Q4 2020 Helmerich and Payne Inc Earnings Call
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Good day, everyone and welcome to todays Helmerich <unk>.
And Payne fiscal fourth quarter earnings conference call. At this time of all participants are in a listen only mode. Later, you will have an opportunity to ask questions. During the question and answer session. You may have.
Registered the ask a question and anytime by pressing the star and the one on your Touchtone phone. Please note. This call maybe recorded and is now my pleasure to turn today's program over to Dave Wilson Director of Investor Relations.
Thank you, Chris the and welcome everyone to how the complaints conference call and webcast for the fourth quarter and fiscal year ended 2020.
Yesterday, or John Lindsay, President and CEO, Mark Smith, Senior Vice President and CFO.
John and Mark the booked and making some prepared comments after which we'll open the call for questions before we begin our prepared remarks rewind every one of that this call will include forward looking statements as defined and on the securities laws such statements are based upon current information and ministers expectations as of the state and are not guarantees of future performance forward looking.
Statements involve certain risks uncertainties and the assumptions that are difficult to predict and.
Such or actual outcomes and results could differ materially you can learn more about these risks and our annual report on form 10-K, our quarterly reports on form 10-Q, and our other SEC filings you should not place undue reliance on forward looking statements and we undertake no obligation to publicly update these forward looking statements.
We also be making reference to certain non-GAAP financial measures such as segment operating income and operating statistics, you'll find the GAAP reconciliation comments and calculations and yesterday's press release, the with that said I will turn the call over to John Lindsay.
Thank you, Dave and good morning, everyone.
This past fourth fiscal quarter was one of the most challenging and the Companys 100 year history. The.
The destruction of all the man induced by cope and is well documented and in terms of drilling activity, our rig count hit bottom in August.
Despite the challenging quarter.
Our strong financial position has enabled us to remain focused on our long term strategies.
Our people are developing new commercial models and innovative drilling and digital technologies that will help to transform the customer experience.
And shape the future of this business.
These efforts have progressed, despite the difficult environment and will serve as the foundation from which the company will build as the market continues to recover.
Our customer centric approach is one that prioritizes, providing customized solutions by employing the combination of people processes rigs and automation technology to deliver more value and.
The lower risk for our customers.
This approach is distinctive and the industry resonates well across our customer base and with further developments on the horizon will be a major driver of growth as activity levels and crude.
Excluding our two idle, but contracted rigs our current U.S. flexrig activity has improved to 80 rigs and we expect our active rig count will exit the first quarter at approximately 90 rigs.
This is almost double the number of rigs turning to the right compared to the lowest level reached and August.
The Permian has led the industry rig count recovery and H. and P. has earned approximately two thirds of the incremental work and that basis.
As we anticipated our rig count growth has exceeded that of our peers coming off of the bottom, allowing us to recoup the four to five points of market share.
We believe that the quality of our field leadership rig crews Flexrig fleet and digital technology solutions will continue to advance the trend.
Oh.
Concurrent with the increase and near term activity.
We're also experiencing increased customer utilization of our performance based contracts and our rig automation software out of line.
We expect the adoption of both the increase and become more prevalent and the industry.
H M P's touch of the button autonomous drilling approach is designed to optimize drilling and the hurt the occur.
Current and the lateral the.
He's the automated solutions, including real time, automated geo steering rotary and sliding execution and improve wellbore quality and placement.
The uniqueness of our automated solutions is backed by a patented economic driven approach where the Soc [noise] non.
Not only makes optimal cost benefit decisions.
And also directs the rig to execute those decisions without the need of human intervention.
This improves reliability and enhances the value and reduces risk for our customers.
Let me give an example of the H. and P value proposition autonomous directional drilling provides.
When customers use auto slide our Flexrig [noise] Rex.
Directional drilling personnel are no longer required at the rigs site.
This is possible because the directional drilling decisions are being calculated using using an algorithm and our patented the guidance system, which can accurately process through thousands of variables and seconds.
Rather than relying on the manual calculations of the traditional directional driller.
The software enabled Flexrig allows the curve to be landed more accurately and reliably.
And the lateral to be placed the more precisely and the shale.
Which result, and lower drilling costs improved production reduced long term maintenance cost for our customers and lower environmental impact.
[noise] commercial models that reward performance, coupled with regard imations software that enhances the value are being adopted across the spectrum of the industry.
Mark will give additional details on performance contracts. The we have been successful and expanding our customer base with a wide range of E and peace.
From Super majors to small private companies.
Today, H. and P. owns more than a third of the estimated 635 super spec rigs and the U.S. market.
With many rig count forecast ranging from 450 to 550 rigs over the next couple of years we.
We see significant further super spec flexrig market share growth and.
And on the DC for improved pricing.
Hey, John P. continues to invest and new and diversified technologies for the long term sustainability of the company.
Recently, we have made investments and and are supporting the effort of a few companies and driving the evolution of geothermal of the geothermal industry [noise].
The core of the evolution is a transition from geographically concentrated.
And naturally occurring hydro thermal resources to enhanced geothermal systems and closed loop systems.
John could I ask you to pause for just the moment. This is mark true I think that the.
The understanding from my team the were having difficulty with their web link not working so we're going to pause for just one moment get that online and.
And continue bear with us folks [noise].
I will say and holding for today's Helmerich <unk> Payne conference. Please continue to standby.
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Well sites on hold for today's Helmerich <unk> Payne fiscal fourth quarter earnings Conference. We do ask that you continue to stand by and appreciate your patience as we continue to work through and difficulties.
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The earnings Conference call. We do appreciate your patience and please continue to standby reversed the technical difficulties.
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Good morning, all of this is Mark Smith with Helmerich <unk> Payne, we appreciate your patience and your interest in age and Pete.
We sincerely apologize for the technical difficulties were having this morning, well or Telephonic conference call is working fine. Our simultaneous webcast is not to ensure regulation FD compliance we need to get that fixed and we're working on that right now and we'll be back with you. Shortly please standby. Thank you.
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Create your patience and do EPS could you. Please continue to stand by and we worked for technical difficulties.
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And your patience and which continue to stand by and we worked for technical difficulties.
[music].
Good day, everyone and welcome to todays.
