Q2 2022 Helmerich and Payne Inc Earnings Call
[music].
Good day, everyone and welcome to the Helmerich <unk> Payne fiscal second quarter earnings call.
At this time all participants are in a listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session.
You start to ask questions at any time by pressing the star and one on your Touchtone phone.
You may withdraw yourself from the queue, but breaking the pound key.
Please note this call maybe recorded and I will be standing by should you need any assistance.
Now my pleasure to turn the call over to Dave Wilson, Vice President of Investor Relations. Please go ahead.
Thank you Nikki and welcome everyone to Helmerich campaigns conference call and webcast for the second 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 in the securities laws.
Such statements are based upon current information and management's expectations as of this date and are not guarantees of future performance forward 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 direct margin and other operating statistics, you'll find the GAAP reconciliation comments and calculations in yesterday's press release with that said I'll now turn the call over to John Lindsay.
Thank you, Dave and good morning, everyone and thank you for joining us today.
Since August of 2020 oil and gas industry has been undergoing a record recovery from the worst downturn in its history.
Just when we thought the environment was beginning to normalize another geopolitical event Russia's invasion of Ukraine unleashed immediate and lasting ramifications.
This has provided a sharp reminder to everyone. How critical abundant cost effective and secure energy is to sustaining security and the broader global economy.
Given the industry's negative experience in recent years it should be no surprise to anyone that U S. Producers have remained cautious rational and disciplined with regard to their capital expenditures.
Even in the face of spike in commodity prices.
<unk> strategy is to also maintain capex budget discipline and holding that line is something we believe is crucial to creating a healthy and sustainable company over the longer term.
The industry rig count increase in the March quarter continued to shrink the availability of Super spec rigs that have worked at some point in the last two years.
This is compounded the preexisting supply demand tension in the market.
We are pleased with our progress and momentum during the quarter, which saw our active North American solutions rig count increase in line with expectations exiting the quarter at 171 rigs after a re commissioning 17 flex rigs and physical.
The second quarter and 27% in first fiscal quarter.
From here, we expect to see our rig count growth moderate in the coming quarters as there is more rig churn developing in the market.
We expect to maintain responsible capex spend given the budget, we set for the year.
You may recall in November we set our 2022 capex budget range of $250 million to $270 million.
That budget was set at a point in time, where we expected to end fiscal 2022 with around 160 active rigs.
If everything goes as planned we now expect our rig count to peak early in the fourth fiscal quarter at 176 rigs.
While remaining within our Capex guidance.
Like 2021, we have front loaded our rig activity for our fiscal year in Q1, and Q2 positioning us well for the rest of 2022.
Accordingly, we remain laser focused on improving pricing and creating returns for our shareholders and not on chasing the rig count or market share.
That said, we plan to remain the leader in the U S land rig market by continuing to deliver great outcomes for customers and receiving the appropriate margin for the value we deliver.
Like our customers, we are requiring more from every capex dollar spent and we note a similar trend occurring within the oilfield service industry.
This and other factors could lead to the persistence of a tight supply demand environment for Super spec rigs in the U S.
Which in turn should help move rig pricing to levels more in line with the value we deliver.
The economics for our spot contracts are improving at a rapid pace and we expect similar improvements for our term contracts as they are renewed or moved into the spot market in the coming quarters.
As I mentioned on our last earnings call.
We believe these conditions could provide a pathway to achieve average spot contract economics and.
In excess of $30000 per revenue day.
We already have many instances of achieving this pricing level in today's contracting activity.
Given the increased cost structure of the industry over the past several years attaining this level of revenue is necessary to garner, 50% gross margins, which we haven't experienced since 2014.
Assuming the market remains strong this market. This margin will enable <unk> to generate returns in excess of our cost of capital to the benefit of all of our stakeholders.
I want to thank our operations.
Our sales and our marketing folks that are working hard to help HMP provide and get paid for the value proposition we deliver.
As we've previously noted the value proposition <unk> brings to its customers is enhanced through technology, driven efficiency and wellbore quality.
This combined with the current market dynamics is differentiating our performance and accelerating improvements in our contract economics.
Mark will touch on our capital allocation strategy, but at this juncture, let me underscore that the company remains fully committed to it's fiscally sound and disciplined approach to capital allocation.
By continuing to do this we can maintain our long standing dividend and pursue opportunistic share buybacks.
This also positions us to explore other ways of returning cash to shareholders as more cash is accretive on the balance sheet.
Now shifting to the international markets the outlook remains positive with additional developments and prospects progressing even though at a much slower pace than we are experiencing domestically.
In our South American operations, Argentina, and Colombia remained focus areas and we have begun to contract additional rigs in those countries.
In the middle East our strategy and opportunity sets are a bit different.
We have delivered some of the flex rigs, we sold to add not drilling and are moving forward with a strong business alliance, we established with them.
We are also actively pursuing opportunities to export some of our idle super spec capacity into the region. In fact, we plan to start moving a rig into our middle East hub during the second half of 2022.
While we're optimistic about our strategy in the Middle East. We're also keenly aware that this is a long play and it will take time for opportunities to emerge and fully develop.
We don't often discuss in great detail or get a lot of questions about our Gulf of Mexico offshore segment.
