Q4 2022 Helmerich and Payne Inc Earnings Call
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Good day, everyone and welcome to today's Helmerich <unk> Payne fiscal fourth 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 period.
Registered to ask a question at any time by pressing star one on your Touchtone phone I will be standing by should you need any assistance and 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 Companion's conference call and webcast for the fourth quarter and fiscal year ended 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, I'll remind everyone that this call will include forward looking statements as defined under the securities laws such statements are based on 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.
The GAAP reconciliation comments and calculations in yesterday's press release with that said I'll turn the call over to John Lindsay.
Thank you, Dave and good morning, everyone.
I appreciate you joining us on our 2022 fiscal year end call.
We're pleased with our fourth quarter results and are optimistic about fiscal 'twenty three.
My primary things, we'll focus on three areas. This morning.
North America solutions pricing and more margin cycle dynamics.
Hep's international opportunities and our technology and sustainability investments.
Our financial results improved substantially quarter over quarter as pricing increases and better contract economics took hold across more of our flex rig fleet.
You may recall from our previous earnings calls this year, we made the point that our rig pricing needed to improve to a level that provides at least a 50% gross margin in order to achieve returns above our cost of capital.
I'm encouraged to report that our leading edge pricing.
Levels are now delivering margins in line with that goal.
These results not seen since the 2012 2014 up cycle.
Strong demand from customers, coupled with rollovers of term contracts should help drive average pricing higher across our active fleet.
We believe there is significant momentum heading into fiscal 2023.
We plan to maintain a posture of fiscal discipline and our North America solutions segment and continue to move our average rig margins toward leading edge pricing and margins.
As such we expect our financial results for the first fiscal quarter of 23 to follow the improving trend over the past two fiscal quarters.
We are also seeing continued demand for our technology solutions. These.
These solutions have and are anticipated to continue to add significant value for our customers.
Many of our technology products and automation solutions are in high demand and are quickly becoming integral parts of the bid process daily operational workflows and performance based contracts.
These solutions are contributing to A&P, becoming the leading drilling solutions provider to many of our customers.
Our technology team is creating an exciting future where digital technology will be the key determinant that drives customer value by enabling safer more efficient and reliable operations.
In short our people are actively carrying culture, our rigs technology and commercial models will continue to differentiate <unk> drilling solutions.
Let me now turn to some observations on pricing and margins and our asset intensive business.
A key metric to be mindful of here is how much of our customer demand can be satisfied by contractual churn.
Rather than by introducing additional supply into the market.
We've talked about churn on previous calls.
In this instance, we define churn as the situation where a rig is released from one customer and then re contracted to another customer within an economically reasonable amount of time, enabling the rig to maintain a high level of activity.
During the past two quarters the demand for flex rigs has primarily been satisfied with readily available hot rigs.
This allows us to postpone the investment, bringing a rig out of stack and this exercise capital discipline.
Here's an example in.
In our fourth fiscal quarter, only one rig was reactivated out of stack in the quarter.
That same quarter, however, we experienced a churn at 14 rigs.
And in the third fiscal quarter, our churn was 18 rigs with three rigs reactivated.
The takeaway is that the majority of customer demand in the past couple of quarters has been satisfied by rig churn not rig reactivation.
The reasons for higher or lower churn in the market have typically revolved around acquisitions efficiency gains acreage budgets and supply chain delays.
We are seeing churn from both large and small customers and we suspect this is happening across the market.
Currently while much of the rig demand is being satisfied through churn there appears to be enough incremental demand growth to reactivate some rigs out of stack as we move into 2023.
We mentioned in our October press release announcing our supplemental shareholder return plan in fiscal 2023, Capex budget that we would reactivate up to 16 rigs.
This would allow us to attain a maximum of 192 active flex rigs for fiscal 'twenty three sometime during the second fiscal quarter.
Regarding these planned reactivation.
We are requiring term contracts of at least two years.
As of today, roughly two thirds are already committed with the majority of those rigs go into large publicly traded e&ps.
As in prior years, we expect most of these 2023 rig adds to begin working toward the front half of our fiscal year.
Having said this we also still anticipate contractual churn throughout the year similar to what we experienced in 2022, possibly averaging around 15 rigs per quarter.
Yeah.
Understanding these pricing dynamics holding the line on capital discipline and not chasing market share is something we believe is crucial to creating a healthy and sustainable company over the longer term.
This discipline extends to not only exercising prudence in fiscal restraint, but also careful consideration to putting capital to work in order to take advantage of longer term growth opportunities.
Having this mindset is enabling improved returns for our stakeholders, including investors who are returning to invest in the energy space.
Moving to our international solutions segment.
The company plans to deploy capital in preparation for more substantial growth in the future.
We are seeing opportunities to bid in areas of existing operations as well as in countries that would be new to H P.
Most of the opportunities are where unconditional drilling is in its very early stages, such as such as in the middle East.
The other opportunity here is the scarcity of digital solutions being applied in many key energy producing regions around the globe.
