1. November 11, 2011
RPC INC.
RES/NYSE
Continuing Coverage:
Growing by Drilling…in Every Direction!
Investment Rating: Market Outperform
Conservative capital structure helps to withstand the volatile oil and
gas industry.
New shale oil and gas reserves present opportunities and threats.
Volatile oil and gas prices cause a variable business cycle.
Large corporate ownership aligns managements' interests with
shareholders' but limits the stock’s float.
Our 12-month target price is $ 26.00.
Company Quick View:
Location: Atlanta, Georgia
Industry: Oil and Gas Equipment and Field Services
Description: RPC Inc. operates in the oil and gas services industry through its
subsidiary companies.
Key Products & Services: RPC Inc.’s key businesses are pressure pumping services,
snubbing, rental tools, coiled tubing, nitrogen, and well control.
Company Website: www.RPC.net
Analysts: Investment Research Manager:
Rajan Gaglani Eric McDonald
Satyajith Jay Gaonkar
Oleksandr Matviienko
Theresa Scales
Andrew Ipping Wah
PRICE: $ 21.47 S&P 500: 1,264.85 DJIA: 12,153.68 RUSSELL 2000: 744.64
Valuation
EPS
P/E
CFPS
P/CFPS
2010 A
$ 1.00
21.5x
$ 2.07
10.4x
2011 E
$ 2.11
10.2x
$ 3.53
6.1x
2012 E
$ 2.70
7.9x
$ 4.40
4.9x
Market Capitalization Stock Data
Equity Market Cap (MM): $ 3,184.30 52-Week Range: $14.21 - $29.05
Enterprise Value (MM): $ 3,332.07 12-Month Stock Performance: 24.90%
Shares Outstanding (MM): 148.31 Dividend Yield: 1.30%
Estimated Float (MM): 34.30 Book Value Per Share: $ 4.85
6-Mo. Avg. Daily Volume: 1,567,352 Beta: 1.55
The BURKENROAD REPORTS are produced solely as a part of an educational program of Tulane University's
A.B. Freeman School of Business. The reports are not investment advice and you should not and may not rely
on them in making any investment decision. You should consult an investment professional and/or conduct your
own primary research regarding any potential investment.
Wall Street's Farm Team
BURKENROADREPORTS
2. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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STOCK PRICE
PERFORMANCE
Figure 1:
5-year Stock Price
Performance
Source: Yahoo Finance
INVESTMENT
SUMMARY
We give RPC Inc. a Market Outperform rating and project a target
price of $26.00 per share by year-end 2012. RPC is a holding company,
consisting of Patterson Services and Cudd Pumping Services that
provides oilfield services and equipment to companies that focus on the
exploration, production, and development of oil and gas properties.
RPC‘s operating business units provide technical services and support
services. Technical services include rental equipment, hydraulic
fracturing, coiled tubing, and snubbing. Support services include rental
tool services and well control training programs.
One of the most significant challenges RPC faces in the long term is if
the commodity prices or economic conditions move in unfavorable
directions its revenue can be negatively impacted. However, we believe
that RPC has a competitive advantage in the oil and gas services
industry in the form of proprietary technology related to unconventional
drilling. In addition, the discovery of shale oil and gas reserves across
the United States provides RPC a significant opportunity to grow.
PREVIOUS
BURKENROAD
RATINGS AND
PRICES
Table 1: Burkenroad Ratings and Prices
Date Rating Price*
11/08/10 Market Outperform $32.26
11/30/2009 Market Outperform $13.34
12/08/2008 Market Outperform $11.00
12/04/2007 Market Perform $12.97
11/30/2006 Market Perform $26.13
03/15/2005 Market Outperform $9.91
02/02/2004 Market Perform $4.90
03/14/2003 Market Perform $4.56
03/20/2002 Market Outperform $6.62
04/15/2001 Buy $5.24
*Price at time of report date.
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INVESTMENT
THESIS
One of the most significant challenges RPC faces in the long-term is if
commodity prices or economic conditions were to move in unfavorable
directions their revenue can be negatively impacted. However, RPC has
a competitive advantage in the oil and gas services industry in the form
of proprietary technology related to unconventional drilling. Also the
discovery of Shale gas and oil reserves across the country provides RPC
a huge opportunity to grow.
Conservative capital
structure helps to
withstand the volatile
oil and gas industry.
.
RPC has a strategy to maintain a conservative capital structure that
reduces the risk of bankruptcy in the volatile oil and gas market. The
Company maintains a prudent debt structure and has established a
revolving credit facility of $350 million with Bank of America
Securities LLC to sustain its everyday operations. This conservative
capital structure will prevent RPC from losing value in times when the
industry or the economy experiences downturns. However, higher
leverage is not necessarily a negative factor; higher leverage helps a
company achieve higher returns during a good economy, when a
company is achieving a higher rate of return than the interest rate it pays
for the debt. RPC for example, can increase its return on equity during a
booming economy by increasing its debt level.
New shale oil and
gas reserves present
opportunities and
threats.
RPC’s ability to provide services for expanding shale oil and gas
production sites positions the Company well for the future because
demand for its services are correlated with the amount of
unconventional wells being drilled in shale regions. Although RPC has
mentioned it currently has no interest in pursuing a September 2011
shale gas discovery in Blackpool, Lancashire, UK the Company does
not rule out other opportunities to enter these markets in the future. But,
there is a downside to this story; certain states in the United States have
imposed regulations against unconventional drilling and shale rock
fracturing citing pollution of both and underground water as a reason.
The companies involved in fracturing are taking necessary steps to
prevent groundwater pollution, and studies have shown fracturing does
not pollute underground water. Nevertheless, these regulations could
increase the cost of drilling operations or reduce drilling activity to
some extent in these states.
Volatile oil and gas
prices cause a
variable business
cycle.
Volatile oil and gas prices make the nature of RPC’s business mercurial.
Commodity prices play a key role in the activity of oil and gas services
companies. High oil and gas prices lead exploration and drilling
companies to increase capital expenditures that directly enhance the
activity of services companies. Therefore, oil and gas price movements
represent the main risk of any service companies performing in the
energy field. RPC’s primary tool to hedge against this price volatility is
to keep a conservative debt structure that will allow the Company to
endure short-term cash inflow reductions. As a result, RPC’s business
could be less inclined to suffer low utilization rates of its equipment
when oil and gas prices are low.
4. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Large corporate
ownership aligns
managements'
interests with
shareholders' but
limits the stock’s
float.
RPC’s insiders and affiliate organizations control a majority (more than
70%) of RPC’s outstanding shares, which aligns the managements’
interest with that of other shareholders and also prevents an outside
organization from attempting a hostile takeover. Large insider holdings,
however, limit the number of shares that are floating in the market,
hence reducing the liquidity of the stock. RPC is a classified as a
“Controlled Corporation” because a small group of individuals control
over 50% of the Company’s voting power; this excludes the Company
from certain NYSE rules such as the requirement of having majority
independent directors on its board.
VALUATION We give RPC a Market Outperform rating and forecast that the stock
price will be trading at $26 by the end of 2012. In calculating our 12-
month target price, we decided to use the discounted cash flow method.
Additionally, we used the multiple method and transactions approaches
to define the range at which we estimate RPC’s stock will be trading.
Figure 2: RPC Valuation
Discounted Cash
Flow Method
In the discounted cash flow method, we calculated the free cash flow of
the Company using a revenue model mainly driven by unconventional
drilling rigs. We projected the free cash flow of the Company until 2020
and then used a perpetual growth rate of 3%.
