Letter from CEO
In 2011 our industry continued the growth that began following the steep downturn in 2008 and 2009. We benefited from a U.S. domestic rig count that rose to its previous cyclical peak, and was comprised of an increasing percentage of rigs used to drill directional and horizontal wells. We increased our fleet of revenue-producing equipment, and placed much of the new equipment in service in high-utilization unconventional resource plays under committed customer relationships. RPC also benefited from high oil prices and increased activity both in traditional oil basins and several of the relatively new shale plays which produce oil and petroleum liquids. Although the price of natural gas declined steadily throughout 2011, the steady increase in the price of oil and shift in U.S. domestic drilling towards some of these oil-directed basins compensated for the decline in natural gas drilling which resulted from falling natural gas prices. Throughout the year, we maintained a conservative capital structure and continued to improve our operational execution in a dynamic business environment.
The strategic decisions we have made over the past several years, coupled with a continued strong industry environment allowed us to generate record revenues and profits in 2011. Revenues for 2011 of $1.8 billion increased by 65.1 percent compared to $1.1 billion in 2010. Our revenues increased at a higher rate than the change in the domestic rig count and underlying commodity prices due to the addition of revenue-producing equipment to support committed customer relationships coupled with increased industry activity. Cost of revenues was $992.7 million in 2011, an increase of 63.8 percent compared to 2010. The increase in these costs was due to the variable nature of many of these expenses, as well as labor cost pressures and increases in the cost of fuel and several key raw materials used in providing services to our customers. Cost of revenues as a percentage of revenues decreased from 55.3 percent in 2009 to 54.9 percent in 2011 due to leverage of some of our direct costs over higher activity and revenue levels.
Selling, general and administrative expenses increased to $151.3 million in 2011, or 8.4 percent of revenues, compared to $121.8 million, or 11.1 percent of revenues in 2010. Selling, general and administrative expenses increased by 24.2 percent during the year due to increases in total employment costs, including increased incentive compensation consistent with improved operating results. As a percentage of revenues, however, costs decreased due to the leverage of our employment costs and the fixed nature of other selling, general and administrative expenses. Depreciation and amortization were $179.9 million in 2011, an increase of $46.5 million compared to $133.4 million in 2010. Depreciation and amortization increased by 34.9 percent in 2011 compared to 2010 due to the large amount of capital expenditures we made in 2011.
RPC reported an operating profit of $482.1 million in 2011, an increase of 101.8 percent compared to $238.8 million in 2010. Our operating profit improvement was due to higher revenues and cost leverage. Both cost of revenues and selling, general and administrative expenses increased, but they decreased as a percentage of revenues. Depreciation and amortization increased as well, due to capital expenditures made during 2011, but RPC achieved cost leverage on these expenses as well. Operating profit was 26.6 percent of revenues in 2011, compared to 21.8 percent of revenues in 2010. Interest expense increased by 29.7 percent, from $2.7 million in 2010 to $3.5 million in 2011, due to a higher average balance on our revolving credit facility, partially offset by lower interest rates during 2011.
Net income for 2011 was $296.4 million compared to $146.7 million in 2010. Diluted earnings per share were $2.02 ($1.35 adjusted for the three-for-two split effective in March 2012), compared to $1.00 in 2010 ($0.67 adjusted for the three-for-two split effective in March 2012). Our earnings before interest, taxes, depreciation and amortization (EBITDA) were $662.2 million in 2011, a 77.3 percent increase compared to $373.5 million in 2010.
Most of our industry’s indicators continued to improve during 2011. The average U.S. domestic rig count during 2011 was 1,878, 21.6 percent higher than 2010. The average price of oil during 2011 was $94.94 per barrel, a 19.6 percent increase compared to 2010. However, the price of natural gas fell during 2011. Its average price declined by 9.0 percent, from $4.34 per Mcf in 2010 to $3.95 per Mcf in 2011. The price of natural has declined fairly steadily during 2010 and 2011, falling to a low of $3.23 per Mcf during the fourth quarter of 2011.
Our strong financial results during 2011 were driven by a combination of the actions we have taken under our long-term strategic plans and our continued strong operating environment. The fleet additions that we received in 2011 had been ordered previously under a long-term strategy to operate with our high-demand services in domestic shale plays. Much of the equipment we received was utilized in domestic shale resource plays under long-term customer agreements. Through these agreements, our customers can rely on us as a committed, competent service provider who can execute a repeatable process that maximizes the efficiency and productivity of their drilling programs. For RPC, these agreements provide near-term visibility for our operational planning, which increases our efficiency and enhances our profitability. During 2011 approximately 60 percent of our pressure pumping fleet was utilized under this type of customer arrangement. By the end of 2011, a portion of our coiled tubing fleet was utilized under this type of arrangement as well. As our revenues grew, our leverage increased and we were able to improve our bottom line results.
RPC continued the prudent use of our revolving $350 million credit agreement for our capital needs. We invested a record $416.4 million in capital expenditures for new equipment and maintenance of existing equipment during 2011. Working capital increased as well, due to the requirements of higher business activity levels as well as our efforts to secure scarce raw materials used to provide our services. At the end of 2011, the balance on our credit facility was $203.3 million, an increase of $82.0 million compared to $121.3 million at the end of 2010. In spite of this increase, our ratio of debt to total capitalization remained lower than the average of our peers of comparable size. We believe that this credit facility, which has a remaining term of almost four years, along with the cash generated from our operations, will provide RPC with the liquidity to fund our future capital requirements.
During a time of high growth and dynamic change, we continued to manage the balance among the various uses for our cash as one means for enhancing shareholder value. As a response to our strong earnings, ability to generate cash, and confidence in our future, RPC’s Board of Directors increased our dividend three times during 2011 as an immediate and tangible way of sharing our success with our stockholders. As the nearby table shows, RPC has demonstrated its ability and willingness to reward our stockholders for their investment with increasing dividends over the long term. At its most recent quarterly meeting in January 2012, the Board of Directors declared a 20 percent increase in the quarterly dividend payable in March. Also at this meeting, the Board approved a three-for-two stock split, the sixth stock split in RPC’s history. In addition, during 2011 we repurchased 1,646,832 shares of our common stock on the open market. We have long believed in open market repurchases at appropriate valuations as another prudent way of returning capital to our long-term stockholders. RPC believes all of these actions reward our stockholders and enhance the investment appeal of our common stock.
Declining natural gas prices during 2011 and early in 2012 serve as a reminder that our industry is cyclical and further upholds as prudent our conservative management and capital structure philosophy. We are always mindful of the risks associated with oil and natural gas price fluctuations, and will remain prepared for any future industry downturns as we continue to pursue a long-term strategy of growth and high returns on invested capital.
Richard A. Hubbell
President and Chief Executive Officer