We believe our proven drilling solutions and technologies can provide significant value to national oil companies by Jumpstarting, the unconventional learning curve.
As we look to the future.
We believe our international business as an important avenue of growth and serves as a potential outlet.
For some of our currently idle Super spec rigs in the U S.
International growth also adds diversification to the company's revenue streams over the long term.
And this current allocation of investment capital plays a pivotal role in the execution of our strategy.
Shifting to the energy transition, we continue to further our strategy of deploying capital and expertise to companies playing an active role in the transition.
As an example, our investments in geothermal are helping to develop an alternative low carbon $24 seven power source.
We are providing flex rigs and our digital technology solutions to enable enhanced geothermal systems and closed loop drilling concepts.
Notably we have made encouraging progress in field trials with two of our geothermal investees.
<unk> and EVAR.
Regarding forbid this past September we completed drilling they're enhanced Geo thermal system pilot project in Nevada, which involved the first two horizontal geothermal wells ever drilled in the U S.
And we are currently drilling ever closed loop pilot project in New Mexico.
Once complete we expect this closed loop project to be the deepest and hottest directional geothermal well in history.
Our strategic alliances with servo, whatever and all of our Investees has put us firmly on the path towards the advent of next generation geothermal as H P takes the lead in unconventional geothermal drill.
We are hopeful that these pilot projects lead to scalable low carbon geothermal developments utilizing electric solutions.
Our second sustainability report will be published soon and we will continue to provide the transparency that is important to our stakeholders. Our team is working hard to continue to raise the bar as a responsible leader in the energy services sector.
In summary, we enter fiscal 2023 with momentum and increased confidence that our initiatives and our North America solutions segment have gained traction and are delivering positive financial results.
We are also excited about the longer term prospects and opportunities before us, particularly in our international solutions segment.
Finally, we believe we've achieved a balanced and responsive capital return methodology with our supplemental shareholder return plan.
These actions align with the company's long history of financial stewardship by increasing the company's financial returns through long term investment in the business and increasing cash returns to shareholders through the augmentation of our long standing dividend commitment.
We're over the past 10 years, we have returned $2 $4 billion in dividends.
In closing <unk>.
During my 35 year career, I have never witnessed a higher level of alignment and communication with our customers, resulting in greater transparency and value delivered.
As a service and solutions company. The successes <unk> has achieved and plans to achieve would not be possible without our devoted.
Customer focused and hard working employee base, which I am proud to say continues to set the standard for our industry.
And now I will turn the conference call over to Mark.
Thanks, John .
Today, I will review, our fiscal fourth quarter and full year of 2022 operating results.
<unk> guidance for the first quarter and full fiscal year 2023, as appropriate and comment on our financial position. Let me start with highlights for the recently completed fourth quarter and fiscal year ended September 32022.
The company generated quarterly revenues of $631 million versus $550 million in the previous quarter. The increase in revenue relates to continued price increases in the quarter for the North America solutions fleet correspondingly total direct operating costs incurred were $412 million for the fourth quarter versus 300.
77 million for the previous quarter. The sequential increase was driven by some structural inflation, but to a greater extent maintenance and supply expense volatility that we typically see in North America solutions quarter to quarter, which ended up being on the higher end of the range this quarter.
General and administrative expenses totaled $47 million for the fourth quarter and 182 million for fiscal 'twenty, two which is in line with our expectations.
And other income expense was a loss of approximately $9 million, which was primarily driven by a lump sum distribution for participants exiting our pension plan.
Yeah.
Our Q4 effective income tax rate was approximately 38%, which is higher than the statutory rate of 21%, primarily because of foreign income taxes and permanent book to tax differences as.
As we crossed the line to become profitable towards the end of the fiscal year, we accrued additional U S cash taxes in fiscal 2022 of which approximately $45 million remains that we plan to pay with the extended filing of our tax return in January of 2023.
To summarize fourth quarter's results agency earned a profit of 42 cents per diluted share versus <unk> 16 cents in the previous quarter.
Earnings per share were negatively impacted by a net.
Three seven loss per share of select items, which was primarily made up of the aforementioned pension item absent select items adjusted diluted earnings per share was <unk> 45 in the fourth fiscal quarter compared with an adjusted 27 cents during the third fiscal quarter.
Capital expenditures for fiscal 'twenty two.
Total of $251 million, which was within the range. We established in November of 2021.
For John's previous comments on market churn, we limited our rig reactivation mid fiscal year in keeping with our strategy of capital discipline.
<unk> generated 234 million in operating cash flow during fiscal 2022, as we discussed last quarter, our cash flow generation fully funded capex in our base dividend in Q3, and this quarter, we were able to do the same and even added some cash to the balance sheet as well, we will discuss accretive FY 2000.
Twenty-three cash generation later in these remarks.
Turning to our three segments, beginning with North America solutions segment.
We averaged 176 contracted rigs during the fourth quarter up from an average of 174 rigs in fiscal Q3, we exited the fourth fiscal quarter with 176 contracted rigs as expected revenues were sequentially higher by $66 million due to pricing increases for our rigs in the spot market and continued.