And Payne fiscal fourth quarter earnings conference at this time, all participants are in a listen only mode. Later, you will have an opportunity to ask questions. During the question and answer session. You may registered ask the question at any time by pressing the star and one on your Touchtone phone. Please note. This call maybe recorded and is now my pleasure to turn to the.
The program over to Mark Smith.
Thank you Christine again.
Our sincere apologies to all of those on the phone and well the telephone and we've had the technical difficulties.
Here with our web cast portion of this conference call. Although the telephonic portion is working just fine.
So again, we do apologize we appreciate your patience and your interest in age and P. In order to cure of the problem, we will be posting the audio recording from this conference call within two hours from the conclusion.
We will be restarting of from the top.
We apologize again, we will conduct the full one our conference call. We hope you are available to stick with us and join US as we give you our fourth quarter.
Fiscal 20 results and look ahead, the fiscal 2021 I'd like to turn the call over now to our and.
The <unk> Investor Relations Director Mr., David Wilson, Dave.
Thanks, Mark and I like to re welcome everybody to help the campaigns conference call for the fourth quarter and fiscal year ended 2020 with US today are John Lindsay President and CEO, Mark Smith, Senior Vice President and CFO, both John and Mark will be strength of prepared comments with us after which we'll open the call for questions.
Before we begin our prepared remarks, I'll remind everyone that this call will include forward looking statements as defined in of the securities laws such statements are based upon current information and management's expectations as of the state and are not guarantees of future performance forward looking statements 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 and our annual report on form 10-K, our quarterly reports on form 10-Q, and our other SEC filings.
The place no undue reliance on forward looking statements and we undertake no obligation to publicly update. These forward looking statements. We will also be making reference to certain non-GAAP financial measures such as segment operating income and operating statistics, you'll find the GAAP reconciliation comments and calculations and Yesterdays press release with that said I'll turn the call over to John Lindsay.
Thank you Dave and good morning, everyone. This is yet. Another example that the fourth fiscal quarter is unprecedented in many ways and and and really challenging during the Companys 100 year history.
The destruction of oil demand induced by cobot is well documented and.
And in terms of drilling activity, our rig count hit bottom in August.
Despite the challenging quarter, our strong financial position has enabled us to remain focused on our long term strategies.
Our people are developing new commercial models and innovative drilling and digital technologies that we believe will help transform the customer experience and shape the future of this business.
These efforts have progressed, despite the difficult environment and will serve as the foundation from which the company will build as the market continues to recover.
Our customer centric approach is one that prioritizes, providing customized solutions by employing a combination of people processes rigs and automation technology to deliver more value and lower risk for our customers.
This approach is distinctive and the industry it resonates well across our customer base and with further developments on the horizon will be a major driver of growth as activity levels improve.
Excluding our two idle, but contracted rigs our current U.S. flexrig activity has improved the 80 rigs and.
And we expect our active rig count will exit the first quarter at approximately 90 rigs.
This is almost double the number of rigs turning to the right compared to the lowest level reached and August.
The Permian has led the industry rig count recovery and H. and P. has earned approximately two thirds of the incremental work and that basin.
As we anticipated.
Rig count growth has exceeded that of our peers coming off of the bottom, allowing us to recoup four to five points of market share. We believe that the quality of our field leadership, our rig crews are flexrig fleet and our digital solutions will continue to advance this trend.
Concurrent with this increase the near term activity. We're also experiencing increased customer utilization of our performance based contracts and our rig automation software waterflood.
We expect we expect adoption of both the increase and become more prevalent in the industry.
H. and peas touch of a button autonomous drilling approach is designed to optimize drilling and the vertical the.
A curve and the lateral the.
The automated solutions include real time, automated geo steering rotary and sliding execution and improve wellbore quality and placement.
The uniqueness of our automated solutions is backed by a patented economic driven approach where the software not only makes optimal cost benefit decisions, but also director of the rig to execute those decisions without the need of human intervention.
This improves reliability enhances the value and reduces risk for our customers.
Let me give an example of the H. and P value proposition autonomous directional drilling provides.
When customers use auto slide on our Flexrig directional drilling personnel are no longer required of the rigs I. This.
This is possible because of the directional drilling decisions are being calculated using an algorithm and our patented the guidance system, which can accurately process through thousands of variables and seconds.
Rather than relying on the manual calculations of the traditional directional driller.
[noise] the software enabled flexrig allows the curve to be landed more accurately and reliably and the lateral to be placed more precisely and the shale, which results and lower drilling cost improve production reduced long term maintenance cost for our customers and lower environmental impact.
Commercial models that reward performance, coupled with regard imations software that enhances the value are being adopted across the spectrum of the industry Mark.
Mark will give additional details on performance contracts that we have been successful and expanding our customer base with a wide range of the and peace from.
From Super majors to small private companies.
Today, H. and P. owns more than a third of the estimated 635 super spec rigs and the U.S. market.
With many rig count forecast ranging from 450 to 550 rigs over the next couple of years.
We see significant further super spec flexrigs market share growth and opportunities for improved pricing.
H. and P. continues to invest and new and diversified technologies for the long term sustainability of the company.
Recently, we have made investments and and are supporting the efforts of a few companies driving the evolution of the geothermal industry.
The core of this evolution is the transition from geographically concentrated and naturally occurring hydro thermal resources to enhance geothermal systems and closed loop systems.
The technologies and techniques. These companies are exploring are expected to improve project economics, the project economics, leading to the ultimate scalability of geothermal as the source of energy.
The growth potential of unconventional geothermal energy applications represent a new opportunity for HMP to increase the utilization of its installed flexrig asset base, along with our digital technology solutions.
Our leadership position as of drilling solutions provider is a natural fit for the evolving geothermal market.
This is driven in part from our technology offerings that have already been utilized by Sun geothermal companies in Europe, and our proven success and unconventional oil and gas drilling and the U.S. and internationally.
Modern geothermal drilling applications require the benefits that autonomous drilling and digital technology delivers for wellbore quality and placement.
Before turning the call over to Mark I want to thank all of our teams that are fully engaged with our customers and working hard to deliver on several strategic objectives that I have described.
We are encouraged by the successes the.
But we're also cognizant that a substantial amount of uncertainty remains in the market surrounding the impact of the pandemic.
