Helmerich & Payne, Inc. — Q3 FY2015 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2015; filed August 7, 2015. The unaudited filing reports a contract drilling business with U.S. Land, Offshore and International Land segments.
Financial results and liquidity
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Revenue | $659.7 million | $952.1 million | $2,599.3 million | $2,734.7 million |
| Operating income | $132.8 million | $271.9 million | $691.8 million | $791.3 million |
| Net income | $90.9 million | $192.3 million | $443.4 million | $540.0 million |
| Diluted EPS | $0.83 | $1.75 | $4.06 | $4.92 |
| Operating cash flow | Not separately stated | Not separately stated | $1,147.5 million | $797.9 million |
| Capital expenditures | Not separately stated | Not separately stated | $971.9 million | $622.0 million |
- Q3 revenue fell about 31% year over year; nine-month revenue fell about 5%. Operating income and net income also declined in both comparisons. Operating margin was approximately 20.1% in Q3 versus 28.6% a year earlier.
- Cash and cash equivalents were $770.9 million at June 30, up from $360.9 million at September 30, 2014. Current assets were $1.50 billion and current liabilities $346.5 million.
- Reported debt carrying value was approximately $571.5 million at June 30. The company issued $500 million of 4.65% senior notes due 2025 in March. A $40 million note repayment due July 2015 was paid after quarter-end. The $300 million revolving facility had $251.8 million available, net of letters of credit; the company reported covenant compliance.
- Nine-month operating cash flow less cash capital expenditures was approximately $175.7 million, a derived measure; the comparable 2014 amount was approximately $175.9 million. Cash generation benefited from working-capital movements, including lower receivables, so it should not be assumed to represent a recurring run rate.
Material changes and operating drivers
- U.S. Land was the main source of weakness: Q3 revenue declined to $494.6 million from $802.3 million, segment operating income to $121.7 million from $271.1 million, and utilization to 47% from 88%. Management attributed the downturn to lower oil prices, reduced customer spending, contract expirations and early rig releases. Idle rigs also raised per-day costs.
- Q3 Offshore revenue was $55.7 million versus $64.6 million; segment operating income was $14.7 million versus $17.0 million. Lower day rates on rigs on standby or special rates weighed on per-day revenue and margins.
- Q3 International Land revenue increased to $106.2 million from $81.3 million and segment operating income to $16.7 million from $6.6 million, helped by rigs transferred into the segment and higher per-day revenue. Utilization nevertheless fell to 51% from 74%.
- Early termination revenue was $84.5 million in Q3 and $179.6 million for the first nine months, compared with $0.5 million and $10.3 million, respectively, in the prior-year periods. This supported reported revenue amid falling activity. The prior-year comparisons also included material gains on investment-security sales: $23.9 million pretax in Q3 and $45.2 million pretax for nine months; there were no such sales in FY2015.
- The company decommissioned 17 SCR-powered FlexRigs effective March 31 and recorded $13.5 million of depreciation-related abandonments over nine months. Unrealized investment-security losses contributed $46.8 million to nine-month other comprehensive loss; the investment balance declined to $160.0 million from $236.6 million.
Outlook, risks and contingencies
- Management expected U.S. and International Land utilization to decline further in Q4 FY2015 as recently idled rigs remained inactive. As of June 30, 153 of 341 U.S. Land rigs were contracted; 156 were contracted as of July 30, excluding rigs being stacked. Management cited about $3.5 million of expected Q4 U.S. early-termination revenue and potentially more than $9 million in International Land.
- FY2015 capital spending was estimated at approximately $1.3 billion. The company expected to complete 12 FlexRigs between July 30, 2015 and March 2016; new rigs scheduled for delivery in 2015 and 2016 were supported by multiyear contracts. Outstanding equipment, parts and supply purchase commitments were approximately $140.2 million.
- Contract backlog fell to $3.5 billion at June 30 from $5.0 billion at September 30, 2014, primarily reflecting revenue earned and contract expirations or terminations. About 89.5% of June backlog was not reasonably expected to be filled in FY2015. Backlog may not convert as expected due to customer termination rights, rig delivery delays, limited-source suppliers and other contract conditions.
- Management expected FY2015 interest expense of approximately $15 million and an effective tax rate of about 34% for the remaining quarter. The filing cautions that current cash generation may not continue at the same level.
- Key risks include sustained low oil prices and further customer spending cuts; early contract termination and spot-rate pressure; operational, weather and insurance exposures; foreign exchange and political risks; and potential interruption of rig construction or delivery. International revenue was 11.4% of consolidated revenue for the nine-month period, with 71.5% of international revenue from South America.
- The Venezuelan government seized the subsidiary’s drilling business in 2010; the company continues to seek damages, but timing, amount and likelihood of recovery are uncertain and no gain is recorded. Discussions with the Department of the Interior Inspector General regarding the 2010 choke-manifold testing matter continued after the related DOJ matter was resolved; any penalty is undetermined, though management did not expect a material adverse effect.
Important facts for investors to verify
- How much future earnings and cash flow can be supported by contracted work versus early-termination payments, and how quickly idle rigs are stacked or redeployed.
- Backlog conversion, contract cancellations, customer demand and the accuracy of the Q4 utilization and termination-revenue expectations.
- FY2015 capital spending, newbuild delivery timing and whether contracted new rigs earn returns sufficient to justify the investment.
- Cash flow quality and liquidity after capital expenditures, dividends, the July debt repayment and ongoing rig-construction commitments; also confirm covenant headroom.
- Exposure and potential outcomes relating to Venezuela, the Department of the Interior discussions, self-insured claims and international currency restrictions.