Q1 2025 Helmerich & Payne Inc Earnings Call
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Speaker Change: Good day, everyone and welcome to today's Helmerich <unk> Payne fiscal first quarter earnings call. At this time all participants are in listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session. You May Register to ask a question at any time by pressing star one on your.
Speaker Change: Telephone keypad. Please note that this call is being recorded I'll be standing by should you need any assistance. It is now my pleasure to turn the program over to Mr. Wilson, David Wilson VP of Investor Relations.
David Wilson: Thank you Shannon and welcome everyone to Hembrick campaigns conference call and webcast for the first quarter of fiscal year 2025 with US today are John Lindsay President and CEO and Kevin Van <unk>, Senior Vice President and CFO both.
David Wilson: Both John and Kevin will be sharing some prepared comments with us after which we'll open the call for questions.
David Wilson: Before we begin our prepared remarks, I'll remind everyone that this call include forward looking statements as defined under the securities laws such statements are based upon current information and management's expectations as at the state and are not guarantees of future performance forward looking statements involve certain risks uncertainties and assumptions that are difficult to predict.
David Wilson: As such our actual outcomes and results could differ materially.
David Wilson: Could differ materially you can learn more about these risks in our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our other SEC filings you should not place undue reliance on forward looking statements and we undertake no obligation to publicly update these forward looking statements.
Speaker Change: We also make reference to certain non-GAAP financial measures such as segment operating income direct margin adjusted EBITDA and other operating statistics, you'll find the GAAP reconciliation comments and calculations in yesterday's press release and earnings presentation, but that said I will turn the call over to John Lindsay.
John Lindsay: Thank you, Dave Hello, everyone and thank you for joining us today and for your interest in H M. P.
John Lindsay: During the first fiscal quarter of 2025, the company continued to execute at a high level.
John Lindsay: Operational and financial results in our North America solutions segment remain the best in the industry.
John Lindsay: Reflecting our relentless focus on providing value to our customers.
John Lindsay: We also made significant progress on two key fronts of our international growth strategy during the quarter.
John Lindsay: First as part of our organic growth plan, we completed the exportation of eight flex rigs into Saudi Arabia.
John Lindsay: Where they will be drilling in unconventional natural gas place.
John Lindsay: Second after receiving the final regulatory approvals for the KC, a doi tag acquisition.
John Lindsay: We were able to close on the transaction a couple of weeks ago, which now makes H M. P. A global leader in providing onshore drilling solutions.
John Lindsay: I'll talk more about the significant attributes of this transaction in a few minutes, but we believe this deal positions us as the Premier Global drilling company with global scale.
John Lindsay: Industry, leading technology.
John Lindsay: Fantastic group of customers and best in class workforce.
John Lindsay: Collectively these achievements in North America solutions, and international continue to demonstrate our ability to execute across multiple capital allocation goals investing in the business for the long term.
John Lindsay: Providing shareholder returns and maintaining a strong financial position, which prioritizes debt reduction.
John Lindsay: Throughout its long history, <unk> has differentiated itself from competitors by developing two distinct competitive advantages.
John Lindsay: In many ways those distinct these revolve around the attributes of our rigs our people our processes and our technology.
John Lindsay: But importantly scale and managing through the cycles are also crucial differentiators.
John Lindsay: We have long been known as an industry leader in the U S with our Super spec flex rig fleet, having over 35% market share today.
John Lindsay: We have a strong presence in all major basins in the U S highlighted by our market leading presence in the Permian.
John Lindsay: Where we have around 100 rigs running today.
John Lindsay: The continued growth and market share of Super spec rigs also benefits H M. P and we remain the market share leader with public E&ps.
John Lindsay: By a very wide margin in addition to our leading position with private E&P operators.
John Lindsay: Our market share leadership is a testament to our customer centric approach, which allows us to align and execute in a manner that has all parties working together toward a common goal.
John Lindsay: Innovations like performance contracts have enabled the company to further accentuate its distinctive advantage by driving alignment around customer value creation.
John Lindsay: While deploying cutting edge performance technologies.
John Lindsay: This focus coupled with our operating and technical performance is why I believe our customer partnerships are stronger than they have ever been.
John Lindsay: Through these efforts in North America solutions, we continue to earn returns in line with our cost of capital.
John Lindsay: And demonstrate our ability to realize these results through the cycle.
John Lindsay: For example in 2024 it was a second year in a row, where our margins have remained at healthy levels and we accreted market share despite industry rig count declines.
John Lindsay: Our disciplined approach will continue to provide us the opportunity.
John Lindsay: To provide strong and consistent margin generation and serve our customers and the best way possible.
John Lindsay: Turning attention towards our international solutions for the past several years, we have spoken about the strategic importance of.
Expanding our scale geographically, especially in the middle East.
John Lindsay: The K C E D acquisition, along with the legacy <unk> organic growth initiatives.
John Lindsay: <unk> provides us with a market leading position in the middle East.
John Lindsay: Let me quickly reiterate the merits of the transaction.
First the legacy KC, a dis assets and operations will help accelerate that international growth strategy and establish H M. P. As a global leader in onshore drilling.
John Lindsay: Second we will have a robust geographic and operational mix across the U S and international crude oil and natural gas markets.
John Lindsay: This will diversify where and how we generate revenues.
John Lindsay: Third we expect the transaction to generate attractive financial returns.
John Lindsay: The legacy K C. A has a solid backlog of work totaling approximately $5 $5 billion supported by Blue chip customers.
John Lindsay: Now that we've closed the acquisition, we will be a more financially resilient company with cash flow diversification across leading global markets.
John Lindsay: The combined company will share our customer centric approach safety focus and commitment to providing exceptional performance and value.
