Morningstar | Lowering RPC FVE on Weaker Near-Term Profitability Outlook
We're lowering our fair value estimate for U.S. land-focused service firm RPC to $13.50 from $14.50 previously. The lower fair value estimate is chiefly owing to a more negative near-term outlook, particularly for the company's pressure pumping business (which accounted for 55% of RPC's revenue in 2018). Our no-moat rating remains in place.After experiencing a rapid recovery in early 2017, RPC's profitability has fallen sharply in 2018. The Technical Services segment (accounting for approximately 90% of company revenue), which includes pressure pumping, peaked at a 23% adjusted operating margin in the third quarter of 2017. At that time, we estimate that RPC was generating about $360 per fleet horsepower in operating income in its pressure pumping business, making it likely the most profitable among all pressure pumpers.
Since then, Technical Services adjusted operating margin has fallen to 6%, and we estimate that the pressure pumping business specifically is now back in the red. To be sure, pressure pumping peers have also seen their profits decline owing to the industry headwinds (stemming from the Permian Basin takeaways constraints). Still, we've been disappointed by RPC's performance, which has been dismal compared with its recent peak in the third quarter of 2017.
We've also been disappointed because, while some of RPC's non pressure pumping businesses have been quite strong from a top-line perspective over the past year (particularly the Thru Tubing business), this hasn't translated into margin improvement for the company as a whole. We are worried about the impact of pricing pressure in these businesses, which have generally carried strong margins.
RPC is a holding company for several oilfield services companies. The company provides oilfield services and equipment to oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the U.S., including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. The services provided are: Technical Services, which include pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline services, and fishing; and Support Services, which include rental tools, oilfield pipe inspection services, well control school and energy personnel international.
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