Rpc Incorporated's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Oct.24.12 | About: RPC Inc. (RES)

Rpc Inc. (NYSE:RES)

Q3 2012 Earnings Conference Call

October 24, 2012 10:00 AM ET

Executives

Jim Landers – VP, Corporate Finance

Ben Palmer – VP, CFO and Treasurer

Rick Hubbell – President and CEO

Analysts

Jeff Patel–GlobalHunter Securities

John Daniel –Simmons & Company

Matthew D. Conlan – Wells Fargo Securities

Neal Dingmann – SunTrust

Luke Lemoine - Capital One

Andrea Sharkey – Gabelli & Company

Doug Garber – Dahlman Rose

Rhett Carter – Tudor, Pickering, Holt & Co

Megan Repine – FBR Capital markets

Michael Marino - Stevens Incorporated

Dave Thomas – High Five Capital

Operator

Please stand by we’re about to begin. Good morning and thank you for joining for RPC’s Inc third quarter 2012 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 Finance. At this time our participants are in listen-only-mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at this time for you to queue up for questions. I would like to advice everyone that this conference call is being recorded. Jim will get us started by reading the forward-looking disclaimer, please go ahead Sir.

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 we 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 2011 10-K and other public filings that outline those risks, all of which can be found on RPC's website at www.rpc.net.

In today's earnings release and conference call, we'll also 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, the nearest GAAP financial measure. Please review that disclosure if you're interested in seeing how it’s calculated.

If you have not received our press release for any reason, please visit our website again at www.rpc.net. For a copy. I will now turn our call over to our president and CEO, Rick Hubbell.

Rick Hubbell

Thank you, Jim. This morning, we issued our earnings press release for RPC's third quarter of 2012. Following my comments, Ben Palmer will discuss our financial results in more detail.

During the third quarter, we experienced a challenging operating environment characterized by increasing competitive pressures as we moved and attempted to increase our equipment utilization and oil direct to basis. As a result our revenues declined by 5.9% compared to the third quarter of 2011 and our net income declined by 20.5% compared to the same period last year.

The decline in natural gas directed drilling continues to impact our activity levels and pricing. Although the price of natural gas increased during the quarter, it remained below our customer’s required minimum prices in the more service-intensive natural gas basis. In spite of these market challenges we are pleased with the results we achieved this quarter and believe that they are a reflection of good execution on the part of our operational managers. Our CFO, Ben Palmer, will now review our financial results in detail for the third quarter of 2012.

Ben Palmer

Thank you, Rick. For the quarter ended September 30, 2012,revenues decreased 5.9% to $472.4 million compared to $502.2 million in the prior year. These low revenues resulted primarily from lower pricing and utilization in many of our service lines.

EBITDA for the third quarter decreased 12.5% to $157.6 million compared to $180 million for the same period last year. Operating profit for the quarter decreased 23.9% to $102.4 million, compared to $134.5 million in the prior year. Our diluted earnings per share during the quarter were $0.30, a 21.1% decrease compared to $0.38in the prior year.

Cost of revenues decreased from $280 million in the third quarter of the prior year to $271.4 million in the third quarter of the current year. This is due to the bearable nature of these expenses.

Cost of revenues for the third quarter as a percent of revenues increased from 55.7% in the prior year to 57.4% due primarily to lower pricing for our services and inefficiencies resulting from lower utilization of our equipment and personnel.

Selling, general and administrative expenses during the quarter were $43 million, an increase of 15.7% compared to $37.2 million in the prior year.

SG&A costs as a percentage of revenues increased from 7.4% last year to 9.1% this year. This percentage increase was primarily due to increases in support staff head count, including those in new or expanding operational locations.

Depreciation and amortization were $54.1 million for the third quarter, an increase of 16.4% compared to $46.5 million in the prior year. This increase is a result of additional equipment placed in service during the past 12 months.

Our technical services segment revenues decreased 6%. Operating profit for this segment decreased to $98.7 million compared to $127.9 million in the prior year.

The decrease in revenues and operating profit was due to lower pricing for our services and lower equipment utilization within this segment. Partially all set by contributions from a slightly larger fleet of revenue-producing equipment.

Our third quarter revenues and operating profits in our Support Services segment decreased by 5.7% and 29.1% respectively due primarily to lower activity levels and pricing within the rental tools service line, which is the largest service line within this segment.

On a sequential basis, RPC's consolidated revenues decreased from $500.1 million in the second quarter of 2012 to $472.4 million, a decrease of 5.5%. Revenues decreased as a result of increasingly competitive pricing and lower utilization in many of our service lines.

Cost of revenues decreased from $281.3 million in the second quarter of 2012 to $271.4 million. Cost of revenues as a percentage of revenues increased 120 basis points from 56.2% in the second quarter of 2012 to 57.4% in the third quarter. This increase was primarily due to lower revenues coupled with negative leverage on certain direct operating expenses including employment costs.

