Q1 2023 Helmerich and Payne Inc Earnings Call

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Good day, everyone and welcome to the Helmerich <unk> Payne fiscal first 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.

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Please note this call may be recorded and it will be standing by should you need any assistance.

It is now my pleasure to turn the conference over to David Wilson. Please go ahead.

Thank you Nikki and welcome everyone to Homosapiens conference call and webcast for the first quarter of fiscal year 2023.

With us today are John Lindsay, President and CEO , and Mark Smith, Senior Vice President and CFO .

Both John and Mark will be sharing some comments with us after which we'll open up 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 securities laws such statements are based on current information.

Maybe some expectation that with the state and they 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 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 make reference to certain non-GAAP financial measures such as segment operating income gross margin and other operating statistics.

Find the GAAP reconciliation comments and calculations in yesterday's press release.

That said I will turn the call over to Jonathan.

Thank you, Dave and good morning, everyone.

We're very pleased with our quarterly results and remain optimistic about the year ahead.

Our first fiscal quarter results of 2023 showed another strong sequential improvement in financial performance.

And a continuation of the momentum established in fiscal 'twenty two.

We remain focused on our three strategic objectives, which are North America solutions pricing and margin cycle dynamics.

Hep's international opportunities.

And our investments related to technology and sustainability.

Almost a year has passed since we set into motion plans to achieve revenue per day in excess of $30000 in direct margins.

50% in our North America solutions segment.

These financial guide cause for established as proxies for what is required to generate sustainable levels of economic return in this capital intensive business.

This recent quarter marks a milestone in achieving that revenue per day go is our average revenue per day was $33000.

Our per day direct margins were approximately 47% very close to achieving our direct margin go but still earning the highest margin level since 2014.

This headway achieved in just a year generating significant value for shareholders.

On our last earnings call in November and in subsequent discussions with investors, we laid out our expectations for a moderation in activity growth for both <unk> and the industry rig rig count during the December quarter relative to what we have seen over the last two years.

That expectation is being realized and is largely attributable to the capital discipline exhibited by our customers and their desire to drive more consistent and sustainable shareholder returns.

We've seen time and again that in a highly cyclical industry like oil and gas, losing sight of the long run can be stable. So we believe the capital discipline contributes to the overall economic health of our company.

As well as our industry.

Most of our large public customer budgets appear to be moderately higher in 2023 and.

And we are planning ahead to manage this potential growth in an optimal fashion.

Accordingly, we intend to maintain our plans for adding no more than 16 incremental rigs to our North America solutions rig counts.

During fiscal 'twenty three.

Dependent upon customer demand and would expect contractual churn to satisfy other points of rig demand.

There has however been a change in the maximum number of rigs we can now achieve with 16 incremental rig adds.

Previously that number was 192.

But it is now a 191 rigs due to losing an active rig as a result of rig fire during operations.

Thankfully no H M. P employees were injured during the incident.

We're able to quickly respond and utilized one of the 16 incremental rigs as a replacement for the rig that is loss, hence the maximum number of active rigs we could reach in fiscal 'twenty. Three is now reduced to 191.

During our earnings call in mid November we mentioned, having 11 of the 16 incremental rigs committed and today, we have 12.

And are currently working and the remaining two are contracted to begin work in February and March.

Before uncommitted rigs, we will not reactivate without contracts, which include margins in term commitments that justify their deployment.

To be clear if we can't achieve those objectives are prevalent our preference would be to allow rig churn in spot market pricing to satisfy incremental rig demand.

In light of this here are three industry data points to keep in mind.

First utilization of the active Super spec fleet is currently over 80%.

A level, which is supporting current pricing.

Second the idle Super spec fleet has now been inactive for over three years, making reactivation an expensive proposition.

The third point is that there are roughly 520 super spec rigs operating currently.

Which is effectively 100% utilization for those rigs that have worked some time in the last three years.

Accordingly, we expect the current utilization of the active Super spec fleet to remain at very high levels.

With our expected rig count we anticipate financial results in the second quarter to continue on an upward trajectory with direct margins per day, moving closer towards our target level of 50%.

While some may be concerned with the momentum of the current cycle our experience over the past few decades is that we should expect to have moderate and choppy activity trends like today and.

An up cycle is rarely a straight up and to the right.

Another opportunity for us during the next few quarters as having more of our fleet with long dated term contracts roll over to current market pricing.

Bringing the pricing of those rigs in line with the rest of the fleet will have a positive impact on our pricing and margin objectives going forward.

