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RES > SEC Filings for RES > Form 10-Q on 29-Apr-2014All Recent SEC Filings

Show all filings for RPC INC

Form 10-Q for RPC INC


29-Apr-2014

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 23.

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, 2013 is incorporated herein by reference. In 2014, the Company's strategy of utilizing equipment in unconventional basins has continued. During the three months ended March 31, 2014, we made approximately $40.3 million in capital expenditures primarily for the maintenance of our existing revenue-producing equipment as well as purchases of new equipment, which were lower than our capital expenditures during the first three months of 2013. However, capital expenditures during the remainder of 2014 will increase due to a new pressure pumping expansion plan. We are now focusing on oil and natural gas liquids directed basins where customer activity levels are higher. In addition, the price of natural gas has increased during the first quarter of 2014, and RPC expects to benefit in the future through modest increases in customer activity levels in selected markets.

During the first quarter of 2014, revenues increased 17.8 percent to $501.7 million compared to the same period in the prior year. The increase in revenues resulted primarily from higher activity levels in several of our service lines, greater service intensity, and a larger fleet of revenue-producing equipment, partially offset by lower pricing. International revenues for the first quarter of 2014 increased 32.7 percent to $21.4 million compared to the same period in the prior year. International revenues reflect increases in customer activity levels primarily in Australia, Argentina and Gabon partially offset by decreases 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 first quarter of 2014 in comparison to the same period of the prior year due primarily to competitive pricing for our services and job mix.

Selling, general and administrative expenses as a percentage of revenues decreased to 9.7 percent in the first quarter of 2014 compared to 10.5 percent in the same period in the prior year. This percentage decrease was primarily due to the leverage of fixed costs over higher revenues.

Income before income taxes was $65.0 million for the three months ended March 31, 2014 compared to $57.4 million in the same period of 2013. The effective tax rate for the three months ended March 31, 2014 was 39.4 percent compared to 38.9 percent in the same period of the prior year. Diluted earnings per share were $0.18 for the three months ended March 31, 2014 compared to $0.16 in the same period of 2013. Cash flows from operating activities were $77.9 million for the three months ended March 31, 2014 compared to $89.3 million in the same period of 2013 due primarily to the impact of deferred taxes and working capital changes partially offset by an increase in net income. The notes payable to banks increased to $80.8 million as of March 31, 2014 compared to $53.3 million as of December 31, 2013.

We expect capital expenditures during full year 2014 will be approximately $375 million, and to be directed towards the purchases of new revenue-producing equipment as well as the capitalized maintenance of our existing fleet of revenue-producing equipment.

RPC, INC. AND SUBSIDIARIES

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 2013. During 2013 and the first quarter of 2014, 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 78 percent of total wells drilled during the first quarter of 2014. Natural gas-directed drilling activity remains at very low levels, and early in the second quarter of 2014 had fallen to a level not recorded since the second quarter of 1993.

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 2013 and early 2014, and at the beginning of the second quarter of 2014 was approximately 18.5 percent higher than at the same time in 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 is directed towards oil early in the second quarter of 2014. 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 rose during 2013 and early 2014, recovering from declines in several previous years, and early in the second quarter of 2014 had reached its highest level since the second quarter of 2011. During the first quarter of 2014 our activity levels improved in selected markets due to the increase in the price of natural gas; however, we remain cautious about continued activity increases because of continued high U.S. natural gas production. As noted above, natural gas-directed drilling activity has fallen to its lowest level in almost 21 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 the first quarter of 2014, the average price of benchmark natural gas liquids was 30.6 percent higher than during the 12 months ended December 31, 2013. As with natural gas, we believe that the increase in the price of natural gas liquids during 2014 has led to slightly improved activity levels in selected markets.

