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RPC, Inc. (NYSE:RES)

Q3 2011 Earnings Call

October 26, 2011 9:00 am ET

Executives

Jim Landers – Vice President, Corporate Finance

Richard A. Hubbell – President and Chief Executive Officer

Ben M. Palmer – Vice President, Chief Financial Officer and Treasurer

Analysts

Neal Dingmann – Suntrust Robinson Humphrey

John Daniel – Simmons & Company International

Scott Burk – Canaccord Genuity

Andrea Sharkey – Gabelli & Company

John Lawrence – Tudor Pickering & Co.

Matt Beeby – Global Hunter Securities, LLC

Megan Repine – FBR Capital Markets

Doug Garber – Dahlman Rose & Co.

Daniel Devine – Gabelli & Co.

Thomas Escott – Pritchard Capital Partners

Operator

Good day everyone and thank you for joining us for the RPC Inc.’s Third Quarter 2011 Earnings Conference Call. Today’s 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 a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to be queued up for questions. I would now like to advise everyone that this conference call is being recorded.

Jim will get us started by reading the forward-looking disclaimer.

Jim Landers

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 will be 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 2010 10-K and other public filings that outline those risks. All these documents can be found on our website at www.rpc.net.

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. Also, we’re required to use EBITDA to report compliance with financial covenants under our revolving credit facility. Our press release today in 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’ve not received our press release and would like one, please call us at 404-321-2140 and we’ll forward one to you immediately.

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

Richard A. Hubbell

Thank you, Jim. This morning we issued our earnings press release for RPC’s third quarter ending September 30, 2011. Following my comments, Ben Palmer will discuss our financial results in more detail.

I’m pleased to report to our shareholders that RPC once again generated record revenues, profits, and EBITDA. Despite a number of operational challenges, our pressure pumping, coiled tubing, downhole tools, and nitrogen service lines all experienced sequential improvement. I’m also pleased to announce that RPC’s Board of Directors in response to strong operating results and balance sheet and as a short confidence in the company’s future performance increased the quarterly dividend to our shareholders from $0.08 to $0.10, a 25% increase.

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

Ben M. Palmer

Thank you, Rick. For the quarter ended September 30, 2011, revenues increased to $502.2 million, 66.2% increase compared to the prior year. These higher revenues resulted from a larger fleet of equipment, higher utilization and improved pricing.

EBITDA for the third quarter was $180 million compared to $107.9 million for the same period last year and operating profit for the quarter was $134.5 million compared to $74.4 million in 2010. Our net income during the current quarter was $83.1 million or $0.57 diluted earnings per share.

Cost of revenues increased from $162.5 million in the prior year to $279.9 million in the current year. This increase in costs resulted from higher business activity levels and 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 increased from 53.8% in the prior year to 55.7%, due to increased costs and some operational inefficiencies resulting from logistical challenges in our raw materials supply chain as well as increases in the market price of several high-demand raw materials used in our pressure pumping service line.

Selling, general and administrative expenses during the quarter were $37.2 million, an increase of 12.4% compared to $33.1 million in the prior year. However, because of our ability to leverage these fixed costs over higher revenues, SG&A costs as a percentage of revenues decreased from 11% last year to 7.4% this year. Depreciation and amortization was $46.5 million for the third quarter, an increase of $13.4 million over the prior year. This increase is a result of higher capital expenditures over the past 12 months.

Our technical services segment revenues increased 73% due to improved utilization of a larger fleet of equipment and improved pricing. Operating profit increased to $127.9 million compared to $65.2 million in the prior year. This improvement was due to higher revenues together with improved pricing and the associated leverage of fixed costs.

Revenues in our support services segment, which is comprised mainly of our rental tool service line, increased by 12.9%. This segment generated an operating profit of $14.1 million compared to $12 million last year, primarily due to higher pricing. For nine consecutive quarters RPC has generated improved revenues, operating profit and EBITDA.

On a sequential basis, RPC’s consolidated revenues increased from $443 million in the second quarter of 2011 to $503.2 million in the third quarter, which is a 13.4% increase exceeding the average increase of 6.2%.

Revenues increased [Audio Gap] higher activity levels, improved pricing and to a lesser extent additional equipment.

Third quarter cost of revenues as a percentage of revenues increased from 54.8% in the second quarter to 55.7% in the third quarter. Our operating leverage and margins continue to be impacted by the increased prices of materials and supplies, and the logistical issues involved in procuring them, as well as higher maintenance and repair expenses. SG&A expenses as a percentage of revenues decreased from 8.1% to 7.4%. These costs as a percentage of revenues have continued to decline due to leverage over higher revenues.