Regarding the international solutions segment. The company's expansion efforts are centered around unconventional drilling where <unk> has significant experience drilling unconventional wells.

Given that our flex rig fleet has drilled over 30000 horizontal wells in the U S over the past 10 years.

This extensive experience can provide substantial value to customers with a complement of people processes rigs in technology.

We are moving forward on several fronts to set the company up for future growth.

Efforts to grow our middle East presence continue with the pursuit of additional work in the region and our operational hub, which should be stood up during the last half of fiscal 'twenty three.

Preparations to send a super spec rig to Australia for an unconventional gas play in the basin are well underway.

These international unconventional place provide a great opportunity for <unk> to locate Super spec rigs in the middle East.

And other unconventional growth areas without the need to build new rigs.

These rigs and our capabilities provide a great opportunity to utilize the idle flex rig capacity and showcase our technology to grow our international footprint.

Our offshore Gulf of Mexico segment remains a steady reliable contributor to the company's overall financial performance.

That said, we are expecting some variability later in the year as we do have one rig contract that is set to expire during the fourth fiscal quarter.

On the technology front, we continue to experience a growing appreciation for our technology solutions, which are adding significant value for our customers through rig efficiencies and wellbore quality.

Many of our technology products in automation solutions have become integral parts of the bid process and daily operational workflows.

Our operational and technology teams are delivering outstanding results for customers.

Longer laterals and more consistent target attainment continue to be key themes for our customers.

To achieve both we have seen increasing usage across our technology portfolio with automation driving consistent three plus mile lateral delivery.

This trend is not limited to one customer one basin, but rather is becoming the way we work and deliver value.

We believe this type of repeatable reliable performance will continue to drive the adoption of <unk> technology by our customers as well as expand our revenue growth.

This keeps our teams excited about the future a future where digital technology helps drive customer value by providing safer more efficient and repeatable drilling operations.

Maintaining a fiscally disciplined approach to our business is a key tenet of our long term strategy and is a major driver behind the company's improving financial results.

Mark will provide details in his comments regarding our capital allocation efforts to date for 2023.

So we are pleased with the execution to date for our supplemental shareholder plan and opportunistic share repurchase efforts.

In conclusion, we remain optimistic about the outlook for 2023 and the longer term energy macro fundamentals.

I've had meetings with some of our most active customers at customers this quarter.

I am very pleased with what I had heard regarding the value proposition <unk> provides the Friday, the <unk> team and a differentiated results we hope to deliver.

As a result of the hard work and dedication of our employees. During this past year, we are positioned to respond effectively to a healthier industry conditions and improve the profitability of the company.

Working closely with customers to identify and then provide industry leading drilling solutions.

We are creating value for these customers and we're beginning to receive commensurate compensation for the value we help create.

We will carry this mindset forward to the benefit of both customers and our shareholders.

And now I'll turn the call over to Mark.

Yes.

Thanks, John Today, I will review our fiscal first quarter 2023 operating results provide guidance for the second quarter reiterate full fiscal year 2023 guidance as appropriate and comment on our financial position.

Let me start with highlights for the recently completed first quarter ended December 31 2022.

The company generated quarterly results of 700.

Really revenues of $720 million versus $631 million from the previous quarter.

As expected the quarterly increase in revenue was due primarily to focused efforts to move our average North America fleet pricing toward recent leading edge rates.

Total direct operating costs were $429 million for the first fiscal quarter versus $412 million for the previous quarter.

The sequential increase is attributable to slightly higher average active rig count in North America, and a full quarter of the labor related to increased discussed on our November call.

General and administrative expenses were approximately $48 million for the first quarter slightly lower than our expectations.

During the first quarter, we recognized a loss of $15 million, primarily related to the fair market value of our <unk> drilling investment, which is reported as a part of the loss on investment securities and our consolidated statement of operations.

We also decommissioned eight non super spec rigs in Argentina, and incurred approximately $12 million in impairment charges, primarily related to those Argentina rigs.

Our Q1 effective tax rate was approximately 25%, which is within our previously guided range.

To summarize this quarter's results HMT earned a profit of 91 cents per diluted share versus 42 cents in the previous quarter.

First quarter earnings per share were negatively impacted by a net 20 cent loss per share of select items as highlighted in our press release <unk>.

Including the aforementioned loss on investment securities and impairment charges.

