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RES > SEC Filings for RES > Form 10-K/A on 19-Dec-2011All Recent SEC Filings

Show all filings for RPC INC

Form 10-K/A for RPC INC


19-Dec-2011

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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, northeast, the Rocky Mountains 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 secure adequate sources of supplies of certain high-demand raw
- materials used in our operations, both in order to conduct our operations and to enhance our competitive position.

- To maintain and selectively increase market share.

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

- To align the interests of our management and stockholders.

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

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 are characterized by natural gas prices which stabilized during 2010 at higher levels than in 2009, and are stable during the first quarter of 2011 compared to the fourth quarter of 2010. Oil prices also increased during 2010 compared to 2009, and have continued to increase during the first quarter of 2011. Compared to the first quarter of 2010, the price of natural gas in 2011 is approximately 12 percent lower, but the price of oil is approximately 14 percent higher. The average U.S. rig count increased by 41 percent during 2010, all of which took place during the second through the fourth quarters. During the first quarter of 2011, the rig count was approximately 27 percent higher than the first quarter of 2010 and slightly higher than the fourth quarter of 2010. Continued increases in the U.S. domestic rig count during 2011 may be limited by the number of rigs available to drill new wells.

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 2010, and was 67 percent of total wells drilled during the year. During the first part of 2011, the percentage of horizontal and directional wells drilled as a percentage of total wells increased to approximately 70 percent. In addition, the percentage of wells drilled for oil increased during 2010, and we believe that this percentage will increase in 2011 due to the high price of oil and the renewed civil unrest in the Middle East. During 2010, the increase in U.S. domestic oilfield activity and the increasingly service-intensive nature of this activity caused the demand for the Company's services to increase significantly. This increased demand was especially evident in the Company's service lines which are used in unconventional completion work, such as pressure pumping, coiled tubing and downhole tools. Also, due to the repetitive nature of this work and the long-term capital commitment required by our customers to execute their drilling programs, several of our large customers entered into contractual relationships with us to provide services to support their drilling and completion programs. These arrangements typically have terms that are greater than one year, and have specific pricing and other financial arrangements which provide satisfactory financial returns to us in the event that the customer's activities decline for any reason.


The Company's response to our current operating environment has been to increase our fleet of equipment, and in some cases, to open new operational locations, to support these significant customer relationships. The capital expenditures have been funded by cash flows from operating activities as well as borrowings under our revolving credit facility. During the third quarter of 2010 the Company re-financed its existing syndicated revolving credit facility in order to maintain sufficient liquidity to fund its capital expenditure requirements.

Income before income taxes was $237.5 million in 2010 compared to a loss before taxes of $33.5 million in the prior year. The effective tax rate for 2010 was 38.2 percent compared to 32.1 percent in the prior year. Diluted earnings per share were $1.00 in 2010 compared to a loss per share of $0.16 for the prior year. Cash flows from operating activities were $168.7 million in 2010, the same as in the prior year, and cash and cash equivalents were $9.0 million at December 31, 2010, an increase of $4.5 million compared to December 31, 2009. As of December 31, 2010, there was $121.3 million in outstanding borrowings under our credit facility.

Cost of revenues as a percentage of revenues decreased approximately 11.8 percentage points in 2010 compared to 2009, because of higher utilization of equipment and personnel, which improved operational leverage, and improved pricing for our services.

Selling, general and administrative expenses as a percentage of revenues decreased approximately 11.1 percentage points in 2010 compared to 2009, which was due to the fixed nature of many of these expenses which we were able to leverage over higher revenues.

Consistent with our strategy to selectively grow our capacity, support our significant customer relationships and maintain our existing fleet of high demand equipment, capital expenditures increased to $187.5 million in 2010, a significant increase compared to $67.8 million last year.

Outlook

Drilling activity in the U.S. domestic oilfields, as measured by the rotary drilling rig count, had been gradually increasing since about 2003 when rig count was just over 800 through a cyclical peak in 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 rig count 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 98 percent to 1,732 early in the first quarter of 2011. The outlook for the U.S. domestic rig count is for it to remain stable or increase slightly during 2011, although the service-intensive nature of the activity is projected to continue to increase. From a low of $34 per barrel early in 2009, the price of oil increased to $92 per barrel during the fourth quarter of 2010. The average price of oil in 2010 was approximately $79 per barrel, an increase of 17 percent compared to 2009. During the first quarter of 2011, the price of oil increased to over $100, an increase of 27 percent compared to the average price of oil in 2010. 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 2009. The average price of natural gas in 2010 was approximately $4 per Mcf, 12.3 percent higher than the average price in 2009. During the first quarter of 2011, the price of natural gas increased slightly compared to 2010. Unconventional drilling activity, which requires more of RPC's services, accounted for 67 percent of total U.S. domestic drilling during 2010. Unconventional activity as a percentage of total oilfield activity had grown to 70 percent during the first quarter of 2011.

