James C. Landers - RPC, Inc. Richard A. Hubbell - RPC, Inc. Ben M. Palmer - RPC, Inc..

Tommy Moll - Stephens, Inc. George O’Leary - Tudor, Pickering, Holt & Co. Securities, Inc. James West - Evercore ISI Marc Bianchi - Cowen & Co. LLC Daniel J. Boyd - BMO Capital Markets (United States) Ken Sill - SunTrust Robinson Humphrey, Inc. William Thompson - Barclays Capital, Inc. Scott A. Gruber - Citigroup Global Markets, Inc.

Michael Lamotte - Guggenheim Securities LLC Thomas Curran - B. Riley FBR, Inc. Waqar Syed - Goldman Sachs & Co. LLC John Watson - Simmons & Company International Chase Mulvehill - Wolfe Research LLC.

Good morning and thank you for joining us for RPC, Inc.'s First Quarter 2018 Financial 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, all participants are in a listen-only mode.

Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to advise everyone that this conference call is being recorded. Jim will get us started by reading the forward-looking disclaimer..

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 will be 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 2017 10-K and other public filings that outline those risks, all of which can be found on our website, which is www.rpc.net. In today's earnings release and conference call, we'll be referring to two non-GAAP measures of operating performance.

The first is EBITDA, 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 record compliance with financial covenants under our credit facility.

The second set of non-GAAP financial measures are net income and diluted earnings per share excluding the impact of the implementation of tax reform. Management believes that presenting the operating results without the impact of the implementation of tax reform enables us to compare RPC's operating performance consistently over various time periods.

Our press release issued today on our website contain reconciliations of these non-GAAP financial measures to net income, which is the nearest GAAP financial measure. Please review that disclosure if you're interested in seeing how they are calculated.

If you've not received our press release and would like a copy, please visit our website again at www.rpc.net for a copy. I will now turn the call over to our President and CEO, Rick Hubbell..

Thanks, Jim. This morning, we issued our earnings press release for RPC's first quarter of 2018. The average U.S. domestic rig count during the first quarter of 2018 was 966, an increase of 29.8% compared to the same period in 2017, and an increase of 4.9% compared to the fourth quarter of 2017.

Oil field activity continued to be strong in the first quarter after a slow start due to extended holidays and winter weather. Although we faced increasing competition in many of our markets, our revenue continued to increase due to our ability to meet the needs of our customers.

Our CFO, Ben Palmer, will review our financial results in more detail after which I will have a few closing comments..

Thank you, Rick. For the first quarter, revenues increased to $436.3 million compared to $298.1 million in the prior year. Revenues increased compared to the prior year due to higher activity levels and improved pricing for our services, higher service intensity and a larger fleet of active revenue-producing equipment.

EBITDA for the first quarter increased to $103.7 million, compared to $46.4 million for the same period last year. Operating profit for the quarter increased to $60.8 million, compared to $1.6 million in the prior year. Our diluted earnings per share were $0.24, compared to $0.02 last year.

Cost of revenues during the first quarter was $295.6 million or 67.7% of revenues, compared to $216.2 million or 72.5% during the same period last year. Cost of revenues increased primarily due to higher employment costs and materials and supplies expenses, both of which were driven by higher activity levels.

As a percentage of revenues, cost of revenues decreased due to improved pricing for our services and leverage of higher revenues over direct employment costs. Selling, general and administrative expenses were $43.8 million in the first quarter, compared to $37.2 million last year.

These expenses increased due to higher employment costs consistent with higher activity levels. As a percentage of revenues, these costs decreased from 12.5% in the prior year to 10% due to improved pricing for our services and leverage of higher revenues over primarily fixed costs.

Depreciation and amortization were $37.5 million during the first quarter of 2018, a decrease of 16.1% compared to $44.7 million in the prior year.

Our Technical Services segment revenues for the quarter increased 46.4%, compared to the first quarter of the prior year, due to higher activity levels and improved pricing for our services, higher service intensity, and larger fleet of revenue-producing equipment. Operating profit increased to $65 million, compared to $9.2 million in the prior year.

Our Support Services segment revenues for the quarter increased by 44.9%, while the operating loss decreased 82.7% compared to the same period last year. On a sequential basis, RPC's first quarter revenues increased to $436.3 million, from $427.3 million in the prior quarter.

Revenues increased due to a slightly larger fleet of active revenue-producing equipment, while pricing was relatively unchanged. RPC's operating profit during the first quarter of 2018 was $60.8 million, compared to $60.3 million in the prior quarter.

Cost of revenues during the first quarter of 2018 increased by $9.9 million, or 3.5%, due primarily to higher maintenance and repair expenses associated with continued high service intensity. As a percentage of revenues, cost of revenues remained relatively unchanged at approximately 68%.

Selling general and administrative expenses during the first quarter of 2018 increased by $1.8 million, or 4.3%, compared to the prior quarter, due to higher employment costs primarily payroll taxes. RPC's EBITDA increased from $101.1 million in the prior quarter, to $103.7 million in the first quarter.

Our Technical Services segment revenues increased by $8.1 million, or 2%, to $419.1 million in the first quarter. Operating profit was $65 million, compared to $67 million in the prior quarter. Our Support Services segment generated revenues in the first quarter of $17.3 million, or 5.8% higher than revenues of $16.3 million in the prior quarter.

Operating loss was $900,000 in the first quarter, compared to $1.6 million in the prior quarter. RPC's pressure pumping fleet increased by 25,000 hydraulic horsepower to 950,000 hydraulic horsepower. This additional horsepower was used to supplement our existing fleets.