The trend in domestic drilling activity indicates very little near-term fluctuation in our customer's overall activity levels or in our revenues, although as noted above, the recent increases in the prices of natural gas and natural gas liquids has had a favorable impact on our customers' activities. Also, the increasing service intensity of customer completion activities has had a favorable impact on our revenues. We believe that the prolonged winter weather in the fourth quarters of 2013 and first quarter of 2014 is partially responsible for the increase in the price of natural gas. For this reason, as well as the fact that U.S. natural gas production continues at record high levels, we do not believe that the recent increase in the price of natural gas will lead to significant increases in customer activity levels over the near term. We do not believe that the overall rig count will increase during the remainder of 2014 unless the price of natural gas continues to rise.

We continue to monitor the market for our services and the competitive environment. We remain cautious about the continued high production of natural gas, and the fact that the price of natural gas is still not sufficiently high to encourage our customers to conduct increased drilling and completion activities in unconventional gas basins. In addition, we continue to monitor our customers' financial condition, because the high cost and complexity of unconventional drilling and completion 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 has attracted new entrants and encouraged existing service companies to purchase additional revenue-producing equipment. Less equipment has been added to the overall U.S. domestic fleet in the past year than in previous years. Also, higher activity levels and increasing completion service intensity are causing the service capacity in the U.S. domestic market to be more highly utilized. Furthermore, we are encouraged by the increase in the prices of natural gas and natural gas liquids during the first and second quarters of 2014, and believe that they will encourage our customers to increase their natural gas - directed drilling and workover activities. We believe that utilization of our equipment and personnel will remain high if these trends continue, and pricing for our services and equipment will improve. For these reasons, RPC decided in the first quarter of 2014 to expand our fleet of pressure pumping equipment. We expect to take delivery of this equipment and place it in service during the third and fourth quarters of 2014 and the first quarter of 2015. We will use our bank credit facility to finance this expansion, but even with the projected additional principal drawn on this facility, we believe that we will still maintain a conservative financial structure by our industry's standards. The lack of availability and increased cost of qualified labor has been a concern and has negatively impacted our revenues and profitability. This will continue to be a concern, especially as we expand our fleet of revenue-producing equipment in 2014 and 2015, and will therefore require more qualified employees to operate this equipment. We are addressing this issue through continued recruitment of new employees, training and retention programs, and more efficient staffing models. Our consistent response to the industry's volatility is to maintain sufficient liquidity and a conservative capital structure and monitor our discretionary spending. We intend to maintain a conservative capital structure during the expansion effort that we are undertaking during 2014.

                           RPC, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

                                             Three months ended
                                                   March 31
                                             2014          2013

Consolidated revenues [in thousands]       $ 501,692     $ 425,821
Revenues by business segment [in
thousands]:
Technical                                  $ 466,970     $ 394,011
Support                                       34,722        31,810

Consolidated operating profit [in
thousands]                                 $  65,232     $  57,219

Operating profit by business segment [in
thousands]:
Technical                                  $  64,896     $  58,501
Support                                        7,457         6,258
Corporate                                     (4,889 )      (4,900 )
Loss on disposition of assets, net            (2,232 )      (2,640 )

Percentage cost of revenues to revenues         65.8 %        63.0 %
Percentage selling, general &
administrative expenses to revenues              9.7 %        10.5 %
Percentage depreciation and amortization
expense to revenues                             11.1 %        12.4 %
Average U.S. domestic rig count                1,779         1,758
Average natural gas price (per thousand
cubic feet (mcf))                          $    4.86     $    3.50
Average oil price (per barrel)             $   98.70     $   94.40

THREE MONTHS ENDED MARCH 31, 2014 COMPARED TO THREE MONTHS ENDED MARCH 31, 2013

Revenues. Revenues for the three months ended March 31, 2014 increased 17.8 percent compared to the three months ended March 31, 2013. Domestic revenues of $480.3 million increased 17.2 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, greater service intensity, and a larger fleet of revenue-producing equipment, partially offset by lower pricing in all of our service lines. International revenues of $21.4 million increased 32.7 percent for the three months ended March 31, 2014 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 38.9 percent higher and the average price of oil was 4.6 percent higher during the first quarter of 2014 as compared to the same period in the prior year. The average domestic rig count during the current quarter was 1.2 percent higher than the same period in 2013.