John Lindsay: I'm encouraged by the excitement from customers over the past few weeks I've been in Saudi and Oman, and Kuwait and there is excitement to work with H M. P.
John Lindsay: In addition, we're seeing multiple avenues of organic growth around these assets as we've heard from numerous customers that are looking forward to working with H M. P in their markets.
John Lindsay: The new company will bring these values forward and continue to operate in the H M. P. J.
Now turning to the outlook for 2025, Kevin's got a hit on these in more detail, but there are some near term headwinds surrounding our international growth plans, namely the rig suspensions related to the <unk> acquisition.
John Lindsay: And the startup costs associated with our organic growth in Saudi.
John Lindsay: I want to stress that we believe these are temporary shock.
John Lindsay: Short term challenges often associated with this highly cyclical industry and they don't reflect the significant value. We believe will be created by H M. P overtime.
John Lindsay: Specifically regarding KC as legacy operations in Saudi the first rigs suspension was last August.
John Lindsay: And those are one year duration suspensions. So as of now we're not planning for a significant contribution indirect margin from those rigs in the near term.
John Lindsay: With regards to direct margins in Q2 of 2025 for the North America Solutions segment, we expect them to remain at healthy levels, but we do expect a modest decline due to fewer days in the quarter and the normal variability that we see with revenues and costs.
John Lindsay: One thing that strikes me as I look at our results across the last couple of years is the resilience of our margins in North America.
John Lindsay: Complex because of the hard work our sales and operations teams have delivered.
John Lindsay: And while we May see some quarterly variation are disciplined and customer centric approach continues to generate consistent margins and free cash flow.
John Lindsay: In closing we strongly believe there are transformational aspects of the K C E D acquisition.
John Lindsay: The new H M P has global scope and scale.
John Lindsay: With exposure to the best hydrocarbon basins in the world and the ability to profitably grow in multiple markets around the world.
John Lindsay: North America solutions is resilient and continues to deliver strong and consistent margin generation.
John Lindsay: While providing innovative solutions for our customers.
John Lindsay: We have an achievable plan to Delever and maintain our investment grade credit rating.
John Lindsay: Which is another financial different differentiation between us and our peers.
John Lindsay: Our international business has the means to quickly grow revenues from this lower starting point and we're already seeing numerous opportunities for synergies across the combined company.
John Lindsay: Our offshore and other business with manufacturing and technology solutions provide capital efficient free cash flow.
John Lindsay: Finally, the H M. P team, which now includes those from legacy Casey a.
John Lindsay: <unk> remains committed to continue delivering the drilling outcomes, our customers desire and a safe and efficient manner.
John Lindsay: <unk> will also remain disciplined and committed to prudent capital allocation for our shareholders.
John Lindsay: Like we have for over 60 years as a public company with a focus on maintaining a strong financial position.
John Lindsay: Balancing our significant free cash flow.
John Lindsay: Growth capex opportunities and returns to shareholders.
Kevin: And now I'll turn the call over to Kevin.
Kevin: Thanks, John.
Kevin: Today I will review our fiscal first quarter 2025 operating results.
Kevin: <unk> guidance for the second quarter, which will include a partial quarter of our expanded international business, resulting from the closing of the KC AVN acquisition.
Kevin: <unk> remaining full year fiscal 'twenty five guidance as appropriate and comment on our financial position.
Kevin: Let me start with a few highlights for the first.
Kevin: Fiscal quarter ended December 31, 2020 for.
Kevin: The company generated quarterly revenues of $677 million versus $693 million from the previous sequential quarter.
Kevin: The quarterly decrease in revenue was due primary primarily to slightly lower revenues in our North American solutions segment.
Kevin: Total direct operating costs were $413 million for the first quarter versus $409 million for the previous quarter. This.
Kevin: This increase is primarily attributable to our startup costs associated with our commencement of legacy unconventional operations in Saudi Arabia.
Kevin: General and administrative expenses were approximately $63 million for the first quarter, a decrease of approximately $4 million on a sequential basis.
Kevin: These costs were higher than expectations, but primarily attributable to the payout on our annual incentive plan rather than a recurring increase.
Kevin: Our reported net income per diluted share during the quarter was 54 versus 76 in the previous quarter as.
Kevin: As highlighted in our press release first quarter earnings were negatively impacted by a net 17 cents loss per share of select items, consisting primarily of transaction and integration costs and the change in fair value of our equity investments during the quarter.
Kevin: Absent the select items adjusted diluted earnings per share.
Kevin: With 71 cents in the first quarter versus an adjusted 76 during the fourth fiscal quarter.
Kevin: Capital expenditures for our first quarter were $106 million, which was consistent with the spend in the previous quarter.
Kevin: This amount is in line with our original expectations with regards to timing and amounts.
Kevin: Our historical legacy business I will comment later on our new fiscal 'twenty five capital guidance expenditure guidance, which will include guidance for our expected Capex for expanded international business, resulting from the closing of the acquisition Q1 cash flow from operations remains strong and resilient at $158 million.
Kevin: $169 million during our fiscal Q4.
Kevin: Now turning to our three segments, beginning with North American solutions, we averaged 149 contracted rigs during the first quarter, which is down slightly from the fourth quarter of fiscal 'twenty for.
Kevin: The exit rig count was 148, which was within our guided range of $1 47 to $1 53, and revenues of 50 $598 million were sequentially lower by $20 million, primarily due to lower average rig count and a slight reduction in daily recognized rig revenue.
Speaker Change: Segment direct margin was approximately $266 million down from the last quarter of $274 million as John mentioned earlier, our customer alignment through the utilization of performance based contracts has never been stronger. These contracts continue to make up a large portion of our total contracted rigs in total segment expenses.