Over the next six months, we anticipate placing on service the remaining 100,000 horsepower ordered in the prior year. First quarter 2018 capital expenditures were $50.5 million. And, we expect full year 2018 capital expenditures to be approximately $250 million directed toward both maintenance of our equipment and new revenue-producing equipment.

At the end of the first quarter, our cash balance was $101 million, and we continue to have no outstanding debt. With that, I'll turn it back over to Rick for some closing remarks..

Thank you, Ben. We remain focused on providing value to our customers, controlling costs, improving operational efficiencies, and maintaining our conservative capital structure.

During the first quarter, we continued our commitment to RPC shareholders with one of the largest quarterly share repurchases in our history, and the payment of an increased quarterly dividend.

Including these uses of cash as well as $50.5 million of capital expenditures, we finished the first quarter with approximately 10% more cash than we had at the end of 2017. Thank you for joining us for RPC's conference call this morning, and at this time, we will open up the lines for your questions..

Thank you. We will now take our first question from Tommy Moll from Stephens. Please go ahead. Your line is open..

Good morning. Thanks for taking my questions..

Sure, Tommy..

So, you commented in the release and then in the prepared remarks about seeing some increased competition in various markets.

Could you give us any insight into the geographies and lines of business that that comment referred to?.

Tommy, this is Jim. The main area of competition that we've seen is in pressure pumping. We've seen some larger competitors reposition some fleets, perhaps add some new equipment. And we've seen some smaller startups in, say, the Permian Basin, for example, bring in some additional equipment, and that's caused some temporary pricing disruption.

Overall, supply and demand is still very positive, but in the short term, there's been some temporary disruption because of that..

Okay. Thanks. And your comment on the overall supply-demand was the follow-up I had for you just moving to the macro for pressure pumping. Overall, fleet attrition for the lower 48 is a theme that gets a lot of attention but is really hard to quantify..

Yep..

You've got some of your peers who have recently said, could be as much as half of the new builds that are going for replacement versus incremental.

How do you guys think about that? And if you look at how demand versus supply versus net supply increase compare for the balance of 2018, which do you think will outpace the other?.

Tommy, this is Ben. We're much more into kind of assessing where the current environment is. Obviously we try to look ahead somewhat. But we're responding to what's directly in front of us, aware of what many people such as yourself are out there tracking all these numbers in detail.

We feel like for us that equipment attrition is becoming an increasingly prominent, significant issue.

We believe that, as we've talked about the equipment that we ordered last year that we've begun to bring into our fleet, that it is much more being used to supplement our existing fleet, not necessarily at this time to replace equipment that has been retired, but needed to supplement the fleet to take some of the wear and tear off.

And we are proving the equipment that we're ordering is larger. We're ordering the 2500-horsepower pumps that are larger than the pumps we've added in the last several years. So, I guess that's the acknowledgment on our part that that type of equipment is more suited for this type of work.

So we're going through a period of evaluating our fleet, as we always do, in terms of what the right configuration is. And we've not made a decision at this point that we're going to completely take out of our fleet any particular equipment.

But I would not be surprised if sometime in the next – pick a time period, next 12 months, that some of those decisions and actions will be taken. I don't think that's going to – and I think it would dramatically impact our capacity to do business and serve our customers.

It's just going be what we feel like we need to do to remain efficient and productive and have our fleet well maintained and capable of providing quality services.

So the equipment that we have coming onboard, we talked about in our comments about 100,000 more hydraulic horsepower coming into the market, that we believe would maybe bring in one more fleet but will also be used again to supplement our existing fleet.

We think that's the right thing to do for our customers and therefore the right thing for us to do to again continue to provide a quality service and be able to provide the best quality to the customer and returns to the company..

Great. Thank you. I'll turn it back..

Sure..

Thanks, Tommy..

Thank you. We will now take our next question from George O'Leary from Tudor, Pickering, Holt & Co. Please go ahead. Your line is open..

Morning, guys..

Hey, George..

As you look ahead at Q2 and I respect not wanting to just always pontificate on the future, but Street EBITDA expectations are around $150 million. So, I wonder if you guys didn't want to take the opportunity to kind of maybe help frame expectations as we head into the second quarter.

Is that $150 million a realistic number, or might there be some downside risks, just given some of the issues experienced in the first quarter?.

This is Ben. As you know, we don't give forward guidance. But, again, as we've talked about, competition is intense. We think there's a lot of positives going on. Rig count continues to increase, DUCs, as we know, are increasing, so that's some available wells that will need to, at some point, be completed. Price of oil is going up.

We feel good about that. But, again, it is a competitive market. So we continue to look for – our pricing kind of in the first quarter was kind of flat. Jim talked about some disruption or some challenges. I mean, the challenges was, we were not able to continue to increase pricing, so pricing was fairly steady.

So what we're doing, as we always do, we're trying to seek that right balance between pricing and utilization, and we think we're making some inroads in that respect. And we'll just have to see what the market can give us. But there is a lot of equipment out there. But my sense is there's not so much on order that it's going be hugely disruptive.

And I guess we're hearing about some of the equipment manufacturers saying that they're not having a tremendous backlog of orders. So, I think all of that is positive because I think the pressure pumping fleets, I think, there will be attrition.

Now, whether it's, again, retirements or equipment that has to be taken out of service because it needs a lot of maintenance. And we know in prior cycles, if people aren't making enough money to be able to maintain their equipment, they're not going to be able to – it's still in the industry-wide fleet but it's not available to work.

So, that provides opportunity for people like us that will continue to invest in the fleet..

Okay, that's helpful. And then maybe just thinking about current market conditions versus the prior quarter, we're getting through April at this point. Sounds like the competitive nature of the market has really kept a lid more on utilization rather than pushing prices lower.

Has utilization started to improve in April? And any color on April versus March would be super helpful..