This was partially offset by lower materials and supplies costs in pressure pumping due to changes in job mix and price concessions from our raw materials vendors.

SG&A expenses as a percentage of revenues increased slightly from 8.6% to 9.1%. RPC's sequential EBITDA decreased 8.9% from $172.9 million in the second quarter to $157.6 million in the third quarter and our EBITDA margin decreased 120 basis points from 34.6% to 33.4%.

Our Technical Services segment generated revenues of $436.1 million, 5.5% lower than prior quarter revenues of $461.6million and an operating profit of $98.7 million compared to $112.4 million in the prior quarter.

Our operating margin in this segment declined 170 basis points from 24.3% of revenues to 22.6% of revenues in the current quarter. Most of our service lines within this segment experienced lower pricing and utilization.

Revenues in our Support Services segment declined 5.5% due to primarily to lower activity and pricing in our rental tools business. Support Services operating profit declined to $10 million compared to $12.5 million in the second quarter. Our operating margin in this segment declined 510 basis points from 32.6% of revenues to 27.5% in the current quarter due to lower pricing and utilization of our rental tools.

RPC's pressure pumping fleet during the quarter remained unchanged at 683,000 hydraulic horsepower. We currently have no additional pressure pumping horsepower on order, although some ancillary equipment is expected to be delivered prior to year end.

Third quarter 2012 capital expenditures were $70 million. We forecast capital expenditures to be approximately $350 million for the full year of 2012. The majority of the remaining 2012 capital expenditures will relate to maintaining our existing fleet of equipment.

RPC's outstanding debt under its credit facility at the end of the third quarter was $83.7 million. The balance declined by $78.3 million compared to the end of the second quarter and our ratio of total debt to total capitalization is 8.4%, which is the lowest percentage in the last six years. With that, I'll turn it back over to Rick for a closing remark.

Rick Hubbel

Thanks, Ben. Natural gas drilling activity remains near 13 year lobes. As we approach the end of 2012 we remain cautious about increase competition impacting the demand in pricing for our services. We are closely monitoring supply and demand dynamics of the natural gas market to ensure we are able to meet our customers’ needs. During the fourth quarter, we are positioning two pressure pumping fleets from a natural gas base into our existing locations that offer opportunities for higher activity levels.

As a result we believe this fleets will be more highly utilized but subject to competitive pricing pressures. In this environment, our conservative capital structure gives us the ability to conduct our operations with a long-term perspective. Our diversified services and locations also provide us with the ability to deliver strategic solutions to our customers in a number of domestic services.

I'd like to thank you for joining us for RPC’s conference call this morning and at this time we'll open the lines up to answer any questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).And we will take our first question from Jeff Patel with Global Hunter Securities.

Jeff Patel–GlobalHunter Securities

Thanks, good morning guys. I guess we could start out maybe just with the refresher on the geographic orientation of the pressure pumping cruise right now. Having moved a lot of stuff around, could you maybe help us out with a little breakdown there.

Jim Landers

Sure Jeff, this is Jim Landers I will give it a start. Alphabetically I guess we’ve got, these are sort of round numbers because a few things are moving but we’ve got about 13% in Appalachia. We’ve got, and this is as of the end of third quarter, we’ve got about 35%, 36% in West Texas, we’ve got about 12% in East Texas in Eagle Ford Shale. We’ve got about another 16% or so. We have assets in the Balkan now and that’s about 4% or 5% of the pressure pumping fleet. We have a rotational fleet that kind of doesn’t count because it’s not generating revenue at this point. Eastern Oklahoma we have about 16% of the fleet, I’m sorry if I’d not, if I’d previously mentioned. That should add up to 100 when you have the rotation fleet

Jeff Patel–Global Hunter Securities

So then maybe if you could speak a little bit to, in pressure pumping or maybe for technical services in general, kind of the trajectory in margins as we went through the quarter and how maybe the September exit rate compared to where we were at the beginning of the quarter.

Jim Landers

As you can imagine, everything is very dynamic I don’t know to be honest I’m not sure we kind of looked at it that particular way. I think some dangers to look month-to-month but I don’t think there was no any, the was no particular trajectory I think in mind that I would say we’re clearly, you know we thought a lot to hear about the highly competitive environment. But certainly going to continue for at least a while longer. We’re moving equipment around we’ve been successful in doing that and getting the equipment working more than it has been or would otherwise be working. So we’re pleased about that but it will continue to be a struggle.

Jeff Patel–Global Hunter Securities

Thanks very much guys, nicely done this quarter.

Operator

We’ll take our next question from John Daniel with Simmons and Company.

John Daniel –Simmons & Company

Hey guys, good quarter again. I want to follow with Jeff’s question on the margins. I know you haven’t looked at it on month-by-month but they’re clearly holding up relatively well versus peers. Is that attributable to favorable low contract sourcing and if not what would you attribute it to? And given the seasonality and all of the chatter with Holiday and Becks in Q4 and lower rig activity etc., how do you see margins in Q4?

