Q1 2022 Helmerich and Payne Inc Earnings Call
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Good day, everyone and welcome to today's.
Hallmark and pants 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 registered to ask a question at any time by pressing the star one and you touched on phone. Please note. This call may be recorded.
It is now my pleasure to turn today's program over to Dave Wilson, Vice President of Investor Relations. Please go ahead.
Thank you Christian and welcome everyone to Hammer campaigns conference call and webcast for the first quarter of fiscal year 2022.
With us today are John Lindsay, President and CEO , Mark Smith, Senior Vice President and CFO .
Both John and Mark will be sharing some comments with us after which we'll open the call for questions.
Before we begin our prepared remarks, I'll remind everyone that this call will include forward looking statements as defined under the securities laws such statements are based upon current information management expectation 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 in 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 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 in yesterday's press release with that said I'll turn the call over to Jonathan.
Thank you Dave good morning, everyone.
We appreciate you joining us today for our first fiscal quarter earnings call 2022 is off to a strong start.
I continue to be encouraged by the progress the industry has made on its path to recovery from the pandemic induced market collapse in 2020.
Rig activity continues to increase with much stronger oil and gas prices, resulting in our customers' 2022 budgets being reset at higher levels than last year.
We believe customers will maintain capital discipline with their budgets as they did in 2021.
The primary thing for my remarks today will be Rick pricing in the U S over.
Over the past seven years, the oil and gas industry has experienced.
Two of the worst downturns in history, and like all downturns rig rates plunged it overnight to very low levels in concert with commodity prices and customer budgets.
Fortunately, we've seen oil and gas prices make a rapid come back since going negative.
Conversely pricing in the oilfield services space has improved only marginally.
As we sit here today with commodity pricing hovering near eight year highs, we're seeing an improving and tightening rig market.
We're also delivering record drilling performance and have responded with substantial investments.
Over $60 million in Opex alone.
That were required to re commission over 110 rigs since our rig count bottomed in August of 'twenty.
Against this background average rig pricing has improved only nominally up to this point.
Our customers have benefited from higher commodity prices.
But from an oilfield service provider perspective, and particularly as a driller, we need substantially higher pricing in order to generate the returns required to attract and retain investors.
Oil field services revenues must increase substantially if the upstream oil and gas industry is to remain vibrant technology, driven and sustainable in the future.
During the first quarter demand for Super spec rigs in our North America solutions segment.
Continued to grow by 27 Recommissioned flex routes.
We're currently experiencing a very tight market, especially for rigs that were active just prior to the pandemic hitting.
The U S in March of 2020.
Yes.
While the second fiscal quarter is expected to be more moderate in terms of rig adds we expect to add a total of 11 to 21 flex rigs during the quarter, which is still a healthy increase.
The company is well positioned for this opportunity given our ability to provide superior rigs people and technologies that culminate in a compelling value proposition for our customer.
Particularly.
And this improved commodity price environment.
Our market share has recovered from below 20%.
Set at the height of the pandemic.
To the highest levels, we've ever achieved in the horizontal market and our teams have worked hard to visit to position us as the leading drilling solutions provider.
Leading edge pricing and margins are growing as a result of a super spec rig demand and the need to offset the operating costs associated with reactivating idle rigs as well as other general operating cost inflation.
Assuming oil prices remain strong we plan to continue to push pricing in the coming quarters as the scarcity of readily available super spec rigs becomes more prevalent.
We believe this upward rig pricing momentum should be commensurate with the value H M. P delivers to the customer.
Achieving a fair return on investment is essential to sustaining capacity and innovation in any business. However at present, we see current pricing environment as an impediment to the capital investment required to relieve the tight supply of capable rigs.
H M. He remains the market leader within the industry with the largest fleet of active rigs as well as the most super spec rigs available too.
To be deployed to satisfy future demand.
Our strategy for new capital investment going forward will be tightly aligned with that of our customers and will continue to be disciplined and return focused.
As we've discussed on previous calls the industry pricing model needs to evolve from a pure day rate to.
To a commercial model that rewards performance.
Where quality and value creation for the customer.
We've grown our performance based contract model to approximately 40% of our active fleet.
And our teams continue to partner with our customers to drive better outcomes.
We've taken a portfolio approach using different iterations of performance contracts.
To determine which types it makes sense for us and the customer under a variety of scenarios.
Our rig pricing strategy is also dynamic.
And kept the same inputs derived from customer demand pricing algorithms reinvestment metrics and industry sentiment.
As we look ahead to pricing and the strengthening and tight rig market. We see revenue revenue per day needing to approach $30000 or H M. P to start generating margins that support cost of capital returns.
Unfortunately, several of our leading edge rigs are beginning to approach this level of revenue today.
Our new commercial models are specially designed to include our automated software solutions that enable value creation through speed of execution and drilling times.
And even more importantly by enhancing overall wellbore quality.
The uptake by customers of our digital solution offerings is increasing and with more rigs working there are a growing number of new customers, who have yet to be introduced to these technologies.
We are encouraged by our progress, but we also know from past experience that introducing innovation in our industry requires patience.
And that adoption will not happen in a linear fashion.
