About RPC Inc:
RPC, Inc., a holding company, provides services and equipment to the oil (74% of ’23 revenues) and gas (26%) exploration and production industry in the United States (90% of ’24 EBT) and in international markets (10% of ‘24 EBT). Technical Services (94% of ’24 revenues) include: pressure pumping (41.5%), downhole tools (27.3%), coiled tubing (9.6%), cementing (7.8%), and other services (7.8%). Support Services made up 6% of ’24 revenues. Has approx. 2,691 employees. Blackrock Institutional Trust owns 7.0% of common. Officers & directors own 60.5% of common (3/25 Proxy).
RPC provides its services primarily to domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in Texas, the mid-continent, the southwest, the Gulf of America, the Rocky Mountain and the Appalachian regions. Demand for RPC’s services in the U.S. is volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. Over the years, the oil and gas industry’s cyclical nature has resulted in many OFS companies going bankrupt, ceasing operations, or being forced to get acquired. The Company believes its financial and operating discipline have resulted in longevity and financial success in an industry where downturns can have significant financial impacts on operator liquidity and economic sustainability.
The graph below shows RPC’s 5 year performance against Russell 2000 index, Philadelphia Oil Services Index (OSX), and its peer groups. Over the 5 year period. RPC has outperformed OSX, and its peer groups.
Industry Overview:
Rig count: During 2024 the average U.S. rig count decreased 12.8% to 600 compared to the prior year. While oil and gas industry demand is influenced by many factors, the rig count is often used as a proxy for current and future industry activity. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles. The most significant recent downturn occurred following the onset of the COVID pandemic, with August 2020 marking the lowest U.S. domestic rig count in U.S. oilfield history at 250. Since that point, the industry began to rebound with strong U.S. economic activity, with the rig count reaching an average of 723 in 2022 and 688 in 2023, before trending even lower and averaging 600 during 2024. Over the past several years, there has been oil and gas price volatility sparked by uncertainties related to the Russian invasion of Ukraine, tensions in the Middle East related to Israel’s conflict in the Gaza Strip and continued uncertainty from OPEC+ regarding production levels. Furthermore, there is an increased likelihood that a potential rapid rise in the use of artificial intelligence would have significant energy consumption requirements and boost demand for power solutions many of which use oil and gas.
Efficiencies in pressure pumping: In the past decade, there have been significant improvements in the efficiency of OFS, with the end result being more oil and gas produced with less equipment. Several factors have contributed to asset efficiency, including the industry’s ability to accurately identify high yielding formations, drill faster and more effectively, complete wells more quickly, and extract the same amount of oil and gas with less rigs and service equipment. Pressure pumpers have also significantly increased pump hours per day, often to 20 to 22 of 24 hours, resulting in assets being “burned” faster and requiring quicker capital investment cycles. Furthermore, more wells are being drilled per pad, or site, each well is being drilled with longer laterals, now often extending several miles, and more stages are being completed within each lateral. All of these factors are increasing hydrocarbon output without creating a correlated increase in cost; however, cost efficiency savings have been disproportionately realized by the E&Ps rather than oilfield service companies. As a result of increased asset efficiency, the Company believes there is a general oversupply of OFS capacity, particularly in pressure pumping, which has created a high level of price competition as OFS companies seek to keep assets utilized.
Consolidation of E&Ps: The oil and gas industry is capital intensive and cyclical. As a result, operating and financial scale have significant benefits related to acquiring attractive land, investing in assets and infrastructure to efficiently extract hydrocarbons, leveraging scale across the value chain, and generating financial leverage to drive investor returns. The recent trend of consolidation among mid-to-large E&Ps has resulted in a more concentrated pool of larger, more powerful E&P companies. Also, as a result of E&P consolidation, there can be significant changes in an OFS company’s customer base, with customers often being acquired (risking loss of business) or making acquisitions (potential customer gains) across service lines. There is the potential for M&A activity to continue as well as become more frequent in the smaller E&P and OFS market.
