Good morning, and thank you for joining us for the RPC, Inc.'s Q3 2021 financial earnings conference call. Today's call will be hosted by Rick Hubbell, President and CEO, and Ben Palmer, Chief Financial Officer. Also present is Jim Landers, Vice President of Corporate Services. At this time, all participants are in listen-only mode.
Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to advise everyone that this conference call is being recorded. Jim will get us started by reading the forward-looking disclaimer.
Thank you, and good morning. Before we begin our call today, I want to remind you that in order to talk about our company, we're going to mention a few things that are not historical facts. Some of the statements that we've made on this call could be forward-looking in nature and reflect a number of known and unknown risks.
I'd like to refer you to our press release issued today, along with our 2020 10-K and other public filings that outline those risks, all of which can be found on RPC's website at rpc.net. In today's earnings release and conference call, we refer to several non-GAAP measures of operating performance. These non-GAAP measures are adjusted net loss, adjusted loss per share, EBITDA and Adjusted EBITDA. We're using these non-GAAP measures today because they allow us to compare performance consistently over various periods without regard to non-recurring items.
In addition, RPC is required to use EBITDA to report compliance with financial covenants under our credit facility. Our press release and our website contain reconciliations of these non-GAAP financial measures to net loss per share, and net income, which are the nearest GAAP financial measures. Please review these disclosures if you are interested in seeing how they are calculated. If you've not received our press release for any reason, please visit our website again at rpc.net for a copy. I will now turn the call over to our President and CEO, Rick Hubbell.
Thanks, Jim. This morning, we issued our earnings press release for RPC's Q3 of 2021. During the Q3 of 2021, oilfield drilling and completion increased as exploration and production companies responded to higher commodity prices. RPC was ready to meet increased demand with equipment and crews. Our revenues increased, and RPC generated quarterly net income for the first time in more than two years.
As the quarter progressed, commodity prices continued to increase, and near-term industry forecasts predicted supply-demand dynamics favorable to our industry. We begin the Q4 of 2021 with a new state-of-the-art pressure pumping fleet and net pricing traction in most of our service lines. Offset to these favorable dynamics include supply chain constraints and increasing cost pressures, which we will continue to manage as we move forward in this industry upcycle. Our CFO, Ben Palmer, will discuss this and other financial results in more detail, after which I will provide some closing comments.
Thank you, Rick. For the Q3 of 2021, revenues increased to $225.3 million, compared to $116.6 million in the Q3 of the prior year. Revenues increased due primarily to higher activity levels and improved pricing compared to the Q3 of the prior year. Operating profit for the Q3 was $8 million, compared to an operating loss of $31.8 million in the same quarter of the prior year. EBITDA for the Q3 was $26.5 million, compared to EBITDA of -$12.3 million in the same quarter of the prior year.
Our diluted earnings per share for the Q3 were $0.02, compared to an $0.08 loss per share in the same quarter of the prior year. Cost of revenues during the Q3 of 2021 was $170.6 million, or 75.7% of revenues, compared to $100.9 million or 86.5% of revenues during the Q3 of 2020. Cost of revenues increased primarily due to increases in expenses consistent with higher activity levels, such as materials and supplies expense, maintenance and repairs costs, and fuel costs.
Cost of revenues as a percentage of revenues decreased primarily due to the leverage of higher revenues over direct employment costs that increased at a lower rate than the increase in revenues. During the quarter, RPC recorded a CARES Act tax credit that was largely offset by the resolution of a long-term contractual dispute with vendors.
Selling, general and administrative expenses were $31.4 million in the Q3 of 2021, compared to $32.4 million in the Q3 of the prior year. Selling, general and administrative expenses decreased from 27.8% of revenues in the Q3 of last year to 14% of revenues in the Q3 of 2021 due to leverage of higher revenues over costs that are relatively fixed. Depreciation was $18.1 million in the Q3 of 2021, compared to $18.7 million in the same quarter of the prior year.
