Q3 2024 Helmerich & Payne Inc Earnings Call
Good day, everyone and welcome to today's Helmerich, <unk> Payne fiscal third quarter earnings and acquisition of K C. A doi tag call. At this time all participants are in a listen only mode. Later, you will have an opportunity to ask questions. During the question and answer session. You May Register to ask a question at any.
Anytime by pressing star one on your telephone keypad.
Please press star two if you'd like to remove yourself from the queue I will be standing by if you should need any assistance and as a reminder, today's call is being recorded. It is now my pleasure to turn the conference over to Dave Wilson, Vice President Investor Relations. Please go ahead Sir.
Yeah.
Dave Wilson: Thank you Tony and welcome everyone to Helmerich campaigns conference call and webcast to discuss the acquisition of TCA joined today and the Companys results for the third fiscal quarter of year 2024.
Speaker Change: With us today are John Lindsay, President and CEO, and Mark Smith, Senior Vice President and CFO.
Speaker Change: The agenda for our call. This morning is as follows.
Speaker Change: John and Mark will be sharing some brief comments on the company's third quarter results and outlook for the fourth quarter. John will then provide an overview of our transaction with TCE join tag and the significant growth and value creation opportunities that generates.
Speaker Change: Then mark will discuss the financial benefits of the acquisition and our deleveraging plan and then finally, John will conclude our.
Speaker Change: Paired remarks by discussing our approach to integration planning and then after that we'll open the call for questions.
Speaker Change: Before we begin our prepared remarks, I'll remind everyone that this call will include forward looking statements as defined in the securities laws such statements are based 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.
Speaker Change: As such our actual outcomes et cetera, our actual outcomes and results could differ materially.
Speaker Change: 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.
Speaker Change: You should not place undue reliance on forward looking statements and we undertake no obligation to publicly update these forward looking statements.
Speaker Change: We also make may make reference to certain non-GAAP financial measures such as segment operating income direct margin operating EBITDA free cash flow net debt to operating EBITDA and other operating statistics.
Speaker Change: The definitions and GAAP reconciliations for direct margin in yesterday's earnings release, and the definition of the other non-GAAP measures in the acquisition press release and accompanying presentation.
John Lindsay: We posted the press release and presentation for any acquisition to the Investor Relations portion of the website. Those documents supplement the information we will discuss on this call and we recommend that you flagged sandy to follow along with John in marks comments with that said I'll turn the call over to John.
John Lindsay: Thank you Dan.
Speaker Change: Good day to everyone.
Speaker Change: I appreciate you joining us on short notice.
John Lindsay: Yesterday afternoon, we announced our financial results for fiscal third quarter of 2024, and this morning, we announced our acquisition of <unk>.
John Lindsay: We believe this merger with Casey is transformation.
John Lindsay: It accelerates our international growth strategy.
John Lindsay: And provides immediate scale in the middle East provides diversified earnings offshore management contract exposure and World class manufacturing and energy services.
Mark Smith: But before going into any more details on the acquisition I'd like to spend a few minutes on our fiscal Q3 earnings and also allow mark to provide some financial highlights for the quarter.
John Lindsay: For fiscal Q4.
Mark Smith: During our third fiscal quarter of 2024, we delivered strong operating and financial performance demonstrating the resilience of our strategy and our North America solutions segment.
Mark Smith: It also remains particularly notable is that despite the more sizable decline in the overall industry rig count our active rig count remained relatively stable during the quarter.
Mark Smith: We believe this is the result of hep's, yielding focus on providing value to our customers.
Mark Smith: From a macro perspective, two influences have become prominent in recent years and act as a governor on activity in the oil and gas industry.
Mark Smith: Oil and gas prices have always been cyclical in that.
Mark Smith: Used to be the predominant driver in the business.
Mark Smith: Today capital discipline is driving principles and while this has ushered in a stage here operating environment.
Mark Smith: It has also been accompanied by slower growth there.
Speaker Change: We believe that prioritizing return on invested capital will bring about a more positive outlook for the industry over time.
Mark Smith: Another important influences customer consolidation and their efforts.
Mark Smith: To drive efficiency and reliability.
Mark Smith: <unk> operational and contracting strategy meshes, well with our customers and our win win commercial models encourage a return focus.
Mark Smith: That delivers higher earnings for our customers shareholders as well as our own.
Speaker Change: Contractual churn remains prevalent in the U S market, but our people are doing a good job of managing through this.
Speaker Change: We expect the churn to continue and as we have seen in recent summers. We also anticipate our active rig count to be flat with perhaps a modest improvement heading into our fiscal year end.
Speaker Change: On the international front, the company's first Super spec flex rig arrived in Saudi Arabia.
Speaker Change: Marking a major step in our strategy to increase our operational presence in the region.
Speaker Change: Activity levels in the international segment in the fourth fiscal quarter are expected to be comparable.
Speaker Change: With the third fiscal quarter with the exception of the addition of the first of those eight Saudi Arabia rigs.
Speaker Change: Those rigs are expected to commence work.
Speaker Change: During the fourth quarter once contractual acceptance procedures are completed.
Speaker Change: The preparation work for the remaining seven Super spec graphics is progressing as planned.
Speaker Change: Export dates expected through the balance of the calendar year.
Speaker Change: Looking forward to working with Saudi Aramco in building, a long term relationship with our new customer.
And now I'm going to turn the call over to Mark to review the Q3 financial highlights.
Mark Smith: Thanks, John today.
Mark Smith: Highlights physicals.
