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Edited Transcript of RES earnings conference call or presentation 23-Oct-19 1:00pm GMT

Q3 2019 RPC Inc Earnings Call

ATLANTA Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of RPC Inc earnings conference call or presentation Wednesday, October 23, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ben M. Palmer

RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary

* James C. Landers

RPC, Inc. - VP of Corporate Finance

* Richard A. Hubbell

RPC, Inc. - CEO, President & Director

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Conference Call Participants

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* Blake Geelhoed Gendron

Wolfe Research, LLC - SVP of Equity Research

* Chase Mulvehill

BofA Merrill Lynch, Research Division - Research Analyst

* Christopher F. Voie

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Connor Joseph Lynagh

Morgan Stanley, Research Division - Equity Analyst

* Dylan Gray Glosser

Simmons & Company International, Research Division - Analyst of Oil Service

* George Michael O'Leary

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research

* Marc Gregory Bianchi

Cowen and Company, LLC, Research Division - MD

* Praveen Narra

Raymond James & Associates, Inc., Research Division - Analyst

* Scott Andrew Gruber

Citigroup Inc, Research Division - Director and Senior Analyst

* Stephen David Gengaro

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* Thomas Allen Moll

Stephens Inc., Research Division - Research Analyst

* Vaibhav D. Vaishnav

Scotia Howard Weil, Research Division - Analyst

* Waqar Mustafa Syed

AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research

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Presentation

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Operator [1]

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Good morning and thank you for joining us for RPC, Inc.'s Third Quarter 2019 Financial Earnings Conference Call. Today's call will be hosted by Rick Hubbell, President and CEO; and Ben Palmer, Chief Financial Officer. Also present is Jim Landers, Vice President of Corporate Finance. (Operator Instructions) I would like to advise everyone that this conference is being recorded.

Jim will get it started by reading the forward-looking disclaimer.

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James C. Landers, RPC, Inc. - VP of Corporate Finance [2]

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Thank you and good morning. Before we begin our call today, I want to remind you that in order to talk about our company, we're going to mention a few things that are not historical facts. Some of the statements that will be made on this call could be forward-looking in nature and reflect a number of known and unknown risks. I'd like to refer you to our press release issued today, along with our 2018 10-K and other public filings, that outline those risks, all of which can be found on RPC's website at www.rpc.net.

In today's earnings release and our conference call, we'll be referring to several non-GAAP measures of operating performance. These non-GAAP measures are adjusted net loss, adjusted net income, adjusted loss per share, adjusted earnings per share, adjusted operating loss, adjusted operating profit, EBITDA and adjusted EBITDA. We're using these non-GAAP measures today because they allow us to compare our performance consistently over various periods without regard to nonrecurring items. In addition, RPC is required to use EBITDA to report compliance with financing covenants under our credit facility.

Our press release today and our website contain reconciliations of these non-GAAP financial measures to operating loss or income, net loss or income and losses or diluted earnings per share, which are the nearest GAAP financial measures. Please review these disclosures if you're interested in seeing how they're calculated. Our press release issued today on our website contain reconciliations of these. If you have not received our press release and would like to see one, please visit our website at www.rpc.net for a copy.

I will now turn the call over to our President and CEO, Rick Hubbell.

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Richard A. Hubbell, RPC, Inc. - CEO, President & Director [3]

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Thank you, Jim.

This morning, we issued our earnings press release for RPC's third quarter of 2019. RPC's significant sequential revenue declines were driven primarily by declines in customer activity in pressure pumping. In addition, changes in job mix negatively impacted revenue. Pricing remains -- remained relatively flat during the quarter. While the many service companies are idling fleets, the pressure pumping industry continues to be oversupplied partially due to increasing industry efficiencies.

Given current market conditions, we initiated a strategic review of our operations during the third quarter. Our CFO, Ben Palmer, will discuss this and other financial results in more detail, after which I'll have a few closing comments.

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [4]

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Thank you, Rick.

In connection with our strategic review, we undertook an extensive operational assessment. We began closing several pressure pumping-related facilities, retiring older, less-capable pressure pumping equipment and reducing the number of staffed fleets and operational and administrative employee head count. As a result of our efforts today, we recorded impairment and other charges of $71.7 million during the third quarter.

For the third quarter, revenues decreased to $293.2 million compared to $440 million in prior year. Revenues decreased compared to prior year primarily due to lower pricing and activity. Adjusted operating results for the third quarter 2019 was a $21 million operating loss compared to $54.6 million operating profit in the third quarter of the prior year. Adjusted EBITDA for the third quarter was $22.8 million compared to $97.8 million for the same period last year. For the third quarter of 2019, RPC reported an $0.08 adjusted loss per share compared to $0.23 diluted earnings per share in the prior year.

Cost of revenues during the third quarter of 2019 was $225.2 million or 76.8% of revenues compared to $300.9 million or 68.4% of revenues during the third quarter of 2018. Cost of revenues decreased consistent with lower activity levels due to lower materials and supplies expenses, employment costs and other expenses that vary with activity levels. Cost of revenues as a percentage of revenues increased due to unfavorable job mix, more competitive pricing for our services and labor cost inefficiencies.

