Good morning, and thank you for joining us for RPC Inc.'s Second Quarter 2023 Financial Earnings Conference Call. Today's call will be hosted by Ben Palmer, President and CEO; and Mike Schmit, Chief Financial Officer. Also hosting is Jim Landers, Vice President of Corporate Services. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. I would like to advise everyone that this conference 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 will be made on this call could be forward-looking in nature and reflect a number of known and unknown risks. I would like to refer you 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 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 income, adjusted diluted earnings per share, adjusted operating profit, EBITDA, and adjusted EBITDA. We're using these non-GAAP measures today because they allow us to compare performance consistently over various periods. In addition, RPC is required to use EBITDA to report compliance with financial covenants under our revolving credit facility. Our press release from this morning and our website contain reconciliations of these non-GAAP measures to operating income, net income and diluted earnings per share, which are the most directly comparable GAAP 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, Ben Palmer.

Thanks, Jim, and thank you for joining our call this morning. As we announced several weeks ago, RPC acquired Spinnaker, a leading provider of oilfield cementing services in the Permian and Mid-Continent Basins. As we begin the integration of Spinnaker into our operations, we continue to be impressed with the quality of Spinnaker's management, employees, and operations. They bring us some additional relationships with customers that should enable us to deepen existing relationships and improve our marketing efforts and other service lines. Spinnaker runs a great business, yet they can benefit from some of our buying power as well as operating synergies we can provide. Turning to a discussion of RPC's second quarter. Business began much like the first quarter but ended with a very challenging June. Since a large percentage of our hydraulic fracturing is spot or partially dedicated work, we were impacted by some customers deferring planned activity to later in the year. This resulted in lower utilization during June and has carried forward into the first part of the third quarter. However, we have already seen signs of improvement on our frac calendar later in the year. While our other business lines have seen some recent pockets of weakness, predominantly in gassy basins, they too are expecting activity to improve. Our participation in the entire suite of completion services provides us with a diversity in both the number of customers and customer profile that balances the more heavily concentrated exposure of our fracturing business. I would like to point out that RPC has initiated a digital transformation designed to improve the company's operating and cost efficiencies. This extensive and multiyear undertaking aims to change the way we manage maintenance, personnel, and equipment as well as our back office functions. We expect this effort will greatly improve our decision-making by providing access to better and more extensive data on a more timely basis. Our CFO, Mike Schmit, will discuss the quarter's financial results, after which I will provide some closing comments.

Thanks, Ben. I'll start with the second quarter 2023 sequential financial overview. Second quarter revenues decreased to $415.9 million from $476.7 million in the prior quarter. The decrease in revenues was largely driven by pressure pumping customers postponing or curtailing their drilling and completion activities, as Ben mentioned. This was combined with weaker activity levels in the natural gas directive basins impacting many of RPC's other service lines. Cost of revenues during the second quarter also decreased to $265.8 million from $305.3 million in the prior quarter. As a percentage of revenues, cost of revenues in the second quarter was 63.9%, which was relatively the same as the 64% in the prior quarter. Selling, general, and administrative expenses increased to $43.6 million in the second quarter compared to $42.2 million in the first quarter. This increase included costs associated with a settlement of a vendor dispute and costs associated with the Spinnaker acquisition, partially offset by a reduction in payroll tax-related costs. In connection with the termination of our pension plan, RPC recorded a non-cash pension settlement charge of $911,000 in the second quarter compared to a $17.4 million charge in the prior quarter. We do not anticipate any remaining significant charges in future quarters associated with the pension plan termination. Operating profit during the second quarter decreased by 9.1% to $82.4 million from $90.7 million in the prior quarter. Adjusted operating profit was $83.3 million in the second quarter, a 22.9% decrease compared to $108 million in the prior quarter. Adjusted EBITDA also decreased by 17.2% to $110.1 million from $132.9 million in the prior quarter. Our Technical Services segment revenues decreased by 13.7% to $390 million. This segment generated $77 million of operating profit compared to $103.5 million in the prior quarter. Support Services revenues increased by 4.7% during the second quarter. Operating profit was $7.9 million compared to $6.6 million in the prior quarter. Now I'll discuss our current quarter results compared to the same quarter in the prior year. Results increased to $415.9 million from $375.5 million. Adjusted operating profit increased to $83.3 million from an operating profit of $60.4 million. Adjusted EBITDA increased to $110.1 million from EBITDA of $80.6 million. These increases were driven by higher customer activity levels and improved pricing, resulting in our adjusted diluted earnings per share improving to $0.30 compared to $0.22 in the same quarter last year. Our Technical Services segment revenues increased 9.5% to $390 million and our segment operating profit increased to $77 million from $59.8 million. Our Support Services segment revenues eased 28.7% to $25.8 million and segment operating profit increased to $7.9 million from $3.3 million. Now I'll discuss our capital expenditures and horizontal pressure pumping fleet count. Capital expenditures were $39.2 million in the second quarter. This includes new Tier 4 dual fuel equipment that was placed into service during the quarter, while a similar amount of older equipment was sent out for refurbishment. We currently estimate full-year 2023 capital expenditures to be between $200 million and $250 million excluding the purchase of Spinnaker. In the latter part of the second quarter, we implemented cost reductions, including a small-scale layoff and other cost control measures. This layoff is not expected to significantly impact our ability to respond to customer needs, and we remain staffed to operate 10 horizontal frac fleets. During this period of reduced activity, we intend to closely monitor and manage our cost structure. I'll now turn it back over to Ben for some closing remarks.

