Q3 2022 Helmerich and Payne Inc Earnings Call
Yeah.
Good day, everyone and welcome to today's Helmerich <unk> Payne fiscal third 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 may registered to ask a question at any time by pressing star one on your Touchtone phone.
Please note this call maybe recorded and I will be sending why should you need any assistance. It is now my pleasure to turn today's call over to Vice President of Investor Relations. Dave Wilson. Please go ahead.
Thank you Ashley and welcome everyone to Hammer campaigns conference call and webcast for the third quarter of fiscal year 2022.
With us today are John Lindsay, President and CEO , and Mark Smith, Senior Vice President and CFO .
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 today I'll remind everyone that this call will include forward looking statements as defined under the securities laws such statements are based upon current information and management's expectations as of this date and are not guarantees of future performance forward looking statements involve certain risks uncertainties and assumptions that are difficult to predict.
That's our actual outcomes and results could differ materially.
You can learn more about these risks in our annual report on Form 10-K for quarterly reports on Form 10-Q, and our other SEC filings.
Should not place undue reliance on forward looking statements and we undertake no obligation to publicly update these forward looking statements.
We will also make 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.
That said I'll now turn the call over to John Lindsay.
Thank you Dave Good morning, everyone and thank you for joining our call today I am pleased with our performance during the quarter the operational and financial results continue to reflect the benefits of our strategic initiatives. We've been working on for several years now.
In particular, the efforts by our sales and operations teams to include pricing and margin growth in our North America solutions segment.
On our earnings call last February and again in April we discussed how rig pricing needed to reach $30000 per day and in our third fiscal quarter, we had roughly 20% of our fleets average revenue per day at or above that level.
This is a great start, but we also recognize that pricing needs to move further to achieve gross margins of 50% or greater to generate returns that fully reflects the value we deliver to customers with our flex rig fleet and complementary technology solutions.
As intended we saw a modest growth in rig count and exited the quarter with 175 rigs contracted in our North American solutions segment.
Physical discipline and contractual churn allowed us to re contract rigs without incurring additional reactivation costs and to redeploy them at significantly higher rates.
Our rapidly improving contract economics are driven by both agencies.
<unk> value proposition to customers as well as a market that's very tight for available Super spec rigs.
We believe that drilling solutions and outcomes, we provide are increasingly being recognized and coveted by customers.
It's encouraging to see capital discipline, and our industry and when combined with the supply chain and labor constraints. We expect this could put a damper on the industry's ability to reactivate idle super spec rigs at significant scale during the buying season.
The last two years that has been in calendar Q4 and Q1.
This will likely perpetuates as supply demand tightness for Super spec rigs and provide momentum for future improvements in contract economics.
We are already seeing some customers enquiring about rig availability for the fourth calendar quarter of this year.
They are realizing that the market for readily available A&P flex rigs is extremely tight.
We are seeing some customers looking to add incremental rigs for 2023. The needs are typically in the range of one.
To four rigs and there are some looking to replace the lower performing regularly fluctuate.
While we are unable to comment on the number of rigs that we could add specifically today. It is important to underscore that going forward, we will apply the same.
Same disciplined focus on financial returns and when receiving commensurate compensation for the value we are providing.
Along those lines Mark Mark will provide some high level remarks on our fiscal 2023, Capex response to potential future demand for our rigs.
Four rigs in our idle Super spec electric fleet.
We continue to hear about the benefits of our customers experience from our digital technology solutions, especially when combined with our uniform <unk> fleet.
As horizontal wells continue to trend toward greater complexity and longer lateral lengths drilling efficiency and reliability are important factors that differentiate our premium <unk>.
Super spec service offering.
On the international front activity is ticking higher with further improvements in our South American operations.
And the potential for more activity in coming quarters.
In the Middle East preparations are underway to export some of our super spec capacity as part of our hedge strategy.
Current plans have one rig moving overseas in the coming months with additional rigs possible depending on the speed of the opportunities that develop in the middle East.
Compared to other competing international locations.
Establishing our middle East hub is an important step in expanding our presence in that region as part of our longer term growth strategy.
Our scale and digital technology, not only enhanced profitability.
American solutions segment, but we believe leisure also crucial elements in our goal to grow internationally.
There is a scarcity of digital solutions being applied in key energy producing regions around the globe and developing ways to integrate new technologies will ultimately lead to improved economic returns for all our stakeholders overtime.
And our offshore Gulf of Mexico segment, our people continued to deliver great value for our customers as.
As mentioned on the last call, we are implementing pricing improvements offshore and have made significant progress.
We expect the margin contribution to continue to improve going forward at moderately higher levels.
In closing it is encouraging to see the industry rebound.
