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spk00: RPC Incorporated's fourth quarter 2023 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 a listen-only mode. Following the presentations, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. I would like to advise everyone that this conference call is being recorded. I'll now turn the call over to Mr. Schmidt.
spk04: Thank you and good morning. Before we begin, I want to remind you that some of the statements that will be made on this call could be forward-looking in nature and reflect a number of known and unknown risks. Please refer to our press release issued today along with our 2022 10-K and other public filings that outline those risks, all of which can be found on RPC's website at www.rpc.net. In today's earnings release and conference call, we'll be referring to several non-GAAP measures of operating performance and liquidity. We believe these non-GAAP measures allow us to compare performance consistently over various periods. Our press release issued today and our website contain reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. I'll now turn the call over to our president and CEO, Ben Palmer.
spk02: Thank you, Mike, and thank you for joining our call this morning. We closed out the year with strong sequential fourth quarter revenues and EBITDA increases, as expected following a soft third quarter. And for the year, we delivered adjusted EBITDA of $374 million and free cash flow of $214 million. We also completed the acquisition of Spinnaker to strengthen and diversify our business, and we are still able to end the year debt-free. We have a solid balance sheet that can support both investments in our business and consistent returns of capital to shareholders. To elaborate further on the fourth quarter, we started off strong but felt the impact of falling oil prices later in the quarter. During our third quarter call, we noted that with oil above 80, we and our customers should have a favorable environment for activity and utilization. At that time, we had indications from our customers that there would be a limited holiday slowdown. Obviously, oil fell below 80 in early November and dipped below 70 in early December. This decline caused completion postponements and more holiday downtime than originally anticipated. While the fourth quarter financial results did show a substantial improvement, from a very soft third quarter, the December lull prevented us from delivering even higher growth. Our pressure pumping activities increased sharply from the third quarter, but still below our expectations. Regarding pricing discipline, as expected, we were able to secure work at more attractive pricing in the fourth quarter than certain opportunities we opted to forego during the third quarter. As for our workforce, our 10 horizontal fleets plus our two vertical fleets remain staffed, but we are monitoring conditions closely and will implement contingent cost actions as appropriate. Spinnaker acquisition was an important strategic decision for RPC, growing our cementing business, increasing our scale, and expanding our customer relationships. Performance remained solid despite a softer environment. Integration on all fronts has gone well, and we are excited about its future. Mike will now discuss the quarter's financial results.
spk04: Thanks, Ben. I'll start with a few quick financial highlights for the year and then go into some more detail about the fourth quarter. For the full year, 2023, revenues were $1.6 billion, increasing 1% versus last year. Diluted EPS was 90 cents. which included a $0.07 negative impact from pension settlement costs in the first half of the year. So adjusted EPS was $0.97 and adjusted EBITDA was essentially flat at $374 million. We generated strong operating free cash flow in 2023. Operating cash flow was $395 million And after CapEx of $181 million, free cash flow was $214 million. Recall, we spent nearly $79 million to acquire the Spinnaker cementing business in early Q3. For the year, we spent $21 million on share repurchases, of which $19 million was through our buyback program. We also paid $35 million in dividends. thus returning more than $50 million of capital to our shareholders. Our strong financial position of $223 million at year end, as well as our projected future cash generation, will continue to support organic investments in our business, potential M&A activities, and further capital returns to our shareholders, while also providing a solid cash buffer in an uncertain market. We are proud of our continued strong financial position, a function of our ongoing discipline and consistent conservative approach. Now I'll cover our fourth quarter results with sequential comparisons to the third quarter of 2023. Revenues increased 19% to $395 million, driven by a significant increase in pressure pumping revenues. Last quarter, we signaled a strong sequential rebound, and that's what we experienced. Breaking down our operating segment, technical services revenues increased 22%, driven by growth in pressure pumping activity, our largest service line in that segment. Technical services represented 94% of our total fourth quarter revenue. while our support services segment revenues were down 14% and represented 6% of our total revenues in the quarter. The following is a breakdown of our fourth quarter revenues for our top five service lines. Pressure pumping was 47.2% of revenues. Downhole tools, 23.3%. Coiled tubing, 9.4%. 