Helmerich & Payne, Inc. (NYSE:HP) Q2 2024 Earnings Call Transcript

Helmerich & Payne, Inc. (NYSE:HP) Q2 2024 Earnings Call Transcript April 25, 2024

Helmerich & Payne, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to Helmerich & Payne’s Fiscal Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask question during the question-and-answer session. [Operator Instructions] Please note this call is being recorded. I will be standing by should you need any assistant. It is now my pleasure to turn the conference over to Mr. Dave Wilson, Vice President of Investor Relations.

Dave Wilson: Thank you, Abby, and welcome, everyone, to Helmerich & Payne’s conference call and webcast for the second quarter of fiscal year 2024. With us today are John Lindsay, President and CEO and Mark Smith, Senior Vice President and CFO. Both John and Mark will be sharing some comments with us, after which we will open the call for questions. Before we begin our prepared remarks, I will remind everyone that this call will include forward-looking statements as defined under the securities laws. Such statements are based on current information and management’s expectations as of this date and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict.

As such, our actual outcomes and results could differ materially. You can learn more about these risks in our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our other SEC filings. You should not place undue reliance on forward-looking statements, and we undertake no obligation to publicly update these forward-looking statements. We also make reference to certain non-GAAP financial measures, such as segment operating income, direct margin and other operating statistics. You will find the GAAP reconciliation comments and calculations in yesterday’s press release. With that said, I will now turn the call over to John Lindsay.

John Lindsay: Thank you, Dave, and good morning, everyone. In light of the choppy market conditions in the U.S., Helmerich & Payne is pleased with our second fiscal quarter results. Even with these shifting market conditions, our margins remain strong. Reflecting our continued focus on maintaining commercial economics commensurate to the value we are delivering to customers. We are also encouraged to see evidence that there is an ongoing necessary shift in the industry’s fiscal behavior, which is moving it toward a more sustainable and investable future. In the U.S. market, contractual churn is still prevalent. And while we achieved our average planned rig count for the second quarter, our exit rig count for the quarter was just below what was projected.

Mark will give more rig count details during his remarks, but let me summarize by saying that part of this churn continues to be a product of the volatility created by a weaker natural gas market and is reminiscent of the volatility experienced this time last year. However, we believe the impact on our overall activity will be less this year going forward. E&P consolidations and a variety of other factors have also contributed to churn. And while we expect many of these underlying factors will persist, we are also projecting a relatively stable outlook for our rig count through the third fiscal quarter. We expect our total projected North America Solutions direct margin for the third fiscal quarter to be down slightly on a sequential basis due to a lower average rig count, but it is important to note that we also expect resiliency in our per day direct margins.

Our customers benefit from reliability, faster well cycles and better well quality, all of which lowers our total well cost. Our ability to deliver consistently on these measures is what ultimately drives direct margins and market share. Oil prices remain attractive, and we see the customer outlook becoming more positive regarding medium- and long-term energy fundamentals. Based on that, we believe there will be growing demand for the top performing super spec rigs due to customers deploying well designs that require technologies to drive stronger economics from their acreage positions. Intersecting with this is the major industry theme of service intensity, where daily rig costs are higher because laterals are longer and circulating pressures are higher to drill these wells.

All these elements coalesce to create the opportunity for technology and performance based contracts that demonstrate the performance differentiation H&P brings to the table. Our operations and sales teams are working more closely than ever with the customer to deliver more collaborative solutions. Regarding our International Solutions segment, we are busy preparing for the unconventional project in Saudi Arabia that we announced last quarter and have finalized the contractual terms for the seven rig tender award. Our first rig awarded by Saudi Aramco in August of 2023 is expected to arrive and commence operations later this summer. For the recent seven rig tender award in January, preparations are ongoing from both the rig and operational perspective with expectations that a majority of these rigs will arrive in Saudi Arabia during the fourth calendar quarter of 2024 and commence operations shortly thereafter.

During these preparations, we will continue to spend our 2024 budgeted CapEx toward this project and incur start-up operational expenses, which will disproportionately impact near-term international segment margins. We look forward to working with Saudi Aramco and believe this is the beginning of a long-term presence in the region with additional growth opportunities. International operations in South America and Australia are expected to remain relatively stable over the next quarter as well as our offshore Gulf of Mexico operations. In addition to our international growth strategy, our capital allocation strategy this fiscal year is structured with a base and supplemental dividend as well as opportunistic share repurchases, and Mark will provide more details in his remarks.

