Helmerich & Payne, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. The filing also reports fourth-quarter results; this is an annual filing, not a standalone Q4 report. H&P provides land and offshore contract drilling services and drilling technology. Its segments are U.S. Land, Offshore, International Land, and H&P Technologies.
Financial results and key metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Operating revenue | $2.798 billion | $2.487 billion |
| Operating income from continuing operations | $20.6 million | $33.0 million |
| Income (loss) from continuing operations | $(32.5) million | $493.0 million |
| Consolidated net income (loss) | $(33.7) million; diluted EPS $(0.34) | $482.7 million; diluted EPS $4.37 |
| Cash provided by operating activities | $855.8 million | $557.9 million |
| Capital expenditures | $458.4 million | $466.6 million |
| Cash and cash equivalents at year-end | $347.9 million | $284.4 million |
| Long-term debt, net | $479.4 million | $494.0 million |
| Debt-to-capital ratio | 10.8% | 10.1% |
- Revenue increased 12.5%, reflecting higher activity and U.S. Land revenue days up 4.9%. Direct operating expenses rose to $1.803 billion from $1.648 billion. H&P reported no individual customer representing at least 10% of FY2019 revenue; its ten largest drilling customers generated about 45%.
- Operating margin was approximately 0.7% of revenue, versus 1.3% in FY2018. The $224.3 million asset impairment charge and $54.5 million loss on investment securities weighed on reported results. FY2018 results included a $477.2 million income-tax benefit, making the year-over-year net-income comparison unusually affected by tax items.
- Operating cash flow rose by $297.9 million, primarily because of a decrease in net working capital. Cash and short-term investments totaled approximately $400.9 million at year-end. Net working capital, as defined by the company, was $303.9 million, down from $412.6 million.
- The $487.1 million principal amount of 4.65% unsecured notes is due in 2025. The $750 million revolving credit facility had no borrowings or letters of credit outstanding at September 30, leaving $750 million available. The company reported compliance with debt covenants.
- Annual dividends declared were $2.84 per share; the most recent quarterly dividend was $0.71 per share. H&P repurchased 1.0 million shares for $42.8 million during FY2019.
Material changes versus FY2018
- Revenue increased by approximately $311 million, while operating income declined. Consolidated net income swung to a loss, primarily amid the large impairment and investment-security loss; FY2018 had an exceptional tax benefit.
- H&P recorded a $224.3 million impairment, mainly on excess capital spares and drilling support equipment following a decision to reduce marketed FlexRig4 fleets. It reduced domestic FlexRig4 rigs marketed from 71 to 20 and international FlexRig4 rigs from 10 to 8. FY2018 impairment charges totaled $23.1 million.
- U.S. Land revenue rose to $2.366 billion, but segment operating income fell to $93.1 million from $148.3 million, including the impairment. Offshore revenue rose 3.6% to $147.6 million while segment operating income fell 25% to $19.6 million. International Land revenue declined 11.2% to $211.7 million; segment income improved to $5.4 million from a small loss. H&P Technologies revenue nearly doubled to $60.0 million and its operating loss narrowed to $12.2 million.
- Contracted rigs fell to 218 at fiscal year-end from 259 a year earlier. Of the 338-rig fleet, 194 of 299 U.S. Land rigs and 18 of 31 International Land rigs were contracted; six of eight offshore rigs were contracted.
- H&P established H&P Technologies as a reportable segment and moved FlexApps into it. It acquired Angus Jamieson Consulting and DrillScan to expand drilling technology capabilities.
Outlook, risks, and unusual items
- Management described FY2020 customer activity as subdued and dependent on oil prices and disciplined customer spending. It expected customer budgets to be set around an assumed $50–$55 per barrel oil price, subject to change. FY2020 capital spending was estimated at $275–$300 million, down from $458.4 million in FY2019; management did not anticipate further super-spec upgrades, though some idle rigs could be converted to walking rigs for multi-year contracts.
- Management saw potential international growth but cautioned that Argentina’s political change could delay opportunities. Letters of intent had been signed for two UAE rigs, one Bahrain rig, and one Colombia rig to return to work in FY2020. Offshore operations were expected to have a broadly similar environment.
- Argentina’s September 2019 currency controls limited repatriation of funds; H&P reported $8.0 million of Argentine foreign-currency losses and $8.2 million across operations for FY2019. A roughly 24-hour strike affected six Argentine rigs in November 2019, after year-end.
- Backlog was $1.2 billion at September 30, 2019, versus $1.1 billion a year earlier; about $0.9 billion was expected to be recognized in FY2020. Backlog is not guaranteed: customers can cancel or modify contracts, and termination payments may not be collectible or may not apply.
- Other material risks include oil and gas price volatility, excess rig supply and pricing pressure, customer concentration, operational accidents and weather, self-insured losses, cybersecurity, regulation and climate-related changes, and the possibility of further asset impairments. H&P was pursuing a lawsuit over Venezuela’s 2010 seizure of its drilling business; recovery timing and amount, if any, were uncertain.
- On November 13, 2019, after year-end, H&P amended its revolving credit facility to extend maturity to November 13, 2024 and remove certain negative covenants.
Investor verification priorities
- Review the impairment assumptions, asset disposition proceeds, and the utilization and dayrate forecasts supporting the remaining FlexRig4 asset values.
- Assess the sustainability of operating cash flow, particularly the working-capital contribution, alongside planned capital spending and the dividend.
- Track U.S. rig activity, dayrates, contracted-rig counts, and backlog conversion and cancellation exposure.
- Monitor Argentine currency controls, cash repatriation, local operating conditions, and any recurrence or expansion of labor disruptions.
- Reconcile reported earnings with the impairment, investment-security loss, asset-sale gains, early termination revenue, and tax effects; note FY2018’s unusually large tax benefit.