We continue to monitor the competitive environment in 2011, and while we are concerned about the low price of natural gas, we are encouraged by the increasingly service-intensive nature of the completion activities in our markets. We are also encouraged by the high price of oil, and the fact that early in 2011 approximately 47 percent of U.S. domestic drilling activity was directed towards oil, the highest percentage of U.S. domestic drilling activity directed to oil since 1995. We are also monitoring the amount of new oilfield equipment that is projected to be placed in service during 2011, because an increase in the supply of oilfield equipment in our markets can cause a decrease in the price we receive for our services if commodity prices and drilling activity do not also increase. We increased our commitments to purchase equipment in 2010 and also intend to take delivery of a large amount of revenue-producing equipment during the first and second quarters of 2011. This is consistent with our business and financial strategies because we believe that the equipment will produce high financial returns. However, we understand 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 by industry standards. Based on current industry conditions, we believe that the Company's consolidated revenues will increase in 2011 compared to 2010 and financial performance for the same period will also improve.


Results of Operations

Years Ended December 31,                                    2010          2009          2008
Consolidated revenues                                $ 1,096,384     $ 587,863     $ 876,977
Revenues by business segment:
Technical                                            $   979,834     $ 513,289     $ 745,991
Support                                                  116,550        74,574       130,986

Consolidated operating profit (loss)                 $   238,845     $ (33,052 )   $ 144,170
Operating profit (loss) by business segment:
Technical                                            $   217,144     $ (20,328 )   $ 110,648
Support                                                   31,086        (1,636 )      36,515
Corporate expenses                                       (13,143 )     (12,231 )      (9,360 )
Gain on disposition of assets, net                         3,758         1,143         6,367

Net income (loss)                                    $   146,742     $ (22,745 )   $  83,403
Earnings (loss) per share - diluted                  $      1.00     $   (0.16 )   $    0.85
Percentage of cost of revenues to revenues                    55 %          67 %          57 %
Percentage of selling, general and administrative
expenses to revenues                                          11 %          17 %          13 %
Percentage of depreciation and amortization
expense to revenues                                           12 %          22 %          14 %
Effective income tax rate                                   38.2 %        32.1 %        39.5 %
Average U.S. domestic rig count                            1,536         1,089         1,879
Average natural gas price (per thousand cubic feet
(mcf))                                               $      4.38     $    3.90     $    8.81
Average oil price (per barrel)                       $     79.27     $   61.90     $   99.96

Year Ended December 31, 2010 Compared To Year Ended December 31, 2009

Revenues. Revenues in 2010 increased $508.5 million or 86.5 percent compared to 2009. The Technical Services segment revenues for 2010 increased 90.9 percent from the prior year due primarily to higher activity levels from expanded customer commitments and improved pricing. The Support Services segment revenues for 2010 increased 56.3 percent from the prior year due to higher activity levels and improved pricing.

Domestic revenues increased 92 percent during 2010 compared to 2009 to $1,041.5 million due to increased customer activity levels coupled with increased capacity of equipment. The average price of natural gas increased by 12 percent and the average price of oil increased by approximately 28 percent during 2010 compared to the prior year. In conjunction with the increase in natural gas prices, the average domestic rig count during 2010 was 41 percent higher than in 2009. 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. International revenues, which increased from $44.8 million in 2009 to $54.9 million in 2010, were five percent of consolidated revenues. These international revenue increases were due mainly to higher customer activity levels in Canada and Qatar, compared to the prior year. Our international revenues are impacted by the timing of project initiation and their ultimate duration.

