Helmerich & Payne, Inc. — Q1 FY2018 Form 10-Q
Business context and reporting period. The company provides contract drilling services through U.S. Land, Offshore and International Land segments, with additional technology and other businesses. This filing covers the three months ended December 31, 2017; comparable results are for the three months ended December 31, 2016. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $564.1 million | $368.6 million |
| Operating income (loss) | $3.5 million | $(49.2) million |
| Income (loss) before tax, continuing operations | $0.001 million | $(52.8) million |
| Income tax benefit | $500.6 million | $18.3 million |
| Net income (loss) | $500.1 million | $(35.1) million |
| Diluted EPS | $4.55 | $(0.33) |
| Cash from operating activities | $72.2 million | $74.4 million |
| Capital expenditures | $91.7 million | $82.1 million |
- Revenue increased 53% year over year, primarily reflecting the recovery in U.S. land activity. U.S. Land revenue rose to $461.6 million from $263.6 million; Offshore revenue was $33.4 million versus $33.8 million; International Land revenue was $63.2 million versus $68.0 million.
- Consolidated operating margin was approximately 0.6%, versus negative 13.3% in the prior-year quarter. The reported net profit and EPS are not representative of operating performance: the tax benefit included an estimated $500.4 million deferred-tax benefit from remeasurement following U.S. tax reform.
- U.S. Land segment operating income was $24.7 million versus a $30.9 million loss. Rig utilization increased to 57% from 31%, while average revenue per rig day fell to $22,400 from $24,788 and average margin per day declined to $8,854 from $9,584.
- Offshore segment operating income increased to $8.7 million from $6.8 million despite lower utilization (63% versus 78%). International Land segment operating income was $3.5 million versus $0.8 million.
Financial position and liquidity
- At December 31, 2017, cash and cash equivalents were $383.7 million, down from $521.4 million at September 30, 2017. Short-term investments were $42.5 million; current assets were $1.17 billion and current liabilities $355.8 million.
- Operating cash flow was $72.2 million. Investing activities used $128.8 million, including $91.7 million of capital expenditures and $47.8 million paid, net of cash acquired, for the MagVAR acquisition. Financing activities used $81.1 million, mainly the $76.5 million dividend payment. Cash decreased $137.7 million during the quarter.
- Long-term debt had $500 million principal and a $493.2 million carrying value, with no amount due within one year; the notes mature in 2025. The $300 million revolving facility had no borrowings and $260.7 million available after letters of credit. The company reported compliance with debt covenants.
- Shareholders’ equity was $4.59 billion. The declared dividend was $0.70 per share, unchanged from the prior-year comparable quarter.
Material changes, outlook and notable items
- The Tax Cuts and Jobs Act reduced the U.S. corporate tax rate; the company recorded a provisional $500.4 million benefit from remeasuring deferred tax balances. The tax accounting was not complete, and estimates may change during the measurement period. The company estimated a 24.5% blended federal statutory rate for FY2018 and 21% thereafter.
- MagVAR, a directional-drilling measurement technology business, was acquired on December 8, 2017 for approximately $47.8 million net of closing adjustments; $6.0 million was placed in escrow. Preliminary purchase accounting included $28.7 million of intangible assets and $17.6 million of goodwill. MagVAR contributed $0.6 million of revenue and a $0.1 million net loss in the quarter.
- Management estimated FY2018 capital spending at approximately $350 million, subject mainly to maintenance needs and market-driven rig upgrades. It expected operating cash and existing cash to fund operating requirements, interest, dividends and planned capital spending, while cautioning that future operating cash flow is not assured.
- Contract drilling backlog was $1.2 billion at December 31, down from $1.3 billion at September 30, 2017. Approximately 49% was not reasonably expected to be filled in FY2018. Backlog can differ from revenue ultimately realized because of customer termination rights, performance provisions and customer credit risk.
- Purchase commitments for equipment, parts and supplies were approximately $53.5 million. The company recorded $7.3 million of depreciation-related asset abandonments, compared with $0.8 million a year earlier. Early termination revenue was $4.3 million, down from $13.5 million.
- Key risks include oil and gas activity and commodity-price volatility, contract termination and backlog realization, operational and safety exposures, foreign political and currency risks, and legal or regulatory matters. The company continued to pursue damages for the 2010 Venezuelan expropriation but could not estimate the timing, amount or likelihood of recovery. A separate Department of the Interior review concerning previously resolved DOJ matters had no assured outcome.
Important facts for investors to verify
- How much of the quarter’s reported earnings reflects recurring operations versus the provisional deferred-tax remeasurement benefit, and whether subsequent tax accounting changes that estimate.
- Whether U.S. Land utilization and contracted rig counts translate into improved dayrates and margins; the quarter showed higher activity but lower revenue and margin per rig day.
- Whether operating cash flow can fund the approximately $350 million FY2018 capital program and dividends without materially reducing cash or increasing borrowing.
- How much of the $1.2 billion backlog converts to revenue, particularly the portion not expected to be filled in FY2018, and whether early-termination protections are collectible.
- Final MagVAR purchase-price allocation, intangible-asset useful lives and subsequent operating contribution.
- Developments in the Venezuelan expropriation claim, foreign exchange exposure, and the Department of the Interior’s consideration of the prior offshore matter.