Rpc Inc Q3 FY2021 Earnings Call

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 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 2020 10-K and other public filings that outline those risks, all of which can be found on RPC's website at rpc.net. In today's earnings release and conference call, we refer to several non-GAAP measures of operating performance. These non-GAAP measures are adjusted net loss, adjusted loss per share, 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 nonrecurring items. In addition, RPC is required to use EBITDA to report compliance with financial covenants under our credit facility. Our press release and our website contain reconciliations of these non-GAAP financial measures to net loss, loss per share and net income, 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 again at rpc.net for a copy. I will now turn the call over to our President and CEO, Rick Hubbell.

Thanks, Jim. This morning, we issued our earnings press release for RPC's third quarter of 2021. During the third quarter of 2021, oilfield drilling and completion increased as exploration and production companies responded to higher commodity prices. RPC was ready to meet increased demand with equipment and crews. Our revenues increased and RPC generated quarterly net income for the first time in more than two years. As the quarter progressed, commodity prices continued to increase and near-term industry forecasts predicted supply-demand dynamics favorable to our industry. We began the fourth quarter of 2021 with a new state-of-the-art pressure pumping fleet and net pricing traction in most of our service lines. Offset to these favorable dynamics includes supply chain constraints and increasing cost pressures, which we will continue to manage as we move forward in this industry up cycle. 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. For the third quarter of 2021, revenues increased to $225.3 million compared to $116.6 million in the third quarter of the prior year. Revenues increased due primarily to higher activity levels and improved pricing compared to the third quarter of the prior year. Operating profit for the third quarter was $8 million compared to an operating loss of $31.8 million in the same quarter of the prior year. EBITDA for the third quarter was $26.5 million, compared to EBITDA of negative $12.3 million in the same quarter of the prior year. Our diluted earnings per share for the third quarter were $0.02 compared to an $0.08 loss per share in the same quarter of the prior year. Cost of revenues during the third quarter of 2021 was $170.6 million or 75.7% of revenues compared to $100.9 million or 86.5% of revenues during the third quarter of 2020. Cost of revenues increased primarily due to increases in expenses consistent with higher activity levels, such as materials and supplies expense, maintenance and repairs costs and fuel costs. Cost of revenues as a percentage of revenues decreased primarily due to the leverage of higher revenues over direct employment costs that increased at a lower rate than the increase in revenues. During the quarter, RPC recorded a CARES Act tax credit that was largely offset by the resolution of a long-term contractual dispute with a vendor. Selling, general and administrative expenses were $31.4 million in the third quarter of 2021 compared to $32.4 million in the third quarter of the prior year. Selling, general and administrative expenses decreased from 27.8% of revenues in the third quarter of last year to 14% of revenues in the third quarter of 2021 due to the leverage of higher revenues over costs that are relatively fixed during the quarter. Depreciation was $18.1 million in the third quarter of '21 compared to $18.7 million in the same quarter of the prior year. Our Technical Services segment revenues for the third quarter were $211.8 million compared to $109.3 million in the same quarter last year due to significantly higher activity and some pricing improvement. Segment operating profit in the third quarter of 2021 was $8.3 million compared to a $24.9 million operating loss in the third quarter of the prior year. Our Support Services segment revenues for the third quarter of this year were $13.5 million compared to $7.3 million in the same quarter last year. Segment operating loss in the third quarter was $55,000 compared to an operating loss of $3.8 million in the third quarter of the prior year. On a sequential basis, RPC's third quarter revenues increased 19.4% to $225.3 million from $188.8 million in the prior quarter. This was due to activity increases in all of our service lines as well as slight net pricing improvement in several of our larger service lines. Cost of revenues during the third quarter of 2021 increased 17% to $170.6 million compared to $145.8 million in the prior quarter. As a percentage of revenues, cost of revenues decreased slightly from 77.2% in the second quarter of this year to 75.7% in the third quarter of 2021, reflecting some pricing improvement and operating expense leverage. Selling, general and administrative expenses during the third quarter of 2021 increased 6.9% to $31.4 million from $29.4 million in the prior quarter, resulting in positive operating expense leverage. As a result of these improvements, operating profit during the third quarter of '21 was $8 million, compared to an operating loss of $1.2 million in the prior quarter. RPC's EBITDA was $26.5 million in the third quarter, compared to EBITDA of $17.3 million in the prior quarter. Our Technical Services segment revenues increased by $35.7 million or 20.3% in the third quarter due to increased activity levels and some pricing improvement in the segment's service lines. RPC's Technical Services segment generated an $8.3 million operating profit in the current quarter compared to an operating profit of $1.4 million in the prior quarter. Our Support Services segment revenues increased by 6.6% to $13.5 million in the third quarter. Operating loss was $55,000 in the current quarter compared to an operating loss of $2.4 million in the prior quarter. During the third quarter, RPC operated 7 horizontal pressure pumping fleets. Also, during the quarter, we made the strategic decision to add a Tier 4 dual fuel fleet. Heavily influencing this decision was an opportunity to partner with Caterpillar in the testing of new controls technology aimed at optimizing fuel burn, minimizing emissions and lowering maintenance costs. In addition, we are working the fleet for a large exploration and production company on a dedicated contract. This equipment was added late in the third quarter and is reflected as a finance lease on our balance sheet with a balloon payment due at the end of 12 months. Third quarter 2021 capital expenditures were $19 million, excluding the equipment acquired under a finance lease in the third quarter. We currently estimate full year 2021 capital expenditures, excluding lease financed equipment, to be approximately $65 million, comprised primarily of capitalized maintenance for existing equipment and selected growth opportunities. With that, I'll now turn it back over to Rick for some closing remarks.

