Helmerich & Payne, Inc. (NYSE:HP) Q1 2023 Earnings Call Transcript
Helmerich & Payne, Inc. (NYSE:HP) Q1 2023 Earnings Call Transcript January 31, 2023
Operator: Good day, everyone, and welcome to the Helmerich & Payne Fiscal First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. Please note this call may be recorded and I'll be standing by should you need any assistance. It is now my pleasure to turn the conference over to Dave Wilson. Please go ahead.
Dave Wilson: Thank you, Nikki, and welcome everyone to Helmerich & Payne's conference call and webcast for the first quarter of fiscal year 2023. With us today are John Lindsay, President and CEO; and Mark Smith, Senior Vice President and CFO. John and Mark will be sharing some comments with us, after which we'll open the call for questions. Before we begin our prepared remarks I'll remind everyone that this call will include forward-looking statements as defined under securities laws. Such statements are based on the current information and management's expectations as of this statement 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 will also make reference to certain non-GAAP financial measures such as segment operating income, direct margin and other operating statistics. You'll find the GAAP reconciliation comments and calculations in yesterday's press release. With that said I'll turn the call over to John Lindsay.
John Lindsay: Thank you, Dave, and good morning, everyone. We are very pleased with our quarterly results and remain optimistic about the year ahead. Our first fiscal quarter results of 2023 showed another strong sequential improvement in financial performance and a continuation of the momentum established in fiscal 2022. We remain focused on our three strategic objectives, which are North America Solutions pricing and margin cycle dynamics, H&P's international opportunities and our investments related to technology and sustainability. Almost a year has passed since we set into motion plans to achieve revenue per day in excess of $30,000 and direct margins of 50% in our North America Solutions segment. These financial guideposts were established as proxies for what is required to generate sustainable levels of economic return in this capital intensive business.
This recent quarter marks a milestone in achieving that revenue per day goal as our average revenue per day was $33,000. Our per day direct margins were approximately 47%, very close to achieving our direct margin goal but still earning the highest margin level since 2014. This headway achieved in just a year generated significant value for shareholders. On our last earnings call in November and subsequent discussions with investors, we laid out our expectation for a moderation in activity growth for both H&P and the industry rig count during the December quarter relative to what we have seen over the last two years. That expectation is being realized and is largely attributable to the capital discipline exhibited by our customers and their desires to drive more consistent and sustainable shareholder returns.
We've seen time and again that in a highly cyclical industry like oil and gas, losing sight of the long run can be fatal. So we believe that capital discipline contributes to the overall economic health of our company as well as our industry. Most of our large public customer budgets appear to be moderately higher in 2023 and we are planning ahead to manage this potential growth in an optimal fashion. Accordingly, we intend to maintain our plans for adding no more than 16 incremental rigs to our North America solutions rig count during fiscal 2023, dependent upon customer demand and would expect contractual churn to satisfy other points of rig demand. There has, however, been a change in the maximum number of rigs we can now achieve with 16 incremental rig adds.
Previously that number was 192, but is now 191 rigs due to losing an active rig as a result of a rig fire during operations. Thankfully no H&P employees were injured during the incident. We were able to quickly respond and utilize one of the 16 incremental rigs as a replacement for the rig that was lost hence the maximum number of active rigs we could reach in fiscal 2023 is now reduced to 191. During our earnings call in mid-November, we mentioned having 11 of these 16 incremental rigs committed and today we have 12. 10 are currently working and the remaining two are contracted to begin work in February and March. The four uncommitted rigs will not reactivate without contracts, which include margins and term commitments that justify their deployment.
To be clear if, we can't achieve those objectives our preference would be to allow rig churn and spot market pricing to satisfy incremental rig demand. In light of this here are three industry data points to keep in mind. First, utilization of the active super-spec fleet is currently over 80%, a level which is supporting current pricing. Second, the idle super-spec fleet has now been inactive for over three years making reactivation and expensive proposition. The third point is that there are roughly 520 super-spec rigs operating currently, which is effectively 100% utilization for those rigs that have worked some time in the last three years. Accordingly, we expect the current utilization of the active super-spec fleet to remain at very high levels.
