Q2 2020 Earnings Call
[music].
Good day, everyone and welcome to the fiscal second quarter 2020 earnings Conference call.
There's time all participants aren't always an only mode. Later, you will have the opportunity to ask questions. During the question answer session.
I just ask a question anytime a pressing the star and one on your Touchtone phone. Please note today's call is being recorded its my pleasure to try to call. The work to director of Investor Relations. Dave Wilson. Please go ahead.
Thank you Keith and welcome everyone to Harman campaigns conference call the webcast for the second quarter fiscal <unk>.
2020, with us today, or John Lindsay, President CEO, and Mark Smith, Senior Vice President CFO.
Hi, Mark will be sharing some comments with this 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 in <unk> securities laws.
Such statements are based upon current information and managements expectations at this stage and are not guarantees of future performance. We're looking statements involve certain risks uncertainties and assumptions that are difficult to predict.
As such our actual outcomes and results could differ materially.
Can learn more about these risks in our annual report on form 10-K quarterly reports on form 10-Q, and our other FCC 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 be making certain reference to non-GAAP financial measures such as segment operating income in operating statistics, you'll find the GAAP reconciliation comments and calculations in yesterday's press release, but that said now I'll turn the color John Lindsay.
Thank you Dave.
Good morning, everyone.
The coop at 19 pandemic has no rivals in recent times for the dramatic and widespread impact it has unleashed told the world and our industry.
Our highest priority over these past few months has remained focused on the health and safety of our employees customers and stakeholders.
I want to begin by thanking all of our employees for their efforts to protect each other and our customers by adhering to physical dispensing practices to control exposures and for following all of the protocols, we put in place to protect our families and each other from the virus.
Throughout our history. The company has sought to be in a position of strength, both operationally and financially.
Face the uncertainty in inherent cyclicality of the energy industry.
We have taken swift actions to maintain the health and safety of our employees and customers. We've also made difficult measured but necessary decisions aimed at preserving the companys longstanding financial strength and its future.
These timely actions have served to minimize the impact of cobot 19 on or operations and helped to preserve our financial position.
This market has been referred to as unprecedented by many.
During my 33 year Careered HMP, we have weathered many downturns, though this one does have unique characteristics.
Well the crude oil market imbalance is a global phenomenon. It has more acutely impacted the U.S. market as a result of storage limitations subsequent to March 31st.
The abruptness of in the overall size of the decrease in demand for refined products, such as gasoline and diesel.
Has created an abundance of supply, which is calls refining capacity to shrink resulting in excess crude oil.
This crude oil overhang and supply has created a storage dilemma for E. N P companies limiting opportunities to market their production and even when they can sell to prices are very depressed.
Consequently, some NP companies have chosen to shut in production postpone completions have drilled and uncompleted wells and many E. M. Pesa stopped drilling wells entirely until the market imbalance writes itself and it once again becomes economic to resume production in drilling.
It is obvious at these current circumstances hold long term negative implications for our industry.
Our experience has shown us that two factors hold the key to surviving a downturn and ultimately furthering the strategic objectives of the company.
First maintaining financial strength.
And second maintaining a long term view for future potential opportunities.
In this regard we will remain focused on establishing new commercial models.
Expanding our digital tech technology offerings to customers, increasing our international presence and cost management.
Liquidity is critically important anytime like this and we are actively reducing expenses and a thoughtful and intentional manner.
We are drawing on learnings from the 2015 2016 downturn to idle rigs more efficiently and we're seeing additional innovative efforts throughout the company pay off and anticipate that this will continue.
We also ended at 48 year run of paying an increased dividend per share by announcing our intention to reduce our dividend to 25 cents per quarter beginning after our next dividend payment.
Given this current environment, we are rightsizing, our organization to reflect these new realities.
And Mark will discuss this in more detail during his remarks.
We're also using this as an opportunity to ensure our talent reflects the company's direction as well as the industry overall.
We are intentionally aligning our organization towards a performance driven approach that drives higher reliability and simplifies our customers experience and forming a stronger partnership.
As we have discussed in previous calls we are making efforts to develop new commercial pricing models that create win win value capture for customers and enable us to earn an equitable share of the value we create with our drilling solutions.
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.
Such value is arguably even more pertinent and strained market conditions like we see today.
While the reduction in our rig count has adversely affected the number of rigs. We currently have underperformance based contracts.
We expect the total of these to represent a larger percentage of our active Flexrig fleet overtime.
The importance of well economics is magnified under the stressed market conditions and combining our digital technology solutions in the commercial model.
Becomes even more appealing to some customers, we recognize that wellbore quality and placement improves the lifetime value of the well.
The cobot 19 pandemic is called everyone to adjust to new reality, such as remote office environments and in our field operations to the logistical challenge of reducing virus exposure in screening rig site crews and third party personnel.
As a result, we're also seeing a new surge in interest for remote drilling and automation technologies.
Many of our customers not only see the financial advantage of de Manning certain positions at the rig site, but also recognize that this trend is inevitable as these automation capabilities mature at a time when physical distancing is needed.