It may take several quarters the understand what the new normal activity environment will look like that said I continue to be impressed with our team's ability to manage through this difficult time, and particularly the diligence they have demonstrated and keeping our employees and customers health and safety top of mind.
And now I'll turn the call over the heart.
Thanks, John Today, and will review, our fiscal fourth quarter and full year 2020 operating results.
Provide guidance for the first quarter and full fiscal year 2021, as appropriate and comment on our financial position.
Let me start with highlights for the recently completed fourth quarter and fiscal year ended September 32020.
The company generated quarterly revenues of 208 million versus $317 million and the previous quarter.
The quarterly decrease in revenue was due to further declines and our rig count caused by the energy demand destruction associated with the goal of and 19 pandemic as well as lower early termination revenues compared to the prior quarter.
Correspondingly total direct operating costs incurred were $164 million for the fourth quarter visit versus 207 million for the previous quarter.
General and administrative expenses totaled 33 million for the fourth quarter lower than our previous guidance.
During the fourth quarter, we closed on the sale of the portion of our real estate investment portfolio.
Comprised of six industrial developments and Tulsa, Oklahoma.
The $40.7 million, which had an aggregate net book value of $13.5 million, the resulting gain of 27.2 million as reported as the sale of assets on our consolidated operations.
As mentioned in the press release of the sale of these properties was contemplated well ahead of the pandemic. However, the pandemic did delay of the sale process art.
Our Q4 effective tax rate was approximately 28% because we recognize and Oklahoma tax benefit related to the sale of our industrial properties and the state net operating losses.
To summarize this quarter's results agent be incurred a loss of 55 cents per diluted share the versus a loss of 43 cents and the previous quarter the fourth quarter earnings per share.
Was positively impacted by a net nineteens and gain per share and select items as highlighted in our press release and the is primarily proteins to the industrial portfolio real estate sale assets.
The absent the select items adjusted diluted.
The loss per share of 74 cents and the fourth fiscal quarter versus an adjusted 34 cents loss during the third fiscal quarter.
Fiscal 2020, as a whole we incurred a loss of $4 of the 60 cents per diluted share. This was driven largely by the 563 million non cash impairment announced and our second quarter as well as other select items, including restructuring charges and mark to market losses on our like of legacy securities portfolio the like.
Secondly, the select items constituted the loss of $3.74 per diluted share and absent. These items fiscal 2020, adjusted losses or 86 cents per diluted share.
Capital expenditures for the full fiscal 2020.
Total 141 million below our previous guidance due to the combination of ongoing capital efficiency efforts as well as of the timing of the small amount of supply chain of spending the crossed into fiscal 2021.
And this annual total is the reduction of $145 million from our initial fiscal 2020 budget and the reduction of over $350 million from fiscal 2019 Capex.
Agent P generated 539 million and operating cash flow during fiscal 2020, representing a decrease of approximately $370 million.
I will note that our cash and short term investments of balance increased by 176 million sequentially year over year, which I will discuss more in.
Detail later in my remarks.
Turning now to our three segments, the beginning with the North America solutions segment.
We averaged 65 contracted rigs during the fourth quarter and.
Maximally 15 of which were idle, but contracted and on some form of cold or warm stack rate.
I will refer to idle, but contracted rigs with the acronym IVC hereafter. This current contracted average was down from an average of 89 rigs and Q3 during the fourth quarter, we bottomed and 62 rigs contracted with about 16, IB see rigs, resulting.
And 46 active rigs at the low activity point.
We exited the fourth quarter was 60 non contracted rigs of which 11 were IVC. The ex account was slightly above our guidance expectations as demand for rigs found footing from the bottom late in the quarter.
Revenues were sequentially lower by $105 million due to the aforementioned activity decline as well as the IVC count.
Included in this quarter's revenues were $12 million of early termination revenue.
North America solutions operating expenses decreased 43 million sequentially in the fourth quarter, primarily due to reduced activity and of the proactive operating initiatives at the field level that I discussed during the third quarter call.
That said the sustained of decline and rig activity during the quarter did calls per day expenses to increase on a per revenue day basis.
Expenses absorbed in the field include the overhead for our field management and maintenance organizations ongoing stacking costs consumption of on the hand average cost inventory as we exhaust penny stock and limited reactivation costs for rigs returning to work.
Further we had higher than expected self insurance expenses, including numerous former employees and continued health and welfare of benefits that will mostly expire towards the end of the first quarter fiscal 2021.
One comment the but the self insurance expenses and context, our prior periods health insurance claims were generated with higher average rig activity as the.
Some of these incurred but not reported claims are just now being developed when current operations are much smaller well.
While we see both positive and negative volatility and our claims expenses as we true up the estimated liability each quarter. The percentage impact is more pronounced when our operations are smaller as they are today.
Now looking ahead to the first quarter of fiscal 2012, and 22021 for North America solutions.
And as I mentioned earlier, we exited Q4 fiscal 2020 with more rigs contracted and running than expected. The activity level has continued to grow as operators add rigs with oil hovering around $40 per barrel.
As of todays call, we have 82 rigs contracted with only two IVC rigs the remaining the market remains uncertain with macro could the demand pressures political uncertainties and forward crude supply balances.
And all of the two situations operators with idle, but contracted rigs and put them back to work and we are winning select opportunities for incremental rigs. We expect the in the first fiscal quarter of 2021 with between 88 and 93 contracted rigs and we also expect the remaining two IVC rigs to return to work and late December early January.
While the decrease and IVC rigs will not increase our contracted rig count it will be accretive to activity and margins.
Almost all of these IVC rigs are on term contracts at rates entered into during the previous Super spec upgrade cycle as John discussed our performance contracts are gaining customer acceptance and of the approximately 21 rigs we have added or are expecting to add to the active agent the rig count and.
After September 30 through December 31, just over 30% our working underperformance contracts.
As we mentioned in the May and July calls our focus on solution based reaffirming its contracts has driven us to evolve the nomenclature reuse to present, our business with investors. We began this transition as we shifted our segment guidance to focus on the segment margins, the driven by a rig and technology solutions, rather than individual rig rates, we will complete the.
Transition as we move forward and the fiscal year 2021 of the stuff publishing per day information in the second tables, and our future press releases.
