Earnings Call Transcript - RES Q3 2023

Operator, Operator

Good morning, and thank you for joining us for RPC, Inc.'s Third 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. 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. Mike will get us started by reading the forward-looking disclaimer.

Mike Schmit, CFO

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 are 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 are 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 issued today 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 are interested in seeing how they are calculated. If you have not received a copy of our press release for any reason, please visit our website at rpc.net for a copy. I'll now turn the call over to our President and CEO, Ben Palmer.

Ben Palmer, President and CEO

Thanks, Mike. Thank you for joining our call this morning. As you can see from our earnings release, it was a challenging third quarter. The softness in the period was an air pocket in our business, and we believe we responded with appropriate discipline and patience. We currently see a strong improvement in our frac calendar for the fourth quarter. We're off to a solid start and expect a significant sequential increase in EBITDA to close out the year. In addition, I would highlight that while pressure pumping, our largest service line, drove the weakness, our other service lines demonstrated stable resilient performance. Regarding Spinnaker, our newly acquired cementing business, integration is progressing well, and we were pleased with their financial performance. From a long-term strategic perspective, we believe a more diversified business is better positioned to offset potential volatility in pressure pumping or other market dynamics. As we indicated on our last call, in the face of competitive pricing pressure, our bias was to idle assets. This soft pricing environment was driven by lower oil prices during the second and into the third quarter, which caused several of our customers to delay completion. While there were near-term cost absorption impacts for idling assets, we think this was the right call. Discipline and financial conservatism underpin our ability to deliver sustainable cash flows over full energy cycles. Pricing remains competitive in the spot market, where we primarily participate, and we have given some concessions. However, our fourth quarter pricing is expected to be more attractive than the temporarily low levels in the marketplace during the third quarter. Further, not participating in projects at particularly low pricing and margins can extend the life of our equipment, push out maintenance and repairs, and maximize the lifetime return of our assets. Bottom line, as it looks now, our fleet should be well utilized in the fourth quarter, which is again consistent with our comments in July. We began removing some costs late in the second quarter and early in the third quarter. However, as calendar visibility and market dynamics improved, we decided to limit workforce reductions. We began to hire back employees to position ourselves to be service-ready and capitalize on the rebound in fourth quarter activity. Overcorrecting on costs might have left us unable to meet current demand. Although we do not provide financial guidance, I can offer you a directional comment in light of our third quarter results. We think fourth quarter results are likely to look more like second quarter than third quarter. I'll caveat that by saying that that's our current view, which is, of course, subject to unpredictable market shifts and currently anticipated minimal holiday slowdown. Mike Schmit, our CFO, will now discuss the quarter's financial results. After that, I'll have a few closing comments.

Mike Schmit, CFO

Thanks, Ben. I'll start with the third quarter 2023 sequential financial overview. Third quarter revenues decreased to $330.4 million from $415.9 million in the prior quarter. This was largely driven by the decrease in pressure pumping activity, as Ben discussed. The following is a breakdown of our revenue percentages for the third quarter for our top service lines: Pressure pumping was 33.5%, downhole tools were 29.1%, coiled tubing was 11.1%, cementing was 8.1%, rental tools were 6.1%, and nitrogen was 3.7%. Cost of revenues, excluding depreciation and amortization, during the third quarter also decreased to $239.1 million from $265.8 million. As a percentage of revenues, cost of revenues in the third quarter was 72.4% compared to 63.9% in the prior quarter. Selling, general and administrative expenses decreased to $42 million in the third quarter of 2023 compared to $43.6 million in the second quarter. This decrease was due to a settlement charge of $4.5 million that was paid out at the beginning of Q2, which was offset by some incremental SG&A from the acquisition of Spinnaker. Operating profit during the third quarter decreased by 72.4% to $22.7 million from $82.4 million in the prior quarter. Adjusted operating profit was $22.7 million in the third quarter, a 72.7% decrease compared to $83.3 million in the prior quarter. Adjusted EBITDA also decreased by 52.9% to $51.9 million from $110.1 million in the prior quarter. Our technical services segment revenues decreased 22.3% to $303.1 million, and segment operating profit decreased to $18.9 million from $77 million. Our support services segment revenues increased 5.8% to $27.3 million, and segment operating profit decreased to $6.9 million from $7.9 million. I'll now discuss our capital expenditures. Capital expenditures were $44.3 million in the third quarter. We currently estimate full-year 2023 capital expenditures to remain between $200 million and $250 million, excluding the purchase of Spinnaker. As a reminder, we are also expecting to receive a US Federal tax refund of approximately $47 million in the first quarter of 2024. I'll now turn it back over to Ben for some closing remarks.

