Helmerich & Payne Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2024

There are 12 speakers on the call.

Operator

Good day, everyone, and welcome to the Hallmark and 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 questions during the question and answer session.

Operator

It is now my pleasure to turn the conference over to Mr. Dave Wilson, Vice President of Investor Relations.

Speaker 1

Thank you, Abby, and welcome everyone to Helmerich and Payne's conference call and webcast for the Q2 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'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 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.

Speaker 1

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 ks, 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.

Speaker 1

You'll find the GAAP reconciliation comments and calculations in yesterday's press release.

Speaker 2

With that said, I'll now

Speaker 1

turn the call over to John Lindsay.

Speaker 3

Thank you, Dave. Good morning, everyone. In light of the choppy market conditions in the U. S, HUMMERIC and Payne is pleased with to see evidence that there's an ongoing and necessary shift in the industry's fiscal behavior, which is moving it toward a more sustainable and investable future. In the U.

Speaker 3

S. Market, contractual churn is still prevalent. And while we achieved our average planned rig count for the 2nd 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 3rd fiscal quarter.

Speaker 3

We expect our total projected North America Solutions direct margin for the 3rd fiscal quarter to be down slightly on sequential basis due to a lower average rig count, but it's 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 their total well costs. 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.

Speaker 3

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 and 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 7 rig tender award. Our first rig awarded by Saudi Aramco in August of 2023 is expected to arrive and commence operations later this summer.

Speaker 3

For the recent 7 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 4th calendar quarter of 2024 and commence operations shortly thereafter. During these preparations, we'll continue to spend our 20 24 budgeted CapEx toward this 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.

Speaker 3

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 and P and provides our customers with safety, consistency and reduced execution risk. All of these successes are possible because of the people at H and P.

Speaker 3

It's 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 will continue to be drivers of that success in the future. And now I'll turn the call over to Mark Smith to provide more details and a review of our financials.

Speaker 4

Thanks, John. Today, I will review our fiscal Q2 2024 operating results, provide guidance for the Q3, update remaining full fiscal year 2024 guidance is appropriate and comment on our financial position. Let me start with highlights for the recently completed 2nd fiscal quarter ended March 31, 2024. Company generated quarterly revenues of $688,000,000 versus $677,000,000 from the previous quarter. Revenues were up sequentially primarily due to an increase in average active rig activity in North America.

Speaker 4

Total direct operating costs were $403,000,000 for the 2nd quarter versus $404,000,000 for the previous quarter. General and administrative expenses were approximately $62,000,000 for the 2nd 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 Q2, we recognized gains of $3,700,000 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 Q2 effective tax rate was approximately 27.5%, which was within our previously guided range for the quarter. To summarize this quarter's results, H and B earned a profit of $0.84 per diluted share versus $0.94 in the previous quarter.

Speaker 4

As highlighted in our press release, 2nd quarter select items had a neutral on diluted earnings per share. For comparison, diluted earnings per share of $0.84 in the 2nd fiscal quarter versus $0.97 during the 1st fiscal quarter after adjusting Q1 for select items. Capital expenditures for the Q2 of fiscal 2024 were $118,000,000 and I will have some further comments when we come to our fiscal 2024 capital expenditure guidance. Our Q2 cash flow from operations was $144,000,000 which was as expected sequential decline in part due to most of our year to date cash tax payments falling into the 2nd fiscal quarter. I will address the company's cash position later in my remarks.

Speaker 4

Turning to our 3 segments beginning with the North America Solutions segment. We averaged 155 contracted rigs during the 2nd quarter, up from 149 in the 1st fiscal quarter. The exit rig count was 152 which declined late in the quarter and was below our guided range of between 154159 due to lower natural gas prices and miscellaneous individual customer factors. Revenues increased sequentially by $19,000,000 primarily due to increase in average activity quarter to quarter as well as some remaining legacy price rigs rolling to current market rates. Segment direct margin was $271,000,000 which was towards the high end of our guidance and sequentially higher than the previous quarter, which came in at $256,000,000 Total segment expenses were down slightly to $19,000 per day in the Q2 compared to $19,600 per day in the previous Q.

