Q1 2021 Helmerich and Payne Inc Earnings Call
Hi.
Program on Dan and approximately two minutes.
[music].
Please standby your program is about to begin.
Good day, everyone and welcome to today's Helmerich <unk> Payne fiscal first quarter earnings call. 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 Register to ask a question at any time by pressing the star and Juan on your Touchtone phone.
Please be advised this call may be recorded it is now my pleasure to turn today's program over to Dave Wilson, Vice President Dave Go ahead.
Thank you Christy and welcome everyone to Hoboken payments conference call and webcast and the first quarter of fiscal year 'twenty 'twenty one.
With us today are John Lindsay, President and CEO, and Mark Smith, Senior Vice President and CFO both.
Both John and Mark will be sharing some 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 under the securities laws such statements are based upon current information and management's expectations as at the state and are not guarantees of future performance.
Looking statements involve certain risks uncertainties and assumptions that are difficult to predict as such our actual outcomes and results could differ materially.
You can learn more about these risks 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 will also be making reference to certain non-GAAP financial measures such as segment operating income and other operating statistics, you will find the <unk>.
GAAP reconciliation comments and calculations and yesterday's press release.
That said I will turn the call over to John Lindsay.
Good morning, everyone and thank you for joining us today.
And with one month behind us in 'twenty and 'twenty, one we find ourselves with a combined sense of relief and optimism.
Leave that one of the most difficult years and the companies and 100 year history is behind us and.
And optimistic considering the market share gains and accomplish during the first fiscal quarter of.
2021, and strengthening oil prices, which enhanced the financial health of our customers.
We entered the new year with 94 rigs running and U S land.
And that's double the number we had in August and the upward trend continues.
Okay.
Around this time last year W. T I prices were trading and the low fifty's.
There were approximately 800 rigs operating and the U S land market and H and P was operating a 194 of those rigs.
Contrast that with today, where oil prices are up over 10% up.
And I've been to the upper fifties.
And the industry rig count is approximately 415 rigs on A&P is running.
And three flex rigs.
Obviously, a lot has happened between these two data points.
And it shouldn't surprise anyone that the short and medium term activity outlook from E&P companies is taking a while to take shape.
However, if market expectations for U S production levels continue to drop.
And that should have a positive impact on oil prices, which further supports consensus expectations.
And for approximately 500 active rigs and the U S at year end.
Taking this a step further.
By our count there are approximately 630 super spec rigs available in the U S market.
Looking forward, we believe the vast majority of all working rigs drilling horizontal wells will continue to trend toward the Super spec classification.
And if activity does reach 500 rigs the.
And the industry rig count would began to approach utilization levels that have historically provided pricing power.
Today, we are hopeful and encouraged by the recent worldwide deployment, if COVID-19 vaccines.
We're encouraged with and improving crude oil price picture.
And we're encouraged by the progress we continue to make on strategic efforts to deploy additional digital technologies solutions and to advance new commercial models.
Even with the early success of vaccines for COVID-19.
And there remains a significant level of uncertainty regarding the global economic recovery as well as the changing political environment and that certainly tempers our short term optimism.
While it is encouraging to see oil price is higher than expectations, we're cognizant that even in a stable or improving environment.
There remains several challenges ahead for the industry.
We are encouraged seeing the industry rig count begin to recover.
The customers are still on the budgeting process to determine their capital allocation and those level will set the chat on <unk>.
And we're activity.
During the remainder of 2021.
We do expect public e&ps to maintain.
Angel discipline.
To the earn outs budgets.
We also expect private e&ps to add rigs.
However, we don't expect an outsized increase in fiscal 'twenty, one rig count even if oil prices reached $60 per barrel.
A return driven capital allocation strategy is and the best long term interest of our industry and that's what we're aiming to support with our solutions based offering.
HP has a differentiated customer centric approach of combining our people rigs and leading edge automation technology.
<unk> enables us to deliver the highest value wells for our customers.
And underlying principle of our performance contracts is the creation of a sustainable win win scenario.
Not only on efficiency.
But also by employing the advantages and automation related to wellbore quality and placement.
Our patented drilling automation software is a key driver and improving well economics for the customer by enabling the drilling consistently higher quality and better place well bores throughout the drilling program.
To date.
Our autonomous auto slide technology is deployed on 25% to 30% of our flex rig fleet.
And we currently have similar percentages for performance based contracts.
Automation solutions, and Peru that drilling efficiency as well, but it also has a significant influence on the lag time value of the asset.
By delivering a better wellbore to the completion phase, which will ultimately enhance production economics.
When successful the combination flex rig and digital technology solutions leads to superior well economics by lowering our risk and increasing returns.
For our customers as well as for HP.
We can't control the macro challenges that we can remain laser focused on our technology solution deployment.
Our performance based contracts and our value accretion for customers.
