Q1 2024 RPC Inc Earnings Call

Participants

Michael Schmit; Chief Financial Officer, Vice President, Treasurer, Company Secretary; RPC Inc

Benjamin Palmer; President, Chief Executive Officer, Director; RPC Inc

Stephen Gengaro; Analyst; Stifel Nicolaus

Don Crist; Analyst; Johnson Rice

Sean Mitchell; Analyst; Daniel Energy

Charles Minervino; Analyst; Susquehanna

Presentation

Operator

Good morning, and thank you for joining us for RPC Inc. first-quarter 2024 conference call. Today's call will be hosted by Ben Palmer, President and CEO, and Mike Schmidt, Chief Financial Officer. (Operator Instructions) And I would like to advise everyone that this conference call is being recorded.
I will now turn the call over to Mr. Schmidt.

Michael 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.
So I'll now turn the call over to our President and CEO, Ben Palmer.

Benjamin Palmer

Thanks, Mike, and thank you for joining our call this morning. So before we get started, I'd like to take a moment to share some unfortunate and sad news, our longtime 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've 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 the miss for all of us.
Shifting to the core, as you can see from our earnings release, the first quarter was a soft start to the year in what feels like a muted oilfield services market. So we did not give explicit financial guidance for the first quarter. We did expect more stable EBITDA. Our activity level in 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 and 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 from gassy plays, adding capacity to an already crowded base. In addition, ongoing operating efficiency gains have created additional power capacity regarding pricing, motivation to keep assets utilized and absorb fixed cost 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're 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 semi beta kit dedicated customers regarding our new Tier 4 dual-fuel fleet. We eagerly await bringing those assets into service around midyear 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, Derik, to reiterate, when we placed the new Tier four DGB fleet and service in a few months, we will be pulling a Tier 2 diesel fleet out of service. So 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 dual-fuel assets have a long demand runway, and we will focus our efforts and capital in this direction until we feel the risk return profile on investments in electric fleets is further in our favor, barring how we see the next few quarters playing out. Visibility remains limited, but we are certainly encouraged by the recent increase in oil prices, 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 U.S. economy. If this level is sustained. We are cautiously optimistic that many of the smaller property and fees that make up the spot intimidate dedicated pressure pumping market will steadily increase activity while the larger E&P stick to, but stick to budgeted expenditures and exercise capital discipline.
Mike will now discuss the quarter's financial results.

Michael 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. So support services were down 9% and represented 6% of our total quarter revenues. 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 costs increased slightly compared to the fourth quarter, contributing the 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. It 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 or sorry, adjusted EBITDA, it was 63.1 million, down from $79.5 million with adjusted EBITDA margin decreasing 340 basis points to 16.7%. Again, there are 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.

Benjamin Palmer

Thanks, Mike. So looking ahead, we're current, we are encouraged by oil price trends and optimistic for an uptick in rig count. This should translate into an improved activity, which would hopefully be accompanied by disciplined pumping capacity management in the marketplace. We also see potential for increased activity by smaller E&P's as a fallout from the wave of M&A and larger M&A space E&P 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 where we are strong, not only with spot and simulated dedicated customers and pressure pumping, but our other service lines have excellent relationships with both small and large E&P we continue to be presented with opportunities to use our strong balance sheet to grow the business.
We are 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 for 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 reiterate that in and 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 to work 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

(Operator Instructions) Your first question comes from Stephen Gengaro, Stifel.

Stephen Gengaro

Thanks. Good morning, everybody. So a couple for me. I think just first, can you talk about the just the overall pressure pumping market so I'm thinking about the competitive landscape. I mean, you talked about competitive pricing environment and how you think about is it 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?

Benjamin Palmer

Stephen, this has been a good question on that. We were going to exercise a lot of discipline have exercised this on the call. We have clearly compared to a year ago, there has been some degradation and pricing on 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 and today, but we're going to remain disciplined and we're not going to burn out of our back burn out our equipment.
There's been a bit of volatility here recently. There have been some people dropping down trying to undertake clinical to take advantage of the spot market in the syndicated 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 nothing that with our team is very agile. It's very in tune with market dissipating and a lot of opportunities.
And as I said, we're going to remain disciplined. Certainly, I think the market to get to that to get better. We're going to obviously have to see increased activity. We're going 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 was our fleet. And unfortunately, again, in this environment, it's not necessarily translating immediately or directly into better better financial results. But I think that is a kind of I think that's consistent with everybody. We're just in a win and a not unusual.
I mean, this is a normal market, right? It's a highly competitive market and in and we will we'll work through it. We're prepared to take more significant steps if we need to. But right now we feel that we are 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 it's not a contributor to any decline in or five outsized contributor to changes in our operating performance. So everybody on a relative basis, you were talking about a fairly small change in revenues. And so there's there's some volatility in their pressure pumping and pressure pumping group again, just fine, as you would expected with a with SenTiva single mid single digit revenue decline. So we're not displeased with or I think we're more more disappointed with the environment that it wasn't a little bit stronger coming out of the coming out of Q4.