Our offshore operation has been an important part of our company for 50 plus years, and we will continue to play an important role in <unk> future.
We've achieved many successes over the years and delivered exceptional service to our customers in fact, some of our most impressive operational and safety accomplishments took place.
In our offshore operations during the pandemic.
On the pricing front, we expect that the margin improvement we are experiencing in the U S will begin showing up in our offshore segment in the coming quarters.
Our technology solutions continue to deliver clear differentiation and is providing very relevant value to our customers. Both in the U S and international markets.
We are continuing to grow auto slide our automated directional drilling solution as well as automated survey management in combination with our new commercial models.
Most recently, we introduced several game changing solutions to our portfolio.
Engine management, and a suite of failure prevention technologies.
Engine management delivers on our commitment to sustainability efforts by autonomously minimizing excess flex rig engine hours lowering emissions, while also delivering reduced fuel consumption for our customers.
Failure prevention automation, such as our newly launched Histolysis protects expensive downhole directional tools, increasing the longevity of those tools that may be hard for operators to source in today's environment.
With current supply chain and labor constraints. It also provides consistent and repeatable execution, removing human variability and preventing expensive downhole problems.
The key to these solutions as market relevancy as both of these additions are particularly pertinent to challenges operators are currently facing in alignment with our focus on delivering better outcomes.
Finally, we continue to further our strategy of deploying our capital and expertise to companies playing an active role in the energy transition.
We've made selective investments in adjacent industries like geothermal companies that are looking to provide an alternative carbon free base load power source.
And more recently subsequent to quarter end, we made a $33 million investment in Galileo technologies in the form of a five year convertible note.
Galileo has a wide global presence through providing modular scalable and portable equipment to capture compress liquefy and transport the gas as LNG basically, creating a virtual pipeline.
This gas can originate from various sources, including Wellheads and stranded gas that may otherwise be flared.
The opportunity here lies in Hep's in Galileo shared global customer base and <unk> various drilling sites that have the potential to assist galileo's growth, particularly in the U S.
We believe their natural gas technologies and equipment systems have the potential to become increasingly relevant as the global demand for natural gas is expected to increase as an important component of the energy transition.
In closing while it is encouraging to see the industry rebound, we should be reminded of past cycles with elevated commodity prices.
And which the drilling industry repeatedly responded by adding excessive capacity only to reap long term negative consequences.
So far this cycle is different.
During my career I've never seen a more consistent focus on value creation and getting paid for the value <unk> provides.
I am continually inspired by and thankful for our employees their passion for taking care of our customers and their innovative spirit that truly differentiate hmp's offerings in the market.
Combined with our flex rig fleet in automation solutions I believe we will continue to lead the way forward in our industry and partnering with our customers to create value for both groups of shareholders.
And now I'll turn the call over to Mark.
Thanks, John Today, I will review our fiscal second quarter 2022 operating results provide guidance for the third 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 second quarter ended March 31 'twenty two.
We generated quarterly revenues of $468 million versus $410 million in the previous quarter as expected the quarterly increase in revenue was due in part to higher rig count activity in North America solutions as operators continued to commit to calendar 2022 drilling activity.
Further we benefited from rapid execution by ourselves and operations teams on the necessary price increases that John mentioned on our previous quarter earnings call.
Total direct operating costs incurred were $341 million for the second quarter versus $301 million for the previous quarter. The sequential increase is attributable to the aforementioned additional rig count as well as the full quarter impact of the wage increase mentioned in our February 22 call.
General and administrative expenses totaled approximately $47 million for the second quarter higher than our previous quarter and our expectations due in part to noncash mark to market adjustments of deferred compensation that are correlated to our stock price as well as increased infrastructure spending.
I will comment on G&A guidance later in these remarks.
During the second quarter, we realize additional gains of approximately $17 million related to the fair market value of our AD not drilling investment, which is reported as a part of gains on investment securities in our consolidated statements of operations.
To summarize this quarter's results HMP incurred a loss of <unk> <unk> per diluted share versus a loss of <unk> 48 in the previous quarter second quarter earnings per share were positively impacted by a net <unk> <unk> per share of select items as highlighted in our press release.
The gain on investment securities that I just mentioned.
Absent the select items adjusted diluted loss per share was <unk> 17 turns in the second fiscal quarter versus an adjusted <unk> 45 loss during the first fiscal quarter.
Capital expenditures for the second quarter of fiscal 'twenty, two were $60 million.
Slightly below our previous implied quarterly run rate guidance.
As a reminder, first quarter Capex was also below guidance at $44 million for the timing of some spending has been pushed to the second half of the fiscal year as key suppliers continued to rebuild capacity that was taken offline during COVID-19 restrictions.
This includes the hiring and training of labor and the sourcing long lead raw materials, such as steel and copper.
A&P generated approximately $23 million in operating cash flow during the second quarter of 'twenty, two and a lot of additional comments about our cash and working capital later in these remarks.
Turning to our three segments, beginning with North America solutions segment, we averaged 164 contracted rigs during the second quarter up from an average of 141 rigs in fiscal Q1, we exited the second fiscal quarter was 171 contracted rigs, which was in line with our guidance expectations.
