RPC, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. RPC provides oilfield services through Technical Services and Support Services, primarily in the United States.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $406.3 million | $501.7 million | Down 19.0% |
| Operating profit | $6.2 million | $65.2 million | Down 90.5% |
| Operating margin | 1.5% | 13.0% | Down 11.5 percentage points |
| Net income | $7.5 million | $39.4 million | Down 80.8% |
| Diluted EPS | $0.04 | $0.18 | Down $0.14 |
| Operating cash flow | $200.6 million | $77.9 million | Up $122.7 million |
| Capital expenditures | $103.5 million | $40.3 million | Up $63.2 million |
| Cash and equivalents, quarter-end | $15.5 million | $9.8 million at Dec. 31, 2014 | — |
| Bank borrowings, quarter-end | $155.6 million | $224.5 million at Dec. 31, 2014 | Down $68.9 million |
Cost of revenues was 72.0% of revenue, versus 65.8%; SG&A was 10.5%, versus 9.7%; and depreciation and amortization was 16.2%, versus 11.1%. The filing reports other income of $5.8 million, compared with $0.1 million a year earlier; it primarily includes mark-to-market gains and losses on investments associated with the non-qualified benefit plan. This materially supported pretax income of $11.3 million despite operating profit of only $6.2 million. The effective tax rate was 33.0%, versus 39.4%.
Technical Services revenue fell 19.0% to $378.1 million and segment operating profit fell to $5.9 million from $64.9 million. Support Services revenue declined 18.8% to $28.2 million and segment operating profit fell to $3.9 million from $7.5 million.
Liquidity, debt and capital allocation
Operating cash flow benefited substantially from working-capital reductions, particularly a $203.7 million decrease in accounts receivable; management attributed the overall favorable working-capital change primarily to lower activity. Investing cash use was $100.6 million and financing cash use was $94.3 million. RPC paid $22.8 million in dividends during the quarter.
RPC had a $350 million revolving credit facility maturing in January 2019. At March 31, $155.6 million was borrowed and $29.3 million supported letters of credit, leaving $165.1 million available. The company reported compliance with its debt covenants. The facility limits debt-to-EBITDA to 2.5x and requires EBITDA-to-interest of at least 2.0x. A one-percentage-point change in floating interest rates would change annual interest cost by approximately $1.6 million.
Management stated that cash, expected operating cash generation and available credit should provide sufficient liquidity for at least the next 12 months. It expected approximately $150 million of capital expenditures for 2015, including completion of the pressure-pumping fleet expansion and equipment maintenance; no further fleet expansion was planned for 2015.
Business trends, outlook and risks
Management attributed lower revenue mainly to reduced customer activity and service pricing. Average U.S. rig count declined 21.1% year over year to 1,403; average oil price fell 50.3% to $48.99 per barrel, and average natural-gas price fell 42.0% to $2.82 per mcf. Management cited lower utilization and near-term pricing pressure, while noting that greater pressure-pumping fleet capacity and service intensity partly offset declines.
Management expected industry activity to remain weak in the near term and was cautious about a rig-count recovery, citing low oil and gas prices and intense competition. It noted that analysts expected the rig count to continue declining in Q2 and potentially stabilize at a lower level in the second half of 2015. RPC responded with supplier price concessions, lower compensation and discretionary spending, location consolidations and headcount reductions. Management also cited uncompleted wells as potential future completion-service demand and expected some smaller competitors to exit or sell equipment.
Key risks include further commodity-price declines and reduced customer spending, service-price competition, customer access to financing, OPEC actions, geopolitical events, weather, hydraulic-fracturing regulation, international operating risks and reliance on large customers. Ongoing sales- and use-tax audits include exposures whose outcomes cannot currently be estimated. Ordinary-course litigation was not expected by management to have a material adverse effect. The company reported no material off-balance-sheet arrangements.
Unusual items and other disclosures
Beginning January 1, 2015, RPC changed the accounting treatment for certain pressure-pumping components: replacement components are treated as consumable supplies and expensed at installation rather than capitalized and depreciated. This increased Q1 cost of revenues by approximately $7.9 million while reducing depreciation and asset-disposition losses by a comparable amount; management said the net effect on operating and net income was not material. The change also shifts related cash flows from investing to operating activities. The remaining year-end book value of these components, approximately $16.4 million, was to be depreciated over an estimated weighted-average remaining life of about 12 months.
The board approved a $0.05-per-share cash dividend on April 28, 2015, payable June 10 to holders of record May 11. The Q1 dividend declared was $0.105 per share. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- Whether revenue, pricing, utilization and operating margins continue to weaken as oilfield activity responds to commodity prices.
- How much of reported operating cash flow reflects sustainable earnings versus working-capital releases.
- Actual 2015 capital spending versus the approximately $150 million outlook, and the returns on recently added pressure-pumping equipment.
- The contribution and persistence of the $5.8 million in other income, and the accounting-change effects on cost, depreciation and cash-flow classification.
- Credit-facility availability and covenant headroom if operating results decline; the filing does not provide a clear covenant-ratio value.
- Potential outcomes of sales- and use-tax audits and the company’s ability to maintain dividends amid lower earnings.