Jim Landers

John this is Jim. If anything margins as Ben just mentioned are continuing to come under pressure. If anything the ending run rate was lower than the full quarter margin in terms of how we’re doing what we’re doing. We’ve got some good customer relationships in some places we have, when we’ve moved equipment we’ve been lucky that we’ve moved it to places where we have operational bases and business going on already so the disruption has been less than you might think.

Ben mentioned job mix, we were some different, we used some different propend that was lower cost. We were able to get some margin there and yes we’ve had some good experience with guar this year so that may have helped as well in third quarter. It’s kind of hard to quantify all those.

Rick Hubbel

No I think I’ll sort of elaborate on that. I think the guar certainly did help, I think that’s a reflection of us. Of us looking ahead and understanding the market and what’s going on with that. I think that’s something will play well for us with customers that we’re able to anticipate those kind of situations. We have a steady supply of guar, the price advantage certainly will not continue into the foreseeable future but we will have a steady supply and that may or may not be an issue again for the industry but we’ll be in very good shape and I think that’s comforting to existing and other potential customers.

I think that will put us in a good position. Also I think just you know we talked about sourcing of materials with things slowing down a bit, we’re certainly going back to many of our vendors asking for them to share in the current environment. We’ve been successful in doing that so that’s a sort of a basic blocking and tackling you do when things are softening up a bit and slowing down. We talked a lot about, I think honestly about the competitive pressures and the pricing environment and I don’t want to send a signal that we’re overly concerned about it but I just think it’s a reality and something we’ll have to work through.

We’re hearing a lot of anecdotes from our guys that the things are slowing down and the holidays may impact us in the fourth quarter but I think our experience is that many times that means that customers get busy with the New Year. You know we’re hearing a lot about people heading out spent their budgets so they slow down over the holidays but many times that means they come back quicker and stronger than they would otherwise with the New Year. So we are hopeful of that.

John Daniel – Simmons & Company

Okay, well I’m not trying to sound too bearish here I’m just trying to understand. Because the guar is clearly benefitting very good planning by you guys but did that allow you to enjoy better utilization because of the favorable guar and that supported margins. I’m just trying to, if you look at some of your competitors which I’m sure you’ve done, some of them have had a lot of choppiness in terms of significant margin declines quarter to quarter and I’m just trying to make sure we’re realistic with our assumptions in terms of margin expectations and Q4 in the next year.

Jim Landers

I think the guar was I think a larger contributor probably, we can’t look inside our competitors’ results as we can our own but I wouldn’t be surprised based on their public comments that our guar did certainly contribute to our better margin. We’d also like to think, and did that allow us to better compete for business? I would say the answer is no, we did not use that as an advantage to price our services lower than we would otherwise price them.

We are acting like we’re for purposes of negotiations acting like we’re playing the market. We’re not trying to take advantage of those lower prices rather than it flowing through to the margin lines. So my guess would be that probably is the largest contributor to the outperformance and just the basic blocking tackling things we do all the time trying to stay close to our customers and serving them well and hopefully that serves us well in the long-term.

John Daniel – Simmons & Company

Okay, thank you, one last one from me then I’ll step out. Some front companies as you guys know have talked about stock pricing being at breakeven levels. Can you say, do you have any fleets operating at those types of margins and would you price your fleets at those margins in order to maintain utilization or would you just choose to stack the equipment?

Jim Landers

Jim again. If it came down to pricing at below sort of operational EBITDA, we wouldn’t do it, we’ll not do it. We would idle equipment before we would work at below EBITDA margins at the operational level. And you’re well aware of our return on invested capital criteria. We try to monitor that as much as we can. And so we will be, so we’re not just going to work just without equipment.

Jim Landers

I don’t know that we are to that point where we’re having to pick and choose those situations. I’m not sure we’ve seen that we’ve degraded to that point yet. Even after making those choices and obviously if you go out you can get to walk away, but we’re not sitting around the table trying to decide do we commit at those level, the pricing that’s that low.

John Daniel – Simmons & Company

Fair enough.

Ben Palmer

That’s right. All right, thanks John.

Operator

We’ll take our next question from Matthew Conlan with Wells Fargo Securities.

Matthew D. Conlan – Wells Fargo Securities

Hey guys. Again very commendable operational execution in a tough environment. I’ll ask the housekeeper question here of could you run down what your revenue contributions were for pressure pumping, coil tubing and down hole tools in the quarter?

Jim Landers

Yes. Matt, this is Jim. For the quarter pressure pumping was 51% of revenues. Coil tubing was 11% of revenues and did you ask down hole tools, was that what you asked?

Matthew D. Conlan – Wells Fargo Securities

Yes please.

Jim Landers

That was 15% of revenues.

Matthew D. Conlan – Wells Fargo Securities

Okay, terrific. Thank you very much. And on the – I wanted to look at the price concessions you are getting. What raw materials in particular are you able to really negotiate lower pricing? Is it sand?

