Business context and reporting period
Helmerich & Payne, Inc. (NYSE: HP) provides contract drilling services and drilling technologies. This unaudited Form 10-Q covers the three and nine months ended June 30, 2019, the company’s fiscal third quarter. Its reporting segments are U.S. Land, Offshore, International Land and H&P Technologies.
At quarter-end, H&P had 338 drilling rigs and 236 contracted rigs, down from 259 contracted rigs at September 30, 2018. The filing reports 155 fixed-term and 81 well-to-well contracts overall.
Financial performance and liquidity
Amounts below are in millions, except per-share data and operating statistics.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $688.0 | $648.9 | $2,149.4 | $1,790.4 |
| Operating income (loss) | $(167.9) | $6.3 | $(18.4) | $8.8 |
| Net income (loss) | $(154.7) | $(8.0) | $(74.8) | $480.2 |
| Diluted EPS | $(1.42) | $(0.08) | $(0.71) | $4.35 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $659.4 | $371.4 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $403.6 | $322.7 |
Q3 reported operating loss included a $224.3 million asset impairment; excluding that charge, management reported U.S. Land operating income of $78.7 million and International Land operating income of $2.4 million. Q3 U.S. Land average rig margin was $10,953 per day, up 25% year over year; Offshore average rig margin was $12,421 per day, versus $4,686; International Land margin was $8,019, down 20%.
At June 30, cash and cash equivalents were $334.8 million, short-term investments $45.7 million, and long-term debt, net, $491.7 million. The company had no revolver borrowings and $740 million available under its $750 million revolving facility; it reported compliance with debt covenants. Nine-month dividends paid were $235.1 million, or $2.13 per share. Operating cash flow less capital expenditures was approximately $255.8 million.
Material changes versus the prior comparable period
- Revenue increased 6% in Q3 and 20% for the nine-month period. Nine-month U.S. Land revenue days rose 11%, and average rig revenue per day rose 12%.
- Reported earnings deteriorated sharply, principally because of the $224.3 million impairment of excess capital spares and drilling support equipment following a decision to reduce the marketed FlexRig4 fleet. The charge comprised $216.9 million in U.S. Land and $7.4 million in International Land.
- Investment securities generated a $13.3 million Q3 loss and $50.2 million nine-month loss after adoption of accounting guidance requiring equity-investment fair-value changes to be recognized in net income. The portfolio’s quarter-end fair value was $32.2 million.
- Nine-month 2018 net income included a $492.2 million discrete tax benefit, largely associated with U.S. tax reform; this makes year-over-year net income comparisons less representative of underlying operations.
- International Land revenue declined 9% for the nine months, while H&P Technologies revenue increased 74% but the segment continued to report an operating loss.
Outlook, management commentary and risks
- Management reduced its fiscal 2019 capital expenditure outlook from an initial $650–$680 million to $500–$530 million, citing customer spending uncertainty and a more moderate expected pace of super-spec upgrades.
- Management expected rig demand to remain relatively moderate for the rest of fiscal 2019 and reported approximately 30 super-spec FlexRigs stacked at June 30. It said six of eight available offshore platform rigs were under contract.
- Contract drilling backlog was $1.6 billion at June 30, up from $1.2 billion at September 30, 2018; about 72% was expected to be fulfilled in fiscal 2020 and thereafter. Backlog is subject to customer cancellation or modification and excludes anticipated renewals.
- Management planned to deploy a super-spec FlexRig to Argentina in fiscal Q4 2019 and had a letter of intent for a second rig for fiscal 2020. Argentina’s currency, inflation and repatriation risks remain relevant; the company recorded a $4.6 million foreign-currency loss for the nine months.
- Other key risks include volatile oil and gas prices, changes in customer capital spending and rig demand, contract termination, operational and insurance exposures, and uncertain recovery from Venezuela-related litigation. No recovery was recognized, and its timing and amount are uncertain.
- The company paid $21 million to settle a personal-injury lawsuit during the nine-month period. It also reported $21.8 million of equipment and supply purchase commitments.
Important facts for investors to verify
- How much of the reported loss reflects the noncash impairment and investment remeasurement, and whether further asset write-downs may be needed.
- Whether contracted-rig counts, utilization, dayrates and backlog convert into revenue and cash flow, considering customer termination rights.
- Whether fiscal 2019 capital spending stays within the revised $500–$530 million range while supporting maintenance and rig reactivations.
- Whether operating cash flow can sustain capital needs and dividends if drilling activity or customer spending weakens.
- How Argentina currency and operating conditions, Venezuela contingencies, and other legal or insurance exposures develop.