Q1 2020 Earnings Call
[music].
Good day, everyone and welcome to today's program fiscal first quarter 2020 earnings Conference call.
At this time, all participants are in listen only mode.
Later, you will have the opportunity to ask your questions. During the question answer session. You. My Register twice as good question at any time by pressing the star and one on your Touchtone phone.
Yeah, I mean, we draw your sell to from the coupon bringing to pad Keith.
Please note this call may be recorded and centric, but if you should need any assistance.
And he's now my pleasure to try to go over to Dave Wilson Director of Investor Relations. Please go ahead.
Thank you Nikki and welcome everyone to Emeka pants conference call the webcast with the first quarter fiscal.
2020.
Let's say on the color, John Lindsay, President and CEO and Mark Smith, Senior Vice President CFO.
Hi, Mark we'll be sharing some comments with us after which we'll open the call for questions.
Before we we get our prepared remarks, I'll remind everyone that this would call. This call will include forward looking statements as defined under the securities laws.
These statements are based on current information and managements expectations as of the state and are not guarantees of future performance.
Working things involve certain risks uncertainties and assumptions that are difficult to predict as such our outcomes and results could differ materially you can learn more about these risks in our annual report on form 10-K.
Reports on form 10-Q, <unk> other SEC filings you should not place undue reliance on forward looking thing with and we undertake no obligation to publicly update forward looking statements.
We also make reference to certain non-GAAP financial measures such as segment operating income and operating statistics, you'll find the GAAP reconciliation comments and calculations in yesterday's press release that said I'll now turn the call over to John Lindsay.
Thank you, Dave and good morning, everyone.
2019 was a challenging year for the industry overall, but it is during these seasons when our industry comes together to create stronger partnerships and embrace new ways of thinking and innovation.
This is what we're experiencing and it can contributes to our results.
Today, we will share some additional context about how h. rupees leadership position and performance.
Which continued to improve because of the company's ability.
To simultaneously deliver incremental value for customers.
DAP to increasingly difficult market conditions, and advanced the future of automation and drilling.
This quarter's results reflect the momentum of shares successes with customers and the company's ability to remain agile and focused on results from our customers and for H.M.P. stakeholders.
I'm going to begin talking about our experience with what we're seeing exploration and production companies value drivers.
Our customers are looking for every opportunity to invest optimally.
They are seeking the best partner with the best expertise and experience that can transcend today's challenging market environment.
We strive to align ourselves with the customers objective to enhance economic returns through better performance in technology.
We're working hard to put this shared focus and decision making at the forefront of all of our partnerships.
Our strategy is focused on strengthening all of our current customer relationships and building more along the way.
We believe technology and automation will be the catalyst for value creation and upstream oil and gas operations.
There is power and predictability three reliable and repeatable performance provided by process excellence and automation.
And we are seeing that pay off for HCP and for our customers.
This concerted effort will continue to set us apart and I believe it's one of the reasons why we are gaining traction.
We see significant value capture opportunities, resulting from our autonomous drilling platform.
For our customers maturing basins and normalize well cycle times are drawing more attention to the advantage is that wellbore quality delivers.
Our automation solutions, specifically auto slide which is automated sliding while directional drilling.
Have numerous points of differentiation from competing services in the market today.
The primary and most customer centric differentiation is our auto slide algorithms are two and what Wellbore economics, and each customers value drivers in mind.
Specifically these algorithms optimize the trade off between drilling days.
I'm in the hydrocarbons and Wellbore Tortue austerity.
As the industry continues to migrate to factory like drilling economically focused automation will be the key enabler.
Well we have found is this predictability allows for optimization of other key drivers that positively impact the total life of the wells.
Examples are optimizing completions and providing an opportunity to push the envelope on new methods and techniques that ultimately lead to production increases and lower costs associated with completions.
In addition to creating value for our customers through improved well economics.
Our technologies reduce the environmental impacts of drilling operations by creating more precise and say for ways to maximize extraction, thus unlocking even more value with a smaller environmental footprint.
And as we deem at at the rig site fewer exposures at the rig and driving back and forth to the right.
Since 2017, we've made several digital technology acquisitions and have added significant expertise to our team to complete our digital technology strategy roadmap.
The first half of that strategy as wellbore quality and economically focused automation with auto slide and we plan to watch more levels of our autonomous platform during 2020.
We believe we have the expertise and capabilities today to take the next step for our industry without further acquisitions.
Power of process automation that drives predictability is paramount for the future of well I guess.
Last year, we introduced the need for new commercial models.
Where we are focused on creating a win win value capture for our customers and for H.P. stakeholders.
Given our customers focus on spending within budgets optimizing investment and value, we're continuing to develop new pricing solutions to reflect the growing partnership between HMP and our customers.
These solutions reinforce that approach.
Enabling us to share at an equitable portion of the value we are delivering.
