Helmerich & Payne, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2018; comparative period is the three months ended December 31, 2017. Amounts are in U.S. dollars; financial statements are unaudited.
Business context
H&P provides contract drilling services and drilling technologies. At quarter-end, its fleet comprised 390 rigs, including 350 U.S. Land, 8 Offshore and 32 International Land rigs. The company also reported H&P Technologies as a new reportable segment after reorganizing its operations.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $740.6 million | $564.1 million |
| Operating income, continuing operations | $54.3 million | $3.6 million |
| Income from continuing operations | $8.4 million | $500.6 million |
| Net income | $19.0 million | $500.1 million |
| Diluted EPS | $0.17 | $4.55 |
| Cash from operating activities | $209.5 million | $79.6 million |
| Capital expenditures | $196.1 million | $91.7 million |
- Revenue increased approximately 31% year over year. Operating margin was approximately 7.3%, compared with 0.6% a year earlier.
- Operating cash flow less capital expenditures was approximately $13.4 million. Cash and cash equivalents were $228.5 million, short-term investments $41.1 million, and total debt carrying value $490.8 million at December 31.
- The current ratio was approximately 2.7. The $750 million revolving credit facility had no borrowings and $712.0 million available, after $38.0 million of letters of credit. H&P reported compliance with debt covenants.
- Quarter-end contract drilling backlog was $1.6 billion, up from $1.1 billion at September 30, 2018. Separately, ASC 606 disclosures report approximately $1.6 billion of remaining performance obligations; these measures have different stated definitions.
- The company declared a $0.71 per-share dividend, payable March 1, 2019. Dividends paid during the quarter totaled $78.1 million.
Material changes and unusual items
- U.S. Land revenue rose 35% to $624.2 million and segment operating income increased to $79.7 million from $24.7 million. Utilization rose to 68% from 57%; average rig revenue per day was $25,265.
- Offshore segment operating income declined to $7.2 million from $8.7 million. International Land operating income increased to $6.6 million from $3.5 million. H&P Technologies recorded a $10.3 million operating loss, compared with $8.8 million.
- A $42.8 million loss on investment securities reduced pretax earnings; the company began recognizing equity-security fair-value changes in net income upon adoption of ASU 2016-01. The portfolio’s fair value was $39.7 million at quarter-end.
- Prior-year income included a $500.4 million tax benefit from remeasurement of deferred taxes following U.S. tax reform, making the large year-over-year decline in net income an unsuitable standalone measure of operating performance.
- Discontinued operations contributed $10.6 million of income, primarily from remeasurement of uncertain Venezuelan tax liabilities following currency devaluation. Continuing-operations income included approximately $4.3 million after-tax gains on asset sales.
- U.S. Land operating expenses included $18 million associated with a settled lawsuit. The filing says the company accrued a $21 million settlement, payable by H&P on behalf of itself and an operator.
Outlook, commentary and risks
- Management described expected rig demand as moderate after crude prices fell during the quarter and some customers reduced planned 2019 spending. It moderated the super-spec upgrade pace and cut FY2019 capital expenditure plans from $650–$680 million to $500–$530 million.
- Management expected relatively stable Offshore utilization and cash flows, while noting that one or more platform rigs could be stacked or placed on lower-margin stack rates. It saw potential International Land growth, particularly in Argentina, but characterized it as potentially sporadic.
- Management expected FY2019 operating needs, debt service, declared dividends and capital expenditures to be funded from cash and operating cash flow, while cautioning that future cash generation is not assured. Backlog is subject to customer cancellation or modification and may not be fully realized.
- Risks include volatile commodity prices and customer spending, rig-market competition, contract cancellations, self-insurance and litigation exposure, and international political, currency and repatriation risks. Argentina is highly inflationary; the filing reports foreign-currency losses of $3.9 million for the quarter, versus $1.5 million a year earlier.
- Other notable items: H&P acquired Angus Jamieson Consulting for approximately $3.4 million; it entered a new $750 million revolving facility maturing in November 2023 and exchanged $487.1 million of subsidiary notes for Company notes due 2025. The filing reported no material change in previously disclosed risk factors.
Investor verification checklist
- Verify whether actual rig demand, utilization, dayrates and customer spending track management’s moderate-demand outlook and revised capex plan.
- Monitor backlog conversion, extensions and cancellations; reported backlog is not guaranteed revenue.
- Assess recurring operating performance separately from the $42.8 million securities loss, asset-sale gains, prior-year tax benefit and discontinued-operations income.
- Track cash generation against capital spending and dividends, and confirm facility availability, covenant compliance and the 2025 debt terms.
- Review exposure to the lawsuit settlement, self-insured claims, Venezuela-related matters and currency or repatriation risks in international operations.