res
TRANSCRIPT
November 11, 2011
RPC INC. RES/NYSE
Continuing Coverage: Growing by Drilling…in Every Direction!
Investment Rating: Market Outperform
Conservative capital structure helps to withstand the volatile oil and gas industry.
New shale oil and gas reserves present opportunities and threats.
Volatile oil and gas prices cause a variable business cycle.
Large corporate ownership aligns managements' interests with shareholders' but limits the stock’s float.
Our 12-month target price is $ 26.00.
Company Quick View: Location: Atlanta, Georgia Industry: Oil and Gas Equipment and Field Services Description: RPC Inc. operates in the oil and gas services industry through its subsidiary companies. Key Products & Services: RPC Inc.’s key businesses are pressure pumping services, snubbing, rental tools, coiled tubing, nitrogen, and well control. Company Website: www.RPC.net
Analysts: Investment Research Manager: Rajan Gaglani Eric McDonald Satyajith Jay Gaonkar Oleksandr Matviienko Theresa Scales Andrew Ipping Wah
PRICE: $ 21.47 S&P 500: 1,264.85 DJIA: 12,153.68 RUSSELL 2000: 744.64
ValuationEPSP/ECFPSP/CFPS
2010 A$ 1.0021.5x
$ 2.0710.4x
2011 E$ 2.1110.2x
$ 3.536.1x
2012 E$ 2.70
7.9x $ 4.40
4.9x
Market Capitalization Stock DataEquity Market Cap (MM): $ 3,184.30 52-Week Range: $14.21 - $29.05
Enterprise Value (MM): $ 3,332.07 12-Month Stock Performance: 24.90%
Shares Outstanding (MM): 148.31 Dividend Yield: 1.30%
Estimated Float (MM): 34.30 Book Value Per Share: $ 4.85
6-Mo. Avg. Daily Volume: 1,567,352 Beta: 1.55
The BURKENROAD REPORTS are produced solely as a part of an educational program of Tulane University's A.B. Freeman School of Business. The reports are not investment advice and you should not and may not rely on them in making any investment decision. You should consult an investment professional and/or conduct your own primary research regarding any potential investment.
Wall Street's Farm Team
BURK
ENRO
AD R
EPO
RTS
RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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STOCK PRICE PERFORMANCE
Figure 1: 5-year Stock Price
Performance
Source: Yahoo Finance
INVESTMENT SUMMARY
We give RPC Inc. a Market Outperform rating and project a target price of $26.00 per share by year-end 2012. RPC is a holding company, consisting of Patterson Services and Cudd Pumping Services that provides oilfield services and equipment to companies that focus on the exploration, production, and development of oil and gas properties. RPC‘s operating business units provide technical services and support services. Technical services include rental equipment, hydraulic fracturing, coiled tubing, and snubbing. Support services include rental tool services and well control training programs.
One of the most significant challenges RPC faces in the long term is if the commodity prices or economic conditions move in unfavorable directions its revenue can be negatively impacted. However, we believe that RPC has a competitive advantage in the oil and gas services industry in the form of proprietary technology related to unconventional drilling. In addition, the discovery of shale oil and gas reserves across the United States provides RPC a significant opportunity to grow.
PREVIOUS BURKENROAD RATINGS AND PRICES
Table 1: Burkenroad Ratings and Prices Date Rating Price* 11/08/10 Market Outperform $32.26 11/30/2009 Market Outperform $13.34 12/08/2008 Market Outperform $11.00 12/04/2007 Market Perform $12.97 11/30/2006 Market Perform $26.13 03/15/2005 Market Outperform $9.91 02/02/2004 Market Perform $4.90 03/14/2003 Market Perform $4.56 03/20/2002 Market Outperform $6.62 04/15/2001 Buy $5.24
*Price at time of report date.
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INVESTMENT THESIS
One of the most significant challenges RPC faces in the long-term is if commodity prices or economic conditions were to move in unfavorable directions their revenue can be negatively impacted. However, RPC has a competitive advantage in the oil and gas services industry in the form of proprietary technology related to unconventional drilling. Also the discovery of Shale gas and oil reserves across the country provides RPC a huge opportunity to grow.
Conservative capital structure helps to
withstand the volatile oil and gas industry.
.
RPC has a strategy to maintain a conservative capital structure that reduces the risk of bankruptcy in the volatile oil and gas market. The Company maintains a prudent debt structure and has established a revolving credit facility of $350 million with Bank of America Securities LLC to sustain its everyday operations. This conservative capital structure will prevent RPC from losing value in times when the industry or the economy experiences downturns. However, higher leverage is not necessarily a negative factor; higher leverage helps a company achieve higher returns during a good economy, when a company is achieving a higher rate of return than the interest rate it pays for the debt. RPC for example, can increase its return on equity during a booming economy by increasing its debt level.
New shale oil and gas reserves present
opportunities and threats.
RPC’s ability to provide services for expanding shale oil and gas production sites positions the Company well for the future because demand for its services are correlated with the amount of unconventional wells being drilled in shale regions. Although RPC has mentioned it currently has no interest in pursuing a September 2011 shale gas discovery in Blackpool, Lancashire, UK the Company does not rule out other opportunities to enter these markets in the future. But, there is a downside to this story; certain states in the United States have imposed regulations against unconventional drilling and shale rock fracturing citing pollution of both and underground water as a reason. The companies involved in fracturing are taking necessary steps to prevent groundwater pollution, and studies have shown fracturing does not pollute underground water. Nevertheless, these regulations could increase the cost of drilling operations or reduce drilling activity to some extent in these states.
Volatile oil and gas prices cause a
variable business cycle.
Volatile oil and gas prices make the nature of RPC’s business mercurial. Commodity prices play a key role in the activity of oil and gas services companies. High oil and gas prices lead exploration and drilling companies to increase capital expenditures that directly enhance the activity of services companies. Therefore, oil and gas price movements represent the main risk of any service companies performing in the energy field. RPC’s primary tool to hedge against this price volatility is to keep a conservative debt structure that will allow the Company to endure short-term cash inflow reductions. As a result, RPC’s business could be less inclined to suffer low utilization rates of its equipment when oil and gas prices are low.
RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Large corporate ownership aligns
managements' interests with
shareholders' but limits the stock’s
float.
RPC’s insiders and affiliate organizations control a majority (more than 70%) of RPC’s outstanding shares, which aligns the managements’ interest with that of other shareholders and also prevents an outside organization from attempting a hostile takeover. Large insider holdings, however, limit the number of shares that are floating in the market, hence reducing the liquidity of the stock. RPC is a classified as a “Controlled Corporation” because a small group of individuals control over 50% of the Company’s voting power; this excludes the Company from certain NYSE rules such as the requirement of having majority independent directors on its board.
VALUATION We give RPC a Market Outperform rating and forecast that the stock price will be trading at $26 by the end of 2012. In calculating our 12-month target price, we decided to use the discounted cash flow method. Additionally, we used the multiple method and transactions approaches to define the range at which we estimate RPC’s stock will be trading.
Figure 2: RPC Valuation
Discounted Cash Flow Method
In the discounted cash flow method, we calculated the free cash flow of the Company using a revenue model mainly driven by unconventional drilling rigs. We projected the free cash flow of the Company until 2020 and then used a perpetual growth rate of 3%.
Our discount rate was determined assuming a market risk premium of 5.7% and a risk-free rate of 2.5%. We found the beta of the Company at 1.551 by regressing it on the Russell 2000. Furthermore, we added a specific risk premium of 1%, considering the natural risk of the sector RPC is operating in, the volatility of Company’s revenues, and the dependence on key customers. Therefore, the cost of equity reaches 12.34%.
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Using historical data, we projected the cost of debt to be 2.71% and the tax rate of the Company to be 37.91%. We calculated the cost of debt after tax to be 1.68%, which led us to estimate the overall cost of capital of RPC to be 11.75%. By discounting back RPC’s projected free cash flow to the present using a discount rate of 11.75%, we calculated the stock’s fundamental value to be $26.00.
Multiples Method To give more accuracy to our analysis, we decided to implement comparable companies and transactions approaches based on EV/Sales, EV/EBITDA, and P/E multiples as of the third quarter of 2011 as well as forward multiples through 2013. According to our analysis, RPC’s stock price would trade between $23.48 and $28.00.
The upper and lower ranges were found using two metrics that appeared to be the most accurate: an EBITDA multiple and a P/E multiple. We determined the multiples by using the average and the median of the EV/EBITDA and P/E ratios of RPC’s peers in the third quarters of 2011, in 2012 and in 2013.
INDUSTRY ANALYSIS
The oil and gas field service industry consists of a wide range companies that support the operations of oil and gas exploration and production (E&P) companies. These field services companies provide a diverse range of services at different stages of oil and gas E&P, from exploring, finding, and extracting oil and gas (upstream companies) to selling and distributing crude oil, natural gas, and other finished products (downstream companies). The oil and gas field service industry is currently undergoing a boom cycle because of high oil and gas prices as well as the discovery of huge shale reserves across the country and because of directional drilling that makes it possible to access the gas trapped within these shale rocks. The boom is going to continue unless regulations curb directional drilling and fracturing.
