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Helmerich & Payne Fiscal Second Quarter 2020 Results

Share Print Bookmark    |    Thursday,April 30,2020

Helmerich & Payne, Inc. reported a net loss of $421 million or $(3.88) per diluted share from operating revenues of $634 million for the quarter ended March 31, 2020, compared to net income of $31 million, or $0.27 per diluted share, on revenues of $615 million for the quarter ended December 31, 2019. The net loss per diluted share for the second quarter of fiscal year 2020 and the net income per diluted share for the first quarter of fiscal year 2020 include $(3.87) and $0.14, respectively, of after-tax gains and losses comprised of select items⁽³⁾. For the second quarter of fiscal year 2020, select items⁽³⁾were comprised of:

• $0.26 of after-tax gains pertaining to gains on sales, a reduction in the fair value of a contingent liability, the reversal of accrued compensation and early termination compensation

• $(4.13) of after-tax losses pertaining to non-cash impairments of goodwill, less capable rigs, and excess related equipment and inventory, abandonments and accelerated depreciation, and a non-cash fair market adjustment to our equity investment

Net cash provided by operating activities was $121 million for the second quarter of fiscal year 2020 compared to $112 million for the first quarter of fiscal year 2020.

President and CEO John Lindsay commented, “Throughout our history the Company has sought to be in a position of strength both operationally and financially to face the inherent cyclicality and uncertainties in the energy industry. We have taken swift actions to maintain the health and safety of our employees and customers and have made difficult, but necessary, measured decisions to uphold the Company's long-standing financial strength. The primary purposes of these actions centered around health and safety, but they have also served to minimize the impact of COVID-19 on our ongoing operations and financial position.

"While the crude oil market imbalance is a global phenomenon, it has more acutely impacted the U.S. market recently due to storage limitations. The abruptness and overall size of the decrease in demand for refined products, such as gasoline and diesel, has created an abundance of supply for such products and is pushing inventory levels to capacity. This has significantly reduced, or in some cases, eliminated the need for additional crude oil in some markets. As such, our customers may have limited opportunities to deliver their oil production and even then, possibly selling it at very low, uneconomical prices. Consequently, some E&P companies are having to shut-in and stop production, and are not completing or drilling additional wells until the supply-demand balance is restored and production and drilling become economically viable once again. We believe these ramifications have yet to be fully reflected in industry activity levels and we expect steeper declines in our third fiscal quarter.

"H&P has responded to many downturns and we believe that our consistent long-term perspective and our financial strength enables us to further the strategic objectives of the Company. In this regard, we will remain focused on new commercial models, expanding our digital technology offerings to the market, increasing our international presence and cost management.

"We continue our efforts to develop new commercial pricing models that are designed to enable us to earn an equitable share of the value we create with our drilling solutions. Such value is arguably even more pertinent in strained market conditions. While the reduction in our rig count has adversely affected the number of rigs we currently have under performance-based contracts, we expect the total of these to represent a larger percentage of our active FlexRig fleet over time. The importance of well economics is magnified under these stressed conditions and the use of our digital technology solutions becomes even more appealing to those customers who recognize that wellbore quality and placement improves production and reserves. This current environment has provided additional impetus for some customers to embrace AutoSlide, because drilling automation improves reliability and reduces the number of individuals present at the drill site. Although the impact of COVID-19 is being felt on a global scale and across all of our operations, we are still actively pursuing long-term growth opportunities in our international operations. While we are encouraged about what the future holds for H&P internationally, the timing and development of these opportunities will be protracted given the current travel and operational hurdles resulting from COVID-19."

Senior Vice President and CFO Mark Smith also commented, "Our strong financial position is the cornerstone upon which we have been able to endure and it is a significant differentiator for us in this volatile and cyclical industry. In times of extreme challenge, like the present, it is paramount for survival. In order to maintain our financial profile, we re-assessed our capital allocation policy and planned spending based on lower activity levels. This assessment resulted in our intention to reduce the Company's annual dividends by approximately $200 million, a reduction of our planned capital expenditures by roughly $95 million from our initial projection and the implementation of measures that will reduce fixed operational overhead by nearly $50 million. Further cost reductions will come to fruition over the coming quarters as we reduce additional overhead and implement evergreen cost reductions throughout the Company, to right-size the cost structure for a lower expected activity level.

"Following calendar 2019 where we saw industry utilization for non-super-spec rigs fall at a faster rate than for super-spec⁽⁴⁾ rigs, the pronounced declines in crude oil prices and rig demand shines a brighter light on the performance and efficiency differences between non-super-spec and super-spec rigs. During the quarter, we performed an extensive valuation of our non-super-spec FlexRig fleet and the related expected future utilization of that portion of our fleet. This assessment combined with an evaluation of our intangible assets, including goodwill, resulted in non-cash impairment charges of approximately $563 million. We had 95 rigs impacted by the impairment, of which 37 were decommissioned subsequent to the quarter end.

"The full extent of the COVID-19 pandemic is uncertain, and we are unable to reasonably estimate the duration and ultimate impact, including the timing of or level to which the industry will recover. Consequently, we cannot be certain of the degree of the impact on H&P's operations or financial position in the future. That said, the Company currently remains on solid economic footing with approximately $380 million in cash on hand and short-term investments and no amounts drawn on our $750 million revolving credit facility. Our debt-to-cap is 12%, with no maturities until 2025, and rating agencies have made no changes to our investment grade credit rating. With our strong balance sheet and ample liquidity of over $1 billion, we believe the Company is well positioned in this challenging market environment and is able to continue to plan for the long-term as a leader in the industry."