But it should also remind us of past cycles, driven by elevated commodity prices and how the drilling industry repeatedly responded by adding capacity, which then led to an oversupplied market.
So far this cycle seems different from both an operator and a service industry perspective.
The plan at <unk> is straightforward.
Safety above all value creation for customers and margin growth.
Getting paid for the value we provide.
I am encouraged by the achievements through the dedication of our employees their passion and their service attitude they bring to the company.
We all strive to deliver excellence each day to enhance the value we provide to our customers and our shareholders.
As we move forward I'm confident our shared values and commitments will endure and enable the company to maintain its leadership position within the oil service industry.
And now I'll turn the call over to Mark.
Thanks, John Today, I will review our fiscal third quarter 2022 operating results provide guidance for the fourth quarter update full fiscal year 'twenty two guidance as appropriate.
Look forward a bit in fiscal 2023 and comment on our financial position.
Let me start with highlights for the recently completed third quarter ended June 32022, the company generated quarterly revenues of $550 million versus $468 million in the previous quarter as expected. The quarterly increase in revenue was due primarily to increased revenue per day in North America solutions segment.
As we have continued to increase pricing for drilling activity.
Total direct operating costs incurred were 377 million for the third quarter versus $341 million for the previous quarter.
The sequential increase is attributable in part to the higher average North American solutions segment rig count compared to the second quarter.
General and administrative expenses totaled approximately $45 million for the third quarter lower than our previous quarter, but still in line with our expectations.
During the third quarter, we incurred losses of $17 million related to the fair market value of our AD not drilling investment, which is reported as a part of gains and losses on investment securities and our consolidated statement of operations, our fiscal year to date gains on the investment or approximately $48 million.
To summarize this quarter's results due in part to the execution of our strategies to align pricing with value delivered as well as disciplined cost management, we had our first positive net income quarter in 10 quarters.
He earned a profit of <unk> <unk> per diluted share versus incurring a loss of five in the previous quarter third quarter earnings per share were negatively impacted by <unk> 11 per share of select items as highlighted in our press release, including the loss on investment Securities that I, just mentioned absent the select items adjusted diluted.
Earnings per share was 27 cents in the third fiscal quarter versus an adjusted loss of 17 cents.
During the second fiscal quarter.
Capital expenditures for the third quarter of fiscal 'twenty, two or $70 million sequentially ahead of last quarter's 60 million.
This is lower than our expectations for the third quarter, but we are still comfortable with the annual range of $250 million to $270 million that was previously provided.
A&P generated approximately $98 million in operating cash flow during the third quarter, which is up over $70 million on a sequential basis from the $23 million in the previous quarter.
Additional comments about our cash flows and working capital later in these remarks.
Turning to our three segments, beginning with North America solutions segment.
We averaged 174 contracted flex rigs during the third quarter up from an average of 164 flex rigs in fiscal Q2.
We exited the third fiscal quarter with 175 contracted rigs, which was in line with our previous guidance.
Added four rigs to our active rig count in the third quarter, including three walking flex rig drilling rig conversions that were completed in fiscal Q3 rare.
Revenues were sequentially higher by $77 million due to pricing increases for our flex rigs in the spot market as John mentioned and as we discussed on the second fiscal quarter call.
Segment dragging margin was $168 million just above the top end of our April guidance.
Incidentally higher than second quarter of fiscal 'twenty two's $114 million.
Overall opex from the North America solutions segment increased on a sequential basis due primarily to the increase in average rig count.
In addition, reactivation cost of $6 5 million were incurred during Q3 compared to $14 2 million in the prior quarter roughly half of these reactivation costs were for the three walking rig conversions added this quarter, while the balance is related to additional reactivation costs for rigs deployed at the end of the March quarter.
Total segment per day expenses, excluding reconditioning costs, and excluding Reimbursable decreased to $15004 90 per day in the third quarter from 15000, a 30 per day in the second quarter.
Looking ahead to the fourth quarter of fiscal 'twenty, two for North American solutions as of today's call. We have 176 flex rigs contracted and we expect to continue at that level through the end of the fourth fiscal quarter of 2022.
As we stated last quarter and much like our competitors are doing and we intend to maintain remain within our capex budget for the fiscal year, which translates to holding the line on rig reactivation.
Our current revenue backlog from our North America solutions fleet is roughly $629 million for rigs under term contract.
Proximately, 65% of the U S. Active fleet is on a term contract.
Of note, we added approximately 10 rigs to our term roster early in the quarter, which had previously been under negotiation for some time between now and calendar year end, we have over 60 rigs rolling off of term contracts, which we expect to reprice in the current market.
The tight Super spec rig supply dynamic is aiding pricing momentum and we expect the percentage of the U S fleet on term to decrease to between 50 and 60% during the next few quarters.