These select items adjusted diluted earnings per share was $1 11, a sense in the first fiscal quarter versus an adjusted 45 during the fourth fiscal quarter.

Capital expenditures for the first quarter of fiscal 2023 were $96 million.

Similar to fiscal 2022, we expect the timing of our capex spend to vary from quarter to quarter.

<unk> generated approximately $185 million in operating cash flow during the first quarter of 2023, which is generally in line with our expectations.

I will have additional comments about our cash and working capital later in these prepared remarks.

Okay.

Turning to our three segments beginning with the North American solutions segment, we averaged 180 contracted rigs during the first quarter up from an average of 176 rigs in fiscal Q4.

We exited the first fiscal quarter with 184 contracted rigs, which was in line with our guidance expectations.

Revenues to increase sequentially by $75 million due to higher average pricing as mentioned earlier segment direct margin was $260 million at the midpoint of our November guidance is sequentially higher than the fourth.

Quarter fiscal 'twenty twos $204 million.

In addition to reactivation cost is $8 6 million were incurred during Q1 compared to $7 5 million in the prior quarter.

We had eight net reactivation in Q1, including a ninth reactivation that replace it lost the rig lost in the fire that John mentioned earlier.

First quarter reactivation costs related to the deployment of those nine rigs as well as preparation costs incurred on rigs ready to go.

Being ready for deployment in the first few months of calendar 2023.

Total segment per day expenses, including reconditioning cost and excluding reimbursable, excluding reconditioning and excluding Reimbursable increased to 16800 in the first quarter from 16500 per day in the fourth quarter.

This is broadly in line with expectations, primarily due to the previously mentioned up labor related increase that commenced at the beginning of the fiscal year.

Looking ahead to the second quarter of fiscal 2023 for North America solutions as I mentioned earlier, we ended Q1 at the mid point of our exit guidance range Yeah.

The activity level looks to continue to grow, albeit at a more moderate pace in the first quarter driven in part by public company operators, who are working to fulfill their calendar 'twenty three budget levels.

As of today's call, we have 185 rigs contracted and we expect to end the second fiscal quarter of 2023 with between 183 and 188 contracted rigs just to be clear and revisiting John's comments on our rig count. We have previously stated that we could add up to 16 rigs and that would get us to a maximum of 192 rigs.

During the fiscal year due to the loss was a one rig to a fire that maximum number is 191. So since fiscal year end through today. We have added 10 of the 16 for a net add of nine rigs with another two slated to go to work over the next few months.

Our current revenue backlog from our North America solutions fleet is roughly $1 1 billion for rigs under term contract.

As of today, approximately 55% of the U S. Active fleet is under term contract.

As mentioned in our last call leading edge revenue per day was and still is approximately $40000 inclusive of performance bonus opportunities in technology utilization.

By comparison average spot revenue per day is currently in the high <unk> compared to the Q1 overall average revenue per day is approximately 33000.

This provides us with a line of sight for further increases in average revenue per day over the next few quarters.

In the North American solutions segment, we expect dragging margins in fiscal Q2 to range between $280 million to $300 million inclusive of the effect of about $4 million in reactivation costs.

As discussed on our November call, we increased field labor related rates to respond to market conditions at the beginning of fiscal 2023.

Labor is approximately 75% of daily operating expenses.

We have also experienced increases in maintenance expense due to pricing inflation that is consumable materials and supplies inventory.

We believe that our currently written materials and supplies costs will be relatively stable for the balance of fiscal 2023.

Results in higher margin accretion as average pricing for the fleet is expected to continue to move towards leading edge.

Yeah.

Regarding our international solutions segments International solutions business activity increased by one rig that 13 active rigs at the end of the first fiscal quarter.

We added a rig in Argentina, as expected, which brings our working rig count to nine in that country.

International results came in above guidance, primarily due to delayed timing for costs associated with developing in the middle east hub, including rig preparation and exportation costs.

As we look toward the second quarter of fiscal 'twenty three for international.

We will incur costs to reactivate a rig in Bahrain, which we expect to begin working in the middle of the quarter, bringing us to two or three rigs working in that country.

In the second quarter, we expect to earn $7 million to $10 million in direct margin aside from any foreign exchange impacts.

Turning to our offshore Gulf of Mexico segment, we still have four of our seven offshore platform rigs contracted and we have active management contracts on three customer owned rigs two of which are on active right.

Offshore generated a direct margin of $95 million during the quarter, which was in line with our estimate.

