Business context and reporting period
Helmerich & Payne, Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2017, the third quarter of its fiscal year. The company provides contract drilling services through U.S. Land, Offshore and International Land segments.
Financial performance and position
- Third-quarter revenue: $498.6 million, up 36% from $366.5 million a year earlier. Continuing-operations net loss was $23.1 million, or $0.22 per diluted share, versus a $21.2 million loss, or $0.20 per share.
- Nine-month results: Revenue was $1.272 billion, down from $1.293 billion. Net loss was $105.7 million, or $0.99 per diluted share, compared with net income of $16.0 million, or $0.13 per diluted share, in the prior-year period.
- Operating results: Continuing-operations operating loss was $28.0 million for the quarter and $142.9 million for the nine months. Operating costs rose substantially year over year, while lower early-termination revenue reduced revenue quality versus the prior-year comparison.
- Cash flow: Nine-month operating cash flow was $236.1 million, versus $615.4 million. Capital expenditures were $300.3 million, producing operating cash flow less capital expenditures of approximately negative $64.1 million. Cash declined $332.8 million to $572.8 million.
- Liquidity and debt: Current assets were $1.250 billion and current liabilities $333.9 million. Long-term debt, net of discount and issuance costs, was $492.6 million; the company had no revolver borrowings and $261.2 million available under its $300 million facility after letters of credit. It reported compliance with debt covenants.
- Dividends and equity: Dividends declared were $0.70 per share for the quarter; $229.1 million of dividends were paid during the nine months. Shareholders’ equity was $4.250 billion at June 30.
Material changes versus the prior comparable period
- U.S. Land activity recovered: quarterly utilization increased to 52% from 24%, and revenue days rose to 16,577 from 7,483. However, average rig revenue per day excluding early-termination revenue fell to $21,676, and the segment shifted from $25.8 million operating income to a $8.0 million loss.
- Early-termination revenue fell sharply: $5.1 million in the quarter versus $80.7 million, and $24.8 million for nine months versus $189.2 million. U.S. Land revenue per day was pressured by lower pricing on recently contracted rigs and expirations of higher-rate legacy contracts.
- Offshore quarterly segment operating income increased to $6.5 million from $2.1 million, despite lower utilization; higher dayrates on certain rigs improved margins. International Land moved to $4.9 million of quarterly operating income from a $5.0 million loss, while its nine-month loss narrowed to $5.2 million from $13.9 million.
- Nine-month capital expenditures increased to $300.3 million from $219.5 million. Cash-flow reduction also reflected the net loss, deferred-tax changes and less favorable working-capital movements.
- The company completed its MOTIVE Drilling Technologies acquisition on June 2 for $74.3 million cash, with potential earnout payments of up to $25 million. Preliminary accounting recorded $51.0 million of developed technology and $47.2 million of goodwill.
Outlook, commentary and risks
- Management estimated fiscal 2017 capital spending at approximately $400 million, potentially higher depending on upgrade timing, up from its prior $350 million estimate. The estimate excludes the MOTIVE acquisition.
- Management expected U.S. Land utilization to increase in the fourth fiscal quarter as rigs returned to work. At June 30, 190 of 350 U.S. Land rigs were contracted; 189 were contracted as of July 27. Expected fourth-quarter early-termination revenue was approximately $4.6 million.
- Contract drilling backlog was $1.4 billion at June 30, down from $1.8 billion at September 30, 2016; approximately 84% was not reasonably expected to be filled in fiscal 2017. Backlog may not be realized because of customer termination rights, performance provisions and customer credit risks.
- Management expected the fiscal 2017 effective tax rate to be 32%–33%. The expected rate for the remaining quarter was 31%–32%.
- Key exposures include oil and gas price volatility and resulting customer spending, contract repricing and termination, foreign political and currency risks, and operational, environmental and regulatory matters. International operations generated 12.4% of nine-month revenue, with about 90% of international revenue from South America.
- The company continues to seek recovery for the 2010 Venezuelan expropriation but cannot estimate timing, amount or likelihood. A separate Department of Interior review related to previously resolved DOJ proceedings had no assured outcome. Management also cited foreign-exchange losses of $3.3 million for the nine months.
- Management had not quantified the impact of adopting new revenue-recognition guidance, expected in fiscal 2019. It also early adopted the revised goodwill impairment guidance on June 30, with no reported financial-statement impact.
Important facts for investors to verify
- Whether higher rig utilization translates into improved dayrates and sustained positive U.S. Land segment profitability.
- Whether the $400 million capital-spending estimate and rig-upgrade program can be funded while maintaining cash, dividends and liquidity.
- How much reported earnings and cash flow depend on asset-sale gains, early-termination receipts and other non-recurring items.
- The conversion and durability of the $1.4 billion backlog, including the fixed-term versus spot-market mix and customer termination exposure.
- The final MOTIVE purchase-price allocation, realized technology benefits and any earnout payments.
- Developments in Venezuela-related recovery efforts, the DOI matter, and foreign-currency and political risks.