RPC, Inc. (NYSE:RES) Q1 2024 Earnings Call Transcript April 25, 2024 9:00 AM ET

Company Participants

Mike Schmit - CFO
Ben Palmer - President and CEO

Conference Call Participants

Stephen Gengaro - Stifel
Don Crist - Johnson Rice
Sean Mitchell - Daniel Energy
Chuck Minervino - Susquehanna

Operator

Good morning and thank you for joining us for RPC, Inc.'s First Quarter 2024 Conference Call. Today's call will be hosted by Ben Palmer, President and CEO; and Mike Schmidt, Chief Financial Officer. 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.

I will now turn the call over to Mr. Schmit.

Mike 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 2023 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.

Ben Palmer

Thanks, Mike, and thank you for joining our call this morning. Before we get started, I'd like to take a moment to share some unfortunate and sad news. Our long-time Head of Investor Relations and Vice President of Corporate Services, Jim Landers, passed away a few weeks ago after a long and courageous battle with cancer. I worked closely with Jim here at RPC for more than 20 years, and he was a tremendous contributor to the company in so many ways. I'm sure those of you listening today were lucky enough to work with him over the years know he was also a great friend and colleague. He will truly be missed by all of us.

Shifting to the quarter, as you can see from our earnings release, the first quarter was a soft start to the year in what feels like a muted oil field services market. Though we did not give explicit financial guidance for the first quarter, we did expect more staple EBITDA. Our activity level and pressure pumping was down modestly on a sequential basis compared to the fourth quarter of 2023, contributing to our overall results finishing below our original expectations. Unlike some recent quarters where we have seen more volatility in pressure pumping compared to other service lines, revenue performance was generally consistent throughout the business. Our total revenues declined about 4% with pressure pumping down 5% and other service lines in aggregate down 3%.

The frac market remains highly competitive. We have seen some fleets moving into the Permian and from gassy plays, adding capacity to an already crowded basin. In addition, ongoing operating efficiency gains have created additional pump hour capacity. Regarding pricing, motivation to keep assets utilized and absorb fixed costs has certainly impacted industry pricing compared to year-ago levels. We are working vigorously to control costs to be as competitive as possible in this environment. We are also balancing our interest in putting our assets to work with our preference to not burn them out on low return projects.

Our Tier 4 DGB fleets are highly sought after and generally serve semi-dedicated customers. Regarding our new Tier 4 dual fuel fleet, we eagerly await bringing those assets into service around mid-year and expect to have solid utilization for this new fleet for the remainder of 2024. We highlight that our operational performance on existing Tier 4 DGB assets has been quite strong. For example, our gas substitution efficiency has sustained an average of above or about 65% over the past few quarters. We believe this efficiency metric is among the best in the pumping industry and demonstrates our ability to effectively operate these high quality assets and drive value for our customers. As we have said before, we intend to continue to invest in fleet upgrades. To reiterate, when we place the new Tier 4 DGB fleet in service in a few months, we will be pulling a Tier 2 diesel fleet out of service, though we do not add to industry capacity, likely repurposing those assets in other parts of our business or keeping them as spare parts and equipment.

We continue to monitor the market for electric fleets. While we do see the benefits of this evolving technology, we also see some potential shifts around the ideal long-term technical and power source solutions. We will continue to invest in our fleet with a strong focus on upgrading to Tier 4 dual fuel. In our view, dual fuel assets have a long demand runway and we will focus our efforts and capital in this direction until we fill the risk return profile on investments in electric fleets is further in our favor.

Regarding how we see the next few quarters playing out, visibility remains limited, but we are certainly encouraged by the recent increase in oil prices, the WTI reaching above $80 a barrel recently. The rally is, in part, attributed to geopolitical events, which can be, of course, unpredictable and reverse quickly, but also supported by a strong US economy. If this level is sustained, we are cautiously optimistic that many of the smaller private EMPs that make up the spot in semi-dedicated pressure pumping market will steadily increase activity, while the larger EMP stick to budget expenditures and exercise capital discipline.

