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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended
Commission File No.
(Exact name of registrant as specified in its charter)
| ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
(Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code -- (
Securities Registered under Section 12(b) of the Act:
Title of each class: |
| Trading Symbol(s) |
| Name of each exchange on which registered: |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | ☒ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of July 21, 2023, RPC, Inc. had
RPC, INC. AND SUBSIDIARIES
Table of Contents
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2023 AND DECEMBER 31, 2022
(In thousands)
June 30, | December 31, | |||||
| 2023 |
| 2022 | |||
ASSETS | (Unaudited) | (Note 1) | ||||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net of allowance for credit losses of $ | | | ||||
Inventories |
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Income taxes receivable |
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Prepaid expenses |
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Purchase of business - advance (Note 16) | | — | ||||
Other current assets |
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Total current assets |
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Property, plant and equipment, less accumulated depreciation of $ | | | ||||
Operating lease right-of-use assets | | | ||||
Goodwill |
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Other assets |
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Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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LIABILITIES |
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Accounts payable | $ | | $ | | ||
Accrued payroll and related expenses |
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Accrued insurance expenses |
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Accrued state, local and other taxes |
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Income taxes payable |
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Pension liabilities | — | | ||||
Current portion of operating lease liabilities | | | ||||
Other accrued expenses |
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Total current liabilities |
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Long-term accrued insurance expenses |
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Long-term retirement plan liabilities |
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Deferred income taxes |
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Long-term operating lease liabilities | | | ||||
Other long-term liabilities |
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Total liabilities |
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Commitments and contingencies (Note 9) |
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STOCKHOLDERS’ EQUITY |
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Preferred stock, $ |
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Common stock, $ |
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Capital in excess of par value |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | | ||
The accompanying notes are an integral part of these consolidated financial statements.
3
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(In thousands except per share data)
(Unaudited)
Three months ended | Six months ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Revenues | $ | | $ | | $ | | $ | | |||||
Cost of revenues |
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Selling, general and administrative expenses |
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Pension settlement charges | | — | | — | |||||||||
Depreciation and amortization |
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Gain on disposition of assets, net |
| ( |
| ( |
| ( |
| ( |
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Operating income |
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Interest expense |
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Interest income |
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Other income, net |
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Income before income taxes |
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Income tax provision |
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Net income | $ | | $ | | $ | | $ | | |||||
Earnings per share |
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Basic | $ | | $ | | $ | | $ | | |||||
Diluted | $ | | $ | | $ | | $ | | |||||
The accompanying notes are an integral part of these consolidated financial statements.
4
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(In thousands)
(Unaudited)
Three months ended | Six months ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Net income | $ | | $ | | $ | | $ | | |||||
Other comprehensive income: |
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Pension adjustment and reclassification adjustment, net of taxes |
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Foreign currency translation |
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Comprehensive income | $ | | $ | | $ | | $ | | |||||
The accompanying notes are an integral part of these consolidated financial statements.
5
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(In thousands)
(Unaudited)
Six months ended June 30, 2023 | |||||||||||||||||
Accumulated | |||||||||||||||||
Capital in | Other | ||||||||||||||||
Common Stock | Excess of | Retained | Comprehensive | ||||||||||||||
| Shares |
| Amount |
| Par Value |
| Earnings |
| Loss |
| Total | ||||||
Balance, December 31, 2022 |
| | $ | | $ | — | $ | | $ | ( | $ | | |||||
Stock issued for stock incentive plans, net |
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| — |
| — |
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Stock purchased and retired |
| ( |
| ( |
| ( |
| ( |
| — |
| ( | |||||
Net income |
| — |
| — |
| — |
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| — |
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Dividends |
| — |
| — |
| — |
| ( |
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Pension adjustment, net of taxes |
| — |
| — |
| — |
| — |
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Foreign currency translation |
| — |
| — |
| — |
| — |
| ( |
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Balance, March 31, 2023 | | $ | | $ | — | $ | | $ | ( | $ | | ||||||
Stock issued for stock incentive plans, net | | | | — | — | | |||||||||||
Stock purchased and retired | ( | — | ( | | — | ( | |||||||||||
Net income | — | — | — | | — | | |||||||||||
Dividends | — | — | — | ( | — | ( | |||||||||||
Pension adjustment, net of taxes | — | — | — | — | | | |||||||||||
Foreign currency translation | — | — | — | — | | | |||||||||||
Balance, June 30, 2023 | | $ | | $ | — | $ | | $ | ( | $ | | ||||||
Six months ended June 30, 2022 | |||||||||||||||||
Accumulated | |||||||||||||||||
Capital in | Other | ||||||||||||||||
Common Stock | Excess of | Retained | Comprehensive | ||||||||||||||
| Shares |
| Amount |
| Par Value |
| Earnings |
| Loss |
| Total | ||||||
Balance, December 31, 2021 |
| | $ | | $ | — | $ | | $ | ( | $ | | |||||
Stock issued for stock incentive plans, net |
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| — |
| — |
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Stock purchased and retired |
| ( |
| ( |
| ( |
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Net income |
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| — | — |
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Pension adjustment, net of taxes |
| — |
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| — |
| — |
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Foreign currency translation |
| — |
| — |
| — |
| — |
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Balance, March 31, 2022 | | $ | | $ | — | $ | | $ | ( | $ | | ||||||
Stock issued for stock incentive plans, net | | | | — | — | | |||||||||||
Stock purchased and retired | — | — | ( | | — | — | |||||||||||
Net income | — | — | — | | — | | |||||||||||
Pension adjustment, net of taxes | — | — | — | — | | | |||||||||||
Foreign currency translation | — | — | — | — | | | |||||||||||
Balance, June 30, 2022 |
| | $ | | $ | — | $ | | $ | ( | $ | | |||||
The accompanying notes are an integral part of these consolidated financial statements.
6
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(In thousands)
(Unaudited)
Six months ended June 30, | |||||||
| 2023 |
| 2022 | ||||
OPERATING ACTIVITIES |
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Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation, amortization and other non-cash charges |
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Stock-based compensation expense |
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Gain on disposition of assets, net |
| ( |
| ( |
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Deferred income tax provision |
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Pension settlement charges |
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| - |
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(Increase) decrease in assets: |
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Accounts receivable |
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| ( |
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Income taxes receivable |
| ( |
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Inventories |
| ( |
| ( |
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Prepaid expenses |
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Other current assets |
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Other non-current assets |
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Increase (decrease) in liabilities: |
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Accounts payable |
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Income taxes payable |
| ( |
| ( |
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Accrued payroll and related expenses |
| ( |
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Accrued insurance expenses |
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| ( |
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Accrued state, local and other taxes |
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Other accrued expenses |
| ( |
| ( |
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Pension and retirement plans liabilities |
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| ( |
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Long-term accrued insurance expenses |
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| ( |
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Other long-term liabilities |
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Net cash provided by operating activities |
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INVESTING ACTIVITIES |
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Capital expenditures |
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Proceeds from sale of assets |
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Purchase of business - advance (Note 16) |
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Net cash used for investing activities |
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FINANCING ACTIVITIES |
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Payment of dividends |
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Cash paid for common stock purchased and retired |
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Cash paid for finance lease | — | ( | |||||
Net cash used for financing activities |
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Net decrease in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period | $ | | $ | | |||
Supplemental cash flows disclosure: | |||||||
Income tax payments, net | $ | | $ | | |||
Interest paid | $ | | $ | | |||
Supplemental disclosure of noncash investing activities: | |||||||
Capital expenditures included in accounts payable | $ | | $ | | |||
The accompanying notes are an integral part of these consolidated financial statements.