Cost of revenues. Cost of revenues in 2010 was $606.1 million compared to $393.8 million in 2009, an increase of $212.3 million or 53.9 percent. The increase in these costs was due to the variable nature of most of these expenses. However, cost of revenues, as a percent of revenues, decreased significantly due to leverage of employment and other direct costs over higher activity levels coupled with improved pricing for our services in 2010 compared to 2009.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 24.7 percent to $121.8 million in 2010 compared to $97.7 million in 2009. This increase was primarily due to increases in total employment costs, including increased incentive compensation consistent with improved operating results. However, as a percentage of revenues, selling, general and administrative expenses decreased to 11.1 percent in 2010 compared to 16.6 percent in 2009 due to leverage of the fixed costs over higher revenues.

Depreciation and amortization. Depreciation and amortization were $133.4 million in 2010, an increase of $2.8 million or 2.1 percent compared to $130.6 million in 2009. 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 increased gains related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment due to the increased intensity of work.

Other income, net. Other income, net was $1.3 million in 2010, a decrease of $279 thousand compared to other expense of $1.6 million in 2009. The increase is mainly due to the current year increase 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 income (expense) includes gains (losses) from settlements of various legal and insurance claims and royalty payments.

Interest expense. Interest expense was $2.7 million in 2010 compared to $2.2 million in 2009. The increase is primarily due to higher interest rates in 2010 incurred on outstanding interest bearing advances on our revolving credit facility.

Interest income. Interest income decreased to $46 thousand in 2010 compared to $147 thousand in 2009 as a result of a lower average investable cash balance in 2010 compared to 2009.

Income tax provision (benefit). The income tax provision was $90.8 million in 2010 compared to an income tax benefit of $10.8 million in 2009. The change is due to the level of income before income tax in 2010, coupled with an increase in the effective tax rate to 38.2 percent in 2010 from 32.1 percent in 2009.

Net income (loss)and diluted earnings (loss) per share. Net income was $146.7 million in 2010, or $1.00 per diluted share, compared to net loss of $22.7 million, or $0.16 per share in 2009. This improvement was due to increased revenues and lower, as a percentage of revenues, costs of revenues, selling, general and administrative expenses and depreciation expense.

Year Ended December 31, 2009 Compared To Year Ended December 31, 2008

Revenues. Revenues in 2009 decreased $289.1 million or 33.0 percent compared to 2008. The Technical Services segment revenues for 2009 decreased 31.2 percent from the prior year due primarily to highly competitive pricing coupled with lower equipment utilization. The Support Services segment revenues for 2009 decreased 43.1 percent from 2008 due to decreased customer activity and significantly lower pricing in the rental tool service line, the largest within this segment.

Domestic revenues decreased 36 percent to $543.0 million during 2009 compared to 2008 due to decreased customer activity and competitive pricing in our largest service lines, such as pressure pumping and rental tools. The average price of natural gas decreased by 56 percent and the average price of oil decreased by approximately 38 percent during 2009 compared to 2008. In conjunction with the decrease in natural gas prices, the average domestic rig count during 2009 was 42 percent lower than in 2008. This decrease in drilling activity had a negative 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 increased from $30.8 million in 2008 to $44.8 million in 2009, were eight percent of consolidated revenues. These revenue increases were due mainly to higher customer activity levels in New Zealand and Mexico compared to 2008. Our international revenues are impacted by the timing of project initiation and their ultimate duration.

Cost of revenues. Cost of revenues in 2009 was $393.8 million compared to $503.6 million in 2008, a decrease of $109.8 million or 21.8 percent. The decrease in these costs was due to the variable nature of most of these expenses as well as the impact of expense reduction measures taken during 2009, including employment cost reductions. Cost of revenues, as a percent of revenues, increased in 2009 from 2008 due to lower pricing for our services.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased 16.6 percent to $97.7 million in 2009 compared to $117.1 million in 2008. This decrease was primarily due to lower employment costs and other expenses resulting from expense reduction efforts instituted during 2009. In response to the industry downturn that RPC experienced in the third and fourth quarters of 2008 and most of 2009, the Company undertook several measures which it believes reduced its operating and net losses for the 12 months ended December 31, 2009. Primary among these measures was a reduction in employment costs, which we accomplished by headcount reductions among both field and administrative employees. During 2009, RPC reduced its headcount by 22 percent. This headcount reduction, along with other compensation reductions, resulted in a 22 percent decrease in total employment costs in 2009 as compared to 2008. As a percentage of revenues, selling, general and administrative expenses increased to 16.6 percent in 2009 compared to 13.4 percent in 2008.