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 is it maybe modest growth in 2Q sequentially just coming off of kind of early or early year inefficiencies in white space are you seeing the same thing into the second quarter, you any any thoughts on that?

Benjamin Palmer

And it's again, it's highly volatile. We're 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, sir.

Operator

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

Don Crist

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

Benjamin Palmer

Yes, Dan, I'll let me make a comment then I'll have Mike take it. I just want to reiterate that pressure pumping that 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.

Michael Schmit

Yes, I mean they were down 3% on average, our other non pressure-pumping loans. 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 that we're also, as you know, spread out in the various basins where our pressure pumping is really on a more heavily in the Permian. So we have that diversity, which helps those a little bit as well. So overall, the impact wasn't as strong in those. But yes, it's been indicated they were down slightly also just really sitting back and looking at the performance for the quarter.
Again, we're talking about mid single digit changes in revenues. And so that can yes, the numbers and the margins can move around quite a bit with that small of a revenue change, but downhole tools a 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 Brett blessing. So we're looking at our pricing strategy there and look forward to some of those results coming through in the quarter. So yes. And again, not outsized changes or differences between the various service lines.

Benjamin Palmer

I'll add to our CapEx spend is spread across all our service lines too. So where 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 still in new drill outs or are you doing some kind of workover work on oil wells, et cetera. And I'm just trying to drive, are you seeing any kind of pickup in coil, not necessarily a neutral outcome?

Benjamin Palmer

We know drill-out 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 some of our other specialty tools with coil tubing to do some P&A work. It 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 you have a we're looking forward to that. That could be a nice opportunity to expand and diversify coil tubing for us and add some nice increment incremental revenue. But otherwise overall, and it's a very appropriate question. There's not a significant amount of other coil tubing work out there out there at this point in time.

Operator

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

Sean Mitchell

Hi, guys. Thanks for taking the question. I'm just wondering, as we look at, you alluded to the kind of M&A in the E&P space, and I think you're right, that activity should pick up as some of these assets get consummated by these spokes and you get some spinners for some of these private smaller guys, but one of the smaller guys saying are 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 that 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?

Benjamin Palmer

Great question. Sean 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, the same sort of thing with the price of oil where it is, it's kind of a mixed blessing right. I mean everybody showed how disciplined and that's correct, hopefully that 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 every buyer in shares sufficient discipline on the Oilfield Services side, it should translate into a better, a better operating environment. So I don't have an answer for you, but it but it's a great question. And, you know, I think a lot of people are talking about 2025 and gas prices and all that are base starting to look forward to 25 and hopefully, hopefully things maybe get a little bit better in the rest of this year. And we look forward to a little bit stronger 2025, but we'll just have to see how some of these new companies shake out are they they're still working on.
Many of the hasn't haven't taken place yet. So a lot of those management teams probably aren't getting ahead of themselves, right? They got first close and integrate some of those transactions before they get to work and start making some phone calls and sending out RFPs.

Sean Mitchell

Yes, thanks for that. And then maybe one more just as you think about the consolidation E&P space, I know you guys are looking for opportunities in the server 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?

Michael Schmit

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

Benjamin Palmer

We've had discussions with several, I think, seller expectations on valuation and are still still haven't done yet lined up, but we're going to remain disciplined, right? We don't like to do transactions just to do transactions on the upfront. And so but I think especially I think if you look at our our results. And, again, not what we wanted it to be, but I think we'll see that others. 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 privates private wholesale service companies. And 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 free some overhead. We have whatever you want to take and maybe those will come our way.
But we're focused on just some of our other some of the phone, some of our service lines where we have nice market share pressure pumping, we're open to an opportunity, some of the smaller pressure pumping companies. Sometimes you have the condition of the equipment and things like that can be can be an issue. But so we're seeing multiple multiple multiple opportunities. You can imagine people would love to merge their company and our balance sheet. So yes, you have to be yes, we have to be mined of that as well.

Operator

Stephen Gengaro, Stifel.

Stephen Gengaro

Thanks. I just wanted to follow up the and I don't think you said it earlier in the call would when you look at the active fleet you have now I think you have 10 horizontal fleets in total. Can you just give us kind of where the fleet count was during 1Q and where you expect to be during 2Q? Like were they active and just underutilized? Or has anything been kind of taken off the market we short term?

