Tulsa-based Helmerich & Payne Inc. (H&P), which fabricates and operates a fleet of high-performance drilling rigs around the world, is aligning operations toward performance-based commercial models rather than the industry standard dayrates to build customer support, CEO John Lindsay said Wednesday.
What historically were separate U.S. Land Operations and HP Technologies business segments have been combined to form the North America Solutions business segment. The new segment is meshing the digital technologies into the performance-based commercial models to give H&P a leg up.
Combining the rig automation software with contracts based on drilling performance and well quality would give customers a better handle on what H&P can do, rather than relying on a “generic dayrate,” Lindsay said during a conference call to discuss results for fiscal 3Q2020.
“Our number of performance-based contracts has held relatively steady despite record rig count declines and limited incremental contracting activity,” he said. The revamped business segments integrate proprietary rig technology, automation software, uniform FlexRig fleet and digital expertise “into one unique industry offering.”
More quarterly earnings coverage by NGI can be found here.
Lindsay spent a few minutes during the call to discuss how quickly the revamped performance-based contracts could be integrated, as dayrates historically have set the price. Trying to switch contracts to the new model within a year would be “a bit aggressive,” he said, “because the industry does have a tendency to adopt change relatively slowly.”
At the same time, though, H&P has seen an uptick in customers adopting technologies, and it is becoming successful in obtaining new contracts with some kind of performance-base award.
“Combining all of these technology solutions with the FlexRig is really beneficial, and there are customers out there, both small and large, that have interest in it,” Lindsay said. “The question is, how quickly can we get adoption is really hard to say, but I do think that we’re going to continue to see traction, and I think we will increase it as we go through 2021.”
Meanwhile, Covid-19 has brought about an “unprecedented decline in activity,” which “continues to reverberate throughout the industry,” he said. “The ramifications will be felt for several quarters to come.”
In light of the impact, “the current state of the industry pointedly underscores a necessity for change and is providing opportunities to accelerate strategic objectives aimed at how we approach adding value and how that value is perceived by our customers.”
To give some perspective, H&P’s fleet at the end of June included 262 U.S. land rigs, 32 international land rigs and eight offshore platform rigs. It now expects to exit September with 58-63 contracted rigs working in North America, including 10-15 generating revenue that could remain idle.
The global operator’s revamped customer-centric approach “is evolving to encompass the wider array of drilling and digital technology solutions H&P can deliver,” Lindsay said. “Rather than focusing on discrete products, like rigs or separate technology applications, we are focusing on packaging the total solution — combining people, rigs and technology to deliver the best possible well that accomplishes our customer’s operational goals while reducing their financial risk.
“We believe these changes are required in order to improve not only the value delivery, but also to enhance the economic performance for our customers and H&P stakeholders.”
Actions underway to preserve the financial position include reducing the annual dividend by $200 million. The planned fiscal 2020 capital spend of $95 million has been cut by another $40 million. In addition, $50 million was sliced from fixed operational overhead, with general and administrative expenses reduced by $25 million on an annualized basis.
“While the vast majority of these reductions are related to the U.S., we are implementing similar cost-saving measures in our international locations as well, working through local jurisdictional regulations,” CFO Mark Smith said.
“More than a quarter has passed since the Covid-19 pandemic began, and we are still unable to reasonably estimate its duration or ascertain the full extent it will have on the industry in terms of timing or magnitude of a recovery,” the financial chief said. “As a result, we cannot be certain of the ultimate impact on H&P’s operations or financial position.”
Net quarterly loss was $46 million (minus 43 cents/share) versus year-ago losses of $155 million (minus $1.42). Operating revenue declined to $317 million from $688 million.
In the North American Solutions business, quarterly operating losses totaled $25 million, driven by a dramatic decline in rig activity. In fiscal 3Q2019, operating losses were $147 million. Revenue in the latest quarter benefited from $50.2 million in early contract termination fees and better-than-anticipated activity from more favorable timing around stacking rigs.
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