Helmerich & Payne, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2020. The filing was submitted May 4, 2020. H&P provides land and offshore contract drilling services and drilling technologies.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $633.6 million, down from $720.9 million | $1,248.3 million, down from $1,461.5 million |
| Operating income (loss), continuing operations | $(518.5) million, versus $95.1 million | $(487.2) million, versus $149.4 million |
| Net income (loss) | $(420.5) million, versus $60.9 million | $(389.9) million, versus $79.9 million |
| Diluted EPS | $(3.88), versus $0.55 | $(3.61), versus $0.72 |
| Cash from operating activities | Not separately stated for the quarter | $232.6 million, versus $409.0 million |
| Capital expenditures | Not separately stated for the quarter | $94.3 million, versus $330.0 million |
- Results include $563.2 million of non-cash asset impairment charges: $441.4 million for drilling rig asset groups, $83.5 million for in-progress equipment and rotational inventory, and $38.3 million for goodwill. Management reported the total impairment reduced earnings by $437.5 million after tax, or $5.19 per diluted share.
- At March 31, cash and cash equivalents were $336.1 million and short-term investments were $45.7 million. The company reported approximately $381.7 million combined, plus $750 million available under its revolving credit facility; management described approximately $1.1 billion of near-term liquidity.
- Long-term debt, net, was $479.8 million, consisting of 4.65% senior notes due March 2025. The revolver had no borrowings or letters of credit outstanding; H&P reported compliance with debt covenants.
- Current assets were $1.12 billion and current liabilities $377.4 million. Management reported working capital, excluding cash and short-term investments, of $361.0 million.
- The six-month net decrease in cash and restricted cash was $2.8 million; period-end cash and restricted cash totaled $380.2 million. Dividends paid in the six months were $155.9 million.
Material changes and operating trends
- Revenue fell 12.1% in the quarter and 14.6% for the six-month period versus the prior year. Management attributed weaker activity primarily to customer spending discipline, followed by the COVID-19 demand shock and OPEC+ production increases.
- At quarter-end, H&P had 170 contracted rigs out of a 339-rig fleet, versus 218 contracted rigs at September 30, 2019. Super-spec FlexRig utilization was 62%, with 89 of 234 rigs idle. The overall fleet included 299 U.S. Land rigs, eight offshore platform rigs and 32 International Land rigs.
- U.S. Land revenue declined 14.1% in the quarter; revenue days fell 18.8% year over year, and utilization was 63% versus 67%. International Land quarterly revenue was nearly flat, but its segment loss included $156.7 million of impairment. Offshore reported a $3.3 million segment loss, including customer bad-debt expense and weaker rig contribution. H&P Technologies revenue increased 20.2%, but its segment loss included the $38.3 million goodwill impairment.
- Contract drilling backlog was $837.6 million at March 31, down from $1.2 billion at September 30, 2019. Approximately $413.1 million was expected to be recognized in the remainder of FY2020, $312.1 million in FY2021 and $112.4 million in FY2022 and thereafter. Backlog excludes anticipated renewals and is subject to customer cancellation or modification.
- Operating cash flow declined year over year, while capital expenditures fell to $94.3 million from $330.0 million. The reduction reflected lower activity, fewer super-spec upgrades and reduced maintenance spending.
Outlook, risks and unusual items
- Management said customer 2020 capital budgets had declined approximately 40% from calendar 2019 levels and expected a meaningful further decline in H&P’s rig count. It could not estimate the duration or ultimate effects of the pandemic, oil oversupply or any recovery.
- H&P announced approximately $145 million of planned cost and capital-spending reductions, with further reductions anticipated. It intended to reduce future quarterly dividends from $0.71 to $0.25 per share beginning with any dividend declared for FY2020’s third quarter. The previously declared $0.71 dividend payable June 1, 2020 was reaffirmed.
- After quarter-end, H&P decommissioned 37 rigs previously included in asset groups impaired at March 31. Additional rig-release notices were expected to generate approximately $27 million of early-termination and notification-fee revenue in future periods; such fees do not assure replacement work or sustained utilization.
- Foreign operations faced COVID-related restrictions, including a complete suspension of drilling in at least one jurisdiction, and a customer invoked force majeure there. Argentina currency controls limited repatriation; H&P reported $33.7 million of cash in Argentina at March 31.
- Other risks include volatile oil prices, lower dayrates and utilization, customer contract terminations, collection risk, and uncertainty in impairment assumptions. H&P’s lawsuit seeking recovery for Venezuela’s seizure of its drilling business remained unresolved; the company could not estimate recovery timing or amount.
Important facts for investors to verify
- Whether subsequent rig releases, decommissioning and customer budget cuts materially reduce utilization, backlog and cash generation.
- Whether the assumptions behind the $563.2 million impairment charges remain appropriate if contract awards, utilization, pricing or asset-disposal values deteriorate further.
- Whether planned spending reductions and the proposed dividend reduction are implemented, and whether liquidity and covenant headroom remain adequate.
- How much reported backlog converts to revenue given cancellation rights, contract renegotiations and customer credit risk.
- Whether Argentina’s currency controls, foreign operating suspensions, and other international risks affect cash access or operations.