Speaker Change: Were relatively flat at 19300 per day as of today approximately half of the U S. Active fleet is on a term contract.
Speaker Change: Now to our international solutions activity ended in.
Speaker Change: During the first fiscal quarter, our ended the first fiscal quarter with 20 rigs on contract of.
Speaker Change: Of those 20 rigs 15, we're generating revenue and we have five rigs in Saudi that have yet to commence operations. The financial results of international solutions were below our guided range as the new activity in Saudi was a little slower in catching its stride, we expect that all of the lessons learned with the <unk> activation of these rigs will help.
Speaker Change: Expedite the remaining rigs that have yet to begin operations.
Speaker Change: We expect one more rig to come online before the end of the quarter with the remaining shortly thereafter.
Speaker Change: Finally to our offshore Gulf of Mexico segment, we have three offshore platform rigs contracted we also have management contracts on.
Speaker Change: Three customer owned rigs the offshore segment generated a direct margin of $6 5 million during the quarter, which was just below our guided range due in part to the timing of some material and supply expenses.
Speaker Change: Now looking ahead to the second quarter of fiscal 2025 for North American solutions, we have 148 rigs contracted we expect to enter our second fiscal quarter with between 146, and 152 working rigs and revenue backlog from North American solutions fleet from our North American solutions.
Speaker Change: <unk> is roughly $700 million for rigs under term contract.
Speaker Change: Average pricing per day should remain relatively flat.
Speaker Change: North American solutions, and we expect direct margin in fiscal Q2, Derange between 240 and $260 million. There are a few factors influencing the lower quarter to quarter expectation, including a couple less days during the quarter and the normal quarter to quarter variations on the amount of realized revenues from performance contracts.
Speaker Change: Based on the current market conditions and the current commodity pricing environment, We expect North American solutions to generate at least $1 billion of direct margin on an annual basis as John mentioned, there are going to be some quarters that generate a little more a little less based on that variability across the quarters. However in the current economic environment that rate is a good rule of thumb.
Speaker Change: As we look towards the second quarter of fiscal 'twenty five for international as we had mentioned in the press release, we expect margins from our legacy HMP International solutions to be between a loss of $7 3 million.
Speaker Change: As I mentioned earlier, we currently have all eight flex rigs in country and three have begun contributing revenue further we have continued to improve our rig acceptance time for each rig as we move up the learning curve.
Speaker Change: <unk> legacy land operations, we are estimating direct margin between 35% and $50 million now recognized we will not be adding a complete quarter of consolidated effect of the acquisition given the date of close.
Speaker Change: Also as we expand our international scale and presence, we will be evaluating projects and returns based on our historical A&P approach, our return hurdles and risk evaluation. The opportunity set is promising and we're looking forward to the increase in customer interest that we have heard post close from both IOC and NOC.
Speaker Change: As we look towards the second quarter of fiscal 2025 for the offshore Gulf of Mexico segment, we expect to be roughly flat and generate between 6 million and $8 million in direct margin again.
Speaker Change: And for <unk> legacy offshore solutions business, we believe it will contribute between 18 and $25 million of direct margin collectively we will exit the quarter between 35, and 39 management contracts and contracted rig platform.
Speaker Change: Outside of our core operating segments, we do have some business that generates additional direct margin collect collectively those businesses are expected to contribute between four and $6 million of margin in the second fiscal quarter.
Now, let me update full fiscal year 2025 guidance as appropriate we expect the timing of our capex spend to vary from quarter to quarter with the inclusion of our expanded international business, resulting from the close of the Actavis acquisition capital expenditures for the full fiscal 2025 year expected to be between 360 and 395.
Speaker Change: Yeah.
Speaker Change: As previously discussed our historical guidance prior to the close of Casey a D was substantially lower than 2024 as post COVID-19 maintenance costs descended to more normal ranges of approximately $1 million per rig. In addition, the 'twenty 'twenty four capex was heavily impacted by cost associated with converting idle U S rigs to walking recertify.
Speaker Change: Im sorry equipment to like new and conducting required rig modifications and purchasing specific equipment for middle east contract opportunities.
Speaker Change: Some cost associated with this activity was included in our fiscal 2025. However, we believe that substantially all of the necessary capital for that project has been incurred.
Speaker Change: As far as expectations for general and administrative expenses with the addition of the <unk> numbers. We now expect our full 2025 year to be approximately $280 million.
Speaker Change: We are already capturing some synergies post closing.
Speaker Change: The close of the acquisition and have identified additional cost savings that will put us in excess of the original $25 million by 2026 that we discussed in July last year.
Speaker Change: As we get deeper into integration the opportunities not only for commercial opportunity expansion, but for cost reduction continued to materialize.
Speaker Change: We are now projecting our fiscal year 2025 cash tax range of $190 million to $240 million, which includes the additional taxes, resulting from the expanded international business depreciation expense for our legacy business is still projected to be around $400 million. We've not completed the allocation of the purchase price for the acquisition, which will impact the dip.
Speaker Change: <unk> projected for the balance of the year.
Speaker Change: Lastly, the new debt incurred to pay for the expanded international footprint, resulting in about $75 million of interest interest expense for the balance of 2025. This amount is inclusive of over $35 million in interest savings for the combined company because of the rates achieved in our bond deal versus those historically paid by <unk>.
Speaker Change: Yeah.
Speaker Change: Now looking at our financial position <unk> had cash and short term investments of approximately $526 million at December 31, 2024. As a reminder, we had sold our equity investment in AD not drilling for proceeds of approximately $190 million. These proceeds together with our September bond issuance and the current.
