Helmerich & Payne, Inc. — Fiscal 2019 Second-Quarter Form 10-Q
Reporting period: Three and six months ended March 31, 2019. H&P provides contract drilling services and drilling technologies; its reporting segments are U.S. Land, Offshore, International Land and H&P Technologies.
Financial performance and position
| Metric | Three months ended March 31, 2019 | Prior-year comparable |
|---|---|---|
| Revenue | $720.9 million | $577.5 million |
| Operating income (loss), continuing operations | $95.1 million | $(1.2) million |
| Net income (loss) | $60.9 million | $(11.9) million |
| Diluted EPS | $0.55 | $(0.12) |
- Quarterly revenue increased about 25%; operating margin was approximately 13.2%, versus a small operating loss in the prior-year quarter. Current-quarter net income included a $11.0 million loss from discontinued operations and approximately $8.9 million of after-tax gains on asset sales.
- For the six months, revenue rose to $1.46 billion from $1.14 billion; operating income was $149.4 million versus $2.4 million, and net income was $79.9 million versus $488.2 million. The prior-year result included an approximately $501.8 million tax benefit from U.S. tax reform. Fiscal 2019 results also included a $37.0 million investment-securities loss.
- U.S. Land drove the improvement: quarterly segment operating income was $106.1 million versus $27.1 million, with utilization rising to 67% from 59% and average rig margin per day increasing to $11,486 from $8,842. Offshore income declined to $4.5 million from $5.4 million; International Land returned to $8.0 million income from a $0.7 million loss. H&P Technologies continued to report a segment loss, $7.9 million for the quarter.
- Six-month operating cash flow was $409.0 million, compared with $207.7 million. Capital expenditures were $330.0 million, versus $191.2 million; operating cash flow less capital expenditures was approximately $79.0 million.
- At March 31, cash and cash equivalents were $243.9 million and short-term investments were $26.1 million. Long-term debt had a $500 million face amount and $491.2 million carrying value. The $750 million revolving facility had $737.9 million available, with no borrowings; H&P reported compliance with debt covenants. Cash flow statement ending cash includes restricted cash and was $278.1 million.
- Total assets were $6.14 billion and shareholders’ equity was $4.32 billion. The company declared dividends of $0.71 per share in each of the first two fiscal quarters; $1.42 per share was paid in the six-month period.
Changes, outlook and notable items
- Management described U.S. rig demand as moderate for the rest of fiscal 2019 after customers reassessed spending amid oil-price volatility. H&P reduced its fiscal 2019 capital expenditure plan from $650–$680 million to $500–$530 million and moderated super-spec rig upgrades.
- At quarter-end, the fleet comprised 390 rigs, of which 249 were contracted. Contract drilling backlog increased to $1.6 billion from $1.2 billion at September 30, 2018, principally due to U.S. Land term contracts and extensions. Backlog is subject to customer cancellation or modification and is not guaranteed revenue.
- Management saw potential for international growth, particularly in Argentina, but noted that growth may be less consistent than in the U.S. Offshore utilization and cash flows were relatively stable, though one or more platform rigs could be stacked or moved to lower-margin standby rates.
- FlexRig4 impairment testing found estimated fair value only about 5% above carrying value for domestic assets and 14% above for international assets. Management reported no impairment, but said reasonably possible changes in assumptions could lead to future impairment.
- A $21.0 million personal-injury lawsuit settlement was recorded; $10.5 million had been paid during the quarter and $10.5 million remained accrued at March 31. The filing separately reports $18 million of related costs in six-month U.S. Land operating expenses.
- Foreign currency, especially Argentine peso devaluation and possible exchange controls or repatriation limits, remains a risk. H&P reported foreign currency losses of $4.6 million for the six months. The Venezuela expropriation lawsuit remains stayed; any recovery is uncertain and no contingent gain was recorded.
- H&P adopted ASC 606 revenue recognition in fiscal 2019 using the modified retrospective method and reported no significant financial-position or performance impact. Management said disclosure controls were effective and there were no material changes to internal controls or previously disclosed risk factors.
Investor facts to verify
- Whether moderate rig demand, customer spending and oil-price conditions affect utilization, dayrates, backlog conversion and the revised capital spending plan.
- Whether the FlexRig4 asset groups’ narrow impairment valuation cushions remain supportable as utilization, contract timing, dayrates and rig reactivation costs change.
- The recurring earnings and cash-flow effects of investment-portfolio volatility, including the reported $37.0 million six-month loss.
- The final accounting and cash payments for the personal-injury settlement, and the status and potential exposure of other legal matters.
- How international currency, political and repatriation risks—particularly in Argentina and Venezuela—affect operations and cash availability.