Rick Hubbell

Yeah. That’s the right answer. As you know there are many, many varieties of sand and you couple that with the dynamics of lower activity and some more sand plans that have come on during this year and supply and demand just let the diligent processor negotiate some price concessions. So that’s basically it.

Matthew D. Conlan – Wells Fargo Securities

So these are concessions on existing contracts or is it…?

Rick Hubbell

With vendors just – we’re just picking up nickels and dimes as we’re able to negotiate a few things with vendors.

Matthew D. Conlan – Wells Fargo Securities

Okay. And the last question I had is on your dividend. There is the possibility of some very substantial changes to dividend taxes come January. Current laws would have them go from 15% to 42%. How would this affect your dividend strategy? Have you considered the possibility of front loading a year or two of future dividends into December?

Rick Hubbell

We recognize the possibility that the dividend tax rate could go up. We certainly have considered it and looked into it and at this point obviously as of today have not determined that we’re going to take that step. We’re obviously very – we do have a conservative balance sheet that is certainly something that we could fairly easily do. We do have restrictions under our revolving credit facility. We’d be able to pay out a fairly substantial amount under that and or ask for a waiver from our lenders which I think we would be able to get. But at this point we have decided not to front load those dividends. So it provides us – continue to provide us lots of flexibility to do other strategic things also that may and I expect will come along.

Matthew D. Conlan – Wells Fargo Securities

Okay, great. Thank you very much guys.

Operator

We’ll take our next question from Neal Dingmann with SunTrust.

Neal Dingmann – SunTrust

Morning gentlemen. Say. Maybe Jim for you or Ben, just wondering what you were saying about what customers are saying so far. I guess I’m trying to get an idea of when you look at the market right now demand, what are you seeing I guess? Are you seeing much is from customers way is what they’re expecting to spend going into ’13 or is it kind of normal or just are they hesitating to tell you at this point what spending patterns are going to be as we enter next year?

Jim Landers

Neil, this is Jim. Just from spending time with our operational managers at Rpc, I think fourth quarter people are worried about where we are in the shoulder season with natural gas and whether or not we’re going to start with the cold winter. So I think there’s some uncertainty. It’s not like natural gas drilling can get a whole lot lower. But whether I think it will pick up in fourth quarter is uncertain and I guess doubtful at this point and people are saying the same things about having spent their budget and with natural gas prices low, you’re not generating cash flow to run your budget. So between that and then whatever might happen with holidays and that sort of thing, fourth quarter could have just I won’t say an accentuated seasonal slowdown, but certainly the seasonal slowdown that you expect. As for 2013, I don’t think we have any really good market data on that.

Ben Palmer

We certainly are not here – we’re not at this point expecting that things are coming to any sort of rapid halt or people are making rash significant decisions to change their activity levels or direction of their spending, but we’re hearing I think more about people saying they’re expecting to get busy next year. I read all the articles and people’s prediction about what’s going to happen or could happen to natural gas prices. We’re certainly we would love to see those pick back up again and activities in those basins begin to increase. So we are hopeful of that and I think some customers were talking about that possibility in the not too distant future. Let me take a moment to maybe mention something about margins that might be helpful too when you look at our results. We talked about job mix.

A lot of that is lower price propane, more as we move out of some of this high pressure natural gas basins, the type of propane many times in those basins are really high priced and we don’t always enjoy as large a margin in that kind of work than we do in some of the less high pressure works. So I think that’s a benefit for us for the quarter and will continue to be as long as we are doing less work in the natural gas basins. Also moving away from that type of work is less difficult on our equipment. You’ll see that on our loss on disposition line. So we’re not tearing the equipment up quite as quickly. So that is a positive benefit and again as long as we’re directed towards more towards the oily basins. I think that will be a trend that will continue as well. So that’s kind of a little bit of a tailwind or some sort of cushion underneath the slowdown as there are some negatives associated with that high pressure very intense natural gas work.

Neal Dingmann – SunTrust

Hey Ben, let me add something to add on to that as far as you all had a pretty nice down position, I don’t want to say down, but solid position in the Permian because of your history there. Are you seeing what I would call abnormal pressure there because of all of the I guess newer players and even the larger players bringing more equipment or I don’t know if I would call it business as normal, but how could you categorize that core area for you all right now?

Ben Palmer

We’ll, I’ll tell you it’s certainly getting more competitive and we knew that would be the case. We too had moved additional equipment into that area and it’s a net positive for us what’s happening there and what we believe will happen going forward. The other thing that’s really going to help in the Permian basin is the increase in the horizontal drilling, which as we all know requires a lot more equipment and has the potential to generate a lot more revenue and cash flow. So to the extent pricing is becoming more under pressure -- again its offset somewhat by increasing activities associated with horizontal drilling. So we think we are as good a position as anybody due to our reputation in West Texas and in other areas that we think we’ll get our share of that work and we hope that trend will continue with the horizontal drilling and that should help also I think to cushion the downside a bit.