I want to conclude my prepared remarks by stating again we have remained firm on our contractual economics by working with and collaborating closely with customers on alternative contract models. Our primary commercial model today is using performance contracts combined with our technology solutions. Having the operational confidence in our ability to consistently execute with our technology solutions results in win-win economics for both the customer and H&P and provides our customers with safety, consistency and reduced execution risk. All of these successes are possible because of the people at H&P. It is you that make our FlexRigs and our technology solutions the best in the industry. Each of you play a key role in our success and we will continue to be drivers of that success in the future.

And now I will turn the call over to Mark Smith to provide more details and a review of our financials.

Mark Smith: Thanks, John. Today, I will review our fiscal second quarter 2024 operating results, provide guidance for the third quarter, update remaining full fiscal year 2024 guidance is appropriate and comment on our financial position. Let me start with highlights for the recently completed second fiscal quarter ended March 31, 2024. The company generated quarterly revenues of $688 million versus $677 million from the previous quarter. Revenues were up sequentially primarily due to an increase in average active rig activity in North America. Total direct operating costs were $403 million for the second quarter versus $404 million for the previous quarter. General and administrative expenses were approximately $62 million for the second quarter, which was higher than our expectations due to a few discrete items including information technology costs, mark-to-market adjustments for director deferred compensation and the incurrence of certain professional services and consulting fees.

During the second quarter, we recognized gains of $3.7 million primarily related to the change in the fair market value of our equity investments, which is part of the gain on investment securities reported in our consolidated statement of operations. Our second quarter effective tax rate was approximately 27.5%, which was within our previously guided range for the quarter. To summarize this quarter’s results, H&P earned a profit of $0.84 per diluted share versus $0.94 in the previous quarter. As highlighted in our press release, second quarter select items had a neutral impact on diluted earnings per share. For comparison, diluted earnings per share of $0.84 in the second fiscal quarter versus $0.97 during the first fiscal quarter after adjusting Q1 for select items.

Capital expenditures for the second quarter of fiscal 2024 were $118 million and I will have some further comments when we come to our fiscal 2024 capital expenditure guidance. Our Q2 cash flow from operations was $144 million which was as expected sequential decline in part due to most of our year-to-date cash tax payments falling into the second fiscal quarter. I will address the company’s cash position later in my remarks. Turning to our three segments beginning with the North America Solutions segment. We averaged 155 contracted rigs during the second quarter, up from 149 in the first fiscal quarter. The exit rig count was 152 which declined late in the quarter and was below our guided range of between 154 and 159 due to lower natural gas prices and miscellaneous individual customer factors.

Revenues increased sequentially by $19 million primarily due to the increase in average activity quarter to quarter as well as some remaining legacy price rigs rolling to current market rates. Segment direct margin was 271 million which was towards the high end of our guidance and sequentially higher than the previous quarter, which came in at 156 million. Total segment expenses were down slightly to 19,000 per day in the second quarter compared to 19,600 per day in the previous Q. Looking ahead to the third quarter of fiscal 2024 for North America Solutions segment. As of today’s call, we have 150 rigs contracted. And while activity through most of the second quarter was strong, the previously mentioned factors began to wear on the market and today the rig count has reverted back to a similar level to January 1.

That said, we are seeing signs that the rig count seems to be nearing a leveling off point and we expect to end our third fiscal quarter with between 145 and 151 working rigs. It is worth noting that among the various factors impacting the rig count, pricing is not one of them. And to that end, as mentioned in the press release, we remain focused and steadfast on our commercial economics. Furthermore, despite a slight decrease in our rig count heading into our third fiscal quarter, we have been able to maintain an even accrete market share since our fiscal 2023 year end U.S. land share of 25.5% to a 27.5% share today overall, while maintaining a 33% to 34% super spec market share. As we have commented before, market share is not our main goal, but rather providing value to customers and being commensurately compensated for our performance and value created.

We believe our financial margins and market performance are representative of our efforts. Revenue backlog from our North America Solutions fleet stands at roughly one billion for rigs under term contract. As of today, about 57% of the U.S. active fleet is on a term contract. Average pricing and revenue per day should remain relatively flat. In the North America Solutions segment, we expect direct margins in fiscal Q3 to range between 255 million to 275 million and we expect cost in Q3 to remain relatively flat. Next to our International Solutions segment. International Solutions activity ended the second fiscal quarter with 11 rigs on contract. International Solutions results were above our guidance range as the inflationary environment in Argentina was less detrimental than anticipated.