We added 17, new rigs to our active rig count in the second quarter, including four walking flex rig drilling rig conversions that were completed in fiscal Q2, and 13 skidding rigs.
Revenues were sequentially higher by $68 million due to the previously mentioned activity and pricing increases segment direct margin was $114 million at the top end of our February guidance, a sequentially higher than the first fiscal quarters $84 million.
Overall Opex for North America solutions segment increased on a sequential basis due to the aforementioned increase in our rig count quarter on quarter and the increased wage rates.
The reactivation cost incurred during Q2 were $14 2 million compared to the $25 million in the prior quarter. These reactivation costs were higher than expected as we have stated on prior calls reactivation costs increase.
Time and rig has been idle accordingly, we expect these costs when and as a cure incurred in future quarters.
To continue to increase given that the average idle super spec as to the stack for two plus years.
Inflation is starting to put upward pressure on the reactivation cost per rig.
Looking ahead to the third quarter of fiscal 'twenty, two for North America solutions as I mentioned earlier, we ended Q2 near the mid point of our exit guidance range.
As with last calendar year public customers are holding their activity within their annually budgeted plan. We believe this fiscal discipline will continue until the end of the calendar year with many of these customers commence their annual budgeting cycles for calendar 2023 due.
Due to the re activation operating expenses and capital expenditures required to reactivate long idled rigs.
We have undertaken two initiatives. This fiscal year first we are increasing our pricing across the active fleet and second we are holding the line on reactivating rigs beyond existing commitments. This fiscal year to remain within our fiscal capex budget much like our customers are doing.
Further as we get into planning for next fiscal year.
We will only be reactivating rigs for pricing and terms that ensure a return on the significant opex and capex investments required to bring the rigs back online.
As of today's call, we have 173 rigs contracted and we expect to end the third fiscal quarter of 'twenty, two with approximately 175 contracted rigs.
Our current revenue backlog from our North American solutions fleet is roughly $534 million for rigs under term contract as mentioned.
Last quarter. This figure does not include additional rig margin above base day rate. The HMP can earn if performance Kpis are met once the well is completed.
Our focus on pricing is targeted at achieving the pricing levels that John mentioned in order to drive towards 50% margins.
Since the pricing peak in 2014, we have not returned to that pricing level in subsequent cycles. Despite rising operating cost driven by inflation longer wells in shorter drilling cycle times on top of the significant capital investments required to high grade our U S fleet to Super spec capacity.
Our focus on this margin level is tied to our goal of achieving blended corporate returns greater than our estimated cost of capital.
Following the unfortunate geopolitical developments since our last earnings call inflationary pressures on costs as well as constraints on supply chain capacity are increasing.
While inflation.
The increase these costs make up less than 20% of the daily operating cost on a rig.
Our scale also enables us to work with our key suppliers to ensure access to timely deliveries of materials and supplies.
In the North American solutions segment, we expect direct margins to range between $150 million to $165 million inclusive of the effect of about $5 5 million and reactivation costs in Q3.
Regarding our international solutions segment International solutions business activity decreased by two rigs to six active rigs at the end of the second fiscal quarter as discussed last quarter, we idled two rigs in Bahrain due to changes in the customer's drilling schedule.
We added a rig in Argentina as expected, but unexpectedly had a rig released offsetting that gain.
International results were above guidance due to multiple immaterial transitory items as we look towards the third quarter of fiscal 'twenty two for international we expect to add two rigs in the blocker mortgage region of Argentina. This quarter. We further expect to add a second rig in Colombia. This month to getting us nine working rigs internationally by the end of Q3.
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Aside from any foreign exchange impacts in the third quarter, we expect to have between a $3 million to $1 million in direct margin loss due to expenses associated with the rig startups that I just mentioned as well as our initial thoughts.
Hum.
Turning to our offshore Gulf of Mexico segment, we still have four of our seven offshore platform rigs contracted in all three of our management contracts on.
On customer owned rigs are now on.
Drilling rates versus two <unk> for all of Q2.
Offshore generated a direct margin of about $8 $3 million during the quarter, which was above the high end of our estimate due to lower than expected cost.
As we look towards the third quarter of fiscal 'twenty two for the offshore segment, we expect that offshore will generate between $7 million to $9 million of direct margin as we will have all three of our management contracts on full drilling rates for the majority of the quarter.
Now, let me look forward to the third fiscal quarter update full fiscal year 'twenty two guidance as appropriate.
Capital expenditures for the full fiscal year are still expected to range between $250 million to $270 million with the remaining spend of approximately $156 million at the midpoint to be distributed fairly evenly over the last two fiscal quarters.
Our expectations for general and administrative expenses for the full fiscal year 2022 are now expected to be just over $180 million the.
The increase over prior guidance is due to the factors, which drove our second quarter results as previously mentioned.
In addition, given the stronger than expected market conditions relative to our expectations in November we have eliminated. Some previously planned cost out efforts in the second half of the fiscal year to support our higher rig count and our plans for middle East growth.
We will not be providing an estimated effective.
Tax rate range as items impacting our tax provision and income are at levels that resulted in a wide variability and the estimated effective tax rate.
With that being said the U S statutory income tax rate for fiscal 'twenty. Two is expected to be 21%. In addition, we are expecting incremental state and foreign income taxes and permanent book to tax differences to impact our provision.