George, this is Jim. Utilization has improved a bit in April relative to March. Part of the choppiness that we've undergone in the past number of months has to do with the advent of and the increase in pad drilling and pad completion. It's sort of a feast or famine type of thing. When you're working, you're highly utilized.

If a customer misses something or jobs are pushed for whatever reason, even if it's not your fault, you miss a lot of work.

And so, that makes some of these predictions, some of our internal predictions anyway, difficult to make because of the nature of the work that's growing increasingly more service intensive, and that translates into long duration jobs on pads. And if something happens, it can impact everything..

That's very helpful. And maybe if I could just sneak one more in.

Could you guys provide the breakdown of the revenues, pressure pumping, ThruTubing Solutions, et cetera?.

Sure, George, happy to. So, this is Jim again. And the numbers I'm going to give are percentages of consolidated RPC revenues for the first quarter. Pressure pumping was 58.7% of consolidated revenue. Thru Tubing Solutions was 21.3% of consolidated revenue. Coiled tubing was 5.8% consolidated revenue. Nitrogen was 2.6% of consolidated revenue.

And rental tools was 2.3% of consolidated revenue..

Great. Thank you guys very much for the color..

Sure, George, Thank you..

Thank you. We will now take our next question from James West from Evercore ISI. Please go ahead. Your line is open..

Thanks. Good morning, guys..

Hey, James..

Wanted to ask a little bit more about the competition you saw in 1Q. And, I think, from our understanding, it's more an absorption issue of new frac spreads coming in, perhaps taking some pricing discounts, and probably your unwillingness to lower pricing, given that you have crews that are working that are doing exceptionally well.

Is that a fair assessment? Have you seen competition take some share from – or not really share but take some of the pie, I guess, from just lowered pricing to get their equipment to work, and you guys just saying, hey, that's your prerogative, you do it, and we're going wait until we have the appropriately priced work to get a return on our investments that we made?.

James, this is Jim. Your assessment is pretty accurate. We care about our margins and our financial returns. And so we are – and we don't need to work – we don't need to practice. So, if somebody wants to come in and take some work at lower pricing, we hate to say we're happy for them to do that but that is their prerogative as you state.

One thing we might have seen in first quarter is some of the newer companies want to get to work and have their crews get some hours and make some money. So it may be a function of getting your crews happy, making money, happy working for you, and you sacrifice your income statement for that.

That's just kind of an assumption on our part based on a little bit of empirical evidence. So, that's kind of our characterization of it at this time..

James, this is Ben. Let me – I'll add a little bit to that..

Sure..

I alluded to it earlier that we're always seeking the right balance between pricing and utilization. So, whether that means we're willing to discount, it all comes down to the volume of the work. Jim alluded to some of the disruptions that happened with some of this pad drilling. It can be really good but it can be disruptive.

We have begun to dedicate fleets with customers that do have a lot of completion activities that they're looking to accomplish. And all things equal, that may result in "slightly lower pricing", but it's – we hope, expect to be offset by improved utilization.

So from that perspective, is that – are we lowering pricing? I would say, I mean, it comes at a – there's a tradeoff there. So we're looking for that right balance. And so we're looking after what happened in the fourth quarter. The competition coming in fourth quarter and first quarter, we're looking to get our utilization back up.

And in some cases, that may mean lower pricing, but overall we believe better returns than we would otherwise get, if we just completely dug in our heels and we're not responsive to what the market pricing is. So, we're always tweaking that and looking for that right combination.

And I'd say that's what we've been doing during the first quarter and we expect that to benefit us going forward..

Okay. And maybe a follow-up on that, Ben.

So, I guess are you suggesting that for pad work, the pricing is a bit lower, yet your throughput or utilization is higher, so your profitability is higher versus, say, non-pad type work where the pricing is a bit better?.

Yes. That is correct..

Okay. Got it. All right. Thanks, guys..

Thanks, James..

Thank you very much. Our next question will come from Marc Bianchi from Cowen. Please go ahead, your line is open..

Hey, thank you very much. Good morning.

I was curious if you could discuss how the pressure pumping revenue progressed throughout the first quarter?.

Marc, this is Jim. I think a comment would be that we got a little bit of a slow start in January due to people being slow coming back from the holidays. We've heard anecdotally that some customers didn't get their budgets in place till February.

We also had some weather issues in North Dakota where we work and in the Permian where we have a big presence. So January had a slow start and that's probably all that's important to say about the first quarter..

Okay. So there isn't necessarily the condition where March was much better than February, and February was much better than March or anything like that.

It was just a little bit of a weak January and then kind of steady in February and March?.

That is correct. Yes..

Okay. Okay, great. And then I guess, so the $150 million EBITDA for second quarter, as George was asking, is probably a high level to think about for second quarter, but if we think back to third quarter, you did $136 million, $304 million of pressure pumping revenues.

How realistic is that kind of level of business over the second or third quarter as we kind of think about the progression that you guys are looking at? I think your third quarter 2017, you really performed well and executed well.

So wondering if that was maybe an anomaly, or if you see that as kind of a realistic aspiration for these next upcoming quarters?.

Well, I really won't, again, comment on maybe the future, but let me comment on the third quarter of last year. Third quarter, typically for us and, I think, many other people, is typically the best quarter of the year, longer days, good weather and all those sort of things.

So I expect the third quarter this year will be good, will be very good for those reasons. Better than, say, the first and the second. Also, third quarter last year, I think what we benefited from, at that point in time, was the fact that we were ready to go when industry conditions improved. The rig count was moving up.

We were available to work and able to work and we captured those opportunities. And we all know that kind of fourth quarter, there was that air pocket. And I guess we were expecting – as everyone, we were expecting that things would come on stronger.