Our Technical Services segment revenues for the Q3 were $211.8 million, compared to $109.3 million in the same quarter last year due to significantly higher activity and some pricing improvement. Segment operating profit in the Q3 of 2021 was $8.3 million, compared to a $24.9 million operating loss in the Q3 of the prior year.
Our Support Services segment revenues for the Q3 of this year were $13.5 million, compared to $7.3 million in the same quarter last year. Segment operating loss in the Q3 was $55,000, compared to an operating loss of $3.8 million in the Q3 of the prior year.
On a sequential basis, RPC's Q3 revenues increased 19.4% to $225.3 million from $188.8 million in the prior quarter. This was due to activity increases in all of our service lines as well as slight net pricing improvement in several of our larger service lines. Cost of revenues during the Q3 of 2021 increased 17% to $170.6 million, compared to $145.8 million in the prior quarter. As a percentage of revenues, cost of revenues decreased slightly from 77.2% in the Q2 of this year to 75.7% in the Q3 of 2021, reflecting some pricing improvement and operating expense leverage.
Selling, general, and administrative expenses during the Q3 of 2021 increased 6.9% to $31.4 million from $29.4 million in the prior quarter, resulting in positive operating expense leverage. As a result of these improvements, operating profit during the Q3 of 2021 was $8 million, compared to an operating loss of $1.2 million in the prior quarter.
RPC's EBITDA was $26.5 million in the Q3 compared to EBITDA of $17.3 million in the prior quarter. Our Technical Services segment revenues increased by $35.7 million or 20.3% in the Q3 due to increased activity levels and some pricing improvement in the segment service lines.
RPC's Technical Services segment generated $8.3 million operating profit in the current quarter compared to an operating profit of $1.4 million in the prior quarter. Our Support Services segment revenues increased by 6.6% to $13.5 million in the Q3. Operating loss was $55,000 in the current quarter compared to an operating loss of $2.4 million in the prior quarter.
During the Q3, RPC operated seven horizontal pressure pumping fleets. Also, during the quarter, we made the strategic decision to add a Tier 4 dual- fuel fleet. Heavily influencing this decision was an opportunity to partner with Caterpillar in the testing of new controls technology aimed at optimizing fuel burn, minimizing emissions, and lowering maintenance costs. In addition, we are working the fleet for a large E&P on a dedicated contract.
This equipment was added late in the Q3 and is reflected as a finance lease on our balance sheet with a balloon payment due at the end of 12 months. Q3 2021 capital expenditures were $19 million, excluding the equipment acquired under a finance lease in the Q3. We currently estimate full year 2021 capital expenditures, excluding lease financed equipment, to be approximately $65 million, comprised primarily of capitalized maintenance for existing equipment and selected growth opportunities. With that, I'll now turn it back over to Rick for some closing remarks.
Thank you, Ben. It became clear this quarter that many E&Ps, including those among our customer base who are private operators, are beginning to respond with conviction to higher commodity prices and forecasts of global energy shortages. Our calendars are filling up, and we are optimistic about the Q4 in spite of the traditional holiday-related slowdown at this time of the year. We are also looking forward to a stronger 2022.
As we operate in this improving environment, we are closely watching emerging challenges in our business. Chemicals, components, and labor shortages, together with cost increases and third-party logistics, are all developing as operational issues. In addition, we are also monitoring reports of shortages of tubular goods and other items used by our customers, which could cause delays in the need for our services.
The continued volatile environment in which we operate makes forecasting difficult, but I am pleased that our financial strength has allowed us to remain competitive as we begin to realize the benefits of higher commodity prices and an improving operating environment. At the end of the Q3, RPC's cash balance was approximately $81 million, and we remain debt-free. I'd like to thank you for joining us for this conference call this morning, and at this time, we'll open up the lines for your questions.
Your first question comes from the line of Stephen Gengaro with Stifel.
Thanks, and good morning, gentlemen.