Our discount rate was determined assuming a market risk premium of
5.7% and a risk-free rate of 2.5%. We found the beta of the Company at
1.551 by regressing it on the Russell 2000. Furthermore, we added a
specific risk premium of 1%, considering the natural risk of the sector
RPC is operating in, the volatility of Company’s revenues, and the
dependence on key customers. Therefore, the cost of equity reaches
12.34%.
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Using historical data, we projected the cost of debt to be 2.71% and the
tax rate of the Company to be 37.91%. We calculated the cost of debt
after tax to be 1.68%, which led us to estimate the overall cost of capital
of RPC to be 11.75%. By discounting back RPC’s projected free cash
flow to the present using a discount rate of 11.75%, we calculated the
stock’s fundamental value to be $26.00.
Multiples Method To give more accuracy to our analysis, we decided to implement
comparable companies and transactions approaches based on EV/Sales,
EV/EBITDA, and P/E multiples as of the third quarter of 2011 as well
as forward multiples through 2013. According to our analysis, RPC’s
stock price would trade between $23.48 and $28.00.
The upper and lower ranges were found using two metrics that appeared
to be the most accurate: an EBITDA multiple and a P/E multiple. We
determined the multiples by using the average and the median of the
EV/EBITDA and P/E ratios of RPC’s peers in the third quarters of
2011, in 2012 and in 2013.
INDUSTRY
ANALYSIS
The oil and gas field service industry consists of a wide range
companies that support the operations of oil and gas exploration and
production (E&P) companies. These field services companies provide a
diverse range of services at different stages of oil and gas E&P, from
exploring, finding, and extracting oil and gas (upstream companies) to
selling and distributing crude oil, natural gas, and other finished
products (downstream companies). The oil and gas field service
industry is currently undergoing a boom cycle because of high oil and
gas prices as well as the discovery of huge shale reserves across the
country and because of directional drilling that makes it possible to
access the gas trapped within these shale rocks. The boom is going to
continue unless regulations curb directional drilling and fracturing.
The oil and gas field services industry is a mature industry and is highly
fragmented. Schlumberger, Halliburton, and Baker Hughes the three
major players in the industry and control approximately 30% of the
market. The other 70% is shared by hundreds of smaller (both public
and private) companies. The oil and gas field service industry comprises
two tiers of companies: large, integrated companies with expertise in a
broad range of services; and small and medium-sized companies that
offer specialized services. Although large companies have a significant
competitive advantage in providing services that are highly capital
intensive, there are enough opportunities for small- and medium-sized
companies such as RPC to provide services.
Industry Drivers Drivers of the oil and gas field services industry mainly are economic
and political activity and supply and demand; all other factors such as
crude prices and rig-count are a function of economic activity and
supply and demand. The drivers are discussed below in the order they
influence the revenues of the Company.
6. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Economy and Politics
The oil industry is directly influenced by economic and political
conditions. Wars and political instability can affect the production of
crude oil, which in turn increases the price. During a recession, there is
less economic activity in manufacturing, transporting, and travel, which
results in less consumption of oil and, subsequently, reduces the price of
oil. The best time to invest in oil and gas companies is when the
economy is booming.
Supply and Demand
Many factors determine the price of oil, but it basically comes down to
supply and demand. Demand generally does not fluctuate except in the
case of recessions, but supply shocks can occur for a number of reasons,
for example, when major oil-producing countries such as OPEC
members decide to vary the supply by a wide margin or when there is
political unrest in one of the oil producing countries such as Egypt or
Libya.
Figure 3: Drivers of Oil and Gas Field Services Industry.
Barriers to Entry Barriers to enter the oil and gas field services industry are high. The
industry is capital intensive and requires significant investment in
property, plant, and equipment; for example, as of the third quarter of
2011, RPC has over $600 million in property, plant, and equipment.
RPC is also currently able to borrow at a favorable rate to take
advantage of recent growth within the industry. New entrants may not
have access to the same amount of capital at a comparable cost of
borrowing. A new entrant will also be faced with obtaining the supplies
necessary to provide oil and gas field services. Some materials such as
guar gum used in hydraulic fracturing are not always readily available
unless arrangements have been made far in advance. Because of current
economic factors, larger companies that do not offer particular services
are finding that this is a favorable time to acquire businesses that offer
Economic/Political
Activity
Supply and
Demand
Crude Oil Prices Rig Count
Field Services
Revenue
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in-demand services within favorable markets. The result is a
tremendous amount of merger and acquisition activity. Although this
activity may decrease the number of companies, these conglomerates
have the capital necessary to compete with companies such as RPC.
Bargaining power of
suppliers
The bargaining power of suppliers is high. The limited number of
suppliers capable of providing the type of materials used in RPC’s lines
of services makes companies significantly vulnerable to changes in
suppliers’ decisions. RPC’s, for example, largest service line—pressure
pumping—is very specialized, and the number of companies in the
oilfield service industry able to meet RPC and its competitors’ needs in
terms of equipment is limited, which leads to a strong bargaining power
from the suppliers side.
During a demand spike, RPC’s and its competitors’ suppliers might not
be able to provide good quality service and products, which can
adversely affect RPC and its competitors’ ability to fulfill their
commitments in time and in quality, thus, supply disruptions have a
direct negative impact on the companies’ services to their customers
and will hurt their revenue and customer- relationship. However, RPC is
trying to reduce the suppliers’ source of power by using various
suppliers as much as it can for other materials such as chemical
additives, acid, or nitrogen.
Finally, since 2009, RPC has been increasingly concerned about the
availability and price of guar. Essential in hydraulic fracturing and
hardly substitutable, the price of this commodity has been extremely
volatile and has reached very high levels ($2.5/lb).
Figure 4: Spot Price Movement of Guar
Bargaining Power of
Buyers
The bargaining power of buyers is high. The oil and gas services
industry is highly dependent on the price of and demand for petroleum.
Once reserves are discovered a significant amount of time will pass
before the site transforms into a producer of hydrocarbons. If oil prices
rise, oil and gas companies must take into account that it takes time
before they can reap the benefits of their efforts.
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On the contrary, because of a single company’s oil services not being
substantially unique in comparison to its competition, the balance of
power is shifting even more towards buyers. This power shift triggers
oil and gas exploratory and development companies to seek lower
prices and better contract terms. During 2010 for example, one of
RPC’s customers accounted for more than 10% of revenues. If this
buyer were to use a different service provider, RPC believes it would
have a material adverse effect on revenues and operations. Although
field services are in high demand, the high prices of these services are
forcing many larger oil and gas companies to operate in-house field
services divisions and to use third-party service companies to
supplement their own activities.
Availability of
Substitutes.
The availability of substitutes is relatively insignificant. The primary
substitute for products offered by oil and gas services companies are
E&P companies’ decisions to service their drilling, completion,
stimulation, and other well-related services in-house.
For an E&P company to undertake additional services requires
significant capital injections, which small to medium size E&P
companies are not able to afford. Larger E&P companies are able to
meet these financial obligations; however, after the 2008-2009 financial
crisis many of these companies have realized the importance of
outsourcing, which leads to operational diversity and stable cash flows
that guard against illiquid and redundant PP&E. Therefore, risk
management considerations and new industry trends that are focused on
outsourcing create a small threat for substitutes of oil and gas services
companies’ products.
