RPC: Improved Frac Fleet Utilization, But Overvalued (NYSE: RES)

Stock Market


Fountain fittings of a gas well with high-pressure gate valve handwheels.  Oil and Gas drilling rig is in the background.  Top drive system of drilling rig.

Alexey Zakirov / iStock via Getty Images

RES Is On A Recovery Track

RPC, Inc. (RES) continued with converting the traditional pressure pumping fleets with lower carbon-emitting Tier 4 dual fuel pumps at the end of 2021. In 2022, the demand for its ESG-compliant drilling solution will go up in the market. It has also started reactivating idle pressure pumping equipment as customer demand and market pricing recover. Also, the current utilization level and the net pricing traction will continue to improve. So, I expect the company’s revenues to increase this year.

I do not see any financial risks in the short term with sufficient liquidity. However, supply chain constraints and labor scarcity will offset some of the gains on the margin. Plus, the frac pricing is still low compared to the pre-pandemic level. The stock is overvalued versus its peers. So, returns can be underwhelming in the short term. However, investors might hold and expect higher returns in the medium term.

The Strategy And Outlook

During Q4, RES operated eight horizontal pressure pumping fleets, adding three in 2021. Some of its pumps are Tier 4 dual-fuel fleet optimized for fuel burn, minimum emissions, and low maintenance costs. By 2021, it started reactivating idle pressure pumping equipment as market pricing and customer demand improved. The company does not have any new equipment on order, and its fleet size will likely remain unchanged for 1H 2022.

At the end of 2021, RES was impacted relatively less by the supply chain-related cost rise than other oilfield services companies. In Q1 2022, it expects 25% -30% incremental revenue growth. However, the supply and wage-related cost impact would be higher in Q1. As the COVID effect wanes, revenue growth would pick up in Q2 to Q4 of 2022.

Pricing And Utilization Improving

Revenues and margin

Seeking Alpha

As the industry improves, RES’s outlook on its sales has improved substantially. Many of its service lines saw improved pricing, which should add to its operating margin expansion in 2022. The pricing environment has improved, leading to a price hike that exceeds the cost increase following the disruption of supply chains. Along with pricing, utilization is also improving. In 2022, management expects the current utilization level and the net pricing traction will continue. Much of the positive momentum was gathering by the end of 2021. This was remarkable given the continued pressure from supply chain and personnel issues following COVID. Read more about RES in my previous article here.

Analyzing Industry Indicators

Growth in indicators

EIA

In the past year until January 2021, the completed wells count growth (23% up) underperformed the drilled well count (69% up). But, the drilled but uncompleted wells declined (40% down). Permian topped (14% up) among the shales that saw higher crude oil production in the past year. Crude oil production decreased by 13% in Appalachia and 5% in Anadarko in the past year.

The average crude oil production in these shales went down by 1% in the past year, despite the crude oil price’s upward run. Since the beginning of Q1 (ie, January), the US rig count kept the momentum up (11% up). The US frac spread count exceeded rig count growth, advancing by 24%, estimates by Primary Vision. So, the short-term indicators are encouraging.

What Were The Q4 Drivers?

Revenue segment

RES’s filings

In Q4 2021, Technical Services revenues increased by 20% compared to Q3 2021. RES’s legacy equipment utilization and pricing improved during the quarter following the rise in energy operators’ activity level, leading to sequential revenue growth. The segment’s operating margin also improved robustly (148% up) in Q4.

However, the Support Services segment saw a more modest revenue growth (3% up) in Q4 Q3, while the operating loss lessened. Earlier, the company had upgraded its fleet to a Tier IV dual-fuel capable fleet by the end of Q3, which contributed to the improved performance. Overall, the company’s cost of revenues (as a percentage of revenues) decreased, albeit marginally, in Q4 as the revenue growth exceeded employment costs.

Capex Growth And Cash Flows

As of December 31, 2021, the company had no debt and positive cash & cash equivalents balance ($ 83 million). Despite much higher revenues in FY2021 than a year ago, cash flow from operations dipped (39% down) due to significantly higher accounts receivable.

The FY2022 capex forecast is $ 125 million, nearly doubled compared to FY2021. Capitalized maintenance for existing equipment and growth capex will account for the FY2022 capex budget. A rise in capex can reduce free cash flow. The company also has a $ 166 million revolving credit facility as of December 31, 2021.

Linear Regression Based Forecast

Revenue forecasr

Author created, Seeking Alpha, and EIA

Based on a regression equation on the key energy indicators and RES’s reported revenues for the past seven years and the previous four quarters, revenues may increase sharply in the next twelve months (or NTM). In NTM 2023, however, it may decrease but may stabilize in NTM 2024.

EBITDA forecast

Author created and Seeking Alpha

Based on the regression model and the forecast revenues, the company’s EBITDA can improve in NTM 2022. The recovery can decelerate in NTM 2023, per the model.

Target Price And Relative Valuation

Target price

Author created and Seeking Alpha

Calculating the EV using RES’s forward EV / EBITDA multiple shows that the returns potential using the forward multiple (9.8x) is lower (52% downside) compared to the returns potential using the past average multiple (26% upside) and sell-side analysts ‘estimates (24% downside) in the next year.

RES’s forward EV-to-EBITDA multiple contraction versus the current EV / EBITDA suggests a similar EV / EBITDA multiple compared to the peers. However, the company’s EV / EBITDA multiple (23.7x) is higher than its peers’ (PUMP, NR, and LBRT) average of 17x. Evidently, the stock is relatively overvalued versus its peers. Although none of the sell-side analysts recommended a “Buy” in February, six recommended a “Hold.” Only one recommended a “Sell.”

What’s The Take On RES?

Total returns

Seeking Alpha

Since the end of 2021, a steeply higher energy price has been encouraging higher drilling and fracking activity. Although the company is unlikely to increase frac fleet capacity in the near term, a higher frac fleet utilization can increase the company’s topline. Also, the company’s pricing will improve in 2022, which will exceed the cost hike, leading to a higher operating margin in the medium term.

However, the margin in the short term will remain under pressure due to cost rise from supply chain constraints and labor scarcity. RES’s cash flows dropped significantly over the past year. This, along with a steep capex budget increase, can lower free cash flow in 2022. So, the stock underperformed the VanEck Vectors Oil Services ETF (OIH) in the past year. The company has zero debt and a healthy liquidity base. Investors should expect benign returns, but they may remain optimistic about a medium-term recovery given the recovery process.



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