Mark Smith: Third quarter, two including four operating results look like the guidance for the fourth quarter. The remaining full fiscal year 2024, as appropriate and comment on our financial position let.
Mark Smith: Let me start with highlights for the recently completed third fiscal quarter ended June 30.
Mark Smith: The company's revenues were up sequentially, primarily due to improved average pricing in North America.
Mark Smith: Total consolidated direct operating costs were increased primarily attributable to expected higher sequential direct expenses in the international segment for.
Speaker Change: The Saudis started of course.
Speaker Change: General and administrative expenses were approximately $67 million for the third quarter, which was higher than <unk> expect.
Speaker Change: Patients due to approximately $7 million of nonrecurring professional services and consulting fees related to the <unk> acquisition.
Speaker Change: It was noted as a significant business select.
Speaker Change: In our earnings release yesterday.
Speaker Change: Third quarter cash flow from operations was $197 million.
Speaker Change: And windows collecting $134 million of capital expenditures and $42 million for the basis supplemental dividend the company generated free cash flow of approximately three 1 million.
Speaker Change: I will address the company's cash position.
Speaker Change: Later in these remarks, turning to our segments.
Speaker Change: Getting with the North American solutions segment.
Speaker Change: We averaged 150 contracted rigs during the third quarter down from 155 in the second fiscal quarter.
Speaker Change: The rig count was 146, which declined late in the quarter due to churn, but remained within our guided range of between $145 151.
Speaker Change: Revenues increased sequentially by $7 million, primarily due to our continual focus on sustaining contract economics for the value delivered to customers totaled.
Speaker Change: Total segment expenses were up slightly to 19550 per day in the third quarter compared to 19000 per day in the previous quarter.
Speaker Change: Within our general expectations as recent daily expenses vary quarter to quarter with the general range of 19000 to 19500.
Speaker Change: Looking ahead to the fourth quarter of fiscal 'twenty four North American solutions as of today's call. We have 148 rigs contracted and activity through the third quarter was relatively flat as we said as we stated last quarter. During the April call. We continue to see signs of the rig count is approaching the levels.
Speaker Change: Uh huh.
Speaker Change: And we expect to in their fourth fiscal quarter with between 147% a 153 rigs working.
Speaker Change: Despite the decrease in total U S industry rig count this calendar year, we continue to maintain that even accrete market share.
Speaker Change: We expect average pricing and revenue per day to continue to remain relatively flat, we expect costs in the fourth quarter to remain relatively flat as well.
Speaker Change: The International Solutions segment, as we look to the fourth quarter of fiscal 'twenty four.
Speaker Change: As mentioned in the press release, we expect most internationally to remain unchanged with the initial Saudi Arabia rig expected to commence operations.
Speaker Change: Before the end of the fiscal fourth quarter.
Speaker Change: Note that $1 million to $3 million of Saudi Recommencing expenses slipped from the third quarter into the fourth quarter, Therefore final Saudi Arabia rig reconditioning expense.
Speaker Change: <unk> in the fiscal fourth quarter is now revised up from $5 million mentioned in the April call $6 million to $8 million.
Speaker Change: Let me update for full fiscal year guidance as appropriate capital expenditures for the full fiscal year 2024 are still expected to be at the top end of our original.
Speaker Change: Range.
Speaker Change: <unk> $500 million, our total international expansion Capex. This fiscal 'twenty 'twenty four is approximately $175 million, which is 35% in the fiscal 2000 and for total expected capex.
Speaker Change: We previously stated that international has been a 30% to $35 million would be incurred in fiscal 2025.
Speaker Change: Any further organic international capital spend in 2025 would be primarily dependent on future rig tendering opportunities would.
Speaker Change: Would you are uncertain at this time.
Speaker Change: Depreciation for fiscal 'twenty, four is revised slightly from $405 million down to $400 million for the full year due to completion of the accelerated depreciation related to excess capital spares created via the walking rig conversion program.
Speaker Change: Our expectations for general administrative expenses for the full fiscal year, we have revised up from the previous guidance range of $240 million to $250 million. This increase is due to previously mentioned.
Speaker Change: Excuse me.
Speaker Change: Professional services and consulting fees related to the <unk> acquisition.
Speaker Change: Research and development costs are revised up for fiscal 2024 from 37 million to $40 million due to a onetime expenditure in the third quarter related to the rig floor automation technologies.
Speaker Change: Yeah.
Speaker Change: Now looking at our financial position <unk>.
Speaker Change: <unk> had cash and short term investments of approximately $290 million at June 32024 versus an equivalent 277 million at March 31.
Speaker Change: Of note, we repurchased the limited amount of shares in fiscal Q2, and we did not buyback any shares in fiscal Q3, even though for sure valuations are below our trailing 18 months averaged buyback levels at times within the quarter instead.
Speaker Change: Instead, we sought to preserve cash on hand for the contemplated Caseate OIBDA transaction.
Based on this quarter's results and our projections for the final quarter of the fiscal year, we are generating ample cash flow to cover this year's expanded capital expenditures the base dividend. This fiscal 2020 for supplemental dividend plan and the share repurchases to date further this fiscal year, we have allocated another $40 million towards various longer.
Speaker Change: And investments.
Speaker Change: That concludes our prepared comments regarding the third fiscal quarter, Let me now turn the call back to John to discuss our Caseate Deutsche Bank acquisition.
John Lindsay: Thank you Mark.
Mark said, we're going to cover the Casey a joy TEG.
John Lindsay: Transaction, we're going to begin on slide three so hopefully you have.
