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H&P Reports Better-Than-Expected Results, Keeps 'Laser Focus' on AC-Drive Rig Technology

Reduced U.S. land fleet expenses lifted Helmerich & Payne (H&P) above Wall Street expectations in the latest period, and with a firm backlog of rig contracts and flexibility to reduce costs further, management said it is poised for a return to business as usual. As to when that may be, however, remains a question.

Tulsa-based H&P owns and operates the largest land fleet of alternating current (AC) drive drilling rigs in the world. AC rigs are considered the top tier of rigs with technology for multi-pad drilling and longer laterals. As of Thursday, H&Ps existing fleet included 347 U.S. land rigs, 38 international land rigs and nine offshore platform rigs.  The company is scheduled to deliver another three AC-drive FlexRigs, all under long-term contracts. Once delivered, the global fleet would total 388 land rigs, including 373 FlexRigs.

During fiscal 1Q2016, H&P reported net income of $16 million (15 cents/share) from operating revenues of $488 million, compared with year-ago profits of $204 million ($1.86) on revenues of $1.06 billion. In fiscal 4Q2015, net losses were $28 million (minus 25 cents/share). Revenue fell 54% year/year to $487.8 million, but it was about $25 million more on average than the Street had expected.

"Our first fiscal quarter results were better than expected primarily as a result of significantly reduced daily rig expenses in our U.S. land segment," CEO John Lindsay said during a conference call Thursday. "Unfortunately, as very low oil and gas prices force our customers to further reduce their drilling budgets, the U.S. land industry rig count has now declined to levels not seen since 1999, which is forcing our customers to make further cuts" to spending, the CEO said.

"Although the market isn't expected to improve in the second fiscal quarter, we will continue to work on cost-effective measures across the organization while strengthening our ability to add value for our customers through innovation and productivity enhancements."

H&P's experience in designing and operating AC-drive land rigs give the company a "distinct advantage" to emerge from the downturn in better shape than some competitors, as more exploration and production customers are moving to the more efficient and technology savvy AC-drive rigs in the onshore.

H&P spent about $114.5 million on capital expenditures during the quarter. At the end of December it had more than $848 million in cash and long-term debt of $492.7 million -- a debt-to capitalization ratio of 9.3%.

H&P's FlexRig line in general offers E&Ps an advantage in drilling complex wells, Lindsay noted. "We have over 320 with a 1,500 hp rating and over 180 are optimized for multi-well pad operations. We continue to add 700 psi mud systems to a large portion of the fleet as well..." H&P has doubled its FlexRig sales since 2008. Last year, despite the downturn, FlexRig sales were 18% higher than in 2014. Continuing to improve technology for its rigs and adding more abilities remains the "laser focus" for the company through the downturn.

Lindsay didn't discount how bad it is across the energy sector.

"The tone in 2016 has shifted to lower for longer," instead of a resurgence in activity, the CEO said. Of the 1,400-plus rigs idled in the United States since late 2014, 900 are legacy rigs and 500 are AC-driven, he said.

"We've seen dramatic reductions in personnel and investments, and clearly, there are are a number of customers struggling to survive."

There are a "few pundits...who see $20 oil. We aren't predicting prices," but "we believe prices are below the level required to sustain production...The question will be, 'who is in the best position for an eventual return of drilling demand?' We believe we are well positioned, and it's not the time to hunker down and wait for things to get better...We will thoughtfully manage costs and continue to improve our products."

Operating income for the U.S. land unit was $56 million in fiscal 1Q2016, versus $318 million a year ago and $34 million sequentially. The sequential increase was attributed in part to a higher rig margin/day average. However, the number of quarterly revenue days, i.e. the measure of activity, decreased sequentially by 11.5% to 11,945 days.

Excluding early contract terminations, the average rig revenue/day increased sequentially by $16 to $26,234, and the average rig margin/day increased sequentially by $949 to $13,344. Meanwhile, the average rig expense/day decreased by $933 to $12,890.

Rig utilization for U.S. land fell to 39% in the latest quarter, versus 89% a year ago and 43% in fiscal 4Q2015. At the end of 2015, H&P's domestic land segment had 131 contracted rigs generating revenue, including 101 under long-term contracts, but 214 rigs were idle.

During fiscal 2Q2016, H&P expects the U.S. land activity, measured in revenue days, to fall by around 20% sequentially. Not taking into account the impact of customers terminating their rig counts early, average rig revenue/day is expected to be roughly flat, with corresponding average rig expense/day increasing to about $13,600.

"As of today, the U.S. land segment has approximately 121 contracted rigs that are generating revenue, including 93 under term contracts, and 226 idle rigs," CFO Juan Pablo Tardio said during the conference call. In the offshore segment, H&P expects the average rig margin/day to be about $8,250, with revenue days falling by 5-10% sequentially.

Lindsay said the market today is "on par with the oil market in the 1980s, but there are key differences in the, size and capability of today's rig fleet. The AC-drive rig replacement cycle is ongoing. At the peak of operations in 2014, 41% of the market was AC-drive and today over 63% is AC-drive tech." The remaining fleet is composed mostly of legacy silicone-rectifier and mechanical.

Last year Lindsay had alluded to a structural change that he thought was taking place in the marketplace, but he said he no longer views the downturn that way.

"I see it as a really classic cyclical market at this stage," he said. "If you look back at history, we've seen some pretty wild swings in downcycles in terms of the number of rigs going down. There are over 900 AC rigs available today, but not all AC rigs are created equal. I think when we begin to see oil prices improve, and I don't know when that will be, that there is going to be high demand for those assets...I think the real challenge, as it relates to the rig fleet, is that it's going to be harder and harder for legacy rigs to be competitive."

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