Participants

Stuart Bodden; President, Chief Executive Officer, Director; Ranger Energy Services Inc

Melissa Cougle; Chief Financial Officer, Senior Vice President; Ranger Energy Services Inc

Don Crist; Analyst; Johnson Rice & Company

John Daniel; Analyst; Daniel Energy Partners

John Kernan; Analyst; Dialectic Capital

Presentation

Operator

Thank you and welcome to Ranger Energy Services first quarter of 2024 results conference call. Ranger has issued a press release summarizing operating and financial results for the three months ended March 31st, 2024. This press release, together with the accompanying presentation materials, are available in the Investor Relations section of our website at www.rangerenergy.com.
Today's discussion may contain forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking state further, please note that non-GAAP financial measures may be disclosed during this call. A reconciliation of GAAP to non-GAAP measurements is available in our latest quarterly earnings release and conference call presentation.
After today's presentation, there will be an opportunity to ask questions to ask a question. You may press star, then one on your telephone keypad. And to withdraw your question, please press star then two. Please also note that this event is being recorded today.
And with that, I would like to now turn the conference call over to Stuart Bodden, Ranger CEO; and Melissa Cougle, Ranger's CFO, for their prepared remarks. Please go ahead.

Stuart Bodden

Thank you, and good morning, everyone. We are pleased to welcome you to our first quarter 2020 for our earnings call. Ranger had a challenging first quarter with revenue of $136.9 million and adjusted EBITDA of $10.9 million. Both reductions from the prior quarter and the prior year quarter. The company was presented with a number of challenges and unique circumstances during Q1 and each of our segments was impacted.
I will spend meaningful time in detail on today's call because I want to give you a sense of what we see as nonrecurring and why we remain bullish on Rangers outlook and our production focus business model. Although we were disappointed in the quarter, we believe this quarter is an anomaly and is not representative of the remainder of the year.
As mentioned in our year-end call 2024 got off to a slow start as the quarter progressed. Typical weather disruptions and events outside of our control, combined with unsustainable below-market pricing offered by competitors and a declining completions market created excess capacity impacting our quarterly performance more than originally expected. While we weathered the back half of 2023, with resilience in the face of significant declines in US onshore rig count.
This winter brought additional pressure in our completions focused areas which had the most significant impact to our Q1 results. We've mentioned before that our business is approximately 65% exposed to production and decommissioning services and about 35% exposed to completions and was this 35% where we saw the most pressure U.S. frac spreads declined by 17% between November and mid-January, which idled wireline and coil tubing assets during the already challenging winter months.
In the north, we experienced a wave of competition that drove down pricing to unprofitable levels on the completions, wireline side and sidelined some of our assets temporarily on the coil side, it is important to remember that our weakest quarters are typically the first and fourth quarters where weather and generalized winter and holiday slowdowns materially impact our business. With that seasonal backdrop, we experienced compounding declines given the dynamics I just mentioned. I'll go into more detail on our wireline and ancillary services to give as much color in these areas as possible.
And then wrap up with the high spec rig business, our wireline services segment experienced significant competitive and pricing pressures throughout the first quarter. Our North wireline region has historically been insulated from the commoditization of plug-and-perf completion wireline services, but this winter season but our new influx of competition that brought with it significantly lower pricing, similar to the dynamics we saw last year in the Permian Basin and have mentioned on prior calls, many of the quoted bid prices we've encountered are unprofitable and ultimately unsustainable.
And we have chosen to only bid at levels that will generate an acceptable level of return for our business in response to lower anticipated activity levels going forward, Ranger has aggressively adjusted our fixed and support cost basis. We have chosen to maintain our discipline in the face of these pressures and while it's painful in the moment, we believe doing so is essential for this industry to remain sustainable through cycle. We also believe that the work that we are pushing to grow in the production and pumpdown areas will ultimately allow for margin expansion.
Our investors know that this quarter is not the first time we have had issues with our wireline services business, given that the barriers to entry to completions related plug-and-perf operations have been significantly lowered over the past five years. This is why we have been engaged in a strategic pivot away from completions work and have been leaning into production and pumpdown services, which performed relatively well through the winter months.
Our production and pumpdown businesses have grown year over year and we consider its continued growth when arrangers most important 2024 strategic initiatives. This goal is important on a stand-alone basis given arrangers broader production focus, and we will continue to push even harder on this front. Acknowledging that growth in this area will take time and resources as we are cultivating different customer relationships and establishing a broader skill set base and operational employees.
Moving onto processing solutions and ancillary services. This segment was also challenged by a decrease in operating activity in the first quarter, primarily attributable to coil tubing services where revenue declined in the North region due to increased competition and seasonal lows in activity in coil tubing, the drop in completions activity freed up additional coil tubing units in a neighboring areas to compete directly with Ranger at lower prices, different from our view on wireline completions.
