Helmerich & Payne, Inc. — Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 31, 2011; filed May 6, 2011. The company provides contract drilling services through U.S. Land, Offshore, and International Land operations. Unless noted, amounts below are in millions.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Revenue | $604.4 | $436.6 | $1,199.0 | $832.8 |
| Operating income | $164.3 | $101.7 | $335.0 | $207.1 |
| Income from continuing operations | $99.0 | $74.1 | $203.3 | $137.9 |
| Net income | $98.8 | $46.7 | $202.9 | $110.0 |
| Diluted EPS | $0.91 | $0.43 | $1.87 | $1.02 |
| Operating cash flow | Not stated quarterly | $451.7 | $225.5 |
- Q2 operating margin was approximately 27.2%, compared with 23.3% a year earlier. Revenue growth and improved U.S. Land results drove the increase.
- U.S. Land Q2 revenue rose to $495.5 million from $324.4 million; utilization increased to 85% from 70%, and average rig margin per day rose to $13,183 from $11,287.
- Offshore Q2 segment operating income declined to $11.5 million from $13.6 million. International Land segment operating income fell to $2.4 million from $11.8 million.
- Cash and cash equivalents were $240.7 million at March 31, versus $63.0 million at September 30, 2010. Six-month capital expenditures were $286.3 million; net cash used in investing activities was $273.2 million.
- Long-term debt was $350.0 million, down from $360.0 million at September 30, 2010. The $400 million credit facility had no borrowings, $21.9 million of letters of credit, and $378.1 million available. The company reported compliance with debt covenants.
- Total assets were $4.73 billion and shareholders’ equity was $3.13 billion at March 31, 2011. Investments included $461.7 million of marketable equity securities, whose unrealized gains contributed to a $99.0 million six-month increase in accumulated other comprehensive income.
Changes, outlook, and risks
- Results improved substantially year over year, led by U.S. Land activity, higher utilization, and higher dayrates. U.S. Land rig revenue days increased to 17,797 in Q2 from 13,114. Management attributed growth to the industry recovery and new FlexRigs.
- Fiscal 2011 capital spending was estimated at approximately $850 million, with actual spending dependent mainly on the timing of rig construction and equipment procurement. The company completed 16 contracted FlexRigs in the first half and three more by the end of April; it announced agreements for 18 new contracted rigs in the first half and eight additional rigs in April.
- Contract drilling backlog was $2.885 billion at March 31, up from $2.449 billion at September 30, 2010, primarily reflecting new FlexRig contracts. Approximately 77.5% was not expected to be filled in fiscal 2011. Backlog is subject to customer termination rights, construction timing, and potential vendor delivery disruption.
- Effective tax rate on continuing operations increased to 37.9% in Q2 from 24.4%; management cited state and foreign taxes as factors in rates above the 35% federal statutory rate.
- Venezuela seized the subsidiary’s eleven rigs and related operating assets in June 2010. The operation is reported as discontinued; the company is pursuing possible recovery but cannot estimate its likelihood, timing, or amount. No recovery gain is recognized.
- A patent-infringement lawsuit involving a vendor’s control system was set for trial in July 2011. The company said it could not estimate a loss; an unfavorable outcome could materially affect financial condition and results.
- A U.S. Attorney grand jury investigation into alleged offshore choke-manifold testing irregularities was ongoing; the company was advised in late April 2011 that it was a subject. The company stated it could not assure the timing or outcome.
- Other key exposures include international political and regulatory risks, foreign exchange, oil and gas activity levels, contract terminations, severe weather, and dependence on limited-source rig-component vendors. The filing gives no quantified earnings guidance.
Investor verification priorities
- Verify U.S. Land utilization, dayrates, and conversion of the $2.885 billion backlog into revenue, including delivery and cancellation risks.
- Track FlexRig construction spending against the $850 million fiscal-year estimate and assess resulting liquidity and operating cash flow.
- Review the valuation and concentration risk of the marketable equity portfolio and the effect of market movements on reported equity and comprehensive income.
- Monitor developments and potential financial exposure in the patent case and the offshore grand jury investigation.
- Assess any developments in Venezuelan recovery efforts; the filing provides no clear estimate of potential proceeds.