As I mentioned last quarter significant inflationary pressures in calendar 2022, together with supply chain constraints are increasing consumable inventory cost such increases are included in our forward guidance.
Note that these cost for consumption of materials and supplies inventory today make up less than 25% of the daily operating cost on a rig with the balance primarily driven by labor.
In addition to the inflationary pressures on cost constraints on supply chain capacity are increasing in regard to supply chain access to parts and materials. We continue to utilize our proactive approach of detailed inventory planning scale leverage and healthy vendor partner relationships to alleviate supply chain challenges in order to.
Avoid a material impact to our ongoing operations.
We remain in close communication with our suppliers and have placed advanced orders for items and higher risk categories.
Approximately 70% to 75% of our daily costs are labor related we implemented a wage rate increase in December 2021.
Our turnover rates remain consistent with our historical turnover rates to date, we have not experienced any loss of drilling time more lost contracts due to crewing issues.
We are monitoring field labor rates as well as job required out of pocket expenditures and as needed we will respond to market conditions to assist in talent retention and attraction.
As a reminder, our contracts are structured and the pass through labor related increases over a 5% threshold.
We have commenced some early reactivation activities for rigs to deploy in fiscal year 2023 to minimize supply chain constraints, where possible and our forward planning.
Specifically, we are incurring costs to ready components of some of the rigs expected to be deployed in the first quarter of fiscal 2023.
Reactivation costs will continue to increase given inflation, but also because the average idle super spec because they were stacked for two plus years.
Our expectation is our reactivation opex costs will approximate what will approximate $1 million per rig moving forward.
In the North American solutions segment, we expect drug margins range between $185 million to $205 million inclusive of the effect of about $6 million in early reactivation costs.
For the fourth fiscal quarter.
Regarding our international solutions segment International solutions business activity.
Increased to nine active rigs at the end of the third fiscal quarter.
As expected we added two rigs in the Bakken region of Argentina, This quarter and ended the second rig in Colombia.
Also as expected we incurred expenses associated with the.
The rig startups that I, just mentioned as well as investments made to establish our middle East hub.
As we look forward to the fourth quarter of fiscal 'twenty two for international.
We expect to add two more rigs in the Bakken more to regions of Argentina, This quarter as well as a third rig in Colombia. These additions will bring our total active international rig count to 12 at the end of the fourth fiscal quarter. If the projected startup timing is adhered to.
We also expect to incur more expenses as we further develop our middle east hub inclusive of preparation to export it to Super spec flex rig that will be targeted at regional drilling opportunities.
Aside from any foreign exchange impact, we expect to have between $4 million to $7 million direct margin contribution in the fourth quarter due in part to sequentially higher average activity reduced startup expenses in rig rate increases.
Turning to our Gulf of Mexico's offshore Gulf of Mexico segment.
We still have four of our seven offshore platform rigs contracted in two of our three management contracts on customer owned rigs are still unfilled drilling rates.
Offshore generated a direct margin of about $8 7 million during the.
A quarter, which was towards the high end of our expectations.
As we look toward the fourth quarter of fiscal 'twenty two for the offshore segment, we expect that total offshore.
But we expect that offshore will generate between $9 million to $11 million of direct margin a sequential increase resulting from contractual pricing increases on our active Gulf of Mexico platform rigs in management contracts as John mentioned earlier.
Now, let me look forward to the fourth fiscal quarter update full fiscal year 'twenty two guidance as appropriate and look ahead to fiscal 'twenty three planning.
As mentioned, we still expect capital expenditures for the full fiscal year dreams between $250 million to $270 million.
Yeah.
With remaining spend of approximately $85 million at the midpoint to be incurred in the last fiscal quarter.
As a reminder, the timing of some spending has pushed to the second half of the fiscal year as key suppliers continuing to rebuild capacity that was taken offline during COVID-19 restrictions and the coinciding or energy downturn.
Looking forward to our fiscal 2023, which begins October one while our budget process is still at an early stage. We have done some preliminary work that help frame up expectations going forward.
With that said you should think about our North America solutions segment Capex in three buckets maintenance reactivation and conversion.
Our bucket of maintenance Capex golf will likely push to the high end of our historical range of 750000 to a million dollars per active rig due to inflationary cost increases.
The rig specific reactivation capex budget and the emergence for 2023 as we get deeper into the idled stacked rigs here onetime capital expenditures will be incurred to overhaul componentry that we optimally utilize in a protracted downturn.
For example to delay an overhaul expenditure, we swapped out like equipment from idled rigs during the downturn that it had more time remaining before an overhaul was required.
This was done in an effort to in an effort to save capital and defend their conservative balance sheet.
Such discrete reactivation capex could range from $1 million to $4 million for each rig reactivation in fiscal 2023, depending on the particular componentry involved.