John Lindsay: Presentation deck in front of you.
Speaker Change: It is a historic and exciting day for <unk>, our acquisition of <unk> is transformative and establishes <unk> as a global leader.
John Lindsay: And onshore drilling and accelerates our international expansion delivering on a major strategic objective for the company.
John Lindsay: <unk> has a highly complementary geographic footprint with very little overlap to <unk> existing assets and operations.
John Lindsay: This transaction is expected to be immediately accretive to both cash flow and free cash flow per share.
John Lindsay: <unk> will become a larger more diversified and more resilient company, having greater earnings visibility and cash flow generation.
John Lindsay: We have a history of taking a thoughtful and managed approach to running and investing in the business. This acquisition continues that legacy and further strengthens the company for many years to come.
John Lindsay: Being a financially conservative company has been a cornerstone of our approach to this business.
John Lindsay: Such we have a clear plan to promptly Delever post close and.
John Lindsay: And expect to maintain our investment grade credit rating.
John Lindsay: The company also has a long history of taking a balanced approach to capital allocation with a focus on providing sustainable shareholder returns and this will continue into the future.
John Lindsay: As you'll hear today.
Casey: Casey a joy tag shares our cultural values focus on safety and wellbeing of employees sustain.
Casey: Sustainability and a customer centric approach.
Casey: These will remain priorities and will support a seamless integration.
Casey: If you turn to slide four.
Casey: It summarizes key details of the transaction.
Casey: To provide the highlights we are acquiring <unk>.
Casey: For approximately $1 $97 billion in cash we will fund primarily with new debt.
Casey: And Mark will cover the financing details in a moment.
Mark Smith: I've already highlighted some of the key financial benefits, but it's worth reiterating the overall accretive nature of this transaction.
Mark Smith: We expect the transaction to close prior to calendar 2024 year end subject to customary closing conditions and regulatory approvals.
Speaker Change: Many of you may be familiar with <unk>, but slide five is a brief introduction.
Casey: Casey a and what excites us most about this opportunity.
Speaker Change: Based in the U K <unk> has a diverse global drilling company with a significant land drilling presence in the middle East and additional operations in South America, Europe and Africa.
Speaker Change: <unk> has over 135 years of experience and a global network of operations supported by approximately 11000 employees.
Speaker Change: One aspect that really excites us about this transaction is that nearly 95% of the company's total operating EBITDA. In 2023 was generating was generated from its land drilling operations in core middle East countries and its offshore contract services operations.
Speaker Change: So they're very they have very concentrated resources of revenue and cash flow generation.
Speaker Change: In total.
Casey: Casey as land operations generated approximately 74% of its 2023 operating EBITDA and roughly 71% of total 2023 operating EBITDA was generated by 63 rigs located in those core middle East countries of Saudi Arabia.
Casey: Born in Kuwait, which again highlights its concentration of revenue and cash flow generation.
Casey: The company generated another 23% of operating EBITDA from its asset light offshore management contract business.
Speaker Change: This business involves 29 offshore management contracts, primarily on platform rigs located in the North Sea, Angola, Azerbaijan and Canada.
Speaker Change: Like their land operations.
Speaker Change: <unk> offshore business is highly complementary to ours with very little overlap.
Casey: The <unk> offshore business also has a robust backlog with super major customers, which provides another source of long term earnings visibility and stability.
Casey: Finally.
Casey: Okay.
Speaker Change: Deutsche <unk> generic segment comprises manufacturing engineering businesses, including Ben Tech.
Casey: Well established drilling manufacturer.
Casey: This business has three facilities, serving the energy industry.
Casey: One in Germany, and then important hubs in Saudi Arabia and Oman.
Casey: We believe this business represents a longer term growth opportunity for the company, providing upside exposure to energy transition efforts in Europe.
Casey: Now turning to slide six.
Speaker Change: This is the right transaction at the right time for <unk>.
Speaker Change: Shortly after the advent of the Super spec rig in the U S.
Speaker Change: S market and our U S customers, becoming more capital disciplined in their businesses, we realize the market in the U S was evolving and that growth opportunities here would likely be more measured than they were in the past as a result, we developed a more concerted strategy to expand internationally.
Speaker Change: This was interrupted by the Covid pandemic that here and then we continue to look for international opportunities, particularly in the middle East.
Speaker Change: As part of this international strategy, we've generated some organic growth, but have also been monitoring various external opportunities around the world for quite some time.
Speaker Change: Looking for the right fit.
Speaker Change: We believe we have found it with this <unk> acquisition.
Speaker Change: In recent years <unk> has streamlined its portfolio of assets geographically.
Speaker Change: Its financial position by significantly reducing debt.
Speaker Change: And enhanced its leadership in the middle east by acquiring side pants onshore operations.
Speaker Change: Turning to slide seven.
Speaker Change: The U S and middle East are the two most prominent oil and gas producing regions in the world.
Speaker Change: We have often said if you want to be big in the U S. You have to be in the Permian.
Speaker Change: And if you want to be big globally, you have to be in the middle East.
Speaker Change: This transaction gives <unk> a key at scale and core middle East markets in a way it would be challenging to replicate organically.
Speaker Change: Making <unk> one of the larger rig providers in the middle East.
Speaker Change: Moving on slide eight that shows the historic and projected demand for rigs in the middle East in comparison to the historical price of Brent oil.
Speaker Change: As I've discussed the middle East market is not only resilient, but is expected to see continued strong growth in the coming years at an estimated 90% rate annually through 2026.
