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RES > SEC Filings for RES > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for RPC INC

Form 10-Q for RPC INC


1-Nov-2012

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 26.

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 select 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, 2011 is incorporated herein by reference. Since year end 2011, the Company's strategy of utilizing a larger fleet of equipment in unconventional basins has continued and we made approximately $274 million in capital expenditures primarily for revenue-producing equipment in support of this strategy. Because of the declining price of natural gas and the reduction in customer activity levels in natural gas basins, we are now focusing on oil and gas liquid directed basins where customer activity levels are higher. As a result, we moved equipment fleets and personnel among different operational locations in recent quarters, and will do so in the fourth quarter. Also due to lower customer activity levels, we have added revenue-producing equipment at a lower rate in 2012 than in 2011, and we anticipate that capital expenditures will be lower in 2012 than in 2011.

During the third quarter of 2012, revenues decreased 5.9 percent to $472.4 million compared to the same period in the prior year. The decrease in revenues resulted primarily from lower pricing and utilization in many of our service lines partially offset by a slight increase in our fleet of revenue-producing equipment. International revenues for the third quarter of 2012 increased 41.3 percent to $20.9 million compared to the same period in the prior year. International revenues reflect primarily increases in customer activity levels in New Zealand, China 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 2012 in comparison to the same period of the prior year due to lower pricing for our services and inefficiencies resulting from lower utilization of our equipment and personnel. These inefficiencies were partially offset by favorable variances in the costs of materials and supplies used in providing our services due to changes in job mix.

Selling, general and administrative expenses as a percentage of revenues increased to 9.1 percent in the third quarter of 2012 compared to 7.4 percent in the same period in the prior year. This percentage increase was primarily due to increases in headcount related to support staff including those in new and expanding operational locations as well as the relatively fixed nature of these expenses during the short term.

Income before income taxes was $103.0 million for the three months ended September 30, 2012 compared to $132.7 million in the same period of 2011. The effective tax rate for the three months ended September 30, 2012 was 35.9 percent compared to 37.4 percent in the same period of the prior year. Diluted earnings per share were $0.30 for the three months ended September 30, 2012 compared to $0.38 in the same period of 2011. Cash flows from operating activities were $465.3 million for the nine months ended September 30, 2012 compared to $312.9 million in the same period of 2011 due primarily to a decrease in working capital and higher depreciation expense. The notes payable to banks decreased to $83.7 million as of September 30, 2012 compared to $203.3 million as of December 31, 2011.


RPC, INC. AND SUBSIDIARIES

Capital expenditures were $273.8 million during the first nine months of 2012. We expect capital expenditures to be approximately $350 million during full year 2012 although this amount will be modified based on market conditions and other factors. Our capital expenditures for the remainder of 2012 will be directed towards growth opportunities, as well as capitalized maintenance.

Outlook

Drilling activity in the U.S. domestic oilfield, as measured by the rotary drilling rig count, reached its most recent cyclical peak at 2,031 during the third quarter of 2008. 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 109 percent to 1,835 early in the third quarter of 2012, although this rig count represents a decline from a 2012 high of 2,008 in the first quarter. 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 171 percent to approximately $92 per barrel early in the third quarter of 2012. 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 increased to more than $4 per Mcf during the second quarter of 2011, although it has declined significantly since 2011. Early in the third quarter of 2012, the price of natural gas was slightly more than $3 per Mcf, and the outlook for the price of natural gas is uncertain throughout the remainder of 2012 and early 2013 and is not expected to improve unless cold weather increases demand for natural gas. Early in the third quarter of 2012, the natural gas-directed rig count was at its lowest level since the second quarter of 1999, and it is projected to remain low throughout the fourth quarter of 2012.

