Helmerich & Payne, Inc. quarterly report, Q1 FY2016

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Helmerich & Payne, Inc. — Fiscal 2016 Q1 10-Q

Business context and period: The filing covers the three months ended December 31, 2015, compared with the three months ended December 31, 2014. H&P provides contract drilling services through U.S. Land, Offshore and International Land segments. Results reflect a sharp industry downturn amid falling oil prices and reduced customer drilling activity. Comparative 2014 figures were adjusted retrospectively after the company eliminated a one-month reporting lag for foreign subsidiaries.

Financial performance and liquidity

  • Revenue: $487.8 million, down 54.0% from $1.061 billion. U.S. Land revenue fell to $369.8 million from $890.0 million; Offshore to $41.9 million from $69.9 million; International Land to $72.2 million from $96.7 million.
  • Profit: Operating income was $38.7 million versus $330.4 million; net income was $16.0 million versus $203.6 million. Diluted EPS was $0.15 versus $1.86. Operating margin was approximately 7.9%, compared with 31.1%.
  • Cash flow and investment: Operating cash flow was $308.2 million, down from $393.3 million. Capital expenditures were $114.5 million versus $370.0 million; operating cash flow less capital expenditures was approximately $193.7 million. Cash increased by $118.8 million to $848.2 million.
  • Liquidity: Cash and cash equivalents plus short-term investments totaled $895.9 million. The company had $259.7 million available under its $300 million revolving credit facility, with no borrowings and $40.3 million of letters of credit outstanding against the facility.
  • Debt: Debt carrying value was approximately $531.8 million, including $40 million due July 2016 and $500 million of 4.65% notes due 2025. The company reported compliance with debt covenants.
  • Shareholder returns: The declared dividend was $0.6875 per share, unchanged from the prior-year quarter. No shares were repurchased under the public repurchase program during the quarter.

Material changes versus the prior comparable period

  • U.S. Land utilization fell to 39% from 89%, and revenue days declined 56% to 11,945. The segment’s operating income fell to $55.5 million from $318.1 million.
  • Offshore utilization eased to 89% from 98%; segment operating income declined to $7.7 million from $21.7 million, principally as rigs moved to lower standby or special dayrates.
  • International Land moved to a $6.7 million segment operating loss from $10.6 million of income. Utilization fell to 40% from 60%.
  • Interest expense increased to $4.5 million from $0.6 million, primarily reflecting the $500 million notes issued in March 2015. The effective tax rate rose to 54.1% from 38.4%.
  • Backlog declined to $2.7 billion at December 31, 2015, from $3.1 billion at September 30, 2015.

Outlook, risks and unusual items

  • Near-term activity: Management expected U.S. Land utilization to decrease in fiscal Q2 as idled rigs remained idle or were newly released. As of January 28, 2016, 121 U.S. Land rigs remained contracted, excluding rigs being stacked. Two International Land rigs had recently become idle, and management expected segment revenue days to decline in Q2.
  • Early terminations: Q1 included $28.9 million of early termination revenue, versus $23.4 million a year earlier. Based on notices received, the company expected more than $78 million in early termination revenue in fiscal Q2. Such payments are contract-dependent and may not be collectible in all circumstances.
  • Spending outlook: Fiscal 2016 capital spending was estimated at $300 million to $400 million. Four new FlexRigs were completed in Q1; another was completed by January 31, 2016, and two more were scheduled. New FlexRigs scheduled for delivery in calendar 2016 were supported by multiyear contracts.
  • Backlog quality: Approximately 65.6% of December 31 backlog was not reasonably expected to be filled in fiscal 2016. Backlog includes future rig construction work and early termination revenue, and actual revenue may differ because of customer cancellations, nonpayment, or supply delays.
  • Currency and accounting: H&P recorded $8.5 million of foreign currency losses, primarily from the Argentine peso devaluation. Eliminating the foreign-subsidiary reporting lag brought a $6.3 million currency devaluation loss into Q1; management said Q1 net income would have been approximately $5.4 million higher absent the accounting change. The 54.1% tax rate was also affected by a tax-law change reducing the prior-year domestic production activities deduction; management expected 32%–35% for each remaining fiscal 2016 quarter.
  • Principal risks and contingencies: Sustained low oil prices could further reduce activity and dayrates. Other cited exposures include foreign exchange and political risks, including the historical Venezuelan expropriation; dependence on limited rig-component suppliers; operational and environmental risks; and customer contract termination or payment risk. The company is pursuing damages related to the Venezuelan expropriation but cannot estimate recovery timing or amount. It also reported ongoing discussions with the Department of the Interior concerning previously disclosed offshore testing irregularities; the company could not estimate any potential penalty.
  • Other items: The company planned to begin transitioning to a new ERP system in the following fiscal quarter and cautioned that implementation difficulties could affect timely financial reporting. Management reported disclosure controls were effective at quarter-end.

Important facts for investors to verify

  • Whether rig utilization, dayrates and customer activity stabilize or continue to deteriorate, particularly in U.S. Land.
  • Whether the expected Q2 early termination revenue is recognized and collected, and how subsequent rig releases affect backlog and contracted rigs.
  • Whether fiscal 2016 capital spending remains within the $300 million–$400 million estimate and how spending aligns with new-rig contracts and demand.
  • Whether Argentine currency volatility, foreign exchange restrictions or other international risks produce further losses or constrain cash repatriation.
  • The July 2016 repayment or refinancing of the $40 million note, covenant compliance and continued availability under the revolving facility.
  • Whether ERP implementation proceeds without material disruption to financial controls or reporting, and whether the Department of the Interior matter or Venezuelan litigation changes materially.