7
1. GENERAL
The accompanying unaudited consolidated financial statements include the accounts of RPC, Inc. and its wholly-owned subsidiaries (RPC or the Company) and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These consolidated financial statements have been prepared in accordance with Accounting Standards Codification (ASC) Topic 810, “Consolidation” and Rule 3A-02(a) of Regulation S-X. In accordance with ASC Topic 810 and Rule 3A-02 (a) of Regulation S-X, the Company’s policy is to consolidate all subsidiaries and investees where it has voting control.
In the opinion of management, all adjustments (all of which consisted of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023.
The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2022.
A group that includes Gary W. Rollins, Pamela R. Rollins, Amy Rollins Kreisler and Timothy C. Rollins, each of whom is a director of the Company, and certain companies under their control, controls in excess of
2. RECENT ACCOUNTING STANDARDS
Recently Adopted Accounting Standards:
ACCOUNTING STANDARDS UPDATE (ASU) No. 2021-08: Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers: The amendments in this ASU address diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination, by adopting guidance requiring an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer would recognize and measure the acquired contract assets and contract liabilities in the same manner that they were recognized and measured in the acquiree's financial statements before the acquisition. The Company adopted these provisions in the second quarter of 2023 prospectively to future business combinations and the adoption did not have a material impact on its consolidated financial statements.
3. REVENUES
Accounting Policy:
RPC’s contract revenues are generated principally from providing oilfield services. These services are based on mutually agreed upon pricing with the customer prior to the services being delivered and, given the nature of the services, do not include the right of return. Pricing for these services is a function of rates based on the nature of the specific job, with consideration for the extent of equipment, labor, and consumables needed for the job. RPC typically satisfies its performance obligations over time as the services are performed. RPC records revenues based on the transaction price agreed upon with its customers.
Sales tax charged to customers is presented on a net basis within the accompanying Consolidated Statements of Operations and therefore excluded from revenues.
Nature of services:
RPC provides a broad range of specialized oilfield services to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States and in selected international
8
markets. RPC manages its business as either (1) services offered on the well site with equipment and personnel (Technical Services) or (2) services and tools offered off the well site (Support Services). For more detailed information about operating segments, see Note 6.
RPC contracts with its customers to provide the following services by reportable segment:
Technical Services
Support Services
Our contracts with customers are generally short-term in nature and generally consist of a single performance obligation – the provision of oilfield services.
Payment terms:
RPC’s contracts with customers state the final terms of the sales, including the description, quantity, and price of each service to be delivered. The Company’s contracts are generally short-term in nature and in most situations, RPC provides services ahead of payment - i.e., RPC has fulfilled the performance obligation prior to submitting a customer invoice. RPC invoices the customer upon completion of the specified services and collection is generally expected between
Significant judgments:
RPC believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (1) our performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to the customer of the services performed under the contract. RPC has elected the right to invoice practical expedient for recognizing revenue related to its performance obligations.
Disaggregation of revenues:
See Note 6 for disaggregation of revenue by operating segment and services offered in each of them and by geographic regions.
Contract balances:
Contract assets representing the Company’s rights to consideration for work completed but not billed are included in accounts receivable, net in the accompanying Consolidated Balance Sheets are shown below:
June 30, | December 31, | |||||
(in thousands) |
| 2023 |
| 2022 | ||
Unbilled trade receivables | $ | | $ | | ||
Substantially all of the unbilled trade receivables disclosed were or are expected to be invoiced during the following quarter.
9
4. EARNINGS PER SHARE
Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the respective periods. In addition, the Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and are therefore considered participating securities. Restricted shares of common stock (participating securities) outstanding and a reconciliation of weighted average shares outstanding is as follows:
Three months ended | Six months ended | ||||||||||||
June 30 | June 30 | ||||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Net income available for stockholders | $ | | $ | | $ | | $ | | |||||
Less: Adjustments for earnings attributable to participating securities | ( | ( | ( | ( | |||||||||
Net income used in calculating earnings per share | $ | | $ | | $ | | $ | | |||||
Weighted average shares outstanding (including participating securities) |
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Adjustment for participating securities |
| ( |
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Shares used in calculating basic and diluted earnings per share |
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5. STOCK-BASED COMPENSATION
In April 2014, the Company reserved
In the first quarter of 2023, the Company issued time-lapse restricted shares to certain employees that will vest ratably over a period of
Stock-based employee compensation expense for the three and six months ended June 30, 2023 was as follows:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2023 | 2022 |
| 2023 | 2022 | ||||||
Pre-tax expense | $ | | $ | | $ | | $ | | ||||
After tax expense | $ | | $ | | $ | | $ | | ||||
The following is a summary of the changes in non-vested restricted shares for the six months ended June 30, 2023:
Weighted Average | |||||
| Shares |
| Grant-Date Fair Value | ||
Non-vested shares at January 1, 2023 | | $ | | ||
Granted |
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Vested |
| ( |
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Forfeited |
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Non-vested shares at June 30, 2023 |
| | $ | | |
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The total fair value of shares vested was $
6. BUSINESS SEGMENT INFORMATION
RPC’s reportable segments are the same as its operating segments. RPC manages its business under Technical Services and Support Services. Technical Services is comprised of service lines that generate revenue based on equipment, personnel or materials at the well site and are closely aligned with completion and production activities of the customers. Support Services is comprised of service lines which generate revenue from services and tools offered off the well site and are more closely aligned with the customers’ drilling activities. Selected overhead including certain centralized support services and regulatory compliance are classified as Corporate.
Technical Services consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. The services offered under Technical Services are high capital and personnel intensive businesses. The Company considers all of these services to be closely integrated oil and gas well servicing businesses and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services.
Support Services consist primarily of drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels.
The Company’s Chief Operating Decision Maker (“CODM”) assesses performance and makes resource allocation decisions regarding, among others, staffing, growth and maintenance capital expenditures and key initiatives based on the operating segments outlined above.
Segment Revenues:
RPC’s operating segment revenues by major service lines are shown in the following table:
Three months ended | Six months ended | ||||||||||||
June 30, | June 30, | ||||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Technical Services: |
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Pressure Pumping | $ | | $ | | $ | | $ | | |||||
Downhole Tools |
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Coiled Tubing |
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Nitrogen |
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Snubbing |
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All other |
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Total Technical Services | $ | | $ | | $ | | $ | | |||||
Support Services: |
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Rental Tools | $ | | $ | | $ | | $ | | |||||
All other |
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Total Support Services | $ | | $ | | $ | | $ | | |||||
Total revenues | $ | | $ | | $ | | $ | | |||||
11
The following summarizes revenues for the United States and separately for all international locations combined for the three and six months ended June 30, 2023 and 2022. The revenues are presented based on the location of the use of the equipment or services. Assets related to international operations are less than 10 percent of RPC’s consolidated assets, and therefore are not presented.
| Three months ended |
| Six months ended | ||||||||||
June 30, | June 30, | ||||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
United States revenues | $ | | $ | | $ | | $ | | |||||
International revenues |
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Total revenues | $ | | $ | | $ | | $ | | |||||
The accounting policies of the reportable segments are the same as those referenced in Note 1 to these consolidated financial statements. RPC evaluates the performance of its segments based on revenues, operating profits and return on invested capital. Gains or losses on disposition of assets are reviewed by the CODM on a consolidated basis, and accordingly the Company does not report gains or losses at the segment level. Inter-segment revenues are generally recorded in segment operating results at prices that management believes approximate prices for arm’s length transactions and are not material to operating results.