Ben Palmer, President and CEO

Thanks, Mike. To wrap up, the quarter really boiled down to one key element, a temporary lull in our pressure pumping business, driven in part by our decision to idle assets until pricing and activity conditions improved. As we stand today, we are currently encouraged by improved market dynamics and expected fourth quarter pricing and utilization. This view is supported by heightened activity among privates, especially in the Permian Basin, where we are well positioned to capture incremental demand. As you know, increasing the capital discipline among large EMPs can create opportunities for smaller companies. If oil remains comfortably above $80, we and our customers should have a favorable near-term operating environment. Shifting to capital allocation, our healthy, debt-free balance sheet is key to maintaining financial flexibility and strategic optionality. We successfully added an attractive business this year with the cash acquisition of Spinnaker, and our Board of Directors just approved our regular $0.04 per share quarterly dividend. With respect to capital investments and trends of newer pressure pumping technologies, I would again say we will take a conservative and disciplined approach. While there is increasing customer interest in the use of alternative fuels to operate equipment, we will prudently invest in a transition of our equipment when justified. Furthermore, I would like to reiterate that while we will replace older equipment, we do not intend to add pressure pumping capacity to an already competitive marketplace. While we operate in an often volatile market, our approach and strategy will remain consistent with a focus on financial stability and long-term shareholder returns. Lastly, we'd like to thank our employees for their continued dedication, staying focused during a difficult operating environment, working on our digital transformation programs, and helping with the integration of Spinnaker into our company. Thanks for joining us this morning. At this time, we'd be happy to address any questions.

Operator, Operator

Thank you. We'll take our first question from John Daniel at Daniel Energy Partners.

John Daniel, Analyst

Thank you for having me. I need your tax expert, by the way. As you know, there are many small operators in the Permian, many of whom operate rigs for short-term projects, and I assume some of them don’t have enough work for a dedicated crew, which leads to the increase in spot services. You mentioned that Q4 looks better, but can you share your insights into the demand from what I refer to as micro-operators for next year? Do you see many of them looking to add rigs and eventually require a fracking crew in 2024? Also, how quickly do you anticipate the spot market could tighten next year?

Ben Palmer, President and CEO

Yes. John, this is Ben. Or, Jim, do you want to take that?

Jim Landers, Vice President of Corporate Services

Yes. Let me at least start, John. Good question, because we are in the spot market and the idea would be that if these smaller operators start working again, they don't have the wherewithal to get a dedicated crew, and that's kind of where we try to play. Some of the small companies that have been purchased over the past year are coming back in. We know a couple of examples. They've got to get the management groups together and get capital that's easier and faster at $90 oil than $70 oil. On the other side of it, there are people who might be hesitant. We think there might be similar spot customer trends as what we've seen in prior years, adding rigs incrementally. But, you know, your question is really about visibility. We probably lack visibility because these smaller players make plans and add rigs quickly. And so, that's good. It's good to do it quickly. But it doesn't necessarily tell us that in February of 2024 we're going to have some great spot work coming up. A lot of these operators, as you know, only operate about one rig at this point. So, anyway, that's I think part of and perhaps most of the answer we have for you today. I don't know what Ben and Mike might want to add.