John Lindsay concluded, “I am very proud of the remarkable way our H&P employees have responded to these unprecedented events. While the celebration of our centennial anniversary coincides with one of the most challenging environments in the Company's history, it underscores the operational and financial resilience that is ingrained within H&P."

Operating Segment Results for Q2

This segment had an operating loss of $309.1 million compared to operating income of $56.7 million during the previous quarter. The operating loss was due to impairments of drilling equipment and related spares, and was partially offset by higher revenues resulting from early contract terminations and lump sum demobilization payments.

Adjusted average rig revenue per day increased by $270 to $25,667⁽²⁾ largely due to an increase in rig demobilization revenues during the quarter partially offset by lower average dayrates. The adjusted average rig expense per day increased sequentially by $918 to $15,905⁽²⁾ primarily due to self-insurance adjustments related to prior year reserves and rig stacking costs. Corresponding adjusted average rig margin per day decreased $648 to $9,762⁽²⁾.

The segment’s depreciation expense for the quarter includes non-cash charges of $1.4 million for abandonments and accelerated depreciation associated with used drilling rig components related to rig upgrades and scrapping of idle equipment, compared to similar non-cash charges of $1.3 million during the first quarter of fiscal year 2020.

This segment had an operating loss of $152.5 million compared to operating income of $3.1 million during the previous quarter. The decrease in operating income was primarily attributable to impairments of drilling equipment partially offset by a higher average margin per day due to higher than expected mobilization revenue. Current quarter results included a $3.4 million foreign currency loss related to our South American operations compared to an approximate $0.7 million foreign currency gain in the first quarter of fiscal year 2020. Revenue days decreased during the quarter by 4% to 1,547 while the adjusted average rig margin per day increased by $2,885 to $10,093⁽²⁾.

This segment had an operating loss of $3.3 million compared to operating income of $6.3 million during the previous quarter. The number of quarterly revenue days on H&P-owned platform rigs declined 17% sequentially to 457. The adjusted average rig margin per day was negative at $7,561⁽²⁾ per day decreasing sequentially by $20,798 due to an increase in bad debt expense, downtime repairs and demobilization expense. Segment operating income from management contracts on customer-owned platform rigs contributed approximately $3.2 million, compared to approximately $2.9 million during the prior quarter.

This segment had an operating loss of $33.6 million compared to an operating loss of $4.6 million during the previous quarter. Current quarter results were negatively impacted by an impairment of goodwill, but also benefited from a change in the fair value of a contingent liability and reversal of accrued compensation. Excluding these items, HPT had an adjusted operating lossof $0.3⁽²⁾ million. The $4.2 million sequential decrease in the adjusted operating loss was due primarily to lower expense incurred during the quarter.

Operational Outlook for the Q3

• We expect U.S. Land operating gross margins⁽¹⁾ to be between $90-$105 million, inclusive of approximately $45 million of contract early termination compensation
• Based on more than 115 rig release notifications since early March 2020, we expect to end the quarter below 70 rigs with much of the decline occurring prior to June 1, 2020.

• We expect International Land operating gross margins⁽¹⁾ to be negative and to be between $(4)-$(6) million

• We expect Offshore operating gross margins⁽¹⁾ to be between $4-$6 million
• Management contracts are expected to generate approximately $2 million in operating income

• Fiscal third quarter revenue is expected to be between $4-$7 million

Other Estimates for Fiscal Year 2020

• Gross capital expenditures are expected to be approximately $185 to $205 million. Asset sales include reimbursements for lost and damaged tubulars and sales of other used drilling equipment that offset a portion of the gross capital expenditures and are expected to total $30 to $40 million in fiscal year 2020.
• General and administrative expenses for fiscal year 2020 are expected to be approximately $180 million, excluding any future one-time items
• Depreciation is expected to be approximately $485 million

Select Items Included in Net Income per Diluted Share

Second quarter of fiscal year 2020 net loss of $(3.88) per diluted share included $(3.87) in after-tax losses comprised of the following:

• $0.03 of after-tax gains related to the change in fair value of a contingent liability
• $0.03 of after-tax gains related to the sale of used drilling equipment
• $0.07 of after-tax income from contract early termination compensation from customers
• $0.13 of after-tax benefits from the reversal of accrued compensation
• $(0.01) of non-cash after-tax losses from abandonment charges and accelerated depreciation related to used drilling equipment
• $(0.09) of non-cash after-tax losses related to fair market value adjustments to equity investments
• $(4.03) of non-cash after-tax losses related to the impairment of goodwill, less capable rigs and excess related equipment and inventory

First quarter of fiscal year 2020 net income of $0.27 per diluted share included $0.14 in after-tax gains comprised of the following:

• $0.02 of a net after-tax gain related to fair market value adjustments to equity investments
• $0.03 of after-tax gains related to the sale of used drilling equipment
• $0.10 of after-tax gains related to the sale of a subsidiary
• $(0.01) of non-cash after-tax losses from abandonment charges and accelerated depreciation related to used drilling equipment