Speaker 4

Looking ahead to the Q3 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 3rd fiscal quarter with between 145151 working rigs. It is worth noting that among the various factors impacting the rig count, pricing is not one of them.

Speaker 4

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 3rd 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 percent 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.

Speaker 4

We believe our financial margins and market performance are representative of our efforts. Revenue backlog from our North America Solutions fleet stands at roughly $1,000,000,000 for rigs under term contract. As of today, about 57% of the U. S. Active fleet is on a term contract.

Speaker 4

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 $255,000,000 to $275,000,000 and we expect cost in Q3 to remain relatively flat. Next to our International Solutions segment. International Solutions activity ended the 2nd 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.

Speaker 4

As we look toward the Q3 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 $10,000,000 to $12,000,000 of operating expense consisting of $2,500,000 of inspection and repair in fiscal Q3 with final recommissioning expense expected in Q4 of approximately 5,000,000 dollars Also included in the Q3 cost guidance is local office setup in Saudi Arabia of approximately 2,000,000 dollars In the Q3, we expect an overall direct margin range of a $2,000,000 earnings to a $2,000,000 loss aside from any foreign exchange impacts in the international segment. Finally to our Gulf offshore Gulf of Mexico segment, we have 3 of our 7 offshore platform rigs contracted.

Speaker 4

We also have management contracts on 3 customer owned rigs, one of which is on active rate. The offshore segment generated a direct margin of about $3,000,000 during the quarter, which was below our guidance range as one rig was delayed in resuming full rate operations. As we look toward the Q3 of fiscal 2024 for the offshore Gulf of Mexico segment, we expect to return to previous run rate levels and generate between $5,000,000 to $8,000,000 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 4 $50,000,000 to $500,000,000 range.

Speaker 4

During our November earnings call describing initial fiscal 2024 guidance, we stated that approximately 14 walk in conversions would occur in Galena Park. 7 were completed entering the U. S. Fleet with the remaining 7 committed to the Saudi Rig Award. As further discussed on our last call in January, international growth capital for the 7 Saudi award 7 rigs Saudi award also includes recertifying certain equipment to like new, conducting required modifications and purchasing specific equipment for Middle East contracts.

Speaker 4

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.

Speaker 4

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 idled U. S. Supply.

Speaker 4

Depreciation for fiscal 2024 is now revised up from $390,000,000 to $405,000,000 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 $230,000,000 to 240,000,000 dollars 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 $30,000,000 to $35,000,000 due to one time 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 variance above the U. S.

Speaker 4

Statutory rate of 21% attributed to permanent book to tax differences and state and foreign income taxes. We continue to project an FY2024 cash tax range of $150,000,000 to 200,000,000 dollars We had cash and short term equivalents at H and P of approximately $277,000,000 at March 31 versus an equivalent $298,000,000 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, receipts 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.

Speaker 4

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 2nd fiscal quarter. Let me now turn the call over to Abby for questions.

Operator

1.

Speaker 5

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 Superstep 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 to where the way the land is and what a little bit of a bull case is?

Speaker 3

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've had a pullback in activity, both H and P and the general industry in general, primarily as a result of natural gas prices like we've talked about. But I think it's I think the outlook is very positive.

Speaker 3

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's 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's very challenging to do.

Speaker 3

But obviously oil prices are strong. But the gas basins, we've had quite a bit of pullback in activity. But again, I think that's we'll see some improvements here in the future.

Speaker 5

Fair enough. 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, $235,000,000 that previous guidance implied, just given most notably the higher CapEx. Is that fair or am I missing a factor?

Speaker 4

It's in the ballpark.

Speaker 5

Got it. Thank you very much.

Speaker 3

Thanks, Derek.

Operator

Our next question comes from the line of Derek Podhaeser from Barclays. Please go ahead.

Speaker 6

Hey, good morning. Maybe just to continue the line of questioning. You talked about in your prepared remarks that you're seeing signs of leveling off in the rig count. Can you maybe just expand on that what you're seeing? Is it customer conversations?