And the North America solutions segment, we expect gross margins to range between 40 to 50 million.
With approximately 1 million of that coming from early termination revenue. This margin guidance is greater than the prior quarter and total and further it has not impacted and any significant way by early termination revenues.
However, Q1 margins will be temporarily adversely impacted by reactivation costs as we rapidly add rigs from the recent bottom and reconditioning costs for a couple of walking rigs conversions.
Our current revenue backlog from our North America solutions fleet is roughly $554 million for rigs under term contract, but importantly is not inclusive of any potential performance bonuses.
This amount does not include the aforementioned $1 million of early termination is expected in Q1.
Regarding our international solutions segment International solutions business activity declined from 11 active rigs during the third fiscal quarter to five active rigs of fiscal year end. This decrease is the result of rigs releases and Argentina and the other dhabi due in large part to the ongoing kind of and 19 pandemic.
As we look toward the first fiscal quarter of 2021 for international Alright, Tivity in Bahrain is holding the study with the three rigs working well, our two rigs and Abu Dhabi and our entire Argentina, and Colombia fleets are now idle.
In Argentina, and we continue to work with it within and arduous regulatory environment, which has prevented us from reducing labor costs to levels that are more and proportion with the reactivity potential the.
This will lead us to incur a legacy cost structure into at least the first quarter and will cause international margins to be negative.
And the first quarter, we expect to have a loss of between five to 7 million apart from any foreign exchange impacts, we still have a pending rig deployment and Colombia, but it has been delayed as our customer is still waiting on all the required regulatory approvals to begin work.
On the marketing front, our international business development team is seeing some bidding tendering activity in Argentina, and Colombia, the middle East and certain other markets at this juncture of these prospects are early in the process and are not included in our forward outlook.
Finally, turning to our offshore Gulf of Mexico segment, we have four of our eight offshore platform rigs contracted and.
[noise] offshore generated a gross margin of 4.6 million during the quarter below our estimates in part due to unfavorable adjustments to self insurance reserves related to prior period claim.
The previously mentioned the gross margin also includes approximately $1 million of contribution from management contract rigs as we look toward the first quarter of fiscal 2021 for the offshore segment, we expect and offshore rigs will generate between $5 million to $7 million of operating gross margin with offshore management contracts contributing an additional one the 2 million.
Now, let me look forward to the first fiscal quarter and full fiscal year 2021 for certain consolidated and corporate items.
As we discussed and our man July calls, we implemented numerous rightsizing efforts by reducing capital expenditures, reducing North America solutions overhead rightsizing selling general administrative overhead and taking similar actions and the international segment, where possible as mentioned, we are continuing to assess our international offices to appropriately calibrated for activity.
And all areas, we will continue to identify cost reduction opportunities and drive efficiency and our daily work activities.
Capital expenditures for the full fiscal 2021 year are expected to range between 85 to 105 million.
Which is the reduction of approximately 33% the fiscal 2020 capex.
This capital outlay is comprised of three approximately equal buckets first maintenance capex to support our active rig fleet given current activity levels, we have sufficient capacity the minimize new maintenance capex expenditures for the foreseeable future.
As you may recall in fiscal 2019, we had bulk purchases and capex to scale up rotating componentry for and then 200, plus working Super spec flex rig count.
In addition, we continue to harvest components from previously impaired and decommissioned rigs to conserve capital as such we expect fiscal 2020 year maintenance Capex will range between 250000 to 400000 per active rig and the North America solutions segment, well below our prior guidance of 750000 Dominion.
Second it's getting to walking capability conversions for the customer with the want and need for walking rigs, we will invest to convert certain rigs from skidding to walking pad capability in exchange for a term contract.
As opposed to competitors are walking rig capacity is fully utilized we ask the like customers, who prefer certain rig design elements and are willing to enter into a contract with at least the year of term to enable that investment whereas.
We estimate walking the versions to approximate six to 7 million per rig.
Third corporate capital investments.
The majority of this bucket is comprised of modernization for data center data and analytics platforms and enterprise I'd systems.
Our onsite data center has elements of the lifecycle renewal of stage and we are seizing the opportunity to move to both collated co located data centers and cloud computing configurations that will be less capital intensive prospectively the.
The data and analytics modernization. The focus is on the cloud forward approach for increased capability and the scalability.
And the enterprise I'd systems Arena, we are implementing a new human capital management system to better accommodate how we manage our diversified and dispersed employee base.
Including all phases of the employment cycle and employee experience.
Finally, the smaller amount of corporate capital is being allocated to office build outs as we reconfigure for new flex work arrangements with enhanced office capabilities that can facilitate of smaller four and office footprint.
Depreciation for fiscal 2021 is expected to be approximately $430 million and this is approximately 50 million less than fiscal 2020 of primarily due to the second quarter impairments of non super spec rigs and associated capital spares.
Our general and administrative expenses for the full fiscal 2021 year are expected to be approximately $160 million.
The decrease.
Sequentially is driven by our Rightsizing efforts as discussed in the July conference call. We believe our restructuring will enable us to achieve activity growth going forward without significant accretion the best DNA.
We are continuing our investment in research and development through the cycle as we push towards autonomous drilling such innovation efforts will yield the next solution offering from our technology roadmap, we expect R&D expenditures to be approximately $30 million in fiscal 2021.
The statutory us federal income tax rate for our fiscal 2021 year end is 21%. In addition to the U.S. statutory rate, we're expecting incremental state and foreign income taxes do impact our tax provision and the resulting in an expected effective income tax rate range of 19% to 24% based upon.
John estimated fiscal 2000, and operating results and Capex, we are projecting a decrease to our deferred tax liability.
With no resulting material cash tax.
Now looking at our financial position.
American Payne had cash and short term investments of approximately 570 is 577 million at September 32020 versus $492 million at June 32020 income.
Including our revolving credit facility availability of our liquidity was in excess of 1.3 billion.
Our debt to capital at quarter end was about 13% with the positive net cash position as our cash on hand exceeds our outstanding bond.
Our debt metrics continue to be best in class of measurement amongst our peer group as.
As a reminder, we have no debt maturing until 2025, and our credit rating remains investment grade.