We're encouraged that several customers have adopted these new solutions.
But we recognize that more work is ahead and additional efforts aimed at change management and domestic or within the industry.
Accordingly improvements and technology solutions and performance based contract adoptions are not likely to be linear and may not always correlate with our rig count.
That said and we're seeing remarkable progress.
And as being made today, and we're steadfast and confident and our ability to lead and.
And effect change and our industry.
I'm very pleased with our people service attitude and the ability to quickly respond to customer demand and improve activity by roughly 35% during the first fiscal quarter.
Our market share today is back to pre pandemic levels.
We're adding back more rigs and the competition due to our proven ability to reactivate rigs safely.
Patiently and cost effectively.
We believe theres, an opportunity to grow our market share above 25%.
If you look at previous downturns, we are facing the 2000 and a financial crisis, we have emerged stronger with greater capability as we.
Differentiator to our offerings and grew market share and the premium part of the market.
Going forward and.
And a structural a smaller U S market, we believe super spec rigs combined with digital technology solutions that provide improved value through wellbore quality will prevail.
Relative to the 800 rigs drilling a year ago.
Many idle SCR and less capable AC rigs and may be permanently sidelines.
Further not all of our competitors with Super spec rigs have the ability to enable that.
And features that many customers are beginning to require.
And the Super spec classification segment, we have approximately 37 per cent of the U S capacity.
With 234 Super spec flex rigs that are unique with their digital technology capability.
<unk> argued for fleet.
Another aspect of our asset deployment strategy, we plan to execute will occur over the medium to long term and international markets.
That strategy is to Opportunistically reduce our U S Super spec concentration over time.
By deploying rigs internationally for appropriately scaled contracts.
Our international business development team, they're seeing some bidding activity and Argentina, Colombia, and the middle East as well as other markets.
At this time.
And these prospects are in early stages, but we are encouraged by the customer interest and <unk> flex rates due to a combination.
And our expertise and unconventional drilling.
Our strong historical performance in these areas and the need for what we would consider and imminent legacy rig replacement driven by and evolution toward digital technology for Wellbore quality and placement.
These are great opportunities for HP, and addition to our initiatives to improve our cost structure, where mark will provide more details in his remarks.
On the last call, we discussed having made investments and geothermal projects and you may have seen some recent announcements by our strategic partners.
Along with looking at admissions, reducing opportunities like geothermal HP will continue to explore and invest in new and diversified technologies and as well as expand our digital technology capabilities for the long term sustainability.
The campaign.
Before turning the call over to Mark I want to underscore once more the focus and success. Our company has made on its strategic objectives.
Particularly given the economic and industry headwinds we are navigating.
As we've indicated previously introducing disruptive technologies and new business models is a long arduous and sometimes unpredictable process.
I believe our dedicated teams are well equipped and our conservative financial stewardship will enable us to capitalize on the challenges and opportunities ahead and net.
And I'll turn the call over to Mark Smith.
Thank you John.
Today I will review our fiscal first quarter 2021 operating results provide guidance for the second quarter update full fiscal year, 'twenty 'twenty, one guidance as appropriate and comment on our financial position.
Let me start with highlights for the recently completed first quarter ended December 31 and 2020.
The company generated quarterly revenues of $246 million versus 208 million and the previous quarter.
The quarterly increase in revenue was due to higher rig count activity in North America solutions as operators resumes and drilling activity.
Total direct operating costs incurred were 200 million for the first quarter versus $164 million per the previous quarter. The sequential increase is attributable to the aforementioned additional rig count and in North America solutions segment, and the related rig Recommissioned and expenses.
General and administrative expenses totaled $39 million for the first quarter higher than our previous quarter due to the resumption of short term incentive accruals for fiscal 2021.
But within our guidance for full fiscal year 'twenty one.
During the first quarter, we closed on the sale of an offshore platform rig to its longstanding customer Asbury provision and the original long term contract.
The sale closed for consideration of 12 million paid out over two years.
The rig had an aggregate net book value of $2 8 million and the resulting gain of $9 2 million as reported as a part of sale of assets on our consolidated statement of operations.
And connection with the sale, we entered into a long term management contract for this rig.
And our Gulf of Mexico segment.
Our Q1 effective tax rate was approximately 19%, which is on the lower end of our guided range due to a discrete tax expense.
To summarize this quarter's results A&P incurred a loss of <unk> 66 cents per diluted share versus a loss of 55 and the previous quarter first quarter earnings per share were positively impacted by a net <unk> <unk> gain per share of select items as highlighted in our press release, including the aforementioned offshore rig disposition.
Absent the select items adjusted diluted loss per share was <unk> 82 cents and the first fiscal quarter versus an adjusted 74 cent loss during the fourth fiscal quarter.
Capital expenditures for the first quarter of fiscal 'twenty one.