As we look towards the second quarter of fiscal 'twenty three for the offshore segment, we expect that offshore will again generate between $8 million to $10 million of direct margin.

Now, let me look at activity and other.

You might have noted the increase in our other line this quarter.

This was primarily due to an adjustment in our captive insurance company at the start of fiscal 2020, we elected to set up a wholly owned insurance captive to finance the deductibles for our workers' compensation.

General liability automobile liability and medical stop loss insurance programs beginning October one 2019 forward.

Our operating segments pay monthly premiums to the captive for the estimated losses based on external actuarial analysis of historical losses and operating trends.

This results in a transfer of risk from our operating subsidiaries to the captive for the deductibles, which mirrors or yourself insurance retention.

Insurance premiums are included in operating segment expenses and are included in intersegment sales in the other non reportable segments.

The intercompany premium revenues and expenses are eliminated in consolidation for.

For the three months ended December 31, 2022, the actuarial estimated underwriting expense was less than the recent run rate.

As a revised develop claim losses were less than reserves.

Were adjusted Accordingly, creating a positive benefit in the first quarter and the other segments.

Now, let me look forward to the second fiscal quarter update full fiscal year 'twenty two guidance as appropriate 23 guidance sorry.

Capital expenditures.

For the full fiscal 2023 year are still expected to range between 425% to $475 million with the remaining spend to be incurred over the last three fiscal quarters.

Our expectations for general and administrative expenses for the full fiscal year have not changed and remain at approximately $195 million.

We are still estimating our annual effective tax rate to be in the range of 23% to 28% with the variance above U S statutory rate of 21% attributed to permanent book to tax differences in state and foreign income taxes.

Continue to project, our fiscal year 'twenty, three cash tax range of $190 million to $240 million of which as mentioned in November a portion relates to fiscal 'twenty two income taxes to be paid to be paid in this fiscal year.

Now looking at our financial position.

Helmerich <unk> Payne had cash and short term investments of approximately $348 million at December 31, 2022 versus an equivalent of $350 million of September 32022.

Including availability under our revolving credit facility, our liquidity remains at approximately $1 1 billion.

The sequential flat cash balance is largely attributable to our recent share repurchases.

Seasonal cash outlays.

And working capital lockup, which was driven by higher revenue.

Our planning should is cash generation and build in the second half of the fiscal year as a reminder, our.

General PREPA and preference is to maintain a minimum of approximately $200 million in cash and short term investments.

The cash and equivalents of $150 million above that minimum plus the 100 million free cash flow, we expect to generate after capex and after the base in supplemental dividends.

As discussed on our November call.

Equals $250 million in flexibility for various capital allocation considerations, including accretive investments and returns to shareholders.

During the latter half of the first fiscal quarter, we saw a combination of excess liquidity and an attractive opportunity to repurchase some of our shares at prices that we believe to be value accretive.

Approximately 844000 shares were repurchased in December for approximately $39 $1 million under our evergreen annual share repurchase authorization of 4 million shares per calendar year.

Note that the board authorized the repurchase of an additional 1 million shares in calendar 2023, bringing the total calendar 2023 authorization to 5 million CFO .

In calendar 2023 through January 27, we have repurchased approximately 434000 shares for roughly $25 million.

So fiscal 2023 repurchases have totaled approximately $1 two 8 million shares thus far for about $60 million and augment our longstanding base dividend and our fiscal 2023 supplemental dividend.

Each of these items and stock repurchases in the basin supplemental dividends encompass the new shareholder return model that we announced in October .

These actions combined with our improving financial performance demonstrated our focus to not only increase the financial returns of the company such as return on invested capital, but also cash returns provided to shareholders.

That concludes our prepared comments for the first fiscal quarter, Let me now turn the call over to Nikki for questions.

Thank you at this time, if you would like to ask a question. Please press the start in the line.

Thank you.

You may withdraw your question at any time by pricing the pound key.

Once again to ask a question please press the star and <unk>.

Kelly.

And we'll take our first question from David Smith with Pickering Energy. Please go ahead.

Hey, good morning, and thank you for taking my question.

Hi, David Good morning, David.

Okay.

John I'm curious.

If you could tell us what you've been hearing from customers on gas basin, particularly.

Hello.

Especially the private and.

And the other prospect for.

Potentially sustain below U S natural gas prices.

We are into your expectations for that.

<unk> of the U S rig count this year.

Okay.

Sure David.

Well I'll start with we've got about 15% of our fleet.

It is currently working that is and just a natural gas basins.