Thanks, Mike. Although we've encountered a near-term air pocket, we are optimistic for the future if oil prices remain firm. We are already observing encouraging indications from both our frac calendar and our sales teams and other service lines, both pointing towards a resurgence of activity as the year progresses. This morning, we announced a regular quarterly cash dividend of $0.04 per share as we continue to maintain a conservative capitalization and shareholder-friendly capital return practices. During the second quarter, we did not repurchase any RPC stock because of our self-imposed trading blackout pending the closing of the Spinnaker transaction. We financed this acquisition with cash, which has been building on our balance sheet for several quarters. Notwithstanding the acquisition of Spinnaker, we will continue to assess our capital allocation alternatives, including share repurchases, dividends, capital expenditures, and acquisitions as methods to maximize our returns on invested capital as well as reward our shareholders for their investment in RPC. Thanks for joining us this morning. And at this time, we are happy to address any questions.

Thank you. We'll go first to John Daniel at Daniel Energy Partners.

Good morning everyone. Thank you for having me. I’d like to start by asking about the current number of fleets you are operating. Also, based on the calendar, what number of fleets do you anticipate running in the latter half of the year?

John, this is Ben. Regarding the latter half of the year, we are fully staffed. We have managed to equip all our machinery as we have in previous quarters, and we anticipate needing that capacity later in the year. Currently, several customers have postponed some of their completion activities until later due to various reasons. We've also been affected by acquisitions, which have led some customers to reevaluate their plans and delay their activities as well. However, we feel optimistic about the frac calendar later in the year. We've had numerous discussions and have confirmed from our customers that they intend to resume their activities.

Fair enough. And on this next question, I'm sure you probably will avoid the granularity, which is fine. But broadly speaking, as you talk to people out in the field, you hear of some fairly significant spot market pricing pressures. My question is just how broad-based are those across the various service lines? And if concessions have been made, how quickly can you recover those concessions? Just your thoughts.

Let me respond and then I'll let my other two teammates elaborate. The concessions within fracturing have been more significant than the other service lines. There are some service lines that have given little to no concessions. Some have given minor concessions. But as I indicated, fracturing has been more significantly impacted here in the short term. In terms of regaining that, it's very hard to say. If oil prices remain firm and perhaps strengthen, we may have a similar type of strengthening that we had in the early part of '22 to mid-'22. I'm hopeful but we're not counting on it; however, I hope it will firm back up reasonably quickly as we move into '24.

Okay. Thank you. And if I could ask one last question, please go ahead.

Hey John, this is Jim. Anytime there's an air pocket or any weakness, there are always going to be bad actors who are going to price very aggressively. We've seen a little bit of that very recently. But for us, our bias is more towards being idle, reducing pricing...

