Ranger Energy Services, Inc. Class A

Thank you and welcome to Ranger Energy Services fourth quarter and full year 2023 results conference call. Ranger has issued a press release summarizing operating and financial results for the three and 12 months ended December 31st, 2023. This press release together with accompanying presentation materials are available in the investor relations section of our website at www.rangerenergy.com. Today's discussion may contain forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainty, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, please note that non-GAAP financial measures may be disclosed during this call. A full reconciliation of GAAP to non-GAAP measurements are available in our latest quarterly earnings release and conference call presentation. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. With that, I would now like to turn the conference call over to Stuart Bowden, Ranger's CEO, and Melissa Kugel, Ranger's CFO, for their prepared remarks.

Thank you, and good morning, everyone. I'm pleased to welcome you to our fourth quarter and full year 2023 earnings call. 2023 was a year of significant milestones and achievement for Ranger. Before we delve into the specifics of our fourth quarter and full year 2023 financial and operational performance, I'd like to take a moment to reflect on the journey we've undertaken, the strategic decisions that have shaped our path, and a few highlights from the year. In 2023, Ranger achieved the highest annual earnings in our company's history. despite facing headwinds stemming from macroeconomic conditions and industry-wide challenges, which resulted in a 20% decline in drilling rig count, which delivered revenue of $636.6 million, marking a 5% increase from the prior year. This growth trajectory was supported by our unwavering commitment to safety, superior service quality, and our production cycle focus, which continues to prove resilient to market fluctuations. Notably, our net income surged to $23.8 million, or 95 cents per fully diluted share, up from $15.1 million, or 65 cents per share, in the previous year. Our success in 2023 underscores the strength of our business model and the dedication of our team members. Throughout the year, we remained steadfast in our commitment to maximizing shareholder value guided by our four strategic pillars. maximizing cash flow, fortifying our balance sheet, returning capital to our shareholders, and exploring growth through acquisitions. Anchor continued to prioritize cash flow generation throughout 2023, leveraging our capital-efficient business model and strong operating leverage. We generated $84.4 million in adjusted EBITDA, reflecting a 6% increase from the prior year. It achieved free cash flow of $54.3 million, or 64% of adjusted EBITDA. Converting cash at these levels is a marked differentiation for Ranger and resulted in free cash flow per share of approximately $2.30, providing for a more than 20% free cash flow yield per share at recent trading levels. Maintaining a robust balance sheet is essential for navigating uncertainties and seizing opportunities in our dynamic industry landscape. In the second quarter of 2023, we achieved a significant milestone of effectively becoming debt-free, paying off nearly $80 million since the first quarter of 2022, when our debt peaked after our 2021 string of acquisitions. We have remained debt-free and ended 2023 with over $85 million in liquidities. We believe that minimal debt is crucial for maximizing shareholder returns and preserving optionality through cycles, and we remain committed to preserving and growing our balance sheet strength. With our balance sheet targets in place in the first half of the year, we turned our attention to capital returns for our shareholders. In 2023, we announced the company's first dividend and repurchased approximately 1.8 million shares, and those repurchases have continued into 2024. As of today, we have now repurchased over 10% of Ranger's outstanding shares. When we discuss acquisitions and strategic opportunities, we are keenly aware that our own stock remains one of the most attractive uses of capital available to us, and any M&A must compete against it. When we launched our shareholder returns program in the second quarter, we committed to returning at least 25% of annual cash flows to shareholders through dividends and share repurchases. And I'm pleased to report that we far exceeded that commitment in 2023 by returning 40% of free cash flow back to our shareholders, reaffirming our dedication to creating long-term value. Delivering meaningful returns to our shareholders will remain a top priority for Ranger. We also intend to increase Ranger's size and scale. And throughout 2023, we remain actively engaged in evaluating strategic opportunities or grow through acquisitions. Our disciplined approach ensures that any potential transactions are value creating and accretive for our shareholders. Would we like to do another transformational corporate transaction? Absolutely, but we are committed to maximizing value and we will not overpay. As a result