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RES > SEC Filings for RES > Form 10-Q on 1-Nov-2013All Recent SEC Filings

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Form 10-Q for RPC INC


1-Nov-2013

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 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 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, 2012 is incorporated herein by reference. In 2013, the Company's strategy of utilizing equipment in unconventional basins has continued, although we have curtailed our capital expenditures for new equipment due to the low price of natural gas and a low natural gas drilling rig count.
During the nine months ended September 30, 2013, we made approximately $159.9 million in capital expenditures primarily for the maintenance of our existing revenue-producing equipment as well as purchases of new equipment, which were significantly lower than our capital expenditures during the first nine months of 2012. Although the price of natural gas has increased recently, the low prices in 2011 and 2012 negatively impacted customer activity levels in natural gas basins. For this reason, we are now focusing on oil and natural gas liquids directed basins where customer activity levels are higher. We anticipate that our capital expenditures will continue at these lower levels as compared to the prior year.

During the third quarter of 2013, revenues increased 4.0 percent to $491.1 million compared to the same period in the prior year. The increase in revenues resulted primarily from higher activity levels in several of our largest service lines, partially offset by lower pricing in all of our service lines. International revenues for the third quarter of 2013 decreased 13.3 percent to $18.1 million compared to the same period in the prior year. International revenues reflect decreases in customer activity levels primarily in New Zealand partially offset by increases in Gabon and Australia. 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 2013 in comparison to the same period of the prior year due primarily to competitive pricing for our services.

Selling, general and administrative expenses as a percentage of revenues increased to 9.6 percent in the third quarter of 2013 compared to 9.1 percent in the same period in the prior year. This percentage increase was primarily due to additional support personnel and higher bad debt expense.

Income before income taxes was $86.8 million for the three months ended September 30, 2013 compared to $103.0 million in the same period of 2012. The effective tax rate for the three months ended September 30, 2013 was 38.1 percent compared to 35.9 percent in the same period of the prior year. Diluted earnings per share were $0.25 for the three months ended September 30, 2013 compared to $0.30 in the same period of 2012. Cash flows from operating activities were $303.5 million for the nine months ended September 30, 2013 compared to $465.3 million in the same period of 2012 due primarily to a decrease in net income and the impact of the deferred taxes and working capital changes. The notes payable to banks decreased to $51.4 million as of September 30, 2013 compared to $107.0 million as of December 31, 2012.

RPC, INC. AND SUBSIDIARIES

We expect capital expenditures during full year 2013 will be approximately $225 million, although this amount will ultimately depend upon market conditions and other factors. Our capital expenditures for the remainder of 2013 will be directed primarily towards capitalized equipment maintenance.

Outlook

Drilling activity in the U.S. domestic oilfields, as measured by the rotary drilling rig count, reached a cyclical peak of 2,031 during the third quarter of 2008. The global recession that began during 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 third quarter of 2009, the U.S. domestic rig count dropped almost 57 percent, reaching a trough of 876 in June 2009. Between its cyclical trough in the third quarter of 2009 and its most recent peak of 2,026 during the fourth quarter of 2011, U.S. domestic drilling activity increased by approximately 131 percent. Beginning late in the fourth quarter of 2011, the domestic drilling rig count began to decline and continued to steadily decline throughout 2012. During 2013, the rotary drilling rig count has varied on a sequential basis by less than one percent. Horizontal and directional wells drilled as a percentage of total oilfield wells drilled have grown steadily over the past several years and represented approximately 75 percent of total wells drilled during 2012 and the first three quarters of 2013. Natural gas-directed drilling activity remains at very low levels, and at the end of the third quarter of 2013 had fallen to a level not recorded since the second quarter of 1995.

The current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity. The average price of oil has been high during 2012 and 2013, remained steady during the first and second quarters of 2013, and increased by approximately 13 percent during the third quarter of 2013. The sustained high price of oil is reflected in the current composition of the U.S. domestic rig count, approximately 78 percent of which was directed towards oil during the third quarter of 2013. The price of oil should continue to have a positive impact on our customers' activity levels and our financial results, since RPC has a significant operational presence in the domestic U.S. basins which produce oil. The price of natural gas declined during 2011 and the first quarter of 2012, but recovered during the third and fourth quarters of 2012 and the first and second quarters of 2013, although it declined by approximately 11 percent during the third quarter of 2013 compared to the second quarter. At the end of the third quarter of 2013 the price of natural gas was approximately 23 percent higher than at the same time in 2012. However, this price increase has not yet encouraged increased natural gas-directed drilling because of record production of natural gas in the U.S. domestic market and a resulting oversupply of natural gas, and the belief among our customers that the spot price of natural gas will remain at current levels during the near term. As noted above, natural gas-directed drilling activity has fallen to its lowest level in 18 years. The price of natural gas liquids has become an increasingly important determinant of our customers' activities, since its sales comprise a large part of our customers' revenues, and it is produced in many of the shale resource plays that also produce oil. During 2012, the average price of benchmark natural gas liquids was 31.4 percent lower than in 2011. However, the price of benchmark natural gas liquids has increased during 2013. The average price of this commodity during the third quarter of 2013 was 14.7 percent higher than the third quarter of 2012 and 12.4 percent higher than the second quarter of 2013.

