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November 7, 2014
RPC, INC. RES/NYSE Continuing Coverage: Weathering the Storm
Investment Rating: Market Outperform PRICE: $ 16.15 S&P 500: 2,031.92 DJIA: 17,573.93 RUSSELL 2000: 1,173.32
RPC’s stock will rebound while oil prices remain low
Conservative capital structure prepares RPC for decreases in revenues and working capital
RPC’s capital expenditures meet demands for hydraulic fracturing
Increases in service intensity and percentage of unconventional rigs will partially offset losses from decreases in oil drilling activity
RPC is an attractive target in current consolidation market
Our 12‐month target price is $19.00
ValuationEPS
P/ECFPS
P/CFPS
2013 A$ 0.7721.0x $ 1.799.0x
2014 E$ 1.0615.2x $ 2.057.9x
2015 E$ 1.0115.9x $ 2.406.7x
Market Capitalization Stock DataEquity Market Cap (MM): $ 3,530.42 52‐Week Range: $14.87 ‐ $25.15
Enterprise Value (MM): $ 3,690.94 12‐Month Stock Performance: ‐5.90%
Shares Outstanding (MM): 218.60 Dividend Yield: 2.60%
Estimated Float (MM): 60.63 Book Value Per Share: $ 4.856‐Mo. Avg. Daily Volume: 1,252,980 Beta: 1.24
Company Quick View: RPC, Inc. keeps cracking with fracking. RPC spun‐off from Rollins, Inc. in 1984 and has grown into an international holdings company with 3,900 employees. Through its subsidiaries, Cudd Energy Services, Thru Tubing Solutions, Patterson Services, and Bronco Oilfield Services, the Company provides oil and gas field services and equipment for energy companies pursuing the exploration, production, and development of oil and natural gas. The Company differentiates itself through its expertise in hydraulic fracturing. RPC is headquartered in Atlanta, Georgia and operates primarily in the U.S., with minor operations in Africa, Canada, China, Eastern Europe, Latin America, the Middle East, and New Zealand. Company Website: www.rpc.net
Analysts: Investment Research Manager:Douglas Taft Hulsey Nikunj BajajJeremy GohMatthew Ryan SolnickLinda Yuntian Long
The BURKENROAD REPORTS are produced solely as a part of an educational program of Tulane University's Freeman School of Business. The reports are not investment advice and you should not and may not rely on them in making any investment decision. You should consult an investment professional and/or conduct your own primary research regarding any potential investment.
Wall Street's Farm Team
BURK
ENRO
AD R
EPO
RTS
4/1/13 4:47 PM
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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Figure 1: 5‐year Stock Price Performance
Source: Yahoo Finance
INVESTMENT SUMMARY
We rate RPC, Inc. as a Market Outperform with a 12‐month price target of $19.00.
RPC provides oil and gas field services and equipment to energy companies pursuing the exploration, production, and development of oil and natural gas in the U.S. Recent drops in oil prices to $80 per barrel will decrease rig counts in the U.S. starting in the second half of 2015. We believe oil prices will remain around $80 per barrel over the next two years based on our projection that OPEC will continue to accept low prices. The drop in oil prices will begin decreasing revenue for RPC in the second half of 2015 when contracts expire and new oil drilling activity decreases. Still, RPC’s earnings over the next three quarters will continue to grow significantly. This is attributed to the expansion of the Company’s pressure pumping fleet as well as increasing service intensity and percentage of unconventional rigs. We believe the recent (27.8%) drop in RPC’s stock price is an overreaction to the recent drop in oil prices. RPC’s stock is now undervalued due to investor fear in energy. Additionally, we believe RPC is extremely attractive compared to its peers due to the Company’s conservative capital structure and ability to effectively allocate capital expenditures to meet customer’s drilling demands.
RPC’s strong liquidity and solvency compared to its peers will protect the Company during the next two years of low oil prices. RPC’s current liquidity ratio of 3.3x and debt‐to‐equity ratio of 14.3% are much stronger than industry averages of 1.3x and 39.4%, respectively. Also, the Company has almost $174 million available on its revolving credit facility until January 2019. As such, RPC’s conservative capital structure positions the Company to perform far better than its peers while oil prices remain low and the U.S. oil and gas field services industry experiences decreases in revenue and working capital. Additionally, the Company’s position make it an extremely attractive acquisition target in a robust consolidation market for the industry.
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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Oil and natural gas production is in the process of changing from conventional drilling to unconventional, horizontal drilling. Pressure pumping, the process of hydraulic fracturing in unconventional rigs, makes up over 55% of RPC’s revenue. RPC meets the growing demand of its customers for higher service intensity and more unconventional drilling with its advanced and growing fleet of pressure pumping equipment. In fact, RPC will spend over $250 million in the second half of 2014 to expand and maintain its pressure pumping fleet in order to meet increasing customer demands. However, going forward RPC will decrease its capital expenditures in preparation for decreases in new oil drilling activity when contracts expire in the second half of 2015. Although rig counts will decrease in the near future with the drop in oil prices, service intensity and the percentage of unconventional rigs will continue to rise. These market trends will cushion RPC’s losses from decreases in new oil drilling activity.
Table 1: Historical Burkenroad Ratings and Prices
Date Rating Price*
11/08/2013 Market Perform $17.45
10/26/2012 Market Perform $10.61
11/11/2011 Market Outperform $12.82
11/08/2010 Market Outperform $10.31
11/30/2009 Market Outperform $3.78
12/08/2008 Market Outperform $3.43
12/04/2007 Market Perform $4.19
11/30/2006 Market Perform $5.51
03/15/2005 Market Outperform $2.44
02/02/2004 Market Perform $1.21
03/14/2003 Market Perform $1.13
03/20/2002 Market Outperform $1.63
04/15/2001 Buy $1.34
*Price at time of report date
INVESTMENT THESIS
We established a 12‐month target price of $19.00 and a rating of Market Outperform for RPC, Inc. Our analysis of RPC’s future performance is driven by several market and internal conditions: oil prices, service intensity and unconventional rig counts, and RPC’s capital structure, capital expenditures, and share ownership.
RPC’s stock will rebound while oil prices remain low
The recent drop in oil prices to $80 per barrel will likely persist over the next two years or even longer. The U.S. move towards oil independence caused OPEC to maintain production quotas in Saudi Arabia and remain comfortable with oil prices around $80 per barrel. As such, energy companies have plummeted in the markets, seeing average losses in the industry of 30%. RPC’s stock price dropped from $22.37 on September 26 to $16.15 on November 7. We believe this (27.8%) drop is an extreme overreaction to the recent decline in oil prices and RPC’s stock is currently undervalued.
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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RPC’s contracts with its customers will not expire until the second half of 2015. As such, strong earnings over the next three quarters will increase investor confidence in RPC. The Company’s extremely conservative capital structure, continued increases in service intensity, and percentage of unconventional rigs prepare RPC for decreases in new oil drilling activity in the second half of 2015.
Conservative capital structure prepares RPC for decreases in revenues and working capital
RPC’s conservative capital structure will maintain the Company’s liquidity and solvency during low oil prices. RPC’s current liquidity ratio of 3.3x and debt‐to‐equity leverage ratio of 14.3% are much stronger than the industry averages of 1.3x and 39.4%, respectively. Additionally, the Company has almost $174 million available on its revolving credit facility through January 2019. RPC’s strong liquidity and solvency will position the Company to outperform its peers while the U.S. oil and gas field services industry experiences low revenue and working capital during low oil prices.
RPC’s capital expenditures meet demands for hydraulic fracturing
RPC successfully maintains and grows equipment in connection with changing drilling demands. Significant increases in unconventional rig counts and service intensity have increased the demand for oil and gas field service companies, like RPC, specializing in hydraulic fracturing and unconventional rigs. RPC spent $237.5 million on capital expenditures through the first three quarters of 2014, and management guidance projects another $137.5 million of capital expenditures in the final quarter of 2014. Recent capital expenditures have been focused towards RPC’s pressure pumping fleet, one of the most significant drivers in the Company’s revenue numbers. The recent increases in property, plant, and equipment (PP&E) will increase revenues for RPC as equipment is put to work. Increases in service intensity will force RPC to focus capital expenditures on maintenance of equipment that is working harder. However, we believe RPC will decrease capital expenditures in preparation for low oil prices and decreases in oil drilling activity in the near future.
Increases in service intensity and percentage of unconventional rigs will partially offset losses from decreases in oil drilling activity
RPC’s main source of revenue is pressure pumping. Consequentially, the recent drop in oil prices will decrease total rig counts and oil drilling activity, and decrease the demand for RPC’s pressure pumping and other products and services. There will be a significant decrease in rig counts once contracts expire in mid‐2015. We predict unconventional rig counts in the U.S. will remain around 1,500 rigs over the next three quarters and then drop to 1,300 rigs by the end of 2015. However, continuous increases in the percentage of unconventional rigs and service intensity per rig will provide relief for RPC. Recent growth in unconventional rig counts have significantly increased the demand for RPC’s pressure pumping services and increased recent revenues. Unconventional rigs increased 12.3% year over year from 459 rigs on July 2, 2004 to 1,490 rigs on July 3, 2014, with an average increase of 7.5% per year over the past decade (see Figure 2). Also, the amount of service provided per rig has recently increased significantly in an effort to produce more oil in a shorter time period.
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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Increases in service intensity are increasing RPC’s revenue exponentially faster than the Company’s rising operating expenses. We believe service intensity and percentage of unconventional rigs will continue to grow and partially offset RPC’s losses when low oil prices decrease new oil drilling activity.
Figure 2: Percentage of Unconventional Rigs in the U.S.
Source: Baker Hughes Rig Count
RPC is an attractive target in current consolidation market
RPC’s conservative capital structure and advanced pressure pumping service make the Company extremely attractive to peers interested in increasing market share for hydraulic fracturing services. The recent drop in oil prices has turned the U.S. oil and gas field services industry into a perfect environment for mergers and acquisitions. Oil and gas field service companies’ are currently undervalued due to plummeting stock prices. As such, companies in the industry may start looking to consolidate with discounted peers in an effort to survive decreases in oil drilling activity. Consolidation will allow companies to increase market share and cut overall costs. Additionally, having fewer companies in the industry will decrease competition and potentially increase pricing for services. In contrast, RPC’s position and strategy make the Company an unlikely candidate to pursue full acquisitions. However, RPC may look to strengthen its operations through acquiring discounted equipment or segments sold off from consolidations.
Management retains controlling interest of RPC through insider share ownership
RPC has an equity structure with a market capitalization of $4.73 billion and 215.2 million shares outstanding. The Company’s float is 28%, which indicates that insiders in the Company have well above majority influence in the decisions of the Company. This current insider ownership position presents an issue for institutional investors who might be seeking a significant interest in the Company. RPC also has a share repurchasing program that it has steadily and consistently exercised over the last few years.
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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This program serves a dual function of shrinking the number of outstanding shares available to the public and, consequently, giving back to its current shareholders while increasing the price earnings ratio per share. RPC partially uses its retained earnings to give back to its shareholders through issuing quarterly cash dividends that have been $0.105 per share each of the past two quarters.
VALUATION
Our team arrived at a 12‐month target price of $19.00 for RPC, Inc. using an average of the target prices produced from the price to earnings ratio (P/E) method and the enterprise value to earnings before interest, tax, depreciation and amortization (EV/EBITDA) method (see Figure 3).
P/E Ratio Method
The P/E ratio method produced a target price of $19.48. We decided to use RPC’s current P/E ratio, 17.655x, rather than a peer average due to extreme variation in the comparable companies P/E ratios. We multiplied RPC’s current P/E ratio by the sum of forecasted earnings per share over the next four quarters, $1.10 per share, to arrive at the target price of $19.48.