RPC’s sequential EBITDA increased 9.7% from $164.2 million in the second quarter to $180 million in the third quarter, while our EBITDA margin decreased from 37.1% to 35.8%.

Our technical services segment revenues increased 14% to $463.7 million and generated an operating profit of $127.9 million compared to an operating profit of $109.5 million in the prior quarter. While most of our service lines within this segment experienced continued utilization and pricing improvements, our pressure pumping business was the largest contributor to the revenue increase in dollars, while downhole tools experienced the largest sequential percentage increase.

As we discussed last quarter, we had some operational issues with a major pressure pumping customer, negatively impacting our second quarter revenues. We were able to resume activity with this customer during the third quarter, which contributed to the sequential pressure pumping revenue increase.

During the third quarter, we experienced challenges associated with sourcing certain key raw materials used in our pressure pumping service line. The limited availability of certain key materials is resulting in price escalations at a time when our needs are increasing. These factors combined to increase our cost of revenues at a greater rate than our revenue increase.

In spite of this situation, our operating margin improved year-over-year by one percentage point, with substantially higher revenues and remained unchanged sequentially.

As our industry continues to experience high activity levels, supply chain challenges will impact our ability to significantly improve margins.

Our support services segment experienced a 6.2% sequential revenue increase, primarily due to an improved product mix in our rental tools business. Support services operating profit was $14.1 million compared to $13.2 million in the second quarter.

During the third quarter, RPC’s in-service pressure pumping fleet increased from 495,000 to 531,000 hydraulic horsepower. Most of this additional equipment went into service under a new committed customer relationship late in the third quarter.

We expect to place in service an additional 86,000 horsepower before the end of calendar year 2011 and an additional 43,000 during the first quarter of 2012. This will result in total horsepower of approximately 660,000 at the end of the first quarter of 2012.

Of the 129,000 additional horsepower to be delivered, approximately 50,000 horsepower will be used at either rotational or back-up equipment to ensure we have the capability to maintain our fleet to meet our customers’ needs. The remaining 79,000 horsepower is committed to specific customer relationships.

Third quarter 2011 capital expenditures were $102 million and we anticipate spending depending on the timing of payments approximately $400 million to $450 million for the full year 2011.

RPC’s outstanding debt under its credit facility at the end of the third quarter was $140.8 million. And our ratio of long-term debt to total capitalization decreased to 16.4% at the end of the third quarter.

With that, I’ll turn it back over to Rick for closing remarks.

Richard A. Hubbell

Thank you, Ben. Our third quarter was another period in which we continued to execute our strategy of serving customers in a rapidly expanding unconventional drilling and completion market. We are proud of our achievements and our employees’ efforts toward managing the logistic dynamics of this service-intensive world.

We're addressing the challenges we encountered in this evolving operational environment. In spite of high capital expenditure requirement, we continue to generate record operating results and cash flow that support an increasingly strong conservatively capitalized balance sheet.

I’d like to thank you for joining us this morning on the conference call and we’ll open the lines up for questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to Neal Dingmann of Suntrust.

Neal Dingmann – Suntrust Robinson Humphrey

Good morning gentleman. Hey, Rich, just on the 79,000 coming if you have an area where that's already directed to and if you’re still, in addition to that equipment coming still pointing on bringing some of the coiled tubing units?

Jim Landers

Neal, this is Jim. The additional 79,000 is probably going to one of two places, probably more in the oily areas. Certainly West Texas is a big target for us because we have big presence there, probably also in the Bakken and the Eagle Ford.

In terms of coiled tubing units, yes, we’ll have a few more coming on early in 2012.

Neal Dingmann – Suntrust Robinson Humphrey

Okay. And then just a follow-up if I could, just wondering on, you mentioned in the press release about the material still in short supply and the weather that caused some issues on the cost side for the quarter, maybe Rick or Jim if you could address a little bit, I assume the weather now is passed, are you still seeing some of the hits because of the supply shortages and do you anticipate that improving to potentially boost the margins a little bit going forward?

Ben M. Palmer

Neal, this is Ben. These issues are – they are popping up, but I think it’s just part of the business right now. I think the one that did impact us in the third quarter have more or less been resolved, but we are not under the impression or believe that they are not going to recover in any form or fashion. So it’s an ongoing issue that we have to deal with, but as we sit here today, we do think it’s much important.

Richard A. Hubbell

Our experience is what we thought in the third quarter may not repeat themselves, but new ones might.

Neal Dingmann – Suntrust Robinson Humphrey

Got you. Thanks, thanks, Rick.