Energy sources that serve as substitutions for crude oil and natural gas
also pose a threat to the oil and gas services industry. The primary
substitutes for oil and gas are coal, nuclear energy, and renewable
energy. However, regarding transportation, oil virtually has no strong
substitutes, because electric vehicles are only in their preliminary stages
of development. For electricity generation purposes, abundant coal can
compete with gas, but it is less environmentally friendly and can be
more expensive. Renewable energy sources occupy a relatively small
fraction of the U.S. energy balance and are generally more expensive
than traditional sources. Nuclear energy has not been considered
favorable for decades, especially now after the nuclear disaster Japan
experienced in spring 2011. Nuclear power plants also involve a
sizeable amount of start up costs and can take several years to build.
Currently North America has twice as much natural gas relative to the
amount of proven oil reserves in Saudi Arabia. The abundance of
natural gas makes it relatively inexpensive, and therefore, difficult to
replace.
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Figure 5: U.S. Energy Balance in 2010.
Competitive Rivalry Competitive rivalry is medium. Demand for oil and gas field services
mainly depends on capital spending by E&P companies. These capital
spending programs are in turn influenced by anticipated changes in oil
and gas prices. When oil or gas prices rise, oil producers hire more
contract drillers and field services providers to increase production from
existing fields and to explore for new reservoirs. Increases in price
benefit the entire industry; what gives an individual company an edge
over its peers is its technical expertise and operational efficiency. RPC’s
Return on Asset (ROA) of 26.35%, which measures the efficiency of
generating revenue from its assets, is the highest in its segment; the
company with the second highest ROA is Carbo Ceramics Inc. at
16.68%.
From an operational diversity standpoint, large companies offer a wide
range of services, whereas, the smaller companies specialize in a
particular service or segment. RPC offers both a wide range of services
through its various business segments as well as specialized and niche
services such as well control. Most of RPC’s business units have a
dedicated R&D division that not only develops new technologies but it
is also involved in improving the quality and efficiency of the products
and services it offers. RPC currently holds eight patents that expire at
varying times in the future.
From an overall perspective, the oil and gas field services industry is
mature and fragmented; some of the key factors that give RPC a
competitive advantage are its safety record and timeliness. Several years
of experience in the oil and gas field service industry have provided
RPC with a considerable amount of knowledge, which helps RPC stay
ahead of new entrants as well as the existing competition.
Series1,
Petroleum, 37%,
37%
Series1, Natural
gas, 25%, 25%
Series1, Coal ,
21%, 21%
Series1, Nuclear
electric power,
9%, 9%
Series1,
Renewable
energy , 8%, 8%
10. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Figure 6: Porter’s Five Forces Analysis.
Legend Description
Extremely Bad for RPC
Bad for RPC
Neutral for RPC
Good for RPC
Extremely Good for RPC
COMPANY
DESCRIPTION
RPC Inc. (RES/NYSE) was formed in 1984 when Gary and Randall
Rollins decided to spin it off Rollins Inc. because the severe cyclical
downturn of the oilfield industry had made the business unrewarding.
RPC also became public in 1984. RPC was a diversified holding
company with businesses in areas ranging from oil services and waste
management to recreational powerboats. Beginning in 1999, the
Company divested its non-core businesses to form a pure-play oil and
gas field services company. The businesses sold included Eco Waste
Technologies, Business Link International, Anchor Crane, and
International Hammer and Spindletop Services.
Headquartered in Atlanta, Georgia, RPC provides a range of oilfield
services and equipment primarily to independent oil and gas companies
involved in the exploration, production, and development of oil and gas
in the United States, Africa, Canada, China, Eastern Europe, Latin
America, the Middle East, and New Zealand. It operates in two
segments: Technical Services and Support Services.
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Technical Services includes RPC’s oil and gas service lines that employ
people and equipment to perform value-added completion, production,
and maintenance services directly to a customer’s well. Support
Services includes oil and gas service lines that provide equipment for
customer use or services to assist customer operations.
RPC has grown through acquisitions since its inception. The Company
operates on a decentralized basis, which appeals to sellers of businesses
who are interested in remaining with their companies after an
acquisition is finalized. RPC is mindful of not overpaying for a
company, and it creates a win-win situation by paying small premiums
for acquisitions while providing the sellers an opportunity to generate
additional profits based on future financial performance.
Figure 7: RPC’s acquisition timeline.
Source: RPC’s documents
Products and
Services
RPC provides energy related services in two business segments:
Technical and Support. Table 2 provides detailed description of each
business line.
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Table 2: RPC’s Technical Services Description.
Cudd Pumping
Provides hydraulic fracturing and acid treatment services to
increase production in existing land wells.
Thru Tubing
Solutions
Provides services to the coiled tubing and snubbing industry, and
specializes in working downhole tools under pressure during
various fishing and drilling operations. Thru Tubing also
provides a proprietary downhole motor design.
Snubbing
Performs maintenance on wells without depressurizing, or
"killing," the well.
Nitrogen Unit
Provides nitrogen gas used in several different oilfield operations
as a drilling fluid and in gravel packing operations; nitrogen is
employed in a well because of its inert nature.
Wireline Unit
Provides a production tool used to remove downhole
obstructions.
Fluid Pumps Provides pumps used in a variety of oilfield operations.
Well Control
Provides professional live well services including blowouts and
firefighting.
Production
Rental Tools
Provides production rental tools (hydraulic chokes, manifolds,
valves, flow iron, and production testing) to the oilfield industry.
RPC’s Support Services Description.
Rental Tools
Offers a variety of rental equipment including drill pipe and
blowout preventers.
Tubular
Services
Performs tubular inspections, and stores and inventories a wide
variety of pipe for customers.
Well Control
School
Provides industry and government-accredited training to industry
personnel.
Energy
Personnel
International
Provides experienced project management personnel, engineers,
and consultants for field work-over programs and optimization
projects.
Source: RPC’s Web site.
The technical services segment generated 92% of revenues, while
support services generated the remaining 8% in 2010. The pressure
pumping business line remains the Company’s main cash generating
unit, accounting for about 48% of total revenues. Figure 8 contains
detailed information about RPC’s revenue breakdown in 2010.
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Figure 8: RPC Revenue by Business Line.
Source: RPC’s documents
RPC operates domestically and internationally. The international
operations accounted for about 3% of total revenue during the first half
of 2011. Principally, such operations consist of snubbing, well control,
oilfield training services as well as providing rental tools and downhole
motors to major international customers. These services are provided
through international branch locations, or wholly owned foreign
subsidiaries.
RPC has a strong geographical presence in the U.S. oil services market.
RPC’s distribution system consists of storage facilities and operational
platforms located in all major oil and gas producing regions: the Gulf of
Mexico, the mid-continent, the Southwest, the Rocky Mountains, and
the Northeast. Figure 9 shows the Company’s geographical presence in
the U.S.
Figure 9: RPC’s National Geographical Presence.
Source: RPC’s documents
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Customers RPC’s customers consist primarily of major and independent natural gas
and oil producing and drilling companies as well as integrated energy
companies. RPC has concentrated on natural gas drilling and production
activities: 67% of revenue in 2010 was related to those activities. RPC’s
main customer, Chesapeake Energy Corporation, generated 15% of
revenue in 2010. RPC believes it maintains a good relationship with this
customer. All other customers accounted for less than 10% each of
RPC’s revenue.
Strategy RPC’s primary growth strategy is to grow through acquisition. The
Company looks for strategic investment and opportunistic
consolidations to gain market share, to increase product offerings, and
to improve the profitability of existing service lines.
Since the end of 2010, the Company’s near-term strategy has changed.