Although the timing ever recovery is not clear the consensus of the industry is that when it does occur it is likely to be at a higher velocity than previous recoveries.
With deep cuts to personnel, we would expect any recovery will occur without the benefit of a large portion of the industrys seasoned veterans.
As many will likely lead the energy industry. During this latest downturn.
Well the near term focus is clearly on cost reduction customers are not just reducing their human workforce. There also asking how their organizations need to change to survive and be competitive with increasing cyclicality.
Unlike other experience like other industries have experienced automation and Digitization of operations is common and these conversations.
Despite the rapid reduction industry rig activity.
Our automation solutions, such as auto slide have remained stable and in fact have seen increased activity in recent months.
We believe this is driven by both the move to reduce costs in human errors, but also a move to establish more manufacturing drilling through digital technology.
In previous cycles. Many of these efforts had sent have centered around visualization and analytics.
Other than true automation and while this has some value a true read yet definition of the workforce rolls did not occur.
However, given h. feasibility to show documented field success, coupled with the financial pressure and health concerns in this current environment. There are signs the log jam has been broken that has previously hindered progress toward automation at the rig.
We believe that automation as a future and we're well positioned with digital technology offerings through the strategic acquisitions, we've made in recent years.
We also feel our uniform Flexrig fleet gives us a unique advantage and the ability to scale automation technology effectively for our customers.
Our focus internationally continues to be on actively pursuing long term growth opportunities and development.
These will likely be affected by travel and operational her hurdles due to cobot 19.
Although we expect the third quarter's results to be negatively impacted we are encouraged about what the future holes for HMP internationally.
The capabilities that allowed h. impeded grow market share in the U.S. over the past 15 years.
Some of the same capabilities that will benefit international growth in the future.
Crucial to all of this is continuing to make investments that further our E.S.G. efforts.
We will continue to partner with customers to invest in areas that helped lower the environmental impact of drilling for oil and gas through greenhouse gas emission reductions.
Like many companies in today's environment, we continue to employ a global remote work model for office personnel and in our field operations where possible.
Well instituting the remote work platform required.
Required quick action robust technology, and greater communication, we have not lost momentum in fact, I I think we're actually gaining momentum organizationally and with customers.
During this time, we digitized an automated processes to save time money and reduce the risk of human error.
A quick actions around cobot 19, or rig sides is something that many of our customers and partners are modeling in their own operations, which underscores the fact that our commitment to health and safety is always Paramount.
HM piece people are difference makers on a daily basis, our investment in the health of our organization has enabled us to remain agile at a time when the ability to adapt is one of the most critical competitive advantage as a company can have.
I have been very impressed by the quality of work provided by our teams during this very intense and challenging time.
In closing I mentioned earlier about our focus on cost reductions, which are critical at this time. However, just like our customers. We're also looking at our organizational structures and asking ourselves how can we streamline our operations.
And use technology and automation to enhance the health and growth of our business over the long term.
Automation and Digitization of operations as a common conversation with our customers today.
And we are using this as an opportunity to innovate for the future of our business success going forward.
And now I'll turn the call over to Mark Smith.
Thanks, John.
Today I will review our fiscal second quarter 2020, <unk> operating results provide guidance for the third quarter.
The full fiscal year 2020 guidance as appropriate.
And comment on our current cash management efforts and the financial position.
Let's start with highlights for the recently completed second quarter.
The company generated quarterly revenues of $634 million versus 615 million in the previous quarter.
The quarterly increase in revenue is primarily due to 10.4 million in early termination revenue and well to well notification fees as a result, the rig releases in the U.S. land segment.
Due to the energy demand destruction caused by the Kuvan 19 pandemic as described in our press release.
Total direct operating costs incurred were $419 million for the second quarter versus 401 million for the previous quarter.
The increase is attributable to self insurance adjustments related to prior year reserves and to cost incurred to demobilize and stack released rigs.
During the.
Fiscal second quarter market events triggered an analysis of our non Super spec Flexrig fleet, and particularly the expected future utilization of that portion of our fleet.
This assessment combined with an evaluation of our intangible assets, including goodwill.
Resulted in total noncash impairment charges of approximately $563 million.
The impairment impacted the value of the following asset classes p. any for less capable non super spec rigs of by 441 million <unk>.
<unk> for excess capital equipment by 45 million.
Inventory of materials and supplies by 39 million and goodwill by 38 million.
They totaled over 95 rigs were impacted by the impairment of which 37 were decommission. The subsequent to the quarter end as such we have downsized the number of U.S., a domestic non super spec flexrig three drilling rigs marketed to customers from 43 rigs to eight rigs in the U.S.
General and administrative expenses totaled 42 million for the first quarter sequential decrease of 8 million, primarily driven by the reversal of accrued annual incentive compensation.
Our Q2 effective tax rate was approximately 20% as we're now forecasting pretax book loss for the full fiscal year versus pretax book income.
Which is offset by local income tax in various U.S. states in international jurisdictions.
