Helmerich & Payne, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, three months ended December 31, 2019; comparisons are with the three months ended December 31, 2018, unless otherwise noted. Amounts are in U.S. dollars.
Business context and operating position
H&P provides contract drilling services and drilling technologies through U.S. Land, Offshore, International Land and H&P Technologies segments. At quarter-end, its fleet comprised 338 rigs; 219 were contracted, including 142 on fixed-term contracts and 77 working well-to-well. Management emphasized technology, safety, operational performance and reliability.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Operating revenue | $614.7 million | $740.6 million |
| Operating income from continuing operations | $31.4 million | $54.3 million |
| Operating margin from continuing operations | 5.1% | 7.3% |
| Income from continuing operations | $30.7 million | $8.4 million |
| Net income | $30.6 million | $19.0 million |
| Diluted earnings per share | $0.27 | $0.17 |
| Cash provided by operating activities | $111.8 million | $209.5 million |
| Capital expenditures | $46.0 million | $196.1 million |
Revenue declined 17.0% and operating income declined 42.2%. Higher net income despite weaker operating results reflected, in part, a $14.96 million gain on the TerraVici subsidiary sale and a $2.82 million investment-securities gain; the prior-year quarter included a $42.84 million investment-securities loss. The effective tax rate on continuing operations was 31.5%, versus 13.9%.
At December 31, 2019, cash and cash equivalents were $355.0 million and short-term investments were $57.0 million. Long-term debt, net, was $479.4 million, consisting of 4.65% senior notes due 2025. The $750 million revolving credit facility was undrawn and available; H&P reported compliance with debt covenants. The filing reports a 10.9% long-term debt-to-total-capitalization ratio. The quarterly dividend paid was $0.71 per share; another $0.71 dividend was declared for payment in March 2020.
Material changes and segment trends
- U.S. Land: Revenue fell 17.9% to $508.8 million; segment operating income fell 25.2% to $56.7 million. Revenue days declined 19.4%, and utilization was 64% versus 68%; average rig revenue per day increased 1.4% to $25,405.
- Offshore: Revenue rose 9.1% to $40.3 million, but segment operating income declined 11.7% to $6.3 million. Six of eight available platform rigs were contracted at quarter-end; this fell to five in early January.
- International Land: Revenue declined 29.9% to $46.5 million and segment operating income declined 53.0% to $3.1 million, reflecting lower activity and average revenue per day.
- H&P Technologies: Revenue increased 25.9% to $18.6 million; segment operating loss narrowed to $4.6 million from $6.4 million.
- Operating cash flow declined year over year, which management attributed primarily to lower activity and unfavorable working-capital timing, including the timing of legal settlements. Capital spending fell mainly because of fewer super-spec rig upgrades.
Outlook, risks and unusual items
- Management set the fiscal 2020 capital expenditure budget at $275 million to $300 million, compared with $458.4 million in fiscal 2019. It expected customer budgets to remain disciplined and did not anticipate sizeable activity increases during 2020, although spending was expected to support activity above late-2019 levels.
- Contract drilling backlog was approximately $1.1 billion at December 31, 2019, down from $1.2 billion at September 30, 2019. About 37.4% was expected to be fulfilled in fiscal 2021 and thereafter. Backlog excludes anticipated renewals and may change because customers can cancel or modify contracts.
- H&P sold TerraVici in December 2019 for approximately $15.1 million, recording a gain of approximately $15.0 million. The company said the sale was not a strategic shift and would not materially affect future operations.
- Argentina’s currency controls restricted the company’s ability to remit funds; cash held in Argentina was $30.5 million at quarter-end. The filing also identifies foreign-exchange, political and operating risks in international markets, alongside volatile commodity prices, customer spending, rig utilization, contract termination and potential asset impairment risks.
- H&P adopted lease accounting guidance on October 1, 2019, recognizing a $52.2 million operating lease right-of-use asset and corresponding liability at quarter-end. The company also began using a wholly owned insurance captive; related estimated underwriting expenses were approximately $8.5 million for the quarter.
- The company’s lawsuit seeking damages for the 2010 seizure of its Venezuelan drilling business remained pending; the timing, amount and likelihood of any recovery could not be determined. Management reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether rig activity, utilization and dayrates stabilize or further weaken, particularly in U.S. Land operations.
- How much of the reported backlog is ultimately realized, given customer cancellation and modification rights.
- Whether operating cash flow can support the dividend and planned capital spending as activity and working capital change.
- Progress against the $275 million to $300 million fiscal 2020 capital expenditure budget and the expected customer spending environment.
- Developments in Argentina’s currency restrictions and the Venezuelan expropriation litigation.
- Whether the new insurance captive’s claims estimates and lease-related obligations change materially.