The oil and gas field services industry is a mature industry and is highly fragmented. Schlumberger, Halliburton, and Baker Hughes the three major players in the industry and control approximately 30% of the market. The other 70% is shared by hundreds of smaller (both public and private) companies. The oil and gas field service industry comprises two tiers of companies: large, integrated companies with expertise in a broad range of services; and small and medium-sized companies that offer specialized services. Although large companies have a significant competitive advantage in providing services that are highly capital intensive, there are enough opportunities for small- and medium-sized companies such as RPC to provide services.
Industry Drivers Drivers of the oil and gas field services industry mainly are economic and political activity and supply and demand; all other factors such as crude prices and rig-count are a function of economic activity and supply and demand. The drivers are discussed below in the order they influence the revenues of the Company.
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Economy and Politics The oil industry is directly influenced by economic and political conditions. Wars and political instability can affect the production of crude oil, which in turn increases the price. During a recession, there is less economic activity in manufacturing, transporting, and travel, which results in less consumption of oil and, subsequently, reduces the price of oil. The best time to invest in oil and gas companies is when the economy is booming.
Supply and Demand Many factors determine the price of oil, but it basically comes down to supply and demand. Demand generally does not fluctuate except in the case of recessions, but supply shocks can occur for a number of reasons, for example, when major oil-producing countries such as OPEC members decide to vary the supply by a wide margin or when there is political unrest in one of the oil producing countries such as Egypt or Libya.
Figure 3: Drivers of Oil and Gas Field Services Industry.
Barriers to Entry Barriers to enter the oil and gas field services industry are high. The industry is capital intensive and requires significant investment in property, plant, and equipment; for example, as of the third quarter of 2011, RPC has over $600 million in property, plant, and equipment. RPC is also currently able to borrow at a favorable rate to take advantage of recent growth within the industry. New entrants may not have access to the same amount of capital at a comparable cost of borrowing. A new entrant will also be faced with obtaining the supplies necessary to provide oil and gas field services. Some materials such as guar gum used in hydraulic fracturing are not always readily available unless arrangements have been made far in advance. Because of current economic factors, larger companies that do not offer particular services are finding that this is a favorable time to acquire businesses that offer
Economic/Political Activity
Supply and Demand
Crude Oil Prices Rig CountField Services Revenue
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in-demand services within favorable markets. The result is a tremendous amount of merger and acquisition activity. Although this activity may decrease the number of companies, these conglomerates have the capital necessary to compete with companies such as RPC.
Bargaining power of suppliers
The bargaining power of suppliers is high. The limited number of suppliers capable of providing the type of materials used in RPC’s lines of services makes companies significantly vulnerable to changes in suppliers’ decisions. RPC’s, for example, largest service line—pressure pumping—is very specialized, and the number of companies in the oilfield service industry able to meet RPC and its competitors’ needs in terms of equipment is limited, which leads to a strong bargaining power from the suppliers side.
During a demand spike, RPC’s and its competitors’ suppliers might not be able to provide good quality service and products, which can adversely affect RPC and its competitors’ ability to fulfill their commitments in time and in quality, thus, supply disruptions have a direct negative impact on the companies’ services to their customers and will hurt their revenue and customer- relationship. However, RPC is trying to reduce the suppliers’ source of power by using various suppliers as much as it can for other materials such as chemical additives, acid, or nitrogen.
Finally, since 2009, RPC has been increasingly concerned about the availability and price of guar. Essential in hydraulic fracturing and hardly substitutable, the price of this commodity has been extremely volatile and has reached very high levels ($2.5/lb).
Figure 4: Spot Price Movement of Guar
Bargaining Power of Buyers
The bargaining power of buyers is high. The oil and gas services industry is highly dependent on the price of and demand for petroleum. Once reserves are discovered a significant amount of time will pass before the site transforms into a producer of hydrocarbons. If oil prices rise, oil and gas companies must take into account that it takes time before they can reap the benefits of their efforts.
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On the contrary, because of a single company’s oil services not being substantially unique in comparison to its competition, the balance of power is shifting even more towards buyers. This power shift triggers oil and gas exploratory and development companies to seek lower prices and better contract terms. During 2010 for example, one of RPC’s customers accounted for more than 10% of revenues. If this buyer were to use a different service provider, RPC believes it would have a material adverse effect on revenues and operations. Although field services are in high demand, the high prices of these services are forcing many larger oil and gas companies to operate in-house field services divisions and to use third-party service companies to supplement their own activities.
Availability of Substitutes.
The availability of substitutes is relatively insignificant. The primary substitute for products offered by oil and gas services companies are E&P companies’ decisions to service their drilling, completion, stimulation, and other well-related services in-house.
For an E&P company to undertake additional services requires significant capital injections, which small to medium size E&P companies are not able to afford. Larger E&P companies are able to meet these financial obligations; however, after the 2008-2009 financial crisis many of these companies have realized the importance of outsourcing, which leads to operational diversity and stable cash flows that guard against illiquid and redundant PP&E. Therefore, risk management considerations and new industry trends that are focused on outsourcing create a small threat for substitutes of oil and gas services companies’ products.
Energy sources that serve as substitutions for crude oil and natural gas also pose a threat to the oil and gas services industry. The primary substitutes for oil and gas are coal, nuclear energy, and renewable energy. However, regarding transportation, oil virtually has no strong substitutes, because electric vehicles are only in their preliminary stages of development. For electricity generation purposes, abundant coal can compete with gas, but it is less environmentally friendly and can be more expensive. Renewable energy sources occupy a relatively small fraction of the U.S. energy balance and are generally more expensive than traditional sources. Nuclear energy has not been considered favorable for decades, especially now after the nuclear disaster Japan experienced in spring 2011. Nuclear power plants also involve a sizeable amount of start up costs and can take several years to build. Currently North America has twice as much natural gas relative to the amount of proven oil reserves in Saudi Arabia. The abundance of natural gas makes it relatively inexpensive, and therefore, difficult to replace.
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Figure 5: U.S. Energy Balance in 2010.
Competitive Rivalry Competitive rivalry is medium. Demand for oil and gas field services mainly depends on capital spending by E&P companies. These capital spending programs are in turn influenced by anticipated changes in oil and gas prices. When oil or gas prices rise, oil producers hire more contract drillers and field services providers to increase production from existing fields and to explore for new reservoirs. Increases in price benefit the entire industry; what gives an individual company an edge over its peers is its technical expertise and operational efficiency. RPC’s Return on Asset (ROA) of 26.35%, which measures the efficiency of generating revenue from its assets, is the highest in its segment; the company with the second highest ROA is Carbo Ceramics Inc. at 16.68%.
From an operational diversity standpoint, large companies offer a wide range of services, whereas, the smaller companies specialize in a particular service or segment. RPC offers both a wide range of services through its various business segments as well as specialized and niche services such as well control. Most of RPC’s business units have a dedicated R&D division that not only develops new technologies but it is also involved in improving the quality and efficiency of the products and services it offers. RPC currently holds eight patents that expire at varying times in the future.
From an overall perspective, the oil and gas field services industry is mature and fragmented; some of the key factors that give RPC a competitive advantage are its safety record and timeliness. Several years of experience in the oil and gas field service industry have provided RPC with a considerable amount of knowledge, which helps RPC stay ahead of new entrants as well as the existing competition.
Series1, Petroleum, 37%,
37%
Series1, Natural gas, 25%, 25%
Series1, Coal , 21%, 21%
Series1, Nuclear electric power,
9%, 9%
Series1, Renewable
energy , 8%, 8%
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Figure 6: Porter’s Five Forces Analysis.
Legend Description
Extremely Bad for RPC
Bad for RPC
Neutral for RPC
Good for RPC
Extremely Good for RPC
COMPANY DESCRIPTION
RPC Inc. (RES/NYSE) was formed in 1984 when Gary and Randall Rollins decided to spin it off Rollins Inc. because the severe cyclical downturn of the oilfield industry had made the business unrewarding. RPC also became public in 1984. RPC was a diversified holding company with businesses in areas ranging from oil services and waste management to recreational powerboats. Beginning in 1999, the Company divested its non-core businesses to form a pure-play oil and gas field services company. The businesses sold included Eco Waste Technologies, Business Link International, Anchor Crane, and International Hammer and Spindletop Services.
Headquartered in Atlanta, Georgia, RPC provides a range of oilfield services and equipment primarily to independent oil and gas companies involved in the exploration, production, and development of oil and gas in the United States, Africa, Canada, China, Eastern Europe, Latin America, the Middle East, and New Zealand. It operates in two segments: Technical Services and Support Services.
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Technical Services includes RPC’s oil and gas service lines that employ people and equipment to perform value-added completion, production, and maintenance services directly to a customer’s well. Support Services includes oil and gas service lines that provide equipment for customer use or services to assist customer operations.
RPC has grown through acquisitions since its inception. The Company operates on a decentralized basis, which appeals to sellers of businesses who are interested in remaining with their companies after an acquisition is finalized. RPC is mindful of not overpaying for a company, and it creates a win-win situation by paying small premiums for acquisitions while providing the sellers an opportunity to generate additional profits based on future financial performance.
Figure 7: RPC’s acquisition timeline.
Source: RPC’s documents
Products and Services
RPC provides energy related services in two business segments: Technical and Support. Table 2 provides detailed description of each business line.
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Table 2: RPC’s Technical Services Description.
Cudd Pumping Provides hydraulic fracturing and acid treatment services to increase production in existing land wells.
Thru Tubing Solutions
Provides services to the coiled tubing and snubbing industry, and specializes in working downhole tools under pressure during various fishing and drilling operations. Thru Tubing also provides a proprietary downhole motor design.
