Helmerich & Payne, Inc. — Form 10-Q
Reporting period: Third quarter and nine months ended June 30, 2012; comparative periods ended June 30, 2011. The company provides contract drilling services through U.S. Land, Offshore, and International Land operations. Unless noted, financial figures below are in millions of dollars.
Financial performance and position
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Revenue | $819.8 | $644.1 | $2,322.4 | $1,843.1 |
| Operating income | $232.7 | $174.4 | $670.2 | $509.4 |
| Net income | $149.9 | $109.8 | $423.9 | $312.8 |
| Diluted EPS | $1.38 | $1.01 | $3.88 | $2.87 |
| Operating margin, approximate | 28.4% | 27.1% | 28.9% | 27.6% |
Q3 revenue increased about 27% year over year; nine-month revenue rose about 26%. Growth and improved operating margins were led by U.S. Land, with higher rig utilization and dayrates. Results include asset-sale gains: $1.2 million after tax in Q3 FY2012 and $7.9 million after tax for the nine-month period.
- Segment trends: Q3 U.S. Land segment operating income rose to $235.7 million from $176.8 million, with utilization of 89% versus 87% and average rig margin per day of $14,759 versus $13,222. International Land moved to $6.3 million operating income from a $0.6 million loss. Offshore income declined to $7.7 million from $12.9 million, affected by idle and standby rigs.
- Cash flow and investment: Nine-month operating cash flow was $613.0 million, down from $696.4 million. Capital expenditures were $774.2 million, versus $493.8 million; reported cash flow after capital expenditures was therefore approximately negative $161.3 million. Investing activities used $742.4 million.
- Liquidity: Cash and cash equivalents were $148.9 million at June 30, 2012, compared with $364.2 million at September 30, 2011. Current assets were $942.6 million and current liabilities $413.6 million.
- Debt: Total debt was $350 million, including $115 million classified as due within one year at June 30. The company reported a subsequent $40 million debt payment. A new $300 million unsecured revolving facility, maturing in May 2017, had no borrowings or letters of credit outstanding at quarter-end.
- Other balance-sheet items: Total assets were $5.52 billion, including net property, plant and equipment of $4.17 billion. Investments were $382.5 million, primarily available-for-sale equity securities with fair value of $365.5 million and cost of $129.2 million.
Material changes and operating developments
- U.S. Land was the primary growth driver: revenue increased to $706.8 million in Q3 from $539.4 million. At June 30, 245 of 275 existing rigs were generating revenue; 163 were under fixed-term contracts and 82 in the spot market. By July 27, fixed-term rigs had decreased to 157 and spot-market rigs increased to 84.
- Offshore Q3 revenue declined to $41.6 million from $54.6 million; seven of nine platform rigs were active at quarter-end. International Land Q3 revenue increased to $67.5 million from $46.1 million, with utilization rising to 77% from 65%.
- Contract drilling backlog increased to $4.1 billion at June 30, 2012, from $3.8 billion at September 30, 2011, mainly reflecting 29 multi-year contracts announced during the first nine months. About 89.4% of backlog was not reasonably expected to be filled in fiscal 2012.
- The company repurchased 1,747,819 shares during the nine months for an aggregate $77.6 million; $6.2 million had not settled by quarter-end. Dividends declared were $0.07 per share for Q3.
Outlook, risks, contingencies, and unusual items
- Management estimated fiscal 2012 capital spending of approximately $1.1 billion, subject mainly to timing of rig construction and component procurement. It expected to deliver 48 new FlexRigs during the fiscal year, at a then-current pace of four per month; 36 contracted FlexRigs were completed in the first nine months and four more by the end of July.
- Management stated that operating cash flow, available cash, and the new revolver were expected to fund operations and estimated fiscal 2012 capital expenditures, while cautioning that cash generation and access to financing were not assured.
- Backlog is not guaranteed revenue: customers may terminate contracts, and certain circumstances—including rig destruction, bankruptcy, sustained unacceptable performance, or delayed delivery—may eliminate termination payments. Some backlog relates to rigs still to be built; limited-source vendors and delivery disruptions could affect realization.
- International operations face political, regulatory, currency, security, and expropriation risks. Venezuela seized the subsidiary’s rigs and related property in 2010; litigation and arbitration claims remained unresolved, and potential recovery amounts and timing were uncertain. A separate $7.5 million arbitration settlement was received after quarter-end and was expected to be recorded in discontinued operations in Q4 FY2012.
- The company disclosed an ongoing U.S. Attorney grand jury investigation related to reported offshore rig testing irregularities. The company said it was cooperating and believed the matter would not have a material adverse effect, but could not assure the timing or outcome.
- Management considered it reasonably possible that reserves for uncertain international tax positions could increase by approximately $7 million to $9 million over the next 12 months. Outstanding equipment, parts, and supply purchase commitments for rig construction were approximately $271.3 million.
Important facts for investors to verify
- Whether strong U.S. Land utilization and dayrates can persist, particularly as the mix of fixed-term and spot-market rigs changes.
- How the $1.1 billion fiscal-year capital spending plan, rig deliveries, and working-capital needs affect cash balances and future funding requirements.
- The timing and terms of upcoming debt repayments, covenant headroom, and continued availability of the $300 million revolving facility.
- Whether backlog converts to revenue as expected, considering cancellation rights, rig construction, and vendor delivery risks.
- Developments in the Venezuela claims, the offshore investigation, and the potential tax-reserve increase.
- Changes in the value of the substantial equity-securities portfolio, whose fair value materially exceeded its recorded cost at June 30, 2012.