This is particularly relevant when a portion of the benefits from Wellbore quality accrues over time and will manifest value after a well has been drilled.
Now shifting to our international segment that we're excited about our strategic alliance with that not drilling.
And the investment we made and we look forward to further expanding that relationship as well as developing additional opportunities in the middle East region.
Our activity in South America is improving slowly and we remain encouraged by the prospects for additional growth in the coming quarters and beyond.
While our long term outlook is policy for both the Middle East and South America in the near term our rig count in the Middle East is expected to decline due to unexpected rig releases and Bahrain.
We published our inaugural sustainability report in December and hopefully many of you have had the opportunity to read it and appreciate the additional transparency into how we operate as a company.
The report highlights how our improving drilling efficiency not only provides economic benefits to our customers, but also the improvement in the collective environmental emissions profile of H P.
And our customers.
As an industry, we continue to lower environmental impacts by creating new solutions to reduce those impacts.
As well as developing pathways to smooth energy transition.
In this challenging transition period, we're actively working with our customers to provide synergistic solutions that can achieve both are economic.
And environmental objectives.
Despite the industry challenges faced during the past couple of years, we remain focused on long term opportunities and a strong disciplined approach to capital allocation.
In this way we will continue to strengthen the company to build a return profile for the long term benefit of our shareholders.
We've maintained a very strong balance sheet and Mark will go into more detail regarding our capital allocation strategy and our ability to generate free cash flow in the second half of fiscal 2022.
This would not be possible without the hard work and dedication of agency employees, both past and present, who continually set the standard in the industry.
Over 100 years of drilling experience combined with our uniform flex rig fleet and industry, leading automation solutions places us in a great position as we move forward.
Our rigs.
Automation solutions, and our digital portfolio provide compelling value propositions for both North America.
And international markets.
The momentum we built during fiscal 'twenty, one carries into fiscal 'twenty, two with a fresh sense of optimism.
Look forward to strengthening our partnerships with new and existing customers and developing drilling solutions that contribute to our mutual long term successes.
And now I'll turn the call over to Mark.
Thanks, John Today, I will review our fiscal first quarter of 2022 operating results provide guidance for the second quarter update full fiscal year 'twenty, two guidance as appropriate and comment on our financial position.
Let me start with highlights for the recently completed first quarter ended December 31, 2021 .
The company generated quarterly revenues of $410 million versus $344 million in the previous quarter as expected quarterly increase in revenue was due to higher account activity in North American solutions.
As operators committed to calendar 2022 drilling activity.
Total direct operating costs incurred were 301 million for the first quarter versus $269 million for the previous quarter. The sequential increase is attributable to the aforementioned the dismal rig count and the related reconditioning and expenses and the North American solutions segment.
General and administrative expenses totaled approximately $44 million for the first quarter lower than our previous quarter and slightly lower than our previous first quarter guidance I will comment on SG&A guidance later in these remarks.
During the first quarter, we realized a gain of approximately $48 million related to the fair market value of our adding a drilling investment which is reported as a part of gain on investment securities and our consolidated statement of operations.
As discussed on last quarter's call, we called our legacy 2025 maturity bonds using the proceeds from our September refinancing and recognize the make whole premium together with the unamortized discount and debt issue costs of approximately $60 million during the first quarter.
Our effective.
Q1 tax rate was approximately 13%, which is outside of our previously guided range as we recorded a discrete tax expense and they're projecting additional foreign tax for fiscal year 2022.
To summarize this quarter's results agency incurred a loss of 48 cents per diluted share versus a loss of 74 cents in the previous quarter first quarter earnings per share were negatively impacted by a net three loss per share of select items as highlighted in our press release.
Including the aforementioned gain on investment securities and debt extinguishment costs.
Absent the select items adjusted diluted loss per share was <unk> 45 cents in the first fiscal quarter versus an adjusted 62 cent loss during the fourth fiscal quarter.
Capital expenditures for the first quarter of fiscal 'twenty, two we're 44 million below our previous implied guidance. This is primarily due to the timing of spending which has shifted to the remaining quarters H M. P consumed approximately $4 million in operating cash flow during the first quarter of 2022 generally in line with our expectations.
We'll have additional comments about our cash and working capital later in these prepared remarks.
Turning to our three segments, beginning with North America solutions segment, we averaged 141 contracted rigs during the first quarter up from an average of 124 rigs in fiscal Q4.
We exited the first fiscal quarter with 154 contracted rigs, which was in line with our guidance expectations.
John touched on earlier demand for rigs continued to expand heading into calendar 2022 producer budgets from October one through December 31, we added 27 rigs to our active rig count, including two walking flex rig drilling rig conversions that were completed in fiscal Q1.
And over 20 is skidding rigs.
For rigs added in the U S market in calendar Q4 across the industry Hp's getting super spec rigs made up roughly 30% of all industry rig count additions according to the Inver as rig counts.
Our U S onshore market share increased in the first quarter was approximately 26% that calendar year in 'twenty, one for total horizontal active rig count and 35% for Super spec active rigs as I will discuss our capital expenditures remarks later, we will focus on putting our idle capacity to work for margin accretive returns.
Notwithstanding any market share dynamics.