There is no change to the previously guided range of anticipated cash tax of 5% to $20 million.
Now looking at our financial position.
Or contain had cash and short term investments of approximately $350 million in March 31, 2022 versus an equivalent $441 million at December 31, 21.
The sequential decrease is largely attributable to our January share repurchases geothermal investments and some working capital lockup due to increased activity.
Including our revolving credit facility availability and liquidity was approximately $1 1 billion at March 31, our debt to capital at quarter end was about 17%.
Net debt was approximately $200 million.
We currently expect our trailing 12 months gross leverage turned to reach our goal of less than two times outstanding debt during the second half of this fiscal year.
These debt metrics continue to be best in class amongst our peer group and.
And as a reminder, our sole remaining long term debt matures in 2031, and our credit rating remains investment grade.
As I mentioned on our last call as our rig count rises working capital shows up to the use of funds and that was substantial during the quarter. Given the addition of 17 rigs.
Accounts receivable at December 31 of $282 million grew by $48 million to approximately $330 million in March 31.
With that as a background as expected positive cash flow generation from operations resumed in fiscal Q2, and we expect that to continue to grow through the remainder of this fiscal year.
Apart from operations, our first half geothermal and vessels that had been about $14 million and our investment in Galileo subsequent to March 31 was approximately $33 million.
Due to these year to date investing activities as well as some additional potential investments within our near term line of sight as of today, we expect to end the fiscal year with between $350 million to $400 million of cash and short term investments on hand down from the range of $400 million to $450 million guided on the February call.
As I mentioned on the February call the growth in rig count and really in the fiscal year provides a platform for cash generation in the second half.
Of the year that in our estimation beginning in fiscal Q3 fully covered the maintenance capex and our dividend and set the stage for cash accretion as John stated the company is considering capital allocation strategies for any future cash build including further shareholder returns that.
That concludes our prepared comments for the second fiscal quarter, Let me now turn the call over to Nikki for questions.
Thank you at this time, if you would like to ask a question. Please press star one on your Dutch telephone.
You may withdraw your question at any time with pricing the pound key.
Once again to ask a question please press star one.
Phone.
And we'll take our first question from Taylor Zurcher.
With Tudor Pickering Holt. Please go ahead your line is open.
Hey, John and Mark Thanks for taking my question.
Just wanted to start on some of the market share.
Strategic thought process comments, you made I mean, they're really interesting to me because.
We don't really know.
I don't really hear of a.
Well well capitalized are market leaders.
Talking about not chasing market share on the way on the way up when pricing.
A really strong level, you typically hear and hear about it on the way down.
<unk> going to bare bones level. So I'm just curious if you could give us a bit more color there and then kind of flesh out for us.
Customers coming to you asking for incremental rigs to be reactivated in the back half and <unk>.
You're basically saying I'm not going to happen this year, but check again in 2020 fiscal 2023.
And maybe if determined and economic alignment will do it correct on all those topics.
Sure Tyler Thanks for the question I'll start and Mark and Dave can can chip in I can tell you to answer a part of the question as part of the reason why we're doing what we're doing is as the lessons from the school of hard knocks.
We've seen lots of up cycles, we've seen lots of down cycles and.
And the reality of it is we have a tendency as an industry to oversupply.
Market.
At the same time, we also.
Now back in October I guess, we put our budget together in October we announced in November what our budget, what our capital budget was going to be and like our customers. We think that's a very wise strategy to spend within that budget.
And.
We've been very fortunate in that we've been able to really front load.
Our rig.
Rig <unk>.
Reactivation with 27 in Q1 and 17 in Q2 as we just announced.
And so when you think about.
Back in October we were we were hoping to achieve a 161 rigs.
Working by the end of the fiscal year and here, we are talking about 176 rigs. So we really outperformed in many ways and and again I'm going to repeat the front loading.
Is really important because all of those rigs that we've that we've put to work those that arent.
Arent in the tariff that arent termed up that our spot we're able to move that pricing and we're going to continue to have rigs rolling off. So we just think it's.
Very wise for us to do that.
Our expectation is that.
If prices remained strong in terms of oil prices gas prices, our customers will reset budgets again.
They did in <unk> and.
'twenty, one and then again in 'twenty, two and we will be in a position with our first fiscal quarter.
Fourth calendar quarter to be able to.
To be able to add capacity if the demand is there.
Dave anything else sure I just.
You know in a couple of things first kind of an editorial comment.
As John Rielly said in his opening prepared remarks it.
It's a more purposeful growth of <unk>.
Margins and profits versus.
Market share growth for growth's sake, so to speak you know how our customers are disciplined and they could grow a lot more than $100 oil, but they are they're living within their budgets in maximizing their returns.
We're doing the same thing and there is a lot of churn in the market right now is adding capacity in the face of that as John said earlier just.
It does not seem like the right capital discipline to us.
A further.
More technically.
Adding an incremental rig to the market is more than just about pricing and market share you have to consider the full opex expense and the capital expenditures required to bring that rig to market.
Together with a link of the commitment or contracts, where we're going to be able to recoup the investment.
Uh huh.
Through through the term of the contractor that together with a foreseeable.
Sure our line of sight to future work.