Now a couple of notes on working capital we are in the cash flow from operations and the fourth quarter of approximately $93 million versus $214 million in fiscal Q3.
Our trade accounts receivable at fiscal year end was approximately $150 million with the preponderance of being less than 60 days outstanding.
Our inventory balances reduced $9 million sequentially from June 30 to 104 million at September 30, as we have leveraged consumables across the entirety of you as basins and have reduced our min Max curing targets to reflect the new activity levels and as mentioned in the previous call. We commenced a project to up to optimize our accounts payable.
Rooms, and negotiate additional early payment discounts from suppliers the.
These efforts continue to bear fruit during the fourth quarter.
The next further benefits, but the impact will be relatively modest in comparison to what we have realized to date.
The macro environment in fiscal 2020 drove capital allocation decisions.
Cost of management measures and the Rightsizing of the company to new activity levels.
These collective efforts undertaken to date are aimed at generating free cash flow of that when combined with the modest uses of cash on hand will cover our capital expenditure plan that service cost and dividends and fiscal 2021.
Based on our budget for 2021 fiscal year, we expect the end fiscal 2021 with cash and short term investments of approximately $450 million to $500 million.
The maintenance of our balance sheet strength and liquidity are foundational elements and our 100 year tradition of capital stewardship and they continue to be a significant differentiator in this volatile and cyclical industry.
That concludes our prepared remarks for the fourth fiscal quarter.
I want to once again say, thank you to all of you on the phone call for sticking with us through our technical difficulties. We look forward to answering your questions now let me turn the call over the Christie for those questions.
At this time of asking.
Please press the star and one on your Touchtone phone.
So from the Q.
Once again.
The question.
We will take our first question.
And.
And.
Hi, Thanks, Good morning, guys I'll ask the most of mine upfront John I wanted to ask if you could.
Elaborate at all on sizing that geothermal opportunity in terms of rigs over the next couple of years and then also for either of you if you.
If you could just sanity check my math for me it sounds like your.
Your gross profit per us land rig is going to be.
Quarter on quarter.
If you take out the the termination revenue that day that mostly go away. So given that and this will also the saving of IVC distortions it sounds like.
We have at least the temporary and bottoming and positive and positive inflection of cash margins.
And.
I think Thats correct do you see that as a durable bottom.
With some.
A positive momentum going beyond this as you get into more spot day rates over the course of.
Of the coming fiscal so just those two questions. Thanks.
Yes, and yes, thanks for the questions good morning, and thanks for sticking around for 48 extra minutes.
As to your second question first yes, we do see the the coming off of the bottom and the inflection point and all the all of the drivers you just mentioned.
With.
The cash flow and margin accretive going forward.
Then if you had any other details there you wanted to tease apart.
Really it really I mean, it sounds like it's about a 5500 and implied gross margin per rig day and Q1, you have some cost relief coming after that and.
You know and does that do you think thats of about an absolute bottom of the cycle for your cash margins is essentially the question.
Well given the macro uncertainties I take through I hate the call anything and absolute.
[laughter], but but certainly the range and the.
Context of the free cash flow budget. The you laid out and I think maybe it is right I think thats correct, the and absolutely.
And again on the on the geothermal. It is it is really early days, we've got several investments out there.
I think what's important is that this is a a new approach.
And it's it's much different than the geothermal industry that we've all dealt with for you know for for decades really in some respects.
So I think the the idea of.
Of the.
Close loop tie.
Type type systems utilizing horizontal drilling being.
Being able to drill and areas.
The that don't typically have geothermal systems.
I think will make a big difference and so.
It's hard to size that at this point, but there will be more to come on that.
All right and states and thanks, guys. Thank you.
We will take our next question from Kurt Hallead with RBC.
Hi.
Great.
Hi, Curt and we're doing a great how about you.
While the oil. Thank you. Thank you.
So I guess I wanted to the follow up first initially just just mark you into the you gave some very explicit guidance of where you thought the cash is going to be.
At the at year end 2021, so I appreciate that all of that color commentary. So it looks like you expect to be at the midpoint of that maybe roughly free cash flow of free cash flow breakeven.
And so it seems like you're going to get some some positive release from working capital of throughout the course of the year or at least that's what my initial math here would show is that that kind of jive with the way you're looking at thanks.
Well, a little bit different twist on that current because I think we've gotten through a lot of the.
And of the working capital benefits in fact, I would expect and working capital level working capital to the flip as activity increases but.
But in terms of free cash flow you know.
I showed the the potential year end range, you just alluded to.
And.
There are a lot of moving parts here between the new activity of pricing and the working capital.
But if you think about if you think about the 577 million of cash equivalents and short term investments on hand.
You back out of the $108 million dividend back.
Back out and other the midpoint of our Capex range is 95 million add back asset sales, which are primarily tubulars of $20 million and then the.
The the difference of that you could plug there is more or less.
The cash flow that will be having from operations.
I appreciate you walking through that the that detail now John.
[noise], obviously youve.
Yes.
Helmerich <unk> Payne has developed a very strong reputation overtime with delivering a good value proposition for the client base and looks like the care, we're clearly the.
The market of shifting and and underway toward shifting.
And you look like you're going to be at the forefront of the value proposition and whether it's on the automated drilling software or and now you're kind of teasing out some context around the the geothermal market. So I was wondering if you can give us a little bit more color around what kind of market penetration.
You have seen already for the the auto slide what you expect to potentially get over the course of the next 12 months and then you know since you are ready TCG thermal dynamic and achieve the said its going at the quite a bit different and what historically been the case, what do you think the addressable market on the John.
Thermal opportunity could be.
Yeah. Thanks, Kurt.
I'll start with a start with auto slide and.
You know the the autonomous drilling platform is really powerful you touched on it and you you picked up on this this opportunity early I must stress with.
We started our journey towards where we are today and automation and and 2015 and 16 in terms of just trying to figure out of strategy and then of course, we made a couple of acquisitions.
Motive and Mac bar and 2017, and we've made two additional acquisitions. Since then and so we're we're really pleased to see that and starting to take shape and the current environment.
The auto slide numbers continue to grow.
You know we're pleased we're pleased with that.
I think the thing to keep in mind is that.
Auto slide the decision engine for auto slide is that guidance system, which was the motive of product and and that's a patented process and its one of things is really.