6.5% and rental tools 4.4%. Together these top five service lines accounted for 91% of our revenues. Cost of revenues excluding depreciation and amortization during the fourth quarter grew to $279.4 million from $239.1 million for a 17% increase. We did see some operating leverage in the quarter, particularly on fixed labor costs. SG&A expenses were $38.1 million, down from $42 million. The reduction in SG&A expenses was due to a variety of discretionary cost controls coupled with lower incentive compensation. Diluted EPS was 19 cents in the fourth quarter, up from 8 cents in the third quarter. There were no non-GAAP adjustments to those EPS figures. Adjusted EBITDA increased 53% to $79.5 million, with adjusted EBITDA margin increasing 440 basis points to 20.1%. Now I'll discuss our 2023 and expected 2024 capital spending. As mentioned, capital expenditures were $181 million for 2023 below our expected range of $200 million to $250 million. Given market conditions that evolved in the latter half of the year, we tightly managed capital expenditures and the completion of some projects were delayed into early 2024. For the coming year, we again project capital expenditures to be in the range of $200 million to $250 million. A key element of this plan is the delivery of a new Tier 4 DGB fleet, which we expect to place into service by the end of the second quarter. I'll now turn it back over to Ben for some closing remarks.
spk02: Thank you, Mike. So, bottom line, we rebounded sharply from the third quarter air pocket. However, falling oil prices and customer indications of budget exhaustion late in the quarter curved the magnitude of that bounce back. Bill, this ability is of course limited and January weather has been a challenge, but we are getting signals from our customers for general near term stability and potential for growth as the year progresses. As Mike referenced, our capital spending plans for 2024 include a new Tier 4 DGB fleet, which will replace a Tier 2 diesel fleet. Thus, we won't be adding pressure pumping capacity to the marketplace. Consistent with previous comments, we're taking a patient and disciplined approach to upgrading our pressure pumping assets to more attractive dual fuel and lower emission equipment. With the addition of this Tier 4 DGB fleet, we will have three in total, plus two Tier 2 DGB fleets and three Tier 4 diesel fleets. Additionally, we are operating two Tier 2 diesel vertical fleets. So in total, eight of our 10 horizontal fleets will be ESG friendly. We remain on the sidelines with respect to electric fleets until there are solutions we feel make economic sense for our business and customers. Lastly, with Spinnaker integration essentially complete, we're looking for additional strategic acquisitions to strengthen our business. While RPC currently offers a wide variety of services required by both large and small EMPs, We see opportunities to increase our scale and broaden our customer relationships. We are patient buyers and believe a potential silver lining to current industry conditions will be the availability of attractive acquisition targets. In the meantime, our balance sheet is quite strong, supporting our 4 cents per share quarterly cash dividend, which our board just approved, together with opportunistic share buybacks. I'd like to thank our employees across the company for another year of dedication and resilience. We're especially proud that through tubing solutions, our downhole tools company has been recognized as a 2023 top workplace by the Oklahoma. This prestigious accolade is a testament to our commitment to fostering the vibrant and inclusive work environment. You'll be able to read more about our values as well as other corporate initiatives as we plan to issue RPC's first sustainability sustainability report very soon. In closing, I want to reiterate that in an often volatile market, our discipline remains consistent. Our focus on financial stability and long-term shareholder returns. Thanks for joining us this morning, and at this time, we're happy to address any questions.
spk00: We will now begin the question and answer session. In order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Steven Gengaro with Stifel. Please go ahead.
spk03: Thanks. Good morning, everybody. Good morning. So a couple of things for me. What I would start with is on the pressure pumping side, can you give us a sense for how many horizontal Fract fleets you ran on average in the quarter and kind of how you see that evolving as the year progresses?
