Helmerich & Payne, Inc. — Q3 FY2014 Form 10-Q
Business context and reporting period. Contract drilling company operating in U.S. Land, Offshore and International Land segments. The quarter ended June 30, 2014; comparisons are with the corresponding 2013 quarter. Fiscal year-to-date figures cover the nine months ended June 30.
Financial performance and position
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Revenue | $952.1m | $840.2m | $2,734.7m | $2,523.1m |
| Operating income | $271.9m | $240.0m | $791.3m | $713.4m |
| Continuing-operations income | $192.3m | $251.0m | $540.1m | $561.7m |
| Net income | $192.3m | $266.2m | $540.0m | $576.8m |
| Diluted EPS | $1.75 | $2.46 | $4.92 | $5.33 |
| Operating cash flow | — | $797.9m | $761.6m | |
| Capital expenditures | — | $622.0m | $618.6m |
- Quarterly revenue rose about 13%, and operating income rose about 13%; net income declined about 28%, mainly reflecting much smaller securities-sale gains. The 2014 quarter included $23.9m of pre-tax securities gains ($0.13 per diluted share after tax), versus $153.4m ($0.86 per diluted share after tax) in 2013.
- For the nine months, revenue increased about 8%, while net income fell about 6%; securities-sale gains were $45.2m versus $162.1m. Q3 2013 also included $15.2m of discontinued-operations income; Q3 2014 had a small discontinued-operations loss.
- Q3 segment results: U.S. Land revenue was $802.3m and segment operating income $271.1m; Offshore revenue was $64.6m and segment operating income $17.0m; International Land revenue was $81.3m and segment operating income $6.6m. U.S. Land utilization improved to 88% from 83%; International Land utilization declined to 74% from 80%.
- Cash and cash equivalents were $549.9m at June 30, up from $447.9m at September 30, 2013. Total assets were $6.69bn; shareholders’ equity was $4.82bn.
- Debt was $195m, including $115m due within one year and $80m long term. The company reported $265.8m available under its $300m revolver after facility letters of credit; there were no revolver borrowings. It reported compliance with debt covenants. The $40m note due July 21, 2014 was paid after quarter-end.
- Cash dividends paid during the first nine months were $189.5m, compared with $39.5m a year earlier. A quarterly dividend of $0.6875 per share was declared for payment September 2, 2014.
Material changes, outlook and commentary
- Drilling backlog increased to $4.8bn at June 30, 2014 from $2.9bn at September 30, 2013, primarily from new multi-year contracts. About 90.3% was not expected to be filled in fiscal 2014. Backlog is not guaranteed revenue and can be affected by customer termination rights, operating performance, rig delivery and vendor delays.
- The company had secured contracts to build and operate 74 new U.S. FlexRigs with 17 customers. It expected to increase construction cadence from three to four rigs monthly beginning September 2014. Ten FlexRigs were planned for transfer to International Land under five-year contracts, with operations expected to ramp during fiscal 2015.
- Fiscal 2014 capital spending was expected to be slightly below the prior estimate of $1.1bn. Management said cash from operations, cash on hand and the credit facility were expected to support operations, estimated capital spending, dividends and debt obligations for the fiscal year, while cautioning that future cash flow and financing were not assured.
- Management expected the fiscal 2014 effective tax rate to be slightly above 35%. The filing gives no broader earnings or revenue guidance.
- Operating margin per day in U.S. Land was $15,091 in Q3 versus $15,414 a year earlier, despite higher revenue days and utilization. International Land segment income was pressured by lower utilization and higher foreign-exchange losses; Offshore improvement was attributed primarily to management contracts.
Risks, contingencies and unusual items
- Key risks include oil and gas price fluctuations, customer concentration and early contract termination, collection of receivables, rig-component supply constraints, operational and offshore hazards, regulation, foreign exchange, and political or expropriation risks in international markets. About 10% of year-to-date revenue was international, with roughly 75% of international revenue from South America.
- Approximately $246m of equipment, parts and supply purchase commitments related to the rig construction program were outstanding at June 30.
- The company continued litigation seeking damages for the 2010 seizure of its Venezuelan drilling business; timing, amount and likelihood of recovery were undetermined, and no gain was recorded.
- A DOJ plea agreement concerning 2010 offshore choke-manifold testing irregularities had been approved and resolved the DOJ investigation. Discussions with the Department of the Interior Inspector General continued; outcome and timing were uncertain.
- Management considered pending ordinary-course legal actions not expected to materially adversely affect financial condition, cash flows or results. It said uncertain tax-position reserves could increase by approximately $8.5m–$11.2m over the next 12 months due to international matters.
Most important facts for investors to verify
- Whether backlog converts to revenue on schedule, including the timing and utilization of newbuild rigs and international transfers.
- Customer contract termination provisions, rig delivery milestones and exposure to limited-source suppliers.
- Cash generation and capital spending against the fiscal 2014 estimate, alongside the elevated dividend and scheduled debt payments.
- How much earnings depend on securities-sale gains versus recurring drilling operations.
- Developments in the Venezuela claim, the Inspector General discussions, and international tax reserves and foreign-exchange exposure.