Speaker 6

Is it DUC counts? Just any way you can help us with the signs that you're seeing as far as leveling off of the rig count?

Speaker 3

Well, Derek, it's really a function of conversations that we have ongoing with customers. There's obviously this continued churn that we've described, but there are examples where customers have rigs, rig opportunities where they're picking up. There's also some high grading that is ongoing really continually as we move forward. If you just look at our count in general, the H and P count, we've been in a 5 rig range since what, since June of last year. And again, we all know what the challenges have been with natural gas.

Speaker 3

So really our outlook and our expectation is really derived from conversations that we've had with customers and what their expectations are. You've heard me say before, it's very hard to forecast out much past a quarter. It's there's a lot of things that can happen in a short period of time. But based on what we know right now, the feedback we're getting, that's the estimate that we've put together.

Speaker 6

Great. Now that's really helpful color. Wanted to dig into the performance based contracts. So one of your customers announced a company record 5.0 pad, all 4 mile laterals last night. Is this a good read through of how you've captured value in generating efficiencies for your customers?

Speaker 6

Maybe describe the mechanics of an example like that.

Speaker 3

Well, that's definitely a great example. At the end of the day, what we're doing is we're having conversations with customers. You've 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's the focus that we have. At the end of the day, we've got to deliver wells more efficiently. We've got to save days.

Speaker 3

We've 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 and P, and aligns it with the outcomes that the customer is wanting, then that's a true win win outcome. And that's the best that you can hope for. And as you've heard us say, at the end of the day, we're making big investments.

Speaker 3

This is our capital intensive business and we're 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's very challenging for us to be investable today and into the future. Great.

Speaker 6

Thanks for the color, John. I'll turn it back.

Speaker 3

Thanks, Jerry.

Operator

Our next question comes from the line of Saurabh Pant from Bank of America. Please go ahead.

Speaker 2

Hi, thanks. Good morning, John and Mark.

Speaker 3

Good morning. Good morning,

Speaker 2

chain perspective. But if I recall your messaging from last quarter, I think there was a path of $30,000,000 $35,000,000 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 2024 CapEx going from 450 to 500 to now 500 or is that still expected to be incurred in FY 2025?

Speaker 4

Thanks for the questions, Rob. No, that's still anticipated to be incurred in 2025. I think I had said or if I didn't, I'll say it now, we're approximately $27,000,000 CapEx all in for each of these Saudi Arabia rigs. And that's 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's really hard quarter to quarter to know exactly how the timing is going to fall when you're working with a very wide supply chain and 150 active rigs in the U.

Speaker 4

S. And trying to catch up as we've said on previous calls for maintenance CapEx for componentry, even going back to the cannibalization we experienced 2021 coming out of the pandemic. So as we're 2 quarters into

Speaker 3

a 4 quarter year, we have

Speaker 4

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.

Speaker 2

Okay. No, that's helpful, Mark. And then John, maybe one for you, just the narrative over the past 3 months internationally, particularly in the Saudi market seems to be that there's a lot more emphasis on gas and clearly that's where you are going with your rigs. And just based on discussing with market participants there, it seems like there might be more tenders coming for more rigs in the Saudi market for unconventional gas. Is there something you can share with us, John, in terms of what you're seeing out there in terms of opportunity from growth and for the rig additions for Hell American

Speaker 3

Paints? So Rob, it's a great question. And really I can't add anything more than what you probably already read out there in the market. We've read the same thing and heard similar rumors about the potential for additional tenders for unconventional gas going forward. We're hopeful that that is in fact the case.

Speaker 3

But like you, we'll be standing by and waiting to see if that is in fact the case because we don't have any direct information on that.

Speaker 2

Right, right. Okay, perfect. Okay, John, Mark. Thank you. I'll turn it back.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Keith Mackey from RBC Capital Markets. Please go ahead.

Speaker 7

Hi, good morning. Just like to start with your comment there about increasing service intensity. Can you just expand a little bit on what that means for Helmerich and Payne in terms of specific revenue or cost opportunities? And secondarily, is it leading customers to want to use the performance based model more or want to use the day rate model more or are there just other factors in there that are driving whatever decision might happen?