Last quarter, we announced that new commercial contracts made up approximately 10% of our contract mix during the first fiscal quarter.
Although today, we have approximately 15% of our active Flexrig fleet contracted under non traditional they write contracts.
The majority of which our performance based contracts.
As Mark will discuss in more detail in his remarks.
These performance based contracts aligned H. impeach performance and compensation with the customers goals and provide for a commensurate distribution of the incremental value creation.
We are seeing momentum across our primary drilling business segments as the U.S. land rig count fell during 2019 H M. P's market share grew from approximately 22% to over 24%.
Indicating a growing preference for super spec rigs and the performance these rigs deliver relative to legacy SCR rigs and lower performing AC rigs.
Along with market share gains.
Our quarter and rig count was sequentially higher.
In the previous quarters ending rig count.
We believe capital discipline by our customers will remain at prevailing thing and we expect industry activity to look similar to the average level experienced during the second half of calendar 2019.
Which implies a modest increase from current levels.
As drilling performance continues to improve a significant portion of these gains are attributable to the added capabilities and efficiencies from super spec capacity rigs.
And knock on effect of this progress our higher daily maintenance costs and higher capital costs.
Related to the third mud pump.
7500 P S I capacity, multi well pad capability and more horsepower requirements, but that tradeoff is well worth it.
Our experience shows that over a three year trend that's super spec capacity Flexrigs can drill 15% to 20% more phage the non super spec rigs.
Moreover, a super spec Flexrig incorporates a number of enhancements that improves safety for employees and reduce the environmental impact at a drilling location.
That said in order to reflect continued efficiency in value games for NPS.
Revenues for rig services that provide optimize drilling solutions need to increase.
To cover the cost of increased maintenance and supply.
Capital cost as well as.
Returns that our shareholders demand.
Mark will address the details of pricing more completely in his prepared remarks.
Pricing remains firm for Flexrigs and U.S. land.
And why shouldn't it.
Super spec utilization, a strong, especially in the most active basins and the rigs are delivering high levels of performance and value for customers.
Before shifting to our international <unk> International segment. Another success during 2019 for H.M.P. was growing our partnerships with a major oil and gas companies.
We've grown our Flexrig fleet market share to 16% from 6% at the beginning of 2019 and we believe the company is best positioned to continue to grow our partnerships with the majors and iOS sees.
So let's shift to our international segment.
This quarter also proved to be positive for our business outside of the U.S.
We remain optimistic about the opportunities, we're saying in the middle East and where we were pleased to put a rig back to work in Colombia.
Our rigs in the Middle East are now fully utilized and prospects for further growth in this region are encouraging.
And would likely result, and the exporting of additional flexrig drilling rigs from the U.S. to satisfy any demand.
As we hear about unconventional resource plays in the Middle East and South America, our experience our expertise and our technologies will continue to put us had a great position to grow in the future.
So in closing financial discipline, and maintaining a strong balance sheet are hallmarks of the company and set us apart from many industry peers.
He has paid a cash dividend to shareholders since 1960 and last year, we increased the annualized dividend per share for the 48 consecutive year.
And thinking about culture, and how that can set a company apart at an industry. We're in the midst of a momentous year at HMP.
2020, as our Centennial year, and we are using some of this time to reflect our history.
The primarily we're looking at our path forward.
In keeping with this milestone we will remain focused on maintaining our position as the industry's most truck trusted partner and drilling productivity and technological innovation.
Our people have always been dedicated to helping our business through the ups and downs of our industry and we know that our employees combined with our rig fleet and technology solutions are the key to our continued long term success.
And now I'll turn the call over to Mark said.
[noise] Thanks, John.
Today I will review our fiscal first quarter 2020 operating results provide guidance for the second quarter.
They full fiscal year 2020 guidance as appropriate.
And comment on our financial position.
Let's start with highlights for the recently completed first quarter.
The company generated quarterly revenues of $615 million versus 649 million in the previous quarter.
The quarterly decrease in revenue is primarily due to a decrease in the average number of rigs working in the U.S. land segment as expected.
Total operating costs incurred were $401 million for the first quarter versus 432 million for the previous quarter. The decrease is primarily attributable to the aforementioned activity declines.
General and administrative expenses totaled $50 million for the first quarter inline with our expectations.
Our Q1 effective tax rate was approximately 32%, which is slightly higher than our guided range due to a discrete tax expense.
Summarizing the overall results of this quarter Asian, P. incurred a profit of 27 cents per diluted share versus earning a profit.
The 37 cents in the previous quarter.
First quarter earnings per share were positively impacted my I know 14 cents per share of select items as highlighted in our press release.
Absent the select items adjusted diluted earnings per share were 13 cents in the first quarter versus an adjusted 38 cents during the fourth fiscal quarter.
Capital expenditures for the first quarter fiscal 2020 were 46 million.
