Rpc Inc Q3 FY2020 Earnings Call

Good morning and thank you for joining us for RPC Inc.'s Third Quarter 2020 Financial Earnings Conference Call. Today's call will be hosted by Rick Hubbell, President and CEO; and Ben Palmer, Chief Financial Officer. Also present is Jim Landers, Vice President of Corporate Services. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would now like to advise everyone that this call is being recorded. Jim will get us started by reading the forward-looking disclaimer.

Thank you and good morning. Before we begin our call today, I want to remind you that in order to talk about our company, we're going to mention a few things that are not historical facts. Some of the statements that we've made on this call could be forward-looking in nature and reflect a number of known and unknown risks. I'd like to refer you to our press release issued today along with our 2019 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. These non-GAAP measures are adjusted net loss, adjusted loss per share, adjusted operating loss, EBITDA, and adjusted EBITDA. We're using these non-GAAP measures today because they allow us to compare performance consistently over various periods without regard to non-recurring items or changes in capital structure. In addition, RPC is required to use EBITDA to report compliance with financial covenants under our revolving credit facility. Our press release issued today and our website contain reconciliations of these non-GAAP financial measures to operating loss, net loss, and loss per share, which are the nearest GAAP financial measures. Please review these disclosures if you're interested in seeing how they are calculated. If you've not received our press release for any reason, please visit our website at rpc.net for a copy. I will now turn the call over to our President and CEO, Rick Hubbell.

Thank you, Jim. This morning, we issued our earnings press release for RPC's third quarter of 2020. Before we begin discussing RPC's results, I would like to take a moment to recognize R. Randall Rollins, our Chairman, who passed away during the third quarter. For nearly half a century, Randall guided our company with a steady hand. He instilled a culture of capital discipline that has allowed RPC to successfully navigate the severe volatility experienced in our industry. He will be missed. RPC's third quarter progressed much as we had expected. U.S. oilfield activity improved from the historic lows recorded in the second quarter and RPC capitalized on this with equipment and crews that were in place and prepared to work. Our results improved due to higher revenue, increased utilization, and continued expense management. Our CFO, Ben Palmer, will discuss this and other financial results in more detail, after which I will provide some closing comments.

Thank you, Rick. The third quarter of 2020 revenues decreased to $116.6 million compared to $293.2 million in the third quarter of the prior year. Revenues decreased due to lower activity levels and pricing compared to the third quarter of the prior year. Operating loss for the third quarter was $31.8 million compared to an adjusted operating loss of $21 million in the third quarter of the prior year. EBITDA for the third quarter was negative $12.3 million compared to adjusted EBITDA of $22.8 million in the same period of the prior year. For the third quarter of 2020, RPC reported a $0.09 adjusted loss per share compared to a $0.08 adjusted loss per share in the third quarter of the prior year. Cost of revenues during the third quarter was $100.9 million or 86.5% of revenues compared to $225.2 million or 76.8% of revenues during the third quarter of 2019. Cost of revenues declined primarily due to decreases in expenses consistent with lower activity levels and RPC's cost reduction initiatives. Cost of revenues as a percentage of revenues increased due primarily to lower pricing for our services. Selling, general, and administrative expenses decreased to $32.4 million in the third quarter of 2020 compared to $42.6 million in the third quarter of the prior year. These expenses decreased due to lower employment costs, primarily the result of cost reduction initiatives during previous quarters, partially offset by $3.3 million of accelerated amortization of restricted stock related to the passing of our Chairman. Depreciation and amortization decreased to $18.7 million in the third quarter of 2020 compared to $44.7 million in the third quarter of the prior year. Depreciation and amortization decreased significantly primarily due to asset impairment charges recorded in previous quarters, which reduced the net book value of RPC's property, plant and equipment as well as lower capital expenditures. Our Technical Services segment revenues for the quarter decreased 60.2% compared to the same quarter in the prior year. Segment operating loss in the third quarter of 2020 was $24.9 million compared to $18.2 million in the third quarter of the prior year. This increased loss was due to significantly lower activity and pricing, partially offset by lower depreciation and amortization expenses. Support Services segment revenues for the quarter decreased 61%, compared to the same quarter in the prior year. Segment operating loss in the third quarter of 2020 was $3.8 million, compared to an operating profit of $1.6 million in the third quarter of the prior year. On a sequential basis, RPC's third quarter revenues increased 30.6% to $116.6 million from $89.3 million in the prior quarter. This was due to activity increases in several of our larger completion-related service lines. Cost of revenues during the third quarter of 2020 increased by $20.8 million, or 26%, due to expenses which increased with higher activity levels such as materials and supplies, and maintenance expenses. As a percentage of revenues, cost of revenues decreased from 89.6% in the second quarter of 2020 to 86.5% in the third quarter, due to more efficient labor utilization and the leverage of higher revenues over direct costs, which are relatively fixed during the short term. Selling, general and administrative expenses during the third quarter of 2020 increased 12.5% to $32.4 million from $28.8 million in the prior quarter, primarily due to the $3.3 million accelerated vesting of restricted stock. RPC incurred an operating loss of $31.8 million during the third quarter of 2020, compared to an adjusted operating loss of $35.9 million in the prior quarter. RPC's EBITDA was negative $12.3 million in the third quarter of 2020, compared to adjusted EBITDA of negative $17.8 million in the prior quarter. Our Technical Services segment revenues increased by $28.7 million, or 35.7%, to $109.3 million in the third quarter due to increased activity levels in several service lines. RPC's Technical Services segment incurred a $24.9 million operating loss in the current quarter, compared to an operating loss of $34.1 million in the prior quarter. Our Support Services segment revenues decreased by $1.5 million, or 16.6%, to $7.3 million in the third quarter. Operating loss was $3.8 million compared to an operating loss of $1.8 million in the prior quarter. During the third quarter, RPC operated as many as five horizontal pressure pumping fleets. At the end of the third quarter of 2020, RPC's pressure pumping capacity remained at approximately 728,000 hydraulic horsepower. Third quarter 2020 capital expenditures were $13.7 million and we currently estimate the full-year capital expenditures to be approximately $60 million to $70 million and comprised primarily of capitalized maintenance of our existing equipment as well as upgrades of selected pressure pumping equipment for dual fuel capability. And with that, I'll turn it back over to Rick for some closing remarks.