EV/EBITDA Method
The EV/EBITDA method produced a target price of $18.78. We used an average of RPC’s peer’s EV/EBITDA to find an appropriate EBITDA multiple to value RPC. Between C&J Energy Services, Seventy Seven Energy, Inc., Basic Energy Service, Inc., and Patterson‐UTI Energy, Inc. we arrived at an average EBITDA multiple of 6.085x. We then multiplied the average EBITDA multiple by the sum of our forecasted EBITDA over the next four quarters, $662,741, and finally divided that by the forecasted weighted shares outstanding in four quarters to arrive at the target price of $18.78.
Figure 3: 12‐Month Target Price Valuation
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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INDUSTRY ANALYSIS
RPC, Inc. operates in the U.S. oil and gas field services industry. The industry provides a range of equipment and solutions to customers engaging in the exploration, production, and development of oil and natural gas. The industry generated 2013 revenue of $112.7 billion from 11,000 companies. Halliburton Company, Schlumberger Limited, and Baker Hughes Incorporated are the major players in the industry, comprising 32.5% of the market share. The U.S. oil and gas field services industry is continuously evolving to meet the demands of exploration and production companies.
Macroeconomic Forces
Oil and natural gas prices are the key drivers for the number of active rigs in the U.S. and, subsequently, the number of active oil and gas rigs in the U.S. is the key determinant of demand for oil and gas field services. The most common metric for oil price is NYMEX Light Sweet Crude Oil (WTI). Oil prices have ranged from $76‐$114 a barrel with a daily average of $97 a barrel since 2011. However, current oil prices of $80 per barrel are a (11.8%) decrease over the last 12 months and a (2.3%) annual decrease over the past five years. Prior to increases in Saudi Arabian oil drilling at the end of September, consistent high oil prices were increasing activity levels and increasing service intensity from oilfield service companies. In fact, the North American rig count has ranged from 876‐2,026 rigs with an average of 1,663 rigs since 2009. The current count of 1,929 rigs is a 9.7% increase over the last 12 months and a 3.8% annual increase over the past five years. Furthermore, the percentage of oil focused rigs increased from 21% in 2009 to 83% currently. Overall, rig counts remained relatively constant over the past few years compared to prior periods, but the demand for oil and gas field services per rig has increased as a result of a substantial increase in activity per rig. However, recent drops in oil prices will decrease overall rig counts and demand for oilfield services in the coming quarters, as new demand for oil drilling decreases.
Industry Trends
A recent trend among oil and natural gas companies shifts drilling techniques from conventional wells (vertical wells) to unconventional wells (horizontal and directional wells). Currently, 80% of U.S. wells are unconventional and 20% are conventional. Unconventional wells cover a much larger area in the ground and produce a much better yield of barrels of oil per day (BOPD) than conventional wells (see Figure 4). Unconventional wells are also significantly more expensive because they require an extraordinary amount of equipment and services. As a result, oil and gas field service companies are experiencing increases in demands for services as the percentage of unconventional wells continues to grow. The strongest players in the U.S. oil and gas field services industry are companies offering the most reliable and efficient equipment and solutions for unconventional drilling.
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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Figure 4: Unconventional (Horizontal) Well with Multi‐Stage Frac Technology
Source: Google Images
The recent drop in oil prices has turned the U.S. oil and gas field services industry into an attractive environment for mergers and acquisitions. Oil and gas field service companies’ stock prices have plummeted, resulting in low P/E ratios and undervalued companies. Oil and gas field service companies may start looking to acquire or merge with peers with similar operations in an effort to survive decreases in oil drilling activity. Successful consolidations will allow companies to increase market share and cut overall costs. Additionally, there will be fewer companies in the industry and pricing for services will increase. RPC’s conservative capital structure and advanced pressure pumping service make the Company extremely attractive to peers interested in increasing market share for hydraulic fracturing services. Also, RPC may strengthen its services through acquiring discounted equipment or segments sold off from consolidations.
RPC’s Position
RPC is a specialized company within the U.S. oil and gas field services industry. The major players, Halliburton, Schlumberger, and Baker Hughes have a combined market cap of $215 billion and provide a range of services on a large scale. The rest of the market is comprised of smaller companies that provide fewer, specialized services (see Figure 5). With a market capitalization of just $4.6 billion, RPC focuses on growing previously successful operations, such as pressure pumping for hydraulic fracturing, coiled tubing, and snubbing.
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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Figure 5: 2013 U.S. Oil and Gas Field Services’ Revenues with Market Share (In Billions)
Source: IBISWorld
Bargaining Power of Suppliers
The suppliers to the U.S. oil and gas field services industry have high bargaining power. This industry requires highly specialized equipment and raw materials that are not readily available. Thus, RPC faces limited flexibility in choosing its suppliers. Furthermore, hydraulic fracturing, RPC’s biggest service, requires a very specific type of equipment and manpower. As a result, RPC balances its expenditures between acquiring new equipment and maintaining existing equipment.
RPC’s highest operational expense is service materials, especially proppant. Proppant is a material used to “prop” fractured rocks open to maintain oil and gas flow. This material is usually sand and varies in grade and uniformity depending on the quality. RPC has made efforts to reduce supplier power by acquiring a sand mine in Wisconsin that provides approximately 15% of the proppant RPC’s customers require. Another raw material RPC frequently uses is guar, a plant grown mainly in India and Pakistan that is commonly used in shampoo, gum, and other consumer products. The primary function of guar in the U.S. oil and gas field services industry is to increase the viscosity of hydraulic fracturing fluids. The high demand for sand and guar has attracted new suppliers, resulting in a slight decrease in supplier’s pricing power. RPC also establishes long‐term contracts with guar and proppant suppliers to decrease risk of having insufficient inventories.
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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Bargaining Power of Buyers
RPC is a price‐taker in the industry market. U.S. oil and gas field services industry revenue is dependent upon the demand from companies engaged in the exploration and production of oil and natural gas. IBIS World’s reports show that there is low concentration in market share for the U.S. oil and gas field services industry. Competition among oil and gas field services companies is high, resulting in a high level of buyer power for oil and gas field services. Halliburton Corp., Schlumberger Ltd., and Baker Hughes Inc. collectively control approximately 32.5% of the market share. Close to 11,000 other oil and gas field services companies constitute the rest of the market with little differentiation in services between companies. Therefore, oil and gas exploration and production companies have a variety of selections and are able to negotiate for low prices.
Threat of Substitution
The U.S. oil and gas field services industry has a low threat of substitute products. For instance, RPC provides highly specific services on unconventional wells involving expensive equipment and highly trained human capital that are not feasible for customers to provide themselves. Since vertical integration for customers is difficult to manage and finance, service companies like RPC face very little threat to substitutes.
Competitive Rivalry
Competition among the companies in the U.S. oil and gas field services industry is fierce. The big players in the industry are able to drive service prices down while smaller companies are price takers. RPC has experienced an increase in demand for its services but at lower prices. While hydraulic fracturing comprises 55% of RPC’s revenue, Halliburton offers RapidSuite for multi‐stage fracture completion, along with other deep water, heavy oil, and mature field services.
Hence, smaller companies like RPC and C&J Energy Service differentiate themselves with exceptional quality of work and reliable equipment. These companies normally have recurring contracts with customers and expand into new business relationships on a referral basis.
Barriers to Entry
The threat of new entrants into the U.S. oil and gas field services industry is historically low due to high barriers to entry. Extremely expensive PP&E and significant expenditures require an immense amount of capital. Furthermore, the U.S. oil and gas field services industry is highly competitive and comprised of established companies with strong customer relationships. It is not economically feasible for most potential entrants to pursue the U.S. oil and gas field services industry when it is tremendously difficult to gain market share.
However, the recent threat of new entrants into the U.S. oil and gas field services industry has increased. High growth in drilling activity and the continuous trend towards unconventional drilling have increased the demand for oil and gas field services. This increase in demand has attracted new entrants to put forward capital in an attempt to break into the growing market.
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Although barriers to entry have recently decreased, the recent drop in oil prices will significantly decrease the threat of new entrants in the industry going forward. Decreases in oil drilling activity and overall rig counts in the near future will decrease the demand for oilfield services. In turn, the market will shrink and potential entrants will avoid entering the industry.
ABOUT RPC
Two Georgia brothers, O. Wayne Rollins and John W. Rollins, Sr., founded RPC, Inc. (RES/NYSE). The brothers owned a car dealership, a radio station, pest‐control company, and a citrus‐fruit growing business. In 1973, Rollins acquired Patterson Services, the leading oil and gas field equipment rental company in the Gulf South.
In 1984, Rollins, Inc. spun off two new companies, Rollins Communications and RPC, Energy Services, to improve efficiency and maximize profits. R. Randall Rollins, son of Wayne Rollins, assumed leadership of RPC Energy Services, which was renamed RPC in 1995. Since then, the Company has grown into an international holding company with 3,900 employees. Through its major subsidiaries, Cudd Energy Services, Thru Tubing Solutions, Patterson Services, and Bronco Oilfield Services, the Company provides specialized oil and gas field services and equipment for energy companies pursuing the exploration, production, and development of oil and natural gas. Geographically, the Company primarily operates domestically to serve the needs of its customers located in Texas, the Gulf of Mexico, Appalachia, and the Rocky Mountains (see Figure 6). International operations have never generated more than 10% of RPC’s total revenues and have accounted for less than 5% of revenues since 2010 (see Figure 7).
Figure 6: RPC Domestic Facilities
Source: RPC Investor Relations Presentation
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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Figure 7: RPC 2013 Revenue Allocation ‐ Domestic vs. International
Source: RPC 2013 10‐K
Products and Services
RPC’s business model provides specialized oil and gas field services and equipment primarily to independent and major U.S. oil and gas companies (see Figure 8). The Company offers service lines to its clients divided into two distinct areas: technical services and support services.
Figure 8: RPC Service Lines
Source: RPC Investor Relations Presentation
Technical Services focuses on maintenance, production, and completion services performed directly on a customer’s well. These services include
Pressure Pumping (55% of 2013 Revenue)
This is RPC’s largest service line and is used to help facilitate the flow of hydrocarbons from a formation through the processes of fracturing and acidizing. This service line has received heavy capital investment and is a primary contributor to RPC’s growth.
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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Downhole Tools (16% of Revenue)
RPC’s subsidiary, Thru Tubing Solutions provides downhole motors, fishing tools, and other specialized tools used for drilling and production operations.
Coiled Tubing (9% of 2013 Revenue)
This service involves injecting flexible steel tubes into wells to facilitate unconventional well completion.
Snubbing (4% of 2013 Revenue)
Snubbing involves using a “hydraulic work over rig” that allows the operator to repair damaged well casings and to remove and replace equipment inside the well while maintaining the necessary pressure.
Nitrogen (4% of 2013 Revenue)
Nitrogen is highly valued as a purging and cleaning implement because it is non‐flammable, non‐corrosive, and environmentally friendly.
Well Control (<1% of 2013 Revenue)
RPC provides oil and gas emergency services that manage and control potential breakouts.
Support Services provide customers with rental equipment and services that assist in operations. These include
Rental Tools (4% of Revenue)
RPC rents a broad variety of specialized tools and drilling equipment that customers find attractive to supplement as opposed to buying their own.
Oilfield Pipe Inspection, management, and storage Services (<2% of Revenue)
RPC offers inspection services, inventory management, and handling services for all customers.
Well Control School (<1% of Revenue)
RPC provides government and industry accredited training programs for those in the U.S. oil and gas industry.
