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Helmerich & Payne’s Permian Activity Still Hot, But Customers Cautiously Raising Rigs Elsewhere

Tulsa-based Helmerich & Payne Inc., the last of the big oilfield drilling contractors to issue quarterly results, continues to see most of its U.S. onshore rigs heading to the Permian Basin, but increasingly, high-spec activity is beginning to increase elsewhere, CEO John Lindsay said Thursday.

H&P's flagship FlexRig fleet, a big draw for unconventional operators, trades on its alternating current (AC) drives that are integrated into the mast, enabling the drill string to be electronically controlled from a computer touch-screen in the driller's cabin. Since activity "troughed in May," the company has reactivated more than 32 FlexRigs in the U.S. onshore, Lindsay said during a conference call to discuss fiscal 4Q2016 results.

"Of those, 28 are in the spot market and four are on term contract," he said. Fifteen now are working in the Permian, five in Oklahoma's Woodford Shale, three each in the Bakken and Haynesville shales, and two each in the Eagle Ford Shale, Powder River Basin and Niobrara formation.

The company also has "added 14 new customers since May, and momentum has been building as a result of the performance our people are delivering," Lindsay said.

Rig mobilizations are averaging less than four days, but it's still slow going in U.S. land, with the bulk of the business in West Texas. Rig utilization in the U.S. onshore was 25% for fiscal 4Q2016, compared with 43% a year ago and 24% sequentially. The number of quarterly revenue days in the U.S. land segment increased sequentially by 6% to 7,955 days, but average rig revenue/day fell by $280 to $24,404. Rig expense/day fell sequentially by an average $91 to $13,326, while rig margin/day declined $189 from fiscal 3Q2016 to $11,078.

"Of the 14 new customers since May, eight are working rigs in the Permian," Lindsay said. "We're seeing that the Permian is leading the recovery," and combined with the company's ability to move rigs where they need to go quickly "implies certainly we'll be at an advantage going forward." H&P "invested heavily in our infrastructure in the Permian back in 2012 through 2014, and it is our largest facility today. At the peak, we were working just shy of 90 rigs in West Texas and had expectations to work as many as 125 rigs prior to the downturn. Today, we have 49 rigs contracted, coming off a low of 37 rigs."

For more insight on other U.S. onshore operators, NGIrecently published North American Oilfield Services 3Q2016 Earnings Call Coverage, a special report highlighting recent results and new technology being unveiled.

There remain 71 idled FlexRigs ready to raise in the Permian, 51 equipped with 1,500 hp, Lindsay said. The fleet for U.S. land also includes newer FlexRigs with 7,500 psi circulating systems and multi-well pad drilling capability, which "meet the general criteria of what some industry followers have identified as 'super-spec' rigs, which is a subset of AC-drive rigs with 1,500 hp draw-works ratings," Lindsay said. "We have approximately 80 of these rigs in our U.S. land fleet, and if demand remains high we could upgrade additional FlexRigs and have approximately 120 of these rigs by the end of our 2017 second fiscal quarter...

"In the event of a significant market improvement for super-spec rigs, we have the capability of providing a total of approximately 270 rigs to the market without requiring newbuild rigs, by solely relying upon upgrades where needed" to the current FlexRig fleet.

The high-spec fleet is drawing customers that want more precision to target unconventional oil and gas deposits, said the CEO.

"From a rig requirement perspective, extended laterals require more hydraulic horsepower, drill strength...and greater capability from technology solutions that 1,500-hp AC rigs provide and, therefore, they are the rig of choice," Lindsay said. "We estimate that H&P has approximately 55% of the available 1,500-hp AC rig in U.S. land today. So, we're positioned with more capacity than any of our competitors in the market."

H&P currently has 104 1,500 hp AC drive FlexRigs under contract, with 220 idle and available to go to work in the United States.

“We have 19% share of the U.S. land horizontal directional drilling market with our closest competitor at 11%." Since the peak of activity in 2014, "we have slightly grown our market share from 18%..."

In the U.S. land segment, revenue days (activity) are expected to increase by roughly 20% sequentially during fiscal 1Q2017. Excluding impacts from early contract termination revenue, H&P is forecasting average rig revenue/day in the first quarter to be roughly $23,500, with rig expense/day averaging about $14,200.

As of Thursday, H&P's U.S. land segment had 105 contracted rigs, with 102 generating revenue days and 72 of them under term contracts. It also had 243 idle rigs. Finding the talent to do the work now has become job No. 1, said the CEO. Many former H&P employees who were laid off during the downturn have been rehired.

"We've had close to a 90% success rate as we've reached out to previous field employees, resulting in hundreds of quality employees returning to H&P," Lindsay said.

Net losses in fiscal 4Q2016 totaled almost $73 million (minus 68 cents/share), versus year-ago losses of $27.6 million (minus 26 cents). For fiscal 2016, net losses totaled $57 million (minus 54 cents/share), versus year-ago net profit of $420 million ($3.85).

In the U.S. land operations segment, losses totaled $70 million, compared with profits of $34 million in the year-ago quarter and $26 million in earnings sequentially. The decrease in land segment operating income between July and September primarily was attributed to a decline in early termination revenues, as well as charges that included $38 million to decommission used drilling equipment.

As of Thursday, H&P’s existing fleet included 348 land rigs in the United States, 38 international land rigs and nine offshore platform rigs. In addition, the company is scheduled to deliver two H&P-designed and operated FlexRigs during the calendar year, both under long-term contracts with customers, which when completed would bring the global fleet to 388 land rigs, including 373 AC-drive FlexRigs.

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