Helmerich & Payne, Inc. annual report, FY2017

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Helmerich & Payne, Inc. — FY2017 Form 10-K

Reporting period: Fiscal year ended September 30, 2017. The filing also reports fourth-quarter results. The company provides contract drilling services through U.S. Land, Offshore and International Land segments, alongside smaller real estate and drilling-technology businesses.

Financial and operating performance

  • Revenue: $1.805 billion, up 11% from $1.624 billion in FY2016. Early termination revenue fell to $29.4 million from $219.0 million, so the increase excluding that revenue was $370.1 million.
  • Profitability: Operating loss was $172.5 million versus $26.0 million in FY2016; net loss was $128.2 million, or $1.20 per diluted share, versus $56.8 million, or $0.54 per share. FY2017 included a $56.7 million income-tax benefit. The filing does not provide a single adjusted profit measure excluding unusual items.
  • Fourth quarter: Revenue was $532.3 million, operating loss $29.7 million and net loss $22.5 million.
  • Cash flow and investment: Operating cash flow was $357.2 million, down from $753.6 million. Capital expenditures were $397.6 million, implying cash flow after capital expenditures of approximately negative $40.4 million. FY2018 capital spending was estimated at $250–$300 million.
  • Liquidity: Cash and cash equivalents were $521.4 million and short-term investments $44.5 million at year-end. The current ratio was 3.6, compared with 4.8 in FY2016. The $300 million revolving credit facility had no borrowings and $261.2 million available, after letters of credit.
  • Debt: Long-term debt had a $492.9 million carrying value, representing $500 million of 4.65% senior notes due 2025. Long-term debt to total capitalization was 10.6%; the company reported compliance with debt covenants.
  • Dividends: The company paid $2.80 per share, totaling $305.5 million. The board may reduce or suspend future dividends.

Material changes versus FY2016

  • Revenue days and U.S. Land utilization recovered: U.S. Land utilization rose to 45% from 30%, and contracted rigs at year-end increased to 218 from 118. However, the average U.S. Land rig revenue per day fell 27.9% to $22,607, while start-up costs for reactivating more than 100 FlexRigs contributed to higher operating expenses.
  • U.S. Land revenue rose 15.9% to $1.440 billion, but the segment swung to a $94.9 million operating loss from $74.1 million income. Offshore operating income improved to $24.2 million from $15.7 million; International Land’s operating loss narrowed to $7.2 million from $14.1 million.
  • Cash flow declined while capital expenditures increased. Cash also fell to $521.4 million from $905.6 million, partly reflecting investment spending, the acquisition and dividends.
  • In June 2017, the company acquired MOTIVE Drilling Technologies for $74.3 million in cash, with up to $25.0 million in potential earnout payments. MOTIVE contributed $3.3 million of revenue and a $2.2 million net loss in FY2017.

Outlook, risks and unusual items

  • Management cited an industry recovery in 2017 and said its advanced rig fleet, customer base and backlog position it to pursue opportunities. It cautioned that commodity prices, customer spending, excess rig supply and day-rate competition remain key uncertainties; no specific earnings or utilization guidance was provided.
  • Contract drilling backlog was $1.3 billion at September 30, 2017, down from $1.8 billion. About 41.7% was not reasonably expected to be filled in FY2018. Backlog may not be realized if customers terminate contracts or fail to pay termination fees.
  • FY2017 included $20.2 million of after-tax income from early terminations and $14.3 million of after-tax gains on asset sales. No rig impairment charge was recorded in FY2017; prior charges were $6.3 million in FY2016 and $39.2 million in FY2015.
  • Foreign-currency losses totaled $7.1 million in FY2017, including continued exposure to the Argentine peso. The company self-insures significant portions of liability risks and may not be fully protected by customer indemnities or insurance.
  • Contingencies include a Department of the Interior review related to previously resolved DOJ matters; the company said it did not anticipate further DOI action but could not assure the outcome. A lawsuit seeking recovery for Venezuela’s 2010 expropriation remains unresolved, with recovery timing and amount uncertain. The $72 million Keel injury settlement was accrued in FY2016 and paid in December 2016 by the company and insurers.
  • The company expects to adopt new revenue and lease accounting standards in future periods; it did not expect the revenue-standard adoption to materially affect total revenue or operating income based on its assessment to date.

Important facts for investors to verify

  • Whether improving rig activity translates into stronger day rates and operating profitability, especially in U.S. Land.
  • Whether backlog converts to revenue and whether customers meet contract and early-termination obligations.
  • Whether operating cash flow can support planned capital spending and dividends, and how liquidity changes as activity recovers.
  • The outcomes and potential financial effects of the DOI review, Venezuela litigation, and self-insured claims.
  • The performance and earnout obligations of the MOTIVE acquisition, and the value of the company’s marketable securities.