RPC, Inc. — Form 10-Q summary
Reporting period: Quarter ended June 30, 2017; results compared with the three and six months ended June 30, 2016. RPC provides oilfield services and equipment, principally through Technical Services and Support Services. Financial statements are unaudited.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $398.8m | $143.0m | $696.9m | $332.1m |
| Operating income (loss) | $67.0m | $(75.2)m | $68.6m | $(150.3)m |
| Net income (loss) | $43.8m | $(48.7)m | $47.5m | $(81.2)m |
| Diluted EPS | $0.20 | $(0.23) | $0.22 | $(0.38) |
| Cash provided by operations | Not separately stated for quarter | $28.7m | $92.3m |
Q2 operating margin was approximately 16.8% and net margin 11.0%; for the first half, operating margin was approximately 9.8% and net margin 6.8%. Cost of revenue was 63.7% of Q2 revenue (88.8% in the prior-year quarter) and 67.5% for the first half (86.8% prior year). SG&A was 10.1% of Q2 revenue and 11.1% for the first half, versus 25.5% and 24.1%, respectively.
At June 30, cash was $125.8m, current assets $601.7m, current liabilities $148.3m, total assets $1,105.9m and stockholders’ equity $848.3m. RPC had no revolving-credit borrowings; the $125m facility matures in January 2019, with $19.1m of letters of credit outstanding. The company reported compliance with its minimum tangible-net-worth covenant. The filing does not report a conventional debt balance beyond the facility disclosure.
For the first half, capital expenditures were $30.6m, net cash used in investing was $22.2m, and net cash used in financing was $12.5m, including $12.5m for shares purchased and retired. Cash declined $6.0m from year-end 2016. Operating cash flow fell $63.6m year over year, principally because of working-capital demands accompanying higher activity, particularly receivables.
Material changes and drivers
- Q2 revenue increased 178.9% year over year; first-half revenue increased 109.9%. Management attributed the gains to higher activity and service pricing, greater service intensity, and a slightly larger in-service fleet. The average U.S. rig count was 895 in Q2 versus 420 a year earlier.
- Technical Services drove the rebound: Q2 revenue was $385.5m and operating income $70.9m, compared with a $65.7m operating loss in Q2 2016. Support Services remained loss-making, with a Q2 operating loss of $3.3m.
- International revenue was $11.1m in Q2, down 0.9%; first-half international revenue was $24.8m, down 9.9%. Management said project timing makes this business difficult to predict.
- Q2 depreciation and amortization declined 26.7% to $41.3m; first-half expense declined 26.5% to $85.9m, which the company attributed to lower prior-year capital expenditures. Gains on asset dispositions were $3.8m in Q2 and $5.3m for the first half, mainly from selling oilfield pipe-inspection equipment.
Outlook, risks and notable items
- Management expected U.S. oilfield activity to continue growing, but anticipated a more moderate near-term pace amid oil-price fluctuations. It described current commodity prices as moderately positive for near-term activity; natural-gas prices remained insufficient, in its view, to encourage more gas-directed drilling.
- RPC expected approximately $100m of 2017 capital expenditures, primarily for maintenance of its existing revenue-producing fleet, and planned only minimal fleet expansion. It said it intended to maintain sufficient liquidity and little or no debt in the near term.
- Management reported upward pressure on skilled-labor wages and certain material costs as activity recovered. It said service-price increases had so far offset these costs, but gave no assurance this would continue.
- Key risks include commodity-price and rig-activity declines, customer access to capital, competition and the ability to sustain pricing, weather, geopolitical events, potential hydraulic-fracturing regulation, international operations and reliance on large customers.
- Sales- and use-tax audits are ongoing; some potential unfavorable outcomes cannot currently be estimated. RPC said ordinary-course litigation was not expected to materially harm results or financial position. No material off-balance-sheet arrangements were reported.
- The 2016 comparison included a $15.7m one-time tax benefit from resolving a state tax matter. In 2017, adoption of stock-compensation guidance resulted in a $2.6m discrete tax benefit for the first half. These items affect period comparability.
- After quarter-end, the board approved a $0.06-per-share cash dividend, payable September 11, 2017. RPC also repurchased 348,000 shares under its buyback program in Q2; 1,702,154 shares remained authorized for repurchase at June 30.
- Management stated disclosure controls were effective at a reasonable-assurance level and reported no materially affecting changes in internal control during the quarter.
Important facts for investors to verify
- Whether higher oilfield activity and service pricing persist, and whether revenue growth translates into sustainable margins and operating cash flow.
- Receivables and working-capital trends, given the sharp increase in accounts receivable and the reduction in first-half operating cash flow.
- Actual 2017 capital spending versus the approximately $100m estimate, and the maintenance or expansion needs of the fleet.
- Liquidity and covenant headroom, including the borrowing base available under the revolver after letters of credit.
- Potential outcomes and financial exposure from sales- and use-tax audits, along with labor and materials inflation and customer concentration risks.
- Dividend and buyback activity, including the effect of capital returns on cash and share count.