It has decided to use a larger fleet of equipment than before in several
completion works such as pressure pumping, coiled tubing and
downhole tools because of increasing demand from many of its
customers. Therefore, recent capital expenditures have increased to
support this new strategy and expansion plan. The Company believes
that the new strategy, along with improved pricing of its technical
services segment, will improve its revenues and profits.
Another key factor in RPC’s strategy is to maintain a conservative debt
structure and long-term relationships with customers based on long-
term contractual agreements. To support and improve relationships with
its customers, the Company established a new $350 million revolving
credit facility on August 31, 2010 with Bank of America Securities
LLC. The facility contains financial covenants limiting the ratio of the
Company’s consolidated debt-to-EBITDA ratio to no more than 2.5.
Consistent with this strategy, RPC’s capital expenditures increased from
$67.8 million in 2009 to $187.5 million in 2010.
Competition The oil and gas services industry is highly competitive, and RPC faces
opposition from many companies some with much larger market
capitalization: Halliburton, Schlumberger, Baker Hughes, Basic Energy,
Calfrack, Key Energy, Lufkin Industries, PHX Energy Services, and
C&J Energy Services.
Latest Developments Over the past several years a significant number of new shale gas and
oil plays around the world including the September 2011 Lancashire
discovery have been revealed. Several exploration and production
companies are focusing more of their resources on known shale
formations that were identified many years ago but are now feasible for
production because of advancements in fracturing technology since
2008. RPC offers several services for unconventional drilling that can
be beneficial to customers interested in producing from shale
formations.
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Revenue from RPC’s hydraulic fracturing and acid treatment services
has increased from 48% of 2010 revenues to 55% of the first half 2011
revenues, which further validates the demand for these particular
services.
Figure 10: Shale Reserves across United States.
As of the third quarter of 2011 pending regulations in the United States
could affect the way oil and gas is drilled for. The Environmental
Protection Agency, for example, has proposed rules to reduce air
pollution from oil and gas drilling operations. The proposed plan would
impose control standards on approximately 25,000 gas wells that are
hydraulically fractured each year. The Environmental Protection
Agency claims that these new regulations will force companies to
capture gas that they could sell, which normally would go to waste. The
proposed plan is estimated to save the industry $30 million a year.
In 2011, significant merger and acquisition activity has taken place
within the oil and gas industry. One of the larger deals was British
Petroleum paying Reliance Industries Ltd. $7.2 billion for a 30% stake
in 21 oil and gas production-sharing contracts that Reliance operates in
India.
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In October 2011 Superior Energy Services, announced it would acquire
Complete Production Services for about $2.6 billion by the end of the
year. This particular acquisition is significant because the two
companies are direct competitors of RPC. According to global data
compiled by Bloomberg, companies have paid an average premium of
28% in acquisition deals announced in the 12-month period preceding
October 2011. Oil futures declined 8% in the first nine months of 2011.
As global economic growth has slowed, there is an increasing concern
that the demand for hydrocarbons will decrease. The decline in prices
has negatively affected the value of many energy companies.
PEER ANALYSIS RPC participates in an industry that is mature and highly fragmented.
Its competitors range from large-cap companies such as Schlumberger
Limited ($83 billion), Halliburton Company ($30 billion), and Baker
Hughes Incorporated ($21.20 billion) to micro-cap companies like
Parker Drilling Company ($512 million) and Pioneer Drilling Company
($466 billion). To conduct our peer analysis we chose companies that
are not only similar to RPC in their service offerings but also similar in
market capitalization ($800 million -$3.5 billion) In addition to publicly
traded companies; RPC competes with a few small private companies
that we do not consider for this analysis.
Table 3: Peer Analysis
Source: MSN Money
Company Ticker Mkt Cap
P/
Book
EV/
EBITDA
ROA ROE D/E
Oper.
Margin
RPC Inc. RES 2.50B 4 5.12 26.38% 43.93% 26.81 26.47%
McDermott
International Inc.
MDR 3.27B 1.86 6.09 5.96% 13.90% 4.82 11.71%
Superior Energy
Services Inc.
SPN 2.19B 1.64 6.87 4.19% 7.69% 87.28 11.34%
Key Energy
Services Inc.
KEG 1.39B 1.47 8.13 2.94% 0.48% 56.46 6.02%
C&J Energy
Services Inc.
CJES 808.90M 4.29 5.15 N/A N/A 59.65 34.31%
McDermott
International, Inc.
(MDR/NYSE))
McDermott International Inc. is a worldwide energy services company
that focuses on executing offshore oil and gas projects. It was founded
in 1923 and is headquartered in Houston, Texas. It provides
engineering, installation, fabrication, manufacturing, procurement,
research, project management, and facility management services to a
variety of customers in the energy industry including the U.S.
Department of Energy. McDermott operates in more than 20 countries
across the Atlantic, Middle East, and Asia Pacific regions. McDermott
has a slightly higher market capitalization than RPC; however, its price-
to-book ratio of 1.86 is considerably lower than that of RPC’s 4. The
company has a higher EV/EBITDA valuation multiple of 6.09, but it
has much lower profitability: RPC’s ROE is around 30 percentage
points (p.p.) higher; ROA is around 20 p.p. higher; operating profit
17. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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margin is around 16 p.p. higher than McDermott’s. McDermott uses an
even more conservative leverage policy than RPC: its D/E is around 8
times lower than RPC’s. McDermott’s significantly lower than the
industry average D/E can be viewed as a sign of inefficient utilization of
leverage policy rather than a feature of safe investment opportunity.
Therefore, taking into account stronger profitability, and the more
efficient usage of leverage opportunities, RPC represents a more
attractive investment scenario.
Superior Energy
Services Inc.
(SPN/NYSE)
Superior Energy Services, Inc. provides specialized oilfield services and
equipment for offshore drilling and production-related operations in the
Gulf of Mexico and throughout the Gulf Coast region. Superior leases
oilfield equipment and provides other equipment and services. Superior
has various business segments and operates across multiple continents.
Superior was founded in 1991 and is headquartered in New Orleans,
Louisiana.
Return on Equity is a metric in which RPC outperforms Superior by
around 35 p.p.; this factor translates to Superior’s not benefitting from
shareholder investments as much as RPC. In terms of debt-to-equity,
Superior has a much larger amount of debt on its books in comparison
to RPC. The operating margin of RPC is 11.19 p.p. higher than
Superior’s meaning that RPC’s competitor has a smaller amount of
leftover revenue on its books in order to pay fixed costs. Given the
above information, RPC represents a much better investment
opportunity than Superior because it is more profitable and efficient as
well as less risky.
Key Energy Services
(KEG/NYSE)
Key Energy Services Inc. is an oil and gas service company with a
market capitalization of $1.45 billion. The company is the largest well
servicing and work-over company in the world. It provides onshore
services such as fishing services, fluid management services, rental
services, rig services, and intervention services. In addition, Key Energy
Services produces and develops oil and natural gas reserves. The
company’s operations are concentrated in Western Texas, Eastern New
Mexico, the Gulf Coast, Oklahoma, Michigan, the Rocky Mountains,
the Four Corners Region, and California.
Key Energy Services has a lower ROE than RPC (12.03% vs. 43.93%).
Key Energy’s revenue increased by 20.72% from 2009 to 2010. Finally,
Key Energy Services EV/EBITDA ratio reaches 8.43, compared to
RPC’s (4.93).
These performance metrics suggest RPC is a strong competitor and is
ahead of its peers.
18. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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C&J Energy
Services Inc.
