Helmerich & Payne, Inc. (HP) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day, everyone and welcome to today's Helmerich & Payne's Fiscal First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Please be advised this call maybe recorded. It is now my pleasure to turn today's program over to Dave Wilson, Vice President. Dave, go ahead.
Dave Wilson: Thank you, Christy. And Welcome everyone to Helmerich & Payne's conference call and webcast for the first quarter and fiscal year 2021. 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 prepared comments with us, after which we will open the call for questions.
John Lindsay: Good morning, everyone and thank you for joining us today. With one month behind us in 2021, we find ourselves with a combined sense of relief and optimism. Relived that one of the most difficult years in the company's 100-year history is behind us and optimistic, considering the market share gains accomplished during the first fiscal quarter of 2021 and strengthening oil prices which enhanced the financial health of our customers. We entered the New Year with 94 rigs running in US land. Now that's double the number we had in August and the upward trend continues. Around this time last year, WTI prices were trading in the low 50s. They were approximately 800 rigs operating in the US land market and H&P was operating 194 of those rigs. Contrasts that with today, where oil prices are up over 10%, up into the upper 50s and the industry rig count is approximately 415 rigs, H&P is running, 103 FlexRigs. Obviously, a lot has happened between these two data points and it shouldn't surprise anyone that the short- and medium-term activity outlook from E&P companies is taking a while to take shape. However, if market expectations for US production levels continue to drop that should have a positive impact on oil prices which further supports consensus expectations for approximately 500 active rigs in the US at year end. Taking this a step further, by our count there are approximately 360 super-spec rigs available in the US market. Looking forward, we believe the vast majority of all working rigs drilling horizontal wells will continue to trend toward the super-spec classification and if activity does reach 500 rigs. The industry rig count would begin to approach utilization levels that have historically provided pricing power.
Mark Smith: Thank you, John. Today I will review our fiscal first quarter 2021 operating results, provide guidance for the second quarter, update full fiscal year 2021 guidance as appropriate and comment on our financial position. Let me start with highlights for the recently completed first quarter ended December 31, 2020. The company generated quarterly revenues of $246 million versus $208 million in the previous quarter. The quarterly increase in revenue was due to higher rig count activity in North America Solutions as operators resumed some drilling activity. Total direct operating cost incurred were $200 million for the first quarter versus $164 million for the previous quarter. The sequential increase is attributable to the aforementioned additional rig count in the North America Solutions segment and the related rig re-commissioning expenses. General and administrative expenses totaled $39 million for the first quarter higher than our previous quarter due to the resumption of short-term incentive accruals for fiscal 2021. But within our guidance for full fiscal year 2021. During the first quarter we closed on the sale of an offshore platform rig to its longstanding customer as per provision in the original long-term contract. The sale closed for consideration of $12 million paid out over two years. The rig had an aggregate net book value of $2.8 million and the resulting gain of $9.2 million as reported as a part of sale of assets on our consolidated statement of operations. In connection with the sale, we entered into a long-term management contract for this rig in our Gulf of Mexico segment. Our Q1 effective tax rate was approximately 19% which is on the lower end of our guided range due to a discrete tax expense. To summarize this quarter's results, H&P incurred a loss of $0.66 per diluted share versus a loss of $0.55 in the previous quarter. First quarter earnings per share were positively impacted by a net $0.16 gain per share of select items as highlighted in our press release including the aforementioned offshore rig disposition. Absent these select items adjusted diluted loss per share was $0.82 in the first fiscal quarter versus an adjusted $0.74 loss during the fourth fiscal quarter.
Operator: and we will take our first question from Tommy Moll with Stephens. Tommy, go ahead, your line is open.
Tommy Moll: John, I wanted to start on performance-based contracts for as long as you've been talking about that initiative you've been very clear that it's not a change in the industry structure that's going to happen overnight and that it's going to take some time. What context could you give us about how the downturn may have accelerated customer willingness to talk about new types of pricing models versus made it more difficult just given how stretched a lot of customers were maybe it was just not something that they were willing to engage in conversations with.