At this juncture, let me summarize the results of the second quarter.
Agent P. incurred a loss of $3.88 per diluted share versus a profit of 27 cents in the previous quarter.
Third quarter earnings per share was negatively impacted by net.
$3.87 loss per share of select items as highlighted in our press release.
Absent these select items adjusted earnings per share was a one penny loss in the second quarter versus <unk> versus an adjusted 13 cents profit during the first fiscal quarter.
Capital expenditures for the second quarter of fiscal 2020 were 48 million as we have begun to wind down or cancel projects in light of market conditions.
Turning to our four segments, beginning with the U.S. land segment.
We averaged 190 working rigs during the second quarter.
As the Coven 19 crisis developed rig activity quickly declined during the last half of March and we exited the second fiscal quarter with 150 working rigs.
Revenues were 21.9 million higher sequentially due to 10.2 million of early termination revenues and well to well notification fees.
The balance of the added revenue is partly attributable to performance contracts through the quarter and partly to demobilization fees for rigs released in the last half of March.
U.S. land operating expenses increased in the second quarter due to two factors first because of the quarter end rig releases, we incurred trucking cost for de mobilizations as well as stacking cost when those rigs arrived in our various yards.
Second we increased self insurance reserves related to legacy claims which occurred prior to October one 2019. These claims will remain liabilities and our operating segments until they have been resolved as a reminder, on October one 2019, we elected to utilize a wholly owned insurance captive to ensure the deductibles for.
Workers' compensation engine reliability, and automotive liability insurance programs from that point forward [noise].
Looking ahead to the third quarter fiscal 2020 for U.S. land segment.
As John said, the covered 19 pandemic and the resulting economic slowdown has created an excess energy supplies in a shortage of storage.
Given the situation some customers are electing to shut in production in Ses, well completions and or the drilling of new wells. This in turn has caused customers to continue to release rigs and we have seen more than 115 rig release notifications since early March.
We expect to end the third quarter below 70 rigs with the vast majority of that decrease happening prior to June one.
Included in our contracted rigs or approximately 10 idled rigs that are generating some margin.
Also as John discussed our performance contracts are gaining customer acceptance and even in this environment a larger portion of working of our working fleet is expected to shift to new commercial models.
These models are designed around a win win formula where it should be has the ability to participate in the value created through reduced overall, well costs and other factors customers value like wellbore placement and quality.
This value can be achieved on HCP flexrigs through the utilization of software delivered for marriage and P. Technology segment. For example in order to hit performance targets, we may elect to utilize some or all H.P.T. solutions, while drilling a well with an agent P. flexrig.
In these cases intersegment charges for the software or incurred which eliminated in consolidation.
The combination of the Flexrig in the H.P.T. software creates the best value solution for the customer.
And the best consolidated revenue and return on investment for each NP.
Therefore, as we develop new commercial models such as performance contracts, we were able to utilize technology solutions and services across our segments to capture additional value.
The value delivered to customers for wells drilled more efficiently and have higher quality requires different pricing discussions with our customers.
We will now begin to speak in a different way as well and our discussions with investors. Our rig segment guidance from this point forward and will be on segment margins, which are defined as operating revenues less direct operating expenses and not on individual rig rates.
We will continue to furnish per day rate information in this segment tables and press releases in public filings through the end of this current fiscal year.
In the U.S. land segment, we expect gross margins to range between 90 to 105 million with approximately 45 million of that coming from early termination revenue.
Our current revenue backlog from U.S. land fleet.
It was roughly $640 million for rigs under term contracts. This amount does not include.
Approximately 50 million of early terminations of which 45 million is expected to be recognized during our third fiscal quarter.
Regarding our international and segment are in.
International in business averaged 17 active rigs during the second fiscal quarter down slightly sequentially as an increased as increased activity in the middle East offset most of the decline in Argentina.
Segment gross margin was slightly up versus prior quarter as we benefited from mobilization revenue and lower startup costs.
As we look toward the third quarter for fiscal 2020 for international.
Activity in Argentina was already expected to suffer due to the local macroeconomic situation and roll off of legacy contracts.
The recent oil price declines of exacerbated in accelerated the pace of that decline.
Due to falling activity in Argentina, and associated force majeure provisions in response to kind of at 19, we expect international margins to be negative with they lost between 46 million.
Turning to our offshore operations segment. We currently have five of our eight offshore rigs contracted one of those five.
Rigs recently mobilize from the shipyard to a new platform for a short 90 day contract.
Offshore generated a gross margin of $400000 during the quarter down roughly 10 million on a sequential basis, primarily due to downtime repairs and demobilization as well as a bad debt expense incurred during the quarter.
As we look towards the third quarter fiscal 2024, our offshore segment, we expect offshore will generate between four to 6 million of operating gross margin.
Off shore management contracts it generating another 2 million.
Now looking at our agent P. technology segment.
Many of our customers are seeing the benefits of wellbore quality and placement as evidenced in seven technical papers presented by the H.P.T. team members at the I.D.C.S.P. International drilling conference and exhibition in Galveston, Texas on March the fifth.