Speaker 3

Okay, Keith. I think, try to summarize when we think about service intensity, we talked about, I think on our last call that laterals are have more than doubled over the last 5 to 7 years. And we're drilling those wells in far fewer days. And of course, the end result is more exposure to the resource, better outcomes, better returns for maintenance CapEx. And so maintenance CapEx continues to go up on a per rig basis.

Speaker 3

And that's largely and a large part of that has to do with that service intensity. So what we're doing is, yes, the performance based contracts are important because it helps you align with the outcomes that your customer is wanting to achieve and you're creating a value proposition that you're getting paid for in the process. So without going into great detail, that's really the concept behind it. And it's not just drilling rigs. I mean, it's pressure pumping, it's across the board.

Speaker 3

All of the equipment in OFS is really working harder in these more challenging well designs, longer laterals and much, much faster cycle times.

Speaker 7

Okay. That's helpful. Thank you. Can we just talk a little bit more about the Saudi rigs? It looks like there's a batching process of them being sent over.

Speaker 7

Once the OpEx portion or the start up costs are spent that Mark outlined, do you expect there to be more costs similar costs in fiscal 2025 or should that be it? And then when roughly do you think that these rigs will get up to their appropriate run rate for revenue and margin profile?

Speaker 4

Well, thanks for the question, Keith. But most of this recommissioning expense will be largely incurred in the fiscal 2024 that we're in. As I mentioned in the prepared remarks, dollars 10,000,000 to $12,000,000 is expected in fiscal Q3 and then another $5,000,000 for that recommissioning in fiscal Q4. And then they start being readied to put on boats and mobilize to the Middle East. And when that happens, there'll be a cash expenditure of $2,000,000 for mobilization per rig, which will be deferred and recognized over the contract term together with the corresponding mobilization revenue once the operations commence.

Speaker 4

So that stuff is largely at 2025 and then through the life of the contract is the recognition. We think that these rigs will mostly be exported through this calendar year and commence turning to the right and operations and spudding in the beginning of calendar 2025.

Speaker 7

Perfect. Thanks very much.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Scott Gruber from Citigroup. Please go ahead.

Speaker 8

Good morning.

Speaker 3

Good morning, Scott. Good morning.

Speaker 8

I want to stay on the Saudi rig topic. I want to ask about the cost structure in country. How do you think about your ability to lessen that over time as you gain experience operating in the country?

Speaker 4

I'll take a stab at that, John, and then please add in. There are several different things. Obviously, most of our daily costs are related to the labor. We're certainly starting with what will be where we have costs that we're incurring in country now as we've set up an office and are beginning to hire people. And we'll be starting with a large complement from our North America Solutions segment so that we ensure safe and efficient and effective startups.

Speaker 4

But through time, we will begin to have local crews and transfer knowledge. I think a prime example of demonstrates how we can do that is Argentina. Today and for some time there's not been a single U. S. Expat in that country, lower 9 super spec rigs and have a similar market share position in the block and mortar to what we have in the U.

Speaker 4

S. Albeit a smaller scale. There's also supply chain benefits through time that we'll get. We've obviously are doing all this work in at our facility in Galena Park to do the equipment recertification, recommissioning, etcetera. But once we're in country, we'll have a couple of things that will be helpful.

Speaker 4

1, because these rigs are like new in their 5 year contract term, we expect minimal maintenance CapEx through the initial 5 years. 2, we'll be developing through that time our supply chain apparatus in the country as we look to have in country, in kingdom value spend and that will also make us more efficient, we believe locally with not only maintenance CapEx, but materials and supplies, inventory consumption as well. So we're working on a lot of these efforts and we're excited about the opportunity to put all these ideas to work.

Speaker 8

Got it. Appreciate the color. And then turning back to the U. S, the customer consolidation in E and Ps obviously should be beneficial for HP. You guys have highlighted that.

Speaker 8

I'm just wondering, now that we're starting to see some deals close, at least from the recent wave, are you having conversations that suggest some consolidation driven share pickup is a distinct possibility for HP in the near future?