Summarized financial information with respect RPC’s reportable segments for the three and six months ended June 30, 2023, and 2022 are shown in the following table:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Revenues: |
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Technical Services | $ | | $ | | $ | | $ | | ||||
Support Services |
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Total revenues | $ | | $ | | $ | | $ | | ||||
Operating income: |
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Technical Services | $ | | $ | | $ | | $ | | ||||
Support Services |
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Corporate expenses |
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Pension settlement charges | ( | — | ( | — | ||||||||
Gain on disposition of assets, net |
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Total operating income | $ | | $ | | $ | | $ | | ||||
Interest expense |
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Interest income |
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Other income, net |
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Income before income taxes | $ | | $ | | $ | | $ | | ||||
As of and for the six months ended | Technical | Support | ||||||||||
June 30, 2023 |
| Services |
| Services |
| Corporate |
| Total | ||||
(in thousands) |
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Depreciation and amortization | $ | | $ | | $ | | $ | | ||||
Capital expenditures |
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Identifiable assets | | | | | ||||||||
As of and for the six months ended | Technical | Support | ||||||||||
June 30, 2022 |
| Services |
| Services |
| Corporate |
| Total | ||||
(in thousands) | ||||||||||||
Depreciation and amortization | $ | | $ | | $ | | $ | | ||||
Capital expenditures |
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Identifiable assets | | | | | ||||||||
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7. CURRENT EXPECTED CREDIT LOSSES
The Company utilizes an expected credit loss model for valuing its accounts receivable, a financial asset measured at amortized cost. The Company is exposed to credit losses primarily from providing oilfield services. The Company’s expected allowance for credit losses for accounts receivable is based on historical collection experience, current and future economic and market conditions and a review of the current status of customers’ account receivable balances. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers’ financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible and recoveries of amounts previously written off are recorded when collected.
The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected:
Six months ended June 30, |
| 2023 |
| 2022 | ||
(in thousands) | ||||||
Beginning balance | $ | | $ | | ||
Provision for current expected credit losses | |
| | |||
Write-offs | ( |
| ( | |||
Recoveries collected (net of expenses) | |
| | |||
Ending balance | $ | | $ | | ||
8. INVENTORIES
Inventories consist of (i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment used in providing these services and (iii) components and attachments for manufactured equipment used in providing services. In the table below, spare parts and components are included as part of raw materials and supplies; tools that are assembled using components are reported as finished goods. Inventories are recorded at the lower of cost or net realizable value. Cost is determined using first-in, first-out method or the weighted average cost method.
June 30, | December 31, | |||||
(in thousands) | 2023 | 2022 | ||||
Raw materials and supplies | $ | | $ | | ||
Finished goods | |
| | |||
Ending balance | $ | | $ | | ||
9. COMMITMENTS AND CONTINGENCIES
Sales and Use Taxes - The Company has ongoing sales and use tax audits in various jurisdictions and may be subjected to varying interpretations of statute that could result in unfavorable outcomes. In accordance with ASC 450-20, Loss Contingencies, any probable and reasonable estimate of assessment costs have been included in Accrued state, local and other taxes.
The Company has received a state tax notification of audit results related to sales and use tax and with its outside legal counsel has evaluated the perceived merits of this tax assessment. The Company believes the likelihood of a material loss related to this contingency is remote and cannot be reasonably estimated at this time. Therefore, no loss has been recorded and the Company currently does not believe the resolution of this claim will have a material impact on its consolidated financial position, results of operations or cash flows.
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10. PENSION AND RETIREMENT PLANS LIABILITIES
The following represents the net periodic benefit cost and related components of the Company’s multiemployer Retirement Income Plan (Plan), a trusteed defined benefit pension plan:
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||
December 31, |
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||||||||||
(in thousands) | |||||||||||||||||||||
| $ | |
| $ | 243 |
| $ | 41 |
| $ | 486 | ||||||||||
Expected return on Plan assets |
| — |
| — |
| — |
| — | |||||||||||||
| |
| 252 |
| 224 |
| 505 | ||||||||||||||
Settlement loss | | — | 18,286 | — | |||||||||||||||||
Net periodic benefit cost | $ | | $ | 495 | $ | 18,551 | $ | 991 | |||||||||||||
During the second quarter of 2023, as part of the termination of the Plan, the Company transferred approximately $
The Company permits selected highly compensated employees to defer a portion of their compensation into the non-qualified Supplemental Retirement Plan (SERP). The Company maintains certain securities primarily in mutual funds and company-owned life insurance policies as a funding source to satisfy the obligation of the SERP that have been classified as trading and are stated at fair value totaling $
The SERP liabilities include participant deferrals, net of distributions, and are stated at fair value of approximately $
11. NOTES PAYABLE TO BANKS
The Company has a revolving Credit Agreement with Bank of America and
The Credit Agreement contains
14
As of June 30, 2023, the Company was in compliance with all covenants.
Revolving loans under the amended revolving credit facility bear interest at one of the following two rates at the Company’s election:
| ● | Term SOFR; plus, a margin ranging from |
| ● | the Base Rate, which is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus |
In addition, the Company pays an annual fee ranging from
The Company has incurred total loan origination fees and other debt related costs associated with this revolving credit facility in the aggregate of approximately $
As of June 30, 2023, RPC had
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, |
| ||||||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| |||||||
Interest incurred | $ | | $ | | $ | 120 | $ | 128 |
| |||||||
Interest paid | | | 83 | 123 | ||||||||||||
12. INCOME TAXES
The Company generally determines its periodic income tax expense or benefit based upon the current period income or loss and the annual estimated tax rate for the Company adjusted for discrete items including changes to prior period estimates. In certain instances, the Company uses the discrete method when it believes the actual year-to-date effective rate provides a more reliable estimate of its income tax rate for the period. The estimated tax rate is revised, if necessary, as of the end of each successive interim period during the fiscal year to the Company’s current annual estimated tax rate.
For the three months ended June 30, 2023, the effective rate reflects a provision of
13. FAIR VALUE DISCLOSURES
The various inputs used to measure assets at fair value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows:
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The following table summarizes the valuation of financial instruments measured at fair value on a recurring basis in the balance sheets as of June 30, 2023 and December 31, 2022:
Fair Value Measurements at June 30, 2023 with: | ||||||||||||
Quoted prices in | Significant | |||||||||||
active markets | other | Significant | ||||||||||
for identical | observable | unobservable | ||||||||||
(in thousands) |
| Total |
| assets |
| inputs |
| inputs | ||||
| (Level 1) | (Level 2) | (Level 3) | |||||||||
Assets: | ||||||||||||
Equity securities | $ | | $ | | $ | | $ | | ||||
Investments measured at net asset value | $ | |
|
|
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|
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| ||||
Fair Value Measurements at December 31, 2022 with: | ||||||||||||
Quoted prices in | Significant | |||||||||||
active markets | other | Significant | ||||||||||
for identical | observable | unobservable | ||||||||||
(in thousands) |
| Total |
| assets |
| inputs |
| inputs | ||||
|
|
| (Level 1) |
| (Level 2) |
| (Level 3) | |||||
Assets: | ||||||||||||
Equity securities | $ | | $ | | $ | | $ | | ||||
Investments measured at net asset value | $ | |
|
|
|
|
|
| ||||
The Company determines the fair value of equity securities that have a readily determinable fair value through quoted market prices. The total fair value is the final closing price, as defined by the exchange in which the asset is actively traded, on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs. Marketable securities comprised of the SERP assets, are recorded primarily at their net cash surrender values, calculated using their net asset values, which approximates fair value, as provided by the issuing insurance or investment company. Significant observable inputs, in addition to quoted market prices, were used to value the equity securities. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods. For the quarter ended June 30, 2023, there were no significant transfers in or out of levels 1, 2 or 3.
