RPC CFO Discusses Q3 2010 - Earnings Call Transcript

Oct.27.10 | About: RPC Inc. (RES)

RPC (NYSE:RES)

Q3 2010 Earnings Call

October 27, 2010 9:00 am ET

Executives

Richard Hubbell – President, Chief Executive Officer

Ben Palmer – Chief Financial Officer

Jim Landers – Vice President, Corporate Finance

Analysts

Max Barrett – Tudor, Pickering, Holt & Co.

Robert Mackenzie – FBR Capital Markets

John Daniel – Simmons & Co.

Joe Gibney – Capital One Southcoast

John Tasdemir – Canaccord Adams

Andrea Sharkey – Gabelli & Co.

William Conroy – Pritchard Capital Partners

Operator

Good morning and thank you for joining us for the RPC Incorporated’s Third Quarter 2010 Earnings conference call. Today’s conference will be hosted by Rick Hubbell, President and CEO; and Ben Palmer, Chief Financial Officer. Also present is Jim Landers, Vice President of Corporate Finance.

At this time, all participants are in listen-only mode. The following presentation will be conducted in 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 is being recorded.

Jim will get us started by reading the forward-looking disclaimer. Please go ahead, Mr. Landers.

Jim Landers

Thank you, Denise, and good morning. Before we begin our call today, I want to remind you that in order to talk about our Company, we are 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 2009 10-K and other public filings that outline those risks, all of which can be found on our website at www.rpc.net.

I also need to inform you in today’s earnings release and conference call, we’ll be referring to EBITDA which is a non-GAAP measure of operating performance. RPC uses EBITDA as a measure of operating performance because it allows us to compare performance consistently over various periods without regard to changes in our capital structure. We are also required to use EBITDA to report compliance with financial covenants under our revolving credit facility. Our press release today and our website provide a reconciliation of EBITDA to net income, which is the nearest GAAP financial measure. Please review that disclosure if you are interested in seeing how it’s calculated.

If you have not received our press release, please call us at 404-321-2140 and we’ll provide one to you immediately.

I will now turn the call over to our President and CEO, Rick Hubbell.

Richard Hubbell

Jim, thank you. This morning we issued our earnings press release for RPC’s third quarter ending September 30, 2010. In a few minutes Ben Palmer will discuss our financial results in more detail.

I’m very pleased to announce that RPC, through the hard work of our employees, generated record revenues, profits, and EBITDA for the quarter. This is a remarkable turnaround from where we were just 12 months ago. While the demand for our pressure pumping services continues to lead our financial results, our other services lines including down hole tools, rental tools, and coiled tubing contributed greatly to the quarter’s improved results.

With that overview, Ben Palmer, our CFO, will provide some financial details.

Ben Palmer

Thank you, Rick. For the quarter ended September 30, 2010, revenues increased to 302.2 million, 129% increase compared to the prior year. These higher revenues resulted from our work in unconventional formations together with improved pricing and overall higher utilization.

EBITDA for the third quarter was 107.9 million compared to 19 million in the same period last year. RPC reported an operating profit for the quarter of 74.4 million compared to an operating loss of 14.9 million in 2009. Our net income during the current quarter was 46.3 million or $0.47 diluted earnings per share.

Cost of revenues in the third quarter increased from 90.4 million in the prior year to 162.5 million in the current year. This increase in costs resulted from higher business activity levels and the associated costs, including materials and supplies, total employment costs, and maintenance and repairs. Cost of revenues for the third quarter as a percentage of revenues decreased from 68.4% in the prior year to 53.8% due to improved operational leverage resulting from higher revenues.

Selling, general and administrative expenses during the quarter were 33.1 million, an increase of 44.9% over the prior year of 22.8 million. However, because of our ability to leverage these fixed costs over higher revenues, SG&A costs as a percentage of revenues decreased from 17.3% last year to 11%.

Depreciation and amortization was 33.1 million for the third quarter, which is approximately the same as the prior year.

Our technical services segment revenues increased 130% due to improved utilization of the entire fleet and improved pricing. Operating profit was 65.2 million compared to an operating loss in the prior year of 9.5 million. This improvement was due to higher revenues and the associated leverage of fixed costs.

Revenues in our support services segment, which is comprised mainly of our rental tool service line, increased 116%. This segment generated operating profit of 12 million compared to an operating loss of 1.8 million last year, primarily due to higher activity in the service lines within this segment.