John Lindsay: Sure Tommy, good morning. It's really - and you won't be surprised by this. It's really a mix. Every customer at this stage of the game probably views it a little bit differently. I think there are some as a result of the downturn as you mentioned. I think it has accelerated their thinking. They recognize as much as we do that the industry really has to evolve and so customer adoption of these new models are - it's different across the board. I think what we were encouraged by - is that there are as we said in our remarks in 25% to 30% of our rigs, our underperformance contracts or some of the new commercial type. And I think the reason is by definition it's that performance-based contract, it's a win-win opportunity. When you execute it properly and it really delivers a higher level of value for the customer and at the end of the day for H&P as well. We've continued to stress that in order to be truly successfully it really has to be a partnership agreement with your customer and there's got to be mutual trust. There's got to be mutual respect. And I think there also has to be an acknowledgement that we each have strengths and there's areas that we can leverage those strengths for the betterment of the project. But taking it really and this is where I think it's most valuable and it really relates to our decision to have an approach more focus on overall solutions because we're combining our digital technology solutions AutoSlide is the easiest one to talk about right now. We're taking a focus and it's not that we're not still interested in taking a 20-day well to 15 days or a 15-day well to 10 days. We want to do that. But we're also focusing on the lifetime value of the asset. Which our customers are doing that but we haven't necessarily been engaged in that discussion. So as you think about wellbore quality and wellbore placement and the things that we're doing. We're really focusing on lifetime value of that wellbore for the next 10 or 15 years. And I think that is really drawing some attention again, we're seeing some opportunities to continue to grow these new models with our customers. As you can imagine, the day rate it's really hard. Our teams are doing a great job. They're out there selling the benefits and I think we're starting to see some results.
Tommy Moll: Thank you, John. That's all very helpful and as a follow-up I just wanted to move to the topic of overall industry rig count. And I want to ask you to make a specific call on a number. But maybe just give us a sense of what the contour might look like based on your customer conversations and so. Does it seem like decision making among customers has maybe been delayed a little bit? In other words, maybe in a typical there would be better visibility into a full year drilling plan at a rough time frame in your mind versus this year. It just seems like there's a lot more uncertainty and that you may end up getting a better peak into what those plans look like later into this fiscal year than normal or do you feel like based on your conversations you have a pretty good sense of what your customer base will be doing to calibrate for the full year drill plans?
John Lindsay: There's no doubt that the market obviously once customers decided to put rigs back to work, it moved very quickly. As we said in our remarks, we're pleased to be at a 103 rigs today. I think our low active rigs, 46 rigs at December. So we still have this quarter ahead, we're at 103. We set a range of 105 to 110. Our goal is to hit 110. Team's working hard. We're going to make certain, we do that. But it is very hard to see and you've heard me say this overtime for a long time really depending regardless of the market. It's hard to see three months and so we do have some insight into April and May. But as you know the budgets for the public E&P's. They're not all final and I think when you start thinking about a ramp in activity. We shouldn't expect a ramp like we've seen since August. I think it's going to be a much lower increase. The other - really surprise to everybody, is that oil BTI is high as it is. It wasn't that long ago, we were talking about $45 to hopefully gain to $50. So one of the ways that we've tried to think about it again and thank you for not asking me to predict rig count. But if we had the opportunity when we do, we look at sell side consistency and you look at their estimates out there, having 500 rigs running by the end of the calendar and I think that's possible. If you think about it, that's not a long way from where we are today and you don't have to add a whole lot of rigs over the next 11 months to get there. So I think clearly, our customers are going to remain disciplined. What they're doing is in the best interest - of their companies in the best interest of our industry. I believe. And so we're going to see how that plays out. We talked about the need to have a return driven capital allocation strategy. We think that's in the best interest of long-term outlook for the industry. So hopefully that answered your question. I wish I could nail a number. I do think the rig count will continue to increase. But I do believe it will be at a much slower pace than what we've experienced over the last four, five months.
Tommy Moll: Fair enough. Thank you, John. I'll turn it back.
Operator: And we'll take our next question from Ian Macpherson with Simmons. Ian, go ahead.
Ian Macpherson: The thing that sit out to me initially was the improvement that you've guided for your North America cash margins for the segment profit divided by rig count for this quarter and even backing out determination and reactivation expenses which I think net out to kind of wash quarter-to-quarter. It's a healthy improvement. This has been a big sort of debate point for you and peers as to where cash margins might ultimately trough out. And so John just given you the constructive framework that you see for tighter super-spec utilization by the end of this year and maybe some pricing power stabilizing, maybe improving the low spot rates that we've seen and heard about. Does that give you more confidence than maybe it had last quarter with regard to having some visibility now to a true troughing in your cash margins and is that going to look somewhere close to what we see here with the second quarter guidance for margins?
John Lindsay: Phil I'm going to direct Mark towards the details. But I do think we're working hard. As mentioned earlier, we're working hard to retire the day rate and we obviously have rigs that are rolling off of term contract that work somewhat against us. But we're also working with customers to enter those rigs into performance-based pricing and so that's beneficial. I do think that we're seeing some uptake on that, which hopefully again helps us on the revenue side of the equation and ultimately generating better margins. Mark, what would you add?