Under the Company’s revolving credit facility, there was
The carrying amounts of other financial instruments reported in the balance sheet for current assets and current liabilities approximate their fair values because of the short maturity of these instruments. The Company currently does not use the fair value option to measure any of its existing financial instruments and has not determined whether it will elect this option for financial instruments acquired in the future.
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14. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive (loss) income consists of the following (in thousands):
Foreign | |||||||||
Pension | Currency | ||||||||
| Adjustment |
| Translation |
| Total | ||||
Balance at December 31, 2022 | $ | ( | $ | ( | $ | ( | |||
Change during the period: |
|
|
| ||||||
Before-tax amount |
| |
| |
| | |||
Tax expense | ( | — | ( | ||||||
Pension settlement charges, net of taxes | | — | | ||||||
Reclassification adjustment, net of taxes: |
|
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| ||||||
Amortization of net loss (1) |
| |
| — |
| | |||
Total activity for the period |
| |
| |
| | |||
Balance at June 30, 2023 | $ | ( | $ | ( | $ | ( | |||
| (1) | Reported as part of Selling, general and administrative expenses. |
Foreign | |||||||||
Pension | Currency | ||||||||
| Adjustment |
| Translation |
| Total | ||||
Balance at December 31, 2021 | $ | ( | $ | ( | $ | ( | |||
Change during the period: |
|
|
| ||||||
Before-tax amount |
| — |
| |
| | |||
Reclassification adjustment, net of taxes: |
|
|
|
| |||||
Amortization of net loss (1) |
| |
| — |
| | |||
Total activity for the period |
| |
| |
| | |||
Balance at June 30, 2022 | $ | ( | $ | ( | $ | ( | |||
(1) | Reported as part of Selling, general and administrative expenses. |
15. CASH PAID FOR COMMON STOCK PURCHASED AND RETIRED
The Company has a stock buyback program to repurchase up to
Shares purchased for withholding taxes represent taxes due upon vesting of time-lapse restricted shares granted to employees. Total share repurchases for 2023 and 2022 year to date are detailed below:
Six months ended | Six months ended | |||||||||||||
June 30, 2023 | June 30, 2022 | |||||||||||||
| No. of shares | Avg. price | Total cost |
| No. of shares | Avg. price | Total cost | |||||||
Shares purchased for withholding taxes | | $ | $ | | | $ | $ | | ||||||
Open market purchases | | | — | — | — | |||||||||
Total | | $ | $ | | | $ | $ | | ||||||
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16. SUBSEQUENT EVENTS
Acquisition of Spinnaker Oilwell Services, LLC.
Effective July 1, 2023, the Company completed its acquisition of all of the outstanding equity interests in Spinnaker Oilwell Services, LLC ("Spinnaker"), pursuant to a Merger Agreement ("Merger Agreement") with Catapult Energy Services Group, LLC, as the representative of the Sellers.
Spinnaker, which is headquartered in Oklahoma City, Oklahoma, is a leading provider of oilfield cementing services in the Permian and Mid-Continent basins. Spinnaker operates
The purchase price was $
As of June 30, 2023, $
The Company will account for this transaction as a purchase of business under the acquisition method of accounting. The required disclosures under ASC 805, "Business Combinations" will be included in the Quarterly Report on Form 10-Q for the period ended September 30, 2023.
Dividends
On July 25, 2023, the Board of Directors declared a regular quarterly cash dividend of $
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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 or the Company) 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 prices 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, the actions of the OPEC oil cartel, 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, 2022 is incorporated herein by reference. In 2023, the Company’s strategy of utilizing equipment in unconventional basins has continued. During the six months ended June 30, 2023, capital expenditures totaled $104.5 million, primarily for new tier four dual fuel equipment that was placed into service during the quarter, coupled with capitalized maintenance and upgrades of our existing equipment. We currently expect capital expenditures to be $200 to $250 million during 2023 and to be directed primarily towards capitalized maintenance of our existing equipment and selected growth opportunities.
During the second quarter of 2023, revenues of $415.9 million increased by $40.4 million or 10.7 percent compared to the same period in the prior year. The increase in revenues is due to improved pricing, higher customer activity levels and a larger active fleet of revenue-producing equipment. International revenues for the second quarter of 2023 decreased 3.8 percent to $6.4 million compared to the same period in the prior year. We continue to pursue international growth opportunities, but the nature of this work is unpredictable and we believe that international revenues will continue to be less than ten percent of RPC’s consolidated revenues in the foreseeable future.
Cost of revenues increased in the second quarter of 2023 compared to the same period in the prior year, primarily due to increases in expenses consistent with higher activity levels, such as materials and supplies expenses, maintenance and repairs expenses, employment costs and fuel costs. Cost of revenues as a percentage of revenues decreased primarily due to improved pricing for our services as well as reduced maintenance expenses due to a decrease in the average age of our equipment.
Selling, general and administrative expenses increased to $43.6 million in the second quarter of 2023 from $35.9 million in the second quarter of 2022 primarily due to costs related to the settlement of a vendor dispute and the acquisition of Spinnaker Oilwell Services. Selling, general and administrative expenses increased from 9.6 percent of revenues in the second quarter of 2022 to 10.5 percent of revenues in the second quarter of 2023.
Income before income taxes was $85.6 million for the three months ended June 30, 2023 compared to $60.4 million during the same period of 2022. Diluted earnings per share were $0.30 for the three months ended June 30, 2023 compared to $0.22 per share in the same period of 2022. Cash provided by operating activities increased to $177.6 million for the six months ended June 30, 2023 compared to $42.9 million in the same period of 2022 primarily due to a significant increase in earnings.
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Outlook
Drilling activity in the U.S. domestic oilfields, as measured by the rotary drilling rig count, reached a cyclical peak of 1,083 during the fourth quarter of 2018 (Source: Baker Hughes, Inc.). Between the fourth quarter of 2018 and the third quarter of 2020, the drilling rig count fell by 77 percent. During the third quarter of 2020, the U.S. domestic drilling rig count reached the lowest level recorded up to that time. The principal catalyst for this steep rig count decline was the decrease in the price of oil in the world markets resulting from the decline in global oil demand associated with the COVID-19 pandemic which began in the first quarter of 2020. The drilling rig count during the second quarter of 2023 was relatively unchanged compared to the second quarter of 2022.