This amount is under our implied guide at run rate due to the timing of various projects.
Turning to our four segments.
Beginning with the U.S. land segment.
We exited the first fiscal quarter with 195 contracted rigs, which was as John mentioned, the first time since calendar year 2018 that we've seen a sequential increase in activity.
Asian, P. increased at U.S. land market share to 24% by quarter end due to the continued sidelining of less capable legacy rigs in the industry.
As John discussed, we expect to see a modest increase in rig count during the second fiscal quarter.
Pricing remained firm in the Super spec market space during the first fiscal quarter, our average rig revenue per day, excluding early termination revenue increased to $25397 for the quarter, which was slightly above our guidance as a reminder, from our November call. This figure excludes our flexible.
Offerings, which are now included in our H.P. technology segment.
American pains average pricing per day varies from base in the basin due to both underlying hydrocarbon economics and competitive rig supply dynamics further as John stated our pricing is differentiated due to the unique value we deliver our customers as evidenced by our leading market share in addition to that.
And amex the specific to each market pricing variations are also driven by other variables, including term coverage and customer concentration.
Our current pricing remains in the low mid twentys with an overall average around 23000 per day.
As a reminder, flex services, including trucking casing running rental equipment et cetera are additive to their eight or and are included in revenue per day of 25397.
As John discussed our performance contracts are gaining ground as a larger portion of the fleet is shifting to this commercial model.
They shouldn't be provides value to our customers such as by reducing their overall well spread cost then agent paper disk participates in that savings creation.
These reform is contracts are now generating approximately $500 per day more in margin than our average day rate and model margins produce.
The average adjusted rig expense per day increased to $14987. This is above our previously guided range, primarily due to higher than expected self insured medical expenses incurred in the fourth calendar quarter.
Which is the final quarter of the medical plan year.
Looking ahead to the second quarter of fiscal 2020 for U.S. land.
We exited the first quarter with 195 rigs working and currently we have 197 rigs turning to the right.
Customer conversations lead us to believe that there will be a decrease of approximately 10% in capex spend in calendar 2020.
Compared to calendar 2019 levels.
This implies that the number of wells drilled in 2020, it would decline by 2300.
From the 16400 wells drilled during calendar year, 2019, and approximately 14% decrease.
To close some of that isn't gap, we would expect to see a modest accretion to the exiting rig on a calendar year end.
With that caveat, we're also anticipating that our customers will spend budgeted rig capex in a more even rate throughout this calendar year.
Given that we expect to exit the second quarter with between 193 of 203 active rigs.
This would result in a modest sequential increase in the quarterly number revenue days.
Which translates to an average rig count of approximately 196 rigs during the second quarter.
[noise] as the market tightens and as opportunities to displace legacy rigs arise. Our initial objective is to put the 45 idle Super spec rigs. We currently have back to work.
Also we still have 44, flexrigs that are upgradable to super spec, when and if market conditions warrant that investment.
Compared to the first quarter at $25397 per day, we expect the adjusted average rig revenue per day to be within a range from 25000 the 25500.
Our average day rate in both the spot in term markets remains in a low to mid twenties range and leading edge Super spec Flexrig pricing is also at that same level.
The average rig expense per day is expected to be in a range of 14652 15150 for the second quarter.
While our overall rig count has stabilized.
We'll continue to incur Costa Rican mission idle rigs and or stack out active rigs do ordinary rig churn across basins.
The per day cost here can vary considerably depending on the type of rig in the market dynamics in the basins.
Are they activities occurring.
We will also continue to incur cost associated with maintaining the idle portion of our fleet.
At the start of the fiscally of this fiscal year, we elected to set up a wholly own insurance captive to ensure the deductibles for our workers compensation general liability and automobile liability insurance programs from October one 2019 forward.
Our operating segments pay monthly premiums to the captive for the estimated losses based on external actuarial analysis.
The result is a transfer of risks from or operating subsidiaries to the captive for the deductibles, which.
Which is our self insurance retention.
We do not expect any significant changes in are ongoing segment per day expenses as a result of this shift the insurance premiums are included in the operating segment expenses.
And are included in intersegment sales in the other non reportable segment.
These intercompany premium revenues and expenses are eliminated in consolidation.
The actuarial estimate it underwriting expense for the three months ended December 31 was approximately 8.5 million.
And was recorded accordingly, and it was recorded within the other operating expenses line item.
And our unaudited condensed consolidated statement of operations.
We had an average of 129 active rigs under term contract during the first fiscal quarter and today that number remains 129 were about 65% of over 197 working rigs. We expect to have an average of 126 rigs under term contract in the first.
In the fiscal second quarter and earning the current average day rates 103 rigs currently remain under term contract through the last three quarters of fiscal 2020.
Regarding our international land segment, the number of quarterly revenue days is relatively flat in the first fiscal quarter slightly above our guidance. The adjusted average rig margin per day in the segment the increased by $1731 to 7200 and aid in the first fiscal quarter the increase.
