RPC INC Q3 FY2024 earnings call

Key Points

• OFS market remains highly competitive with limited near-term visibility; pressure pumping faces more headwinds than other service lines. Spot and semi-dedicated market has ample horsepower capacity with pricing under pressure. Other service lines were more resilient with a modest sequential revenue decline.
• Frac market is highly competitive with downward pricing bias; RPC has remained disciplined by idling assets. Tier 4 DGBs have solid demand and better visibility; legacy diesel equipment faces more challenged demand due to fuel costs.
• Impact of E&P consolidation was felt in the third quarter with a meaningful pressure pumping customer lost; efforts are ongoing to replace revenues.
• Took cost actions like headcount reductions to align cost structure with demand. Non-pressure pumping service lines were relatively resilient; rental tools were flat, cementing and downhole tools were slightly down, while snubbing, nitrogen, and tubular services saw gains. Newly launched 3.5 inch downhole motor is gaining traction, and a new technology to reduce reliance on bridge plugs is being marketed.
• Coiled tubing has an emerging opportunity in California for specialized plug and abandonment work, with ramp-up expected to be lumpy.

In the third quarter, RPC's pressure pumping revenues were down 12%, while all other businesses in total were down just 4%. Technical Services, representing 93% of total third quarter revenues, decreased 8%. Support Services, representing 7% of total third quarter revenues, were up 7%. The top five service lines by revenue were: pressure pumping at 38.4%, downhole tools at 29%, coiled tubing at 8.8%, cementing at 8%, and rental tools at 5.2%, which together accounted for 89% of total revenues.

Guidance

• Expect CapEx to finish 2024 within the guided range of $200 million to $250 million.
• Still expect strong cash flow this year and a robust trailing two-year average despite challenging industry conditions.
• Maintain a strong balance sheet with a cash position of $277 million at quarter end.

Risks

• OFS market is highly competitive with limited near-term visibility.
• Pressure on pricing in the spot and semi-dedicated market due to ample horsepower capacity and peers maintaining utilization.
• Impact of E&P consolidation, including potential loss of customers.

Q: Good morning, guys. How are you, all this morning?

A: Good morning, Don.

Q: Ben, I wanted to ask about the downhole technology. I've heard some field reports that it's pretty revolutionary and didn't know if you could expand on kind of what advances you're making in that. Any kind of color you can provide around that? And what kind of opportunity that can provide specifically in California going forward into next year?

A: Don, the California opportunity is with coiled tubing with some plug and abandonment work, where there's been some wells that have been impacted by seismic shifts. So that takes advantage of our -- some of our steerable tool technology working with coiled tubing. The frac technology that we talked a lot about are these pods that we have used in the past and quite successfully just very briefly. The improvement that we've recently made is on how to deliver those pods downhole. We've come up with a way to do that. We believe that's much more effective and straightforward and believe that's going to create an opportunity for customers if they are comfortable again to displace bridge plugs. There's a number of other benefits with that particular technology, and it's nice. And I'm sure you're aware, it's a pretty big market, and we're encouraged about it. We actually have a test going on today with a number of customers that are going to be out at our downhole tool facility in Newcastle, Oklahoma.

Q: And on the M&A front, how is the bid/ask spread going? Because I know, there's a lot of pressure out there from the small mom-and-pop operators that have been around for a long time and didn't know if that bid/ask spread is narrowing versus the last six months to nine months or so?

A: Yeah. We've talked about that in the past. It's all relative. I think everybody is settling in to the fact or realize and can see that just looking at public valuations, I think privates and others do recognize that people can't pay a substantially higher or higher multiple for private companies than they're trading at. So I think spreads have compressed a bit. I don't know, quite honestly, that I could say that we've looked at a large enough sample and gotten far enough along with targets to be able to say definitively that they're narrowing, but that is the -- it has narrowed. I really can't quantify on what that might be.

Q: Hey, good morning. Thank you. I'm going to follow along Don's questions if that's all right. On the acquisition opportunities, what is the -- what's your willingness to use cash? And what's the willingness of potential sellers to take stock?

A: Discussion stock is -- I think sellers typically, there's a range of things that a seller just experienced over the years, right, a number of things that people look at over time, and it has to be something that works with both parties. We're lucky enough to have a decent cash balance and a nice strong balance sheet. It gives us flexibility to go either way. We believe our stock is valuable to us. So we tend try to be prudent and not let too much of that go at too low a price. So it just varies. It varies. We cash oftentimes for private sellers or are the preference, but there are other opportunities where stock can be a more natural fit. So we have both of those.

Q: The U.S. completion market just stays stable for a year or two, right? A little bit of volatility in Q4 because seasonality and all that normal stuff. But what's the optimal fleet size for you guys from a marketed perspective? I think you have like 10 or 11 fleets on a regular -- back, say, a year ago. Is there any color you could say? Because that obviously has implications to CapEx and everything else.