And were $14 million below our previous implied guidance. This is primarily due to the timing of spending which has shifted to the remaining three quarters of the fiscal year.
Agent P consumed approximately $20 million and operating cash flow during the first quarter of 2021 in line with our expectations and will have additional comments about our cash and working capital later and these prepared remarks.
Turning to our three segments, beginning with North America solutions segment.
We averaged 81 contracted rigs during the first quarter up from an average of 65 rigs and fiscal Q4.
I'll note here that at the end of fiscal Q1 on idle, but contracted rigs, which I will refer to as <unk> rigs thereafter.
And returned to work compared to an average of approximately 15, ABC rigs and the previous quarter.
During the first quarter, we doubled our rig activity from the prior quarter LOE and <unk> 47 active rigs.
We exited the first fiscal quarter with 94 contracted rigs, which was slightly above our guidance expectations as demand for our rigs continued to expand from the leu reached midway through the end of the previous quarter.
Revenues were sequentially higher by $53 million due to the previously mentioned activity increase included and this quarter's revenues were roughly $4 million of unexpected early termination revenue from the cancellation of one rig contract.
North.
America solutions operating expenses increased $47 million sequentially and the first quarter, primarily due to adding 25 rigs a 35 per cent increase and North America activity as well as reactivating 10, idle, but contracted rigs.
Both of which resulting and onetime reactivation expenses of approximately $10 6 million.
Looking ahead to the second quarter and fiscal 2021 for North America solutions as I mentioned earlier, and we exited Q1 with slightly more rigs contracted and running and expected.
And the level has continued to grow, albeit at a more moderate pace and the prior quarter, because operators and rigs to maintain production levels with oil above $50 per barrel as of today's call. We have 103 rigs contracted with no ABC rigs remaining we expect to and the second fiscal quarter of 'twenty, one with between 105 and one.
And 10 contracted rigs and.
As John discussed our performance contracts are gaining customer acceptance and the approximately.
34 rigs and we have added.
And to the active agent P rig count after September 33 today more than a quarter are working under such performance contracts.
And the North American solutions segment, and we expect gross margins to range between $60 million to $70 million with no early termination revenue expected.
As we continue to add rigs, we will also incur related onetime reactivation expenses such expenses are expected to be approximately $6 million and the second quarter as.
As we have seen in previous cycles. There is a correlation between the reactivation cost per rig.
And on length of time and rig has been idle.
As a reminder, and most of our rigs were stacked back in April of 2029 months ago Mr.
Historical experience indicates that rigs stacked for nine months or longer we will incur cost of 400 to $500000 to reactivate.
Reactivation costs are incurred in the quarter of startup so the absence of such costs in future quarters is margin accretive.
Our current revenue backlog from our North America solutions fleet, and there's roughly $448 million for rigs under term contract, but importantly, this figure does not include additional margin that agent peak and earn his performance contract criteria are met.
Okay.
Regarding our international solutions segment International solutions business activity declined from five active rigs at the end of the fourth fiscal quarter to four active rigs at December 31.
This decrease is the result of and expected rig really Houston and Abu Dhabi due in large part to the disruption created by the ongoing and COVID-19 pandemic.
As we look towards the second quarter of fiscal 'twenty, one for international or activity and Bahrain is holding steady with three rigs working we also have one rig under contract and Argentina.
And the second quarter, we expect to have a loss of between one to 3 million apart from any foreign exchange impacts.
As the legacy structural costs, and Argentina and continued to hamper international margins also and we still have a pending rig deployment and Colombia that continues to be delayed as our customer weighted on required regulatory approvals to begin work.
Turning to our offshore Gulf of Mexico segment.
We currently have four of our seven offshore platform rigs contracted and we have active management contracts on free customer owned rigs one of which is on full active right.
Offshore generated a gross margin of $6 million during the quarter, which was at the lower end of our estimates as we look toward the second quarter of fiscal 'twenty. One for the offshore segment, we expect that offshore and will generate between $6 million to $9 million of operating gross margin.
Now, let me look forward to the second fiscal quarter and updated full fiscal year 2000, and 'twenty one guidance as appropriate.
Capital expenditures for the full fiscal 'twenty, one year are still expected to range between 85 to 180 to $105 $85 million to $105 million with remaining spend distributed over the last three fiscal quarters.
Our expectations for general and administrative expenses for the full fiscal 2021 year have not changed and remain at approximately $160 million.
We also remain comfortable with the 19% to 24% range for estimated annual effective tax rate and do not anticipate incurring any significant cash tax and fiscal 2021.
The difference and effective tax versus statutory rate.
Is it related to permanent book to tax differences as well as state and foreign income taxes.
Now looking at our financial position.
Summer campaign had cash and short term investments of approximately $524 million and December 31, and 2020 versus 577 million at September 30.
Including our revolving credit facility availability and our liquidity was approximately $1 3 billion.