Repricing of term rollovers.
Segment direct margin was 204 million just below the top end of our July guidance and sequentially higher than the third fiscal quarter by $36 million.
In addition, reactivation costs of $7 5 million were incurred during Q4 compared to $6 5 million in the prior quarter. The Q4 reactivation costs were primarily related to the rigs are being prepared for deployment in the first few months of fiscal 2023.
Total total segment per day expenses.
Excluding re commissioning cost and excluding Reimbursable has increased to 16453 in the fourth quarter.
From 15490 per day in the third quarter. This was above our expectation due primarily to normal maintenance and supplies expense volatility.
As well as inflation that I mentioned previously.
Looking ahead to the first quarter of fiscal 2023 for North America solutions as of today's call. We have 180 rigs contracted and we expect to end their first fiscal quarter with between 181 and 186 working rigs with expectations for a few additional ads in early January .
And with line of sight for up to 192 rigs by the end of fiscal Q2.
Our current revenue backlog from our North America solutions fleet is roughly $864 million for rigs under term contract as of today approximately two thirds of the U S. Active fleet is on a term contract or increase in term value of approximately 235 million from June 30 to September 30.
Is due to one the reactivation and the first.
2023 fiscal quarter, requiring term contracts into term extensions as well as some performance contracts for strategic customers.
However from now through March 31, we have about 65 rigs rolling off of term contracts with almost half rolling off on March 31, as a result of these more legacy type term rigs rolling off a tailwind is created for the average pricing level of rigs remaining under term contract.
Accordingly in an Oversimplified example, if all of these rigs rolled to the spot market. We would expect the average pricing of our remaining term rigs to benefit roughly 1500 per day over each of the next couple of quarters as lower priced term rigs were simply removed from the average for.
For reference we expect the average revenue per day for our term rigs in the first fiscal quarter to be about $30000 per day.
We still expect the percentage of your U S fleet on term to be between 50 and 60% by the end of fiscal 2023.
In the North American solutions segment, we expect drag margins in fiscal Q1 to range between $250 million to $270 million inclusive of the effect of about.
Eight and a half million in reactivation costs.
As of the recent start of fiscal year 2023.
We increased field labor related rates to respond to market conditions and assistant talent retention and attraction.
As a reminder, our contracts are structured and the pass through such labor related cost increases over a 5% threshold. Therefore significant labor increases are largely margin neutral at the time of adoption due to contractual protections.
Also approximately 70% to 75% of our daily cost or labor related and these recent increases are approximately $650 per day, our direct margin guidance is inclusive of our expectations for labor and materials inflation.
In the first fiscal quarter.
Yeah.
Regarding our international solutions segments as expected International solutions business activity increased by three rigs to exit the quarter at troll rigs, having added two in Argentina and the late in the quarter one in Colombia, as we look toward the first quarter of fiscal 'twenty three for international we expect to add another rig in art.
Tina and benefited from a full quarter of the recently added rig in Colombia interact.
In our October press release, we mentioned upgrading five Argentina rigs to Super spec. These upgrades are performed in Argentina, using local currency and our intended to meet ongoing customer demand for unconventional drilling.
We will have nine of 12 flex rig threes working by December 31, and plan to upgrade the five that are not super spec by the end of this fiscal year.
We also expect to continue to incur more expenses as we further develop our middle east hub inclusive preparation to exports Super spec flex rigs that will be targeted at regional unconventional drilling operations.
Yes.
Aside from any foreign exchange impacts that we expect to have between $7 million to $10 million direct margin contribution in the first quarter.
Well it will not contribute to activity until the fourth fiscal quarter of 2023, you may have read reports of our recent investment in rig contract with Tambor and resources in Australia.
Australia was on our long term planning horizon for opportunities around the burgeoning unconventional plays globally, and we look forward to adding value by bringing our unconventional expertise and experience to this long term project.
Our customer has key acreage and then emerging unconventional gas play in the <unk> basin and there are no current super spec rigs in Australia that are suitable for such drilling Hmp's first rig in Australia.
Is being scheduled to ship during the first half of the year and if our customers successful with their delineation work wear.
We are hopeful that this will be a new region for international growth.
Turning to our offshore Gulf of Mexico segment, we have four of our seven offshore rig.
Platform rigs contracted offshore generated direct margin of $9 million during the quarter, which was within our guided range.
As we look toward the first quarter of fiscal 'twenty three for the offshore segment, we expect that it will generate between $8 million to $10 million of direct margin.
Now, let me look forward to the first fiscal quarter and full fiscal year 'twenty three for certain consolidated and corporate items.
Yeah.
As we increase our rig count capital expenditures for the full fiscal 2023 year are expected to range between $425 million to $475 million. This capital outlay is comprised of three domestic buckets, plus international and corporate spend.
As discussed on the July call, our North America segment, Capex has three buckets maintenance reactivation and conversion our bucket of maintenance Capex cost is anticipated to push above the high end of our historical range of.