Neal Dingmann – SunTrust

And then, last one if I could either just for you or Jim, just on the Bakken obviously now it’s nice to have price inch in there, 5% I think is what Jim said. Do you anticipate continued growth areas or a lot of expansion potential here even in near term or how do you see that sort of playing out over the next few quarters?

Ben Palmer

Me and the others we’ve been in the Bakken for a long time with our other service lines. Just got there with pressure pumping. So we need to prove ourselves there in the pressure pumping market. I think the answer to that maybe hinges on the price of oil. There’s differential on the Bakken because of transportation and other reasons. So it would be nice to see oil head back up a little more before we feel a whole lot better about that market, but we are certainly, we are talking to a couple of people about contracts which we’d like to do if we can and so we might be able to use more equipment there.

Jim Landers

And we have begun to do work there. So, that’s good but it is -- again it is very competitive and I think it will continue to be, but we’ve made some nice progress and we can have a real opportunity there over the next couple of quarters.

Neal Dingmann – SunTrust

That’s great color. Thank you.

Operator

And we’ll take our next question from Luke Lemoine, with Capital One South Coast.

Luke Lemoine - Capital One

Hi, good morning. Jim, in response to Jeff’s question about the geographical adjacent of your horse power, you said about 16% was in Oklahoma. Were you just lumping your Fayetteville into that as well or are you out of the Fayetteville at this point?

Jim Landers

I was – we are out of the Fayetteville at this point.

Luke Lemoine - Capital One

And then in technical services. Can you just kind of – I guess within pressure pumping really, I guess depending on round ink, your revenues declined $20 million to $25 million quarter-on-quarter. Can you just kind of put in order the magnitude of those impact between lower spot utilization , maybe term crew going to minimum utilization and pricing?

Jim Landers

Yeah Luke, really good question. Your numbers are approximately right on sequential decline. We put some more horse power to work in the Bakken. So that was an increase. Beyond that it’s difficult to quantify the decline. I would say that qualitatively more of the decline came from – and it’s probably evenly split between pricing and utilization. We had some 24 hour work become 12 hour work. Still a good contract and a good customer but there were certainly to be lower utilization there. Spot market pricing declined during the third quarter, everybody knows that and a little more of our equipment now is in the spot market. So it’s probably evenly split. That’s the best answer I can give.

Luke Lemoine - Capital One

Okay. And then for 4Q, how does the backlog on the backend crew look right now?

Jim Landers

Backlog, as in work that they have?

Luke Lemoine - Capital One

Yeah. How much work rate?

Jim Landers

We’ll, they are busy. So the crew is being utilized.

Luke Lemoine - Capital One

And then you also said you are moving two fleets in 4Q. Where are those fleets coming from and where are they going?

Jim Landers

Two fleets going from the Fayetteville. One is going to Oklahoma which can work from the Pan level Texas, North and East of there; the Mississippi line, over more into Eastern Oklahoma. So once it will go there. The other fleet will go to Permian in the fourth quarter.

Luke Lemoine - Capital One

But those are already in the adjusted splits you gave, right on your geographical locations?

Jim Landers

Yes

Luke Lemoine - Capital One

Okay. And then I guess for those crews. Should we think that maybe they are off payroll for two to four weeks in 4Q?

Jim Landers

In other words being not productive?

Luke Lemoine - Capital One

Yeah or not earning revenue.

Jim Landers

Yeah. That’s decent I think.

Luke Lemoine - Capital One

Okay. Alright. Great. That’s it for me. Thanks.

Jim Landers

Alright, Luke. Thanks.

Operator

We will take our next question from Andrea Sharkey with Gabelli & Company.

Andrea Sharkey – Gabelli & Company

Hi, good morning. I was wondering maybe discuss a little on the previous questions about spot pricing. I was wondering how many of your crews now will be going from previously booked term contracts to the spot market over say the next three months, six months?

Ben Palmer

I think we tell – Andrea, this is Ben, we – I think we mentioned last quarter that about a third of our fresh company equipment was under contract last quarter. That’s down to about 25%, and I think over the next six months, that’s probably going to go more certainly continue to decline in terms of these traditional protected minimum contracts. We still expect and are already experiencing that we are entering into more pricing agreements but they don’t include some of the potentially favorable terms of some of the earlier contracts. So that number of 25% will trend down over the next three to six months.

Andrea Sharkey – Gabelli & Company

Okay. Great. Thanks. And then in terms of what you are seeing in spot pricing and obviously it’s probably different across space but we know it declined in Q3. How much more pressure are you seeing now in October. Are you seeing that continuing to decline? Is it at a more rapid rate or is it at the same sort of decline that it has been?

Jim Landers

Andrea, this is Jim. I would say if you look at spot pricing in October it’s probably continuing to decline but declining at a lower rate.