Selling, general and administrative expenses increased slightly to $42.6 million in the third quarter compared to $41.8 million in the third quarter of the prior year. Depreciation and amortization expense was $44.7 million during the third quarter of 2019, an increase of 4% compared to $43 million in the prior year.

Our Technical Services segment revenues for the quarter decreased 34.8% compared to the same quarter in the prior year. Operating results, excluding impairment and other charges in the third quarter of 2019, were an $18.2 million loss compared to $56.2 million profit in the prior year. These decreases were due to both lower pricing and lower activity within our pressure pumping service line.

Our Support Services segment revenues for the quarter were flat at $18.7 million.

Now I'll discuss our sequential results. RPC's third quarter revenues sequentially decreased 18.2% to $293.2 million from $358.5 million in the second quarter due to lower activity levels and change in customer job mix. Cost of revenues during the third quarter of '19 decreased by $39.9 million or 15% due primarily to decreases in materials and supplies expenses and other expenses which vary with activity levels. As a percentage of revenues, cost of revenues increased from 73.9% in the second quarter to 76.8% in the current quarter due primarily to labor inefficiencies and increasingly competitive pricing for our services.

Selling, general and administrative expenses decreased slightly to $42.6 million during the third quarter of the year compared to $43.3 million in the prior quarter. RPC generated an adjusted operating loss of $21 million during the third quarter of '19 compared to an $8.4 million operating profit in the prior quarter. RPC's adjusted EBITDA was $22.8 million compared to EBITDA of $51.2 million in the prior quarter.

Technical Services segment revenues decreased by $63.6 million or 18.8% to $274.5 million in the third quarter. This segment incurred an $18.2 million operating loss compared to a $6.9 million operating profit in the prior quarter.

Our Support Services segment revenues in the third quarter were $18.8 million compared to $20.5 million in the prior quarter. Operating profit was $1.6 million in the third quarter compared to $4 million operating profit in the prior quarter.

During the third quarter, RPC operated an average of 16 pressure pumping fleets. In connection with our strategic review and fleet assessment, we are in the process of retiring and disposing approximately 400,000 hydraulic horsepower. By year-end 2019, we will have approximately 750,000 hydraulic horsepower but only have plans to operate 9 fleets. We will adjust this number up or down based on market conditions.

Third quarter 2019 capital expenditures were $77 million, and we currently estimate 2019 capital expenditures to be approximately $260 million. At the end of the third quarter, our cash balance was $49.5 million, and we had no outstanding debt.

With that, I'll turn it back over to Rick for a few closing comments.

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Richard A. Hubbell, RPC, Inc. - CEO, President & Director [5]

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Thanks, Ben.

In our second quarter commentary, we stated there were indications -- there were indication customer activities would decline during the third quarter. But these declines occurred and we expect them to continue during the near term.

In addition, the enhanced completion techniques, newer equipment and better technology have greatly increased service efficiency. This has reduced our industry's requirements for pressure pumping service capacity at any given oil field activity level. The locations we are closing had inadequate equipment and crew utilization. The older pressure pumping equipment is being retired because it is no longer -- it no longer effectively meets the industry's current market requirements, required more maintenance and was not expected to generate adequate returns in the future. As a result of these steps, RPC will be in -- will be better positioned to compete in a difficult market environment.

I thank you for joining us for RPC's conference call this morning. And at this time, we'll open up the lines for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Praveen Narra, Raymond James.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [2]

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I guess if we could get a bit more color on the decision-making process to retire the equipment. I guess when you guys looked at it, could you talk about kind of the maintenance requirements that, that equipment needed? And then any color you can give on maybe the vintage of the equipment or maybe anything you can provide on the type of equipment that's being retired.

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James C. Landers, RPC, Inc. - VP of Corporate Finance [3]

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Praveen, this is Jim. I think we've covered a lot, but I'm happy to give you a little bit more color on this. As you know, and people who have known us for a long time know, we have been in the practice of rebuilding equipment. It was a very good financial decision starting in 2012. We did that a lot, and we returned it to the field in like-new condition at a 50% or more of replacement cost. What we've ended up with is the increase in 24-hour work, the increase in zipper frac work, especially in the Permian. What we've ended up with is equipment that is serviceable but doesn't meet the requirements of zipper fracs and just these longer-duration jobs. So the maintenance required on that equipment got to be onerous, and it just wasn't performing the way we needed it to. We also have some -- have had some locations that were not performing all that well. So that was the backdrop to this assessment and this action we've taken.

One thing you'll notice, and everyone knows this, that we were buying equipment this year when many of our peers weren't. We were doing that because we have the capital strength to do so, because we're committed to pressure pumping and because we realized that some of our equipment was getting older. We just felt it was prudent at this time to really, really retire some of that older equipment and have a more streamlined operation to face the market that we're in.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [4]

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Okay. So then I guess if we think about it on a CapEx-per-fleet basis or however -- as we go into 2020 and as we think about that going forward, how should we think about the CapEx profile of the remaining fleets for just maintenance CapEx?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [5]

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Praveen, with the increased efficiency, we're -- so we're learning all the time. But we are expecting about $2 million per fleet that we're operating. We will benefit some in 2020 from the perspective of being able to harvest some of the components that are on the equipment that's being retired. So what that effect will be, we're not -- we haven't spent a lot of time trying to forecast that. But I would say the number, if it's normally around $2 million, it'll be slightly less than $2 million. So -- but that's the way we're thinking about that.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [6]

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Okay. If I could squeeze one in. On the majority of your cost-saving initiatives, can you give an idea of when they took place? And I guess just trying to figure out if they impacted the third quarter, or if they more impact the fourth quarter.