Snubbing Performs maintenance on wells without depressurizing, or "killing," the well.
Nitrogen Unit Provides nitrogen gas used in several different oilfield operations as a drilling fluid and in gravel packing operations; nitrogen is employed in a well because of its inert nature.
Wireline Unit Provides a production tool used to remove downhole obstructions.
Fluid Pumps Provides pumps used in a variety of oilfield operations.
Well Control Provides professional live well services including blowouts and firefighting.
Production Rental Tools
Provides production rental tools (hydraulic chokes, manifolds, valves, flow iron, and production testing) to the oilfield industry.
RPC’s Support Services Description.
Rental Tools Offers a variety of rental equipment including drill pipe and blowout preventers.
Tubular Services
Performs tubular inspections, and stores and inventories a wide variety of pipe for customers.
Well Control School
Provides industry and government-accredited training to industry personnel.
Energy Personnel International
Provides experienced project management personnel, engineers, and consultants for field work-over programs and optimization projects.
Source: RPC’s Web site.
The technical services segment generated 92% of revenues, while support services generated the remaining 8% in 2010. The pressure pumping business line remains the Company’s main cash generating unit, accounting for about 48% of total revenues. Figure 8 contains detailed information about RPC’s revenue breakdown in 2010.
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Figure 8: RPC Revenue by Business Line.
Source: RPC’s documents
RPC operates domestically and internationally. The international operations accounted for about 3% of total revenue during the first half of 2011. Principally, such operations consist of snubbing, well control, oilfield training services as well as providing rental tools and downhole motors to major international customers. These services are provided through international branch locations, or wholly owned foreign subsidiaries.
RPC has a strong geographical presence in the U.S. oil services market. RPC’s distribution system consists of storage facilities and operational platforms located in all major oil and gas producing regions: the Gulf of Mexico, the mid-continent, the Southwest, the Rocky Mountains, and the Northeast. Figure 9 shows the Company’s geographical presence in the U.S.
Figure 9: RPC’s National Geographical Presence.
Source: RPC’s documents
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Customers
RPC’s customers consist primarily of major and independent natural gas and oil producing and drilling companies as well as integrated energy companies. RPC has concentrated on natural gas drilling and production activities: 67% of revenue in 2010 was related to those activities. RPC’s main customer, Chesapeake Energy Corporation, generated 15% of revenue in 2010. RPC believes it maintains a good relationship with this customer. All other customers accounted for less than 10% each of RPC’s revenue.
Strategy RPC’s primary growth strategy is to grow through acquisition. The Company looks for strategic investment and opportunistic consolidations to gain market share, to increase product offerings, and to improve the profitability of existing service lines.
Since the end of 2010, the Company’s near-term strategy has changed. It has decided to use a larger fleet of equipment than before in several completion works such as pressure pumping, coiled tubing and downhole tools because of increasing demand from many of its customers. Therefore, recent capital expenditures have increased to support this new strategy and expansion plan. The Company believes that the new strategy, along with improved pricing of its technical services segment, will improve its revenues and profits.
Another key factor in RPC’s strategy is to maintain a conservative debt structure and long-term relationships with customers based on long-term contractual agreements. To support and improve relationships with its customers, the Company established a new $350 million revolving credit facility on August 31, 2010 with Bank of America Securities LLC. The facility contains financial covenants limiting the ratio of the Company’s consolidated debt-to-EBITDA ratio to no more than 2.5. Consistent with this strategy, RPC’s capital expenditures increased from $67.8 million in 2009 to $187.5 million in 2010.
Competition The oil and gas services industry is highly competitive, and RPC faces opposition from many companies some with much larger market capitalization: Halliburton, Schlumberger, Baker Hughes, Basic Energy, Calfrack, Key Energy, Lufkin Industries, PHX Energy Services, and C&J Energy Services.
Latest Developments
Over the past several years a significant number of new shale gas and oil plays around the world including the September 2011 Lancashire discovery have been revealed. Several exploration and production companies are focusing more of their resources on known shale formations that were identified many years ago but are now feasible for production because of advancements in fracturing technology since 2008. RPC offers several services for unconventional drilling that can be beneficial to customers interested in producing from shale formations.
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Revenue from RPC’s hydraulic fracturing and acid treatment services has increased from 48% of 2010 revenues to 55% of the first half 2011 revenues, which further validates the demand for these particular services.
Figure 10: Shale Reserves across United States.
As of the third quarter of 2011 pending regulations in the United States could affect the way oil and gas is drilled for. The Environmental Protection Agency, for example, has proposed rules to reduce air pollution from oil and gas drilling operations. The proposed plan would impose control standards on approximately 25,000 gas wells that are hydraulically fractured each year. The Environmental Protection Agency claims that these new regulations will force companies to capture gas that they could sell, which normally would go to waste. The proposed plan is estimated to save the industry $30 million a year.
In 2011, significant merger and acquisition activity has taken place within the oil and gas industry. One of the larger deals was British Petroleum paying Reliance Industries Ltd. $7.2 billion for a 30% stake in 21 oil and gas production-sharing contracts that Reliance operates in India.
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In October 2011 Superior Energy Services, announced it would acquire Complete Production Services for about $2.6 billion by the end of the year. This particular acquisition is significant because the two companies are direct competitors of RPC. According to global data compiled by Bloomberg, companies have paid an average premium of 28% in acquisition deals announced in the 12-month period preceding October 2011. Oil futures declined 8% in the first nine months of 2011. As global economic growth has slowed, there is an increasing concern that the demand for hydrocarbons will decrease. The decline in prices has negatively affected the value of many energy companies.
PEER ANALYSIS RPC participates in an industry that is mature and highly fragmented. Its competitors range from large-cap companies such as Schlumberger Limited ($83 billion), Halliburton Company ($30 billion), and Baker Hughes Incorporated ($21.20 billion) to micro-cap companies like Parker Drilling Company ($512 million) and Pioneer Drilling Company ($466 billion). To conduct our peer analysis we chose companies that are not only similar to RPC in their service offerings but also similar in market capitalization ($800 million -$3.5 billion) In addition to publicly traded companies; RPC competes with a few small private companies that we do not consider for this analysis.
Table 3: Peer Analysis
Source: MSN Money
Company Ticker Mkt Cap P/
Book EV/
EBITDA ROA ROE D/E
Oper. Margin
RPC Inc. RES 2.50B 4 5.12 26.38% 43.93% 26.81 26.47%
McDermott International Inc.
MDR 3.27B 1.86 6.09 5.96% 13.90% 4.82 11.71%
Superior Energy Services Inc.
SPN 2.19B 1.64 6.87 4.19% 7.69% 87.28 11.34%
Key Energy Services Inc.
KEG 1.39B 1.47 8.13 2.94% 0.48% 56.46 6.02%
C&J Energy Services Inc.
CJES 808.90M 4.29 5.15 N/A N/A 59.65 34.31%
McDermott International, Inc.
(MDR/NYSE))
McDermott International Inc. is a worldwide energy services company that focuses on executing offshore oil and gas projects. It was founded in 1923 and is headquartered in Houston, Texas. It provides engineering, installation, fabrication, manufacturing, procurement, research, project management, and facility management services to a variety of customers in the energy industry including the U.S. Department of Energy. McDermott operates in more than 20 countries across the Atlantic, Middle East, and Asia Pacific regions. McDermott has a slightly higher market capitalization than RPC; however, its price-to-book ratio of 1.86 is considerably lower than that of RPC’s 4. The company has a higher EV/EBITDA valuation multiple of 6.09, but it has much lower profitability: RPC’s ROE is around 30 percentage points (p.p.) higher; ROA is around 20 p.p. higher; operating profit
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margin is around 16 p.p. higher than McDermott’s. McDermott uses an even more conservative leverage policy than RPC: its D/E is around 8 times lower than RPC’s. McDermott’s significantly lower than the industry average D/E can be viewed as a sign of inefficient utilization of leverage policy rather than a feature of safe investment opportunity. Therefore, taking into account stronger profitability, and the more efficient usage of leverage opportunities, RPC represents a more attractive investment scenario.
Superior Energy Services Inc. (SPN/NYSE)
Superior Energy Services, Inc. provides specialized oilfield services and equipment for offshore drilling and production-related operations in the Gulf of Mexico and throughout the Gulf Coast region. Superior leases oilfield equipment and provides other equipment and services. Superior has various business segments and operates across multiple continents. Superior was founded in 1991 and is headquartered in New Orleans, Louisiana.
Return on Equity is a metric in which RPC outperforms Superior by around 35 p.p.; this factor translates to Superior’s not benefitting from shareholder investments as much as RPC. In terms of debt-to-equity, Superior has a much larger amount of debt on its books in comparison to RPC. The operating margin of RPC is 11.19 p.p. higher than Superior’s meaning that RPC’s competitor has a smaller amount of leftover revenue on its books in order to pay fixed costs. Given the above information, RPC represents a much better investment opportunity than Superior because it is more profitable and efficient as well as less risky.
Key Energy Services (KEG/NYSE)
Key Energy Services Inc. is an oil and gas service company with a market capitalization of $1.45 billion. The company is the largest well servicing and work-over company in the world. It provides onshore services such as fishing services, fluid management services, rental services, rig services, and intervention services. In addition, Key Energy Services produces and develops oil and natural gas reserves. The company’s operations are concentrated in Western Texas, Eastern New Mexico, the Gulf Coast, Oklahoma, Michigan, the Rocky Mountains, the Four Corners Region, and California.