Andrea Sharkey – Gabelli & Company

Okay. Great. That’s helpful. And then maybe this is too early stages but last cycle you guys were kind of a fast mover on equipment additions and worked out well for you. So looking forward when the market does come back, I guess what would you look to see before you would start thinking about adding new equipment?

Jim Landers

Natural gas prices at four would be really the big one. And the belief that that would continue. I am not trying to be flipping; I think that is the thing. Natural gas drilling have a 13-year low and you’ve heard it so many times from us and others but we need a cold winter and we need natural gas prices to be high so that the service intensive Shale plays get to work. Service intensive plays are good for us because we are in the pressure pumping business that sort of thing.

Ben Palmer

Not a bad question but different things at different times that you see and anticipate. So it’s hard to know at this point but as Jim said and certainly the price is trending up, discussions with customers and things like that, all of that is taken into consideration to make good decisions.

Andrea Sharkey – Gabelli & Company

Great. And would you be opportunistic if there were maybe some smaller competitors out there that were maybe in trouble and were looking to sell equipment. Would you look at doing something like that if the opportunity arose?

Jim Landers

Those opportunities do come along occasionally. We have taken the look but again we are sticking, we’ll be consistently sticking to our return criteria and usually when multiple people are scrambling for an opportunity like that, usually that type of pricing doesn’t meet our return criteria, but we’ll certainly look at it, there might be particular situations that somebody for some reason wants to associate themselves with us as a company rather than someone else. So that might provide a unique opportunity and certainly we are always looking and are interested -- again where it’s a good deal for us and obviously it needs to be a good deal for the seller too but a good deal for us to meet or exceed our return requirements.

Andrea Sharkey – Gabelli & Company

Great. Thanks a lot.

Operator

We’ll take our next question from Doug Garber with Dahlman Rose

Doug Garber – Dahlman Rose

Good morning guys. I wanted to ask you about your coiled tubing operations. What you are seeing there and also a housekeeping question of how many units you have at the end of the quarter and how many you expect to have by the end of the year?

Jim Landers

Doug, this is Jim. 51 units at the end of third quarter coiled tubing units and anticipate having 53 at the end of the year, one more to be delivered early in Q1 of 2013. What we are seeing revenue declines – we’ll not obviously – but we’ve disclosed revenue declines. More – probably more utilization than pricing at this point that’s driving the decline. We are not seeing pricing declines per se that much. There’s a big mix – there’s a mix between working time and standby time in the coil tubing market and we are seeing some maybe some more standby time in coil tubing, but pricing per se for those services is not declining as much as some people would think. Could have been some more utilization declines at this point.

Ben Palmer

We are also – this is Ben. We are seeing a little bit of improvement in activity in the smaller bore coil tubing units which is welcome news.

Doug Garber – Dahlman Rose

And what’s driving the smaller bores? Is that more maintenance than completion?

Jim Landers

Correct

Ben Palmer

Yes

Doug Garber – Dahlman Rose

And one other question, maybe I’ll follow up offline with you Jim. It looks like the other technical service revenue, not the pressure pumping , not the coiled tubing, but it looks like that’s been increasing each quarter just a little bit throughout the year. What’s driving that?

Jim Landers

That would be our down hole tools service line which we report within the technical services segment.

Doug Garber – Dahlman Rose

Got you. And then one other question I guess CapEx for next year. What are you anticipating and can you also I think remind us your maintenance CapEx as well?

Jim Landers

Obviously we are still putting our plan together for next year but I think last quarter we said we would spend less than the 350 that we expect to spend this year. That’s still the case. How much less? We’ll have to wait and see but it’s 250 to 300 is probably what we would expect given what we know right now. Maintenance CapEx has probably been one-third maintenance, two-thirds growth this year and it may approach something more like 50/50 or 60/40 maintenance versus growth next year, because we are in the middle of this refurbishment program of our pressure pumping fleet. And so that has been ongoing in the latter half of this year and will take place throughout 2013.

Doug Garber – Dahlman Rose

So where you are saying the gross CapEx that is the refurbishment of the track fleet. Is there anything else that you are doing gross CapEx for?

Jim Landers

No, the refurbishment of the fleet would be maintenance in my vernacular.

Doug Garber – Dahlman Rose

What’s the gross CapEx of roughly $100 million? What are you aiming to add capital?

Jim Landers

Reasonable question but not really prepared to add any much color on that at this point.

Doug Garber – Dahlman Rose

Of course. Alright. Thank you guys, I’ll turn it back.

Operator

We’ll take our next question from Rhett Carter with Tudor, Pickering & Holt

Rhett Carter – Tudor, Pickering, Holt & Co

Hi, good morning guys. I noticed you guys paid down debt in quarter. I just wanted to see with the excess cash flow coming on. Is reducing debt still the number one priority for your cash?

Ben Palmer

For the day-to-day it is. But we still look at other things we have done. Some share repurchases throughout the year, that’s still certainly a possibility and but debt yes, it remains a priority.