Good morning.
Hey, Stephen.
I guess two things from me. I'll start with you. You talked about the frack fleet. It's seven fleets, and you mentioned Technical Services pricing and activity improvements. Can you give us a sense for what you're seeing specifically on the pressure pumping side? and how you think that kind of flows through into 2022?
Stephen, this is Ben. You know, we are beginning to see some improvement. You know, we're now in the bidding season that, you know, will very much impact next year so w e're trying to, you know, position ourselves w e're trying to do what we can to, you know, increase pricing wherever we can and where necessary y ou know, we're certainly having the discussions with our customers about, you know, the ability to pay for the type of equipment that they desire.
We're watching that very closely and we are hopeful that we'll experience some of that in pricing improvement next year and as well as some continued, you know, strong activity levels. We think it's, you know, headed in the right direction.
Thanks. As you know, you talked about the Tier 4 DGB fleet. You know, we've been hearing for a while there's sort of a, at least a utilization premium, if not a price premium for these assets. We've also started to hear pricing moving for the traditional diesel fleets as well a re you seeing that same trend?
Yes, I would say so. Yes. Yes. There is some bifurcation in terms of our customers, in terms of their degree of desire for the quote-unquote "ESG-friendly equipment." We expect to continue to have a blend of, you know, the older Tier 2 and the newer equipment. We think there'll be a, you know, a market for both. It'll take some time for that to evolve. Doing everything we can to get as much equipment busy at acceptable pricing as possible.
Thank you. Just one final quick one. Can you give us the product line breakdown?
Stephen, this is Jim. Yes, absolutely. Happy to. The percentages I'm gonna give are the percentage of consolidated RPC revenue that these major service lines comprised. The largest was pressure pumping, which was 42.8% of consolidated RPC revenue for the quarter.
The second-largest was our downhole tools service business, through Thru Tubing Solutions, and that was 27.5% of revenue. Number three is coiled tubing at 11.9% of revenue. After that, we have nitrogen, which was 4.0% of revenue. Right behind that is rental tools, which is in our Support Services segment. That was 3.8% of revenue. Thanks for the question.
Yep. Great. Thank you.
Your next question comes from the line of Waqar Syed with ATB Capital Markets.
Thank you for taking my question. Just want to know that this Tier 4 fleet is that going to be the eighth active fleet in Q4?
We expect to have eight in Q4, yes.
Okay. Beyond that, you know, as you look into, you know, next year, Q1, are you planning on adding additional Tier 4 fleets?
There are no plans at this point in time. We don't have anything else on order, which I guess would be the answer to that question.
Okay. If you were to order any equipment, what would be the lead time to get deliveries if you've explored that?
I don't have a specific answer for that c ertainly a reasonable question w e understand with, you know, supply chain and everything else that and have read, you know, anecdotes that the timeframe is lengthening. To be honest, we don't know.
Okay. Just one final question. Like, you know, in terms of the market dynamics, certainly, you know, we hear about, you know, pricing improvements, but we also hear about, industry adding new capacity. As you get into bids, are you still seeing, you know, a large number of companies pumpers bidding into individual jobs? Are you seeing a little bit more, you know, few companies now and it's getting, you know, much tighter?
Waqar, this is Jim. There are fewer people bidding, but if you're talking about pressure pumping, there is still plenty of idle equipment out there. Pricing is improving, activity levels are good, but it's the pricing and competitive nature is still very competitive.
Okay. I thank you very much. Appreciate the answers.
Thanks, Waqar.
Your next question comes from the line of John Daniel with Daniel Energy Partners.
Hey guys, thanks for including me.
Sure, John.
Question on the Tier 4, sort of the financing of the fleet for the DGB fleet. Seems like a relatively new concept d o you think that gains traction? Just, can you speak to what the balloon payment would be when it comes due?
I apologize, John, you were going in and out just a little bit. Can you repeat that?