Okay, fair enough. And then the last one for me, and I'll turn it over. With the Spinnaker acquisition, when you start reporting the revenues, is it going to be your #2 or #3 or #4 segment? Can you just throw that out there for us in terms of that?

Yes, we'll give that in a second. It will be four.

We'll take our next question from Stephen Gengaro at Stifel.

Maybe to start, just a follow-up on John's question. Can you give us the segment breakdown and then maybe slot Spinnaker in there in some manner?

Sure, Stephen. Thank you for the question. So I'm going to start with actual second quarter. So what I'm about to describe is the percentage of revenue that our top service lines comprise as a percentage of total consolidated RPC revenues. Yes, actual. So number 1 was pressure pumping at 50.5% of revenue. Number 2 was downhole tools, which is our Tubing Solutions service line that was 24.4% of revenue. Number 3 is coiled tubing at 9% of revenue. Number 4 is rental tools, which is in our Support Services segment, but it was 4.4% of consolidated RPC revenue. Number 5 is nitrogen, 3.1% of revenue. Number 6 is snubbing at 1.8% of revenue and Number 7 is cementing at 1.4% of revenue. Now that does not include Spinnaker because we did not own it during the second quarter. If we had owned Spinnaker during the second quarter, cementing would have been our Number 4 service line at 7.4% of consolidated revenues.

Great. That's great color. Thank you. When we think about the business, and I think, Jim, you might have just mentioned, there's been some bad actors in a downturn. We've seen, at least on the pressure pumping side, a lot of consolidation, a lot of equipment in the hands of the biggest players. It feels like others have indicated that behavior has been generally better than prior cycles. Are you not seeing that? Or are you talking about maybe some smaller product lines where there's been some bad actors? I'm just trying to triangulate the commentary?

No, we agree that my comment was about some instances of small private pressure pumpers aggressively pricing over the past month or so. We all seem to share the view that the market structure in pressure pumping is improving, and the larger companies are maintaining discipline, as we are too; we prefer to idle fleets during this time rather than make pricing concessions. We believe this situation is temporary, and we would rather bring fleets back at current pricing than make concessions and try to recover from that.

Thank you. I have one final question regarding margins. The decrementals for the quarter were around 40% for the company overall. I believe that’s accurate, possibly a little higher. Considering there were some cost-related headwinds this quarter, how should we view the margin profile and decrementals moving forward? Will they return to more typical levels compared to history, or are we expecting them to be unusually high in the short term? How should we approach this?

These are all valid questions. I should mention that this situation has arisen quite suddenly. It really started to develop around mid to late June. We aren't exactly sure how everything will turn out, but we do have specific discussions with customers and are optimistic about improved activity in the latter half of the year. The third quarter may present some challenges as we continue to focus on filling gaps and preparing for a busier fourth quarter. The decrementals were substantial; when we plan ahead, we also took into account some of our SG&A costs related to settling a vendor dispute, which was a significant amount that we hadn't anticipated. Although SG&A appeared relatively stable, it would have declined if not for that expense and the cost of the Spinnaker acquisition, which also wasn't included in our EBITDA calculations. We don't foresee that kind of headwind impacting the third quarter, and without that, the decrementals will likely be less severe. I realize I'm not addressing the question directly, but typically, we see favorable incrementals with revenue increases and larger decrementals during revenue declines. It will be challenging, but we are eager to navigate this temporary phase and move towards more stable conditions.

Thanks. I understand there's a lot of moving pieces, but thanks for the color.

Yes, thanks Steve.

Thanks.

We'll take our next question from Don Crist at Johnson Rice.

Good morning. I would like to ask a question regarding the Spinnaker acquisition. I have two options for how you might address it. As you know, cementing accounted for 1.4% of revenue in the second quarter. Could you either provide the number of cementing fleets you had operating in the second quarter, or the revenue impact per fleet for the 18 you are adding from Spinnaker? This information will help us model the impact of Spinnaker in the second quarter.

Yes. This is Mike. We had four running in the quarter. And so that will increase pretty significantly after Spinnaker's in their next quarter.

And our existing cementing business performed reasonably comparably. I think the larger Spinnaker, we disclosed that they have 18 spreads at the time of the purchase. They've created a little bit more leverage, given their size, but the results were not dissimilar for spread.