The Technical Services segment revenues for the first quarter of 2014 increased 18.5 percent compared to the same period in the prior year. Revenues in this segment increased due primarily to higher activity levels in most of the service lines within this segment, as well as greater service intensity and raw material usage in pressure pumping, the largest service line within this segment, partially offset by lower pricing. The Support Services segment revenues for the first quarter of 2014 increased by 9.2 percent compared to the same period in the prior year. This increase was due principally to higher activity levels within rental tools, the largest service line within this segment. Operating profit in both the Technical and Support Services segments increased due to higher activity levels. In Technical Services, operating profit also increased due to greater service intensity in pressure pumping.

RPC, INC. AND SUBSIDIARIES

Cost of revenues. Cost of revenues increased 23.0 percent to $330.0 million for the three months ended March 31, 2014 compared to $268.2 million for the three months ended March 31, 2013. Cost of revenues increased due to higher materials and supplies expense associated with increased activity levels and service intensity, and higher employment costs associated with increased activity levels during the first quarter 2014 compared to the prior year. Cost of revenues, as a percentage of revenues, increased in the first quarter of 2014 compared to the first quarter of 2014 due primarily to competitive pricing for our services and job mix.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $3.8 million or 8.4 percent to $48.7 million for the three months ended March 31, 2014 compared to the same period in the prior year. As a percentage of revenues, these costs decreased to 9.7 percent during the three months ended March 31, 2014 compared to 10.5 percent during the same period in the prior year. Our selling, general and administrative expenses increased due to higher activity levels but decreased as a percentage of revenues compared to the prior year due to the leverage of fixed costs over higher revenues.

Depreciation and amortization. Depreciation and amortization totaled $55.5 million for the three months ended March 31, 2014, a 5.1 percent increase, compared to $52.8 million for the quarter ended March 31, 2013.

Loss on disposition of assets, net. Loss on disposition of assets, net was $2.2 million for the three months ended March 31, 2014 compared to $2.6 million for the three months ended March 31, 2013. 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 $80 thousand for the three months ended March 31, 2014 compared to other income, 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. Interest expense was $337 thousand for the three months ended March 31, 2014 compared to $340 thousand for the three months ended March 31, 2013.

Income tax provision. Income tax provision of $25.6 million increased during the three months ended March 31, 2014 in comparison to $22.4 million for the same period in 2013 primarily due to higher income before income taxes. The effective tax rate of 39.4 percent for the three months ended March 31, 2014 was slightly higher than the 38.9 percent for the three months ended March 31, 2013.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The Company's cash and cash equivalents at March 31, 2014 were $44.3 million
which is higher than normal due to the timing of receipts and the timing of
payments of principal under our revolving credit facility. The following table
sets forth the historical cash flows for the three months ended March 31, 2014
and 2013:

                                                   Three months ended March 31
   (In thousands)                                   2014                 2013

   Net cash provided by operating activities   $       77,868       $       89,309
   Net cash used for investing activities             (37,433 )            (50,045 )
   Net cash used for financing activities              (4,842 )            (43,144 )

Cash provided by operating activities for the three months ended March 31, 2014 decreased by $11.4 million compared to the same period in the prior year. This decrease is due primarily to an unfavorable change in working capital of $13.2 million and an unfavorable change in deferred taxes of $5.2 million due to a decrease in tax depreciation benefits resulting from lower capital expenditures, partially offset by an increase in net income of $4.3 million.

RPC, INC. AND SUBSIDIARIES

The unfavorable change in working capital is primarily due to the following: an unfavorable change of $43.4 million in accounts receivable due to higher business activity levels and an unfavorable change of $17.4 million in inventories due to higher business activity levels. These unfavorable changes were partially offset by a favorable change in accounts payable of $14.9 million consistent with increasing business activity levels; a favorable change of $24.9 million in net current income taxes receivable/payable; and a favorable change of $3.8 million in accrued state, local and other taxes due to the timing of payments.

Cash used for investing activities for the three months ended March 31, 2014 decreased by $12.6 million, compared to the three months ended March 31, 2013, primarily as a result of lower capital expenditures in response to highly competitive pricing.