As John mentioned in this environment, we're seeing more customers interested in utilizing onto slide.
Given an intensified effort to demand at the well site.
Agent H.P.T. generated 18 million of revenue in the second fiscal quarter.
We are expecting Q3 revenue for H.P.T. to be between four to 7 million.
This expected some sequential decline as a direct result of rig releases, both for agent P and for the industry.
As our H.P.T. and U.S. land teams leveraged successes in penetration of performance contracts as a percentage of contracted rigs. We expect continued leverage of software to drive achievement of value delivery to customers.
Now, let me look forward on corporate items for the third fiscal quarter and the remainder of the fiscal year.
As a result of today's energy down cycle and the outlook for the oil and gas production business. We have undertaken a number of measures to maintain and extend agent piece financial strength.
We have updated our capital allocation by reducing or future intended dividends, we have reduced our capital expenditures. During this fiscal year, we are working to finalize the reorganization of our U.S. land operations for lower activity levels.
We are assessing our international offices to appropriately calibrate for activity.
And we have begun to rightsizing of our general and administrative overhead to served to reduce scale for the near to mid term planning horizon.
Let me take a few minutes to discuss each of these five areas and I will close by discussing our working capital and liquidity and expectations for the next quarter.
First as John mentioned and as we announced on March 31, our board of directors and tends to reduce the size of future quarterly dividend payments by 65% from 71 cents to 25 cents per share.
Per quarter.
This reduction it preserves approximately 200 million of cash on an annualized basis.
Second capital expenditures for the full fiscal 2020 year are now expected to range between 185 to 205 million.
Which is a reduction of over $90 million from our initial fiscal 2020 budget and a reduction of over 260 million from fiscal 2019 Capex.
We expended 48 million in the second quarter, as we reduced to procurement activities and reined in projects.
Note that components from the previously mentioned decommissioned rigs.
We will be used it to the extent possible as parts in an effort to lower forward operating and capital costs for our fleet.
A reminder, that asset sales are primarily customer reimbursement for the replacement value of drill pipe that is damaged or lost an old during drilling operations. These sales offset a portion of our tubular purchases within capex and are expected to be between 30 to 40 million this fiscal year.
Third.
U.S. land activity is precipitous drop has resulted in the aforementioned rigor leases and in the unfortunate reduction of our field workforce impacting over 2800 individuals.
Therefore, we are working in the month of May to finalize the reorganization of U.S. land fixed operational overhead.
With plans to reduce our number of districts from seven to four.
The smaller administrative overhead structure should save approximately $50 million in direct operating expenses annually.
While still allowing us to serve customers throughout the existing basins, where we work we have long island. The majority of the facilities, where we operate and have our Flexrig fleet proportionally stored in those yarns.
Relative to the working rig utilization levels of this last cycle.
Fourth we have started an assessment of our international fixed operational overhead within with the intention to size in country offices to rig activity levels today.
And with an eye toward medium term potential market opportunities.
Fifth and finally, we have begun the process of downsizing, our general and administrative footprint to supporting now smaller active rig business.
Our current expectation for full fiscal 2020 general and administrative expenses is now $180 million reduced in part.
From initial fiscal year budget because of the reversal of accrued annual incentive compensation.
We are now in the process of implementing an evergreen cost reductions to our DNA service structure.
Collectively.
These downsizing decisions are difficult ones for the company and for our employees.
Taken together.
These cost reduction measures will allow us to meet the challenges of today's down cycle. These efforts are in process and we expect to complete the above outlined rightsizing across the company.
In the fiscal third quarter and expect to recognize a onetime restructuring charge as a result.
This charge will include a cash component currently estimated at roughly $20 million.
We will continue our investment in research and development through the cycle as we push word autonomous drilling.
We are estimating our annual effective tax rate to be in the range of 16% to 21% and do not anticipate incurring any significant additional cash tax related to the full.
2020 fiscal year.
The difference in effective rate versus statutory rate is related to permanent book to tax differences as well as state in foreign income taxes.
Now looking at our financial position.
Homework in pain had cash and short term investments of approximately 382 million at March 31.
Versus 412 million at December 31, 2019.
Including our revolving credit facility availability in our liquidity was approximately 1.13 billion.
We are in cash flows from operations in the second quarter of approximately 121 million versus 112 million in fiscal Q1.
We expect operating income to be lower and the remaining quarters of the fiscal year.
Firstly, we expect cash flows from operations to be higher in the second half of the fiscal year as the ongoing activity decline resulted in a significant amount of working capital over the next several quarters.
Additionally, we have several working capital improvement initiatives there were already in place prior to the downturn that will further enhance our cash position.
Our debt to capital.
At quarter end was 12% with a 2.5% net debt to cap.
Which is a continued best in class measurement amongst our peer group.
We have no debt maturing until 2025, and our credit rating remains investment grade.
We repurchased some shares in the second quarter as we have historically from time to time no further share buybacks are contemplated at this time.