However, we don't believe the market dynamics for coiled tubing have fundamentally changed as we have already seen our coil activity begin to recover in March and April from the February low. We expect activity to continue to increase in May and June with a more substantial rebound potentially on the horizon in the second half of this year.
On the bright side, our rental service line performed quite consistently and has seen an improvement in pull-through revenue opportunity, which is creating a much more consistent margin profile each month. Additionally, the Torrent service line has received an increased number of inbound inquiries for in-field gas processing, given the increases at the increases in liquids pricing and the need for infield power generation, and we are optimistic about the opportunity to grow this business in the future.
Finally, our plug and abandonment business is experiencing an uptick in demand to complete necessary decommissioning work, and we believe we are well positioned to capitalize on this growing market.
P&a is another service line that tends to experience seasonality and declines in the winter months. So this pickup in activity is encouraging.
And finally, turning to our high specification rigs business this quarter, revenues were essentially flat quarter over quarter and increasing year over year. In our year-end investor call, we mentioned a material downtime event in January on a non Ranger rig that was outside of our control.
This event affected 75 rig days in the quarter, during which time we had significantly reduced or zero rig revenue, but full cost burdens and extraordinary inspection costs, which pushed down margins for the quarter our high-specification rigs business has proven very reliable and the demand for IT services consistent for the past two years, despite the downtime in our typical seasonality, we grew revenues to $79.7 million and rig hours to 111,000 hours and pricing remained strong at $718 per hour. We had our highest revenue quarter in this segment in Rangers history, which is remarkable given the downtime and that seasonality is typically highest in the first quarter.
This business has already seen margins recover in March and we expect to see historical 19% to 21% margins moving forward. Strong activity and pricing continues to reflect the consistent demand we see in the high specification rigs business and we are grateful for our strong partnerships with majors, along with large and small independent operators across the premier US basin.
We see these relationships only getting stronger, supported by a backdrop of an increasing number of producing horizontal wells requiring maintenance each year. As we have repeatedly repeatedly discussed on these calls, our interest production focus provides a buffer from dislocations in the market and a dependable revenue and free cash flow base from which to grow strategically and return capital to shareholders.
We are the largest provider of well services in the United States and the only public company that has more than 50% of its revenue tied to production services. That said, this quarter makes clear. We are not fully immune to completions activity declines. And we have made a series of changes to our business across all service lines, considering what we view as sustained impairment to the completion space in wireline and acknowledgment of the efficiencies and process improvements we've generated in the business.
The past couple of years, we undertook a deep cost review across all segments, identifying approximately $4 million of annualized cost savings that will help streamline the organization moving forward. These efficiencies are most significantly and direct personnel costs with additional efficiencies identified through select administrative and operational spending categories.
Looking forward, we remain focused on creating long-term value based on our previously communicated four strategic pillars of maximizing cash flows, defending the balance sheet, prioritizing shareholder returns and growing through acquisitions. We continued to execute against these pillars despite a challenging quarter. Importantly, we maintained our net debt zero position and high liquidity, which has been one of our highest priorities because it allows us to ride through the variability of the energy cycle and maintain our dividend.
We can have a tough quarter and still maximize our returns to shareholders because of our excellent free cash flow conversion rate and our strong balance sheet. In the first quarter, we issued our regular dividend of $0.05 per share and repurchased 846,900 shares for $8.5 million. And today we are announcing our second quarter dividend since we implemented our shareholder returns program in the second quarter of last year, we have repurchased over 2.6 million shares for a total value of $27.6 million and returned over 65% of trailing 12 months cash flow to shareholders with the remaining cash flows going toward repaying outstanding debt.
These actions far exceeded our commitment of a 25% minimum free cash flow return. While we are eager to execute a transaction to grow our business. We have a disciplined capital allocation program that also takes into consideration the opportunities related due to repurchasing our own stock at attractive prices. We have had numerous conversations of the past several quarters and remain in active dialogue with potential counterparties, but we will not consummate a transaction unless it has the ability to create meaningful long-term value for our shareholders.
Finally, our view for the full year remains positive. Having weathered a perfect storm these past winter months from which we've emerged stronger through March and April, we have seen customer activity and revenue pick back up with a much improved margin profile. And we expect, as is typical to have strong spring and summer season through all of this, we remain committed to ensuring strong cash flow generation to maximize shareholder returns.
With that, I would now like to turn the call over to Melissa to review the financial results in more detail.