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [7]

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Yes. This is Ben. Definitely will be more fourth quarter and even more in first quarter next year. That's what we're focused on, is looking at how we're going to be positioned as we start 2020. And so the actions that have been taken to date are, again, somewhere in third quarter, mid to late third quarter, and others are in the fourth quarter, early fourth quarter.

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Operator [8]

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Our next question will come from Stephen Gengaro, Stifel.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [9]

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I guess 2 things I'll start sort of following up on the first question and maybe if you could help us understand as to looking forward and thinking about how the third quarter evolved. But when you think about the cost savings and the sort of operating more efficient fleets going forward, can you give us any sense for how that should impact the margins in Technical Services? And maybe as part of that, as we look at the sequential decline 2Q to 3Q, how much of that is sort of older inefficient fleets? And how much is related to pressure pumping versus the rest of the business? Is there a way to help us sort of work through that a bit?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [10]

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This is Ben. I can qualitatively sort of discuss that. As we've read and heard from others, September was a particularly weak month for us, and that affected some of our service lines that typically aren't as affected by things like that. So it was kind of, across-the-board for us, weak in the quarter. Now we don't expect this to be a continuing trend, but the beginning of the fourth quarter was a little bit better than that, which was good to see, but nothing we're going to count on in terms of a continuing upward trajectory from this point. So it was kind of across-the-board. Also, job mix can -- contributed to some of the revenue declines for customer-supplied materials, which has been obviously a recent trend and impacted us from quarter-to-quarter.

We also -- and I think I mentioned -- let me clarify another comment. I said that other actions we're taking are going to be more mid to late fourth quarter, not early in the fourth quarter, in terms of headcount reductions. But like I said earlier, we're kind of focused on where we're going to enter 2020, how do we get positioned for 2020, not so much as where we're going to land in the fourth quarter. We know fourth quarter's going to difficult, has been in the last 2 years. We're not expecting anything different this year.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [11]

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And then as a follow-up is when you look at your -- the composition of your pressure pumping fleet and what it looks like going forward versus maybe where it was a year ago, and you sort of referenced retiring equipment that was basically serviceable but really not profitable, can you give us sort of the vintage of that equipment? And -- because as we sort of think about the overall market, it would seem like this has got to be a trend across the industry, which maybe helps balance the market a little bit over the next couple of quarters. Is there a way to sort of think about the age of your equipment or not because there's been sort of rebuilding done over the years?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [12]

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Stephen, this is Jim Landers. As you know and everyone else knows on the call, pressure pumping is this assemblage of componentized equipment. So it's hard to put an age on it. However, if you really try to think about the units and how old they are, if you start with June 30, 2019, at RPC and end up at December 31 of 2019, the average age of our fleet will have dropped, fallen by almost 40%. So that's a qualitative comment we can give you right now.

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Operator [13]

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Our next question will come from Chase Mulvehill, Bank of America.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [14]

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I guess real quickly, just to follow up on Stephen's question. Basically, if I look at your fleet, you've got 750,000 horsepower now. It looks like -- I guess maybe if you can confirm this, 450,000 that was built over, call it, the last 5 years, and then -- so that's kind of question one. And then a follow-up on that, how much of the 750,000 is Tier 4 engines?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [15]

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Chase, this is Jim. I'm not sure how much actually is Tier 4. We did buy some new equipment that was grandfathered in at Tier 2. Certainly, everything we've purchased this year, and you know about our 3,000-horsepower pumps, those are all Tier 4. I just don't have that number in front of me right now. And I'm sorry, can you repeat the first part of your question?

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [16]

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Yes. The first part was I was trying to do the math on it. It looked like about 450,000 horsepower was actually built the past 5 years. Does that number sound about right?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [17]

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Yes. That's about right.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [18]

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Okay. Great. And can we talk a little bit about fourth quarter? I mean, obviously, you're going from 16 to 19 manned fleets. So that probably -- and then obviously, the industry's contracting in the fourth quarter. But you taking down -- taking off some costs and reducing the number of manned fleets should help support profitability somewhat. So I don't know if you could maybe just help us frame or understand the impact of revenue? And then ultimately, what kind of impact that may have on margins as we get into the fourth quarter?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [19]

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Chase, this is Ben. Fourth quarter is very -- very difficult to predict. All things equal, obviously, we would expect revenue to come down. We are in the process of -- have been in the process of moving from 16 to 9 fleets. We're not all the way there at this point but are getting there. So as we get to the end of 2019, we expect to be at 9. And as I expressed in my comments, we'll be more or less than that as conditions change.