Mike will now discuss the quarter's financial results.

Mike Schmit

Thanks, Ben. I'll now discuss the first quarter results with sequential comparisons to the fourth quarter of 2023. Revenues decreased 4% to $378 million, driven by a combination of moderately lower industry activity and some competitive pricing concessions. Breaking down our operating segments, Technical Services revenues decreased 4%, driven by pressure pumping, our largest service line within that segment. Technical Services represented 94% of our total first quarter revenues. Support Services were down 9% and represented 6% of our total quarter revenues.

The following is a breakdown of our first quarter revenues for our top five service lines. Pressure pumping, 46.6%. Downhole tools, 24.8%. Coiled tubing, 8.8%. Cementing, 7.3%. Rental tools, 4.2%. So together, these top five service lines accounted for 92% of our total revenues. Cost of revenues, excluding depreciation and amortization during the first quarter, decreased by $2.8 million to $276.6 million from $279.4 million, or a 1% decrease. Despite lower sales, total employment expenses were flat and maintenance and repairs cost increased slightly compared to the fourth quarter, contributing to margin compression. On another note, materials and supplies were a higher percentage of our sales mix, which also impacted our margins.

SG&A expenses were $40.1 million, up slightly from $38.1 million. The increase in SG&A was due to total employment costs and was in part due to the timing of certain accruals. Diluted EPS was $0.13 in the first quarter, down from $0.19 in the fourth quarter. There were no non-GAAP adjustments to these figures. Adjusted EPS -- sorry, adjusted EBITDAs was $63.1 million, down from $79.5 million with adjusted EBITDA margin decreasing 340 basis points to 16.7%. Again, there were no adjustments made to these measures for unusual items.

Operating cash flow was $56.6 million and after CapEx of $52.8 million, free cash flow was $3.8 million. We noted that second quarter will have a heavy spend as we make final payments and accept delivery of our new Tier 4 DGB fleet. While our guided CapEx range of $200 million to $250 million in 2024 remains unchanged, we may manage the lower end of that range depending on market conditions in the second half of the year.

During the quarter, we spent nearly $10 million on share repurchases, of which $7.5 million was under our buyback program. And we paid $8.6 million in dividends. Thus, we returned more than $16 million of capital to our shareholders between our cash dividend returns and our buyback program. We continue to maintain a debt-free balance sheet with a strong cash position of $212 million at quarter-end. We remain proud of our healthy financial position, a function of our ongoing discipline and conservative approach. We're also pleased to share that subsequent to the end of the quarter, we received a $52 million tax refund, including interest from the IRS this week related to past tax years.

I'll now turn it back over to Ben for some closing remarks.

Ben Palmer

Thanks, Mike. So looking ahead, we are encouraged by oil price trends and optimistic for an uptick in rig count. This should translate into improved activity, which would hopefully be accompanied by disciplined pumping capacity management in the marketplace. We also see potential for increased activity by smaller EMPs as a fallout from the wave of M&A in the larger M&A space -- EMP space. As mergers and acquisitions close, we see possible non-core asset divestitures with the acreage moving into the hands of our customers. We would be well positioned to capitalize on this trend, given our deep customer relationships. We are strong not only with spot and semi-dedicated customers and pressure pumping, but our other service lines have excellent relationships with both small and large EMPs.

We continue to be presented with opportunities to use our strong balance sheet to grow the business. We're confident that in time we will find attractive acquisitions to increase our scale, bolster our service lines, broaden our customer relationships, and of course, provide a solid return on capital. As we said last quarter, 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, affording our $0.04 per share quarterly cash dividend and opportunistic share buybacks. If over time we maintain an elevated cash position, we would likely assess options to return additional capital to investors at an accelerated pace.

In closing, I want to reiterate that in an often volatile market, our discipline remains consistent, with a focus on financial stability and long-term shareholder returns. And thank you to all our employees who worked tirelessly to deliver high levels of service and value to our customers. Thanks for joining us this morning, and at this time we're happy to address any questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Stephen Gengaro with Stifel. Please go ahead.