Key Energy Services has a lower ROE than RPC (12.03% vs. 43.93%). Key Energy’s revenue increased by 20.72% from 2009 to 2010. Finally, Key Energy Services EV/EBITDA ratio reaches 8.43, compared to RPC’s (4.93).
These performance metrics suggest RPC is a strong competitor and is ahead of its peers.
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C&J Energy Services Inc.
(CJES/NYSE)
C&J Energy Services Inc is small-cap company with a market capitalization of $800 Million. C&J Energy Services provides hydraulic fracturing and coiled tubing services. It operates in South Texas, East Texas, North Louisiana, and Western Oklahoma. Though C&J Energy Services is much smaller than RPC in terms of market capitalization, the services offered by C&J Energy Services and the operating locations overlap with that of RPC, which makes CJES a close competitor and comparable company.
C&J Energy Services completed its initial public offering in August 2011. The P/E ratio as of November 11, 2011 is 8.11 vs. RPC's 10.61. Many of C&J Energy Services ‘s financial ratios are close to that of RPC’s, with the exception of the debt-to-equity ratio of 60 compared to RPC's 26.81; the debt-to-equity ratio reiterates the fact that RPC maintains a conservative debt structure, which is favorable for a company operating in a volatile energy industry.
MANAGEMENT PERFORMANCE AND BACKGROUND
RPC‘s management team consists of 4 executives and 10 board members. Richard A. Hubbell, 65, is the president and chief executive officer. He has held this position since 1987 and has extensive experience in oil and gas industry. Ben M. Palmer is the vice president and chief financial officer and treasurer. He held this position since 1996 and has a deep knowledge of the financial idiosyncrasies of the energy industry. RPC does not reveal its management’s succession plan. However, RPC does encourage in-house development of talent and leadership to lead the Company in the future.
ROIC RPC’s return on invested capital, which is a measure of management performance, increased to 31.33% during the second quarter of 2011 from 22.35% in 2010. The energy industry recovered from the downturn of 2009, leading oil and gas prices to rise and the number of rigs to increase. As a result, RPC and the oil and gas service industry in general has improved. More specifically, RPC’s ROIC has outperformed its peers for the past two years.
Table 4: Peer ROIC
Period RPC Peer Average FY2009 -3.70% 6.09% FY2010 22.35% 10.12% Q12011 27.59% 12.30% Q22012 31.33% 12.25%
Sources: RPC, Bloomberg
RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Randall Rollins Chairman of the Board (79) Randall Rollins started his career with Rollins Inc. in 1949. Following RPC’s spin-off from Rollins in 1984, Mr. Rollins was elected chairman of the board and chief executive officer. Since his election as chairman, he was also elected as chairman of the board of Rollins Inc. in October 1991 and of Marine Products Corp. in February 2001. In addition to these positions, Mr. Rollins currently serves as board member of LOR Inc. Rollins is a graduate of the University of Delaware with a degree in accounting.
Richard A. Hubbell President and Chief Executive Officer (66) Richard A. Hubbell, a graduate of Westminster College with a degree in economics, has been the president since RPC’s spin-off from Rollins in 1984. He has been with the Company for over 27 years, which has made him knowledgeable about the industry and the business. He served as chief operating officer from 1995-2003 prior to being appointed chief executive officer in April 2003. In addition to RPC, Mr. Hubbell has served as president and chief executive officer of Marine Products Corp. since February 2001.
Ben Palmer
Vice President, CFO, and Treasurer (50) Ben Palmer holds positions of vice president, chief financial officer, and treasurer at RPC and Marine Products Corp. He joined RPC in July 1996 and Marine Products Corp. in February 2001. Mr. Palmer was previously employed by Arthur Andersen and was a CFO of EQ Services. He holds bachelor’s degree in business administration from Auburn University.
Linda Graham Vice President and Secretary (74) Linda Graham holds the positions of vice president and secretary at RPC and Marine Products Corp. She joined RPC in January 1987 and Marine Products Corp. in February 2001. Ms. Graham was previously vice president and secretary of Rollins Communications Inc. Ms. Graham holds a bachelor’s degree in English from Berea College.
Board of Directors RPC is a “Controlled Corporation” because a group of individuals, including executive board members, controls in excess of 50% of the Company’s voting power. RPC’s executive officers, directors and their affiliates hold in the aggregate approximately 71% of RPC’s outstanding shares.
Effectively this group of individuals controls the operations of RPC, including the election of directors and approval of significant corporate transactions such as acquisitions and other matters requiring stockholder approval. This concentration of ownership could also delay or prevent a third party from acquiring control over the Company at a premium or indulging in a hostile take-over.
RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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RPC has elected the Controlled Corporation exemption under Rule 303A of the NYSE Company Guide; consequently, the Company need not comply with certain NYSE rules including those requiring a majority of independent directors. Currently, RPC has ten directors on its board. Four are independent outside directors, three are outside directors, one is an outside affiliated director, and four are executive directors. The board of directors in total holds around 45% of RPC's outstanding shares. Five of the ten directors have been on the board since 1984 and two since 1987.
Table 5: RPC Board of Directors
Name Position Year
Appointed to the Board
R. Randall Rollins Director; Chairman of the Board
1984
Gary W. Rollins Inside Director; President and chief executive officer of Rollins Inc.
1984
Richard A. Hubbell Inside Director; President and chief executive officer
1987
Linda H. Graham Inside Director, vice president and Secretary 2001
James A. Lane Jr. Outside Affiliated Director; Executive vice president of Marine Products and president of Chaparral Boats
1987
Bill J. Dismuke Outside Director; Retired president of Edwards Baking Company
2006
Wilton Looney Independent Director; Honorary chairman of the board of Genuine Parts Company
1984
Henry B. Tippie Independent Director; Chairman of the board and chief executive officer of Tippie Services Inc.
1984
James B. Williams Independent Director; Former chairman of the executive committee of SunTrust Banks Inc.
1984
Larry L. Prince Independent Director; Chairman of the executive committee of Genuine Parts Company
2009
Source: RPC’s Web site October 3, 2011
Management Incentives
RPC has an incentive program that aligns the interests of management, directors and shareholders. In addition to their base salaries, each executive and manager receives cash or non-cash rewards according to his or her performance. A compensation committee of the Company is responsible for determining the performance rewards.
RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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SHAREHOLDER ANALYSIS
As of the fourth quarter of 2011 RPC has 146.84 million shares of common stock outstanding. RPC’s directors, executive officers, and their affiliates own approximately 71% of RPC’s common stock. Because of the significant percentage of internal ownership, shares of RPC are not as liquid as companies that have a larger number of investors. The Rollins family has controlling interest in RFPS Management, LOR Inc., and RFT Investment Company. GAMCO Asset Management Inc. is the largest institutional investor in RPC common stock with a 3.46% stake.
RPC’s board of directors announced a stock buyback program on March 9, 1998 authorizing the repurchase of 17,718,750 shares. The Company repurchased 810,377 shares of common stock under the program during the six months ended June 30, 2011. The Company may repurchase common stock periodically based on market conditions and its capital allocation strategies. Since 2010, Gary Rollins has had a net sell off of common stock. Randall Rollins, Richard Hubbell, Linda Graham, and Ben Palmer all had net purchases of common stock.
Table 6: RPC’s Largest Shareholders Holder Name Portfolio Name Source Amount Held % Out
RFPS Management N/A Form 4 86,306,977 58.20 RFT Investment Co N/A Form 4 7.528,350 5.08 LOR Inc. N/A Form 4 7,528,350 5.08 GAMCO Asset Management Inc.
GAMCO Asset Management Inc.
13F 5,126,816 3.46
Gary W. Rollins N/A Form 4 4,928,900 3.32 Randall R. Rollins N/A Form 4 3,068,409 2.07 First Trust Advisors LP First Trust Advisors LP 13F 2,864,123 1.93 Vanguard Group Inc. Vanguard Group Inc 13F 2,453,527 1.65 Gabelli Funds LLC Gabelli Funds LLC 13F 2,105,000 1.42 Royce & Associates Inc. Royce & Associates LLC 13F 1,784,364 1.2
Source: Bloomberg October 24, 2011
RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Table 7: Institutional Investors Holder Name Portfolio Name Source Amount Held % Out GAMCO Asset Management Inc.
GAMCO Asset Management Inc.
13F 5,126,816 3.46
First Trust Advisors LP First Trust Advisors LP 13F 2,864,123 1.93
Vanguard Group Inc. Vanguard Group Inc 13F 2,453,527 1.65
Gabelli Funds LLC Gabelli Funds LLC 13F 2,105,000 1.42
Royce & Associates Inc. Royce & Associates LLC 13F 1,784,364 1.2 Source: Bloomberg October 24, 2011
RISK ANALYSIS AND INVESTMENT CAVEATS
RPC like any other corporation is subject to various external and internal risks. Some of the risks are generic to all the companies; others are specific to companies operating in oil and gas services and a few are specific to RPC alone. All the risks relevant to RPC are discussed below.
