Tulsa-based Helmerich & Payne Inc. (H&P), one of the leading high-tech drillers in the world, expects to see more stable rig demand into 2020 and a continued call for top-of-the-line equipment, but orders could be impacted as customers focus on capital discipline, CEO John Lindsay said Friday.
The company, which designs, fabricates and operates high-performance rigs, better known as super-specs, also provides automation, directional drilling and survey management technologies with a fleet of 99 U.S. land rigs, 31 international land rigs and eight offshore platform rigs.
Lindsay in September had warned of the ongoing decline in activity by exploration and production (E&P) customers. The “sizable pullback in industry activity” by E&Ps was evident in fiscal 4Q2019, Lindsay said.
“The steep decline this past quarter is a result of the overspend of E&P capital budgets that occurred during the first six months of the calendar year.” However, “recent trends and customer conversations” point to “more stability in rig demand over the next couple of months and heading into calendar 2020, but capital discipline will remain the dominant theme.”
E&Ps also “are becoming more selective in the quality and capability of the rigs they employ, as the decline in legacy rigs drilling horizontal wells is more pronounced compared to the decline felt in the super-spec space,” said the CEO. “In previous industry downdrafts, we've experienced rigs released regardless of performance or capability, so this discernment on rig performance is welcome news. Rig contractors continue to write off legacy rig fleets, resulting from low-performing, less capable rigs in the U.S. market.”
Even with the softness experienced this year, H&P’s “super-spec utilization is still strong in the most active basins, and the company has remained disciplined in its approach to pricing.”
In the U.S. land segment, quarterly revenue fell in the latest quarter by $39 million sequentially to $545 million, while operating margins declined by $23 million to $188 million; revenue days decreased sequentially to 18,765 from 19,846.
U.S. land adjusted average rig revenue in the final quarter was $25,365/day, down roughly $400 million/day, or 2% sequentially. Quarterly adjusted average rig margin of roughly $10,400/day was off about 5% sequentially, or by $520/day.
Domestic land operating income increased sequentially by $203.4 million to $59.2 million, primarily from impairing U.S. drilling equipment and spares that had negatively impacted results in fiscal 3Q2019.
In the international markets, services gained traction, as H&P secured letters of intent to deploy a third FlexRig in Bahrain, two in Abu Dhabi, a high horsepower alternating current (AC) drive rig in Colombia, and to provide FlexApps to a customer in Argentina.
Results from the H&P Technologies (HPT) segment in fiscal 4Q2019 were reflective of decreased drilling activity, Lindsay said, “but also the slow and often difficult process of introducing change into the industry,” Lindsay said. “As true with many industrial innovations, the largest barrier to technology adoption is the human workflow changes new technologies can trigger.”
The HPT segment had operating income of $600,000 in the latest quarter, versus a sequential loss of $2.7 million. The sequential increase in the operating loss primarily resulted from lower revenues associated with lower industry rig counts.
“The adoption resistance we are experiencing today is reminiscent of the initial responses we had over 15 years ago,” when H&P rolled out its first super-spec FlexRigs with alternating current, or AC, drives, Lindsay said. E&Ps, however, want to adopt and use the high-tech software solutions “because of the value propositions they provide, like risk mitigation of parent-child well interference. These incremental investments in well performance and productivity on the front end will pay dividends over the entire life of the well for our customers.”
While U.S. land activity slowed, the international markets are gaining traction, contract-wise. Revenue days in the international segment increased by 6% to 1,598, while the adjusted average rig margin/day decreased by $2,423 to $5,481.
In the offshore business, operating income decreased by $2.3 million sequentially to $2.8 million, while revenue days on H&P-owned platform rigs increased by 1%. The average rig margin/day fell by $4,960 sequentially to $7,460. Operating income from contracts on customer-owned platform rigs contributed around $2.2 million, compared with $2.0 million sequentially.
"The company executed well during a volatile quarter and finished the fiscal year generating approximately $196 million in cash flow from operations and roughly $142 million in free cash flow,” CFO Mark Smith said. “Looking out into fiscal 2020, we expect customers to remain disciplined with their spending behavior,” and H&P is basing its initial capital expenditure budget of $275-300 million on those projections.
In fiscal 1Q2020, U.S. land operations are forecast to see a sequential decrease of 5.5-6.5%, exiting the quarter at 187-197 active rigs.
“Average rig revenue/day expected to be down slightly to between $24,750-25,250 (excluding any impact from early termination revenue),” with average rig expenses/day of $14,350-14,850.
For the international segment, quarterly revenue days are expected to fall by around 2% sequentially, representing an average rig count of about 17 rigs in fiscal 1Q2020. Average rig margin/day is forecast to decrease to $3,000-4,000 from rig start-up costs in Abu Dhabi, Bahrain and Colombia.
In the offshore operations, revenue days in fiscal 1Q2020 are expected to fall sequentially by around 15%, representing an average rig count of five rigs. Average rig margin/day is forecast to climb quarter/quarter to $12,000-13,000. Management contracts expected to generate around $2 million in operating income.
Net income in fiscal 4Q2019 totaled $41 million (37 cents/share) on revenue of $649 million, compared with year-ago profits of $4.64 million (2 cents), on revenue of nearly $697 million.
In fiscal 2019, net losses totaled $34 million (minus 34 cents) on operating revenue of $2.8 billion. A one-time loss totaled $224 million (minus $2.09) related to impaired drilling equipment and spares driven by downsizing the Flex4 rig fleet. Fiscal 2018 net profits totaled almost $483 million ($4.49/share). Operating net cash was $856 million, versus $558 million in fiscal 2018.