Speaker 9

Scott,

Speaker 3

I don't I really don't want to get into those details. I mean, again, I think when you look at consolidation over time, I think when I look back at H and P and we've been we've come out on the good end on many of the consolidations over the years. And our expectation is that we'll continue. I mean, at the end of the day, it comes back to no surprise what we've said before, and that is the ability to deliver safe, efficient and reliable performance. And I think as long as we can continue to do that and have strong over time over time.

Speaker 2

Got it. I understand the sensitivity. Appreciate the color. Thank you.

Speaker 3

Okay. Thank you, Scott.

Operator

Our next question comes from the line of Marc Bianchi from Cowen. Please go ahead.

Speaker 10

Hi, thanks. Hey, guys. I wanted to go back to the Saudi margin opportunity there because I think you previously outlined it as more than $25,000,000 for the 7 rigs, which would compute to something just below $10,000 a day. It sounds like there's a fair bit of overhead, but when I look back at the international business for H and P over time, the margins don't seem to really get up above $10,000 a day. And I know it's different geographies and such, but you made the comment about historically Argentina operating.

Speaker 10

So I'm just curious, where do you see the opportunity in margin for Saudi? Should this ultimately look more like what we see in North America? Or are there just factors that we've seen with international historically that would keep this closer to $10,000 a day?

Speaker 4

Mark, thanks for the question. And let me just say on one hand, no, the $10,000 a day that you're coming up with is not a marker for 2025 or thereafter. Having said that, there are certain details we're not going to get into for competitive reasons. Here, as was previously stated on this call, we do expect future tenders in a competitive bit tender environment in the few. Going forward, we've done our internal modeling for returns that get us to our IRR hurdles on the $27,000,000 investment per rig.

Speaker 4

That's one thing to note. Another thing to note is that as you referenced to my comment on Argentina this morning, we've only recently gotten to that no U. S. Expat status with our focus on cost management the last couple of years. And I will say historically in our business not just H and P but the onshore drilling industry for U.

Speaker 4

S. Drillers moving internationally, we did not do a great job of scale. We would go into countries with 1 or 2 rigs and we'd set up an entire SG and A apparatus to support it. And we have said for a couple of years on these calls that is exactly the opposite of what we will do going forward. We started with 1 rig last August, we've just added 7 to get 8.

Speaker 4

We will begin to see benefits of scale as we get local content both in terms of people and supply chain and we will continue to add to that scale. We will also be leveraging more of a supply chain back office support for the corporation and are excited about things we can do for this that are very different than that historical experience you just outlined.

Speaker 3

And this is John. And I think just to add to Mark's comments, specifically in Saudi, obviously it's unconventional. We have a lot of experience with unconventional. Again, our there was a question earlier about additional tenders. My assumption is over the next several years, there'll be more tenders and our expectation is that we would be successful and we would be successful because we're going to be providing and adding value for Aramco.

Speaker 3

So that's my hope. The other factor that we haven't really talked much about is the technology aspect of our offering. And there's some opportunities there. Again, as you think back as you think about what we're doing in the U. S.

Speaker 3

And the unconventional play and how we've been doing this work in the U. S. All these years and yet we continue to have year over year improvements that and a lot of cases are driven by technology. So that's the other upside component to this with H and

Speaker 10

P. That's great color. Thanks guys. Mark, I wanted to ask one more on kind of the maintenance CapEx. I think previously, we go back and it was like $1,000,000 a rig per year that was increased to like $1,000,000 $1,300,000 and then the latest comment was it was maybe between $1,300,000 $1,500,000 if I remember correctly.

Speaker 10

And now it sounds like maybe there's some upward bias to that. Can you talk about how much of that is sort of just this hangover from the cannibalization period versus what could be sustainably a higher run rate over time?

Speaker 4

Sure. Mark, there's if you think about fiscal 2023, so go back a year and look at our maintenance, look at our CapEx, maintenance CapEx specific guidance for fiscal 2023 at the beginning of the year and when we ended 2023 September 30, we did not spend that amount. So we had revisions downward and we had a lot of supply chain constraints. What we've seen this year is the supply chain finally responding with more throughput so that we can do this catch up we've been talking about for quite some time. So what you see is transitory amounts here as we've been able to nail down the supply chain.