Our expectations for the remainder <unk> remainder of fiscal 2020 include continued declines in rig activity most of which will occur in the third quarter.
Simultaneously, we will be finalizing our cost management measures and Rightsizing the company to new activity levels.
These efforts should generate sufficient free cash flow to cover our selling general and administrative expenses our debt service costs go forward maintenance capital expenditures and intended lower dividend, while preserving and building our cash on hand.
Our balance sheet strength and liquidity level serve as the cornerstone upon which we have been able to endure for 100 years.
And they are significant differentiator in this volatile and cyclical industry.
That concludes our prepared comments for the second fiscal quarter, Let me now turning the call over to Keith for questions.
At this time, if he'd like to ask a question its star and one on your Touchstone telephone star.
Touchtone phone.
We'll go first to Sean Meakim with JP Morgan. Please go ahead.
Thank you Hey, good morning.
Hi, Sean.
So John maybe to start and U.S. land, you kind of trying to parse through the guidance that you put out a it looks like in fiscal Threeq you the margins could be quite compressed I'm going to try to counter the early termination impact.
Are there any transitory costs associated with the pace of the rig drops that maybe normalize as the rig count stabilizes into fiscal Fourq you just how should we think about U.S. land operating gross margins.
Normalized basis, maybe say and.
Go Fourq you relative to what it looked like in fiscal Twoq you.
<unk>.
Yes, Sean Thanks for the question. We were certainly are incurring transitory costs related to a to stacking.
But offsetting that are more cost expense cuts still coming as I just finished describing a few minutes ago.
So still a solar little early to have a final.
The final look at what would be two quarters from now.
Sean I'd, just say that.
You know, there's there's so much happening so quickly if you've seen the rig count drop I said in my remarks were done a great job in the field, but again the you know it's pretty choppy right now with the amount of.
Activity, that's going on with the idling rigs and managing through the costs and then you also have the additional burden of managing with Cobot 19 in the way that were physical dispensing with our people and it's just it's just a little bit different process, but.
As Mark said, we'll have greater clarity in the.
In the coming quarter.
Okay, well I appreciate you providing that context.
Oh, yeah somewhat related to different topic I think.
Leveraging H.P.T., so we along with your Super spec rigs as.
Obviously away to create value for customers, perhaps it will be a premium in coming quarters. If he had Peter try to stretch every capex dollars they have but the remote working world for you and your customers might also be changing perceptions degree of what can be done remotely do you see any of that in terms of.
Motive and Mag took me notice as potentially getting more traction and a low activity level with remote operations.
The more critical for customers I'm, just curious about beyond kind of immediate immediate environment, where everyone scrambling to lower activity.
Is there I just I feel about.
Or the change remote working it's always make it easier for you to show value automotive in particular.
Yes, Sean I think that's we've seen that over the past several weeks.
You know the value proposition as we've described and we've had customers describe to us on wellbore quality and Wellbore placement is there.
We have this ability to to de man, we have this ability to automate directional drilling.
And.
Again as you start thinking about.
Having exposures health exposures to the virus Ah theres another level of desire to demand for those for those reasons.
And so yes, we are we're seeing a pickup in interest we continue to have very good meetings with a with customers both large and small and I think that's that's encouraging.
But you know as you think about it.
On the one hand, it's a no brainer in that you can you know do this and an automated fashion you can do it at the same efficiency or even a higher levels of efficiency in terms of of time, but then there's the added value.
They should have a higher quality wellbore, so you're leaving behind a higher quality wellbore.
And working with your customer so as you start thinking about combining kinda holistically with the overall offering with the rig offering and and the technology offering and then your.
Your your structuring that.
That offerings, specifically to a customer's needs and desires that there's a lot of advantages to that so answer your question, Yes, we're seeing some some additional interest in.
You know the the challenges that weve that we faced with a cobot 19 has has got a people talking about it in addition to.
The level of interest we already had.
Makes sense to me extra.
Thank you.
Our next autonomy mall with Stephens. Please go ahead.
Good morning, Thanks for taking my question.
Good morning, Tom.
John I wanted to start on customer conversations.
My assumption is most rigs have been drops recently, primarily because the customer was just making a decision to stop drilling and not because.
Negotiating on price would have made much difference.
That's correct.
How far down the road you have to look before we get to a meaningful discussion.
Around price.
And if we look back to the last downturn.
I think mid teens.
Thousand dollars per day is probably where we ended up.
Near the bottom that I wonder if that's a fair bogey to think about this time around or if the market dynamic may have changed and.
And maybe different somewhat in some way.
Well I'm certainly with the.
The release of rigs and we've described it as as really indiscriminate and it wouldn't matter what the price of of the rig would be.
As as you know as everybody to see has seen.
A lot of a NPS are either.
Cutting their rig count by 65, 50, 60, 65, 75% or in some of even gone to zero.
And so you know in those cases, it doesn't really matter you know about about the rig.
But I I.
