RPC, Inc. (NYSE:RES) Q4 2022 Earnings Call Transcript

RPC, Inc. (NYSE:RES) Q4 2022 Earnings Call Transcript January 25, 2023

Operator: Good morning and thank you for joining us for RPC Inc.’s fourth quarter and year-end 2022 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. Jim will get us started by reading the forward-looking disclaimer.

Jim Landers: 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’d like to refer you to our press release issued today along with our 2021 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 EBITDA, which is a non-GAAP measure of operating performance. RPC uses EBITDA as a measure of operating performance because it allows us to compare performance consistently over various periods without regard to changes in our capital structure.

We’re also required to use EBITDA to report compliance with financial covenants under our revolving credit facility. Our press release today and our website provide a reconciliation of EBITDA to net income, which is the nearest GAAP financial measure. Please review that disclosure if you’re interested in seeing how it’s calculated. If you have not received a 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.

Ben Palmer: Thanks Jim, and thank you for joining our call this morning. 2022 was an exceptional year, and we finished the year with very strong results in the fourth quarter. I would like to start by thanking our employees for an outstanding 2022. Their hard work and dedication in overcoming many challenges made our success possible. We look forward to building on our achievements and expect continued success in 2023. RPC’s fourth quarter financial results showed very little impact from weather-related or holiday downtime. Furthermore, our customers continued to work throughout the fourth quarter with no evidence of budget exhaustion. Although oil prices have recently moderated from their highs, they remain above levels sufficient to motivate our customers to drill and complete new wells.

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While pressure pumping is certainly a core business for RPC, we are much more than just a pure play pressure pumper; in fact, we are one of the very few companies that can provide nearly all of the services required to complete oil or gas wells. This diversification represents a competitive advantage for RPC and adds value as a leading provider of completion services for our customers. Our CFO, Mike Schmit will discuss this and other financial results in more detail, after which I will provide some closing comments.

Mike Schmit: Thanks Ben. I’ll start with the fourth quarter 2022 sequential financial overview. Fourth quarter revenues increased by 4.9% to $482 million from $459.6 million in the prior quarter due to improved pricing in most of our service lines and higher equipment utilization, supported by a full quarter of operations for our most recently reactivated pressure pumping fleet. Cost of revenues during the fourth quarter decreased slightly to $308.6 million from $309.8 million in the prior quarter. As a percentage of revenues, cost of revenues improved to 64% from 67.4% in the prior quarter due to improved job mix and continued strong pricing for our services. Selling, general and administrative expenses were $38.2 million in both the fourth and third quarters of 2022.

During the fourth quarter of 2022, RPC also recorded a $2.9 million defined benefit pension plan charge related to a lump sum settlement offered to plan participants. During Q1 2023, we expect to record a settlement charge of approximately $22.5 million associated with the final termination of this plan. Also in connection with the transfer of the plan liability to a third party, RPC expects to make an approximately $10 million cash contribution also in the first quarter of ’23. Operating profit during the fourth quarter increased by 21.9% to $112.3 million from $92.2 million in the prior quarter. EBITDA increased by 19.8% to $135.5 million from $113 million in the prior quarter. Our technical services segment revenues increased by 5.1% to $458.1 million.

This segment generated $110.5 million of operating profit compared to $89.5 million in the prior quarter. The improvement in operating results were driven by higher customer activity levels, improved pricing, and a larger active fleet of revenue-producing equipment. Support services revenues were unchanged during the fourth quarter of 2022 compared to the prior quarter. Operating profit, though, was $6.7 million compared to $5.3 million in the prior quarter. Now I’ll discuss our current year–sorry, our current quarter results compared to the same quarter in the prior year. Revenues increased to $482 million from $268.3 million. Operating profit increased to $112.3 million from $20.1 million. EBITDA increased to $135.5 million from $39.4 million.

These increases were driven by higher customer activity levels and improved pricing, resulting in our diluted earnings per share improving to $0.40 compared to $0.06 in the same quarter of the prior year. Our technical service segment revenues increased 80.1% to $458.1 million, and segment operating profit increased to $110.5 million from $20.5 million in the same quarter of the prior year. Our support services segment revenues increased 73.1% to $23.9 million and segment operating profit increased to $6.7 million from an operating loss of $373,000 in the same quarter of the prior year. Now I’ll briefly discuss our capital expenditures and horizontal pressure pumping fleet count. Capital expenditures were $49.3 million in the fourth quarter.