It's primarily due to lower than anticipated.
Cost associated with some of our rigs in Argentina, among other factors as.
As we look toward the second quarter of fiscal 2020 for international quarterly revenue days are expected to decrease approximately 7% with an average second quarter rig count of approximately 16 to 17 active rigs in the segment.
We have been successful and redeploying.
All five of the rigs we currently have in the middle East and while these additions have not been incremental to our international rig count. They have served to mitigate the rigs that have rolled off contract in Argentina.
We remain optimistic that there'll be opportunities in Argentina to put rigs back to work. However, the timing is uncertain.
The average rig margin is expected to decrease the range of six to $7000 per day during the second fiscal quarter.
As decreasing startup cost in the middle east or more than offset by the impact of idling, Argentina rigs rolling off of their five year NFC contracts and Additionally, we incur an unplanned maintenance expenses during the starting a phase of putting an idle rig back to work in Colombia.
Turning to our offshore operations segment.
We averaged six platform rigs working in the first fiscal quarter, we exited the quarter was six contracted rigs. However, one rig has since been released in the mobilized.
The average rating margin per day increased sequentially due to the unexpected and maintenance downtime occurred in the previous quarter.
As we look toward the second quarter fiscal 2020 for the offshore segment. We currently have five of our eight offshore rigs contracted one of those five rigs is in the shipyard as it transitions from one Gulf of Mexico customer to another and is expected to read commence drilling operations in late March.
The average rig margin per day is expected to decrease your range of 10000 do 11000 during the second quarter due to the reduced activity.
Finally at looking at our agent P. technology segment.
H.P.D. revenues were largely inline with our expectations HBT operating income was approximately 2 million when excluding research and development cost of 6 million.
We are expecting Q2 revenue for HPG to be between.
$16 million to $19 million inclusive of flex apps.
As our teams leverage recent successes, we expect continued growth in customer adoption during a stable to modestly increasing recount environment.
In December 2019, we closed on the sale of Terra Vg drilling solutions Inc., resulting in a gain on sale of approximately $50 million.
As a reminder, we wrote off the intangibles related to tear of EG and the fourth fiscal quarter of 2018.
Now, let me look forward on corporate items for the second fiscal quarter and the remainder of the fiscal year.
At December year end and as of todays call our revenue backlog from our U.S. land segment was roughly $900 million rigs under term contract with early termination provisions.
Capital expenditures for the full fiscal 2020 are still expected to range between $275 million to $300 million based on our current outlook for fiscal 2020, which as a reminder, there's approximately a 40% reduction to fiscal 2019 capex.
Extended 46 million in the first quarter, which is less than the implied quarterly run rate of our guidance due to timing differences of procurement activities and project progression.
As we mentioned in the press release asset sales are primarily customer reimbursement for their replacement value of drill pipe that is damaged or lost in whole during drilling operations.
These cells offset a large portion of our tubular purchase bucket of Capex.
Our previously communicated expectations for full fiscal 2020 general and administrative expenses research and development expenses depreciation and effective tax rates are unchanged.
Now looking at our financial position.
American pain had cash and short term investments of approximately $412 million at December 31 versus 401 million at September 31, 2019.
We are into cash flow from operations of approximately 112 million in fiscal Q1.
The sequential decrease in cash flow was due to several conversion factors, including reduced activity.
Annual payment of accrued short term incentive compensation plan seasonal holiday slow down in the receivable collections and the payment of the legal settlement that was accrued and disclosed in the previous quarter.
We expect cash flows from operations to be higher and the remaining quarters of our fiscal year.
Our debt to capital at quarter end of 11%, which has a continued best in class measurement amongst our peers.
A reminder, we have no debt maturing until 2025.
Our expectations for the remainder of fiscal 2020 include operating activity levels in pricing to generate sufficient free cash flow to cover our selling general and administrative expenses debt service costs planned capital expenditures and current dividend, while modestly accretive to our cash.
On hand.
Our balance sheet strength liquidity level and term contract backlog might agent p., the flexibility to adapt to market conditions take advantage of attractive opportunities and maintain our long practice of returning capital to shareholders through our dividend.
That concludes our prepared comments for the first fiscal quarter.
Let me now I'll turn the call over to Nicky for questions.
[laughter] at this time, if you will like asking a question. Please press star one on your Touchtone phone you may we draw your question at any time by bringing Apache once again try asking question. Please press star and what are your Touchtone phone.
I would take our first question from Jacob Lundberg from Credit Suisse. Your line is open.
Hey, good morning, guys.
Good morning.
Just to start off I wanted to drill down on the performance based contracts that you mentioned could you just help us think about how quickly that mix can grow as a percentage of your your total work total works in a nice increase in fiscal once you do you anticipate that to continue and then anything you could provide in terms of your desired mix of traditional versus.