Interesting about that and important for customers is that it makes it economically driven decisions.
So each customer can customize the algorithm to their needs, which is really important and so it's making the algorithms and making decisions on a cost benefit basis, and it's taking three costs and and to mine with time towards the loss the and profit proximity of the pay zone. So.
So as you start thinking about that that's.
That's that's differentiated compared to what a lot of products, if you will or talked about.
Out in the marketplace and I think the the true test of that is seeing how the adoption is going and so obviously you have customers start with one rig.
And and we've had many customers that you know go from one to three one to five recently, we've had a couple of that have gone at least the forward plan is to go to all six are all eight of the rigs and they have operating so it's a it's still a work in progress and we're continuing to layer on additional.
Capabilities with auto Slide talk and we'll talk more about that.
And the future.
Again, the on on the geothermal it's it's really it's really early days, but.
You know what needs to happen.
Is you need to have the.
These new technologies and these new ideas.
Workout. So there is growth potential for us because the geothermal energy applications.
Our would be.
Focused on utilizing our installed flexrig asset base, with and again, which would which would be great be great for HCP and be it'd be great for sustainability. So that again, we'll be updating more on the progress on activity opportunities and the future.
Okay, great. Thanks.
Thanks Kurt.
And we will take our next question.
Gruber with Citigroup.
<unk>.
Yes, good morning.
Morning, Scott.
Just a quick follow up on the.
Cash flow discussion from earlier, just one of the unpack the little bit more Mark can you provide any additional color on the working capital range.
So you're contemplating and your forecast for the 21.
Not not much more than the large.
Large amount of detail of Hardie unpack Scott.
Okay.
Okay. The other track.
And this is more of the kind of high level question.
You guys of introduced the number of compelling technology, and especially auto slide.
In terms of the how are you.
Measuring the return you're you're getting on your R&D investment as you start to layer and more and more investment on the rigs and.
Based upon the publicly available data the.
You release, especially given the the change in the reporting.
The structure.
What should we be watching to think about.
And the return you're getting on the R&D investment.
[noise] well I appreciate that and I'll let.
John chime in here as well, but.
I think one of the things that to me that is the most interesting about that.
The return is what we've just are observing as we speak today. So I mentioned that we are basically the midpoint of our exit guidance for fiscal Q1, it's about 90 rigs and so if we exited the 69 and.
They are adding back 21, and we say that the over 30% of those being added back or non performance contracts.
So we are seeing and accretion.
Of.
We are seeing and accretion and North American solutions.
The market share and.
And Thats really driven by the technology that we can deploy and.
Three of these performance contracts.
So thats.
It's really doing our and our competitive position with customers and our differentiation in the marketplace to accrete market share and then.
As importantly, do it and a different manner through the performance contract, which allows for potential upside performance bonuses based on the Kb eyes.
Which are.
Which if if they are received and actually.
The targets are met and we are paid of that would be accretive to the backlog is booked those contracts.
Yeah, I would I would add on that Scott the.
You know the and everybody knows this but.
New technologies [noise] and.
The adoption rates are challenging and the best of markets and then when you consider the type of market the that we've been.
And that we've seen over the last several well all three through 2020.
The.
That's the challenge, but what all of what I'll leave you with is I can assure you the early days of the flexrig or not.
I wasn't easy to see the return on invested capital that we were going to get that we ultimately did get with the Flexrig, which was the which was the technology offering and it was the differentiated.
Offering the good news with the with auto slide and our other digital solutions and software is that it is a low capital intensive.
And so we fully intend to get we fully intend to to get returns and we'll be more transparent.
With that over you know overtime.
As John has said the for the you know downturns are opportunities and we really feel like we've hit a tipping point and the number of.
And an upturn and performance contracts and an upturn and the actual.
A number of deployed on of the slides and.
That we have working and all of that you know as I as I mentioned and with the potential of the hit those performance targets and as potentially margin accretive.
And I understand the San Juan Yes.
The up the uptake seems to be the reflecting of the appetite and the technology.
I think the the Investor base, just once the little bit more color on the the margin impact.
After we get through the the cash.
Contract roll.
Do you guys and if there's any color that you got sort of provide on and how you know the.
The accrete to the margins for the segment and the.
In fact, the margin profile I think would just be helpful. Yes.
Yes, and and it'll it'll be evident.
And.
We'll see that we'll see that overtime.
I appreciate that got appreciate the color. Thank you <unk>. Thank you.
And we will take our next question from Taylor's are true.
And then.
Hey, good morning, and the U.S. and <unk>.
Seems like most of <unk> are targeting of some sort of production maintenance budget next year and.
And that's driving a lot of the the recent ramp and the rig count and I Wonder as you look into the calendar year 2021.
How far do you think <unk> and that process the process and operators ramping it up and to that maintenance program, maybe set of different ways looking beyond the <unk>.
12, 31 and of 2020.
Do you have any visibility to today to the.
Further increases and the rig count above and beyond the nine <unk> point of view.
Sure. We can give you some additional color on that I think one of the things to think about with this recent increase and it really kind of started at the beginning of our of our fiscal year.
And after hitting the hitting the bottom in August.
We were talking about this for several months that the budgets the ultimate budgets that are that customers and the and piece of that cut down to was after successive reductions to their budget and I think the the budget expectation was probably said and a 25 of $30 oil price environment.
But not with the $40 oil price environment that we've been experience and over the last several months. So I think with that you know obviously, the the really low activity levels of.
We weren't surprised to see you know the.
The rig count beginning to grow. So we're you know we're pleased with that customers are remaining remaining disciplined.
We felt like all along that we would be at the kind of of the leading edge of of that growth watch once the customer started getting back into the game one of the things I'm I'm really excited about and this is that.
Not only have we put.
But most of the idle, but contracted rigs back to work the other half of the rigs with the to work had been rigs that we have competed.
On and the and the marketplace and and we've done very well, we've expanded our customer base and the and I and I do think that.
We said, we're going to close the fiscal year, we hope and around the 90 range and I think there is some potential we see additional activity and the January and February Paul.
Possible, but.
But again as you've heard me say over the time, it's kind of hard to see out further than that and the 90 days.