of the unfavorable bid-ask spread in 2023, we pivoted to evaluating smaller asset acquisitions that folded into our current operations portfolio. In the third quarter, we successfully closed a modest acquisition of pump-down assets and support equipment, further enhancing our operational capabilities. We have the balance sheet and the resources to execute quickly on these types of opportunities and will continue to be nimble in evaluating both large and small deals on behalf of our shareholders. While full-year results demonstrated our resilience and growth trajectory, the fourth quarter did present some unique challenges. We experienced the impact of falling oil prices, customer budget exhaustion, and early weather shutdowns in addition to our typical holiday slowdown. Despite these headwinds, our high-specification rigs business demonstrated stability, reflecting its production cycle focus, which is less tied to the ups and downs of U.S. land rig count, not to mention our ongoing dedication to service quality and strong customer relationships. Our wireline segment faced more significant and seasonal factors, particularly in the northern region where our business is strongest. Finally, our processing solutions and ancillary services segment increased revenues year-over-year in most business lines, but adjusted EBITDA declined due to higher operating costs and operational and scheduling inefficiencies that creeped into certain service lines during the year due to the overall market slowdown. Looking ahead in the near term, the first quarter has started slower than we planned, similar to many of our peers. Given macro uncertainties and continued pressure in gas markets, our E&P customers have been cautious with their activity levels to start the year. We have also experienced customer-driven shutdowns this quarter related to a safety incident of other service providers that caused hand-downs across all service providers. On the positive side, we are already seeing activity levels pick back up in the back half of February, paving the way for a stronger second quarter. Regarding full year 2024, we built a budget assuming slight year-over-year improvement underpinned by a relatively stable customer demand. Given the puts and takes I mentioned at the start of the year, we expect demand to be stronger in the second half of the year, and we remain optimistic about our ability to grow our business in the medium and long term. We are encouraged that the well services space has already shown resilience to weaker activity levels, providing a reliable floor to our business. We also feel there are upsides to the year that are not fully yet realized, such as the extended work associated with the key customer agreement we signed in 2023. We think this is a model for future customer relationships and continue to have encouraging conversations with our customers. We continue to be encouraged that our highest quality customers are willing to commit additional operating dollars to Ranger. We fully stand behind our ability to convert approximately 60% of our episodic free cash flow, even under flat-ish conditions. and have shown diligence in deploying these cash flows in the most secretive way possible for our shareholders. Today, we have spent more than $25 million of our original $35 million of repurchase authorization announced one year ago, which has resulted in the repurchase of over 10% of the company's outstanding shares. Given our belief in the underlying value of our stock and our continued commitment to returning capital in the most efficient way possible, the Board has increased our share repurchase authorization by an additional $50 million, resulting in total share repurchase capacity of $85 million. Along with all of the notable financial achievements, the entire Ranger team is proud to announce the release of our first-ever sustainability report. This report reflects our commitment to operating responsibly and underscores our efforts to promote environmental, social, and governance initiatives. We remain dedicated to fostering culture of safety and sustainability across all aspects of our operations. As we embark on the new year, Ranger is well positioned for continued strong performance and value creation. Our strategic priorities for 2024 center on driving toward growth, the challenging market conditions, and targeted acquisitions. We will focus on high quality and safe execution to differentiate ourselves with a relentless commitment to customer satisfaction, all the while remaining fully committed to providing meaningful capital returns to our shareholders. Our acquisition strategy will be complemented by ongoing dividends and share repurchases, reflecting our confidence in the long-term prospects of our business. In conclusion, I want to express my gratitude to our dedicated team members whose hard work and dedication have been instrumental in our success. As we navigate the year ahead, I am confident in Ranger's abilities to deliver sustainable growth and value for our shareholders. With that, let me turn the call over to Melissa to review our key financial results.