Ben Palmer, President and CEO

It's a great question, John. We often discuss the spot market, which isn't a simple matter. Our work isn't limited to what some classify as spot customers. When a client has a rig or something less than a fully equipped rig for the entire year, we typically work with them for just a few weeks. Many of our business relationships are with customers we engage with for several months. Then, there are the larger clients, fewer in number, who usually account for about half of the market in the Permian and are open to signing year-long contracts. We have collaborated with some of these major players. However, our focus is primarily on the spot market participants and what we refer to as partially dedicated clients.

John Daniel, Analyst

Right.

Ben Palmer, President and CEO

So, spot market being people that we work for a few weeks, then there are a lot of customers and a lot of work for customers we can work for a few months. And then a lot of the big players that are operating 10-plus rigs. They are the ones that want a lot of the technology that everybody is talking about in terms of energy, fuel delivery alternatives, and things like that. We don't own that technology. We're not developing that technology. We're not investing today significantly in that technology. But that's half the market, right. So, there's half the market that we're certainly very well positioned to work in and have worked in. We'll be working with those players in the fourth quarter and into 2024. So, there's a lot of work.

John Daniel, Analyst

Okay.

Ben Palmer, President and CEO

Lot of work. Yeah.

John Daniel, Analyst

That's helpful. And my follow up, and I hate to be that guy, but I missed the revenue breakdown when you went through the prepared remarks.

Ben Palmer, President and CEO

I knew that was going to be the case. I'm sure I knew that.

Mike Schmit, CFO

So, this is Mike. I can give you that, John. Pressure pumping was 33.5%, downhole tools were 29.1%, coiled tubing was 11.1%, cementing was 8.1%, rental tools were 6.1%, and nitrogen was 3.7%.

John Daniel, Analyst

Perfect. Thank you. Sorry about that.

Mike Schmit, CFO

No problem.

Ben Palmer, President and CEO

No problem.

Operator, Operator

We'll move next to Don Crist at Johnson Rice.

Don Crist, Analyst

Good morning, gentlemen.

Ben Palmer, President and CEO

Good morning.

Don Crist, Analyst

Obviously, it's a challenging quarter, but I wanted to ask just from a fleet count. Obviously, you were at about 10 the first quarter of the year. Do you think that you can get back close to that in the fourth quarter, or do you think it will be a little bit less than that? Just kind of driving kind of what John was asking on the demand side, I mean, what does the demand look like out there for you all?

Ben Palmer, President and CEO

Well, a couple of ways to characterize that. You know, I'm sure people have already done the math that pressure pumping is down about 50%. So that pretty much correlates, I guess, to the effective utilization of our fleets. So, the question of can we get back to 10 once the quarter is over? I don't know that we would say that all 10 fleets were fully utilized during the fourth quarter, but we still think it's appropriate for us to hold on to. We're pleased with the fact that we have all of those 10-plus fleets staff up and available to work in the fourth quarter and moving into early 2024. So, you know, we indicated that the fourth quarter is going to look more like the second quarter than the third quarter. We were pretty well utilized with all of our fleets in the second quarter. Obviously, as the quarter ended, it was less fully utilized, but we needed all of that capacity to service the business that we had the opportunity to work on.

Don Crist, Analyst

Yeah, okay.

Mike Schmit, CFO

The frac calendar suggests that we will be much closer to utilizing all of those resources.

Don Crist, Analyst

Okay. I appreciate that color. And we've been hearing some anecdotes of equipment moving back into the Haynesville and other gas-type basins. Are you moving any assets kind of out of the Permian into chasing some of that gas work that people are doing into year-end?

Ben Palmer, President and CEO

At this point in time, we are not.

Don Crist, Analyst

Okay. And just one final question from me. Regarding the Spinnaker acquisition, it seems that it is already starting to have a positive impact on the financials. Can you provide any comments on how the integration is progressing?

Ben Palmer, President and CEO

Yes. We mentioned it's going very, very well as planned leading up to the closing. Obviously, we did a lot of planning, and we've got some post-closing integration activities from a systems perspective and things like that. But, otherwise, you know, great company with a lot of great infrastructure and capability, and so it's nothing complex at all about bringing them into our company. As you know, we were already in the cementing business, so we knew the business, so we're not having to start from scratch and learn more about it. We're seeing some benefits of now being diversified into a third basin or going from one basin in South Texas to now being in the MidCon and the Permian. So, we think that's going to create a lot of opportunities. Spinnaker has tremendous customer relationships that we expect to leverage not only within cementing but hopefully within some of our other service lines as well.