That's a little harder in this current environment, where our customers budget calendar year to calendar year.
And higher reactivation costs, just have to drive higher pricing.
Anyway, we're trying to get to a capital efficient rates here.
Reactivate rigs and what else would have to just consider the longer term.
Okay understood and on all those fronts and thanks for the detailed responses.
A quick follow up on pricing. So obviously now we're in a pretty constructive pricing backdrop, you've been champion championing.
Performance based model for for a number of of corners now of years now.
And I guess I'm curious in that sort of pricing backdrop isn't conducive to more adoption of performance based models or do customers now start to start going away from performance based and back to a more of a traditional pricing models in this in this day and age.
Well Tyler we're still we still have 40% of our rigs that are on a performance based type contracts.
<unk> had that now for several quarters.
Obviously much improved from when we very first went on this journey two years ago like you've mentioned.
So we continue to have customers that are really true partners that are working we're both working very closely together to provide.
Later value.
Improved well cycle improve well wellbore quality wellbore placement.
Enabling automation solutions lots of things that we're working on together to deliver better outcomes at the end of the day for the customer they are willing to share and that I will say that it doesn't always work with every customer.
With some customers.
Sometimes it's harder for whatever reason to partner and we go back to a more traditional.
Contract structure, which is fine.
As long as as long as we're able to to generate the types of margins that we've talked about that are really needed.
For us to you know to continue on this journey to become more and more investable as a company.
So.
It's as you can imagine it's a pretty large.
In terms of the types of customers, but what's great about it is.
Both large small supermajors, we've got a very wide range of customers that are participating with us in these new commercial models and it's delivering a lot of value. So my expectation is that it is going to continue to grow.
And become more popular.
Awesome. Thanks for the answers thank you.
We will move next question, Doug Becker with benchmark research. Please go ahead.
Thanks.
Throw out a hypothetical if all your rigs were.
Magically on the current leading edge economics.
What's a realistic margin per day that could be achieved given regional pricing differences cost differences rig specs contract differences.
And I'm just thinking about back in 2014, there were a few quarters, where we did see 15000.
Dollars, a day and so I'm not trying to get too far over my skis, but.
Just wanted to get a little context about what is kind of realistic just with the economics, we see today.
So I think just high level, our answer would be.
We would be in a position to generate 50% gross margins.
Again.
If you look back at 2014.
We were generating on average 50% gross margins the differences the cost structure was.
<unk> 3000, $4000 a day less than what it is today for lots of reasons I.
I mean in 2014, we might have had a handful of super spec rigs today every rig with the exception of two that's running for US is super spec capacity much more investment the rigs are running much harder.
The <unk>.
Expandable everything we're using it's driving driving the cost up but at the end of the day, it's delivering greater value for customers. So that's really the goal. So I think that would probably be the answer mark you're hearing.
Yeah I agree.
No that's helpful.
And then.
Fully appreciate that market share is not a target it's not a goal, but as we think about <unk>.
Next calendar year.
Could you conceptually or a high level expect to kind of maintain the market share or is it really that is just a complete secondary consideration. It was much more about getting the right type of returns on whats currently deployed.
Well, Doug you've seen us.
Off of the.
At the bottom.
Out of the downturn, we had lost some market share based on.
Our customers are primary customers were those that cut their rig fleets. The most so we've caught back and we I think we actually have more market share to date and then we did so it.
It's not that in certain in certain parts of the cycle market share is an important what we're saying is right now what's most important is generating the margin that we need and living within.
The budget that we <unk>.
Our shareholders.
Our investors that we were going to live with them. So that's most important so we've said this all along we said it.
In 'twenty, one and we're still saying it that 'twenty two we at least we expect is going to play out very similar to 'twenty, one where.
The fourth calendar quarter, we've got a lot of rigs going back to work first calendar quarter, a lot of rigs going going back to work then it gets.
A little flatter you get choppy a lot of churn Mark had mentioned.
Something about that.
We've had I don't know.
<unk> six or seven rigs that have been given back to us for various reasons.
And we've been able to place those rigs with customers that you know that.
Have have programs. So that's worked out really at much higher rates and obviously, a very much higher higher rates. So.
As we as we think about 2023, which.
Be here before we know it.
We will be resetting our budget in October like like we like what we did in the past years and and our hope is is that we'll be able to to be able to add additional rigs in 2023.
Yes.
In calendar <unk>.
Q4, and Q1 again, we hope it plays out like that obviously.
We've got a lot of a lot of work ahead and it with it and I would just put note that Doug by by adding that given our focus on value proposition to customers and our sheer scale with the most idle capacity super spec capacity in the United States.
We expect to maintain or increase and market share through the cycle.
Makes sense. Thank you.
Thank you.
Well move next with Ian Macpherson with Piper Sandler. Please go ahead. Your line is open.
Thank you good morning, John and Mark.
How are you.
I am picking up attention here that needs to be resolved.
Every quarter, what we're witnessing is that youre cycle is moving up more sharply.
Faster with with activity and so far and with pricing and margins and at the same time, we know as recently as our conference last month that <unk> are low to lock in current rates. They don't they don't want term contracts at 30000 hours a day.
But we hear resolutely from you and your peers that no one is going to build rigs and we know we're going to run out of high spec rigs.
