- H&P’s U.S. land market share increased from 15% to 20% from September 30, 2016 to September 30, 2017
- Net loss of $23 million or ($0.21) per diluted share from operating revenues of $532 million
Helmerich & Payne, Inc. (ticker: HP) President and CEO John Lindsay said, “The fourth fiscal quarter headlines were dominated by oil price uncertainty which remained range-bound in the mid $40s and set expectations for a substantial rig count reduction for the balance of 2017.
“Even with that cautious outlook, H&P was able to grow its rig count and leading edge pricing. We have also seen improvement in international markets where our rig count has increased to 16-17 active rigs.”
Super-spec rigs
H&P began the fiscal year with 95 rigs contracted in U.S. land and will close the year with 197 rigs, an increase of 102 FlexRigs, most of which were upgraded to super-spec capacity.
The total super-spec fleet in the U.S. is estimated at 400 rigs and H&P makes up about 40% of that total. The industry super-spec fleet is nearly fully utilized and some customers are demanding increased capacity rigs that can effectively drill more complex horizontal wells with longer laterals. H&P estimates that 100-250 additional rigs are candidates for super-spec upgrades. H&P said that demand for additional higher performing rigs will decide future upgrades.
H&P has been utilizing high-speed data generated from rigs and leveraging the Internet of Things (IoT) to monitor rig equipment and operations, acting upon conditions, patterns, and recurring trends. The company utilizes a critical alarm and maintenance dashboard, which provides complex event analysis based on real-time streaming data. H&P said that the dashboard facilitates a more focused and prioritized approach to preventative and condition-based maintenance, in addition to better uptime and less downtime.
There are still approximately 240 legacy rigs drilling in U.S. land, according to CEO Lindsay. About 155 of those legacy rigs are SCR and the remainder are mechanical rigs.
MOTIVE Drilling Technologies
In June, H&P acquired MOTIVE Drilling Technologies. MOTIVE has recently passed 4 million feet using its Bit Guidance System to provide drilling performance enhancements, as well as more consistent and accurate wellbore. This has led to both short term economic improvements to drilling costs and can potentially lead to enhanced production over the life of these wells.
The Bit Guidance System is not a downhole tool, it is software-based, and this has kept H&P out of competing in the traditional directional drilling business. MOTIVE is currently active on 15 rigs, five of which are FlexRigs, and several additional rigs are scheduled to be picked up through the remainder of the year.
CEO Lindsay said, “As we look to the future, we expect an ongoing trend to more complex well trajectories with tighter well spacing and longer lateral lengths, resulting in the need to enhance control of wellbore placement and quality. We are optimistic about the future with MOTIVE, as they represent a disruptive technology for directional drilling execution.”
U.S. land drilling
Activity has increased by 10-11 rigs. The Permian led the way with seven rigs, followed by three in the Eagle Ford. H&P’s most active basins are the Permian, the SCOOP and STACK play, and the Eagle Ford. The Permian remains the most active operation with 98 rigs contracted, compared to 85 rigs during the 2014 peak. 46 idle FlexRigs are in the area, 25 of which have 1,500-horsepower ratings. In the SCOOP and STACK and Eagle Ford, H&P has 31 and 29 rigs contracted, coming off a low of 15 and 16 contracted rigs, respectively.
H&P exited the period with 197 contracted rigs and had an increase of approximately 6% in total quarterly revenue days. The adjusted average rig revenue per day remained flat at around $21,700 during the two most recent quarters.
The average rig expense per day level is expected to slightly increase to roughly $14,100. The expected increase is primarily attributable to expenses related to moving all five of H&P’s rigs in California to Texas, an effort to reduce overall expenses in the segment going forward and to move the rigs to better markets. These five FlexRigs have been idle for some time and are suited to go back to work in West Texas in the near future.
The average number of corresponding rigs that H&P already has under term is approximately as follows: 80 for fiscal 2018, 30 for fiscal 2019, and 7 for fiscal 2020. H&P expects to generate approximately $4 million during the first fiscal quarter and a total of approximately $10 million during the following four quarters in early termination revenues.
Offshore operations
- Quarterly revenue days decreased by approximately 10%
- Exited Q4 with five contracted rigs
- Average rig margin per day increased sequentially by about 5% to $12,088
- Management contracts contributed approximately $2.5 million to operating income
International land operations
The adjusted average rig margin per day increased by 38% to $12,386. The number of revenue days for the quarter was 1,291, or an average of 14 contracted rigs. H&P exited the quarter with 16 rigs, including 13 in Argentina, two in Colombia, and one in Bahrain.
H&P said that four rigs were going back to work in Argentina and that there are no set commitments to expand international activity beyond 16 rigs. The average rig margin per day is expected to be approximately $8,000.
Fiscal 2018
- Fiscal 2018 CapEx estimate currently ranges from $250 to $300 million. Maintenance CapEx, including tubulars, represents close to 40% of the current CapEx estimate
- H&P’s $560 million depreciation estimate includes approximately $20 million in abandonment charges
- The effective income tax rate is expected to be around 32% during fiscal 2018
Conference call Q&A
Q: Would you still expect to increase your market share and upgrade assets even in a flat rig count environment?