Jim Landers, Vice President of Corporate Services

The team on Spinnaker has been a great cultural fit, both operationally and from the finance side. It's been one of the smoothest integrations I've experienced. We are very pleased.

Don Crist, Analyst

I appreciate the color. Thanks, guys.

Ben Palmer, President and CEO

Great. Thank you.

Jim Landers, Vice President of Corporate Services

Thanks, Don.

Operator, Operator

We'll move next to Alec Scheibelhoffer at Stifel.

Alec Scheibelhoffer, Analyst

Hi. Good morning, everyone, and thanks for taking my question.

Ben Palmer, President and CEO

Good morning.

Mike Schmit, CFO

Good morning.

Alec Scheibelhoffer, Analyst

Good morning. So, I just wanted to touch on CapEx potentially for next year, if there's any sense you could provide any guidance on that. I think previously you had said you expected spending next year to be near the high end of the range provided for this year in the $200 million to $250 million. I was wondering if that's still the case or if there's any kind of shift in strategy there?

Mike Schmit, CFO

I can take that one. You know, we haven't finalized all of our budgeting for next year, but kind of what we're thinking right now is that we'll probably be in about the same range as what we're expecting. A lot of that will depend on the demand and what we need to order and when. But, right now, that is probably our best guess that we'll be in the same range, possibly at the higher end.

Ben Palmer, President and CEO

This year, we have reduced our capital expenditures, partly due to the lower activity observed in the third quarter. As a result, we have not needed to spend as much on maintenance capital expenditures, which will also be lower. However, we do not anticipate a significant increase in spending for growth. As we mentioned, we are not planning to expand our fleet count, but we will need to continue investing in the business. As our older equipment becomes less effective, we will need to refurbish and replace it when it makes economic sense. We will make these investments once the current equipment is no longer financially viable or cannot perform adequately. Our aim is to transition our fleet, likely acquiring more Tier 4 equipment, while ensuring it aligns with our commitment to being more environmentally sustainable.

Alec Scheibelhoffer, Analyst

Great. Great. Thank you for that. And this question might be a little bit more high level, but just out of curiosity, we've heard some operators shift to lower quality rock away from Tier 1 acreage, just the service intensity in some of these wells goes up. I was just curious if there's any kind of read-through that could be had on the spot pricing for maybe higher quality versus lower quality assets, if that's just your standard supply/demand on that side or if there's any kind of read-through we could get on that.

Ben Palmer, President and CEO

Yes. It's standard supply and demand and an evolving trend. While I don’t have many specific anecdotes, we're seeing ongoing opportunities. Privately held companies, in particular, are moving quickly and obtaining permits, and we anticipate some market tightening. These companies don't require specialty fuel and delivery systems, as they can't afford them and they aren't suitable for their operations. We are also positioned to act quickly. Our sales, operations, procurement, and logistics teams are adept at leveraging vendor relationships to move swiftly. We can assist smaller players who can't purchase their own sand or manage it, providing an effective solution for them. Overall, the third quarter was quite unusual, with several factors at play, including mergers and customers delaying projects due to inventory buildup. The situation allowed us to negotiate with vendors to adjust material costs, enabling us to return to customers competitively and secure favorable terms.

Alec Scheibelhoffer, Analyst

Great. Thanks for the color. And I'll turn it back.

Ben Palmer, President and CEO

Thank you.

Operator, Operator

And at this time, we have no further questions. I would like to turn the conference back over to Mike Schmit for closing remarks.

Mike Schmit, CFO

Thank you all for joining our call today. We appreciate it. We will now close the call. Thank you very much.

Operator, Operator

And this concludes today's conference call. There will be a replay on www.rpc.net within two hours following the completion of the call. Thank you for your participation. You may now disconnect.