Yeah, sorry. Am I through? The question was just about the leasing arrangement on the new fleet d o you think that's gonna be a new concept for either RPC or the industry? Can you just tell us what the balloon payment will be?
Well, you can look at the balance sheet and see what the liability is t he balloon payment would be around $17 million-
Okay.
-After a year. I can't speak to whether it's an industry trend i don't believe it is. I'll speak maybe a minute to, you know, the relationship with Cudd and what we're doing. Caterpillar did have this equipment built, but it was purpose-built, built in a way for them to be able to do this field follow project t hat's what they call it.
It's my clear understanding that that's not their business is not gonna be to manufacture equipment like this t hey did it specifically to be able to test this new technology, as we've indicated in our comments about, you know, maximizing fuel usage, controlling emissions, and managing maintenance costs. That's what we are in the process of testing with them t hey have some power systems, control technology software that they are testing, that they've used in other industries, I think mining in particular.
They are using us as an experiment, if you will, and we're pleased to do that. They're obviously a world-class company dedicated to the oil and gas industry, and we're very pleased to be teamed with them. We think, you know, that'll give us a jump start t hey expect and we expect that the technology will work great.
We'll have had a year under our belt with that technology and I think it'll you know we'll have a jump start on it if you know if we decide to utilize it ourselves going forward w e're excited to be teamed up with them and it's helping us in a lot of ways y ou know, as I said, they're a very professional world-class company and we've learned a lot w e think it's helping us also with some of our internal digital initiatives.
It's just getting started. The E&P customer is certainly aware of the testing and the experiment, and they too, from my understanding, are very excited and pleased with the progress that's being made and what the opportunities are w e're really excited about it.
Fair enough. On the pricing front, you know, as you guys are negotiating the increases, is this the case where they're going in effective immediately, or is it a January first concept where as you start the new year, the prices go up?
John, this is Jim. It's a little bit of both.
Okay.
We're in the spot market. People who know us know.
Yeah.
We're gaining some price increases with the next completion. This is also contract renewal season, and we're focusing on pricing for, you know, existing MSA, but pricing for 2022. There'll be some more-
Okay.
-that takes effect, we hope, on 1 January .
Got it. Thank you for the time, guys.
Yeah. Sure, John.
You do have a follow-up question from the line of Stephen Gengaro with Stifel.
Thanks. Just curious. We've seen, you know, obviously when revenue's moving around a lot, your incremental margins can be kind of funky from quarter- to- quarter. It seems like you're getting better overhead absorption now, and things are starting to normalize a bit. Can you give us a sense of, if we thought about 2022 versus 2021? What types of incremental margins you think would be a reasonable target to be thinking about?
Stephen, this is Jim. Our incrementals Q2 and Q3 were respectable but not characteristic of RPC in a typical upcycle. Based on $85 oil and $6 Henry Hub or whatever it is today, and the way 2022 looks, we would look for sequentials to be at least approaching what they were in traditional upcycles in the past. That would be higher than today, but higher than this quarter, I should say. We still have these cost increases we're dealing with.
I wanna make it clear that we pass those cost increases along, but that always takes some management, which again, we're doing. That causes us to be a little less optimistic about, you know, hitting 40% or 45% sequentials in the coming year. That's right.
Okay. Great. Thank you. The other just follow-up, just sort of when you think about the I guess it gets to your capital allocation, but also gets to the pressure pumping business in general. How do you think when you make an investment for a new asset, right? Let's say it's a Tier 4 DGB. What types of either contract commitments or returns are you thinking about to justify the investment?
This is Ben. It's a very good question. Is there a clear runway to appropriate returns or clear vision or view or, you know, contractual relationship that leads to an appropriate return today? No. There's not. We and the industry need to be moving in that direction much sooner than later.