We currently estimate full year 2023 capital expenditures to be approximately $250 million to $300 million, including a new Tier 4 dual fuel fleet we plan to place into service during the second quarter, at which time we expect to take down an existing fleet for refurbishment. During the fourth quarter, we operated 10 highly utilized horizontal pressure pumping fleets. We expect to continue operating 10 horizontal fleets throughout 2023. I will now turn it back over to Ben for some closing remarks.

Ben Palmer: Thank you Mike. Our confidence in the current industry outlook along with our view of how that should translate to our financials has encouraged us to make investments in our completion-oriented businesses. Previous up-cycles have resulted in our industry adding significant capacity, inevitably outpacing demand. In contrast, our current focus is on long-term investments to maintain and selectively improve our current productive capacity, also to generate leading industry-leading returns on invested capital and leverage technology to perform our services in an environmentally friendly manner. Through a combination of dividends and open market share repurchases, RPC has returned over $536 million to shareholders over the last decade.

As evidence of our confidence in the strength of the current cycle and commitment to our shareholders, we announced this morning an increase in our regular quarterly cash dividend from $0.02 to $0.04 per share. Thank you for joining us this morning, and at this time, we’re happy to address any questions you may have.

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Q&A Session

Operator: We’ll take our first question from Stephen Gengaro at Stifel.

Stephen Gengaro: Thank you, and good morning everybody.

Ben Palmer: Hey Stephen.

Stephen Gengaro: A few things from me, if you don’t mind. I guess the first is when you look at the current pressure pumping market and what you see in the industry dynamics, we think, and I think there’s a lot of people out there who are sort of sensing a much different approach by operators as far as adding assets, etc. In the field, what do you see? Is your experience similar to that, and maybe talk a little bit about how you think about new build economics right now.

Jim Landers: Stephen, when you talk about operators adding assets, I think you mean us, not our customers?

Stephen Gengaro: Yes, sorry – I mean pressure pumpers in general, yes.

Ben Palmer: Yes. Stephen, this is Ben. I think that there is investment that’s taking place. I think more than whether there’s investment taking place is ultimately what the overall capacity equation is going to look like. We’re working really hard to–or we’re committed to a plan to–as I indicated in my comments, we’re trying to more or less maintain our existing capacity, but we’re upgrading that, we’re making investments where we need to, to make sure that we can continue to provide a quality service. But we want to utilize our existing equipment, right, and get as much out of it as we can. If it can generate adequate returns and provide a quality service, we don’t want to take it out of service too quickly, but then we have the long lead times for new equipment, so getting the timing right between when an existing fleet will be ready to retire or lay down, right, that’s tricky, and that’s not something we’re trying to necessarily say those are going to happen on precisely the same date.

But we’re really looking at–you know, we’re committed to trying to generate free cash flow during this particular cycle. As I indicated, we’ve returned a lot of cash to shareholders over time. Our history shows that we’ve done that, and we continue to be committed to that. So our–and return, you asked about our returns and the way we think about that, the return profile or what one would reasonably expect 12 or 14 months ago versus where we are today, obviously it’s completely different, right, so we don’t all of a sudden wake up and say, well, today or last month or last quarter, the return indications are unbelievable so we should ramp our spend or our investment. We’re trying to–we expect to remain disciplined, we want to go at an appropriate pace, having a longer term plan and try to execute against that plan, and allow us to take advantage of the opportunities, be there to provide services to our customers, maintain our existing capacity more or less, selectively grow but maintain our capacity, and focus on that continuing to return excess cash to shareholders.

Hopefully that’s responsive, and I don’t know if anybody else has any other additional comments on that.

Mike Schmit: Yes, this is Mike. I’ll just add one thing to think about too. When you order new equipment in pressure pumping, right now there could be up to a year lead time, so you’re making a huge financial commitment and betting on what the market is going to be a year from now. That’s the other consideration that’s worth thinking about, capital allocation to capex.