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RES > SEC Filings for RES > Form 10-Q on 3-Nov-2011All Recent SEC Filings

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Form 10-Q for RPC INC


3-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion should be read in conjunction with the Consolidated Financial Statements included elsewhere in this document. See also "Forward-Looking Statements" on page 29.

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, Rocky Mountain and Appalachian regions, and in 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. 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.

The discussion of our key business and financial strategies set forth under the Overview section in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2010 is incorporated herein by reference. Since year end 2010, the Company's strategy of utilizing a larger fleet of equipment in unconventional basins expanded into additional unconventional basins with additional customer opportunities. As a result, we increased our 2011 capital expenditures in order to support this expanded effort, and this larger fleet has increased our revenues and profits during the first nine months of 2011.

During the third quarter of 2011, revenues increased 66.2 percent to $502.2 million compared to the same period in the prior year. The increase in revenues resulted primarily from an increase in the fleet of revenue-producing equipment in several service lines, improved utilization across all of our service lines, and improved pricing. International revenues for the third quarter of 2011 were approximately equal to the third quarter of 2010. International revenues reflect decreases in customer activity levels in New Zealand, offset by increases in Canada and Mexico. We continue to focus on developing international growth opportunities; however, it is difficult to predict when contracts and projects will be initiated and their ultimate duration.

Cost of revenues as a percentage of revenues increased during the third quarter of 2011 in comparison to the same period of the prior year due to increased costs due to logistical challenges in obtaining key materials used in pressure pumping, as well as increased usage of certain raw materials due to a changing job mix. This increase was partially offset by the leveraging of fixed employment costs over higher revenues.

Selling, general and administrative expenses as a percentage of revenues decreased by approximately 3.6 percentage points in the third quarter of 2011 compared to the same period in the prior year due to positive leverage of these costs resulting from higher revenues.


RPC, INC. AND SUBSIDIARIES

Income before income taxes increased to $132.7 million for the three months ended September 30, 2011 compared to $74.1 million in the same period of 2010 primarily because of higher revenues partially offset by an increase of $5.1 million in net losses on disposition of assets due to increased wear and tear on our equipment, particularly pressure pumping components. The effective tax rate for the three months ended September 30, 2011 was 37.4 percent compared to 37.6 percent in the same period of the prior year. Diluted earnings per share increased to $0.57 for the three months ended September 30, 2011 compared to $0.32 in the same period of 2010. Cash flows from operating activities were $142.1 million for the three months ended September 30, 2011 compared to $44.8 million in the same period of 2010 due to significantly higher net income partially offset by increased working capital requirements consistent with higher revenues and business activity levels. The notes payable to banks increased to $140.8 million as of September 30, 2011 compared to $108.3 million as of September 30, 2010.

Capital expenditures were $305.7 million during the first nine months of 2011. We currently expect capital expenditures to be approximately $400 to $450 million during full year 2011. Our capital expenditures for the remainder of 2011 will be directed towards growth opportunities, as well as capitalized maintenance costs, and equipment related to specific projects in which we have a contract with a customer.

Outlook

Drilling activity in the U.S. domestic oilfields, as measured by the rotary drilling rig count, had been gradually increasing since 2003 when rig count was just over 800 through the latter half of 2008 when the U.S. rig count peaked at 2,031 during the third quarter. The global recession that began in the fourth quarter of 2007 precipitated the steepest annualized decline in U.S. domestic oilfield history. From the third quarter of 2008 to the second quarter of 2009, the U.S. domestic rig count dropped almost 57 percent, reaching a trough of 876 in June 2009. Since June 2009, the rig count has increased by 129.7 percent to 2,012 early in the fourth quarter of 2011. The outlook for U.S. domestic oilfield activity remains positive for the remainder of 2011. The price of oil fell by 77 percent from $147 per barrel in the third quarter of 2008 to $34 early in 2010. Since that time, the price of oil has increased by approximately 144 percent to approximately $83 per barrel early in the fourth quarter of 2011. The price of natural gas fell by 85 percent from approximately $13 per Mcf in the second quarter of 2008 to slightly below $2 per Mcf in the third quarter of 2010. Since that time, the price of natural gas has increased to more than $3 per Mcf early in the fourth quarter of 2011.


