RPC, Inc. (RES - Free Report) is well poised to grow on the back of strong domestic presence and balance sheet. However, intensified competition in the market and conservative spending by customers are persistent concerns.
Atlanta, GA-based RPC is an oilfield service provider. It supplies equipment and services to oil and natural gas explorers and producers in almost all prospective plays like the Rocky Mountain regions, Appalachian area, Gulf of Mexico, and other resources in the United States. The company has a market cap of $692.7million. It beat earnings estimates thrice in the last four quarters.
Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
What’s Favoring the Stock?
RPC is among the leading providers of advanced oilfield services, and equipment to almost all the prospective oil and gas shale plays in the United States. RPC derives strong and stable revenues via diverse oilfield services that include pressure pumping, coiled tubing and rental tools.
With no debt load, the company had cash and cash equivalents of $145.4 million at second quarter-end, higher than the first-quarter level of $82.6 million. This reflects its strong balance sheet that will provide the company with massive financial flexibility.
RPC’s management has taken strategic measures to pull through the challenging exploration and production spending environment. As such, it decided to lower 2020 capex to around $50-$60 million from the 2019 level of $250.6 million. This is indicative of the company’s capital efficiency. Management is focused on maintaining a healthy capital structure, while looking to improve shareholder returns. Notably, for more than a decade, RPC has been reporting positive operating cash flows, reflecting stable operations despite volatile commodity prices.
The company’s 2019 cost of revenues was recorded at $919.6 million, which declined 22.3% from 2018 levels. Also, cost of revenues contracted from $265.1 million in second-quarter 2019 to $80 million in second-quarter 2020 due to reduced activity levels and cost-reduction initiatives. Its effective cost-containment efforts are expected to continue, which will improve profit levels.
However, there are a few factors that are impeding the growth of the stock lately.
Intensified competition in the domestic market has left limited room for oilfield services companies to charge premium prices for the services being offered. Moreover, slowdown of demand for pressure pumping services in shale plays is marring RPC’s prospects. This is evident from its weak performance in the last reported quarter due to lower activity levels and pricing in the company’s pressure pumping service business, which in turn affected the bottom line.
Pricing for pressure pumping activities in North America is likely to remain soft. As pressure pumping is RPC’s biggest service line, the firm’s business outlook is gloomy. Also, declining rig count in the region amid storage shortage problems will keep activities low.
Explorers and producers are constrained by reduction in borrowing capacity and an increase in the cost of capital. Also, explorers are facing constant pressure from investors for higher returns instead of production growth. These headwinds are likely to lower investments by explorers and producers in the land market of North America. Hence, conservative spending by customers is likely to hurt demand for the company’s services.
To Sum Up
Despite significant growth opportunities, intensified competition in the domestic market and conservative spending by customers are concerns. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Stocks to Consider
Some better-ranked players in the energy space include Halliburton Company (HAL - Free Report) , EOG Resources, Inc. (EOG - Free Report) and NexTier Oilfield Solutions Inc. (NEX - Free Report) , each holding a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Halliburton’s earnings estimates for the current year have improved over the past 60 days. It has witnessed 11 upward estimate revisions and one downward movement in this time period.
EOG Resources’ sales for 2021 are expected to rise 18.8% year over year.
NexTier’s bottom line for 2021 is expected to rise 27.6% year over year.
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