Overview

The following discussion should be read in conjunction with "Selected Financial Data," and the Consolidated Financial Statements included elsewhere in this document. See also "Forward-Looking Statements" on page 2.

RPC, Inc. ("RPC") provides a broad range of specialized oilfield services primarily to independent and major oilfield companies engaged in exploration, production and development of oil and gas properties throughout the United States, including the Gulf of Mexico, mid-continent, southwest and Rocky Mountain regions, and selected international locations. The Company's revenues and profits are generated by providing equipment and services to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells.

Our key business and financial strategies are:

- To focus our management resources on and invest our capital in equipment and geographic markets that we believe will earn high returns on capital, and maintain an appropriate capital structure.

- To maintain a flexible cost structure that can respond quickly to volatile industry conditions and business activity levels.

- To deliver equipment and services to our customers safely.

- To maintain and increase market share.

- To maximize shareholder return by optimizing the balance between cash invested in the Company's productive assets, the payment of dividends to shareholders, and the repurchase of our common stock on the open market.

- To align the interests of our management and shareholders.

- To maintain an efficient, low-cost capital structure, which includes an appropriate use of debt.

In assessing the outcomes of these strategies and RPC's financial condition and operating performance, management generally reviews periodic forecast data, monthly actual results, and other similar information. We also consider trends related to certain key financial data, including revenues, utilization of our equipment and personnel, pricing for our services and equipment, profit margins, selling, general and administrative expenses, cash flows and the return on our invested capital. We continuously monitor factors that impact the level of current and expected customer activity levels, such as the price of oil and natural gas, changes in pricing for our services and equipment and utilization of our equipment and personnel. Our financial results are affected by geopolitical factors such as political instability in the petroleum-producing regions of the world, overall economic conditions and weather in the United States, the prices of oil and natural gas, and our customers' drilling and production activities.

Current industry conditions include natural gas prices that have been very volatile, and while high by historical levels, declined tremendously during 2008. Oil prices are also extremely volatile, having reached record highs at the beginning of the third quarter of 2008, prior to declining to a low of slightly more than $32 per barrel by the end of the year, which is the lowest level for oil prices since the first quarter of 2005. In the beginning of 2009, natural gas prices are falling dramatically compared to 2008, and during the first quarter are approximately 38 percent lower than the same period last year. The price of oil has fallen as well, and is approximately 56 percent lower than the same period last year. The average rig count in 2008 increased by 6.3 percent compared to the prior year, but fell during the fourth quarter of 2008 and into early 2009. During the first quarter the average rig count is approximately 16 percent lower than the same period last year. In addition to the overall rig count, the Company also monitors the number of horizontal and directional wells drilled in the U.S. domestic market, because this type of well is more service-intensive than a vertical oil or gas well, thus requiring more of the Company's services provided for a longer period of time. The number of horizontal and directional wells drilled in the United States increased in 2008, and was 49 percent of total wells drilled during the year. During the first part of 2009, the percentage of horizontal and directional wells drilled as a percentage of total wells increased to approximately 56 percent. Over the past several years, the supply of oilfield service equipment in the U.S. domestic market has increased tremendously, both from existing service companies and new entrants to the oilfield services business. Although the supply of oilfield equipment did not increase as much in 2008 as in prior years, the large supply of equipment and service providers has caused pricing for the Company's services to decrease, which has had a negative impact on the Company's financial results and returns. The Company responded by reducing its capital expenditures during 2008, closely monitoring its competitors' activities, and scrutinizing planned capital expenditures more closely for acceptable financial returns. In spite of increased competition and declining financial results, the Company's returns are still high by historical standards, and cash flow from operations as well as proceeds from our revolving credit facility have allowed us to make significant capital expenditures during 2008.

Income before income taxes was $137.8 million in 2008 compared to $139.8 million in the prior year. The effective tax rate for 2008 was 39.5 percent compared to 37.7 percent in the prior year. Diluted earnings per share decreased to $0.85 in 2008 compared to $0.89 for the prior year. Cash flows from operating activities were $177.3 million in 2008 compared to $141.9 million in the prior year, and cash and cash equivalents were $3.0 million at December 31, 2008, a decrease of $3.3 million compared to December 31, 2007. During the second quarter of 2008, we expanded our revolving credit facility to $296.5 million. As of December 31, 2008, there was $174.5 million in outstanding borrowings on our revolving credit facility.