RPC, INC. AND SUBSIDIARIES

Unconventional drilling activity, which requires more of RPC's services than conventional drilling activity, accounted for 70 percent of total U.S. domestic drilling at the end of the third quarter of 2011. Oil-related drilling activity has also increased during the past year, and during the third quarter of 2011 increased to 54 percent of total domestic drilling, compared to 36 percent in the third quarter of 2010. We are encouraged by this trend, because the new oil-directed drilling is taking place in unconventional drilling environments, and we also believe that this type of activity is more robust than natural gas-directed drilling because of the continued high price of oil. During the third quarter we continued to expand into unconventional basins in which oil-directed drilling is the predominant hydrocarbon production activity.

We continue to monitor the competitive environment. Increasing activity levels and the service-intensive nature of completion activities in unconventional basins, in which we have a growing presence, have presented opportunities to improve utilization and pricing and to expand our fleet of revenue-producing equipment. However, the market remains competitive, and the current operating environment creates expansion opportunities for existing and new competitors. We are concerned about the near-term weakness in the price of natural gas and the impact that this weakness may have on predominantly natural gas basins in which we have a significant presence. Our response to the industry's potential uncertainty is to maintain sufficient liquidity and a conservative capital structure and monitor our discretionary spending. We intend to closely manage the amount drawn on our credit facility.


                           RPC, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS
                                             Three months ended            Nine months ended
                                                September 30,                September 30,
                                             2011          2010           2011           2010

  Consolidated revenues [in thousands]     $ 502,235     $ 302,200     $ 1,327,025     $ 768,240
  Revenues by business segment [in
thousands]:
Technical                                  $ 463,685     $ 268,049     $ 1,219,823     $ 684,990
Support                                       38,550        34,151         107,202        83,250

  Consolidated operating profit [in
thousands]                                 $ 134,454     $  74,390     $   360,047     $ 149,047

  Operating profit by business segment
[in thousands]:
Technical                                  $ 127,877     $  65,225     $   337,302     $ 136,527
Support                                       14,121        12,015          37,210        20,564
Corporate                                     (3,365 )      (3,755 )       (11,775 )      (9,618 )
(Loss) gain on disposition of assets,
net                                           (4,179 )         905          (2,690 )       1,574

  Percentage cost of revenues to
revenues                                        55.7 %        53.8 %          54.6 %        56.2 %
  Percentage selling, general &
administrative expenses to revenues              7.4 %        11.0 %           8.2 %        11.8 %
  Percentage depreciation and
amortization expense to revenues                 9.3 %        11.0 %           9.9 %        12.9 %
  Average U.S. domestic rig count              1,949         1,626           1,835         1,498
 Average natural gas price (per thousand
cubic feet (mcf))                          $    4.07     $    4.22     $      4.19     $    4.52
 Average oil price (per barrel)            $   88.29     $   76.62     $     95.07     $   77.38


RPC, INC. AND SUBSIDIARIES

THREE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2010

Revenues. Revenues for the three months ended September 30, 2011 increased 66.2 percent compared to the three months ended September 30, 2010. Domestic revenues increased 69.6 percent to $487.5 million compared to the same period in the prior year. The increases in revenues are due primarily to a larger fleet of revenue-producing equipment in several service lines, improved utilization across all our service lines and improved pricing. International revenues decreased 0.2 percent to $14.8 million for the three months ended September 30, 2011 compared to the same period in the prior year. Our international revenues are impacted by the timing of project initiation and their ultimate duration and can be volatile in nature.