It's a little bit of, you know, whatever you want to call it, betting on the come or, you know, doing what we feel like we need to do. I mean, we're working on a roadmap, you know, in terms of what it's gonna look like or need to look like, over the next, say, you know, two or three years for us to continue to replace, buy, modify whatever our equipment. That's something we've been working on, and we'll continue to work on to try to-
-you know, draw that out, that we can have, you know, decision points with particular financial returns in mind before we, you know, pull the trigger. You know, we all know that there are long lead times on equipment t here's uncertainty about what future business conditions might look like, including pricing in particular so y ou have to make judgments and take risks.
You know, adding this new Tier 4 DGB, it is a risk, but there are lots of benefits to being partnered up with Caterpillar. That was certainly a significant factor in us, you know, making this particular commitment i mean, it lined up well with what we're trying to accomplish and what we see as our roadmap going forward.
You know, it didn't hurt that the nature of the arrangement with the finance lease and all that o bviously, it allowed us to. Then it was really Caterpillar's choice, but we were fine with that, t hat allowed us to, you know, defer the payment for a substantial portion of the cost of the equipment. That worked out, you know, okay. It worked out well also. Anyway, we're trying to look at that roadmap. We're trying to establish our targets and our returns.
You know, clearly we're all we. In terms of what overall returns we need to achieve and what returns we want to achieve over time, we're honing in on that too in terms of what we believe the industry and we can achieve. We'll build that roadmap around that, and we'll execute on that as we move forward.
Great. No, thank you for the call, gentlemen.
Sure.
Thanks, Stephen Gengaro.
Your next question comes from the line of Don Crist with COKER & PALMER.
Hey, good morning, gentlemen, and thank you for including me.
Hey, Don Crist.
Hey. Just a quick, maybe just two quick questions. One on the Tier 4 DGB, the new build. Will it be used as? Do you know, like, if it will be used as, like, one fleet or will it be broken down into several fleets?
Definitely in the first year with this partnership with Caterpillar, it will be maintained together.
Okay. That's helpful. As we think about improvement in pricing, and as we think about that versus seasonality or holidays in Q4, is it fair to think in terms of EBITDA per fleet, it could be modestly higher because of the Tier 4 DGB? Outside that, how should I think about EBITDA per fleet increasing from Q3 to Q4?
Don, that particular question is difficult to answer. Let's speak to Q4, though. Obviously, there's always seasonality in our business in Q4. Weather is not predictable, but there are holidays and that sort of thing. We believe, based on looking at our calendars right now, that we are not gonna experience the same level of seasonality this Q4 that we typically do. Plus, we're in an improving environment.
You know, EBITDA per fleet or our RPC's results in general, at this point look kind of flattish sequentially. Also it bears mentioning that Thanksgiving's on Thursday, but Christmas and New Year's come on a Saturday, so that's modestly helpful as well. We just don't think we're gonna experience the same level of seasonality that we normally do. EBITDA per fleet is not something that we talk about because everybody calculates it differently.
Okay. Maybe one quick one, if I could. Just thinking about upgrades. Like you talked about, maybe it's not in plan for another new build, but how are you thinking about more upgrades to Tier 4 DGB?
Well, that's part of our roadmap. Again, we're going through and evaluating the different options we have for, you know, the equipment we have today and what the options are for and what returns, again, we need to have in hand or be expecting to generate as we move forward i mean, it's a good question. We have some opportunity. We've done some upgrading of our Tier 4, I mean, Tier 2 equipment w e have not yet upgraded any Tier 2 equipment to Tier 4, but that is an option. It is one of the things that we are evaluating about whether we put that on our roadmap or not.
That's helpful. Thank you for taking my questions.
Sure.
Thanks, Crist.
Again, if you would like to ask an audio question, simply press star then one on your telephone keypad. At this time, there are no further audio questions. We'll now turn the call back over to Mr. Jim Landers for closing remarks.
Thank you, and thanks to everybody who called in and for the questions. We enjoyed the discussion, and we look forward to talking to everyone soon. Have a good day.
Thank you. Thank you for your participation. This concludes today's conference call. You may now disconnect.