Speaker Change: The two year term loan funded funded the <unk> acquisition.
Speaker Change: With our Undrawn credit facility of $950 million and the remaining cash on hand, we have adequate liquidity liquidity to not only cash effect efficiently fund. The 25 operations that continue to generate ample cash to fund our base dividend and pay back the term loan of 400 million over the next 18 months.
<unk> maintains an investment grade credit rating as the rating agencies have stated our rating is supported by our large scale and globally diversified rig operations. Following the <unk> acquisition. In addition to a significant contracted backlog that provides stability in a cyclical industry and our long history of <unk>.
Speaker Change: Prudently balancing debt holder and shareholder interest.
Speaker Change: With the closing of the acquisition, we have significantly enhanced our scale diversification and overall business risk profile. As we have stated previously we are committed to a quick two quick debt reduction with a goal to reduce our long term net leverage two or below one turn.
Speaker Change: And let me close with one other data point that I think is important as we think about our guidance for the expanded international opportunities <unk> last fully completed quarter, which results were made public what's the third calendar quarter of 2024.
Speaker Change: During this quarter, where there was minimal impact Saudi rig suspensions Casey a D show total EBITDA of right around $80 million, which equates to roughly $320 million on an annual basis.
Speaker Change: So although our second quarter guidance is experiencing a bit of an air pocket because of the full impact of the rig suspensions and some general softness in the market. It does not reflect our ability to fully optimize our pro forma cost structure.
Speaker Change: Does it not reflect any of the commercial upside we expect to see in the business going forward and is not inclusive of any material synergy capture.
Speaker Change: And with that I'd like to turn it back over to the operator to open it up for questions.
Speaker Change: Certainly at this time, if you would like to ask a question. Please press star one on your telephone keypad. If your question has been answered you may remove yourself from the queue by pressing star two.
David Smith: Again, Thats star one to ask a question we will take our first question from David Smith with Pickering Energy partners.
Speaker Change: You May proceed.
David Smith: Good morning, and thank you for taking my question.
Dave: Good morning, Hello, Dave.
David Smith: Wanted to start with.
David Smith: Regarding the preliminary guidance for <unk> can you talk about the range for that international onshore margin, maybe any key items that could drive up between 35 and 50.
David Smith: Yeah, David This is Kevin.
David Smith: Between 35 and 50, obviously.
David Smith: There is the.
David Smith: Generally as I talked about Theres, a general softness in the market related to two areas outside of the rigs suspensions and Saudi.
David Smith: But the team that we have over there they are actively working on getting some of the rigs and some of the other countries back to work and getting that EBITDA back to a level that is commensurate with kind of what we were seeing.
David Smith: Back at during the third calendar year of 2024, and the amount of EBITDA that they were generating.
David Smith: Also the timing of the close.
David Smith: We still have to go back through and kind of do it in an allocation of how much margin was generated during the first 16 days of January.
David Smith: Is going to take a little bit a little bit of work and then the rig suspension timing.
David Smith: The first quarter.
David Smith: Our second quarter will bear the brunt, it's the first real quarter that we're seeing all of it but we still there still is one rig.
David Smith: Currently working.
David Smith: And then also as we think about just our operating cost and with these rigs suspensions.
David Smith: We're going to start pulling some costs out of the system.
David Smith: That.
David Smith: It is associated with those suspensions and if we don't see those rigs coming back to work relatively soon then we need to really be thinking about what kind of cost can we pull out of it.
David Smith: Yes.
David Smith: Initiate that.
David Smith: And if I'm doing the math right I'm coming up with a quarterly run rate for the case, yes edition that around.
David Smith: Ah $64 million of EBITDA, but round that up to 65 and call. It annualized $2 60, I recognize it's not a full year outlooks, but just wanted to compare that to that calendar Q3 level annualized at $3 20.
David Smith: And just looking for any color you might provide on how much of that delta.
David Smith: Between the fourth quarter outlook and last.
David Smith: Three Q contract re queue.
David Smith: Results, how much of that relates to that the Saudi suspensions.
David Smith: The vast majority of it rates.
David Smith: It relates to the to the rig suspensions I may think.
David Smith: On a full calendar year run basis based upon the work that we're able to do now that we're closed we see those rigs suspensions at about $7 million per rig.
David Smith: Per year, and and as a result of it mid year, you really taken close to $80 million out of our full year on a full year basis.
David Smith: What it doesn't include is how much cost we believe that we can save.
David Smith: Based upon our projections in anticipation of Windows rigs may go back to work.
David Smith: Perfect. Thank you very much.
Speaker Change: Thanks, Dave.
Speaker Change: Thank you we will take our next question is from the line of Doug Becker with capital one.
Speaker Change: Thank you.
Speaker Change: John you mentioned being in Oman, Kuwait as well as just some general area of softness outside of Saudi Arabia. So I just wanted to get your thoughts on <unk>.
Speaker Change: How 'bout trajectory in those countries looks and in particular my recollection is that <unk> was looking for a delivery of a couple of rigs for Oman, specifically at the end of last calendar year.
Speaker Change: Yes, Doug.
Speaker Change: The feedback that I got was was really positive both in Oman and Kuwait.
Speaker Change: They do have a rig that well I think one rig that actually was recently delivered and spud.
Speaker Change: And all is going well there I don't recall, if theres another one coming up but they are the conversations we were having and this is one of the things thats.
Speaker Change: That we're really excited about is just in general.
Speaker Change: Customers that we previously or E&ps about both IOC and NOC that we havent worked before with this new exposure to the middle East really opens up opportunities for us. So we're we're seeing some growth opportunities.
Speaker Change: Those won't hit our.
Speaker Change: Immediately, but there's definitely some some offer opportunities.