Energy Personnel International (<1% of Revenue)
The Company provides energy specialists in all divisions of the oil and gas industry on a consulting basis.
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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Corporate Strategy
RPC focuses on three strategic areas: (1) Developing capital and equipment in geographic markets with high returns, (2) selectively increasing market share, and (3) maintaining an appropriate blend of short‐term and long‐term revenues.
For the short term, RPC plans to increase its market share through expansion of its pressure pumping position. This is done through focusing capital expenditures on equipment for unconventional wells requiring hydraulic fracturing. This approach has allowed the Company to enjoy favorable market share in the pressure pumping sector.
To bridge the gap between short‐term and long‐term strategy, RPC maintains an appropriate blend of short and long‐term revenues. The Company does this by monitoring relevant industries closely, and making necessary changes to adapt to current market conditions. Maintaining this blend gives investors confidence that the Company’s operations are sustainable.
As the U.S. oil and gas industry has a high level of uncertainty in the long‐term, RPC monitors relevant industry benchmarks, oil and gas prices, demand for its products, and the utilization of equipment and personnel. For example, the Company reduced capital acquisitions in 2013 and focused on increasing the efficiency of current equipment. RPC is ramping up capital expenditures for 2014 with a projected budget of $375 million to meet the increasing demands of its services from increases in service intensity and increases in percentage of unconventional rigs. Due to the high level of volatility within the industry, the Company also ensures that it has sufficient liquidity, a conservative capital structure, and monitors discretionary spending closely.
Recent Developments
The exploration and production of oil and natural gas drive the U.S. oil and gas field services industry. As such, energy commodity prices are the main driver of exploration and production levels. RPC is affected by three categories: events within the oil industry, events within the natural gas industry, and internal developments.
Recent Events Within the Oil Industry
Oil prices in the U.S. have ranged from $76‐$114 a barrel with a daily average of $97 a barrel since 2011. However, current oil prices of $80 per barrel are a (11.8%) decrease over the last 12 months and a (2.3%) annual decrease over the past five years. Prior to increases in Saudi Arabian oil drilling at the end of September, consistent high oil prices were increasing activity levels and increasing service intensity from oilfield service companies. In fact, the North American rig count has ranged from 876‐2,026 rigs with an average of 1,663 rigs since 2009. The current count of 1,929 rigs is a 9.7% increase over the last 12 months and 3.8% annual increase over the past five years. Furthermore, the percentage of oil focused rigs increased from 21% in 2009 to 83% currently.
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Overall, rig counts remained relatively constant over the past few years compared to prior periods, but the demand for oil and gas field services per rig has increased as a result of substantial increases in activity per rig. We believe the recent drops in oil prices will decrease overall rig counts and demand for U.S. oilfield services in the coming quarters as contract expires and new demand for oil drilling decreases.
Recent Events Within the Natural Gas Industry
Since 2011, natural gas prices have ranged from $2‐$6 per thousand cubic feet with a daily average of $4 per thousand cubic feet, with prices rising in 2013 and 2014 after multiple years of decline. Current natural gas prices around $4 per thousand cubic feet are a 13.2% increase over the last 12 months, but a (3.5%) annual decrease over the past five years. Despite the rise in natural gas prices, natural gas drilling activity is at its lowest level since 1993. Increases in natural gas prices show slight improvements in activity levels, but activity is still facing strong headwinds from recent low natural gas prices compared to oil.
Internal Developments
RPC focused 2013 capital spending on maintaining and updating existing equipment. There has been a higher demand for oil and gas field services due to an increase in service intensity. Notably, the Company believes its pricing will improve from the increase in demand of its services. The Company has also expanded its fleet of pressure pumping equipment in the second half of 2014 and projects $375 million in total capital expenditures for the year. The new pressure pumping equipment will begin operations in early 2015.
RPC has historically generated the majority of its revenue from natural gas drilling activities. However, the Company has experienced significant increases in its percentage of revenue generated from oil drilling activities since 2010 (see Figure 9). Unattractive natural gas prices and high oil prices have influenced exploration and production companies to focus operations on oil drilling. The recent drop in oil prices may shift some focus back to natural gas drilling in the near future. In turn, RPC will experience a larger percentage of revenues generated from natural gas drilling activities.
Figure 9: RPC Revenue Allocation ‐ Oil Drilling vs. Natural Gas Drilling
Source: RPC 10‐Ks
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PEER ANALYSIS
The U.S. oil and gas field services industry is highly competitive, with three companies, Baker Hughes, Inc., Halliburton Company, and Schlumberger Limited covering 32.5% of the industry’s market share. However, these companies are much larger than RPC, Inc. As such, smaller, more focused oil and gas field service companies represent better comparables than these services giants.
Based on recommendations from RPC’s management and our own analysis, we chose the following four companies for comparison (see Table 2): Basic Energy Services, Inc., C&J Energy Services, Inc., Patterson‐UTI Energy, Inc., and Seventy Seven Energy, Inc.
Table 2: RPC Comparable’s Key Ratios
Revenue Mkt Cap P/E ROIC (%) Debt/Equity
RPC, Inc. $2.192B $4.724B 23.14 9.5 0.14x
Patterson $2.940B $4.668B 38.73 2.0 0.24x
C&J $1.390B $1.641B 30.55 5.1 0.40x
Seventy Seven $2.097B $1.205B N/A (1.1) 5.48x
Basic $1.398B $0.884B 271.13 0.3 2.18x
Source: S&P Capital IQ ‐ LTM as of September 30, 2014
Patterson‐UTI Energy, Inc. (NASDAQ/PTEN)
Patterson‐UTI Energy, Inc., headquartered in Snyder, Texas, provides pressure pumping and onshore contract drilling services to oil and natural gas producers in the U.S. and western Canada. The pressure pumping segment delivers well stimulation through hydraulic and nitrogen fracturing predominantly in Texas and the Appalachian Basin. The onshore contract drilling segment provides drilling rigs and crews to oil and gas field operators. Patterson‐UTI controls over 275 land‐based drilling rigs in North America.
C&J Energy Services, Inc. (NYSE/CJES)
C&J Energy Services, Inc., headquartered in Houston, Texas, provides oil and gas field services in the U.S. The company operates through its subsidiaries to provide services categorized into three segments: stimulation and well intervention services, wireline services, and equipment manufacturing. C&J Energy Services’ biggest segment is stimulation & well intervention services, which accounts for about 69% of total revenue. Hydraulic fracturing accounts for about 80% of revenue within the segment. Other significant services provided by C&J include constructing and maintaining equipment used by themselves and other companies.
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Seventy Seven Energy, Inc. (NYSE/SSE)
Seventy Seven Energy, Inc. (SSE) is an Oklahoma‐based oil and gas field service company. Formerly known as Chesapeake Oilfield Operating, L.L.C, SSE was part of Chesapeake Energy Corporation (NYSE/CHK) until it was spun off in 2014. The company specializes in hydraulic fracturing, drilling, equipment rentals, and water transference for well completion for unconventional oil rigs.
Basic Energy Services, Inc. (NYSE/BAS)
Basic Energy Services, headquartered in Fort Worth, Texas, is an oil and gas field services company that provides site services to U.S. oil and natural gas production companies. Basic provides services to over 2,000 oil and gas companies in 13 states. The company divides its wide variety of services into four different business segments: completion and remedial services (40% of revenues), fluid services (27%), well servicing (29%), and contract drilling (4%). The completion and remedial segment is the primary generator of Basic’s revenue and includes specialized pumping services similar to RPC’s pressure pumping, thru tubing, coiled tubing units, snubbing units, and fishing tools. Basic Energy Services operates in the same geographic regions as RPC, including the Permian Basin where it competes for the same type of drilling contracts.
MANAGEMENT PERFORMANCE AND BACKGROUND
RPC, Inc.’s management team consists of nine directors. Since RPC is a “Controlled Corporation” (giving the Board full control of operations), it is worth noting some of the Company’s major board members.
Five of RPC’s key employees include R. Randall Rollins, Chairman, who started at Rollins, Inc. in 1949, and has been the Company’s Chairman of the Board since the spin‐off in 1984; Richard A. Hubbell, Chief Executive Officer and President of RPC; Linda H. Graham, Vice‐President and Secretary of RPC since 1987; and Ben M. Palmer, Vice President, Chief Financial Officer, and Treasurer since 1996. Rollins, Hubbell, and Graham are also elected members of the RPC Board of Directors.
RPC’s Board of Directors has an average age of 77, with Richard A. Hubbell (69) as the youngest member. The advanced age of the Board of Directors could potentially be an issue for prospective investors, especially since RPC does not have a succession plan made available to the public despite its emphasis on promoting from within.
Management Performance
RPC’s operations require the Company to hold large amounts of assets. Hence, return on assets is a strong benchmark to evaluate management performance (see Table 3). Since 2011, RPC has exceeded its peers regarding the efficient allocation of the Company’s assets.
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Table 3: Return on Assets (ROA)
Period RPC, Inc. Patterson‐UTI Energy, Inc.
C&J Energy Service, Inc.
Seventy‐Seven Energy,
Inc.
Basic Energy Services, Inc.
2011 22.1% 7.6% 30.1% 1.7% 3.1%
2012 20.1% 6.6% 18.0% 3.3% 1.2%
2013 12.1% 4.0% 5.9% (1.0%) (2.3%)
9/30/14 (LTM) 12.7% 2.4% 3.5% (0.9%) 0.2%
Source: S&P Capital IQ
R. Randall Rollins Chairman of the Board of Directors (82)
R. Randall Rollins has managed RPC since the spin off from Rollins, Inc. in 1984. Mr. Rollins served RPC as Chief Executive Officer from 1984 to 2003 and is currently Chairman of the Board, a position he has held since 1984. In addition to his roles at RPC, Mr. Rollins is the Chairman of the Board for Marine Products Corporation and Rollins, Inc. Mr. Rollins is also a Director of Dover Downs Gaming & Entertainment and Dover Motorsports, Inc. He has over 30 years of experience in the U.S. oil and gas field services industry.
Richard A. Hubbell President and Chief Executive Officer (69)
Richard A. Hubbell has served as President of RPC since 1987 and the Chief Executive Officer (CEO) since 2003. Mr. Hubbell has also served as a Director for RPC since 1987. Prior to becoming CEO, Mr. Hubbell served as Chief Operating Officer at RPC from 1987 to 2003. In addition to his roles at RPC, Mr. Hubbell is a Director and the President and Chief Executive Officer at Marine Products Corporation. He has over 27 years of experience in the U.S. oil and gas field services industry.
Ben M. Palmer Chief Financial Officer (54)
Ben M. Palmer has served as Chief Financial Officer, Treasurer, Vice President, and Principal Accounting Officer of RPC since 1996. Mr. Palmer also serves as the Treasurer of RPC’s subsidiary, Cudd Energy Services. In addition to his roles at RPC, Mr. Palmer is the Chief Financial Officer, Treasurer, Vice President, and Principal Accounting Officer at Marine Products Corporation. He has over 18 years of experience in the U.S. oil and gas field services industry.
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Linda H. Graham Vice President and Corporate Secretary (77)
Linda H. Graham has served as Vice President and the Corporate Secretary at RPC since 1987. Ms. Graham also served as a Director at RPC since 2001. In addition to her roles at RPC, Ms. Graham is a Director, Vice President and the Secretary at Marine Products Corporation. She has over 27 years of experience in the U.S. oil and gas field services industry.
Board of Directors
RPC’s Board of Directors consists of nine members: R. Randall Rollins, Linda H. Graham, Richard A. Hubbell, James A. Lane, Jr., Gary W. Rollins, Henry B. Tippie, James B. Williams, Bill J. Dismuke, and Larry L. Prince.