But we do think we're going to have some additional increases as we as we get into the.
2021, probably mostly in the first quarter, you said fiscal year, but I think and includes the calendar year and nine the I'm sorry, yeah close the calendar year.
Thanks Mark.
Thanks for that and and a second questions on international the some of the.
The cost and efficiency problems, and Argentina, and been well documented and.
Obviously, that's the market that's taken on the and following the and dynamic.
Looking out over the full fiscal year of 2021, and we've already seen.
I'm in for him and off the bottom and Argentina industry industry wide and I Wonder if you could frame for us what sort of demand levels <unk> and <unk>.
It's become a more of the rearview mirror type issue, what would what sort of demand levels and you'd expect out of Argentina, maybe exiting 2021 or.
Grow into over the course of point and.
Well and Argentina, we have seen some interest pick up the perhaps not as much as has been discussed and some of the industry chatter we here.
As most of the rigs going back to work that we have seen or either workover rigs. The rigs that are returning the work after contracts suspension due to kind of and 19.
The aim there really might be the to get the quick access to a production increase compared to any new developments. We are seeing some tendering activity take place and these opportunities are typically a year or less and duration and have some onerous terms.
And compensation relative to the length of term so while there are some opportunities and Argentina to the 19 is still the factor as as of the lower commodity price environment.
As well as.
Currency issues and other issues related to that jurisdiction. So.
That's really kind of our current view on it.
All right well, thanks for that I'll turn it back.
Thank you.
And we'll take our next question.
And from Chase.
Bank of America.
Hey, I guess the first question I wanted to ask us about the the guide and so on the North America solution segment of.
You know I guess margins maybe came in a little bit softer I mean, obviously you gave a good rig count guide, but but if you think about the margin profile, maybe that's a little bit softer than some of the expected. So maybe could you just help us understand whether the the softer than expected kind of margin guidance was more of the function of kind of soft day rates.
The or is it kind of elevated opex per day, as you're looking to kind of the reactivate rigs and and then and when you answered that it maybe you could speak to where you think that you know more.
George and I don't know, if you're going to talk to margin percentages or cash margin per day, but where do you think that you can get margins to over time as the horizontal rig count kind of comes back towards stopping the rigs.
I just the sure a couple of thoughts there. Thanks for the question.
You know, it's there's a lot of as I mentioned in the prepared remarks, a lot of transitory cost in Q1.
Yeah. The reactivating 21, the rigs is you know just over 30% of what was of the ending rig count at the end of the fiscal year. So that's that's a big and around.
The rapid uptick and and there's a lot of cost and their related the rig reactivation.
And also related to as I mentioned commissioning a couple of walking rigs conversions.
<unk> as we have talked about before and we're trying to get away from per day discussions.
But I will tell you there there will be some of.
The margin up lift as those rigs continue to work point forward.
[noise] [noise], Okay, all right and.
And the fucking just follow up on and kind of the rig count and this may be the last and I can ask you on the rig count so good and take advantage of it.
You talked about exiting it about you know 90 active rigs if we if we think about you know historical share of the horizontal rig count your historical share that would put kind of the industry rig count and about 325 horizontal rigs at the end of the year. So that's you know, adding another 60 or so rigs.
Through the end of the year for the industry.
You know does that sound reasonable four and industry rig count towards the end of the year and you're kind of 26 27, 28% market share of the horizontal rigs and then also when we think about adding rigs through the end of the year do you think it's going to be more weighted towards public and peace or profit the and peaks.
Answering your second part first I think it's going to be a mix of so far we've seen and nice mix between.
Both the small private as as well as.
Our traditional customer base going back to work with the idle, but contracted rigs. So it's been a nice the.
It's been a nice mix on that.
And I think when you when you think about the the rig count I think your numbers are are in line I mean at the end of the day.
You know it it kind of the depends on what age and piece of market share is just because that's the the knowledge that we have and so and a 90 rigs or 90 rig count for HMP and it and we of 25%, obviously, whether there's a 360 rigs running so.
We think we're going to continue to capture additional market share you've.
You've seen the several reports that show you know of 400 of 420 rigs I think we can get there and you know and the second or the first calendar quarter. The second calendar quarter of 2021, and I think as you look.
The out a year or two I think its reasonable that that you could see 450 to 550 rigs.
Working again and why that's important is because.
Again back to the 630 or so super spec rigs.
And the 450 to 500 rigs running your and that 70% to 80% utilization, where historically and our industry, you've seen pricing power and and I think the other thing and to keep in mind of that 630 rigs not all of those rigs are created equal and are not gonna be it as highly sought after.
So I think that gives us some encouragement.
Encouragement.
That we're going to one have you know rigs going back to work and to have some some pricing but back to the commercial model and it's so easy to fall back into to the day rate conversation.
And.
You know what what we really want to continue to focus on is a new commercial models and I want to I want to first give a shout out to our folks for a given a lot of credit for undertaking. This challenge it's tough to think about retiring the day rate Weve had day rates around for decades.
And and to add new commercial models that are really more attractive and and deliver higher levels of value for our customers. So we really think that you know, we're we're creating an economic surplus for our shareholders and our customers together. So we just think that the there's a great opportunity for these new commercial models.
And obviously the the thing to do is to kind of fall back into the day rate focus and margin per day focus but.
You'll be hearing more.
From us all of that as as the picture comes together.
Perfect and I appreciate all the color I'll turn it back over thank.
Thank you.
We will take our next question.
With <unk> capital markets [noise].
Thank you for taking the question.
John and I'm off of your guidance of $40 million to $50 million from margins.
Gross profit margins and in the U.S solutions.
What are you assuming for and what kind of benefits you're going to get some performance based contracts and that is that range. The only driven by the activity levels by the end at 88 to 93 rigs or is there something far and how the performance based on Thats kind of a shame.
Shake out.
[noise] well and car appreciate the question you know from a from a GAAP perspective, if you think of backlog and and we try to do all of our work as you know.
Very conservatively here and Asian piece, if you think about how the the GAAP backlog calculation works as of the quote unquote base the day rate.
So as an income by way of example, if you get to the end of the of the well and you have metrics tied to that well and you get an uplift for hitting performance targets you book that at the end of the well when it's been Earth. So non in backlog, so said differently. The <unk>, our budgeting really focuses and.