But, again, what we've experienced is a lot of competition that's moved into the market as we've already described. So, what the dynamic is going be over the next couple of quarters, with increasing oil prices, I would like to think that's going to encourage customers to commit to frac crews more readily than they would otherwise.

That's reflective in the rig count moving up. Hopefully the rig count will continue to move up, or at least the number of completions will continue to move up. So we think there, there is some real positive indicators from that perspective. And whether in the next quarter or two, we can get back up to much higher, for us, activity levels, not sure.

Depends on the competition and depends on how well they're able to maintain their equipment. But we recognize, too, that we're working off of better returns, better margins than some of our other competitors.

So, we don't want to internally penalize ourselves or feel too bad about ourselves because we aren't able to continue to progress with our margins. Our margins are not bad. They're good. They're better than many of our other competitors. And we're proud of that.

And we don't need to beat ourselves up too much about the fact that it's not continuing to immediately increase. But we will keep doing what we do, which is, again, find that right balance between pricing and utilization. We'll continue to provide quality services to our customers.

And I think, in the end, we'll continue to be able to do the things that we said we're focused on, including returns to our shareholders and producing good returns on invested capital to company that allows us to return capital back to our shareholders in multiple forms. So, we'll continue to focus on that, and not lose sight of that..

Yep. Okay. Thanks very much for that, Ben, I'll turn it back..

Thanks, Marc..

Thank you. We'll now take our next question from Dan Boyd from BMO Capital Markets. Please go ahead. Your line is open..

Hi, thanks. Just want to kind of follow-up on the same line of questioning. Just as we think about leading-edge crew profitability. It sounds like what you're saying is that the crew profitability over the past few months and even into April has been relatively flattish.

Is that a fair characterization?.

Yeah, Dan, that's about right..

Okay. And then, as you think about utilization, I guess there's two forms of utilization. One is the efficiency of your customer to stay active, as you pointed out, with the difference between well-to-well and pad drilling.

But if we just looked at the number of your crews that are committed and looked at utilization that way, how much flak is there, or your crews fully committed?.

Dan, this is Jim. Not to get into this discussion unless anybody wants to. But we don't have that many committed crews. Most of ours are on the "spot market" which with pad drilling and completion actually can be a 13-week or 14-week commitment.

But having said all that, the utilization of dedicated fleets is honestly a little bit lower than we like it to be because there's been some – there's been friction in the system throughout the oil field, we believe. Everyone pretty famously knows about shortages of skilled labor and employment issues.

We think that's just caused some friction throughout the oil field. So our dedicated crews, of which we think we're going have more of in the second quarter, but that utilization is good. It's worth doing, but it's not the extremely high percentage that an Excel model would predict..

Okay. And then just to clarify when I said, sort of dedicated, I meant more spoken for. Because....

Oh, okay..

...in the past, you said, even though you're in the spot market, your crews are still spoken for..

Okay. Excellent. That's right..

Yeah, and then just my last one is just on the higher maintenance costs and what you experience in the first quarter.

Is this a higher run rate that we need to start thinking about? Just given the increased service intensity, was this something that you think will get worse over time or was there maybe something one-time that could bring repair and maintenance costs down?.

This is Ben. That's a good question. It's something that we are looking at. And it's hard to have a definitive answer. Sometimes things like fluid ends break whenever they break.

And whether some of what we experienced in the first quarter is kind of it was just time after we had a – again as we've talked about a particularly busy third quarter 2017, certainly not as much activity in fourth, or maybe it was just time in the first quarter. So we don't really know whether it's going to continue.

We are putting more equipment in our fleets. We think that, we hope, net-net will, all things being equal, would result in stabilizing or improving the maintenance costs. But if the service intensity continues to increase, that may be – may be maybe this trend continues. So it's hard to say. It wasn't – it's something that definitely we're looking at.

It's nothing that's – we're trying to manage for it. And when it comes to that, we certainly, with these kind of things, our intention was to price it into our jobs.

And because it showed up as sort of impacting our results, that means net-net that it – it wasn't priced in so we have to look at that and see what – in those circumstances, where we are having higher maintenance, are we – can we price that into our jobs or not, right. And that's just something that you have to work on over time, right..

Yeah..

And we'll avoid the work where we think it's causing higher maintenance unless we can charge more. So that's something you're always searching for. So at this point, we don't think that one quarter creates a trend but it's something we're keenly aware of and are looking at..

Okay. Can you help quantify it a bit in terms of whether it's cost per crew per year or cost per thousand horsepower.

Some metrics around it, maybe just – how that's resolved over time? Since we all work with Excel?.

We're not looking at it that way. We have some numbers. We have some information. Don't really have anything offhand that we could give to you right now but we'll try to work on that..

All right. I'll follow-up on it. Thanks, guys. Bye..

Thank you very much. We will now take our next question from Ken Sill from SunTrust. Please go ahead. Your line is open..

Hey, good morning, gentlemen..

Hey, Ken..

I guess we're all struggling with, can you grow in pressure pumping? And I'm going to ask the same question which was asked before but maybe ask for a little bit more color.

So the competitors your peers were so far basically said that, look, January's slow, February's a little better, March was better than that and April's off to a really good start. So they've seen acceleration. Now, that might be in Halliburton's case because they've got sand again and that doesn't seem to have been an issue for you.

But one of the things in everybody's models is we've got, okay, if utilization goes up and pricing goes up and both those levers work, you can get a lot of -you can get further earnings growth. But if kind of Q3 2017 is as good as the profit's going to get, then the growth in pressure pumping is limited to capacity coming on.

So I guess what we're trying to figure out is how much – is there an ability to squeeze more utilization and where is net pricing relative to where it was in Q3 of last year?.