Capital discipline by E&Ps: During the past cycle, E&P companies have taken a more disciplined approach to capital allocation of operating and free cash flow. They are maintaining steadier operations and not significantly accelerating or decelerating investment with commodity price cycles and providing a more significant and consistent return of capital to shareholders. This has taken the form of both dividends and share buybacks. This level of discipline is intended to boost overall investor returns, in part by limiting activity volatility and enabling more consistent free cash flow generation available to distribute. As a result, many large E&Ps are focused on developing and securing OFS partners who can meet their needs for scale and types of equipment across their large asset base. While the rig count has trended lower due to the efficiencies discussed above, capital discipline has reduced and should generally continue to reduce the volatility of the rig count over time.
Increased adoption of low-emission equipment: Pressure pumping requires emission-intensive equipment as it has historically been powered solely or primarily by diesel fuel. However, in recent years DGB and electric powered fleets have been increasingly adopted. Electric powered fleets use electric motors powered by lower-cost energy sources (e.g., natural gas converted on-site, compressed natural gas, or grid-supplied electricity) and offer reduced emissions compared to diesel fuel or DGB equipment. Electric assets are often desired by customers, especially large public companies, to achieve their ESG goals, while smaller independent E&Ps often place less value on ESG-related benefits. To date, RPC has not invested in electric fleets but is considering future investments in this area.
Low natural gas prices: In 2024 average natural gas prices decreased 13.8% compared to the prior year, despite strong performance in the second half of 2024. Flat consumption of natural gas in the United States has been met with increasing supply from high yielding gas shales and gas collected as byproduct from oil production. This abundant supply has resulted in low natural gas prices, thus reduced gas production activity. The Company believes the favorable long-term outlook for natural gas demand is sufficient for our customers to maintain natural gas-directed E&P activities. However, currently suppressed activity has resulted in OFS companies shifting assets out of gassy basins toward oil basins, resulting in more competition in the Company’s key service lines, particularly pressure pumping in the Permian basin.
Valuation:
The company’s current P/E ratio is 12.9. The Oil & Gas Exploration and Production industry has a total of 89 stocks, with a combined market cap of $755.51 billion, total revenue of $292.65, and a weighted average PE ratio of 16.60. So, based on the P/E ratio, RPC Inc is trading at a discount to the industry average.
The company’s 2024, 2023, and 2022 Free Cash Flows were $129.46 million, $213.76 million, and $61.73 million respectively. So, the company’s 3 year average Free Cash Flow is $135 million.
If we assume this $135 million cash flow into perpetuity, at no growth and 10% discount rate, the intrinsic value would equate to $1.35 billion. ($135 million divided by 10%).
If we assume this $135 million cash flow into perpetuity, at no growth and 7.89% WACC discount rate, the intrinsic value would equate to $1.71 billion. ($135 million divided by 7.89%).
The Company’s cash and cash equivalents were $326.0 million as of December 31, 2024.
The Company is debt-free.
So, the total intrinsic value, which accounts for its future cash free cash flows and the cash on hand, is somewhere in the range of $1.67 billion and $2.03 billion. However, the company’s current market cap is $1.1 billion. So, the company is trading between 54% and 65% below its intrinsic value.
In other words, we believe that the company’s stock price can rise between 51% and 84% in the next 3 years. This equates to an annualized return between 15.39% and 25.06%.
Business Fundamentals:
Over the past 10 years, the company’s revenue has ranged from a low of $598 million in 2020 to a high of $1.72 billion in 2018. The company’s 2024 revenue was $1.41 billion.
The company’s gross margins were 17.4%, 26.0%, and 26.9% in 2024, 2023, and 2022 respectively.
The company’s net income margins were 6.5%, 12.1%, and 13.6% in 2024, 2023, and 2022 respectively. The lower net income number for 2024 was due to the drop in sales arising from lower industry activity levels across service lines, and competitive pricing.