Cost of revenues as a percentage of revenues increased approximately 4.1 percentage points in 2008 compared to 2007, because of lower pricing for our services due to competition and higher cost for materials and supplies, personnel and fuel.

Selling, general and administrative expenses as a percentage of revenues decreased approximately 2.2 percentage points in 2008 compared to 2007, which was primarily due to positive leverage of these costs realized from the higher revenues.

Consistent with our strategy to selectively grow our capacity and maintain our existing fleet of high demand equipment, capital expenditures were $170.3 million in 2008.

Outlook

Drilling activity in the U.S. domestic oilfields, as measured by the rotary drilling rig count, has been stable or gradually increasing for several years, and the overall domestic rig count during the fourth quarter of 2008 was approximately 6.3 percent higher than in the comparable period in 2007. The average price of oil during the fourth quarter fell by approximately 37 percent as compared to the prior year while the average price of natural gas fell by approximately 10 percent. Horizontal and directional wells drilled during 2008 were 49 percent of total domestic activity, an increase from 44 percent in the prior year, and the highest percentage of total drilling activity during the time that this data has been reported. This trend has continued in early 2009. The price of oil has fallen dramatically due in part to low global demand, especially among newly-industrializing countries such as China and India, in spite of political instability and conflict in the oil-producing regions of the Middle East. While the overall drilling rig count has increased, it began to fall in the fourth quarter of 2008 as declining commodity prices and the global economic slowdown, coupled with declining availability of capital for drilling projects, caused industry activity levels to decline. These declines continued during the early part of 2009, and do not show signs of improvement in the near term.

The Company continues to monitor the competitive environment in 2009, and is concerned about the rapidly-declining rig count and commodity prices, especially in light of the higher level of competition which has arisen from the large amount of additional equipment that has been placed in service in the domestic market during the past several years. The Company's response to these deteriorating industry conditions is to reduce our planned capital expenditures, implement cost-reduction plans and enhance our sales and marketing efforts. The Company understands that factors influencing the industry are unpredictable, and our response to the industry's potential uncertainty is to maintain sufficient liquidity and a conservative capital structure and monitor our discretionary spending. Although we used our bank credit facility to finance our expansion, we will still maintain a conservative financial structure, and intend to reduce the amount drawn on this facility over the course of 2009. Based on current industry conditions and the deep global recession, we expect consolidated revenues for 2009 to decrease compared to 2008.

Results of Operations

Years Ended December 31,                               2008          2007          2006
Consolidated revenues                                $ 876,977     $ 690,226     $ 596,630
Revenues by business segment:
Technical                                            $ 745,991     $ 574,723     $ 495,090
Support                                                130,986       115,503       101,540

Consolidated operating profit                        $ 144,170     $ 142,038     $ 177,800
Operating profit by business segment:
Technical                                            $ 110,648     $ 116,493     $ 153,126
Support                                                 36,515        29,955        30,953
Corporate expenses                                      (9,360 )     (10,703 )     (12,248 )
Gain on disposition of assets, net                       6,367         6,293         5,969

Net income                                           $  83,403     $  87,049     $ 110,794
Earnings per share - diluted                         $    0.85     $    0.89     $    1.13
Percentage of cost of revenues to revenues                  57 %          53 %          48 %
Percentage of selling, general and administrative
expenses to revenues                                        13 %          16 %          15 %
Percentage of depreciation and amortization
expense to revenues                                         14 %          11 %           8 %
Effective income tax rate                                 39.5 %        37.7 %        38.1 %
Average U.S. domestic rig count                          1,879         1,768         1,649
Average natural gas price (per thousand cubic feet
(mcf))                                               $    8.81     $    6.93     $    6.65
Average oil price (per barrel)                       $   99.96     $   72.78     $   66.36

Year Ended December 31, 2008 Compared To Year Ended December 31, 2007

Revenues. Revenues for 2008 increased $186.8 million or 27.1 percent compared to 2007. The Technical Services segment revenues for 2008 increased 29.8 percent from the prior year due primarily to a higher drilling rig count and increased capacity driven by higher capital expenditures partially offset by lower pricing for services. The Support Services segment revenues for 2008 increased 13.4 percent from the prior year due to increased capacity driven by higher capital expenditures as well as a more profitable job mix in the rental tool service line, the largest within this segment.

