Helmerich & Payne, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 30, 2010; filed August 5, 2010. Fiscal third-quarter results are compared with the quarter ended June 30, 2009. Dollar amounts below are in millions unless noted.
Business context and financial performance
The company provides contract drilling services through U.S. Land, Offshore, and International Land operations. Venezuelan operations were classified as discontinued operations after the government seized the subsidiary’s rigs and related assets on June 30, 2010.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $483.4 | $384.4 | $1,316.2 | $1,485.5 |
| Operating income from continuing operations | $111.5 | $106.2 | $318.6 | $518.4 |
| Income from continuing operations | $64.9 | $68.0 | $202.8 | $325.6 |
| Discontinued-operations loss | $(101.6) | $(15.0) | $(129.5) | $(23.5) |
| Net income (loss) | $(36.7) | $53.0 | $73.3 | $302.1 |
| Diluted EPS, continuing operations | $0.61 | $0.64 | $1.89 | $3.05 |
| Diluted EPS, net | $(0.34) | $0.50 | $0.68 | $2.83 |
Operating margin from continuing operations was approximately 23.1% in Q3 2010 versus 27.6% in Q3 2009, and 24.2% for the nine-month period versus 34.9%. Q3 revenue growth did not translate into higher continuing net income, reflecting costs, taxes, and segment mix; the reported net loss was driven chiefly by Venezuela-related discontinued operations.
Cash flow, liquidity, debt, and capital
- Nine-month operating cash flow was $333.0, down from $734.5; management attributed the decrease mainly to lower earnings and working-capital movements, including higher receivables as drilling activity improved.
- Investing cash outflow was $201.5, including $220.2 of capital expenditures, compared with $743.7 of investing outflow and $734.5 of capital expenditures in the prior-year period.
- Financing cash outflow was $150.0. Debt was reduced by $135.0 during the nine months; cash declined to $77.7 at June 30, 2010 from $96.1 at September 30, 2009.
- Total debt was $390.0, down from $525.0 at fiscal year-end. The $400 million unsecured credit facility had $338.1 available at June 30 after borrowings and letters of credit; subsequent to quarter-end, the company reported $348.1 available. It was in compliance with debt covenants.
- Current assets were $549.3 and current liabilities $211.0 at June 30. The filing does not present a separate management-defined liquidity ratio.
- Contract drilling backlog was $2.68 billion at June 30, up from $2.53 billion at September 30, 2009; 89.3% was not expected to be filled in fiscal 2010. Backlog is subject to customer termination rights, delivery conditions, and execution risks.
Material changes and operating trends
- Q3 U.S. Land revenue rose to $367.0 from $282.4, with utilization increasing to 76% from 51%. Average revenue per day fell to $23,690 from $28,325, partly because prior-year early termination and delayed-delivery revenue was higher. Nine-month U.S. Land segment operating income declined to $285.4 from $483.6.
- Q3 Offshore revenue was $53.1 versus $55.6 and segment operating income was $11.2 versus $12.7; utilization fell to 78% from 93%. Management estimated the deepwater drilling moratorium reduced Q3 segment operating income by about 3% through lower standby rates.
- Q3 International Land revenue increased to $60.0 from $43.9 and segment operating income to $9.9 from $6.5, with more rigs working. Nine-month utilization was lower year over year, while segment operating income increased to $32.8 from $20.5.
- Nine-month revenue declined 11.4%, while continuing operating income fell 38.6%. U.S. Land dayrates and lower FlexRig termination/delivery-delay revenue weighed on results. The prior-year period also included $10.1 of equity-method income from an affiliate.
Outlook, unusual items, and risks
- Management raised its fiscal 2010 capital-expenditure estimate by $20 million to $350 million, mainly for higher maintenance needs as activity increased. It stated that operating cash flow, cash on hand, and credit facilities should be sufficient to fund operations and estimated fiscal 2010 expenditures, while cautioning that future cash generation and financing are not assured.
- Venezuela’s June 30 decree authorized the forced acquisition of eleven rigs and seizure of related property. The company wrote off $65.0 of property and equipment and $5.1 of inventory, recorded about $10.7 net write-offs of receivables, payables, and deferred items, and impaired approximately $21.8 of local cash. It reported $31.3 of cash balances in Venezuela, including restricted cash for remaining local obligations; the amount recoverable or transferable is uncertain.
- Venezuela’s January 2010 currency devaluation generated a $19.7 exchange loss in discontinued operations. The company is evaluating possible remedies or recoveries but recognized no gain because timing, amount, and likelihood are uncertain.
- A former customer’s lawsuit alleges deficient drilling performance and seeks actual and punitive damages. The company said the outcome and potential loss could not be estimated; trial was scheduled for late August 2010. Management warned an adverse result could materially affect financial condition and results.
- Other considerations include international political and currency risks, customer contract cancellations, collection risk, adverse weather, and dependence on limited-source rig-component suppliers. Outstanding rig-construction purchase commitments were approximately $46.9.
- General and administrative expense increased, including $4.7 of additional stock-compensation cost from a plan amendment permitting continued vesting after retirement eligibility. Available-for-sale equity securities had a reported fair value of $257.7 at June 30; nine-month other comprehensive income included $82.1 of unrealized securities depreciation before related tax effects.
Important facts for investors to verify
- Whether any compensation or other recovery is obtained for the Venezuelan seizure, and what portion of local cash can be accessed or remitted.
- The outcome and potential financial exposure of the customer lawsuit, for which the filing provides no loss estimate.
- Whether the $2.68 billion backlog converts to revenue as scheduled, given termination rights, rig delivery delays, and supplier constraints.
- Actual fiscal 2010 capital spending versus the $350 million estimate, and cash flow and debt levels as rig activity changes.
- How the offshore drilling moratorium, U.S. Land dayrates, and international political and currency conditions affect utilization and margins.