Helmerich & Payne, Inc. — Q3 FY2011 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2011; filed August 8, 2011. The company provides contract drilling services through U.S. Land, Offshore, and International Land segments. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Revenue | $644.1 million | $483.4 million | $1,843.1 million | $1,316.2 million |
| Operating income | $174.4 million | $111.5 million | $509.4 million | $318.6 million |
| Operating margin | 27.1% | 23.1% | 27.6% | 24.2% |
| Income from continuing operations | $109.8 million | $64.9 million | $313.2 million | $202.8 million |
| Net income (loss), including discontinued operations | $109.8 million | $(36.7) million | $312.8 million | $73.3 million |
| Diluted EPS from continuing operations | $1.01 | $0.61 | $2.87 | $1.89 |
| Cash from operating activities | Not separately reported for the quarter | $696.4 million | $333.0 million | |
| Capital expenditures | Not separately reported for the quarter | $493.8 million | $220.2 million |
Q3 revenue increased about 33% year over year, while operating income rose about 56%. For the first nine months, revenue grew about 40% and income from continuing operations increased about 54%. The prior-year comparisons include a $101.6 million Q3 and $129.5 million nine-month loss from discontinued Venezuelan operations; the 2011 discontinued-operation losses were minimal.
Segments and operating trends
- U.S. Land: Q3 revenue was $539.4 million versus $367.0 million; segment operating income was $176.8 million versus $103.1 million. Utilization rose to 87% from 76%, and average rig revenue per day increased to $25,970 from $23,690. Management attributed growth to stronger activity, higher dayrates, and new FlexRigs.
- Offshore: Q3 revenue was $54.6 million versus $53.1 million and segment operating income was $12.9 million versus $11.2 million. Seven of nine platform rigs were active at quarter-end.
- International Land: Q3 revenue declined to $46.1 million from $60.0 million, and the segment recorded a $0.6 million operating loss versus $9.9 million income. Utilization fell to 65% from 76%; management cited labor interruptions and idle rigs carrying fixed costs.
Balance sheet, liquidity, and capital
- At June 30, cash and cash equivalents were $288.1 million, investments were $453.0 million, and total assets were $4.91 billion. Current assets were $882.6 million against current liabilities of $261.9 million.
- Long-term debt was $350.0 million, down from $360.0 million at September 30, 2010. The company reported compliance with debt covenants. Its $400 million revolving facility had no borrowings and $378.1 million available, after $21.9 million of letters of credit.
- Nine-month operating cash flow of $696.4 million exceeded capital expenditures of $493.8 million. Cash increased $225.0 million from fiscal year-end.
- Management reduced its fiscal 2011 capital-spending estimate to $800 million from $850 million, principally for new FlexRig construction. It stated that cash, operating cash flow, and credit facilities were expected to fund operations and estimated fiscal 2011 capital spending, while cautioning that cash generation and financing availability were not assured.
- Drilling backlog was $3.698 billion at June 30, up from $2.449 billion at September 30, 2010. The reported June backlog includes expected revenue from 32 multi-year contracts finalized in July; approximately 90.7% was not expected to be filled in fiscal 2011.
Management commentary, risks, and unusual items
- Growth was concentrated in U.S. Land, with improved utilization and dayrates. Offshore and International Land had weaker nine-month segment income, primarily because of reduced revenue days offshore and labor disruptions and idle rigs internationally.
- Q3 continuing-operations income included approximately $2.2 million after-tax gains from asset sales and $0.6 million from investment-security sales. Nine-month figures included approximately $6.4 million and $0.6 million, respectively. Available-for-sale equity securities had a reported fair value of $436.6 million, with substantial unrealized appreciation; market-value changes can affect comprehensive income.
- The Venezuelan government seized the former subsidiary’s rigs and other operating property in June 2010. The company is pursuing remedies, including two arbitrations seeking an aggregate $75 million from parties not affiliated with the Venezuelan government or PDVSA. Recovery timing, amount, and likelihood are uncertain; no gain was recognized.
- A patent-infringement lawsuit was settled after quarter-end. The company accrued $7.75 million at June 30 and expected to pay it in Q4 FY2011.
- A U.S. Attorney grand jury investigation into alleged offshore choke-manifold testing irregularities remains ongoing. The company said it had cooperated and presently believed the matter would not have a material adverse effect, but could not assure the outcome or timing.
- Other stated risks include oil and gas price fluctuations, early contract terminations, rig construction and component-delivery delays, weather, foreign political and currency risks, and changes in economic conditions. Management noted that interim results may not indicate full-year results.
- A $0.07-per-share dividend was declared June 1, payable September 1, 2011. The effective tax rate for the first nine months was 37.2%, compared with 34.1% a year earlier. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification priorities
- Confirm U.S. Land utilization, dayrates, fixed-term versus spot-market rig exposure, and execution of contracted FlexRig construction.
- Assess whether backlog converts to revenue as expected, including the effect of customer termination rights and potential vendor or delivery disruptions.
- Track actual fiscal 2011 capital spending against the $800 million estimate and resulting cash and debt levels.
- Monitor International Land utilization, labor interruptions, and fixed costs on idle rigs, as well as offshore rig activity.
- Follow the Venezuelan recovery proceedings and the U.S. Attorney investigation; neither has a certain outcome, and the potential Venezuelan recovery is not recorded as an asset.
- Review the $7.75 million settlement payment, investment-portfolio valuation changes, and compliance with debt covenants.