750000 to $1 million per active rig the fiscal 2023 range do you expect it to be between $1 1 million and $1 3 million per active rig.
As mentioned in our October press release, the reasons for this are twofold.
One is due to the reduced spending during the pandemic years, when the company judiciously preserve capital spending by utilizing component equipment from idle rigs.
Now we were making that now we are making up for those capital spending deferments. The second reason is the current inflationary environment and supply chain challenges.
The second bucket for our North America segment.
Isn't even for 2023 and includes the rig specific reactivation capex that is required for the plan to redeployment of up to 16 rigs that had been stacked for some time much of the spend will be incurred to overhaul componentry that we optimally utilized during the protected during the protracted downturn.
Such discrete reactivation capex is anticipated to range from 1 million to $4 million for each of the 16 rig reactivation as planned in the first half of fiscal 'twenty three depending on the unique rigs particular componentry involved.
The final bucket for N a S as the conversion bucket, which relates to the continuation of a walking rig conversion program. We plan to convert one rig a month for the first six months of fiscal 2023 for reactivation in the U S market as a reminder, our skidding to walking conversions are approximately 7 million.
Per rig.
The International segment also has three areas of spend concentration first we're converting six stacked rigs in the U S from skidding to walking in the second half of the fiscal year and also incurring re commissioning capex for those six conversions, which will be export it.
As mentioned earlier, we are upgrading five total rigs in Argentina to Super spec and third maintenance Capex for the international and offshore segments are collectively expected to be $1 million to $2 million per active rig.
Finally, corporate capital investments are expected to be about 10% of our fiscal 2023 Capex. Two thirds of this is information technology related including hardware lifecycle replacements.
Enhanced data capabilities and further improvements to our infrastructure communications and cyber security.
Depreciation for fiscal 2023 is expected to be approximately $400 million.
A few overarching comments on capital expenditures are in order first capex is up year over year as we are investing to maintain our U S fleet with modest growth this year as well as investing in international growth for future year margin generation as well as geographic margin diversity.
It is important to note that after our plan to 16 U S rig reactivation and our planned six international rig exports. We will have 32 remaining stacked super spec flex rigs located in the U S for future growth domestically or internationally in upcoming years.
If you exclude the pandemic years of 2020 in 2021 capital intensity, which we measure as capex as a percentage of revenue.
Should be among the lowest it has been in the last 10 years in fiscal 2023.
This reduced capital intensity results in return and cash flow generation, which I'll comment on more in a few minutes.
Finally, like fiscal 2022, we are committed to our capex guidance for fiscal 2023, barring any unexpected investment opportunities in international markets.
Okay.
Our general and administrative expenses for the full fiscal 'twenty three year are expected to be approximately $195 million.
Which is up from the year recently completed which had an average of 163 rigs working.
While this annual G&A spend is just under the $50 million per quarter run rate, we had going into the pandemic. When we had approximately 195 rigs working.
We're expecting to operate about the same number of rigs in an inflationary environment and at the same time are building capabilities to support future international growth in essence, we were doing a bit more with a little less for support cost.
Specifically, we expect about $50 million of expense in Q1 with the remainder spread proportionately over the final three quarters.
Our investment in research and development remains largely focused on solutions and important to our customers such as drilling automation wellbore quality and power management.
We anticipate R&D expenditures to be approximately $28 million in fiscal 2023.
As a result of our return to profitability. We are once again, becoming a U S quarterly estimated taxpayer.
We are expecting an effective income tax rate range of 23% to 28% with the variance above U S statutory rate of 21% driven by state and foreign taxes.
Based upon an estimated fiscal 2023 operating result in Capex, we are projecting a consolidated cash tax range of $190 million to $240 million.
Of which 45 million relates to fiscal 222 taxes.
To be paid in fiscal 'twenty, three resulting in a cash tax range of $145 million to $195 million related to fiscal 'twenty three activity.
Of note.
We currently estimate that the impact of our deferred tax liability of roll off for fiscal 'twenty three is less than $10 million. It should be noted. These ranges do not include approximately $28 million of federal tax receivables on our September 32022 of which about 25 million where subsequent subsequently collected in October after the fiscal year end.
Now looking at our financial position Helmerich.
Helmerich <unk> Payne had cash and short term investments of approximately $350 million as of September 30.
2022 versus 333 million at June 30.
Including availability under our revolving credit facility, our liquidity remains at approximately $1 1 billion.
We again expect changes in the components of working capital to reduce cash in fiscal 2023 as was the case in fiscal 'twenty two whenever revenue increases as we expect with pricing uplifts across the fiscal year.
Rising receivables create a use of cash.
Q1 is expected to experience lower cash flow from operations in the following quarters due to the planned rig reactivation and ongoing price increases.
Earlier.
I've mentioned the cash flow generation expected for fiscal 2023 as John mentioned.
Moving through fiscal 'twenty, three our returns as measured in ROIC C should be back in line with levels seen in 'twenty 14 and earlier.
These levels are expected to be well into the double digits as an average across the fiscal year and therefore in excess of our estimated weighted average cost of capital.