Economic Risk:
Like most energy services companies, RPC’s revenue is mainly affected by the supply and demand for oil and gas. Risks arising from political instability, military conflicts, and a shortage in supply or demand contribute highly to the volatility of energy commodities and, therefore, RPC’s revenues. A decline in oil and gas prices decreases the capital investments of RPC’s customers, leading to a weaker services demand and a decrease in the Company’s revenue. An increase or a decrease in oil and natural gas prices directly impacts drilling and the production activities of RPC’s customers that can result in a high or a low percentage of utilization of RPC’s resources.
Regulatory and Environmental Risks
In the oil services industry, there are risks associated with a company’s effect on the environment and how government regulatory agencies can impose penalties on companies within the industry. The production of shale formations often results in the pollution of air and water in the areas surrounding a drill site. Pollution has been a focal point for the EPA over the past several years. There are also risks associated with potential drill site explosions and toxic spills.
The EPA has suggested standards to control the negative effects of hydraulic fracturing by proposing that operators capture and sell natural gas that would typically escape into the air. However, industry representatives believe these proposed rules are complicated to execute and that the costs associated with them would create financial hardships for companies drilling in shale. The EPA estimates that, if its proposal were to be fully implemented, it would reduce emissions of organic compounds by about 540,000 tons (25%). Additional regulations can affect RPC’s revenues because regulations can force exploration and production companies to stop producing for various amounts of time. The EPA believes the industry can save $30 million per year by selling excess natural gas.
RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Labor Risk RPC’s productivity and profitability depend greatly on the Company’s ability to attract and retain loyal and skilled workers. If RPC expands its operations, it will need to increase the labor force significantly. The Company faces difficulty trying to expand into areas that are unattractive to potential workers, especially if current employees are not interested in relocating. In order for RPC to recruit the necessary workforce, employees may demand higher wages than the Company wants to pay. The demand for employees in particular regions results in competing employers offering RPC’s employees higher wages and, thus, ultimately reducing the Company’s labor force. Competitors are reported to offer $16 per hour as incentive to switch employers compared to RPC’s $12 per hour. Daily benefits offered by competitors have forced RPC to increase its daily benefits from $25 to $75. Shannon Pope, director of administrative services, stated that competitors have recruited RPC’s trained employees, a practice that is common throughout the industry.
Financial Risk and Credit Risk
RPC is not only subject to external risks, but also to internal financial risks that arise from its financial health. Table 8 shows various financial ratios used to assess the financial health of a company.
Table 8: Financial Health
Source: MSN Money
Ratios RPC MDR SPN KEG CJES Interpretation Industry S&P 500
Debt/Equity 0.27 0.05 0.89 0.59 0.60 Lesser Lower the Risk
0.47 1.01
Current Ratio 2.90 1.70 1.50 1.80 2.20 Higher the Better 2.1 1.5
Quick Ratio 2.50 N/A 1.20 1.70 1.90 Higher the Better 1.5 1
Interest Coverage
106.1 312.7 4.30 1.30 13.80 Higher the Better 29 89.9
Leverage Ratio
1.70 1.70 2.40 2.10 2.20 Lower the Better 2 3.5
RPC has 0.27debt-to-equity ratio, which is a substantial indicator of financial risk. The Company’s ratio is not only lower than the industry average but is also lower than the S&P 500 average. This indicates the robust capital structure of RPC. The leverage ratio is a better measure of debt than D/E and total D/E because it covers certain debt that is addressed neither by D/E nor long D/E. RPC, has the lowest leverage ratio among its peers, the industry average, and the S&P 500. In general, RPC is in good financial condition and inherently has little financial risk in its current capital structure.
The current ratio of 2.90, which tests a company’s ability to meet short-term obligation in case of an emergency is higher for RPC than most of its peers and the industry average and the S&P 500 average. The quick ratio is a modification of the current ratio to adjust for inventories; RPC is high compared to the others.
RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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The interest coverage ratio of 106.1 is reasonably high for RPC and represents the debt interest burden on a company's profits. RPC has sufficient profits to cover its interest expenses.
Credit Risk is an external risk that arises from the chances of RPC’s customers defaulting on their payments to RPC. RPC has significant credit risk as do all its competitors that have their customers concentrated in oil and gas industry. RPC has a concentration of credit risk, e.g., Chesapeake Energy Corporation alone account for 15% of RPC’s revenue. Other external financial risks such interest rates are low for RPC, because RPC’s debt is considerably small.
Altman Z-Score The Altman Z-score, created by Edward Altman—an assistant professor of finance at New York University—is a risk analysis methodology of determining a company’s financial health. The Z-score is used for predicting the probability of a company’s failure or bankruptcy within two years. The Z-score formula combines the following five financial ratios weighted by coefficients:
EBIT/Total Assets
Revenues/Total Assets
Working Capital/Total Assets
Retained Earnings/Total Assets
Market Value of Equity/Total Liabilities.
A Z-score greater than 2.99 indicates that a company is within the safe zone, whereas, a score lower than 1.80 indicates that a company is in the distress zone. Such a score points toward a high potential of bankruptcy within two years. A Z-score between 1.80 and 2.99 indicates that a company lies in a gray zone.
As Figure 11 shows, RPC’s Z-score has been well above the safety level of 2.99; indicating RPC has little or no risk of bankruptcy in the near future as long as it maintains its Z-score above 2.99.
RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Figure 11: Historic RPC Z-score
FINANCIAL PERFORMANCE AND PROJECTIONS
We projected various line items on the financial statements such as revenue, cost of goods sold, other operating expenses, working capital items, capital expenditures, and other operating and non-operating items used in the DCF valuation of RPC. We performed these projections using historic data and trends, as well as data from various economic and financial agencies, such as Bloomberg, Reuters, and Economist Intelligence Unit (EIU).
Unconventional Rig Count
We used unconventional rig count as a primary driver for revenue. Unconventional rigs include rigs that use horizontal and directional drilling, which is more service-intensive than traditional drilling. This increased service-intensity produces greater demand for RPC’s services. Over the past several years the number of unconventional rigs in proportion to traditional rigs has increased. We forecasted unconventional rig count utilizing historical quarterly data for the past eight years, and we used a combination of exponential smoothing and the simple moving average (based on latest three quarters) techniques. This forecast identified an increase in rig counts over the forecast horizon with a gradual decrease in the growth rate reflecting the saturation effect. We regressed these projections to arrive at our revenue forecast.
Oil and Gas Prices Expected oil and gas prices are one of the primary drivers of oil and gas field activity. Increases in oil and gas prices give the oil and gas companies more incentive for additional drilling. Moreover, oil and gas prices can also be viewed as a nominal component of an energy service company’s revenue. We used Bloomberg’s consensus oil and gas prices in our forecast. Oil and gas prices forecasts were used to estimate the drilling activity and business cycles and, indirectly, the revenue of RPC.
RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Macroeconomic Factors
Some of the macroeconomic factors that directly influenced our valuation of RPC are projected PPI (producer price index) and nominal wages increase. Both factors produce a substantial effect on RPC’s valuation, and therefore, have to be projected accurately and obtained from reliable sources. Changes in PPI and nominal wages are proxies for changes in general operating and payroll expenses, respectively. We used the data from EIU for projecting the changes in PPI and nominal wages, which were used to project SG&A expenses of RPC.
Microeconomic Factors
Such items as capital expenditures, working capital needs, depreciation and amortization, interest payments, and dividends were additionally taken into consideration when we created RPC’s financial model. The forecast for capital expenditures was based on management’s projections for expansion and maintenance capital expenditures and adjusted to take into account the projected depreciation and disposal rates as well as the anticipated PPI index. Working capital items were forecast based on the two-year average quarterly data as well as on projected revenue and cost of services, adjusted for the management-anticipated future working capital policy. The depreciation and amortization rate was forecast based on the four-year quarterly data. The projected interest rate was based on the first three quarters of 2011’s interest rates taking into account new revolving credit facility conditions. Currently the Company has a relatively low debt-to-equity ratio and is able to borrow at a favorable rate. Dividend projections were based on the third quarter of 2011’s dividend per share figures, and we assumed no change in this figure for the whole projected horizon. Interest rates and divided estimates are necessary to project the interest expense and retained earnings respectively. In our projections, we also assumed that RPC would not make any additional share repurchases in the foreseeable future. The terminal growth rate was assumed to be 3%, which is consistent with our expectations concerning the long-term U.S. economy’s nominal GDP growth rate.
SITE VISIT At 5 a.m. on September 30, 2011, our team of Burkenroad Analysts, Oleksandr Matviienko, Andrew Ip Ping Wah, Rajan Gaglani, Theresa Scales, and Satyajith Gaonkar, began our trip to the airport to board a flight from New Orleans, Louisiana to Houston, Texas.
The one-hour flight gave us some time to review our notes and finalize our list of questions for management. After arriving at RPC’s Houston offices, we were greeted by James Landers, vice president of corporate finance, and Sharon Lennon investor relations and corporate communications manager. Mr. Landers and Ms. Lennon were our hosts throughout the day, leading us through presentations from the subsidiaries of RPC, answering our questions, and hosting a Texas-style lunch.
RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Mr. Landers and Ms. Lennon presented a high-level view of RPC’s operations, and they answered our questions at the conclusion of the presentation, which focused on the internal and external variables that affect RPC’s revenue. Following the general presentation, Peter Osborne, senior well control engineer, gave us a tour of Cudd Well Control‘s facilities and talked about the general processes. After the tour, Mike Powell, Patterson Services’ vice president of operations, gave us a presentation about the various areas of Patterson Services and specifically focused on how Patterson stands out from its competitors. Cody Trebing, sales engineer then discussed the services that Thru Tubing Solutions offers and what makes those services valuable. After a brief question and answer session with Mr. Trebing, we were given a presentation from Sebastian Ng-A-Mann on Cudd Energy Services to conclude the day. The site visit answered several questions we had and gave us a thorough understanding of the Company’s business segments.