Revenues were sequentially higher by $48 million due to the previously mentioned activity increase segment gross margin was $84 million at the top end of our November guidance is sequentially higher than the fourth quarter of fiscal 'twenty $169 million.
Overall opex for the North America solutions segment increased on a sequential basis due to the aforementioned 21% increase in our rig count quarter on quarter and the associated reactivation costs.
We're activation costs were $20 5 million during the quarter compared to $6 6 million in the prior quarter, including the impacts of reactivation costs in the quarter.
Excluding I should say, excluding the impacts of reactivation costs in the quarter pretty expenses fell by more than $1000 per day to just below $15000 a day.
As we began to benefit from increased scale, coupled with cost management efforts undertaking since the pandemic, including the first quarter sale of two margin neutral service lines rig move trucking casing running tool services.
A couple of comments or an order regarding reactivation costs.
As we have seen in previous cycles and has stated on recent calls there is a positive correlation between the reactivation cost per rig in the <unk>.
Length of time, the rig has been idle this factor can.
Combined with inflation is putting upward pressure on the revert reactivation cost per rig, but we're working hard to minimize those costs.
As a reminder, most of our rigs were stacked back in April and May of 2020, most of our 27 first fiscal quarter twenty-two reactivation that had been idle on average of 540 days or over 18 months.
H M. P. Currently has 42 rigs remaining that worked within the past 21 to 24 months rigs that were active as the U S was heading into the pandemic. This is the largest portion of swing to supply in the U S too.
To remind as we have discussed on prior calls reactivation costs are mostly incurred in the quarter. The rig starts to turn to the right and the absence of such costs in subsequent operating quarters is margin accretive to the company.
Looking ahead to the second quarter of fiscal 'twenty, two for North America solutions.
As I mentioned earlier, we ended Q1 near the midpoint of our exit guidance range. The activity level is continuing to grow, albeit at a more moderate pace in the first quarter driven in part by public company operators, who are working to fulfill their calendar 'twenty do budget levels as of today's call. We have 164 rigs contracted and we expect to end the second fiscal.
Quarter of 'twenty, two with between 165 and 175 contracted rigs.
As noted in John's comments performance contracts now make up about 40% of contracted in North America solutions rigs as discussed on previous calls contract bonus potential is not included in backlog since it is contingent upon achieving specific contractual criteria, which is typically measured at the end of the well.
While completed wells in the quarter with performance bonuses or ability to build and recognized within the quarter the amount of potential bonus for wells in progress as of December 31 that cannot be recognized until well completion was approximately $2 $7 million.
As such when in progress wells are completed in the second quarter. The actual bonus earned will be recognized this potential.
This bonus potential at quarter end has been steadily growing quarter upon quarter as a proportion of performance contracts across our fleet and increases.
Our current revenue backlog from our North American solutions sleep is roughly 493 million for rigs under term contract and as I noted. This figure does not include additional margin above the base day rate that agent P. Can earn performance Kpis are met once wells are completed.
In the North American solutions segment, we expect gross margins range between 101 hundred $15 million inclusive of the effect of the $11 million in reactivation costs.
I will now turn our attention to inflationary and supply chain considerations.
As a reminder, from our November call, we increased the labor rates in early December which although a margin neutral pass through will be accretive to full second quarter costs were still seeing some inflationary pressures on materials and supplies as mentioned last quarter, although some pricing pressures appeared to be beginning to stabilize we do expect recurring.
On a per day expenses to increase above 15000 per day.
Fiscal Q2 as.
As it relates to supply chain access to parts of materials, we continue to utilize our proactive approach to alleviate supply chain challenges in order to avoid a material impact to our ongoing operations that approach includes remaining vigilant about inventory and actively engaging with our suppliers and partners.
In order to be ready to adjust quickly as developments unfold.
Regarding our international solutions segment International solutions business activity increased by two rigs to eight active rigs at the end of the first fiscal quarter. We added a rig in Argentina and had a rig commenced work in Columbia that had previously been delayed international results were below guidance due to the startup of these rigs and other transitory costs.
As we look towards the second quarter of fiscal 'twenty two for international activity in Bahrain will decrease from three rigs to one active rig does that do to notification in January regarding changes in the customer's drilling schedule.
Firstly, we expect to add another rig in Argentina as activity. There. It gets two five working rigs plus a second rig in Colombia during fiscal Q2.
In the second quarter, we expect to have between a $2 million loss and breakeven results.
Aside from any foreign exchange impacts.
Turning to our offshore Gulf of Mexico segment, we still have four of our seven offshore platform rigs contracted and we have active management contracts.
On three customer owned rigs two of which are on active rate offshore generated a gross margin of approximately $8 $6 million during the quarter, which was above the high end of our estimate.
As we look to the second quarter of fiscal 'twenty two for the offshore segment, we expect that offshore will generate between $6 million to $8 million of operating gross margin.
Now, let me look forward to the second fiscal quarter and the full fiscal year 'twenty two guidance as appropriate capital expenditure for the full fiscal year 2022 are still expected to range between $250 million to $270 million with the remaining spend distributed fairly evenly over the last three fiscal quarter.
Yes.