With our expected rig count we anticipate financial results in the second quarter to continue on an upward trajectory with direct margins per day moving closer towards our target level of 50%. While some may be concerned with the momentum of the current cycle, our experience over the past few decades is that we should expect to have moderate and choppy activity trends like today. An up cycle is rarely straight up and to the right. Another opportunity for us during the next few quarters is having more of our fleet with long-dated term contracts rollover to current market pricing. Bringing the pricing of those rigs in line with the rest of the fleet will have a positive impact on our pricing and margin objectives going forward. Regarding the International Solutions segment, the company's expansion efforts are centered around unconventional drilling where H&P has significant experience drilling unconventional wells given that our FlexRig fleet has drilled over 30,000 horizontal wells in the US over the past 10 years.
This extensive experience can provide substantive value to customers with a complement of people, processes, rigs and technology. We are moving forward on several fronts to set the company on for future growth. Efforts to grow our Middle East presence continue with the pursuit of additional work in the region and our operational hub, which should be stood up during the last half of fiscal 2023. Preparations to send a super-spec rig to Australia for an unconventional gas play in the Beetaloo Basin are well underway. These international unconventional plays provide a great opportunity for H&P to locate super-spec FlexRigs in the Middle East and other unconventional growth areas without the need to build new rigs. These rigs and our capabilities provide great opportunity to utilize the idle FlexRig capacity and showcase our technology to grow our international footprint.
Our offshore Gulf of Mexico segment remains a steady reliable contributor to the company's overall financial performance. That said, we are expecting some variability later in the year as we do have one rig contract that is set to expire during the fourth fiscal quarter. On the technology front, we continue to experience a growing appreciation for our technology solutions which are adding significant value for our customers through rig efficiencies and wellbore quality. Many of our technology products and automation solutions have become integral parts of the bid process and daily operational workflows. Our operational and technology teams are delivering outstanding results for customers. Longer laterals and more consistent target attainment continue to be key themes for our customers.
To achieve both, we have seen increasing usage across our technology portfolio with automation driving consistent three-plus mile lateral delivery. This trend is not limited to one customer or one basin, but rather is becoming the way we work and deliver value. We believe this type of repeatable reliable performance will continue to drive the adoption of H&P technology by our customers, as well as expand our revenue growth. This keeps our teams excited about the future, a future where digital technology helps drive customer value, by providing safer more efficient and repeatable drilling operations. Maintaining a fiscally disciplined approach to our business is a key tenet of our long-term strategy and is a major driver behind the company's improving financial results.
Mark will provide details in his comments regarding our capital allocation efforts to-date for 2023. But we are pleased with the execution to-date for our supplemental shareholder plan and opportunistic share repurchase efforts. In conclusion, we remain optimistic about the outlook for 2023 and the longer-term energy macro fundamentals. I've had meetings with some of our most active customers this quarter and I'm very pleased with what I have heard regarding the value proposition H&P provides, the pride of the H&P team and the differentiated results we helped to deliver. As a result of the hard work and dedication of our employees during this past year, we are positioned to respond effectively to healthier industry conditions and improve the profitability of the company.
Working closely with customers to identify and then provide industry-leading drilling solutions, we are creating value for these customers and we're beginning to receive commensurate compensation for the value we help create. We will carry this mindset forward to the benefit of both customers and our shareholders. And now, I'll turn the call over to Mark.
Photo by Markus Spiske on Unsplash
Mark Smith: Thanks, John. Today, I will review our fiscal first quarter 2023 operating results, provide guidance for the second quarter, reiterate full fiscal year 2023 guidance as appropriate and comment on our financial position. Let me start with highlights for the recently completed first quarter ended December 31, 2022. The company generated quarterly results of -- quarterly revenues of $720 million versus $631 million from the previous quarter. As expected, the quarterly increase in revenue was due primarily to focused efforts to move our average North America fleet pricing toward recent leading edge rates. Total direct operating costs were $429 million for the first fiscal quarter versus $412 million for the previous quarter.
The sequential increase is attributable to slightly higher average active rig count in North America and the full quarter of the labor-related increase discussed on our November call. General and administrative expenses were approximately $48 million for the first quarter, slightly lower than our expectations. During the first quarter, we recognized a loss of $15 million, primarily related to the fair market value of our ADNOC drilling investment, which is reported as a part of loss on investment securities and our consolidated statement of operations. We also decommissioned eight non-super-spec rigs in Argentina and incurred approximately $12 million in impairment charges primarily related to those Argentina rigs. Our Q1 effective tax rate was approximately 25%, which is within our previously guided range.