Okay. And I'm assuming that the majority of those 18 are running today?

Yes.

Okay. That's all I had. Thank you.

Thanks.

Yes. I want to mention that in the cementing business, we have not seen any significant impact. Cementing is generally less volatile than fracking, which is an advantage. We believe that the growth opportunity in this area will remain strong for the next several months.

We'll go next to Don Dasher at Pinnacle.

Hi, good morning. Just following up on the Spinnaker deal. Just working through the math, it looks like that business is perhaps a $90 million to $100 million a year business. Is that fair?

That's a good guess.

Okay. Fair enough.

Good calculation.

Okay. Good. And what's the margin profile of that on an EBIT basis? I realize there's cyclicality involved, but kind of on a go-forward basis, what would a reasonable EBIT margin be for that?

Let me discuss the EBITDA margin. The team was adequately staffed, not overly so, so we don’t see any opportunities for cost reduction. We believe we can achieve some operational efficiencies and leverage our procurement strategies, which we think will yield incremental benefits. I would indicate that the EBITDA margins for this cementing business are comparable to what we experienced overall in Technical Services, particularly in the second quarter, which is quite positive. Additionally, we appreciate that the maintenance CapEx requirements are significantly lower. If we expand, it will involve some CapEx, but it won't be as significant as with fracturing. From a maintenance CapEx perspective, the cash flow profile looks very favorable.

Okay. Great. That's helpful. What were the EBITDA margins for Technical Services in the second quarter?

Give us a second here.

Yes, that's fine.

25% to 30%, probably the upper end of that range.

Okay. Great. And finally, who was the seller of Spinnaker?

Catapult was the direct owner. They are not familiar exactly with all the structure, but Natural Gas Partners was the ultimate parent, if you will. I don't know if that's the right way to describe it or not; both entities were great to work with. They did a great job creating that company established in 2014. They've grown it nicely, especially over the last three years or so. We're lucky to have it and glad to have it.

Okay. Great. Was it an auction process?

It was, yes. It was.

It was an auction process. Okay, great. Very good. I appreciate the help.

Thank you.

Thanks, John.

We'll go next to John Daniel at Daniel Energy Partners.

You guys are very gracious for putting me back in. Thank you.

Absolutely, John.

Well, you know it's early in the morning. So it gives some to do. Hey, on the CapEx budget, it looks like you brought it down to $200 million to $250 million from the original guidance of $250 million to $300 million, which would make sense. I fully understand you haven't done your 2024 budget yet, but based on what you see today and your expectations, would you envision a spend in '24 being higher or lower the same as the current guidance for '23 ballpark?

John, we're looking at each other here, trying to think that one out.

Fine. And I know it can change like 10x now, but I'm just curious.

Yes, probably similar because as you know, we're on the schedule of refurbishing frac fleets, and that should continue in 2024. So that's the chunk of CapEx.

We have a roadmap for our pressure pumping fleet depending upon the level of usage of it, when we expect the pumps to wear out or need refurbishment, the swing factor for next year, I think Jim's response that should be similar. I think on an overall basis, that's probably true. The swing factor is going to be if we were to take delivery of a new fleet in 2024. As we sit here right now and think about what we hope is going to happen later this year and expect into 2024, I suspect that probably at the upper end of the current range may be more appropriate, I think we probably will acquire a new fleet sometime in 2024.

Got it. And then the last one for me is when you think about the frac market, which is where the most pronounced spot pricing pressures are. If you look at the competitive landscape, most of the small players that are bringing the prices down are the two to three fleet type companies, I suspect, some of whom were created with legacy equipment coming out of the downturn. It would seem the viability of some of those businesses is going to get called into question, because my gut would say that spot pricing doesn't recover quickly. So you've got a bit of a knife fight for several quarters here, which then raises the opportunity for consolidation. Is that something you envision seeing happening? And would you be willing to participate in that?

