RPC, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2015, compared with the same 2014 periods. RPC provides oilfield services, principally in the United States, through Technical Services and Support Services. Results are highly sensitive to customer drilling activity, oil and gas prices, and service pricing.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $291.9 | $620.7 | $995.8 | $1,705.2 |
| Operating profit (loss) | $(51.5) | $106.7 | $(97.8) | $274.9 |
| Net income (loss) | $(35.2) | $64.9 | $(61.7) | $167.6 |
| Diluted EPS | $(0.16) | $0.30 | $(0.29) | $0.77 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $386.3 | $206.3 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $155.2 | $237.5 |
- Margins and costs: Cost of revenues was 80.4% of revenue in Q3 versus 64.2% a year earlier, and 77.2% for the nine months versus 64.7%. SG&A was 12.3% of Q3 revenue versus 8.2%, and 11.9% for the nine months versus 8.6%. Higher depreciation also weighed on results.
- Cash flow: Nine-month operating cash flow rose by $180.0 million year over year, primarily from working-capital changes as activity declined, including a substantial reduction in receivables. It was partly offset by lower net income.
- Liquidity and debt: At September 30, cash was $7.5 million, current assets $478.0 million, and current liabilities $117.3 million. Bank borrowings were $19.5 million, down from $224.5 million at year-end 2014. Of the $350 million revolver, $301.2 million was available after borrowings and letters of credit. RPC said it was in compliance with its financial covenants.
Material changes and unusual items
- Revenue fell 53.0% in Q3 and 41.6% for the nine-month period. Domestic revenue declined 54.7% and 42.6%, respectively; international revenue rose 1.6% in Q3 but declined 15.4% for the nine months.
- Average U.S. domestic rig count fell 54.6% in Q3 and 42.7% for the nine months against 2014. Average oil prices were down 52.1% in Q3 and 48.8% for the nine months; natural gas prices also declined.
- Both operating segments weakened sharply. Technical Services recorded operating losses of $44.2 million in Q3 and $87.6 million for the nine months; Support Services lost $1.9 million in Q3 and earned $0.6 million for the nine months.
- Starting in 2015, replacement components for pressure-pumping equipment are expensed as repairs and maintenance when installed rather than capitalized. This change added $12.6 million to Q3 and approximately $32.0 million to nine-month cost of revenues; management said the net effect on operating income and net income was not material. It also shifts related cash spending from investing to operating activities.
- RPC recorded a $3.8 million Q3 charge for slow-moving or unusable materials and supplies. The Q3 loss on asset dispositions was $3.8 million, compared with $7.7 million a year earlier; the nine-month losses were $1.1 million and $11.3 million, respectively.
- The board temporarily suspended the quarterly common dividend on July 28, 2015. The company said it expects to resume dividends, subject to earnings, financial condition, and other factors.
Outlook, risks, and contingencies
- Management expected 2015 capital expenditures of approximately $165 million, mostly for equipment purchases and fleet maintenance; $155.2 million had been spent through September. RPC did not plan further fleet expansion during 2015.
- Management was cautious: it expected declining rig counts to continue through the remainder of 2015 and the first quarter of 2016, with low oil and gas prices and competitive service pricing likely to pressure near-term activity and results. It cited cost reductions, supplier concessions, lower headcount, selected location closures, and revised variable compensation.
- RPC stated that cash, expected operating cash flow, and available credit should provide sufficient liquidity for at least twelve months. The revolver matures in January 2019.
- Risks include commodity-price and drilling-activity declines, competition and pricing pressure, possible hydraulic-fracturing regulation, international operations, customer concentration and customer access to capital, geopolitical events, and adverse weather. Management said ongoing sales and use tax audits could have unfavorable outcomes that are not currently estimable. Ordinary-course litigation was not expected to have a material adverse effect.
- Management reported no material off-balance-sheet arrangements and concluded disclosure controls were effective as of September 30, 2015.
Most important facts for investors to verify
- Whether oil and gas prices, rig counts, customer activity, and service pricing stabilized or continued to deteriorate after quarter-end.
- Whether operating cash flow remains adequate after the unusually favorable working-capital release, and whether working capital reverses as activity changes.
- How the replacement-component accounting change and the $3.8 million inventory write-down affect comparability of margins and cash-flow classification.
- Actual full-year capital expenditures, revolver usage, covenant headroom, and any change to the dividend suspension or intended resumption.
- Developments in sales and use tax audits and the competitive and financial condition of customers and smaller competitors.