Speaker Change: This represents another compelling reason for executing the transaction at this time.
Speaker Change: We view this transaction as more than just acquiring assets.
Speaker Change: Rather we are acquiring operations.
Speaker Change: All of the people and processes. We are excited about what this means for <unk> future.
Speaker Change: And I will now turn the call over to Mark to discuss the financial benefits of this acquisition.
John Lindsay: Thanks, John.
Speaker Change: The acquisition is a win win.
Mark Smith: It increases our scale and strengthens our geographic and operational mix across the U S and international markets.
Mark Smith: As shown on slide nine on a combined basis. The company would have delivered operating EBITDA of approximately $1 2 billion over the past 12 months, an increase of more than 30% for <unk> on a standalone basis.
Speaker Change: We will also have a much more diversified business. For example, we expect this transaction will grow our international land operations from approximately 1% on a standalone basis to approximately 19% on a pro forma basis.
Speaker Change: On calendar year 2023 operating EBITDA.
Speaker Change: And offshore operations are expected to grow from approximately 3% on a standalone basis to approximately 7% on a pro forma basis.
Speaker Change: So on a pro forma basis.
Speaker Change: About a quarter of the combined company's operating EBITDA will come from international and offshore operations, creating a diversification from our legacy U S onshore business.
Speaker Change: As a result, <unk> will have better geographical balance and earnings and cash flow streams.
Speaker Change: Looking at slide 10.
Speaker Change: We'll also have stronger cash flow stability and visibility is supported by a robust backlog.
Speaker Change: I've worked for Blue chip customers.
Speaker Change: <unk> adds approximately $5 5 billion of contract backlog to <unk> $1 7 million approximately $3 8 billion of which is firm and approximately $1 7 billion of which is optioned.
Speaker Change: This includes work for large well known customers.
Speaker Change: Casey Doi Dag, including BP Exxonmobil and shell as.
Speaker Change: As well as in.
Speaker Change: <unk> in key international markets.
Moving on to slide 11, the transaction is accretive to all our key financial metrics it.
Speaker Change: It is immediately accretive to cash flow and free cash flow per share and increasingly accretive thereafter with double digit free cash flow accretion expected as soon as 2025.
Speaker Change: Furthermore, the returns for this transaction are expected to exceed cost of capital by 2026 timeframe that is shorter than what is typical for transactions of this type.
Speaker Change: Additionally, and despite a little geographic overlap, we expect to realize approximately 25 million in run rate synergies by 2026, driven primarily by a reduction in overhead and procurement savings we.
Speaker Change: We believe there are opportunities for additional synergies over time. These anticipated synergies were not a large factor when considering the strategic and economic rationale for the transaction.
Speaker Change: Including synergies, we are acquiring MPC doi tag at a transaction multiple of approximately five four times. This is much lower than the trading multiples of other middle East.
Speaker Change: Public peer companies.
Speaker Change: Slide 12 details our plans for a balanced but prompt move to Delever post closing.
Speaker Change: We remain committed to a conservative balance sheet and investor returns.
Speaker Change: <unk> history of maintaining financial discipline is purposeful in twofold.
Speaker Change: One it allows us to plan and invest for the long term despite the volatility often seen in the crude oil and natural gas markets.
Speaker Change: It also allows us to take advantage of market opportunities, including this severity transformative transaction.
Speaker Change: For the for this case the <unk> acquisition, we are willing to temporarily increased our leverage to take advantage of a meaningful international growth opportunity.
Speaker Change: We expect to maintain our investment grade rating.
Speaker Change: Debt reduction will be a capital priority for one to two years post close.
Speaker Change: We also expect to refinance existing Casey do I take that lower cost of capital and we will be well positioned to promptly reduce debt by utilizing our strong projected cash flows.
Speaker Change: Pre payable term loans and newly issued bonds with staggered maturities.
Speaker Change: Our focus will be reducing our net debt to operating EBITDA ratio from one seven times at close to a long term target.
Speaker Change: Of at or below one times.
Speaker Change: Consistent with our history, we are focused on financial stewardship in the near term to realize a significant long term benefits of this transaction.
Speaker Change: Yes.
Speaker Change: Turning to slide 13.
Speaker Change: This transaction improves our returns while also reducing volatility, enabling us to deliver both near and long term value creation for shareholders.
Speaker Change: We will maintain our long standing commitment and capital allocation priority to provide shareholder returns we will be in the fourth and final installment of the fiscal 2020 for supplemental supplemental dividend that we declared on June five 2024.
Thereafter, we do not anticipate providing a supplemental dividend during the near term deleveraging period we.
Speaker Change: We do intend to maintain the current annual base dividend of $1 per share.
Speaker Change: And we expect the yields to remain competitive with industry and industry averages.
Speaker Change: As we work to reduce debt in the near term, we will continue to select to target select investment opportunities with strong return profile, including further U S rig export opportunities.
Speaker Change: We will also consider additional opportunistic returns to shareholders beyond the base dividend and through the first couple of years following close.
With that I will turn the call back over to John.
John Lindsay: Thanks, Mark Holleran.
Speaker Change: I'll wrap up our prepared comments today by discussing our common core values and integration plans at a high level.
Speaker Change: If you turn to slide 14, and an important aspect of our complementary businesses as our similar cultures.
Speaker Change: And how we serve our customers or how we keep our employees safe like.
Speaker Change: Like HMP Casey a Deutsche Bank has a customer centric approach that emphasizes safety sustainability.
Speaker Change: And operational and financial excellence.