Melissa Cougle

Good morning, everyone, and thank you for joining us today to discuss Rangers First Quarter 2024 financial results faced with challenging market conditions. Our revenue for the first quarter totaled $136.9 million, a 13% decrease from $157.5 million in the first quarter of 2023. This decline was primarily due to lower activity levels in wireline completions and coiled tubing service lines.
We reported a net loss of $800,000 or negative $0.03 per fully diluted share down from net income of $6.2 million or $0.25 per share a year ago, and net income of $2.1 million or $0.09 per share in the fourth quarter of 2023. The decrease in net income from the prior year and prior quarter periods is primarily attributable to declining activity levels in wireline as well as processing and ancillary services segments and increasing costs due to inflationary pressures across cost categories.
Cost of services for the quarter was $120.8 million, representing 88% of revenue compared to $130.9 million or 83% of revenue in the prior year period. The increase in cost of services as a percent of revenue was primarily attributable to reduced operating activity during the quarter and inflationary pressures on labor, rentals and repair costs.
The most significant inflationary cost increase noted is with regard to medical cost per employee, which affected cost of services by $1.8 million in the first quarter of 2024 when compared to the first quarter of 2023. As a reminder, Ranger began to see these costs escalate significantly during the second quarter of 2023, and they have remained elevated adjusted EBITDA for the quarter was $10.9 million, reflecting a decrease of $9.2 million from the prior year period and $7.5 million from the prior quarter.
With regards to our segment performance. High specification rigs revenue for the first quarter was $79.7 million, an increase of $2.2 million or 3% from the prior year period. And an increase of $700,000 from the fourth quarter of 2023. Rig hours increased by 3% from the prior quarter period and decreased by 1% from the first quarter of 2023.
The blended rig hourly rate for the first quarter was $718 per hour, which represented an increase of 4% year over year due to general pricing increases captured in 2023 and decreased 2% from the prior quarter due to customer and asset mix. This reflects relatively consistent pricing and operating levels quarter over quarter. In addition to the nonrecurring downtime events, rig transitions between customers during the quarter also impacted margins with slightly elevated operating costs due to make ready tasks between jobs.
In our wireline services segment, revenue was $32.8 million in the first quarter, down 34% as compared to the first quarter of 2023, with stage counts down 47% over that same period. Revenue was down 21% as compared to the fourth quarter of 2023, with stage counts down 32% over that same period.
Stuart went into significant detail as to the dynamics in the completion space, and Ranger has initiated reporting of service line detail for this segment. Going forward to add greater clarity to our financial performance. We have seen year over year growth in both production and pumpdown services, and we'll be focused on continuing that growth in 2024.
In our Ancillary Services segment, revenue was $24.4 million in the first quarter, down $5.7 million or 19% from $30.1 million in the prior year period and down 21% from the prior quarter. Contributing most significantly to the declines was a reduction in operational activity in the coiled tubing service line affecting both operating income and adjusted EBITDA.
Revenues have been improving in both March and April, along with profitability in response to reductions in Marlin activity levels and to better align the business and drive further efficiencies. Ranger completed an extensive review of all fixed costs within the Company, including direct operational costs and direct operational and administrative costs, as well as corporate costs.
Through this review, Ranger was able to identify approximately $4 million of annualized savings efficiencies with $3 million of those savings associated with personnel reductions and another $1 million in support and service related costs. These reductions will align more closely with the new operating levels anticipated in wireline completions and allow for improved leverage going forward as revenues continue to ramp during the year.
Turning to the balance sheet, we remain in pristine financial health and ended the first quarter with zero net debt. Once more, we posted cash from operating activities of $12 million during the first quarter as we were able to further improve collections and saw a reduction in working capital.
Capital expenditures of $6.5 million was slightly elevated as we continued to take delivery of assets associated with our new contract announced in 2023 and upgraded certain talk coil tubing assets. We expect capital expenditures will decline slightly in the back half of the year.
Free cash flow for the quarter was $5.5 million and we bought back over $8.5 million worth of Ranger shares aggressively repurchasing when we saw an economic opportunity to do so.
Finally, we ended the quarter with $66.5 million in liquidity, consisting of $55.4 million of capacity on our revolving credit facility and $11.1 million of cash on hand, we are committed to maintaining the highest degree of financial flexibility so that we can always act in the best interest of our shareholders.
Looking ahead to the remainder of 2024, we expect modest growth in our high-specification rig business and ancillary segment, while anticipating flat operator activity levels for the year. We will continue to focus on expanding our production and pumpdown service lines within the wireline side versus segment and believe this segment can as a whole return to very modest profitability in the second quarter.
Although further wireline revenue declines could occur on a consolidated basis, we believe the improving trend we saw in March, financials will continue in the coming months, providing for a return to more normalized levels of profitability. Our business will continue to prioritize high conversion of EBITDA to free cash flow, which will provide the means for returning meaningful capital to our shareholders.
With that, we will turn the call back over to the operator for questions.

