Helmerich & Payne, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below identify Q4 FY2016 where relevant. Comparatives were retrospectively adjusted after the company eliminated a one-month reporting lag for foreign subsidiaries.
Business context
Helmerich & Payne is primarily a contract driller, operating U.S. Land, Offshore and International Land segments. Its fleet totaled 395 rigs at fiscal year-end. Results were pressured by the oil-price downturn and reduced customer drilling budgets; management said U.S. activity began increasing late in FY2016.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $1.624 billion | $3.162 billion |
| Operating income (loss) | $(26.0) million | $672.0 million |
| Net income (loss) | $(56.8) million | $420.4 million |
| Diluted EPS | $(0.54) | $3.85 |
| Cash from operations | $753.6 million | $1.429 billion |
| Capital expenditures | $257.2 million | $1.131 billion |
- Direct operating costs were $898.8 million, or 55% of revenue, versus 54% in FY2015. Depreciation was $598.6 million; reported operating loss also reflected $6.3 million of asset impairment and corporate costs.
- Year-end cash and cash equivalents were $905.6 million, with $44.1 million in short-term investments. The current ratio was 4.8.
- Debt consisted principally of $500 million in 4.65% senior notes due 2025; carrying value was $491.8 million. The $40 million notes due in 2016 were repaid. Long-term debt to total capitalization was 9.7%; no revolver borrowings were outstanding, and $261.2 million was available under the $300 million facility at year-end. Covenants were met.
- Dividends paid totaled $300.2 million. The quarterly dividend rose to $0.70 per share in Q4 from $0.6875; the board may reduce or suspend future dividends.
Material changes and segment trends
- Revenue fell 49% year over year. U.S. Land revenue declined 51% to $1.242 billion and segment operating income fell 89% to $74.1 million; utilization dropped to 30% from 62%.
- Offshore revenue decreased 43% to $138.6 million and segment operating income fell 77% to $15.7 million. Utilization declined to 82% from 93%.
- International Land revenue decreased 40% to $229.9 million; the segment recorded a $14.1 million operating loss versus a $7.1 million loss in FY2015. Utilization was 39%, down from 51%.
- Contract drilling backlog was $1.8 billion at year-end, down from $3.1 billion. Approximately 53% was not reasonably expected to be filled during FY2017. Ten largest drilling customers represented about 68% of revenue; the three largest represented about 30%.
- Q4 revenue was $331.7 million and net loss was $72.8 million, compared with Q4 FY2015 revenue of $553.8 million and net loss of $27.6 million.
Outlook, risks and unusual items
- Management estimated FY2017 capital spending at approximately $200 million, subject primarily to drilling-market conditions, and expected depreciation to decline. It anticipated funding operating needs and capital spending with cash and operating cash flow, while noting cash generation was not assured.
- Management reported an increase in demand and activity since May 2016. U.S. Land contracted rigs rose from 95 at September 30 to 105 at November 17, 2016. Commodity-price weakness, excess rig capacity, lower dayrates, customer contract cancellations and customer credit risk remain key uncertainties.
- FY2016 included a $26.0 million pre-tax impairment of the Atwood Oceanics investment, a $6.3 million rig-equipment impairment, and an $18.8 million U.S. Land operating cost from the Keel litigation settlement. The settlement was $72 million in total, with $50.2 million recorded as an insurance receivable at year-end.
- The Argentine peso devaluation contributed to foreign-currency losses; the filing reports $9.3 million aggregate currency losses in direct operating costs for FY2016. Venezuela’s new exchange system also contributed to a $3.8 million discontinued-operations loss.
- Other matters to monitor include the unresolved Department of the Interior discussions related to a 2010 offshore testing matter, the disputed EPA claim proposing a $186,868 penalty, and the uncertain recovery from litigation over Venezuela’s 2010 seizure of company assets.
- The company noted operational, environmental, weather, insurance, foreign-country, regulatory, cybersecurity, tax and impairment risks. It self-insures portions of certain liabilities and states that customer indemnities or insurance may not fully protect it.
Investor verification priorities
- Confirm subsequent U.S. rig contracting, utilization and dayrate trends, and whether the late-FY2016 activity improvement persisted.
- Review backlog conversion, customer termination rights and exposure to major customers, including the collectability of early-termination payments.
- Check FY2017 capital spending, cash flow and dividend decisions against the company’s estimates and liquidity position.
- Monitor impairment exposure in idle or marketed rigs and the valuation of the remaining securities portfolio.
- Track insurance recovery and payment of the Keel settlement, as well as outcomes of the DOI, EPA and Venezuela matters.