Helmerich & Payne, Inc. (NYSE:HP) this morning reported net income of $500 million or $4.55 per diluted share from operating revenues of $564 million for the first quarter of fiscal 2018.  Net income per diluted share includes $4.57 of after-tax gains comprised of select items(4), the most significant of which is a non-cash gain of approximately $501 million related to a reduction of H&P’s deferred income tax liability as a result of applying the new corporate tax rate enacted by the Tax Cuts and Jobs Act(5). 

Summary: First Quarter Results

• Quarterly U.S. Land revenue days (activity) increased approximately 4%
• H&P’s spot pricing in the U.S. Land market continued to increase (approximately 4%) from fourth quarter results announcement (November 16, 2017) to January 25, 2018
• Quarterly U.S. Land adjusted average rig margin per day increased 11%(1)
• H&P’s U.S. Land contracted rig count increased by approximately 4% from 197 rigs at September 30, 2017 to 204 rigs at December 31, 2017, compared to a slight decline in the industry rig count(2)
• Upgraded 16 FlexRigs to super-spec(3) capacity during the first fiscal quarter of 2018

President and CEO John Lindsay commented, “Our team continued to deliver better-than-expected results. Setting aside the significant and favorable impact of the non-cash adjustment related to the new tax law, our operational results exceeded expectations in the first fiscal quarter. We are encouraged by an improving macro outlook for oil prices, and the prospect of an increasing level of rig activity that it portends.

“One of the primary factors driving rig pricing is the continued demand for high capacity super-spec rigs and the near full utilization of that portion of the U.S. fleet.  A significant driver for super-spec rig demand last year was an average 15% increase in the length of laterals, and we expect this trend to continue.  H&P has over 40% of the active super-spec rigs and with that portion of the industry fleet fully utilized we believe pricing should continue to improve.  We also have a significant advantage for future growth as we have roughly half of the 200 to 250 upgradeable rigs available in the U.S. market today that could be readily upgraded to super-spec capacity.

“We are well equipped for the industry’s digital evolution.  With our acquisitions of Motive Drilling Technologies and MagVAR we can provide additional value for our customers through improved wellbore quality and placement. Both companies are technology leaders in their respective space and the demand for their offerings is increasing as the importance of wellbore accuracy grows with longer laterals and tighter well spacing.

“Our people, performance, technology, reliability and uniform FlexRig fleet remain our strongest competitive advantages. Our most recent acquisitions add an attractive dimension to our strategic vision and further differentiate us from others in the market.  Along with our scale and financial rigor, we are able to continue to provide superior value to customers and shareholders.”

Operating Segment Results for the First Quarter of Fiscal 2018

U.S. Land Operations:

Segment operating income increased by $28.9 million to $24.7 million sequentially.  For the third quarter in a row, the favorable change was primarily attributable to an increase in quarterly revenue days and a higher average rig margin per day.  The segment’s Depreciation expense for the quarter includes non-cash charges of $7.2 million for abandonments of used drilling rig components related to rig upgrades, compared to similar non-cash charges of $15.4 million during the fourth fiscal quarter of 2017.

The number of quarterly revenue days increased sequentially by approximately 4%.  Adjusted average rig revenue per day increased by $483 to $22,167(1) as pricing continued to improve throughout the quarter.  The average rig expense per day decreased sequentially by $359 to $13,546; the decrease in the average was mostly attributable to lower than anticipated self-insurance expenses.  The corresponding adjusted average rig margin per day increased sequentially by $842 to $8,621(1).

Offshore Operations:

Segment operating income increased by $3.7 million to $8.7 million sequentially primarily as a result of higher management contract contributions and slightly higher average rig margins during the quarter.  Management contracts on customer-owned platform rigs contributed approximately $6.5 million to the segment’s operating income, compared to approximately $2.5 million during the prior quarter.  The number of quarterly revenue days on H&P-owned platform rigs decreased sequentially by approximately 6%, and the average rig margin per day increased sequentially by $287 to $12,375.

International Land Operations:

The segment had operating income this quarter as compared to an operating loss during the previous quarter.  The $5.5 million sequential increase in operating income was primarily attributable to a higher number of revenue days during the quarter.  Revenue days increased during the quarter by 23% to 1,587.  The average rig margin per day decreased by $1,035 to $11,351.  Both the first fiscal quarter and the prior quarter benefited from favorable adjustments that are not expected to recur going forward.