To summarize this quarter's results, H&P earned a profit of $0.91 per diluted share versus $0.42 in the previous quarter. First quarter earnings per share were negatively impacted by a net $0.20 loss per share of select items, as highlighted in our press release, including the aforementioned loss on investment securities and impairment charges. Absent these select items adjusted diluted earnings per share was $1.11 in the first fiscal quarter versus an adjusted $0.45 during the fourth fiscal quarter. Capital expenditures for the first quarter of fiscal 2023 were $96 million. Similar to fiscal 2022, we expect the timing of our CapEx spend to vary from quarter-to-quarter. H&P generated approximately $185 million in operating cash flow during the first quarter of 2023, which was generally in line with our expectations.
I will have additional comments about our cash and working capital later in these prepared remarks. Turning to our three segments, beginning with the North America Solutions segment. We averaged 180 contracted rigs during the first quarter, up from an average of 176 rigs in fiscal Q4. We exited the first fiscal quarter with 184 contracted rigs, which was in line with our guidance expectations. Revenues increased sequentially by $75 million due to higher average pricing, as mentioned earlier. Segment direct margin was $260 million at the midpoint of our November guidance and sequentially higher than the fourth quarter of fiscal 2022's $204 million. In addition, reactivation costs of $8.6 million were incurred during Q1 compared to $7.5 million in the prior quarter.
We had eight net reactivations in Q1, including a 9th reactivation that replaced a loss the rig lost in the fire that John mentioned earlier. First quarter reactivation costs were related to the deployment of those nine rigs, as well as preparation costs incurred on rigs ready to being ready for deployment in the first few months of calendar 2023. Total segment per day expenses, including re-commissioning costs and excluding reimbursables excluding re-commissioning and excluding reimbursables increased to $16,800 in the first quarter from $16,500 per day in the fourth quarter. This is broadly in line with expectation, primarily due to the previously mentioned labor-related increase that commenced at the beginning of the fiscal year. Looking ahead to the second quarter of fiscal 2023 for North America Solutions.
As I mentioned earlier, we ended Q1 at the midpoint of our exit guidance range. The activity level looks to continue to grow, albeit at a more moderate pace than the first quarter, driven in part by public company operators who are working to fulfill their calendar 2023 budget levels. As of today's call we have 185 rigs contracted and we expect to end the second fiscal quarter of 2023, with between 183 and 188 contracted rigs. Just to be clear in revisiting John's comments on our rig count, we have previously stated that, we could add up to 16 rigs and that would get us to a maximum of 192 rigs during the fiscal year, due to the loss of the one rig to a fire that maximum number is 191. So since fiscal year-end through today we have added 10 of the 16 for a net add of nine rigs, with another two slated to go to work over the next few months.
Our current revenue backlog from our North America Solutions fleet is roughly $1.1 billion for rigs under term contract. As of today approximately 55% of the US active fleet is on a term contract. As mentioned on our last call, the leading-edge revenue per day was and still is approximately $40,000 inclusive of performance bonus opportunities and technology utilization. By comparison, our average spot revenue per day is currently in the high 30s compared to the Q1 overall average revenue per day of approximately 33,000. This provides us with a line of sight for further increases in average revenue per day over the next few quarters. In the North America Solutions segment, we expect direct margins in fiscal Q2 to range between $280 million to $300 million, inclusive of the effect of about $4 million in reactivation costs.
As discussed on our November call, we increased field labor related rates to respond to market conditions at the beginning of fiscal 2023. Labor is approximately 75% of daily operating expenses. We have also experienced increases in maintenance expense, due to pricing inflation of consumable materials and supplies inventory. We believe that, our current labor and materials and supply as costs will be relatively stable for the balance of fiscal 2023, resulting in higher margin accretion as average pricing for the fleet is expected to continue to move towards leading edge. Regarding our International Solutions segment, International Solutions business activity increased by one rig to 13 active rigs at the end of the first fiscal quarter, we added a rig in Argentina as expected, which brings our working rig count to nine in that country.