And about half or a little over half of those 15% are on term contracts.

From the from a customer perspective.

We really haven't heard a lot.

In terms of.

Our rig activity, obviously, theyre not theyre not adding there has there have been rigs that we've actually added recently both in the Haynesville.

In the North East.

But so far we haven't we haven't heard a really much much discussion.

Again, I don't know what to expect at this point again, our exposure is pretty low.

Thanks, the other.

One of the things that's a benefit over time is the ability to move those rigs pretty easily from one basin to another we have several of our customers that obviously have exposure in oily basins as well so.

It could just as easily move move one of those those rigs to two and oil correlation.

And John I might just add.

The footnote there that.

So about 185 active rigs would have around 28.

If you're drilling gas wells, which is about 15% of the fleet and most of those 28 or accidents in the form of term.

Okay.

Okay I appreciate that.

And then.

Yes, the follow up if I could.

<unk> strong leadership on pricing and capital discipline.

<unk> increased.

We're clearly seeing the benefits of your Retrans approach.

Hoping you could share some color on what the playbook for bats.

Our returns focused approach.

Suggest.

Scenario.

Rig demand were to come down in five or 10%.

Okay.

Yes, Dave.

David you know its interesting first of all we are focused on moving the margin in.

We've said now for for several months that our focus has been on getting the average closer to the leading edge more towards that.

The high Thirty's.

Because we're on the lower lower end of that now we want to continue to push on that.

That's important.

The other thing that I would mention about address a little bit of it in my prepared remarks as it relates to up cycles.

I can't.

As I think back and I look back on rig activity through the up cycle it tends to be choppy.

We've gone through I guess, if you just look at the last couple of last couple of decades.

Look at the activity coming out of the financial crisis.

And the pickup in activity in them.

The Choppiness and actually you know having.

100 rigs or a newer go down of course, we had quite a bit more rigs running but on a percentage basis, it's very similar.

And so I think as long as the rig choppiness.

The rig releases are moderate.

And.

2030, 40, 50 rigs I mean, it's a very small percentage of the overall working fleet, even if you're just looking at the Super spec fleet.

No it <unk>, our focus will be continuing to.

Focus on pricing and.

Our teams our sales force does a great job with it.

Rig churn and getting in getting rigs put back to work.

<unk> doesn't make a lot of sense to get into a bidding war.

So.

That would be our approach is to continue to focus on.

On the value creation that we're delivering for customers and getting getting paid a commensurate amount of money for that.

Really appreciate that color. Thank you.

Thanks, Dave.

And we will go next with so Rob Chen with Bank of America. Please go ahead.

Hi, Thank you guys John a quick follow Opex I me on the prior question right I'm not trying to put words into your mouth, but it.

Seems to me what you are indicating is that some kind of like when he took the 40 unit.

The decline is a relatively small number obviously, you've already done and that kind of scenario you would focus on on pricing and you might be willing to laid out when a few rigs.

The only thing of any size.

Is that kind of good addition, you did have put that got at least from an expectation standpoint, I know, it's all hypothetical at this point well, yes, and again I think.

I would encourage you and others to look back on previous cycles, and just look at how choppy the rig count is and I look back in the pricing from 2011 through 2014, there was a lot of volatility with rig count and we were able to continue to maintain pricing.

Obviously, we were continuing to build new rigs there was a replacement cycle going on as well but.

Yes, there's no reason to adjust your pricing on two or three or 4%, even 10% of the working fleet being idled just historically.

When you've got that when you've got utilization levels of about 8%, you've got pretty pretty strong pricing power I would just add it's rob that we are not predicting a 20% to 40% decline.

That's not what we're saying, we're simply saying as John said in his prepared comments 520 Super specs working.

And David's question was if you lost five or 10% of that I mean, that's 26% to 52 rigs, but that's still 95% to 90% utilization in the Super spec fleet.

As John just mentioned, we've historically always had pricing power above at 80% utilization level, Yeah, I was responding to your.

To your reference to if there were but we're sure we're sure not predicting that.

No.

Yeah, No no no.

No I get it it's all hypothetical at this stage, but again, that's what the investors thinking about so I wanted to make sure.

I understand how youre thinking about things.

Okay perfect perfect.

And then Oh.

Last quarter our market. Thank you you had this in your prepared remarks that for the next couple of quarters, you expect about a <unk> hundred dollars increase in average contracted revenue per day.