Sequentially RPC’s business experienced a continued improvement compared to the previous quarters in 2010 without any meaningful increase in equipment capacity before the end of the third quarter. Our consolidated revenues during the third quarter increased again to 302.2 million from 252.9 million in the second quarter, which was a 19.5% increase. Revenues increased with higher activity levels including the number of jobs and the intensity. Also pricing continued to improve over prior quarters, especially in horizontal drilling including shale formations.

Third quarter cost of revenues as a percentage of revenues decreased from 55.2% in the second quarter to 53.8% in the third quarter as a result of improved job mix, including better pricing coupled with leveraging costs over higher revenues.

We are pleased that our operating leverage and margins have continued to improve throughout 2010; however, we foresee challenges in maintaining these margin percentages due to potential increases in salaries and wages, materials and supplies, and maintenance and repairs.

SG&A expenses increased 3.6 million or 12.3% from the prior quarter primarily due to higher employment costs. However, SG&A as a percentage of revenues decreased from 11.7% to 11% due to leverage from higher revenues.

Our sequential EBITDA increased 26.7% from 85.2 million in the second quarter to 107.9 million in the third quarter. Our technical services segment revenues increased 18.8% to 268 million and generated an operating profit of 65.2 million compared to an operating profit of 46.3 million in the prior quarter. Almost all of our service lines within this segment experienced pricing and utilization improvements with our pressure pumping, down hole tools, coiled tubing, and surface pressure control businesses leading the way.

Our support services segment experienced a 24.8% sequential revenue increase and generated an operating profit of 12 million during the third quarter. This compared to an operating profit of 6.6 million in the second quarter.

At the end of the third quarter, our pressure pumping fleet remained at approximately 280,000 hydraulic horsepower. Our fleet will grow to approximately 480,000 hydraulic horsepower by the end of the first quarter of ’11, an amount approximately 50,000 hydraulic horsepower greater than previously announced during our second quarter conference call. A substantial portion of this 200,000 hydraulic horsepower aggregate increase is dedicated to fulfill agreements with our E&P partners. Approximately 15% of this aggregate increase will be in service and generating revenue during the fourth quarter. The remaining potion of the aggregate will be generating revenues by the end of the first quarter of ’11.

Our third quarter 2010 capital expenditures were 49.3 million. As previously announced, capital expenditures for the year are projected to be $210 million. The actual amount will be highly dependent upon the timing of equipment deliveries.

During the third quarter of 2010, RPC refinanced its existing credit facility with a new revolving $350 million credit agreement. This five-year facility should provide RPC with the liquidity to meet its capital needs for the foreseeable future. Outstanding debt under the credit facility at the end of the third quarter was 108.3 million. Our ratio of long-term debt to total capitalization was 18.1% at the end of the third quarter compared to 19.6% at this time last year.

And with that, I’ll turn it back over to Rick for a few closing remarks.

Richard Hubbell

Thanks, Ben. As one can see from our operating results, the demand for our services remains strong. Yesterday RPC’s Board of Directors voted to increase our quarterly dividend from $0.06 to $0.07, and today we announced a three-for-two stock split effective this December.

One of the consequences of higher activity levels is the additional demands on both our equipment and personnel. Despite the fact that we are presented with a large number of new opportunities, we remain committed to exercising operational and financial discipline. This includes maintaining the quality of our services with our many key partners.

Over the last five years, our managers have gained extensive experience in managing rapid growth. This experience will serve us well as we work through the challenges of executing our expansion plans during the next few quarters.

I’d like to thank you for joining us on the conference call this morning, and at this time we will be open to answer any questions you may have.

Question and Answer Session

Operator

Thank you. To ask a question, please press star, one on your telephone keypad at this time. A voice prompt on your phone line will indicate when your line is open to ask a question. We will pause for a moment to assemble the queue.

And for our first question, we have Max Barrett from Tudor, Pickering, Holt. Sir, please go ahead.

Max Barrett – Tudor, Pickering, Holt & Co.

Sorry, I was on mute. Good morning, guys.

Richard Hubbell

Good morning.

Max Barrett – Tudor, Pickering, Holt & Co.

Just as it relates to your new build pressure pumping capacity, could you provide us with an update sort of on the destination for this equipment; and then maybe also an update on the customer contracts you may have?