Speaker Change: There are some.
Speaker Change: Opportunities in Oman.
Speaker Change: For us to move some rigs enter into Oman to to.
To improve activity there.
Speaker Change: So again, we're we're pleased about that I think.
Latin America will will probably be relatively flat.
Speaker Change: Down in some countries, but in general the feedback that we've gotten it's been very very positive related to <unk> and our ability to work with again with in some cases IOC that we do a lot of work with here in the states that we really haven't had the opportunity to <unk>.
Speaker Change: Work with internationally, because we don't have that footprint. So we had the great partnership great relationship here now we can take that same relationship and transfer that like I said into the end of the middle east or other other opportunities areas that that that we see ahead.
Speaker Change: Yes.
Speaker Change: Got it and then.
Speaker Change: Maybe just switching to the U S. Certainly appreciate this fewer calendar days in the March quarter versus the December quarter.
Speaker Change: Could you expand some of the other moving parts driving the lower outlook for direct margin in.
Speaker Change: North America.
Speaker Change: Solutions, particularly is there anything changing in the performance based contracts.
Speaker Change: It's really more a function of rig churns.
Speaker Change: Uh huh.
Doug: Doug It's again, great great question.
Speaker Change: There.
Speaker Change: There is going to continue to be a level of churn and I mentioned it in my prepared remarks, our teams.
Speaker Change: <unk> continuing to do a great job.
Speaker Change: Our sales force the operations teams and delivering tremendous value for our customers and.
Speaker Change: And that is.
Speaker Change: Really a win for us.
Speaker Change: As I said.
Speaker Change: Even with a flat to even slightly down.
Speaker Change: Overall industry rig count in North America solutions, we still created a little bit of a little bit of market share again.
Speaker Change: We believe that.
Speaker Change: Fully responsible based on the safety and the performance and the value proposition.
Speaker Change: We've mentioned before about performance based contracting of about 50% of our of our rigs on our own performance base, so sometimes quarter over quarter. There is some give and take there plus and minuses again the teams continue to deliver.
Speaker Change: Really well, but a lot of it is just.
Speaker Change: Just quarter to quarter.
Speaker Change: You would add hey, Kevin Yeah, I think again, just some of that variability that we see across quarters and really the what we're projecting in terms of the margins.
Speaker Change: They may be slightly down, but it's because it's really some dogs and cats stuff that moves in.
Speaker Change: In pricing, but the pricing coming down just slightly is not because we are given.
Speaker Change: Really any room on day rates at some of the performance contracts or some of the tech revenue that we expect to receive and so <unk>.
Speaker Change: Sales team has been wonderful.
Speaker Change: Disciplined about kind of maintaining those leading margins and again they are the leading margins across the industry, but again, that's why I mentioned.
Speaker Change: To say that on an annual basis, we're going to see margins that are going to be.
Speaker Change: In excess of $1 billion, but you're going to see a little bit of kind of quarterly very variation as maybe as those margins move up 401 quarter and then down 400 next quarter. So.
Speaker Change: They are really hanging in there, it's just a little bit of variability across quarter.
Speaker Change: Got it thank you very much thank.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question comes from the line of Robert <unk> with Bank of America.
Speaker Change: Hi, Good morning, John and Kevin Good morning, Good morning.
Speaker Change: John Kevin maybe I wanted to go back to international and what's this just gives you do it if I just focus on the eight rigs are you deployed in Saudi I know three.
Speaker Change: We have spud, thus highlighting the country, they're going to spud, but as these rigs get fully operational John Kevin.
Speaker Change: The operations the profitability on that normalizes, maybe give us some color on the timing of that when do you expect that to fully happen and once that happens can you just remind us of the earnings followed into free cash flow positive just not pushing into your business.
Kevin: Well I'll, just I'll, just start and have Kevin chime in on.
Speaker Change: Some of the some of the numbers but.
Speaker Change: We're really in terms of the timing.
Speaker Change: Spud of the first three or four rigs were really pretty much in line.
Speaker Change: I think the other rigs are going to come in closely behind but we're really pleased with first of all just.
Speaker Change: The performance on safety and the focus there and then we've really seen some some good performance in terms of drilling drilling the wells.
Speaker Change: But but there is some strong earnings power there going forward, yes, I think we're kind of in that.
Speaker Change: Once those are all fully operational we are expecting probably close to $20 million of EBITDA and margin contribution.
Speaker Change: For the year.
Speaker Change: Okay perfect.
Speaker Change: Got it.
Speaker Change: And then again on the on the on the <unk> side of things I was thinking about I know David asked about the EBITDA side. If the question if I just move on and think about free cash flow contribution I know you raised your audio.
Speaker Change: Cash taxes, our guidance for the full year by $50 million, but how should we think about oh, how much free cash flow comes out of the gates you deal with that side of the business, especially cash taxes.
Speaker Change: Some of the DD&A stoffel, USDA and the and the pluses are finalizing that but maybe any preliminary color on thinking about free cash flow conversion yes.
Speaker Change: Beauty of of the <unk>.
Speaker Change: Acquisition, even in the short term, where we're seeing a little as I mentioned, an air pocket kind of in this in the second quarter.
Speaker Change: Even with that low that lower guidance I think if you were to annualize it and factor all of those cost, including the taxes and the interest rate the additional interest rate expense on that you're still roughly.
Speaker Change: Breakeven on cash flow now once we once we start to see some improvement in some of the business in the third and fourth quarter that were anticipating.
Speaker Change: And getting back to those levels that I talked about for the third quarter of last year that was.
Speaker Change: Was contributing.
Speaker Change: I think youre going to see.
Speaker Change: Probably.