Not included and the previously mentioned and cash balance is approximately $35 million of income taxes receivable and related interest that we collected after the end of the first fiscal quarter.
Our debt to capital at quarter end was about 13% and our net cash position exceeds our outstanding Board agent.
And piece of debt metrics continue to be and best in class measurement amongst our peer group that allows us to keep our focus on maximizing our long term position and.
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.
Our trade accounts receivable at fiscal year and of 150 million and grew by $38 million to approximately 188.
Due to the added rig activity as previously mentioned.
The preponderance of our AR continues to be less than 60 days outstanding from billing day.
Also included and they are there's another approximately $10 million or tax refund receivables.
Our inventory balances have declined approximately $5 million sequentially from June.
And from.
At September $30 million to $99 million and we continue to it.
Leverage consumables across the entirety of U S basins, do you use and reduce inventory on hand.
Efforts are resulting in better spending rationalizations that are reducing our out of pocket expenditures.
Our accounts payable terms optimization project mentioned on the last earnings call, we will extend our payable terms with certain key vendors.
And finally of note are one the majority of our annual AD valorem taxes accrued through the year are paid annually and the fourth calendar quarter.
And two.
The short term incentive compensation accruing for fiscal year 'twenty, one will not be paid until the first quarter of fiscal year 'twenty two.
Yeah.
As I mentioned on the November call, we expected to use a modest amount of cash on hand, as we works for day 100, plus rig count activity level.
As mentioned earlier and my comments, we arrived at a 100 rig count level during the second quarter.
We believe that this activity level, our point forward quarterly operating earnings will fund, our maintenance capital expenditures debt service cost and dividend.
Based on our updated forecast, we expect to end fiscal 2021 with cash and short term investments at or above $500 million.
Yeah.
And in closing we are continuously working to manage our costs, both operating and SG&A expenses as well as capital expenditures.
We believe active cost management is crucial and and now structurally smaller United States upstream market.
Various initiatives are underway to identify and drive out costs, where possible to enhance margins going forward.
That concludes our prepared comments for the first fiscal quarter, Let me now turn the call over to Christie for questions.
Okay.
Yeah.
At this time, if you would like to ask a question. Please press the star and Juan on your Touchtone phone.
Remove yourself from the queue at any time.
Once again and that is star and wanted to ask a question.
And we will take our first question from Tommy Moll with Stephens, Inc.
Go ahead your line.
Good morning, and thanks for taking my questions.
Alright and Tommy.
John I wanted to start on performance based contracts for as long as you've been talking about that initiative, you've been very clear that it's not.
It's not a change in the and.
And the industry structure, that's going to happen overnight and that is going to take some time.
What context could you give us about how.
The downturn may have accelerated customer willingness to share.
Talk about new types of pricing models versus.
<unk> made it more difficult just given.
How stretched a lot of customers, where it maybe it was just not something that debt.
And they were willing to engage in conversations with.
Okay.
Sure Tom and good morning.
It's really well.
Okay surprised by this it's really a mix.
Every customer.
At this stage of the game, probably views and a little bit a little bit differently. I think there are some as a result of the downturn as you mentioned I think it has accelerated there they're thinking.
Recognize as much as we do that.
The industry.
Really has to evolve.
And so customer adoption of these new models.
Sure.
It's different across the board I think what we're encouraged by though is that.
There are.
And as we said in our remarks on 25% to 30% of our rigs are underperformance contracts for some of the new commercial type and.
And I think the reason is by definition.
Debt performance based contracts.
Win win.
Opportunity.
When you execute it properly and it really delivers a higher level of value for the customer and at the end of the day for <unk> as well.
We have continued to stress that.
Net in order to be truly successful it really has to be a partnership agreement with your customer and there's got to be mutual trust Theres got to be mutual respect and I think there also has to be and acknowledging that debt.
Each we each had.
<unk> and and there's areas that we can leverage the strengths for the betterment of the project.
But taking it really and this is where I think it's most valuable and it really relates to our decision.
To have.
And on approach more focus on solutions overall solutions.
And we're.
And we're combining our digital technology solutions auto slide is the easiest way to talk about right now, but we're taking a focus and.
And it's not that we're not still interested in and taking a 20 day well to 15 days or 15 day will the 10 day. So we want to do that but we're also focusing on the lifetime value of the asset.
<unk>, which our customers are doing that but we haven't necessarily been engaged in that and that discussion. So as you think about wellbore quality and wellbore placement and the things that we're doing we're really focusing on the lifetime value of that level for the next 10 or 15 years and I think.
That is is really drawing some attention again, where we're seeing some some opportunities.
And to continue to grow these new models with our with our customers as you can imagine the day rate.
It's really hard our teams are doing a great job they are out there.
Selling and the benefits and and I think we're starting to see some results.
Thank you John that's all very helpful and as a follow up I just wanted to to.