The benefit of reducing the fleet is that we'll be focused on our more highly capable equipment, not having to maintain and at times struggle with the equipment to perform some of the more demanding work. So it will allow us to be more focused. Also, with the fewer crews, we're expecting to be more efficient. We'll have less white space in the calendar. We're going to be more disciplined in terms of bidding our jobs and what jobs we accept. We think this is, hopefully with other people idling equipment, disposing of equipment and doing some of the same, will help with some of the discipline to get the overall market balanced sooner than it might be otherwise. So we don't want to contribute to that. So we're going to try to become much more disciplined, again, with how we did or the levels at which we bid and have less white space and focus on our operating procedures on location to be much more efficient and effective and get our efficiencies up. All of those things together should allow us to improve our margins. Where the margins are going to go, so many variables in place. But we should have -- be more efficient with our labor. We'll be able to be more focused on operating procedures and our own efficiency when on location, and all those things should result in improved performance.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [20]

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Right. And then just to clarify, when you said improved margins, you mean over the next few quarters, not in the fourth quarter, correct?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [21]

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Probably not. Fourth quarter is very difficult. We're focused on getting ready for 2020. Hard to know where fourth quarter is going to be. That will be the -- the timing differences with some of the layoffs and so forth that are taking place, exactly where that's going to fall and what the impact is going to be is -- we haven't spent a lot of time trying to forecast what that's going to be. We're focused on getting in position to begin 2020.

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Operator [22]

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Our next question will come from Marc Bianchi, Cowen.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [23]

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There's a lot of noise here with all these actions you're taking in the third and the fourth quarter. I was hoping we could talk about what the profitability might look like when we get through this process. One way I was thinking about it is you're going to have 9 fleets, assuming the market remains steady with those 9 fleets, and perhaps they're earning $10 million a fleet. So that piece of the business could be earning $10 million a fleet or $90 million on an annualized basis kind of once we get to the other side of this. Is that the right way to think about it? Or are there any other puts and takes you'd add?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [24]

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Marc, this is Jim. That's a very appropriate way to think about it, except we're looking at 7 horizontal fleets and 2 vertical fleets. So 2 vertical fleets would be earning less -- generating less EBITDA. But the $10 million EBITDA per fleet in the current market environment is a good goal and one towards which we're striving right now, so yes.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [25]

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Okay. That's helpful. And then on the CapEx, you mentioned, I think, $2 million a fleet. So if we've got 9 fleets, that's just $18 million. I'm sure that there's a bunch more CapEx that we would likely see in '20, and I know you probably don't have your plan together. But can you talk about just generally what the rest of the business requires and maybe perhaps put a range around expectations for '20 for us?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [26]

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Reasonable question. At this point in time, we don't have any large outstanding orders that would fall into 2020. We've talked about the CapEx for this year. There's some additional spending this year to wrap everything up. We spent some money this year in coiled tubing. We spent some money obviously in pressure pumping. At this point in time, unless market conditions change, we don't see any large growth initiatives, requirements and so forth. So we believe -- and again, we are -- as you indicated, we're in the midst of -- with all these changes, you describe it as noise, which is true, we're working through that right now. But we believe CapEx will be minimal next year, I think certainly less than $100 million, maybe $80 million, unless market conditions change. If things slow down and deteriorate, we'll adjust our pressure pumping fleet, staff fleets further, which will reduce our maintenance CapEx. If industry conditions improve, we'll increase the fleets. And so the number will go up. But at this point in time, kind of a steady-state, maybe $80 million.

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Operator [27]

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Our next question will come from Scott Gruber, Citigroup.

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Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [28]

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Just to follow on the last line of questions. When you're referring to the kind of $80 million, $90 million of EBITDA or the goal of getting to $10 million per fleet, is that total company? Or is that just specific to pressure pumping?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [29]

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No, that's been some of the industry metrics for the pressure pumping fleets, so that's (inaudible).

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Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [30]

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Okay. I just wanted to clarify. So -- and then when you think about those types of targets, are they -- are these reasonable targets for the first half of '20, assuming no change in market, no change in pricing? Can you get there just with the actions you're taking?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [31]

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We certainly believe it's possible, but again, highly -- the market is very difficult. We're certainly shooting for it, and we'll see where it'll play. We're going to get into early 2020 to see how things are going, make the appropriate adjustments and go from there. Reasonable question, but we would hope so. And with the efficiencies we'll have, certainly, that will be a contributor, and a lot of it, again, will depend on job mix and things like that, so still a work in progress.

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Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [32]

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And I know the market is very uncertain at this point. But is there any way to put some color around the magnitude of activity recovery early next year that would facilitate such a recovery in your EBITDA? Assuming no price change but just thinking about volumes, what type of volumes will be required to get there?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [33]

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Scott, this is Jim. That's a hard one. It's a moving target. We don't have a grade number right now for you, yes.

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Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [34]

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Okay. Okay. And overhead, how should we think about overhead for 2020?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [35]

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Well, at this point in time, I guess we've been on about a $43 million a quarter of run rate. We are implementing plans to get that down by early 2020 to at least get that down between 5% and 10%. And again, we'll be taking a deeper dive into our various costs. And from there, we'll react to market conditions and industry conditions. So that's our target at this point.

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Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [36]

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So we should assume a run rate in 4Q for now, where we'll start to...

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James C. Landers, RPC, Inc. - VP of Corporate Finance [37]

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Yes. Yes.

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Operator [38]

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Our next question will come from Chris Voie, Wells Fargo.