There's a lot of conversation about consolidation through acquiring some of the smaller companies. Over the years, we’ve certainly had many opportunities for that. The key consideration is the condition of the equipment, which is something we need to evaluate carefully. I believed that more consolidation would be beneficial. Clearly, we recognize the significant merger that was announced a month or two ago, and I believe it will be advantageous, as the announcement and the collaboration of the two firms coming together should positively impact the frac industry. We definitely support this trend, though it’s uncertain if we will engage directly. We are actively seeking opportunities to position ourselves for potential benefits. From a pricing standpoint, as we emerged from the downturn in 2020 and 2021, we were very careful in how we priced our projects and assessed the contribution we were receiving from those projects before we decided to hire staff for new fleets and began marketing them. We did not simply deploy staff fleets and do whatever was necessary to get them operational; we maintained a disciplined approach regarding the resumption of fleets. This strategy proved successful for us. We have adopted a similar disciplined approach in the opposite direction. If we cannot reach a minimum return, we need to evaluate the anticipated activity levels for the future. Currently, we believe the demand will be enough to sustain our existing staffing levels. However, if pricing opportunities are too low, we are prepared to temporarily idle some fleets if we expect there won’t be enough work to keep those fleets active at an acceptable pricing level. They will remain in that state just as we did on the way up.

Yes. That's the benefit of having no debt and enough cash. Some people don't have that. Okay guys. Thank you.

Thank you, John.

Thanks, John.

We'll take our next question from Derek Podhaizer at Barclays.

Hey, I was wondering if you can give us some examples that give you confidence that activity will recover as the year progresses? Is it just conversations with your customers? Or are you seeing fleets or rigs actually being committed on the calendar?

Good question. It's more firm than that. We've had specific conversations with customers giving us reasons why they delayed and what their plans are to start back up. Certainly, we're aware that customers are not going to inform you three months out that they will not work. They might have work scheduled, and they will inform you in advance that they will not proceed. So we've had conversations. We're comfortable things could change if oil prices don't remain firm; they will reassess their plans. But at this point, if they remain firm, we're comfortable that things will recover nicely for us.

Got it. That's helpful color. So for your mix of fleets between diesel and dual fuel, how has that changed heading into 2024? So by the end of the year, I know you're refurbishing. So by the end of 2024 versus the start of 2023. I'd assume your fleet has increased towards that next-gen dual fuel away from diesel. And would this mix shift lend itself to put more of your fleet on the dedicated market versus spot as we move into 2024?

Good question. We are gradually increasing our DGB in the Tier 4 fleet, and it hasn’t changed significantly at this moment. It is slightly more ESG-friendly than it was at the start of the year. We will continue this process according to our roadmap. We are carefully analyzing our returns, considering the age and condition of the equipment. We don’t want to rush; we will progress when the economics support it. Our experience with many of our customers indicates that while fuel substitution is somewhat important, it is not as crucial as many believe, at least for our current customers. We think this will change and demand will grow. We have a favorable customer mix, including partially dedicated customers who operate four to five or more rigs. They might not be running 10, 15, or 20, but they have a reasonable level of activity. This group is less affected by fuel substitution. We offer fuel-efficient equipment that they appreciate both for its efficiency and ESG benefits. This approach has been beneficial, and we will continue to serve that market while also maintaining our goal of having more ESG-friendly equipment as we reach mid-2024 and the end of 2024.

Got it. That's helpful. Just one last question from me. I understand you mentioned plans to acquire a new fleet in 2024. Will that be a new build Tier 4 DGB, or are you entering the e-frac market?

Good question. This is Ben. I would expect next year, at this point, it would be another DGB. E-frac for us, we're certainly evaluating that market, staying close to that market. But as I said to our customers, the fuel substitution is not of great importance to them, and I would say the e-fleets are even less important. It's something we will eventually get into once we're convinced that there is proven technology and that we have sufficient customer demand for it, but at this point, we're still in a wait-and-see mode.

And we have no further questions at this time. I would like to turn the conference back over to Jim Landers.

Thank you, and thanks to everybody who called in to listen in. Thanks for the questions. We enjoy the conversation. Hope everybody has a good day, and we'll see you soon.

This concludes today's conference call. I would like to remind everyone that there will be a replay on www.rpc.net within two hours following the completion of this call. Thank you for your participation. You may now disconnect.