Speaker Change: Together, we will build on these shared values as we look forward to welcoming <unk> talented employees to A&P.
Speaker Change: Working together to provide exceptional performance and value to customers across our global markets.
Speaker Change: Moving to slide 15.
Speaker Change: Our similar cultures for ground our integration planning.
Speaker Change: We will take a measured approach focusing on execution and continuing to support our customers.
Speaker Change: As we plan to bring our companies together, we will have a few areas of focus.
Speaker Change: These include leveraging expertise of both companies optimizing our geographic footprint enhancing each company's strengths and.
Speaker Change: Identifying opportunities to use our existing assets and operations with Casey as local knowledge.
Speaker Change: Post close <unk> will have three primary operating segments.
Speaker Change: North America solutions.
Speaker Change: International solutions.
Speaker Change: And offshore solutions.
Speaker Change: Hey, Jordan AG manufacturing and engineering business, Ken Era falls under other on this slide but as we mentioned previously we believe there is an opportunity to grow this.
Speaker Change: For your modeling purposes, Hmp's North America solutions segment will remain unchanged.
Speaker Change: Turning to slide 16.
Speaker Change: And summarizing what we are creating through this acquisition.
Speaker Change: We are excited about <unk> future with Kcl Doi TEG, we are building on a 200 plus year legacy of combined companies with successful operations to create a leading global land driller.
Speaker Change: We will have asset light offshore services, and strong innovation and technology and engineering.
Speaker Change: And we will continue to foster a culture that centers on our people and communities.
Speaker Change: I firmly believe the best is yet to go.
Speaker Change: Before we get to the Q&A, we'll wrap up today's call with the first slide that we shared in this presentation outlining the strategic rationale for the transaction.
Speaker Change: On slide 17.
Speaker Change: As you've hopefully heard Casey of Joy Tag is a transformative and important acquisition for <unk> and we believe it offers attractive long term benefits for the company.
Speaker Change: I want to thank all of <unk> employees for their hard work their dedication and their commitment to excellence.
Speaker Change: You have made today's announcement possible and you will continue to drive our success in this next chapter.
Speaker Change: I look forward to welcoming the Casey a tag team to A&P and working closely together to drive growth and deliver strong value for our shareholders customers and partners.
Speaker Change: Now that concludes our prepared remarks, thank you for your attention.
Speaker Change: And we're gonna be happy to answer your questions economy with some of the time that we have remaining.
Speaker Change: Thank you I'll hop off.
Speaker Change: I'd like to ask a question. Please press star one on your telephone keypad.
Speaker Change: You may remove yourself from the queue by pressing star one.
Speaker Change: Once again that is star one to ask a question and we will pause for just a moment to allow everyone an opportunity to signal for.
Speaker Change: Quick question.
Speaker Change: And we will take our first question.
Speaker Change: So Rob.
Speaker Change: Hi, good morning, Jonathan Bock.
Speaker Change: Tom Watson for so let me just start with that on the TCE both oxide.
But the one slide you showed on my side.
$5 4 billion, including Kennedy's Amba middle Eastern joined upstream not higher multiples.
John Lindsay: But being a U S listed company, John market item and any high level views on what drives.
Speaker Change: In the West it's too bad that appreciate the opportunity.
Speaker Change: On the middle East totally.
Speaker Change: Totally agree with you that we are not acquiring assets, it's much more than assets as an organization of business you are acquiring.
Speaker Change: What drives the rates up.
Speaker Change: We see it and give credit for that.
So let me spell constrained worsening from middle East.
Speaker Change: Kindness.
Speaker Change: Yes, Rob.
Speaker Change: I didn't catch all of your all of your question. It broke up just a little bit, but we do we do feel good about where we are with the with the multiple in the outlook and the opportunities ahead. As we've said this is a.
Speaker Change: A transformational deal for <unk> in it and accelerate the international growth strategy that we've been talking about for really for the past five five years and having that that land rig access.
Speaker Change: Large concentration in the Middle East I think is really beneficial.
Speaker Change: Yes, Rob I would just add.
Speaker Change: It is at a premium to our group trading multiple.
Speaker Change: And how are we thinking about it well.
Speaker Change: We view the implied multiple favorably when we compare it to multiples of other companies with significant middle East presences, especially at several of them that have listed in the recent couple of years.
Speaker Change: The characteristics of a lot of cases, Deutsche bank's cash flow stream the visibility and resiliency is the backlog I mentioned in prepared remarks tend to carry higher market valuation relative to what is seen.
Speaker Change: For more U S centric Oss companies with historical higher volatility within cycles.
Speaker Change: Finally, the size of the scale of <unk> within the Middle East region is challenging to replicate.
Speaker Change: Quite frankly.
Speaker Change: Contributes to its attractiveness.
Speaker Change: No absolutely that makes sense.
Speaker Change: And then maybe one quick one in terms of getting.
Speaker Change: Again target market might be above the bone going down from one seven at the close to one times.
Speaker Change: How should we think about the timeline of that of course it depends on the free cash flow you generated a combined entity today, but how are you thinking about the timeline of that from this point on.
Thanks Robert.
Speaker Change: We have we've always maintained a low debt level historically and we believe this is a near term transient increase.
Speaker Change: Debt reduction as I said in prepared comments will be the capital allocation priority for one to two years post close our focus will be reducing from that one seven times.
Speaker Change: Hi.
Speaker Change: EBITDA.
Speaker Change: Coverage at close to sort of a longer term contract, where we like to operate in the oilfield services drilling sector and one at one time or below.