Performance base would be helpful.
Okay. Jake if this is a this is john.
It's hard to it's hard to know for sure.
How we can impact the mix.
But I do feel.
Positive about is that we are taking a a customer centric approach to these.
New commercial models, a you know were.
Every customer you know obviously it looks it looks at things looks at costs looks at.
Their particular program a little bit differently. So we're trying to align it with where there you know what their drivers are.
Most of these contracts have been performance based contracts. So there's a a true when a true win win for a for both the customer and HMP. In this case. So our hope is that we'll we'll be able to can continue to do more of that one way to think about it is most of the of the.
The rigs that have.
The potential of entering into these types of contracts are generally in in the spot market rigs as opposed to those that are already under term contract.
But again I think there's I think there's an opportunity for us for us to do more as you said, we had a nice improvement.
You know our our sales force continues to adapt to this we have you know we've made lots of investments in the organization to create the infrastructure that we need to two to manage these types of a contract. So again, our hope is to continue to grow it as far as the told me.
Exit it you know again, that's hard to say as well.
But I suspect that as we get more mature and a and our customers see the benefits that will be able to enter into more of those.
And do you have do you have a desired ultimate mix would you would you go pure performance base. If the market was there or would you like to maintain some portion of the fleet still on the traditional structure.
Well I I think.
Mark had mentioned it in his remarks that our average revenue is higher on our performance based contracts. Obviously, we're taking some associated risk when you when you do that.
You know again, it's hard to say what kind of a mix in terms of total, but we're definitely interested in doing more I think the likelihood the reality of it or at least anytime soon to have the whole fleet on performance or some other type of commercial model Besides day rate.
Yeah, you know probably isn't a isn't achievable realistically.
Okay, and then a follow up if I could could stand on the performance based contracts could you just talk about the spread so if if on average are seeing $500 a day more on the performance based contracts what does that spread looked like presumably there's some jobs that they don't go your way and maybe it's even in that.
It had been pack to I would imagine there somewhere it's significantly more positive than than 500, <unk>, maybe what does that spreads look like and then over a time.
Where do you think you can bring that total average incremental day rate on those contracts.
Yes.
Yeah that that's a that's a tough one you are you are accurate and that you know we're not going to achieve if you're talking about performance contract you're not going to achieve it every time, obviously the goal is to.
At the end of the day to to be able to have a higher revenue than what we would achieve with a with a day rate contract. So we're still in the early stages, even though we've been at this for a year you know our industry in some respects moves pretty pretty.
Slow on on things like this yeah, I really want to stress that it is a partnership with our with our customer.
You're only going to be able to have these sorts of.
Arrangements or types of contracts with customers that you have a pretty good relationship with it and are able to get in and you.
Negotiate something that again as a true win win for both parties.
Do you think it would be fair to say that overtime. There is an ability to increase to 500 dollar number though.
I would sure I would sure hope so I mean, we have examples where.
You know at several thousand dollars. Obviously, you do have those that don't don't work at your way for one reason or another.
But again, we're where an organization that has a lot of a lot of data a lot of information I think that we can we can continue to help help our customers drill wells more more effectively.
All right appreciate a great quarter guys. Thank you. Thank you.
Well take our next question from told me more from Stephens, Inc. Your line is open.
Morning, and thanks for taking my questions.
Sure Tommy.
So I wanted to start on HP technology, specifically autos slide which it looks like is now in six basins.
In an environment.
In a macro environment as you.
Indicated you expect for this year, so maybe slight uptick in rig count.
But continued capital discipline among customers.
How do you feel about the adoption going forward I'm for auto slide is it still are we still in the early days where the.
The adoption rates low or do you do you feel like we're getting closer to an inflection point.
Well Tommy I think we have had you know a nice improvement in adoption since our since September 30.
We are auto slide.
Rig count as it 15 today I think we're around seven or so we more than doubled since September 30. So we've had some nice a nice adoption.
There there is I think a in some respects.
Because of capital discipline and it's there are some adverse effects I think that that you end up dealing with on the adoption side and then the other side. It's just it's as we said before it's a pretty significant change and and work flow at the rig site. So there's a real need for change management.
But you know over the last several months, we've obviously achieved a lot of success and as you say, we're we're on that.
Six six basis today, there most of the most active basins and.
And we're having some success. So we are getting some we are getting some adoption. So our expectation is that we continue to grow a we'd love to be a lay out for you you know what our ultimate a you know what we've been.
He successive quarter, but so much of that.
Really depends on.
How what how quickly customers can adapt to the auto slide.
Situation in that we you know we are changing the work flow and we are de Manning in most cases, I think 60 or 70% of the auto slide jobs. We have today are fully.
Demand as far as the directional drillers are not being on the rig which is a which is a great thing. It's it's a great thing for the customer to great thing for the industry because of the reliable reliability piece less exposure, but it is disruptive.