As John emphasized earlier, we are closely assessing rig reactivation is for appropriate contract terms and economics in light of increasing opex reactivation costs maintenance cap ex accretion and required return on investment I'll mention again that H MP has 42 Super spec flex rigs that had been idle just under two years.
There we have another 26 super spec flex rigs that have been idled longer than two years, the significant U S swing capacity that can be deployed for the right economics of price and term duration, our guidepost in this process our hurdle rates.
At or above the U S S industry cost of capital.
A few observations on Hps U S flex rig fleet and U S supply.
Given the available idle rigs that can be deployed through time.
We see no need for new build capacity on our mid to long term planning horizon.
H B sleep is approximately nine years old on average and has a composite weighted average accounting life of 15 years. However, the economic life of the rig structure is 30 plus years with a major rig components, including blowout preventer as top drives and engines regularly refurbish to via our maintenance capex, thereby extending their economic lives.
Complete rig is simply to have a long horizon that economic return generation.
We regularly conduct R&D efforts for rig improvements. We currently see no breakthroughs that was the plan today is a uniform flex rig fleet.
Their expectations for general and administrative expenses for the full fiscal 'twenty two year have not changed and remain at approximately $170 million. However, we expect second quarter SG&A to be higher than the final two quarters of the year as unexpected Q1 expenses were delayed into Q2.
We are now estimating our annual effective tax rate to be in the range of 10% to 16% with no change to the previously guided range of anticipated cash tax of $5 million to $20 million.
The difference in effective rate versus statutory rate is related to permanent book to tax differences as well as state and foreign income taxes.
You will notice that our income statement has a new line gain on reimbursement of drilling equipment.
Which has historically been included in the line item gain or loss on sale of assets. We broke this out to provide more transparency around income that is derived from our normal recurring operations and is used to offset a portion of a gross maintenance capex. These amounts were primarily derived from reimbursements. We received from customers for tubular goods that are lost in hole or damaged.
Andre repair.
Now looking at our financial position.
Or companion had cash and short term investments of approximately $441 million at December 31, 2021 versus an equivalent 570 million at September 32021, after backing out the 2025 bond extinguishment.
This sequential decrease is largely attributable to our recent share repurchases a seasonal cash outlay isn't working capital lockup.
The latter half of the first fiscal quarter, we saw a combination of excess liquidity and they're in an attractive opportunity to repurchase some of our shares at prices that we believe to be value accretive.
Through January 28, we have repurchased approximately three 1 million shares total for roughly $76 million.
<unk> $2 5 million shares were repurchased in December under our evergreen annual share repurchase authorization of 4 million shares for calendar year do date in calendar 'twenty. Two we have repurchased about 600000 shares under the calendar 'twenty two 4 million authorization.
These recent repurchases augment our long standing dividend as we allocate excess cash.
Including our revolving credit facility, our liquidity was approximately 1.2 billion at December 31.
Our debt to capital at quarter end was approximately 16% and our net debt was approximately $101 million.
We currently expect our trailing 12 months of gross leverage turn it to reach our goal of less than two times outstanding debt during this fiscal year.
<unk> debt metrics continue to be a best in class measurement amongst our peer group and as a reminder, our sole remaining long term debt carries a two 9% interest rate and matures in 2031, our credit rating remains investment grade.
As mentioned on our last call working capital as a use of funds as our rig count rises and that was substantial during the quarter. Given the addition of 27 rigs.
Our accounts receivable at fiscal year end of 229 million undergrad by $53 million to approximately $282 million. The preponderance of our AAR today continues to be less than 60 days outstanding from billing day, although historically, we have experienced seasonal calendar year.
Year end collections slowdowns as we just did.
Consolidated inventory increased slightly for the first time in over a year finally, as a reminder, our annual short term incentive bonus compensation and our AD valorem taxes accrued throughout the year and we pay all of the compensation and most of those taxes during the first fiscal quarter.
With that as background as expected fiscal Q1 saw lower cash flow from operations than we expect for the next few quarters due to the rig ramp up into seasonal cash expenditures as of today, we expect to end the fiscal year with between 400 and $450 million of cash and short term investments on hand down for.
The range of $4 75 to 525 I didn't guide it on the November call due to the aforementioned share repurchases.
As I mentioned on our November call, we expected to use a moderate amount of cash on hand, as we work towards the calendar year, and the 150 plus rig count activity level.
As expected growth in rig count early in the fiscal year. It provides a platform for cash generation in the second half of the year that point forward fully covers our cash usage, including our dividend and sets the stage for cash accretion.
That concludes our prepared remarks for the first fiscal quarter, Let me now turn the call over to Gretchen for questions.
Yeah.
At this time, if you'd like to ask a question. Please press. The Star then one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key once again that is star one to ask a question.
We'll pause for a moment to allow questions to queue.
And our first question comes from Ian Macpherson from Piper Sandler Your line is open.
Good morning, John and Mark.
Good morning Ann.
So.
Curious on lead times, obviously, you have very clear contracted visibility into your fiscal Q2.
Rig ads, we have a higher oil price deck than we had last time, we spoke clearly.
You know more impetus to drill in the second half of the calendar year.