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Christopher F. Voie, Wells Fargo Securities, LLC, Research Division - Associate Analyst [39]

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First question, I guess, I wonder if you could give a little color -- a little more color around the 9 fleets. Is essentially the 9 going to be what you expect to have working at the end of the year? Or is that what you expect to have ready to go to market in 1Q '20 based on the visibility you have for work to start the year?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [40]

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We're hopeful that whether it's all going to be working on 12/31, not sure, but no, we expect that those will be working or certainly gearing up to begin work in early 2020. And like I said, I mean, if we get to early 2020 and something less than 9 appear to be sufficiently busy, we'll make additional adjustments, right? We're going to respond to what we see before us. We're going to strive for efficiency. We're going to strive for utilization, utilization first, then efficiency on the well side, and we'll see where to go, where it goes from there.

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Christopher F. Voie, Wells Fargo Securities, LLC, Research Division - Associate Analyst [41]

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Okay. And then on the closing locations, I was wondering if you could give an update in terms of the basin presence. Has there been any kind of exiting of basins related to this? And could we get a breakdown of where the 9 fleets that you expect to have at year-end, where they would be in terms of the basins?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [42]

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Chris, this is Jim. We will not have a pressure pumping presence in the Bakken, and we are streamlining locations in Texas. We'll still have a strong big presence in the Permian and can service other areas as well.

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Christopher F. Voie, Wells Fargo Securities, LLC, Research Division - Associate Analyst [43]

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Okay. And if I could just squeeze one last one in. You usually give a breakdown of the revenues by business. I was wondering if you could maybe read those out.

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James C. Landers, RPC, Inc. - VP of Corporate Finance [44]

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Yes. Chris, absolutely happy to. So the numbers I'm about to share are percentages of RPC's consolidated revenue for the third quarter. This is by service lines. The largest service line for the third quarter was Thru Tubing Solutions at a little over 38% of revenue, 38.1%. For the third quarter, #2 was pressure pumping at 37.9%. And after that, of course, will follow fairly rapidly, coiled tubing was 6.7% of consolidated third quarter revenue. Rental tools, which is in our Support Services segment, was 4.3% of consolidated revenue. Our nitrogen service line was 3.5% of consolidated revenue for the third quarter.

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Operator [45]

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Our next question will come from Vebs Vaishnav, Howard Weil.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [46]

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I guess the remaining 750,000 horsepower, how many fleets is that? Is that like around 15?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [47]

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It's around...

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [48]

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13 to 14.

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James C. Landers, RPC, Inc. - VP of Corporate Finance [49]

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Yes.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [50]

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Okay. Okay. And the fleets that you're retiring, are you like cutting them up or selling them? How are you disposing that?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [51]

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It's a good question. We are in the midst of kind of planning for that. Clearly, don't want the pumps to come back and compete against us, so it'll be a variety of things. We'll be selling some components. We'll be cutting up what we otherwise think can't be sold. And there are a few that we are repurposing in other parts of our business for -- but a good question. We definitely want to take them, or we'll be taking them completely out of the hydraulic fracturing market.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [52]

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Okay. If I think about the third quarter, and this is, again, just me trying to do some math gymnastic, it seems like EBITDA per fleet was negative. Obviously, you're going from 16 fleets to 9 fleets. Is it fair to say that those 9 fleets are actually EBITDA-positive fleets? Or is there a way you can help us like what's the range of EBITDA per fleet that you guys saw within your fleets?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [53]

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Vebs, this is Jim. You'd probably described that exercise as gymnastics, and we agree. We have some regions, and we talked about this in our conversations, we have some regions and some locations that are doing well in pressure pumping. And we are very interested in replicating that success with a smaller number of fleets. So I can't give you an EBITDA per fleet range. Some was positive, and some of the fleets were positive and fine. Fine doesn't mean great, but they were fine. Others, due to the problems and the issues we've discussed, were otherwise. That's where we're making the change.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [54]

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Got it. And I guess you mentioned about the mix impacting third quarter. Could you like provide some color like how -- what that mix was and how much of the impact was there?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [55]

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I'm sorry, can you clarify?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [56]

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Mix, the impact of mix.

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James C. Landers, RPC, Inc. - VP of Corporate Finance [57]

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Yes. Sure. So that, too, is a good question. During the third quarter, the percentage of profit that our customers provided really increased a lot. And as a result of that, probably 1/3 of our sequential revenue decline in pressure pumping is attributed to us bringing less of the sand to the job, and therefore, that sand not [recorded] to our P&L.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [58]

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Okay. And last one, if I may. So we are closing down less-profitable locations and fleet. Have you guys -- or can you guys talk about what changes have you made in sales force so that you can align with customers who have higher utilization?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [59]

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Well, it's a focus of ours, not really prepared today to dive into a long discussion. But clearly, we're looking for the much-discussed, more dedicated work. And we're going to do that through focusing our efforts, improving our fleet and crew quality and data, data accumulation and analytics. But we'll have more on that later.

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Operator [60]

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Our next question will come from Connor Lynagh, Morgan Stanley.

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Connor Joseph Lynagh, Morgan Stanley, Research Division - Equity Analyst [61]

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I'm wondering if we could -- I'm not sure if you guys have quantified this, so I apologize if you missed it -- if I missed it. But have you quantified just the absolute dollar amount of impacts to EBITDA that closing some of these facilities and shutting down some of these crews is going to have? And any commentary around timing of that would be appreciated.