Stephen Gengaro

Thanks. Good morning, everybody.

Ben Palmer

Good morning.

Stephen Gengaro

So a couple for me. I think just first, can you talk about the just the overall pressure pumping market that could like, so I'm thinking about the competitive landscape, I mean you talked about competitive pricing environment, and how you think about either holding assets back or marketing assets at current price levels and also how do you think that evolves over time as far as the pricing structure?

Ben Palmer

Stephen, this is Ben. Good question. We're going to exercise a lot of discipline, have exercised discipline. We have clearly -- compared to a year ago, there has been some degradation in pricing. That's clearly affected our results. But we talk about it often. We do have some floors that we've established. We're not bidding everything at those floors today, but we're going to remain disciplined. We're not going to burn out our equipment. There's been a bit of volatility here recently. There have been some people dropping down, trying to take, quote unquote, take advantage of the spot market and the semi-dedicated market. So we're seeing some of that taking place. I don't know if that's an indication of some others having some pressure on their businesses. But it's something that -- our team is very agile, very in tune with the market, dissipating in a lot of opportunities, And as I said, we're going to remain disciplined. Certainly, I think the market, to get better, we're going to obviously have to see increased activity. We're going to have to see some of that capacity absorbed to where the service companies can have a little bit more control over the pricing demand rising to the point where we can realize a bit more stability. We're working really, really hard with our customers. We're our own worst enemy with how efficient we're being. Our efficiency measures when we look back over the last 12 months, our efficiency is up considerably with our fleet. And unfortunately, again, in this environment, it's not necessarily translating immediately or directly into better financial results. But I think that is consistent with everybody. We're just in a -- we're in a, not unusual, I mean this is a normal market, right? It's a highly competitive market. And we'll work through it. We're prepared to take more significant steps if we need to. But right now, we feel -- we talked about pressure pumping revenue was down slightly more than some of the other service lines but the margin change or indication was similar. I mean pressure pumping is not the contributor to any decline or an outsized contributor to changes in our operating performance. So everybody on a relative basis, we're talking about a fairly small change in revenues. And so there's some volatility in their pressure pumping group [indiscernible] just fine, as you would expect it, with a single, mid-single-digit revenue decline. So we're not displeased with quarter. I think we're more disappointed with the environment that it wasn't a little bit stronger coming out of the full quarter.

Stephen Gengaro

Thanks, and I apologize because I jumped on a little late. But when just looking at others' commentary from an activity level perspective, it feels like there's maybe modest growth in 2Q sequentially, just coming off of kind of early year inefficiencies and white space. Are you seeing the same thing into the second quarter? Any thoughts on that?

Ben Palmer

Again, it's highly volatile. I wouldn't say we're seeing any strong indication up or down. It's sort of bumping along at this point.

Stephen Gengaro

Okay, great. Thank you for the details.

Ben Palmer

Sure. Thank you, Steve.

Operator

Your next question comes from Don Crist with Johnson Rice. Please go ahead.

Don Crist

Good morning, gentlemen. I wanted to ask about non-pressure pumping activities. Obviously, they held up a little bit better than pressure pumping during the quarter, but are you seeing as competitive a market in, say, coil or downhole tools as you are in pressure pumping? I know pressure pumping is significantly competitive in the Permian, but obviously your other services are in other basins. Just curious about demand there.

Ben Palmer

Yeah. Good, Don. Let me make a comment, then I'll have Mike take it over. I just want to reiterate that pressure pumping, again, did not contribute outsized to the decline in EBITDA. It was fairly consistent across the board. Mike can speak to downhole tools and some of the other service lines.

Mike Schmit

Yeah, I mean they were down 3% on average, our other non-pressure pumping lines. So the customer mix is a little different in those for us as well. So they were kind of more in line with the overall industry. We're also, as you know, spread out into various basins where our pressure pumping is really kind of more heavily in the Permian. So we have that diversity, which helped those a little bit as well. So overall, the impact wasn't as strong in those. But it's been indicated that they were down slightly also.