Thank you John and just sticking with the technology same you mentioned in your remarks that there could be more announcements coming and 2020 on the autonomous drilling theme.
I expect we'll have to wait for some press releases to get the full details on any of those but could you give us even just high level some of the different.
Pieces of the drilling process that you think are ripe for disruption with some autonomous solutions.
Oh, I think a what I, what I prefer to do Tommy is weight and rolled out a little.
You know with greater clarity on what I'd be able to give you are right now, but but the fact is there's still some.
Highly.
There are some.
Things that are done at the rig site that are highly people oriented obviously and there's a lot of variability and the.
The performance because of the human the human interaction and there are things that are ripe for automation you know there right for.
Developing algorithms or two to replace that and to add more factory like a.
Outcome so.
Yeah, there will be more to more to come on that I wish I could tell exactly when that is but it will I think in the next quarter or two we'll be able to to have another commercial announcement that will that we're rolling nicely with with auto slide.
Well, we will stay tuned for the updates and I'll turn it back thank you.
Thanks, Tony.
Well take our next question from Sean Yes.
Good morning.
Thanks, Good morning.
Were shot.
When it.
Can we talk about the change in quarterly profitability for HP technologies and.
How you would be guiding investors going forward I guess I'm just trying to think about the buckets there driving the changes that just absorption on higher volumes R&D is separated other next considerations just trying to think about how to understand the fundamentals and it's going to be probably a little bit tough to navigate that quarter over quarter.
Thanks, Sean there several moving parts in there and because of that we're going to keep our guidance for that for the near term really at a top revenue line item.
To your point there is a increased adoption of or give some products, especially the new autos life product the Johns and speaking of this morning.
You also have some price accretion on a per unit basis, as we work with different contracting models honestly and importantly isn't not on a day rate model.
We have various forms of contract in Italy.
As we move through some of these early days, we will probably land on the best feud forms of contractors that are mutually beneficial to the customer and ourselves so until we get to that point.
It's really a sort of a topline guidance.
Lastly, we have.
Much more discrete internal goals, but those are moving as well as we learn more through this process.
That's very helpful. We're able to give us any hindsight color on the prior quarter relative to the one before that.
I'm not at this stage on not at this stage.
Okay fair enough.
Maybe so switching to international.
Could you maybe just give us a sense of what you see as an opportunity set in terms of number of rigs that could be exported from the U.S. or whatever timeframe you feel comfortable with next 12 months or something and just curious how those latest contract terms are looking relative to prior between Latin America and in the Middle East.
Well and as John mentioned, we're excited to put a rig back to work in Colombia, and we continue to have marketing discussions in that country.
We still on a long term basis are excited about.
The unconventional play in Argentina.
And are being patient a there as our customers are as we sort it through the new dynamics in that country.
We do have rigs rolling off of their original IP, a five year contracts through the rest of this calendar year.
And we had been in and they continue to and continue to be in discussions with I have the season and other players related to the redeployment of those rigs.
As it relates to the middle East I'd be a bit more can cautious if you will and trying to provide any specific guidance.
We have a numerous discussions happening in various countries in the middle Eastern are very excited about being able to participate in unconventional plays as they begin to really take shape in a at scale and some some countries. There are so excited to to be participating in discussions a those range.
Ranged from preliminary discussions all the way through two been tender type of discussions.
And it's early days it but Oh, we have 45 idle super specs in the United States that are great candidates to put to some of those opportunities when they come to fruition.
But so you wouldn't be able to characterize changes in rates or term at a high level across any of those markets.
Not yet no a you know its.
Flexrig, we think can really add value in a in the middle East and we also have some H.P.T. trials that are happening I.
With some of the H.P.T. technology products as we speak there as well and and he knows as we've discussed in previous calls the technology could be a rig pull through.
Right Okay.
Thanks, a lot.
Thanks, John.
Our next question comes from Mark.
Cowen Your line is helping.
Thank you just following up to the question on H.P.T. and profitability I. Appreciate that you know you don't want to give us any guidance, but if I just kind of assume what we had a in the most recent quarters 10 million Bucks of gross profit and that I take U.S. land in international and offshore all at that.
<unk> points of your guidance I kind of gets $210 million of gross profit I'm wondering.
What else, we need to deduct from that to get to your EBITDA because we've got this insurance thing this quarter that's.
A new item.
And then obviously DNA and perhaps R&D from there.
There's several things built into your into your question there Mark as it relates to the first of all let me just address the insurance captive.
From a segment operating expense perspective, there's there's no change there.
It's just transferring of those premiums to the captive.
And again as its intersegment revenue to the captive which has eliminated in consolidation.
And it's a big self insurance retention that deductible and so we're managing that a retention of a different way through the captive but from a segment expense perspective really didn't change.