Operator

We’ll go next to John Daniel with Simmons & Company.

John Daniel – Simmons & Company International

Hey, guys, couple of questions, good morning. First (inaudible) contract what the other frac companies are minimum take or pay, is that correct?

Richard A. Hubbell

That is correct.

John Daniel – Simmons & Company International

When you look at the customers who are bound by those contracts, are they using more than the minimum requirements today or any our them dialed back activity plus that it puts some – a little bit more of your equipment into the stock market?

Richard A. Hubbell

They are as far as we can tell based on what we are told, they are certainly attempting to reach those minimums. Again, with the various challenges that not only pressure pumping companies, but they themselves encountered, they’re not always reaching those minimums and because they’re striving to reach those minimums, there are distinct periods of time that they’re saying you are free to go to do something else. So we are committed to those customers, we’re tied to them. So we’re not moving from again working for the committed contracted customer to other stock work with those particular ones.

Ben M. Palmer

We haven’t seen any conscious dial back of their expectations.

John Daniel – Simmons & Company International

I'm trying to, just wasn’t sure that could be a cause of what we’re hearing about all of the spot pricing coming down in places like the Marcellus, perhaps more equipment hitting spot market that was maybe not being used by their contracted customers, just your thoughts on the pricing will be appreciated.

James Landers

John...

John Daniel – Simmons & Company International

I’m sure you’ve heard those rumors.

James Landers

John, this is Jim. In places like the Marcellus, we’re on contract. So I don’t know – couldn’t speak to spot market pricing. In the Permian Basin oily, obviously, and that's more a spot market, pricing is still strong and continuing be to be strong. I think one comment that is worth making overall is that completion costs are now a much bigger percentage of total well cost.

There are some data recently that showed that. We know that anecdotally from talking to our customers. And so it’s harder to push pricing simply because we’re a bigger piece of the cost than we were before. So it’s kind of a problem that's going on. So I think that puts a governor on pricing, again, where we're in a spot market, things are good and I cannot speak to things like places the Marcellus, we just frankly don’t know.

Richard A. Hubbell

And I’ll say, John, the dynamic of trying to explain or predict what’s happening to pricing. There are still opportunities where there are cost increases to do pass-throughs and/or maybe more often adjustment of prices perspectively on a periodic basis under these contracts. So is that a pricing for you that you are able to recover, prospectively increase cost, I would say yes, but that does necessarily include your margins over a period of time.

So we see a lot of demand for equipment, but we are still making inquiries about whether we have equipment available, we feel very good about the level of inquiries, and are not upset with the direction of pricing if that’s beforehand.

John Daniel – Simmons & Company International

Fair enough. I want to turn this over to others, just to follow up on your point, you do have the ability to eventually pass that through to your customers, I mean margins were impacted in Q3, is that what gives you the confidence that you might see some improvement in Q4 as you will get the pass on the increases you observed in Q3, and then my last question, I’ll hang up here, with respect to your 2012 CapEx thoughts, any thoughts there and do you have any slots reserved for frac pumps beyond the 43,000 horse power in Q1, ‘12 and I will turn it over. Thanks.

Richard A. Hubbell

Let’s see, on the second question we do have a few reserves, it’s not used in significant relative to CapEx for next year, we are going to our planning process right now. I’ve said last quarter that I thought we would spend less next year than we are going to spend this year, and I think that’s true. If we hit the 400 to 450 this year, I think we will be 350 or so in 2012.

Relative to the first part of the question was, in terms of our ability to pass through, we do feel pretty good about that; there will be opportunities through that. But what you are seeing impacting us in the third quarter, to a large degree or sort of extraordinary situations, and to any details, so that’s not going to be something that we could probably go to with our customers, and be able to recover all of that increased cost.

John Daniel – Simmons & Company International

Thank you.

Operator

We will go next Scott Burk of Canaccord.

Scott Burk – Canaccord Genuity

Hi, good morning guys.

Richard A. Hubbell

Good morning.

Scott Burk – Canaccord Genuity

I got a couple of questions, first of all could just get the revenue contributions of pressure pumping and coiled tubing for the quarter?

Jim Landers

Scott, this is Jim, I am going to, let me get back to you on that. Here we go…

Scott Burk – Canaccord Genuity

And then, I guess why you’re looking at me, let’s go to, the question I had, you got the – you talked about the proppant shortage and some, having some problems getting some of that materials there. What exactly are you doing to address those shortages, and how are you working to overcome, but just the problems involved there?