I wanted to hear what your expectations are for bottlenecks to continue to add rigs through.
Calendar Q3 and Q4.
And what your delivery lead times look like if I'm, if I'm, a private E&P with zero or one rigs running today and they need another one no I'm not just weighing on H P. I'm waiting on other equipment.
Equipment providers, as well, but how how easy or difficult would it be to deliver them more rigs in the back half of the calendar year.
Sure Ian you.
You know from an equipment perspective, I don't know of any any particular.
<unk> that we have at least for the foreseeable future for the next a.
A couple of quarters based on what we see right now I would say.
You know kind of going back to the same the biggest probably the biggest bottleneck to growth for us is just being able to get pricing at a level that makes sense to make the investments that we need to make in order to re commission the rigs.
There's a there's obviously some capex associated with that.
As well, but you know most of that is just pure re commissioning costs and just getting the pricing.
You know I think law I'm trying to think past maybe the next several several quarters, where maybe into 2023 I know.
You know V O piece or a potential bottleneck.
That are out there.
Dave Mark anything else that.
You're aware of no.
So he and I think we're in pretty good shape with our with the fleet and the.
The fleet that we have the inventory that we have on hand as well as the you know the internal capabilities that we had to that we have to.
Repair and get quick equipment in working order.
Okay. Thanks, Jon if I, if I heard you correctly and correct me if I if I misstate. This you said I think 30% of the industry rig adds last quarter, where you're getting rigs.
And if that's the case are those customers that are accepting skidding rigs with.
An expectation to be upgraded to a fully walking rig at a later point in time or are those applications, where the skidding rig.
It is just what they need because I do think that that was a point of.
Maybe controversy coming out of last quarter's discussions.
Sure No you know we have our customers that have a very high demand for for skidding skidding rigs that's their preference you know their preference.
It's the rig they've used a you know for several years now and that is there a preference whether it's a flex three oraflex five.
There are some customers that have a preference for the walking application as you know when I say preference is really driven by factors related to the you know their location in.
And well configuration, but we also have a lot of customers that use both I mean, they have both the flex.
Flex III scared flex fives and they have a you know the flex III walking.
So it's pretty much across the board I Hope you know Mark made a great point with you know the ads that are that we've seen during the during the quarter and really during the year you know that the.
Skidding rigs of have picked up pretty substantial amount of market share.
Okay, great. Thank you John .
Thank you.
Our next question comes from Scott Gruber from Citigroup. Your line is open.
Yes, good morning.
Good morning, Scott.
Mark can you just give me again the AR.
Expected cash balance at fiscal yearend I missed that earlier.
Sure Scott it's.
Four.
$404 50, so it's really just down.
By the 75 approximate of share repurchases that we discussed.
Gotcha and I appreciate that.
Yeah thinking about cross return.
How did your longer term your free cash potential is going to improve here in the second half of the year and into 'twenty three.
Yeah, just thinking about how you know buybacks.
Yeah, how much emphasis you gotta place on those into the future.
Is it going to be an increasing pointed out.
So the company into the up cycle and a longer curve, yeah do you believe that cash.
Cash flow per share growth shouldn't be a strategic priority of the company.
But the energy transition.
Okay.
Well I'll start off and then.
John or Dave chime in but.
You know are absolutely growing.
Our cash flow is paramount and in a lot of the theme that John discussed around pricing as it related to.
Absolutely as it relates to these particular buybacks you know as I mentioned, we thought there was value dislocation and we thought it was very opportunistic couple that with what we believe to be <unk>.
Excess liquidity on hand, coupled out with as I mentioned looking ahead in our debt metrics for the trailing 12 months during this fiscal year getting below two times turn.
You know add all those things up with a $4 million I mean, the 4 million share pre authorization.
It just seemed like the prudent prudent investments.
To make we will.
<unk> do you use that as a as a lever you know together with our longstanding 60 years of dividend payments.
And you know this is one of the really great things about looking ahead is that these are the discussions that we as a management team are having.
Today.
And with our board about capital allocation and the cash build that will be having so these options are.
Or was it a front and center for us looking at the long standing dividend.
The share buyback potential and who knows maybe a special dividend as we move through time, but we're still formulating those is still deliberating. The exact methods are more to come on that.
Okay got it.
And then just another one on yeah. The appetite for performance based contracts have you seen a mark.
The appetite to enter those performance based contracts over the last.
Three months in.
He can provide some more color there.
The terms and conditions are starting to become more favorable for you in terms of achieving the bonuses.
Yes, Scott you know its interesting its a as you know time flies its been two years. Since we first started talking about new commercial models and changing away from the day rate the day rate model and you know those for several quarters it was pretty pretty slow adoption.
But as we've said, we're you know we're around 40% of our working rigs today.
You know it's.
It is a it's really a partnership working with our with our customers and you know what's what's great about it is there's a portfolio of different options that we can provide for the customer working together based on what you know what's most important to them in terms of the outcomes that they're looking for are the areas that they're challenged with.
In terms of driving driving performance so.
There's no doubt that you know as you look at kind of our base revenue per day.
That that number has moved up significantly significantly on the performance base just like just like our spot pricing and then as you as you look at leveraging the technology components and figuring out you know.