Jim Landers

Well Max, this is Jim. It’s going pretty much to places that we’ve talked about in the past; and as we’ve said, I think, fairly consistently, this new build is not spec. It has a home certainly in a strong operating environment. We have dedicated places for it to go once it arrives here and is operational.

Ben Palmer

Beyond that, we’re not going to provide any specificity.

Jim Landers

Yes.

Max Barrett – Tudor, Pickering, Holt & Co.

Okay, and then just kind of along—sticking with pressure pumping, did you enter into any new basins in Q3 or Q4 to date?

Jim Landers

No.

Max Barrett – Tudor, Pickering, Holt & Co.

Okay, and then I guess last question from me – switching to support services, you did impressive 79% incrementals in that segment in Q3. Just was trying to get some color on kind of the factors at play there, be it equipment utilization or pricing.

Jim Landers

Sure. As Ben mentioned and as I think most people know that the majority of support services is rental tools. The incrementals there came from just greater utilization of our rental tool fleet.

Ben Palmer

Some pricing improvement, but a lot more of it was utilization at this point.

Max Barrett- Tudor, Pickering, Holt & Co.

Okay, that does it for me. Thanks, guys.

Jim Landers

Thanks, Max.

Ben Palmer

Thank you.

Operator

And we’ll now take our next question from Bob Mackenzie from FBR Capital Markets. Please go ahead.

Robert Mackenzie – FBR Capital Markets

Good morning guys.

Jim Landers

Hey Rob. Good morning.

Robert Mackenzie – FBR Capital Markets

I guess question for you on the capacity adds. You know, it looks like you guys are leading the industry in terms of timing of your incremental capacity. Can you give us a feel for how much of your new capacity is locked up on term agreements, and kind of the average duration of those terms?

Ben Palmer

Again without specific numbers, as Jim indicated, this is not spec. I wouldn’t—I’d be remiss to say that all of it is 100% locked up under signed contracts, but we are highly confident that it will be; and we’re working toward that and fully expect that a substantial portion will be under contract.

Robert Mackenzie – FBR Capital Markets

Okay. Without being base and specific, do you have any feel for what percentage of it’s going to dry gas basins versus more liquids rich plays?

Ben Palmer

Jim, I don’t know. What do you think?

Jim Landers

Yeah, the majority of it is going to dry gas basins, Rob. We do have some that’s going to more liquid rich plays. It’s a smaller percentage overall, especially when you consider how large our aggregate fleet of equipment will be. It’s a substantially smaller percentage that’s going to be in the liquid rich areas.

Ben Palmer

And I would say that—to add to that, I think we like to be diversified between the different types of plays, both geographically and the target commodities. But as much as that, it’s really we’re very focused on the relationships too. We want to have quality partners that we team up with, and I would say that’s as important or more important to us than the types of basins we’re trying to target.

Robert Mackenzie – FBR Capital Markets

Okay, fair enough. In terms of capacity of the equipment, how much of the new equipment you’ve ordered is, call it 15,000 Psi capable versus 10,000?

Jim Landers

Good question, Rob. I’m not completely sure I know that answer. I know it’s—I believe that a lot of it is rated for higher Psi just because it’s the new stuff. We may have answer for you during our call here. We may come back with a discussion about that in a moment.

Robert Mackenzie – FBR Capital Markets

And then actually, if you wouldn’t mind, I’m trying to figure out for you guys and the industry in general what the kind of the mix is right now, because it seems like there may be somewhat of a bifurcation, perhaps, in the higher versus lower horsepower and the supply/demand dynamics for the sub-segments.

Jim Landers

Yeah. We’ll try to come back and make the announcement about that on the call if we can get the information before the end of the call.

Robert Mackenzie – FBR Capital Markets

Okay, thank you. And what do you guys make of the statements out of two of the bigger players in the U.S. land market that seem to be bracing for some—a challenging environment, perhaps, in stimulation of dry gas plays in the next several quarters?

Jim Landers

Challenging in what regard?

Robert Mackenzie – FBR Capital Markets

Well, Halliburton announced on their call specifically that they are not going to be pushing pricing in dry gas plays and are looking for ways to cut costs and keep costs low for operators there.

Jim Landers

That’s a pretty wide-ranging discussion. You can cut costs and keep costs low by being more efficient and setting up repeatable, leveragable processes with your customers.

Richard Hubbell

Yeah, we would try to have the lowest cost possible no matter where we’re operating.

Jim Landers

Yeah.