Ben M. Palmer

To be honest, some of it was due to this major customer and kind of the start and stop issues involved there, so that causes complexities there. We also – asset is something that a lot of people are having difficulties with, and that’s just trying to work your relationships with customers. If that is not being produced, I mean there’s really not a whole lot you can do about and just working hard to kind of work with the customers, may be to dilute the asset a little bit more to make it obviously last structure, add a little bit more, just as working hard everyday or we know we’ve talked about, it’s been an issue looking for alternatives to drive sources that we try to, hedge on the waiver needs, but go into some of these alternative sources. So nothing in particular, nothing magical, I think everybody is having to do it, and that is just work hard all the time and hoping that market forces are going to take care of themselves in some of these supply demand fundamentals are going to start to align themselves and we won’t have as much difficulty.

We have, and I think the industry has, getting back and talking about the number of stages or the activity levels of our customers under these contracts, if we can get to more of a steady state, and perform more stages without interruptions, it’s going to benefit everybody. It’s going to benefit our customers from the standpoint, relinquishes their production, it relinquishes our revenue generating capability, it will improve our – not only M&A and logistical issues, but just our overall efficiencies are being able to run our operations. So I’d see as things move out, that in and of itself will create lots of opportunities for us and others.

Scott Burk – Canaccord Genuity

Okay.

James Landers

Scott, this is Jim, real quick in percentages. Pressure pumping was 56% of consolidated third quarter revenue, our coiled tubing was 11%, downhole motors and tools was 11%, and our rental tools service line was 6%, and then it goes down from it.

Scott Burk – Canaccord Genuity

Okay. And then, wanted to follow-up on one of the earlier questions. So you talked about companies attempting to reach minimums, they’re not always reaching minimums. Is that just because they have shortage of engineers to kind of get the completion designed or is it more of a lack of supply, what’s the driver there, meeting the minimums?

Richard A. Hubbell

I think it could be all those things. I'm not privy to what minimum stages, our competitors are putting in the contract. And if we were working with the same customer if we have, then I don’t know whether they put in ‘12 or 8 or 6. But for us, they are not meeting the minimums, obviously, for us under the contracts, the higher the minimum, the better that comes down to negotiation.

So that’s sort of hard to answer that, absolutely directly, I know we only speak of our experience, which is more than often we are meeting them, but it’s a struggle to meet those minimums. They are striving to, we are striving to and I think the issues are, I don’t know that it’s so much the engineering design, it could be some of that, but it’s just the overall logistical, I'm sure you guys have been out to well side and resolved all the activities that are taking place there. There is a lot of things that can go on, or upset things including readily available supplies of service and materials. So it will get back, that’s our goal.

Scott Burk – Canaccord Genuity

Okay. All right, terrific, thanks.

Operator

We’ll go next to Andrea Sharkey of Gabelli & Company.

Andrea Sharkey – Gabelli & Company

Hi, good morning.

Richard A. Hubbell

Good morning, Andrea.

Andrea Sharkey – Gabelli & Company

I guess, kind of more of a strategy question for you guys, it seems like over the past year there has been some changes in the industry, Superior Well Services is now part of neighbor, complete production, it’s going to be part of Superior Energy. So just bigger companies, and I'm wondering that changes competitive dynamic for you guys and maybe if you would look at needing to beef up a little bit and more product lines or just get bigger, or what else you might be interested in potentially expanding your reach to the customers?

Jim Landers

Andrea, this is Jim. I think right now, and I don’t want to sound boring, but we are disclosing comments, we are pretty much, what we’ve been doing for the past year and a half, we think it’s turning into some good results for us. So we are going to continue doing what we are doing right now in terms of expanding too many additional service lines, we’ve got our plate full with this evolving marketplace in horizontal completion. So we are doing lot of work there and that’s where we are staying.

There is a certain new level to which you have to arrive if you are in pressure pumping business and that is to say that it takes a bigger fleet to do a job than it used to, but we are there now. We can take 50,000 hydraulic horsepower to (inaudible) completion and that’s what you need you can do with 10,000 hydraulic horsepower.

So we are enjoying where we are right now, we don’t want to put too much on the plate because that will dilute our focus and so there is nothing right now it says that we are really looking for some additional service line, that’s my quick answer.

Ben M. Palmer

And frankly our experience has been in watching these mergers and combinations that they are very difficult to execute, even that its lot order than just adding some numbers together and in the past we frankly have been beneficiary for a period of time of those combinations, just doing what we are doing.

Andrea Sharkey – Gabelli & Company

Okay. Great, that makes sense. And then maybe just one follow-up question, it sounded like the downhole tools part of the business was the biggest percentage increase or I was just, increasing revenues here this quarter. I was wondering, if you can give a little bit more color on that rise in (inaudible) more room for that to grow both on just utilization and equipment and pricing?