Thank you, Ben. As we mentioned during the last quarter's conference call, we believe that domestic oilfield activity reached its lowest point in the second quarter. The downturn we experienced in our industry was possibly the most severe we have ever faced. The fact that RPC has managed to navigate this challenging period so effectively is a reflection of our employees' dedication and hard work. Although there was a slight increase in activity during the third quarter, the modest improvements in the industry are not enough to yield sustainable financial returns. Much of the recent rise in activity across the industry has been due to operators completing previously drilled wells. For our service sector to remain healthy, we need to see consistent growth in the rig count, followed by increased pricing. The recent consolidations among exploration and production companies may pose challenges in this area. Thus, until we observe signs of significant demand growth for our services, we will continue to focus on managing expenses and limiting our capital investments. At the end of the third quarter, RPC had a cash balance of $145.6 million and remains debt-free. This financial stability enables us to continue operating under these tough conditions, make selective investments, and respond appropriately as the industry evolves. Our objective is to achieve positive free cash flow in 2021. Thank you for joining us for RPC's conference call this morning. We will now open the lines for your questions.

Thank you. Your first question this morning comes from Ian MacPherson from Simmons. Please, go ahead.

Good morning, gentlemen. I'd like to offer my condolences on the passing of Mr. Rollins, first of all, and thanks for the outlook here. Well, if things are not getting a lot easier in the near-term and we're seeing accelerating consolidation on your customer front, and I know that RPC has always been a very stick to your knitting, conservatively run company, but it seems like the entire imperative for consolidation and upstream is just coming toward us more quickly and I wonder if your calculus around industry structure and M&A has changed given the recent events with a tougher slog with the commodity outlook, as well as a faster consolidation spree among the E&P side? And how you're evaluating your capital allocation in light of those changes?

Well, Ian, this is Ben. Things are changing quickly, and as we mentioned, this could pose another challenge for the industry and for us. However, the actual outcome regarding the degree of consolidation is uncertain. We believe that further consolidation will occur within the industry, but we have not significantly altered our internal strategic priorities due to these developments. We are continuously monitoring the situation while focusing on our internal operations. We are fortunate to have a strong balance sheet and cash position, which gives us the patience to work towards achieving a positive free cash flow. Our aim, as stated, is to reach free cash flow positivity in 2021. While there may be additional challenges from these headwinds, we have various strategies to help us achieve this goal. If we don't see a significant improvement in the business, we did see a positive progression from the second to the third quarter, and the fourth quarter has started positively as well. Although we are starting from a low point, there are signs of improvement. We are committed to being free cash flow positive in 2021, and we have internal strategies we can implement to reach that target. Should the industry conditions not support this, we will continue to assess our immediate and long-term strategic objectives. We have maintained our independence for quite some time, but we will explore all options as the industry evolves.