The current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity. Following the trough of the most recent oilfield downturn in the second quarter of 2020, the price of oil rose by more than 250 percent in the third quarter of 2022 compared to the average price of oil in the second quarter of 2020. The price of natural gas has risen by over 300 percent during the same time period. Following a low price of $0.23 per gallon in the second quarter of 2020, the price of benchmark natural gas liquids rose to $1.25 per gallon in the third quarter of 2022 (Source: U.S. Energy Information Administration). In addition, oil and gas prices experienced increases beginning in February 2022 due to concerns about potential world-wide supply constraints resulting from the Russian invasion of Ukraine. Although the price increases in these commodities have recently moderated from their highs, RPC believes that they remain above levels sufficient to motivate our customers to maintain drilling and completion activities.
The Russian invasion of Ukraine during the first quarter of 2022 prompted Western European countries to curtail or eliminate their purchases of natural gas from Russia. As a result, the demand for liquified natural gas from the United States increased significantly, which increased the price for natural gas in the United States to its highest level since 2008 and encouraged additional investment in liquified natural gas production facilities in the United States. These factors have been offset by warm weather and the idling of a major liquified natural gas facility in the U.S. contributing to the recent decline in price of natural gas. Despite the recent decline in price, we believe the favorable long-term outlook for natural gas provided by the U.S. oil and gas industry is sufficient to encourage our customers to maintain their natural gas-directed exploration and production activities.
The majority of the U.S. domestic rig count remains directed towards oil. In the second quarter of 2023, approximately 79 percent of the U.S. domestic rig count was directed towards oil, compared to 82 percent in the same quarter of the prior year. We believe that oil-directed drilling will remain the majority of domestic drilling, and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near term. However, we believe that natural gas-directed drilling will increase in the future because of favorable long-term market dynamics. This projected higher demand for oil and natural gas should drive increased activity in most of the basins in which RPC operates.
We continue to monitor the market for our services and the competitive environment, including the current trends and expectations with regard to environmental concerns and related impact on our equipment fleets. The growing efficiency in recent years with which oilfield completion crews are providing services is a catalyst for the oversupplied nature of the oilfield services market. We believe that most of the feasible efficiency gains have been realized, and a number of our smaller competitors have ceased operations. These factors, combined with the increase in drilling and completion activities and the improvement in commodity prices, leads us to believe that the competitive market for our services improved during 2022 and early 2023, and despite what we believe is a temporary moderation of customer drilling and completion activity we expect demand will continue to improve over the next several quarters.
During 2022, RPC completed payment under a finance lease arrangement for a new Tier 4 dual-fuel pressure pumping fleet that went to work during the fourth quarter of 2021 and refurbished an existing fleet that was placed into service during 2022. Additionally, during the second quarter of 2023 the Company placed into service another pressure pumping fleet, replacing existing older equipment sent out for refurbishment. We have selectively upgraded our existing equipment to operate using multiple fuel sources and to take advantage of advances in technology and data collection. RPC’s response to our industry’s recent higher activity levels and improved service pricing is primarily to maintain and upgrade our current fleet capacity of revenue-producing equipment. We will remain highly disciplined about adding new incremental revenue-producing equipment capacity and will only expand when we believe the projected financial returns of such capital expenditures meet our financial return criteria. The Company is allocating capital to maintain the capacity of our pressure pumping fleet to offset anticipated future fleet retirements.
Effective July 1, 2023, the Company acquired Spinnaker, a leading provider of oilfield cementing services in the Permian and Mid-Continent basins. The Company expects the acquisition of Spinnaker will expand RPC’s cementing business from its presence in South Texas to basins in which we currently provide other services.
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Results of Operations
Three months ended | Six months ended |
| |||||||||||
June 30, | June 30, | ||||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Consolidated revenues [in thousands] | $ | 415,858 | $ | 375,507 | $ | 892,526 | $ | 660,131 | |||||
Revenues by business segment [in thousands]: | |||||||||||||
Technical | $ | 390,018 | $ | 356,103 | $ | 842,009 | $ | 622,452 | |||||
Support | 25,840 | 19,404 | 50,517 | 37,679 | |||||||||
Consolidated operating income [in thousands] | $ | 82,369 | $ | 60,415 | $ | 173,026 | $ | 83,450 | |||||
Operating income (loss) by business segment [in thousands]: | |||||||||||||
Technical | $ | 77,017 | $ | 59,827 | $ | 180,550 | $ | 81,638 | |||||
Support | 7,920 | 3,334 | 14,564 | 6,114 | |||||||||
Corporate | (4,672) | (4,544) | (9,753) | (9,054) | |||||||||
Pension settlement charges | (911) | — | (18,286) | — | |||||||||
Gain on disposition of assets, net | 3,015 | 1,798 | 5,951 | 4,752 | |||||||||
Percentage cost of revenues to revenues | 63.9 | % | 69.5 | % | 64.0 | % | 71.2 | % | |||||
Percentage selling, general & administrative expenses to revenues | 10.5 | % | 9.6 | % | 9.6 | % | 10.9 | % | |||||
Percentage depreciation and amortization expense to revenues | 6.3 | % | 5.4 | % | 5.6 | % | 6.0 | % | |||||
Average U.S. domestic rig count | 719 | 719 | 740 | 678 | |||||||||
Average natural gas price (per thousand cubic feet (mcf)) | $ | 2.2 | $ | 7.5 | $ | 2.4 | $ | 6.1 | |||||
Average oil price (per barrel) | $ | 73.5 | $ | 109.0 | $ | 74.8 | $ | 102.0 | |||||
THREE MONTHS ENDED JUNE 30, 2023 COMPARED TO THREE MONTHS ENDED JUNE 30, 2022
Revenues. Revenues of $415.9 million for the three months ended June 30, 2023 increased 10.7 percent compared to the three months ended June 30, 2022. Domestic revenues of $409.4 million increased 11.0 percent for the three months ended June 30, 2023 compared to the same period in the prior year. The increase in revenues was primarily due to improved pricing, higher customer activity levels and a larger active fleet of pressure pumping equipment. International revenues of $6.4 million decreased 3.8 percent for the three months ended June 30, 2023 compared to the same period in the prior year.
During the second quarter of 2023, the average price of oil was 32.5 percent lower and the average price of natural gas was 71.2 percent lower, both as compared to the same period in the prior year. Oil and gas prices have moderated since the price increases in the prior year due to the Russian invasion of Ukraine but remain at sufficient levels to encourage customer drilling and completion activities. The average domestic rig count during the second quarter of 2023 was unchanged compared to the same period in 2022.
The Technical Services segment revenues for the second quarter of 2023 increased by 9.5 percent compared to the same period of the prior year due to higher customer activity levels, improved pricing and a larger fleet of pressure pumping equipment in service. Technical Services reported operating income of $77.0 million during the second quarter of 2023 compared to operating income of $59.8 million in the second quarter of 2022. The Support Services segment revenues for the second quarter of 2023 increased by 33.2 percent compared to the same period in the prior year, primarily due to higher activity levels and improved pricing within rental tools. Support Services reported operating income of $7.9 million for the second quarter of 2023 compared to an operating income of $3.3 million for the second quarter of 2022. Second quarter 2023 Support Services operating profit increased by $4.6 million compared to the second quarter of the prior year due to higher activity levels, improved pricing, and leverage of higher revenues over costs that are fixed during the short term.
