Helmerich & Payne, Inc. quarterly report, Q2 FY2013

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Helmerich & Payne, Inc. — Q2 FY2013 Form 10-Q

Reporting period: Three and six months ended March 31, 2013. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.

Business context and results

The company provides contract drilling services through U.S. Land, Offshore, and International Land segments. Second-quarter revenue was $838.3 million, up 8.9% year over year; six-month revenue was $1.683 billion, up 12.0%.

Key financial metrics

  • Q2 earnings: Operating income was $232.9 million versus $207.0 million; net income was $151.1 million versus $129.7 million. Diluted EPS was $1.39 versus $1.18.
  • Six-month earnings: Operating income was $473.5 million versus $437.6 million; net income was $310.7 million versus $274.0 million. Diluted EPS was $2.87 versus $2.51.
  • Margins: Q2 operating margin was approximately 27.8% versus 26.9%; net margin was approximately 18.0% versus 16.9%. For six months, operating margin was approximately 28.1% versus 29.1%, and net margin approximately 18.5% versus 18.2%.
  • Cash flow, six months: Operating activities provided $494.3 million, compared with $438.8 million. Capital expenditures were $438.5 million, versus $492.7 million; investing activities used $404.2 million. Cash increased $76.9 million to $173.0 million.
  • Liquidity and debt: Current assets were $932.0 million and current liabilities $304.5 million. Debt totaled $235.0 million, including $40.0 million due within one year. The company had $269.3 million available under its $300 million revolver, with no revolver borrowings; cash less debt was approximately $62 million.
  • Shareholder returns: Dividends declared were $0.15 per share in Q2, versus $0.07 a year earlier; six-month dividends were $0.30 versus $0.14.

Changes versus prior comparable periods

  • U.S. Land revenue and segment operating income rose, and average rig margin per day increased to $15,170 from $13,799. However, utilization fell to 82% from 91%; additional FlexRigs lifted revenue days despite the lower utilization.
  • Offshore segment income increased to $13.7 million from $9.8 million in Q2, with higher utilization and average margin per day. Eight of nine platform rigs were active, compared with six a year earlier.
  • International Land Q2 segment income improved to $13.2 million from a loss of $1.0 million. Higher dayrates, more rigs working, and approximately $5.3 million of early-termination fees contributed.
  • Six-month results included an $8.8 million gain on sale of investment securities. Income also included gains from asset sales: $5.3 million in Q2 and $10.5 million for six months, compared with $7.8 million and $12.5 million, respectively, in the prior-year periods.
  • Depreciation and general and administrative expense increased. Management attributed higher G&A primarily to salaries, bonuses, stock compensation, and employee growth.

Outlook, risks, and contingencies

  • Management estimated fiscal 2013 capital spending of $850 million and said cash generation, available cash, and the credit facility should be sufficient to fund operations and estimated spending, while cautioning that cash flow and financing availability are not assured.
  • Contract drilling backlog was $3.3 billion at March 31, 2013, down from $3.6 billion at September 30, 2012. Approximately 74.3% was not reasonably expected to be filled in fiscal 2013. Backlog is subject to customer termination rights, rig delivery and performance conditions, and vendor supply risks.
  • After quarter-end, the company announced contracts to build and operate two FlexRigs and an agreement to build a 3,000-horsepower AC-drive rig for anticipated International Land operations in spring 2014. It completed 17 contracted FlexRigs during the six months and three more by the end of April.
  • Rig-construction purchase commitments were approximately $118.4 million. Management expected approximately $2.1 million of pension contributions for fiscal 2013.
  • The company continued to pursue claims related to Venezuela’s 2010 seizure of 11 rigs. It reported an arbitration effort to recover an aggregate $50 million from an unaffiliated third party, but stated that recovery timing, amount, and likelihood could not be determined. No contingent gain was recorded.
  • A U.S. Attorney’s investigation into offshore rig testing irregularities remained ongoing; the company said it was cooperating and could not assure the timing or outcome. The filing text also refers to a former employee pleading guilty in August 2013, a date after the stated May 3, 2013 filing date; verify this chronology against the original filing.
  • Other stated risks include oil and gas market conditions, early contract termination, receivable collection, rig-component availability and delivery, operational incidents, regulation, weather, foreign exchange, and political or expropriation risks in international markets. Management said pending ordinary-course legal actions were not expected to materially affect the company.

Important facts for investors to verify

  • Whether lower U.S. Land utilization persists and how it affects rig margins and earnings.
  • Execution of the $850 million fiscal-year capital program, rig deliveries, and contracted backlog conversion.
  • The timing and repayment source for the $40 million debt maturity in July 2013, and continued compliance with credit covenants.
  • Any material developments in the Venezuela claims and the offshore testing investigation; confirm the filing’s future-dated reference to an August 2013 guilty plea.
  • The valuation and concentration risk of the company’s investment securities, which had a reported fair value of $492.8 million at March 31, 2013.