A: Yeah. It remains stable, being where it is now. It's obviously going to be lower than that 10 or 11, and that's where we are now. We're… And as you know, trying to define and say how many are being marketed and all that. If you're anything less than all, it's sort of hard to give a guide. But I think it's lower. It's going to be more the mix, and we continue to be committed to the frac market, right? We're just trying to be prudent and then trying to rebalance our portfolio, as we've talked about, and you never know what's going to happen around the corner. I guess we do know there's going to be volatility, but we are committed to continue to upgrade prudently over time. And -- but it's probably a lower number just because of the efficiencies that are lower for us. It'd be nice if it was lower than the overall industry. If the discipline can remain, overall, that would help everybody. But for us, it's probably lower. And I think with the continued upgrade of our fleet, I think we could actually, net-net, end up in a better place, right? But that's the question we're trying to ask now. We're going through our planning process next year and, of course, looking at our long-term plans. So we're still contemplating that question. It's a good question.

Q: Going back to acquisitions, and I know you have to speak in general terms of this, but you alluded to a lot of opportunities. Would you say that those are more characterized by PE firms trying to finally get out of their investments? Or are these distressed opportunities where you can step in or is it something else or all of the above?

A: A combination.

Q: Thanks. Good morning, everybody. So two for me, and maybe I'll stay on the M&A side, and I apologize if I missed a little bit of this. But one of the things we've seen kind of over the last about 20-plus years, but clearly over the last 10, was the lack of kind of interest from investors around some of the smaller and very small oil service players. And the reason I bring it up is because I'm thinking about consolidation being kind of a key driver maybe of success in creating larger businesses. But when you think about consolidation, how do you balance sort of the maybe buying something or a couple of businesses that could be a little more commoditized, but kind of create critical mass in those businesses versus making sure you buy something that's kind of differentiated or unique in some way.

A: And you're talking about a... That wouldn't be our first choice to do that. Clearly, we want to try to find very good businesses, whether it'd be a commoditized service or not. I think that's -- that would be more of the key for us, and that's our focus. And I think in this particular market, as we're sort of alluding to that, I think we're somewhat uniquely positioned, I think, to be good purchaser. I think we know there are some parties out there that they care about where they land. And they care about -- earlier on John's question, they care about the consideration they receive and the culture and the environment that they come into, and I think we check a lot of those boxes for companies that are looking to exit and find their next home. So -- but to answer your question, we don't want to get bigger just to get bigger. I understand your question. I know that scale -- investment scale is very important. That's something that we do want to try to address and think we are positioned to do. And of course, that investment scale, if done correctly, can generate some operational scale and some cost leverage as well. So that's what we're trying to pursue. We're trying to change that. Consolidation has been discussed for oilfield services for a long time. And really, there hasn't been a lot of those transactions yet. But perhaps, that will pick up a bit, and we'll see. But that's our strategy. We'll see what happens.

Q: The other question is just kind of back on the frac side. Are you -- how are you thinking about the '25 pricing dynamic? I don't know if you mentioned earlier enough, but we've kind of heard kind of mix from some of your competitors so far. But how do you think about -- what's your view of kind of how pricing evolves next year?

A: As we sit here right now today, we’re not going to go into it and spend or do things expecting pricing to improve a significant amount. So we’re trying to position ourselves to take advantage if things do improve, but trying to be prudent as well. So it just feels like it’s more of the same. Hopefully, there’s going to be some discipline. We’ve idled some assets. We’ve reduced our headcount. If others do that, that would help in reducing fleet – marketed fleets and things like that. So we’re not counting on pricing to be better in ‘25. There’s certainly that possibility. The discussion about maybe the improvement in the natural gas market might help a bit, any sort of improvement like that could help, but we’re not counting on it.

Q: Hey. Thanks for letting me back in at the end here. Ben, if you were going to upgrade another fleet, what kind of decision point would that entail and kind of how long would that take if you wanted to add another Tier 4 DGB fleet?

A: Don, it's probably still nine months or so to get all of a full fleet in place. And -- but we're looking at a variety of things. We're talking to some of the component manufacturers about some alternative technologies. We're talking to some smaller OEMs. We're looking at a variety of things. Chances are the next firm commitment that's directly in hand would probably be another Tier 4 fleet for us, but we're looking at a variety of things. There's a lot of different technologies that are available. And so just a few months out, but I think we have a little bit of time.

Q: And would you require like a three year contract or something to do that or would you kind of do it more in the spot market?

A: We -- at this point, yes, we would not require a long-term contract. I mean when we place an order for that type of equipment, that just would be because where we are in our fleet, the evolution of our fleet and the need to replace and to maintain and things like that. So we probably would -- we certainly would try to pursue that. But at this point in time, we wouldn't require anything like a three year contract. Certainly, talking to the team, we -- certainly, at least a multi-month contract would be nice and something that certainly would support that decision.