As announced in our October press release subject to ongoing board approval, we plan to pay supplemental dividends across fiscal 2023 of approximately 100 million.
Which is approximately 50% of the remaining cash flow after capex and after our established a base dividend.
So in essence this results in a full two thirds of cash flow after capex returned to shareholders.
With one third retained for flexibility.
As of today with this flexible $100 million unallocated, we would expect to end the fiscal year what's.
It was between 430 and $490 million of cash and $60 million to $120 million of net debt.
However that is not the intention rather going forward, we will reassess this allocation throughout the year.
With an eye towards opportunistic share repurchases additional dividends and or accretive investment opportunities.
That said our current plans for capital allocation look to further add to our long standing priority of returning cash to shareholders and add to the roughly $2 7 billion of cash that we have returned to shareholders. During the past 10 years through dividends and share repurchases.
That concludes our prepared comments for the fourth fiscal quarter, Let me now I'll turn the call over to Ashley for questions.
Yes.
Thank you and at this time I 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 Thats star one.
We'll take our first question from Derek <unk> with Barclays. Please go ahead.
Hey, good morning, guys I just wanted to first ask about the leading edge day rates and moving the average up to that level. So maybe could you just talk to me about how long that lag is to close that gap I think you. Just you just got it's about 30000, a day rates for the for fiscal <unk>, leading edge sounds like it's on the upper Thirty's or has hit.
40000, just maybe walk us through how you can broaden the term contracts over to reach that level and when we can see it in the financials.
Good morning.
This is John .
I don't have the exact timing on that Dave or Mark may have more more color on that but you.
You know you you nailed it that is our focus and we are seeing the results of that quarter over quarter will continue to move.
Those are averages both in the spot and term.
Closer.
To that to that leading edge and that's really our focus because that's where the real opportunity set is there mark do you have some.
Any further color on that.
Well, our our average our average.
Spot is a about what Dave about.
Yeah, and that's not including the day rate revenues, but revenue average is about 37, yes. So the delta if you think of legacy ancillary and technology all in our revenue per day.
At the spots about 37000 a day.
Our term as we mentioned earlier is about 30 revenue per day, and I think leading edge is getting up to around 41000 a day.
And Derik, that's why we mentioned that the 65 rigs we have rolling off between now and March 31 kind of give you an idea of.
That progression and how you can model that into the year.
Got you Okay. That's helpful.
I want to jump over to international obviously, a lot of moving pieces going on can you walk us through your you just exited about 12 rigs you said, where do you expect to exit fiscal 2023, just trying to get an idea of the cadence of the rig activations between Argentina, and Middle East and Australia, and then what can we expect as far as earnings and margin power.
In the international region, how much that's going to contribute to total company.
Well I think we just guided to somewhere around 13 rigs at the end of December with the one we plan to add in Argentina, but as you move through fiscal 'twenty, three and we will have an eye on the three remaining.
Flex threes in Argentina that will be upgraded to super spec and trying to deploy those.
Importantly, we also have one that's moving to Australia, as we mentioned and that looks to spud in the summer of 'twenty three.
And it was originally by the way are earmarked to go to the middle East hub, but its been redirected for this tambor and opportunity.
And then the six rigs that we have mentioned that are being recommissioned and converted to walking in the second half of the year.
Those are all geared towards various bid tenders, we're participating in with an eye towards the middle East there are several burgeoning golf coast country.
Unconventional plays where were those rigs can differentiate and we've been working as we have talked about.
Successive quarters on these calls we've been working in.
Increasing our brand presence in the region, which was aided by our transaction in partnership with Aetna and.
And we were actively participating and looking to differentiate in the yen and the unconventional plays.
In gas and oil I think was a real focus and several of these countries currently on natural gas.
Okay. That's helpful and anything on what we can expect from these rigs when they are fully contributing on as far as a daily margin just the earnings power on these rigs.
I think the earnings power on these rigs would be you know equivalent with what you're seeing today and more and again, that's that's yet another year away before those six would actually be.
Beginning to turn to the right so more to come but we certainly are we certainly targeted returns for these just like we do for everything in the item that team.
Okay I appreciate the color I'll turn it back.
Thank you.
And we'll go next to David Smith with Pickering Energy go ahead. Please.
Hey, good morning, and thank you for taking my questions.
Good morning, David.
Just a quick follow up on that last question about that.
Six rigs you plan to export from the U.
I think you said that those are probably going to.
10 minutes here, but I imagine there is fairly long lead time in those tenders.
So when you're thinking about fiscal 'twenty for US is when we could start seeing a contribution from those.
That's correct, David that's correct.
I appreciate it.
Regarding the commentary about the base and the supplemental dividend.
Presenting about two thirds of expected.
Cash flow less capex in fiscal 'twenty three.
Is that roughly two thirds figure indicative of your longer term thinking on returning cash via the basin supplemental dividend.
David This is really you know our 2023 our plan is really just that it's a it's our 2023 plan because that's the.
