Letter from the CEO
During 2012, our industry’s activity levels moderated relative to the growth that we experienced in 2010 and 2011. The U.S. domestic rig count rose during the first and second quarters, but in the third quarter it began to decline as low natural gas prices discouraged natural gas-directed drilling.
We increased the size of our fleet of revenue-producing equipment and took our final deliveries of pressure pumping equipment early in the third quarter of 2012. RPC benefited from oil prices that remained high enough to encourage our customers to drill both in the oil-rich Permian Basin and the newer oil-directed shale plays in North Dakota and South Texas. Oil-directed drilling is increasingly important for RPC, because by the end of 2012, natural gas-directed drilling declined to levels not seen since the second quarter of 1999. While natural gas prices began to recover slightly by the end of the year, they remained too low to encourage our customers to drill in the service-intensive shale plays which had been so active in the previous several years. Throughout 2012, we maintained a conservative capital structure and demonstrated our ability to react quickly and appropriately to changing market conditions.
The overall strong industry environment, our expanded fleet of equipment, and our locations in strong domestic U.S. oilfield markets allowed us to generate record revenues. Revenues for 2012 of $1.9 billion increased by 7.5 percent compared to $1.8 billion in 2011. Cost of revenues was $1.1 billion in 2012, an increase of 11.4 percent compared to 2011. The increase in these costs was due to the variable nature of many of these expenses, as well as increased employment costs. Cost of revenues as a percentage of revenues increased from 54.9 percent in 2011 to 56.9 percent in 2012 due to the cost increases as well as competitive pricing pressures for our services. Selling, general and administrative expenses increased to $175.7 million in 2012, or 9.0 percent of revenues, compared to $151.3 million, or 8.4 percent of revenues, in 2011.
Selling, general and administrative expenses increased by 16.2 percent during the year due to increases in total employment costs associated with more service locations and higher business activity levels. As a percentage of revenues, these costs also increased due to competitive pricing for our services, which continued to increase throughout 2012. Depreciation and amortization were $214.9 million in 2012, an increase of $35.0 million compared to $179.9 million in 2011. Depreciation and amortization increased by 19.5 percent in 2012 compared to 2011 due to capital expenditures we made in 2012, although this increase was lower than in previous years.
RPC reported an operating profit of $442.4 million in 2012, a decrease of 8.2 percent compared to $482.1 million in 2011. Although revenues increased in 2012, our costs of revenues and selling, general and administrative expenses increased by greater amounts. Our activity levels remained high, but competitive pricing for our services, as well as continued high service-intensive work that we performed in several U.S. domestic basins, impacted our profitability. Operating profit was 22.7 percent of revenues in 2012, compared to 26.6 percent of revenues in 2011. Interest expense decreased by 42.8 percent, from $3.5 million in 2011 to $2.0 million in 2012, due to a lower average balance on our revolving credit facility in 2012 as compared to 2011, which was achieved through improved working capital and capital expenditure discipline.
Net income for 2012 was $274.4 million compared to $296.4 million in 2011. Diluted earnings per share were $1.27, compared to $1.35 in 2011. RPC’s earnings before interest, taxes, depreciation and amortization (EBITDA) were $659.5 million in 2012, a decrease of less than 1 percent compared to $662.2 million in 2011.
Our industry’s indicators were mixed during 2012. The average U.S. domestic rig count during 2012 was 1,919, or 2.2 percent higher than in 2011. The rig count reached its highest point during the year in the second quarter, declined gradually during the remainder of the year, and at the end of 2012 was 10 percent lower than at the end of 2011. The average price of oil during 2012 was $94.20 per barrel, a decrease of less than 1 percent compared to 2011. Like the rig count, the price of oil reached a peak in the second quarter and declined gradually through the remainder of 2012. Although it declined, the price of oil remained high enough to encourage our customers to conduct drilling activities in the oil-directed basins in our domestic markets. The price of natural gas remained below 2011 levels during most of the year, although it began to increase toward the end of 2012. The average price of natural gas declined by 30.9 percent, from $3.95 per Mcf in 2011 to $2.73 per Mcf in 2012. The price of natural gas dampened our customers’ activity levels during 2012 because its price was too low to encourage drilling and completion in the service-intensive natural gas shale plays. The price of benchmark natural gas liquids, which have become an increasingly important driver of our customers’ activities in domestic liquids-rich basins, declined by 31.4 percent, from $1.46 per gallon in 2011 to $1.00 per gallon in 2012.
Our moderate revenue growth in 2012 was driven by a larger fleet of revenue-producing equipment, particularly in our pressure pumping and coiled tubing service lines, and higher activity levels in our downhole tools service line. Downhole tools has grown in U.S. domestic and international markets with a specialized service offering that is used in unconventional completion activities. During the last two quarters of 2012, however, stagnant activity levels and steady competitive pressures caused declining pricing in most of our service lines. This pricing pressure, along with high costs of several raw materials used in providing our services and fully staffed operational crews, led to lower operating, net income and earnings per share in 2012.
Our fiscal discipline, coupled with an uncertain operating environment, made it prudent for RPC to invest less in its fleet of revenue-producing equipment compared to 2011. During 2012 we invested $328.9 million in capital expenditures for new equipment and maintenance of existing equipment, a decline of $87.5 million, or 21.0 percent, compared to $416.4 million in 2011. Working capital declined as well, although inventories increased as we continued our efforts to secure scarce raw materials used to provide our services. At the end of 2012, the balance on our credit facility was $107.0 million, a decrease of $96.3 million compared to $203.3 million at the end of 2011. Our ratio of debt to total capital declined during 2012 and was once again lower than our peer group averages. Our credit facility and the cash generated from our operations continue to provide RPC with the liquidity to fund our capital requirements.
During 2012, RPC maintained its commitment to reward our stockholders for their investment in our company. We continued our 15-year tradition of quarterly dividends, and during the fourth quarter, we declared and paid a special dividend of $0.20 per share. At its most recent quarterly meeting in January 2013, the Board of Directors declared a 25 percent increase in the regular quarterly dividend payable in March. In addition, during 2012 we repurchased a record 2,622,250 shares of our common stock on the open market. We have used open market repurchases at appropriate valuations for many years as one method of creating value for our stockholders. RPC believes all of these actions reward our stockholders and enhance the long-term investment appeal of our common stock.
It was with mixed emotions that we received Wilton Looney’s announcement that he will not seek reelection when his term as Director expires at our upcoming stockholders’ meeting in April. Wilton has served as an RPC director for 29 years, since RPC’s spin-off from our former parent company. His extensive financial and management expertise has made him an important member of four of our Board committees, and his experience as a chief executive officer and board chairman has helped us to manage our growth through many years in our highly cyclical industry. We will miss Wilton’s presence on our Board of Directors and wish him well in his retirement and continued involvement in the community.
We are proud of our operational execution and the tactical decisions that we made during 2012, and we are pleased to have continued to reward our stockholders with high returns. We are enthusiastic about the changing domestic energy landscape and our position in the market that allows us to capitalize on it. However, continued low natural gas prices and a declining rig count in the second half of 2012 and the first part of 2013 validate our conservative capital structure and recently implemented operational strategies. In 2013 we will continue to balance the long-term growth opportunities in our business with the need to mitigate the risks inherent with commodity price fluctuations and the potential for further downturns in the industry.
Richard A. Hubbell
President and Chief Executive Officer