Site Visit Photo
INDEPENDENT OUTSIDE RESEARCH
Our team of analysts read various investment reports published by other analysts who cover RPC Inc. Our Team also approached the faculty of the Tulane Energy Institute to get the faculty’s view on the oil and gas field services industry. We also spoke to analysts who cover RPC to discuss and compare the methodology of valuation. The overall analyst consensus is extremely bullish for the oil and gas field services industry in general and for the companies involved in directional drilling, in particular.
We also referred to various sources such as Bloomberg, Thomson Reuters, Thomson One Banker, Yahoo Finance, Google Finance, and MSN Money to collect historic data. We used the various SEC fillings such as 10K’s, 10Q’s and Form 4, 13F of RPC and its peer companies. Most importantly we visited the senior management of RPC to get a better understanding of its operations.
RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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WWBD? What Would Ben (Graham) Do?
BEN GRAHAM ANALYSIS (slightly modified)
Benjamin Graham, scholar and financial analyst, is recognized as the father of value investing. During his tenure as professor at Columbia University, he emphasized the importance of value-investing strategies. Ben Graham created eight criteria, or hurdles, used to analyze companies that are undervalued with growth potential. The first step in the Ben Graham analysis is to find stocks that are underpriced, which can be achieved through the use of Graham’s first six hurdles. The second step is to look for companies that have the ability to grow consistently, which can be achieved analyzing the remaining two criteria.
Based on the hurdles set forth by Graham, RPC meets four of eight analysis criteria, making the Company an attractive investment. Given that RPC cleared four of the first six hurdles, it would be categorized as undervalued. The Company’s earnings-to-price yield is double the yield of a 10-year treasury notes, the dividend yield is half of the 10-year treasury notes yield, and the total debt is less than the book value. RPC, however, did not pass criteria seven and eight necessary for it to be a quality growth stock because its earnings growth did not achieve an earnings growth of 7% or higher over the past five years, the Company’s earnings growth has been inconsistent. This inconsistency was because of the global economic slow down, but RPC did outperform the S&P 500 and Russell 2000 during the same period. (See the following table for the complete Ben Graham analysis.)
RPC Inc. (RES) BURKENROAD REPORTS (www.burkenroad.org) November 11, 2011
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Earnings per share (ttm) 1.32$ Price: 21.47$
Earnings to Price Yield 6.15%
10 Year Treasury (2X) 4.14%
P/E ratio as of 12/31/06 9.1
P/E ratio as of 12/31/07 7.3
P/E ratio as of 12/31/08 7.3
P/E ratio as of 12/31/09 (42.1)
P/E ratio as of 12/31/10 N/A
Current P/E Ratio 16.3
Dividends per share (ttm) $0.27 Price: 21.47$
Dividend Yield 1.24%
1/2 Yield on 10 Year Treasury 1.04%
Stock Price 21.47$
Book Value per share as of 9/30/11 4.95$
150% of book Value per share as of 9/30/11 7.42$
Interest-bearing debt as of 9/30/11 140,800$
Book value as of 9/30/11 718,828$
Current assets as of 9/30/11 565,293$
Current liabilities as of 9/30/11 185,075$
Current ratio as of 9/30/11 3.1
EPS for year ended 12/31/10 1.00$
EPS for year ended 12/31/09 (0.16)$
EPS for year ended 12/31/08 0.85$
EPS for year ended 12/31/07 0.99$
EPS for year ended 12/31/06 1.13$
EPS for year ended 12/31/10 1.00$ -725%
EPS for year ended 12/31/09 (0.16)$ -119%
EPS for year ended 12/31/08 0.85$ -14%
EPS for year ended 12/31/07 0.99$ -12%
EPS for year ended 12/31/06 1.13$
Stock price data as of November 11, 2011
No
Hurdle # 8: Stability in Growth of Earnings
No
Hurdle # 5: Total Debt less than Book Value
Yes
Hurdle # 6: Current Ratio of Two or More
Yes
Hurdle # 7: Earnings Growth of 7% or Higher over past 5 years
No
Hurdle # 3: A Dividend Yield of 1/2 the Yield on 10 Year Treasury
Yes
Hurdle # 4: A Stock Price less than 1.5 BV
No
RPC INC. (RES)
Ben Graham Analysis
Hurdle # 1: An Earnings to Price Yield of 2X the Yield on 10 Year Treasury
Yes
Hurdle # 2: A P/E Ratio Down to 1/2 of the Stocks Highest in 5 Yrs
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vent
orie
sP
rep
aid
exp
ens
es
and
oth
er
curr
en
t ass
ets
Equ
ipm
en
t and
pro
pert
y, n
etA
cco
unt
s pa
yabl
eA
ccru
ed p
ayro
ll a
nd r
ela
ted
exp
ens
es
Acc
rued
insu
ranc
e e
xpe
nse
sA
ccru
ed s
tate
, loc
al a
nd o
ther
taxe
s
23.9
9%5.
68%
0.89
%53
.61%
6.98
%2.
33%
0.53
%0.
27%
22.2
2%9.
49%
0.93
%67
.40%
8.49
%1.
82%
0.73
%0.
34%
26.8
2%93
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90.3
7%87
.06%
89.6
0%25
.24%
91.5
9%90
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89.6
0%89
.60%
23.1
7%5.
84%
18.6
7%17
.75%
18.5
4%20
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5.87
%21
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20.9
4%20
.17%
20.3
1%5.
25%
0.63
%2.
03%
3.53
%3.
49%
1.48
%0.
42%
1.65
%1.
65%
1.52
%1.
55%
0.40
%41
.32%
132.
22%
128.
23%
122.
00%
126.
93%
35.7
6%12
7.01
%13
2.04
%12
3.30
%13
1.79
%34
.08%
7.18
%25
.50%
26.9
3%27
.78%
26.5
2%7.
47%
32.2
7%27
.58%
28.6
7%26
.30%
6.80
%2.
18%
6.02
%5.
66%
5.59
%6.
40%
1.80
%6.
40%
6.40
%6.
40%
6.40
%1.
66%
0.47
%1.
55%
1.36
%1.
20%
1.63
%0.
46%
1.63
%1.
63%
1.63
%1.
63%
0.42
%0.
53%
6.89
%1.
27%
0.79
%0.
77%
0.22
%0.
73%
0.72
%0.
65%
0.67
%0.
17%
Oth
er
accr
ued
exp
ens
es
Lon
g-t
erm
acc
rued
insu
ranc
e e
xpen
ses
SE
LE
CT
ED
CO
MM
ON
-SIZ
E A
MO
UN
TS
(%
of t
otal
ass
ets
)To
tal c
urre
nt a
sse
tsE
quip
me
nt a
nd p
rope
rty,
net
0.04
%0.
96%
36.9
0%59
.25%
0.04
%1.
46%
33.8
1%61
.05%
0.09
%0.
18%
0.11
%0.
26%
0.21
%0.
06%
0.21
%0.
21%
0.21
%0.
21%
0.05
%0.
77%
2.17
%2.
07%
1.77
%2.
66%
0.75
%2.
66%
2.66
%2.
66%
2.66
%0.
69%
44.9
0%45
.73%
45.7
6%46
.56%
46.2
1%46
.21%
47.2
2%47
.56%
50.4
1%51
.30%
51.3
0%51
.02%
50.6
2%50
.96%
50.4
7%51
.01%
51.0
1%50
.18%
49.9
7%47
.35%
46.5
7%46
.57%
Inta
ngib
les,
ne
t O
the
r as
sets
3.04
%0.
81%
3.71
%1.
43%
2.71
%2.
42%
2.16
%1.
98%
1.86
%1.
86%
1.74
%1.
66%
1.50
%1.
42%
1.42
%1.
36%
1.23
%1.
12%
0.98
%0.
92%
0.92
%0.
86%
0.82
%0.
74%
0.70
%0.
70%
Tota
l cur
ren
t lia
bilit
ies
11.6
4%10
.44%
13.2
3%15
.84%
15.7
5%15
.24%
17.8
8%17
.88%
17.2
9%15
.72%
17.1
9%15
.99%
15.9
9%L
ong
-ter
m a
ccru
ed in
sura
nce
exp
ense
s1.
06%
1.32
%0.
96%
0.83
%0.
82%
0.73
%1.
07%
1.07
%1.
05%
1.01
%1.
02%
0.94
%0.
94%
Def
err
ed
inco
me
taxe
sTo
tal l
iab
ilitie
s
Com
mo
n st
ock
Cap
ital i
n e
xce
ss o
f par
val
ue
Ear
nin
gs r
etai
ned
6.86
%43
.40%
1.23
%0.
50%
56.1
3%
8.65
%36
.87%
1.52
%1.
18%
61.7
9%
2.07
%7.
92%
8.02
%11
.46%
7.58
%7.
58%
7.44
%7.
45%
6.97
%6.
93%
6.93
%39
.30%
41.6
6%42
.03%
40.7
9%39
.05%
39.0
5%37
.49%
35.3
2%35
.30%
33.4
5%33
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1.67
%1.