spk02: Well, Steven, you know, they all were staffed, as we indicated. They all did some work during the quarter, but, you know, it varies, of course. And I think the way we would expect that to evolve in 2024 is they will either become uh more busy or or we'll make the decision to maybe reduce the number of fleets we have in the field right now we're confident with the way things are going in the first quarter that we need to keep all of those fleets uh appropriately staffed and uh so for the time being that's what we expect and uh and we're counting on but we'll take the appropriate action if it doesn't pan out that way okay thanks and then
spk03: And that actually leads into my other question, which was you, on the technical services side, you clearly had, you know, your margin doubled, right, sequentially on the operating income line. And you're, despite, I think it sounds like carrying costs and having maybe, you know, more staff fleets that actually work the whole quarter. But how does that play out into kind of margin trajectory and or incremental margins in technical services as we go forward? I know it's going to vary based on revenue, et cetera, but kind of is there any parameters you can give us to sort of think about, you know, how the incremental margin performs given the costs that are in place?
spk02: You know, a reasonable question. Obviously, the incrementals this quarter were tremendous because of the large increase in revenue, and that's quite typical. I would say, yeah, and obviously it depends on the amount of revenue and job mix and a lot of different things. But clearly, we're not going to see, we would not expect to see that percentage of incremental margins going forward. But with revenue gains and increases, we would expect to see something in the teens, mid-teens, perhaps 20%. But the first quarter, again, starting off with the way it is, I mean, you know, the fourth quarter is kind of a reasonable base to kind of say, you know, what's the first quarter going to look like? We don't know exactly, but it's starting off okay. And I think like many other people have said, it's a little bit slow. It's always when we slow down late in the fourth quarter, it takes a little bit of time for it to crank back up. So we'll have to deal with that.
spk03: And just to clarify, and thank you, the margin coming – high teens or 20s. That's an absolute margin over time. Or is that an incremental margin you were referring to?
spk02: I was actually referring to incremental. Obviously, it depends on the amount of revenue growth. So we're not expecting anything outsized or unusual.
spk03: Got it. Great. Thanks for the details. Sure. Thank you, Steve.
spk00: Your next question comes from the line of Derek Podhazer with Barclays. Please go ahead.
spk01: Hey, good morning, guys. Hoping you can maybe expand on the types of services you're looking to increase for scale and enhance your growth outlook. You mentioned some potential acquisitions. Just maybe some more color around what types of services or products you're looking to get into.
spk02: Good question. You know, we have in Yeah, pressure pumping obviously is our largest service line, but it's by far the largest market right in the oil field. So there's a big market out there to go after. Many of our other service lines, downhole tools, coal tubing, many of the larger ones that we've referenced here, we have meaningful market share cementing. We have decent market share, especially with cementing in the regions where we operate. We have very strong market share in those particular regions. And we hope to achieve the same with cementing and teaming up with Spinnaker in our South Texas market where we've been operating for a number of years. We think there's a great opportunity down there to bring some of Spinnaker's customer relationships and capabilities to bear down there. So that's an opportunity cementing. Coal tubing, we have a good market share. That's a good business. That's something that we've brought along in the last couple of years. And downhole tools, there might be some opportunities to expand there. So we're looking to expand for the most part. Yeah, we're looking to some of those particular service lines that I'm representing are with some of the larger customers that have a lot of activity. And so we are looking to expand on that. And those particular service lines I've referenced are the ones where we have good scale and good market share now. And those would be the ones we would focus on primarily.
spk01: Got it. That's helpful. And then just on the pumping, is that more of an equipment comment, like looking to bolster your equipment base or maybe services around the frack pump, more of those ancillary services like wireline, profit, logistics, power solutions, things of that nature?
spk02: The ones I prefer to are not directly tied to pressure pumping. I think the commitment and the requirement to internally develop some of those A lot of our larger peers, some of these systems and capabilities they have beyond wireline. We have a small wireline business, so we do wireline. It's just not something that we've talked about because it's pretty small. And wireline is used for a lot of different things, not just for the completion of the well. you know, we'll be selective. We think with our very good market share with some of these other service lines, that's going to be the primary focus, but we're certainly open to other opportunities. Our larger peers with some of the larger customers, you know, that's getting a lot of attention right now, but there are many other customers other than the ones that can benefit from, you know, a fully integrated, you know, tremendous infrastructure to bring out to, you know, not every customer has the type of number of wells and the type of fields that require that type of uh setup and and that would benefit from that type of capability there are plenty of customers who who need you know need the the breadth of services that we offer so that's where we're aligned that's where we're set up that's where we have our historical relationships and i expect for the time being that's that's where we'll focus as it relates to
spk01: Got it. That makes sense. And then just to follow up from me, maybe just talk about the competitive landscape in frack among those, those smaller players, you know, the, the privates that we don't get great insight to many of those, those tier two diesel players. I'm not sure if you come across them when you bid work or just see them out in the field, but you know, there's been anecdotes of bankruptcies and laying down equipment, but just any insights that you guys can provide from what you've seen would be helpful. Right.