Question and Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Don Crist, Johnson Rice.

Don Crist

Vaughan and Stuart and Melissa, I hope you're doing well, what I've done are you aware of that and done. Well, I wanted to start with Torrent. You know, you haven't really talked about it too much over the past year or two and a lot has been made over the shift to DGB. and natural gas usage in the Permian in particular. I was just wondering if you could kind of walk through what kind of segment you're or what kind of services you're providing there? And is this scrubbing field gas, et cetera, can be used for completions? Just anything you can give us on the Torrid side?

Stuart Bodden

Yes, sure. Thanks for the question, Dan. The bulk of our offering on the Torrent service line is until gas processing using MR used mechanical refrigeration units. And that is for scrubbing and field gas knocking out the liquids out in the field. We actually have a pretty pretty exciting kind of pilot we're running right now. We're out in the Permian as scrubbing gas, and that's actually going into a microgrid and also going to a dual fuel frac fleet at the same time on the region that we're pretty excited about. That is obviously, if we can do processing for until gas and actually haven't go into frac, we're into into a power generation, it's a pretty exciting opportunity. So yes, we're starting to see a lot more inbounds on that. We made some changes to the to the sales organization inside of that about six months ago that we think are really starting to bear some fruit. So cautiously optimistic on that.

Don Crist

I appreciate that color. And one on the high spec rig side, it was unfortunate what happened in the first quarter, which would caused some slowdowns there one-time in nature, obviously. But given that the recent industry consolidation and the events that occur or are you gaining any market share in certain geographic regions? Or are you kind of it's the same place where you were before. Just curious as to if that, that's it, operator, those that had the issue has been displaced or not?

Stuart Bodden

Yes, we do feel like that. We are slowly gaining share in a couple of regions. It's amazing some of these things take time. Obviously, the incident that occurred was the unfortunate incident that occurred at sort of taking a little bit of time to work its way through the system. But I think we do feel like that. Ultimately, it's a it's potentially an opportunity for us but again, just takes a little bit of time to work through the system.

Don Crist

Okay. And all of those costs that were incurred and that has been reversed now, right? So the second quarter should return fairly back to normal?

Stuart Bodden

Yes, we are expecting the second quarter to return back to normal levels.

Don Crist

With that, I'll turn it back and get back into.

Stuart Bodden

Thanks Great. Thanks, Dan.

Operator

John Daniel, Daniel Energy Partners.

John Daniel

Good morning to have specialists including me. Stuart, just a question. I mean when you look at the strength of the well service business, certainly relative to a lot of other segments out there and frankly also sort of the safety incident that impacted one of your peers and customers. I'm curious and maybe it's too bold to meet assets, but are as are there actually chances for you to continue raising prices this year? Just given the quality difference and service?

Stuart Bodden

No, I'd love to tell you the answer is yes, I think right now it's difficult to say for and be able to kind of raise price meaningfully.
I do think kind of back to Dan's question, we are getting more in balance as a result of some operators thinking about shifting around our contractors and ultimately, there could potentially come a point where as things tighten up, there's an opportunity right now, we're holding at holding it steady or I'm sorry.