Unconventional drilling activity, which requires more of RPC's services than conventional drilling activity, accounted for 72 percent of total U.S. domestic drilling at the end of the third quarter of 2012. Oil-related drilling activity has also increased over the last several quarters, and during the third quarter of 2012 increased to 74 percent of total domestic drilling, compared to 54 percent in the third quarter of 2011. We continue to be encouraged by this shift, because the growth in 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 relatively high price of oil. Furthermore, this increase in oil-directed drilling can help offset weakness in natural gas-directed drilling. During recent quarters we moved several equipment fleets from natural gas-directed basins to 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 has recently grown more competitive, as new competitors have entered the domestic oilfield services market and the supply of revenue-producing equipment has increased. Natural gas-directed drilling activity has fallen to its lowest level in more than 13 years. We are concerned about the near-term weakness in the price of natural gas and our customers' movement from natural gas basins to oil basins, because we have operational locations and significant amounts of revenue-producing equipment in natural gas basins and this will decrease the overall demand for our equipment and services. Also, the natural gas-directed basins are very service-intensive, so customer movement from these areas results in under-utilized revenue-producing equipment. Although the price of oil is high by historical standards, it has declined by approximately 16 percent during 2012 from a high of $110 in the first quarter to $92 early in the third quarter. Further declines in the price of oil may cause our customers to curtail their drilling activities in oil-directed drilling. Our response to the industry's potential uncertainty is to maintain sufficient liquidity and a conservative capital structure and monitor both our discretionary spending and our capital expenditures. The amount drawn on our credit facility has declined from $162.0 million at the end of the second quarter of 2012 to $83.7 million at the end of the third quarter due to profitable operations, lower capital expenditures for revenue-producing equipment as well as declining working capital requirements due to lower revenues and activity levels during the quarter. 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,
                                             2012          2011           2012            2011

 Consolidated revenues [in thousands]      $ 472,418     $ 502,235     $ 1,475,081     $ 1,327,025
 Revenues by business segment [in
thousands]:
Technical                                  $ 436,056     $ 463,685     $ 1,359,220     $ 1,219,823
Support                                       36,362        38,550         115,861         107,202

 Consolidated operating profit [in
thousands]                                 $ 102,368     $ 134,454     $   353,083     $   360,047

 Operating profit by business segment
[in thousands]:
Technical                                  $  98,708     $ 127,877     $   334,610     $   337,302
Support                                       10,004        14,121          36,532          37,210
Corporate                                     (4,793 )      (3,365 )       (13,200 )       (11,775 )
(Loss) gain on disposition of assets,
net                                           (1,551 )      (4,179 )        (4,859 )        (2,690 )

 Percentage cost of revenues to revenues        57.4 %        55.7 %          56.0 %          54.6 %
 Percentage selling, general &
administrative expenses to revenues              9.1 %         7.4 %           8.9 %           8.2 %
 Percentage depreciation and
amortization expense to revenues                11.4 %         9.3 %          10.8 %           9.9 %
 Average U.S. domestic rig count               1,906         1,949           1,955           1,835
 Average natural gas price (per thousand
cubic feet (mcf))                          $    2.87     $    4.07     $      2.52     $      4.19
 Average oil price (per barrel)            $   92.81     $   88.29     $     96.24     $     95.07

THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2011

Revenues. Revenues for the three months ended September 30, 2012 decreased 5.9 percent compared to the three months ended September 30, 2011. Domestic revenues decreased 7.4 percent to $451.5 million compared to the same period in the prior year. The decreases in revenues are due primarily to lower pricing and utilization in many service lines partially offset by a slightly larger fleet of revenue-producing equipment. International revenues increased 41.3 percent to $20.9 million for the three months ended September 30, 2012 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 29.5 percent while the average price of oil increased 5.1 percent during the third quarter of 2012 as compared to the same period in the prior year. The average domestic rig count during the quarter was approximately 2.2 percent lower than the same period in 2011.

The Technical Services segment revenues for the quarter decreased 6.0 percent compared to the same period in the prior year. Revenues in this segment decreased due primarily to lower pricing for services and lower equipment utilization within this segment partially offset by increased activity from a slightly larger fleet of revenue-producing equipment. The Support Services segment revenues for the quarter decreased by 5.7 percent compared to the same period in the prior year. This decrease was due principally to lower activity levels and pricing for services within rental tools, the largest service line within this segment. Operating profit in the Technical Services segment declined due to lower revenues, lower pricing and lower personnel and equipment utilization. Operating profit in the Support Services segment declined due to lower revenues impacted by weaker utilization and pricing in our rental tools service line.