You can quickly these ratios on that because obviously there are a number of rigs under contract has gone up. So if you can refresh us on that how should we think about that number moving up over the next couple of quarters.

Sure Rob I think it says we said last quarter going to be the same this quarter more or less.

If you think about you know for us are.

If you look at our term fleet I think our average day rate in around the term fleet today is around.

32000 per day.

And if you look at.

If we look at what we expect as this quarter four for our average spot revenue per day, that's closer to the 38 five.

And then if we look at the leading edge is as I mentioned are the revenue per day.

Not just day rate revenue plus ancillary services technology utilization that's.

Just above 40.

Okay. Okay, Okay, Mark Thanks for that John Thank you.

<unk>.

Okay. Thank you.

And we will move next with Waqar.

ATB capital markets. Please go ahead.

Thank you for taking my questions.

First of all.

If you look at the DUC inventory in the <unk> domain low level right now are you seeing.

Anything from your customers that they see the decks inventories low and they have to build up the drilling inventory.

Good morning Waqar.

We don't get into a lot of discussion on index, but I think just generally speaking I think.

We all recognize that we're at record record lows and that there are some discussions related to being able to build that DUC count back up but it's not.

It's not a metric that we're following too terribly close date do you have any any additional color on that.

Yeah, John as you say, we don't suffer.

We track.

But clearly there are very very low levels and I've heard various.

Customers talk about building those out.

Okay.

Great and then.

Looking at it.

Our capital spending budget of 425 $75 million that you know that's a wide range.

Yeah.

You know what would drive the lower end is it just the U S.

Get to about 16 or is it more international and that gets you to between move between the northern and then that Brent.

Yeah.

Oh a car. Thanks for the question you know a lot of that is timing I mean think about the midpoint of the range $4 50. If you divided by four you probably would've expected a higher number in the calendar Q1 that I mean that fiscal Q1 calendar Q4, we exited but these things are lumpy I mean, there are some large purchases like drill pipe orders et cetera.

If delivery moves a week you can move quarter to quarter and that really timing is what I'd say is kind of a primary factor there.

Okay, and then just one final question.

I look at your rigs in the Haynesville.

Is there anything in terms of capabilities.

Right.

You know when you acquired them.

I'm pleased to maintain that before you can put them to work in the Permian and Eagle Ford.

No car there.

They're ready to go.

Essentially had the same same DLP same lay out those rigs are consistent across the fleet.

They would they would be able to go pretty seamlessly over to work in any oil basins, including the Permian.

Okay. Okay. Thank you very much thanks for the color. Thanks.

Thanks Waqar.

We will take our next question from Scott Gruber with Citigroup. Please go ahead.

Yes, good morning.

Okay.

Good morning, one question just on the guidance, just so I understand it a bit better.

You mentioned the potential for a 7% to 15% improvement in daily margin.

What drives the high end versus the low end.

<unk> is the high end does that align with CMS.

188 rigs go to work and you just have more rigs.

Got that.

Yeah, more elevated spot rate versus the lower end.

Are there other factors that kind of drive the delta.

Yeah.

Scott Thanks for the.

Thanks for the question, but.

Our margin accretion, it's just a continual we've talked about it just a question a minute ago.

The moving up the term rollovers through time, and then pricing.

Spot continuing to you know is not at leading edge either we are we're very we have relationships with our customers. We don't just increase a week to week pad.

Pad to pad or quarter to quarter or some sort of periodicity. So we still have upward momentum in the spot towards leading edge as well, it's just that continual repricing all the while all the while.

Managing our expenses very closely so that we get this all.

Paul.

So that we get the full benefit to the bottom line of that pricing increase and we're back up to like 42% I think of the fleet on performance contracts, which helps to drive that revenue per day over headline day rates as well.

Okay.

Gotcha.

Bush's fun.

Yeah.

No I mean, I know that there's you know it.

The momentum to the margin expansion I'm, just trying to think about it.

What would drive the high end versus the low end.

So maybe turning to that last point you made on the performance contracts.

There does seem to be more more appetite.

Kind of go.

So long run on rig contracts.

Oh, certainly since late last year.

Do you feel like there is no good continued momentum or maybe even Greg went back from today on performance type contracts.

Evolution.

Yes.

I think there is I mean.

We're we're working very closely with customers to deliver better outcomes at the end of the day.

And the way you do that it worked very closely with the customer you you look at the technologies that you have you combine that with the types of wells that are being drilled the challenges that they might be having in a particular area you combine all that together and at the end of the day you know if we can do.