Robert Mackenzie – FBR Capital Markets

Does part of that mean working—perhaps working longer days to be more efficient, or how do you think about that?

Jim Landers

Yeah, absolutely. Where the customer wants it and allows it—you know, some customers don’t allow you to work at night, so only daylight hours. But yeah, that’s a big part of this whole sea-change in pressure pumping, that you’re staying in one place for six days instead of four hours, and you know where you’re going to be next week too. So that’s a part of it.

Robert Mackenzie – FBR Capital Markets

Great. Well, that does it for me for now. I’ll let someone else have a chance.

Jim Landers

Okay, thanks Rob. Appreciate it.

Operator

And we will now take our next question from John Daniel from Simmons & Company. Please go ahead.

John Daniel – Simmons & Co.

Hey guys.

Jim Landers

Hey John.

John Daniel – Simmons & Co.

Just on the 200,000 horsepower, can you tell us how many frac spreads that is?

Jim Landers

Well John, as you know, the definition of a frac spread has changed because each quote-unquote spread has more horsepower than it did.

John Daniel – Simmons & Co.

I’m just trying to backend (inaudible).

Jim Landers

Yeah.

John Daniel – Simmons & Co.

But—fine. While you think about that, next question. As you’re signing these contracts with the customers, what type of excess capacity backup requirements are they now requiring? We’ve seen some companies that have announced contracts and if it’s like, say, 25,000 in the Marcellus, they’re required to put 40,000 in terms of the contracted amount to the customer. I’m just trying to get a sense as to—

Jim Landers

Yeah. I don’t have those agreements in front of me, John. I’m not sure that it’s specified in the agreement or whether it’s just our own judgment as to how much excess we take. We do take—

Richard Hubbell

It’s a combination, and I think we’re conservative.

Jim Landers

Yeah, we’re conservative. We take more of a percentage excess to a job than some of our peers do, so we’re probably on the higher end of that scale. That’s kind of the best answer I can give you.

John Daniel – Simmons & Co.

Okay, fair enough. So then there’s two quick ones before I turn it over to someone else. One, you’re going to exit Q1 ’11 at 480,000 horsepower. At this point, have you placed any other orders beyond that 480,000?

Jim Landers

Yes, we have.

John Daniel – Simmons & Co.

Okay. I don’t suppose you could say how much that would be?

Jim Landers

Well, it’s probably huge. Yeah.

John Daniel – Simmons & Co.

Okay, fine. Of the 280,000 horsepower that you currently have, when would you expect to see the first round of retirements for some of that equipment?

Jim Landers

We try not to retire any of it, but we’re obviously doing a lot of maintenance and repair, and a lot of replacing the high wear-and-tear parts. So in terms of—I mean, let me answer it in a more practical way. We don’t anticipate that anytime soon we’ll say we’ve got X-hydraulic horsepower and that’s a gross number, but we retired X-percentage of that horsepower so we’ve got a lower net number. We don’t anticipate saying that anytime soon.

John Daniel – Simmons & Co.

Okay. All right, that’s all I’ve got. Thanks guys. Great quarter.

Jim Landers

Okay, thanks John.

Richard Hubbell

Thank you.

Ben Palmer

The earlier question about the 15,000 Psi-capable equipment – all of it is capable of working at those pressures.

Jim Landers

Right. So that answers Rob Mackenzie’s question with FBR. We’re ready for the next question, Operator.

Operator

Thank you. And for our next question, it will come from Joe Gibney from Capital One Southcoast.

Joe Gibney – Capital One Southcoast

Thanks, and good morning guys.

Jim Landers

Hey, Joe.

Joe Gibney – Capital One Southcoast

Just a couple quick ones from me. Just curious if you could update us on the timeline on new deliveries for some of your coiled tubing units? I believe you have five that are slated to come in. The expectation I have was at the beginning of the first quarter next year. Is that still accurate or has the pace picked up on that a little bit?

Jim Landers

Joe, this is Jim. That is—the pace has not picked up. I believe that’s still accurate.

Joe Gibney – Capital One Southcoast

Okay. And if you could—Jim, if you have the number in front of you, just curious, year-to-date now, what percent of your total Company revs are pumping and coil? I think pumping was 47% through the first half, coil 11%. Do you have an update on those figures?

Jim Landers

We will during the call. Yeah. We’ll get that.