Speaker Change: Closer to if you get once you get back up to that that that third quarter level Youre, probably looking at a $100 million of contribution to the overall pie is a free cash flow that could be generated by it.
Speaker Change: Okay perfect perfect, Okay, Kevin I got it okay, John Kevin. Thanks, Thanks, a lot I'll turn it back.
Speaker Change: Thank you.
Speaker Change: Thank you we will take our next question from Keith Mckey with RBC capital markets.
Keith Mckey: Hey, good morning, Thanks for taking my questions can we just maybe just circle back to the legacy HP International operations.
Keith Mckey: Can you just maybe give us a little bit more context into what the startup costs that youre at Youre incurring generally relate to certainly those would have all been much higher than we than we might have thought so maybe just a little bit more context around there and then and then to the extent you can maybe just give us a little bit more color.
Keith Mckey: On the timing you expect that that legacy division could be back to.
Keith Mckey: Breakeven or positive level of direct margin generation.
Keith Mckey: Yes, Keith good good question I'll start by just saying again.
Keith Mckey: First first time that we've had these are the flex rigs in country and just going through the acceptance in the process.
Keith Mckey: Obviously, it's been a big a big learning curve for us. So we've learned a lot each rig comes out.
Keith Mckey: A little a little quicker, but there are clearly are costs associated with that.
Keith Mckey: On the positive side of the equation.
Keith Mckey: Is the feedback that we're getting from from the customer.
Keith Mckey: And as we think about.
Combining the legacy <unk> and the <unk>.
Keith Mckey: Legacy Casey a D and the synergies that we're that we're going to see there and the learnings that we're going to have I think there are going to be significant.
Keith Mckey: Kevin you want it yes, and I think most of the costs that we're incurring right now has a relationship to just labor and rentals.
Keith Mckey: Thats pretty much driving.
Keith Mckey: The cost side and again the sooner the center, we're getting the remaining or we get the remaining five rigs.
Keith Mckey: Working.
Keith Mckey: And online.
Keith Mckey: We start to generate some revenues and again, we're anticipating close to $15 million to $20 million of additional margin associated with those rigs once they are up and working but right now, it's primarily labor miles, but thats.
Those costs are.
Keith Mckey: What time, we stepped up to the plate now we've learned and we're learning from from <unk>.
Keith Mckey: Now that we're mining company and so those costs are just continuing to go down.
Speaker Change: Yeah understood. Okay, maybe just turning back to back to North America.
Speaker Change: Some some have thought maybe we'd see a bit of.
Speaker Change: Incremental natural gas driven activity at some point in 2025, it seems like maybe that has moved a little bit.
Speaker Change: To the right.
Speaker Change: And now the talk is.
Speaker Change: More centered around 2026 can you maybe just give us your thoughts on on how youre seeing the market unfold.
Speaker Change: Because absent of that it kind of feels like were in certainly a flat year, but just curious on your thoughts for the impact of that and where you think rig counts in the U S might go through 'twenty five and into 2006 to the extent you can.
Speaker Change: Yeah, Keith well.
Speaker Change: Again, if we just look at the market in general where we're really bullish.
Speaker Change: About energy really bullish about oil and gas and general obviously.
Speaker Change: As you know we've all been.
Speaker Change: Challenged over time in predicting what the timing would be but I think if you just look at the fundamentals and you look at the long term fundamentals for natural gas.
Speaker Change: They are really really positive and obviously there is an opportunity to grow production significantly.
Speaker Change: In that scenario again are going to need super spec capacity rigs going to need more HMP rigs in the market. So.
Speaker Change: We feel good about that and believe that there is a lot of opportunity for us to.
Speaker Change: To keep rigs running and to put additional rigs to work, it's really hard to call whether that's a 2025 are or whether that's a 2026 phenomenon, but if youre looking at it through the long term lens, where we're really bullish and I think if you think about the projects that are going to lead to that additional demand to where the price signals.
Speaker Change: Or start to you start to see those pricing signals in the market.
Speaker Change: Those are long lead time type of projects that take a while before you start to see that increase in demand and I mean I'm a firm believer. We are a firm believer that its going to happen is just.
Speaker Change: I'm not going to be 25% is just how quickly in 'twenty six 'twenty seven does that do we start getting the signals.
Speaker Change: I'll tell you the other thing to think about in relation to two activity in North America.
Speaker Change: In general the rigs for the most part as you know the rig count has been pretty flat and you look at Hmp's rig rig count we've been range bound $1 45 to $1 55. If you just look at the industry rig count has been pretty range bound and that's been going on for 18 months. So one way to think about that as the rigs that are idle have now been.
Speaker Change: Idle for a year to 18 months in some cases the rigs that were.
Speaker Change: Prior to that had been down for two years.
Speaker Change: So as you think about the cost associated with.
Speaker Change: Reactivating getting those rigs back out into the market what that does is it creates a.
Speaker Change: A really strong market.
And one where.
Speaker Change: It helps us maintain that pricing discipline that we've been that we've been talking about and again, it's back to <unk>.
Speaker Change: Continuing to deliver great value for customers utilizing performance based contracts and being paid for that performance that we're driving so.
Speaker Change: The point I'm trying to drive home here is that.
Speaker Change: Theres not a lot of additional capacity in the market.
Speaker Change: That's ready to go to work, it's going to take a significant amount of capital in order to reactivate those assets.
Speaker Change: Before they go to work.
Speaker Change: Understood I appreciate the comments thanks. Thank you.
Speaker Change: Thank you we will take our next question from Kurt <unk> with benchmark.
Kurt: Hey, good morning, everybody.
Speaker Change: Thanks for thanks for Slotting me so.
Kurt: Yes.