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [62]

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Connor, this is Ben. We have not quantified it, but I indicated that there were some reductions that took place in the middle of the third quarter and other actions as we've gone along, and there will be others that will be delayed in the fourth quarter.

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Connor Joseph Lynagh, Morgan Stanley, Research Division - Equity Analyst [63]

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Okay. That's fair. I mean if we think about -- if we're looking at -- to your cost of sales in the third quarter, could you quantify maybe as a percentage of that how much is related to the facilities that are going to be no longer operating by sometime next year?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [64]

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The actual -- well, we don't -- reasonable question. We don't really look at it that way. Obviously, it depends on the relationship of the revenue to the cost. We sort of look at it as we are limiting our exposure, right, our fixed cost exposure as it relates to crude costs and things like that. We want to fill up the calendar, improve our utilization and focus on efficiency on the well side. So again, reasonable question, not sure it really gives -- if we had the number, I'm not sure that translates into anything other than how we've reduced, again, our fixed cost exposure. Certainly, there's less opportunity with less crews to generate revenue, but we believe that we will be -- all things equal, as we go into 2020, we're going to have better margins, better -- a better cost relationship as we are rightsizing to the amount of work that we can do on a regular basis at a appropriate -- a higher utilization level.

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Connor Joseph Lynagh, Morgan Stanley, Research Division - Equity Analyst [65]

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Okay. That's fair. Appreciate that's not maybe how you look at it. So I'll try one different way, which is just how -- of what you've chosen to shut down, how large of an EBITDA drag would that have been in the third quarter? Or just any way you can frame this up just so we can think about -- obviously, we all have different views around what next year looks like. But I'm just trying to think about how much cost savings there is still to flow through.

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James C. Landers, RPC, Inc. - VP of Corporate Finance [66]

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Connor, this is Jim. Very, very hard estimates. You can drive a truck through this estimate, but somewhere between $5 million and $10 million in EBITDA.

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Operator [67]

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Our next question will come from Waqar Syed, AltaCorp Capital.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research [68]

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Could you provide some outlook for your other businesses, Thru Tubing and the coiled tubing business, what you're seeing there?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [69]

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Those businesses, too, are experiencing some of the same weakness like we talked about in the end of the third quarter with a little bit of a bounce-back early in the fourth quarter, which was good to see, a little bit of a relief. One of the things we are doing as part of our strategic review, we are looking at opportunities to try to get our various service lines to be able to work a little closer together. We are hopeful that that's going to generate some positive benefits as well, more to come on that later. But we've made some strides in that direction with some of the investments we made in coiled tubing in the last several quarters. And we kind of scrubbed the coiled tubing service line last year with little or no P&L impact. But we've kind of trimmed the fleet here and there with some of our older equipment. So we feel pretty good about the quality of -- or the size, the capability of the coil tubing equipment that we have. And so we look forward to the benefit of trying to touch the customer as well as many times as possible with our various services. It's something we talked about a lot over the years. We've had some success from time to time, but we're hopeful that maybe we can generate additional overall benefits and opportunities to bring some of those things a little bit closer together.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research [70]

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How about the pricing in coiled tubing? Could you quantify that where it stands today versus where it was maybe a few months ago?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [71]

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Pricing in all of our service lines has not continued to fall precipitously. So it's been more of a utilization sort of play. I'm hopeful that the industry -- and it appears that maybe we've reached the point where people aren't going to be able to continue to drive pricing down. And we don't want to continue to contribute to that sense in the industry. So we're going to try to become a little more disciplined in that regard and try to make sure we're getting our utilization up and make sure that our performance is at least reasonable, and that's a work in process. But again, to answer your question, pricing has not been falling tremendously, and a lot of it depends on mix, of course.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research [72]

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Now as you reduce your pressure pumping size of the fleet to go down to about 9, so certainly, you could benefit from utilization for individual assets. But on the other hand, you'll also lose economies of scale. And so you mentioned that you're going to be out of Bakken. But when we think about it, would all the assets to be close together in a basin? Or would there be some extra costs that may creep up on a per-unit basis just because you may not have economies of scale as you operate?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [73]

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Waqar, this is Jim. In our pressure pumping experience over the last almost exactly 20 years in operating in multiple basins, we believe that economies of scale exist within a basin but not across basins. So to be in a region that's a very long distance from other areas just doesn't help you. It doesn't help you with profit and logistics. It doesn't help you with sharing crews. It doesn't help you with sharing equipment. And that the -- for many customers, the decision-making process is decentralized. Even when it's centralized, it's still made on a regional basis. So it's a good question. But we do not think that getting out of basins -- a specific basin hurts us from an economy of scale point of view. We actually think that by focusing more in certain basins, that the economies of scale that are there to be gained, we can gain more of those.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research [74]

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That exactly was my point, that would you be then all focused just in the Texas area so you get economies of scale in that area and be out of the Rockies completely, the Northeast and other areas or...

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James C. Landers, RPC, Inc. - VP of Corporate Finance [75]

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So yes, that's part of the business plan, that it will be streamlined, and the economies of scale are probably pretty elusive. But those that are able to be gained, we stand a better chance of realizing those.

