Helmerich & Payne, Inc. — Q3 FY2016 Form 10-Q
Reporting period: Three and nine months ended June 30, 2016; filed August 5, 2016. The company provides contract drilling services through U.S. Land, Offshore and International Land segments. Comparative 2015 figures were adjusted retrospectively for a change eliminating the one-month reporting lag for foreign operations.
Financial performance and liquidity
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Revenue | $366.5 million | $661.4 million | $1,292.5 million | $2,607.9 million |
| Operating income (loss) | $(13.3) million | $135.0 million | $67.0 million | $696.7 million |
| Net income (loss) | $(21.2) million | $90.9 million | $16.0 million | $448.0 million |
| Diluted EPS | $(0.20) | $0.83 | $0.13 | $4.10 |
- Q3 operating margin was approximately (3.6%), versus 20.4% a year earlier, reflecting lower activity and higher corporate G&A. Nine-month operating margin was approximately 5.2%, versus 26.7%.
- Q3 segment operating income was $25.8 million for U.S. Land and $2.1 million for Offshore; International Land recorded a $5.0 million loss. For the first nine months, the respective results were $143.9 million, $13.1 million and a $13.9 million loss.
- Cash provided by operating activities was $615.4 million for the first nine months, down from $1,151.6 million. Capital expenditures were $219.5 million versus $971.6 million; cash used in investing activities was $211.0 million. Cash increased $177.6 million to $907.0 million.
- At June 30, cash and cash equivalents were $907.0 million and short-term investments were $49.6 million. Debt carrying value was approximately $532.4 million, including $40 million due in July; that principal and interest were paid in July. Shareholders’ equity was $4.70 billion.
- The company had no borrowings on its $300 million revolving facility at June 30. It replaced that facility in July with a new $300 million unsecured facility maturing in 2021. A funded-leverage covenant requires a ratio below 50%.
Changes, outlook and key commentary
- Revenue fell about 45% year over year in Q3. Management attributed lower activity and pricing chiefly to low oil prices, customer budget cuts, nonrenewals and early contract terminations. U.S. Land revenue days fell 47% and utilization declined to 24% from 47%; International Land revenue days fell 31% and utilization to 37% from 50%. Offshore utilization was 78%, versus 89%.
- Early termination revenue was $80.7 million in Q3 and $189.2 million for the nine months. Based on notices received, management expected approximately $30 million in Q4 FY2016. The filing cautions that termination payments and backlog may not be realized in full.
- Management expected U.S. Land utilization and International Land revenue days to increase in Q4 as some rigs returned to work. The company reported 89 of 348 U.S. Land rigs contracted at June 30 and 91 contracted as of July 28. It expected one additional FlexRig completion in calendar 2016, after which scheduled new-rig construction would be complete.
- FY2016 capital spending was estimated at $300–$350 million. Management expected a 75%–80% effective tax rate for FY2016 and approximately 58% for the remaining quarter.
- Notable items include a $6.3 million impairment of decommissioned U.S. drilling equipment held for sale; $9.4 million of foreign-currency losses for the nine months, primarily related to the Argentine peso; and a $3.9 million discontinued-operations loss tied to Venezuela’s currency system. Q3 also included workforce-reduction and pension-related costs.
- Risks include prolonged low commodity prices and further reductions in drilling activity or dayrates; international political, currency and repatriation risks; customer contract termination or nonpayment; and operational, regulatory and litigation exposures. The Keel injury suit seeks damages well in excess of $100 million; the company says it has accrued its self-insured retention, but cannot predict the outcome. Discussions with the Interior Department concerning previously investigated offshore testing irregularities continue; potential loss and timing are unclear. Recovery from Venezuela’s expropriation is uncertain and no gain was recognized.
- Management said disclosure controls were effective at June 30. The ERP implementation was ongoing; management noted future phases could require control changes. The filing provides no broader earnings or commodity-price guidance.
Most important facts for investors to verify
- Whether rig counts, utilization, dayrates and customer activity recover as management anticipated, and how quickly early-termination revenue declines.
- How much of the $2.0 billion drilling backlog converts to revenue, considering expirations, termination rights and customer credit risk.
- Whether operating cash flow can support dividends, capital spending and debt obligations under continued weak market conditions.
- The actual effect of the expected elevated FY2016 tax rate, currency movements and any further impairments or restructuring charges.
- Developments in the Keel litigation, Interior Department discussions and Venezuela recovery proceedings, including any change in estimated exposure.