Business context and reporting period
Helmerich & Payne, Inc. filed this Form 10-K for the fiscal year ended September 30, 2009 (not a standalone fourth-quarter report). The company primarily provides contract drilling services through U.S. land, offshore and international land segments; it also owns Tulsa-area real estate and develops rotary-steerable drilling technology.
Financial and operating performance
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Operating revenue | $1.894 billion | $2.037 billion |
| Income from continuing operations | $353.5 million | $461.7 million |
| Diluted earnings per share from continuing operations | $3.32 | $4.34 |
| Total assets at year-end | $4.161 billion | $3.588 billion |
| Long-term debt | $420 million | $475 million |
| Declared dividends per common share | $0.20 | $0.185 |
Revenue declined about 7% and income from continuing operations about 23% year over year. The provided filing text does not give clear cash-flow, operating-margin, net-income, cash-balance or current-liquidity figures; the financial statements and MD&A are incorporated by reference to the shareholder annual report.
- U.S. land: Revenue was $1.441 billion, approximately 76% of consolidated revenue; utilization fell to 68% from 96%. The fleet grew to 201 rigs, with 111 working at fiscal year-end.
- Offshore: Revenue was $204.7 million, approximately 11% of consolidated revenue; utilization rose to 89% from 75%.
- International land: Revenue was $237.4 million, approximately 13% of consolidated revenue; utilization fell to 68% from 82%.
- Contract backlog: $2.528 billion at September 30, 2009, versus $3.374 billion a year earlier. About 63% of 2009 backlog was not reasonably expected to be filled in fiscal 2010.
Material changes, liquidity and capital commitments
The company had $70 million drawn under its $400 million senior unsecured credit facility and $21.9 million in letters of credit outstanding at September 30, 2009. Borrowings had declined to $40 million by November 20, 2009. The facility expires in December 2011; borrowings bear variable rates. The filing also reports $420 million of long-term debt, but the provided text does not reconcile that balance to facility borrowings.
The securities portfolio had a fair value of $360 million at year-end and approximately $387 million at November 19, 2009. The company reported a $2.2 million currency loss following a 27% Argentine peso devaluation. It estimated potential Venezuelan currency losses of approximately $6.6 million to $35.7 million under a 10%–100% devaluation scenario, based on the disclosed net working-capital exposure and assumptions.
Outlook, risks and unusual items
- Management cited recession-related uncertainty, volatile oil and gas prices, reduced drilling demand and intensified price competition. The filing provides no specific consolidated earnings or revenue guidance.
- Of 140 FlexRigs committed for construction under fixed-term contracts, 133 were completed by year-end; seven remained to be completed by the end of fiscal Q3 2010. Estimated total construction cost was $2.2 billion, including tubular and ancillary equipment.
- In Venezuela, PDVSA collectability became uncertain; the company stopped recognizing revenue from PDVSA from the beginning of fiscal Q2 2009. It recognized $50.3 million of Venezuelan drilling revenue for the year and did not record an additional $57.9 million. Work was being discontinued as contracts expired; one rig remained active at year-end and subsequently became idle. The company said it would not commit to new contracts until there was further progress on receivables and conversion of local currency to U.S. dollars.
- The company disclosed a July 2009 SEC and DOJ resolution concerning past subsidiary payments related to customs passage in Latin America. It agreed to pay $375,681.22 in disgorgement and prejudgment interest to the SEC and a $1 million DOJ civil penalty, and to enhance compliance measures. The DOJ agreed not to prosecute; the settlements involved no criminal charges.
- Other material risks include dependence on a concentrated customer base (59% of revenue from the ten largest customers), slow or failed customer payments, foreign political and currency risks, hurricane exposure, uninsured business-interruption losses, and reliance on a limited number of rig-component suppliers.
Management and the auditor concluded internal control over financial reporting was effective as of September 30, 2009; the auditor expressed an unqualified opinion on the consolidated financial statements.
Important facts for investors to verify
- Review the incorporated annual report’s financial statements and MD&A for cash flows, margins, cash and current-liquidity measures, and the reconciliation of reported debt to credit-facility borrowings.
- Assess backlog quality, termination provisions, customer extensions and actual fiscal 2010 utilization, particularly given the sharp U.S. land utilization decline.
- Track PDVSA receivable collections, any further revenue-recognition effects, and Venezuela’s currency-conversion and devaluation exposure.
- Verify completion, cost and contracted status of the remaining FlexRigs, along with the funding and expected returns on the construction program.
- Monitor customer concentration, portfolio valuation, variable-rate borrowing costs, insurance renewals and any further compliance-related developments.