Cost of revenues. Cost of revenues increased 1.9 percent to $265.8 million for the three months ended June 30, 2023 compared to $260.9 million for the three months ended June 30, 2022. Cost of revenues increased primarily due to increases in expenses consistent with higher activity levels, such as materials and supplies expenses, maintenance and repairs expenses, employment costs and fuel costs. Cost of revenues, as a percentage of revenues, decreased from 69.5 percent in the second quarter of 2022 to 63.9 percent in the
21
second quarter of 2023 primarily due to improved pricing for our services as well as reduced maintenance expense due to a decrease in the average age of our equipment.
Selling, general and administrative expenses. Selling, general and administrative expenses increased to $43.6 million for the three months ended June 30, 2023 compared to $35.9 million for the three months ended June 30, 2022, primarily due to costs related to the settlement of a vendor dispute and the acquisition of Spinnaker Oilwell Services. Selling, general and administrative expenses increased from 9.6 percent of revenues in the second quarter of 2022 to 10.5 percent of revenues in the second quarter of 2023.
Pension settlement charges. Pension settlement charges were $911 thousand for the three months ended June 30, 2023. There were no pension settlement charges for the three months ended June 30, 2022. See note 10 of the notes to the consolidated financial statements for more information.
Depreciation and amortization. Depreciation and amortization increased 30.4 percent to $26.2 million for the three months ended June 30, 2023, compared to $20.1 million for the three months ended June 30, 2022. Depreciation and amortization increased due to capital expenditures in the past year.
Gain on disposition of assets, net. Gain on disposition of assets, net was $3.0 million for the three months ended June 30, 2023 compared to a gain on disposition of assets, net of $1.8 million for the three months ended June 30, 2022. The gain on disposition of assets, net is generally comprised of gains and losses related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment.
Other income, net. Other income, net was $631 thousand for the three months ended June 30, 2023 compared to other income, net of $79 thousand for the same period in the prior year.
Interest expense and interest income. Interest expense was $73 thousand for the three months ended June 30, 2023 compared to $222 thousand for the three months ended June 30, 2022. Interest expense includes facility fees on the unused portion of the credit facility and the amortization of loan costs. Interest income increased to $2.7 million compared to $128 thousand in the prior year due to a higher average cash balance coupled with higher investment yields.
Income tax provision. Income tax provision was $20.6 million during the three months ended June 30, 2023 compared to $13.5 million tax provision for the same period in 2022. The effective tax rate was 24.1 percent for the three months ended June 30, 2023 compared to a 22.3 percent for the three months ended June 30, 2022. The increase in the 2023 effective tax rate is primarily due to unfavorable permanent items.
SIX MONTHS ENDED JUNE 30, 2023 COMPARED TO SIX MONTHS ENDED JUNE 30, 2022
Revenues. Revenues of $892.5 million for the six months ended June 30, 2023 increased 35.2 percent compared to the six months ended June 30, 2022. Domestic revenues of $878.8 million increased 36.4 percent for the six months ended June 30, 2023 compared to the same period in the prior year. The increase in revenues was primarily due to improved pricing, higher customer activity levels and a larger active fleet of pressure pumping equipment. International revenues of $13.7 million decreased 14.1 percent for the six months ended June 30, 2023 compared to the same period in the prior year.
During the first six months of 2023, the average price of oil was 26.7 percent lower, and the average price of natural gas was 60.4 percent lower, both as compared to the same period in the prior year. The average domestic rig count for the six months ended June 30, 2023 was 9.1 percent higher than the same period in 2022.
The Technical Services segment revenues for the first six months of 2023 increased by 35.3 percent compared to the same period of the prior year due to higher customer activity levels, improved pricing and a larger fleet of pressure pumping equipment in service. Technical Services reported operating income of $180.6 million during the first six months of 2023 compared to operating income of $81.6 million in the same period of 2022. The Support Services segment revenues for the first six months of 2023 increased by 34.1 percent compared to the same period in the prior year, primarily due to higher activity levels and improved pricing within rental tools. Support Services reported operating income of $14.6 million for the first six months of 2023 compared to an operating income of $6.1 million for the same period of 2022.
Cost of revenues. Cost of revenues increased 21.6 percent to $571.0 million for the six months ended June 30, 2023 compared to $469.8 million for the six months ended June 30, 2022. Cost of revenues increased primarily due to increases in expenses consistent
22
with higher activity levels, such as materials and supplies expenses, maintenance and repairs expenses, employment costs and fuel costs. Cost of revenues, as a percentage of revenues, decreased from 71.2 percent for the six months ended June 30, 2022 to 64.0 percent for the six months ended June 30, 2023 primarily due to improved pricing for our services, as well as reduced maintenance expense due to a decrease in the average age of our equipment.
Selling, general and administrative expenses. Selling, general and administrative expenses increased to $85.8 million for the six months ended June 30, 2023 compared to $72.1 million for the six months ended June 30, 2022, primarily due to costs related to the settlement of a vendor dispute and the acquisition of Spinnaker Oilwell Services, as well as increases in variable employee compensation costs consistent with improved financial operating results. Selling, general and administrative expenses, as a percentage of revenues, decreased from 10.9 percent in the first six months of 2022 to 9.6 percent in the same period of 2023 primarily due to the leverage of costs that are relatively fixed during the short term over higher revenues, partially offset by the impact of the acquisition of Spinnaker Oilwell Services.
Pension settlement charges. Pension settlement charges were $18.3 million for the six months ended June 30, 2023. There was no pension settlement charge for the six months ended June 30, 2022. See note 10 of the notes to the consolidated financial statements for more information.
Depreciation and amortization. Depreciation and amortization increased 27.2 percent to $50.3 million for the six months ended June 30, 2023, compared to $39.6 million for the six months ended June 30, 2022. Depreciation and amortization increased due to capital expenditures in the past year.
Gain on disposition of assets, net. Gain on disposition of assets, net was $6.0 million for the six months ended June 30, 2023 compared to a gain on disposition of assets, net of $4.8 million for the six months ended June 30, 2022. The gain on disposition of assets, net is generally comprised of gains and losses related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment.
Other income, net. Other income, net was $1.4 million for the six months ended June 30, 2023 compared to other income, net of $583 thousand for the same period in the prior year.
Interest expense and interest income. Interest expense was $145 thousand for the six months ended June 30, 2023 compared to $400 thousand for the six months ended June 30, 2022. Interest expense includes facility fees on the unused portion of the credit facility and the amortization of loan costs. Interest income increased to $4.6 million compared to $143 thousand in the prior year due to a higher average cash balance coupled with higher investment yields.
Income tax provision. Income tax provision. Income tax provision was $42.3 million during the six months ended June 30, 2023 compared to $21.8 million tax provision for the same period in 2022. The effective tax rate was 23.6 percent for the six months ended June 30, 2023 compared to a 26.0 percent effective tax rate for the six months ended June 30, 2022. The decrease in the 2023 effective tax rate is primarily due to favorable discrete adjustments.
Liquidity and Capital Resources
Cash Flows
The Company’s cash and cash equivalents decreased $25.9 million to $100.5 million as of June 30, 2023 compared to cash and cash equivalents of $126.4 million as of December 31, 2022. This decrease is primarily due to the advance of cash to fund the purchase of business on June 30, 2023, partially offset by an increase in net income during 2023 compared to the prior year.