R. Randall Rollins serves as the Chairman of the Board. Linda Graham, Richard Hubbell, and Gary Rollins are inside directors, which means they have management positions within the Company. The rest of the directors are either outside or independent directors.
RPC’s Board of Directors has a relatively large degree of freedom in decision making. This is largely due to the Board’s controlling interest, >50%, of the Company’s stock. This means that the Company is a “Controlled Corporation” giving the Board full control of operations. Another benefit of having controlling interest is the decreased risk of a third party takeover of the Company.
Management Incentives
RPC has two main incentives for management: the 2014 Stock Incentive Plan and executive compensation, both cash based and equity based, is determined by a compensation committee.
RPC’s Board of Directors adopted the 2014 Stock Incentive Plan on January 28, 2014, contingent on approval by the Company’s shareholders. This plan replaces the 2004 Employee Stock Incentive Plan, and lasts for ten years. Under this plan, directors, officers, and other key employees of RPC and its subsidiary companies, receive stock options if they are involved in the growth and/or profitability of the Company. Although there is no limit to the number of award recipients, there is a limit of eight million shares that can be distributed through this plan.
RPC’s compensation committee is responsible for the determination and administration of executive compensation. The committee is composed of three independent directors who are not under the payroll of the Company. As such, this committee ensures that compensation towards management is based on performance of the Company.
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SHAREHOLDER ANALYSIS
RPC, Inc.’s equity structure, as at September 30, 2014, is comprised of 215.2 million shares outstanding with a free float of 60.26 million shares. The outstanding common stock is distributed among various investor types including investment managers, brokerage firms, and strategic entities composed of two corporations and nine individuals. An important aspect to note is the limited number of shares available for purchase in the open market due to high internal holdings. The Rollins Family Trust holds the largest stake in the Company at approximately 68.8 percent. This figure, in combination with ownership of a select few inside officers and directors, totals around 71.04% (see Table 4). As indicated by the low float ratio, the Company’s equity structure has a high internal ownership in order to obtain the status of a “Controlled Corporation.” This allows the Board of Directors to effectively control the operations of the Company, including the election of the board of directors. The high internal concentration of Company ownership also mitigates the risk of possible third party takeovers.
In 1993, RPC initiated a share buyback program that authorized the repurchasing of 26.57 million shares over an unspecified amount of time. On June 5, 2013, the program was supplemented by an additional authorization of another five million shares able for repurchase. As of September 30, 2014, 4.1 million shares remain available for repurchase. RPC has consistently purchased its shares from the market over the last few years and has announced share repurchases in both the first and third quarters of 2014 in the amounts of 399,611 and 209,485 shares, respectively. This consistent exercising of the buyback program reflects RPC’s priorities of maintaining internal control as well as increasing the value of each share by limiting available shares in the open market.
Table 4: Top Ten Investors (2014)
Investor Name % O/S
R. Randall Rollins 66.40
Gabelli Funds, LLC 4.37
Gary W. Rollins 2.35
The Vanguard Group, Inc. 1.97
BlackRock, Inc. 1.48
Milennium Management LLC 1.34
Richard A. Hubbell 1.19
Henry B. Tippie 1.10
Citadel Investment Group, LLC 0.84
TIAA‐CREF 0..76
Source: S&P Capital IQ September 30, 2014
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RISK ANALYSIS AND INVESTMENT CAVEATS
RPC, Inc. faces both unique risks that are specific to the Company and common risks that are associated with the U.S. oil and gas field services industry as a whole. These risk caveats can be segmented into three different categories: operational risks, regulatory risks, and financial risks. Operational risks generally involve broader environmental and economic concepts that could apply to the entire industry. Many of these risks involve the variability in demand for types of services that RPC provides. Regulatory risks deal with the potential consequences that RPC could face as a result of government regulations dealing with hydraulic fracturing and designated economic development zones. Finally, financial risks are related to the Company’s unique debt and equity structures.
Operational Risks
Demand Changes Price Volatility
RPC is an oil and gas field services company, and is consequently highly dependent on the volatility of oil and natural gas prices. When prices decline, companies involved in the exploration and production of these resources cut spending, negatively impacting the demand for RPC’s services. The change in prices does not always have immediate consequences due to the nature and extent of the services. Customers that are involved in the exploration are able to react faster by curtailing capital investments, but companies that are involved in production of oil and natural gas have a lag time due to legal obligations to the services. Consistently low prices for these resources may hurt RPC’s financial condition in the future.
Competition
The U.S. oil and gas field services industry is highly competitive because companies tend to operate in concentrated areas with vast oil reserves. RPC provides its services in aggressive markets, competing against large and small oil services companies that price according to constant fluctuation in consumer activity. Consequently, RPC’s revenues and earnings are variable depending on changing prices set by competition based on demand, general economic conditions, and regulations. In order to maintain a competitive position relative to its peers, the Company strives to deliver the highest quality of service to customers through consistent maintenance and ensuring the safety of all parties involved.
Weather and Catastrophe Risks
RPC’s operations are directly impacted by adverse weather conditions. The Company is frequently subjected to significant weather events that could have an effect on performance and demand, particularly in the short run. For instance, RPC has many sites located in areas such as the Gulf Coast and in the Gulf of Mexico that are susceptible to hurricanes and other storms during certain periods in the year. These weather catastrophes could impede the progress of certain activities, decrease the short term needs for services, and may even impact the prices of oil and gas. Rain, snow, and ice are also potential issues that may cause conditions that are not suitable for transportation of equipment and workers.
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Inability to Identify/Complete Acquisitions
Acquisitions have been an important component of RPC’s business strategy in the past. However, there are uncertainties associated with finding and acquiring favorable companies. For example, RPC may not be able to identify targets for acquisition that would prove beneficial in the near future. In the case that a strong opportunity arises, RPC might not be able to finance the acquisition by itself and will either need to take on debt or issue more equity that would cause dilution to the stockholders. Another potential issue is the risk that a newly acquired company may not integrate well.
Raw Material Availability
RPC’s operations rely heavily on raw material being available at the site. The essential raw materials that RPC needs are sand, used as proppant, and guar, a vital ingredient for fluid that is used during hydraulic fracturing. To be used as proppant, the sand has to be unique, with suitable characteristics. As such, RPC purchases and ships its sand from Wisconsin. Due to the aging rail system, RPC has to monitor the transportation process very closely, as receiving too much sand at once will cause the Company to incur immense storage costs, while shortages will put a halt to the Company’s operations. RPC purchases guar imported from India. This raw material is also a vital ingredient in many other products, like toothpaste, shampoo, and ice cream. As such, there is a very high demand for this raw material. Hence, the Company has to pay a premium to ensure a continuous supply of guar.
Regulatory Risk
RPC has to abide by strict regulations placed on its day‐to‐day operations. These regulations come mostly from governing bodies on the federal and state level and can affect RPC directly or indirectly by affecting customer demand for the Company’s services.
For instance, RPC is greatly affected by regulations placed on its main revenue generator, pressure pumping. The regulations placed on hydraulic fracturing come from both federal and state regulatory agencies. Currently, regulations focus on ensuring that water supply in areas where hydraulic fracturing activities are performed do not become contaminated. The Clean Water Act, Safe Drinking Water Act, and Resource Conservation and Recovery Act are examples of regulations that protect the water supply. RPC’s main area of operations for its pressure pumping segment is in the Permian Basin, Texas, under its subsidiary, Cudd Energy Services. In Texas, the state regulations force companies involved in hydraulic fracturing to disclose the chemicals and additives used in the fracing fluids.
Currently, many federal and state regulatory agencies, like the U.S. Environmental Protection Agency, are conducting research to judge the feasibility and necessity of adding regulations impacting hydraulic fracturing.
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Financial Risks
Liquidity Risk
Liquidity measures how easily assets can be converted into cash. The current liquidity ratio measures a company’s ability to quickly pay off current liabilities with liquid assets by dividing current assets by current liabilities. RPC’s current liquidity ratio more than two and a half times the industry average (see Table 5). A high level of liquidity puts RPC at a low financial risk because the Company three times more current assets than current liabilities.
Table 5: RPC Liquidity and Solvency
RPC, Inc. Industry Average
Current Liquidity Ratio 3.3x 1.3x
Leverage Ratio 14.3% 39.4%
Source: S&P Capital IQ September 30, 2014
Solvency Risk
RPC’s leverage is driven by the Company’s level of debt. RPC currently has a $350 million revolving credit facility with an expiration date of January 17, 2019. This means RPC can borrow up to $350 million over the life of the revolving credit facility. As of September 30, 2014 RPC had outstanding borrowings of $152 million with $78 million of the balance borrowed in the first two quarters of 2014.
The leverage ratio measures a company’s capital structure by comparing debt‐to‐equity. RPC’s current leverage ratio on September 30, 2014 is three times less than the U.S. oil and gas field services industry average. RPC achieved this low ratio because the Company maintains an extremely conservative capital structure compared to its peers. A conservative capital structure mitigates RPC’s financial risk because the Company does not use debt to finance its operations. RPC’s leverage ratio at year‐end 2013 was 5.5% and rose to 12.9% at June 30, 2014. This significant increase is attributed to the $78 million debt borrowed through the revolving credit facility in the first two quarters of 2014. RPC’s leverage ratio is still conservative compared to the industry average, but RPC will face increased financial risk from its leverage if the Company continues to borrow debt.
Interest Rate on Debt Risk
RPC’s $152 million outstanding balance on the revolving credit facility bears interest on a floating rate. If the interest rate on the outstanding balance changed one percent, interest costs would consequentially change $1.5 million. Although small compared to other risks, the interest rate risk creates financial risk for RPC.
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FINANCIAL PERFORMANCE AND PROJECTIONS
Our estimate of RPC, Inc.’s future financial performance is based on historical and projected trends within the U.S. oil and gas field services industry and, more specifically, within RPC. We used historical data from Bloomberg, S&P Capital IQ, Thomson One, Yahoo Finance, RPC SEC filings, and Baker Hughes rig count reports, as well as management guidance and analyst and economist predictions to make assumptions and projections on RPC’s future financial condition. Our valuations of RPC resulted in a rating of Market Outperform and a target price of $19.00.
Revenue Drivers
Our analyst team created a regression model to project RPC’s revenue out to the first quarter of 2016. We then used a long‐term growth rate of 3% to forecast revenues out to 2023. We tested over ten descriptive variables and found that property, plant, and equipment (PPE), drops in oil prices, increases in service intensity, and unconventional rig counts are the most significant factors affecting RPC’s revenue.
Drop in Oil Prices
Drops in oil prices significantly hurt RPC’s revenue, but this affect is not immediate. Exploration and production companies finish out contracts with oil and gas field service companies and continue drilling for oil during low prices. RPC will begin seeing large decreases in revenue when its current contracts expire in the second half of 2015. We forecast that oil prices will remain low through 2016. Consequently, RPC will operate under fewer contracts and experience decreases in revenue from low oil prices in the near future.
Increases in Service Intensity
Recent increases in service intensity have significantly increased RPC’s revenues. Improved hydraulic fracturing technology has increased the amount of oil and natural gas wells can produce. Sequentially, unconventional rigs are continuously increasing the amount of stages per well. These recent changes have significantly increased demand for oil and gas field services specializing in hydraulic fracturing, such as RPC. Service intensity per rig will continue rise, even while oil prices remain low and total oil drilling decreases. Increases in revenue from continued increases in service intensity will cushion RPC’s losses from fewer new contracts in the second half of 2015.