spk02: Not a whole lot specific. Obviously we see them from time to time and hear that that you know sometimes when we miss opportunities it might be to one of those smaller players. Obviously the the pressure pumping equipment to upgrade and continue to invest in that equipment is expensive and it and it's not everybody can afford to do that. So hopefully maybe we'll have a shakeout in that regard. Maybe that that part of the market will. further improve, and we're certainly set up to take advantage of that. We had, when the market tightened in the first and second quarter of 2023, we had tremendous financial results within pressure pumping, and obviously the market loosened up a bit. We think some of the smaller players, as you're indicating, I think it will be difficult challenge, as it always is, for them to be able to expand. So hopefully that market will improve a bit. And we have certainly overall in North America, we have a relatively small market share in pressure pumping, but within the regions and the particular customers that we focus on, again, that don't need all of these massive infrastructure, we're pretty well positioned and do well in that.
spk01: Got it. Appreciate all the color. I'll turn it back. Sure.
spk00: Thank you. As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your next question comes from the line of Stephen Gangario with Stifel. Please go ahead.
spk03: Thanks. I just wanted to follow up. Thanks. We've heard a lot about kind of pricing bifurcation in the market between low emission assets and older assets and also kind of the difference between sort of spot pricing for pressure pumping versus sort of contracted or committed arrangements. Can you comment on that at all?
spk02: It's getting more and more complicated. You know, the more fully integrated, whatever you want to call it, some of our larger peers that have all this infrastructure to be able to bring to a well site, they're obviously getting paid something for that, but that requires an additional investment, right? So their investment, all things being equal, is a lot per fleet, if you will. It's a lot higher than our investment, right? So it's very difficult, too, I think, to talk about pricing because of those various aspects that you peel back the various services that are being offered. You know, again, we have a number of services, some of which work from time to time with our pressure pumping fleet and we don't, you know, we watch our pressure pumping service line We monitor each of the service lines individually. There is some opportunity to bundle services, but that's not something that we focus on per se. We try to be the best we can be at a particular service we're trying to execute. Clearly, it seems that some of the very large EMPs appreciate, of course, that's the word, appreciate, will contract, will look for, Some of the service providers that do have a multitude of different services to bring, but there are a lot of customers who still like to unbundle. Customers love to have competitors. They're not going to give all their business to one service company. It's never happened, and I don't believe it's going to happen in the future. So we're continuing to improve our fleet. know we're we're following our roadmap uh it's certainly adjustable but we have a roadmap that says you know as our equipment wears out we're gonna we're gonna uh you know invest and buy new equipment and it certainly will be uh equipment that is newer has additional capabilities uh where where our our significant percentage of our fleet today can burn natural gas and that is appealing to some of our customers not every one of our customers um So we're moving that along. And those decisions that we're making are, you know, they're financial decisions. They're not decisions just to say we want to have, you know, we want to do whatever it takes to have X percentage of our fleet have a particular characteristic by a point in time. We're letting, you know, we're letting the market and our customers and the demand dictate when we make those investments. So, yeah. we're moving that along obviously the the ordering of this new tier 4 fleet moves us along that path uh that's again that's consistent with our road map and like i said it is flexible in terms of you know the exact points when we we take delivery and pay for that type of equipment but we're executing on that that plan for the for the long term and uh and improving our fleet as as we do that great now that's good color thank you
spk00: Sure. Thanks, Steve. Your next question comes from the line of Derek Podhazer with Barclays. Please go ahead.