48%
1.33
%1.
22%
1.16
%1.
16%
1.10
%1.
06%
0.97
%0.
93%
0.93
%0.
73%
0.00
%0.
00%
0.00
%0.
00%
0.00
%0.
00%
0.00
%0.
00%
0.00
%0.
00%
59.3
7%57
.78%
57.4
6%58
.77%
60.5
3%60
.53%
62.1
0%64
.28%
64.3
2%66
.18%
66.1
8%
RP
C I
nc.
(R
ES
) B
UR
KE
NR
OA
D R
EP
OR
TS
(w
ww
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rken
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ovem
ber
11,
201
1
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RP
C I
NC
. (R
ES
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nn
ual a
nd
Qu
arte
rly S
tate
men
ts o
f C
ash
Flo
ws
In th
ousa
nds
For
the
pe
riod
end
ed
Cas
h fl
ow fr
om
op
era
tions
:N
et in
com
eN
onca
sh c
harg
es (
cre
dits
) to
ea
rnin
gs:
Dep
reci
atio
n an
d a
mo
rtiz
atio
n a
nd
oth
er n
on-c
ash
cha
rges
Sto
ck-b
ase
d co
mp
ens
atio
n(G
ain)
loss
on
sal
e o
f eq
uipm
ent a
nd
pro
per
ty
2008
A
83,4
03$
118,
444
3,73
2
(6
,36
7)
2009
A
(22
,74
5)$
130,
581
4,44
0
(1
,143
)
2010
A3
1-M
ar A
30-
Jun
A3
0-S
ep
A31
-De
c E
2011
E3
1-M
ar
E3
0-Ju
n E
30-
Se
p E
31-
Dec
E20
12 E
146,
742
$
65
,524
$
73,1
65$
83
,111
$
84,9
65$
30
6,76
5$
90
,591
$
89,8
97$
11
0,4
24$
10
2,59
4$
39
3,50
6$
133,
253
39,2
49
44
,908
46,4
76
50
,231
180,
864
53,1
86
55
,784
58,4
06
61
,032
228,
408
4,90
9
2,
215
1,60
6
1,
602
5,42
3
(3
,758
)
(1
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)
(7
8)
4,
179
2,69
0
2012
E20
11 E
Def
err
ed
inco
me
tax
pro
visi
on
(be
nefit
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xce
ss t
ax b
en
efits
fro
m s
har
e-b
ase
d pa
yme
nts
27,1
99
(8
46)
1,
669
(1
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)
22
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(2
,21
0)
10
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49
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(4
0,9
15)
16
,672
4,
846
5,38
4
3,
414
5,39
2
19
,036
(6
51)
(2
,27
8)
(1
,141
)
(1
5)
(3
,434
)
(I
ncre
ase
) de
cre
ase
in a
sse
ts:
Acc
ou
nts
rece
ivab
leIn
vent
orie
sF
eder
al i
nco
me
taxe
s re
ceiv
abl
eP
rep
aid
exp
ens
es
and
oth
er
curr
en
t ass
ets
Oth
er
non
curr
ent
ass
ets
Incr
ea
se (
dec
reas
e)
in li
abili
ties:
Acc
ou
nts
paya
ble
Fed
era
l in
com
e ta
xes
pay
ab
leA
ccru
ed p
ayro
ll a
nd r
ela
ted
exp
ens
es
Pen
sion
lia
bilit
ies
Acc
rued
insu
ranc
e e
xpe
nse
sA
ccru
ed s
tate
, loc
al a
nd o
ther
exp
ense
sO
the
r ac
cru
ed e
xpe
nse
sO
the
r no
ncu
rre
nt li
abi
litie
sN
et c
ash
pro
vid
ed b
y co
ntin
uing
op
era
tions
Cas
h fl
ows
fro
m in
vest
ing
act
iviti
es:
C
apita
l exp
endi
ture
s
(34,
508
)
(20,
377
)
(2
,46
2)
(2,2
31)
(20)
9,69
1
(9
81)
2,42
6
(4
81)
11
9
676
(2
03)
10
6
17
7,32
0
(170
,31
8)
80,0
35
(5
,798
)
(1
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)
2,
575
(2,5
97)
(5,7
11)
(2,7
12)
(9,6
90)
4,88
2
(1
26)
(3
94)
(1
67)
(1,7
79)
16
8,74
0
(67
,83
0)
(16
3,1
62)
(6
2,9
09)
(43
,311
)
(3
7,2
02)
(29,
044
)
(1
72,
466
)
(34
,83
6)
2,
319
(52,
767)
16,1
07
(6
9,1
76)
(8,1
30)
(7,2
18)
(7,3
49)
(14
,75
2)
(1
5,2
57)
(44,
576)
(7,5
40)
596
(8,8
62)
2,80
1
(1
3,0
06)
1,58
4
18
,793
1,27
3
(1
,755
)
18
,311
(852
)
(903
)
(8,1
90)
(2,2
51)
9,84
2
(1
,502
)
(1
,368
)
(4
3)
(2
49)
77
(1,5
83)
(920
)
(157
)
197
536
576
14,1
91
15
,438
16,1
19
22
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(1,4
81)
53,0
19
38
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(24,
723
)
24
,661
(19
,34
3)
19
,161
5,14
1
20
,509
(7,2
16)
(15
,09
6)
40
,509
38,7
06
(3
2,8
21)
13,7
21
16
,854
15,6
59
13
,414
13,1
73
(8
82)
2,
080
2,99
9
5,
251
9,44
8
1,
711
22
5
4,
159
(1,1
51)
4,94
4
1,
628
417
353
(388
)
382
718
590
987
(677
)
7,37
4
8,
274
1,14
5
15
1
2,
783
(770
)
3,30
9
98
7
1,
671
977
503
3,15
1
11
2
(6
9)
1,
077
(257
)
751
55
7
13
3
(3
7)
15
8
1,
430
(737
)
607
608
478
168,
657
85,6
32
85
,193
142,
090
111
,218
424,
133
113,
535
143,
318
158,
957
182,
360
598,
171
(18
7,4
86)
(9
2,3
18)
(111
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)
(1
01,
96
6)
(98,
119)
(40
3,8
48)
(8
7,5
23)
(87,
936
)
(9
0,34
6)
(8
9,6
06)
(35
5,4
11)
P
roce
eds
from
sa
le o
f eq
uip
men
t an
d pr
ope
rty
11,3
65
6,
686
15,7
17
6,03
0
9,
174
3,69
3
18
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N
et c
ash
use
d in
inve
stin
g a
ctiv
ities
Cas
h fl
ows
fro
m fi
nan
cin
g a
ctiv
ities
: P
aym
ent
of d
ivid
end
sD
ebt
issu
e c
ost
sTa
x e
ffect
(158
,95
3)
(23,
328
)
(9
4)
846
(61
,14
4)
(2
1,5
56)
(234
)
1,
421
(17
1,7
69)
(86,
288
)
(10
2,2
71)
(98
,27
3)
(98,
119)
(3
84,
951
)
(8
7,5
23)
(8
7,9
36)
(9
0,34
6)
(89
,60
6)
(35
5,4
11)
(20
,64
7)
(1
0,3
54)
(10,
326)
(11,
821
)
(1
4,5
32)
(47,
033)
(14
,54
1)
(1
4,5
50)
(14,
559)
(14
,56
8)
(5
8,2
17)
(1,8
86)
(415
)
(415
)
(830
)
651
2,27
8
1,
141
15
3,
434
(Rep
aym
ent
s) b
orro
win
gs o
f deb
tC
ash
pai
d fo
r co
mm
on
stoc
k pu
rch
ase
d a
nd r
etir
ed
Pro
ceed
s re
ceiv
ed
upo
n ex
erc
ise
of
stoc
k op
tions
Net
ca
sh p
rovi
ded
by
(use
d in
) fin
anci
ng a
ctiv
ities
Net
incr
eas
e (
dec
reas
e)
in c
ash
Cas
h, a
t be
gin
ning
of
per
iod
Cas
h, a
t en
d o
f pe
riod
18,0
50
(17,
489
)
34
7
(2
1,66
8)
(3
,30
1)
6,
338
3,
037
(84
,15
0)
(1,7
47)
122
(10
6,1
44)
1,
452
3,
037
4,
489
30,9
50
28,5
50
23,3
00
(32
,30
0)
19,5
50
(1,6
50)
(17,
499
)
(1
,358
)
(1
8,85
7)
24
0
32
4
24
8
69
180
821
180
180
180
180
718
7,65
8
3,
299
12,5
90
(4
4,0
37)
(14,
353
)
(4
2,50
1)
(1
4,3
61)
(14,
370
)
(1
4,37
9)
(1
4,3
88)
(57,
499
)
4,
546
2,64
3
(4
,488
)
(2
20)
(1
,25
3)
(3
,318
)
11
,65
1
41
,012
54,2
32
78
,366
185,
261
4,48
9
9,
035
11,6
78
7,
190
6,97
0
9,
035
5,71
7
17
,368
58,3
80
11
2,61
2
5,
717
9,03
5
11
,678
7,19
0
6,
970
5,71
7
5,
717
17,3
68
58
,380
112
,61
2
19
0,97
8
19
0,97
8
Ope
ratin
g c
ash
flo
w p
er
sha
re
e
xclu
din
g w
ork
ing
ca
pita
l ch
ange
s O
pera
ting
ca
sh fl
ow
pe
r sh
are
1.