Over the next few months, we will refine our planning for next fiscal year with the intent to normally reactivating rigs for pricing and terms and ensure a return on the significant opex and capex investments required to bring the rig back online.
The final bucket once you consider as a conversion bucket, which relates to the continuation of our walking rig conversion program consistent with how we have been converting rigs to walking rig capability, depending on customer demand and projected returns we will likely do so in fiscal 2023 at a pace of approximately one per month.
Our expectations for general and administrative expenses for the full fiscal 'twenty two year are still expected to be just over $180 million.
Items impacting our tax provision and income are at levels that are resolved and the wide variability and the estimated effective tax rate and therefore, the effective tax rate for upcoming quarters may be volatile with that being said the U S statutory rate for fiscal year 'twenty. One is 21%. In addition, we are expecting incremental state and foreign income tax.
Texas 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 for this fiscal year.
Now looking at our financial position Helmerich, <unk> Payne had cash and short term investments of approximately $333 million at June 32022 versus an equivalent of $350 million at March 31 22.
Expected sequential decrease was largely attributable to our investment in Galileo and the quarter for $33 million as mentioned during the previous quarter call.
Including our revolving credit facility availability liquidity was approximately $1 1 billion at June 30, our debt to capital at quarter end was about 17%.
Our net debt was $209 million approximately we currently expect our trailing 12 months gross leverage churn to reach our goal of less than two times outstanding debt by September 30 of 2022.
Following a resumption of positive cash flow generation from operations in fiscal <unk> and fiscal Q2, the growth of that generation in the third quarter stemmed primarily from a result of the good pricing work discussed earlier and also due to less reactivation expenditures as rig counts remained relatively steady in North America solutions segment as planned.
Dan.
On the working capital front, our accounts receivable at March 31 of $330 million grew by $68 million to approximately $398 million at June 30.
The preponderance of our a R. Today continues to be less than 60 days outstanding from billing date, although absolute dollar receivables are up primarily for price increases in North America solutions.
Several additional international rigs working and Jean price increases in the offshore segment.
During the third fiscal quarter, we had a couple of significant cash related transactions first as mentioned in last quarter's call. We invested approximately $33 million in Galileo second we sold our legacy Schlumberger stock for approximately $22 million in pre tax proceeds we still expect to end the fiscal year with between 350 and $400 million of cash.
Cash and short term investments on hand.
Although we expect to be towards the bottom half of that range due in part to some working capital Lockups from accounts receivables as I mentioned.
As we expected the growth in rig count early in the fiscal year provided a platform for cash generation in the second half of the year to that point.
The recently completed third quarter, we fully covered our maintenance capex with cash flow from operations.
As well as funded our regular dividend further our disciplined capital planning and operational execution excellence sets the stage for cash accretion going forward.
Cash returns to shareholders remains a top priority with our existing dividend and we have a desire to augment these returns in the future.
Additional returns are not yet determined by our board of directors, but could consist of an assessment of our longstanding regular dividend.
Potential variable type dividend and opportunistic share buybacks.
As mentioned in the press release, our financial stewardship compels us to take a measured approach and balance our maintenance capex requirements.
Growth capital opportunities for both U S reactivation and international expansion.
The potential additional shareholder returns.
More to come on this for fiscal 2023 in the coming quarters call.
Note that this concludes our prepared comments for the third fiscal quarter, Let me now turn the call over to Ashley for questions.
And at this time, if you would like to ask a question. Please press star one on your Touchtone phone you may withdraw your question at any time by pressing the pound key.
Once again that is star one.
And we will take our first question from Derek <unk> with Barclays. Please go ahead. Your line is open.
Hey, Good morning, guys just wanted to get more of a sense on how many rigs you could add to the market next year. I know you are in conversation with your customers you mentioned.
Getting to walking conversion program and the breakdown of the Capex about one per month call that 12.
What else do you think you can add to the market just based on your conversations and based on the demand, but theyre all within keeping in your.
And your framework of generating the returns based on the amount of the Capex and opex needs to be to deploy to player I just love a little more color on that.
Yes Derrick.
I can give you some <unk>.
Some sense of that as Mark said, we're really not in a position other than.
So just mentioned the the 12 walking conversions, assuming the demand in the.
The margins returns are there.
One way to think about it is what you expect the rig count to do in the Super spec space.
Next year, and really I would I would say starting in calendar Q4 of this year because again as I said earlier that that's kind of been the buying season over the last two years. So if you think about if you make an assumption that 75 to 100 rigs get added over that.
12, 12 month period, starting in Q4.
If you look at R.
Our 25% market share.
That would be a reasonable range.
To think about but again I think the main point I want to get across is we're not making decisions based on market share, we're making decisions based on the returns that we can generate from these rigs and just making certain that we're getting reasonable rates of returns over a long period of time.