Ben Palmer

It's really sitting back and looking at the performance for the quarter. Again, we're talking about mid-single-digit changes in revenues. And so the numbers and the margins can move around quite a bit with that small of a revenue change. The downhole tools are continuing to do well. We've come out with some new technology that we're really excited about and working now to strategically determine the pricing for that particular new tool that we think again creates a lot of efficiencies for our customers. So it's sort of a -- it's a mixed breath blessing. So we're looking at our pricing strategy there and look forward to some of those results coming through in the next few quarters. So again, not outsized changes or differences between the various service lines.

Mike Schmit

I'll add to, our CapEx spend is spread across all our service lines too. So we are making some investments in our other than just the new DGB fleet in our other service lines also. So we expect those to pay off for us as the year goes on and in future years.

Don Crist

I appreciate that color. And can you remind us on the coil side, are you pretty much doing new drill-outs, or are you doing some kind of work over work on oil wells, et cetera? I'm just trying to drive -- are you seeing any kind of pick up in coil if not necessarily a new drill out perspective?

Ben Palmer

We -- no, drill outs is certainly the largest component of that business revenues in that business. We do have a special project which is starting up very soon using some of our other specialty tools with coiled tubing to do some P&A work. That happens to be out in California. You wouldn't believe how difficult it is to start to do business in California, or maybe you would. But yeah, but we're looking forward to that. That could be a nice opportunity to expand and diversify coiled tubing for us and add some nice incremental revenue. But otherwise, overall, and it's a very appropriate question, there's not a significant amount of other coiled tubing work out there at this point in time.

Don Crist

Okay, I'll get back in queue. I appreciate the question or the answer.

Ben Palmer

Thank you. Yeah, thank you.

Operator

Your next question comes from Sean Mitchell with Daniel Energy. Please go ahead.

Sean Mitchell

Hi, guys. Thanks for taking the question. Just wondering, as we look at -- you alluded to the kind of M&A and the E&P space, and I think you're right that activity should pick up as some of these assets get consummated by these folks and you get some splinters for some of these private, smaller guys. But what are the smaller guys saying or the private guys saying? Because it seems like crude above $80, service costs coming down and continuing to come down. What are they saying is like the key driver here? Is it they don't have acreage to drill or is it because the economics seem to make a ton of sense today at $80 -- above $80?

Ben Palmer

Great question, Sean. To be honest with you, I can't tell you that I personally have talked to a lot of these guys. But just on an overall basis, it's the same sort of thing with the price of the oil. It's kind of a mixed blessing, right? I mean, everybody's showing discipline, and that's great. Hopefully that will result in some more stability. Maybe the cycles won't be quite as severe. Maybe we're not seeing the uptick, but maybe we're not going to see a whole lot of significant downward pressure from here, hopefully. If everybody can show some sufficient discipline on the oilfield services side, it should translate into a better operating environment. So I don't have an answer for you, but it's a great question. And I think a lot of people are talking about 2025 and gas prices and all that. Everybody's starting to look forward to ‘25. And hopefully, maybe get a little bit better in the rest of this year, and we can look forward to a little bit stronger 2025. But we'll just have to see how some of these new companies shake out. They're still working on, many of the investors haven't taken place yet, so a lot of those management teams probably aren't getting ahead of themselves, right? They got to first closed and integrate some of those transactions before they get to work and start making some phone calls and sending out RFPs.

Sean Mitchell

Yep. Thanks for that. And then Maybe one more, just as you think about the consolidation in the EMP space, I know you guys are looking for opportunities in the service space. Are things picking up there in terms of consolidation opportunities? And kind of where do you see the best opportunities today for you guys?

Mike Schmit

Yeah, I can start. This is Mike. We're always looking. We're getting a lot of opportunities coming across our desk. It's just finding the right one at the right price and the right fit. We think we are -- we will be successful in finding some good opportunities that make sense. But we're definitely actively looking at opportunities. And there are a lot of them you know out there. So I don't know Ben, if you want to add?