Speaker Change: We have we have very intentional plans for deleveraging Casey as longer term contracts the robust backlog I just talked about in your last question supported by that Blue Chip customer base provides a line of sight to resilient revenues and as I said less volatility through cycles.
Speaker Change: Got it and then just one quick unrelated follow up if I may on the USA legacy business.
Speaker Change: It's positive to see signs of bottoming with a slight update towards the end of <unk>.
Speaker Change: Mark can you just comment on what's driving that increase is that potentially you could easily see a decline.
Speaker Change: Is it more on high grading you think customer moving to HMP rigs or do you think that is an opportunity that the overall market starts to move up a little bit.
Speaker Change: I think it's probably a combination of both there are some great opportunities as we look as we look forward.
Speaker Change: I think there is an improved outflows fundamentally.
And then of course as we always see at the end of the year.
Speaker Change: And going into the new calendar year, there's usually a reset in budgets and theres some activity improvement there but of course as we've said before that's very hard to see out that far in advance, but thats what were seeing and hearing.
Speaker Change: As we talk as we talk with our customers.
Speaker Change: But you know really.
Speaker Change: The real driver is our is our people and our performance in these win win.
Speaker Change: Opportunities that we have with our customers.
Speaker Change: Right perfect. Okay. No I appreciate that thanks for the answer John Macke ill turn it back.
Rob: Thank you thanks, Rob.
Speaker Change: Yes.
Speaker Change: And well take our next question from Keith.
Speaker Change: RBC.
Speaker Change: Hi, good morning, Thanks for taking my questions.
Speaker Change: I guess the first question really is.
How do you think about now.
Speaker Change: First is this.
Speaker Change: Does this change the amount of rigs you might think about moving to.
Speaker Change: Outside of the outside of the U S.
Speaker Change: Are you now pretty well set in a lot of your other jurisdictions, particularly the middle East as you well know gained over a much larger footprint over there.
Speaker Change: Keith I think I think this.
Speaker Change: This merger really provides us an opportunity to explore really even more rigs than what we would have.
Speaker Change: When thinking about before because of the exposure there.
Speaker Change: That we have in the footprint and the experience.
Speaker Change: That <unk> they have a long history of of work.
Speaker Change: Obviously internationally and specifically in the Middle East. So I think there is.
Speaker Change: A lot of opportunities there I sure don't see it as less opportunity I would see it is more.
Speaker Change: Just reminding that we have between 70 and 80 idle Super spec rigs in the U S.
Speaker Change: Yes.
Speaker Change: Absolutely.
Speaker Change: Just a follow up on the on the free cash flow accretion so pretty strong accretion.
Speaker Change: Next year, what I always seem to find is they're tending to be.
Speaker Change: More cost that creep in wedding and companies acquire others and that tends to push out some of those targets. So not saying that's going to be the case here, but can you give us.
Speaker Change: Some reasoning or confidence as to maybe why that won't happen and why your double digit free cash flow accretion next year.
Speaker Change: Is is well in hand.
Speaker Change: Yes.
Speaker Change: <unk> looked at this we.
Speaker Change: We have looked at this transaction from for many different ways, including.
Speaker Change: Including the simple Unlevered Standalone business the transaction is.
Speaker Change: As you said.
Speaker Change #100: It looks to be accretive we have double digit cash flow accretion expected as.
Speaker Change #100: As soon as next year 2025.
Speaker Change #100: And transaction your returns exceeding cost of capital by 2026, which for a.
Speaker Change #100: A transaction of this size and my experience is just.
Speaker Change #101: A really quick result, we feel really confident that we've had a long look at this we've had many months of due diligence we've had a lot of access to sites.
Speaker Change #101: People.
Speaker Change #101: Okay.
Speaker Change #101: The annual review of all aspects of the business and we are pretty confident as I said, we don't have many.
Speaker Change #101: Over we have very little.
Speaker Change #102: You know.
Speaker Change #102: Geographic overlap with our complementary businesses, but again, we still do expect to have some synergies by 2026.
For some reductions in overhead and procurement improvements leveraging across the global fleet.
Speaker Change #103: Okay. Thanks very much.
Speaker Change #104: Thank you.
Speaker Change #104: And we'll take our next question from David Smith.
Speaker Change #105: Energy partners.
Hey, good morning, and congratulations on this deal.
Speaker Change #106: Good morning, David Thank you thanks, David.
Speaker Change #105: Okay.
Speaker Change #107: About that the case size and scale being tough to replicate.
Speaker Change #107: <unk>.
Speaker Change #107: And again, a long process with some real startup costs.
Speaker Change #108: Following him.
Speaker Change #109: It keeps question how do you think about the potential international market appetite.
Can you flex rate.
Speaker Change #109: How should we think about the pro forma company to build needs.
Speaker Change #109: It reflects the other geographies.
Speaker Change #109: Yeah.
Speaker Change #109: What are the hurdles establishing a relationship.
Well, David that's a.
David Smith: It's a great question.
David Smith: I do think that.
David Smith: Just the sheer nature of the.
David Smith: Leveraging the experience and the relationships that they have.
Speaker Change #111: In some cases, obviously, we don't have that same exposure.
Speaker Change #111: We don't have that same experience, we HMP and so I think just by definition that opens up some opportunities.
Speaker Change #111: I think the other is unconventional resource.
Speaker Change #111: Plays I mean, I think we continue to see that as a great opportunity for international expansion and I think.
Speaker Change #111: This this merger.