Kurt: I guess from my standpoint right.
Kurt: Acquisitions, you know are always a little bit choppy or sloppy or whatever.
Kurt: And clearly you've made.
Kurt: Make a bet on the long term opportunity set.
Kurt: With respect to the acquisition of KC Doi tag.
Kurt: So 25% is going to be what it is right, but I was just kind of curious in the context of <unk>.
Kurt: No.
Kurt: As you are getting larger and getting more scale.
In the Middle East and the markets that you haven't really operated before.
Speaker Change: What do you take away from some of the more recent learnings I know it's been very recent with the close of the deal, but what what he's taken away from some of the learnings that as you go forward gives you the conviction and confidence that youre going to youre going to be able to substantially improve.
Kurt: The operational efficiency performance and profitability.
Kurt: Of what you have going into the middle East, Yes, Kurt.
Kurt: That's a great great comment and question and again, we feel very very good about the long term fundamentals of the <unk> acquisition.
Kurt: Obviously.
Kurt: This transaction accelerates our international growth strategy.
Kurt: You followed the company for a long time, you've seen that we have.
Kurt: We've been working on the Saudi opportunity with these eight rigs for over five years and so to grow internationally. It takes some time and so now we have global scope. We have scale, we have exposure to the best hydrocarbon basins in the world and it really gives us gives <unk> the ability.
Kurt: To grow in multiple areas.
Kurt: Okay.
Kurt: I said it earlier, but I think just to reemphasize the feedback that we're getting from IOC and NOC is excited about HMP.
Kurt: Now being in the in the basins, where they work or the countries where they work.
Kurt: They are very very excited about that so.
Kurt: You know again, it's unfortunate the timing is isn't great.
Kurt: But as you know this is a cyclical business, it's always been cyclical.
Kurt: <unk> has a great track record for being able to manage through the cycles. So I don't have any doubt that we're our teams are going to work very closely with our customers and work our way through this so we have a lot of.
Kurt: A lot of excitement.
Kurt: About the about the future you just think about Saudi.
Kurt: Oman, Kuwait the U S.
Kurt: North Africa, Argentina.
Speaker Change: You know this we haven't talked at all about the offshore business. Obviously, we've had a legacy with HP legacy offshore management contract business. That's been very successful now were.
Speaker Change: We've grown that were in four or five additional countries over 30 contracts.
Speaker Change: Yeah.
Speaker Change: Very low capital intensive business.
Speaker Change: Really gives us a lot of opportunity we see this as a multi decade opportunity again, we're bullish oil and gas you just look at the energy demand.
Speaker Change: That we that we see globally.
Speaker Change: And I think we're positioned really well for the future we know without a shadow of doubt that is very hard to grow.
Speaker Change: And any.
Speaker Change: Quick timing on the international side. So this gives us an immediate footprint and an opportunity to grow.
Speaker Change: And I would just add to your point, we're only a couple of weeks into.
Speaker Change: Post close work, we've been working on pre close integration planning work.
Speaker Change: But getting kind of unleashing the two workforces and being able to <unk>.
Speaker Change: Question each other's like why do you do it this way or why do we do it that way I think theres already some some early learnings that are going to generate some significant cost savings across the combined company that again when I look back at the acquisition economics, we didn't plan for those we didn't predicate the deal on those things.
Speaker Change: And so but.
Speaker Change: I know just based on the learnings in the first couple of weeks, there's a lot of opportunity there that will be realized in the next 12 to 18 months.
Speaker Change: That's great and if I can just one follow up on the shuffling of the cards are shuffling of the rigs in Saudi right.
Speaker Change: So as that situation.
Speaker Change: John.
Speaker Change: And that puts you on the spot too much here, but just kind of curious right. You've got you've got a handful of rigs that you obviously brought into the country from the U S.
Speaker Change: I don't know is there any risk of cannibalization as you will see a fleet that's in in Saudi and and and again just high level type stuff.
Speaker Change: Just kind of seems like either two quick points.
Speaker Change: So dental on timing right that you guys got these contracts and at the same time, they released some of the key CA rates.
Speaker Change: On the flip side of that I, just would have thought given the dynamic that the incremental spend is going to unconventional gas land.
Speaker Change: That the Saudis would want to keep as many land rates running as possible to take advantage of that so just how do you think so.
Speaker Change: Yes.
Speaker Change: That's a great a great question so listless.
Speaker Change: Kind of look at it more broadly.
Speaker Change: A&P or Casey, a but legacy KC now HMP those rigs number one have been suspended they've not been released.
Speaker Change: HMP rigs are not the only rigs that have been suspended both onshore and offshore.
In Saudi rigs have had been suspended so.
Speaker Change: Don't get the impression that.
Speaker Change: That the legacy KC, a rigs had been treated any differently than others secondly.
Speaker Change: I want to say three of the 12 are four of the 12 rigs were drilling gas. The others are drilling oil I think that's an important aspect.
Speaker Change: <unk>.
Speaker Change: Maybe one actually I don't think any of the rigs were really actually drilling unconventional gas.
Speaker Change: So that's another point so the.
Speaker Change: We believe and I think we have evidence to prove that those rigs are.
Speaker Change: Built and designed for the type of work that's being done mostly conventional work. There are some of the rigs that have done some unconventional in the past and I think there's some opportunities for us to do that so.
Speaker Change: I I would.
Speaker Change: I would not I'm sure. There is conversations people that I've talked about that but the reality of it is again I was there two weeks ago I had direct conversations.
Speaker Change: With executives that that basically said this is.
Speaker Change: This happens occasionally its budget driven.
Speaker Change: Everybody is being impacted all the contractors are being impacted obviously legacy cases.
