Shares of RPC, Inc. (NYSE: RES) were down 16.5% as of 12:57 p.m. EDT today, following the release of the oil and gas industry service provider's first-quarter results, and an announcement that it was cutting its dividend in half.
In short, RPC's operating and financial performance in the first quarter was a sharp reversal from 2018: The company reported a 23% decline in revenue to $334.7 million; a $2.2 million operating loss, down from $60.8 million in operating profits last year; and a net loss of $739,000, compared to $52 million in net income in the year-ago period.
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On a sequential basis, RPC also saw its results weaken, even with higher oil prices. Revenue fell 11.2% and gross margin fell by 2.6 percentage points (from 27.2% to 24.6%), as lower prices and weakening demand outpaced the company's ability to lower costs.
In the earnings release, CEO Richard Hubbell said the company's biggest weakness in the quarter came from its core pressure-pumping operations: "Our activity levels declined compared with the prior quarter because of seasonal weakness and inconsistent customer activity levels. We believe the pressure pumping market continues to be oversupplied because of increasing efficiency achieved by completion services providers."
Moreover, ongoing takeaway capacity in the Permian Basin continues to play a role in weakened demand for RPC's services, and the bottleneck in pipeline capacity isn't going to be fixed overnight . This could continue to weigh on RPC's financial results in the near term. Hence management's decision to cut the dividend, and to prioritize maintaining a strong balance sheet right now.
Today's dividend cut is a big blow for investors who expected RPC to be a dependable income stock. Moreover, what's looking like a weak 2019 is adding more injury, as sellers looking to move on continue to push the share price back down near the lows of late 2018.
The payout cut is certainly painful, but one look at the chart above should make it clear that dividend ups and downs are the norm. For a company like RPC, which can see demand for its services rise and fall very quickly, maintaining a strong balance sheet must take priority when demand weakens. In other words, it's not likely to ever be a dividend stalwart.
But with that reality, the risk profile makes it worth taking a look at. It reported a net loss, but its cash flows remain positive, and it has zero debt and $113 million in cash on hand. It's likely to take a few more quarters for new Permian Basin pipeline capacity to come online and start boosting demand for RPC's services; in the meantime, management will be faced with tightening the belt and cutting expenses, without hamstringing the company's ability to quickly ramp up when demand recovers.
But if RPC can carry it off, patient investors who buy at recent prices could do well when the Permian picks back up late this year or early in 2020. That's a lot of "ifs," but I think the risk-reward profile is in management's favor.
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