Richard A. Hubbell

The downhole tools addition company that we have some technology, some capabilities that are very well suited for the horizontal completions and they've done a terrific job of taking no advantage of that. Their pricing is strong, I wouldn't say that it's something that we continuously pushed down below to escalate I mean pricing is very good, they’re doing well. I think the increase was more from volume than price improvements itself. But I think there continues to be opportunities, the service that we provide is unique in some ways, but I think the company has a terrific reputation, and I think that’s continue to benefit us and I think there is continual growth opportunity to it.

We’re also very innovative in that service line, what helps us is the fact that is there are sort of specialty services and specialty tools, which does allow you to charge a little bit more and you can on sort of commodity based products. So that's a big benefit and that helps drive demand for that service. And we’re pretty innovative in that area as well looking for other tools that we think will provide additional growth opportunity with these horizontal completions, and I think we've made some inroads that they’re in and think there is some continued very good potential with that service line.

Andrea Sharkey – Gabelli & Company

Okay, great. Thanks a lot.

Ben M. Palmer

Thanks, Andy.

Operator

We'll go next to John Lawrence of Tudor Pickering.

John Lawrence – Tudor Pickering & Co.

Hey guys. Good morning.

Richard A. Hubbell

Hey, John.

Ben M. Palmer

Hey, John.

John Lawrence – Tudor Pickering & Co.

Just a question on pressure pumping, I think you have some capacity rolling early next year. I saw negotiations to extend those, and so could you talk about maybe expectations for turns there?

Richard A. Hubbell

John, just to clarify, you said we have some capacity rolling, I think you mentioned contracts rolling over…

John Lawrence – Tudor Pickering & Co.

Yes, some contracts.

Richard A. Hubbell

And yes we do, yes you certainly don’t want to start negotiating a contract of month that terminates so you know certainly Rich have discussions right now with those customers and you know we feel like things are going to be, we’ve done a good job with the customer, we think the contracts going to be renewed, don’t have any idea right now, but whether contract terms are going to be more or less favorable or the same at this point?

Ben M. Palmer

I think a lot of the rollover we have at this point is you know the market continues to be very, very tight and I would, who knows what will happen, but I expect that will be rolled over and because there are extensions and so it won’t be a re-negotiation per se, it will just be we’ll continue to roll forward the market of that type and I think that’s our current expectations to that (inaudible).

John Lawrence – Tudor Pickering & Co.

Okay, great thanks. And then just on share buybacks, I know you guys bought back some stocks around earlier in the year could you talk about your appetite for more share buybacks?

Ben M. Palmer

Well, it’s something we constantly look at and we are currently looking at our various options obviously between additional growth CapEx, dividends and so we increase the dividends you know it something that we are always ticking around and evaluating, but no specific color at this point.

Richard A. Hubbell

If sure we have room under our current buyback authorization and…

Ben M. Palmer

And certainly (inaudible) we got the capacity if we wanted to do some, so certainly a possibility.

Richard A. Hubbell

And we think at current price it’s a pretty good value.

John Lawrence – Tudor Pickering & Co.

Great. Okay, thanks a lot guys.

Ben M. Palmer

Sure.

Richard A. Hubbell

Thanks John.

Operator

We’ll go next to Matt Beeby of Global Hunter Securities

Matt Beeby – Global Hunter Securities, LLC

Thank you, good morning.

Richard A. Hubbell

Good morning

Ben M. Palmer

Good morning

Matt Beeby – Global Hunter Securities, LLC

A quick question on 2012 CapEx, are you seeing enough opportunity for early next year to continue placing orders for new equipment that is not necessarily the long lead items like pumping or coiled tubing, have your rental tools are up for the downhole business?

Richard A. Hubbell

I’m not sure, I heard that very beginning of the question.

Ben M. Palmer

Yeah, when mentioning this for 2012, do we have opportunities for taking orders for equipment for some of the things that are other than pressure pumping or coiled tubing like rental tools and downhole tools, things like that.

Matt Beeby – Global Hunter Securities, LLC

How you get that, are you placing orders for that kind of equipment...

Richard A. Hubbell

We are placing orders.

Ben M. Palmer

Based on the lead times and things like rental tools and lot of that is consumed in the business regularly. So you have to place orders not in advance, just “at least to stay even” and we have done that. We are still committed to maintaining and growing the rental tool business, so we have placed orders for additional rental tools. But responsive downhole tools is not as nearly as capital intensive, the lead times aren’t nearly as long there as they are here, some of the rental tool items.

