RES - RPC Caught In The Market's Crosswinds

2023-11-12 05:06:28 ET

Summary

• RPC's third quarter results were negatively impacted by challenging market conditions, particularly in the pressure pumping sector.
• The company expects a quarter-over-quarter improvement and potential earnings growth in Q4, but the decline in drilling activity and falling oil prices raise concerns.
• The current oil price slump may indicate a tough year ahead in 2024, with the possibility of continued weak demand for RPC's services.

Ever heard the one about seeing light at the end of the tunnel? It's the hope that tough times for a company will eventually give way to brighter days. That's where we found ourselves with RPC ( RES )—on the cusp of a turnaround, or so it seemed. But sometimes, that 'light' is just a tease, a mere light bulb when you're hoping for daylight.

RPC is an oilfield services company, based in Atlanta, Georgia, with a market cap of $1.56 billion. In my previous article , I said that although the company had been posting robust revenue and earnings growth, the tough business environment could dampen its results. And that’s what we got from the company’s previous results announced a few weeks earlier. But hold on, because there's been a flicker of hope with the recent uptick in rig count. RPC might also report a big jump in earnings in the next quarter’s results. Could this mean the oilfield services sector is on the upswing? Well, don't bet the farm just yet. While RPC might show us some brighter numbers for the fourth quarter, I'm buckling up for more twists and turns on this ride.

Pressure in the Oilfield Patch

RPC, a provider of specialized oilfield services, supports the oil and gas sector's drilling ambitions. It breaks down its operations into two main segments: Technical Services, which handles tasks like well completion, production, and maintenance, and Support Services, which supplies rental equipment and various services like pipe inspection and training courses.

The lion's share of RPC's revenue—93% in the first nine months of fiscal year 2023— springs from its Technical Services. Here, pressure pumping takes the lead, making up more than a third of last quarter's revenue alone. Other vital services like downhole tools, coiled tubing, and cementing round out RPC's primary revenue streams within this segment. It's crucial to note that pressure pumping is one of the biggest sources of earnings for RPC, and it is this very service line which came under pressure in the third quarter.

In prior articles , I pointed out the demand softness hitting oilfield service providers, stemming from oil and gas producers pulling back on rig deployments and scaling down drilling operations. Baker Hughes's weekly rig count data has been trending downward throughout 2023, with declines initially appearing on a quarter-over-quarter basis while still showing annual growth. However, the situation deteriorated as the year progressed, culminating in a third-quarter average U.S. rig count that was 9.7% lower than the previous quarter and a stark 14.7% drop from the same period last year.

I was expecting weakness in RPC's earnings, owing to the ripple effects of a reduced demand for its services. The reality, however, was even grimmer than my expectations. Not only did drilling operations dwindle, but RPC also battled against escalating pricing pressures. The situation was exacerbated in their pivotal pressure pumping business which got hit by project timing issues and customer delays in initiating work.

The fallout was starkly evident in RPC's financial results , with the company reporting a year-over-year revenue slump of 28.1% to $330.4 million, and technical services revenue saw a sharper fall of 30.5% to $303 million. Adjusted net profits tumbled by 75% from $69.3 million, or $0.32 per share, down to $18.3 million, or $0.08 per share, a decrease that mirrored the drop in GAAP profits. Analyst predictions had been more optimistic, setting profit expectations at $0.24 per share on revenue forecasts of $378.17 million, according to Seeking Alpha data.

Brief Bright Spot

RPC presented an upbeat forecast, suggesting a significant earnings upturn on the horizon. After a particularly soft third quarter marked by sluggishness in their pressure pumping service, the

company is not expecting a repeat in the upcoming quarter. With a strong forecast for frac activity in the fourth quarter, management expressed confidence during the earnings call about a “significant sequential increase in EBITDA.” An uptick in drilling activity in the Permian Basin, where RPC has a substantial operation, positions the company to capitalize on the growing workload. The management anticipates better pricing and fleet utilization, which should collectively contribute to a rebound in both revenue and earnings.

Further optimism stemmed from the company’s belief that its fourth-quarter results could resemble those of the second quarter more closely than the third. To recall, RPC's adjusted EBITDA dropped from $110.1 million in Q2 to $51.9 million in Q3, with adjusted net income plunging from $0.30 per share to $0.08 per share over the same period. However, as per the company’s guidance, these figures could surge in Q4, potentially aligning with Q2's numbers. The rig count data from October also offered evidence of improvement, reinforcing the view that RPC might be on a trajectory toward recovery.

In early October, the U.S. rig count showed 619 active units, a slight decrease from the previous week's count of 623, according to data released by Baker Hughes. This marked a continued decline from January's starting point of 772 rigs. Yet, the following weeks brought a modest uptick, with the count rising incrementally to 622, then 624, and 625 units, sparking optimism that the industry might have hit a turning point with a steady rebound underway.

The optimism was short-lived, though, as numbers dipped once more to 618 rigs in the first week of November, deteriorating further to 616 by this week's end. This fluctuation dampened hopes, suggesting the increase was a temporary rally rather than a sustained recovery.

The oil prices aren’t offering any support either. The commodity has been on a downslide for the last three weeks, succumbing to dimming demand prospects from key global players like China, the United States, and Europe. The U.S. benchmark WTI crude has witnessed a 13% decline over this period, settling at around $77 per barrel despite OPEC and its allies' efforts to prop up prices by curtailing production.

In the U.S., the Federal Reserve's unwavering commitment to controlling inflation which is above the central bank’s target at 3.7% by keeping interest rates high, with Chairman Jerome Powell's recent intimation of potentially additional rate hikes down the road, could cool economic expansion. While China is taking action to bolster its economy, the latest indicators , including disappointing consumer price figures and ongoing factory deflation, raise questions about the robustness of its economic rebound.

The situation in the Eurozone is more dire, with the economy contracting by 0.1% last quarter. The global economic growth is expected to slow down from 3.5% last year to 3% in 2023 and 2.9% in 2024, substantially lower than the historical average of 3.8%, according to the IMF. This broader slowdown may drag oil demand lower than anticipated, potentially preventing the significant supply shortfall foreseen by OPEC for the fourth quarter and keeping oil prices under pressure.

In my view, the latest downturn in oil prices, with WTI dipping below the $80 mark, coupled with the declining rig count, paints a grim picture for RPC's immediate future. While the company is expected to rebound from the third quarter's low activity, it's still uncertain if this recovery can match the performance seen in the second quarter. The persisting difficult market conditions suggest that RPC's earnings may not surge as strongly as hoped.

The recent oil price decline over the past three weeks further complicates RPC’s outlook for 2024. Oil producers, RPC's customers, are likely to remain prudent in their spending. Given the uncertain market and economic signals, they may hold off on increasing their budgets or expanding drilling operations. This conservative approach from oil producers could lead to sustained weak demand for RPC’s services, potentially extending the sector's recovery timeline.

Takeaway

RPC's third quarter was marred by challenging market conditions, particularly within the pressure pumping landscape, negatively affecting its financial results. Although a quarter-over-quarter improvement is anticipated, with potential for meaningful earnings growth in Q4, the ongoing decline in drilling activity and faltering oil prices raise concerns about the strength of this recovery. Moreover, the current oil price slump may foreshadow a tough year ahead in 2024, with the possibility of continued subdued demand for RPC’s services. In my opinion, it might be prudent for investors to maintain a watchful stance and consider staying on the sidelines until the market landscape stabilizes.

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