Helmerich & Payne Announced Its First-Quarter 2016 Results, Warns On Revenue Decline Next Quarter

| About: Helmerich & (HP)

Summary

Helmerich & Payne's revenues were down to $487.9 million from $566.1 million, or 13.8% lower quarter over quarter. Earnings per share were $0.16 compared to ($0.25) last quarter.

Revenues in all segments are expected to go down from 10% to 20% next quarter. This is not a good sign for the dividend in 2016.

I recommend a hold on HP, because of the oil situation and a potential 50% dividend cut that may be forced upon the company by the market ongoing uncertainty.

Helmerich & Payne (NYSE:HP)

Operates as a contract drilling company worldwide. It provides drilling rigs, equipment, personnel, and camps on a contract basis to explore for and develop oil and gas from onshore areas and fixed platforms, tension-leg platforms, and spars in offshore areas.

Source: HP Flex4.

Fleet Analysis

As of January 28, 2016, the Company's existing fleet includes 347 land rigs in the U.S., 38 international land rigs, and nine offshore platform rigs. In addition, the Company is scheduled to deliver another three new H&P-designed and operated FlexRigs®, all under long-term contracts with customers. Upon completion of these commitments, the Company's global fleet is expected to have a total of 388 land rigs, including 373 AC drive FlexRigs.

U.S. Land Rigs

Financial Snapshot:

Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015
Revenue $ million 369.805 420.393 494.615 718.463 890.047
Operating Income $ million 55.532 33.653 121.734 224.866 318.122
Rig margin per day $ 13,344 13,490 14,219 20,802 27,355
Rig Utilization 39% 43% 47% 68% 89%
Click to enlarge

International Rigs

Financial Snapshot:

Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015
Revenue $ million 72.194 78.069 106.198 98.222 92.885
Operating Income $ million 64.008 69.784 16.670 6.328 12.214
Revenue days 1,411 1,608 1,887 1,842 2,080
Rig Utilization 40% 45% 51% 52% 63%
Click to enlarge

Offshore Rigs (Platform Rigs)

Financial Snapshot:

Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015
Revenue $ million 41.880 52.280 55.673 62.626 69.473
Operating Income $ million 7.722 12.616 14.716 19.069 21.484
Revenue days $ 736 736 728 794 809
Rig Utilization 89% 89% 89% 98% 98%
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Q1'16 Financial Results Snapshot

Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015
Total Revenue in $ million 487.887 566.110 659.694 883.052 1,056.59
Total Revenue from drilling in $ million 483.879 563.052 656.486 879.381 1,052,79
Operating cost in $ million 449.177 582.131 526.914 469.328 554.243
Operating income from operation in $ million 38.670 (16.021) 132.780 227.172 331.819
Net Income $ million 16.002 (27,596) 90.860 149.537 203.042
Cash and Cash equivalent $ million 848.230 717.977 710.918 719.127 251.636
EPS Earning per share $ 0.15 (0.25) 0.84 1.37 1.85
Dividend declared per share $ 0.6875 0.6875 0.6875 0.6875 0.6875
Long-term note payable $ million 492.668 492.443 532.388 532.908 40.000
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Capital expenditure for 2015 was $1,133.5 million:

We reported capital expenditures of slightly over $1.1 billion for fiscal 2015 well below our $1.3 billion estimate for the year.

Commentary

Helmerich & Payne's revenues were down to $487.9 million from $566.1 million, or 13.8% lower quarter over quarter. Earnings per share was $0.16 compared to ($0.25) last quarter.

Mr. Juan Pablo Tardio, CFO, gave us an estimate for the 2Q'16 in the conference call:

Looking ahead to the second quarter of fiscal 2016, we expect revenue days to decrease by close to 20% quarter-to-quarter. Excluding the impact of revenues corresponding to early terminated long term contracts, we expect our average rig revenue per day to be roughly flat. The average rig expense per day level is expected to increase to roughly $13,600. This expected increase is primarily attributable to the relatively large number of rigs becoming idle during the quarter and impacting total expenses, which are then allocated to a smaller number of expected revenue days.

Overall, M. Juan Pable Tardio was describing a very grim outlook for the next few quarters and it was not a surprise. Revenues in all segments will be going down from 10% to 20% next quarter. Looking at the pace the rigs are getting idle in the US land segment, it rings an alarming signal for the dividend in 2016. I tried to illustrate what M. Tardio said in the conference call in a simple graph for US rigs, below, based on a total count of 347 rigs:

Conclusion:

On the one side, the company has a strong balance sheet with no net debt and a good forward revenue stream, from a strong backlog that is not sufficient at first glance. Capital expenditures for 2016 will be in a range of $300 million to $400 million, which is reasonable. Furthermore, HP has a honest, responsible management and a modern fleet, with a clear competitive advantage described by M. John Lindsay, CEO, in the conference call:

But there are key differences, and one big difference is the age, size and capability of today's rig fleet. The AC drive rig replacement cycle of the legacy fleet is ongoing. At the peak of activity in 2014, approximately 41% of the fleet was AC drive, and today, over 63% of the active fleet is AC drive technology.

The remaining fleet is legacy SCR and mechanical rigs, and the question remains, what will be the marketable legacy fleet at the end of the downturn? We believe it will be a very small portion of the marketable fleet, and those rigs will have a very difficult time competing in the world of complex, unconventional horizontal wells.

The strong backlog in 2016 is comprised of 104 rigs under contracts, 81 rigs under contract in 2017 -- with 66 for US land segment -- and 47 rigs under contract in 2018 -- with 34 rigs in US land segment.

This is the side that justifies easily an accumulation on any weakness that I will describe below.

On the other side of the equation, we have a terrible market with no clear visibility. Yes, M. Lindsay is indicating that this bear cycle is a "normal" bear cycle, and he doesn't see it as a structural change, yet, which could imperil the actual level of the dividend paid.

Looking at the pace of the revenue drop above, I am now wondering if M. Lindsay is not being a little over-optimistic on that topic?

I see clearly a risk of a dividend cut in 2016, at least 50% or even more. Because the company has no clear idea what lies ahead and the real nature of this terrible cycle, and even less when it will finally end.

In these circumstances, it is of a paramount importance to scale down the dividend to a sustainable level and focus on retiring the long term debt as much as possible. The company is paying now approximately $297 million per year in dividend, which is a significant amount, and I do not see that amount as reasonable due to the pace of degradation of the HP drilling business.

I recommend a hold on HP, right now, because of the oil situation and a potential 50% dividend cut, that may be forced upon the company by the market ongoing uncertainty. I would be confident to add to my long position only in the low $40's and take profit above $50.

Disclosure: I am/we are long HP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.