As it relates <unk>, yeah, sorry go ahead.
Related to clarify.
Yes, it could I just clarify not just because you're on it on the insurance piece. So UBS that 210 of gross profit. That's all in the segments. There's no additional deduction that I would need to make to that to get your EBITDA as it relates to the insurance.
Yeah.
And he can you can see that in the segment reconciliation.
Yeah, right, which is in the press release and we'll be in the 10-Q filed later today.
Okay.
Through the they come the reconciliation offline.
Yeah, I think it's good to talk about it.
Life, because I'm getting a lot of questions about it so perhaps other investors are very interested.
Hi, Mark you were going to talk about the DNA in the R&D.
Ah yes, the DNA I think he have all the components to get to to get to your EBITDA number.
Mark really but specific to your HBT question in particular on on any more details within their you know we have a growing revenue base.
As we said before we're excited about it because the technology is really software as a service. So in these initial deployments were really getting started we haven't been a variable operating expenditures, but through time, we expect that to be a really margin accretive portion of the business as we've talked about.
The DNA related to HBT in particular is pretty fixed and the R&D is as well as I mentioned in my opening comments, we don't have any changes to the full year guidance.
Once we get through the technology Road map the John's articulated we will through time have or indeed drop off obviously and once you move to a sort of maintenance. If you will on the software. So you go from version diversion as opposed to new software.
But that's that's a bit out a in our planning horizon. So if you stick with the numbers. We we mentioned in November for year to year to yearly DNA and R&D et cetera.
You'll be able to get your EBITDA.
Got it got it that's great Mark Thanks, and then just if I could on on a kinda M&A I caught the comment that you don't need to do any more M&A to build out the automation capability, but you didn't make the comment in the press release about having kind of ample flexibility to take advantage of additional investment opportunities. So I'm just curious.
What that might be referring to and help maybe set some expectations for M&A for us.
Well Mark.
From an M&A perspective, you heard in the past what we what we don't plan to do which is any consolidation in a in in the industry.
As far as rigs go.
I think the investments that will be making are on the technology side. There's obviously the potential to grow internationally has as mark a as Mark mentioned.
You know continuing to enhance the the fleet based upon customer demand and that's that's where we're going to going to be investing.
Got it okay. Thanks, very much I'll turn it back export.
Our next question comes from David Anderson with Barclays. Your line is open.
So John we're talking about auto slide and all the.
How to improve performance also talking about contracts I'm, just wondering how the to work together on kind of 15% of your business, which as.
New commercial models are you, implying auto slide in those in any of those contracts.
You know there there have been some over there have been some overlap and bids that we've made I can't speak too.
Any particular right now that we have but it's definitely in in the discussion.
I think that to your point I think it does it does make a lot of sense as we as we grow the auto slide functionality and automation in general.
I think there is that potential there.
And then I'm also be just talking about a little bit the customer mix I'm, just kind of curious that 15%.
Is that more skewed towards the bigger operators I'm, just curious which types of customers are more receptive to that because I also certainly noted how you were talking about your share of the majors gone up I'm wondering if those are related.
The really the answer the first part of your your question is Oh, we have interest and have contracts right now with.
Ah with large and small.
In piece.
And I and I expect that that's going to going to continue these performance contracts are not related to the the growth and.
On the major side of the equation, but I wouldn't rule it out longer term I mean, let's face it that the majors are very much value oriented.
And and I think as they look at.
Ways to enhance value not only time based value, but overall life.
Lifecycle of the well value I think we have a lot of opportunity to grow there so hopefully that.
It gives us some opportunity going forward.
Thanks.
I was just wanted to just elaborate a little bit about the growth opportunity in the middle East I think we'd just like we saw the last time I sought to get a couple of weeks operating brain and a couple of <unk> I'm could you just tell us how you said five rigs operating in middle East today could you just talk a little bit about where those are looks like you react to him anyway. We just saw announcement came out.
<unk> anyway.
That's really <unk> and also if you want my just also just telling is are you qualified and all the major GCC countries in the middle East, particularly Saudi I remember you ever working in Saudi just wondering.
Well, we have a of the I'll just start start us off with the the five that you mentioned specifically, we I think if you went back a year ago. This time, we had one one rig working in in Bahrain to idle, there and to idle and I'll be Dhabi.
And interestingly a last year, we closed our Ecuador operation because of its sub scale size.
And.
And we you know really have the same size operations in Bahrain and I'll be Dhabi that we purposely kept those open as marketing venues.
Sensing what could be a developing unconventional play in several countries there and that that's coming to fruition as those all five of those rigs are now working continue to have.
Prospective customers going to visit them as well.
And any yes, that's a fixed exciting opportunities in many countries there including anyway.
No we do what about Saudi qualified.
We do have entities, we do have an entity in Saudi Arabia legal entity I should say and we have a entities in various countries actually in in the middle East.