Speaker Change #112: Creates even that much more of an opportunity for us to have that exposure.
Speaker Change #112: Two at two <unk>.
Speaker Change #112: Additional customers in additional countries.
Speaker Change #112: So I do think it provides us upside.
Speaker Change #112: I appreciate it and if I could ask a follow up.
Speaker Change #119: Sorry, if I missed it but did you mentioned what percentage of your <unk>.
Activity and performance based contracts.
Speaker Change #113: And I know, it's early to ask but I'm curious if you think there.
Speaker Change #114: Opportunity to take the performance contracting carriage outside the U S.
David Smith: David we've been consistent.
Speaker Change #115: Consistent quarter on quarter around 50% of the fleet.
Speaker Change #116: As we have experienced some some churn.
Speaker Change #117: For many various reasons and our customer base.
Speaker Change #118: In including some of the E&P consolidation that's occurred and we do expect.
Speaker Change #118: The churn.
Speaker Change #118: Settles and then activity slows to once again increase that percentage.
Speaker Change #118: And to your point the rig that we have a little startup in Bahrain and the fourth calendar quarter.
Speaker Change #118: Fiscal 'twenty five.
Speaker Change #118: Is it performance contract and it isn't that we believe to be the first <unk> contract in the Gulf Coast countries.
Speaker Change #120: Fantastic. Thank you so much.
Speaker Change #124: Thanks, David.
Speaker Change #118: No.
Speaker Change #118: And we'll take our next question from Doug Becker capital one.
Speaker Change #118: Okay.
Doug Becker: Thank you and congratulations.
Speaker Change #122: In terms of the slide deck.
Speaker Change #123: Certainly we're highlighting.
The run rate growth.
Just curious about the growth prospects off of that base and what's contemplated in some of your accrue.
Speaker Change #125: Accretion and return on invested capital metrics.
Speaker Change #125: So that $3 41 run rate base.
Dave Wilson: That's a great question Dave.
David Smith: David you know a lot of our.
Speaker Change #129: The work here is as you will note.
Speaker Change #126: Is it based on 2023.
EBIT 12, 21, 12, 31 2023 EBIT.
Speaker Change #128: EBITDA and.
Speaker Change #126: The company.
Speaker Change #127: Casey Doi Doi tag and just finished its <unk> acquisition towards the back half of it.
Speaker Change #126: 22 and in that.
Speaker Change #131: Saipem acquisition actually had many various staggered closings one.
Speaker Change #126: One of which for a portion of Latin America, Argentina, I believe did not occur until this year.
Speaker Change #126: So there has been EBITDA growth since at 12, 31 2023 number.
Speaker Change #126: And we believe in it there is the opportunity to invest not only in some of the agent fee legacy rig exports.
Speaker Change #126: We just talked about with the last analyst.
Speaker Change #130: But we believe there are opportunities throughout caseate Deutsche <unk> existing footprint.
For further growth related to the type of work that they do today, which is primarily conventional onshore drilling.
Speaker Change #132: No it certainly sounds encouraging.
Speaker Change #132: In the due diligence process.
Speaker Change #134: What's your assessment or you just see them in the market.
Speaker Change #133: What was TCA doi tags.
Speaker Change #135: Relationship with the <unk> and the general perception with customers.
Casey: Casey a deutsch has has an excellent reputation of course.
Casey: Okay.
Casey: As long as I've been in the business.
Casey: I've known and.
Casey: And they've always had a great reputation.
Casey: I've actually had conversations with.
Casey: Some of the customers that are that are big customers of theirs and they couldn't be more happy.
Casey: With the relationship and the performance and the focus on safety.
Casey: They agreed culturally they felt like there was some great overlap. So the the early reception that we have is very positive coming from from the customers both in terms of.
Casey:
Casey: Casey as.
Casey: Service that they provide the customers and and also focus on technology and looking at ways of doing the business differently and better which is.
Speaker Change #136: A big driver for <unk>, So I think there's.
Speaker Change #136: A really positive aspect to this.
Speaker Change #137: And I think Theres, a great opportunity through the through the integration and as we move forward as I've said previously.
Speaker Change #138: These are great assets, but we are also anticipating some amazing people.
Speaker Change #138: And those processes and people I think are going to really be a difference maker. So I feel really good about about the brand is strong and I think the combined.
Speaker Change #138: Together, we're going to be very powerful.
Speaker Change #140: That makes sense. Thank you very much.
Speaker Change #139: Thank you.
Speaker Change #139: And well take our next question from Marc Bianchi PD.
Speaker Change #139: Okay.
Marc Bianchi: Hey, thanks.
Speaker Change #142: Thanks for keeping us on our toes this morning.
Speaker Change #143: Good morning.
Speaker Change #144: Our goal that was our goal we've been up pretty early so we thought we would pass some of that around.
Speaker Change #145: [laughter] mission accomplished.
Speaker Change #145: I.
Speaker Change #145: The first one was on.
Speaker Change #146: Just on kind of the asset quality here and.
Speaker Change #147: If I look at HMT historically leader in kind of high end assets leader and the drive to AC rigs in North America.
And I look at TCA in I'm, not quite as familiar with what their fleet of assets looks like but I would suspect it's not the leading edge stuff necessarily maybe there's some in there.
Speaker Change #147: And then also maybe related to it if I look at the multiple that you've got on that that slide there at five four times versus the others that does.
Speaker Change #148: Higher multiples is is there some reason.
Speaker Change #148: That the asset quality or something something about Casey a explains that difference or is it just.