International results came in above guidance, primarily due to delayed timing for costs associated with developing our Middle East hub, including rig preparation and exportation costs. As we look toward the second quarter of fiscal 2023 for international, we will incur costs to reactivate a rig in Bahrain, which we expect to begin working in the middle of the quarter bringing us to two or three rigs working in that country. In the second quarter, we expect to earn $7 million to $10 million in direct margin aside from any foreign exchange impacts. Turning to our Offshore Gulf of Mexico segment, we still have four of our seven offshore platform rigs contracted, and we have active management contracts on three customer-owned rigs two of which are on active rate.
Offshore generated a direct margin of $9.5 million during the quarter, which was in line with our estimate. As we look toward the second quarter of fiscal 2023 for the offshore segment, we expect that offshore will again generate between $8 million to $10 million of direct margin. Now, I look at activity in other. You might have noted the increase in our other line this quarter. This was primarily due to an adjustment in our captive insurance company. At the start of fiscal 2020, we elected to set up a wholly-owned insurance captive to finance the deductibles for our workers' compensation, general liability, automobile liability and medical stop-loss insurance programs beginning October 1, 2019 forward Our operating segments pay monthly premiums to the captive for the estimated losses based on external actuarial analysis of historical losses and operating trends.
This results in a transfer of risk from our operating subsidiaries, to the captive for the deductibles, which mirrored our self-insurance retention. Insurance premiums are included in operating segment expenses and are included in intersegment sales in the other non-reportable segments. The intercompany premium revenues and expenses are eliminated in consolidation. For the three months ended December 31, 2022, the actuarial estimated underwriting expense was less than recent run rate, as revised developed claim losses were less than reserved. These were adjusted accordingly, creating a positive benefit in the first quarter in other segments. Now let me look forward to the second fiscal quarter, and update full fiscal year 2022 guidance as appropriate -- 2023 guidance, sorry.
Capital expenditures for the full fiscal 2023 year, are still expected to range between $425 million to $475 million, with the remaining spend to be incurred over our last three fiscal quarters. Our expectations for general and administrative expenses, for the full fiscal year have not changed and remained at approximately $195 million. We are still estimating our annual effective tax rate to be in the range of 23% to 28%, with the variance above US statutory rate of 21%, contributed to permanent book-to-tax differences in stated foreign income taxes. We continue to project the fiscal year 2023 cash tax range of $190 million to $240 million, of which as mentioned in November, a portion relates to fiscal 2022 income taxes to be paid in this fiscal year.
Now, looking at our financial position. Helmer Campaign, had cash and short-term investments of approximately $348 million at December 31 2022, versus an equivalent $350 million at September 30, 2022. Including availability under our revolving credit facility, our liquidity remains at approximately $1.1 billion. The sequential flat cash balance is largely attributable to our recent share repurchases and seasonal cash outlays, and working capital lockup, which was driven by higher revenue. Our planning shows cash generation and build in the second half of the fiscal year. As a reminder, our general preference is to maintain a minimum of approximately $200 million in cash and short-term investments. The cash and equivalents of $150 million above that minimum, plus the $100 million free cash flow we expect to generate after CapEx and after the base and supplemental dividend, as discussed on our November call, equals $250 million of flexibility for various capital allocation considerations including, accretive investments and returns to shareholders.
During the latter half of the first fiscal quarter, we saw a combination of excess liquidity and an attractive opportunity to repurchase some of our shares at prices that we believe to be value accretive. Approximately, 844,000 shares were repurchased in December for approximately $39.1 million under our evergreen annual share repurchase authorization, of four million shares per calendar year. Note, that the Board authorized the repurchase of an additional one million shares in calendar 2023, bringing the total calendar 2023 authorization to five million shares. In calendar 2023, through January 27, we have repurchased approximately 434,000 shares for roughly $20.5 million. So fiscal 2023 repurchases have totaled approximately, 1.28 million shares thus far, for about $60 million and augment our long-standing base dividend and our fiscal 2023 supplemental dividend.
Each of these items, stock repurchases and the base and supplemental dividends and encompass the new shareholder return model that we announced in October. These actions combined with our improving financial performance, demonstrate our focus to not only increase the financial returns to the company, such as return on invested capital, but also cash returns provided to shareholders. That concludes our prepared comments for the first fiscal quarter. Let me now turn the call over to Nikki for questions.
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