Unconventional Rig Counts
RPC’s revenues are highly dependent on the number of unconventional rigs. Changes in unconventional rig counts directly affect RPC’s revenue for the following quarter. Unconventional rig counts have increased 7.5% per year over the past decade and the percentage of total rigs that are unconventional have increased from 35% in 2004 to over 80% in 2014. Unconventional rigs require the specialized services and equipment that RPC provides from its pressure pumping and other product lines.
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We forecast that the percentage of unconventional rigs will continue to rise during low oil prices. However unconventional rig counts will begin decreasing when contracts expire in the second half of 2015. We project unconventional rig counts will remain constant around 1,500 rigs over the next three quarters and then will decrease to around 1,300 rigs by the first quarter of 2016. Therefore, unconventional rig counts will have no effect on RPC’s revenues for the next four quarters, then RPC’s revenues will begin to decrease starting in the fourth quarter of 2015 due to the one quarter lag.
Property, Plant, and Equipment (PP&E)
RPC’s amount of property, plant and equipment is directly correlated with the Company’s revenues. RPC allocates capital expenditures to adjust PP&E to meet its customer’s drilling demands. In 2014, RPC significantly increased PP&E to match market increases in service intensity and unconventional rig counts. We forecast RPC decreasing capital expenditures in the near future to keep PP&E constant as low oil prices will decrease the demand for RPC’s services when contracts expire in the second half of 2015. Keeping PP&E relatively constant in the near future will have no effect on RPC’s revenues.
Forecast Assumptions
Conservative Capital Structure
One of RPC’s most important strategies is maintaining its conservative capital structure. RPC’s current liquidity ratio and leverage ratio are almost three times stronger than the industry average. We forecast that RPC will increase its debt borrowings as little as possible to maintain its liquidity and solvency. Our minimal forecasted debt borrowings are used for capital expenditures towards PP&E and maintaining quarterly dividends.
Quarterly Dividends
RPC consistently pays out quarterly dividends to shareholders, with a bonus payment in every fourth quarter. Based on historical averages, we forecast that RPC will continue to pay dividends of 50% of net income per share in the first three quarters and 200% of net income per share in the fourth quarter. The only deviations in our forecasts for dividends occurred when RPC lacked sufficient cash and adding debt would jeopardize the Company’s conservative capital structure. In these instances, we forecasted that RPC would slightly decrease its quarterly dividends.
SITE VISIT
Our analyst team including Douglas Taft Hulsey, Jeremy Goh, Matthew Ryan Solnick, Yuntian Linda Long, and Nikunj Bajaj flew to Midland, Texas, on September 19, 2014 to meet with management at the new offices of the Company’s largest subsidiary, Cudd Energy Services. We were greeted by Jim Landers, Vice President of Corporate Finance at RPC, Inc., Sharon Lennon, Manager of Investor Relations and Corporate Communication at RPC, as well as Joe Lee, Regional Technical Manager of Cudd Energy Services ‐ West Texas, and Giles Kemp, Business Unit Manager at Cudd Energy Services.
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Mr. Landers started off the visit with a review of the history, operational strategies, and financial strategies of RPC. Mr. Landers stressed that the Company continues to maintain a conservative capital structure in an effort to be prepared for unexpected market developments. He also highlighted the Company’s emphasis on return on invested capital and continuous dividend payout.
After a short break, Mr. Lee spoke about Cudd Energy Services’ operations in the Permian Basin, and provided a brief description of the Permian Basin itself. He explained some technical aspects of Cudd’s operations such as hydraulic fracturing (commonly known as fracing) and the benefits of the process to the oil and gas industry. Finally, Mr. Lee ended his presentation by discussing how the industry is making an effort to conserve water by converting recycled water into frac fluid.
Mr. Lee also gave our analyst team a tour of Cudd Energy Services’ operations office. Mr. Lee and his team of geologists walked us through the steps of creating frac fluid from drinking water, actual water samples, and recycled water. This was an extensive process involving many different types of chemicals. We then explored the shop floor where we were introduced to the various types of equipment used for hydraulic fracturing.
The visit helped our team of analysts understand the concept of hydraulic fracturing, the operations of RPC and its biggest subsidiary, Cudd Energy Services. Our team of analysts has a much clearer picture of the U.S. oil and gas field services industry and we will be able to more accurately compare RPC to its peers.
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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INDEPENDENT OUTSIDE RESEARCH
The majority of our research on RPC, Inc. was done online, through databases such as Bloomberg, Baker Hughes, IBISWorld, Yahoo Finance, Thomson One, and S&P Capital IQ. We collected and analyzed key data and information to give us a comprehensive understanding of RPC’s operations and how the Company compares to its peers.
To gain outside professional insight into RPC and current market conditions our team reached out to a Burkenroad alumni currently working as an associate focused on researching U.S. oil and gas field service companies at Evercore ISI. We learned that RPC is seen as a tortoise in a fast growth industry. Analysts also view RPC as relatively undifferentiated compared to its peers. However, RPC is known for having superior financial stability in its industry, which may help the Company as many people are very uncertain on future oil prices and drilling activity. Our conversation reinstated our beliefs that RPC may not be the hottest company in the U.S. oil and gas field services industry, but it is one of the best positioned companies in times of oil price uncertainty.
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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ANOTHER WAY TO LOOK AT IT
ALTMAN Z‐SCORE
The Altman Z‐score, designed by Edward Altman, was published in 1968 and is still widely used today to estimate a company’s risk of bankruptcy. After a Z‐score is calculated, the company under analysis will fall into one of three zones: distress (Z‐score below 1.8), grey (Z‐score between 1.8 and 2.99), and safe (Z‐score above 2.99) For our purposes, we use five key financial ratios to calculate the Z‐score: (1) working capital/total assets, (2) retained earnings/total assets, (3) EBITDA/total assets, (4) market value of equity/total liabilities, and (5) net sales/total assets.
For 2013, RPC, Inc. has a Z‐score of 8.91. This places the Company deep in the “safe” zone, with little risk of bankruptcy. RPC has been in the “safe” zone since 2006 (see Table 6). This is largely due to RPC’s conservative capital structure, and reluctance to take out loans.
Table 6: RPC’s Z‐scores
Year Ended 2006 2007 2008 2009 2010 2011 2012 2013
Z‐score 14.12 6.15 5.27 7.65 10.11 7.79 7.06 8.91
Zone Safe Safe Safe Safe Safe Safe Safe Safe
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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PETER LYNCH EARNINGS MULTIPLE VALUATION
In his best‐selling book, One Up On Wall Street, Peter Lynch reveals a useful and highly effective tool for measuring the value of stocks based on the earnings per share of the company and a fixed multiple.
This method uses a theoretical price by constructing an “earnings line” by multiplying the earnings per share (EPS) by a price‐earnings multiple of 15 and then transposing the lines onto one graph known as the “Peter Lynch Chart.” If the stock price trades below the line, then the Peter Lynch graphing method supports buying the stock because it is undervalued. Conversely, if the stock trades above the line then the method recommends selling the stock because it is overvalued.
RPC, Inc. is interesting in that its price is very close to the theoretical price determined by Peter’s method. Currently, the price is trading barely above the line so Peter’s method would technically prescribe selling the stock (see Figure 10).
Figure 10: Peter Lynch Chart
Source: Bloomberg November 7, 2014
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WWBD? What Would Ben (Graham) Do?
Benjamin Graham was a professional investor, known by many as “the father of value investing” and Warren Buffet’s mentor. Graham’s method of value investing made him one of the most successful investors in the world. Many investors still incorporate his method of minimizing risks into their own investment strategy today. Graham’s method analyzes a company’s stock based on ten criteria, eight of which are used in this report.
Based on our analysis of RPC, Inc., the Company meets four out of the eight selected criteria. This puts RPC in the category where Ben Graham would “consider the possibility” of buying stock in RPC. The criteria that RPC meets are: (1) The dividend yield is more than half the yield on a 10‐year Treasury bond, (2) Total debt is less than its Book Value of equity, (3) Current Ratio (Current Assets divided by Current Liabilities) of two or more, and (4) An earnings growth of more than 7% over the past five years.
The criteria that RPC does not meet are: (1) Earnings to price yield of two times more than the yield on the 10 year Treasury bond, (2) Price/Earnings ratio less than half of the stock’s highest in five years, (3) A stock price that is less than one and a half times Book Value of equity, and (4) Stability in growth of earnings.
From the mixed results of Ben Graham’s analysis, RPC is shown to be a stock that is neither undervalued nor overvalued (see Figure 11). However, the fluctuation in earnings growth makes predicting RPC’s future performance very difficult.