The following table sets forth the historical cash flows for the six months ended June 30, 2023 and 2022:
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| ||||||
|
| ||||||
Six months ended June 30, |
| ||||||
(In thousands) |
| 2023 |
| 2022 |
| ||
Net cash provided by operating activities | $ | 177,558 | $ | 42,853 | |||
Net cash used for investing activities | (174,782) | (43,430) | |||||
Net cash used for financing activities | 28,665 | (3,623) | |||||
Cash provided by operating activities for the six months ended June 30, 2023 increased by $134.7 million compared to the six months ended June 30, 2022. Cash provided by operating activities for the six months ended June 30, 2023 includes net income of $136.5 million, coupled with favorable changes in accounts receivable of $23.0 million primarily due to improved collections, offset by unfavorable changes in other components of our working capital (accounts payable and accrued payroll) totaling $37.7 million primarily due to the timing of payments.
Cash used for investing activities for the six months ended June 30, 2023 increased by $131.4 million compared to the six months ended June 30, 2022, primarily due to the advance of cash to fund the purchase of business on June 30, 2023, coupled with an increase in capital expenditures primarily due to the timing of new equipment deliveries and consistent with higher business activity levels.
Cash used for financing activities for the six months ended June 30, 2023 increased by $25.0 million primarily due to the resumption of cash dividends paid to common stockholders beginning in the third quarter of 2022, coupled with repurchases during the first quarter of 2023 of the Company’s common shares on the open market and repurchases for taxes related to the vesting of restricted shares.
Financial Condition and Liquidity
The Company’s financial condition as of June 30, 2023 remains strong. We believe the liquidity provided by our existing cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months. The Company’s decisions relating to the amount of cash to be used for investing and financing activities are influenced by our capital position, and the expected amount of cash to be provided by operations. RPC does not currently expect to utilize our revolving credit facility to meet these liquidity requirements.
The majority of our cash and cash equivalents are held at a single financial institution and are in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC). This financial institution is among the largest in the United States and we believe it is a safe place to hold our deposits.
The Company currently has a $100.0 million revolving credit facility that matures in June 2027 as recently amended. The facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. In the second quarter of 2022, the Company amended the revolving credit facility. Among other matters, the amendment (1) extends the termination date for revolving loans from July 26, 2023 to June 22, 2027, (2) replaces LIBOR with Term SOFR as an interest rate option in connection with revolving loan borrowings and reduces the applicable rate margins by approximately 0.25% at each pricing level, (3) introduces a 1.00% per annum floor for base rate borrowings, (4) permits the issuance of letters of credit in currencies other than U.S. dollars. As of June 30, 2023, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $16.4 million; therefore, a total of $83.6 million of the facility was available. The Company was in compliance with the credit facility financial covenants as of June 30, 2023. For additional information with respect to RPC’s facility, see Note 11 of the consolidated financial statements.
Cash Requirements
The Company currently expects capital expenditures to be $200 million to $250 million in 2023 and to be directed towards both capitalized maintenance of our existing equipment and selected growth opportunities. The Company is allocating capital to maintain the capacity of its pressure pumping fleet to offset anticipated future fleet retirements. During the second quarter of 2023 the Company placed into service a new pressure pumping fleet, replacing existing older equipment sent out for refurbishment. The actual amount of capital expenditures in 2023 will depend primarily on equipment maintenance requirements, expansion opportunities, and equipment delivery schedules.
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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. See Note 9 of the Notes to Consolidated Financial Statements for additional information.
During the first six months of 2023, the Company made cash contributions of $5.4 million to its Retirement Income Plan and currently expects to make minimal contributions for the remainder of the year.
Effective July 1, 2023, the Company acquired Spinnaker, a leading provider of oilfield cementing services in the Permian and Mid-Continent basins. The purchase price was $79.5 million for 100 percent of Spinnaker’s equity. The acquisition was effective July 1, 2023 and amounts advanced as of June 30, 2023, consisted of approximately $77.0 million in cash and a $2.0 million pay-off of capital lease liabilities. Additionally, the Company assumed $518 thousand of capital lease liabilities effective July 1, 2023. The agreement contains a post-closing adjustment window for an agreed-upon level of Spinnaker’s working capital, as well as other usual and customary items, which we expect to finalize during the third quarter of 2023.
The Company has a stock buyback program to repurchase up to 49,578,125 shares in the open market, including an additional 8,000,000 shares authorized for repurchase by the Board of Directors in the second quarter of 2023. As of June 30, 2023, 15,115,820 shares remained available to be repurchased. During the three months ended June 30, 2023 there were no shares repurchased in the open market primarily due to our self-imposed trading blackout pending the closing of the Spinnaker acquisition. During the first quarter of 2023 the Company repurchased 1,132,364 shares on the open market. 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.
On July 25, 2023, the Board of Directors declared a regular quarterly cash dividend of $0.04 per share payable September 11, 2023 to common stockholders of record at the close of business on August 10, 2023. The Company expects to continue to pay cash dividends to common stockholders, subject to industry conditions and RPC’s earnings, financial condition, 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. In addition, increases in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees, especially if employment in the general economy increases. Also, activity increases can cause supply disruptions and higher costs of certain materials and key equipment components used to provide services to the Company’s customers. In recent years, the price of labor and raw materials increased due to higher oilfield activity and labor shortages caused by the departure of skilled labor from the domestic oilfield industry in prior years. These cost increases moderated in the second quarter of 2023 but remain high by historical standards.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any material off balance sheet arrangements.
RELATED PARTY TRANSACTIONS
Marine Products Corporation
In conjunction with the spin-off of its former power boat manufacturing segment conducted through Chaparral Boats, Inc., RPC and Marine Products Corporation (Marine Products) entered into various agreements that define the companies’ relationship. RPC charged Marine Products for its allocable share of administrative costs incurred for services rendered on behalf of Marine Products Corporation totaling $526 thousand for the six months ended June 30, 2023 and $473 thousand for the comparable period in 2022.
As part of the termination of the Retirement income plan, The Company paid $482 thousand to Marine Products, during the second quarter of 2023, to reimburse funds paid using Marine Product’s assets in the Plan to settle its participant liabilities.
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Other
The Company periodically purchases, in the ordinary course of business, products or services from suppliers that are owned by officers or significant stockholders of, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $1.1 million for the six months ended June 30, 2023 and $740 thousand for the six months ended June 30, 2022.
RPC receives certain administrative services and rents office space from Rollins, Inc. (a company of which Mr. Gary W. Rollins is 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 selected administrative 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 $3 thousand for the six months ended June 30, 2023 and $52 thousand for the six months ended June 30, 2022.
RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $100 thousand for each of the six months ended June 30, 2023 and June 30, 2022.
CRITICAL ACCOUNTING POLICIES
The discussion of Critical Accounting Policies is incorporated herein by reference from the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2022. There have been no significant changes in the critical accounting policies since year-end.
IMPACT OF RECENT ACCOUNTING STANDARDS
See Note 2 of the Notes to Consolidated Financial Statements for a description of recent accounting standards, including the expected dates of adoption and estimated effects on results of operations and financial condition.
SEASONALITY
Oil and natural gas prices affect demand throughout the oil and natural gas industry, including the demand for the Company’s products and services. The Company’s business depends in large part on the economic conditions of the oil and gas industry, and specifically on the capital expenditures of its customers related to the exploration and production of oil and natural gas. There is a positive correlation between these expenditures and customers’ demand for the Company’s services. As such, when these expenditures fluctuate, customers’ demand for the Company’s services fluctuates as well. These fluctuations depend on the current and projected prices of oil and natural gas and resulting drilling activity, and are not seasonal to any material degree.