Speaker Change: Was was one of those so I think looking at it longer term.
Speaker Change: To your point about <unk>.
Speaker Change: Performance and processes, we have a lot of respect for the legacy cases.
Speaker Change: If you just look at it through a broader lens from a performance space I think <unk> and our culture and our processes are going to be really.
Speaker Change: Welcomed.
Speaker Change: Welcomed from the customers and I can tell you getting a lot of positive feedback from the legacy <unk> employees. They are learning a lot.
Speaker Change: As Kevin said a minute ago, we're both learning together.
Speaker Change: This is a situation where one plus one isn't going to equal two it's going to equal three and I think theres a lot of opportunity for us ahead.
Speaker Change: With this this new global footprint and there is lots of opportunity. So again, we're excited about it recognize again Unfortunately, we hate to see this but again cyclical business.
Speaker Change: In this business for 38 years I don't know how many.
Speaker Change: Up cycles and down cycles or side.
Speaker Change: Sideways cycles I've been a part of it but I've been a part of a lot of them and <unk> knows how to manage through these through these cycles, yeah and the only thing I would add is that as John mentioned that he was over there.
Speaker Change: A couple of weeks ago.
Speaker Change: In the middle East and the relationships with all of our all of the <unk> customers all of our existing customers is strong.
Speaker Change: This is not a these rigs suspensions are not as a result.
Speaker Change: Of.
Speaker Change: Historical poor performance or bad relationship. This is.
Speaker Change: This is John mentioned this is just part of the budgeting that.
Speaker Change: That normally occur or occurs every once in a while and unfortunately, given the timing of the closing of the acquisition. We're right there in one of those air pockets.
Speaker Change: Budget constraints are resulting in a rig suspensions.
Speaker Change: Last forever.
Speaker Change: Honestly these rigs will go back to work and we will stand ready to meet the customers' needs and when they do the other thing I wanted to mention too is.
These rigs some of these rigs that have been suspended have actually had their contracts extended.
Speaker Change: 357.
Speaker Change: Seven years, so I think thats, an important element to keep into account to take into account is again the rigs were not released they are suspended and some of the rigs even wilder suspension period their contracts have been extended so I think that's really important I think the last thing to just.
Speaker Change: We're excited about it but this isn't going to happen in the next the next couple of quarters.
Speaker Change: The first rig.
Speaker Change: Rigs were suspended in August in their one year suspension periods.
Speaker Change: Youre looking at August September timeframe.
Speaker Change: Before you would even begin to see.
Speaker Change: Rigs.
Speaker Change: More than likely going back to work.
Speaker Change: That's great color really appreciate it thank you.
Speaker Change: <unk>.
Speaker Change: Thank you. Our last question comes from the line of Waqar Syed with ATB capital market.
Waqar Syed: Thank you for taking my question then.
Speaker Change: Sean Florida of ADT alarm set a floor.
Speaker Change: Just.
Speaker Change: Following up on the rigs.
Speaker Change: Casey do Todd.
Speaker Change: In the U S youre using putting in a lot of technology on the drilling rigs do you see that demand for that technology in the international markets as well.
Speaker Change: If so again that technology would be put on the <unk> rigs.
Speaker Change: And if so does it acquired any upgrades to do that.
Waqar Syed: Great question Waqar as a matter of fact, yes, we continue to have a <unk>.
Waqar Syed: Deploy technologies, we're starting to see more of that internationally.
Waqar Syed: Of course, most of that is directly related to the unconventional plays which is where our technologies were developed.
Waqar Syed: And really adding value to customers.
Waqar Syed: We do believe.
Waqar Syed: That over time, we'll be able to deploy more of our technology and Saudi obviously, the legacy flex rigs.
Waqar Syed: But also.
Waqar Syed: On on the legacy Casey a rigs and Thats something that internally, we're working on the two teams are working together on.
Waqar Syed: We're really really excited about that opportunity in that and those technology.
Waqar Syed: Would be.
Waqar Syed: Margin accretive those technologies would be additive to what we have.
Waqar Syed: What we've been doing up to this point. So yes, we think that there is a lot of a lot of opportunities ahead for technology.
Speaker Change: Okay, and just a follow up.
Speaker Change: The <unk> backlog was about $555 billion.
Speaker Change: Could you maybe quantify like how much.
Speaker Change: What <unk>, what time period, you could recognize that backlog is it and maybe just like 80% to 90% of that could be but when could you could that would be recognized.
Speaker Change: Well, we don't have we don't have that in front of us that's something that we can we can try to.
Speaker Change: Get.
Speaker Change: Get to you.
Speaker Change: Later, but at this stage of the game, we don't have that level of detail.
Speaker Change: I did I did want to say that.
Speaker Change: Our finance teams have just done an amazing job as you can imagine closing on the 16th and to get to be where we are right now knowing what we know right now.
Speaker Change: <unk> has been a herculean effort and just really do appreciate them and all the the extra time that they've put in to make this happen.
Speaker Change: Thank you very much.
Speaker Change: Thank you.
Speaker Change: Yeah. Thank you I will now turn the program back over to John Lindsay.
John Lindsay: Thank you Shane again, everybody. Thank you for joining us today.
John Lindsay: As we've mentioned we believe the potential of this acquisition is a game changer for our business at <unk> see a lot of opportunities ahead, I mentioned, it but energy demand is rising it's going to continue and we believe that we are positioned well to take advantage of this.
John Lindsay: <unk>.
John Lindsay: Globally for decades to come so thank you again.
John Lindsay: For joining us and have a great day.
John Lindsay: This does conclude today's program. Thank you for your participation you may disconnect at any time.
John Lindsay:
John Lindsay: Yeah.