(CJES/NYSE)
C&J Energy Services Inc is small-cap company with a market
capitalization of $800 Million. C&J Energy Services provides
hydraulic fracturing and coiled tubing services. It operates in South
Texas, East Texas, North Louisiana, and Western Oklahoma. Though
C&J Energy Services is much smaller than RPC in terms of market
capitalization, the services offered by C&J Energy Services and the
operating locations overlap with that of RPC, which makes CJES a
close competitor and comparable company.
C&J Energy Services completed its initial public offering in August
2011. The P/E ratio as of November 11, 2011 is 8.11 vs. RPC's 10.61.
Many of C&J Energy Services ‘s financial ratios are close to that of
RPC’s, with the exception of the debt-to-equity ratio of 60 compared to
RPC's 26.81; the debt-to-equity ratio reiterates the fact that RPC
maintains a conservative debt structure, which is favorable for a
company operating in a volatile energy industry.
MANAGEMENT
PERFORMANCE
AND
BACKGROUND
RPC‘s management team consists of 4 executives and 10 board
members. Richard A. Hubbell, 65, is the president and chief executive
officer. He has held this position since 1987 and has extensive
experience in oil and gas industry. Ben M. Palmer is the vice president
and chief financial officer and treasurer. He held this position since
1996 and has a deep knowledge of the financial idiosyncrasies of the
energy industry. RPC does not reveal its management’s succession
plan. However, RPC does encourage in-house development of talent
and leadership to lead the Company in the future.
ROIC RPC’s return on invested capital, which is a measure of management
performance, increased to 31.33% during the second quarter of 2011
from 22.35% in 2010. The energy industry recovered from the
downturn of 2009, leading oil and gas prices to rise and the number of
rigs to increase. As a result, RPC and the oil and gas service industry in
general has improved. More specifically, RPC’s ROIC has
outperformed its peers for the past two years.
Table 4: Peer ROIC
Period RPC Peer Average
FY2009 -3.70% 6.09%
FY2010 22.35% 10.12%
Q12011 27.59% 12.30%
Q22012 31.33% 12.25%
Sources: RPC, Bloomberg
19. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Randall Rollins Chairman of the Board (79)
Randall Rollins started his career with Rollins Inc. in 1949. Following
RPC’s spin-off from Rollins in 1984, Mr. Rollins was elected chairman
of the board and chief executive officer. Since his election as chairman,
he was also elected as chairman of the board of Rollins Inc. in October
1991 and of Marine Products Corp. in February 2001. In addition to
these positions, Mr. Rollins currently serves as board member of LOR
Inc. Rollins is a graduate of the University of Delaware with a degree
in accounting.
Richard A. Hubbell President and Chief Executive Officer (66)
Richard A. Hubbell, a graduate of Westminster College with a degree
in economics, has been the president since RPC’s spin-off from Rollins
in 1984. He has been with the Company for over 27 years, which has
made him knowledgeable about the industry and the business. He
served as chief operating officer from 1995-2003 prior to being
appointed chief executive officer in April 2003. In addition to RPC,
Mr. Hubbell has served as president and chief executive officer of
Marine Products Corp. since February 2001.
Ben Palmer Vice President, CFO, and Treasurer (50)
Ben Palmer holds positions of vice president, chief financial officer,
and treasurer at RPC and Marine Products Corp. He joined RPC in July
1996 and Marine Products Corp. in February 2001. Mr. Palmer was
previously employed by Arthur Andersen and was a CFO of EQ
Services. He holds bachelor’s degree in business administration from
Auburn University.
Linda Graham Vice President and Secretary (74)
Linda Graham holds the positions of vice president and secretary at
RPC and Marine Products Corp. She joined RPC in January 1987 and
Marine Products Corp. in February 2001. Ms. Graham was previously
vice president and secretary of Rollins Communications Inc. Ms.
Graham holds a bachelor’s degree in English from Berea College.
Board of Directors RPC is a “Controlled Corporation” because a group of individuals,
including executive board members, controls in excess of 50% of the
Company’s voting power. RPC’s executive officers, directors and their
affiliates hold in the aggregate approximately 71% of RPC’s
outstanding shares.
Effectively this group of individuals controls the operations of RPC,
including the election of directors and approval of significant corporate
transactions such as acquisitions and other matters requiring
stockholder approval. This concentration of ownership could also delay
or prevent a third party from acquiring control over the Company at a
premium or indulging in a hostile take-over.
20. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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RPC has elected the Controlled Corporation exemption under Rule
303A of the NYSE Company Guide; consequently, the Company need
not comply with certain NYSE rules including those requiring a
majority of independent directors. Currently, RPC has ten directors on
its board. Four are independent outside directors, three are outside
directors, one is an outside affiliated director, and four are executive
directors. The board of directors in total holds around 45% of RPC's
outstanding shares. Five of the ten directors have been on the board
since 1984 and two since 1987.
Table 5: RPC Board of Directors
Name Position
Year
Appointed to
the Board
R. Randall Rollins
Director;
Chairman of the Board
1984
Gary W. Rollins
Inside Director;
President and chief executive officer of Rollins Inc.
1984
Richard A. Hubbell
Inside Director;
President and chief executive officer
1987
Linda H. Graham Inside Director, vice president and Secretary 2001
James A. Lane Jr.
Outside Affiliated Director;
Executive vice president of Marine Products and
president of Chaparral Boats
1987
Bill J. Dismuke
Outside Director;
Retired president of Edwards Baking Company
2006
Wilton Looney
Independent Director;
Honorary chairman of the board of Genuine Parts
Company
1984
Henry B. Tippie
Independent Director;
Chairman of the board and chief executive officer of
Tippie Services Inc.
1984
James B. Williams
Independent Director;
Former chairman of the executive committee of
SunTrust Banks Inc.
1984
Larry L. Prince
Independent Director;
Chairman of the executive committee of Genuine
Parts Company
2009
Source: RPC’s Web site October 3, 2011
Management
Incentives
RPC has an incentive program that aligns the interests of management,
directors and shareholders. In addition to their base salaries, each
executive and manager receives cash or non-cash rewards according to
his or her performance. A compensation committee of the Company is
responsible for determining the performance rewards.
21. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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SHAREHOLDER
ANALYSIS
As of the fourth quarter of 2011 RPC has 146.84 million shares of
common stock outstanding. RPC’s directors, executive officers, and
their affiliates own approximately 71% of RPC’s common stock.
Because of the significant percentage of internal ownership, shares of
RPC are not as liquid as companies that have a larger number of
investors. The Rollins family has controlling interest in RFPS
Management, LOR Inc., and RFT Investment Company. GAMCO
Asset Management Inc. is the largest institutional investor in RPC
common stock with a 3.46% stake.
RPC’s board of directors announced a stock buyback program on
March 9, 1998 authorizing the repurchase of 17,718,750 shares. The
Company repurchased 810,377 shares of common stock under the
program during the six months ended June 30, 2011. The Company
may repurchase common stock periodically based on market conditions
and its capital allocation strategies. Since 2010, Gary Rollins has had a
net sell off of common stock. Randall Rollins, Richard Hubbell, Linda
Graham, and Ben Palmer all had net purchases of common stock.
Table 6: RPC’s Largest Shareholders
Holder Name Portfolio Name Source Amount Held % Out
RFPS Management N/A Form 4 86,306,977 58.20
RFT Investment Co N/A Form 4 7.528,350 5.08
LOR Inc. N/A Form 4 7,528,350 5.08
GAMCO Asset
Management Inc.
GAMCO Asset
Management Inc.