To move to the topic of overall industry rig count.
And I won't ask you to make a.
A specific call on on a number.
But maybe just give us a sense of what the contour might look like based on your customer conversations and so.
Does it seem like decision making.
Among customers has maybe been delayed a little bit in other words, maybe and and a typical year there would be better visibility into our full year drilling plan.
At a rough a rough timeframe in your mind versus this year. It just seems like Theres a lot more uncertainty.
And the debt you may end up getting a better peak and what those plans look like later into this fiscal year than normal or do you feel like based on your conversations you have a pretty good sense of of what your customer base will be doing debt to calibrate for the full year drill plant.
There's there's no doubt that.
On the market, obviously once customers decided to put rigs back to work it moved very quickly.
And we're as we've said and our remarks, we're pleased to be at 100 and trade rigs today, you know what I mean.
Our LOE was 46 Richter little active rigs 46 rigs in December.
So.
And we still have this quarter ahead.
Three we.
Set a range of 105 to one and our goal is to hit 110 teams working hard and we want to make certain we do that.
But it is very hard to see and you've heard me say this over and over time for a long time and really depending on regardless of the market, it's hard to see much past three months.
And so we do have some insight into April and day.
But as you know the book.
And budgets for the public E&ps Theyre not all final.
And when you and I think when you start thinking about a ramp and activity.
We shouldn't expect a ramp like we've seen since August I think it's gonna be on.
A much lower increase.
The other.
Yeah really surprise to everybody.
Is that Oh oil and V. T is as high as it is and it wasn't that long ago, we were talking about 45 to <unk>.
And hopefully getting to $50.
So.
And one of the ways that we've tried to think about it again and thank you for not asking me to predict.
Rig count, but if we have the opportunity and we do we look at and we look at the sell side consensus and you look at U.
And there are estimates out there of having 500 rigs running by the end of the calendar year and I think Thats I think thats possible and if you think about it that's not a long way from where we are today and you don't have to add a whole lot of rigs over the next 11 months to get there.
So I think clearly.
Customer who got to remain disciplined.
You know what Theyre doing is and the best interest of their companies and the best interest of our industry I believe.
And so we're going on we're going to see how that plays out we talked about the need to have a return driven capital allocation strategy, we think us and the best interest of debt.
Long term outlook for the industry. So hopefully that answer answered your question I wish.
And I wish I could nail and remember I do think the rig count.
We'll continue to increase.
I do believe it'll be at a much.
Slower pace and what we've experienced.
Over the last four five months.
Fair enough. Thank you John I'll turn it back.
Thanks Kelly.
And we will take our next question from Ian Macpherson with Simmons and go.
<unk>.
Yes, Thanks, good morning, John and Mark and Dave.
The thing that stood out to me initially was.
Improvement that you have guidance for your North America cash margins.
The segment profit divided by and rig count for this quarter and even backing out the termination.
And reactivation expenses, which I think net out to kind of a wash and quarter to quarter, it's a healthy improvement.
This has been a big sort of debate point for for you and peers as to where cash margins might ultimately trough out and so.
John just given your.
Constructive framework that you see for tighter Super spec utilization by the end of this year and maybe some pricing power.
Stabilizing and maybe improving the low spot rates that we've seen and heard about that.
Does that give you more confidence than maybe you had last quarter with with regard to having some visibility now to a true trough ing and your cash margins and is that going to look somewhere close to what we see here with the second quarter guidance for margins.
Well I'm going to direct mark towards the details, but I do think we are working hard.
I mentioned earlier, we're working hard to retire the day rate and we obviously have rigs that are rolling off.
Rolling off of term contract that works somewhat against us.
But we're also working with customers to enter those rigs into performance based pricing and so that.
And that's beneficial.
I do think that we are.
And we're seeing some uptake on that which hopefully again helps us on the on the revenue side of the equation and ultimately generating better margins Mark what would you what would you add.
Yeah.
Thanks, Johnny.
Several things to think about and there is certainly.
And certainly this.
Quarter, we just exited and we had some some pressure obviously from the re commissioning.
Expenses.
Another thing, we had a little bit upward pressure on as well as you may have heard me talk about quote unquote Penny stock over the prior couple of quarters into and last calendar year, we've kind of gotten through.
That a penny stock because we increased activity and as a consequence, we've begun really digging into our on hand average cost of inventory, which drives up.
Which drives up Inverness cost we you know it's also.
And there's some other things and there that are moving around and not necessarily all all linear but.
Increasing activity levels, you know it has a positive impact obviously on our fixed cost leverage that we really I think.
Your comment on trough ing out and maybe potentially because we had gotten down to that 47 rig low point of activity.
Last quarter.
I mean, the previous quarter, so we're getting more leverage and air with has increased and number of rigs.
We're still gonna have reactivation expenses coming through and obviously we.