Helmerich & Payne President and CEO John Lindsay: I think we’ve been talking about that now for a while. I think we’ve been able to demonstrate that in a flattish, slightly down, I guess it depends on which rig count service you’re looking at. But in general, over the last quarter, the rig count has been relatively flat, and we’ve been able to continue to add to our active fleet as well as continue to upgrade rigs to super-spec. And again, we’ve got our market share up to 20%.
I do think that the rig count that we’ve seen over the last quarter is a function of an expectation of $45 to $50 oil price or mid-$40 type oil prices. Obviously, oil prices have improved significantly over the last several weeks. We’re not necessarily expecting or have a belief that it’s going to remain there. But if you do see that outlook change toward an expectation of higher oil prices, then I think in some cases you may see not a dramatic improvement in rig count, but I think maybe a continued improvement in rig count. And with that, what we’ve seen is a pretty high level of churn related to contracts and working for different customers.
And I think customers in that sort of an environment, where they’re focused pretty heavily on capital discipline, they’re going to be looking at getting the best services and the best performance that they can get. And so if you’re drilling more challenging wells and you don’t have a rig that is super-spec capable, you’ve got some opportunity to improve your drilling times and lower your costs by having a higher capacity rig.
So I know it’s a long answer to your question, but I think in general, we feel pretty confident that we can continue to grow our fleet and take some market share because of the value that our folks are able to provide in the field.
Q: What do you think the market price would have to be to economically justify a newbuild?
CEO Lindsay: I’m not certain what a competitor’s newbuild would be. I’ve heard estimates of a low $20 million range. I think if that’s the case, and if they’re going to get a reasonable rate of return on that investment, I think you’re going to need a $26,000 or $27,000 a day, day rate in order to get a reasonable rate of return. And again, I would think you’d want to have a multiple-year term contract.
Q: One follow-up on the CapEx guidance for next year, the $250 million to $300 million. You implied that 60% of that is upgrade CapEx beyond the maintenance CapEx. What should we be assuming in terms of upgrade cost and the scale of upgrade that’s being constructed into that $250 million to $300 million plan?
Helmerich & Payne VP and CFO Juan Pablo Tardio: To your first question, I think that most of the 60% is attributable to upgrades in general. As we look forward and look at the opportunities at hand, there are several things that we considered. One important consideration is lead times for certain components. Making sure that we are not constrained with bottlenecks and that we have the capability to quickly respond to market conditions, as we have in the past. And so part of what you see there is us just making sure that we’re well prepared to respond to improving market conditions.
Another part of your question related to upgrade cost per rig, as you have heard us say before, as we upgrade our standard FlexRig3 rigs and add pad drilling capability through skidding systems and 7,500-psi systems in general, that type of upgrade can be a $2 million to $3 million per rig upgrade. We’ve also introduced some walking systems. So instead of a skidding capability, we add a walking system and also a 7,500-psi system. That type of investment is significantly higher at closer to $8 million. But what we’ve seen in the past is, again, a much higher number of skidding type upgrades as compared to walking.
So, that gives you a sense of how we’re looking at upgrade costs. In both of those type of scenarios, we have found that our expected returns on incremental CapEx or investments on those rigs is very attractive. Especially, of course, on the skidding upgrades to super-spec capacity.
Q: I was trying just to get to the extent to which you’re seeing any mix shift between the more expensive upgrades and the skiddable upgrades as you’re seeing the market pull from that. And also, to the extent you as a company and the plan leaning forward on building perhaps an inventory of upgraded, ready-to-go rigs so that you can respond to demand.
CEO Lindsay: That’s a great question. I think with the outlook, I mean, let’s face it. The outlook remains fairly uncertain with where oil for sure is going to go. We’ve got the OPEC meeting upcoming. We don’t know for sure what the outcome’s going to be there. But again, I think in the oil price range that we’ve talked about, we think we’re going to have the ability to continue to upgrade. Just to kind of give you an example from last year, of course, we upgraded over 90 rigs. And I think we averaged 22 a quarter, with a range of anywhere from 12 upgrades to 38 upgrades per quarter. Clearly, we’re not going to be doing anything on the 38 end, but 12 is reasonable. I mean, it’s possible for us to do that.
But, as Juan Pablo said, we’re not just going to – I guess to answer your question directly, our intent is not to upgrade rigs on spec with an expectation that the market’s going to improve. I think we have the capability to respond much more quickly than others. And having the CapEx that we’ve talked about, enables us to prepare the supply chain, if you will, to be able to respond. And if we see an improving outlook going forward, in the next quarter, then we can ramp our cadence up. Very similar to what we did with new builds in the past, where we would start with 1 or 2 rigs a month, and when we saw demand, we were able to scale up to 4 rigs a month. And it would be the same thing with the upgrade if we saw that sort of a demand.