Thank you, Ben. It became clear this quarter that many exploration and production companies, including those among our customer base who are private operators, are beginning to respond with conviction to higher commodity prices and forecasts of global energy shortages. Our calendars are filling up and we are optimistic about the fourth quarter. In spite of the traditional holiday-related slowdown at this time of the year, we are also looking forward to a stronger 2022. As we operate in this improving environment, we are closely watching emerging challenges in our business. Chemicals, components, and labor shortages, together with cost increases and third-party logistics are all developing as operational issues. In addition, we are also monitoring reports of shortages of tubular goods and other items used by our customers, which could cause delays in the need for our services. The continued volatile environment in which we operate makes forecasting difficult. But I'm pleased that our financial strength has allowed us to remain competitive as we begin to realize the benefits of higher commodity prices and an improving operating environment. At the end of the third quarter, RPC's cash balance was approximately $81 million and we remain debt-free. I'd like to thank you for joining us for this conference call this morning. And at this time, we'll open up the lines for your questions.

Your first question comes from the line of Stephen Gengaro with Stifel.

I have two questions. First, you mentioned the frac fleet at seven fleets and talked about improvements in technical services pricing and activity. Can you share what you are specifically observing on the pressure pumping side and how you expect it to impact 2022?

Stephen, this is Ben. We are beginning to see some improvement. And we're now in the bidding season that will very much impact next year. So we're trying to position ourselves. We're trying to do what we can to increase pricing wherever we can and where necessary. We're certainly having the discussions with our customers about the ability to pay for the type of equipment that they desire. So we're watching that very closely, and we are hopeful that we'll experience some of that pricing improvement next year, as well as some continued strong activity levels. So we think it's headed in the right direction.

And then as you talked about the Tier 4 DGB fleet. And we've been hearing for a while there's sort of at least a utilization premium, if not a price premium for these assets. But we've also started to hear pricing moving for the traditional diesel fleets as well. Are you seeing that same trend?

Yes. I would say so. Yes, yes. There is some bifurcation in terms of our customers, in terms of their degree of desire for the 'ESG friendly' equipment. So we expect to continue to have a blend of the older Tier 2 and the newer equipment. We think there's going to be a market for both. So it will take some time for that to evolve, but we're doing everything we can to get as much equipment at acceptable pricing as possible.