Again back to what are the outcomes that we're trying to provide for the customer there continues to be a you know an upside for us. So yeah. I think it's a I think it's a good trend in the industry in and again, we're getting a lot of uptake from from new customers. You know a lot of growth with customers they've been working with assistant with with.
On this all along but we also have some new customers as well.
Okay I appreciate the color. Thank you.
Uh huh.
Our next question comes from Taylor Zurcher from Tudor Pickering. Your line is open.
Hey, John and Mark Thanks for taking my question I wanted to circle back on some of the pricing comments you made John you talked about a few of your I think several of your rigs approaching $30000 of revenue per day, which is materially higher than.
What you reported this quarter I think somewhere in the neighborhood of $23000 in revenue per day. So I'm just curious when it comes to about $30000 a day number.
I imagine that's including.
A whole host of solutions, including digital that you provide and it might be more on the performance first traditional day rate side, but I mean should we be thinking about close to $30000 a day and as you know true leading edge, whether you're on the traditional day rate model or the.
Performance based model and just more importantly, with all of these inflationary items impacting cost how should we be thinking about that $30000 a day I'm not translating into margins should we be using a 15000 dollar type type costs remember there.
Yeah.
Well Tyler starting on the on the cost side.
Today, you know 15, but you know our you know our goal is to get there I think what we guide.
For a little higher than 15 and guidance. We just gave gross margin guidance. So.
As I mentioned in my prepared remarks, we do we will get over 15000 in this quarter.
Taylor, So you know somewhere between 15% and 15 five yep.
So I think that you know the the the point is is that it is a.
This 30000 revenue per day, it is a very tight market.
There.
We're faced with obviously significant recall costs everybody everybody has seen that.
We've we've had substantial investments in super spec capable.
Capability and performance.
You look at oil and gas prices and how they.
No there really at eight year highs.
And you know you're going back to that period of time, when we last saw pricing oil prices at that level our average.
Day rate on a rig was between 25 and $26000 a day.
So our costs are up three to $4000 compared to the same period of time. So you know as you start looking at that and you look at the inflation. It just you know that $30000. A day revenue revenue per day really makes a lot of sense. Obviously, you don't get there overnight and but that's that's part of.
But the point to make is that in a downturn rates dropped immediately overnight and Internet you know and as.
As you start to see the market improve you know were 17 months since the.
The bottom.
And we've had you know really we're appreciative of the increases, but they're pretty nominal when you compare to where we were at the bottom in terms of average pricing. So we got to get that average pricing, but again, we wont get there overnight.
But we have evidence that its possible we have it out in the in the market today.
With customers that are our you know really saying a lot of value.
With the performance based contracts from the technology solutions that we're providing.
Understood. Thanks for that and then a follow up there just on the contract market and it sounds like based on that response in some of your earlier comment that that pricing is becoming a bit of an impediment to reactivate a bunch more rigs in and says I'm looking at your contract book, you've had a bunch of turning a bunch of new term contracts, but not many.
With variations of longer than 12 months. So just curious if you could frame for us what a customer appetite is today to not to lock in terms longer than 12 months and what your appetite is today tend to lock in terms longer than 12 months at current pricing.
Yeah, So I think it's.
When you when you.
You know when you say current pricing not current averages, but our current leading edge I mean, we have entered into 18 month in a two year terms or in the process I'm not certain that their sign now I think some of them some of them are.
But there you know they're in the 18 to 24 month in there at that leading edge pricing as that I'm talking about you know mid twenty's in terms of.
A base rate and then you have.
Technology solutions and other performance criteria in order to get that pricing.
Up from there.
And just to give you a little color answer the specifics other than that of the 27 rigs. We added during the first quarter. Taylor you know 12 around term 15 were on spot, but more recently the 10. We've added this calendar year to date you know seven of those are on term and three are on spot.
Yeah.
So as I answered correctly, yeah. We're we're definitely looking at term contracts. We have customers that are interested in term contracts. So you know our desire would be to keep doing that so keep in mind also we have rigs that are rolling off of term during the quarter.
And.
You know some of those rigs will roll back into it or of course, it at much higher pricing it would be our expectation and where they are today I would imagine you know some of those those rigs would also roll into performance based contracts as well.
Understood. Thanks for that appreciate it thank.
Thank you.
Our next question comes from John Daniel with Daniel Energy. Your line is open.
Thank you.
John and good morning, I missed a lot of your mouth.
One question and one of my colleagues.
At times.
So Tom.
Since you're going to run them.
Would you characterize your involvement according to price or perhaps a blessing of Christ CT historically on them how did you come across that uncle in Mexico.
Yeah.
Well I'm I'm definitely not an involved on a day to day basis, but are clearly and you know in terms of setting pricing and expectations I'm you know I'm I'm involved with that.
But you know the overall leadership team.
Weighing in on that.
One of the things you know its interesting John It's a great question is as I as I think about.
That.
There's a benefit to being in this business a really long time.
And there's also the things that work against you over time, because you begin to ask yourself. So why does you know.
Ken.