In a matter of quarters.
So that.
That's a big gap that needs to be resolved and it probably needs to be resolved with multi year contracts.
Near 50% margins are low to mid 30 day rates right now when do you start to see some narrowing of that gap and.
Attitude towards locking up these rates on multi year term.
Well I'll address a couple of things and I'll have mark and Dave kick in additional comments first of all.
I hear what youre, saying about the Super available Super spec fleet, but the reality of it is there is still a lot of capacity out there I don't think that were going to be in a situation, where we're going to be building or needing to build.
The new Super spec rigs.
You had mentioned a couple of quarters I think it's going to take.
Well over a year at the <unk>.
The current time.
Type of activity gains.
We don't know for sure how how budgets are going to be reset for 2023, we have some some view of the rest of 2022.
So.
For us today.
Our preference is to not lock in to more term our preference is to continue to.
Moved pricing up in the spot market at some point in time I think we do have some customers that have locked into pricing above.
Hi, <unk> above 30, and you can get and start using our technology solutions to push pricing.
Fire based on the value proposition that's delivered but.
I would be surprised mark what would you what would you know I think you hit it Jon I think it's a.
It's a combination of.
We're just at the right spot in the cycle, we expect our customers to hold flat.
The next two quarters are going into the fiscal hole.
First quarter of 'twenty three for US final calendar quarter of this year and sort of resetting their budgeting season, just as they have just as it recently did and just as they did at the end of <unk>.
At the end of 'twenty going into 'twenty one.
While we are at this flat level and we're seeing churn still demand for rigs we have to move the pricing up as Jonathan said and then I think at some point in the future. Once we started moving in that direction across more of our average.
<unk> right.
Some stage then we will have the right juxtaposition of the ability to set term based on that that higher pricing, but we're just not there yet yes. One other thing to add I don't think I said, this which is as we start thinking about 2023 and <unk> and.
Calendar Q4.
We will be react we would be reactivating rigs that had been idle for over two years. So the re commissioning cost.
Whatever capex no its not new build but it is additional cash that up to this point in many cases.
We funded we've self funded that and so we would be looking at.
At that situation with higher prices and.
A term contract commitment in order to reactivate those rigs is the way I'm thinking about it right now.
Understood. Thank you gentlemen, and then as my follow up Mark you alluded to.
Seeing.
Seeing some upside to your Gulf of Mexico operations, not too far out and I think also.
When you get to the end of this fiscal quarter with plus three more rigs in Latin America that should probably have a better run rate than what you've guided for fiscal Q3 could you describe what those upsides might be in the following quarter or quarters as you get ramped up in those secondary markets.
Thanks for the question and I think it's a little a little early as I as we mentioned with international adding two rigs in Argentina, and one in Colombia, we're going to have a lot of costs associated with those startups in Q3, but to your point the absence of that will help going forward, we're still in negotiations.
For additional rig adds in both of those countries. So depending on how that shakes out and we can have again.
More abnormality.
<unk> costs over the next couple of quarters as we continue to add to that rig count, but build us up well for future cash flow generation and the absence of those reactivation costs just like we've had in the U S.
And offshore I think the potential there and it really goes to Johns comment on his prepared remarks and that is about.
We need to work on pricing with our with our <unk>.
Harvest offshore segment.
Hopefully that's helpful.
Yes, good for now and checking on that again next quarter. Thanks, guys.
Thank you.
We will move next with Waqar Syed with Citibank capital markets. Please go ahead.
Hey, John .
Question on <unk>.
New build rigs.
We've talked about that and maybe you don't have a number but what is your expectation that if you were to order a new build rig what would it cost today.
So the current requirements of the rig and then what kind of margin is required to.
Just a five building a new rig.
<unk>, let me just jump in for a second thanks for the question, but I have to tell you. We haven't asked that question.
We had 60, Idaho zip respects by man.
I'd like to put to work with a heck of a lot less investment than a newbuild rig and for all the right reasons that we've talked about with the with returns on capital returns on the Opex the right pricing margins to get us to return on capital employed is the consolidated corporate entity. So we have a lot of focus on that as we move.
We move through time here.
But let me ask the question another way.
When you get to this $30000 type of revenue per day.
Yes.
Give your competition on somebody Allison named is probably where that could be any one house the financial incentive to build Rick.
But let me.
We've seen a couple of those.
Those pop up over the last 10 years, if you look at the results of those.
Companies that have done that not great not great results. So I find it very hard to believe that.
We're going to see somebody jump into this business or start to invest in new builds when there is a number I mean, there is 150 super spec rigs that are idle on the sideline today that have been idle for over over two years.
And so I.
Let's face it requires less let's think back to the why behind the new builds.
That we started back in 2000 and for 2005 timeframe.
It was a replacement cycle, we had rigs that were all that were built in the seventies and eighties.
Faced with that today, we're faced we've got a.
The rig fleet and industry wide rig fleet that may have lots of different variations, but at the end of the day. They have a lot of capacity now we're going to have to reinvest in those rigs that are idle because a lot of that.
Equipment has been used to maintain the working fleet I think everybody is pretty pretty well established that that's been going on so I just find it very hard to even imagine that somebody.