We are.
We have a roll off on the revenue side and some term contracts, but you know, obviously, helping that or the performance contracts.
We are putting in place so again, not all linear or a lot of moving parts I think that Oh.
In addition to all of that as I mentioned, we're working on a lot of cost cost out initiatives as I'll turn it on.
And when I got to go into a lot of details on debt.
But over the next couple of quarters, we hope that those are additive and and each of the initiatives and the aggregate helps the take some cost out of the system.
And then I guess, just you know as I'm thinking out loud here finally.
On.
There's a little bit of apples and oranges and as we move through this last year and took our to go and where to sell.
Segments legacy U S land and HPT and combined them into North America solutions, you pulled in some of that overhead costs from the legacy HP T. So there's a little bit of increase in cost there and so a lot of moving parts and is that helpful.
Helpful and at the end of the day and look we have your cash flow outlook for the year, which kind of.
Proposal together for us as.
And as well so that's good thanks I wanted to ask a follow up though on the international side.
We've seen.
Argentina and Colombia.
They went from a 100 plus rigs to zero last year, but.
And they are racing upward back too.
Probably 50 plus today.
So.
Wanted to get John your thoughts on how you can how you can or how you want to and aspire to participate and the continued recovery there and does his.
<unk> very strategic markets for you internationally.
Yes, and I mean, we've been and in both countries, Argentina, and Colombia for a very long time, and we have a great personnel base.
People and country.
Great asset base and in both countries.
And so yes, I think we're going on we're going to participate in that and I mean, there's no doubt that.
We will see some rigs going back to work in both countries, but there you know there are things that are.
Challenging that are you know not just not just the macro side theres other challenges and we have work definitely interested I think we have a great opportunity to put rigs back to work.
Mark what would you book.
Yeah.
Just a couple of other comments he and you know some of those initial rigs I think as we might have mentioned on our previous quarter call or some some workover work and then also the equivalent of idle, but contracted rigs as we had on the U S going back to work that were parked.
For some operators you know as John said in his prepared remarks, we are seeing you know bidding and tendering activity and country currently.
And you know the Super spec rig that we had sent a goodness was at 18 months ago now down to Argentina.
It does some of those conversations were in with folks are about the super spec capability again as John alluded to about our kind of mid to long term international look we really think that the super spec rig.
Rig there.
And potentially.
Oh.
Grading other rigs there through time, it can really be beneficial to that market.
Yeah, I think those are the international market in general just to add on a little bit more color.
And the U S. We've been undergoing this replacement cycle for well over 15 years and.
And you know there are many many countries that have still very old assets SCR.
Even some that are newer versions when you really look at it, particularly if youre going to be drilling on.
More volatile unconventional well there.
And theyre not ideally suited for that type of work. So I think thats why it fits us and a great position to grow internationally, we obviously had and the capacity to move flex rigs out of the U S and we've obviously done that and in both countries and we were talking about as well as the middle East. We just we just need to get more scale.
So we think the opportunities are there and and I think.
With the slowdown in activity that we've seen internationally, we're going to see some pick up there is usually six months nine months delay and getting the international cash back yes.
Got it great. Thanks, John and thanks, Mark Thanks.
Thanks Ian.
And we will take our next question from Sean Meacham with Jpmorgan. Your line is open.
Thank you Hey, good morning.
Good morning, Sean.
And so I'd like to and maybe just talk a little more about how the market share and the rig count has been unfolding and what do you think it means for your opportunities going forward. So at current levels.
The data suggests the five largest land drillers have only maybe 60% market share today.
Waller drillers seem to have an outsized share relative to their share of super spec supply.
So would it be your stipulation that.
Those small drillers have their super spec or their best approximation of Super spec rigs, probably mostly utilized at this point and the incremental capacity to be soaked up will be predominantly them on the large drillers led by yourself.
Well Sean.
You know I I don't recall, saying that as a data point, Dave or Mark may have some additional color on this what I will say is.
If you look at the unless space that most of the rigs that went back to work for a large portion of the rigs went back to work around the Permian and I think David.
And the rigs that went back to work and the Permian, we recaptured two thirds of that of that share.
So I'm a little surprised that it's at 60% I think the five largest drillers and about 80% of the super spec capacity and I'm not certain how that how that looks in terms of rigs that have gone back and gone back to work I do think there is.
There's much more to the story than just the classification of the rig.
Because what we're seeing is again more of a manufacturing.
And I approach.
And you really are looking at the premium and as a market.
And when you think about our business and its amazing the efficiencies that we've been able to drive.
And our industry.
But when you start getting through the efficiencies that we're at now in order to get to that next level, you really need some automated solutions, we're still relying heavily on human.
And the decision, making and that decision, making is a $24 seven decision making.
And making process. So there's there's obviously.
Opportunities to do to do better with software.
And so I think the smaller.