And in a down cycle as I already said rates drop overnight in an up cycle as it starts to improve it moves very very slowly and and where is it written down that it has to be that way. So as you as you go back into looking at the actual data you know we've had a really tight market now for a couple of quarters.
Even though there's available capacity, it's a really tight market for lots of reasons.
So we we definitely spend a lot of time on pricing strategy.
And we're using tools today that are we've we haven't used previously.
That utilize data in a much more effective way. So it's not just a gut feel it's right.
Again, we've got a dataset.
That that we fully that we fully understand.
That.
It's not just a maybe it's a it's a certainty that the pricing needs to improve.
I would agree with Brian .
A bigger question and not meant to be group.
If oil prices and commodity keep bleeding out do you see yourself getting into point, where you say this is the law and this is how we're going to run it or is that a little bit too.
Too much be enough a dictatorship on your part I'm just curious how you'll approach that point.
Well John you know are we're in the customer service business and yeah.
Opinion.
Yeah and.
You know I I'm not in a habit of dictating to two customers you know obviously in a tight market.
There's there's.
There's a lot of demand and there's there's little supply, but again I think in most cases, John our customers.
I mean, they're true it's a true partnership where working together, we you know what I mean, let's face. It you know we're are up.
Obviously, a public company that has to you know has to make better returns for our shareholders and we're trying to do the same thing for our customers. So we're really working arm in arm in arm a trying to make this happen.
Fair enough and that wasn't kind of broke out some questions just mature.
I know John you'd never do that.
Uh huh.
Some of our remarks.
For a moment.
I apologize.
If a customer calls.
I need the macro to go once you bring it back realistically, what's the time from today when that field.
What's the what I'm, sorry, just as other pizza like bringing a cold stacked rig back with the.
The realistic timeframe to having that out.
I haven't checked on that lately, John but I think generally speaking you know we've got a couple of weeks to pull people together, probably four to five weeks in general to get everything.
Ready you know.
Six months ago. It was probably two weeks and you know a year ago. It was it was a week so.
It does it does take it does take longer and you have to also realize that you know just like last quarter. We we.
We put 27 rigs into the market.
And again hopefully this this quarter will be closer to 20.
Okay.
So got it fair enough and the last one for me and this can be glad to answer because you might not have.
Okay.
Got it.
Recall, our real inquiries, if you will sort of bracket what percent would be integrated versus just remaining publics versus privates.
But you're correct I guess is fine.
I think just the mix between private and public I think its 50, it's probably no. We got it we got about 40% that are private.
Terms of rig count and then the other 60 or public and John with within that public.
Yes, 10%, there's a little less than 10% as the majors.
But what about the inquiries you asked about was that even though.
Yeah.
That I don't understand it.
If yeah pretty soon.
Have it in front of us, but I think it's pretty similar John .
Okay, well thank you.
Hum.
Hope you guys helped us look.
Look we've seen a few weeks yes.
Yes, looking forward to see you John .
Our next question comes from Derek <unk>.
Sir from Barclays. Your line is open.
Hey, Good morning, guys I just wanted to go back to the daily margin conversation. The the physical teach too cute guide implies margins look to stay kind of in the flattish range, excluding reactivation expenses.
Can you talk about where you see them going in fiscal second half 'twenty to the level of expansion driven by both the revenue side and then the cost side as well as rigs are added just thinking in the backdrop of you.
You talked about reaching 30000 per day, and those costs normalizing around that $15 50, and a half range.
Derek I'll start.
And then.
As John to chime in here as it relates to you know that cost range. You just mentioned I think so.
Let's start you know we will see.
As I mentioned, the full effect of the labor increase you know hit us this quarter.
And are you now and thankfully, we're starting to see some stabilization as I mentioned from an M and asking them for.
Perspective.
But what I, what I'd say is that you know as we add more units for continued continue to have assistance from just fixed cost absorption and the scale as a as we've really benefited from this quarter that we're talking about here. Today ended 12 31, we'll continue to see that it will continue to manage cost.
Recipe as we as we have been which has given US. This result, this last quarter, but I think the opportunity set in front of US is really everything about the theme. The John has been discussing from the outset of this call today, and that's getting the pricing up where we needed it to be.
To get to the right return.
Or return that.
Gets to our cost of capital has a hurdle rate in it and above it that's where we have to be.
As a corporation and and that's where the upside could come from through that through the year, John anything to add to that yeah, I don't really have anything to add.
Okay.
What do.
Do you think you can get to a margin with a nine handle.
The second half of 'twenty two.
Paul.
Well.
I think excluding reactivation, sorry, excluding reactivation.
Yeah, well and that's part of the that's part of the opportunity right is that if if this year follows like 'twenty, one, whereas you've got you know that the rig count ramp at the first the first quarter of the year of the calendar year.
And then it kind of flattens out slightly up then obviously the rig re commissioning cost go away.
And and you know you're you're focusing your costs are down and so you're focusing on on a growing margin through through pricing.
Okay. That's helpful. Thank you switching over to China, where it kind of in the new the new energy theme.
Q thermal obviously the news flow has been picking up there I know you guys had a few after the investments are helping out some pilot programs.
Kind of talk to that how that that's about developing and progressing just thinking about what's been put out by the California public utility with a 1000 megawatts requirement for geothermal in the grant just just any updates there.