Speaker Change #148: The market is missing something here.
Speaker Change #149: I'll, let mark hit that last point, but I think just going back to the assets and the asset quality, we really like the fleet that they have I think even more important is the customers really like the fleet that they have.
Speaker Change #149: And.
Mark Smith: It's mostly conventional drilling.
Mark Smith: <unk>.
Mark Smith: The last 15 years at HP, mostly what we've done, particularly in the U S has all been unconventional.
Speaker Change #150: The majority of the work they have as conventional so theyre more conventional assets.
But there have been a lot of.
Speaker Change #150: Investments in the in those rigs and.
Speaker Change #150: Upgrades over the years, just like just like the business in the U S. So.
Speaker Change #151: We feel really good about the fleet I don't I don't think the fleet has anything to do with the multiple variances that were that were talking about.
Speaker Change #151: But I would totally excuse me I would totally agree with that John If you took the.
John: If you took the <unk>.
Speaker Change #153: Approximately 70 plus percent of EBITDA from the core countries.
John: And looked at the active rigs.
Speaker Change #154: In the Middle East I think it's a pretty attractive for asset value.
Speaker Change #154: And from a maintenance perspective, we got very comfortable with.
Casey Deutsche <unk> assets are well maintained as I said, we spent time with this.
Speaker Change #154: And we're able to see quite a few site visits.
Speaker Change #155: You are you can realize the level of performance of the equipment.
Speaker Change #155: You could not realize the level of performance that they are achieving with equivalent that was not well maintained.
Speaker Change #155: We have we are certainly.
Speaker Change #156: We've certainly considered that.
Speaker Change #156: And.
Speaker Change #157: And I would say with this with this acquisition, it's more than just senior acquiring assets as John as Ed was acquiring EMEA operations and the people that are running these rigs that will benefit us in the long term we gained immediate scale in the core middle east countries in a way that would be.
Speaker Change #157: As I said be challenging.
Speaker Change #157: Not only to replicate organically, but but from any other sort of transformative transactional opportunity like this one.
And the relationships that.
Speaker Change #158: That case has we have great relationships they have a much larger footprint and again my experience with interaction with customers is that they have very good relationships.
Speaker Change #158: It's obviously very very important in a service industry and so again, we feel very good about that.
Speaker Change #159: Yep, Okay. Thanks for that guys.
Speaker Change #160: The other one I had was on kind of the capital intensity of the business of the <unk> business. So I guess, there's a look.
Speaker Change #161: It's like $350 million plus of cash generation here for 25, I'm looking at the bottom of slide 12.
Speaker Change #162: I presume, you're assuming that Hmp's capex is in that $500 million range I know the swing factor is what happens with tenders in Saudi but.
Speaker Change #163: What is what's the combined company or whats the case Capex number that we should be thinking about on a on a recurring basis and what's reflected in that 25 number here.
Speaker Change #162: Yes.
Dave Wilson: Mark This is Dave.
Dave Wilson: We're going to operate as two separate companies. So when we come out with our fiscal 2020, Capex budget that'll be A&P only.
Speaker Change #164: I would kind of point you to some of the publicly available information on the website I think the run rate for Capex through March four T. J tag was about $22 million last.
Speaker Change #164: Last year 2023 years of $124 million. So you can kind.
Speaker Change #164: I'll give you an idea of kind of their run rate and what they're what they're seeing for capex.
Speaker Change #164: Got it got it okay. Thanks, Dave I'll turn it back.
Speaker Change #164: Yes.
Speaker Change #165: And just to add to that that there there per active rig maintenance capex number per annum is pretty.
Speaker Change #166: Pretty similar to our own markets.
Speaker Change #166: Thanks for the questions.
Speaker Change #166: And at this time, we have no further time for questions I will now turn the call back over to John for any additional or closing remarks.
John: Well. Thank you again for joining us on short notice the company is going to continue to strive to execute as it always has is a customer centric using our customer centric approach in our safety focus which is really ingrained in our company culture.
Speaker Change #168: We are very much looking forward to joining forces with Casey a doi tag we're very excited about the future and about this opportunity and the value that we can create for our shareholders going forward.
John: And then finally I wanted to mention.
John: Most of you probably know this but just in case you don't this is a.
Speaker Change #167: Farewell for Mark and before we sign off I wanted to call out our appreciation and accomplishments that Mark has had with the company.
So last earning call with A&P, we're going to Miss yet.
Speaker Change #167: A little over six years ago.
Speaker Change #169: You joined <unk>. When we started this journey together to build a strong financial team drive financial acumen companywide for the purpose of delivering value to shareholders and we've accomplished a whole lot together and we appreciate your humor [laughter] and your friendship work ethic.
Speaker Change #170: Our deep industry and financial knowledge, it's been a fantastic experience and speaking for everyone at <unk>, we want to wish you and Angela all the best in retirement.
Speaker Change #169: Yes.
Speaker Change #171: Success in your next chapter.
Speaker Change #169: Sure.
Speaker Change #169: Yes.
Speaker Change #172: And this concludes today's conference. We thank you for your participation you may disconnect at any time.
Speaker Change #169: Oh.
Administrating.
Yeah.
Okay.
Please check your mute switch or return to your telephone handset.
Once again, if you are able to hear me I am unable to hear you. Please check your mute switch.
Hello.
We will disconnect Hi may have your conference I D. Sir.
<unk> added metric and same earnings call.
Yes, Sir that call actually was cancelled this morning.
Okay. Thank you.
You're welcome have a great day.
Thank you Pedro.