Good morning everyone and thank you for joining us today. I'm pleased to provide an overview of our financial performance for the full year 2023 and the fourth quarter specifically. Let's start with a summary of our full year 2023 financial results. Overall, we achieved year-over-year growth and made substantial progress across key financial metrics. Our revenue for the full year totaled $636.6 million marking a 5% increase from $608.5 million in 2022. This growth was primarily driven by our continued focus on service quality, effectively managing white space in the calendar, and operational efficiency, despite encountering challenges in customer activity that dampened our full-year performance. Moving on to profitability, our net income for the full year stood at $23.8 million, are $0.95 per fully diluted share. This represents a substantial improvement from the previous year's net income of $15.1 million, or $0.65 per share. Our ability to deliver higher earnings reflects the effectiveness of our business model and underscores its resilience in the face of declining market conditions. Adjusted EBITDA also saw a notable growth compared to $79.5 million in the prior year. This 6% increase demonstrates our ability to generate strong operating cash flows and underscores our commitment to maximizing shareholder value. Furthermore, we are incredibly proud to have achieved free cash flow for the year of $54.3 million, representing over 60% of adjusted EBITDA. This robust free cash flow generation reflects our disciplined approach to capital allocation and underscores our financial strength. Now, let's delve into the financial performance for the fourth quarter of 2023. Despite encountering headwinds during this period, we maintained our focus on operational excellence and remained agile in responding to market dynamics. For the fourth quarter, our net income totaled $2.1 million, or $0.09 per holding daily this year. While this represents a decrease from the prior year, it's important again to note the broader market cap challenges in the fourth quarter, the customer budget exhaustion, and a notable holiday slowdown during this period. Despite these challenges, we remained resilient and focused on optimizing our operations. Adjusted EBITDA for the fourth quarter was $18.4 million, with the lion's share of the year's free cash flow coming in and totaling $29.1 million. Turning to our balance sheet and liquidity position, I'm pleased to report that Ranger's balance sheet strength continues to improve. we ended the year with $85.1 million in loan credit, consisting of $69.4 million of capacity on our revolving credit facility and $15.7 million of cash on hand. This represents a significant improvement from the previous year, underscoring our commitment to financial discipline and improving capital management. We would call attention to what we expect will be our typical first-order decline in cash flows largely due to compensation commitments at the start of every year. Our total debt at the end of December was virtually zero to reflect our commitment to maintaining the highest degree of financial flexibility to seize on opportunities in the future. Our ability to achieve these results amidst a challenging operating environment highlights the effectiveness of our strategic initiatives and underscores our commitment to creating long-term value for our shareholders. In conclusion, I'd like to reiterate that despite the challenges we faced in 2023 that have continued into 2024, we remain confident in not only the resilience and strength of our business, but also the longevity of the U.S. onshore market and Ranger's ability to provide through-cycle returns in its backdrop. We will continue to focus on executing our strategic priorities, driving operational excellence, and delivering value for our shareholders. Thank you for your attention. and I will now turn the call back over to the operator for the question and answer session.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble the roster. And our first question comes from Luke Lemoine of Piper Sandler. Please go ahead.

Hey, good morning. Good morning, Luke. Stuart. Good morning. Stuart. all the large operator market consolidation should really help you guys. You know, I'm a high spec, we're excited with your focus on safety, you know, relative to smaller peers. I know this doesn't kick up in a linear manner and there might be some pauses as operators kind of determine and sort out plans, but could you just speak to the change in the operator market structure and how this could benefit you probably in the, in the back part of the year?

Sure. Thanks for the question, Luke. We do think it has helped us and will continue to help us because of our focus on, as you said, maintaining equipment, training crews, and on safety as well. So we do think it's going to help us. I think we're conscious that sometimes when the EMPs consolidate, one plus one doesn't equal two, it equals 1.7. And so sometimes that could be a negative. But what we're seeing with the largest players, we certainly think it's going to benefit us, that we think that we'll get additional work, and we think that it'll start to shake itself out as the year progresses.