Companies are going on are going to be challenged even more not only on the rig spec side of the equation, but on on that.
Digital side of the equation so.
Dave do you did you have time to look at your notes do you have a.
And your follow up.
On that on.
Yes.
Just follow up on on over time. These smaller players don't have the.
And the technology that some of the larger players have and if theres going to be a differentiation, even among the super spec rigs over time.
And so I do think the larger players that have that technology are you able to provide that value, we're going to get get the lion's share.
Of the rigs.
And I appreciate that and I think part of it I was trying to get out is to the extent that you know.
And they've got their best rigs running at this point and they tend to have.
Small numbers right single digit numbers on these types of rigs.
And then.
And at the larger drillers remaining.
And with the remaining capacity that would probably help your confidence around pricing progression that you would have a concern it would be likely to.
Bid on future opportunities.
Yes, Sean I think I think that's Brian and thank you Youre, making a great a great point, there I missed I missed.
Yeah.
Pardon, sorry policy and that's kind of closing the loop laid on that on that question. So then the other thing I was thinking about was with respect to private e&ps.
And they've been a swing and demands coming back quicker right that's consistent.
Consistent with historical trends and they potentially.
And be more of a swing later in the year oil prices hold and and they they have some incremental cash flow.
So John just what are you seeing in terms of.
Uptake for Super spec <unk> and <unk>.
And the incremental automation and software solutions and is it or is it too early or can we get a bit of a read on appetite.
For that that part of your portfolio versus maybe where those types of operators.
Would you would you say pre 2020.
Yeah.
I tell you I've been very pleased with the response from the private companies private equity.
And the company's small privates just in general.
We have some very strong partnerships and and a couple of cases we've.
Whether they're two rigs three rigs or five rigs, we've got all of the rigs Dave they're all in on on the on the flex rigs are all in on the digital solutions.
You know there there are partners with US we've got some.
As an example, and.
And alpha and beta testing we've got.
Auto Geo steering and one of the private companies are working with us on that so that's encouraging to see.
On the question earlier about the downturn on me, let's face it a downturn.
Time for survival and so.
So where we're all trying to figure out how can we make our businesses better and more durable and so we're seeing that and.
And unfortunately for HP, it's not just on the small private side private equity side as well, we're also saying and of course with our larger.
We traded companies as well as our Supermajors. So we've been we've been very pleased with our with the response.
I appreciate that thanks John.
<unk>.
Okay.
And we will take our next question from Taylor Zurcher with Tudor Pickering Holt Your line is open.
Okay. Thanks, and good morning talked a lot about the continued adoption of these performance based models and.
Clearly some of these software solutions, you're offering or.
A big piece of the value added there, but I wanted to touch on on the hardware side of things you've got off the top on my head and I think somewhere and the forties in terms of walking rigs and your fleet.
And if we look at the 30% of your fleet that's under performance based contracts today.
A big concentration of that with your walking rigs and and.
Do you have a target moving forward or do you need to do to increase the number of walking rigs to two also increase notably the performance based on percentage of your contracts or are those two.
Kind of independent factors moving forward.
And it's really it's really independent.
Factor.
We do still have some conversions and and and <unk>.
Process.
And.
On the on the walking side of the equation.
But we've.
We've been very fortunate, whether it's blocking and whether it's flex.
Flex very scared or or flex five we've got really kind of across the board.
And our customers have those rigs that really suit there.
There are their well designs and and the pads that there that they are building.
So there's there's really not any.
Bush towards one or the other on the performance side.
Okay and in a number of quarters of on some of these performance based models now on the books are you seeing any any customers sort of accelerate the timeline, where you really look at the underlying kpis and these contracts or is that sort of a stone and evolving process right now.
It's really evolving I know there's.
Continue it.
It seems like concern and angst over kind of resetting the bar.
And and I think it kind of goes back to my my earlier.
Comments related to you know building.
And building strong partnerships, and having mutual trust and recognizing and acknowledging.
The strengths that each brings to the brings to the party and I mean at the end of the day.
And if we're able to deliver better performance and they can working with brand X y or Z then.
That's great for for them and it's great for us and so we really haven't seen.
And that much again, we recognize it as being.
And as being a risk.
But you know at this stage of the game, we're not overly concerned Mark did you have something you wanted to.
And just I would add John that you know for some of those customers who've been with us on the journey and longer and are early adopters of the performance contract.
And they've seen the full effect of the use of the technology.
And the improvement on the Wellbore quality and along the way. So what that does is it enables us to go to a completely different set of goalposts overtime.
And that is looking at quality of the well and so.
And if you think about our you know the overall spread costs to build a well and you think and the pie shape, where a slice of buy for our drilling cost completions or have a pie and if or if it's a less tortuous wellbore can can be completed and frac and more easily and reduce the cost of that part well that's.