Cash used for financing activities for the three months ended March 31, 2014 decreased by $38.3 million primarily as a result of higher net loan borrowings partially offset by higher open market share repurchases during the three months ended March 31, 2014 compared to the same period in the prior year.

Financial Condition and Liquidity

The Company's financial condition as of March 31, 2014 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 January 2019. 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 $80.8 million at March 31, 2014 and approximately $24.1 million of the credit facility supports outstanding letters of credit relating to self-insurance programs or contract bids. Accordingly, a total of $245.1 million was available under our facility as of March 31, 2014. 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.

Cash Requirements

The Company currently expects that capital expenditures will be approximately $375 million during 2014, of which $40.3 million has been spent as of March 31, 2014. We expect capital expenditures for the remainder of 2014 to be primarily directed towards expansion of our pressure pumping fleet and capitalized equipment maintenance. The actual amount of 2014 capital expenditures will depend upon 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 subject to varying interpretations of statutes. The Company has recorded the exposure from these audits to the extent issues are resolved or are reasonably estimable. There are issues 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. The Company contributed approximately $0.8 million to this plan in the first quarter of 2014 and does not expect to make any additional contributions during the remainder of 2014.

As of March 31, 2014, the Company's 1998 stock buyback program authorizes the repurchase of up to 31,578,125 shares. There were 399,611 shares purchased on the open market during the first quarter of 2014, and 4,312,623 shares remain available to be repurchased under the current authorization as of March 31, 2014. The Company may repurchase 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.

RPC, INC. AND SUBSIDIARIES

On April 22, 2014, the Board of Directors approved a $0.105 per share cash dividend payable June 10, 2014 to stockholders of record at the close of business May 9, 2014. 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 equipment, materials and labor could increase as well. Also, increases in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees as well as increases in the costs of certain materials and key equipment components used to provide services to the Company's customers. During 2012 and 2013, the Company incurred higher employment costs due to a continued shortage of skilled labor in many of its markets. During the first quarter of 2014, we began to experience additional cost pressures due to competition for available skilled employees, and the Company expects that labor costs will continue to remain high during 2014. During 2012, the prices of certain raw materials used to provide the Company's services fluctuated significantly. The Company mitigated some of the cost increases for raw materials by securing materials through additional sources, and the Company continued to source raw materials from these additional sources in 2013 and the first quarter of 2014. Increased availability of many of these raw materials in response to high market prices has caused prices of some of these raw materials to decline, although we are beginning to experience upward price pressures on the prices of certain raw materials due to high activity levels and service intensity. Finally, the price of equipment used to provide services to the Company's customers has remained relatively constant in spite of declining demand.

OFF BALANCE SHEET ARRANGEMENTS

The Company does not have any material off balance sheet arrangements.

RELATED PARTY TRANSACTIONS

Marine Products Corporation

Effective February 28, 2001, the Company spun-off the business conducted through Chaparral Boats, Inc, RPC's former powerboat manufacturing segment. In conjunction with the spin-off, RPC and Marine Products Corporation entered into various agreements that define the companies' relationship. During the three months ended March 31, 2014, RPC charged Marine Products Corporation for its allocable share of administrative costs incurred for services rendered on behalf of Marine Products Corporation totaling $175,000 for the three months ended March 31, 2014 compared to $112,000 for the comparable period in 2013.

Other

The Company periodically purchases in the ordinary course of business products or services from suppliers who are owned by officers or significant stockholders of, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $367,000 for the three months ended March 31, 2014 and $405,000 for the three months ended March 31, 2013.

RPC receives certain administrative services and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman, and which is controlled by Mr. Rollins and his affiliates). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on three months' notice. The services covered by these agreements include office space, selected administration services for certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent aggregated $21,000 for the three months ended March 31, 2014 and 2013.

RPC, INC. AND SUBSIDIARIES

CRITICAL ACCOUNTING POLICIES

The discussion of Critical Accounting Policies is incorporated herein by . . .

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