Thanks, Ben. Following up on the fourth quarter outlook, we know that activity has improved significantly from the low point, and there may be continued upward momentum into the first half of Q4. However, can you confidently say that pricing for your services has bottomed out and stabilized? Is this still an uncertain area, or do you have a clear perspective that this aspect is at least slightly improving moving forward? Additionally, as we consider not only free cash flow but also EBITDA recovery from Q3 onwards, will we see any further benefits from the cost reductions implemented earlier that may not have been fully apparent in the third quarter financials?

That was a lot to cover. Regarding pricing, we think it has reached its lowest point and we do not plan to reduce it further. We intend to maintain our discipline in this area. We are optimistic that the industry will exhibit some discipline as well, especially with the service-related activities we have discussed. There is a lot of competition, and many are bidding for work, which is keeping pricing low. However, we have our own internal metrics that we follow closely to ensure we are not chasing pricing or contributions that do not meet our standards at this stage in the cycle. While we are performing better, the current pricing and returns are not adequate, and we hope to see some stabilization and possibly improvement as utilization rises. From a cost perspective, the third quarter has been relatively clean. Without taking further actions, our current run rate is stable, though we did have one instance with the accelerated vesting of restricted stock. If we do not see ongoing revenue growth and improvement in EBITDA, we have other options we can pursue. For now, the third quarter has been quite steady.

Good. That's very clear. Appreciate it, Ben. I'll pass it over.

Thanks, Ian.

Our next question comes from Chris Voie from Wells Fargo. Please go ahead.

Thanks, good morning.

Hey, Chris.

First question just on your strategy with cash preservation move. Obviously, there's a lot of new technologies coming out, some enable efficiency, some on the ESG front, which is popular with customers. How do you think about balancing the need to invest in your fleets to make them more attractive with your customer base compared to the need to conserve cash? And maybe in terms of timing, if you see an inflation of activity and other people winning in advance of you, is that a trigger to invest speculatively or just wonder if customers will – they probably won't give you the time to upgrade a fleet when they're bidding, right? So just thinking about your strategy of balancing those initiatives.

Chris, this is Jim. I'll take a stab at some of that. As we mentioned in our prepared remarks, we are upgrading some of our equipment to – our pressure pumping equipment to dual fuel capability. So we are doing that and the equipment is working, so it's getting some good customer reception. We also have some Tier 4 equipment, which has been working fairly steadily. So in terms of just equipment standards, those changes are things we're implementing and we think they're beneficial. On the technology front, we are doing some sort of homegrown initiatives to reduce non-productive time – to track non-productive time I should say, to reduce idle time, increase fuel efficiency and thereby decrease emissions. So we have talked to our customers about that and made some statements about what we're doing there. So that's part of it. We are not in a position right now to invest speculatively. The pricing and financial returns in today's oilfield services market do not allow you to make speculative investments hoping that customers will use you and pay you something extra for the investment that you've made. So that's the unfortunate position we're in. We do have the cash to do it, as we've discussed, we have – we're not focused on some things that some of our peers are having to focus on, we can take a little time and look at things. But we are governed by this financial return metric that has to balance that out.

Okay, thanks, that's helpful. And for my second question, I think you said you had as many as five fleets operating in the third quarter. I'm curious if you can give the average number of fleets in the third quarter? And then, how many you have now and what you expect in the fourth quarter, if possible?

The average was probably 4.5, but there is no such thing as half of fleets so that's a difficult number. And in the fourth quarter, it's hard to say, let's call it five at this point from an effective point of view – effective utilization point of view.

Great, thank you.

Thanks, Chris.

Our next question comes from Stephen Gengaro from Stifel. Please go ahead.

Thanks, and good morning, gentlemen.

Good morning.

I guess two things to start with. Jim, can you give us the breakdown of the product lines?

