Helmerich & Payne, Inc. — Q2 FY2018 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2018. The company provides contract drilling services through U.S. Land, Offshore and International Land segments. Comparisons are with the corresponding 2017 periods; balance-sheet comparisons are with September 30, 2017. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 FY2018 | Six months FY2018 | Prior comparable period |
|---|---|---|---|
| Revenue | $577.5 million | $1,141.6 million | Q2: $405.3 million; six months: $773.9 million |
| Operating income (loss), continuing operations | $(1.3) million | $2.3 million | Q2: $(65.7) million; six months: $(114.8) million |
| Income (loss), continuing operations | $(1.6) million | $499.0 million | Q2: $(48.5) million; six months: $(83.0) million |
| Net income (loss) | $(11.9) million | $488.2 million | Q2: $(48.8) million; six months: $(83.9) million |
| Diluted earnings (loss) per share | $(0.12) | $4.43 | Q2: $(0.45); six months: $(0.78) |
| Operating cash flow | Not separately reported | $197.0 million | Six months FY2017: $150.3 million |
| Capital expenditures | Not separately reported | $191.2 million | Six months FY2017: $175.3 million |
- Q2 revenue increased about 42% year over year, led by U.S. Land drilling. Six-month revenue increased about 48%. Operating results improved substantially from the prior-year losses.
- The six-month net profit is not a measure of underlying operating improvement alone: it included a $501.8 million tax benefit associated with remeasuring deferred taxes after enactment of the Tax Cuts and Jobs Act. Before income taxes, continuing operations recorded a six-month loss of $5.6 million. Q2 also included $3.9 million of after-tax gains on asset sales.
- Q2 operating margin was approximately negative 0.2%; six-month operating margin was approximately positive 0.2% (calculated from reported operating income and revenue). Segment operating income, a company-defined non-GAAP measure, was $24.8 million in Q2 and $54.5 million for six months, versus losses of $58.0 million and $83.4 million, respectively, in 2017.
- At March 31, cash and cash equivalents were $334.8 million, short-term investments $45.3 million, and total current assets $1.131 billion against current liabilities of $340.2 million. Cash declined $186.6 million from fiscal year-end.
- Long-term debt, net of discount and issuance costs, was $493.4 million, essentially unchanged from September 30, 2017. The company had $260.7 million available on its $300 million revolving facility, no revolver borrowings, and was in compliance with debt covenants. Senior notes mature in 2025.
- Operating cash flow less capital expenditures was approximately $5.8 million for the six months, before acquisition spending, dividends and other investing or financing flows. Cash used for the MagVAR acquisition was $47.9 million; dividends paid were $153.4 million.
Segments and material changes
- U.S. Land: Q2 revenue was $482.7 million versus $331.0 million; segment operating income was $27.1 million versus a $51.9 million loss. Utilization rose to 59% from 42%, and average revenue days to 18,666 from 13,166. Q2 average rig margin per day increased to $8,842 from $7,042. For the six months, however, average revenue per day excluding early-termination revenue fell year over year, as older, higher-priced contracts rolled off.
- Offshore: Q2 revenue was $33.0 million versus $36.2 million; segment operating income was $5.4 million versus $5.9 million. Utilization declined to 63% from 77%, while fewer revenue days reflected a previously sold rig and another rig being idle.
- International Land: Q2 revenue was $52.5 million versus $34.8 million, and the segment loss narrowed to $0.7 million from $11.0 million. Utilization rose to 45% from 25%, principally as activity increased.
- The company acquired Magnetic Variation Services (MagVAR) in December 2017 for approximately $47.9 million cash, plus restricted stock awards to certain managers. MagVAR contributed $3.9 million revenue and a $1.1 million net loss in the six-month period. The acquisition added $28.7 million of identifiable intangible assets and $17.8 million of goodwill.
- General and administrative expense increased to $48.3 million in Q2 from $33.5 million, and to $94.9 million for six months from $67.8 million, reflecting higher staffing, compensation and stock-based compensation, as well as acquisitions.
Outlook, risks and unusual items
- Management estimated fiscal 2018 capital spending of approximately $400 million to $450 million, primarily for maintenance and fleet upgrades. It expected operating cash, existing cash and, if needed, the revolving facility to fund operating needs, dividends and capital spending; it cautioned that cash generation is not assured.
- Contract drilling backlog was $1.3 billion at both March 31, 2018 and September 30, 2017. Approximately 61.3% of March backlog was not reasonably expected to be filled in fiscal 2018. Backlog is subject to customer termination, performance and collection risks and is not guaranteed revenue.
- At March 31, 213 of 350 U.S. Land rigs were contracted; 216 were contracted as of April 26. Based on notices received, management expected approximately $2.2 million of early-termination revenue in Q3 FY2018. An offshore rig was scheduled to return to work in Q3.
- Management attributed increased drilling activity primarily to higher commodity prices. Key exposures include oil and gas price volatility, customer concentration and contract termination, operating and safety risks, litigation, and international political, currency and repatriation risks. Argentina and Colombia accounted for most international revenue; foreign operations generated 10.1% of consolidated revenue in the six-month period.
- The Venezuelan government’s 2010 seizure of 11 rigs remains the subject of litigation. The company cannot determine the timing, amount or likelihood of any recovery and has recognized no gain. A separate Department of the Interior review related to previously resolved DOJ proceedings had no assured outcome.
- The company reported $70.3 million of equipment, parts and supply purchase commitments. It also disclosed a $15.7 million Level 3 contingent earnout liability related to a prior acquisition and an unrealized loss position on an equity security; management did not consider the security impairment other-than-temporary.
- Revenue recognition guidance was expected to be adopted October 1, 2018; management did not expect a material overall effect but anticipated possible changes in timing of drilling-contract revenue and related costs. Lease accounting adoption was expected October 1, 2019.
Most important facts for investors to verify
- Separate operating recovery from the one-time $501.8 million tax benefit when assessing six-month earnings and earnings per share.
- Track U.S. Land utilization, contracted rigs, spot pricing and the effect of legacy contract roll-offs on day rates and margins.
- Monitor cash conversion and working-capital needs against capital spending guidance, dividends and acquisition-related spending.
- Assess backlog conversion and customer termination exposure; backlog value is not a guarantee of future revenue.
- Review MagVAR integration and performance, the unresolved Venezuela recovery claim, and material international currency and political exposures.