Helmerich & Payne, Inc. quarterly report, Q2 FY2017

Helmerich & Payne, Inc. — Form 10-Q Summary

Reporting period: Second quarter and first six months of fiscal 2017, ended March 31, 2017. The company provides contract drilling services through U.S. Land, Offshore and International Land segments. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.

Financial performance

Metric	Q2 FY2017	Q2 FY2016	Six months FY2017	Six months FY2016
Revenue	$405.3 million	$438.2 million	$773.9 million	$926.0 million
Operating income (loss)	($65.7) million	$41.6 million	($114.8) million	$80.3 million
Net income (loss)	($48.8) million	$21.2 million	($83.9) million	$37.2 million
Diluted EPS	($0.45)	$0.19	($0.78)	$0.33
Operating cash flow	Not separately provided	Not separately provided	$146.4 million	$492.5 million

Revenue declined 7.5% year over year in Q2 and 16.4% for the six-month period. Operating results swung from profit to loss in both comparisons.
Q2 operating costs were $296.8 million, versus $221.6 million a year earlier; depreciation was $152.8 million, including $18.6 million of asset abandonments associated with rig upgrades.
Asset-sale gains partially offset operating losses: $14.9 million in Q2 and $15.7 million for the six months. Management reported after-tax gains of about $10.1 million and $10.6 million, respectively.
Q2 effective tax rate was 31.0%; the six-month rate was 32.5%. The company recorded income tax benefits of $21.8 million in Q2 and $40.1 million for six months.

Segments and operating trends

U.S. Land: Q2 revenue was $331.0 million, with a segment operating loss of $51.9 million, versus $62.5 million income in the prior-year quarter. Utilization rose to 42% from 31%, but average rig margin per day fell to $7,042 from $20,079. Lower dayrates, reduced legacy-contract contribution, start-up costs and rig-component abandonments weighed on results.
Offshore: Q2 revenue was $36.2 million and segment operating income was $5.9 million, compared with $3.3 million a year earlier. Higher revenue and margin per day reflected certain rigs moving from standby or special rates to higher pricing; utilization declined to 77% from 84%. The company sold one idle offshore rig during the quarter.
International Land: Q2 revenue was $34.8 million and the segment operating loss widened to $11.0 million from $2.3 million. Utilization declined to 25% from 38%, and average rig margin per day fell to $3,691 from $10,487, reflecting fewer working rigs and fixed costs on stacked equipment.

Cash, liquidity and debt

Cash and cash equivalents were $741.7 million at March 31, 2017, down from $905.6 million at September 30, 2016. Short-term investments were $48.0 million.
Six-month operating cash flow of $146.4 million was well below $492.5 million in the prior-year period. Capital expenditures were $175.3 million; operating cash flow less reported capex was approximately negative $28.9 million.
Investing activities used $165.7 million and financing activities used $144.4 million in the six months. Dividends paid were $152.6 million.
Long-term debt had a $500 million principal balance and $492.4 million carrying value; the unsecured notes mature March 2025 and bear 4.65% interest. No revolver borrowings were outstanding; $259.7 million was available under the $300 million facility after letters of credit. The company reported compliance with debt covenants.
Current assets were $1.364 billion and current liabilities $301.4 million at quarter-end. Shareholders’ equity was $4.347 billion.

Outlook, material items and risks

Management expected U.S. Land utilization to increase in Q3 FY2017 as rigs returned to work. As of April 27, 176 of 350 U.S. Land rigs were contracted, compared with 168 at March 31. Expected Q3 early-termination revenue was approximately $5.1 million.
Fiscal 2017 capital spending was estimated at approximately $350 million, subject to maintenance needs and market-driven fleet projects. Management expected operating requirements, interest, dividends and capital spending to be funded from cash and operating cash flow, while cautioning that cash generation was not assured.
Contract drilling backlog was $1.5 billion at March 31, down from $1.8 billion at September 30. About 70.3% of reported backlog was not reasonably expected to be filled during fiscal 2017. Backlog depends on customer performance and contract terms, including early termination provisions.
Five International Land rig termination notices issued in December 2016 were withdrawn in Q2; the customer indicated it wished to assign the contracts to other operators. Timing and outcome remain uncertain.
The company had approximately $73 million in equipment, parts and supply purchase commitments. A Venezuelan expropriation lawsuit remains unresolved; the company cannot estimate the timing, amount or likelihood of any recovery. The filing also discusses possible further DOI action concerning a previously resolved DOJ investigation, though management did not anticipate further action.
Key exposures include oil and gas price volatility and customer spending, contract cancellations and collections, operational and safety events, foreign political and currency risks, and restrictions on repatriating funds. Argentina is identified as highly inflationary; the company recorded $2.0 million of foreign currency losses in the first six months of FY2017. International operations generated 13.3% of six-month revenue, mostly from South America.
The company expected to adopt new revenue recognition guidance in fiscal Q1 2019 using the modified retrospective method; its impact was not yet quantifiable. Management said disclosure controls were effective as of March 31, 2017 and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether the improving U.S. rig count and utilization translate into sustainable dayrates and positive segment margins, given the sharp year-over-year reduction in U.S. Land margin per day.
How quickly operating cash flow recovers, and whether planned capital spending and dividends remain supportable if market conditions weaken.
Backlog quality and conversion, including early termination protections, the International Land contract assignments, and how much backlog is expected to be realized after FY2017.
The basis and recurrence of asset-sale gains and rig abandonment charges, and their effect on reported operating results.
Developments in the Venezuela litigation, DOI consideration, foreign currency and repatriation risks, and the company’s ability to maintain covenant compliance.