And just one final quick one. Can you give us the product line breakdown?

Stephen, this is Jim. Yes, absolutely. Happy to. So the percentages I'm going to give are the percentage of consolidated RPC revenue that these major service lines comprised. So the largest was pressure pumping, which was 42.8% of consolidated RPC revenue for the quarter. The second largest was our downhole tools service business ThruTubing Solutions and that was 27.5% of revenue. Number 3 is coiled tubing at 11.9% of revenue. After that, we have nitrogen, which was 4.0% of revenue. Right behind that is rental tools, which is in our Support Services segment, that was 3.8% of revenue. And thanks for the question.

Your next question comes from the line of Waqar Syed with ATB Capital Markets.

Just want to know that this Tier 4 fleet, is that going to be the eighth active fleet in Q4?

We expect to have 8 in Q4. Yes.

Okay. And then beyond that, as you look into next year, first quarter, are you planning on adding additional Tier 4 fleets?

Not. There are no plans at this point in time. We don't have anything else on order would I guess, be the answer to that question.

Okay. And if you were to order any equipment, what would be the lead time to get deliveries if you've explored that?

I don't have a specific answer to that. Certainly, a reasonable question. We understand with supply chain and everything else that and anecdotes that the timeframe is lengthening. So to be honest, we don't know.

I have one last question. Regarding market dynamics, we hear about pricing improvements, but we also notice the industry is adding new capacity. As you engage in bids, are you still encountering a significant number of companies competing for individual jobs? Or are you observing fewer companies now, making the situation tighter?

Waqar, this is Jim. There are fewer people bidding, but if you're talking about pressure pumping, there is still plenty of idle equipment out there. So pricing is improving. Activity levels are good, but the pricing and competitive nature are still very competitive.

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

I have a question about the Tier 4 financing update regarding the DGB fleet. It seems like a relatively new concept. Do you believe it will gain traction? Also, could you provide details about the balloon payment when it becomes due?

John, you were going in and out a little bit. Can you repeat that?

Yes, sorry. The question was about the leasing arrangement for the new fleet. Do you think this will be a new concept for other RPCs or the industry? Can you also address what the balloon payment will be?

If you examine the balance sheet and identify the liability, the balloon payment is projected to be approximately $17 million after a year. I can't comment on whether this is a trend in the industry, but I don't believe it is. Let me briefly discuss our relationship with Caterpillar and our ongoing collaboration. Caterpillar manufactured this equipment specifically for their field follow project group. It's my clear understanding that they do not intend to produce similar equipment in the future. This was done to test new technology aimed at maximizing fuel efficiency, controlling emissions, and managing maintenance costs. We are currently in the testing phase with them. They have some power systems, control technology, and software they are assessing, which they have previously applied in other sectors, particularly mining. Thus, they are using our setup as a test case, and we appreciate being part of this process. Caterpillar is a top-tier company committed to the oil and gas sector, and we are happy to collaborate with them. We believe this partnership will give us a competitive edge. Both we and they anticipate that the technology will perform exceptionally well, and we will gain valuable experience from it, which will benefit us in the future if we choose to implement it. We are eager to be working with them, and it is providing significant advantages. As mentioned, they are an exceptionally professional, world-class organization, and we have gained a great deal from this experience. We believe it is also benefiting our internal digital projects. This partnership is just beginning, and our E&P customers are aware of our testing and remain enthusiastic about the advancements and the opportunities ahead, which is very encouraging for us.

On the pricing front, as you negotiate increases, are these going into effect immediately, or is it a concept for January 1st where prices go up as you start the new year?

John, this is Jim. It's a little bit of both. We're in the spot market. People who know us know. And so we are gaining some price increases with the next completion. This is also a contract renewal season, and we're focusing on pricing for existing MSAs but pricing for 2022. So there will be some more of this, we hope, on January 1st.

You do have a follow-up question from the line of Stephen Gengaro with Stifel.