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Operator [76]

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Our next question will come from George O'Leary, Tudor, Pickering, Holt & Co.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [77]

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With respect to the CapEx commentary, there's the potential to spend $80 million or less in 2020. That's obviously a material cut, which seems a prudent move in the current environment. And if you guys go back and look at 2016 where you obviously dropped at a much lower rig count, you guys spent $34 million in CapEx that year. Is it possible that if the market pans out to be as bad as it is today or as bad as it may get in the fourth quarter, do you guys spend closer to that level of CapEx, the $34 million versus the $80 million? The fleet will be smaller. It seems like you guys are rationalizing some facilities as well. So it actually seems like there's a potential for CapEx to come at a well over year-over-year but also don't want to set falsely low expectations.

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [78]

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George, this is Ben. Yes, there is that possibility. We're going to be working really hard as we did in '16 and do every year to really scrutinize our CapEx. And there certainly is that possibility that it will be lower than the $80 million number that we mentioned.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [79]

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Okay. And then just piling on to that question but a slightly different angle. From kind of a free cash flow perspective, you guys also did a really good job in the '15 and '16 downturn of blowing down working capital, and I realized some of that just happens naturally as revenue declines. But it seems like there was the -- you have the sand business. So sand, where you already have some costs and you could sell that sand for some (inaudible) Thru Tubing Solutions side, also probably a potential for diverse sales and things of that nature to buoy free cash flow. Just curious, realize it depends to the degree to which revenue declines, but is working capital a source of cash next year as you guys see it today?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [80]

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George, this is Jim. You bring up some good factors, and thanks again for the history lesson to our friends who may not remember 2016 and what that CapEx level was. The answer is yes. We try to manage prudent -- we try to manage working capital very prudently. I think we have a good record of that. All the factors you brought up are there and possible. Let's do acknowledge, though, that we're starting from a lower revenue run rate. So collection of receivables won't quite be the boon to cash that it would be otherwise. And we've been trying to manage inventory pretty well. So there will be those impacts should 2020 have declines from beyond third quarter, just forget about the fourth quarter for a second, and we will absolutely manage to a sound balance sheet whatever it takes.

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Operator [81]

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Our next question will come from Tommy Moll, Stephens Inc.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [82]

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So for the 9 fleets that you're planning to have active once we get to the beginning of next year, could you comment on how utilization has trended in recent months for those 9? Is it at a level that you're pleased with? Or is there still a lot more work to be done to improve utilization on this?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [83]

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Tommy, it's Jim. It's a good question, hate to answer by saying that it's a moving target. One reason it's a moving target is, as you know, we have just put 100,000 new horsepower in the field in July, August and September, and it's performing well for us and the utilization is high because of how well it performs and good customer acceptance in several regions. So that's a positive. So we've got some fleets that their utilization is I'll step-characterize it as acceptable but not where it needs to be. Some of that has to do with spotty customer activities. We've got some good customers that we work for very steadily, and that utilization is fantastic. We've got some other customers that we work for and do a good job for. In fact, in some cases, the job is too go and we finish early. And that refers back to the increasing service efficiency in our part of the industry and how that can someways hurt you. So utilization needs to improve. But in some places, it is decently acceptable for us right now.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [84]

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And as a follow-up there, again, if we look at the pro forma for the beginning of next year, you're at 750,000 horsepower, so call it 13 or 14 fleets. For the 4 or 5 you're planning to have idle at that time, in the event you wanted to bring those back to work, other than hiring people, is there deferred maintenance that would -- you'd be required to address when bringing those back to the field? Or should we think of them as essentially ready to work but for being staffed?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [85]

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Tommy, they are ready to work. All we would need to do is crew them up.

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Operator [86]

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Our next question will come from Dylan Glosser, Simmons Energy.

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Dylan Gray Glosser, Simmons & Company International, Research Division - Analyst of Oil Service [87]

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When you guys mentioned 16 active fleets in Q3, how utilized were those fleets? And if you were to take out those on a more fully utilized basis, similar to what some competitors provide, would that number be closer to 9 or so?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [88]

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Let's wait and see what our competitors say happened during the third quarter. Utilization was low. Utilization dropped off in the third quarter. Some are -- let me answer it this way...

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [89]

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Late in the third quarter.

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James C. Landers, RPC, Inc. - VP of Corporate Finance [90]

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Yes. Yes. Ben said earlier that pricing has not fallen. But materially, our declines have had to do with utilization/activity and then the job mix issue that we mentioned earlier. And say it another way, we've got some fleets in some locations that were very highly utilized in third quarter, others that were not.

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [91]

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And thus, the reason we began to move to go from something that looked like 16 fleets down to 9. I mean, that's the reason for the adjustment. And is 9 going to be the right number? We're hopeful that 10 or 11 is going to be the right number. We don't know, but we're getting down to 9. We'll assess the market, and we'll adjust from there.