Domestic revenues increased 30 percent to $846.2 million during 2008 compared to 2007 due to increased capacity in our largest service lines, such as pressure pumping and rental tools. The average price of natural gas increased by 27 percent and the average price of oil increased by approximately 37 percent during 2008 compared to the prior year. In conjunction with the increase in natural gas prices, the average domestic rig count during 2008 was seven percent higher than in 2007. This increase in drilling activity had a positive impact on our financial results. We believe that our activity levels are affected more by the price of natural gas than by the price of oil, because the majority of U.S. domestic drilling activity relates to natural gas, and many of our services are more appropriate for gas wells than oil wells. Foreign revenues, which decreased from $41.1 million in 2007 to $30.8 million in 2008, were four percent of consolidated revenues. These revenue decreases were due mainly to lower customer activity levels in Turkmenistan and Hungary compared to the prior year. Our international revenues are impacted by the timing of project initiation and their ultimate duration.

Cost of revenues. Costs of revenues in 2008 was $503.6 million compared to $368.2 million in 2007, an increase of $135.4 million or 36.8 percent. The increase in these costs was due to the variable nature of many of these expenses, including materials and supplies, compensation, and maintenance and repairs. Cost of revenues, as a percent of revenues, increased in 2008 from 2007 due to more competitive pricing, higher costs of proppant used in our pressure pumping service line and increased maintenance and repairs expenses.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 8.7 percent to $117.1 million in 2008 compared to $107.8 million in 2007. This increase was primarily due to higher employment costs consistent with higher activity levels and geographic expansion under RPC's long-term growth plan. As a percentage of revenues, selling, general and administrative expenses decreased to 13.4 percent in 2008 compared to 15.6 percent in 2007.

Depreciation and amortization. Depreciation and amortization were $118.4 million in 2008, an increase of $39.9 million or 50.8 percent compared to $78.5 million in 2007. This increase resulted from a higher level of capital expenditures during recent quarters within both Support Services and Technical Services to increase capacity and to maintain our existing equipment.

Gain on disposition of assets, net. Gain on the disposition of assets, net increased due primarily to gains related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment.

Other(expense) income, net. Other (expense), net in 2008 was $(1.2) million, a decrease of $3.1 million compared to other income of $1.9 million in 2007. The decrease is mainly due to the current year decline in the fair value of trading securities held in the non-qualified Supplemental Retirement Plan. In addition to changes in the fair value of trading securities, other (expense) income includes gains from settlements of various legal and insurance claims and royalty payments.

Interest expense. Interest expense was $5.3 million in 2008 compared to $4.2 million in 2007. The increase is due to higher interest expense in 2008 incurred on larger outstanding interest bearing advances on our revolving line of credit.

Interest income. Interest income increased to $73 thousand in 2008 compared to $70 thousand in 2007 as a result of a higher average investable cash balance in 2008 compared to 2007.

Income tax provision. The income tax provision increased to $54.4 million in 2008 from $52.8 million in 2007. The increase is due to an increase in the effective tax rate to 39.5 percent in 2008 from 37.7 percent in 2007.

Net income and diluted earnings per share. Net income decreased 4.2 percent to $83.4 million, or $0.85 earnings per diluted share, compared to $87.0 million, or $0.89 earnings per diluted share in 2007. This decrease is due to higher costs of revenues, selling, general and administrative expenses, depreciation expense, other expense, and interest expense partially offset by increased revenues.

Year Ended December 31, 2007 Compared To Year Ended December 31, 2006

Revenues. Revenues for 2007 increased $93.6 million or 15.7 percent compared to 2006. The Technical Services segment revenues for 2007 increased 16.1 percent from the prior year due primarily to increased capacity driven by higher capital expenditures partially offset by lower pricing for services and increased drilling rig count. The Support Services segment revenues for 2007 increased 13.8 percent from the prior year due to increased capacity driven by higher capital expenditures as well as a more profitable job mix in the rental tool service line, the largest within this segment.

