Helmerich & Payne, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2012. The company provides contract drilling services through U.S. Land, Offshore and International Land operations. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where applicable.
Financial performance
- Quarter: Revenue was $770.0 million, up 27% from $604.4 million a year earlier. Operating income increased to $207.0 million from $164.3 million; net income rose to $129.7 million from $98.8 million. Diluted EPS was $1.18 versus $0.91.
- Six months: Revenue was $1.503 billion, up 25% year over year. Operating income was $437.6 million versus $335.0 million; net income was $274.0 million versus $202.9 million. Diluted EPS was $2.51 versus $1.87.
- Margins and segments: U.S. Land drove growth: quarterly segment operating income increased to $210.0 million from $164.3 million, as utilization rose to 91% from 85% and average revenue per rig day increased to $27,625 from $25,640. Offshore quarterly segment income declined to $9.8 million from $11.5 million. International Land recorded a $1.0 million quarterly segment loss, compared with $2.4 million income; management cited prior-year early termination revenue and higher current operating costs. Company-wide operating margin was approximately 26.9% for the quarter, versus 27.2% a year earlier.
- Cash flow and investment: Six-month operating cash flow was $438.8 million, compared with $451.7 million. Capital expenditures were $492.7 million versus $286.3 million, primarily reflecting FlexRig construction; investing cash outflow was $467.2 million. Cash declined $39.9 million to $324.4 million.
- Liquidity and debt: Current assets were $999.4 million and current liabilities $385.7 million (current ratio approximately 2.6). Debt totaled $350.0 million, including $115.0 million due within one year; cash less debt was approximately negative $25.6 million. The $400 million revolving facility expired in December 2011, and the company was pursuing a smaller replacement facility.
- Other key figures: Total assets were $5.441 billion and shareholders’ equity $3.602 billion at March 31. Investments included $426.8 million of available-for-sale equity securities. The six-month effective tax rate was 36.8%. Dividends declared were $0.07 per share for the quarter.
Changes, outlook and management commentary
- U.S. Land improvement reflected more rigs working, higher utilization and improved dayrates. At March 31, 240 of 266 U.S. Land rigs were generating revenue; 159 were on fixed-term contracts and 81 in the spot market.
- Contract drilling backlog increased to $4.1 billion from $3.8 billion at September 30, 2011, largely due to 26 announced multiyear contracts. About 79.3% of backlog was not expected to be filled in fiscal 2012. Backlog is subject to termination, delivery and other execution risks.
- Management estimated fiscal 2012 capital spending of approximately $1.1 billion and expected to deliver 48 new FlexRigs during the year, subject to procurement timing. It said operating cash flow and available cash were expected to fund operations and estimated capital expenditures, while cautioning that cash flows and financing availability were not assured.
- Quarterly income from continuing operations included approximately $4.9 million after-tax gains on asset sales ($0.05 per diluted share); the prior-year quarter included approximately $2.6 million ($0.02 per share). Six-month 2012 results included about $7.9 million of such gains.
- Outstanding equipment, parts and supplies commitments for rig construction were approximately $347.9 million. The Tulsa office lease extension and expansion added about $15.0 million to previously reported commitments.
Risks, contingencies and unusual items
- Venezuelan authorities seized the company’s Venezuelan drilling assets in 2010. Subsidiaries sought damages in U.S. litigation and were pursuing two arbitrations seeking an aggregate $75 million from third parties. The company said recovery timing, amount and likelihood could not be determined and recognized no gain.
- A U.S. Attorney grand jury investigation concerning alleged offshore choke-manifold testing irregularities remained ongoing; the company was identified as a subject and continued to cooperate. A former rig manager pleaded guilty to a felony false-statements charge. Management believed the matter would not have a material adverse effect but could not assure the outcome.
- International operations face political, regulatory, currency and expropriation risks. Possible new hydraulic-fracturing regulation could indirectly delay or limit customer drilling programs; the company stated it does not perform hydraulic fracturing.
- The company reported that litigation pending in the ordinary course was not expected to materially affect its financial condition, cash flows or results. It also noted a possible $7–$9 million increase in uncertain-tax-position reserves over the next 12 months related to an international matter.
- Rig construction depends on a limited number of suppliers, creating potential delivery disruption. Other stated risks include commodity-price-related customer activity, contract termination, weather, receivables collection and operational performance.
Investor verification points
- Assess whether U.S. Land utilization, dayrates and fixed-term contract coverage support continued earnings growth, and whether spot-market exposure changes.
- Compare the $1.1 billion capital-spending estimate and 48-rig delivery expectation with actual spending, completions and operating cash flow.
- Review upcoming debt maturities, covenant compliance and the status and terms of any replacement revolving credit facility.
- Track the value and concentration of the equity-securities portfolio, including unrealized gains and potential impairment exposure.
- Monitor outcomes and potential costs of the Venezuela recovery actions, the federal investigation, and the international tax matter.
- Consider that the interim results may not indicate full-year performance; the filing does not provide earnings guidance.