As you as you start thinking about and you know you're you're you're framing up this notion of day rate you know, we're making the case that that the day rate model is obsolete needs to be retired.
That's that's the way that we're going to approach. This you know there's a huge value proposition that that we can provide at age MP and we're seeing that and that in the conversations that we're having with customers. So even in this environment.
That we're seeing right now we're entering into.
Contracts with customers that are win win type contracts.
For the reasons that I saw that I stated earlier you know we're doing our are dead level best to align ourselves with the customers objective to enhance the economic returns will obviously they want to they want to lower costs, but they also want a better wellbore left behind so we're working really hard on the on the part.
Ownership side, you know our goal is to not be not be discussing.
Day rates because of the obsolescence of the model and we're going to keep working on a different models with customers and you know every customer is different we don't expect to have a a one model fits all a you know we've got an organization that's a capable of adapting to that and that's that's part of our research.
Structuring as you'll see more that were that we're doing overtime is.
As organizing ourselves for a for that sort of a of an offering to our customer.
Following on that same John.
Do you do you have any sense that when we do bottom and then start to recover.
The expectation may not be for whats currently perceived as a super spec rig in terms of the capabilities and that it might or might be added default assumptions about what kinds of technologies or capabilities, you need to bring to the market.
In order to be competitive any light you could shed on where we might be added just in terms of what.
The market standard or the leading edge offering might look like.
Sure.
Well you know.
We had we have our definition of Super spec I'm sure every company does.
There's a pretty wide range of of capabilities, even within the Super spec space. So I think once the market shakes out as in previous cycles are the best rigs are the best performing rigs a the best performing crews those those those are the rigs getting a go.
Back to work first I do think that.
That we will see a shift towards talking more about.
Again, the quality of the of the Wellbore the power of predictability that software brings that humans can't I mean, it you know we see it everyday in life.
And then in exist in the oil field as well and so there's there is this great opportunity and so I do think that.
But.
The requirements will change in the future. Obviously, we're working very hard to position ourselves in that in that place as I talked about you know, we all hate how hate downturns, we've weathered a lot of them, but what we can say about downturns is that it is a driver for chain.
Change and it's a great opportunity for us to take to take advantage and really doubled down on the.
On the you know the performance type contracts and and the the technology offerings. We continue we're going to we're planning to continue to invest heavily there because we think that's a that's a differentiator. So it's a long way of saying a answering your question I think it does I think there are some some changes and like I said earlier every customer.
There's a little bit different but that's that's fine you know we've got a various offerings that we can provide for a lot of different customers.
Thank you John I'll turn it back.
Thank you.
Our next question from Kurt Hallead without.
Please go ahead.
Morning.
I hope everybody is.
Hello.
Same to you are doing well Kurt Thank same same to you.
Appreciate that.
So.
Yes, I guess what.
Just.
At first here is when you take a look at the dynamics in the U.S market into guidance you provided.
Go out into a into the next quarter.
Just want to make sure I heard bark correctly say that there's another $5 million or early termination payments are expected to occur.
During the quarter and if so is that going to be the absolute.
Minimum or is there a possibility for additional early termination payments.
Customers, having quite a alerted you to yet.
[noise] five number is correct Kurt and.
No. It's we <unk> on one hand, when we look we think we have.
Sort of see a line of sight to would could be.
A June one and then also at June 30 level of activity, but on the other hand, we have nuclear visibility if you'd asked me. The question three weeks ago would have had a completely different answer so.
The activity level is a.
You know uncertain in some regard and therefore, the early term that associated with it would be as well.
Oh, sorry, I appreciate that and John just maybe a follow up for you.
Yeah.
Basically the way with the day rate model and you continue to push forward.
With a more win win hormones base.
Dynamic yeah, you're just kind of thinking out loud.
On the call now and.
So why did you gotta look into the next cycle.
<unk>.
Yes, how much incremental.
How much incremental EBITDA, how much incremental value.
I think that this performance based model.
Okay and can result in poor Rachel.
Your last peak cycle EBITDA.
Kevin model.
The next why would you be more performance base, what kind of incremental value can be.
Well, Kurt that's a that's a great question I'll start with first of all I don't know what the I don't know what the number is what I do know is that.
You know this this will take some time, there's going to be a transitionary period. We'll continue to have rigs that are that are working on a day rate basis and customers that will want to do that.
But I do.
Again, we're seeing evidence of it it's very attractive to to customers. This this whole notion of having having skin in the game and and delivering higher quality wellbore. So I don't I don't have a a clear answer to that a may.
You know turn over to Mark CE, Mark has some additional color to add or add to that but what I. Do believe is that we will be in a much better position going down the path that we're going with creating these new commercial model than continuing to.
Do things the way, we've always done them.
With an obsolete model like the day rate model.
Nothing to add but Kurt I do want to just clarify within five to make sure that and for others that are listening as well, we still expect to receive approximately 50 million.
If cash payment or in the third quarter 45 of that would be recognized.
And then another five deferred and recognized after the third quarter.