Domestic revenues increased 15 percent to $649.1 million during 2007 compared to 2006 due to increased capacity in our largest service lines, such as pressure pumping and rental tools. The average price of natural gas increased by four percent and the average price of oil increased by approximately ten percent during 2007 compared to 2006. In conjunction with the increase in natural gas prices, the average domestic rig count during 2007 was seven percent higher than in 2006. This increase in drilling activity had a positive impact on our financial results. Foreign revenues, which increased from $30.0 million in 2006 to $41.1 million in 2007, were six percent of consolidated revenues. These revenue increases were realized due mainly to higher customer activity levels in Bolivia, Canada, Egypt and Turkmenistan compared to the prior year. Our international revenues are impacted by the timing of project initiation and their ultimate duration.

Cost of revenues. Costs of revenues in 2007 was $368.2 million compared to $287.0 million in 2006, an increase of $81.2 million or 28.3 percent. The increase in these costs was due to the variable nature of many of these expenses, including compensation, materials and supplies, fuel and maintenance and repair costs. Cost of revenues, as a percent of revenues, increased in 2007 from 2006 due to upward cost pressures for materials and supplies, personnel, fuel, delays in the delivery of revenue producing equipment and resulting inefficiencies, as well as lower pricing for our services, due to increased competition.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 18.4 percent to $107.8 million in 2007 compared to $91.1 million in 2006. This increase was primarily due to higher employment costs consistent with higher activity levels and geographic expansion under RPC's long-term growth plan. As a percentage of revenues, selling, general and administrative expenses increased to 15.6 percent in 2007 compared to 15.3 percent in 2006.

Depreciation and amortization. Depreciation and amortization were $78.5 million in 2007, an increase of $31.8 million or 68.1 percent compared to $46.7 million in 2006. This increase resulted from a higher level of capital expenditures during 2006 and 2007 within both Support Services and Technical Services to increase capacity and to maintain our existing equipment.

Gain on disposition of assets, net. Gain on the disposition of assets, net increased due primarily to gains related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment.

Other income, net. Other income, net in 2007 was $1.9 million, an increase of $0.8 million compared to $1.1 million in 2006. Other income includes gains from settlements of various legal and insurance claims and royalty payments.

Interest expense. Interest expense was $4.2 million in 2007 compared to $356 thousand in 2006. The increase is due to higher interest expense in 2007 incurred on larger outstanding interest bearing advances on our revolving line of credit.

Interest Income. Interest income declined to $70 thousand in 2007 compared to $319 thousand in 2006 as a result of a lower average investable cash balance in 2007 compared to 2006.

Income tax provision. The income tax provision decreased to $52.8 million in 2007 from $68.1 million in 2006. The decrease is due to the decline in income before taxes coupled with a decrease in the effective tax rate to 37.7 percent in 2007 from 38.1 percent in 2006.

Net income and diluted earnings per share. Net income decreased 21.4 percent to $87.0 million, or $0.89 earnings per diluted share, compared to $110.8 million, or $1.13 earnings per diluted share in 2006.

Liquidity and Capital Resources

Cash and Cash Flows

The Company's cash and cash equivalents were $3.0 million as of December 31,
2008, $6.3 million as of December 31, 2007 and $2.7 million as of December 31,
2006.

The following table sets forth the historical cash flows for the years ended
December 31:

                                                                    (in thousands)
                                                          2008           2007           2006
Net cash provided by operating activities              $  177,320     $  141,872     $  118,228
Net cash used for investing activities                   (158,953 )     (239,624 )     (151,085 )
Net cash (used for) provided by financing activities      (21,668 )      101,361         22,777

2008

Cash provided by operating activities increased by $35.4 million in 2008 compared to the prior year. Although net income decreased $3.6 million in 2008 compared to 2007, cash provided by operating activities increased due primarily to an increase in depreciation due to higher capital expenditures and a higher deferred tax provision due to accelerated tax depreciation. Increased business activity levels and revenues in 2008 resulted in higher accounts receivable, inventories and prepaid expenses partially offset by increased accounts payable and accrued payroll including bonuses.