As we look toward the third quarter of fiscal 2024 for international. As mentioned in the press release, we expect all international activity to remain unchanged across the quarter. With regard to our Middle East growth, our Galena Park facility at the Port of Houston is using its capacity to convert and recommission rigs to meet Saudi Aramco unconventional specifications for the remainder of fiscal 2024. In addition to capital investment outlined in our previous quarterly call, we are incurring recommissioning and expenses. We expect to incur 10 million to 12 million of operating expense consisting of 2.5 million of per rig for inspection and repair in fiscal Q3 with final recommissioning expense expected in Q4 of approximately five million.

Also included in the Q3 cost guidance is local office setup in Saudi Arabia of approximately two million. In the third quarter, we expect an overall direct margin range of a two million earnings to a two million loss aside from any foreign exchange impacts in the international segment. Finally to our Gulf offshore Gulf of Mexico segment, we have three of our seven offshore platform rigs contracted. We also have management contracts on three customer owned rigs, one of which is on active rate. The offshore segment generated a direct margin of about three million during the quarter, which was below our guidance range as one rig was delayed in resuming full rate operations. As we look toward the third quarter of fiscal 2024 for the offshore Gulf of Mexico segment, we expect to return to previous run rate levels and generate between five million to eight million of direct margin.

Let me update full fiscal year 2024 guidance. Capital expenditures for the full 2024 year are now expected to be at the top end of our original $450 million to $500 million range. During our November earnings call describing initial fiscal 2024 guidance, we stated that approximately 14 walk in conversions would occur in Galena Park, seven were completed and are in the U.S. fleet with the remaining seven committed to the Saudi Rig Award. As further discussed on our last call in January, international growth capital for the seven rig Saudi award also includes recertifying certain equipment to like new, conducting required modifications and purchasing specific equipment for Middle East contracts. What was previously estimated timing for maintenance CapEx across the U.S. fleet together with refined international growth CapEx is now pinpointed to the top end of the original range with more supply chain clarity with our placed orders.

It is worth repeating what we have said on prior calls that we are marketing our super spec FlexRigs internationally for the work they were designed for and have excelled at in the U.S. and exporting these idle super spec FlexRigs to international fit for purpose opportunities increases our fleet wide utilization and exposes HP to markets with longer term contract profiles and starts to reduce U.S. concentration while alleviating long idle U.S. supply. Depreciation for fiscal 2024 is now revised up from $390 million to $405 million for the full-year due to the acceleration of depreciation related to excess capital spares created via the walking rig conversion program. Our expectations for general and administrative expenses for the full fiscal year are revised up from original guidance of 230 million to 240 million.

This increase is due to IT project costs as well as some other unrelated professional services and consulting fees. Research and development costs are revised up for fiscal 2024 from 30 million to 35 million due to onetime expenditures in Q2 to acquire certain intellectual property. We still estimate our annual effective tax rate to be in the range of 24% to 29% with the variance above the U.S. statutory rate of 21% attributed to permanent book to tax differences and state and foreign income taxes. We continue to project an FY’24 cash tax range of 150 million to 200 million. We had cash and short-term equivalents at H&P approximately 277 million at March 31st versus an equivalent 298 million at December 31, 2023. The sequentially decreased cash balance is largely attributable to the previously mentioned cash tax timing in Q2.

There is noise from quarter-to-quarter based on timing of various payments and receipts and movement of asset and liability balances. But overall, we are still aligned with what we projected for the full fiscal year and are still comfortable with our overall cash flow projections for fiscal 2024. That said, based on the quarter’s results and our projections for the remainder of the fiscal year, we still forecast that we will be generating ample cash flow to cover our capital expenditures, the base dividend and the fiscal 2024 supplemental dividend plan. That concludes our prepared comments for the second fiscal quarter. Let me now turn the call over Abby for questions.

See also 15 Best Eventbrite Alternatives for Registration & Ticketing and 20 Best Evernote Alternatives in 2024.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Doug Becker from Capital One.

Doug Becker: John, if you – I want me to dream a little bit. It does seem like the rig count is stabilizing, but was just hoping to get an update on how you see supply and demand for the super spec market in particular. And when conceptually we could see pricing power again if the outlook for next year, higher oil prices, a little bit better natural gas price outlook. Just want to get a sense for where the way the land is and what a little bit of a bull case is?