Thats great. Thank you for that clarification that John I know I know.
Don't have that specific answers on that value.
<unk> can be interesting to see out involves for sure appreciate your your status.
Yeah. Thanks for the question will.
Well keep working hard.
Our next question from Taylor's Parker with Tudor Pickering Holt. Please go ahead.
Hey, good morning. Thank you wanted to follow up on some of these questions on the performance based model if I remember correctly on the last call you talked about the ideal rigs.
To incremental rigs that to enter in the into these sorts of models to be in the spot market and as get push for with the.
Sort of approach moving forward I, how do you protect yourself from a term contract coverage perspective.
As you enter into more of these contracts moving forward and then secondarily I tend to think these contract having a lower base day rate and then the leading edge sort of rate and you make it up with performance incentives. So are you protected.
Apples to apples basis from an early termination perspective as you enter into these contracts.
On the.
On the early term port part I'll take that and then turn it over to John.
Oh, we enter into a term contracts on performance, a jet and have a rigs and both both under term and the end exposed to the spot market equally like we do.
Any other traditional model.
But the one thing to recognizes that this last many months last couple of quarters as we were putting more performance contracts in place.
You had an already soft market, so you're having more of the overall fleet exposed to the spot market in any case.
So said differently when we see a return of utilization whenever that point in time comes for this market to improve I would expect performance contracts, yes to have term coverage on the on the way up in utilization.
Okay.
Oh wobbling down on international guidance for Q or the next quarter is a fairly meaningful negative EBITDA. It sounds like that that covered 19 issues are big part of that.
Could you frame for us how many rigs you have working today and I asked that is because of the contract coverage that segment, so low and so how many rigs working today and how many.
You have visibility to certain level of rig count.
Over the next I don't know two or three quarters.
Next quarter's a international segment across all countries and we expect to have approximately 10 working.
Okay and it.
Is that going to be higher or lower beyond that or is it the early today.
It's simply too early to say.
Okay, great. Thanks.
Thank you.
Next question from Ian Mcpherson with Simmons. Please go ahead.
Thank you John for all the description or color on this.
Very.
Difficult to predict but I'm, saying on the international side John.
The change in the world.
Looking out.
Since it beyond a quarter or to do you think that the new realities that you can price.
You.
Give me more appetite for international exposure for the company over the long, one or maybe more appetite to refresh to consolidate onto a more efficient.
Frank here domestically or.
To essentially keep keep the exposure there.
Which is.
Glenn but with the U.S. focus.
We are definitely and of course, we've been talking about this for quite some time in and we've had quite a bit attraction different respects [noise].
In the Middle East and obviously with the the pandemic in economy shutting down.
Everything has been being pushed out and I don't know if it's pushed out six months or if it's nine months or 12 months, but as I said and in my prepared remarks, the the quality in the values that at HMP brings.
That helped us get to the the position that we are in the U.S. I think translate very well internationally and so we're definitely interested and continuing to pursue international activity.
You know again middle East, obviously, we've been very excited about Argentina, but a you know clearly that the country is is shut down there's.
Very little if anything going on there now so it's going to take some time, but we're going to continue to invest in that capability. That's another area that as we think about kind of doubling down on.
On investments that that's a place that we're going to do and but we're also again.
Please with the opportunity set that what we've already described a you know we think we've got a great team that we that we've put together and we're going to continue to find ways to organize ourselves to be to be more effective going forward. So I'd say both of those areas, we're going to continue to to invest and in our case.
Abilities.
Got it and then I had a follow up for you Mark.
Your capex guidance for this year.
Please correct me if you agree it strikes me that.
Hey, aggressively it's still lagging.
How steep ramp decline.
Right.
Second half of this year can you give us some frame framework to think about maintenance capex for.
The company.
Realistically lower rig count.
I don't think it's close to 200, but if you could offer anything in terms of rule of thumb there though.
That would be helpful.
Yes, he and thanks to the question it.
You know the you will the capex reductions.
Certainly be it a little more evident I think as we move through the remaining two quarters in the fiscal year.
And get to to the point of your question what should be back to our previously stated range. The 750000 2 million.
Per active rig so.
We're working very quickly to wind down in and right size. The operations of for example of our Flexrig machinery Center.
Here in Tulsa, which services component tree for the entire fleet.
As I said in my prepared remarks, we plan to also through time utilize componentry through the decommissioned rigs.
So I don't know where within the 750000 2 million range will be.
Hopefully the lower part of that range for the U.S. portion of the company remember that also includes that range includes our international and offshore rigs as well, but but yes maintenance capex will be the primary and mostly.
The well nearly all of Capex.
Perfect. Thank you about.
Thank you.
Well take our next question from Jacob Lundberg with Credit Suisse. Please go ahead.
Hey, good morning, guys.
I guess thinking sticking on the performance based contract discussion I'm curious if you could describe any changes you've seen in the K P eyes that are going into those contracts either actually being realized or just from the discussions with your customers.
I would say.
The.
Theres more discussion that I've already said this but I think it's a great question and to make the point that.