FORWARD-LOOKING STATEMENTS
Certain statements made in this report that are not historical facts are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements that relate to our business strategy, plans and objectives, and our beliefs and expectations regarding future demand for our equipment and services and other events and conditions that may influence the oilfield services market and our performance in the future. Forward-looking statements made elsewhere in this report include, without limitation, statements regarding: our ability to continue to monitor factors that impact current and expected customer activity levels, such as the prices of oil and natural gas, changes in pricing for our services and equipment, and utilization of our equipment and personnel; the effect of geopolitical factors such as political instability in the petroleum-producing regions of the world, the actions of the OPEC oil cartel, overall economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ drilling and production activities on our financial results; our strategy of utilizing equipment in unconventional basins; our expectation that capital expenditures will be $200 million to $250 million during 2023 and our expectation that such expenditures will be directed primarily towards capitalized maintenance of our existing equipment and selected growth opportunities; our plans to continue to pursue international growth opportunities; our belief that international revenues will continue to be less than ten percent of our consolidated revenues in the foreseeable future; our belief that current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity; our belief that oil and gas price increases motivate our customers to maintain drilling and completion activities; our belief that the favorable long-term outlook for natural gas provided by the U.S. oil and gas industry is sufficient to encourage our customers to maintain their natural gas-directed exploration and production activities; our belief that oil-directed drilling will remain the majority of domestic drilling and that
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natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near-term; our belief that natural gas-directed drilling will increase in the future because of favorable long-term market dynamics and our belief that this projected higher demand should drive increased activity in most of the basins in which we operate; our plans to continue to monitor the market for our services and the competitive environment and related impact on our equipment fleets; our belief that the growing efficiency with which oilfield completion crews are providing services is a catalyst for the oversupplied nature of the oilfield services market; our belief that most of the feasible efficiency gains have been realized and that a number of our smaller competitors have ceased operations; our belief that the competitive market for our services improved during 2022 and early 2023 and will continue to improve during the near term; our plans to remain highly disciplined for about adding new incremental revenue-producing equipment capacity and to expand only when we believe the projected financial returns of such capital expenditures meet our financial return criteria; our plans to allocate capital to maintain the capacity of our pressure pumping fleet to offset anticipated fleet requirements; our plans to refurbish an existing fleet that will be activated in 2023 and our expectations regarding the delivery of a pressure pumping fleet in the second half of 2023; the strength of our financial condition; our plans with respect to our stock buyback program; our belief that the liquidity provided by our existing cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months; our belief that we will not need our revolving credit facility to meet our liquidity requirements; our expectations to continue to pay cash dividends to common stockholders, subject to industry conditions and RPC earnings, financial condition and other relevant factors; estimates made with respect to our critical accounting policies; the effect of new accounting standards; the effect of the changes in foreign exchange rates on our consolidated results of operations or financial condition; and the impact of lawsuits, legal proceedings and claims on our financial position and results of operation.
The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “estimate,” “focus,” “plan,” and similar expressions generally identify forward-looking statements. Such statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of RPC to be materially different from any future results, performance or achievements expressed or implied in such forward-looking statements. Risk factors that could cause such future events not to occur as expected include the following: the volatility of oil and natural gas prices; our concentration of customers in the energy industry and periodic downturns; our business depends on capital spending by our customers, many of whom rely on outside financing to fund their operations; dependence on our key personnel; our ability to identify or complete acquisitions; our ability to attract and retain skilled workers; some of our equipment and several types of materials used in providing our services are available from a limited number of suppliers; whether outside financing is available or favorable to us; increasing expectations from customers, investors and other stakeholders regarding our environmental, social and governance practices; our compliance with regulations and environmental laws; the combined impact of the OPEC disputes and the COVID-19 pandemic on our operating results; possible declines in the price of oil and natural gas, which tend to result in a decrease in drilling activity and therefore a decline in the demand for our services; the ultimate impact of current and potential political unrest and armed conflict in the oil producing regions of the world, which could impact drilling activity, adverse weather conditions in oil or gas producing regions, including the Gulf of Mexico; competition in the oil and gas industry; the Company’s ability to implement price increases; the potential impact of possible future regulations on hydraulic fracturing on our business; risks of international operations; reliance on large customers; our operations rely on digital systems and processes that are subject to cyber-attacks or other threats; and our cash and cash equivalents are held primarily at a single financial institution. Additional discussion of factors that could cause actual results to differ from management’s projections, forecasts, estimates and expectations is contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and in this 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to interest rate risk exposure through borrowings on its credit facility. As of June 30, 2023, there were no outstanding interest-bearing advances on our credit facility, which bear interest at a floating rate.
Additionally, the Company is exposed to market risk resulting from changes in foreign exchange rates. However, since the majority of the Company’s transactions occur in U.S. currency, this risk is not expected to have a material effect on its consolidated results of operations or financial condition.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures – The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its
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management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, June 30, 2023 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date.
Changes in internal control over financial reporting – Management’s evaluation of the effectiveness of the design and operation of its disclosure controls and procedures described above did not identify any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
RPC is involved in litigation from time to time in the ordinary course of its business. RPC does not believe that the outcome of such litigation will have a material adverse effect on the financial position or results of operations of RPC.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as updated in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
| |||||||||
Period |
| Total Number of Shares (or Units) Purchased | Average Price Paid Per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1) | ||||
April 1, 2023 to April 30, 2023 |
| 306 | (2) | $ | 7.39 | — | 15,115,820 | ||
May 1, 2023 to May 31, 2023 |
| — | — |
| — | 15,115,820 | |||
June 1, 2023 to June 30, 2023 |
| — |
| — |
| — | 15,115,820 | ||
Total |
| 306 | $ | 7.39 |
| — | 15,115,820 |
| (1) | The Company has a stock buyback program to repurchase up to 49,578,125 shares in the open market, including an additional 8,000,000 shares authorized for repurchase by the Board of Directors in the second quarter of 2023. As of June 30, 2023, 15,115,820 shares remained available to be repurchased. During the three months ended June 30, 2023 there were no shares purchased in the open market. |
| (2) | Represent shares repurchased by the Company in connection with taxes related to vesting of certain restricted shares. |
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
During the three months ended June 30, 2023, no director or officer, as defined in Rule 16a-1(f) under the Securities Exchange Act of 1934, as amended, of the
ITEM 6. EXHIBITS
Exhibit |
| Description |
3.1(a) | ||
3.1(b) | ||
3.1(c) | ||
3.2 | ||
4 | ||
10.25* | ||
31.1 | ||
31.2 | ||
32.1 | Section 906 certifications for Chief Executive Officer and Chief Financial Officer. | |
101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
104 * | Cover Page Interactive Data File (formatted as Inline XBRL) Portions of this Exhibit have been omitted pursuant to Item 601(a)(6) of Regulation S-K |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RPC, INC. | ||
/s/ Ben M. Palmer | ||
Date: July 28, 2023 | Ben M. Palmer | |
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
/s/ Michael L. Schmit | ||
Date: July 28, 2023 | Michael L. Schmit | |
Vice President, Chief Financial Officer and Corporate Secretary | ||
(Principal Financial and Accounting Officer) |
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