Helmerich & Payne, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. This is an annual report, not a standalone Q4 filing; selected quarterly figures are noted below. The company provides contract drilling services and drilling technologies, primarily through U.S. Land, Offshore and International Land segments.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Operating revenue | $2.487 billion | $1.805 billion |
| Operating income (loss), continuing operations | $31.6 million | $(172.5) million |
| Income (loss) from continuing operations | $493.0 million | $(127.9) million |
| Net income (loss) | $482.7 million; diluted EPS $4.37 | $(128.2) million; diluted EPS $(1.20) |
| Cash from operating activities | $544.5 million | $361.6 million |
| Capital expenditures | $466.6 million | $397.6 million |
| Cash and short-term investments at year-end | $325.8 million | $565.9 million |
| Long-term debt, face amount | $500.0 million | $500.0 million |
| Debt-to-capital ratio | 10.1% | 10.6% |
| Dividends declared per share | $2.82 | $2.80 |
Revenue increased 37.8%. The reported net profit is not a straightforward measure of operating performance: FY2018 included a $477.2 million income tax benefit, principally reflecting a roughly $502.1 million deferred-tax remeasurement following the U.S. Tax Reform Act. Pretax continuing income was $15.8 million. Operating margin was approximately 1.3% (versus a loss in FY2017); reported net margin was substantially affected by the tax benefit.
U.S. Land generated $2.068 billion of revenue and $150.7 million of segment operating income; Offshore generated $142.5 million and $26.1 million; International Land generated $238.4 million and a $0.7 million operating loss. Segment results are before certain corporate costs and other reconciliation items. U.S. Land utilization rose to 61% from 45%, with average rig margin per day up 15.6% to $9,229. Offshore utilization declined to 70% from 74%; International Land utilization increased to 49% from 36%, while its average rig margin per day fell 14.2% to $9,620.
For the fourth fiscal quarter, revenue was $696.8 million, operating income $23.1 million and net income $2.5 million. Quarterly net income also reflected impairments and asset-sale gains.
Changes, outlook and risks
- Drilling activity recovered: 259 rigs were contracted at fiscal year-end versus 218 a year earlier. The company upgraded 52 rigs to super-spec during FY2018 and reported more than 40% of U.S. super-spec market share.
- Operating cash flow rose by $182.9 million year over year, while capital spending increased. Cash declined to $284.4 million, partly as the company funded investment, acquisitions, capital expenditures and dividends.
- FY2018 included $23.1 million in impairment charges: $9.2 million for Ecuador rigs designated for recycling, $1.4 million for a remaining rig in that asset group, $5.7 million for U.S. rigs planned for auction, and $5.6 million for TerraVici goodwill and intangible assets. The Ecuador rig sale was completed in November 2018.
- Contract backlog was $1.1 billion at September 30, 2018, down from $1.3 billion. Backlog covers expected dayrate revenue on qualifying fixed-term contracts; termination, renegotiation, customer credit and contract performance can affect realization.
- Management estimated FY2019 capital spending at $650–$680 million and expected higher customer E&P spending, robust super-spec demand into FY2019, and further rig upgrades. It also expected International Land opportunities to be more sporadic and Offshore utilization and cash flows relatively stable, while noting a platform rig could be stacked or placed on a lower-margin rate later in FY2019.
- At September 30, the $300 million revolving facility had no borrowings and $260.7 million available after letters of credit. On November 13, 2018, the company replaced it with a $750 million revolving facility; $712 million was available at closing. The $500 million senior notes bear fixed interest of 4.65% and mature in 2025.
- Key risks include oil-price and customer-spending volatility, excess rig capacity and pricing pressure, customer concentration (top ten drilling customers generated about 50% of revenue), contract cancellations, impairment risk, safety and environmental exposures with significant self-insurance, cybersecurity, and international currency and political risks. Argentina generated $190.0 million of revenue; FY2018 foreign-currency losses totaled $4.0 million.
- The company continued its $2.82 annual per-share dividend but stated the board may reduce or suspend future dividends. It reported no off-balance-sheet arrangements and was in compliance with debt covenants at year-end. A Venezuelan expropriation lawsuit remains unresolved; recovery timing, amount and likelihood are uncertain.
Most important facts for investors to verify
- How much of FY2018 earnings and deferred-tax assets depend on the one-time Tax Reform Act remeasurement, and whether deferred tax assets remain realizable.
- Whether higher rig utilization and dayrates translate into sustainable operating profits and cash generation after rising capital spending.
- The quality and timing of the $1.1 billion backlog, including termination protections, customer creditworthiness and the share expected after FY2019.
- FY2019 capital spending, super-spec upgrade returns, and the availability of economically upgradeable rigs and skilled crews.
- Liquidity after dividends and planned investment, and the terms and covenant capacity of the replacement $750 million credit facility.
- Outcomes and potential financial effects of the Ecuador rig disposition, asset impairments, TerraVici valuation and Venezuelan litigation.