HP

Helmerich & Payne, Inc. - 10-Q Summary (Period Ended June 30, 2003)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Helmerich & Payne, Inc. for the period ended June 30, 2003. The company operates primarily in the contract drilling industry (Domestic and International segments) and Real Estate. Following a spin-off on September 30, 2002, the company's former exploration and production business (Cimarex Energy Co.) is reported as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 10% for the quarter and 12% for the nine-month period compared to the prior year. This was driven by a significant drop in investment income (down ~$25 million) due to the absence of large gains from the sale of securities recorded in the prior year.
• Profitability Drop: Net income fell 71% for the quarter and 79% for the nine-month period. The prior year included $5.7 million from discontinued operations and $15.2 million in after-tax gains from securities sales, neither of which occurred in the current period.
• Segment Performance:
  • Domestic Drilling: Operating profit increased to $18.8 million (Q3) due to higher land rig margins and activity, despite increased depreciation from new FlexRig3 units.
  • International Drilling: Operating profit rose slightly to $3.9 million (Q3), but revenues declined. Venezuela operations improved, while Colombia, Argentina, and Bolivia reported combined losses due to a 60% decline in rig activity.
• Expense Increases: Interest expense rose to $3.2 million (Q3) from negative $0.5 million in the prior year due to $200 million in new term notes issued in late 2002. General and administrative expenses increased due to higher pension and health insurance costs.

Guidance, Outlook, and Risks

• Capital Expenditures: The company anticipates total capital expenditures of approximately $260 million for fiscal 2003. Funding is expected to come from internally generated cash flows (projected at $115 million), borrowing against a $125 million line of credit, or selling investment securities.
• Operational Outlook:
  • Domestic: Positive movement in dayrates noted; FlexRig3 project completed with an extension for seven additional rigs.
  • International: Outlook for Venezuela is positive with expectations for all eight deep rigs to be working by year-end. Activity in Argentina and Bolivia remains low but is expected to resume in Q4 and Q1 2004 respectively.
• Risks and Contingencies:
  • Venezuela Currency Risk: The company holds approximately $8 million in Venezuelan bolivars which cannot currently be converted to U.S. dollars. A 50% devaluation could result in a $3.9 million expense.
  • Pension Plan Changes: Effective October 1, 2003, the company will freeze new participation in its pension plan and reduce benefit accruals, with a full freeze on accruals by October 1, 2006.

Investor Verification Checklist

• Verify the status of the $8 million Venezuelan bolivar cash balance and any progress on conversion permissions.
• Monitor the utilization rates of the new FlexRig3 units and the timing of the seven additional rigs scheduled for delivery.
• Review the company's ability to fund the projected $260 million capital expenditure program given the decline in operating cash flow.
• Assess the impact of the pension plan revisions on future operating expenses and employee retention.
• Track the recovery of rig activity in Argentina and Bolivia to validate the management's Q4/Q1 2004 restart projections.