Thank you.
Our next question comes from Scott Gruber with Citigroup. Your line is open.
Yes, good morning.
On a Scott.
A question on a working capital for Mark the working capital sounds like it should improve going forward do you have any color for us on a whether working capital will be a benefit or a cash drag for HP for the full year.
It should improve a as I mentioned in the comments and you know we.
I think we're going to be relatively stable activity levels too I think working capital will be relatively stable as well as opposed to being a big benefit or drag honestly.
Having said that we at age and P. are still trying to turn over every rock weekend and we had some successful working capital projects a last fiscal year and this year, we have more that we're looking at including an assessment of our inventory levels.
Got it and then just back on a U.S. plan do you think your rate premium to peers in U.S. Atlanta has widened and not just relative to the smaller players, but even relative to some of your bigger Oh primary competitors. You think your your rate premium is actually widened a bit there.
Hi, Scott I know the.
Our other drilling peers at least I don't believe they've.
They've reported yet.
I don't know I don't have the the details of the data to know if it if it's widened.
I think in general.
Yeah.
We've had pricing discipline in our in our sector.
You know as I've mentioned, the rigs are performing at a high level and adding a lot of value.
And so I think in general it's if everyone's best interest to continue to.
Keep keep pricing it at a reasonable level that today's levels and again I think theres an argument to be made.
That because of the cost side of the equation and rigs working harder that there isn't element for increasing revenues in order to cover those expenses.
Got it that's it for me. Thank you actually the color. Thanks Scott.
Thanks.
Our next question comes from change.
With Bank of America. Your line is open.
Hey, Thanks for squeezing me in I wanted to come back to the performance base or the new commercial models or that you're pushing out to the market.
So it's kinda do some back then below math it kind of looks like you may be saving you know 15 to 20000 per well.
You know could you kind of walks through the different pieces of cost savings that you're you're you're saving for your customer you know how much of it is you know drilling faster versus kind of taking people all four for me, but maybe you know cannibalizing some of the other drilling services. So just kind of help us understand you know the different buckets.
For the value proposition to your customer.
Chase I'd say most of.
The us the shared savings are related to time and as you look at you know a real real simple example is.
You know 15 day, well and and two days of savings.
And you know a total spread spread rate of $150000 total but between those two days and then you you know you essentially share those share those savings. So lets say you split the savings. So on a lot of 15 day well you know you've got 5000 dollar day.
Type of Oh.
Additional revenue.
I'm trying to give you a simple example, there are other <unk> K.P.I. type key performance indicator type.
Models, as well where customers want to focus on focus on specific items. During the course of the well I don't have I don't have all those at the tip of my time right now but.
Most most of those are areas that a they're having a challenges.
And or there's an opportunity for us to to come in and perform at a higher level than what are what our peer would be doing and we're able to do that by essentially going in with a a little bit lower lower rate and then earning.
Higher rate.
Got it Okay. A quick follow up just on the performance based contracts, if we think about.
How how youre trying to attack you know the risk side.
You know if you think about what kind of risk you're absorbing on the third party service providers. How do you protect yourself. There and then also you know with performance based contracts. It's always it seemed like a perpetual kinda resetting of the baseline is as performance continues to improve so how do you protect yourself on that element as well.
Well, that's a that's a very good a good good question, you've obviously a seen these types of contracts over over the top overtime and and there can be some negative.
Results as a result of either resetting a framework or the third parties I think a as we look at our experience and expertise and the data set that we have.
You know we have a pretty good handle on the obviously the customer that we're working with the partnership that we share a have a pretty good understanding of those areas that were are particularly or have been particularly a problem in the past and obviously one of those is.
The the directional drilling component.
We obviously have a significant expertise and directional drilling.
Internally with a directional drillers and then obviously auto slide algorithms and so lot lots of data at our fingertips that we didn't previously had before.
So I think it helps us actually work with our customers to.
Or even potentially high grade some of the third parties that you know that are that are working.
Jointly with us on location, so overall I'm not overly concerned or bothered by the third party a piece of the equation. Obviously the the reset that you mentioned this is just something that you have to work out in a in the contract.
But.
Again, as I think about our industry and how we have.
Really changed and improved over time and that we are working together a more as as partners with our customers and I think that.
Obviously, they they want us to win because if we win they win right and so there's a there's there's a there's an opportunity for both parties to come out in a better place.
So good to hear that your customers are willing to work with just US alright, Thanks, John Alright Chase. Thank you.
No well not kind of program back to John for any closing remarks.
All right Nicky Ah. Thank you and thanks to everyone for joining us on the call today, we really appreciate it.
Yeah, we're looking forward to celebrating our centennial during 2020 as I said early earlier well, we're really doing is looking ahead to our bright future looking forward to to that and thank you all have a great day [noise].
This does conclude today's conference you may disconnect your lines have a good day everyone.
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