That would be able to get the backing to start a new company or to build or to build new rigs with the amount of excess capacity. It's on the ground right now.
That's great. Thank you and just my second question.
<unk> been investing in R&D.
Clean up of around $25 million to $30 million a year.
For several years now how do you internally my ear that it turns on that R&D investment and.
What what's your view.
Well that has.
So those investments.
Well thanks for the question I'll take a stab at that.
Is that technology, and then that digital software that we have focusing on downhole.
Operation improvement for our customers as we've long talked about.
Straighter in better placed well bores, which actually help with our customers overall.
Total cost of ownership of a well, we as the driller or about 20% to 25% of an assay for a well.
And we can affect a lot of the other 72.
5% plus cost with drilling and a better well.
I think thats it proved evident in our uptake in performance contracts because in those as we've talked about.
This last year or two if you think about it just did its basic administrative.
From an administrative perspective, we used to have a rig contract with several separate forms of contracts for various software.
Today, we have with the performance contract is single contract, where we work with the customer to set kpis.
Together and pull through the technologies to achieve those kpis and to reduce overall well cost.
I think the uptake.
From a couple of years ago, not having procurement contracts to today, having 40%.
The fleet on as.
Those contracts that are driving the 30000 plus revenue per day are really at the top end of our fleet.
Of our fleet and helping us to get to the margins that we've talked about we need to get through John with reality.
No.
This industry is going to continue to trend.
Toward utilizing did.
Digital technology algorithms automation to do what have you.
Then relatively manually intensive.
Obviously, we focused a lot of attention on on the on directional drilling technique.
<unk> technologies, but.
We've made some great acquisitions, we're going to continue to have strong R&D budget and.
Hopefully we were able to maintain a strong market going forward as you can imagine through since we've been deploying these technology, we've had some pretty pretty difficult markets, but we are starting to see even more traction.
Great. Thank you very much thanks.
Thanks Robert.
Well move next to Derrick Todd Heisler with Barclays. Please go ahead.
Hey, Good morning, guys. Just wanted to continue in line of questioning you showed considerable term contract backlog uplift can you talk about the dynamics on the willingness of both new and the E&ps to lockup breaks for longer is it coming more from your side of things are more from the E&P side and given the <unk>.
<unk> that you're seeing now do you have line of sight to reaching our 50% gross margins targets.
Thanks, Thanks for the question we had.
Eric we had.
Some additions to term it in this.
In the press release that was filed yesterday and a lot of that really took place in January frankly, it's been a fast moving market and those contracts that are.
We're in the in the in the Q and the press release.
Or negotiated in really in the fourth calendar quarter heading into this calendar year.
So that really up took in January and since then since the February call, where John discussed our need to uptake pricing. We've really since then entered into spot contracts focus to get our rates up across the fleet further as terms rollover, we're not as likely based on the comments.
As we've said.
This.
This morning, we debate.
We're not as likely to re up that term, we're focused more on getting the appropriate pricing uplift.
With the current spot.
Okay got it that's helpful color that makes sense I want to switch internationally, you talked about the middle East can you talk about the ultimate goal of that maybe maybe.
Maybe the regions and types of rates do you want to send over other technology pull through maybe what the required rate looks like in that region, which upgrades. Some of your idle super spec rigs other than just spending just some more color and details around I know, it's a long play, but what do you ultimately see as the middle East hub looking like.
Well we.
You know, it's if you think about something as like the like the Permian from from the eastern Midland to the Western Delaware, It's along geographic space.
The Gulf Coast countries.
We're thinking about approaching that from from from yard or a hub perspective, not unlike we do with the Odessa operation that we have and as we look to the long term we've spoken about this on it.
For a couple of quarters I think.
The Middle East has had a really steady rig count through the compared to the volatility of the U S shale play over the last 15 years.
There's not really been a rig replacement cycle there.
You couple that lift or what is it.
Burgeoning gas play with several countries in the region, including for their own energy strategic gas independence reasons as well as potential LNG export reason.
That is a different kind of drilling its horizontal and we believe that really fits our super spec flex rig quite well provides an opportunity to shift capacity.
After the <unk> transaction last year, we were really sort of increased.
Our presence from a marketing perspective in hiring boots on the ground sales folks as well.
And in the region. So if you think about our Internet as you said you know the international timing is hard to predict we're still developing a lot of resources to move the ball forward. If you will.
But we do plan to send over a rig during the second half of this fiscal year that John mentioned in earlier and there will be initial costs associated with that.
But we are quite comfortable with those given the longer term opportunities that sort of setting up if you will on the showroom floor.
<unk> to show a horror show off our product and we are actually today participating in several tenders with different different players in the region and these things take a while to move through time to get settled but if we're successful.
Even though it's just one of them that could be a three three to five to six rig addition for us so stay tuned, but we're being patient but are really planning to look at that as a way to reduce the U S concentration risk that we've had historically as of recent times.
Okay. That's helpful. Appreciate the comments I'll turn it back.
Thank you.
And we'll take our next question from Connor Lynagh with Morgan Stanley . Please go ahead.
Yes. Thanks.
I've got a high level question that frankly no.
Borderline impossible to answer, but I'm going to just get your thoughts on it anyway.