spk01: Hey, guys. Just wanted to ask about your exposure to a couple of basins, primarily the Haynesville, Midcon, and Eagleford. I mean, these basins were the ones that came under the most pressure as gas started to capitulate. I mean, gas has been pretty lethargic here, pushed out to 2025. So can you maybe take some time for those three basins? and give us a sense of what you're seeing as far as activity and customer with conversations.
spk02: Yeah, you said three bases, Haynesville, uh, Haynesville, MidCon, yeah, Haynesville, MidCon, Eagle. Uh, Haynesville, uh, we, uh, we, we have historically had pressure pumping in South Texas and the Haynesville. We've not been there for many years since probably 15, 16. We've moved out of those, uh, Basins of Hainesville in particular is very intensive work, very, very high pressure, and it's just something that we've not focused on the last few years. Many of our other service lines, downhole tools in particular, that's not as sensitive to those types of pressures. We have a very good business in the Hainesville in South Texas and certainly the MidCon. We still have pressure pumping that we do in the MidCon. South Texas, we've done some work in South Texas. We have, again, our cementing operation is down there. But right now, we're not looking to make a significant move into either South Texas or the Hainesville at this point in time. But there have been some opportunities for us that we have pursued in South Texas with pressure pumping. But to reiterate, our downhole tools company has significant market share.
spk04: uh and they operate in all the basins around around the us uh pressure pumping we're a little more focused if you will on on the basins where uh where we're the best position yeah rental tools is another one that's kind of in all the bases but a lot of the service lines that we are spread out are things that we can move easily you know to where there is uh activity and need for that equipment so As Ben mentioned, if you think pressure pumping, we're really more permian. We have little, you know, our other service lines are definitely more spread out, but that's not heavily impacted because we can move that stuff pretty quickly to where the need is.
spk01: Got it. And then maybe just some thoughts on the E&P consolidation wave that we're starting to see. I mean, you mentioned throughout the call you work for maybe some of those smaller companies that could be targets of the large-caps independence projects. looking to gain share and shale. I mean, have you had any customers that have been acquired yet? Have you seen an impact to your services? Just maybe some color on how you guys are thinking about that.
spk02: We were impacted somewhat in the third quarter with pressure pumping. That was a contributing factor to that air pocket. Since that time, we have not, pressure pumping has not been impacted. Heretofore, in the last several quarters with some of the consolidation that's taking place. Our other service lines have not seen an impact from the from that consolidation, and we hope and expect that they'll actually be a benefit because we do work for the other service lines that we've referenced to work for many of these large, highly active EMP companies. So if we're working for too high activity producers, operators, you know, we hope to continue to do that in the future. If we're already working for both of them, we would expect to continue to work for them in the future. So we don't, we've not seen any negative impact other than the third quarter, and we've not seen any further, any of the recent consolidations that not directly impacted us. And of course, some people have written that they think it's kind of the taking out of some of the smaller to midsize operators may be coming to an end, right? There's a lot of consolidation at that upper end, which might impact kind of the more concentrated, larger pressure pumpers more than it would us, right? So anyway, so that's my take.
spk01: Gotcha. No, that's helpful. Just last one, just to clarify on your outlook for first quarter, do you expect just top line and profitability to be flat just given the weather and the slow start from the EMPs or do you see upside and you're talking about the incrementals at the top of the Q&A or maybe this is a flat to up how you're thinking about first quarter earnings?
spk04: Yeah, I guess I could start. That's probably a good way to think about it, sort of flat to up, you know, with exactly as you described it, the end of the year, you know, winter season kind of flowed and it was a little bit of a slow start. We had some weather in January, but we have a lot of positive signs coming into the next couple months. So similar to what we've heard, you know, some of the other folks that have announced the last couple days, it's similar, sort of flat to up, no huge increase or decrease we're expecting currently. Got it. Great. Appreciate it, guys. Turn it back.
spk00: Thank you, Derek. At this time, there are no further questions. I'll now turn the call back over to Ben Palmer for closing remarks.
spk02: Thank you, operator. Appreciate it. And thank you, everybody, for joining our call. Appreciate your interest and attention, and I look forward to catching up. Take care. Bye-bye.
spk00: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect your lines.
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