Helmerich & Payne (H&P), which owns the largest U.S. fleet of walking rigs, proved during the fiscal first quarter that bigger is better, as it captured higher prices and improved utilization rates for its onshore equipment.
The Tulsa-based drilling contractor increased its margins for U.S. onshore rigs by 10% sequentially as customers lined up not only for H&P’s super-spec rig fleet but idled equipment too, CEO John Lindsay said Thursday during a conference call to discuss fiscal 1Q2018 performance.
“The downturn has been a challenging three-year journey, and H&P has been preparing for the opportunity this improved outlook presents for 2018 and beyond,” Lindsay said.
H&P’s gains continue to be linked to upgrading its trademark FlexRig fleet to super-spec status. The alternating current (AC) walking rig systems are in high demand in the U.S. onshore, ready to tackle rough environments and drill further into shale and tight formations.
As of Thursday, H&P’s fleet included 350 U.S. land rigs, 38 international land rigs and eight offshore platform rigs, with an overall FlexRig count of 373.
H&P’s super specs are “essentially fully utilized in U.S. land with approximately 400 rigs active today,” Lindsay said.
The AC-drive super specs, come loaded with 1,500 hp, 750,000-pound hook loads, pad capabilities and 7,500 psi mud systems. H&P’s 171 super spec fleet now is operating at 98% utilization.
There’s still opportunities for more business, Lindsay said.
“We believe there are another 200-250 rigs in the industry where upgrades to super-spec capacity would be economically feasible, and H&P owns roughly half of those,” said the CEO. Of the upgradable fleet, he said about 30 active FlexRigs each could be upgraded to super-spec status with a $2-3 million investment.
Over the past year H&P has upgraded 107 FlexRigs to super-spec capacity.
“If customer demand remains, and we're able to achieve reasonable pricing, our upgrade cadence could average 12 or more FlexRig upgrades per quarter,” Lindsay said. “The key takeaway here is that H&P is uniquely positioned to grow its active rig count without building new rigs, whether that be under improved commodity pricing or the range-bound pricing we've experienced most of this past year.
“This successful strategy has allowed us to grow market share from 15% to 20% in the U.S. land fleet and over 30% in the AC-drive market.”
The draw for the super specs “is the fact that lateral lengths have increased to the extent that this is pushing the limits of the standard AC-drive rig fleet. In fact, in 2017 the average lateral increased another 15% to approximately 8,000 feet, and we expect this trend and longer laterals to continue.”
The average laterals in 2015 were about 6,000 feet, Lindsay noted.
H&P also is making strides toward becoming a bigger player in the industry's digital evolution, he said. For the past decade, the FlexRig fleet has enabled the company to use high-speed data generated from the rig and leveraged Internet of Things tools to enhance efficiencies and reliability.
Since the previous conference call in mid-November, H&P has raised six more U.S. land rigs, including four in the Permian Basin, said CFO Juan Pablo Tardio. The three most “most active basins” are the Permian, Oklahoma’s stacked reservoirs and the Eagle Ford Shale.
“The Permian remains our most active operation, with 102 rigs contracted,” Tardio said. But rigs remain available, he added. “We still have 46 idle FlexRigs in the area, 25 of which have 1,500 hp drawworks rating.”
In Oklahoma’s stacked reservoirs H&P is running 30 rigs, and it has 31 rigs contracted in the Eagle Ford. H&P exited 2017 with 204 contracted rigs, with an increase of about 4% in the total quarterly revenue base.
“We continued to experience growth in activity from the beginning to the end of the quarter, and we now expect a similar trend for the fiscal 2Q2018,” Tardio said. “In general, the improved level of pricing and the spot market more than offset the decreasing proportion of rigs under long-term contracts that were priced years ago during strong markets.”
In the U.S. land market, H&P’s adjusted average rig revenue/day increased during the latest period by $483 to $22,167. However, the average rig expenses per day decreased by $359 to $13,546.
H&P sees more strength ahead and is forecasting a 3-4% sequential increase in the average number of active rigs during fiscal 2Q2018.
“Although our average day rate in the spot market is still in the high teens, leading edge super-spec FlexRig pricing is in the low to mid-$20s,” Tardio said. The average rig expense/day is expected to be roughly $13,900.
H&P boosted its 2018 capital expenditures to $350 million from an earlier forecast of $250-300 million, in part to upgrade more rigs.
U.S. land operations are expected to see revenue days increase by 1-2% sequentially, representing a 3-4% hike in the average number of active rigs, given the lower number of calendar days in fiscal 2Q2018. Average rig revenue/day is expected to be roughly flat from fiscal 1Q2018, with average rig expenses/day at around $13,900.
For the offshore operations, revenue days in fiscal 2Q2018 are seen declining by around 2% sequentially, also on fewer calendar days. Average rig margins/day are expected to be about $11,500. Management contracts should generate around $4 million in operating income.
International land operations should decline by around 4% sequentially from the first quarter, with an average rig margin/day of around $8,000.
Net income in fiscal 1Q2018 climbed to about $500 million ($4.57/share), a turnaround from year-ago losses of $35 million ( minus 33 cents) and sequential losses of $22.5 million (minus 21 cents). Operating revenue climbed to $564 million from year-ago revenue of almost $369 million and sequential revenue of $532 million.
U.S. land drilling revenue increased in fiscal 1Q2018 to almost $461.6 million from year-ago revenue of $263.6 million and sequential revenue of $439.4 million.