Rpc Inc Q4 FY2023 Earnings Call

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.

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.

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, but felt the impact of falling oil prices later in the quarter. During our third quarter call, we noted that with oil priced above $80, 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, resulting in declining 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 fell below our expectations. Regarding pricing discipline, as expected, we were able to secure work at more attractive pricing in the fourth quarter, and for 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 will implement contingent cost actions as appropriate. The 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.

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 capital expenditures 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, 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, will 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 our capital expenditures, and the completion of some projects was 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 service by the end of the second quarter. I’ll now turn it back over to Ben for some closing remarks.

Thank you, Mike. So, bottom line, we rebounded sharply from the third quarter dip. However, falling oil prices and customer indications of budget exhaustion late in the quarter curbed the magnitude of that bounce back. 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 and potential 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 solutions are available that 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. While RPC currently offers a wide variety of services required by both large and small E&Ps, we see opportunities to increase our scale and broaden our customer relationships. We are patient 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 in Oklahoma. This prestigious accolade is a testament to our commitment to 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 will be released very soon. In closing, I want to reiterate that in an often volatile market, our discipline remains consistent, and our focus on financial stability and long-term shareholder returns is unwavering. Thanks for joining us this morning. And at this time, we’re happy to address any questions.

We will now begin the question-and-answer session. Your first question comes from Stephen Gengaro with Stifel. Please go ahead.

Thanks. Good morning, everybody.

Good morning.

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?

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 possibly reduce the number of fleets we have in the field. Right now, we’re confident that given 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.

Okay, thanks. And then 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, etc., but, is there any parameters you can give us to think about how the incremental margin performs given the costs that are in place?

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 factors. 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%. The first quarter, again, starting off with the way it is, I mean, the fourth quarter is a reasonable base to say, what’s the first quarter looking like? We don’t know exactly, but it should start off 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.

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

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

Got it, great. Thanks for the details.

Sure. Thank you, Steve.

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

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

Good question. Pressure pumping obviously is our largest service line, but it’s by far the largest market 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 by 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 there to bring some of Spinnaker’s customer relationships and capabilities into play. So that’s an opportunity in cementing. Coiled tubing, we have a good market share. That’s a 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, targeting those service lines where we have good scale and market share now.

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 ancillary services like wireline, pumping logistics, Power Solutions, things of that nature?

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. Many of our larger peers have these systems and capabilities beyond wireline. We have a small wireline business. So we do wireline; it’s just not something that we’ve talked about much as 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 our primary focus. But we’re certainly open to other opportunities, our larger peers have been getting a lot of attention right now. But there are many other customers who can benefit from a fully integrated tremendous infrastructure, not every customer has the number of wells or the type of fields that necessitate that type of setup. There are plenty of customers who need the breadth of services that we offer. So that’s where we’re aligned. That’s where we set up and have our historical relationships. I expect for the time being, that’s where we’ll focus as it relates to pressure pumping.

Got it. That makes sense. And then just a follow-up from me, maybe just talking about the competitive landscape in frac among those smaller players, the privates that we don’t get great insight into, or those Tier 2 diesel players. I’m not sure if you come across them when you bid work or just see them out in the field? But there’s been anecdotes of bankruptcies and laying down equipment, just any insight that you guys can provide from what you’ve seen would be helpful.

Right. Not a whole lot specific. Obviously, we see them from time to time and hear that sometimes when we miss opportunities, it might be to one of those smaller players. Obviously, the pressure pumping equipment needs continuous upgrading and investment, which is expensive, and not everyone can afford to do that. So hopefully, maybe we’ll have a shakeout in that regard, and perhaps that part of the market will further improve. We’re set up to take advantage of that. When the market tightened in the first and second quarter of 2023, we had tremendous financial results within pressure pumping, and obviously, the market loosened a bit. We think some of the smaller players, as you indicated, will find it difficult; it’s always a challenge for them to be able to expand, so hopefully that market will improve a bit. Overall, in North America, we have a relatively smaller market share in pressure pumping, but within the regions and the particular customers that we focus on, we’re pretty well positioned and do well in that market.

Got it. Appreciate all the color. I’ll turn it back.

Sure, Ben. Thank you.

Your next question comes from Stephen Gengaro with Stifel. Please go ahead.