The average price of natural gas decreased 3.6 percent while the average price of oil increased 15.2 percent during the third quarter of 2011 as compared to the same period in the prior year. The average domestic rig count during the quarter was approximately 19.9 percent higher than the same period in 2010.

The Technical Services segment revenues for the quarter increased 73.0 percent compared to the same period in the prior year. Revenues in this segment increased due primarily to an increase in the fleet of revenue-producing equipment and higher activity levels from customer commitments, as well as improved pricing in all of the service lines within this segment. The Support Services segment revenues for the quarter increased by 12.9 percent compared to the same period in the prior year. This increase was due primarily to improved pricing and utilization in the rental tool service line, which is the largest service line within this segment. Operating profit in both the Technical Services segment and Support Services segment improved due to higher revenues, improved pricing, and cost leverage.

Cost of revenues. Cost of revenues increased 72.2 percent to $279.9 million for the three months ended September 30, 2011 compared to $162.5 million for the three months ended September 30, 2010. This increase was due to the variable nature of several of these expenses. Cost of revenues, as a percentage of revenues, increased in the third quarter of 2011 compared to the third quarter of 2010 due primarily to increased costs as a result of logistical complexities with raw materials used in pressure pumping, as well as increased usage of certain raw materials due to a changing job mix. This increase was partially offset by the leveraging of fixed employment costs over higher revenues.

Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended September 30, 2011 increased 12.4 percent to $37.2 million compared to $33.1 million for the three months ended September 30, 2010. This increase was primarily due to increases in total employment costs consistent with improved operating results. However, these costs as a percent of revenues decreased during the three months ended September 30, 2011 compared to the same period in the prior year due to the fixed nature of several of these expenses and our ability to leverage these costs over higher revenues.


RPC, INC. AND SUBSIDIARIES

Depreciation and amortization. Depreciation and amortization totaled $46.5 million for the three months ended September 30, 2011, a 40.4 percent increase, compared to $33.1 million for the quarter ended September 30, 2010. The increase was due to assets placed in service over the prior twelve months, however, these costs as a percentage of revenues decreased.

(Loss) gain on disposition of assets, net. (Loss) on disposition of assets, net was $(4.2) million for the three months ended September 30, 2011 compared to a net gain of $0.9 million for the three months ended September 30, 2010. The
(loss) gain on disposition of assets, net includes gains or losses related to various property and equipment dispositions including certain equipment components experiencing increased wear and tear in performing high intensity operations which requires early dispositions, or sales to customers of lost or damaged rental equipment.

Other (expense) income, net. Other (expense) income, net was $(906) thousand for the three months ended September 30, 2011 compared to $441 thousand for the same period in the prior year. Other (expense) income, net primarily includes mark to market gains and losses of investments in the non-qualified benefit plan, settlements of various legal and insurance claims, and royalty receipts.

Interest expense and interest income. Interest expense was $887 thousand for the three months ended September 30, 2011 compared to $707 thousand for the three months ended September 30, 2010. The increase in 2011 is due to a higher average debt balance on our revolving credit facility, net of interest capitalized on equipment and facilities under construction partially offset by lower interest costs on our refinanced syndicated revolving credit facility. Interest income was $9 thousand for the three months ended September 30, 2011 and $14 thousand for the three months ended September 30, 2010.

Income tax provision. Income tax provision was $49.6 million during the three months ended September 30, 2011, compared to $27.9 million for the same period in 2010. This increase was due to the increase in income before taxes. The effective tax rate of 37.4 percent for the three months ended September 30, 2011 was slightly lower than the 37.6 percent for the three months ended September 30, 2010.


RPC, INC. AND SUBSIDIARIES

NINE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2010

Revenues. Revenues for the nine months ended September 30, 2011 increased 72.7 percent compared to the nine months ended September 30, 2010. Domestic revenues increased 79.1 percent to $1,294.9 million compared to the same period in the prior year. The increases in revenues are due primarily to a larger fleet of revenue-producing equipment, the expansion of customer relationships and improved pricing, particularly within our technical services segment. International revenues decreased 28.7 percent to $32.2 million for the nine months ended September 30, 2011 compared to the same period in the prior year. Our international revenues are impacted by the timing of project initiation and their ultimate duration and can be volatile in nature.