The trends in both commodity prices and domestic drilling activity indicate very little near-term fluctuation in our customer's overall activity levels or in our revenues, although there may be negative seasonal fluctuations impacting customer activity levels in the fourth quarter. We do not believe that the overall rig count will increase during the remainder of 2013 unless the price of natural gas increases significantly.

We continue to monitor the market for our services and the competitive environment. We are concerned about the low prices and continued high production of natural gas and natural gas liquids, and the fact that the high cost of completing wells in many unconventional shale plays has discouraged our customers from conducting drilling and completion activities in these areas until these commodity prices significantly improve. In addition, we continue to monitor our customers' financial condition, because the prolonged low price of natural gas may cause financial distress among our less well-capitalized customers, thus jeopardizing timely collection of our accounts receivable. We also monitor the competitive environment because the high historical financial returns and favorable long-term outlook for our industry attracted new entrants and encouraged existing service companies to purchase additional revenue-producing equipment during 2011 and 2012. Due to the decline in domestic drilling activity that began in the fourth quarter of 2011, as well as the decrease in service-intensive drilling activities related to natural gas-directed shale plays, we believe that there is an excess of service capacity in the U.S. domestic market at the present time. Additionally, as of the end of the third quarter of 2013 all of the contractual agreements in our pressure pumping service line have expired, and we now operate our fleets in the spot market, which in the current market has resulted in relatively lower utilization and pricing. Because of these concerns, we anticipate that our equipment purchases will continue to be curtailed until sustainable improvements are indicated. Our consistent response to the industry's volatility is to maintain sufficient liquidity and a conservative capital structure and monitor our discretionary spending. Although we have used our bank credit facility to finance our expansion, we will continue to maintain a conservative financial structure by industry standards.

                           RPC, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

                                             Three months ended             Nine months ended
                                                 September 30                  September 30
                                             2013          2012           2013            2012

Consolidated revenues [in thousands]       $ 491,121     $ 472,418     $ 1,374,508     $ 1,475,081
Revenues by business segment [in
thousands]:
Technical                                  $ 458,168     $ 436,056     $ 1,276,209     $ 1,359,220
Support                                       32,953        36,362          98,299         115,861

Consolidated operating profit [in
thousands]                                 $  85,839     $ 102,368     $   210,911     $   353,083

Operating profit by business segment [in
thousands]:
Technical                                  $  86,183     $  98,708     $   210,807     $   334,610
Support                                        6,022        10,004          19,361          36,532
Corporate                                     (5,098 )      (4,793 )       (13,592 )       (13,200 )
Loss on disposition of assets, net            (1,268 )      (1,551 )        (5,665 )        (4,859 )

Percentage cost of revenues to revenues         61.8 %        57.4 %          62.5 %          56.0 %
Percentage selling, general &
administrative expenses to revenues              9.6 %         9.1 %          10.2 %           8.9 %
Percentage depreciation and amortization
expense to revenues                             10.8 %        11.4 %          11.6 %          10.8 %
Average U.S. domestic rig count                1,770         1,906           1,763           1,955
Average natural gas price (per thousand
cubic feet (mcf))                          $    3.54     $    2.87     $      3.67     $      2.52
Average oil price (per barrel)             $  106.37     $   92.81     $     98.28     $     96.24

THREE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2012

Revenues. Revenues for the three months ended September 30, 2013 increased 4.0 percent compared to the three months ended September 30, 2012. Domestic revenues of $473.0 million increased 4.8 percent compared to the same period in the prior year. The increases in revenues are due primarily to higher activity levels in several of our largest service lines, partially offset by lower pricing in all of our service lines. International revenues of $18.1 million decreased 13.3 percent for the three months ended September 30, 2013 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 difficult to predict.

The average price of natural gas was 23.3 percent higher and the average price of oil was 14.6 percent higher during the third quarter of 2013 as compared to the same period in the prior year. The average domestic rig count during the quarter was approximately 7.1 percent lower than the same period in 2012.