Figure 11: Ben Graham Analysis
RPC Incorporated (RES) BURKENROAD REPORTS (www.burkenroad.org) November 7, 2014
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Earnings per share (ttm) 0.65$ Price: 16.15$
Earnings to Price Yield 4.01%
10 Year Treasury (2X) 4.64%
P/E ratio as of 12/31/09 (101.2)
P/E ratio as of 12/31/10 27.1
P/E ratio as of 12/31/11 13.6
P/E ratio as of 12/31/12 9.6
P/E ratio as of 12/31/13 23.2
Current P/E Ratio 24.9
Dividends per share (ttm) $0.73 Price: 16.15$
Dividend Yield 4.49%
1/2 Yield on 10 Year Treasury 1.16%
Stock Price 16.15$
Book Value per share as of 9/30/14 4.93$
150% of book Value per share as of 9/30/14 7.39$
Interest‐bearing debt as of 9/30/14 152,000$
Book value as of 9/30/14 1,060,945$
Current assets as of 9/30/14 785,056$
Current liabilities as of 9/30/14 241,476$
Current ratio as of 9/30/14 3.3
EPS for year ended 12/31/13 0.77$
EPS for year ended 12/31/12 1.27$
EPS for year ended 12/31/11 1.35$
EPS for year ended 12/31/10 0.67$
EPS for year ended 12/31/09 (0.10)$
EPS for year ended 12/31/13 0.77$ ‐39%
EPS for year ended 12/31/12 1.27$ ‐6%
EPS for year ended 12/31/11 1.35$ 102%
EPS for year ended 12/31/10 0.67$ 750%
EPS for year ended 12/31/09 (0.10)$
Stock price data as of November 7, 2014
Yes
Hurdle # 8: Stability in Growth of Earnings
No
Hurdle # 5: Total Debt less than Book Value
Yes
Hurdle # 6: Current Ratio of Two or More
Yes
Hurdle # 7: Earnings Growth of 7% or Higher over past 5 years
No
Hurdle # 3: A Dividend Yield of 1/2 the Yield on 10 Year Treasury
Yes
Hurdle # 4: A Stock Price less than 1.5 BV
No
RPC INC. (RES)
Ben Graham Analysis
Hurdle # 1: An Earnings to Price Yield of 2X the Yield on 10 Year Treasury
No
Hurdle # 2: A P/E Ratio Down to 1/2 of the Stocks Highest in 5 Yrs
RPC In
corporated (RES)
BURKEN
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RPC IN
C. (RES)
Annual
and Quarterly Income Statements
In th
ousands
For the period ended
Revenue
Cost
of services rendered and goods sold
Selling,
general
and administrative expenses
Dep
reciation and amortization
(Gain) loss
on disposition or a
ssets
Operating income
Interest
(expense) income
Other income, net
Income before
taxes
Income ta
x provision
2011 A
1,809,807
$
992,704
151,286
179,905
3,831
482,081
(3,435)
169
478,815
182,434
2012 A
1,945,023
$
1,105,886
175,749
214,899
6,099
442,390
(1,946)
2,175
442,619
168,183
2013 A
31‐M
ar A
30‐Jun A
30‐Sep A
31‐Dec E
2014 E
31‐M
ar E
30‐Jun E
30‐Sep
E31‐Dec
E2015 E
1,861,489
$
501,692
$
582,831
$
620,684
$
635,345
$
2,340,552
$
635,696
$
636,959
$
592,909
$
561,824
$
2,427,388
$
1,178,412
330,015
374,275
398,306
409,797
1,512,393
410,024
410,839
382,426
362,377
1,565,665
185,165
48,708
47,603
50,814
57,181
204,306
57,213
57,326
53,362
50,564
218,465
213,128
55,505
56,517
57,219
63,607
232,848
66,742
68,999
71,572
74,172
281,484
9,371
2,232
1,405
7,684
11,321
0
275,413
65,232
103,031
106,661
104,760
379,684
101,718
99,795
85,549
74,712
361,774
(1,403)
(333)
(43)
(452)
(650)
(1,478)
(767)
(767)
(767)
(767)
(3,068)
2,260
80
831
(454)
457
276,270
64,979
103,819
105,755
104,110
378,663
100,951
99,028
84,782
73,945
358,706
109,375
25,591
40,536
40,870
40,603
147,600
39,371
38,621
33,065
28,838
139,895
2015 E
2014 E
Net income
Earnings
per share:
296,381
$
274,436
$
166,895
$
39,388
$
63,283
$
64,885
$
63,507
$
231,063
$
61,580
$
60,407
$
51,717
$
45,106
$
218,810
$
Basic
(net
income)
1.39
$
1.28
$
0.77
$
0.18
$
0.29
$
0.30
$
0.30
$
1.07
$
0.29
$
0.28
$
0.24
$
0.21
$
1.02
$
Diluted (n
et income)
Weighted average
shares:
Basic
Diluted
1.35
$
213,153
220,250
1.27
$
210,707
216,796
0.77
$
0.18
$
0.29
$
0.30
$
0.29
$
1.06
$
0.28
$
0.28
$
0.24
$
0.21
$
1.01
$
215,504
215,175
215,224
215,202
215,139
215,139
215,015
214,895
214,777
214,661
214,661
216,733
216,214
216,238
216,334
216,201
216,201
216,077
215,957
215,839
215,723
215,723
Dividend per share
SELECTED
COMMON‐SIZE AMOUNTS
Cost
of services rendered and goods sold
Selling,
general
and administrative expenses
0.21
$
54.85%
8.36%
0.76
$
56.86%
9.04%
0.70
$
0.11
$
0.11
$
0.11
$
0.21
$
0.53
$
0.14
$
0.14
$
0.12
$
0.42
$
0.82
$
63.30%
65.78%
64.22%
64.17%
64.50%
64.62%
64.50%
64.50%
64.50%
64.50%
64.50%
9.95%
9.71%
8.17%
8.19%
9.00%
8.73%
9.00%
9.00%
9.00%
9.00%
9.00%
Dep
reciation and amortization
Operating income
Income before
taxes
Net income
YEAR
TO
YEA
R CHANGE
Revenue
Cost
of services rendered and goods sold
Selling,
general
and administrative expenses
Dep
reciation and amortization
Operating income
9.94%
26.64%
26.46%
16.38%
65.1%
63.8%
24.2%
34.9%
101.8%
11.05%
22.74%
22.76%
14.11%
7.5%
11.4%
16.2%
19.5%
‐8.2%
11.45%
11.06%
9.70%
9.22%
10.01%
9.95%
10.50%
10.83%
12.07%
13.20%
11.60%
14.80%
13.00%
17.68%
17.18%
16.49%
16.22%
16.00%
15.67%
14.43%
13.30%
14.90%
14.84%
12.95%
17.81%
17.04%
16.39%
16.18%
15.88%
15.55%
14.30%
13.16%
14.78%
8.97%
7.85%
10.86%
10.45%
10.00%
9.87%
9.69%
9.48%
8.72%
8.03%
9.01%
‐4.3%
17.8%
27.4%
26.4%
30.5%
25.7%
26.7%
9.3%
‐4.5%
‐11.6%
3.7%
6.6%
23.0%
30.1%
31.1%
28.5%
28.3%
24.2%
9.8%
‐4.0%
‐11.6%
3.5%
5.4%
8.4%
0.0%
7.9%
25.6%
10.3%
17.5%
20.4%
5.0%
‐11.6%
6.9%
‐0.8%
5.1%
7.1%
7.5%
17.1%
9.3%
20.2%
22.1%
25.1%
16.6%
20.9%
‐37.7%
14.0%
51.8%
24.3%
62.4%
37.9%
55.9%
‐3.1%
‐19.8%
‐28.7%
‐4.7%
Income before
taxes
Net income
Segm
ent Inform
ation
Revenues
Technical
services
Support
services
101.6%
102.0%
1,663,793
$
146,014
$
‐7.6%
‐7.4%
1,794,015
$
151,008
$
‐37.6%
13.1%
55.5%
21.8%
59.7%
37.1%
55.4%
‐4.6%
‐19.8%
‐29.0%
‐5.3%
‐39.2%
12.3%
56.6%
20.7%
68.7%
38.4%
56.3%
‐4.5%
‐20.3%
‐29.0%
‐5.3%
1,729,732
$
466,970
$
544,392
$
576,908
$
590,871
$
2,179,141
$
591,198
$
592,372
$
551,405
$
522,496
$
2,257,471
$
131,757
$
34,722
$
38,439
$
43,776
$
44,474
$
161,411
$
44,499
$
44,587
$
41,504
$
39,328
$
169,917
$
Year
to year changes
Technical
services
Support
services
69.80%
25.28%
7.83%
3.42%
‐3.58%
18.52%
28.39%
25.92%
30.28%
25.98%
26.60%
8.81%
‐4.42%
‐11.57%
3.59%
‐12.75%
9.15%
14.62%
32.84%
32.93%
22.51%
28.16%
15.99%
‐5.19%
‐11.57%
5.27%
Operating profits
Technical
services
Support
services
Corporate
Gains/losses
Total operating profits
451,259
51,672
(17,019)
(3,831)
482,081
$
420,231
45,912
(17,654)
(6,099)
442,390
$
276,246
64,896
99,717
102,849
118,174
385,636
118,240
118,474
110,281
104,499
451,494
26,223
7,457
8,998
14,735
11,119
42,309
11,125
11,147
10,376
9,832
42,479
(17,685)
(4,889)
(4,279)
(3,239)
(3,239)
(15,646)
(3,239)
(3,239)
(3,239)
(3,239)
(12,956)
(9,371)
(2,232)
(1,405)
(7,684)
(7,684)
(19,005)
(7,684)
(7,684)
(7,684)
(7,684)
(30,736)
275,413
$
65,232
$
103,031
$
106,661
$
118,370
$
393,294
$
118,441
$
118,698
$
109,734
$
103,408
$
450,281
$
Operating profit %
Technical
services
Support
services
27.12%
35.39%
23.42%
30.40%
15.97%
13.90%
18.32%
17.83%
20.00%
17.70%
20.00%
20.00%
20.00%
20.00%
20.00%
19.90%
21.48%
23.41%
33.66%
25.00%
26.21%
25.00%
25.00%
25.00%
25.00%
25.00%
RPC In
corporated (RES)
BURKEN
ROAD REP
ORTS (www.burken
road
.org)
November 7, 2014
33
RPC IN
C. (RES)
Annual
and Quarterly Balance
Sheets
In th
ousands
As of
Assets
Cash and cash equivalents
31‐Dec‐11 A
7,393
$
31‐Dec‐12 A
14,163
$
31‐Dec‐13 A
31‐M
ar A
30‐Jun A
30‐Sep A
31‐Dec
E31‐Dec‐14 E
31‐M
ar E
30‐Jun E
30‐Sep E
31‐Dec E
31‐Dec‐15 E
8,700
$
44,293
$
22,164
$
8,522
$
5,067
$
5,067
$
6,267
$
11,081
$
66,449
$
24,702
$
24,702
$
2014 E
2015 E
Accounts
receivable, n
et
Inventories
Deferred income ta
xes
Federal income ta
xes receivab
le
Prepaid expenses an
d other current a
ssets
Total current a
ssets
Equipment a
nd property, n
et
461,272
100,438
7,183
10,805
39,464
626,555
675,360
387,530
140,867
5,777
4,234
15,256
567,827
756,326
437,132
467,978
565,940
591,585
607,721
607,721
621,570
615,960
567,130
537,397
537,397
126,604
135,727
138,836
153,948
146,993
146,993
150,342
148,985
137,175
129,983
129,983
14,185
12,502
11,624
10,851
8,151
8,151
7,900
8,031
7,990
8,025
8,025
5,720
2,099
16,874
11,081
11,081
11,081
11,081
11,081
11,081
11,081
11,081
12,584
10,229
12,789
9,069
12,584
12,584
10,229
12,789
9,069
12,584
12,584
604,925
672,828
768,227
785,056
791,597
791,597
807,389
807,928
798,893
723,772
723,772
726,307
707,774
708,598
775,714
849,634
849,634
853,090
865,501
884,653
893,842
893,842
Intangibles,
net
Other a
ssets
24,093
12,203
24,093
18,917
31,861
32,150
32,150
32,150
32,150
32,150
32,150
32,150
32,150
32,150
32,150
20,767
21,543
21,886
23,113
23,113
23,113
23,113
23,113
23,113
23,113
23,113
Total assets
Curren
t liabilities:
Accounts
payab
le
Accrued payroll an
d re
lated expen
ses
Accrued insurance
expenses
Federal income ta
xes payab
le
Accrued state, local and other taxes
1,338,211
$
122,987
$
33,680
5,744
5,066
10,705
1,367,163
$
109,846
$
32,053
6,152
6,428
7,326
1,383,860
$
1,434,295
$
1,530,861
$
1,616,033
$
1,696,494
$
1,696,494
$
1,715,741
$
1,728,691
$
1,738,809
$
1,672,877
$
1,672,877
$
