Helmerich & Payne, Inc. — Q2 FY2014 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2014, the second quarter of the company’s fiscal 2014; comparisons are with the quarter ended March 31, 2013. Helmerich & Payne provides contract drilling services through U.S. Land, Offshore and International Land segments. The filing also reports six-month results for the period ended March 31.
Financial performance
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Revenue | $893.4 million | $838.3 million | $1,782.6 million | $1,682.9 million |
| Operating income | $255.3 million | $232.9 million | $519.4 million | $473.5 million |
| Net income | $174.6 million | $151.1 million | $347.8 million | $310.7 million |
| Diluted EPS | $1.59 | $1.39 | $3.17 | $2.87 |
| Operating cash flow | Not separately reported | Not separately reported | $540.0 million | $494.3 million |
| Capital expenditures | Not separately reported | Not separately reported | $356.8 million | $438.5 million |
- Q2 revenue increased 6.6% and operating income increased 9.6% year over year. Operating margin was approximately 28.6%, versus 27.8% a year earlier. Net income included after-tax gains of approximately $12.9 million from investment-security sales and $2.7 million from asset sales.
- For the six-month period, revenue increased 5.9%, operating income 9.7%, and net income 11.9%. Operating margin was approximately 29.1%, versus 28.1%. Six-month net income included after-tax gains of approximately $12.9 million on investment securities and $6.4 million on asset sales.
- Segment operating income in Q2: U.S. Land $245.1 million (up from $226.0 million); Offshore $19.3 million (up from $13.7 million); International Land $11.2 million (down from $13.2 million). U.S. Land benefited primarily from more revenue days and higher utilization; Offshore benefited from higher revenue per day. International results included a $5.3 million early-termination fee in the prior-year quarter.
Balance sheet, cash flow and liquidity
- At March 31, 2014, cash and cash equivalents were $585.0 million, total assets $6.49 billion, and shareholders’ equity $4.69 billion. Cash increased $137.1 million from fiscal year-end.
- Debt totaled $195.0 million: $115.0 million due within one year and $80.0 million thereafter. Cash exceeded debt by approximately $390.0 million. The company had no revolver borrowings and $269.3 million available under its $300 million credit facility; it reported compliance with debt covenants.
- Six-month cash flow was $540.0 million from operations, $(320.1) million from investing activities and $(82.8) million from financing activities. Operating cash flow less capital expenditures was approximately $183.3 million, a simple derived measure, compared with approximately $55.8 million in the prior-year period.
- Dividends paid were $121.5 million in the six months, versus $23.5 million a year earlier. Dividends declared were $0.625 per share for the quarter, versus $0.15 in the prior-year quarter.
Material changes, outlook and risks
- Contract drilling backlog rose to $4.1 billion at March 31 from $2.9 billion at September 30, 2013, primarily reflecting new multiyear contracts. About 78.9% of the March backlog was not reasonably expected to be filled during fiscal 2014. Backlog is not guaranteed revenue and may be affected by customer termination rights, rig delivery, performance, vendor and operating risks.
- Management increased its fiscal 2014 capital-spending estimate to $1.1 billion, citing demand for FlexRigs, and expected to complete three rigs per month through fiscal year-end. It stated that cash, operating funds and the credit facility were expected to support operations, estimated capital expenditures, dividends and debt obligations for fiscal 2014, while cautioning that cash generation and financing are not assured.
- The company had secured contracts to build and operate 44 new U.S. FlexRigs. It also entered five-year international contracts requiring ten FlexRigs to transfer from U.S. Land; deployment was expected to progress into fiscal 2015. A new 3,000-horsepower international rig was also scheduled to enter service.
- Management expected the fiscal 2014 effective tax rate to be approximately 35%. The six-month effective rate was 35.4%.
- Unusual and contingent matters include the Venezuelan government’s 2010 seizure of subsidiary drilling assets; the company is pursuing damages but cannot estimate recovery timing or amount. Discussions with the Department of the Interior’s Inspector General continued following resolution of a DOJ investigation into 2010 offshore choke-manifold testing irregularities. Management believed the discussions would not have a material adverse effect but gave no assurance on timing or outcome. The company also disclosed possible $8.0–$10.7 million increases in uncertain-tax-position reserves over the next 12 months and approximately $189.7 million of outstanding rig-construction purchase commitments.
- Key risks include oil-and-gas market and customer changes, contract terminations, timely rig construction and component supply, operational and offshore hazards, international political and currency risks, regulation, and litigation or investigations. Approximately 10% of six-month revenue came from international drilling; approximately 75% of international revenue came from South America.
Important facts for investors to verify
- How much reported earnings growth reflects core drilling performance versus the investment-security and asset-sale gains.
- Whether the $4.1 billion backlog converts to revenue as expected, including contract termination protections and new-rig delivery schedules.
- Execution, utilization and returns on the $1.1 billion fiscal 2014 capital-spending plan and the 44 contracted FlexRig builds.
- Repayment or refinancing of the $115 million due within one year, and the effect of planned capital spending and higher dividends on liquidity.
- Developments in Venezuela recovery proceedings, the Interior Department discussions, and uncertain tax positions.