Tulsa-based drilling expert Helmerich & Payne (H&P) is getting more bang for its buck, as North American pricing improves for the super-spec FlexRig fleet.
CEO John Lindsay and CFO Mark Smith led a recent conference call to discuss fiscal 3Q2022 results with analysts.
In the North American Solutions segment, efforts earlier this year to “achieve more sustainable contract economics continue and will accumulate further as pricing improves” for the high-tech FlexRigs, Lindsay said. “Our scale and technology enhance profitability in the U.S., and these advantages are also providing a pathway to grow internationally, both of which will ultimately lead to improved economic returns for all our stakeholders over time.”
More Revenue Per Rig
As expected, H&P ended June with 175 rigs operating in North America, which represented modest growth, he said. However, the company brought in more revenue per rig.
“Fiscal discipline, together with additional contractual churn, allowed us to re-contract rigs without incurring additional reactivation costs and redeploy them at significantly higher rates,” he noted. “Our rapidly improving contract economics are primarily driven by H&P’s value proposition to customers in a tight market for readily available super-spec rigs…
“Capital discipline by many among the land drillers, combined with supply chain and labor constraints, are governing the drilling industry’s cadence of reactivating idle super-spec rigs at scale,” the CEO said. “This will likely perpetuate the supply-demand tightness for super-spec rigs, leading to further improvements in our contract economics.”
The Gulf of Mexico segment also is providing a “steady contribution,” with pricing inching higher. On the international front, activity also continues to tick higher, “with the potential for further improvements in our South American operations in the coming quarters,” Lindsay said.
Preparations also are underway to export some idle super-spec capacity to the Middle East, “part of a longer-term growth strategy.”
Smith said the margin expansion experienced in the latest quarter was “frankly needed to sustain our capital-intensive and technologically demanding business in the long term. We anticipate further improvements in the coming quarters as our contracts in our North America Solutions segment continue to reprice at higher levels.”
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In the North America Solutions segment, revenue improved by $1,950/day, or 8% sequentially, to $26,500/day. Direct margins increased $2,850/day, up 37% to $10,600. Still, the solid gains continued to be negatively impacted by the costs associated with reactivating rigs. H&P spent close to $7 million to reactivate rigs in the quarter, costs that were down by about half sequentially.
For fiscal 4Q2022, North America Solutions direct margins are forecast to be $185-205 million, which would include $6 million to reactivate rigs. H&P expects to exit September running 176 contracted rigs in North America, up one from the latest period.
The Price Is (Almost) Right
“On our earnings call last February and again in April, we discussed how rig pricing needed to reach $30,000/day,” Lindsay said. “In our third fiscal quarter, we had roughly 20% of our fleet average revenue per day at or above that level.
“This is a great start, but we also recognize that pricing needs to move further to achieve gross margins of 50% or greater to generate returns that fully reflect the value we deliver to customers with our FlexRig fleet and complementary technology solutions.”
The “rapidly improving contract economics” are being driven by a market “that’s very tight for available super-spec rigs,” the CEO said.
Inflationary pressures this year, combined with supply chain constraints, “are increasing consumable inventory costs,” Smith said. Higher costs also are impacting supply chain access to parts and materials. To that end, H&P has been proactive in inventory planning and its vendor relationships to alleviate issues and avoid material impacts to operations.
Around 70-75% of daily costs are labor-related, Smith noted. To ensure it has a solid workforce, the company implemented a wage rate increase last December. The turnover rates for the work crews have remained consistent with historical rates, the CFO said.
“Today, we have not experienced any lost drilling time or more lost contracts due to crewing issues.”
Net income was $18 million (16 cents/share) from operating revenue of $550 million in the fiscal third quarter, compared with a year-ago loss of $56 million (minus 53 cents). Operating revenue climbed year/year to $550 million from $332 million.
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