Rhett Carter – Tudor, Pickering, Holt & Co

Okay. And then just talking about some of your competitor’s potentially operating equipment below EBITDA, breakeven. Are you seeing any equipment come to market that is being offered for sale at below book value at this point?

Jim Landers

Rick, this is Jim. Not yet and afraid that way because there are discussions that there are some folks on the brink with their debt covenants or whatever. You say below book value, that’s based on one person’s accounting policy. I think below market value, then you kind of reset market value I guess but we have not seen it yet, it could happen though.

Rhett Carter – Tudor, Pickering, Holt & Co

Okay. Thank you very much.

Operator

We’ll take our next question from Robert Mackenzie, with FBR Capital markets.

Megan Repine – FBR Capital markets

Good morning guys. It’s Megan Repine filling in for Rob. Most of my questions have been asked at this point, but many of your larger competitors this quarter have touted added certain technological advances in areas like the Eagle Ford. Have your guys seen technology driving a change in the competitive dynamics there and if so what are you guys doing to counter this?

Jim Landers

There is lots of discussion about different technologies. We are always watchful. I don’t know if there’s anything that’s going to tremendously change the competitive landscape in the short term. Things like -- each down time there’s always discussions of new technologies that try to get people excited about other things other than competitive pricing in weaker activity levels, but certainly technology is important for the industry and we’re certainly monitoring that closely but at this time we don’t think there’s anything that’s of such significance again that’s really going to bend the curve. There’s a few things we are doing. There are some opportunities to license some of that technology that we have explored and looked into but again we don’t think it’s a huge game changer but something that we certainly need to be mindful and monitor.

Megan Repine – FBR Capital markets

Okay. And then, I guess you guys have some working capital improvements during the quarter. Can you talk to any specific initiatives that you are taking to drive that improvement and what we should expect going forward?

Jim Landers

Nothing in particular other than just the things we do every day. We had very good luck with our receivables collection, that was the largest driver. Not yet, not doing anything different other than just staying focused on that’s come down with kind of slower, lower activity, lower revenues. The inventory is something with raw material initiatives and so forth that we have taking place and some selected growth areas where we’ve had to build up inventory. You will see that inventory increased and the prepaids also came down or other current assets came down. Those two accounts sort of interrelated but we are having to make an investment in some critical materials in order to secure those. But nothing in particular other than what we focus on all the time.

Megan Repine – FBR Capital markets

Okay. Great. Thanks for talking my questions.

Operator

We’ll take our next question for Michael Marino – with Stevens Inc.

Michael Marino - Stevens Incorporated

Thanks guys. You guys have answered most of my questions but just wanted to get some clarifications on a couple of things, on the pumping side. One, do you guys have any idle crews or have you idled any fleets to date?

Jim Landers

None that we’ve stacked or whatever you want to call. At this moment, I am sure there are some crews that are sure idle, but we’ve not pushed anybody and decided and said you are not going to work for an extended period of time.

Michael Marino - Stevens Incorporated

Sure. Okay. And then on the fleets you are moving into oily basins. Do you have work lined up for those or you are kind of getting that lined up right now?

Jim Landers

Yeah. More of the latter than the former. I would say some of it is heading towards some availability work but it will take some work to get it consistently working and get our utilization up. That is I think for us right now it is the biggest focus for everybody is to get the equipment working at the best prices that we can and we still feel confident that these moves will be a net positive over the coming months but we’ll just have to make adjustments as we need to over the next quarter or two to just respond to what we see.

Michael Marino - Stevens Incorporated

Okay. But they weren’t customer driven moves, they’re more Rpc?

Jim Landers

Not yet, not necessary, not specific customers known absolute opportunity…

Michael Marino - Stevens Incorporated

Okay. Thanks.

Operator

We’ll take our next question from Dave Thomas, with High Five Capital

Dave Thomas – High Five Capital

Hi guys. Thanks for taking the question. Just going back on the Guar issue earlier, can you talk about your contracts that have covered you for this year? When do they expire?

Ben Palmer

I think maybe the better way of saying is that I put the harvest season for Guar. We need to answer this way, we are covered for right now. We are certainly covered for third quarter. We are covered for fourth quarter. We have some good supply relationships in place and the Guar harvest is starting in November. So we feel like we’ll be covered at good rates, good market, competitive prices for 2013 as well.

Dave Thomas – High Five Capital

And so the contracts you guys signed last year when they re-priced, that’s going to be in the fourth quarter of this year or is in Q1?

Ben Palmer

Probably Q1.

Dave Thomas – High Five Capital

Okay. And Jim, is there any way we just thinking through helping us just kind of quantify or understand the impact that had the beneficial impact on margins. Is there a way that we can think about what if Guar was -- if you’ve been buying at market price, what margins would be relative to what you guys have done or is there any other way you can think of helping us quantify the benefits just as we look into ’13?