RPC, INC. AND SUBSIDIARIES

The Technical Services segment revenues for the third quarter of 2013 increased 5.1 percent compared to the same period in the prior year. Revenues in this segment increased due primarily to higher service intensity and an improved job mix in our largest service lines within this segment. The Support Services segment revenues for the third quarter of 2013 decreased by 9.4 percent compared to the same period in the prior year. This decrease was due principally to lower pricing within rental tools, the largest service line within this segment. Operating profit in both the Technical and Support Services segments declined due to more competitive pricing for our services, and in Technical Services, due to higher materials and supplies expenses resulting from more service intensive jobs. Operating profit in Support Services also declined due to lower revenues as a result of highly competitive pricing pressures.

Cost of revenues. Cost of revenues increased 11.9 percent to $303.7 million for the three months ended September 30, 2013 compared to $271.4 million for the three months ended September 30, 2012. Cost of revenues increased due to higher materials and supplies expense resulting primarily from more service intensive jobs in our pressure pumping service line during the third quarter 2013 compared to the prior year. Cost of revenues, as a percentage of revenues, increased in the third quarter of 2013 compared to the third quarter of 2012 due primarily to competitive pricing for our services.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $4.1 million or 9.5 percent to $47.1 million for the three months ended September 30, 2013 compared to the same period in the prior year. As a percentage of revenues, these costs increased to 9.6 percent during the three months ended September 30, 2013 compared to 9.1 percent during the same period in the prior year. Our selling, general and administrative expenses are relatively fixed during the short term, but were higher during the third quarter of 2013 compared to the third quarter of 2012 due to additional support personnel and higher bad debt expense. The increase in bad debt expense of $3.7 million compared to the prior year was due to an increase in general reserves associated with higher accounts receivables consistent with higher revenues coupled with an increase in specific customer reserves.

Depreciation and amortization. Depreciation and amortization totaled $53.2 million for the three months ended September 30, 2013, a 1.6 percent decrease, compared to $54.1 million for the quarter ended September 30, 2012.

Loss on disposition of assets, net. Loss on disposition of assets, net was $1.3 million for the three months ended September 30, 2013 compared to $1.6 million for the three months ended September 30, 2012. The loss on disposition of assets, net is comprised of 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, net. Other income, net was $1.3 million for the three months ended September 30, 2013 compared to other income, net of $1.1 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. Interest expense was $283 thousand for the three months ended September 30, 2013 compared to $441 thousand for the three months ended September 30, 2012. The decrease in interest expense is due primarily to a lower average debt balance on our revolving credit facility in the third quarter 2013 compared to the same period in the prior year.

Income tax provision. Income tax provision of $33.1 million decreased during the three months ended September 30, 2013 in comparison to $37.0 million for the same period in 2012 primarily due to lower income before income taxes. The effective tax rate of 38.1 percent for the three months ended September 30, 2013 was higher than the 35.9 percent for the three months ended September 30, 2012 primarily due to a positive provision to return true-up in the prior year.

NINE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2012

Revenues. Revenues for the nine months ended September 30, 2013 decreased 6.8 percent compared to the nine months ended September 30, 2012. Domestic revenues of $1.3 billion decreased 6.7 percent compared to the same period in the prior year. The decreases in revenues are due primarily to lower pricing coupled with lower activity levels in most of our service lines during the first and second quarters of 2013 compared to the same periods in the prior year. International revenues of $48.7 million decreased 9.4 percent for the nine months ended September 30, 2013 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 difficult to predict.

RPC, INC. AND SUBSIDIARIES

The average price of natural gas was 45.4 percent higher while the average price of oil was 2.1 percent higher during the nine months ended September 30, 2013 as compared to the same period in the prior year. The average domestic rig count during the nine months ended September 30, 2013 was approximately 9.8 percent lower than the same period in 2012.

The Technical Services segment revenues for the nine months ended September 30, 2013 decreased 6.1 percent compared to the same period in the prior year. Revenues in this segment decreased primarily due to increasingly competitive pricing in all our service lines and lower activity levels in several of our service lines during the first and second quarters of 2013 compared to the same periods in the prior year. The Support Services segment revenues for the nine months ended September 30, 2013 decreased by 15.2 percent compared to the same period in the prior year. This decrease was due primarily to highly competitive pricing within rental tools, the largest service line within this segment. Operating profit in the Technical and Support Services segments declined due to lower revenues caused by more competitive pricing for our services.