You know you've heard me say before it's hard to see much past a quarter in this business and were forecasting out a year and in making that commitment for 2023. So.
Our our intent our hope is that you know in future fiscal years will have a similar if not even better but that's that's kind of where.
This is just the 2023.
Anything to add.
Yes, I would just add.
David as you know John and I, the management team and in discussions with the board we sort of we think there are several capital.
Capital allocation criteria.
And I'll just kind of tick through these you know one is maintaining a minimum liquidity for operations, which is less than the cash we had on hand at September 30th we have are with a view that you know as we have with our conservative stewardship of the balance sheet in our view the risk management.
And also positioning for Optionality, we prefer 200 million minimum cash balance.
In consideration in our capital allocation criteria as we have long committed to our creditors and our fiscal stewardship is assessing cash generation to ensure we maintain it.
Leverage of less than two times less than two turns.
<unk>.
Third as you know, we're opportunistic for accretive investment opportunities with as I said, just a minute ago in a previous question with mid to high teen returns individually and they contribute to our goals for consolidated ROE I see in the same range.
Fourth opportunistic in using the evergreen 4 million share repurchase authorization.
Example of that would really be last November and December a year ago. When we believed that there was a dislocated dislocation in our share price, which led us to repurchase shares in the first quarter of fiscal 'twenty two.
And then finally I would say towards the end of the fiscal year in consideration of all the aforementioned if an excess cash balance remains in management and the board will consider further or additional dividends and then as John said, then we will move forward and develop the fiscal 'twenty four budget, which would reassess Ford fiscal year cash generation above cat.
X at that time and above the established base dividend to work with the board to figure out the 24 capital allocation plan.
I do appreciate all that color and I will jump back in the queue.
Alright, David Thank you.
And well take our next question from.
Luke Lemoine with Piper Sandler. Please go ahead.
Hey, good morning, good morning.
John If we look at your 16 reactivation this fiscal year I imagine, there's a few things going on with incremental activity.
Some operators upgrade to super spec rigs and maybe some market share gains as well from other super spec rig providers could you talk about these buckets, a little more and maybe which of these you see as the main driver.
Look I think there's.
We said there's there are several drivers I think.
You heard us the 16 that the ones that we have committed are mostly large public companies with which was really has been our expectation I think most people's expectations.
The private companies have contributed a lot of rigs.
Active rigs to the fleet over the last couple of years.
So we think our you know most of that will be directed towards the larger players. We think most of that will also be in a in the Permian, but not all I mean, we do have haynesville and.
I think there might be an Eagle Ford Theres, Some north Dakota.
Opportunities I think we may even have an Oklahoma rig in there, but I think the majority of it is focused and.
In the Permian, but going back to you know our.
Ocean earlier, so much of the demand out there is being provided through this through it.
At least in our fleet I would have to suspect other other companies are the same.
This is really a function of the churn that we're seeing.
Quarter over quarter, and so a lot of that demand is satisfied there. So you know as an example, if what we found is on the 16 that we there was more churn than expected you know it could be that we wouldnt put all 16 of those rigs out into the market because we're satisfying that demand.
You know through through other means so does that answer your question.
Alright, I guess.
Yes, partly but maybe you could talk about churn a lot of analysis to do you think maybe some of the churn in other people's fleets that you're gaining some market share or do you think these are purely incremental rigs from a large public players yeah. That's a good point that its a mix we've had.
Some of these rigs are incremental some of these rigs are our replacement, but as you know.
If we replace a another peers rig that rig then moves over and satisfies demand somewhere else as you just start thinking about these points of demand in the market.
Those are going to be satisfied in many cases, you know from other rigs that are rolling off of one to the other I think I think two thirds.
Our our.
Incremental and then the other third are replacement for what we have committed right now.
Okay got it and then maybe just kind of on the overall market outlook with two thirds of its being incremental.
You haven't got a quarter of the overall market share do you think that's kind of indicative of overall market growth are hard to say.
I think it's I think it's really hard to say at.
At this point.
You know we feel like that.
There'll be modest growth, obviously on our you know from our rig count we would consider that to be modest.
We're as we've said probably.
<unk> said, it maybe too many times, but we're really focused on capital discipline and making certain that.
You know, we don't we don't put a rig in the market that is.
As the next X S excess rig if you will.
Just based on on the demand criteria. We can you utilize a rig that's hard that's rolling off from somebody else and then we can do that.
But it's really hard to say I mean, obviously, if you just use the math on our market share.
Adding 40 to 50 rigs back over the next Oh, what 13 14 months.
As is reasonable, but it's just really hard as you know, it's really hard to call from this point.
Okay.
Very helpful. Thanks, so much.
Thank you.
And we will take our next question from Arun <unk> with Jpmorgan. Please go ahead.
Yeah good morning.
You guys mentioned that about two thirds.
Of the 16 rigs that you plan to reactivate have been contracted.
John you mentioned that Youre looking for a minimum of two years in terms of commitment.
Put those into the field just wondering if you could give us a sense.
Of.