Liver better better performance versus whatever the whatever the benchmark is.

Then we share essentially we share in those savings and so it's a real win win for the customer why wasn't a customer wants to pay us more when they're getting wells that are delivered.

More efficiently more reliably and place better and are in the zone. So it's a it's a huge win win.

And again.

We have custom.

Customers continue to adopt our technology and automation solutions are really helping us to achieve that.

I appreciate the update.

Thank you alright, Scott Thank you.

We will take our next question from John Chris with Johnson Rice. Please go ahead.

Good morning, gentlemen, thank you for allowing me to ask a question.

Good morning.

Ken can I just ask just a.

Term question.

Has the attitude of the E&ps kind of.

Or flowed in relation to term contracts or are they more willing to sign term today than they were six or nine months ago, given given the utilization today or how is that kind of progress through the year.

Don.

It really it really depends on a lot of factors.

You know, it's a very customer specific timing.

Pacific.

Uh huh.

How many rigs do they have running and how many of those they have on long term versus how many are on spot.

It's very.

It's really kind of all over the all over the board from our perspective, our focus is.

Historically, 50% to 60% of our of our contracts.

Our term.

And again, you've heard us talk about having.

So it's really dependent on the customer in many cases you have anything.

No I agree I mean is that I don't think theres been any change in what we've seen especially with the public company customers really having a preponderance for a year a year term that more or less mirrors there.

Physical mostly calendar fiscal years.

I appreciate that color and just one more if I could I just wanted to touch on the supply chain and kind of where it is today versus six months ago and more specifically.

Steel prices have come down quite significantly over the past nine months or so are you seeing any of that kind of rolled through the pipe pricing is any of that started to come down yet.

I think our.

Don I think we certainly noticed the steel price.

Peak in 'twenty two.

And I think that that you know us.

As a resulted in a moderating of price increases.

But if you think about the manufacturing the supplies us just like we needed to increase our margins I think our supplier base as needed to do the same in order to be able to reinvest in their capacity because the biggest issue for the industry going forward is.

Scale access to capacity so are we.

We've seen a moderation in price increases I think they've kind of are more steady, which I referenced in my prepared remarks about our expectations for for example materials and supplies.

Cost being relatively stable this calendar year or so.

The good news for us at <unk>. It was about access because of our scale our uniform fleet, we have direct access to our key suppliers.

As you.

By way of example, as we've mentioned in previous calls our <unk>.

<unk>.

<unk>.

Oil country tubular goods. If you will we had purchase orders in place by September 30th fully secure our calendar 2023 needs.

So we have that access and I think that.

That's a key for us in this tight supply chain environment.

I appreciate the color I'll turn it back thank you.

Thank you Donna.

Yeah.

We'll take our next question from Adam <unk> with Goldman Sachs. Please go ahead.

Hi, John Hi, Mark.

Your international solutions margin came in better than guidance.

And you mentioned the driver there, but can you give us some color on how you expect this expense to trend over the next few quarters as you work on the Middle East hub.

Sure. Thanks for the question we have.

We had a rig that's mobilizing to Australia and that was.

That's going to happen I think that.

It will commence in March we could have a you could've simply sooner.

However, it would have been probably stuck at the ports due to weather at the time of its arrival. So we elected to just delay it's sending a little bit it's still expected to spud.

In the back half of our fiscal year.

The final quarter.

And then in particular I think the bigger focus as I mentioned in prepared remarks or in the middle East hub.

We have a rig that was just delayed there.

From from the first quarter to the second quarter in the setting of sales. So that's windows mobilization expenses are incurred.

And then as we have previously said as we move through the end of our fiscal year, we have those six.

Im walking rig conversions it'll be happening essentially April through September .

And those will be translated over to the middle East is our expectation.

Again, we wouldn't expect to see revenues from those.

Until fiscal 'twenty four.

Having said all of that our expectations for fiscal 'twenty three full year have not changed it was just us.

Timing from Q1 to Q2 and three in terms of mobilization expenses.

Yes.

Got it I appreciate that and then how do you view the appetite for M&A, whether it's for technology in North America for expanding our footprint, but maybe incumbents in the international markets.

Well on the on the technology side I mean, we're always we're always looking we feel like we've got a really good portfolio and there's not any anything that I feel like as necessarily.

Oh a gap.

You know from a M&A perspective in the U S.

Set often.

We didn't feel like that that made a lot of sense.