Cash used for investing activities in 2008 decreased by $80.7 million compared to 2007, primarily as a result of lower capital expenditures.

Cash (used for) provided by financing activities in 2008 increased by $123.0 million compared to 2007, primarily due to lower net borrowings from notes payable to banks during 2008, an increase in common stock purchased and retired, and a 20 percent increase in dividends paid per share to common shareholders.

2007

Cash provided by operating activities increased by $23.6 million in 2007 compared to the prior year. Although net income decreased $23.7 million in 2007 compared to 2006, cash provided by operating activities increased due primarily to an increase in depreciation due to higher capital expenditures, a higher deferred tax provision due to accelerated tax depreciation and lower growth in working capital requirements. Increased business activity levels and revenues in 2007 resulted in higher accounts receivable, inventories and prepaid expenses partially offset by increased accounts payable and accrued payroll including bonuses.

Cash used for investing activities in 2007 increased by $88.5 million compared to 2006, primarily as a result of higher capital expenditures to increase capacity and maintain our existing equipment.

Cash provided by financing activities in 2007 increased by $78.6 million compared to 2006, primarily due to net borrowings from notes payable to banks during 2007, partially offset by a 50 percent increase in dividends paid per share to common shareholders.

Financial Condition and Liquidity

The Company's financial condition as of December 31, 2008, remains strong. We believe the liquidity provided by our existing cash and cash equivalents, our overall strong capitalization which includes a revolving credit facility and cash expected to be generated from operations will provide sufficient capital to meet our requirements for at least the next twelve months. During the third quarter of 2006, the Company replaced its $50 million line of credit with a $250 million revolving credit facility (the "Revolving Credit Agreement"), with a term of five years. During the second quarter of 2008, the Company entered into a certain Commitment Increase Amendment to the Revolving Credit Agreement to increase the amount of the credit facility by $46.5 million to its current amount of $296.5 million. The Revolving Credit Agreement contains customary terms and conditions, including certain financial covenants including covenants restricting RPC's ability to incur liens, merge or consolidate with another entity. A total of $99.9 million was available under our facility as of December 31, 2008; approximately $22.2 million of the credit facility supports outstanding letters of credit relating to self-insurance programs or contract bids. For additional information with respect to RPC's credit facility, see Note 6 of the Notes to Consolidated Financial Statements.

The Company's decisions about the amount of cash to be used for investing and financing purposes are influenced by its capital position, including access to borrowings under our credit facility, and the expected amount of cash to be provided by operations. We believe our liquidity will continue to provide the opportunity to grow our asset base and revenues during periods with positive business conditions and strong customer activity levels. The Company's decisions about the amount of cash to be used for investing and financing activities could be influenced by the financial covenants in our credit facility but we do not expect the covenants to restrict our planned activities.

Cash Requirements

Capital expenditures were $170.3 million in 2008, and we currently expect capital expenditures to be approximately $90.0 million in 2009. We expect these expenditures to be primarily directed towards revenue-producing equipment in our larger, core service lines including pressure pumping, snubbing, nitrogen, and rental tools. The actual amount of 2009 expenditures will depend primarily on equipment maintenance requirements, expansion opportunities, and equipment delivery schedules.

The Company's Retirement Income Plan, a multiple employer trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to eligible employees. The Company does not currently expect to make any contributions to the defined benefit pension plan in 2009 to meet its funding objectives.

The Company's Board of Directors announced a stock buyback program on March 9, 1998 authorizing the repurchase of up to 11,812,500 shares of which 2,807,265 additional shares were available to be repurchased as of December 31, 2008. The program does not have a predetermined expiration date.

On January 27, 2009, the Board of Directors approved an increase in the quarterly cash dividend per common share, from $0.06 to $0.07, payable March 10, 2009 to stockholders of record at the close of business February 10, 2009. The Company expects to continue to pay cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors.

Contractual Obligations

The Company's obligations and commitments that require future payments include a
bank demand note, certain non-cancelable operating leases, purchase obligations
and other long-term liabilities. The following table summarizes the Company's
significant contractual obligations as of December 31, 2008:

Contractual obligations                                  Payments due by period
                                                 Less than        1-3            3-5         More than
(in thousands)                      Total         1 year          years         years         5 years
. . .