13F 5,126,816 3.46
Gary W. Rollins N/A Form 4 4,928,900 3.32
Randall R. Rollins N/A Form 4 3,068,409 2.07
First Trust Advisors LP First Trust Advisors LP 13F 2,864,123 1.93
Vanguard Group Inc. Vanguard Group Inc 13F 2,453,527 1.65
Gabelli Funds LLC Gabelli Funds LLC 13F 2,105,000 1.42
Royce & Associates Inc. Royce & Associates LLC 13F 1,784,364 1.2
Source: Bloomberg October 24, 2011
22. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Table 7: Institutional Investors
Holder Name Portfolio Name Source Amount Held % Out
GAMCO Asset
Management Inc.
GAMCO Asset
Management Inc.
13F 5,126,816 3.46
First Trust Advisors LP First Trust Advisors LP 13F 2,864,123 1.93
Vanguard Group Inc. Vanguard Group Inc 13F 2,453,527 1.65
Gabelli Funds LLC Gabelli Funds LLC 13F 2,105,000 1.42
Royce & Associates Inc. Royce & Associates LLC 13F 1,784,364 1.2
Source: Bloomberg October 24, 2011
RISK ANALYSIS
AND
INVESTMENT
CAVEATS
RPC like any other corporation is subject to various external and
internal risks. Some of the risks are generic to all the companies; others
are specific to companies operating in oil and gas services and a few
are specific to RPC alone. All the risks relevant to RPC are discussed
below.
Economic Risk: Like most energy services companies, RPC’s revenue is mainly
affected by the supply and demand for oil and gas. Risks arising from
political instability, military conflicts, and a shortage in supply or
demand contribute highly to the volatility of energy commodities and,
therefore, RPC’s revenues. A decline in oil and gas prices decreases the
capital investments of RPC’s customers, leading to a weaker services
demand and a decrease in the Company’s revenue. An increase or a
decrease in oil and natural gas prices directly impacts drilling and the
production activities of RPC’s customers that can result in a high or a
low percentage of utilization of RPC’s resources.
Regulatory and
Environmental Risks
In the oil services industry, there are risks associated with a company’s
effect on the environment and how government regulatory agencies can
impose penalties on companies within the industry. The production of
shale formations often results in the pollution of air and water in the
areas surrounding a drill site. Pollution has been a focal point for the
EPA over the past several years. There are also risks associated with
potential drill site explosions and toxic spills.
The EPA has suggested standards to control the negative effects of
hydraulic fracturing by proposing that operators capture and sell
natural gas that would typically escape into the air. However, industry
representatives believe these proposed rules are complicated to execute
and that the costs associated with them would create financial
hardships for companies drilling in shale. The EPA estimates that, if its
proposal were to be fully implemented, it would reduce emissions of
organic compounds by about 540,000 tons (25%). Additional
regulations can affect RPC’s revenues because regulations can force
exploration and production companies to stop producing for various
amounts of time. The EPA believes the industry can save $30 million
per year by selling excess natural gas.
23. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Labor Risk RPC’s productivity and profitability depend greatly on the Company’s
ability to attract and retain loyal and skilled workers. If RPC expands
its operations, it will need to increase the labor force significantly. The
Company faces difficulty trying to expand into areas that are
unattractive to potential workers, especially if current employees are
not interested in relocating. In order for RPC to recruit the necessary
workforce, employees may demand higher wages than the Company
wants to pay. The demand for employees in particular regions results in
competing employers offering RPC’s employees higher wages and,
thus, ultimately reducing the Company’s labor force. Competitors are
reported to offer $16 per hour as incentive to switch employers
compared to RPC’s $12 per hour. Daily benefits offered by competitors
have forced RPC to increase its daily benefits from $25 to $75.
Shannon Pope, director of administrative services, stated that
competitors have recruited RPC’s trained employees, a practice that is
common throughout the industry.
Financial Risk and
Credit Risk
RPC is not only subject to external risks, but also to internal financial
risks that arise from its financial health. Table 8 shows various
financial ratios used to assess the financial health of a company.
Table 8: Financial Health
Source: MSN Money
Ratios RPC MDR SPN KEG CJES Interpretation Industry
S&P
500
Debt/Equity 0.27 0.05 0.89 0.59 0.60
Lesser Lower the
Risk
0.47 1.01
Current Ratio 2.90 1.70 1.50 1.80 2.20 Higher the Better 2.1 1.5
Quick Ratio 2.50 N/A 1.20 1.70 1.90 Higher the Better 1.5 1
Interest
Coverage
106.1 312.7 4.30 1.30 13.80 Higher the Better 29 89.9
Leverage
Ratio
1.70 1.70 2.40 2.10 2.20 Lower the Better 2 3.5
RPC has 0.27debt-to-equity ratio, which is a substantial indicator of
financial risk. The Company’s ratio is not only lower than the industry
average but is also lower than the S&P 500 average. This indicates the
robust capital structure of RPC. The leverage ratio is a better measure
of debt than D/E and total D/E because it covers certain debt that is
addressed neither by D/E nor long D/E. RPC, has the lowest leverage
ratio among its peers, the industry average, and the S&P 500. In
general, RPC is in good financial condition and inherently has little
financial risk in its current capital structure.
The current ratio of 2.90, which tests a company’s ability to meet short-
term obligation in case of an emergency is higher for RPC than most of
its peers and the industry average and the S&P 500 average. The quick
ratio is a modification of the current ratio to adjust for inventories; RPC
is high compared to the others.
24. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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The interest coverage ratio of 106.1 is reasonably high for RPC and
represents the debt interest burden on a company's profits. RPC has
sufficient profits to cover its interest expenses.
Credit Risk is an external risk that arises from the chances of RPC’s
customers defaulting on their payments to RPC. RPC has significant
credit risk as do all its competitors that have their customers
concentrated in oil and gas industry. RPC has a concentration of credit
risk, e.g., Chesapeake Energy Corporation alone account for 15% of
RPC’s revenue. Other external financial risks such interest rates are
low for RPC, because RPC’s debt is considerably small.
Altman Z-Score The Altman Z-score, created by Edward Altman—an assistant
professor of finance at New York University—is a risk analysis
methodology of determining a company’s financial health. The Z-score
is used for predicting the probability of a company’s failure or
bankruptcy within two years. The Z-score formula combines the
following five financial ratios weighted by coefficients:
EBIT/Total Assets
Revenues/Total Assets
Working Capital/Total Assets
Retained Earnings/Total Assets
Market Value of Equity/Total Liabilities.
A Z-score greater than 2.99 indicates that a company is within the safe
zone, whereas, a score lower than 1.80 indicates that a company is in
the distress zone. Such a score points toward a high potential of
bankruptcy within two years. A Z-score between 1.80 and 2.99
indicates that a company lies in a gray zone.
As Figure 11 shows, RPC’s Z-score has been well above the safety
level of 2.99; indicating RPC has little or no risk of bankruptcy in the
near future as long as it maintains its Z-score above 2.99.
25. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Figure 11: Historic RPC Z-score
FINANCIAL
PERFORMANCE
AND
PROJECTIONS
We projected various line items on the financial statements such as
revenue, cost of goods sold, other operating expenses, working capital
items, capital expenditures, and other operating and non-operating
items used in the DCF valuation of RPC. We performed these
projections using historic data and trends, as well as data from various
economic and financial agencies, such as Bloomberg, Reuters, and
Economist Intelligence Unit (EIU).
Unconventional
Rig Count
We used unconventional rig count as a primary driver for revenue.