Joe Gibney – Capital One Southcoast

Okay, helpful. And Ben, just one for you. I know it’s a little early now but as you layer in this incremental 50K, you’ve got 210 million in CAPEX this year. Any thoughts directionally on capital spend in ’11? I know it’s early.

Ben Palmer

It’ll possibly depend on how much capacity we add in addition. It’s a little bit early. I think at this point it will be similar, I think, to our current spend. As you know, we do have—as we’ve disclosed and talked about, we have a lot of equipment coming in in the next six months, so how much it is this year is highly dependent upon that, and that could really swing the number for next year, so I know that’s kind of vague, but. So we could be less than 210 this year, and that will make early next year, it’ll be higher. But I would say the direction of spend is clearly—at this point, we will be spending more in the five quarters of ’10 and first quarter of ’11 than we will in the four quarters of next year. I don’t know if that helps at all, but—

Joe Gibney – Capital One Southcoast

No, that’s helpful. I appreciate it. Yeah, just let me know if you get those Company revs and percentage-wise, it’d be helpful. I appreciate it. Nice quarter.

Ben Palmer

Thank you.

Richard Hubbell

Thank you.

Operator

And we’ll now take our next question from John Tasdemir with Canaccord.

John Tasdemir – Canaccord Adams

Hey, morning guys. Just a couple follow-ups. On—I guess starting with your support services business. A pretty big jump in revenue and margin. I think you talked a little bit about that, but can you help me think through what drove that revenue growth and how to think through that as we kind of roll into the next quarter and going forward? Certainly it’s outpacing the rig count growth, the capacity. What’s going on there?

Ben Palmer

I think it relates to the same trend. I think just with us, pressure pumping was a quarter or so ahead of some of the other service lines, so I think what you’re seeing is the other ones in support services, including primarily rental tools, that it is again sort of catching up. It too has more exposure to the unconventional basins, which is driving our activity levels and to some extent pricing. So I think it’s just a timing difference. We saw very large incremental improvements in pumping kind of in the first and second quarter, nice incremental this quarter but not as high as we did in the first and second quarter. And I think support services, including rental tools, is just sort of coming up to that point.

John Tasdemir – Canaccord Adams

So nothing, then, and I guess definitely nothing in the quarter that—so from that margin base and revenue base, we can grow that depending on our forecasts?

Ben Palmer

Right.

John Tasdemir – Canaccord Adams

Okay. And then I just wanted to get some clarity. I think you said of your 200,000 horsepower incremental, 15% of that will be working in the fourth quarter. Did I hear that right, so another 30,000 in the fourth quarter?

Ben Palmer

Right.

John Tasdemir – Canaccord Adams

Okay. And then finally just on pricing trends – sounds like things have been stronger than expected in the last quarter. Are you still seeing improvements in pricing or have we kind of gotten to a high point? In pressure pumping, to start with.

Ben Palmer

I think that’s—certainly it’s a fair question. You know, we talk about that a lot. I’d say the simple answer is yes, pricing is improving. But I think the more difficult question is it’s difficult to prepare to compare the type of work we’re doing today to what we were doing 18 months ago. You know, with the unconventional plays, the increased service intensity of those wells, it’s really hard to make an apples-to-apples comparison. When you combine the utilization and the amount of revenue, clearly it’s better; but on an apples-to-apples comparison, it’s a bit difficult. I mean, the business really is—and for us, really has transformed; so again, it’s hard to make that direct comparison.

John Tasdemir – Canaccord Adams

Well, let me ask you – I don’t know if you can—if I’m getting too granular on you. But I’m wondering as the new capacity rolls in, let’s say the 30,000 in the fourth quarter, any thought that that new capacity will come in at a higher margin than what you’re just reporting today with your existing capacity?

Ben Palmer

Part of our comment about margin pressure is that the nature of this work, again, it’s much higher revenues and it may or may not be higher percentage margins, but it should be higher dollars. So that’s that balancing act between ourselves and our customers is we want to generate high returns and you can do that several ways. You can do that by spot market, working less, maybe having better percentage margins; or you can look at other types of work where the percentage margins may be lower but you’re generating significantly higher revenues and therefore significantly higher cash flows. So—and that’s a mix issue. It’s, again, it’s—we still have some of both, so it’s difficult to answer that directly. Does that make sense?

John Tasdemir – Canaccord Adams

Yeah, it does. I think you’re just kind of telling us to maybe conservatively model the growth and margins until we see how things unfold.