So does that answer your question.
Yes.
That's helpful and then.
You mentioned, the 30000 per day at or above that level, 20% of your fleet on that based on the visibility you had in the <unk>.
The rigs coming up on term in the contract churn how can we double that to 40% fixed for not just the cadence and how long it would take to get the whole fleet up to that 30 at 30 year or Bob day rate.
And.
If it's not clear in the.
Prepared remarks, but that 20% was effective the end of our fiscal Q3, that's not where we are today necessarily.
So that's a that's a Q3 Q3 fiscal Q3 number.
We don't have we have pretty pretty clear insight into that it does take a.
A couple of quarters to get there.
And so I don't I don't think David we said anything about what that timing would be I think reasonably.
Reasonably speaking over.
Two or three.
Two or three quarter.
Probably process wise, what enable us to get to that to that level of pricing low <unk> pricing I think that's exactly right. John a couple more quarters because as you said that June 30 number you gave in the prepared remarks.
Here, we are not far beyond that and we're already seeing meaningful accretion to that number of months later.
Got it that's very helpful. I appreciate the color guys and I'll turn it back.
Thanks, Gary.
And we will take our next question from Doug Becker with Benchmark Research. Please go ahead. Your line is open.
Thanks, John .
John I wanted to get your thoughts on a conceptual question investors historically have thought about.
Day rates, reaching a soft ceiling when it comes back to reactivation cost or upgrade costs. It seems like spot rates are getting above some of those levels at least on a leading edge basis, but just wanted to get your thoughts on is that is still a relevant framework to think about pricing or have we moved into a different dynamic.
Yes, I think the.
Historical.
Pricing in the context, there, it's really it's really different today for.
For a lot of reasons.
But you know I think.
When you consider the.
The investments that we have in the specifically in the Super spec capacity fleet I think most people want to compare today versus 2014 time period.
As an example, and as we said in our previous call that was the last time, we had 50% gross margins, but we didn't have a 230 super spec rigs in the fleet at that time, so it's a much much different situation.
Yes, John .
I'll just add to that.
Doug that you know as I mentioned in 2014, we didn't we didn't have a super spec rig so go.
Going into 16 and beyond we invested a lot of money in the upgrading of the fleet, resulting in the industry's largest super spec fleet and also resulting in a lot of benefits for our customers.
Along the way, we as you know.
Very oftentimes had what we would consider to be suboptimal returns on invested capital.
<unk> two compared to what our working but what our weighted average cost of capital is so as we were just trying to get back to numbers that make sense financially.
And in this 50% margin is what will get US there we're on the journey to get to that.
Separately simultaneously the rigs we built back then $20 million a piece or even sub $20 million in 2014 today rough estimate say that somewhere between $30 million to $35 million.
So a lot of a lot of capital still to be deployed to the idle assets that had been there two and a half two years plus.
Which means when we get to the buying season at the end of this calendar year. The beginning of calendar 'twenty three they've only been sitting there two and a half years, so a lot of capital to deploy.
For what we estimate to be nearly 150 super spec rigs and that two and a half a year idle tenure by the time, we get to the end of this calendar year I hope that helps Doug.
That provides some good context, maybe more succinctly.
It doesn't sound like you expect a meaningful increase in capacity if spot rates are 35000.
Date or higher because of.
The framework, you've just laid out.
Fair to say.
And then again just to say it one more time.
Sure.
Trying to gauge is your expectation if we see $37000 a day spot day rates do we see a big influx of capacity coming into the market.
Yeah, I think the capacity that is that is out there as we described.
We're estimating around 130 Super spec rigs, we know there is other.
Drillers that are looking at doing some upgrades to SCR type rigs in order to satisfy demand.
Yes, I think you know I would be surprised personally to see.
All of those rigs reactivated in 2023 for a number of reasons that we've already talked about related to just the supply chain and the capability to be able to provide the AR.
Equipment sets are required to get those rigs back into working.
Back up to working condition, because we you know as well.
As an industry.
We've utilized equipment sets off of those rigs that have been idle now as Mark said forever will be for over two and a half years.
And so.
Personally I don't think theres going to be a response, we've had some people ask about new builds in and I. Just think that you know again based on what Mark just said in terms of a 30% to 35 million dollar price tag for a new rig I don't I don't think that's going to be the case, either yes, yes.
Take the midpoint 32, and a half million if youre, making at 15000, a day margin that's a six year payback or if you're making 20000, a day margin that's a four and a half year payback and then with the customer base today that has little appetite to contract up beyond their fiscal budget year.
So yeah, I think the supply chain thing as John as John mentioned is is actually.
Significant hurdle.