Unconventional rigs include rigs that use horizontal and directional
drilling, which is more service-intensive than traditional drilling. This
increased service-intensity produces greater demand for RPC’s
services. Over the past several years the number of unconventional rigs
in proportion to traditional rigs has increased. We forecasted
unconventional rig count utilizing historical quarterly data for the past
eight years, and we used a combination of exponential smoothing and
the simple moving average (based on latest three quarters) techniques.
This forecast identified an increase in rig counts over the forecast
horizon with a gradual decrease in the growth rate reflecting the
saturation effect. We regressed these projections to arrive at our
revenue forecast.
Oil and Gas Prices Expected oil and gas prices are one of the primary drivers of oil and
gas field activity. Increases in oil and gas prices give the oil and gas
companies more incentive for additional drilling. Moreover, oil and gas
prices can also be viewed as a nominal component of an energy service
company’s revenue. We used Bloomberg’s consensus oil and gas
prices in our forecast. Oil and gas prices forecasts were used to
estimate the drilling activity and business cycles and, indirectly, the
revenue of RPC.
26. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Macroeconomic
Factors
Some of the macroeconomic factors that directly influenced our
valuation of RPC are projected PPI (producer price index) and nominal
wages increase. Both factors produce a substantial effect on RPC’s
valuation, and therefore, have to be projected accurately and obtained
from reliable sources. Changes in PPI and nominal wages are proxies
for changes in general operating and payroll expenses, respectively.
We used the data from EIU for projecting the changes in PPI and
nominal wages, which were used to project SG&A expenses of RPC.
Microeconomic
Factors
Such items as capital expenditures, working capital needs, depreciation
and amortization, interest payments, and dividends were additionally
taken into consideration when we created RPC’s financial model. The
forecast for capital expenditures was based on management’s
projections for expansion and maintenance capital expenditures and
adjusted to take into account the projected depreciation and disposal
rates as well as the anticipated PPI index. Working capital items were
forecast based on the two-year average quarterly data as well as on
projected revenue and cost of services, adjusted for the management-
anticipated future working capital policy. The depreciation and
amortization rate was forecast based on the four-year quarterly data.
The projected interest rate was based on the first three quarters of
2011’s interest rates taking into account new revolving credit facility
conditions. Currently the Company has a relatively low debt-to-equity
ratio and is able to borrow at a favorable rate. Dividend projections
were based on the third quarter of 2011’s dividend per share figures,
and we assumed no change in this figure for the whole projected
horizon. Interest rates and divided estimates are necessary to project
the interest expense and retained earnings respectively. In our
projections, we also assumed that RPC would not make any additional
share repurchases in the foreseeable future. The terminal growth rate
was assumed to be 3%, which is consistent with our expectations
concerning the long-term U.S. economy’s nominal GDP growth rate.
SITE VISIT At 5 a.m. on September 30, 2011, our team of Burkenroad Analysts,
Oleksandr Matviienko, Andrew Ip Ping Wah, Rajan Gaglani, Theresa
Scales, and Satyajith Gaonkar, began our trip to the airport to board a
flight from New Orleans, Louisiana to Houston, Texas.
The one-hour flight gave us some time to review our notes and finalize
our list of questions for management. After arriving at RPC’s Houston
offices, we were greeted by James Landers, vice president of corporate
finance, and Sharon Lennon investor relations and corporate
communications manager. Mr. Landers and Ms. Lennon were our hosts
throughout the day, leading us through presentations from the
subsidiaries of RPC, answering our questions, and hosting a Texas-
style lunch.
27. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Mr. Landers and Ms. Lennon presented a high-level view of RPC’s
operations, and they answered our questions at the conclusion of the
presentation, which focused on the internal and external variables that
affect RPC’s revenue. Following the general presentation, Peter
Osborne, senior well control engineer, gave us a tour of Cudd Well
Control‘s facilities and talked about the general processes. After the
tour, Mike Powell, Patterson Services’ vice president of operations,
gave us a presentation about the various areas of Patterson Services and
specifically focused on how Patterson stands out from its competitors.
Cody Trebing, sales engineer then discussed the services that Thru
Tubing Solutions offers and what makes those services valuable. After
a brief question and answer session with Mr. Trebing, we were given a
presentation from Sebastian Ng-A-Mann on Cudd Energy Services to
conclude the day. The site visit answered several questions we had and
gave us a thorough understanding of the Company’s business
segments.
Site Visit Photo
INDEPENDENT
OUTSIDE
RESEARCH
Our team of analysts read various investment reports published by
other analysts who cover RPC Inc. Our Team also approached the
faculty of the Tulane Energy Institute to get the faculty’s view on the
oil and gas field services industry. We also spoke to analysts who cover
RPC to discuss and compare the methodology of valuation. The overall
analyst consensus is extremely bullish for the oil and gas field services
industry in general and for the companies involved in directional
drilling, in particular.
We also referred to various sources such as Bloomberg, Thomson
Reuters, Thomson One Banker, Yahoo Finance, Google Finance, and
MSN Money to collect historic data. We used the various SEC fillings
such as 10K’s, 10Q’s and Form 4, 13F of RPC and its peer companies.
Most importantly we visited the senior management of RPC to get a
better understanding of its operations.
28. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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WWBD?
What Would Ben (Graham) Do?
BEN GRAHAM
ANALYSIS
(slightly modified)
Benjamin Graham, scholar and financial analyst, is recognized as the
father of value investing. During his tenure as professor at Columbia
University, he emphasized the importance of value-investing strategies.
Ben Graham created eight criteria, or hurdles, used to analyze companies
that are undervalued with growth potential. The first step in the Ben
Graham analysis is to find stocks that are underpriced, which can be
achieved through the use of Graham’s first six hurdles. The second step
is to look for companies that have the ability to grow consistently, which
can be achieved analyzing the remaining two criteria.
Based on the hurdles set forth by Graham, RPC meets four of eight
analysis criteria, making the Company an attractive investment. Given
that RPC cleared four of the first six hurdles, it would be categorized as
undervalued. The Company’s earnings-to-price yield is double the yield
of a 10-year treasury notes, the dividend yield is half of the 10-year
treasury notes yield, and the total debt is less than the book value. RPC,
however, did not pass criteria seven and eight necessary for it to be a
quality growth stock because its earnings growth did not achieve an
earnings growth of 7% or higher over the past five years, the Company’s
earnings growth has been inconsistent. This inconsistency was because of
the global economic slow down, but RPC did outperform the S&P 500
and Russell 2000 during the same period. (See the following table for the
complete Ben Graham analysis.)
29. RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Earnings per share (ttm) 1.32$ Price: 21.47$
Earnings to Price Yield 6.15%
10 Year Treasury (2X) 4.14%
P/E ratio as of 12/31/06 9.1
P/E ratio as of 12/31/07 7.3
P/E ratio as of 12/31/08 7.3
P/E ratio as of 12/31/09 (42.1)
P/E ratio as of 12/31/10 N/A
Current P/E Ratio 16.3
Dividends per share (ttm) $0.27 Price: 21.47$
Dividend Yield 1.24%
1/2 Yield on 10 Year Treasury 1.04%
Stock Price 21.47$
Book Value per share as of 9/30/11 4.95$
150% of book Value per share as of 9/30/11 7.42$
Interest-bearing debt as of 9/30/11 140,800$
Book value as of 9/30/11 718,828$
Current assets as of 9/30/11 565,293$
Current liabilities as of 9/30/11 185,075$
Current ratio as of 9/30/11 3.1
EPS for year ended 12/31/10 1.00$
EPS for year ended 12/31/09 (0.16)$
EPS for year ended 12/31/08 0.85$
EPS for year ended 12/31/07 0.99$
EPS for year ended 12/31/06 1.13$
EPS for year ended 12/31/10 1.00$ -725%
EPS for year ended 12/31/09 (0.16)$ -119%
EPS for year ended 12/31/08 0.85$ -14%
EPS for year ended 12/31/07 0.99$ -12%
EPS for year ended 12/31/06 1.13$
Stock price data as of November 11, 2011
No
Hurdle # 8: Stability in Growth of Earnings
No
Hurdle # 5: Total Debt less than Book Value
Yes
Hurdle # 6: Current Ratio of Two or More
Yes
Hurdle # 7: Earnings Growth of 7% or Higher over past 5 years
No
Hurdle # 3: A Dividend Yield of 1/2 the Yield on 10 Year Treasury
Yes
Hurdle # 4: A Stock Price less than 1.5 BV
No
RPC INC. (RES)
Ben Graham Analysis
Hurdle # 1: An Earnings to Price Yield of 2X the Yield on 10 Year Treasury
Yes
Hurdle # 2: A P/E Ratio Down to 1/2 of the Stocks Highest in 5 Yrs
35. BURKENROAD REPORTS RATING SYSTEM
MARKET OUTPERFORM: This rating indicates that we believe forces are in place that would enable this
company's stock to produce returns in excess of the stock market averages over the next 12 months.
MARKET PERFORM: This rating indicates that we believe the investment returns from this company's
stock will be in line with those produced by the stock market averages over the next 12 months.
MARKET UNDERPERFORM: This rating indicates that while this investment may have positive
attributes, we believe an investment in this company will produce subpar returns over the next 12
months.
BURKENROAD REPORTS CALCULATIONS
• CPFS is calculated using operating cash flows excluding working capital changes.
• All amounts are as of the date of the report as reported by Bloomberg or Yahoo Finance unless
otherwise noted. Betas are collected from Bloomberg.
• Enterprise value is based on the equity market cap as of the report date, adjusted for long-term
debt, cash, and short-term investments reported on the most recent quarterly report date.
• 12-month Stock Performance is calculated using an ending price as of the report date.
The stock performance includes the 12-month dividend yield.
2011-2012 COVERAGE UNIVERSE
AFC Enterprises Inc. (AFCE)
Amerisafe Inc. (AMSF)
CalIon Petroleum Company (CPE)
Cal-Maine Foods Inc. (CALM)
Carbo Ceramics Inc. (CRR)
CLECO Corporation (CNL)
Conn's Inc. (CONN)
Craftmade International Inc. (CRFT)
Crown Crafts Inc. (CRWS)
Cyberonics Incorporated (CYBX)
Denbury Resources Inc. (DNR)
EastGroup Properties Inc. (EGP)
Energy Partners Ltd. (EPL)
Evolution Petroleum Corp. (EPM)
Gulf Island Fabrication Inc. (GIFI)
Hibbett Sports (HIBB)
Hornbeck Offshore Services Inc. (HOS)
Houston Wire & Cable Company (HWCC)
IBERIABANK Corp. (IBKC)
ION Geophysical Corp. (IO)
Key Energy Services (KEG)
Marine Products Corp. (MPX)
McMoRan Exploration Co. (MMR)
MidSouth Bancorp Inc. (MSL)
PetroQuest Energy Inc. (PQ)
Pool Corporation (POOL)
Powell Industries Inc. (POWL)
Reddy Ice Holdings Inc. (RDDY)
Rollins Incorporated (ROL)
RPC Incorporated (RES)
Sanderson Farms Inc. (SAFM)
SEACOR Holdings Inc. (CKH)
Sharps Compliance Inc. (SMED)
Shaw Group Inc. (SHAW)
Stone Energy Corp. (SGY)
Superior Energy Services Inc. (SPN)
Susser Holdings Corp. (SUSS)
Team Incorporated (TISI)
Teche Holding Company (TSH)
Willbros Group Inc. (WG)
PETER RICCHIUTI
Director of Research
Founder of Burkenroad Reports
Peter.Ricchiuti@tulane.edu
ANTHONY WOOD
Senior Director of Accounting
Awood11@tulane.edu
NATALIE DOMINO
RANDALL FROST
RICHARD GRAY
Associate Directors of Research
BURKENROAD REPORTS
Tulane University
New Orleans, LA 70118-5669
(504) 862-8489
(504) 865-5430 Fax
36. To receive complete reports on any of the companies we follow, contact:
Peter Ricchiuti, Founder & Director of Research
Tulane University
A.B. Freeman School of Business
BURKENROAD REPORTS
Phone: (504) 862-8489
Fax: (504) 865-5430
E-mail: Peter.Ricchiuti@Tulane.edu
Please visit our web site at www.BURKENROAD.org
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Named in honor of William B. Burkenroad Jr., an alumnus and a longtime
supporter of Tulane’s business school, and funded through contributions
from his family and friends, BURKENROAD REPORTS is a nationally
recognized program, publishing objective, investment research reports on
public companies in our region. Students at Tulane University’s Freeman
School of Business prepare these reports.
Graduates of the BURKENROAD REPORTS Program have moved on to posi-
tions at a number of highly respected financial institutions including:
ABNAMRO Bank ·AYCO ·Aegis Value Fund · Invesco/AIM Capital Management
· Alpha Omega Capital Partners · American General Investment Management ·
Banc of America Securities · Bank of Montreal · Bancomer · Barclays Capital ·
Barings PLC · Bearing Point · Bessemer Trust · Black Gold · Capital Blackrock
Financial Management · Boston Consulting Group · California Board of Regents
· Cambridge Associates · Central Bank of Turkey · Chaffe & Associates · Citadel
Investment Group · Citibank · Citigroup Private Bank · City National Bank
· Cornerstone Resources · Credit Suisse · Deutsche Banc · Duquesne Capital
Management · Financial Models · First Albany · Fiduciary Trust · Fitch Investors
Services · Forex Trading · Franklin Templeton · Fulcrum Global Partners · Gintel
Asset Management · Global Hunter Securities · Goldman Sachs · Grosever Funds
· Gruntal & Co. · Guggenheim Securities , LLC · Hancock Investment Services ·
Hanifen Imhoff Inc. · Healthcare Markets Group · Capital One Southcoast Capital
· Howard Weil Labouisse Friedrichs · J.P. Morgan Securities · Jefferies & Co. ·
Johnson Rice & Co. · KBC Financial · KDI Capital Partners · Key Investments
· Keystone Investments · Knight Securities · Legacy Capital · Liberty Mutual ·
Lowenhaupt Global Advisors · Manulife/John Hancock Investments · Marsh &
McLennan · Mercer Partners · Merrill Lynch · Miramar Asset Management ·
Morgan Keegan · Morgan Stanley/Smith Barney· New York Stock Exchange ·
Piper Jaffray & Co. · Professional Advisory Services · Quarterdeck Investment
Services · RBC Dominion Securities · Raymond James · Restoration Capital · Rice
Voelker, LLC · Sanford Bernstein & Co. · Second City Trading LLC · Sequent
Energy · Sidoti & Co · Simmons & Co. · Southwest Securities · Spear, Leeds
& Kellogg · Stewart Capital LLC · Susquehanna Investment Group · Thomas
Weisel Partners · TD Waterhouse Securities · TXU · Texas Employee Retirement
System ·Tivoli Partners ·Tudor Pickering & Co. · Tulane University Endowment
Fund · Turner Investment Partners · UBS · Value Line Investments · Wells Fargo
Capital Management · Whitney National Bank · William Blair & Co. · Zephyr
Management