Ben Palmer

I think that’s fair.

John Tasdemir – Canaccord Adams

Okay, that’s all, guys.

Ben Palmer

Great.

Jim Landers

Okay, thanks, John.

Operator

And we will now take our next question from Andrea Sharkey with Gabelli & Company.

Andrea Sharkey – Gabelli & Co.

Hi, good morning everyone.

Jim Landers

Hey Andrea.

Andrea Sharkey – Gabelli & Co.

I guess just maybe on the cost stuff that you guys are concerned about – higher wages and materials and things like that. I mean, how much of that do you think would be fairly easy to pass through to customers, just given where the market demand is?

Ben Palmer

Well, it’s never easy; but again, fair question. I think this is inevitable. It happens every time we have an up cycle. We knew it would happen, expected it, working hard to manage it; and I think it’ll continue to be there. In terms of passing it along, we do have some opportunities to do that, but hopefully we, again, plan for it in looking ahead and doing our modeling and our analyzing of these opportunities that we have. So in some respects, I think we will be able to pass it along, but not directly, not necessarily through a direct action of we have higher wages, therefore we need to increase our prices.

Andrea Sharkey – Gabelli & Co.

Okay, that makes sense. And then maybe just thinking about some of the outlook in the pure gas plays. We’ve heard a lot of E&Ps talk about shifting more to liquids and oil. Maybe could you give us a sense of how much of your pressure pumping equipment is working in oil-directed versus gas-directed, and if you’re seeing any slowdown from your customers on gas and shifting to liquid or oil?

Jim Landers

Andrea, this is Jim. As you know, historically we’ve had a big presence in West Texas, the Permian Basin, and we have a lot of pressure pumping equipment there so we’ve got that presence there. We have worked with several service lines up in the Bakken and continue to do that and hope to expand that presence there. So those are kind of the two main places. And then the Eagle Ford, as well, we’ve just started in. So it’s probably not telling you anything that you didn’t already know, but we’ve got presence there and will continue to with a number of service lines. So have not seen any slowdown yet from customers who drill for natural gas.

Andrea Sharkey – Gabelli & Co.

Okay, great. And then maybe just a longer term outlook into the next three to five years. It seems like maybe the next leg of growth and demand in some of these unconventional plays is going to be international and, say, China, India, Eastern Europe. I think Halliburton did the first horizontal in Poland recently. What are your thoughts about that market? I know you guys are primarily North America but would you consider trying to enter into that market, and maybe just from an industry perspective, do you think maybe some of the bigger competitors are going to take equipment out of the U.S. into international, or do you think it will be a new build—new equipment that will be built specifically for those regions?

Jim Landers

You know, clearly that’s a trend; and I think another undercurrent that you’re seeing is that people are coming here and doing work in our shale plays so that they learn how to do it so they can go to another market where it’s not yet being done. We greet that with enthusiasm, whether we go or whether somebody else goes and changes some of the capacity dynamics here. Either would benefit us.

Ben Palmer

Yeah, and hard to know the next three to five—I mean, reasonable question but the next three to five years, I think whether it’s shipped from here or whether—you know, if we’re out of existing capacity or whether it’s new capacity, of course, will depend upon somebody’s assessment of what they think current and the intermediate term opportunities are here in the U.S. So I think that’s an opportunity to help keep the pressure pumping capacity more balanced than it would otherwise be. In other words, if capacity stays tight here, they’ll do new builds to do international work. If it becomes an overcapacity situation, they’ll move some capacity out of the U.S. to overseas, and that will help stabilize that. So we think that is a somewhat comforting situation and dynamic with pressure pumping right now, that it should help.

Andrea Sharkey – Gabelli & Co.

Okay, great. Thanks so much. That’s all I had.

Jim Landers

Thanks Andrea.

Operator

And our next question will come from William Conroy from Pritchard Capital Partners.

William Conroy – Pritchard Capital Partners

Good morning, gentlemen.

Jim Landers

Hey Bill.

William Conroy – Pritchard Capital Partners

A couple of questions around the labor side. First of all, have you begun adding headcount to support the capacity that’s coming on, and did we see that reflected in the 3Q numbers at all?

Ben Palmer

Yes, clearly we are. It’s something that we’re very focused on and we’ll have to remain focused on it because—for various reasons, but including the competition for experienced, qualified employees. But yes, I mean, the current quarter does reflect some of that and the next few quarters will also.