Okay. And then on your share repurchases, I mean, Stuart, you kind of outlined, you know, what you did in 23 as far as paying down debt, and then you bought back about 10% of shares so far. I think with the remaining authorization, you have a little over 20% of your market cap that's available. Could you just talk about, and a lot of free cash flow coming this year too, could you just talk about how, you know, aggressive you would like to be with that buyback? I mean, I know you have the goal of returning, you know, at least 25% of free cash flow, but you exceeded that in 23. And I'm kind of guessing you'll probably exceed that this year as well.

Again, thanks for the question, Luke. Certainly we're committed to returning at least 25% of cashflow at a minimum back to shareholders. I think what we saw in 23, and I think we'll take the same stance in 24 was as the stock price came under pressure, we felt like it was a great buying opportunity. So our intention is to kind of take that same stance as we go forward. Again, I think that, you know, we do want to grow the company. We want to preserve, capital to be able to do that. But we know that anything we do has to compete with our own shares. And what we saw was the value of our own shares was incredibly attractive with no integration risk. So, again, I think going forward, you could expect us to take a pretty similar stance that if we see an opportunity, we'll get pretty aggressive. And the board is very supportive of that stance as well.

Okay. Thanks so much. Thanks, Luke.

The next question comes from Don Crist of Johnson Rice. Please go ahead.

Good morning, guys. I wanted to ask a question on pricing. You know, the per hour rate on the work over rigs and the per stage on the wire line really kind of surprised me this quarter. Is there anything there? Is it more bundling or just not chasing kind of unprofitable work and your average came up? Can you add any details there?

It's mainly the latter. It's mainly the, you know, not chasing unprofitable work. I think that's the first part I'd highlight. And then I would say that there is some, you know, bundling, meaning more ancillary equipment going out with some of the rigs, which tends to increase kind of the revenue, you know, the overall average revenue per hour.

Yeah, the other thing, Don, to probably call attention to is when you look at, I think Stuart's comments apply – really strongly to high-tech rigs one of the dynamics we had in wireline although challenged as far as a quarter there were a few jobs that were really productive jobs so overall activity depressed but the jobs we had were really really productive jobs which i think kind of drove that stage count pricing up i think you'll probably see that it's probably that's probably not going to stay there in the first quarter we'll see how the year shakes out as kind of frac uh in the coming months. But I think you'll see that cool off here in the first quarter from a wireline pricing perspective, I think.

Okay. And just two quick modeling questions for me. CapEx this year, I'm assuming with kind of flat activity, CapEx will come in a little bit from last year?

A little bit. We kind of suggested last year we were putting a little bit of dollars behind the new customer contract. there's still a few of those kind of falling through. So I think we think of it mostly as a flattish year, as much as a pullback year, but sort of remains to be seen, I think, as we get into the year. Fair enough?

Yeah. And I'm assuming that the second and third quarters would be the highest growth quarters and highest EBITDA quarters with the first a little bit light and the fourth kind of in the middle. Is that the right way to think about it as well?

That's where we're seeing it. Yeah, exactly.

Okay, I appreciate it. I'll turn it back.

All right, thanks, Don. Thank you. The next question comes from Derek Podhazer of Barclays. Please go ahead.

Hey, maybe just sticking on the wireline theme, can you talk about maybe the interplay between the different services under that brand? I know you have the completions-focused work, you have production-focused work, and then the pump-down work. I know there's different margin profiles there. And did that affect some of the per-stage pricing they were seeing? But just thinking about it more from those different verticals under Wireline.