Mark Smith: Thanks John. Ian, several things to think about in there. Certainly, the quarter we just exited we had some pressure obviously from the re-commissioning expenses. Another thing, we had a little bit upward pressure on as well. You may have heard me talk about “penny stock” over the prior couple of quarters in the last calendar year. We've kind of gotten through that penny stock as we increased activity and as a consequence. We've begun really digging into our on hand average cost inventory which drives up M&S cost. There are some just other things in there that are moving around, not necessarily all linear. But the increasing activity levels has a positive impact obviously on our fixed cost leverage that we really, I think your comment on troughing out maybe potentially because we had gotten down to that 47 rig low point of activity previous quarter. We are getting more leverage there with this increased number of rigs. We're still going to have reactivation expenses coming through obviously. We have a roll off on the revenue side of some term contracts. But obviously hoping that or the performance contracts that we're putting place. So again not all linear, a lot of moving parts. I think that in addition to all of that, as I mentioned we're working on a lot of cost out initiatives as I'll term it. I'm not going to go into a lot of details on the - but over the next couple of quarters. We hope that those are additive and each of the initiatives and the aggregate helps - takes some cost out of the system. And then I guess as I'm thinking out loud here, finally. There's a little bit of apples and oranges as we move through this last year and took over two segments legacy US land and HPT and combining them in North America Solutions. You pulled then some of that overhead cost from the legacy HPT, is a little bit of increasing cost there. So lot of moving parts. Ian, is that helpful?
Ian Macpherson: Very helpful and at the end of the day, look we have your cash flow outlook for the year which kind of pulls it together for us as well. So that's good. Thanks. I wanted to ask a follow-up though on international side. We've seen Argentina, Colombia. They went 100 plus rigs to zero last year. But they're racing upward back to probably 50 plus today. So wanted to get John your thoughts on how you can or how you want to and aspire to participate in the continued recovery there and those historically very strategic markets for you, internationally.
John Lindsay: Yes, Ian. I mean we have been in both countries Argentina and Colombia for very long time and we have a great personnel base, great people in country, great asset base in both countries. And so yes, I think we're going to participate in that. I mean there's no doubt that we'll see some race going back to work in both countries. But there are things that are challenging, that are not just the macro side. There's other challenges we had. We're definitely interested. I think we have a great opportunity putting rigs back to work. Mark, what would you add?
Mark Smith: Just a couple other comments. Ian, some of those initial rigs I think as we might have mentioned on our previous quarter call with some workover work. And then also the equivalent of idled but contracted rigs as we had in the US going back to work. There were part for some operators. As John said in his prepared remarks. We're seeing bidding and tendering activity in country currently. And you know the super-spec rig that we had sent and this was 18 months ago, now down to Argentina. Some of those conversations we're in with folks are about the super-spec capability again as John alluded to about are kind of mid-to-long-term international look. We really think that the super-spec rig there and potentially upgrading other rigs there through time can really be beneficial to that market.
John Lindsay: Yes, I think the international market in general just to add on a little bit more color. In the US, we've been undergoing placement cycle well over 15 years. There are many, many countries that have still very old assets SCR, even some that are newer versions. When you really look at it particularly if you're going to be drilling on core unconventional well. They're not ideally suited for that type of work. So I think that's why it puts us in a great position to grow internationally. We obviously have the capacity to move FlexRigs out of the US. I know we've obviously done that in both countries we were talking about as well as the Middle East. We just need to get more scale. So we think the opportunities are there and I think with the slowdown in activity that we've seen internationally we're going to see some pickup. There's usually six months, nine months delay in getting international count back up.
Ian Macpherson: Got it, great. Thanks John. Thanks Mark.
Operator: And we will take our next question from Sean Meakim with JP Morgan. Your line is open.
Sean Meakim: So I'd like to maybe just talk little more about how the market share and the rate count has been unfolding. What do you think it means for your opportunities going forward? So at current levels the data suggest the five largest land drillers have only maybe 60% market share today? So smaller driller seem to have an outsized share relative to their share of super-spec supply. So would it be your stipulation that those small drillers have their super-spec or their best approximation of super-spec rigs probably mostly utilized at this point and the incremental capacity to be soaked up will be predominantly among the large drillers led by yourself?