William Conroy – Pritchard Capital Partners

And maybe down that same line, have you also seen your turnover increase at all or have you been able to keep that where it was?

Ben Palmer

It’s certainly higher than it was a year ago. We’re trying to take steps. I mean, I think just like with wage pressures that I’m sure you’ve heard about, turnover also happens when that situation is occurring. So it is higher today than it was a few quarters ago, but again we’re trying to take steps to try to address that, and it’ll be something we’ll continue to stay focused on.

William Conroy – Pritchard Capital Partners

And maybe tightening onto an earlier question, more along the lines of maintenance requirements. Number one is are you seeing your maintenance dollar spend continue to move up? And are you seeing the amount of the fleet that’s out for what we would all agree would be routine maintenance – is that also coming up as a function of these tougher jobs and such?

Jim Landers

Bill, this is Jim. The answer to the first question is definitely yes. M&R expenditures, whether capitalized or expenses, are increasing. The routine maintenance on the fleet—and we’ve got a newer fleet. It’s kind of hard to say, certainly, to quantify anything. But there’s not a substantial percentage of the fleet that’s out—that’s down of maintenance at any given time. I don’t think that percentage is increasing at this point, to be honest.

Ben Palmer

At this point; but I think we do expect with the intensity of these jobs that we will have more of that than we had historically. But again, that’s something that’s not unexpected, something that we’ve planned for, something we expected to happen and it’s been factored into our return calculations and evaluations of our opportunities.

William Conroy – Pritchard Capital Partners

If I could just maybe tag on to that very last point – does that suggest that the redundancy requirements of a 480,000 horsepower fleet are more than—even on a proportional basis, more than when you guys started the expansion at 280?

Jim Landers

Are the redundancy requirements higher? Bill, I’m not sure that necessarily follows. We’re not—we do not believe that to be the case at this time.

William Conroy – Pritchard Capital Partners

Okay. Okay. That does it for me. Thanks very much.

Richard Hubbell

Thank you.

Jim Landers

Thanks, Bill.

Operator

And for our next question, we have Max Barrett with Tudor, Pickering, Holt.

Max Barrett – Tudor, Pickering Holt & Co.

Thanks guys. Just one follow-up on rental tool margins. I think we talked about—or you talked about the challenge in maintaining those margins. Just as we look forward to Q4, kind of help us with the ability to sustain those margins into Q4 and 2011.

Ben Palmer

Well I think in response to another question, we said there was nothing unusual in the quarter so I don’t believe that we commented on any difficulty in maintaining that particular margin. So yes, I mean, all things being equal it should be the same. Not incremental margin improvement, but the margin.

Max Barrett – Tudor, Pickering, Holt & Co.

Okay, and then I guess last one for me, switching back to technical services. You did 30% operating margins in 2006 in that segment. Just again looking forward to Q4 and 2011, is that 30% margin achievable in 2011?

Jim Landers

Max, this is Jim. We discuss that a lot. You could argue it either way. I think that’s going to be difficult to get back to those peak operating margins.

Ben Palmer

It may not be impossible but, again, as I indicated earlier, the nature of this work is much more revenue intensive, and as you can see from our results, the cash flow generating capability is much higher than it was back in ’06, even on a comparable size basis.

Max Barrett – Tudor, Pickering, Holt & Co.

Very helpful. Thanks guys.

Jim Landers

Thanks, Max.

Operator

And as a reminder, to ask a question, please press star, one on your telephone keypad. And we will now take our next question from John Daniel with Simmons & Company.

John Daniel – Simmons & Co.

Hey guys. Thanks for letting me come back in. Just a couple quick ones. You mentioned the concept of higher revenues but slightly lower margins. Is that a function, Jim, of increased profit volumes flowing through the work ticket with less pass-through?

Jim Landers

Increased what volumes, John? I’m sorry.

John Daniel – Simmons & Co.

Like, profit volumes flowing—

Jim Landers

Oh, profits. It could be. We’re thinking more, though, of wage and labor pressures.

John Daniel – Simmons & Co.

Okay. Here’s one for you guys just to think about. You know, when we talk to some of the small private guys and they give you varying revenue per stage quotes – I mean, you’ve got some people who are saying that they’re getting 250, 275 a stage in Eagle Ford. I talked to another guy and he says he’s budgeting 170 a stage. As you roll those numbers through, you get astronomical revenue numbers on a per-spread basis. And I’m just wondering, for example, when we hear—because you know, you talk about going to the dry gas markets. Presumably some of that is the Haynesville. When we start hearing numbers like 275, 300,000 a stage, how much of that is going to you?