119,170
$
141,398
$
150,894
$
182,123
$
162,450
$
162,450
$
166,193
$
164,693
$
151,655
$
143,718
$
143,718
$
36,638
30,439
37,686
41,446
44,196
44,196
45,214
44,806
41,259
39,100
39,100
6,072
6,374
6,624
5,526
8,361
8,361
8,554
8,477
7,806
7,397
7,397
6,593
535
558
558
558
558
558
558
558
558
5,002
6,505
8,411
10,609
10,609
10,609
10,609
10,609
10,609
10,609
10,609
Other a
ccrued
expenses
Total current liabilities
1,284
179,466
2,706
164,511
1,170
1,230
1,310
1,214
1,911
1,911
1,955
1,938
1,784
1,691
1,691
168,052
192,539
205,460
241,476
228,086
228,086
233,084
231,081
213,672
203,073
203,073
Long‐term
accrued insurance
expenses
9,000
10,400
10,225
11,183
11,412
10,082
13,617
13,617
13,492
13,367
13,242
13,118
13,118
Long‐term
pen
sion liability
Deferred income ta
xes
Notes payable
to ban
ks
Other long‐term
liabilities
Total liabilities
Common stock
Capital
in excess
of p
ar value
Earnings
retained
24,445
155,928
203,300
3,480
575,619
14,746
760,492
26,543
155,007
107,000
4,470
467,931
22,014
891,464
21,966
22,229
22,867
22,786
22,786
22,786
22,786
22,786
22,786
22,786
22,786
153,176
141,330
127,459
114,459
102,729
102,729
103,319
105,200
108,998
110,902
110,902
53,300
80,800
131,400
152,000
237,000
237,000
222,000
207,000
207,000
197,000
197,000
8,439
7,902
10,618
14,285
14,285
14,285
14,285
14,285
14,285
14,285
14,285
415,158
455,983
509,216
555,088
618,503
618,503
608,966
593,719
579,983
561,164
561,164
21,899
21,884
21,883
21,860
21,860
21,860
21,860
21,860
21,860
21,860
21,860
2,398
2,398
4,796
7,194
9,592
11,990
11,990
956,918
966,966
1,009,711
1,049,636
1,064,284
1,064,284
1,090,670
1,116,470
1,137,924
1,088,414
1,088,414
Accumulated other comprehensive
income (loss)
Total liabilities and equity
(12,646)
1,338,211
$
(14,246)
1,367,163
$
(10,115)
(10,538)
(9,949)
(10,551)
(10,551)
(10,551)
(10,551)
(10,551)
(10,551)
(10,551)
(10,551)
1,383,860
$
1,434,295
$
1,530,861
$
1,616,033
$
1,696,494
$
1,696,494
$
1,715,741
$
1,728,691
$
1,738,809
$
1,672,877
$
1,672,877
$
SELECTED
COMMON‐SIZE AMOUNTS
(% of revenues)
Accounts
receivable, n
et
Inventories
Prepaid expenses an
d other current a
ssets
Equipment a
nd property, n
et
Accounts
payab
le
Accrued payroll an
d re
lated expen
ses
Accrued insurance
expenses
Accrued state, local and other taxes
25.49%
5.55%
2.18%
37.32%
6.80%
1.86%
0.32%
0.59%
19.92%
7.24%
0.78%
38.89%
5.65%
1.65%
0.32%
0.38%
23.48%
93.28%
97.10%
95.31%
95.65%
25.96%
97.78%
96.70%
95.65%
95.65%
22.14%
6.80%
27.05%
23.82%
24.80%
23.14%
6.28%
23.65%
23.39%
23.14%
23.14%
5.35%
0.68%
2.04%
2.19%
1.46%
1.98%
0.54%
1.61%
2.01%
1.53%
2.24%
0.52%
39.02%
141.08%
121.58%
124.98%
133.73%
36.30%
134.20%
135.88%
149.21%
159.10%
36.82%
6.40%
28.18%
25.89%
29.34%
25.57%
6.94%
26.14%
25.86%
25.58%
25.58%
5.92%
1.97%
6.07%
6.47%
6.68%
6.96%
1.89%
7.11%
7.03%
6.96%
6.96%
1.61%
0.33%
1.27%
1.14%
0.89%
1.32%
0.36%
1.35%
1.33%
1.32%
1.32%
0.30%
0.27%
1.30%
1.44%
1.71%
1.67%
0.45%
1.67%
1.67%
1.79%
1.89%
0.44%
Other a
ccrued
expenses
Long‐term
accrued insurance
expenses
SELECTED
COMMON‐SIZE AMOUNTS
(% of total assets)
Total current a
ssets
Equipment a
nd property, n
et
0.07%
0.50%
46.82%
50.47%
0.14%
0.53%
41.53%
55.32%
0.06%
0.25%
0.22%
0.20%
0.30%
0.08%
0.31%
0.30%
0.30%
0.30%
0.07%
0.55%
2.23%
1.96%
1.62%
2.14%
0.58%
2.12%
2.10%
2.23%
2.33%
0.54%
43.71%
46.91%
50.18%
48.58%
46.66%
46.66%
47.06%
46.74%
45.94%
43.27%
43.27%
52.48%
49.35%
46.29%
48.00%
50.08%
50.08%
49.72%
50.07%
50.88%
53.43%
53.43%
Intangibles,
net
Other a
ssets
1.80%
0.91%
1.76%
1.38%
2.30%
2.24%
2.10%
1.99%
1.90%
1.90%
1.87%
1.86%
1.85%
1.92%
1.92%
1.50%
1.50%
1.43%
1.43%
1.36%
1.36%
1.35%
1.34%
1.33%
1.38%
1.38%
Total current liabilities
13.41%
12.03%
12.14%
13.42%
13.42%
14.94%
13.44%
13.44%
13.59%
13.37%
12.29%
12.14%
12.14%
Long‐term
accrued insurance
expenses
0.67%
0.76%
0.74%
0.78%
0.75%
0.62%
0.80%
0.80%
0.79%
0.77%
0.76%
0.78%
0.78%
Deferred income ta
xes
Total liabilities
Common stock
Capital
in excess
of p
ar value
Earnings
retained
11.65%
43.01%
1.10%
0.00%
56.83%
11.34%
34.23%
1.61%
0.00%
65.21%
11.07%
9.85%
8.33%
7.08%
6.06%
6.06%
6.02%
6.09%
6.27%
6.63%
6.63%
30.00%
31.79%
33.26%
34.35%
36.46%
36.46%
35.49%
34.34%
33.36%
33.54%
33.54%
1.58%
1.53%
1.43%
1.35%
1.29%
1.29%
1.27%
1.26%
1.26%
1.31%
1.31%
0.00%
0.00%
0.00%
0.00%
0.14%
0.14%
0.28%
0.42%
0.55%
0.72%
0.72%
69.15%
67.42%
65.96%
64.95%
62.73%
62.73%
63.57%
64.58%
65.44%
65.06%
65.06%
RPC In
corporated (RES)
BURKEN
ROAD REP
ORTS (www.burken
road
.org)
November 7, 2014
34
RPC IN
C. (RES)
Annual
and Quarterly Statem
ents
of C
ash Flows
In th
ousands
For the period ended
Cash flow
from
operations:
Net income
Noncash
charges (credits)
to earnings:
Dep
reciation and amortization and other
non‐cash charges
Stock‐based compen
sation
(Gain) loss
on sale of e
quipmen
t and property
2011 A
296,381
$
179,787
8,075
3,831
2012 A
274,436
$
214,153
7,860
6,099
2013 A
31‐M
ar A
30‐Jun A
30‐Sep
A31‐Dec
E2014 E
31‐Mar
E30‐Jun E
30‐Sep E
31‐Dec E
2015 E
166,895
$
39,388
$
63,283
$
64
,885
$
63,50
7$
231
,063
$
61,580
$
60,407
$
51,717
$
45,106
$
218,810
$
215,812
56,280
57,02
8
58,074
63,607
234,989
66,742
68,999
71,572
74,172
281,484
8,177
2,320
2,397
2,398
2,398
9,513
2,398
2,398
2,398
2,398
9,592
9,371
2,232
1,405
7,684
11,321
2014 E
201
5 E
Deferred
income tax provision (b
enefit)
Excess
tax benefits
from
share‐based paymen
ts
77,074
(3,371)
4,821
(2,724)
(13,060)
(10,19
2)
(13,063)
(12,253)
(9,030)
(44,538)
842
1,749
3,840
1,869
8,300
(3,178
)
(4,455)
39
38
(4,378)
(Increase) d
ecrease in
assets:
Accounts
receivable
Inventories
Federal income ta
xes receivable
Prepaid expen
ses and other
current a
ssets
Other curren
t assets
Increase (decrease) in liabilities:
Accounts
payable
Federal income ta
xes payable
Accrued
payroll and re
lated expen
ses
Pen
sion liabilities
Accrued
insurance
expen
ses
Accrued
state, local and other e
xpen
ses
Other a
ccrued
expen
ses
Other n
oncurrent liabilities
Other n
on‐curren
t assets
(167,312)
9,817
(36,511)
(2,783)
(30,524)
30,102
4,917
9,799
1,249
1,114
2,078
958
1,032
294
73,809
(40,354)
9,295
(2,284)
26,189
(4,929)
(4,277)
(1,627)
(589)
1,808
2,260
1,412
990
(6,415)
(49,959)
(31,04
3)
(97,819)
(25,825)
(16,136)
(170,823)
(13,849)
5,610
48,830
29,733
70,324
14,078
(9,421)
(2,840)
(15,485)
6,955
(20,791)
(3,350)
1,357
11,811
7,192
17
,010
1,692
8,076
(14,814)
5,755
(983)
1,519
506
2,543
445
(3,515)
(21)
2,355
(2,560)
3,720
(3,515)
1,114
1,692
(5,034)
3,162
(180)
14,062
19,508
13,72
3
19,939
(19,673)
33,497
3,743
(1,500)
(13,038)
(7,937)
(18,73
2)
(6,428
)
6,593
(6,058)
23
558
4,585
(6,181)
7,229
3,793
2,750
7,591
1,018
(408)
(3,547)
(2,159)
(5,096)
3,183
396
771
51
1,218
(80)
302
250
(1,098)
6,371
5,825
68
(202)
(796)
(533)
(1,464)
(2,324
)
1,503
1,906
2,198
5,607
(1,548
)
60
79
(101)
697
735
44
(18)
(153)
(93)
(220)
3,594
421
2,945
2,337
5,703
(1,881
)
(117)
(350)
(1,234)
(1,701)
Net cash provided
by continuing operations
Cash flows from
investing activities:
Cap
ital
expenditures
386,007
(416,400)
559,933
(328,936)
365,624
77,868
13,62
0
114,786
97,930
304,204
121,591
135,832
176,354
146,231
580,008
(201,681)
(40,29
5)
(72,509)
(124,669)
(137,527)
(375,000)
(70,197)
(81,410)
(90,724)
(83,361)
(325
,692)
Proceeds from
sale of e
quipmen
t and property
24,763
19,309
11,071
2,862
9,096
3,022
14,980
Net cash used in
investing activities
Cash flows from
finan
cing activities:
Payment o
f dividends
Deb
t issue costs
Tax effect
(391,637)
(47,327)
(415)
3,371
(315,838)
(114,069)
2,724
(207,654)
(37,43
3)
(63,413)
(121,647)
(137,527)
(360,020)
(70,197)
(81,410)
(90,724)
(83,361)
(325
,692)
(87,789)
(22,98
6)
(22,897)
(22,939)
(44,455)
(113,277)
(30,790)
(30,204)
(25,858)
(90,212)
(177
,065)
(667)
(667)
‐
3,178
4,455
(39)
(38)
4,378
‐
(Rep
ayments) b
orrowings
of d
ebt
Cash paid fo
r common stock
purchased
and re
tired
Proceeds received upon exercise of stock
options
Net cash provided
by (used in) financing activities
Net increase
(decrease)
in cash
Cash, at b
eginning of p
eriod
Cash, at e
nd of p
eriod
82,050
(34,419)
728
3,988
(1,642)
9,035
7,393
(96,300)
(30,224)
544
(237,325)
6,770
7,393
14,163
(53,700)
27,500
50,60
0
20,600
85,000
183,700
(15,000)
(15,000)
(10,000)
(40,00
0)
(25,122)
(13,14
4)
(4,404)
(4,404)
(21,952)
(4,404)
(4,404)
(4,404)
(4,404)
(17,61
6)
(163,433)
(4,842)
27,66
4
(6,781)
36,141
52,182
(50,194)
(49,608)
(30,262)
(104,616)
(234
,681)
(5,463
)
35
,593
(22,129)
(13,642)
(3,455)
(3,633)
1,200
4,814
55,368
(41,746)
19,635
14,163
8,700
44,29
3
22,164
8,522
8,700
5,067
6,267
11,081
66,449
5,067
8,700
44
,293
22,16
4
8,522
5,067
5,067
6,267
11,081
66,449
24,702
24,702
Supplemental cash flow
disclosures:
Operating cash
flow
per share
excluding working capital
chan
ges
Operating cash
flow
per share
2.57
$
1.75
$
2.34
$
2.58
$
1.79
$
0.42
$
0.51
$
0.56
$
0.56
$
2.05
