Helmerich & Payne, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended December 31, 2014; comparisons are with the three months ended December 31, 2013 unless noted. The company provides contract drilling services through U.S. Land, Offshore, and International Land segments.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Operating revenue | $1,056.6 million | $889.2 million | +18.8% |
| Operating income | $331.8 million | $264.0 million | +25.7% |
| Net income | $203.0 million | $173.2 million | +17.2% |
| Diluted EPS | $1.85 | $1.59 | +$0.26 |
| Operating cash flow | $389.7 million | $304.9 million | +$84.8 million |
| Capital expenditures | $369.0 million | $140.6 million | +$228.4 million |
- Operating margin was approximately 31.4%, versus 29.7%. Net margin was approximately 19.2%, versus 19.5%.
- Revenue growth was led by U.S. Land: $890.0 million, up from $731.7 million. Offshore revenue was $69.5 million, up from $59.1 million; International Land was $92.9 million, down from $95.3 million.
- U.S. Land segment operating income rose to $318.1 million from $251.0 million. Offshore segment income rose to $21.5 million from $18.5 million; International Land declined to $12.2 million from $12.8 million.
- The effective tax rate increased to 38.8% from 34.1%, principally due to a tax-law change reducing the prior-year domestic production activities deduction. Management expected a 35%–36% rate for the remaining three quarters of FY2015.
Cash, debt, and liquidity
- Cash and cash equivalents were $251.6 million at December 31, 2014, down from $360.9 million at September 30, 2014. Operating cash flow was more than offset by investing outflows of $361.9 million and financing outflows of $137.1 million.
- Operating cash flow included $129.5 million of deferred income tax expense, compared with $1.9 million in the prior-year quarter; this was a significant contributor to the reported year-over-year cash-flow change.
- Financing outflows included $74.8 million of dividends paid and $59.7 million of open-market share repurchases. The declared dividend was $0.6875 per share, versus $0.6250 a year earlier.
- Total debt was $81.0 million, including $80.0 million of 6.10% senior notes and $1.0 million of short-term international borrowing, which was repaid after quarter-end. Note principal repayments of $40 million were due in July 2015 and July 2016.
- The $300 million revolving facility had no borrowings and $257.8 million available after letters of credit at quarter-end. The company reported compliance with debt covenants.
- Fiscal 2015 capital spending was estimated at approximately $1.3 billion. Management said it expected to fund operating needs, debt repayments, repurchases, and capital spending through cash, operating cash flow, and potentially borrowings or securities sales, while cautioning that cash flows or financing availability could weaken.
Material changes, outlook, and risks
- Oil prices had fallen significantly, and customers were cutting drilling budgets. U.S. Land utilization was 89%, versus 84% a year earlier, but management expected utilization to decline in Q2 FY2015. Active U.S. Land rigs had fallen to 235 as of February 5, 2015, excluding rigs being stacked; the company warned the count could fall below 200 by March 31.
- Since quarter-end, the company received U.S. rig termination notices and said Q2 early termination revenue could exceed $60 million. It expected approximately $8 million of such revenue in International Land and was discussing a possible additional termination. U.S. Land Q1 revenue included $23.4 million of early termination fees, versus $9.9 million a year earlier.
- Contract drilling backlog was $4.6 billion at December 31, down from $5.0 billion at September 30. About 70.2% of the December backlog was not reasonably expected to be filled in FY2015. Backlog depends on customers honoring contracts and on new-rig delivery; termination exceptions and possible vendor disruptions may affect realized revenue.
- Capital expenditures increased substantially as the company built new FlexRigs. It placed 12 new FlexRigs into service during the quarter and three more by January 29; all rigs scheduled for delivery in calendar 2015 were supported by multi-year contracts. Management expected the construction pace to decline from four to two rigs per month beginning June 2015.
- Available-for-sale equity securities had a $42.2 million after-tax unrealized loss in other comprehensive income, reducing accumulated other comprehensive income to $41.1 million from $83.1 million. The portfolio’s market value is exposed to equity-price movements.
- Other disclosed matters include a $327.2 million outstanding commitment for rig-construction equipment and supplies; a Venezuelan expropriation lawsuit for which recovery timing and amount are uncertain; and ongoing discussions with the Department of the Interior concerning a resolved DOJ investigation. Management said it did not expect the latter matter to have a material adverse effect, but could not determine whether a penalty would be assessed.
- International operations carry political, currency, and expropriation risks. Venezuela announced a planned new foreign-currency exchange system in January 2015; the company was monitoring developments.
Key investor verification points
- Track U.S. rig activity, customer releases, spot-market pricing, and actual early-termination payments against management’s Q2 expectations.
- Assess whether the $4.6 billion backlog converts to revenue as scheduled, including contract termination provisions and new-rig delivery risks.
- Compare planned FY2015 capital spending with operating cash generation, cash balances, and the July 2015 debt repayment.
- Monitor the value and accounting impact of the securities portfolio, the effective tax rate, and any changes in Venezuela-related exposure or legal contingencies.