Ben Palmer

You mean how much of that work are we getting?

John Daniel – Simmons & Co.

Yeah, in terms of the revenue per stage. How much of that dollar amount would be—like, E&P companies will sometimes talk about the cost per stage. How much of that is going to the pressure pumping company? In other words, Jim, when we hear revenue per stage numbers in the Haynesville, call it 275, likely even higher. Is that what you guys would be—I mean, is that how we should be modeling a frac spread for your business going into that market?

Ben Palmer

Our experience is it varies tremendously by basin.

John Daniel – Simmons & Co.

Okay.

Ben Palmer

And then even customers by basin. It just depends on their approach, their design of the job, which as you probably know, anything can change once they come up with their model, their standard, that can be adjusted as they deem necessary. So again, reasonable question but difficult for us to answer.

John Daniel – Simmons & Co.

Tough to answer. Okay. Fair enough. And then just a last one – you talked—I mean it’s clear R&M expense goes higher in this environment. But as I recall in the rental business, for example, if you got on a job and there’s a maintenance issue, once the project is over you can oftentimes submit that expense—or the repair, you can invoice the customer for that.

Jim Landers

Yes.

John Daniel – Simmons & Co.

Within pressure pumping right now, as these fluid ends are failing and things like that, are you now able to go to the—I would think you are able to do it, but are you going to the customer and saying hey, we’re going to bill you for any equipment failures out on location post-job?

Ben Palmer

I would characterize it as not—you know, it’s not as direct as the rental tool business, but I think we look at these new customer relationships as partnering with our customers, and we sit down with them and do a lot of preplanning—again, design the jobs. We have experience with different pressures and temperatures and volumes, and we have a decent idea of—we’re learning new things every day, but a decent idea about what that particular job design will do to our equipment.

John Daniel – Simmons & Co.

Yeah.

Ben Palmer

And we price accordingly. If the customer says we need to increase the flow rates, we hope and expect with the right partners we’ll be able to go to them to say, well, that’s going to result in additional wear and tear. What can we do about that?

John Daniel – Simmons & Co.

Right.

Ben Palmer

And we’re hoping they’re willing and expect that there will be some opportunity to, however you want to call it, pass that along or whatever to the customer. So that’s clearly the way we’re trying to work it. That gets back also to the margin question. We, again, are looking at these contracts as higher revenues—I mean, all things being equal, higher revenues, lower margins. There’s no way we can—well, not no way. We don’t expect that we’re going to be able to generate the multitude of revenues that we’re talking about here and ever higher margins. That certainly wouldn’t work for an operator.

John Daniel – Simmons & Co.

Yeah, okay. That’s all I had. Thanks guys.

Jim Landers

Thank you, John. Thanks.

Operator

And our next question will come from William Conroy from Pritchard Capital Partners.

William Conroy – Pritchard Capital Partners

Hi. Just one quick follow up. As you’re getting this new capacity dedicated to customers, are you also on the hook to supply propping or is the customer supplying propping?

Ben Palmer

It varies by customer, by situation.

William Conroy – Pritchard Capital Partners

And to the extent that you are—how is supply either on sand or ceramic?

Jim Landers

Well, it’s okay now, Bill, because we’ve worked pretty hard over the past number of years to secure alternate or different sources of supply. So it’s okay right now but no guarantees for the future.

William Conroy – Pritchard Capital Partners

Got it. Thanks again, guys.

Jim Landers

Okay thanks, Bill.

Operator

We have no further questions in the queue at this time. I will now turn the call back over to Jim Landers for closing.

Jim Landers

Okay, thank you, Denise. Before we close, I want to answer a question that Joe Gibney of Capital One Southcoast had a few moments ago. For the year-to-date period ending September 30, pressure pumping was 47% of RPC’s consolidated revenues and coiled tubing was 11% of RPC’s consolidated revenues.

So we appreciate everyone’s participation this morning and your questions. We enjoyed the dialogue. I hope everyone has a good day. Thank you.

Operator

This does conclude today’s conference call. As a reminder, the conference call will be replayed on your website within two hours following the completion of the call. Thank you for your participation.

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