Oh, where pricing is for term contracts relative to the leading edge that you pegged in the low 40 <unk>.
On the the term contracts are the majority of those rigs are in some sort of a performance based contract.
In that two year term contract and our expectation would be that you know of.
Again, assuming performance and that's where that's what we're focused on with our customers.
We're gonna be.
The closer you know, we're gonna be closer to that leading edge pricing.
With those with those term contracts.
Again their performance based but we've been able to deliver on this so we feel we feel good about the pricing.
In other words, we're not putting we're not taking and really it's not just put those rigs, but it's all rigs you know we're not entering into a term contract at a discount or entering into a term contract at them at leading edge or close to leading edge with the opportunity to get some additional rare.
Canoe and margin based on performance and sharing sharing in those savings.
Great.
A follow up John on the companies call. It international growth strategy, I think a quarter your capex this year or fiscal year will be a.
Focused on the international side of the business as we look forward to fiscal year.
2024.
Could you give us maybe frame some some ranges of potential rigs that you could see deployed.
Internationally.
And as you think about participating in tenders are you participating with.
Other service companies are talking to us about the bidding dynamics, particularly as we think about the middle East.
Well Arun you know the the market very well in the middle East and and these are long you know these are long plays in and so.
Thinking about 2024, I think really makes a lot of sense. We were recently in Abu Dhabi here a few weeks two three weeks ago at a pet conference in a lot of excitement there and of course you know we're we're.
We're excited about opportunities in Abu Dhabi, and Saudi Oman other other countries that.
That have shown some interest in the majority of that is for unconventional resource play development and of course, nobody has drilled more horizontal wells than that A&P. So I think we have a lot a you know a lot to add there.
So these these are tenders take taken a long time and you have to have a lot of patients, but again, it's a it's a long game and that's what we're focused on core if you have anything you would.
No I agree John .
As you mentioned unconventional and I and I would just add maybe a footnote Arun as we as we look at these.
Various tenders, we're participating in.
And a bona fide participation in them in with many of these indices.
Boots on the ground.
Sales folks and in the in the region there.
We've invested in the last couple of years, we're looking at some of these tenders with scale, so not one or two rigs, but four or five six rigs and that's.
Each and that's why you see our see our investment this year is setting us up for our.
Our margin generation.
You know accretive to the company in 'twenty four and beyond.
Right and then just maybe just a quick follow up here is just on the frame agreement with with the.
Not growing how does that work relative to that.
Your companies your.
H M P specific opportunities how would that work in Abu Dhabi.
Well, we've we've delivered.
The eight rigs.
That we talked about we've sold.
We have.
An agreement, where we're working with them on conventional product.
Projects and so that continues to trend well.
And.
Don't have a whole lot to more to add to that right now.
But there'll be more to come with more to come as we as we go through the next several quarters.
Great. Thanks, a lot John .
Thank you.
And we will take our next question from Waqar Syed with ATB capital markets. Please go ahead.
Thank you good morning.
John .
The rig.
We needed for unconventional drilling in the middle East is it a similar type of Super spec rig is 50000 horsepower now for that type of drilling or do you need to have a bigger rig could you maybe elaborate what type of rig that'll be needed.
Yes, good morning, recur now that that's exactly right. Our really are a flex three are both flex III scared in and flex III walking rigs or are both very well suited for the wells that we've looked at at this point.
Those rigs have performed very very well and in our Derby.
In the past when when we were drilling previously.
I don't think they were doing any horizontal they were doing a lot of really long directional type wells, but now they are very well suited for that for that work and I think our.
National oil companies, we're talking to are very excited about the opportunity.
Great and then Mark.
EBITDA margins in the international business, we're at about 1% or so in the past.
Fast in a couple of years ago, they were as high as you know the 20%.
Where do you think these EBITDA margins could go through this fiscal year.
The the the.
Well, if you look at the fiscal year, starting off with a higher rig count to begin with I think youll certainly see year over year margin expansion.
But I'll just caveat that that even that margin expansion is even with a bit of a drag on some of the expenses. We're incurring in setting up the middle East and Australia more more more focus on that middle east hub, but even with that you're going to see margin expansion. This year.
Could you quantify those expenses in the middle East and Australia.
Not you know.
No.
Now it's a it's really early days in Australia, you know Theres a lot of there's a lot of.
Planning work, that's happening for setting up operations on the ground in the summer of 'twenty three I will tell you as I mentioned earlier that rig that's targeted to be shipped in January much of the work was already incurred on that in fiscal 'twenty, two but as it relates to the middle East hub are quite a bit of work is.
Happening and and you'll just see that to continue to be a little bit of a drag on <unk>.
Oh, you know as I said the margin expansion for the segment is up simply because of the number of units working and getting better and better pricing on those units.
It's just the scale thing and we think that'll that'll do nothing but grow through time.
Yeah, well a car that.
We're excited about that opportunity as Mark said and there's a lot of experience on the ground there timber and has.
Guys that have done a lot of work on unconventional plays in the U S and we're excited to be working with them.