RPC, INC. AND SUBSIDIARIES

Cost of revenues. Cost of revenues decreased 3.0 percent to $271.4 million for the three months ended September 30, 2012 compared to $279.9 million for the three months ended September 30, 2011. This decrease was due to the variable nature of these expenses and slightly lower revenues. Cost of revenues, as a percentage of revenues, increased in the third quarter of 2012 compared to the third quarter of 2011 due to lower pricing for our services and inefficiencies resulting from lower utilization of our equipment and personnel. These inefficiencies were partially offset by favorable variances in the costs of materials and supplies used in providing our services due to changes in job mix compared to the prior year.

Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended September 30, 2012 increased 15.7 percent to $43.0 million compared to $37.2 million for the three months ended September 30, 2011. Additionally, these costs as a percent of revenues increased to 9.1 percent during the three months ended September 30, 2012 compared to 7.4 percent during the same period in the prior year. This percentage increase was primarily due to increases in headcount related to support staff including those in new or expanding operational locations as well as the fixed nature of these expenses during the short term.

Depreciation and amortization. Depreciation and amortization totaled $54.1 million for the three months ended September 30, 2012, a 16.4 percent increase, compared to $46.5 million for the quarter ended September 30, 2011. The increase was due to assets placed in service over the prior twelve months.

Loss on disposition of assets, net. Loss on disposition of assets, net was $1.6 million for the three months ended September 30, 2012 compared to $4.2 million for the three months ended September 30, 2011. The loss 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 which requires early dispositions, or sales to customers of lost or damaged rental equipment. The decrease in the loss was due to declining activity levels especially in the higher pressure natural gas basins.

Other income (expense), net. Other income, net was $1.1 million for the three months ended September 30, 2012 compared to other expense, net of $0.9 million 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.

Interest expense and interest income. Interest expense was $441 thousand for the three months ended September 30, 2012 compared to $887 thousand for the three months ended September 30, 2011. The decrease in 2012 is due to a lower average debt balance on our revolving credit facility, as well as slightly lower interest rates in the third quarter 2012 compared to the same period in the prior year. Interest income was $16 thousand for the three months ended September 30, 2012 and $9 thousand for the three months ended September 30, 2011.

Income tax provision. Income tax provision was $37.0 million during the three months ended September 30, 2012, compared to $49.6 million for the same period in 2011. The effective tax rate of 35.9 percent for the three months ended September 30, 2012 was lower than the 37.4 percent for the three months ended September 30, 2011.

NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2011

Revenues. Revenues for the nine months ended September 30, 2012 increased 11.2 percent compared to the nine months ended September 30, 2011. Domestic revenues increased 9.8 percent to $1.4 billion compared to the same period in the prior year. The increases in revenues are due primarily to a larger fleet of revenue-producing equipment and higher activity levels in several service lines partially offset by lower pricing for our services in several service lines. International revenues increased 67.0 percent to $53.7 million for the nine months ended September 30, 2012 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.


RPC, INC. AND SUBSIDIARIES

The average price of natural gas decreased 39.8 percent while the average price of oil remained stable with a small increase of 1.2 percent during the nine months ended September 30, 2012 as compared to the same period in the prior year. The average domestic rig count during the nine months ended September 30, 2012 was approximately 6.7 percent higher than the same period in 2011.

The Technical Services segment revenues during the nine months ended September 30, 2012 increased 11.4 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 partially offset by lower pricing for our services within this segment. The Support Services segment revenues during the nine months ended September 30, 2012 increased by 8.1 percent compared to the same period in the prior year. This increase was due primarily to higher activity levels in several of the service lines. Operating profit in the Technical Services segment declined slightly due to slightly lower personnel and equipment utilization as well as lower pricing. Operating profit in the Support Services segment declined due to lower utilization and pricing in our rental tools service line.

Cost of revenues. Cost of revenues increased 14.1 percent to $826.5 million for the nine months ended September 30, 2012 compared to $724.2 million for the nine months ended September 30, 2011. This increase was due to the variable nature of these expenses. Cost of revenues, as a percentage of revenues, increased during the nine months ended September 30, 2012 compared to the prior year period due primarily to lower pricing for services and inefficiencies resulting from lower utilization of our equipment and personnel. These inefficiencies were partially offset by favorable variances in the costs of materials and supplies used in providing our services due to changes in job mix compared to the prior year.

Selling, general and administrative expenses. Selling, general and administrative expenses for the nine months ended September 30, 2012 increased 20.0 percent to $131.1 million compared to $109.2 million for the nine months ended September 30, 2011. This increase was primarily due to increases in total employment costs. These costs as a percent of revenues remained relatively stable during the nine months ended September 30, 2012 compared to the same period in the prior year.

