Helmerich & Payne, Inc. — Fiscal 2010 Second-Quarter 10-Q
Reporting period: Quarter and six months ended March 31, 2010; filed May 5, 2010. Amounts below are in U.S. dollars. The company provides contract drilling services through U.S. Land, Offshore, and International Land operations.
Financial performance and position
| Metric | Three months ended March 31, 2010 | Prior-year quarter | Six months ended March 31, 2010 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $439.7 million | $520.3 million | $839.6 million | $1,144.1 million |
| Operating income | $79.5 million | $183.3 million | $181.9 million | $405.8 million |
| Net income | $46.7 million | $103.7 million | $110.0 million | $249.0 million |
| Diluted EPS | $0.43 | $0.98 | $1.02 | $2.34 |
| Operating margin | 18.1% | 35.2% | 21.7% | 35.5% |
- Quarterly revenue fell 15.5% year over year and net income fell 54.9%. For the six-month period, revenue fell 26.6% and net income fell 55.8%.
- Quarterly revenue decline was concentrated in U.S. Land, where revenue decreased to $324.4 million from $414.5 million. Lower early-termination and new-rig delivery-delay revenue accounted for much of the lower average revenue per day.
- Six-month operating cash flow was $205.9 million, compared with $490.5 million a year earlier. Capital expenditures were $142.7 million versus $525.9 million; cash used in investing activities was $126.3 million.
- Cash and cash equivalents were $125.7 million at March 31, down from $141.5 million at September 30, 2009. Current assets were $550.4 million and current liabilities $182.9 million.
- Total debt was $440 million, all classified as long-term, versus $525 million at September 30, 2009. Net debt, calculated as debt less cash, was approximately $314.3 million. The $400 million revolving facility had $288.1 million available at quarter-end, after $21.9 million of letters of credit; availability rose to $318.1 million after a subsequent $30 million repayment. The company reported compliance with debt covenants.
- Quarterly dividends declared were $0.05 per share; six-month dividends were $0.10 per share.
Segments and material changes
- U.S. Land: Quarterly segment operating income was $90.7 million versus $192.9 million; utilization was 70% versus 72%. For six months, segment income was $182.2 million versus $387.0 million and utilization was 66% versus 83%. The filing describes some U.S. market recovery since June 2009; 154 of 212 segment rigs were generating revenue at March 31.
- Offshore: Quarterly segment operating income was $13.6 million versus $15.8 million; utilization declined to 81% from 98%. Seven of nine platform rigs were working at quarter-end.
- International Land: Quarterly segment operating loss was $10.7 million, improving from a $15.3 million loss; six-month results shifted from $7.3 million of income to a $2.3 million loss. All 11 Venezuela rigs were idle at quarter-end. An approximately $19.7 million Venezuelan currency devaluation loss was recorded in second-quarter operating costs.
- Quarterly general and administrative expense increased to $20.8 million from $16.4 million. The six-month increase included $4.9 million of additional stock compensation related to a plan amendment allowing continued vesting after retirement eligibility.
- Interest expense increased, principally because of borrowings under a fixed-rate facility obtained in July 2009. The effective tax rate was 37.9% for the quarter and 36.6% for six months, down from 45.6% and 40.8%, respectively, in the comparable periods.
Outlook, risks and unusual items
- Management estimated fiscal 2010 capital expenditures at $330 million, a $65 million increase from its prior estimate. The increase supports rig construction, spare components, selected projects and maintenance. Three new FlexRigs had multi-year term contracts; the company also described flexibility to build up to five additional FlexRigs into early 2011.
- Management expected research and development expense of up to approximately $2.5 million per quarter during fiscal 2010. It stated operating cash flow, cash on hand and credit facilities were expected to fund operations and estimated fiscal 2010 capital expenditures, while cautioning that future cash generation and financing were not assured.
- Contract drilling backlog was $2.427 billion at March 31, down from $2.528 billion at September 30, 2009. About 78.9% was not reasonably expected to be filled during fiscal 2010. Backlog is subject to customer termination rights, rig delivery and performance conditions, and component-supply constraints.
- Venezuela presents collection and currency risks. The company recognized revenue there as cash was collected; approximately $39.5 million of revenue remained unrecognized pending collection, with associated expenses expected to offset about 14%. PDVSA receivables were $8.4 million at quarter-end; subsequent payments reduced the balance by about $3.1 million and were expected to result in $1.2 million of revenue in the next quarter. Timing of collections and currency conversion remained uncertain.
- A former customer lawsuit concerning drilling services alleges contract and performance failures and seeks actual and punitive damages. The company is defending the case; an adverse outcome could materially affect financial condition and results. Outstanding rig-construction purchase commitments were approximately $25 million.
- Other risks cited include oil and gas price and customer-spending changes, early contract termination, foreign political and currency risks, weather, and reliance on limited-source rig-component suppliers. Quarterly earnings included approximately $0.8 million of after-tax gains from asset sales; the Venezuela devaluation loss was an unusual and material expense.
Important facts for investors to verify
- Whether U.S. Land activity and dayrates continued to recover, and how much revenue depends on spot work versus fixed-term contracts.
- Collections from PDVSA, conversion of Venezuelan currency into U.S. dollars, and the carrying value and recoverability of Venezuelan assets and receivables.
- Whether the $2.427 billion backlog converts to revenue as expected, including the effect of customer termination rights and rig delivery constraints.
- Execution of the $330 million capital plan, FlexRig construction and associated funding needs; confirm subsequent revolver availability and debt repayments.
- Developments in the former-customer litigation and any change to the company’s assessment of potential exposure.