Long and a GAAP line of sight, if you will see and we do have some upside the upside potential with.
With margins with the growing number of performance contract.
And then typically these bugs and taking let's assume that the bought by the number 20 day. So the will be presumably there will be still as you know and number of out of that would have been completed and the and the December quarter of eight if you generate the funds based upon facts and you could recognize that it is that fair.
That's fair yes.
Okay give me the.
The small the growing portion of the fleet and the and the potential upside there I think we'll we'll see more of that actually three calendar of 2020 of the first and the first fiscal quarter.
And so then to that point in terms of your free cash flow a of cash flow guidance that you provided.
You know what are you assuming for the pharma space are you assuming some of the pharma space content contribution and 2021 in that guidance and that is going to be you know that may come.
<unk>.
That happens and you didn't do that.
Well what car, it's you know and our business and good times, it's hard to see past a quarter ahead, as you know and and and where we are today.
Looking at that ex accounts for the first quarter of approximately 90 rigs.
With all of the uncertainties I talked through earlier you know the the macro you have the ongoing cash.
The the demand issues with energy supply imbalances, the geopolitical concerns et cetera, et cetera, we really for our budgeting purposes of taken that 90 rigs and and the conservative manner, and which we provide stewardship of our balance sheet, we really flat line that for the rest of the fiscal year, we'll be updating.
That each quarter with our forecast as we move through time, but that's the that's they're concerned about the today.
Yeah [noise] and.
And then John in terms of international activity of the.
You know you mentioned that would that be rigs the down right now any any thoughts and those that have gone faster and so would they be coming back on and sometimes that's the next year or kind of the yet.
No I think those the those rigs and Abu Dhabi a their contracts are.
Either either had early termination or are we the those contracts are close of those rigs are idle, we don't have any additional contract term.
From the left.
So for the international business is kind of this <unk> and under the guidance that you provided for the next quarter.
That is as bad and just going to get and and probably you know as you manage your cost of maybe the revenues don't change, but the cost would come in and through the course of kind of Indiana and next year.
I think yes, as you move into the.
But as you move and through calendar 21, a couple of things, yes, we're going to as we mentioned and and the remarks work on cost, especially those costs related to the legacy size structure and in Argentina, but also as I mentioned, the you know, we're seeing quite a bit of potential revenue possibilities again and.
Two or two early days the to put any of those into our forward outlook and but we are participating in a number of.
Bidding and tendering activities.
And the places we have rigs today and also in the new jurisdictions, where we do not.
Okay.
No he thinks move snow and internationally do you think the the best guess and if you add up the pick up a couple of rigs is that standard.
On the calendar and perspective second quarter of <unk>, and third quarter and kind of a possibility.
It's you know were car as you know it is so hard I mean with the.
The potential second wave of with co of it I mean international of.
You know started late slowed down much later than than the U.S. market. So it's just really hard it's really hard to call. At this stage, we don't have any indication that the things you're going to get better and the next couple of quarters.
But obviously, we can be surprise to the upside that we sure don't see anything right now.
Sure.
Thank you Thats all the half thank you for your and I just thanks for the car.
And once again, if you would like to ask a question. Please press the star and Juan.
Your touchtone phone.
The next call from Chris <unk> with Wells Fargo.
Thanks, Good morning.
Good morning, Chris.
Hi, so the number of term contracted rigs just come up a little bit has there been much competitive bidding yet or is it still mostly direct negotiations and and if so can you comment and one of those rates are dilutive to the average and side and the first quarter or is it maybe they're stable quarter over quarter of step down and I guess the context here is that it sounds like you of course.
Incidents and leading edge margins grant.
Granted theres the performance based overlay we have to have.
And estimate for that it sounds like your confidence and that may be bottoming. So just just curious if there's much competitive bidding the backing that up.
Oh, I'll give a little color on the on the bidding and the term contract I have mark give a little more color on the.
The weather's dilutive or not but.
Several of the rigs that we.
That we re contracted we're competitive bids and we did enter into some term contract coverage is generally six months six to 12 months.
So that that's a positive obviously those those those.
The overall margins would be lower than historically when we were.
Getting at current contracts for the.
During the Super spec upgrades.
Process.
But.
Overall, it has been competitively bid bid and we are getting some some term contracts mark anything else to add on.
No I mean, I've and I would just.
The remind you and some of those IVC rigs, we have that are coming back into the active end of the active turning to the right and mode and are accretive to our current margins because they are on the legacy term contracts that were entered into during the upgrade cycle.
Right.
And some of those term contracts that I mentioned that we can use it for.
Also our on a performance based contracts. So while there may be a base margin that we're looking at there's there's a higher margin that we can that we can attain.
As we work with our partners and.
And our partnership of their customers and and have kind of have that win win situation.
Okay. Thanks, that's helpful and maybe maybe shifting the performance based contracts is there any shift of now that you've got rigs going up this year and he shifting with popular for customers or the way you guys like the structure. These contracts in terms of which keep the eyes are involved just curious if there's been any shifts or any more color around that.
It's really all over all over the board I think that's what's important about the these types of contracts of.
We're we're having that the that discussion with the customer and what's the most important to the customer and and what are the things that they are wanting to achieve and how can we work with them and help them achieve that.
And the and so again, we're saying performance basic CPI based also shared savings type contracts, even some footage type the type contracts. So it's really a it's really just working closely with our customers and and trying to be as customer centre.
As we can in terms of what is it the they're wanting to accomplish.
Great. Thank you thank.
Thank you.
And this does conclude.
Question and answer session for today.
Over to John Lindsay.
The closing remarks.
Thank you Christie and the again, thanks to everyone for your patience today I know your time is valuable and we appreciate you.
Hanging in there with the.
You know just kind of closing out with looking back at this unprecedented and demanding 20 fit 2020 fiscal year.
We remain steadfast and our commitment to reshape our business and the industry. During this challenging time.
Our teams are doing great work to accelerate long term strategic priorities, including driving efficiency across the company and evolving our digital technology and data platforms to deliver value added solutions and services to our customers and partners. So again. Thank you again for your for your interest and everybody have a great.
Dave.
Thank you.
Good day.
You may disconnect.
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