$
0.61
$
0.62
$
0.60
$
0.57
$
2.40
$
1.69
$
0.36
$
0.06
$
0.53
$
0.45
$
1.41
$
0.56
$
0.63
$
0.82
$
0.68
$
2.69
$
RPC In
corporated (RES)
BURKEN
ROAD REP
ORTS (www.burken
road
.org)
November 7, 2014
35
RPC IN
C. (RES)
Ratios
Productivity Ratios
Receivables turnover
2011 A
4.60
2012 A
4.58
2013 A
31‐M
ar A
30‐Jun A
30‐Sep A
31‐Dec E
2014 E
31‐M
ar E
30‐Jun E
30‐Sep E
31‐Dec E
2015 E
4.51
1.11
1.13
1.07
1.06
4.48
1.03
1.03
1.00
1.02
4.24
2015 E
2014 E
Inventory
turnover
12.21
9.17
8.81
2.52
2.73
2.72
2.72
11.06
2.76
2.75
2.67
2.71
11.31
Working capital
turnover
5.26
4.57
4.43
1.09
1.12
1.12
1.15
4.68
1.12
1.11
1.02
1.02
4.48
Net
fixed asset
turnover
3.22
2.72
2.51
0.70
0.82
0.84
0.78
2.97
0.75
0.74
0.68
0.63
2.78
Gross
fixed asset
turnover
1.41
1.25
1.07
0.28
0.31
0.32
0.31
1.19
0.29
0.28
0.26
0.23
1.06
Total asset turnover
1.63
1.44
1.35
0.36
0.39
0.39
0.38
1.52
0.37
0.37
0.34
0.33
1.44
# of d
ays
Sales in
A/R
93
73
86
84
88
88
88
95
88
88
88
88
81
# of d
ays
Cost
of Sales
in Inventory
37
46
39
37
34
36
33
35
33
33
33
33
30
# of d
ays
Cash‐based expenses in
A/P
and accrued expenses
58
48
48
47
47
51
47
51
47
47
48
48
44
Liquidity measures
Current ratio
3.49
3.45
3.60
3.49
3.74
3.25
3.47
3.47
3.46
3.50
3.74
3.56
3.56
Quick ratio
2.61
2.44
2.65
2.66
2.86
2.49
2.69
2.69
2.69
2.71
2.97
2.77
2.77
Cash ra
tio
2.61
2.44
2.65
2.66
2.86
2.49
2.69
2.69
2.69
2.71
2.97
2.77
2.77
Working capital
447,089
403,316
436,873
480,289
562,767
543,580
563,511
563,511
574,305
576,847
585,221
520,698
520,698
Financial
Risk (Leverage) R
atios
Total debt/equity ratio
0.75
0.52
0.43
0.47
0.50
0.52
0.57
0.57
0.55
0.52
0.50
0.50
0.50
Debt/eq
uity ratio (e
xcluding deferred ta
xes)
0.55
0.35
0.27
0.32
0.37
0.42
0.48
0.48
0.46
0.43
0.41
0.41
0.41
Total LT debt/equity ratio
0.52
0.34
0.26
0.27
0.30
0.30
0.36
0.36
0.34
0.32
0.32
0.32
0.32
LT debt/equity (excluding deferred ta
xes)
0.32
0.17
0.10
0.12
0.17
0.19
0.27
0.27
0.25
0.23
0.22
0.22
0.22
Total debt ratio
0.43
0.34
0.30
0.32
0.33
0.34
0.36
0.36
0.35
0.34
0.33
0.34
0.34
Debt ratio
(excuding deferred ta
xes)
0.35
0.26
0.21
0.24
0.27
0.29
0.32
0.32
0.31
0.30
0.29
0.29
0.29
Profitability/Valuation M
easures
Gross
profit m
argin
45.15%
43.14%
36.70%
34.22%
35.78%
35.83%
35.50%
35.38%
35.50%
35.50%
35.50%
35.50%
35.50%
Operating profit m
argin
26.64%
22.74%
14.80%
13.00%
17.68%
17.18%
16.49%
16.22%
16.00%
15.67%
14.43%
13.30%
14.90%
Return
on assets
26.71%
20.29%
12.13%
2.80%
4.27%
4.12%
3.83%
15.00%
3.61%
3.51%
2.98%
2.64%
12.99%
Return
on equity
45.64%
33.03%
17.87%
4.05%
6.33%
6.23%
5.94%
22.58%
5.64%
5.39%
4.51%
3.97%
19.99%
Earnings
before
interest
and ta
xes margin
26.64%
22.74%
14.80%
13.00%
17.68%
17.18%
16.49%
16.22%
16.00%
15.67%
14.43%
13.30%
14.90%
EBITDA
margin
36.57%
33.76%
26.39%
24.22%
27.46%
26.54%
26.50%
26.26%
26.50%
26.50%
26.50%
26.50%
26.50%
EBITDA/Assets
59.64%
48.54%
35.71%
8.62%
10.80%
10.47%
10.17%
39.91%
9.87%
9.80%
9.06%
8.73%
38.18%
BURKENROADREPORTSRATINGSYSTEMMARKETOUTPERFORM:Thisratingindicatesthatwebelieveforcesareinplacethatwouldenablethiscompany'sstocktoproducereturnsinexcessofthestockmarketaveragesoverthenext12months.MARKETPERFORM:Thisratingindicatesthatwebelievetheinvestmentreturnsfromthiscompany'sstockwillbeinlinewiththoseproducedbythestockmarketaveragesoverthenext12months.MARKETUNDERPERFORM:Thisratingindicatesthatwhilethisinvestmentmayhavepositiveattributes,webelieveaninvestmentinthiscompanywillproducesubparreturnsoverthenext12months.BURKENROADREPORTSCALCULATIONS
CPFSiscalculatedusingoperatingcashflowsexcludingworkingcapitalchanges. AllamountsareasofthedateofthereportasreportedbyBloombergorYahooFinanceunless
otherwisenoted.BetasarecollectedfromBloomberg. Enterprisevalueisbasedontheequitymarketcapasofthereportdate,adjustedforlong‐
termdebt,cash,&short‐terminvestmentsreportedonthemostrecentquarterlyreportdate. 12‐monthStockPerformanceiscalculatedusinganendingpriceasofthereportdate.
Thestockperformanceincludesthe12‐monthdividendyield.
2014‐2015COVERAGEUNIVERSEAmerisafeInc.(AMSF)BristowGroupInc.(BRS)TheFirstBancshares(FBMS)CalIonPetroleumCompany(CPE)Cal‐MaineFoodsInc.(CALM)CarboCeramicsInc.(CRR)CashAmericaInternationalInc.(CSH)Conn'sInc.(CONN)CrownCraftsInc.(CRWS)CyberonicsIncorporated(CYBX)DenburyResourcesInc.(DNR)EastGroupPropertiesInc.(EGP)EraGroupInc.(ERA)EvolutionPetroleumCorp.(EPM)Globalstar(GSAT)GulfIslandFabricationInc.(GIFI)HibbettSports(HIBB)HornbeckOffshoreServicesInc.(HOS)IBERIABANKCorp.(IBKC)IONGeophysicalCorp.(IO)
KeyEnergyServices(KEG)MarineProductsCorp.(MPX)MidSouthBancorpInc.(MSL)NewparkResourcesInc.(NR)PetroQuestEnergyInc.(PQ)PopeyesLouisianaKitchen(PLKI)PoolCorporation(POOL)PowellIndustriesInc.(POWL)RollinsIncorporated(ROL)RPCIncorporated(RES)Ruth’sHospitalityGroupInc.(RUTH)SandersonFarmsInc.(SAFM)SEACORHoldingsInc.(CKH)SharpsComplianceInc.(SMED)StoneEnergyCorp.(SGY)SunocoLP(SUN)SuperiorEnergyServicesInc.(SPN)TeamIncorporated(TISI)VaalcoEnergyInc.(EGY)WillbrosGroupInc.(WG)
PETERRICCHIUTIDirectorofResearchFounderofBurkenroadReportsPeter.Ricchiuti@tulane.eduANTHONYWOODSeniorDirectorofAccountingAwood11@tulane.edu
JERRYDICOLODAVIDDOWTYELLIOTTEDWARDSAssociateDirectorsofResearch
BURKENROADREPORTSTulaneUniversityNewOrleans,LA70118‐5669(504)862‐8489(504)865‐5430Fax
To receive complete reports on any of the companies we follow, contact:Peter Ricchiuti, Founder & Director of Research
Tulane UniversityFreeman School of BusinessBURKENROAD REPORTS
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E-mail: [email protected] visit our web site at www.BURKENROAD.org
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Named in honor of William B. Burkenroad Jr., an alumnus and a longtime supporter of Tulane’s business school, and funded through contributions from his family and friends, BURKENROAD REPORTS is a nationally recognized program, publishing objective, investment research reports on public companies in our region. Students at Tulane University’s Freeman School of Business prepare these reports.Alumni of the BURKENROAD REPORTS program are employed at a number of highly respected financial institutions including:ABN AMRO Bank · Aegis Value Fund · Invesco/AIM Capital Management · Alpha Omega Capital Partners · American General Investment Management · Ameriprise Financial · Atlas Capital · Banc of America Securities · Bank of Montreal · Bancomer · Barclays Capital · Barings PLC · Bearing Point · Bessemer Trust · Black Gold Capital· Bloomberg · Brookfield Asset Management · Brown Brothers Harriman Capital · Blackrock Financial Management · Boston Consulting Group · Buckingham Research · California Board of Regents · Cambridge Associates· Canaccord Genuity · Cantor Fitzgerald · Chaffe & Associates · Citadel Investment Group · Citibank · Citigroup Private Bank · City National Bank · Cornerstone Resources · Credit Suisse · D. A. Davidson & Co. · Deutsche Banc · Duquesne Capital Management · Equitas Capital Advisors· Factset Research · Financial Models · First Albany · Fiduciary Trust · Fitch Investors Services · Forex Trading · Franklin Templeton · Friedman Billings Ramsay · Fulcrum Global Partners · Gintel Asset Management · Global Hunter Securities · Goldman Sachs · Grosever Funds · Gruntal & Co. · Guggenheim Securities , LLC · Hancock Investment Services · Healthcare Markets Group · Capital One Southcoast · Howard Weil Labouisse Friedrichs · IBERIABANK Capital Markets · J.P. Morgan Securities · Janney Montgomery Scott · Jefferies & Co. · Johnson Rice & Co. · KBC Financial · KDI Capital Partners · Key Investments · Keystone Investments · Legacy Capital · Liberty Mutual · Lowenhaupt Global Advisors · Mackay Shields · Manulife/John Hancock Investments · Marsh & McLennan · Mercer Partners · Merrill Lynch · Miramar Asset Management · Moodys Investor Services · Morgan Keegan · Morgan Stanley · New York Stock Exchange · Perkins Wolf McDonnell · Piper Jaffray & Co. · Professional Advisory Services · Quarterdeck Investment Services · RBC · Raymond James · Restoration Capital · Rice Voelker, LLC · Royal Bank of Scotland· Sandler O'Neill & Partners · Sanford Bernstein & Co. · Scotia Capital · Scottrade · Second City Trading LLC · Sequent Energy · Sidoti & Co · Simmons & Co. · Southwest Securities · Stephens & Co. · Sterne Agee · Stewart Capital LLC · Stifel Nicolaus · Sun-Trust Capital Markets · Susquehanna Investment Group · Thomas Weisel Partners · TD Waterhouse Securities · Texas Employee Retirement System · Texas Teachers Retirement System · ThirtyNorth Investments · Thornburg Investment Management · Tivoli Partners · Tudor Pickering & Co. · Tulane University Endowment Fund · Turner Investment Partners · UBS · Value Line Investments · Vaughan Nelson Investment Management · Wells Fargo Capital Management · Whitney National Bank · William Blair & Co. · Zephyr Management