This is Ben. Yeah, pricing has not again changed appreciably. I think this is more of a utilization question. When you talk about capacity additions you have to talk about attrition. And whether it's attrition, that the equipment's just not available to work or whether if somebody has taken it out of their fleet. A lot of dynamics there.

A lot of really no – certainly you can make predictions but no way to really know how that's going to shake out. We have continued to maintain our equipment very timely. And, again, we are supplementing our fleets so we can work on these more highly-intensive jobs that we think overall can generate better margins than some of the less-intensive work.

But it's always – again, it's finding that balance between the pricing and the mix of the jobs, the volume of work, and that's what we're striving for. So we are striving to get our utilization up. We hope that pricing gets stabilized – for us it's generating decent margins.

It's not generating – other people, it's not generating as good of margins for them but it's generating decent margins for us. Can it move up from here? I don't know. It's all about supply and demand. The price of oil moves up.

If the rig count moves up and there's more wells that need to be completed, then there may be the opportunity to move prices up. I think customers would be much more interested in getting to work at $70-plus oil rather than low-$50s. And hopefully that will translate into certainly better utilization if not some better pricing as well..

And then just to make sure we've got this right, so you've got another 100,000-horsepower coming, is that going to come on in Q2 so that you'll add essentially just one more fleet, be up to 21 fleets running by the end of Q2?.

Probably. We think four to six months. So it may – and we do think there will be one more fleet that we do believe will be placed into service during the second quarter. So that will be a "5%" increase to the fleet capacity..

So you're going put one more fleet in Q2 and then some of the horsepower still coming in Q3 but that won't add another fleet..

Correct..

Is that the right way to model that? Okay..

Okay. Sure..

Okay. All right. And then just finally to get back to the dedicated versus spot. This is a semantic question, it's like to me, there's not that much that's actually contracted. What you've got is agreements to let somebody use the fleet and you've got a negotiated price but that's subject to all kinds of, if anything changes, we're changing the price.

So in terms of, are you guys about half of your fleet's pretty much dedicated to the same customers? They've got essentially kind of a right of first refusal on it or unless they don't have work for it, or is it less than that?.

Ken, at the end of the first quarter, it was less than that, probably about 10% or so.

By the end of the third quarter, we think that about a third of our pressure pumping fleet will be dedicated to – will be dedicated with all the caveats that you just named and I'll add one to it, is that there are no take or pay economics in any of the handshake agreements that we're in or we are contemplating or that we know about in the market..

Those never work anyway. All right. Thank you..

Okay, thanks, Ken..

Thank you very much. We will now take our next question from Will Thompson from Barclays. Please go ahead. Your line is open..

Hey, good morning..

Hey, Will..

I just wanted to follow-up on your comments if I heard you correctly, where you're kind of alluding to high-grading the fleet. Your CapEx guidance of $250 million, it appears that it was down from, I think, your prior guidance of $265 million. I believe a big chunk of that was going to maintenance of the frac fleet.

Is some of that upgrading the fleet today or were your comments regarding new builds actually – continuing new builds to replace some of the older pump units?.

This is Ben. A large percentage of the corporate, when we placed the orders last year, we had to put some down payments down, so – but a percentage, a large percentage of the $250 million this year will be, obviously, the $25 million we took delivery of and the additional $100 million. So all of the $250 million will be for additional pumps.

And as we've talked about, supplementing the fleet and one additional spread. So, and in terms of trying to overhaul the fleet, there will be some of that. But, again, a larger percentage is being spent to increase the fleet size.

And we are spending a little bit of money in some of our other significant service lines as well, to continue to invest in there and make sure we're positioned as well as we can be there, as well..

Did I hear your comments correctly? I think the question that Tommy had, regarding in the next 12 months you have to make a decision around maybe high-grading some of the pump units? If that was the case, what are the factors that would go into that decision?.

Will, this is Jim. I don't know about high grading pump units, as much as a lot of the equipment that we're buying, that we're taking delivery of, is going to supplement existing fleets and replace older equipment in fleets. That's why we're buying the three new fleets, but it's a net add of one.

Now, we haven't discussed in this conversation the fact that we are moving some of that older equipment to our pump down service lines, and we actually started doing that in first quarter, and we think that's going be successful for us. And it's going to add some more revenue and earnings.

But, in general, remember that a lot of the equipment that we're buying, it's either going to supplement an existing fleet by adding more horsepower on location, or, in some cases, it's going to replace some older pumps, so that we can have a more reliable fleet on the same geographic footprint. Hope that answers the question..

I guess I'll try one more time. The comment around 2500 horsepower pumps..

Yes..

You implied that you have some older pumps that are smaller sizes, I didn't know if there was a customer preference or there's more sort of cost of ownership of these smaller pumps? That's what I was kind of drilling down to, is what you're trying to play there?.

Customers like bigger and more powerful pumps. The smaller, older pumps can work in the pump down service line..

And can do other pumping work. The larger capacity equipment can do these very highly-intensive and high utilization type jobs. So, there is opportunity of all types and sizes. The question about whether we actually will retire or repurpose pumps, that's what I'm saying. We'll make that decision in the next 12 months.

So we may, in disclosing our hydraulic Pressure Pumping fleet size, it may be that there's some net reductions by that time because we've repurposed it to other service lines, or we decided to retire them, or what have you. I guess that's what I was alluding to.

Due to the nature of the work that we can provide better services to our customers, we are adding – at this point, the additions we're making are higher capacity pumps..

Okay. That's helpful. Thank you for the clarification..

Thanks, Will..

Thank you very much. I would take our next question from Scott Gruber from Citi. Please go ahead. Your line is open..

Yes, good morning, guys..

Hey, Scott..