For any you know, we're working with our scale and leverage with our suppliers to make sure that we can.
Put rigs back to work and also keep the active fleet.
In good working condition.
And that's a that's an effort that's a lot different today than it was at any time over the last 10 years. So.
And Doug It really goes back to just to capital discipline, we've talked about that that that's really the rallying cry within the within the industry. Our customers are demonstrating at a service.
Industry is displaying that and.
You know, there's there's no reason to rush, even if the supply chain was there there's no reason to rush to try to capture.
All of this any.
<unk> market share that you might be able to capture one of the things that debt.
That we experienced in this last quarter and you heard us talk about churn, we actually had 18 rigs that were given back to us for various reasons.
Customers.
Going through their budget too fast.
<unk> acreage position the list goes on and on 18 rigs that were 18.
Points of demand that historically speaking as an industry, we would've tried to satisfy that demand for reactivating something and so last quarter. We said, we're going to $1 75 in Q3, we're going to finish the year at 176 were within our capital budget that wouldn't have been the case in previous cycles.
Would have continued to try to capture additional share. So I think that's a really distinct difference in our industry, which I think is really healthy it's healthy on the operator side, it's healthy on that one.
On the oilfield services side as well.
Thank you very much.
Thank you.
Well go next to Keith Mackey with RBC. Please go ahead. Your line is open.
Hey, good morning, and thanks for taking my questions just wanted to maybe start out with the contracting nature.
Are you seeing any increased appetite for longer term contracts from customers that are not necessarily associated with conversion of our upgrade or or are those are you know hot rigs or whatever you'd like to call them still on on shorter term durations.
Keith I would say, it's a it's a mix.
We have customers that are.
Or that are interested in and terming up a rig for a portion of their fleet, particularly larger customers that.
You may have.
10, or 15 rigs running I'm, making this up 10 or 15 rigs running they they don't necessarily want to turn up every rig.
Maybe when it turned out some rig from our perspective as Mark said, we've got.
60 rigs approximately they're rolling off term.
Our next couple of quarters.
And we'll.
We will be looking at those very very closely in terms of whether those are remaining term or rollover into spot I would say most of those rigs are going to probably go into more of a spot spot.
Spot type market, but I think it's really a mix we see customers across the board some that want to lock up term some that would prefer to play the spot market.
Got it thanks for that.
I'll just add for us at this time.
Our momentum in pricing in the supply demand dynamics in the sector trying to get the returns that we have been discussing.
Putting more of our market into the upward mobility of the spot pricing.
Yes.
Got it that's helpful.
Just curious if you can give us a little bit more detail on the number of rigs you have that could be reactivated within that one to 4 million Capex range and may be just your a little more on your on your your confidence in being able to get additional rigs to the market in.
And our early.
Fiscal or calendar 2023, given given the supply chain.
Hello, we have.
You know from from a reactivation.
Standpoint.
No I wouldn't.
We got into some of the supply chain work that we're doing in this fourth quarter to get ready for putting some rigs back to work, but it's too soon to know definitively how many we will put into the market as John mentioned, we're being very cognizant about.
Capital discipline, one and two we're not going to try to meet every demand point that comes our way because we know if it will be the existence of churn in the market in other words rigs freeing up for whatever reason whatever reason may be.
Our contractor I mean, an E&P running out of budget and E&P running out of acreage.
Many dynamics, we are we won't meet every single demand point to that makes sense. So we're still trying to balance.
Don't you know the last two years.
And the buying season at the end of the calendar year.
Calendar Q4 calendar Q1.
40 enforcement $40 and 44 rigs each of the last two buying seasons for us to be at and we don't see that level of addition, coming you have to remember that in those two seasons, we were coming off from that.
I'm, a substantially low bought them through both the OPEC price change in the in the pandemic that began in March of 'twenty 'twenty. So there's substantial bottom to come back up from we're approaching numbers.
From March one and 2020 today from an activity level standpoint, so don't see the quantum of additions said differently do not see the quantum of additions coming that we had in the last two buying season.
So I don't know specifically what that'll be yet we are working though.
To to know what every single one of our approximately 54 remaining three perspective takes a better but are not ready to comment on.
Hum.
Delineating our numbers for all four of those.
Okay.
Got it got it no. That's helpful. Thanks, very much I'll turn it back.
Thank you.
And we will take our next question from Andrew hearing with Jpmorgan. Please go ahead.
Thank you good morning.
I was hoping to turn to the international outlook. So it sounds like in the near term you're activating a few rigs or adding a few rigs.
In Argentina, and Colombia, and then transferring one into the Middle East I was wonder if you can comment on the outlook on some middle east growth in activity do you think customers are looking for more demand before the end of calendar 'twenty two and initial insights into what we might expect in 2023.
I'll start John if you want to chime in.