Sure, Stephen, absolutely. So the numbers I'm about to quote are percentages of consolidated revenues that our largest service lines of RPC generated for the third quarter – third quarter only. So the largest was pressure pumping at 37.0%, the second largest was Thru Tubing Solutions at 30.1%, number three is coiled tubing and that was 10.6% of consolidated revenues. Then comes nitrogen, which was 7.1% of consolidated revenues, then our rental tool business, which is in our Support segment, that was 3.2% of revenues.

Great, thank you. And then as a follow-up to another question, when we think about the incremental margin performance in the third quarter and I'm thinking on the Technical Services side, you got a little bit above 30% coming off of a fairly low base. Any guidance on how to think about that number going forward here given the cost cut has been put in place in the current market conditions?

This is Ben. It's a good question and I said earlier that I do want to confirm, the SG&A number was pretty clean. There were a few items that were operational in nature that we would not say were one-time, but there were a few charges that we had that did impact – negatively impact the reported EBITDA. So I guess overall, I think our EBITDA – incremental EBITDA margin was I think in the low to mid 20% range. Traditionally, we've experienced numbers that are closer to 40-plus percent and I think with some of the adjustments we're referring to it was closer to that 40%. So I would say in this environment coming off a low base that that – all things being equal, that it should be something closer to 40-plus percent incremental margins being generated.

Thank you, that’s helpful. Just one final question. When you reflect on your disciplined approach and your unwillingness to pursue business that doesn’t meet your return thresholds as activity improves, has that ever affected your customer relationships? I doubt it has, but I’m curious about how those discussions unfold as activity increases, especially since you might be hesitant to engage in business at levels where others might choose to. Has that impacted you competitively in the past?

Stephen, this is Jim. I'm trying to grasp your question and respond effectively. I believe you may be referring to times when activity reaches a level that balances supply and demand. In those instances, discussions with customers shift; we can't operate on their timeline, but rather on our own availability, which can eventually lead to price improvements. However, we're currently not at that point. When activity increases, the focus shifts from the customer's timeline to ours, and the market ultimately determines pricing.

I think this situation is different from the past. Previously, when activity increased after a downturn, the common approach was to take on as much work as possible at current pricing, even if it wasn't entirely adequate. However, today the circumstances require us to be more selective. We might need to have conversations with some customers to inform them that we have better opportunities elsewhere and that their pricing is not adequate compared to what we could potentially receive from other clients. Even though we have more equipment capacity, we are hesitant to commit that capacity without needing more personnel to maintain relationships that might not be worthwhile. We anticipate having tough discussions with customers to assert our need for better pricing or increased activity to continue our partnerships. In the past, these conversations were uncommon, but they may become necessary now as we work to meet the minimum thresholds we’ve set while expanding our equipment in the market.

Great. That's helpful color. And clearly your balance sheet allows you to be careful, so that's positive. So thank you for the color.

Yes, thanks.

Thank you, Stephen.

Our next question comes from Jacob Lundberg from Credit Suisse. Please go ahead.

Hey, good morning, guys. Thanks for taking the questions.

Hey, Jacob.

Hey, Jim. I wanted to revisit our conversation about dual fuel. Can you share your thoughts on the current bidding activity and what you're hearing from customers regarding the need for or requirement of dual fuel or electric fleets? Also, have you come across any discussions about multi-year contracts for the construction of a new fleet?

We are not currently having discussions with customers about dual fuel or electric fleets, and customers are not expressing interest in those discussions right now. Generally, there is a preference for ESG-friendly equipment to be available for work. As mentioned in our earlier comments, we are implementing dual fuel conversion with part of our fleet. Even though we are not converting our entire fleet, we can utilize some of our Tier 4 and dual fuel capabilities to meet our customers' needs. This approach allows us to allocate desirable equipment among our fleets, which often meets the minimum requirements that customers are looking for.

Okay. Thanks. And then I guess relatedly, so you brought up the midpoint of your CapEx guide by about $10 million and you've been talking about some dual fuel upgrades, presumably that incremental dual fuel upgrades, because you were talking about them last quarter as well, is what kind of drove that increase. Correct me if I'm wrong, but if that's the case, could you just kind of talk about some of the motivating factors behind that decision? I'd be interested if you're getting any sort of assurances of duration of work or anything like that or if these are upgrades simply to make the equipment more competitive in the market?

