Helmerich & Payne, Inc. annual report, FY2013

Helmerich & Payne, Inc. — FY2013 Form 10-K

Reporting period: Fiscal year ended September 30, 2013. The filing also reports fourth-quarter results for the three months ended September 30, 2013. The company is primarily a contract driller, operating U.S. Land, Offshore and International Land segments; it also owns Tulsa-area real estate and develops rotary-steerable drilling technology.

Financial and operating results

Metric	FY2013	FY2012
Operating revenue	$3.388 billion	$3.152 billion
Operating income	$956.7 million	$909.6 million
Income from continuing operations	$721.5 million	$573.6 million
Net income	$736.6 million	$581.0 million
Diluted EPS	$6.79	$5.34
Cash provided by operating activities	$997.2 million	$1.000 billion
Capital expenditures	$809.1 million	$1.098 billion

FY2013 revenue increased 7.5% and net income rose 26.8%. Earnings included a $162.1 million pretax gain on investment-security sales ($97.9 million after tax, or $0.91 per diluted share) and $12.2 million of after-tax asset-sale gains. Operating income increased more modestly than net income; the securities gain was a material contributor to the latter.

In fiscal Q4, revenue was $864.5 million, operating income $243.2 million, net income $159.8 million and diluted EPS $1.47. The quarter included a $2.8 million after-tax asset-sale gain; no investment-security sale gain was reported for Q4.

Direct operating costs were 55% of revenue, versus 56% in FY2012. Depreciation was $455.6 million, up from $387.5 million, reflecting the larger rig fleet; management expected depreciation to rise again in FY2014. Segment operating income was $932.6 million for U.S. Land, $53.1 million for Offshore and $44.6 million for International Land. These segment measures exclude certain corporate items and are non-GAAP.

Liquidity, debt and capital allocation

• Cash and cash equivalents were $447.9 million at year-end, versus $96.1 million a year earlier. Current assets were $1.258 billion and current liabilities $452.3 million; the reported current ratio was 2.8, up from 2.4.
• Total debt was $195 million: $115 million due within one year and $80 million classified as long-term. Long-term debt to total capitalization, including current maturities, was 4%, versus 6% in FY2012. The company reported compliance with debt covenants.
• The $300 million revolving credit facility had no borrowings and $272.8 million available at September 30, 2013, after letters of credit; subsequent letters of credit reduced availability to $269.3 million. Operating cash flow and cash funded most capital spending.
• FY2013 dividends paid were $93.1 million, or $0.87 per share. No common shares were repurchased during the year. The company continued its multiyear record of annual dividend increases.
• Marketable securities had a year-end fair value of $305.6 million, concentrated in Atwood Oceanics and Schlumberger; their value is exposed to equity-market fluctuations.

Material changes and outlook

• Revenue grew across all three drilling segments. U.S. Land revenue rose 4.0%, but utilization declined to 82% from 89%; revenue days increased to 88,620. Offshore revenue rose 17.3% and utilization improved to 89% from 79%. International Land revenue rose 35.9% and utilization improved to 82% from 77%.
• The fleet totaled 340 rigs at year-end, including 302 U.S. Land rigs; 20 new FlexRigs entered service during FY2013. Management reported 276 active rigs, compared with 264 a year earlier, and said customer discussions suggested potential for higher activity.
• Contract backlog fell to $2.9 billion from $3.6 billion, primarily due to expiration of long-term contracts. About 81.7% of year-end backlog was not reasonably expected to be filled in FY2014. Backlog is not guaranteed revenue and may be affected by cancellations, customer performance or rig-delivery delays.
• Management estimated FY2014 capital spending at $850 million, assuming a build pace of approximately two rigs per month through September 2014. Subsequent to year-end, the company announced agreements for 13 additional U.S. FlexRigs. Management emphasized technology, safety and field performance as competitive priorities.

Risks, contingencies and unusual items

• Results depend on customer drilling budgets, which are sensitive to commodity-price expectations, financing conditions and industry activity. Customer concentration is significant: the ten largest customers represented about 61% of FY2013 revenue and the three largest about 31%.
• Operational hazards, severe weather, environmental liability and insurance limitations pose risks; the company self-insures substantial portions of equipment and liability exposure. Regulatory changes affecting hydraulic fracturing could reduce customer activity even though H&P does not itself perform fracturing.
• In November 2013, a court approved a DOJ plea agreement resolving an investigation into 2010 offshore choke-manifold testing irregularities. The subsidiary entered a three-year probation period and must implement an environmental compliance plan. A $5.4 million penalty and $1.0 million community-service payment were accrued at year-end and paid in November. Discussions with the Interior Department Inspector General continued; the filing says timing and outcome are uncertain.
• The company continued litigation against Venezuela over the 2010 seizure of 11 rigs and related assets. Arbitration settlements with unrelated third parties generated $15.0 million in FY2013 discontinued-operations proceeds. Any recovery from the Venezuela litigation is uncertain and was not recognized as a gain.
• Other risks include international political and currency exposure, dependence on limited rig-component suppliers, competition for skilled personnel, and the possibility of additional tax liabilities. The independent auditor issued an unqualified opinion; management and the auditor concluded internal control over financial reporting was effective.

Important facts for investors to verify

• How much of the FY2013 earnings increase is attributable to recurring drilling operations versus the $162.1 million investment-sale gain?
• Whether lower U.S. Land utilization persists, and how new rig additions affect dayrates, margins, depreciation and returns on capital.
• The conversion and durability of the $2.9 billion backlog, including contract expirations, customer termination rights and rig-delivery schedules.
• FY2014 capital spending, expected operating cash flow, debt maturities and available revolver capacity.
• Developments in the DOJ compliance plan, Interior Department discussions and Venezuela litigation, including any additional costs or recoveries.
• Exposure to customer concentration, the market value of the securities portfolio and potential claims exceeding insurance or indemnification coverage.