<unk> got all of the big rig contractors reporting earnings over the last 24 hours here.
There is not.
Significant activity.
Increase contemplated in anyone's third quarter outlook I'm curious.
As I can see it three big reasons why activity wouldn't be growing given where oil prices are one is the E&P is sticking to their capital budgets the other SP.
Supply chain bottlenecks that we've seen out there and the third is the service companies talking to their capital budgets. Like you guys are highlighting here are raising pricing. So I am curious of those three.
Big do you think each is contributing two two would go black of activity growth. We are seeing given how robust oil prices are.
I think most of what.
<unk> to the behaviors that you are seeing all really go back to the the e&ps and their capital discipline.
Again, if you look at how.
Yeah.
The budgets that were set in 'twenty going into 'twenty, one and the type of activity that we had 22 is playing out very similarly.
And it's.
They're setting budgets and they're sticking to their to their budgets and if you look at.
I've seen it.
I think most e&ps public E&P set their budgets at a $55 to $60 oil price environment, obviously, much stronger pricing than that but they've stuck to it.
And what's great about that is that it does enable you to play in your business.
Better.
At least for <unk>, we Havent you know.
Our rig count growth isn't related to the supply chain challenges, even though there are supply chain challenges, it's not related to people we've done a great job of acquiring.
People and our folks just to continue to do a great job, it's really driven by.
The e&ps are customers at the end of the day.
Okay got it and I appreciate it's very early on this front, but.
Just in your conversations with customers do you feel that there is a willingness or desire.
To grow within their stated frameworks.
<unk> grow capex within their stated allocation framework or do you think they're more sort of thinking about the production growth.
Thomas and St.
Would you be able to think they are solving for.
Yeah Yeah.
There they are intending to live within their their capex budget in that Capex budget that they announced they had a.
Depending on the customer they had anywhere from no growth to 5% growth and that's our expectation.
I don't I don't see any indication that there's any any change at all.
With with the the.
The large public players and quite frankly, even the private companies.
We keep hearing about this wildcard the privates are just going to ramp up production and we just really haven't seen evidence of that.
There's a lot of discipline associated with those companies as well and again I just I think it sets us up for a much better outlook as an industry, we haven't done a good job.
In the past in doing that but I really believe you know like we've talked about that we're on a course to to continue to go down this path.
Alright makes sense thanks for the color.
Thank you Ron.
We'll go next with that.
That being with Goldman Sachs. Please go ahead.
Hey, good morning.
Good morning, good morning.
So just in light of comments on.
Capital discipline for me all I gave in the prepared remarks can you provide some color on how we should think about non maintenance capex beyond fiscal 2022.
Would that non maintenance Capex primarily include just the walking rig conversions going forward are there going to be ongoing.
There can be a capex commitments beyond that.
We're we're still.
We're obviously not in budget season at this stage.
And we really haven't made any decisions in a while.
We're just starting to get into into looking at that so our preference would be to hold off and talk more about that.
When we get into budget season.
It's still really early in the game to do that right now what I will say is just no more than what I said earlier, which is everybody in the industry.
Their idle capacity has been idled.
For over two years and.
Much of that equipment has been used to you know to maintain and upkeep. Other other rigs that are running why why invest new capital. When you could use something you already have in the ground.
So obviously.
And as we've seen through the very beginning coming off of the downturn. The early rigs that were reactivated cost.
$1000 100 passenger horseshoe when much to it they were ready to go.
But that cost continues to get higher so more to come on that.
Sounds good. Thank you and then just one follow up on on your customer mix mix I'd imagine I guess, it's more weighted to the privates. Now then that's definitely before the pandemic do you expect that mix to materially change going forward, especially as we get into <unk>.
The budgeted refreshed even enter into calendar 2023, and is there sort of a.
How is the difference in dynamic.
Pricing and contract dynamics with your private customer base versus your public customer base. Historically is there is there any sort of big change now that we should see as we think about this cycle.
Well.
We actually have a larger percentage of our fleet working for public companies than we do private companies I think we're probably.
The only or one of the few that that has that in our in our space, but we have grown our private.
Company customer base significantly we are the largest market share in.
Rigs running for Super majors for large public.
Public e&ps as well as for privates, but theres, a theres a dramatic range between where the private companies.
Much much lower percentage.
Anything that you want to add.
Yes.
The only thing I'd add is within the private group customer base there is different.
Different operating styles. Some of them will do you want to have visibility we wanted he term long term.
As far as different contracting styles between private and public so some of those contracts and styles for the private mirrored the publics and other what other ones. They just have short term work. So that's kind of the main difference that I see from a contracting perspective.
Got it thanks, a lot I'll turn it over.
Thank you.
And this does conclude our Q&A session I will turn the call over to Joe for any closing remarks.
Okay.
Yeah.
Okay. Thanks for the questions.
Very helpful.
As you heard US say, we're very optimistic about the future we're very pleased with the momentum.
That we've garnered.
This past year.
As you've heard US say, we are focused on margin growth. We're focused on returns we're focused on continuing to provide an elevated.
Performance.
Proposition for our customers.
So we're very excited about that we're happy to have the folks we have in A&P. Thanks for everybody's contribution and we'll talk to you next quarter. Thank you have a great day.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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