John Lindsay: Sure, Doug. Good morning. I think if you just look at the activity set over the last several years, the super spec segment of the market continues to grow on a percentage basis. Obviously, we have had a pullback in activity, both H&P and the general industry in general, primarily as a result of natural gas prices like we have talked about. But I think the outlook is very positive. I think the ability to continue to drive efficiencies and reliability, do it in a safe fashion and leverage technologies are really those key things that are going to be needed. That is what customers are looking for. So I feel good about overall the super spec space in the U.S. In terms of trying to pick the timing, as you know, that is very challenging to do. But obviously, oil prices are strong. But the gas basins, we have had quite a bit of pullback in activity. But again, I think that is we will see some improvements here in the future.

Doug Becker: And, Mark, I know you expressed comfort with the cash flow outlook. Just wanted to try and reconcile a lot of the moving parts. My assumption would be that free cash flow would be below the, say, 235 million that previous guidance implied just given, most notably the higher CapEx. Is that fair or am I missing a factor?

Mark Smith: It is in the ballpark.

Operator: Our next question comes from the line of Derek Podhaizer from Barclays.

Derek Podhaizer: You talked about in your prepared remarks that you are seeing signs of leveling off in the rig count. Can you maybe just expand on that, what you are seeing? Is it customer conversations? Is it duct counts? Just any way you can help us with the sign that you are seeing as far as leveling up on the rig count.

John Lindsay: Well, Derek, it is really a function of conversations that we have ongoing with customers. There is obviously this continued churn that we have described. But there are examples where customers have rigs, rig opportunities where they are picking up. There is also some high grading that is ongoing, really continually as we move forward. If you just look at our count in general, the H&P count, we have been in a five rig range since, what, since June of last year. And again, we all know what the challenges have been with natural gas. So really, our outlook and our expectation is really derived from conversations that we have had with customers and what their expectations are. You have heard me say before, it is very hard to forecast out much faster quarter. It is there is a lot of things that can happen in a short period of time. But based on what we know right now and feedback we are getting, that is the estimate that we have put together.

Derek Podhaizer: I wanted to dig into the performance based contract. So one of your customers announced their company record five well pad, all four mile laterals last night. Is this a good read through of how you capture value in generating efficiencies for your customers? Maybe describe the mechanics, of an example like that.

John Lindsay: Well, that is definitely a great example. At the end of the day, what we are doing is we are having conversations with customers. You have heard us talk about before, this is a partnership, and we work very closely in trying to understand what their deliverables are, what makes for them looking seeing what would be a positive outcome and whatever that metric is, that is the focus that we have. At the end of the day, we have got to deliver wells more efficiently. We have got to save days. We have got to improve wellbore quality, consistency. The technology solutions that we have really help deliver that. So if you can put together a performance based contract construct that really rewards the service provider, in this case H&P, and aligns it with the outcomes that the customer is wanting, then that is a true win-win outcome.

And that is the best that you can hope for. And as you have heard us say, at the end of the day, we are making big investments. This is a capital intensive business, and we are making big investments. And those investments are designed to enhance the quality and the performance. At the same time, we have to get returns above our cost of capital. Otherwise, it is very challenging for us to be investable today and into the future.

Operator: Our next question comes from the line of Saurabh Pant from Bank of America.

Saurabh Pant: Mark, maybe I will start with one clarification. So you did give a good color on CapEx and you have better line of sight from a supply chain perspective. But if I recall your messaging from last quarter, I think there was a path of $30 million, $35 million you said in additional CapEx related to the Saudi rigs that was expected next year. So is there an element of that being pulled forward to your FY’24 CapEx going from $450 million to $500 million to now $500 million or is that still expected to be incurred in FY 2025?

Mark Smith: No, that is still anticipated to be incurred in 2025. I think I had said or if I didn’t, I will say it now, we are approximately 27 million CapEx all in for each of these Saudi Arabia rigs. And that is no different than the number we were giving in building our models around this time last quarter. What I will say though is we always have a range and it is really hard quarter-to-quarter to know exactly how the timing is going to fall when you are working with a very wide supply chain and 150 active rigs in the U.S. and trying to catch up, as we have said on previous calls, for maintenance CapEx for componentry. Even going back to the cannibalization we experienced in 2021 coming out of the pandemic. So as we are two quarters into a four quarter year, we have a little more certainty around that maintenance CapEx timing and that is really one of the largest components of driving up towards the top end of the range.