Ben Palmer

Yeah, yeah, a lot have been presented. We've had discussions with several. I think seller expectations on valuation are still -- still haven't lined up, but we're going to remain disciplined, right? We don't like to do transactions just to do transactions.

Sean Mitchell

Yep.

Ben Palmer

And so, but I think, especially, I think you look at our results, and it's not, again, not what we wanted it to be. But I think we'll see that others in the space are -- the results are not where they want them to be either. So I think, and the privates are seeing the same thing with some of our discussions with some of the private oilfield service companies. I think they're feeling the pressure. And I think that environment will get better. That is for finding some people who maybe -- will be a little more accommodative or reasonable, whatever you want to say. And maybe those will come our way. But we're focused on some of our other service lines where we have nice market share. Pressure pumping, we're open to an opportunity. Some of the smaller pressure pumping companies. Sometimes the condition of the equipment and things like that can be an issue. But we're seeing multiple, multiple, multiple opportunities. You can imagine people would love to merge their company into our balance sheet. So we have to be mindful of that as well.

Sean Mitchell

All right, guys. Thanks.

Ben Palmer

Thank you, Sean.

Operator

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

Stephen Gengaro

Thanks. I just wanted to follow up, the -- and I don't think you said this earlier in the call. When you look at the active fleets you have now, and I think you have 10 horizontal fleets in total, can you just give us where the fleet count was during 1Q queue and where you expect to be during 2Q? Like, were they active and just underutilized, or has anything been taken off the market in fleet short term?

Ben Palmer

Yeah, so they were all active during the quarter, but that said, just the utilization wasn't exactly where we would want it. We typically don't give the exact kind of utilization percentage, but obviously our newer Tier 4s were utilized a lot more than some of the other fleets, but we're still fully staffed, Not as staffed as we were this time last year, but enough that if the work's there, we can get them going. So we haven't taken any down, and in the current environment, have no plans to set any aside at the moment. Other than the one [Technical Difficulty] new Tier 4 comes on board.

Mike Schmit

As Ben said, we're not going to add capacity. We'll take a Tier 2 down when that one comes on board later this quarter.

Sean Mitchell

Okay, thank you. And then one other, when we think about the bigger players, right, they talk all about these long-term arrangements and for lack of a better word, some level of contracted assets with some big E&Ps. When you think about your fleet and your strategy, how does that impact you? I mean, it seems to be that there's been consolidation, so there's probably more bigger players. But does that give you kind of an advantage when things ultimately turn with the smaller players and available assets? Like how should we think about the short and long-term implications of kind of consolidation and a lot of players going after sort of the term contracts and how that impacts you?

Mike Schmit

Yeah, we certainly hope so. I mean, obviously, we haven't seen that right now in this quarter. But our hope is if things stay where they are, that some of the smaller players and privates will get more active in the second half of the year and will benefit then. But that's certainly our belief.

Ben Palmer

That's exactly right. Yes, our results, given our customer base and where we are, might be a little more volatile than some others. But certainly that gives us opportunity to the upside, right? So there may be a little bit more downside, but there's opportunities to the downside. We definitely think that's the case. Great question.

Stephen Gengaro

Good. Thanks. Thank you again, gentlemen.

Ben Palmer

Thank you, Steve.

Mike Schmit

Thanks.

Operator

Your next question comes from Chuck Minervino with Susquehanna. Please go ahead.

Chuck Minervino

Hi, good morning. I was just wondering if you could provide a little bit more color on kind of the pricing situation in frac right now. You talked about some competitive pricing. Do you think it's kind of bottoming here or is it still kind of trying to find its bottom? Just wanted to try to get a sense of where we are in that. And also kind of tied to that, you mentioned some frac fleets coming in from gas basins. Has that stopped or do you expect that will continue as well?