The average price of natural gas decreased 7.4 percent while the average price of oil increased 22.9 percent during the nine months ended September 30, 2011 as compared to the same period in the prior year. The average domestic rig count during the nine months ended September 30, 2011 was approximately 22.5 percent higher than the same period in 2010.

The Technical Services segment revenues for the nine months ended September 30, 2011 increased 78.1 percent compared to the same period in the prior year. Revenues in this segment increased due primarily to an increase in the fleet of revenue-producing equipment and higher activity levels from customer commitments coupled with improved pricing. The Support Services segment revenues for the nine months ended September 30, 2011 increased by 28.8 percent compared to the same period in the prior year. This increase was due primarily to improved pricing and utilization. Operating profit in the Technical and Support Services segment improved due to higher revenues, improved pricing, and cost leverage.

Cost of revenues. Cost of revenues increased 67.8 percent to $724.2 million for the nine months ended September 30, 2011 compared to $431.6 million for the same period in the prior year. This increase was due to the variable nature of several of these expenses. Cost of revenues, as a percentage of revenues, decreased in the first nine months of 2011 compared to the first nine months of 2010 due primarily to the leveraging of fixed costs over higher revenues, partially offset by increases in the costs of raw materials and fuel.

Selling, general and administrative expenses. Selling, general and administrative expenses for the nine months ended September 30, 2011 increased 20.8 percent to $109.2 million compared to $90.4 million for the same period in the prior year. This increase was primarily due to increases in total employment costs, including increased incentive compensation consistent with improved operating results. However, these costs as a percent of revenues decreased during the nine months ended September 30, 2011 compared to the same period in the prior year due to the fixed nature of several of these expenses and the ability to leverage these costs over higher revenues.

Depreciation and amortization. Depreciation and amortization totaled $130.9 million for the nine months ended September 30, 2011, a 32.6 percent increase, compared to $98.7 million for the nine months ended September 30, 2010.


RPC, INC. AND SUBSIDIARIES

(Loss) gain on disposition of assets, net. (Loss) on disposition of assets, net was $(2.7) million for the nine months ended September 30, 2011 compared to a net gain of $1.6 million for the nine months ended September 30, 2010. The
(loss) gain on disposition of assets, net includes gains or losses related to various property and equipment dispositions including certain equipment components experiencing increased wear and tear in performing high intensity operations which requires early dispositions, or sales to customers of lost or damaged rental equipment.

Other(expense) income, net. Other (expense) income, net was $(582) thousand for the nine months ended September 30, 2011 compared to $556 thousand for the same period in the prior year. Other (expense) income, net primarily includes mark to market gains and losses of investments in the SERP, settlements of various legal and insurance claims, and royalty receipts.

Interest expense and interest income. Interest expense was $3.0 million for the nine months ended September 30, 2011 compared to $1.8 million for the same period in the prior year. The increase in 2011 is due to a higher average debt balance on our revolving credit facility, net of interest capitalized on equipment and facilities under construction partially offset by lower interest costs on our refinanced syndicated revolving credit facility. Interest income was $16 thousand for the nine months ended September 30, 2011 and $46 thousand for the nine months ended September 30, 2010.

Income tax provision. Income tax provision was $134.7 million during the nine months ended September 30, 2011, compared to $56.6 million for the same period in 2010. This increase was due to the increase in income before taxes. The effective tax rate of 37.8 percent for the nine months ended September 30, 2011 was lower than the 38.3 percent for the nine months ended September 30, 2010 due primarily to changes in the relationship of annual estimates of pretax income and permanent tax differences.