54$
1.20
$
0.
79$
1.19
$
2.
07$
0.70
$
0.
88$
1.26
$
0.
65$
3.53
$
1.
02$
1.04
$
1.
19$
1.16
$
4.
40$
1.15
$
0.
58$
0.58
$
0.
97$
0.76
$
2.
92$
0.78
$
0.
99$
1.09
$
1.
25$
4.11
$
RP
C I
nc.
(R
ES
) B
UR
KE
NR
OA
D R
EP
OR
TS
(w
ww
.bu
rken
road
.org
) N
ovem
ber
11,
201
1
33
RP
C IN
C. (
RE
S)
Rat
ios
Pro
du
ctiv
ity R
atio
sR
ece
iva
ble
s tu
rno
ver
2008
A
4.50
200
9 A
4.1
8
201
0 A
31-
Ma
r A3
0-Ju
n A
30
-Se
p A
31-
De
c E
2011
E31
-Ma
r E
30
-Ju
n E
30
-Se
p E
31-
Dec
E2
012
E
4.82
1.17
1.17
1.20
1.15
4.69
1.13
1.10
1.17
1.10
4.6
1
2012
E20
11 E
Inve
nto
ry t
urn
ove
r13
.39
7.2
010
.21
2.97
3.24
3.26
2.90
12.3
52.
732.
662.
802.
6711
.11
Wo
rkin
g ca
pita
l tu
rno
ver
5.46
3.7
05.
131.
321.
401.
411.
395.
531.
401.
251.
241.
064
.79
Ne
t fix
ed
ass
et
turn
ove
r1.
881
.34
2.75
0.80
0.83
0.85
0.82
3.30
0.81
0.77
0.83
0.77
3.1
9G
ross
fix
ed
ass
et
turn
ove
r1.
050
.65
1.10
0.34
0.36
0.38
0.37
1.44
0.36
0.35
0.37
0.35
1.4
3To
tal a
sse
t tu
rno
ver
1.15
0.8
41.
480.
410.
420.
430.
411.
670.
410.
390.
400.
361
.55
# o
f da
ys S
ale
s in
A/R
888
198
8482
8082
8282
8282
82
82
# o
f da
ys C
ost
of
Sa
les
in I
nve
nto
ry36
52
3932
2931
3434
3434
343
43
4#
of d
ays
Ca
sh-b
ase
d e
xpe
nse
s in
A/P
and
acc
rue
d e
xpe
nse
s57
56
6161
5454
5454
6155
595
55
5
Liq
uid
ity m
ea
sure
sC
urr
ent
ra
tio3.
173
.24
3.39
2.89
2.90
3.05
2.58
2.58
2.73
3.03
2.93
3.21
3.2
1Q
uic
k ra
tio2.
311
.99
2.58
2.33
2.32
2.40
2.04
2.04
2.17
2.44
2.41
2.69
2.6
9C
ash
ra
tio2.
311
.99
2.58
2.33
2.32
2.40
2.04
2.04
2.17
2.44
2.41
2.69
2.6
9W
ork
ing
capi
tal
200
,494
151,
681
281
,174
298
,100
334,
519
380,
218
366,
965
366
,965
414
,414
463
,265
532
,510
597,
056
597,
056
Fin
anc
ial R
isk
(Lev
era
ge)
Ra
tios
Tota
l de
bt/e
qu
ity r
atio
0.77
0.5
80.
650.
710.
720.
690.
640.
640.
600.
550.
550.
500
.50
De
bt/
eq
uity
ra
tio (
exc
lud
ing
de
ferr
ed
tax
es)
0.65
0.4
50.
610.
580.
590.
500.
520.
520.
480.
430.
440.
400
.40
Tota
l LT
de
bt/e
qui
ty r
atio
0.56
0.4
20.
430.
440.
450.
430.
350.
350.
320.
300.
280.
260
.26
LT d
ebt/
eq
uity
(e
xclu
din
g d
efe
rred
ta
xes)
0.44
0.2
80.
400.
310.
310.
240.
220.
220.
200.
190.
170.
160
.16
Tota
l de
bt r
atio
0.43
0.3
70.
390.
420.
420.
410.
390.
390.
370.
350.
350.
330
.33
De
bt
ratio
(e
xcu
din
g d
efe
rre
d t
axe
s)0.
390
.31
0.38
0.37
0.37
0.33
0.34
0.34
0.32
0.30
0.30
0.28
0.2
8
Pro
fitab
ility
/Val
ua
tion
Me
asu
res
Gro
ss p
rofit
ma
rgin
42.5
7%33
.01%
44.7
2%47
.28%
45.1
5%44
.26%
43.8
1%
44.9
7%
44.0
8%44
.11%
45.5
7%
45.2
0%
44.7
7%
Op
era
ting
pro
fit m
arg
in16
.44%
-5.6
2%21
.78%
27.8
5%26
.92%
26.7
7%26
.40
%26
.92
%26
.76%
26.3
9%28
.96
%27
.73
%27
.51
%R
etu
rn o
n a
sse
ts10
.98%
-3.2
6%19
.78%
6.95
%6.
93%
7.14
%6.
77%
27.7
8%
6.76
%6.
33%
7.2
2%6.
23%
26.3
5%
Re
turn
on
eq
uity
19.3
9%-5
.28%
32.0
4%11
.69%
11.9
2%
12.1
8%11
.27
%47
.00
%10
.95%
9.95
%11
.16
%9.
49%
41.1
0%
Ear
nin
gs
be
fore
inte
rest
an
d ta
xes
ma
rgin
16.4
4%-5
.62%
21.7
8%27
.85%
26.9
2%26
.77%
26.4
0%
26.9
2%
26.7
6%26
.39%
28.9
6%
27.7
3%
27.5
1%
EB
ITD
A m
arg
in29
.95%
16.5
9%33
.94%
38.1
3%37
.06%
36.0
2%36
.05
%36
.71
%36
.48%
36.5
2%38
.45
%37
.94
%37
.39
%E
BIT
DA
/Ass
ets
34.5
7%13
.98%
50.1
6%15
.45%
15.5
5%15
.54%
14.9
5%
61.4
2%
14.9
0%14
.16%
15.4
8%
13.7
7%
57.8
8%
This Page Intentionally Left Blank
BURKENROAD REPORTS RATING SYSTEM MARKET OUTPERFORM: This rating indicates that we believe forces are in place that would enable this company's stock to produce returns in excess of the stock market averages over the next 12 months. MARKET PERFORM: This rating indicates that we believe the investment returns from this company's stock will be in line with those produced by the stock market averages over the next 12 months. MARKET UNDERPERFORM: This rating indicates that while this investment may have positive attributes, we believe an investment in this company will produce subpar returns over the next 12 months. BURKENROAD REPORTS CALCULATIONS
• CPFS is calculated using operating cash flows excluding working capital changes. • All amounts are as of the date of the report as reported by Bloomberg or Yahoo Finance unless
otherwise noted. Betas are collected from Bloomberg. • Enterprise value is based on the equity market cap as of the report date, adjusted for long-term
debt, cash, and short-term investments reported on the most recent quarterly report date. • 12-month Stock Performance is calculated using an ending price as of the report date.
The stock performance includes the 12-month dividend yield.
2011-2012 COVERAGE UNIVERSE AFC Enterprises Inc. (AFCE) Amerisafe Inc. (AMSF) CalIon Petroleum Company (CPE) Cal-Maine Foods Inc. (CALM) Carbo Ceramics Inc. (CRR) CLECO Corporation (CNL) Conn's Inc. (CONN) Craftmade International Inc. (CRFT) Crown Crafts Inc. (CRWS) Cyberonics Incorporated (CYBX) Denbury Resources Inc. (DNR) EastGroup Properties Inc. (EGP) Energy Partners Ltd. (EPL) Evolution Petroleum Corp. (EPM) Gulf Island Fabrication Inc. (GIFI) Hibbett Sports (HIBB) Hornbeck Offshore Services Inc. (HOS) Houston Wire & Cable Company (HWCC) IBERIABANK Corp. (IBKC) ION Geophysical Corp. (IO)
Key Energy Services (KEG) Marine Products Corp. (MPX) McMoRan Exploration Co. (MMR) MidSouth Bancorp Inc. (MSL) PetroQuest Energy Inc. (PQ) Pool Corporation (POOL) Powell Industries Inc. (POWL) Reddy Ice Holdings Inc. (RDDY) Rollins Incorporated (ROL) RPC Incorporated (RES) Sanderson Farms Inc. (SAFM) SEACOR Holdings Inc. (CKH) Sharps Compliance Inc. (SMED) Shaw Group Inc. (SHAW) Stone Energy Corp. (SGY) Superior Energy Services Inc. (SPN) Susser Holdings Corp. (SUSS) Team Incorporated (TISI) Teche Holding Company (TSH) Willbros Group Inc. (WG)
PETER RICCHIUTI Director of Research Founder of Burkenroad Reports [email protected] ANTHONY WOOD Senior Director of Accounting [email protected]
NATALIE DOMINO RANDALL FROST RICHARD GRAY Associate Directors of Research
BURKENROAD REPORTS Tulane University New Orleans, LA 70118-5669 (504) 862-8489 (504) 865-5430 Fax
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Tulane UniversityA.B. Freeman School of Business
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