And a certain total cost of ownership benefit for our customer.
And that we can participate in and so we're working with some customers on defining things such things as tortuosity index and and trying to move to a different set of goalpost and get off of the.
Get off and be efficiency treadmill.
Got it that makes sense thanks for the answers.
Okay.
Thank you.
Yeah.
Yeah.
Okay.
Great.
Is it where you Christy.
So do you have any more and the Q.
Yes, we have Waqar Sayed your line is open.
Okay. Thanks for taking my question.
Couple of things first of all are you seeing any input cost inflation, rather than trucking are for steel and Andrew.
Piper and anything like that.
Okay alright good.
Good morning, and.
No not not not yet know obviously steel prices have increased this last year.
As we know but we.
And <unk>.
We have a we have a lot of extra componentry and our system from spares and from our previous ramp up and the rig the rig activity before this downturn that we've discussed previously so we.
We haven't had to we haven't had to.
Buy anything new to add.
To deal with increased steel costs, having said that I I definitely see three time I think this will hit us probably more in fiscal 'twenty two that when we get to two to the next round of tubular replacement.
Bad debt that certainly could.
Come into play but.
The rest of the system no we haven't seen any any inflationary pressures.
And good and then just on my last question in terms of you mentioned number of tenders and international market right now.
And then our right now we know what are they telling you in terms of and this contracts.
Actually stocked up on foot.
And the recognizing that international things keep Inc.
Tend to get pushed to the right.
Well as we as John said in his prepared remarks, and we do see that tendering activity and it's early days, but just to your.
To your point and and John's comment that there's no certainty on that stuff now because.
Some of these tenders and we.
We bid on actually a win the bid date comes and everything is finished and and guess what that date gets pushed to the right and you rebid it again.
But the good news is that debt that potential deal flow with it and it's.
Coming through and whereas this time last year it was not.
So that's the that's an improvement and the right direction I think as we get more certainty around that.
On the vaccine rollout and.
And and the next you know post hopefully.
Covid World, but we should see that open up a bit more on when demand and a more fulsome.
Just like for the second half and I say second half calendar year, 'twenty and 'twenty one.
Do you think you'd have more rigs and.
And for mental rigs active and Latam are in the Middle East are the same for both get it off.
Okay.
What car we're sure we're sure hopeful.
No.
What is that there's so many things as we've said there's still uncertainty out there.
Things are definitely looking better and.
And you know.
With the lag time that we generally see with international I think your timing is spot on and we just.
And we just hope that.
Things keep moving the direction that they are and.
We were able to close on some of the deals that we think we can close on.
Thank you very much.
Thanks for color.
Okay.
And we will take our next question from Scott Gruber with Citigroup Scott Your line is open.
Hey, Scott.
We can't hear you Scott if you're.
And if you're on there.
Are you able to hear me now.
Yeah.
Oh, sorry about that.
Martha you say you're on the performance contracts.
And the bonuses that you receive on to them how much did that benefit fiscal <unk> margin and more importantly, assuming a similar achievement rate going forward does the performance bonus potential improve and the quarters ahead on a on a per day basis and.
And if so any color on how much.
Okay got that.
Yeah, we haven't.
We haven't really quantified that publicly historically, but I'll tell you what it.
And just anecdotally if you if you look at.
Some of the term contract rollovers, and we've had and so basically going back and time of year to the previous spot rate.
Spot rates and the market are obviously lower today, but what these performance.
Kickers and allow us to do is really kind of bring that oh.
There's a bridge that gap if you will between the two.
Well, that's a that's been it's certainly been a margin accretive to us and equally beneficial to our to our customers cost and as well.
Got you, but any color on whether that kind of opportunity and I know, you're putting more contracts in place, but I guess is the margin benefit from the improving going forward and kind of static at this point.
It's a customer by customer.
Relationship based.
And by specific customer.
Need a basis. So it's it's a it's.
If you look at these.
Performance contracts, we have and the portfolio there's no <unk>.
Your linear.
Derivation and that can be had with them I think it's really you know it's it's as John has been talking about it it's the solutions based approach and so.
Each set of Kpis and is different for for each and unique customer and the pad there on and the things that they need to accomplish.
Got it and just for me appreciate the color Mark.
Thank you. Thank you.
This does conclude our question and answer session for today I will now turn the program back over to our presenters for any additional or closing remarks.
Thank you Christy and thanks again to all of you for joining us today.
And we have touched on during this call.
There are many challenges ahead. However, we believe A&P is and a strong position to take advantage of these opportunities.
We recognize that the only sustainable way forward is for our industry to continue to evolve.
And we are approaching that change with our customer centric approach, which includes digital technology performance solutions and and equitable sharing have created value.
So thank you again for joining us today.
Have a great day.
This does conclude today's program. We appreciate your participation you may disconnect at any time.
Yeah.
Hey, guys.
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