Yeah, thanks for the question, Derek. On the per-stage pricing, that really is just tied specifically to the plug-in per business or the completion business. So it's not really impacted by either the pump-down or the production side. I think as we've kind of talked about in the past, On the completion side, it's been a pretty challenging market. It remains pretty challenging. There are some, I would say, some kind of deals being shopped that might potentially, you know, help on the consolidation side. We'll see if they come to fruition or not. But, you know, again, I think on the plug and curve side, we've seen the market remain pretty challenged. And truthfully, some of the EMP operators are kind of re-bidding a lot of that work to see if they can lock in lower prices. And again, as we've said, as a result, we're really focusing our attention more on the more resilient through cycle production type work on the wireline side.

And it's probably worth mentioning, Derek, we've talked a bit in the past about shifting that focus over. I think what you saw in the fourth quarter and what's continued, and we've talked about previously, Stuart made a comment about the north region. Remembering the north region really is the bigger business. And it has a really outside sort of weather impact. So they start to see significant declines in November, and it doesn't really start to pick back up until late March. We see that phenomenon again this year. And so we do feel strongly we are going to be pursuing the pivot. I think that's that much more difficult to do in the middle of winter. So I think you had sort of an outsized effect, if you will, because you had us sort of saying we're not chasing the unproductive completions work. And as we're trying to sort of pivot over to production and pump down, we're kind of doing it as, you know, we only had a couple of months sort of start at that before we really start to see some winners. So we're optimistic this year. It'll probably take a little bit to get off the ground. It'd be fair to say we probably expect a press to results off a wire line again in Q1, but I think we really are expecting That's a pickup here.

Yeah, for sure. I'd agree with that.

And then, I mean, on the margin profile, obviously it's bounced around quite a bit over the last few years. I mean, is there – do you have a gauge on what you think kind of through cycle – margins could look like for this business? I mean, I know there's just been a lot of volatility, but as far as the cost, addressing the cost structure, addressing the right mix of work under the Wireline brand, just in order to help us gauge how we should think about margin profile over the next couple of years for Wireline.

You know, how we think about it internally, Derek, is certainly we think it's kind of a north of 15% business. That's kind of how we're modeling it, kind of through cycle. Obviously a little bit of work to do still to get there, but that's how we're thinking about it.

And that's really a blend. I know we've probably talked offline. Production and pump down is closer to 20. Completions are arguably right now. So the other wild card in that mix is completions is arguably 10 or in some months less. But when you get high productive jobs, You can, you can reach 10% even in completions. We're just not seeing that lately given the market dynamic. But I think to Silver's point, our first priority is to kind of get continuously above 10 every month. And then we'll be stretching as we get more and more of our footing and our foundation set on the production business. I think you'll see that. It might take us a couple of years, but I think you'll see that start to get more resilient. You can see that there.

Got it. That's helpful. Just a final one for me. The outlook for 2024 seems to be softening quite a bit, primarily driven from the weakness in the natural gas spaces. But any initial high-level takes on how we should think about top-line 2024 in EBITDA, just where you guys are thinking right now?

I think we're thinking about a pretty similar year, or 2024 being a pretty similar year in total to 2023. As I said in my earlier remarks, Q1 kind of got off to a slow start, but we do have some things in place, and we're kind of optimistic on how things will kind of come together in the back half of the year. So, again, I mean, I think kind of year over year it feels 24 is pretty similar to 23, but, again, Q1 is going to be kind of a bit of a slow start.

It's probably – it's probably also worth it to mention this year. What Ranger's been able to do in pullback times, the last time we saw that in 2021, we pulled off three acquisitions. So I think that that's getting to be higher on our radar screen as well this year. So we'll see. Anybody's guess, but I think that's something that's certainly on our radar screen as well.

Thanks for the caller. I'll turn it back.

All right. Appreciate it, Derek.

The next question comes from John Daniel of Daniel Energy Partners. Please go ahead.

Good morning, Stuart and Melissa. How are you?

Hey, John. How are you?

I am well. My first question is how would you characterize seller expectations today just kind of given natural gas weakness and fears of more E&P consolidation and the impact on the business? Have you seen a change today versus maybe a year ago?

