Helmerich & Payne, Inc. — Fiscal 2016 Second-Quarter 10-Q
Business context and reporting period. The filing covers the three and six months ended March 31, 2016, for the contract drilling company’s fiscal 2016 second quarter. Operations are reported in U.S. Land, Offshore, and International Land segments. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended March 31, 2016 | Year-over-year change | Six months ended March 31, 2016 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $438.2 million | Down 50.5% | $926.0 million | Down 52.4% |
| Operating income | $41.6 million | Down 82.0% | $80.3 million | Down 85.7% |
| Operating margin | 9.5% | 26.1% in prior-year quarter | 8.7% | 28.9% in prior-year period |
| Income from continuing operations | $25.2 million; diluted EPS $0.23 | Prior-year income $153.5 million; diluted EPS $1.41 | $41.1 million; diluted EPS $0.37 | Prior-year income $357.2 million; diluted EPS $3.27 |
| Net income, including discontinued operations | $21.2 million; diluted EPS $0.19 | Prior-year net income $153.5 million | $37.2 million; diluted EPS $0.33 | Prior-year net income $357.2 million |
- Segment performance: Second-quarter U.S. Land revenue was $349.3 million and segment operating income was $62.5 million. Offshore revenue was $34.3 million and segment income was $3.3 million. International Land revenue was $51.4 million and the segment recorded a $2.3 million loss.
- Cash flow and investment: Six-month operating cash flow was $492.5 million, versus $816.6 million a year earlier. Cash capital expenditures were $180.5 million, versus $766.0 million; operating cash flow less capital expenditures was approximately $312.0 million. Cash increased by $168.6 million to $898.0 million.
- Liquidity: Cash and short-term investments totaled approximately $943.5 million. The company reported $532.1 million of debt carrying value, including $40 million due in July 2016 and $500 million of notes due in 2025. Its $300 million revolver had no borrowings and $259.7 million available after letters of credit.
- Capital returns: Dividends paid were $149.3 million in the first half; the declared dividend was $0.6875 per share for each of the two quarters. No common shares were repurchased in fiscal 2016 to date.
Material changes versus the prior comparable periods
- Lower oil prices and reduced customer spending sharply reduced activity. U.S. Land utilization fell to 31% in the quarter from 68% a year earlier; revenue days declined 54%. For the six-month period, utilization fell to 35% from 78%, and revenue days declined 55%.
- U.S. Land revenue per day excluding early termination revenue declined year over year in the quarter. Fewer revenue days also increased allocated rig expenses per revenue day as idle rigs continued to incur personnel and stacking costs.
- Offshore segment income fell to $3.3 million from $19.0 million for the quarter, principally amid lower dayrates as rigs moved to standby or other special rates. International Land moved from segment income to a loss, reflecting weaker activity and pricing, as well as currency losses.
- Six-month interest expense increased to $10.2 million from $3.2 million, primarily following the March 2015 issuance of $500 million of senior notes.
- Contract drilling backlog declined to $2.3 billion at March 31, 2016 from $3.1 billion at September 30, 2015, reflecting revenue earned and contract expirations and terminations.
Outlook, risks, contingencies, and unusual items
- Near-term outlook: Management expected U.S. Land utilization to decline further in the third quarter, with International Land revenue days also expected to fall. Based on termination notices received, third-quarter early termination revenue was expected to exceed $80 million. This revenue is compensation for contract terminations, not a measure of ongoing drilling demand.
- Spending and tax outlook: Fiscal 2016 capital spending was estimated at $300 million to $350 million. Management expected an effective tax rate of 33% to 36% in each remaining quarter. The filing provides no specific full-year revenue or earnings forecast.
- Termination revenue: Early termination revenue was $79.6 million for the quarter and $108.4 million for the six months. Such payments depend on contract terms and customer performance; backlog and expected receipts may not be realized as reported.
- Currency and discontinued operations: Foreign currency transaction losses were $8.3 million in the six months, primarily due to the Argentine peso’s December 2015 devaluation. Venezuela’s new exchange system resulted in a $4.0 million second-quarter discontinued-operations loss related to former Venezuelan operations.
- Other unusual items: A voluntary accounting change eliminated the one-month reporting lag for foreign subsidiaries, with retrospective adjustments to prior periods. The change shifted the timing of certain currency effects between quarters. The company also early adopted the standard requiring deferred tax balances to be classified as noncurrent. Six-month income included $4.4 million of after-tax gains from asset sales.
- Principal risks and contingencies: Sustained low oil prices could further reduce drilling activity, utilization, dayrates, and cash generation. International operations face political, currency, repatriation, regulatory, and expropriation risks. The company continues to seek recovery over the 2010 Venezuelan expropriation but cannot estimate timing, amount, or likelihood. Discussions with the Department of the Interior concerning previously investigated offshore testing irregularities remain unresolved; the company said it could not estimate any potential penalty, but did not expect a material adverse effect.
- Other commitments: Outstanding rig-construction purchase commitments were approximately $15.7 million. The company reported compliance with debt covenants. Its fiscal 2016 rig deliveries were supported by multiyear contracts.
Important facts for investors to verify
- Whether realized rig utilization, dayrates, customer contract terminations, and early termination receipts match management’s near-term expectations.
- How much of the $2.3 billion backlog converts to revenue, given customer termination rights and the possibility of nonperformance.
- Cash generation and capital spending against the $300 million to $350 million fiscal-year estimate, including the upcoming $40 million debt maturity.
- Developments in Argentine currency conditions and the unresolved Venezuelan expropriation and Department of the Interior matters.
- The effects of the reporting-lag accounting change when comparing quarterly results; prior-year figures were adjusted retrospectively.