How how those how those pilot projects are developing.
Sure.
Well I'll, let mark talk about some of those developments some of the investments I will say that we do have a rig working today are drilling a geothermal well in Nevada, and it's drilling a couple of horizontal wells and in a vertical well and I think it's the first horizontal.
A geothermal well in the U S. It's been drilled so we're excited about <unk> excited about that and seeing some opportunities there.
Or if you want to talk about it.
Sure.
Well Derrick as it relates to it we're always looking at.
<unk> been making in our financial and operational decisions for the long term interest of the shareholder and with regards to geothermal.
You know, we're looking at several different opportunities across the entire spectrum of G O opportunities instead of focusing just on one particular aspect so.
Companies have different strategies to get to scale geothermal and its early in the development of that here in the in the U S and internationally.
The market is developing it's taking time some of these technologies have to be proved out.
The wells as John just described are are a part of that process and then we recently invested.
And two separate geothermal companies one is pursuing a closed loop concept that uses horizontal multilateral well bores the others pursuing the enhanced.
Geothermal system concept using horizontal drilling has just discussed.
And then you know the collective investments to date of about $12 million and I'll add to that that further in our pipeline. We are in various points of discussion was around the 10 companies.
Focusing on geothermal.
Potential scale advancements globally. So we definitely are very active in that space, we participated as a geothermal conferences.
And look forward to doing some more of that and we're making prudent and appropriate investments. We think you know with the right sort of levels.
And that includes also in time services as well so more to come.
Great exciting stuff. Thank you.
Thank you.
Our next question comes from Wyatt Carr site from ATB.
Hi, Thanks for taking my question John first of all congratulations on a great sustainability report really sets a new standard for our sustainability report. Thanks. So my congratulations to you and your team.
Thank you Robert.
Really hard on it.
Out of them.
Great read yet.
Now my question is on the greenhouse gas emissions.
Panting typically from the service industry is that the greenhouse in the D&S.
As gas emissions from this equipment and services at the well site go into the inventory off the E&P company or the customer you've taken a slightly different approach to that could you maybe elaborate the approach that you took and why.
Yeah, well Carl I'll handle that one.
You know for us to come out and say, Hey, you know all our emissions or somebody else's problem.
Problem.
From a credibility standpoint, I don't think that would sit well with investors. So we were able to determine what our rigs are.
Emit as far as the missions and so we're just being transparent that this is what this is what we've been able to track over the past few years do that so there is some shared accountability there, but we want to be.
Uh huh.
Having a full transparency and increasing.
Some trust in the market, but we're not shying away from this challenge and we're going to meet it head on.
Great. Yeah, you guys did a screen very well on our ATB ESG framework. So congrats on that John just one other question on the outlook for activity do you have any visibility into the second half and do you see that they could still be some growth in the second half, but do you think most of them.
Rig increase their activity increase in the U S is just a first half weighted.
Yeah, what car, it's a great question, because we've been thinking about it very similar to <unk> to 'twenty, one and you know of course.
In 'twenty, one you had the for the fourth quarter of 'twenty and in the first quarter of 'twenty, one is where the ramp up was and we've really seen the same thing in the fourth quarter of 'twenty one in the first quarter of 'twenty two.
And our belief has been that it would mirror our 'twenty one very closely even though there was some slight uptick in and in activity.
But obviously, there's you know it's hard to it's hard to say past here I think once we get to a more kind of a standard rig count.
Wherever that's gonna wherever that's going to land and then you kind of start looking at the the budgets that our customers have we might be able to drive a little bit more out of the public company.
Budgets from there, but it's hard to say and of course, we don't have any really any insight into the into the private company. Besides just conversations that we have going on but.
Hard to say at this point our hope is of course is that we'll see some additional growth along with the pricing you know pricing improvements at the same time.
But does the industry's ability to move pricing up.
Yeah, how do you see that like once the rig activity.
Growth starts to slow down.
Yeah. It's you know, it's a really tight market.
Or are there are you know just a very small number of rigs that have worked in the industry over the you know.
Less than two years period of time, you know like in other words rigs that that were working prior.
Prior to the pandemic. So you know if there's a there's a large investment to be to be had so I just think with with our the amount of activity that we have it and I'm talking primarily about the super spec space.
We're close to 70% utilization, but you know again there the rigs the rig supply is very tight and the same way the same way with the people side of the equation. So I think there's going to be a lot of pricing power moving forward.
Yeah. Okay. Thank you very much appreciate you taking my questions. Thanks Waqar.
Yeah.
And it appears that is all the time, we have for questions I will now turn the program back over to John Lindsay.
Okay Gretchen thank you.
Thanks, everybody for joining us today, we are very optimistic about the future.
And the momentum that we've garnered during the past several years as we've said we think we're very well positioned for the future. We've got a strong balance sheet, we've got the largest and most efficient super spec flex rig fleet.
Technology solutions, a leading customer satisfaction delivered by the best people in the in the drilling business. So again. Thank you for your time, we appreciate it and have a great day.
Yes.
That concludes today's program. Thank you for your participation you may disconnect.
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