RPC, Inc. — Q2 2015 Form 10-Q
Business and period: Unaudited results for the quarter and six months ended June 30, 2015. RPC provides oilfield services through Technical Services and Support Services, primarily in the United States. Figures below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $297.6 | $582.8 | $703.8 | $1,084.5 |
| Operating profit (loss) | $(52.5) | $103.0 | $(46.4) | $168.3 |
| Net income (loss) | $(34.1) | $63.3 | $(26.5) | $102.7 |
| Diluted EPS | $(0.16) | $0.29 | $(0.12) | $0.47 |
| Operating cash flow | — | — | $344.2 | $91.5 |
| Capital expenditures | — | — | $139.3 | $112.8 |
Q2 revenue fell 48.9% year over year; six-month revenue fell 35.1%. Q2 gross margin was approximately 18.8% versus 35.8%, and operating margin was approximately (17.7%) versus 17.7%. For the six-month periods, gross margin was approximately 24.1% versus 35.1%, and operating margin was approximately (6.6%) versus 15.5%. The filing reports cost of revenue, rather than a separately labeled gross margin; percentages are calculated from reported figures.
At June 30, cash was $14.8 million, current assets $511.6 million, current liabilities $116.7 million, and total assets $1.384 billion. Bank debt was $54.9 million, down from $224.5 million at December 31, 2014. Under its $350 million revolving facility, RPC had $265.8 million available after borrowings and letters of credit. It was in compliance with facility covenants. Six-month financing cash flow was $(205.9) million, mainly reflecting net debt repayments and dividends.
Changes and drivers
- Management attributed the sharp revenue decline primarily to weaker customer activity and pricing amid lower oil and gas prices and a lower rig count. Average U.S. rig count was down 51.0% in Q2 year over year; the filing cited oil and natural gas prices down 44.3% and 40.7%, respectively, for the quarter.
- Both segments weakened: Technical Services Q2 revenue fell 49.3% and Support Services fell 43.4%; each reported an operating loss. Lower utilization and service pricing pressured margins, partly offset by cost reductions and supplier concessions.
- Operating cash flow rose to $344.2 million from $91.5 million, largely due to working-capital release, particularly a $334.9 million reduction in receivables. This cash generation coincided with lower business activity and should not be read as improved earnings.
- Depreciation and amortization increased 23.5% in Q2, reflecting equipment placed in service over the prior four quarters. SG&A declined in dollars, but rose to 13.6% of Q2 revenue from 8.2% because of its relatively fixed costs.
- Effective January 1, 2015, RPC changed the accounting for certain pressure-pumping components: replacement costs are expensed in cost of revenue upon installation rather than capitalized. This added approximately $11.5 million to Q2 and $19.4 million to first-half cost of revenue; management said the net effect on operating income and net income was not material. The change also shifts related cash outflows from investing to operating activities.
Outlook, risks and unusual items
- Management expected 2015 capital expenditures of approximately $165 million, primarily for revenue-producing equipment and fleet maintenance; $139.3 million had been spent by June 30. RPC did not plan further increases in its revenue-producing fleet during 2015.
- Management was cautious: low commodity prices and competitive service pricing were expected to pressure near-term activity and financial results. It viewed the rig count as possibly stable or slightly higher, but noted uncertainty around oil prices and recovery. Cost reductions included lower headcount, revised variable compensation, and supplier price concessions.
- On July 28, 2015, the board voted to temporarily suspend the quarterly common dividend. Management said resumption would depend on earnings, financial condition, and other factors. Q2 dividends were $0.05 per share; first-half dividends were $0.155 per share.
- Other income was $6.1 million for the first half, versus $0.9 million in 2014, and primarily included mark-to-market gains and losses on non-qualified benefit-plan investments. The filing does not give a clear full reconciliation of the year-over-year increase in this line.
- RPC disclosed ongoing sales and use tax audits; some potential unfavorable exposures could not currently be estimated. It said ordinary-course litigation was not expected to have a material adverse effect. Principal risks include commodity prices, customer activity and financing, competition and pricing, regulation of hydraulic fracturing, international operations, weather, and geopolitical events.
Most important facts for investors to verify
- Whether oilfield activity and service pricing stabilize or continue to deteriorate, and the resulting effect on revenue, utilization, and margins.
- Whether the unusually strong first-half operating cash flow is sustainable after the substantial working-capital release.
- Execution of the $165 million 2015 capital-spending plan and the effect of maintenance and expansion spending on cash and equipment capacity.
- Dividend policy following the temporary suspension, together with debt-facility availability and covenant compliance.
- Developments in sales and use tax audits and any future estimate of currently unquantifiable exposures.
- The effects of the pressure-pumping component accounting change on reported costs, cash-flow classification, and comparability.