Yes, some of the additional capital expenditure is related to the conversion to dual fuel. While it's not a significant amount, it is a contributing factor. This topic appears in almost every request for proposal and is important, but due to current supply and demand in the market, it's not resulting in guarantees of work or multi-year contracts. Additionally, we had the chance to purchase some equipment opportunistically and are utilizing it in a basin that we believe holds potential, specifically in our snubbing service line rather than in pressure pumping.

All right. Very helpful. Thanks, guys. Appreciate it.

Thank you.

Thanks, Jake.

Our next question comes from Connor Lynagh from Morgan Stanley. Please go ahead.

Yeah, thanks. Morning.

Morning, Connor.

I appreciate that there's a lot of uncertainty out there right now, so maybe you could just discuss, sort of, the puts and takes to this question, but just looking for an early look at how you're thinking about 2021, it seems like from some of the larger companies out there, there's some hopes around a second-half recovery but it sort of depends who you ask, I guess, I would put it that way. So what, sort of, customer sentiment right now do you feel there is some follow through from the activity recovery that we're seeing right now?

Connor, this is Ben. That's a great question. As you mentioned, there's a lot of uncertainty, but I am hopeful that we will see some progress and improved activity in 2021. It appears that we won't face the same level of slowdown in the fourth quarter as we have in the previous three years, which is certainly positive. I'm optimistic that this may help 2021 start off a bit stronger than previous years following a significant downturn in the fourth quarter. Ideally, we might experience some nice growth in the early part of next year. However, regarding a clear uptick in activity, we are not currently counting on that. We aren't planning for it, investing for it, or hiring for it; we are adopting a wait-and-see approach instead of anticipating an improvement. I would say that given the current low levels of industry activity, I am hopeful for some improvement next year, but we are not expecting a rapid recovery.

Yeah, understood. That's helpful. I guess, sort of, pivoting here, we talk a lot about consolidation in pressure pumping and probably rightly so since it's so fragmented, but are there opportunities to consolidate in some of the non-pressure pumping product lines? Are there maybe some assets available out there on the cheap that you don't need to hire a large number of people to acquire, are there any things that we should be monitoring on that side of things?

Good question. We have several ideas in mind, but nothing particularly urgent or worth mentioning publicly regarding potential opportunities. Jim referenced the capital expenditure we made, where we were able to acquire something affordably that we expect will positively impact us in the coming months. Beyond that, visibility is challenging due to the numerous mergers occurring, many of which seem more like strategic moves than efforts to enhance the portfolio. However, we have been presented with various potential opportunities which we will continue to evaluate and pursue. Regarding consolidation in pressure pumping, it does seem strategically beneficial at first glance, and there could be advantages to having more consolidation, although we're uncertain if we will be involved. Nevertheless, having fewer competitors and pooling resources could help address some challenges in pressure pumping, and I share that perspective.

All right. Thanks very much. I'll turn it back.

Okay. Thanks.

Our next question comes from Taylor Zurcher from Tudor, Pickering, Holt. Please go ahead.

Hey, good morning, and thank you.

Hey, Taylor.

As we approach Q4, there is clearly some uncertainty regarding how the latter half will unfold due to year-end seasonality. At the same time, Jim, it appears you anticipate that the fleet count will increase by about 10% in Support Services, and the drilling rig count is showing an increase of over 10% sequentially, which should contribute to revenue growth in that segment. Given all this, do you believe that achieving a 10% revenue growth target for Q4 is realistic based on the visibility you have now?

Taylor, yes. Things improved during the third quarter and we see fourth quarter's revenue stronger than third quarter's. So, we definitely do. We actually see based on what our input from our field operations that the holiday impact this year will be less pronounced than in previous years, but let's be honest, we've been disappointed each of the last three years. So that enthusiasm is a little bit tempered but even with that caveat in mind fourth quarter will be stronger to third.

Understood. You mentioned a target for maintaining positive free cash flow for 2021, and we can create our own EBITDA estimate for that year. However, in a more active environment, I assume you'll need to invest in cash and working capital. Regarding your target for positive free cash flow in 2021, how do you view working capital? Additionally, could you provide some guidelines on CapEx for 2021?