Speaker 4

The componentry in question, it's all sorts of stuff. It's 7 year top drive, it's 5 year BOP, it's engine work, it's mud pump work, etcetera, etcetera, etcetera. So it's across the full stack of componentry on the rig. And I would say as I look at the list of components and work with our U. S.

Speaker 4

Operations and maintenance teams, we're starting to see where we're turning the corner on some of these components. So the volume that we've had to get through should come start to tick down, I would hope in 2025. And then but I will say we do have some inflation that will be sticky. So will we ever get to under $1,000,000 I don't see that necessarily, but I think the 1.4 that we started this year with and 1 somewhere between those 2 and another year or 2 looks to be a good zip code.

Speaker 10

Great. Thanks so much.

Speaker 7

Thank you.

Operator

Our next question comes from the line of wakar Syed from ATB Capital Markets. Please go ahead.

Speaker 11

Good morning. Couple of questions here. First of all, John, with oil prices in the 80s and the Permian, that inventory relatively low. I know you mentioned that you're seeing kind of a flattish market, but do you see any hope of any pickup in activity in the Permian for H2 and perhaps for next year?

Speaker 3

Good morning, Ricard. Well, we're always hopeful. And I did mention that the longer term outlook, the fundamentals are strong. Obviously, oil prices are strong. The activity set that we're experiencing this correction in activity, as you know, is a function of natural gas, not oil.

Speaker 3

And so I do think the Permian has a lot of potential. Obviously, we're the largest driller, has the most rigs running in the Permian. And quite frankly, I think the rig count we have today is essentially the same as it was when we had close to 170, 180 rigs running. So we've done very well in terms of maintaining our market share actually growing a little bit in that basin. So I think the outlook is good.

Speaker 3

The big question as we all say is, well, when is that opportunity to add back units? And again, our hope is we'll start to see some improvement in the back half of this year. But again, at this stage, it's just hope as we don't really have any additional information than you or anybody else does.

Speaker 11

We do hear that with these some of these big E and P consolidations once they're consummated, you may see or you're seeing some geoscientists come out from these consolidated companies or become redundant. And some private capital is chasing them and new companies are being formed. And that you may see private activity maybe pick up in the second half or maybe in 2025. Are you seeing any early signs of that? Are you having any conversations in that respect?

Speaker 3

Well, as you probably know, most of I think 80% of our active fleet today is with large public companies. However, we do have nice partnerships with the private. And there are some examples where here recently, just recently in the past quarter, we've put a rig to work for various small private companies. So I definitely think that that's an opportunity. Clearly, these the consolidation that we see usually in the first period of time there's some slowdown in activity, but at the end of the day they're going to want to keep their production levels up and in many cases, that means keeping the same amount or even adding some rigs.

Speaker 3

So and then the additional private companies, we could sure see that happening. It's happened in the past and maybe it will happen in the future, but hard to say much more about that book car.

Speaker 11

Okay. And then just one final question that as the service intensity continues to increase now going to these 4 mile type laterals for some companies, are you seeing the super spec rig specifications kind of change again or step out again? Are the rig of choice, super spec rig of choice for the last year or 2 years ago is still pretty relevant?

Speaker 3

Very relevant. We have been able to handle these 3 and 4 mile laterals with the kit that we have. There are times where you may need to upside the setback capacity or something like that. But in general, the FlexRig is very well suited for the work that is required and ongoing. So we feel really good about where we are.

Speaker 3

Like I said earlier, we think there'll be more demand for super spec, not less. It's going to be harder and harder for the lower tier rigs to be competitive, because of the length of the lateral and the performance that's required. And then just finally on the technology side, it's very, very difficult for a human to keep up with what a computer or the technology is going to do. So this is 20 fourseven work and the ability to have apps and algorithms that are doing the work, making the decisions as opposed to it being done by a human 20 fourseven. It's night and day difference.