I think we've definitely seen a change. We're taking more inbounds than we have in the past. I think we feel like the bid ask is narrowing. I'm not sure it's all the way there yet, but it does feel like it's starting to narrow.

Okay. And then I thought the commentary in the release in on the prepared remarks was helpful, but as you look at the difference between smaller bolt-ons versus the larger deals, Again, very general question, but who's more realistic in their expectations? And if you could just opine on that, if that makes any sense.

Yeah, I think what I would say is we're probably more focused on the bigger transactions than the smaller ones. And part of that, John, is that I think on the smaller ones, unless it's really tied to a specific region that we're not in, right? So it's a geographic expansion or, you know, perhaps they have a, you know, technology or a sort of a defensible position. I think those are interesting to us. But in general, a lot of the smaller players, we feel like, you know, we have equipment and a lot of the smaller players don't really, they don't give us a lot. Whereas I think we feel like with some of the bigger ones, we can really kind of continue the consolidation theme.

um that we've been pursuing so i think we're more focused on the bigger ones big one fair enough and then the last one for me is uh just on coil tubing i know it's not the big biggest of your businesses but just your thoughts on what you're seeing there and then just as laterals are getting longer at the permian sort of separately any difference in demand for stick pipe versus coil i know just some thoughts would be helpful on the operations side

Yeah, I'll start off on the first one on the coil. And again, you know, the coil business for us is in the Rockies. I think what we are seeing is even there with the longer laterals, we're seeing demand for, you know, kind of, again, sort of, you know, more capable equipment. So we are starting to see that. year to to satisfy that demand i think if you look at on the drill out space for us in 23 even with the slowdown in uh frac that kind of happened through the year our 24-hour space or our drill out space was very very consistent through the year um so you know i i it's I wouldn't say it's a huge shift, but again, I think we're seeing demand hold up pretty well. It was a little slower in January, but we're kind of back off to the races on that. Okay.

Thank you for including me.

Thanks. Appreciate it.

The next question comes from William Kim of Presidio Asset Management. Please go ahead.

Hey, Stuart and Melissa. Thank you for taking the call. I guess it looks great that Ranger is in a great financial position to be able to repurchase shares being debt-free compared to your competitors. I think your shares have been reflecting that versus the other guys. But my question relates more to the shareholder dynamics. I know that your largest shareholder has distributed shares to their limited partners partially, but I know there's also a large chunk left. Do you have any color on what the exit strategy may be in the coming year?

Sure. Thanks for the question, William. I know in the distribution that happened in the fall, that was related to end of funds. So our shares were in two separate funds for that shareholder for CSL. And the first fund timed out. And so that's why those shares were distributed to LPs. Beyond that, we don't have a lot of clarity on fund two. We do know that CSL has been very supportive of the business, constructive of the business. So we don't anticipate any near term. But truthfully, I don't think we know for certain. supportive and constructive.

Got it. Do you think that there may be an opportunity to repurchase a large chunk of those shares, or is that kind of not in discussion or on the table?

Yeah, I mean, I guess I'll take a stab at that and say our best understanding right now is those are not available to be purchased. One thing Stuart did mention is there was some selling on the back of the distribution of Fun One. We understood that to be some small rebalancing. So it's not our understanding at this point that those shares are available and they're interested in actually hitting the market. I think if we were to become aware that there was a distribution plan or there was a need to sell further, Yeah, but the funds, you know, our board member is pretty keenly aware of our desire to repurchase. We have very active dialogue around that, so we would be very interested in engaging in that discussion. As best we know now, those shares are not coming out.

Got it. Thank you so much, and keep up the great work.

Great. Thanks, William. Appreciate it.

This concludes our question and answer session. I would like to turn the conference back over to student, Stuart Bowden, for any closing remarks.

Thanks, Andrea. Thanks, everybody, for joining the call. Thanks for your interest in Ranger. I very much appreciate it, and I hope everyone has a great day.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.