Depreciation and amortization. Depreciation and amortization totaled $159.6 million for the nine months ended September 30, 2012, a 21.9 percent increase, compared to $130.9 million for the nine months ended September 30, 2011. The increase was due to assets placed in service over the prior twelve months. As a percentage of revenues these costs increased slightly during the nine months ended September 30, 2012 compared to the same period in the prior year.

Loss on disposition of assets, net. Loss on disposition of assets, net was $4.9 million for the nine months ended September 30, 2012 compared to $2.7 million for the nine months ended September 30, 2011. The loss 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 which requires early dispositions, or sales to customers of lost or damaged rental equipment.

Other income (expense), net. Other income, net was $1.1 million for the nine months ended September 30, 2012 compared to other expense, net of $0.6 million for the same period in the prior year. Other income, net primarily includes mark to market gains and losses of investments in the non-qualified benefit plan.

Interest expense and interest income. Interest expense was $1.7 million for the nine months ended September 30, 2012 compared to $3.0 million for the nine months ended September 30, 2011. The decrease in 2012 is due to lower interest rates on our revolving credit facility net of interest capitalized on equipment and facilities under construction partially offset by a slightly higher average debt balance on our revolving credit facility. Interest income was $25 thousand for the nine months ended September 30, 2012 and $16 thousand for the nine months ended September 30, 2011.

Income tax provision. Income tax provision was $133.5 million during the nine months ended September 30, 2012, compared to $134.7 million for the same period in 2011. The effective tax rate was 37.9 percent for the nine months ended September 30, 2012 and 37.8 percent for the nine months ended September 30, 2011.


                           RPC, INC. AND SUBSIDIARIES

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The Company's cash and cash equivalents at September 30, 2012 were $11.1
million. The following table sets forth the historical cash flows for the nine
months ended September 30, 2012 and 2011:

                                                  Nine months ended September 30,
  (In thousands)                                    2012                   2011

  Net cash provided by operating activities   $        465,270       $        312,915
  Net cash used for investing activities              (261,928 )             (286,832 )
  Net cash used for financing activities              (199,593 )              (28,148 )

Cash provided by operating activities for the nine months ended September 30, 2012 increased by $152.4 million compared to the comparable period in the prior year. This increase is due primarily to decreases in working capital requirements and higher depreciation expense resulting from capital expenditures for the nine months ended September 30, 2012. The decrease in working capital requirements was primarily due to a decrease in accounts receivables partially offset by a decrease in accounts payable both due to slowing business activity levels and an increase in inventory of critical supplies used to provide services.

Cash used for investing activities for the nine months ended September 30, 2012 decreased by $24.9 million, compared to the nine months ended September 30, 2011, primarily as a result of lower capital expenditures and lower proceeds from the sale of assets.

Cash used for financing activities for the nine months ended September 30, 2012 increased by $171.4 million primarily as a result of higher net loan repayments during the nine months ended September 30, 2012 compared to the prior year as a result of improvements in working capital. Also contributing to the increase is an approximately 60 percent increase in the per share common stock dividend coupled with higher open market share repurchases during the nine months ended September 30, 2012 compared to the prior year.

Financial Condition and Liquidity

The Company's financial condition as of September 30, 2012 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 $83.7 million at September 30, 2012 and approximately $18.1 million of the credit facility supports outstanding letters of credit relating to self-insurance programs or contract bids. Accordingly, a total of $248.2 million was available under our facility as of September 30, 2012. Additional information regarding our Revolving Credit Agreement is included in Note 9 to our Consolidated Financial Statements included in this report.

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.


RPC, INC. AND SUBSIDIARIES

Cash Requirements

The Company currently expects that capital expenditures during 2012 will be approximately $350 million, of which $273.8 million has been spent as of September 30, 2012. We expect these expenditures for the remainder of 2012 to be primarily directed towards several growth opportunities we have identified, as well as capitalized maintenance improvements. The actual amount of 2012 expenditures will depend primarily on equipment maintenance requirements, expansion opportunities, and equipment delivery schedules and can be modified based on market conditions and other factors.

The Company has ongoing sales and use tax audits in various jurisdictions . . .

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