I think as we think about it we're looking more.
Over the next two to three years in our planning horizon. So if you think about we're always looking at a five year planning horizon, we consider the middle East.
Scale to be more mid cycle in that horizon.
So we're preparing really our middle east hub, which is to be able to if you just simply just simply have an operating presence in the structure and the Gulf coast countries. So that we can respond to demand points that we see coming in that mid cycle horizon.
We are excited about several opportunities we have are part and parcel to the brand presence that we that we benefited from after the AD hoc investment last year, we're participating in many bid tenders in the region.
With NOC and IOC as alike.
So it's a little too early to say, if we might be successful in one of those tenders in and if we are you know that sort of thing is say three to six rigs per per permitting effort.
So if we were fortunate enough to win too that might be six to 12 rigs in the next couple of years is that the way to think about it.
And in particular, the flex rigs that we have or with her we've drilled more shale wells than anyone else Uh huh.
Has globally, frankly, and taking that expertise, especially into some of the burgeoning gas plays in the region.
A really good way to help the customer.
<unk> achieved their goals. So those are the sorts of things we're interested in John any any other comments.
No I think I think we've talked about the unconventional opportunity for really we've talked about it internationally for many years, we're starting to see evidence that.
You know, we're hoping it's going to come to fruition. So I would just.
And add to that and I think our our fleet that's really designed for unconventional.
Work.
The performance reliability and the technology solutions that we have all of those are really complementary to that opportunity set.
Great. Thank you that's very helpful.
And as a follow up then on the economics internationally I understand it might be a little early to comment on the middle East but.
This won't be more accretive contracts, you're talking about comparing the U S to prior cycle to what extent is that helpful and our you know our bottling for internationally comparing to prior year margins, you've been able to achieve on these rigs.
With the higher technology can we see them.
So it's almost just any comment you could help.
Help us kind of gauge where he can see margins trend here would be helpful.
Well each.
Each one of these big tenders for example that we're participating in you know the economics have to be to be right for us.
Our own history over the last couple of years internationally.
We're not looking to that as any sort of guidance because of the Cree.
Crazy volatility and actually a wind down to zero rigs working.
Because of the pandemic.
But as we move forward these things have to be accretive and we look at the financial returns through time, we also look though at the ability to build scale. So if we won an initial bid with three rigs we would be looking beyond that singular bid.
<unk> is a potential new entry point for a new customer for H N P and looking to see what the potential might be for that customer to scale that up.
And and really get you know better.
Better absorption rates like we do here in the U S through our scale, so where we're looking at a lot of different components, but I think easy to say that it would have to be financially accretive.
All right. Thank you I'll turn it back.
Yes.
I don't know we will take our next question from Tom Curran with Seaport Research. Please go ahead. Your line is open.
Good morning.
Okay.
Well when it comes to the.
The remaining inventory of idle and redeploying a ball super spec rigs at <unk> 54.
There's been a lot of emphasis placed on.
What you're trying to achieve with regards.
Two.
Converting.
The psychology around pricing hitting.
New levels for.
Leading edge day rates and the associated gross margin, but on the terms and condition side.
Are you now expecting or do you think you might be able to get.
Some minimal term.
Or.
Take or pay.
Conditions, maybe an early termination provision just wondering how good the remainder of the reactivation contracts might be that we could see.
Well in the U S. We will.
As I mentioned earlier, we see a <unk>.
Movement down from 65% to.
Where does the 50% to 60% range for term and for everything we enter into in the U S. On in term, Tom we do get that take or pay cancellation provision, having said that where we are today financially is much different than where we were coming out of a couple of things.
Two or three of the more recent downturns, what do I mean by that.
But we have one that is due in 2031, we have.
The base dividend at 65% lower than it was going into the pandemic.
We have and.
A substantial amount of cash on hand, and look to accrete that so our capital structure requirements for such a take or pay per visions.
Our lesson necessary than they might have been in prior cycles, but we still always like to have some defensiveness, which is why we're still going to remain within that 50% to 60% target range.
But you give up some term to try to capitalize on the <unk>.
Supply demand dynamic that is creating this push up and pricing and therefore margins for us John any other.
Yes. It is.
Always a it's always a balance.
There will be some.
Of our walking conversions are probably most of our walking conversions that we will have a term contract commitment, but as I said earlier Mark mentioned, we're going to have 60 rigs rolling off of term contract over the next couple of quarters and I would imagine most of those are going to roll into.
A spot market so are we.
We will have some certainty on returns on the larger.
Re commission or conversions.
But.
As Mark said, where we're positioned really well to be able to manage through that.
Got it helpful clarification, and then I'll.
Was wondering if you could give us an update on auto slide.
The percentage of your.