Yeah, there's really there's just really not a lot of opportunities out there that we can see them on.

From our perspective.

And then anything internationally maybe.

Okay.

Interfere in that yet literally just like John said, we're monitoring technology.

Okay.

We're monitoring international and I think if we were going to have an accretive investment would probably be the national International Arena, we haven't seen it yet, but we're always always monitoring, especially with our focus on the middle East.

And then what youre not going to see US do is as we've said many times in the past is youre not going to see us consolidate the U S market further it's already consolidated and we think it would not be a good use of capital to put idle iron behind their own idle iron.

And especially dilutive to our uniform fleet.

In the U S.

Alright. Thank you for the answer I appreciate it I'll turn it back.

Thank you.

We will take our last question from Thomas Curran with Seaport Research partners. Please go ahead.

Good morning, guys last but hopefully not least.

Yeah.

Okay.

Okay.

Yes.

I was curious for your performance based contracts for the portion of the active fleet in the quarter that was working under performance based agreements could you tell us what.

With the average premium.

That fleet realized in the quarter wise and then.

I know.

The premium has been trending around 1500.

Some quarters it has gotten as high as 2000.

Okay. How would you expect that to evolve from here just how much more upside could we see.

For the performance based fleet when it comes to that average premium.

Yeah.

Oh well.

Suffice it to say Tom that it's still in that same ballpark you mentioned 1500 to 2000 uplift per day.

What's included in our revenue per day numbers.

We've mentioned and I think the upside is you know as we continue to get potentially more of the fleet on performance contracts. If you look at us at AT&T, we have over 60 customers. We have two thirds of our rigs with public companies.

And correspondingly I think about two thirds to 80% of our performance contracts are with public companies.

It also creates stickiness if you will in some of those public companies. We we may have had a small percentage of their total fleet. It has been a lot of those cases, we now have the majority of the rigs operating in their fleet and I think it's really helpful customer relationships John .

Yes.

Most cases Mark Mey.

Set said this but in most cases, we've got some of our technology involved in and the performance contracts.

And so when you've got technology, you've got automation that we're working on downhole downhole automation and it's really becoming more.

Much more of a trend.

And we're seeing more adoption from customers and so as you think about.

Heard us talk about auto slide and and that technology.

We recently rolled out a new.

Advanced auto driller.

We've got new failure prevention applications.

We've got engine automation solutions to help with lowering emissions and improving fuel economy. So as as I mentioned earlier as you look at this from a shared.

Shared savings perspective, and a value creation.

Or more and more willing to go.

To share in those savings, which enables us to increase our revenues and really get paid for.

The value proposition or a portion of the value proposition that we're providing.

Got it.

That's a nice segue into what was already going to be my next question, which is.

What's the current timeline for reaching the next level.

Our nation.

And just refresh us on what you would consider that level to be John using.

The Tesla five level full self driving analogy and then maybe could you share some color on specific technology initiatives you have for this year.

Well.

If you think about because automation on a rig is you're covering a lot of ground.

A big portion of our automation has been.

Focused on.

Manually intensive.

Type type processes.

Something that using directional drilling as an example, where you've got somebody that's required.

Person 24 seven.

And being able to automate that and apply algorithms to that is as delivered a law, but theyre.

All sorts of other things that are are little automation pieces that are.

You know helping.

The driller are helping the customer do more with less and be more reliable and not requiring a human to have to pay attention to it like I said 24 seven.

There are.

Automation things that we're working on related to work around rotary table.

You know lowering exposures related to making connections or things like that that we're working on.

This is a you know what.

A very very long conversation to cover cover it all but as far as pushing a button and the rig drilling the next well, we're probably not we're not at that at that point, Although auto slide you push a button and you you drill the next stand.

But.

We're a long way from affiliates on this rig.

Got it.

I appreciate that color.

You guys wrap it up.

Alright, Thank you Toms.

Thank you I would now like to turn the call back to Chuck for any closing remarks alright.

Alright, Thank you Nikki thanks to everybody for joining us today.

There's a lot of earnings calls going on this week. So we appreciate your time.

We spend a lot of time as a management team looking at pricing dynamics. The salesforce looking at pricing dynamics, we're holding the line on capital discipline.

Not chasing market share, we believe that it's crucial.

Two creating a healthy and sustainable capex over the long term.

Our focus is going to remain on top tier performance safety and reliability and we're going to continue to focus on improving our margins and returns on capital. So thank you again for joining us today 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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