Operational Outlook for the Second Quarter of Fiscal 2018

U.S. Land Operations:

• Quarterly revenue days expected to increase by approximately 1% to 2% sequentially (representing a 3% to 4% increase in the average number of active rigs given the lower number of calendar days during the second fiscal quarter)
• Average rig revenue per day expected to be roughly flat to slightly up as compared to the first fiscal quarter (excluding any impact from early termination revenue)
• Average rig expense per day expected to be roughly $13,900

Offshore Operations:

• Quarterly revenue days expected to decrease by approximately 2% sequentially (as a result of the lower number of calendar days during the second fiscal quarter)
• Average rig margin per day expected to be approximately $11,500
• Management contracts expected to generate approximately $4 million in operating income

International Land Operations:

• Quarterly revenue days expected to decrease by approximately 4% sequentially (representing a 2% decline in the average number of active rigs given the lower number of calendar days during the second fiscal quarter)
• Average rig margin per day expected to be roughly $8,000

Other Estimates for Fiscal 2018

• Given the continued improvement in market conditions and corresponding opportunities, fiscal 2018 capital expenditures are now expected to be approximately $350 million, up from our original estimate of $250 to $300 million.
• The estimate for general and administrative expenses for fiscal 2018 is now approximately $180 million.

Other Highlights

• On December 8, 2017 H&P continued to add to its Family of Solutions by acquiring Magnetic Variation Services, LLC (MagVAR), an industry leader in enhancing the accuracy of directional drilling and wellbore placement.
• Since November 16, 2017, 10 AC drive FlexRigs were upgraded to super-spec(3) capacity resulting in 171 super-spec rigs in our fleet today.
• On December 5, 2017, Directors of the Company declared a quarterly cash dividend of $0.70 per share on the Company’s common stock payable March 1, 2018 (as filed on Form 8 K at the time of the declaration).

Select Items Included in Net Income (or Loss) per Diluted Share

First Quarter of Fiscal 2018 net income of $4.55 per diluted share included $4.57 in after-tax gains comprised of the following:
• $4.55 of income tax adjustments related to the recognition of the new corporate tax rate under the Tax Cuts and Jobs Act in calculating the Company’s new deferred income tax liability
• $0.03 of after-tax income from long-term contract early termination compensation from customers
• $0.04 of after-tax gains related to the sale of used drilling equipment
• $(0.05) of after-tax losses from abandonment charges related to the decommissioning of used drilling equipment

Fourth Quarter of Fiscal 2017 net loss of $(0.21) per diluted share included $(0.07) in after-tax losses comprised of the following:
• $0.03 of after-tax income from long-term contract early termination compensation from customers
• $0.02 of after-tax gains related to the sale of used drilling equipment
• $0.03 of after-tax gains related to a favorable adjustment to interest and other expenses as a result of the reversal of previously booked uncertain tax positions where the statute of limitations has expired
• $(0.11) of after-tax losses from abandonment charges related to the decommissioning of used drilling equipment
• $(0.04) of income tax adjustments related to a net operating loss carryback to a prior fiscal year that caused a reduction of prior year Section 199 domestic production deductions

Helmerich & Payne, Inc. is primarily a contract drilling company.  As of January 25, 2018, the Company’s fleet includes 350 land rigs in the U.S., 38 international land rigs, and eight offshore platform rigs.  The Company’s global fleet has a total of 388 land rigs, including 373 AC drive FlexRigs.

Forward-Looking Statements: This release includes “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, and such statements are based on current expectations and assumptions that are subject to risks and uncertainties.  All statements other than statements of historical facts included in this release, including, without limitation, statements regarding the registrant’s future financial position, operations outlook, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements.

Note Regarding Trademarks.  Helmerich & Payne, Inc. owns or has rights to the use of trademarks, service marks and trade names that it uses in conjunction with the operation of its business.  Some of the trademarks that appear in this release include FlexRig and Family of Solutions, which may be registered or trademarked in the U.S. and other jurisdictions.

(1) See the Selected Statistical & Operational Highlights table(s) for details on the revenues or charges excluded on a per revenue day basis.  The inclusion or exclusion of these amounts results in adjusted revenue, expense, and/or margin per day figures, which are all non-GAAP measures.
(2) The overall market’s decrease of seven rigs (less than 1%) was calculated using the U.S. Land rig counts corresponding to the last weeks of the third and fourth calendar quarters of 2017 as publicly published by BHGE.
(3) The term “super-spec” herein refers to rigs with the following specifications: AC drive, 1,500 hp drawworks, 750,000 lbs. hookload rating, 7,500 psi mud circulating system and multiple-well pad capability.
(4) See the corresponding section of this release for details regarding the select items.
(5) On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law, effective January 1, 2018.  H&P continues to analyze the effect of the new tax law on the Company’s tax position, which may result in further adjustments to our income tax provision.