John Daniel

Okay.nAnd then Exa. And then just given the strength of your balance sheet and so forth. There is now the right time to do the smaller tuck-in deals. And on the workover rig side, just it would seem to lend itself well to more consolidation and an already strong market.

Stuart Bodden

We have started to look at some smaller players. Again, I think that we're very conscious when we do that of asset quality. We yes, as we've said there, we do have opportunities as we gain some share to to pull some additional equipment off the fence and bring that into the market so on small players, we're very, very focused on asset quality more than anything.

John Daniel

Okay. That's all I got. Thank you for including me, our.

Operator

Thanks. (Operator Instructions) John Kernan, Dialectic Capital.

John Kernan

Thanks for taking the question. Is you have to merge them morning. So it looked like some of your share repurchasing was kind of on a on a trend line. And so although you did a nice job and you bought back 10% of your shares over the last year. The recent couple of quarters looked like they were trending more towards a 20% type number. I appreciate the opportunistic nature of it. Your stock price is really cheap right now. And just help us understand how you're thinking about that in the present either share price dependent level or just in general?

Stuart Bodden

Yes. I'll start off and most obviously chime in. And I think I'd highlight a couple of things. I mean, one, we're obviously very, very committed to returning capital to shareholders. We also feel like that. And yes, our stock is a very good value and I think we have looked at that somewhat opportunistically through the last couple of quarters and I think we'll continue to look at that also say, I think we're very committed as we go forward to continuing to return capital to shareholders. That's a core part of the program.

Melissa Cougle

I would only add to that, John, I think we are also mindful of just sort of our what our cash flows right. And we moved in really aggressively through the end of the year and the beginning of this year. And I think we're going to charge truck, trying to be mindful of, you know what or how much cash we're generating as you know, in light of how much we can repurchase too. So not that one has to match the other, but we're just mindful of how much cash are we generating to be able to sort of move into that space and Amazon Amazon line of sight? Do you see the future cash flows to us?
So I think each deal of it yes, that's an additional consideration.

John Kernan

And although you're kind of you're you're not changing your guidance for the year, right from this call, is that right?

Stuart Bodden

We're not changing guidance, but we're also not giving specific guidance shown on when we at the last call, we said that we thought that the year would be relatively consistent versus last year. And I'd highlight a couple of things. I mean, one is I think we see a very reasonable path to that happening. The completions market and the natural gas markets, as you know, are under a lot of pressure right now. And I think various they are introducing some uncertainty in the market. So I'm hopeful we're not really giving specific guidance right now given some of the uncertainty we see in the market.

John Kernan

And so but plus or minus, you know, there's there's there's uncertainty, but you seemed like a bad quarter with a one-off incident that materially dent your cash flow you're guiding in the next quarter to returning to year-on-year growth in most of your business lines. I assume cash flow would kind of be a similar thing for the next quarter, something?

Stuart Bodden

That's right.

John Kernan

Then like it seems like when somebody asked about M&A, tuck-in acquisitions, you're very mindful of asset quality. And it seems like there's it's going to be very difficult to find something more compelling than your share price right here. Are all of those thoughts, right? Or if not, which which ones aren't?

Stuart Bodden

Yes, no, I have. Yes, I'll say yes, I think I think that is all right. And I think as we again, yes, I think about that Q4 and early part of Q1, we were very aggressive for exactly the reasons you outlined. And so, you know, 65%, you guided to a minimum of 25%, you did 65%.

John Kernan

Great like applause right? Are we sticking with our minimum of 25%. And you know, if you guys continue to see the value in your sharp Sherbrooke cycle you do out here, can we expect something similar? Or is there a reason not to think?

Stuart Bodden

Yes. And yes, agreed.

John Kernan

And so if that ends up being 20% of your shares outstanding this year than great hallelujah Yes.

Stuart Bodden

Yes, that's right for sure.

John Kernan

Okay. Super. I'll get back in queue. Thanks, guys.

Stuart Bodden

Thanks, John.

Operator

(Operator Instructions) And this will conclude our question-and-answer session. I'd like to turn the conference back over to Stuart Bodden for any closing remarks.

Stuart Bodden

Just want to thank everybody for joining the call this morning, and thank you for your continued interest and support of Ranger on, and we will see you on the quarter. Thanks.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.