Business context and reporting period
Helmerich & Payne, Inc. is a contract drilling company with U.S. Land, Offshore, and International Land operations. This unaudited Form 10-Q covers fiscal first-quarter 2017, the three months ended December 31, 2016, and compares results with the quarter ended December 31, 2015. Unless noted otherwise, amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $368.6 | $487.8 |
| Operating income (loss), continuing operations | ($49.2) | $38.7 |
| Net income (loss) | ($35.1) | $16.0 |
| Diluted earnings (loss) per share | ($0.33) | $0.15 |
| Operating cash flow | $70.7 | $308.2 |
| Capital expenditures | $82.1 | $114.5 |
| Cash dividends paid | $76.2 | $74.6 |
- Cash and cash equivalents were $825.9 at December 31, 2016, down from $905.6 at September 30, 2016. Short-term investments were $45.3; total current assets were $1,445.3 and current liabilities $286.6.
- Cash declined $79.7 during the quarter. Operating cash flow less capital expenditures was negative $11.5.
- Debt carrying value was $492.1, representing $500.0 principal on 4.65% unsecured notes due March 2025. There were no revolver borrowings; $259.7 was available under the $300.0 facility after letters of credit. The company reported compliance with debt covenants.
- Quarterly operating loss equaled approximately 13.3% of revenue, versus operating income of approximately 7.9% of revenue a year earlier. The effective tax rate was 34.6%, compared with 54.1%; the quarter included an $18.3 tax benefit.
- Other comprehensive income was $12.8, largely reflecting $12.4 of after-tax unrealized appreciation on securities.
Material changes versus the prior comparable period
- Revenue fell 24%, and results shifted from profit to loss, primarily amid lower drilling activity and customer spending following the oil-price downturn.
- U.S. Land revenue declined to $263.6 from $369.8; segment operating results moved to a $30.9 loss from $55.5 income. Revenue days fell 18%, utilization decreased to 31% from 39%, and average rig revenue per day declined to $24,788 from $28,651. Stacked-rig fixed costs and start-up costs pressured expenses.
- Offshore revenue decreased to $33.8 from $41.9 and utilization fell to 78% from 89%; segment operating income was $6.8 versus $7.7. Higher average revenue and margin per day partly offset fewer revenue days.
- International Land revenue decreased to $68.0 from $72.2, but segment results improved to $0.8 income from a $6.7 loss. The prior-year quarter included $8.5 of foreign-currency losses; the current quarter included $1.4 of foreign-currency losses company-wide.
- Operating cash flow was substantially lower, reflecting the net loss, tax-related changes, and less favorable working-capital movements. The prior-year comparison also included different working-capital and deferred-tax effects.
Outlook, risks, contingencies, and unusual items
- Management expected U.S. Land utilization to increase in fiscal Q2 as rigs returned to work. U.S. Land contracted rigs increased from 127 at December 31 to 140 at January 26, 2017. Expected U.S. Land early-termination revenue for Q2 was approximately $6.0.
- Five International Land rigs received early-termination notices in December; revenue days were expected to decrease significantly in Q2. The company expected to recognize related early-termination revenue in Q2 or Q3.
- Fiscal 2017 capital spending was estimated at approximately $350. Management expected cash and operating cash flow to fund operating needs, interest, dividends, and estimated capital spending, while cautioning that market conditions could constrain cash generation.
- Contract drilling backlog was $1.5 billion at December 31, down from $1.8 billion at September 30. Approximately 55.2% was not reasonably expected to be filled in fiscal 2017. Backlog depends on customers’ ability to perform and may be reduced by contract termination or other circumstances.
- Management expected an effective tax rate of 32%–33% for each of the remaining fiscal 2017 quarters. The company completed one new FlexRig during the quarter.
- A $72.0 settlement in the Keel litigation, accrued at September 30, 2016, was paid by the company and insurers in December. The filing reports no material adverse impact expected from other ordinary-course legal matters, subject to uncertainty.
- The company continues to seek damages related to Venezuela’s 2010 expropriation of 11 rigs and related property; timing, amount, and likelihood of any recovery remain uncertain, and no gain was recognized. The filing also notes possible further Department of Interior consideration related to a previously resolved DOJ matter.
- Principal risks include oil and gas price volatility and its effect on customer activity, contract termination and backlog realization, foreign political and currency risks, and operational, regulatory, litigation, and collection risks. International operations generated 18.5% of revenue; 84.5% of international revenue came from South America.
Important facts for investors to verify
- Whether the increase in contracted U.S. Land rigs translated into sustained utilization, dayrates, and improved segment profitability.
- Timing and amount of early-termination revenue, particularly for the five International Land rigs, and the related expected decline in revenue days.
- Whether the $1.5 billion backlog converts to revenue as expected, considering termination provisions and customer creditworthiness.
- Cash generation relative to the $350 million fiscal-year capital-spending estimate and continued dividend payments.
- Potential effects of foreign-currency movements and political or regulatory developments, including the unresolved Venezuela claim and DOI matter.
- The reported $492.1 debt carrying value, revolver availability, and covenant compliance; also distinguish the $500.0 million principal amount from its carrying value.