Cost of revenues. Cost of revenues increased 4.0 percent to $859.5 million for the nine months ended September 30, 2013 compared to $826.5 million for the nine months ended September 30, 2012. Cost of revenues, as a percentage of revenues, for the nine months ended September 30, 2013 increased compared to the same period 20 2012 due to lower pricing for our services and higher materials and supplies expense resulting primarily from more service intensive jobs in our pressure pumping service line.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $8.6 million or 6.5 percent to $139.6 million for the nine months ended September 30, 2013 compared to the same period in the prior year. As a percentage of revenues, these costs increased to 10.2 percent during the nine months ended September 30, 2013 compared to 8.9 percent during the same period in the prior year. Our selling, general and administrative expenses are relatively fixed during the short term, but were higher during the nine months ended September 30, 2013 compared to the same period of prior year due to additional support personnel and higher bad debt. The increase in bad debt expense of $7.0 million compared to the prior year was due to an increase in general reserves associated with higher accounts receivables consistent with higher revenues coupled with an increase in specific customer reserves including a customer bankruptcy during the second quarter of 2013.

Depreciation and amortization. Depreciation and amortization totaled $158.8 million for the nine months ended September 30, 2013 compared to $159.6 million for the nine months ended September 30, 2012.

Loss on disposition of assets, net. Loss on disposition of assets, net was $5.7 million for the nine months ended September 30, 2013 compared to $4.9 million for the nine months ended September 30, 2012. The loss on disposition of assets, net is comprised of 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, net. Other income, net was $1.6 million for the nine months ended September 30, 2013 compared to other income, net of $1.1 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. Interest expense was $1.6 million for the nine months ended September 30, 2013 compared to $1.7 million for the nine months ended September 30, 2012. The decrease in interest expense is due primarily to a lower average debt balance on our revolving credit facility in the nine months ended September 30, 2013 compared to the same period in the prior year partially offset by interest expense resulting from a sales tax audit.

Income tax provision. Income tax provision of $81.8 million decreased during the nine months ended September 30, 2013 in comparison to $133.5 million for the same period in 2012 due to lower income before income taxes. The effective tax rate of 38.8 percent for the nine months ended September 30, 2013 was slightly higher than the 37.9 percent for the nine months ended September 30, 2012.

                           RPC, INC. AND SUBSIDIARIES

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The Company's cash and cash equivalents at September 30, 2013 were $22.9
million. The following table sets forth the historical cash flows for the three
and nine months ended September 30, 2013 and 2012:

                                                             Three and nine months ended September 30
(In thousands)                                                    2013                      2012

Net cash provided by operating activities                  $           303,537       $           465,270
Net cash used for investing activities                                (151,276 )                (261,928 )
Net cash used for financing activities                                (143,487 )                (199,593 )

Cash provided by operating activities for the nine months ended September 30, 2013 decreased by $161.7 million compared to the same period in the prior year. This decrease is due primarily to a decrease in net income of $89.8 million, an unfavorable change in deferred taxes of $17.9 million due to a decrease in tax depreciation benefits resulting from lower capital expenditures, and an unfavorable change in working capital of $60.9 million.

The unfavorable change in working capital is primarily due to the following: an unfavorable change of $85.9 million in accounts receivable due to slightly higher business activity levels in the current year compared to declining activity levels in the prior year; an unfavorable change of $18.6 million in other current assets due to lower deposits on raw materials in the current period; an unfavorable change of $15.1 million in net current income taxes receivable/payable; and an unfavorable change of $4.7 million in accrued state, local and other taxes due to the timing of payments. These unfavorable changes were partially offset by a favorable change of $54.4 million in inventories which declined during the current period primarily due to improved sourcing of critical supplies that require longer lead times.

Cash used for investing activities for the nine months ended September 30, 2013 decreased by $110.7 million, compared to the nine months ended September 30, 2012, primarily as a result of lower capital expenditures in response to highly competitive pricing.

Cash used for financing activities for the nine months ended September 30, 2013 decreased by $56.1 million primarily as a result of lower net loan repayments coupled with lower open market share repurchases, partially offset by a 25 percent increase in the per share common stock dividend declared during the nine months ended September 30, 2013 compared to the same period in the prior year.

Financial Condition and Liquidity

The Company's financial condition as of September 30, 2013 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 liquidity 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 $51.4 million at September 30, 2013 and approximately $17.3 million of the credit facility supports outstanding letters of credit relating to self-insurance programs or contract bids. Accordingly, a total of $281.3 million was available under our facility as of September 30, 2013. 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 will be approximately $225 million during 2013, of which $159.9 million has been spent as of September 30, 2013. We expect capital expenditures for the remainder of 2013 to be . . .

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