That's a reasonable question. Let me clarify a few points. I would say that, without another downturn or a severe slowdown, we'll be free cash flow positive. However, if we experience a stronger than expected upturn, achieving that goal could be more challenging due to working capital considerations. But that would be a nice problem to have. Essentially, in a sustained slow to decent upturn in the business, we intend to manage our operations to ensure we remain free cash flow positive. If there's a significant increase in activity, we will still be very selective with our capital expenditures for the same reasons. If conditions improve more than anticipated, we may face working capital cash needs along with greater opportunities for capital expenditures. Therefore, it might be harder to commit to being free cash flow positive within a single time period in 2021, but we will certainly position ourselves to achieve free cash flow positivity in the intermediate term. We are clearly focused on that goal and will make the necessary adjustments to ensure it happens. I hope that answers your question.

Yeah, that helps. Just to tie a bow on it, any thoughts on CapEx for 2021, are there any lumpy…

Quite well.

…in the 2020 budget that won't flow through?

Not anything significant there. It's going to be selective and opportunistic while maintaining our capitalized equipment. So without a bounce back, it's likely to be similar or perhaps slightly lower than 2020.

Understood. Thanks for the answer.

Sure.

Our next question comes from Blake Gendron from Wolfe Research. Please go ahead.

Hey, thanks. Good morning. Just one question for me on Thru Tubing. It's traditionally been a really nice business, really specialized and differentiated. The degree to which it's underperformed here over the last quarter to and even through the pandemic probably driven by the fact that the rig count has been weaker than the completion count. And it's also a business that specifically for you guys been leveraged to the Mid-Con region, which has been particularly weak. So my question here is, the rig count's ticking up, do you expect Thru Tubing to respond in kind? And if not, would you attribute the weakness to specific basin weakness in the Mid-Conference, or is there something structural going on where in the shale basins that are active, wells are just so cookie cutter that things like Thru Tubing and fishing are just not as prevalent? Thanks.

Yeah. Blake, this is Jim. Your answer was actually embedded in the question, so thanks for that. Thru Tubing Solutions has an outsized exposure to Oklahoma and that rig count and that activity in that state and those areas has been lower. There is nothing that structurally changed Thru Tubing Solutions business or customer reception. They actually had some strength in one of their specialty product lines in the third quarter that was in another market area, outside of Oklahoma. So that's where they're going right now. But we are looking for the rig count and completions in the Oklahoma area to improve, perhaps because of natural gas strength, but there are no huge shale plays with that sort of thing going on. So it's the exposure to Oklahoma and there are no fundamental changes in Thru Tubing's business.

And I'll add, this is Ben, that with our balance sheet, we're able to continue to invest in new technology in that particular area and there are some bright spots there that we think could be incremental contributor in the next few quarters as well. So that's positive and we're lucky, again, that we can continue to make those R&D investments in that area.

Understood. And then, just in terms of reconfiguring the business spend, if Oklahoma remains weak, would it take a whole lot of investment for you to move Technical Services or Thru Tubing rather and some of the auxiliary Technical Service lines to other basins? Are you serving the Haynesville, are you serving the Eagle Ford? Would it be a matter of maybe displacing competitors in those basins? How do you think about the competitive landscape beyond Oklahoma for everything not frac?

Blake, it's Jim again. Thru Tubing operates in other basins as well, including the Permian and the Northeast. Unlike some businesses, providing Thru Tubing's service in different areas is straightforward since it doesn't rely on heavy equipment. Logistically, it’s not difficult. Thru Tubing Solutions is a market share leader, although there are some small specialized competitors. It's a competitive industry, and entering a new market always presents challenges. However, I want to highlight that Thru Tubing Solutions operates in all major U.S. basins, and it has significant exposure to Oklahoma, where the business was established 20 years ago.

Understood. Thanks for the time guys.

All right, Blake. Thanks.

Our next question comes from John Daniel from Daniel Energy Partners. Please go ahead.

Hey, guys. Thanks for squeezing me in.

Sure.

You guys talked about in the Q&A how more customers are asking about dual fuel and etcetera. When do you expect they're going to be willing to pay more for those solutions?

John, this is Ben. When the market tightens enough regarding availability or demand, and I'm not sure when that will happen, we will continue to emphasize internally, and I expect it has been and will continue to be important for our customers to understand that we need to improve over time. The returns we are seeing today need to significantly improve to achieve sustainable returns. We've mentioned before that the current situation cannot last indefinitely; however, we are hopeful that a shakeout among competitors might occur, and that consolidation could expedite reaching that point for the industry. It's a valid question, and we'll keep stressing internally and with our customers that while we recognize we can't change the market dynamics and we are not the market leaders, we will not pursue every activity; instead, we need to focus on achieving minimum contribution margins.