So that’s, and that’s the body, other than pressure pumping and coiled tubing nitrogen is married and we’re looking at as well. So working in that, obviously we are saying that we are going to spend $350 million next year, and that’s sort of what we have visibility too. So that’s an indication, I guess where orders have been placed.

Matt Beeby – Global Hunter Securities, LLC

Okay. That is helpful, thank you. One more, can you guys offer anything related to the commentary on selling the company that we’ve heard in recent months since the last call maybe?

Jim Landers

Hey, Matt. This is Jim. No, the source of anything you’ve seen is not RBC, it’s others. So we have no comment on it.

Matt Beeby – Global Hunter Securities, LLC

Okay, thanks. That is helpful.

Ben M. Palmer

Thanks.

Operator

We will go next to Megan Repine of FBR Capital Markets.

Megan Repine – FBR Capital Markets

Hi, guys, it’s Megan filling in for Rob.

Richard A. Hubbell

Hi, Megan.

Megan Repine – FBR Capital Markets

Can you help me understand the rational behind the dividend increase, I mean is the idea that help support the stock in potentially weak financial markets?

Ben M. Palmer

No, I think it’s just, as we said in the press release I think our board is pleased with our performance and growth and the prospects that we have right now, and they obviously we’re a little unusual that we pay a dividend, but I think it’s certainly not out of line from the perspective of that percentage increase from the perspective of our earnings and growings, I think it is simply that. Again as we said earlier, how we allocate our capital and gone to maximize our returns to shareholders, dividends can and obviously for us this is the strategy to do help achieve that. There is many ways to do that. We obviously see lots of opportunities to grow by investing organically and we are doing the math aggressively as well. So it is just one way to help generate that return to shareholders.

Jim Landers

And Megan this is Jim. Just a quick follow on, it is a way of sharing our success with our shareholders, we are rare, but not unique among our peers that we pay a dividend. I think where there are questions about the dividend and why we do it, I think many times there is a difference in time horizon. I think (inaudible) studies, but over a long period of time the majority of our return to shareholders comes from dividends and our price appreciation, we have a longer-term view than the many folks who were looking to space right now.

Megan Repine – FBR Capital Markets

Okay. Thanks for that. And then, I might have missed it. But can you guess maybe quantify the negative impact of weather of the northeast during the quarter?

Richard A. Hubbell

Our strategy on the call is we’re not making any excuses. It certainly had an impact, but quite honestly, there were things that had even a bigger impact almost...

Megan Repine – FBR Capital Markets

Okay.

Richard A. Hubbell

But they're not, but we'd rather not sold are strictly quantified.

Megan Repine – FBR Capital Markets

Okay, well, thanks for taking my questions.

Richard A. Hubbell

Sure.

Ben M. Palmer

Thanks (inaudible).

Operator

We'll go to Doug Garber of Dahlman Rose.

Doug Garber – Dahlman Rose & Co.

Good morning guys.

Ben M. Palmer

Good morning.

Richard A. Hubbell

Hey, Doug.

Doug Garber – Dahlman Rose & Co.

My first question is on the changing job mix you alluded to in the tax. I was curious if you could give a little more color as to what you saw there, and how that impacted the cost structure and is that something we should expect going forward?

Richard A. Hubbell

Really, it’s something that happened last quarter and continues this quarter for a particular customer, significant customer they sort of switched up the sort of the job design and the (inaudible) they were using and that impacted us for a complicated formula. Under the contract we hope to be able to recover some of that, address some of that in the next few months. So at this point, it is still ongoing.

Doug Garber – Dahlman Rose & Co.

Okay. And you mentioned, I remember a few years ago, you guys took some steps to kind of improve your supply chain, you were trucking things to the side as opposed to railing them. Can you talk about some of the longer term things you’re doing, currently, are you revisiting the logistics chains or did you have kind of a lot of one-time things here we had a truck things to say whereas in the future, you will be able to rail them to the site?

Richard A. Hubbell

That's I sort of alluded to the kind of the disruption we had during the second quarter of it. We talked about it, we resume that activity in the third quarter and it was sort of a dramatic shift, so and that’s the case there were some higher cost we had to do, take whatever steps were necessary to be able to start back up with that customer and that’s a good way to put it as we had to drop somethings to get it there immediately rather than using them more efficient way.

So that’s where we should have the opportunity prospectively that we can get that particular area and that particular doors flowing more normally, which should alleviate that probably one time, but that extraordinary cost that we incurred during the third quarter.

Doug Garber – Dahlman Rose & Co.