Thanks. I just wanted to follow up. We’ve heard a lot about pricing bifurcation in the market between low-emission assets and older assets and also differences between spot pricing for pressure pumping versus contracted or committed arrangements. Can you comment on that a little?

It’s getting more and more complicated. The more fully integrated, whatever you want to call it, some of our larger peers that have all this infrastructure to bring to a well site, they’re obviously getting paid something for that. But that requires an additional investment, right. Their investment, all things being equal, per fleet is quite a bit higher than ours. I think pricing is influenced by those various aspects. We monitor each of the service lines individually; there is some opportunity to bundle services, but that’s not something we focus on per se. We try to be the best we can be at a particular service we’re trying to execute. Clearly, it seems that some of the very large E&Ps appreciate that, and they will contract with service providers that have a multitude of different services to offer. However, many customers still prefer to unbundle their services and keep competition alive; they aren’t going to give all their business to one service company, and I don’t believe that will happen in the future either. So, we’re continuing to improve our fleet and following our roadmap. We’re flexible in terms of the exact timing for when we make these investments; however, we are executing on the plan for the long term and improving our fleet as we do that.

Great. Now that’s good color. Thank you.

Sure. Thank you, Steve.

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

Hey, guys. I just wanted to ask about your exposure to a couple of basins, primarily the Haynesville, MidCon, and Eagle Ford. These basins have come under the most pressure, as gas started to capitulate and projections have been pushed out to 2025. So can you maybe take some time to give us a sense of what you’re seeing as far as activity and customer conversations in those three basins?

Yeah. You mentioned three basins: Haynesville, MidCon, and Eagle Ford. MidCon is still a focus for us; we do pressure pumping there. As for Haynesville, we’ve not been active there for many years, likely since '15 or '16. It is very intensive work with high pressure, and it’s just not an area we focused on in recent years. We do have a good business in downhole tools in South Texas, and we operate in the MidCon, where we have pressure pumping. However, we’re not looking to make a significant push into either the Haynesville or the Eagle Ford at this time, although there have been some pressure pumping opportunities in South Texas that we’ve pursued.

I’ll add rental tools is another service line that we’re involved in across all basins. A lot of the service lines that we operate are spread out accordingly, so we can easily move our equipment to where there is the activity and demand for it. As Ben mentioned, our pressure pumping services are more concentrated in the Permian, while our other service lines are definitely more expansive across various locations.

Got it. And then maybe just some thoughts on the E&P consolidation wave that we’re starting to see. You mentioned throughout the call you’re looking for potential targets among those smaller companies that large-cap independents could acquire to gain share in shale. Have you heard of any customers that have been acquired yet, or have you seen an impact on your services? Just any color on that?

We were impacted somewhat in the third quarter in pressure pumping, which contributed to the slowdown we experienced. However, since that period, our pressure pumping activities have not been affected. In the last several quarters, our other service lines have not felt the effects of any consolidation. We hope and expect that there will actually be a benefactor from this, as we work with many of the highly active E&P companies. We have already established relationships with those that are active in the industry, and we expect to maintain those connections in the future. The recent consolidation has not negatively impacted us aside from what occurred in the third quarter. Additionally, some analysts predict that the consolidation trend among smaller to mid-sized operators may be reaching its peak. Increasing consolidation at the upper end may affect larger pressure pumpers more than us.

Got you, that’s helpful. Just to clarify your outlook for the first quarter, do you expect just top line and profitability to be flat due to the weather and slow start from the E&Ps, or do you see potential upside? You mentioned increments earlier in the Q&A. Should we consider it flat to up?

Yeah, I guess I can start. That’s probably a good way to think about it—flat to up, just as you described. The end of the year had a winter slowdown, and it was a slow start. We have seen some positive signs coming into the next couple of months. Similar to what we’ve heard from others who have announced recently, we’re looking at flat to up with no significant increases or decreases currently expected.

Got it. Great. I appreciate it, guys. I’ll turn it back.

Thank you, Derek.

At this time, there are no further questions. I’ll now turn the call back over to Ben Palmer for closing remarks.

Thank you, operator. I appreciate it. Thank you, everybody, for joining our call. I appreciate your interest and attention in order to catch up. Take care. Bye-bye.

Ladies and gentlemen, that concludes today’s call. Thank you all for joining, and you may now disconnect your lines.