The company does not carry any debt on its balance sheet. The company’s book value in 2024 is $1.078 billion and tangible book value is $1.014 billion. So, we can see that the company’s current stock price is trading around its book value.
As of December 31, 2024, the company’s total assets were $1.386 billion, the total liabilities were $308.2 million, and the shareholder’s equity was $1.078 billion.
According to the company’s proxy, the management’s incentive compensation is tied to Operating Cash Flow (OCF). The company calculates its OCF as EBITDA minus cash capital expenditure. By focusing on OCF, management is incentivized to focus on both the company’s income statement and its cash flow statement. Management is unlikely to play any accounting shenanigans.
As seen on the company’s cash flow statement, the company also paid $34.43 million in dividends, and repurchased $9.94 million of common stock in 2024.
Next, the company has fragmented customers and suppliers. This is good as neither a single customer nor a single supplier controls the financial outcome of RPC. In other words, losing the biggest customer or supplier would not jeopardize the future of the company.
- The Company provided oilfield services to several hundred customers during each of the past three years. One of our customers, a private E&P company, accounted for approximately 13% of the Company’s revenues in 2024, another private E&P company accounted for approximately 11% of the Company’s revenues in 2022.
- The Company’s suppliers mainly provide equipment and materials used across our service lines. The company purchases hydraulic fracturing fleets, including pumps and ancillary components, trucks, sand, chemicals, and cement to support our pressure pumping and cementing service lines. The company also procures flexible steel pipe used in coiled tubing. The company claims to have multiple suppliers for its key equipment and materials needs and it believes that these sources of supply are adequate to secure its demands at competitive prices.
The company’s biggest competitive advantage in this highly competitive and cyclical industry is that it is debt free, with $326 million in cash on its balance sheet. Additionally, the company’s management has skin in the game. All directors and executive officers as a group hold 60.5% of all the shares outstanding.
Outlook
The current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity and can be impacted by economic and policy developments as well as geopolitical disruptions, such as the continuing conflicts in the Middle East as well as Russia and Ukraine. RPC believes that oil prices currently remain above levels sufficient to motivate its customers to maintain drilling and completion activities. Long-term, projected steady higher demand for oil and natural gas should drive increased activity in most of the basins in which RPC operates.
RPC continues to monitor the supply and demand for our services and the competitive environment, including trends such as increasing customer preferences for lower emission and more efficient equipment. Increased asset efficiency in recent years of oilfield completion fleets, particularly in pressure pumping, has inherently contributed to oversupply in the OFS market. RPC believes that most of the feasible operating efficiency gains have been realized, but competition is expected to remain at a high level.
Share buybacks
The Company has a stock buyback program to repurchase up to 49,578,125 shares in the open market. As of December 31, 2024, 12,768,870 shares remained available to be repurchased under the current authorizations. The program does not have a preset expiration date.
Risks
The company operates in a highly cyclical industry, where the companies go through boom and bust cycles.
98% of the company’s revenue comes from the United States.
The company has high exposure to permian basin
Two of the company’s Directors, Gary W. Rollins and Pamela R. Rollins, have chosen not to stand for re-election. Collectively, these two directors own 56% of the shares outstanding.
Catalysts
We believe that consolidation within the OFS market should help drive up the company’s top line number as this would take the excess OFS supply off the market. Additionally, as a debt free company with $326 million in cash, the company can easily acquire another competitor, or be acquired by a bigger company.
Additionally, higher oil prices should also help drive up the company’s revenue. Higher oil prices are linked to increased OFS activities.
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Superior North LLC’s content is for educational purposes only. The calculators, videos, recommendations, and general investment ideas are not to be actioned with real money. Vyom Joshi is not a professional money manager or a financial advisor. Contact a professional and certified financial advisor before making any financial decisions. Please review the Disclaimer and Terms and Conditions.
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