Okay. And also on the coiled tubing, I was curious if you could give us an updated count on the number of units you had and also a little bit more detail as to your plans to increase that, how many and when. And then as you plan your budget for 2012, there is still a hefty amount of CapEx. I'm just curious how you think about pressure pumping versus coiled tubing in terms of percentage of that CapEx or the relative returns going forward for the two different units?

Richard A. Hubbell

For 2012, the CapEx, yeah, there is a significant amount of CapEx for both pressure pumping and coiled tubing, we talked about the amount of horsepower that we’re taking delivery of next year and one that add that cost up until that will be significant. Coil tubing is similar in size and volume of cost. And we are forecasted to add next year, expand the fleet by probably 15% next year, 15% to 20%.

Doug Garber – Dahlman Rose & Co.

And would you provide the number of units you currently have and what you expect to, how many you’ll have next year, how many you’re planning to add.

Richard A. Hubbell

We’re currently around 44, 45 and we’ll be in the low 50s next year.

Doug Garber – Dahlman Rose & Co.

Okay.

Richard A. Hubbell

By the end of next year.

Doug Garber – Dahlman Rose & Co.

Okay. And last question on the support service margins. They’ve been strong for a few quarters here. Could you just give us any guidance on the sustainability of those going forward and what is driving that?

James A. Lane, Jr.

Doug this is, Jim. I mean, I think obviously you know that, but just make sure everybody were on the same page. Majority of support services is our rental tool service line. Rental tools is a high fixed cost, low variable cost business, relatively speaking. So with higher volume you get better margins to the bottom line, higher operating margins, higher EBITDA margins.

We anticipate that will continue as long as drilling activity remains strong, as the drilling business not a completion business. Having said that, the directional and horizontal drilling that’s taking place is harder on the equipment so it’s eating up more capital, that issue aside that also reduces your effective fleet, your ability to utilize the fleet. So we feel good about that and I think for the time being those operating margins are sustainable.

Richard A. Hubbell

Yes. From a return on capital standpoint both remain very, very strong as I always say, you have no idea for sure what return is going to be in the future and you can only decide that by looking backwards. The returns on both have been great up to this point. We expect they’re going to continue to be great going forward. And in terms of the relative returns parts say, again, the both grade and we’d love the diversity. I will say that our coiled tubing operating profit margins are at all-time high. We’ll speak about that.

Doug Garber – Dahlman Rose & Co.

All right. Thank you. I'll turn it back.

Richard A. Hubbell

Thanks, Doug.

Operator

We'll go to Dan Devine of Gabelli & Co.

Daniel Devine – Gabelli & Co.

Hey guys, thanks for taking my call.

Richard A. Hubbell

Sure.

Daniel Devine – Gabelli & Co.

So, I guess, just two quick questions. Can you remind me again how many shares Randall Rollins owns in the company and do you have any sense that there is any potential changes to that?

Richard A. Hubbell

Well, I don’t know that specifically how many he owns individually, but the controlled group that we disclosed it’s approximately 70%. And I have no idea of what Randall’s plans are or the family’s plans are.

Daniel Devine – Gabelli & Co.

Okay. That's it. Thanks.

Richard A. Hubbell

Thanks.

Operator

We'll got to Tom Escott of Pritchard Capital.

Thomas Escott – Pritchard Capital Partners

Good morning fellows.

Richard A. Hubbell

Good morning, Tom.

Ben M. Palmer

Hey, Tom.

Thomas Escott – Pritchard Capital Partners

In spite of comments you've made at the pressure pumping equipment the market remains very tight. Are you seeing clearly remains solid and you got a 129,000 new capacity being added. Question related to that is, can we infer from all that that you are not or do not contemplate retiring any order equipment in this market environment?

Richard A. Hubbell

That would not be our strategy to actually retire. We've talked about these, and referred here again this morning to I think last quarter, we said there was 40,000 that was coming in that we were going to use as rotational pumps. We also have some additional pumps we brought following as a back up, which we hope will help alleviate some of the stress on the equipment, but our strategy is going to be not to retire, but we're going to use those rotational pumps to send to the field. We’ll bring in older pumps and we’ll do, we'll catch those, and we'll rebuild them to the point where when they come out they will be pretty much brand new.

Richard A. Hubbell

So it’s almost a remanufacturing for them.

Ben M. Palmer

So no plans to specifically tear off the tyre and buy a brand new, the strategy is going to be [presently] as you know is relatively young overall, so we don’t have any blackmail that we would say that we’re going to take completely out of service.

Thomas Escott – Pritchard Capital Partner

So the older equipment that is rebuild and not retired?

Ben M. Palmer

Correct.

Richard A. Hubbell

It’s correct.

