Helmerich & Payne, Inc. — Form 10-Q Summary
Business context and period: Contract drilling company operating in U.S. Land, Offshore and International Land. This fiscal first quarter covers the three months ended December 31, 2010, compared with the three months ended December 31, 2009. Financial amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q1 FY2011 | Q1 FY2010 |
|---|---|---|
| Revenue | $594.6 | $396.2 |
| Operating income | $170.7 | $105.4 |
| Income from continuing operations | $104.4 | $63.8 |
| Net income | $104.2 | $63.2 |
| Diluted EPS | $0.96 | $0.59 |
| Operating cash flow | $238.7 | $122.3 |
| Capital expenditures | $116.2 | $64.8 |
- Revenue increased about 50%, operating income about 62%, and net income about 65% year over year. Operating margin was approximately 28.7%, versus 26.6%.
- Cash and cash equivalents were $173.8 at December 31, 2010, up from $63.0 at September 30, 2010. Operating cash flow less capital expenditures was approximately $122.4 for the quarter.
- Long-term debt was $350.0, down from $360.0 at September 30; cash less debt was approximately negative $176.2. The $400 million revolving credit facility had no borrowings and $378.1 available, net of letters of credit. The company reported compliance with debt covenants.
- Total assets were $4,465.6 and shareholders’ equity was $2,963.3. Investments were $397.8; available-for-sale equity securities had a reported fair value of $379.7. Their quarter-over-quarter unrealized appreciation contributed $47.8 to other comprehensive income, not net income.
- Quarterly dividend declared was $0.06 per share, compared with $0.05 in the prior-year quarter.
Material changes and operating trends
- U.S. Land: Revenue rose to $476.8 from $285.1; segment operating income increased to $158.4 from $91.5. Utilization improved to 84% from 62%, and revenue days increased to 17,249 from 11,260. Average rig margin per day was essentially unchanged at $13,020 versus $13,030.
- Offshore: Revenue declined to $44.9 from $52.3 and segment operating income to $9.0 from $15.1. Utilization fell to 71% from 85%; average margin per day fell to $18,065 from $24,936.
- International Land: Revenue increased to $69.0 from $55.8 and segment operating income to $14.4 from $11.1. Utilization improved to 76% from 58%.
- U.S. Land growth reflected recovering activity and new FlexRigs. The company reported 193 of 210 U.S. Land rigs generating revenue at quarter-end. Growth in operating cash flow also reflected higher earnings and collection of a $36 million income-tax receivable.
- Discontinued Venezuelan operations produced a $0.2 loss in the quarter, versus a $0.6 loss a year earlier. The Venezuelan government seized the subsidiary’s rigs and related operating assets in June 2010; potential recovery remains uncertain and no recovery gain was recorded.
Outlook, risks and unusual items
- Management increased its fiscal 2011 capital-spending estimate from $600 million to approximately $750 million, citing customer commitments for new FlexRigs and rig-component orders. Four new-rig agreements were announced during the quarter and eight more in January 2011.
- Drilling backlog was $2.591 billion at December 31, up from $2.449 billion at September 30. Approximately 66.7% was not reasonably expected to be filled in fiscal 2011. Backlog is not guaranteed: customer termination rights, performance and delivery conditions, and construction timing may affect revenue realization.
- Management said operating cash flow, cash and credit facilities were expected to be sufficient for fiscal 2011 operations and estimated capital expenditures, while cautioning that future cash generation and financing are not assured.
- There were $117.3 million of outstanding equipment, parts and supply purchase commitments related to rig construction. The company also paid $4.0 million for a TerraVici Drilling Solutions performance milestone, recorded as goodwill.
- Risks cited include oil and gas market and activity fluctuations, contract termination, rig delivery and component-supply disruptions, weather, collection of receivables, foreign currency and political risks, and possible expropriation. International operations represented about 12% of quarterly revenue; the filing highlights concentration in South America and the Venezuelan asset seizure.
- Asset-sale gains contributed approximately $1.7 million after tax in the current quarter, compared with approximately $0.7 million a year earlier. Research and development expense increased to $3.5 million from $1.8 million, principally for rotary-steerable-system development.
Important facts for investors to verify
- Whether U.S. Land utilization, rig margins and dayrates can be sustained as activity and the FlexRig fleet expand.
- Progress, cost and timing of the fiscal 2011 rig-building program against the approximately $750 million capital-spending estimate and component-supply constraints.
- Backlog conversion, including customer termination provisions and the portion expected to be filled in fiscal 2011.
- Offshore utilization and margins, which weakened year over year, and the timing of expected rig restarts.
- Any developments in potential remedies or recovery relating to the Venezuelan seizure; the filing provides no clear estimate of timing, amount or likelihood.
- Liquidity and covenant headroom as capital spending rises, and exposure to market-price changes in the substantial equity-securities portfolio.