Ben Palmer

Chuck, it's all in flux. I mean, we are hopeful that we're reaching a trough or a bottom. As I indicated, we've got our stated price at which we won't work below. We're not bidding everything at that particular price level. So we'll see. If at some point we're not winning anything at the level at which we're bidding it, we'll have to take more dramatic steps. But we're hopeful that the industry will be rational and appropriately rational and we are monitoring it very closely and I can tell you that you know competition -- all of industries we compete in, all of the oilfield services is incredibly competitive, our customers do an incredible job exploiting the fact that they have lots of choices and if our industry can show some discipline, it would be more disciplined. But it is competitive. This is capitalism. So we understand that. And so we're hopeful we're reaching that point. It may help with some of the smaller players who, at the very low end of the market, that they're probably bidding more aggressively, but they're going to be wearing out their equipment and perhaps don't have the capital to be able to invest back in the fleet like others do, like us. So we're trying to be very mindful. We don't want to burn our equipment up. We want to be in a position, obviously, to generate a nice return on our investments, so we're not going to dip down too low. But we're hoping things will shake out and there'll be some improvement. There's obviously a lot of focus on e-fleet market. A lot of investment going in at that upper end of the market. Have to believe that competition there is intensifying as well. And so it's an ever-changing market. Technology is changing constantly. We're hearing of new types of technology that are different, innovative, and could be quite interesting, which is one of the reasons we haven't at this point tried to go into electric technology in a big way because it is changing. It is changing, and it is evolving. And as we noted in our comments, what the ideal or appropriate configuration for the equipment and the ability to get power sources is evolving and changing. Lots of people are spending a lot of time coming up with viable solutions that hopefully at the appropriate time we will be able to exploit. But at this point, we're monitoring that market and feel good about our position in the market that we focus on.

Mike Schmit

And I'll add, in relation to your question about potentially more fleets from gassy basins moving in, the Permian or other areas, I mean, gas prices have been pretty low for a while. So we don't anticipate there's a lot more movement that could happen, because we don't think there are a lot of fleets left in gassy basins that are not working. So if they're at this price, we don't anticipate there to be incremental movement.

Chuck Minervino

Got it. And then just one more. If you can just talk me through a little bit the free cash flow outlook for the year here, it sounds like maybe the CapEx number might be coming down a little bit. Also, you mentioned a tax refund coming in, and I guess a little bit of the moving parts there with EBITDA as well.

Mike Schmit

Well, we did receive the tax refund. That came in this week, actually. So that was good. And we said if things slow, we would move to the lower end of the range. Obviously, we're hopeful that's not the case. But we have flexibility in that spend, I guess, with the point there. So if things are good, we'll definitely spend the money and we'll continue to invest our businesses. As you know, we have a very strong balance sheet. We've got over $200 million in cash. And so we're not concerned currently about our ability to generate cash for the rest of the year and meet all of our CapEx needs. And we still will plan to -- we think we have plenty to do an acquisition if we find the right one and also return cash to our shareholders. So not a lot of concerns. The comment on CapEx is just that's a lever we can pull to ensure that we do continue to generate the cash we need to for our plans.

Ben Palmer

Our plans this year include some, I'll call them, strategic investments. We don't have a tremendous amount of specific growth capacity investments, but we're making a lot of targeted strategic investments in different parts of the business that we think are, obviously, we think is appropriate and are going to pay off. That's part of what's driving our number this year. But we can manage down. Certainly, the capitalized maintenance would come down naturally if activity levels were to fall. That one would kind of manage itself, if you will. So the upper end of that $200 million, $350 million has some quote unquote, extra stuff in there that is incremental. So that's really not our annual run rate at this level of activity. It'd be something closer to the lower end of the range.

Chuck Minervino

Got it. Thank you.

Ben Palmer

Thank you.

Operator

[Operator Instructions] Seeing no further questions in the queue, I will turn the call back to Ben Palmer for any closing remarks.

Ben Palmer

Thank you, operator, and thank you everybody for joining us this morning, and we look forward to catching up again soon. Take care.

Operator

This will conclude our conference call. Please note a replay of today's call will be available on marineproductcorps.com within two hours following the completion of this call. Thank you for your participation. You may now disconnect.