Letter from the CEO
During 2013 RPC operated in an industry environment that was uneventful by many external measures. Overall rig counts remained flat during the year, and commodity prices did not fluctuate enough to impact our customers’ activity levels. Beneath these surface metrics, however, several factors influenced RPC’s financial results. First, we were impacted by continued competitive pricing for our services. The high levels of U.S. oilfield activity over the past few years have attracted a great deal of capital to our industry, which has resulted in a much larger amount of oilfield equipment in the market in which we compete. Second, we found ourselves in an increasingly service-intensive operating environment. In this environment, we are using greater amounts of raw materials than in previous years, which is changing the way we manage our business. During 2013, oil prices remained high enough to encourage our customers to drill in oil-rich basins such as the oil-rich Permian Basin and the newer oil-directed shale plays in North Dakota and South Texas. Natural gas prices increased during 2013, but they remained too low to encourage our customers to drill new wells in our domestic U.S. basins. We purchased a small amount of oilfield equipment on an opportunistic basis in 2013. Throughout 2013, we maintained a conservative capital structure and adapted to a changed profitability environment by focusing on process improvement and logistics.
RPC’s 2013 revenues declined by 4.3 percent to $1.86 billion compared to $1.95 billion in 2012. The principal cause of this decline was continued competitive pricing in almost all of our service lines. Pricing for our services continued the decline that began in 2012, although it stabilized in the third quarter of 2013. In addition, the remaining contractual arrangements under which much of RPC’s pressure pumping fleet had operated over the past several years expired during 2013, and we did not renew them due to low pricing. These negative factors were partially offset by higher service intensity and activity in our pressure pumping service line, and small additions to our revenue-producing fleet of equipment in pressure pumping, coiled tubing and rental tools. Cost of revenues was $1.2 billion in 2013, an increase of 6.6 percent compared to $1.1 billion in 2012. The increase in these costs was due to the variable nature of many of these expenses, especially materials and supplies expenses, which increased due to higher activity levels in our pressure pumping service line and greater service intensity of these services. Cost of revenues as a percentage of revenues increased from 56.9 percent in 2012 to 63.3 percent in 2013 due primarily to competitive pricing for our services.
Selling, general and administrative expenses increased to $185.2 million in 2013, or 9.9 percent of revenues, compared to $175.7 million, or 9.0 percent of revenues, in 2012. Selling, general and administrative expenses increased by 5.4 percent during the year due to increases in total employment costs and bad debt expense. Depreciation and amortization were $213.1 million in 2013, a slight decrease of $1.8 million compared to $214.9 million in 2012.
The impact of lower revenues due to competitive pricing for our services, and higher costs due to high activity levels and increasing service intensity, reduced RPC’s profitability in 2013. As a result of these factors, RPC reported operating profit of $275.4 million in 2013, a decrease of 37.7 percent compared to $442.4 million in 2012. Operating profit was 14.8 percent of revenues in 2013, compared to 22.7 percent of revenues in 2012. Interest expense decreased by 7.8 percent, from $2.0 million in 2012 to $1.8 million in 2012, due to a lower average balance on our revolving credit facility in 2013 as compared to 2012, which was achieved through lower capital expenditures in 2013, partially offset by higher working capital requirements during the year.
Net income for 2013 was $166.9 million compared to $274.4 million in 2012. Diluted earnings per share were $0.77, compared to $1.27 in 2012. RPC’s earnings before interest, taxes, depreciation and amortization (EBITDA) were $490.8 million in 2013, a decrease of 25.6 percent compared to $659.5 million in 2012.
In general, our industry’s metrics demonstrated stability that is unusual in the domestic oilfield. The average U.S. domestic rig count during 2013 was 1,762, 8.2 percent lower than 2012. During the year, however, the rig count was essentially unchanged. The average unconventional rig count declined by 3.0 percent, from 1,367 in 2012 to 1,326 in 2013. As a percentage of total wells drilled, the unconventional rig count increased from 71.2 percent in 2012 to 75.3 percent in 2013. This trend is favorable, because unconventional drilling and completion require more of RPC’s services. This continues a trend that has benefited us for a number of years. The average price of oil during 2013 was $98.06 per barrel, an increase of 3.9 percent compared to 2012. The price of oil reached a peak during the third quarter but declined slightly during the fourth quarter. The price of natural gas rose significantly during the 2013, with an average price of $3.71 per Mcf, a 35.8 percent increase compared to the average price in 2012. While significant in percentage terms, the increased spot price of natural gas remains below a threshold that encourages our customers to drill and complete new wells. This is evidenced by the natural gas drilling rig count, which was 374 at the end of 2013, the lowest it has been since the second quarter of 1995. The average price of benchmark natural gas liquids, which have become an increasingly important driver of our customers’ activities in domestic liquids-rich basins, was $1.00 per gallon in both 2012 and 2013, although spot prices increased towards the end of 2013.
RPC once again invested less in capital expenditures in this fiscal year than in the prior year. During 2013 we invested $201.7 million in capital expenditures for maintenance of existing equipment and purchase of new equipment, a decline of $127.2 million or 38.7 percent compared to $328.9 million in 2012. Working capital increased in 2013, due to an increase in accounts receivable. Inventories decreased, however, in spite of higher usage of raw materials. This decrease was due to enhanced logistical capabilities which have increased efficiencies, coupled with declining costs of certain raw materials used in providing our services. At the end of 2013, the balance on our credit facility was $53.3 million, a decrease of $53.7 million compared to $107.0 million at the end of 2012. Our ratio of debt to total capital declined during 2013 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. Early in 2014 we took advantage of market conditions to extend the term on the facility and reduce the margin above the benchmark interest rate paid on the outstanding balance.
During 2013 RPC maintained its commitment to reward its stockholders for their investment in our company. We continued our 16 - year tradition of quarterly dividends, and paid $0.40 per share in dividends during 2013. While this was lower than the $0.52 split-adjusted dividend amount paid in 2012, our dividends in 2012 included a special year-end dividend of $0.20 per share. At its most recent quarterly meeting in January 2014, the Board of Directors declared a five percent increase in the quarterly dividend payable in March. In addition, during 2013 we repurchased 1,511,614 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.
We are very optimistic about the long-term future of the domestic energy industry and our position in the oilfield services market. In early 2014, the price of natural gas is approximately 30 percent higher than during the same period in 2013, and at its highest level since the first quarter of 2010. Our outlook for the near term remains conservative, however, as our market is still burdened with an overcapacity of equipment and natural gas production remains at high levels. In 2014 we will continue to manage our business to generate high returns on invested capital while making prudent investments that will continue our growth.