The management team of Tulsa-based Helmerich & Payne Inc. (H&P) offered a dismal view of the state of the market on Thursday during a conference call to discuss fiscal 4Q2015 results. Of the firm's 344 U.S. land rigs available between July and September, 132 were generating revenue while 212 were idle.
The global drilling contractor, one of the biggest in the United States, said only 108 of the rigs generating revenue in the latest period were under contract, with 104 generating revenue days and another 24 active in the spot market. Overall, H&P had only 128 U.S. rigs generating revenue days between July and September, CFO Juan Pablo Tardio told investors.
"The average annual level of drilling activity for the company declined by over 20%, but the decline is closer to 50%" when compared to the year-ago quarter, Tardio said.
"After delivering record-breaking results in 2014, we began fiscal 2015 with high expectations," CEO John Lindsay said during the conference call. "Unfortunately, these past 12 months have brought very low and volatile oil prices and the industry rig count in the U.S. has fallen to levels below those experienced during the recession in 2009. Drilling activity and service pricing levels continue to decline, and for many the major theme across the industry is survival, and has led to sharp reductions in personnel, expenses and investments across the board."
In the latest quarter, the industry rig count "was nearing the low levels reached during the 2009 recession and we were witnessing a second round of declining oil prices and increased volatility," Lindsay said. "The question on everyone's mind then was, are things going to get worse from here? We know that the fundamentals had continued to deteriorate. And today, U.S. land drilling activity is at the lowest level since January of 2003."
Customers are "indiscriminate of rig quality as evidenced by the number of Tier 1 rigs on the sideline," both alternating current (AC) or silicone rectifier (SCR) rigs.
In the U.S. land segment alone, rig utilization was only 43% during fiscal 4Q2015, compared with 87% a year ago and 47% sequentially. At the end of September, the domestic land segment had 145 contracted rigs generating revenue and 198 that were idled, including 197 FlexRigs -- H&P's top-of-the-line AC rigs that can drill in all kinds of conditions and on multi-well sites.
Within the domestic land drilling segment, quarterly revenue declined sequentially by more than 5% a day, resulting in an average of about 147 rigs generating revenue days. On average, 118 were under term contracts and 29 rigs worked in the spot market.
H&P is generating revenue from more early contract terminations by U.S. customers, said Tardio. Minus that extra revenue of about $33 million, the U.S. arm generated $26,218/day during fiscal 4Q2015, "primarily the result of a reducing volume of rigs becoming idle and requiring attention...Given existing notifications for early terminations, we expect to generate about $13 million during the first fiscal quarter [of 2016], about $45 million during the remaining three quarters of fiscal 2016, and over $10 million thereafter in early termination revenues."
Since November 2014, H&P has received early termination notifications for 60 U.S. rigs that were under long-term contracts. Total early termination revenue related to those contracts is estimated at more than $270 million through the contract life.
There is some positive news for contractors, Lindsay said. Although the "best rigs" are idle, there's some evidence that customers are upgrading equipment when it's replaced.
"A year ago, approximately 41% of the active rigs were AC-drive. And today, approximately 58% of the active rigs in the U.S. are AC-drive rigs, with the remaining 42% of the active rigs made up of a legacy fleet of SCR and mechanical rigs that continue to be less relevant as the cycle wears on."
Some domestic rigs that generate revenue days are on standby type dayrate, Tardio noted. Rigs generating revenue -- but not generating revenue days -- include four newbuilds "with deliveries that were delayed in exchange for compensation from customers."Over the next quarter, H&P sees business getting worse, with revenue days declining by another 11-14% from fiscal 4Q2014. The average rig revenue also is expected to fall to about $26,000/day. The average rig expense level is expected to also decline to roughly $13,600/day. H&P has six new FlexRigs set for delivery until the end of March.
"As has been the case, with over 330 new AC drive FlexRigs on average over the last decade or so, every new rig that we are scheduled to complete is sponsored with a three-year term contract that is expected to generate an after tax payback of close to 90% during the duration of the contracted term," Lindsay said.
The operator had an average of 118 rigs under term contracts set to activate in fiscal 2016, 93 in 2017 and 52 in 2018. However, given the soft market conditions and early termination of long-term contracts, H&P's backlog had decreased to $3.1 billion at the end of September from $3.5 billion at the end of June.
"I want to reemphasize our 2015 fiscal year has been a very challenging year, but even the most difficult of market conditions will provide opportunities," Lindsay said. "As the industry's high grade process moves forward, our ability to respond with the right rig, the best people, and in a timely and efficient manner will position the company for more opportunities and will ultimately allow us to provide greater value to customers."
Net losses in fiscal 4Q2015 totaled $21 million (minus 20 cents/share), versus year-ago profits of $168.7 million ($1.55). Operating revenue totaled $566 million from $985 million.
Segment operating income for the U.S. land operations was $34 million, compared with $259 million a year ago and $122 million in the fiscal third quarter. The number of quarterly revenue days was down sequentially by 5.1% to 13,490 days. Excluding contract terminations, the average rig revenue per day fell sequentially by $416 to $26,218, and the average rig margin per day decreased sequentially by $109 to $12,395. The average rig expense per day fell sequentially by $307 to $13,823.