John Lindsay: Well Sean, I don't recall saying that as a data point. Dave or Mark may have some additional color on this. But I will say is, if you look at the and let's face it most of the rigs that went back to work or large portion of the rigs went back to work in Permian. And I think of the rigs that went back to work in the Permian recaptured two-thirds of that share. So I'm a little surprised that 60% I think the five largest drillers owned about 8% of the super-spec capacity and I'm not certain how that looked in terms of rigs that have gone back to work. I do think there's much more to the story than just the classification of the rig because what we're seeing is, again more of a manufacturing type approach. If you're really at looking at the premium end of the market. You think about our business and it's amazing these efficiencies that we've been able to drive in our industry. But when you start getting to the efficiencies that we're at now. In order to get to that next level, you really need some automated solutions. We're still relying heavily on human decision making and that decision making is a 24x7 decision making process. So there's obviously opportunities to do better where software. And so I think the smaller companies are going to be challenged even more not only the rig spec side of the equation, but on that digital side of the equation. So Dave, did you have time to look at your notes? Do you have any follow-up on that or Mark?
Dave Wilson: Yes, I just follow-up on overtime - the smaller players don't have the technology that some of the larger players have and there's going to be differentiation even among the super-spec rigs overtime. And so I do the larger players that have that technology are able to grow by that value are going to get the lion share of the rigs.
Sean Meakim: I appreciate that. I think part of us trying to get at is to the extent that, they've got their best rigs running at this point. They tend to have small numbers, right. Single-digit number these types of rigs that the larger driller is remaining with remaining capacity that will probably help your confidence around pricing progression. That you would have and continue to be - likely to bid on future opportunities.
John Lindsay: I think that's bright. I think you're making a great point there. I missed the part.
Sean Meakim: Yes, so I apologize, kind of closing a loop late on that question. So then the other thing I was thinking about is with respect to private E&P's. They've been a bit of swing in demand coming back quicker right that's consistent with historical trends. And then potentially can be more of a swing later and the oil price hold and they have some incremental cash flow. So John, what are you seeing in terms of their uptake for super-spec and the incremental automation and software solutions? Is it too early or can we get a bit of read on appetite for that part of your portfolio versus maybe where those types of operators would view them say pre-2020?
John Lindsay: I'll tell you. I've been very pleased with the response from the private equity companies small private just in general. We have some very strong partnerships and in a couple of cases. Whether there are two rigs, three rigs or five rigs. We've got all of the rigs they're all in on the FlexRig. They're all in on the digital solutions. They're partners with us. We've got some as an example in alpha and beta testing, we've got auto geo steering and one of the private companies are working with us on that. So that's encouraging to see, the question earlier about the downturn. Let's face it. The downturn - that's a time for survival and so we're all trying to figure out how can we make our businesses better and more durable. And so we're seeing that again fortunately for H&P it's not just on the small private equity side. We're also seeing in a course with our larger publicly traded companies as well as super majors. So we've been very pleased with the response.
Sean Meakim: I appreciate that. Thanks John.
Operator: And we will take our next question from Taylor Zurcher with Tudor, Pickering & Holt. Your line is open.
Taylor Zurcher: You've talked a lot about the continued adoption of these performance-based models and clearly some of these software solutions you're offering, a big piece of the value added there. I wanted to touch on the hardware side of things. You've got off the top of my head, I think somewhere in the 40s in terms of walking rigs in your fleet. If we look at the 30-ish percent of your fleet that's under performance-based contracts today. Is a big concentration of that with your walking rigs and do you have a target moving forward or do you need to increase the number of walking rigs to also increase notably the performance-based percentage of your contracts or are those two kind of independent factors moving forward?
John Lindsay: It's really independent factor. We do still have some conversions in process and on the walking side of the equation. But we've been very fortunate whether it's walking, whether it's walking, Flex3 skid or Flex5. We've got really kind of across the board customers. How did those rigs, that really suit their wells designs and the pads that they're building? So there's really not any push towards one or the other on their performance side.
Taylor Zurcher: Okay and with a number of quarters of some of these performance-based models now in the book. Are you seeing any customers sort of accelerate the timeline where you relook at the underlying KPIs in these contracts or is that sort of still an evolving process right now?
John Lindsay: No, it's really evolving. I know there's continued it seems like concerned angst over kind of resetting the bar. And I think it kind of goes back to my earlier comments related to building strong partnerships and having mutual trust and recognizing and acknowledging the strength of each brings to the party. I mean at the end of the day, if we're able to deliver better performance and they can work with brand X, Y or Z. then that's great for them and it's great for us. And so we really haven't seen that much. Again we recognized it as being a risk. But at this stage of the game we're not overly concerned. Mark, did you have something, you wanted to mention?