We think it's a great opportunity to get its really really early days, but it is.
It looks like an exciting play.
Absolutely and then just final question John .
What's your contracting strategy change given that you now have this capital allocation program and you've got this.
94 type dividend that you're planning for our.
Fiscal year 2023.
Uh huh.
No.
I don't I'm not completely following following.
The change of our contracting strategy.
I'm, just saying that you have about let's say do cuz rigs contracted right now and that's pretty much consistent with what you've had over the last one year or so and.
And 50% over the next six months, so I'm just thinking that would you guess.
A higher number of rigs under term contracts and therefore, the subsequent six months going forward are you, okay with that despite.
A high level of dividend.
But you'd be paying out.
Yeah, where we were.
We're targeting in a 50% to 60% range and in that.
It really hasn't been driven by the dividend levels I mean, the cash that we're generating is.
As a you know.
As Mark described what we should have excess cash outside of that plan Mark what would you add I would just say today you know we talked about so many of them rolling over between now and in the end of March in the prepared comments with car and the average term length. Today is probably 10 or 11 months. So you have to just re.
Remember that you know by and large those those.
So many of the term contracts that you now.
Have you have existed from rollovers back from the Super spec upgrading timeframe.
Or really in the one year calendar period, you know that's why so much of our.
You know capital allocation plan as a result of their customers and they're really adhering to their annual budgets and so that really gives us underpinning in our confidence.
For the annual supplemental plan.
But you know overall, where we are in the cycle and due to that due to not having new builds due to not having significant investments in super spec upgrades and do the customers living in our annual fiscal year budget as opposed to cash flow you see a lot of 12 months terms yeah.
Yeah, much later first cycle or car than than what we had experienced previously because obviously were.
We're not looking at new builds we don't have all that capital outlay and as we've said, we're really focused on this and margin generation. It's a margin cycle not really a growth cycle. So we're excited about that.
Wonderful. Thank you very much thank you.
We will go next to Marc Bianchi with Cowen. Please go ahead.
Hey, thanks.
Mark I think in your prepared remarks, you mentioned a 1500 dollar.
Sequential benefit to margin.
That meant for the March quarter, and then does that kind of continue in the in the subsequent quarters was that the message just because of how the.
The contracts kind of roll off and reprice.
It's actually happening for this December quarter, and then each of the next couple, but that's exactly right Mark that's what I was.
Looking about is that a rollover when you pull the lower term out helps the average of the remaining on term.
Okay, but the benefit in the December quarter should be better than the 1500, if I'm just trying to back into.
Back into what's implied by the $2 50 to $2 70.
Yeah, you got it right from yeah, it's a little bit better.
Okay and then the.
The implication of this sort of leading edge 40000 or so.
John you made the comment about it being the term contracts being performance based and being able to kind of get to that 40000, if youre caster.
16, five then we're getting into the 'twenty three.
500.
Kind of margin per day at some point once once the fleet rules I mean, if I just carry this out it seems like you could be there.
In the beginning of March 2024.
Is that the right way to think about where this ultimately goes or are there.
Other puts and takes that you'd call out that maybe we shouldn't model it that way.
Well those are those are the numbers and you know we are.
Are we.
We are again, we're focused as I said earlier on getting the averages for spot and term.
Closer to leading edge you know what we haven't said is you know how many how many rigs are closer to that leading edge that isn't our focus.
So.
You know again.
The numbers are the numbers so yeah.
Okay, just one more from me on the walking upgrades so.
Just doing six for North America at this point.
What are the what's the scenario, where you would be doing back on that sort of one per month cadence.
And should we think of what should we think about that beyond 2023 are you going to.
Kind of turned the whole fleet over to walking at some point or what's the long term thought on that.
Well Mark as you've heard us say before I mean, you just look at the fleet that's out there working today and.
The lion's share of that or flex three skid rigs and.
Youre right the six rigs we're doing six.
Conversions to walking, but that's really a function of customer demand. We have we've actually had more demand for flex III skid rigs and we have walking rigs. So it's all going to be dependent upon customer.
Customer demand and the types of wells that are being drilled.
It's just really a wide range.
The sixth the other six rigs that we are.
Converting those were the ones that we're talking about sending to the middle East So.
We're going to we're going to do what is in the best interest of satisfying customer demand and whats in the best interest of shareholders, but they're sure it won't be a conversion to the entire fleet again, there's customers out there that all their user flex III skid rigs.
Yep.
Great. Thanks, so much John I'll turn it back.
Thank you.
And at this time I'll turn the call back over to John Lindsay for any closing remarks.
Thank you Ashley and thanks again to all of you for joining US today, we know there's a lot going on there's a lot of priorities that are going on out there at this time of the year. So we really appreciate your time I'll tell you again that the <unk> team and I've said, it and I'll continue to say it we're laser focused on delivering value to.
<unk> and shareholders.
We aim to deliver value to customers through top tier performance safety and reliability and to our shareholders. We're going to continue to focus on improving our rig margins and growth in our returns on capital. So thank you again for your time and 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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