This Company Shows Investors the Money

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RPC (NYSE: RES) rewarded investors on Friday by announcing a $0.20 per share special dividend to be paid before the end of December.  Combine that with dividends paid over the last 4 quarters, and the company will return $0.56 per share this year.  At current prices around $11, this is a 5.1% dividend yield.  Over the last twelve months the company generated $154 million in free cash flow, and will return roughly $120 million in dividends this year.  That’s an impressive 78% of FCF being returned to shareholders in cash. 

Why the Love?

The press release offered little insight into the rationale behind the decision, besides a “sensible return of capital to our shareholders that we will accomplish in a tangible and immediate manner”.  That’s all well and good, and as a shareholder I’m pleased management made a prudent decision, but this is also about making the best of a less than ideal situation.  Natural gas prices are well below 2003 to 2008 levels, causing the energy companies to focus more on oil and less on natural gas.  RPC services both oil and gas rigs, but the weakness in natural gas is hurting the company’s growth prospects.  As a result, RPC is backing away from capital expenditures - $70 million less in the third quarter compared to the second.  This means a significant increase in free cash flow, which the company is clearly putting towards this special dividend.  It’s great to see an immediate 2% yield coming my way, but I have to keep in mind it’s because management is slowing down on growth efforts.

I’m willing to be patient, especially if the company pays me while I wait, but I want to be sure this is a situation of a weakened market and not a problem with the company itself.  Looking at the recent performance of the oilfield service titans should add some perspective.  Halliburton’s (NYSE: HAL) most recent quarterly earnings release cited a weakened market in North America for driving down revenues, specifically “activity reductions by some of our customers”.  Schlumberger (NYSE: SLB) reported a similar story with North American Oilfield Services revenues dropping 2%.  Both Halliburton and Schlumberger have significant international operations that are still posting strong growth and more than compensate for the weakness in North America.  RPC, however, makes less than 5% of its sales from outside the United States.  It is much more a pure American natural gas play and is feeling the squeeze more than its global big brothers. 

Another Possible Reason?

Part of the pending “fiscal cliff” tax changes includes an increase in tax rates on capital gains.  Steve Wynn, founder and CEO of Wynn Resorts (NASDAQ: WYNN) made headlines late October when he announced a sizeable special dividend, partially citing the possible change in dividend tax rates as a reason.  Some saw this as a politically charged move, others pointed out this means a $75 million payday for Wynn, and I personally couldn’t care less.  RPC’s Directors and Executives own over 70% of outstanding shares, so an equally cynical person might argue the decision was made out of self-interest.  If self-interest is aligned with shareholder interest, then things are all good as far as I’m concerned. 

Worth the Wait

Things may not look great now, or even within the next couple of years, but there are many reasons to be excited about the future prospects of American natural gas production and by consequence the future prospects of RPC Inc.  The U.S. Energy Information Administration projects that 60% of new electricity generation capacity added between 2010 and 2035 will come from natural gas fired plants.  The United States should become a net exporter of natural gas by 2020.  In 2010 shale gas accounted for 23% of natural gas production sources.  By 2035 that figure will more than double to 49% of production.  This plays directly into the hands of service companies like RPC that specialize in horizontal drilling and hydraulic fracturing techniques.  It may be a long wait for this thesis to play out, but I’m happy to receive whatever cash payouts the company is willing to send me in the meantime.

drfrank1 owns shares of RES. The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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