Michael Schmit

Yes. So they were all active during the quarter, but that said, just the utilization wasn't exactly where we want it. We typically don't give the exact kind of utilization percentage, but obviously our newer Tier fours were utilized a lot more than some of the other fleets, but we're still fully staffed or not not as staffed as we were this time last year.
But on a note that if the works there we can get them, get them going. So we haven't taken any down in the current environment, have no plans to sell any aside at the moment. And so that's I mean one that will make new Tier four comes on board. As Ben said, we're not going to add capacity. We'll take a Tier two down when that one comes on board later this quarter.

Stephen Gengaro

Okay, thank you. And then one other, if we think about, you know, 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 & P's. When you think about your fleet, your strategy, how how does that impact you? I think it seems to be that there's been consolidation centers by more bigger players, but does that give you kind of an advantage when 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?

Benjamin Palmer

Yes. We certainly hope so. I mean, obviously, we wouldn't see that we haven't seen that, yes, right now in this quarter. But our hope is as things if things stay where they are that some of the smaller plays and privates will get more active in the second half of the year and we'll benefit then. But that's certainly our belief.
No, that's exactly right. We yes, I mean, 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.

Operator

Chuck Minervino with Susquehanna. Please go ahead.

Charles Minervino

Hi, good morning, Northern's. I was just wondering if you could provide a little bit more color on kind of the pricing situation in frac right now on 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 trying to get a sense where are we on that? And also kind of tied to that, you mentioned some some frac fleets coming in from gas basins. Has that stopped or do you expect that will continue as well?

Benjamin Palmer

On docket, it's all in flux. I mean, we are hopeful that that we're reaching a trough or a bottom. As I indicated, we've got our stated price of which we won't work below. We're not bidding everything at that particular price level. So so we'll say at some point, we're not winning anything at the level at which we're bidding, and we'll have to take more more dramatic steps. But we're hopeful that the industry will be rational and appropriately rational and it will and we are monitoring it very closely.
And I can tell you that competition in all of the industries we compete in all of those services is incredibly competitive. Our customers do an incredible job of exploiting the fact that they have lots of choices. And And yes, if our industry can show some discipline that we have which are more disciplined, less 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 are 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 we want to be in a position, obviously to generate a nice return on our investment. So we're not going to we're not going to dip down to below that. We're hoping things will shake out and know they'll be some improvement off of obviously a lot a lot of focus on the the fleet market, a lot of investment going in at that, that upper end of the market have to believe that competition there is intensifying as well. And so it's an ever-changing market and you have technologies changing constantly.
We're hearing of new types of technology that are it's 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, right? It is changing and it is evolving. And as we noted in our comments of what the ideal or appropriate configuration for the equipment and the and the ability to get power sources is evolving and changing. A lot of people are spending a lot of time coming up with viable solutions that hopefully, at the appropriate time, we'll 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.

Michael Schmit

And I'll add in relation to your question about potentially more fleets from gassy basins moving in the Permian or other areas. Adding 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 they're there at this price. You know, we don't I anticipate there to be incremental movement.

Charles Minervino

Got it. And then just one more, if you can, if you could 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 more. So you mentioned a tax refund coming in and on, I guess a little bit of the moving parts there with EBITDA as well?

Benjamin Palmer

Well, we did receive the tax refund that came in this week, actually sets to that list. That was good and then we said if if the if things slow, we would move to the lower end of the range and obviously, we're hopeful that's not the case. But I mean, we have flexibility in that spend, I guess with the point, Barry and others. So if things are good, we'll definitely spend the money and continue and will continue to invest in our businesses where 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 on yield about our ability to generate cash for the rest of the year and meet all of our CapEx needs. And we still 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 it's not a lot of concerns that the comment on CapEx is just that's a lever we can pull on to ensure that we do continue to generate the cash we need to for our plans to our plans this year includes some, I'll call them strategic investments.
We don't have a tremendous amount of of no specific growth capacity investments. But we're making a lot of targeted strategic investments and 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 when we kind of manage itself, if you will. So a nose of the upper ends of that 250 have some, quote-unquote extra stuff in there that is incremental. So that's really not our annual annual run rate at this level of activity would be something closer to the lower end of the range.

Operator

(Operator Instructions) I will turn the call back to Ben Palmer for any closing remarks.

Benjamin Palmer

Thank you, operator, and thank you, everybody, for joining us this morning, and we look forward to catching up against that gap.

Operator

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