I want to ask a question, which I will be asking all your peers this quarter. You guys have been on the more disciplined end of the spectrum, returning cash ahead of basically everybody else. So it's a bit unfair to start with you. But you report first, so I will..

We understand..

If you look at the frac industry in total, the trend here is to order new capacity on a speculative basis. Why is that? If we look at the dynamics in the land drilling space, they tend to wait for contracts to order new equipment.

So, would you guys actually commit to refraining from new build orders for growth purposes, and not for replacement, but for growth, until a contract is in hand so you have some commitment from the customer?.

This is Ben. That's one way of looking at it. The problem being that the lead times on ordering equipment, that's difficult to do, so I think it's more of a read on the market.

I think that at this point in time, given where we see things, I don't know that we are not – because we've not announced and haven't said that we're placing orders for additional equipment to grow the fleet. We haven't said that yet.

I think that but, as I alluded to earlier, I think in the next 12 months, we may be talking about the fact that the fleet size is decreasing. So we may be placing orders to at least stay stable. Right. So I think that's more – we just have to make a decision. I mean, we're committed to the pressure pumping industry. And it's good for us.

It's a great space. So we do want to grow it where we can, certainly actively maintain, if you will.

We don't want to – we want to make sure that our fleet is in very good shape, and that may take placing orders – will take – will require placing orders for new equipment sometime in the next several months to perhaps, again, just stay even because of the other dynamics that we talked about, so..

And that makes a lot of sense. I'm just – as we go into the second half of this year, people are going to be thinking about potentially deploying some capital to get ready for 2019. So if you're replacing, makes a lot of sense.

It would just be nice to see the industry move to receiving commitments from customers if they're really thinking about growth. Just as you guys think about capital deployment as you go through the second half of the year, if the market holds from here, you'll be generating some really good free cash.

Just how do you think about the kind of incremental cash return versus that growth opportunity?.

Scott, this is Jim. Sort of the same three legs of the stool that we've always had. I mean, what we'd rather do, what we'd most prefer to do is buy equipment with a very high projected return on invested capital. But we had the dividends, which we've increased.

In the first quarter we did a very large stock buyback, I believe, by my accounting, it's the second largest in our history. So we certainly have that as well as a return to shareholders and committed to the dividend. So that's where we are.

As well as a responsible deployment of capital that overall gives us a lower cost of capital, which I think is good for our shareholders also. We – sometimes commitments by customers have been a good catalyst for ordering equipment. We did that over 10 years ago.

We had some good commitments from customers, but it's a very hard – commitments from customers today is very hard to predicate equipment purchases on..

Certainly 12....

Certainly 12 months out, or 9 to 12 months out, that would be the order time for equipment, so..

Right. Well, I think the issue is the customers don't have to. They just have to indicate an interest, and....

That's right..

...somebody will go out and order..

Exactly, yeah. Prisoner's dilemma, for sure..

Where is zipper frac work today? Jim, when we last spoke, I think you were hoping to get it up towards 50% first half.

Where are you guys at?.

Yeah. As a percentage of total stages, it increased slightly during the first quarter. It was 49%, so, close to where we were, a little bit higher..

Got you. So that's ticking high.

Are you seeing much overall improvement on kind of stages per fleet per month? If you kind of take away the noise around kind of seasonality and everything else the last few quarters? For those fleets that are run inconsistently, are you seeing stage count improvement?.

We are. If you try to normalize things, we're seeing some stage count improvement, with the caveats that we've talked about personnel and other issues just kind of pushing jobs, but that's right..

Got it. Appreciate it, guys. Thanks..

Thanks, Scott..

Thank you. Our next question is from Michael LaMotte from Guggenheim. Please go ahead. Your line is open..

Thanks. Good morning, guys..

Hi, Michael..

If I can ask a few questions around sand, how much, if any, of the sand is now being self-sourced by your customers?.

Michael, this is Jim. We've always tried to keep that down a little bit for a couple of reasons. But at this point, let's see, of the sand that we pumped in first quarter, I believe 68% of it was ours, compared to 75% of it being ours in the fourth quarter.

So the amount of sand that we pumped, which we delivered, was slightly lower than in fourth quarter..

Yeah. Let me add. This is Ben. Let me comment on that briefly. Obviously that means more self-service for us for the quarter, more self-service by customers. That probably is a trend. I think that percentage change may be a little more significant because it's kind of a customer relationship.

I mean, there's particular – there's a couple of customers that we weren't doing work for because of a variety of reasons, including the pricing we were able to get on those types of jobs, and that was resolved. So we began to work for that customer again. So I think that impacted the percentage some.

I don't know that that's a trend that's going to stick, that we're going to have that dramatic of a – it's not overly-dramatic, but that big of a percentage increase in the amount of sand supplied by our customers..

Okay.

And so, based on your legacy relationships, I guess, I could interpret it that probably no more than a third of the sand would be self-sourced going forward? Somewhere between that, let's call it, 60% and 70% range is going to stay RPC story?.

That's a reasonable prediction at this point in time. Yeah..

Okay. And then in terms of – I know sand prices are up in the last two, three quarters.

With pricing dynamics in the marketplace, have you been able to push those prices through, or has that been part of the margin compression that you all have experienced?.

Michael, this is Jim. We actually have not seen price increases for sand..

Okay. We've been able to, for whatever reason, been able to do it. Our guys do a good job, and we've been able to sort of hold that down. That has not been an issue up to this point for us..

Okay.

So then, it's fair to say that the difference in profitability per crew really is utilization and maintenance?.

Exactly. Those are the two drivers..

The two big levers. Okay. And then last one for me, I know that sand kings are going away because of the change in OSHA regs. I'm curious as to where you are in that replacement trend, and if you're seeing potentially any reduction in maintenance expenses as a result of literally less sand in the gears..