                           RPC, INC. AND SUBSIDIARIES

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The Company's cash and cash equivalents at September 30, 2011 were $7.0
million. The following table sets forth the historical cash flows for the nine
months ended September 30, 2011 and 2010:

                                                          Nine months ended September 30,
 (In thousands)                                             2011                2010

 Net cash provided by operating activities               $   312,915       $        92,630
 Net cash used for investing activities                     (286,832 )             (95,355 )
 Net cash (used for) provided by financing activities        (28,148 )               1,470

Cash provided by operating activities for the nine months ended September 30, 2011 increased by $220.3 million compared to the comparable period in the prior year. This change is primarily due to a significant increase of $130.5 million in net income for the nine months ended September 30, 2011 compared to the same period of 2010 in addition to an increase in depreciation expense resulting from higher capital expenditures partially offset by an increase in working capital requirements consistent with higher revenues and business activity levels.

Cash used for investing activities for the nine months ended September 30, 2011 increased by $191.5 million, compared to the nine months ended September 30, 2010, primarily as a result of higher capital expenditures directed primarily at increasing our fleet of equipment.

Cash used for financing activities for the nine months ended September 30, 2011 increased by $29.6 million, compared to the nine months ended September 30, 2010, as a result of higher common stock dividend distributions in the nine months ended September 30, 2011 compared to the prior year, coupled with open market share repurchases during 2011.

Financial Condition and Liquidity

The Company's financial condition as of September 30, 2011 remains strong. We believe the liquidity provided by our existing cash and cash equivalents, our overall strong capitalization and cash expected to be generated from operations will provide sufficient capital to meet our requirements for at least the next twelve months. The Company currently has a $350 million revolving credit facility (the "Revolving Credit Agreement") that matures in August 2015. The Revolving Credit Agreement contains customary terms and conditions, including certain financial covenants including covenants restricting RPC's ability to incur liens or merge or consolidate with another entity. Our outstanding borrowings were $140.8 million at September 30, 2011 and approximately $16.6 million of the credit facility supports outstanding letters of credit relating to self-insurance programs or contract bids. A total of $192.6 million was available under our facility as of September 30, 2011. Additional information regarding our Revolving Credit Agreement is included in Note 10 to our Consolidated Financial Statements included in this report.


RPC, INC. AND SUBSIDIARIES

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. In addition, the Company's decisions about the amount of cash to be used for investing and financing activities may also be influenced by the financial covenants in our credit facility.

Cash Requirements

The Company currently expects that capital expenditures during 2011 will be approximately $400 to $450 million, of which $305.7 million has been spent as of September 30, 2011. We expect these expenditures for the remainder of 2011 to be primarily directed towards several growth opportunities we have identified, as well as capitalized maintenance and equipment related to specific projects in which we have a contract with a customer. The actual amount of 2011 expenditures will depend primarily on equipment maintenance requirements, expansion opportunities, and equipment delivery schedules.

The Company has ongoing sales and use tax audits in various jurisdictions and may be subjected to varying interpretations of statutes that could result in unfavorable outcomes that cannot be currently estimated.

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. In the first quarter of 2011, the Company contributed $600,000 to the pension plan. The Company does not currently expect to make any additional contributions to this plan during the remainder of 2011.

The Company's Board of Directors announced a stock buyback program on March 9, 1998 authorizing the repurchase of 17,718,750 shares. The Company repurchased 810,377 shares of common stock under the program during the first quarter of 2011 and may repurchase additional outstanding common shares periodically based on market conditions and our capital allocation strategies considering restrictions under our credit facility. The stock buyback program does not have a predetermined expiration date.

On October 25, 2011, the Board of Directors approved a $0.10 per share cash dividend payable December 10, 2011 to stockholders of record at the close of business November 9, 2011. 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.

INFLATION

The Company purchases its equipment and materials from suppliers who provide competitive prices, and employs skilled workers from competitive labor markets. If inflation in the general economy increases, the Company's costs for . . .

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