Helmerich & Payne, Inc. — Fiscal 2013 First-Quarter 10-Q
Reporting period: Three months ended December 31, 2012, compared with the three months ended December 31, 2011. The company provides contract drilling services through U.S. Land, Offshore, and International Land operations. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Key financial results
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $844.6 | $732.6 | +15.3% |
| Operating income | $240.5 | $230.5 | +4.3% |
| Income from continuing operations | $159.6 | $144.3 | +10.6% |
| Net income | $159.6 | $144.3 | +10.6% |
| Diluted EPS | $1.48 | $1.32 | +12.1% |
| Operating margin | 28.5% | 31.5% | Down 3.0 percentage points |
Revenue growth came from all three drilling segments. Reported operating income included gains on asset sales of $5.2 million, compared with $4.7 million a year earlier. Net income also included an $8.8 million pretax gain from selling interests in three investment partnerships (about $5.5 million after tax, or $0.05 per diluted share). The effective tax rate was 35.2%, versus 36.8%.
- U.S. Land: Revenue rose to $696.0 million from $617.8 million; segment operating income increased to $234.4 million from $224.7 million. Average rig revenue per day rose to $28,040 from $26,861, but utilization fell to 82% from 91%. At quarter-end, 239 of 293 rigs were generating revenue.
- Offshore: Revenue was $57.7 million, up from $50.8 million; segment operating income rose to $15.0 million from $12.2 million. Utilization improved to 89% from 84%; eight of nine platform rigs were active at quarter-end.
- International Land: Revenue increased to $87.3 million from $60.7 million, and segment operating income rose to $9.1 million from $7.9 million. Utilization improved to 85% from 78%, though average rig margin per day declined to $8,400 from $9,015, partly because a rig underwent unexpected repairs without dayrate revenue.
Operating costs excluding depreciation increased to $466.9 million from $391.0 million; depreciation rose to $106.6 million from $86.3 million. General and administrative expense increased to $32.4 million from $26.2 million, mainly due to salaries, bonuses, stock compensation, and workforce growth. Research and development expense was $3.4 million, related to development of a rotary steerable system.
Cash flow, liquidity, and debt
- Operating cash flow was $341.9 million, compared with $236.6 million. Capital expenditures were $219.4 million, versus $256.9 million; operating cash flow less capital expenditures was approximately $122.5 million.
- Cash and cash equivalents increased to $241.1 million at December 31, 2012, from $96.1 million at September 30, 2012. Investing activities used $193.9 million and financing activities used $2.9 million.
- Total debt was $235 million: $40 million due within one year and $195 million classified as long-term. The company reported compliance with its debt covenants.
- The $300 million revolving credit facility matures in May 2017. No amounts were borrowed at quarter-end; $269.3 million remained available after letters of credit issued under the facility. Additional letters of credit totaling $12.2 million were issued separately and did not reduce that availability.
- Investments totaled $441.8 million on the balance sheet, including $433.4 million of available-for-sale equity securities. The company declared a $0.15-per-share dividend, payable March 1, 2013; dividends declared were $0.15 per share versus $0.07 a year earlier.
Material changes, outlook, and risks
- Fiscal 2013 capital spending was revised upward to approximately $800 million from $740 million, primarily reflecting the timing of new FlexRig construction. Management said operating cash flow, cash balances, and the credit facility were expected to be sufficient to fund operations and estimated fiscal 2013 capital spending, while cautioning that cash generation and financing availability were not assured.
- Contract drilling backlog was $3.5 billion at December 31, 2012, down from $3.6 billion at September 30, 2012. About 64.4% of the December backlog was not reasonably expected to be filled in fiscal 2013. The company reported delivery of 11 contracted FlexRigs during the quarter, three more by the end of January, and planned 19 contracted new-rig deliveries during fiscal 2013. Subsequent to quarter-end, it announced agreements to build and operate three additional FlexRigs under multiyear contracts.
- Backlog is not guaranteed revenue: customers may terminate contracts, and certain circumstances can eliminate termination payments. New-rig contracts, delays, limited-source suppliers, and component delivery disruptions may also affect expected revenue.
- Venezuela’s 2010 seizure of 11 rigs and related property remains unresolved. The company’s subsidiaries seek damages in U.S. litigation and are pursuing a separate arbitration to collect an aggregate $50 million; the arbitration hearing was scheduled for late May 2013. No recovery was recognized, and timing, amount, and likelihood remained uncertain.
- A U.S. Attorney’s grand jury investigation into alleged offshore choke-manifold testing irregularities remained ongoing. The company said it was cooperating and did not then expect a material adverse effect, but could not assure the outcome or timing. A former rig manager pleaded guilty to a felony charge related to false statements.
- Other disclosed risks include oil and gas price fluctuations, early contract termination, rig construction and delivery issues, vendor concentration, weather, receivable collection, foreign exchange, and political or expropriation risks in international markets. The company noted that roughly 10% of quarterly revenue was international, with about 66% of international revenue from South America.
- The company estimated that reserves for uncertain tax positions could increase by approximately $7 million to $10 million over the next 12 months due to an international matter. It also had approximately $91 million of outstanding equipment, parts, and supply commitments related to rig construction.
Most important facts for investors to verify
- Whether U.S. Land utilization and operating margins stabilize, and whether dayrate gains offset lower utilization and higher costs.
- Execution of the $800 million fiscal 2013 capital program, contracted FlexRig deliveries, and the effect of construction timing on cash and returns.
- Conversion and durability of the $3.5 billion backlog, including customer termination rights, supplier constraints, and new-rig delivery risks.
- Debt maturities, covenant compliance, and available revolver capacity as capital spending proceeds.
- Developments and potential financial consequences of the Venezuela recovery claims, the offshore investigation, and the uncertain tax matter.