Michael, this is Jim. We'll have to get back to you on sand kings going away because of OSHA regulations. It's not clear to me that that's the case. You've been on jobs with us. You know that we use sand kings. They're fully depreciated and they still work. We are purchasing silos, sand silos, but we're not in a rush.

As far as I know – we'll have to follow-up on that to replace all our sand kings by June 23rd..

And this is Ben. Let me add. I'm certainly no expert on this, but there's a fair way – period of time until we – we have to begin monitoring process within the next couple of quarters with respect to what the exposure is on some of our work sites. And based on some of those results, we'll then have to react and begin to control the silica in the air.

And there's a variety of different ways to be able to accomplish that. We've not made a decision yet on what approach or techniques we'll use. Some of that will depend on the results of our testing and other information that comes along. But there is a fair way.

I think it's certainly more than a year, maybe 18 months out I think is when we have to begin to be prepared to make changes to be able to control the silica in the air..

Okay. If I could squeeze one more in on the silos.

By the end of this year, with the CapEx that you have planned, how many of the crews will be operating with silo systems?.

Michael, this is Jim. I honestly do not know offhand..

Okay..

I do not..

We'll follow-up offline. Thanks, guys..

Okay..

Thank you. Our next question is from Tom Curran from B. Riley FBR. Please go ahead. Your line is open..

Good morning, guys..

Hey, Tom..

Ben or Jim, I know that, back in June of 2016, as we were exiting the downturn, about 60% of Cudd's pumps were quintuplex.

Could you update us on what that percentage will be after you've added this remaining 100,000 horsepower? And whether, when it comes to the pad-based jobs you're doing with 100% quintuplex pumps, on those jobs, have you identified any meaningful change in the frequency with which you need to add additional redundant horsepower or are experiencing non-productive time?.

Tom, this is Jim. I do not know offhand, at 12/31/18, what percentage of our fleet will be quintuplex pumps versus triplex. It will be higher than it was. I mean, you know, north of 75% will be quintuplex. We are always working with the amount of equipment that we need on a job and how much redundancy we want to have. You know us for being conservative.

We'll have more equipment on a job site. I was on a pad completion site recently, and we had 40% more equipment on the site than our peer doing the same job one or two wells over, and we have some on the sidelines. And we're always working with that. I can't really quote a firm policy on how much redundant horsepower we're going to have right now.

I will say, qualitatively, that with the new 2500 horsepower pumps that have more reliability components, components that themselves have been engineered for continuous duty rather than intermittent duty, the amount of redundant horsepower we need on site will, in some way, be lower. But I don't have a percentage to quote for you.

It's a great question. I'm just not sure I know the answer..

Okay. Thank you for that. That's helpful though.

And then, have you had any customers seemingly or disclosed to you that they're slowing the execution pace of or deferring a frac program specifically because of concerns related to takeaway capacity constraints? Has that actually happened for you yet?.

Tom, we've heard rumors that some customers are not completing because they're waiting on takeaway capacity, but it's nothing firm. But we have heard that and then we have the price differentials between Crude and the Permian and West Texas Intermediate. So, can't say anything specific about that, but it's not impossible..

And has there been any unifying theme to the operators that you've heard or maybe observed those anecdotes about.

Do they tend to be smaller or clustered in a specific county or counties?.

No. Tom, we don't have any specific knowledge about that. Again, good question. But, no, we don't..

All right. Last one for me then. On pricing, we've heard that before the industry hit that December air pocket for pricing gains, spot rates had reached a fairly high premium relative to what we're calling dedicated rates, and that the pricing pressures seen since has largely been borne and disproportionately impacted on the spot side of the market.

I know, Jim, you've already clarified that we actually haven't seen pricing come off that much. It's more just been about a pause in sustained pressure.

But, is that depiction of the pricing dynamic between spot and dedicated rates accurate? Where you've seen the pressure, has it been more on the spot side?.

Tom, I mean, I think, yes, just by nature of how pricing competition comes in at this point in the market, new fleets come in and need to get to work, so I think that's the case. I would also say that, as Ben alluded earlier, pricing has actually increased slightly during third quarter.

But the rate of increase has, for us anyway, has decreased significantly. And we're in the spot market, the way that we in the industry are talking about it right now. So, I think that's credible..

Yeah..

All right. Great. Thanks for the answers..

Thanks, Tom..

Thank you. Our next question is from Waqar Sayed from Goldman Sachs. Please go ahead. Your line is open..

Thank you very much. So I may shift away from pressure pumping and maybe look into some of the other business lines. Your revenues, if I'm doing the math correctly, was down in coiled tubing quarter-over-quarter, is that right, sequentially..

That's correct..

Yes..

And what was the rationale for that? And then going forward, do you think all your business lines in Technical Services are going to have more or less the same kind of growth rate or one business line may grow at a faster rate?.

It's a good question. Pressure pumping, again, was still strong. Activity levels are strong. Coiled tubing, I think, there's opportunity there. We're doing some things to tweak the fleet in coiled tubing.

I think some of what we're seeing and hearing is that the longer laterals and more stages and things like that, that that's something that I think is here to stay and something that we need to continue to respond to in terms of our coiled tubing and other supporting service.

We need to respond to that change in that trend which we have been and we will continue to. I think – we've seen some strength, rental tools, we're seeing some strength there. Some of our other smaller service lines, we're seeing strength.

So, I like to think with – again with higher oil prices, rig count continuing to move up, that I think we'll – I think we'll have some positive progression by all or most of all of our service lines. I am optimistic that we're not in a bad environment.

We're still in a strong environment and we should be able to take advantage of that environment and experience some growth in the coming quarters..

