U.S. oilfield activity has begun to tick higher from the historic lows last spring, but even stronger oil and natural gas prices are not enough to generate sustainable returns, RPC Inc. CEO Richard A. Hubbell said Wednesday.
During the third quarter conference call, Hubbell said conditions have improved since bottoming in 2Q2020, but they are far from great. The Atlanta-based oilfield services (OFS) and equipment operator works across the United States and in international markets through Cudd Energy Services, Thru Tubing Solutions and Patterson Services.
“As we indicated on the last quarter’s conference call, we believe domestic oilfield activity bottomed out during the second quarter,” Hubbell told investors. “The downturn our industry experienced was perhaps the steepest and most severe ever encountered. The fact RPC is weathering it as well as we are is a testament to the dedication and hard work of our employees.”
However, even with the uptick in activity, “the modest industry improvements experienced during the third quarter are insignificant — insufficient to generate sustainable financial returns. Much of the recent increase in our industry wide activity has been driven by operators completing previously drilled wells.”
For the OFS industry to remain healthy, it needs cooperation from the exploration and production (E&P) customers.
“We need to see sustained growth in the rig count, followed by higher service pricing. The recent consolidations among the exploration and production companies likely represent a headwind in that regard. Therefore, until we see the signs that demand for our services is likely to grow substantially, we will continue to focus on expense management and limit our capital investments.”
The CEO said “things are rapidly evolving” regarding E&P consolidation.
“We think all things equal, that does present perhaps another headwind for the industry and us. But what actually will happen is not clear in terms of the extent to which there will be that consolidation.
“In terms of our view with consolidation, we think there will be more consolidation within the industry. We haven’t significantly changed our strategic priorities here internally due to those activities, but it’s something that we constantly look at and review at this point in time where we are, certainly operationally focused internally.
RPC remains debt free and the cash balance at the end of September was $145.6 million.
“We’re fortunate enough to have a strong balance sheet with a strong cash position that allows us to have some patience with respect to getting ourselves back to a free cash flow positive standpoint, but we’re not going to rest on that,” Hubbell said. “Our goal, as we indicated, in ’21 is to get to free cash flow positive and certainly with some of these headwinds, it may present an additional challenge, but we have other levers to be able to get there.”
The fourth quarter started out with “some decent visibility. So that’s good and that’s positive. Of course, we’re coming off a very low base, but there is some positive progression there…”
Hubbell said RPC would “continue to evaluate our near-term and long-term strategic objectives.”
The CEO alluded to the possibility that RPC may need to consider other ways to operate.
“While the company has been “independent for a long, long time…we will continue to evaluate those options here as the industry does evolve.”
RPC’s Technical Services and Support Services business units each saw revenues decline along with activity.
Technical Services segment revenue fell 60.2% year/year, nearly the same decline for Support Services, off 61%, on “significantly lower activity and pricing,” CFO Ben Palmer told investors.
However, on a sequential basis, RPC’s third quarter revenues climbed 30.6% to $116.6 million.
“This was due to activity increases in several of our larger completion-related service lines,” Palmer said. “Cost of revenues during 3Q2020 increased by $20.8 million, or 26%, due to expenses which increased with higher activity levels such as materials and supplies, and maintenance expenses.
“As a percentage of revenues, cost of revenues decreased from 89.6% in the second quarter of 2020 to 86.5% in the third quarter, due to more efficient labor utilization and the leverage of higher revenues over direct costs, which are relatively fixed during the short term.”
Net loss was $16.4 million (minus 8 cents/share), versus a year-ago loss of $69 million (minus 33 cents).
Hubbell also marked the death of Chairman R. Randall Rollins, who died in August following a short illness. “He held management and board positions at RPC and its predecessor entities for almost 50 years, and we will miss his stewardship. Gary W. Rollins, a long-standing director, has assumed the role of nonexecutive chairman, and we have added two independent directors to our board.”
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