Jim Landers

Reasonable question but that’s pretty detailed. I mentioned earlier that probably a big part of our – has been described our outperformance versus our customers probably on the margin line. A lot of that – I would say a good piece of that probably is related to Guar. We have clearly had a big advantage in the second and the third quarter. I think there will be some advantage in the fourth quarter but based on just the timing of purchases and everything else I think we’ll be going into ’13, we will probably still have some advantage but it won’t be as large as it has been in the second and third quarter but as much as the price advantage, we are going to have the advantage of the very stable, known availability to Guar. So that takes a least one worry away from having that critical supply available. In comforting to our customers as well to know that we have it available. So I would say – again the benefit will still – we expect that there will be some benefit into ‘13 but it will be much less so than it has been here since 2000.

Dave Thomas – High Five Capital

Okay, great. Thanks very much

Operator

(Operator instructions). And we’ll take our next question from John Daniel, again with Simmons & Company.

John Daniel - Simmons & Company

Hey guy, thanks for putting me back in. I am probably over interpreting some things but then response to the question on the dividend, you guys said that you wanted to be prepared for other strategic things that may come along. But then you also sort of pushed back on the idea of being acquisitive and I am just curious if you could elaborate on what the strategic things might be?

Jim Landers

John, this is Jim. You might be reading a little bit into that. We always want to have dry powder to do some acquisitions or do a big opportunistic strategic acquisition. We are not overly acquisitive, we don’t want the winner’s curse that you get from auctions, but sometimes people are interested in us and you can look at our history, interested in us because they want a good corporate home that’s maybe different from some of the other frostiness that you see in the welfare service business. So we always want to be available to – always want to be ready, something like that. That’s all.

John Daniel - Simmons & Company

Okay. Fair enough. That’s what I figured it was, but just wanted to confirm. And then not to beat the dead horse because there’s been a lot of talk on Guar because you guys did a really good job managing this. But as you look at where your Guar contract price is, I am not asking you to disclose it but and then versus where Guar spot prices are, is there a material difference between those two?

Ben Palmer

Yeah. I think that’s why we have better margins.

John Daniel - Simmons & Company

No, but I know that going back but Guar has come off quite a bit, right. So I am talking about – I just…

Ben Palmer

There’s lots of a benefit. It’s still a benefit but it’s declining into the fourth quarter and into 2013…

John Daniel - Simmons & Company

Fair enough. Spot prices for Guar are still higher than what your contract -- where you sourced to that back in the good old days.

Ben Palmer

So, that’s correct.

John Daniel - Simmons & Company

Fair enough. And last one for me is on the refurbishment program that you talked about. When you go through this process on the frac fleet, are you going out and buying an entirely brand new unit to replace something or you are just going out and buying component parts and then doing the rework in house?

Jim Landers

We are currently outsourcing it and so it’s accommodating – you get through an inspection process where components are – you need to change out, which components maybe need nothing, and which components need some rework but we – the intention was and the early results are that what we come away with, with an attractive relative investment is something that’s legally there’s almost as good as new with only a percentage of investment of a new unit.

John Daniel - Simmons & Company

Got it. I am a bit overly annual on this and when you guys had 683,000 horse power and there’s nothing on order. I just want to make sure there’s not 40,000 horse power ordered new units than you are going to cannibalize or retire 40,000…

Jim Landers

Reasonable question but yeah, it’s our existing fleet. We don’t expect that – we are big on maintaining our equipment and keeping it up. Some of these units that we are working on have had component changed that multiple times. This process goes through and we don’t expect any particular unit that’s going to be jammed and thrown away. We are going to end up, if we have no additional purchases of brand new units at the end of this program we are going to have 683,000 hydraulic horse power.

Ben Palmer

And we had already bought a replacement pumps to be able to recycle them while the old ones are being refurbished.

John Daniel - Simmons & Company

Got it. Okay. That’s all I had guys. Thanks again for putting me back in the queue.

Operator

And we’ll take our next question from Doug Garber with Dahlman Rose

Doug Garber – Dahlman Rose

Hi guys. I wanted to follow up on I guess the refurbishment program and what you are seeing in terms of pricing from vendors for various components. Whether it’s fluid ends or the pump or the transmission or the engine. As you refurbish them it seems like there is a lot of capacity out there and there are not a lot of people buying equipment next year. Just wanted to see if you are getting good pricing or if that pricing has come down from where it was a year or two ago?

Jim Landers

Yeah Doug, this is Jim. Good question. We’ve kind of surveyed our operation, I mean the folks who are responsible for purchasing we think that component costs are down probably mid-single digits percentages, maybe as much as 10% compared to this time last year.

Doug Garber – Dahlman Rose

Alright. Thanks guys.

Operator

And we have no further questions in the queue, please go ahead Mr. Landers.

Jim Landers

Okay. Great. This is Jim Landers. I appreciate everybody calling in. We enjoyed the discussion. I hope everyone has a good day. Thanks again.

Operator

And this does conclude today’s conference call. Thank you all for your participation.

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