So just curious, so we've seen, obviously, when revenue is moving around a lot, your incremental margins can be kind of funky from quarter-to-quarter. And it seems like you're getting better overhead absorption now and things are starting to normalize a bit. Can you give us a sense of, if we thought about 2022 versus '21, what types of incremental margins you think would be a reasonable target to be thinking about?

Stephen, this is Jim. So our incrementals second, third quarter were respectable, but not characteristic of RPC in a typical up cycle. So based on $85 oil and $6 Henry Hub or whatever it is today and the way 2022 looks, we would look for sequentials to be at least approaching what they were in traditional up cycles in the past. So that would be higher than today, but we still have these cost increases we're dealing with. I want to make it clear that we pass those cost increases along, but that always takes some management, which again, we're doing. But that causes us to be a little less optimistic about hitting 40% or 45% sequential growth in the coming year.

Okay, great. As a follow-up, when considering your capital allocation and the pressure pumping business, how do you evaluate the investment in a new asset, such as a Tier 4 DGB? What kinds of contract commitments or returns do you consider to justify that investment?

This is Ben. It's a very good question. Is there a clear pathway to achieving appropriate returns or a defined contractual relationship that ensures adequate returns today? No, there isn't, but we and the industry must move in that direction sooner rather than later. It's somewhat like taking a chance or doing what we feel we need to do. We're developing a roadmap that outlines what we need to achieve in the next two to three years to continue updating our equipment. This is something we've been actively working on, aiming to identify decision points with specific financial returns in mind before proceeding. We all recognize the long lead times for equipment and the uncertainty regarding future business conditions, including pricing. Therefore, we must make judgments and take risks. Adding this new Tier 4 DGB involves risk, but there are considerable benefits to partnering with Caterpillar, which significantly influenced our commitment and aligns with our goals moving forward. Additionally, the finance lease arrangement allowed us to defer a significant portion of the payment for the equipment, which was advantageous. We're focused on developing that roadmap and establishing our targets and returns. Clearly, we are refining what overall returns we need and aim to achieve over time, considering what we believe is possible in the industry. We'll build our roadmap around this and execute as we progress.

Your next question comes from Veb Vaishnav with Coker and Palmer.

Thank you for having me. I have two quick questions. First, regarding the Tier 4 DGB, the new build, will it be utilized as one fleet or will it be divided into several fleets?

Definitely in the first year with this partnership with Caterpillar, it will be maintained together.

Okay. That’s helpful. And as we think about improvement in pricing and as we think about that versus seasonality or holidays in 4Q, is it fair to think in terms of EBITDA per fleet, it could be modestly higher because of the Tier 4 DGB? But outside that, how should I think about EBITDA per fleet increasing from 3Q to 4Q?

That particular question is difficult to answer. Let's speak to Q4 though. Obviously, there's always seasonality in our business in Q4. Weather is not predictable, but there are holidays and that sort of thing. We believe, based on looking at our calendars right now that we are not going to experience the same level of seasonality this Q4 that we typically do, plus we're in an improving environment. So EBITDA per fleet or RPC's results in general, at this point, look kind of flattish sequentially. Also, it bears mentioning that Thanksgiving is on Thursday, but Christmas and New Year's come on a Saturday. So that's modestly helpful as well. So we just don't think we're going to experience the same level of seasonality that we normally do. EBITDA per fleet is not something that we talk about because everybody calculates it differently.

Fair enough. Just one last quick question. Considering upgrades, while you mentioned that another new build isn't in the plan, how are you approaching additional upgrades to Tier 4 DGB?

That's part of our roadmap. We are currently evaluating the options available for our existing equipment and the potential returns as we move forward. It's a relevant question. We have some opportunities and have upgraded some of our Tier 2 equipment, but we haven't yet transitioned any Tier 2 equipment to Tier 4. However, that remains a possibility and is something we are assessing for inclusion in our roadmap.

Thank you, and thanks to everybody who called in and for the questions. We enjoyed the discussion, and we look forward to talking to everyone soon. Have a good day.

Thank you, and thank you for your participation. This concludes today's conference call. You may now disconnect.