Average active Frac fleet for the quarter of 174 rigs, what what percentage of that count.
Used auto slide at any point over the course of the quarter.
I think we're around 25, 25%.
I believe that I believe that's right.
And we.
We continue to have.
Uptake. It's you know it's been really well received.
In terms of providing automated directional drilling.
Capacity and.
As the rig count grows it's even more important because we're bringing a lot of.
Directional drillers back into the space and then obviously they don't have they don't have the experience.
I had a lot of operators would like to have but just being able to automate that process directional drilling processes is a huge win and then we're also able to.
Tie that into a commercial performance based model, that's a really a win win situation for us where a champion for our customer.
And would you say that the 25% Okay used auto side at some point does that 25% contained the entirety of the 20% of the fleet for the quarter net realized average revenue per day of 30000 or greater.
We don't we don't have a it's a great question I don't have that data I do know that there is a portion of that that is included in that but I don't I don't have the split.
Data for if it's all 20% or so some subset of that.
Alright.
It would be overlap would be high if not perfect eclipse, but.
Okay. Thanks for taking my questions.
I don't think so.
Go to another question from John Daniel with Daniel <unk>. Please go ahead.
Hey, guys, thanks for including me.
John and Mark I think most of us have talked ourselves and I believe in.
This is a multiyear up cycle in <unk>.
Assuming and hoping that's right I'm just curious.
You know as you look at the pricing.
We keep hearing about the low mid thirties in terms of leading edge.
But the rig count if we actually as an industry I would call. It 50 to 100 rigs over the next 12 months.
We're just question go to.
Well John .
Obviously, there's.
Pricing has moved very very quickly.
It needed to move very very quickly.
It was a huge disconnect in value.
Proposition that we provide the investments that we have and the margin generation and if you just look at previous cycles.
Obviously, we.
Since 2014, we have not been able to get back to that.
So right now, we're seeing leading edge mid thirties.
So as we've already said is to get to the get to the low thirties, and that's really our focus right now is getting to 50% gross margin.
It's really hard to say pass that that Jon I mean, we all read the same same materials out there and you know there's a lot of people that are <unk>.
Surviving.
It's going in.
Obviously, we've got a pretty good glimpse into that but right now we're just we're just sticking to.
To hit the goals that we've laid out there and we'll see we'll see where it lands.
At this point.
Have you had any shareholders that have advocated pushing.
Pushing activity over price.
No no.
We haven't been unanimous.
Got it we haven't I mean, I I think I.
I think there's some that haven't didn't completely follow from our last call that we said hey were.
Rig counts going to be at the most 176 rigs this fiscal year and that was a call.
A quarter ago.
And.
Again, we're really pleased because at the beginning of the year, we thought the same $2 $50 million to $270 million was 160 rigs, we're able to get the 176 out of it so.
We added some great great efficiencies there but.
We expect to continue to see that from us and Oh I think that's what that's what shareholders want that's what investors want very much like what our.
Our customers are doing Scott.
I've got two quick ones and I'll I'll wrap up the <unk>.
He said this I apologize, but kind of do you have.
Range of where you might exit calendar Q4 in terms of our contracted rig count.
Calendar Q4 now.
As we said you know we're working on reactivation is a little too far out to know the definitive demand points and as we alluded to earlier, we will not meet every one of them.
Alright.
So it's still too early John .
Fair enough, but you would expect to be about 176, I presume in calendar Q4.
We would be yes.
And you know it's.
Again, you know.
Going back to the question you guys, John a minute ago.
I think some folks who are maybe not heard the $1 76 for for this.
September 30 goal or you know in holding rigs tight and Capex type, which is helping the dynamics of supply demand and helping pricing.
I think that was more on the analyst side, but when we speak to investors and long only investors there's not a single one of them that we've talked to you that would like as we go for any sort of share over margin. So.
We're going to be very cognizant of that theme as we think about your own.
Last question and figuring out how many rigs to put in the market and in our first fiscal quarter are to get to a 12 31.
Yes, Okay, well I'm glad you are shareholders and thinking in Washington.
You've been very Josh at the time, it's coming up on the end of the hour I'll turn it over for anyone else and a.
Follow up on David Afterwards.
Thanks. Thank you. Thank you Joe.
There are no further questions at this time I'll turn the call back over to John Lindsay for any closing remarks.
Thank you Ashley and thanks to all of you for joining joining US today. We know there are a lot of earnings calls going on today and we really appreciate your time I will tell you. The HMP team. We've already said it we're laser focused on delivering value to customers and shareholders.
Aim to deliver value to customers through top tier performance safety and reliability.
And to our shareholders a continued improvement in our margin growth at our returns. So thank you again for your time and have a great day.
Thank you and this does conclude today's program. Thank you for your participation you may disconnect.
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