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Dylan Gray Glosser, Simmons & Company International, Research Division - Analyst of Oil Service [92]

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As a follow-up to that, as far as the clarity for January and February in 2020, given that you guys plan to have about 9 fleets moving into 2020, is it fair to say that visibility for January isn't super clear yet? And that you maybe haven't received a great intel from your customers indicating a meaningful ramp-up in January?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [93]

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That's fair. There's a broad range of customer indications right now. We are also watching very closely, as I know everyone else in the analyst community is, our customers' capital constraints and capital sources. The debt equity, private equity markets don't seem to be open for our customers right now. They're, in some cases, doing some creative financing, as was discussed in The Wall Street Journal this week. So we're actually looking a lot at their financial capabilities. And $55 oil ought to be okay, but we're interested in their capital constraints. So we don't have a lot of visibility right now is probably the best answer.

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Dylan Gray Glosser, Simmons & Company International, Research Division - Analyst of Oil Service [94]

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Okay. Great. If I could just squeeze one more in. As far as the CapEx plans for next year, I know you guys -- maybe talking about the range of around $80 million and the possibility of maybe even going lower. With that being said, is it fair also to say that you guys are not expecting to order any replacement horsepower for next year and maybe push that off to 2021?

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Ben M. Palmer, RPC, Inc. - VP, CFO, Treasurer & Corporate Secretary [95]

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Yes. We have no plans at this point to order any pressure pumping equipment. We are pleased with the 750,000 hydraulic horsepower. A lot of work went into determining where that line of demarcation is. So we like what we're left with and believe we've retired very, very few pumps in the last 20 years that we've been in business. So we are pleased with the quality and the capability of that 750,000 hydraulic horsepower and believe that it can operate with -- certainly, maintenance CapEx will be required but that it can operate for the next several years. And so the decision on replacement horsepower will be obviously well-thought-out and looked at very, very carefully, but we don't believe we're going to have to have any replacement horsepower in the near term.

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Operator [96]

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Our next question will come from Blake Gendron, Wolfe Research.

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Blake Geelhoed Gendron, Wolfe Research, LLC - SVP of Equity Research [97]

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I know you don't have great visibility into the horsepower that your peers are stacking and cutting up. But maybe talking about the horsepower that's come to market over the past 6 months. First, can you quantify maybe the amount of horsepower in the sale block now versus 6 months ago? And then when you look at the horsepower itself, how much would you categorize as equipment that you would have otherwise stacked, probably won't come back ever versus horsepower that is viable in the current market dynamic?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [98]

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Blake, it's Jim. Are you talking about -- on the sale block, you're referring to potential transactions, correct? Because we aren't selling equipment. Is that what you were asking?

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Blake Geelhoed Gendron, Wolfe Research, LLC - SVP of Equity Research [99]

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Yes. I know you're not selling equipment, but what you can see from your peers bringing their horsepower to market.

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James C. Landers, RPC, Inc. - VP of Corporate Finance [100]

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Yes. We haven't looked anything closely enough to give you a comment that would be meaningful. There's plenty of pressure pumping horsepower for sale, I would assume.

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Blake Geelhoed Gendron, Wolfe Research, LLC - SVP of Equity Research [101]

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Okay. And then moving to next year CapEx coming down, assuming you get okay utilization and the EBITDA per spread that you expect or at least improvement, what's the preference for cash build versus maybe reinstating shareholder returns next year?

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Richard A. Hubbell, RPC, Inc. - CEO, President & Director [102]

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Well, we'll have to wait and see. I always focused on shareholder returns, but we'll have to wait and see. That's a decision we make on an ongoing basis. Reasonable question, but we do like shareholder returns.

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Operator [103]

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Our next question will come from Stephen Gengaro, Stifel.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [104]

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Just a quick follow-up. When you think about the reduction in your pressure pumping fleet going to 2020, is there any impact there that we should think about on its impact on other product lines? And any sort of related revenue and/or kind of complementary services you provide around that, that could impact your other product lines in 2020 with fewer frac fleets working?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [105]

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That is a very good question, and the answer is no impact.

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Operator [106]

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Our last question will come from Vebs Vaishnav, Howard Weil.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [107]

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And I guess just one follow-up question because of -- I think you guys said something about $5 million to $10 million EBITDA per fleet. I couldn't really understand what it was. Were you talking about of that was the drag in 3Q and that's how much your EBITDA per fleet would improve in 4Q? Or was that like where you would like to go to?

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James C. Landers, RPC, Inc. - VP of Corporate Finance [108]

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Vebs, this is Jim. The question, and I'm the one who answered it, was what was the drag of the fleets that are being eliminated. And my estimate, I said you could drive a truck through that estimate, is between $5 million and $10 million on -- EBITDA on a quarterly basis. So that's -- that was the question and the answer.

And I'm told that the webcast cut off for a little while, so I apologize for that. If there are any follow-ups, we can clarify just on what we said, not additional information.

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Operator [109]

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Thank you very much. At this time, we have no further questions in the queue. So I'd like to turn the conference back over to Jim Landers.

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James C. Landers, RPC, Inc. - VP of Corporate Finance [110]

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Thank you, Chantal. Thank you, everybody, for spending the last hour with us. We appreciate your interest. We look forward to talking to many of you soon and seeing you soon. Thanks.

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Operator [111]

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Thank you very much. Ladies and gentlemen, at this time, this conference is now concluded. You may disconnect your phone lines, and have a great rest of week. Thank you.