Helmerich & Payne, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2015. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and financial performance
The company provides contract drilling services through U.S. Land, Offshore and International Land operations. Results reflect a sharp downturn in oil prices and customer drilling activity, particularly in U.S. land markets.
| Metric | Three months ended March 31, 2015 | Six months ended March 31, 2015 |
|---|---|---|
| Revenue | $883.1; down 1.2% year over year | $1,939.6; up 8.8% |
| Operating income | $227.2; down 11.0% | $559.0; up 7.6% |
| Operating margin | 25.7%, versus 28.6% | 28.8%, versus 29.1% |
| Net income | $149.5; down 14.3% | $352.6; up 1.4% |
| Diluted EPS | $1.37, versus $1.59 | $3.23, versus $3.17 |
| Cash from operations | Not presented separately for the quarter | $812.6, versus $540.0 |
| Capital expenditures | Not presented separately for the quarter | $763.4, versus $356.8 |
| Dividends declared per share | $0.6875, versus $0.6250 | $1.3750, versus $1.2500 |
Six-month operating cash flow exceeded cash capital expenditures by approximately $49.2 million. Cash and equivalents were $719.1 million at March 31, up from $360.9 million at September 30, 2014. Total debt was approximately $572.1 million, including $40 million due in July 2015; cash exceeded debt by approximately $147 million. The $300 million revolver had no borrowings and $251.8 million available after letters of credit. The company reported compliance with debt covenants.
At March 31, total assets were $7.34 billion and shareholders’ equity was $5.00 billion. Investments included available-for-sale equity securities with fair value of $151.4 million. The company recorded a $43.1 million six-month after-tax decline in other comprehensive income, primarily from lower unrealized gains on securities.
Material changes and segment trends
- U.S. Land: Second-quarter revenue was $718.5 million, down from $741.8 million; segment operating income fell to $224.9 million from $245.1 million. Utilization declined to 68% from 86%, and revenue days fell to 20,802 from 24,300. Average revenue per day excluding early termination revenue was $2,951, down from $3,413.
- U.S. Land revenue included $71.0 million of early termination revenue in the quarter and $94.4 million for the six-month period, compared with none and $9.9 million, respectively, in the prior-year periods. This revenue cushioned results amid customer contract cancellations.
- Offshore: Second-quarter segment operating income was $19.1 million, nearly unchanged year over year. Utilization improved to 98% from 89%, while average revenue and margin per day declined, primarily due to a contractual dayrate reduction on one rig.
- International Land: Second-quarter revenue increased to $98.2 million from $85.5 million, but segment operating income declined to $6.3 million from $11.2 million. Utilization fell to 52% from 78%; higher revenue per day was offset by increased expenses and fewer rigs working.
- Depreciation included $12.2 million of abandonments in the first six months, versus $3.7 million a year earlier. The company decommissioned all 17 of its SCR-powered FlexRigs effective March 31, citing a view that they would not meet customer needs when demand recovers.
Liquidity, outlook, risks and unusual items
- On March 19, the company issued $500 million of 4.65% unsecured senior notes due in 2025, receiving net proceeds of approximately $492.8 million. Proceeds were intended for general corporate purposes, including rig construction. Management expected fiscal 2015 interest expense of approximately $15 million.
- Management estimated fiscal 2015 capital spending of approximately $1.3 billion. The planned new-rig construction cadence was expected to slow beginning in June 2015. Six-month cash capital expenditures were more than double the prior-year amount, largely reflecting the FlexRig program.
- Contract drilling backlog declined to $3.9 billion at March 31 from $5.0 billion at September 30, 2014. Approximately 79.5% of current backlog was not expected to be filled in fiscal 2015. Backlog is subject to customer termination rights, construction delays and other risks.
- At March 31, 179 of 332 U.S. Land rigs were contracted; 165 remained contracted as of April 23, excluding rigs being stacked. Management warned that fewer than 150 U.S. Land rigs might be contracted and generating revenue by June 30. Based on notices received after quarter-end, third-quarter fiscal 2015 early termination revenue could exceed $75 million.
- Management attributed weakening demand to lower oil prices and reduced customer budgets, and expected further U.S. rig idling and spot-market pricing softness. It cautioned that sustained low or lower prices could materially reduce activity, dayrates and results. The filing does not provide full-year earnings guidance.
- Operating cash flow benefited from working-capital movements and non-cash deferred tax expense; management noted that comparative cash flows were affected by tax and bonus-depreciation timing. Fiscal 2015 effective tax rate was 36.9% for the first six months; management expected 34%–35% for the remaining two quarters.
- Quarterly results included approximately $1.9 million of after-tax gains from asset sales. The prior-year quarter included approximately $12.9 million of after-tax gains on investment securities and $2.7 million from asset sales, affecting comparability.
- Risks include commodity-price exposure, contract cancellations and potential nonpayment of termination fees under specified circumstances, rig utilization and dayrate pressure, backlog execution and concentrated rig-component suppliers, and international political, currency and expropriation risks. The company continues to seek recovery for its Venezuelan assets; timing, amount and likelihood are uncertain, and no gain was recognized. Discussions with the Department of the Interior concerning a past offshore testing matter remained unresolved; the company said it could not estimate any penalty but did not expect a material adverse effect.
Important facts for investors to verify
- Whether subsequent rig releases, stacking and early termination receipts matched management’s projections for the third quarter and June 30 contracted-rig count.
- How much of reported revenue and cash generation depends on early termination fees, and whether those fees are collected and recognized as expected.
- Actual fiscal 2015 capital spending, new-rig delivery timing, contract coverage and backlog conversion amid the slowdown.
- Cash flow sustainability after working-capital and tax-related effects, and liquidity after capital spending, dividends and scheduled debt repayments.
- Potential effects of continued oil-price weakness on U.S. utilization, dayrates, international operations, rig values and future impairments or abandonments.
- Developments in the Venezuelan recovery action and the Department of the Interior discussions, including any change in estimated exposure or recovery prospects.