RPC, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. RPC provides oilfield services and equipment, primarily in the United States. This unaudited filing covers the quarter and nine months ended September 30, 2017, compared with the same periods in 2016. Results improved sharply as U.S. drilling and completion activity, service pricing, service intensity, and utilization of previously idle equipment increased. Technical Services—especially pressure pumping—drove most of the recovery.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $471.0 million, up 167.8% | $1,167.9 million, up 129.9% |
| Operating income (loss) | $97.4 million, versus a $56.4 million loss | $165.9 million, versus a $206.7 million loss |
| Net income (loss) | $57.3 million, versus a $38.9 million loss | $104.8 million, versus a $120.1 million loss |
| Diluted earnings (loss) per share | $0.26, versus a $0.18 loss | $0.48, versus a $0.56 loss |
| Operating cash flow | Not stated for the quarter | $109.3 million, versus $94.6 million |
In Q3, cost of revenues was 62.6% of revenue, down from 83.4%; selling, general and administrative expenses were 8.4% of revenue, down from 19.8%. The resulting operating margin was approximately 20.7%, compared with a negative margin in Q3 2016. For the nine months, cost of revenues was 65.5% of revenue versus 85.6%, and SG&A was 10.0% versus 22.6%.
Cash, investment and liquidity: Cash was $136.9 million at September 30, 2017, compared with $131.8 million at year-end 2016. Nine-month capital expenditures were $75.0 million; operating cash flow less capital expenditures was approximately $34.3 million. Cash used in investing activities was $64.5 million and cash used in financing activities was $39.8 million. The company had no revolving-credit borrowings; $19.1 million of letters of credit left $105.9 million available under its $125 million facility, which matures in January 2019. RPC reported compliance with its minimum tangible-net-worth covenant. Total liabilities were $266.8 million and stockholders’ equity was $881.9 million at quarter-end.
Material changes and operating drivers
- Technical Services revenue increased 179.0% in Q3 and 139.9% for the nine months. The segment moved to operating income of $104.3 million for Q3 and $184.5 million for the nine months, from losses in the prior-year periods.
- Support Services revenue rose 21.7% in Q3 and 6.8% for the nine months, but the segment remained loss-making: operating losses were $2.1 million and $10.6 million, respectively.
- Average U.S. domestic rig count was 946 in Q3, up from 483, and 862 for the nine months, up from 482. Management attributed the revenue recovery to higher activity and pricing, greater service intensity, and equipment reactivation.
- Accounts receivable increased to $375.4 million from $169.2 million at December 31, 2016. Management linked the working-capital outflow principally to higher activity; the filing reports a $206.2 million receivables cash-flow use for the nine-month period.
- Property, plant and equipment, net, declined to $444.7 million from $498.0 million at year-end despite higher current-period capital spending; depreciation and amortization fell 25.7% year over year for the nine months.
Outlook, risks and notable items
- Management expected approximately $150 million of 2017 capital expenditures, primarily for revenue-producing equipment and maintenance. RPC said it did not plan to increase fleet size during 2017, but had ordered new revenue-producing equipment for delivery in the first and second quarters of 2018.
- Management saw moderately positive near-term implications from prevailing commodity prices and expected U.S. completion activity to continue increasing, while noting that drilling efficiencies could moderate rig-count growth. It believed near-term demand for service capacity would exceed supply, but was monitoring announced competitor fleet additions.
- Management intended to maintain sufficient liquidity and a conservative capital structure, with little or no debt in the near term. No specific revenue or earnings guidance was provided.
- Key sensitivities include oil and natural-gas prices, customer capital availability and activity, competition and the company’s ability to sustain service-price increases, skilled-labor and input-cost inflation, weather, regulation of hydraulic fracturing, international operations, and reliance on large customers. Hurricane-related disruptions caused temporary raw-material shortages and price increases in Q3; management said it had so far offset cost pressure with service pricing.
- Income-tax expense included discrete unfavorable adjustments: $4.1 million in Q3, primarily from changes in estimates for prior-year state taxes and net operating losses, and a net unfavorable discrete adjustment of $1.1 million for the nine months. The prior-year nine-month tax benefit included a one-time $15.7 million favorable state-tax resolution.
- RPC recorded a $5.8 million net gain on asset dispositions for the nine months, including the sale of operating equipment from its pipe-inspection service line. The Board declared, after quarter-end, a regular dividend and special year-end dividend of $0.07 per share each, payable December 11, 2017.
- Sales- and use-tax audits are ongoing; some potential unfavorable outcomes could not be estimated. RPC reported ordinary-course litigation and did not expect it to materially affect its financial position or results. It reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether stronger U.S. activity and service pricing persist, and how much of the earnings rebound reflects sustainable operating performance versus the cyclical recovery and improved fixed-cost absorption.
- Receivables collection and working-capital needs as activity expands, given the substantial increase in accounts receivable and its cash-flow impact.
- Execution and returns on the approximately $150 million 2017 capital-expenditure plan and the equipment orders scheduled for 2018 delivery.
- Whether labor and materials inflation, hurricane-related supply disruptions, or competitor capacity additions pressure margins or pricing.
- Progress on unresolved sales- and use-tax audits, and the impact of future discrete tax adjustments.
- The status of the share-repurchase authorization: 726,889 shares were repurchased in Q3, with 975,265 shares remaining available at September 30, 2017; also assess the declared dividends against cash needs and industry conditions.