Thomas Escott – Pritchard Capital Partner

Thank you.

Richard A. Hubbell

Thanks, Tom.

Operator

We’ll go to John Daniel of Simmons & Company.

John Daniel – Simmons & Company International

Hey guys, thank you for putting me back in. I just want to kind of test you a little bit more on the CapEx for next year, you mentioned $350 million sort of kind of a preliminary not stepping stone. You’ve got 43,000 horsepower in Q1 ballpark, let’s just call that $45 million, $50 million, similar amount of coiled tubing dollar CapEx, that at least quite a bit left over. Can you just help us understand, I mean I'm assuming they’re going to order more horsepower, but can you just help us bridge for us the delta between the $350 million and what we know to be on order?

Ben M. Palmer

I'm sorry on that.

John Daniel – Simmons & Company International

Okay.

Ben M. Palmer

We are expanding in the other locations so there is backup equipment, there is rental tools, there is…

Richard A. Hubbell

Maintenance CapEx.

Ben M. Palmer

Yeah, the maintenance CapEx.

John Daniel – Simmons & Company International

Yeah, but maintenance is that much about $75 million to $100 million?

Richard A. Hubbell

It’s probably more than that; bigger fleet of equipment working harder.

John Daniel – Simmons & Company International

Okay.

James A. Lane, Jr.

We do have slots, we have reserve for next year, where we haven’t had to make a down payment on them yet. When that time comes that’s when we’re going to have to make that hard decision.

John Daniel – Simmons & Company International

All right. Well that’s all for me, guys. Thank you.

Richard A. Hubbell

Thank you.

Operator

(Operator Instructions). We will go to Scott Burk of Canaccord.

Scott Burk – Canaccord Genuity

Hi guys thanks for the follow up here. Wanted to just verify you said you had 45% of pressure pumping equipment under contract and gone to 60% next year.

James A. Lane, Jr.

No, no. Scott, this is Jim. It’s about 60% under contract today and in the future, ever since we started this contractual relationships, it’s been sort of a 60/40 split, and with our current and then projected growth, it’s still about 60/40 split.

Scott Burk – Canaccord Genuity

And then wanted to follow up on something you talked about last quarter; 24 hour operations, are you seeing any expansion of that in your fleet and what areas are you seeing more 24 hour operations?

James A. Lane, Jr.

The answer is yes, we are seeing some expansion, it’s still small for us. The sort of operational catalyst for that is different regions; different regions have more 24 hour operations, even South Texas has more 24 hour operations, we’re starting to see that in the Marcellus, Pennsylvania and the Bakken seems to have more 24 hour operations although we’re not doing pressure pumping right at this time.

So 24 hour operations are increasing, still small for us, we still have a lower percentage of our equipment under 24 hour operations than probably many of our peers at this point. And that’s the function of customer preference and regions you’re operating.

Scott Burk – Canaccord Genuity

Okay. And then one thing, I want to follow-up the question you had earlier; you mentioned that you have the new equipment, the 100, somewhat 1000 horsepower have delivering is under contract but you are not sure which region, is that because the customers hasn’t told you where to put it or that the contracts are flexible?

Ben M. Palmer

Well, we didn’t say customers; it’s customer I guess relationships, little bit of that is, we have options available and what we say under contract is not necessarily signed contracts at this point.

Scott Burk – Canaccord Genuity

All right, okay.

Ben M. Palmer

What we’ve said is that you know have active and ongoing discussions with a variety of customers and will go to wherever we have to dust opportunity where we gain to have the best options. And we’ll make that decision as you know as we get a little bit closure to the delivery side.

Scott Burk – Canaccord Genuity

Okay and then one other question; after the third quarter you know seasonal issues that you had with rain in the Marcellus; anything come up in the fourth quarter that you’d usually anticipate may be the winter weather or would that be a more something you might hit the first quarter.

Richard A. Hubbell

Scott, nothing we know about right now, but it’s knows more in North Dakota and Pennsylvania than it does in South Louisiana. I don’t think it will be flipping but I feel certainly that there will be some weather impact before December 31; just don’t know where it will be.

Scott Burk – Canaccord Genuity

Right yeah, of course, Marcellus. All right, thanks

Operator

(Operator Instructions) With no further questions in the queue I will turn the conference back to Mr. Landers for any closing remarks.

Jim Landers

Okay operator, thanks. Thank you for everybody who called into listen and thanks for the discussions also. Everyone have a good day. Thanks.

Operator

We would like to remind our audience that a replay of today’s event will be available on the RPC, Inc’s website within two hours following the completion of the event. This concludes today’s conference call. Good day and thank you for your participation.

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