Right.

We can't just chase the activity and we're hopeful that other people will follow that lead and maybe we'll get there sooner than we might otherwise.

I’d like to follow up on that. Many of us who cover the sector discuss the division within the U.S. frac fleet as companies upgrade their equipment, whether through pump designs or electrification. I’ve noticed that while customers are requesting these upgrades, they are hesitant to pay for them. Is it possible that the industry will move forward with companies like yours, which have stronger finances, completing these upgrades merely to maintain market share and stay afloat, rather than achieving a significant return on investment? It seems like you’re taking a risk by investing in order to survive, while others may not be able to make those investments.

John, this is Jim. It does. I mean, a very basic way of looking at things like dual fuel is, it does not increase pricing, but it allows you to get the job that you wouldn't otherwise get. So there is a binary outcome. So you figure out your financial returns and then reduce those a little bit by the additional capital investment to convert to dual fuel and it's probably as simple as that, until the industry returns from still historic lows.

Sure. Just one last question from me. I think I heard you mention that, regarding your fleet, you do have some dual fuel units. However, it's not that the entire fleet runs on dual fuel, just a few of those units. Is that correct?

We are considering that as an option, and there are customers who are receptive to it.

I'm just wondering, if they are open to that because they get a few units and then they, if you will, they check the box. Right. So they can go to their own investor base and say, yeah, we're using dual fuel even though, in some regards, cheating and since that it's only a couple of units within a fleet. Just your thoughts.

You need to ask them. We don't think accuse our customers of cheating.

And I mean everybody on the call knows of this, but any time you can use field gas, produce natural gas to power a natural gas fleet, you get a double benefit. You're reducing greenhouse gas emissions and flaring from the actual well site, as well as lower emissions on the equipment, so there is a double benefit, you don't want to discount that, but other dynamics are in play too.

Fair enough. Thanks, guys.

Thanks, John.

Thanks, John.

Our next question comes from Chris Voie from Wells Fargo. Please go ahead.

Hi, thanks for letting me back in the queue. Just a little bit more color on pricing maybe. I think you mentioned that it had bottomed or you think it's bottomed, but is 3Q pricing on average lower than the second quarter? And then kind of related to that, are there customers out there trying to get term now that prices are so low, is there much of that dynamic? Just curious. Thank you.

So, this is Jim again. If you really squint at the numbers in third quarter, it looks like pricing kind of improved by a 100 basis points or so, but some of that is just maybe customer mix or it may be job mix that has different kinds of propping in it. So we do believe that it's bottomed, it did not decline in third quarter. We don't see it improving anytime. And there have been several questions in this conversation about term contracts, if they are being discussed in the oilfield, we are not privy to those discussions, we do not believe any term contracts being discussed or offered or accepted right now, we really don't.

Okay, that's helpful. Thanks. And then, just curious on the cost to reactivate fleets, I guess, maybe we haven't seen a response as fleets have been reactivated this time compared to the last cycle. I guess the last cycle you had kind of 2015 and then the first half of '16 grinding down equipment. So when fleets had to go back to market, they were in worse shape and you had to reinvest more. Curious if you can talk about the cost to reactivate fleets going forward and compared to last cycle? Thank you.

For us, the cost will be quite minimal. While I can't comment on the rest of the industry, we believe we maintain our equipment as well as anyone else. Therefore, while the cost to us will be low, I can't say it's non-existent because there are always some expenses. However, I can't speak for others, though I hope it's quite costly for them to reactivate their fleets.

Yeah. And I was also going to say, this time around hiring skilled personnel is a part of the start up costs or the reactivation costs that is a lot lower because you're hiring people who have experience unlike 2015, 2016, those people have not gone to other parts of the country yet or other industries yet and they were not laid off all that long ago. So the personnel component reactivating fleet is lower now than it would have been in the last cycle.

Okay, that's helpful. Thanks, guys.

Thank you.

We have no further questions at this time. I would like to turn it back to Jim Landers for final comments.

Thank you, Carol, and thanks to everybody who listened in and everybody who called to ask. Hope everybody has a good day and we will talk to everyone soon. Thanks.

Well, ladies and gentlemen, this does conclude today's conference call. As a reminder the conference call will be replayed on www.rpc.net within two hours. Thank you again for participating. And you may now disconnect.