Depreciation and amortization. Depreciation and amortization were $130.6 million in 2009, an increase of $12.2 million or 10.3 percent compared to $118.4 million in 2008. This increase resulted from a higher level of capital expenditures during 2009 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 decreased due primarily to decreased gains related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment.


Other income (expense), net. Other income, net was $1.6 million in 2009, an increase of $2.8 million compared to other expense of $1.2 million in 2008. The increase is mainly due to the 2009 increase 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 income (expense) includes gains (losses) from settlements of various legal and insurance claims and royalty payments.

Interest expense. Interest expense was $2.2 million in 2009 compared to $5.3 million in 2008. The decrease is due to lower interest expense in 2009 incurred on lower outstanding interest bearing advances on our revolving credit facility. During 2009 RPC also reduced its capital expenditures due to the industry downturn. While we reduced capital expenditures in order to strengthen our balance sheet and preserve cash, and because we did not believe the potential expenditures met our financial return criteria, this action also had the effect of reducing interest expense.

Interest income. Interest income increased to $147 thousand in 2009 compared to $73 thousand in 2008 as a result of a higher average investable cash balance in 2009 compared to 2008.

Income tax (benefit) provision. The income tax benefit was $10.8 million in 2009 compared to a tax provision of $54.4 million in 2008. The change is due to 2009's loss before income tax, partially offset by a decrease in the effective tax rate to 32.1 percent in 2009 from 39.5 percent in 2008.

Net (loss) income and diluted (loss) earnings per share. Net loss was $22.7 million in 2009, or $0.16 per share, compared to net income of $83.4 million, or $0.57 per diluted share in 2008. This decrease is due to decreased revenues and higher, as a percentage of revenues, costs of revenues, selling, general and administrative expenses and depreciation expense.


Liquidity and Capital Resources

Cash and Cash Flows

The Company's cash and cash equivalents were $9.0 million as of December 31,
2010, $4.5 million as of December 31, 2009 and $3.0 million as of December 31,
2008.

The following table sets forth the historical cash flows for the years ended
December 31:
                                                                    (in thousands)
                                                          2010           2009           2008
Net cash provided by operating activities              $  168,657     $  168,740     $  177,320
Net cash used for investing activities                   (171,769 )      (61,144 )     (158,953 )
Net cash provided by (used for) financing activities        7,658       (106,144 )      (21,668 )

2010

Cash provided by operating activities was comparable in 2010 compared to the prior year despite net income increasing significantly to $146.7 million in 2010 compared to net loss of $22.7 million in 2009. This contribution of net income to cash provided by operating activities was largely offset by increases in working capital requirements. Increased business activity levels and revenues in 2010 resulted in higher accounts receivable and increased inventory, partially offset by increases in accounts payable and accrued payroll including bonuses, consistent with higher activity levels and profitability.

Cash used for investing activities in 2010 increased by $110.6 million compared to 2009, primarily as a result of higher capital expenditures.

Cash provided by (used for) financing activities in 2010 increased by $113.8 million compared to 2009, primarily due to the net increase in borrowings under our credit facility during 2010 to fund working capital requirements and capital expenditures.

2009

Cash provided by operating activities decreased by $8.6 million in 2009 compared to 2008. Net loss was $22.7 million in 2009 compared to net income of $83.4 million in 2008, decreasing cash provided by operating activities partially offset by decreases in working capital requirements. Decreased business activity levels and revenues in 2009 resulted in lower accounts receivable and prepaid expenses partially offset by increased inventory and declines in accounts payable and accrued payroll including bonuses, consistent with lower activity levels and profitability.

Cash used for investing activities in 2009 decreased by $97.8 million compared to 2008, primarily as a result of lower capital expenditures.

Cash used for financing activities in 2009 increased by $84.5 million compared to 2008, primarily due to the reduction in notes payable to banks during 2009, partially offset by a decrease in common stock purchased and retired.

Financial Condition and Liquidity

The Company's financial condition as of December 31, 2010, 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. The Company currently has a $350 million revolving credit facility that matures in August 2015. The facility 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 $209.9 million was available under the facility as of December 31, 2010; approximately $18.8 million of the facility supports outstanding letters of credit relating to self-insurance programs or contract bids. For additional information with respect to RPC's 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 facility, and the expected amount of cash to be provided by . . .

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