPS figures. Adjusted EBITDA increased 53% to $79.5 million. With adjusted EBITDA margin, increasing 440 basis points to 20.1%. Now I’ll discuss our 2023 and expected 2024 capital spending. As mentioned, capital expenditures were $181 million for 2023, below our expected range of $200 million to $250 million. 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 million to $250 million. A key element of this plan is the delivery of a new Tier 4 DGB 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.

Ben Palmer: Thank you, Mike. So bottom line, we rebounded sharply from the third quarter air pocket. However, falling oil prices and customer indications of budget exhaustion late in the quarter curbed the magnitude of that bounce back. Built visibility is of course limited and January weather has been a challenge, but we’re getting signals from our customers for general near-term stability potential for growth as the year progresses. As Mike referenced our capital spending plans for 2024 include a new Tier 4 DGB fleet, which will replace a Tier 2 diesel fleet, thus, we won’t be adding pressure pumping capacity to the marketplace. Consistent with previous comments, we’re taking a patient and disciplined approach to upgrading our pressure pumping assets to more attractive dual-fuel, lower emission equipment.

With the addition of this Tier 4 DGB fleet, we will have three in total, plus two Tier 2 DGB fleets, and three Tier 4 diesel fleets. Additionally, we’re operating two 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 until their solutions we feel make economic sense for our business and customers. Lastly, with Spinnaker integration essentially complete, we’re looking for additional strategic acquisitions to strengthen our business. Well RPC currently offers a wide variety of services required both large and small E&Ps, we see opportunities to increase our scale and broaden our customer relationships. We are patient in 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 of 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. We’re especially proud that through tubing solutions, our downhole tools company has been recognized as a 2023 top workplace at Oklahoma. This prestigious accolade is a testament to our commitment fostering a vibrant and inclusive work environment. You’ll be able to read more about our values as well as other corporate initiatives we plan to issue RPC’s first 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 and long-term shareholder returns.

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

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Stephen Gengaro with Stifel. Please go ahead.

Stephen Gengaro: Thanks. Good morning, everybody.

Mike Schmit: Good morning.

Stephen Gengaro: 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 how you see that evolving as the year progresses?

Ben Palmer: Well, Stephen, all were staffed as we indicated, they all did some work during the quarter. But, it varies, 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 we have in the field. Right now, we’re confident with the way things are going in the first quarter 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.

Stephen Gengaro: Okay, thanks. And then and that actually leads into my other question, which was, on the Technical Services side, your margin doubled, right, sequentially on the operating income line. And despite it sounds like carrying costs and having maybe, more staff fleets that actually worked the whole quarter. But how does that play out into margin trajectory slow and or incremental margins in Technical Services as we go forward? I know it’s going to vary based on revenue, et cetera, but, is there any parameters you can give us to think about how the incremental margin performs given the costs that are in place?

Ben Palmer: Reasonable question. Obviously, the incrementals this quarter were tremendous, because of the large increase in revenue and that’s quite typical. And obviously, it depends on the amount of revenue and job mix, a lot of different things. But clearly, 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, perhaps 20%. First quarter, again, starting off with the way it is, I mean, fourth quarter is a reasonable base to say, [what’s] [ph] the first quarter and look like we don’t know exactly, but to start off all 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 the fourth quarter, it takes a little bit of time for it to crank back up. So we’ll have to deal with that.

Stephen Gengaro: Just to clarify, and thank you. The margin, the high-teens or 20s, that’s an absolute margin overtime or was that an incremental margin you’re referring to?

Ben Palmer: I was actually referring to incremental. Obviously it depends on the amount of revenue growth, so we’re not expecting anything outsized or unusual. So.

Stephen Gengaro: Got it, great. Thanks for the details.

Ben Palmer: Sure. Thank you, Steve.

Operator: Your next question comes from the line of Derek Podhaizer with Barclays. Please go ahead.

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

Ben Palmer: Good question. And pressure pumping obviously is our largest service line, but it’s by far the largest market right in the oilfield. So there’s a big market out there to go after. Many of our other service lines, downhole tools, coiled tubing, and 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 particular 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 a number of years. We think there is a great opportunity down there to bring some Spinnaker’s customer relationships and capabilities to bear down there.

So that’s an opportunity in cementing. Coiled tubing, we have a good market share. That’s good business. That’s something that we brought along in the last couple of years. And downhole tools, there might be some opportunities to expand there. So we’re looking to expand for the most part. Yeah, 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 will be the ones we would focus on primarily.

Derek Podhaizer: Got it, that’s helpful. And then just on the pumping. Is that more of an equipment comment? Like looking to bolster your equipment base or maybe services around the frac pump more those ancillary services like wireline, [pumping logistics] [ph], Power Solutions, things of that nature?

Ben Palmer: The ones I’ve referred to are not directly tied to pressure pumping. I think the commitment and the requirement to internally develop some of those capabilities can 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. It’s just not something that we’ve talked about it’s pretty small. And wireline is used for a lot of different things, not just for the completion of the well. 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 certainly open to other opportunities, our larger peers with some of the larger customer, just getting a lot of attention right now.