Mark Smith: Yes, I would add John for some of those customers who have been with us on the journey longer and are early adopters of the performance contract. They seem to pull effect of the use of the technology and the improvement on the wellbore quality along the way. So what that does, is that enables us to go to a completely different set of goal post overtime, Taylor and that is looking at quality of the well. If you think about the overall spread cost to build a well. You think of the pie shape. We're slice of pie for our drilling cost. Completions are half of pie and if less tortuous wellbore can be completed infracted more easily and reduce the cost of that part. Well that's a certain total cost of ownership benefit for our customer that we can participate in. So we're working with some customers on defining such things as tortuosity index and trying to move to a different set of goal post and get off the efficiency treadmill.
Taylor Zurcher: Got it, that makes sense. Thanks for the answers.
John Lindsay: Christy?
Dave Wilson: Do we have anymore in the queue?
Operator: Yes, we have Waqar Syed. Your line is open.
Waqar Syed: Couple of things, first of all. Are you seeing any input cost inflation whether in trucking or for steel drill pipe or anything like that?
Mark Smith: No, not yet. Obviously steel prices have increased this last year. As we know, but we have a lot of extra component in our system from spares and from our previous ramp up in rig activity before this downturn that we've discussed previously. So we haven't had to, we haven't had to buy anything new to deal with the increased steel cost. Having said that, I definitely see through time I think this will hit us probably more in fiscal 2022 that when we get to the next round of tubular replacement that certainly could come into play. But through the rest of the system, no we haven't seen any inflationary pressures.
Waqar Syed: Good. And then just my last question in terms of you mentioned number of tenders on the international market right now. When are right now - what are they telling you in terms of when there's contracts would I mean actually start up, fully recognizing that international things tend to get pushed to the right?
Mark Smith: As John said in his prepared remarks, you do see that tendering activity in its early days. But just to your point and John's comment there's no certainty on that stuff now because some of these tenders we bid on actually when the bid day comes and everything's finished. And guess what, the big gets pushed to the right and you re-bid it again. But the good news is that, that potential deal flow is coming through. Whereas this time last year, it was not. So that's an improvement in the right direction. I think as we get more certainty around vaccine rollout in the next post - hopefully COVID world. We should see that open up a bit more when demand is more fulsome.
Waqar Syed: Just like for the second half calendar year 2021, do you think you'll have more rigs incremental rigs active in LATAM or in Middle East or same for both?
Mark Smith: Waqar, we're sure hopeful. What is it there are so many things as we said there's still uncertainty out there? Things are definitely looking better and with the lag time that we generally see with international I think your timing is spot on. I mean we just hope that things keep moving in the direction that they are and we are able to close on some of the deals that we think we can close on.
Waqar Syed: Thank you very much.
Operator: And we will take our next question from Scott Gruber with Citigroup. Scott, your line is open.
Mark Smith: Scott, we can't hear you Scott. If you're on there.
Scott Gruber: Are you able to hear me now?
Mark Smith: Yes.
Scott Gruber: Mark, on the performance contracts and the bonuses that you receive under them, how much did that benefit fiscal 1Q margin and more importantly assuming similar achievement rate going forward. Does the performance bonus potentially improve in the quarters ahead on a per day basis? If so, any color and how much?
Mark Smith: Scott, we haven't really quantified that publicly, historically. But I'll tell you, what - just anecdotally. If you look at some of the term contract rollovers we've had and so basically going back in time and year to previous spot rates. Spot rate to the market are obviously lower today. But what these performance kickers allow us to do, is really kind of bring that - is bridge that gap if you will between the two. So that's certainly been margin accretive to us and equally beneficial to our customers cost as well.
Scott Gruber: Got you. But any color whether that kind of opportunity. I know you put in more contracts in place, but I guess as the margin benefit from them improving going forward kind of static at this point?
Mark Smith: It's a customer-by-customer relationship by specific customer need basis. So if you look at these performance contracts, we have in the portfolio there's no pure or linear duration have with them. I think it's really, as John has been talking about it's the solutions-based approach and so each set of KPIs is different for each and unique customer and pad they're on and the things that they need to accomplish.
Scott Gruber: Got it. That was it from me. Appreciate the color, Mark.
Operator: This does conclude our question-and-answer session for today. I will now turn the program back over to our presenters for any additional or closing remarks.
John Lindsay: Thank you, Christy and thanks, again to all of you for joining us today and we have touched on during this call. There are many challenges ahead. However, we believe H&P is a strong position to take advantage of these opportunities. We recognized that the only sustainable way forward is for our industry to continue to evolve and we're approaching that change with our customer centric approach which includes digital technology, performance solutions and an equitable sharing of created value. So thank you again for joining us today. Have a great day.
Operator: This does conclude today's program. We appreciate your participation. You may disconnect at any time.