So off your coiled tubing fleet, how many of your units are maybe like 2 3/8 inch or larger, if any?.

Let's see. I don't know that exact bifurcation, Waqar. The majority of our coiled tubing units are two inches or higher in diameter, 2 3/8 and we are doing some upgrading of the fleet this year to have more of the larger units. I do not know offhand, I'm sorry..

No problem.

And then off your pressure pumping fleet, let's say, 20 fleets right now, how many are horizontal, how many are vertical?.

We have 21 fleets now, Waqar..

Okay..

Approximately 18 or 19 are horizontal and we have a couple of vertical fleets..

Okay.

And what's your kind of maintenance CapEx per fleet on a horizontal fleet? How is that kind of trending?.

Maintenance CapEx has actually been flat to maybe even a little bit down in the past few quarters. That's maintenance capital expenditures, let's be clear about that..

Right..

As we've been discussing in this conversation, maintenance expense has been higher....

Right..

...due to fluid and replacement. But maintenance CapEx has been a bit lower. We've been looking at some systems and installing some systems that allow us to do predictive maintenance, which is helpful on the maintenance CapEx side. And I mentioned this earlier, but a lot of our new components are continuous duty components and they just last longer.

We're getting many more hours out of transmissions than we used to, for example. And working on the engines also, we're getting more hours out of them as well..

So $4 million to $5 million of maintenance CapEx per fleet, is that kind of a right ballpark number or below that?.

I might have to get back to you on that one, Waqar. That sounds about right, but I don't want to throw out a number or agree to a number that I haven't really thought about..

Okay. No, that's fine. Great. That's all I have. Thank you very much..

Okay. Thanks..

Thank you. Our next question is from John Watson from Simmons & Company. Please go ahead. Your line is open..

Thanks for squeezing me in..

Sure, John..

Quick one for me.

Given the new competition that we've talked about, are you having to consider working for customers different from the legacy customer base at least over the past few quarters or years? Meaning, more larger operators?.

This is Ben. I think we're constantly looking for, again, the right mix of pricing and utilization. So we'll continue to seek that, whether that leads us to – and I think in some cases it is, at this point, leading us to a different customer base. And we're fine with that, right. We like all of our customers.

So I think – so the mix has changed some in the first quarter and is continuing to evolve a bit compared to where it was third quarter and fourth quarter last year..

Okay, great.

And this might be tough to answer, but do you know the new competition that you've talked about, if they're operating under a contracted business model with dedicated fleets or are they coming in with spot work?.

John, we're not sure, but in general, we believe they are not doing contracts..

Perfect. Thanks very much, guys..

Sure..

Thanks..

Thank you. We will now take our final question from Chase Mulvehill from Wolfe Research. Please go ahead your line's open..

Hey, good morning, and thanks for squeezing me in..

Hey, Chase..

Appreciate you going a little longer today. Yeah, thanks, Jim.

I guess first question, maybe this isn't the way to think about it given your spot strategy, but how full is your 2Q frac calendar right now?.

Chase, there's not a lot of white space. We feel like it's pretty full. Caveat is always, if jobs get pushed for logistical reasons or whatever else, but things are pretty full..

Okay. So given that outlook that your frac calendar is pretty full, what's a reasonable expectation for sequential increase in maybe your stage calendar hours pumped or something if you want to kind of help us kind of put out a number out there when we think about underlying activity for your fleet..

Chase, we think stage count will be higher in second quarter than first, because we don't have the weather issues in January. That's probably the best we can say right now..

And we do have additional equipment coming onboard..

That's right..

So we will have another fleet – we expect sometime during the second quarter, will be available for the third quarter. So all things being equal, there should be a growth, as Jim indicated..

Okay. All right. Maybe this will help us a little bit.

If we think about pump hours per active fleet in 1Q, how does this compare to 3Q, it was probably peakish for you if we think about that metric?.

Pump hours per active fleet Q3 2017 to Q1 2018, is that your question?.

Yeah..

I mean, it's – I mean it was lower. I actually don't know what percentage but it's about utilization. I mean that's maybe the answer to a closing question here. Pricing is fair and pricing has improved over the past few quarters, albeit by a small amount. It's about utilization right now..

And we are – again, the difference between spot, we're saying a crew or a fleet is playing in the spot market versus a dedicated fleet. I mean, that's not black and white.

But, as Jim indicated earlier, we will have, do have moving into the second quarter and during the second quarter, we will have more dedicated fleets, which by definition, and hopefully this occurs, there will be higher utilization than we had in Q1..

Right. That's helpful. I'll squeeze one more in and then I'll let you go. If we think about sand and your integration on sand, I think you've got Chippewa in Wisconsin.

Can you – is that running at full capacity? And is that full capacity about 1 million tons? And is that all going to supply sand internally or are you filling that externally?.

It's not quite a million tons. It's going as far as it can. Our sand mine provided 28% of the sand we pumped during first quarter, which was higher than it has been in the past..

Our primary outlook for that sand is, to ourselves, but we're always seeking, again, opportunities to work with other sand mines, and if there's grade differences or so forth, so we're trading it around. And we do have some "third- party sales out of the mine". But a large percentage is used and consumed by Cudd Pumping..

Okay. All righty. Thanks for all the color. War Eagle, Ben..

Absolutely. War Eagle..

Okay everyone, we appreciate everyone's time. We've gone over our allotted time. We look forward to follow-up in various investor meetings over the next few months. We are going to cut it off now. We appreciate everybody's attention, and hope you all have a good day. Talk to you soon..

This concludes today's conference call. Replay will be available on www.rpc.net within two hours following the completion of the call. Thanks for your participation, ladies and gentlemen. You may now disconnect..