It's not only speed.
And it's not only costs.
It is it is a function of wellbore quality and Wellbore placement in there's metrics that are associated with those.
Wellbore Tortue austerity hasn't always been measured is not necessarily easy to measure there's not a benchmark, but there's definitely.
Clear evidence that a less torturous smoother wellbore.
Creates a lot of advantages both during the drilling of the well as well as back to this lifetime value of the well. So those are the sorts of CPI is that.
Are beginning to be used today and so what you're doing is your benchmarking against a you know an algorithm software algorithm versus a human.
That's that's doing kind of the same same work and so.
It's an interesting it's a it's an extra interesting change and I think again, that's where automation I think overtime will win the day because it does have a higher level of reliability, it's going to ultimately be lower costs and you're going to have a better wellbore left behind so those are those or something.
The K P eyes that that a that are being looked at today.
This is if you were to ask.
Six nine months ago, a there wasn't a lot of discussion or our interest in that.
That's helpful and I guess my follow up would be we've touched on it earlier in the discussion, but I'm just curious given the strong balance sheet, giving your liquidity position.
Just thinking about the opportunity set that you guys can kind of take advantage of or execute on during the downturn.
Touched on doubling down on performance based contracts as well as the technology offerings, but wondering if there's anything if there's anything beyond that scope do you guys are thinking about in terms of being in a being in a good position of being able to play off and starting this downtime.
Well you know there's there's further.
Mm improvement.
Again as you start thinking about utilizing a technology and there's also the ability to right size. The organization structure the organization to be more effective to be lower lower costs. More you know just an overall more effective organization I think there's still some opportunities as a company for.
Just to continue to modernize you know were.
You know I'm I'm very proud of of our people on how hard they've worked.
To get where we are today, but we still have a lot of opportunities ahead, I think I know that I'm not I'm not being a real specific but what I do know is going back to.
What you said, which is we've got strong balance sheet, we've always got our eyes open a we're always looking for the next opportunity and you know we made some great acquisitions in 2017 in 2019, and we're you know were again, we're looking for that.
For that edge and we've got the balance sheet and the capacity to do that so we're going keep our eyes open and <unk> continuing to try to figure out ways to change the change the industry and improve our.
Our value offering to our customers.
Okay. Thank you very much appreciate the thoughts.
Thank you.
Well take today's final question from what car side with Altera capital. Please go ahead.
Thank you for taking my question.
Yeah.
The issue is that you're seeing of its going 19 are you seeing the same in Colombia.
And could you maybe break down the 10 rigs that you get working on a country that by basis, how many in each country.
We have then equal split what car five in South America in five or in the middle East as of today.
Yeah, and the five in South America, one is in Colombia is the right.
Thats correct.
Okay, and what have you seen any interruption this work interruptions, yes.
No.
Oh were the rig or in Colombia is actually just gone to work. So we're.
But but in Argentina, yes, a as we talked about in prepared remarks, certainly saw in effect there.
And more cars as you as you know each country has its own.
Challenges and their own protocols and how they're approaching and you know we've got our internal HMP playbook, but we have to you know kind of modify that that playbook. If you will to fit within each each country. We are working remotely a and all of the country.
In the offices and again, where we can for the rigs that are running we're doing what we can remotely obviously, there's a there's challenges associated with.
A you know the cruise getting too and and having to have a certain amount of quarantine time, there's all sorts of different challenges in each country.
So in Argentina.
I believe on March 20, if they need to put no. One can seem dropped out and Baker Hughes recounted today shows that there was you know what makes active in Argentina.
So.
Well.
You are getting paid for those.
If there is another rig working through April I, you still getting paid there number one number two.
Do you have any expectations and when the activity may come back in Argentina.
Well those rigs where the or the ones I mentioned in the prepared comments that are that have a force Ms. Your provision what car.
Okay. So.
And into the second part of your question you know, it's as we've said about all aspects of the market. It's it's too soon to tell.
When activity will it will return.
You know, there's there's not only the covered 19 in and global issue in global oversupply, but.
There were issues a macroeconomic issues within the country of Argentina separately before that.
Yeah.
Okay, great. Thank you very much my question, if an asset because it.
Thanks Mccarthy with car.
Keith I think we're at the end to end of our time before signing off I wanted to a call attention.
To to members of my team that have recently announced a their retirement Rob Stauder.
Has been with HMP over 35 years, he was our senior VP and chief engineer.
Ah weighed Clark a 33 plus years he was a RVP one of our VP of U.S. land.
I've been fortunate to be able to.
Work closely with both of these gentlemen.
Made great contributions to HMP over the years, but.
Honestly, what I appreciate a most about them are their leadership, they're integrity their desire to do the right thing great team players.
We're going to Miss you, both and best of luck to both of you in the future.
And thank you again for.
<unk> listening in on our call and a further questions and if you have additional questions of course, a reach out to.
Dave Wilson.
Thank you and have a great day.
This does conclude today's program. Thank for your participation you may now disconnect.
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