Speaker 3

So the technology opportunity set is huge. And whether that's a 2 mile lateral or a 4 mile lateral, we're going to see more and more of that adoption, I believe, as we go forward.

Speaker 11

Great. Well, thank you very much.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Kurt Hallead from Benchmark. Please go ahead.

Speaker 9

Hey, good morning, everybody.

Speaker 3

Hi, Kurt. Good morning.

Speaker 9

Good morning. Hey, John, I'm curious, right, where we've what your take might be on your conversations with your customer base, your customer base looking out beyond 2024, a lot of hope and opportunity with respect to exporting gas for these LNG facilities that are scheduled to come online. And then on top of that, a lot of discussion of late around the data centers and AI and the need to power that dynamic and that needing more grid capacity and that needing more natural gas. Long winded way of asking the question is, are any of these topics on the front of mind of your customer base? And how do you think about how that's going to translate into incremental drilling activity, 1st for LNG going into next year and then potentially looking at the dynamics related to the data center?

Speaker 3

Well, Curt, it's a great question and it's a question on everybody's mind. And no doubt, there's a lot of opinions out there and our opinion, our hope is that it's going to be sooner as opposed to later. I think at some point in time, it's definitely going to happen on the gas side. It's just that natural gas is just a great energy source for lots and lots of reasons and there's a huge opportunity ahead. Obviously, the unconventional gas that opportunities that we see in the Middle East.

Speaker 3

So there's a market out there and I there's a huge opportunity ahead for us. It's just as I said earlier, Kurt, it's hard to say when that's going to be. I think we're going to play H and P will play a very large role in that when that recovery takes off, just like we were playing previously before the correction in the natural gas activity.

Speaker 9

That's fair enough. Thanks. And just follow-up on I noticed here that you had very minimal share repurchase activity during the course of the March quarter relative to the December quarter. Just kind of curious as to what those dynamics were driven by and was it related to the Saudi contract or anything else that kind of you guys had to put the policy on?

Speaker 4

Kurt, thanks for the question. In our original capital allocation guidance in October for our supplemental plan, we outlined the fiscal 2024 supplemental dividend of $68,000,000 plus quote and allocated cash of 68,000,000 To date, in this fiscal year, we've repurchased $52,000,000 of shares primarily in fiscal Q1. That said, we have further projected free cash flow as well as cash on hand in excess of our previously stated target of $200,000,000 We slowed calendar Q1 repurchases as the rig count looked to soften a bit and as previously discussed this morning and due to macro uncertainties in the market overall. We will continue to be opportunistic while maintaining our long standing financial stewardship.

Speaker 9

That's great. Thanks. Appreciate the color.

Speaker 3

Thanks, Kurt.

Operator

Our last question comes from the line of Jeffrey LeBlanc from TPH. Please go ahead.

Speaker 6

Good morning, John, and Mark. Thanks for taking my question. I just had a quick one. Given the success that you've had in maintaining margin and day rates, do you believe that operators will still be amenable to day rate increases to offset reactivation costs moving forward, particularly when you see natural gas prices recover?

Speaker 2

Well, Jeff,

Speaker 3

I can really only speak to the H and P from the H and P perspective. The rigs that we have idled over the last year are rigs at least in my view would be ready to go to work, would not require much startup expense. We're not cannibalizing our fleet. So we have available capacity. I can't tell you right now for sure what that would be.

Speaker 3

But I wouldn't expect that there would be a lot of start up CapEx that would be required. Now again, I'm making an assumption that that's happening in a year timeframe from being idle to going back to work year, year and

Speaker 5

a half. I appreciate

Speaker 6

the color. I'll turn it back to the operator. Thank you very

Speaker 3

much. All right, Jeff. Thank you.

Operator

That appears to be all the time we have for questions. I will now turn the

Speaker 3

Thank you, Abby, and thanks to everyone for joining us today. We're very excited about the future and the opportunities ahead and we'll now sign off. Thank you.

Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time.

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Earnings Conference Call
Helmerich & Payne Q2 2024
00:00 / 00:00