Helmerich & Payne, Inc.

Good day, and welcome to the Helmer Campaign's third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. Please note today's call is being recorded, and you may ask questions later during our question and answer session. It is now my pleasure to turn the conference over to Dave Wilson. Please go ahead.

Hello, everyone. Helmer Campaign's conference call and webcast for 2020. With us today are John Lindsey, President and CEO, and Mark Smith, Senior Vice President, CFO. Both John and Mark will be sharing some comments with us at the West Bowl in the Hall of Fame. Before we begin our prepared remarks, I want to remind everyone that this call will include four of these statements that define our industry as it was.

Such statements are based upon current information and management 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. As such, our actual outcomes and results could differ materially. You can learn more about these risks in our annual report on Form 10-K, 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. We will also be making reference to certain non-GAAP financial measures, such as segment operating income and other operating statistics. You will find the gap reconciliation comments and calculations in yesterday's press release. With that said, I'll turn the call over now to John Lindsay.

Thank you, David, and hello, everyone. Thanks for joining us today. The unprecedented decline and volatility caused by the COVID-19 pandemic continue to reverberate throughout the industry, and we expect that ramifications will be felt for several quarters to come. I'm very proud of how our people have persevered in this time of great personal challenge and uncertainty and have kept the health and safety of fellow employees and customers the top priority. In response to COVID and demand destruction, H&P acted decisively to preserve operational and financial integrity, and this will enable us to capitalize on our strengths as we shape and deploy strategic objectives aimed at addressing the challenges and opportunities within the energy sector. While the near-term outlook is uncertain, we believe there is an improved future state for our industry. The oil and gas industry has always been cyclical, and H&P has many years of experience in navigating these cycles. We will work hard to continue to perform and strategically position ourselves for future success. we believe the remainder of 2020 will continue to be challenging. We don't see surplus oil supplies dissipating or the rig count improving materially. While we are hopeful that the rig count in the U.S. is nearing a trough level, we must leave open the possibility of further declines driven by lower oil prices or budget exhaustion for the remainder of 2020 and perhaps beyond. It appears likely that the future will include more consolidation leading to fewer customers and competitors as some industry players are experiencing greater levels of financial distress as the downturn lingers. On our last call, we laid out four strategic objectives that we believe will be crucial to our successful journey to the future. First, new customer-centric commercial models Second, growth of digital technology solutions. Third, international expansion. And fourth, diligence around cost management. Each of these strategic objectives are supported by our strong organizational culture, which serves as a foundation of our success. For many years, the companies made significant investments in our culture to achieve alignment throughout the organization. where communication is fluid and innovation is fostered. At H&P, we work hard to build healthy, cohesive teams, and it has paid dividends. H&P is pleased to celebrate our 100-year anniversary this year, an incredible accomplishment, especially in such a cyclical industry and a testament to the service attitude and teamwork of our people. We aim to continue advancing our organizational health to build an even stronger culture that is laser focused on providing best-in-class services and solutions for our customers. The payback we've experienced from these efforts have been vital, and nurturing this mindset will be foundational as we move forward in this environment. As we think about innovation at our company, I'm proud to mention our advancements and progress as it relates to the health and safety of our employee base. COVID-19 has been incredibly challenging, but fostered by our strong culture. Our employees have continued to meet challenges with creativity and determination. Our focus on safety and innovating the development of our actively care program has continued to drive improved safety performance in our field operations. These advances are possible through the development of safety-focused applications, edge computing and training tools, and the use of data science to predict and prevent negative events from occurring. Digital technology will continue to play a pivotal role in differentiating HMP going forward, and I'm pleased to report that our autonomous drilling platform continues to advance. The adoption of AutoSlide is gaining momentum and is now deployed on over one third of our active fleet. We are autonomously sliding on more flex rigs today than during any previous quarter. AutoSlide provides touch of a button sliding automation during the directional drilling process. And to date, our customers have employed this technology to drill over 300 wells and more than 5 million feet of wellbore. Customers experience greater reliability of directional drilling due to more accurate calculations driven by our software compared to human errors when drilling manually. They are also able to consistently land the curve earlier in the zone, which provides more exposure to the shale and greater return on investment. An inadvertent benefit of auto slide in the COVID-19 environment is the elimination of the third party directional drilling personnel from the rig site, which means a reduced risk of virus exposure. Our technology team has additional automation technology solutions in alpha and beta development with customers as we speak, and we are looking forward to commercializing those in the next few quarters. Our customer-centric focus has served the company well, but the approach of adding value to customers must evolve and encompass a wider array of drilling and digital technology solutions. For many years, the industry experienced significant improvements in drilling time productivity, and the H&P FlexRig forged the path to many of these gains. The step change in rig technology has been instrumental in driving shale production growth However, the antiquated day rate contract model is not designed to allocate benefits delivered through significant additions of efficiency and wellbore quality. Our solutions are designed to change the narrative around H&P's value proposition. Instead of focusing on discrete products like rigs or separate technology applications, we are packaging solutions. combining the expertise of our people, flex rigs, and digital technology solutions to deliver the best possible well that delivers and achieves our customers' goals. This downturn has actually accelerated conversations, and we have several customers ranging from the small independents to the super majors that are working with us on new models. The models vary from customer to customer as they are crafted to address each customer's specific issues and needs. We are intentionally aligning our organization around this performance-driven approach which drives higher reliability, simplifies our customers' experience, and forms stronger partnerships. Combining H&P FlexRig and digital technology solutions creates the opportunity to advance new commercial models and our business segments will start to reflect the integration of this holistic solutions-based strategy. Mark will discuss this in more detail during his remarks, but what has historically been referred to as the U.S. land and H&P technologies business segments have now been combined to form the North America solutions business segment. Over time, we see alternative commercial models like performance-based contracts becoming the new normal and we are pleased to see that these have remained relatively steady despite record rig count declines and the general lack of incremental contracting activity. The primary objective is to provide customers with a variety of solutions delivered through proprietary rig technology, touch-of-a-button automation software, efficiency advantages of our uniform flex rig fleet, and our unique digital offerings. The importance of well economics is magnified under these stressed market conditions, and achieving wellbore quality and placement significantly improves the lifetime value of a well. The integration of drilling and digital technology combined with performance-focused commercial models is central to enhancing the economic performance for both our customers and H&P. This is a transitional process and adoption won't happen overnight, but we are confident that we can continue to demonstrate the economic effectiveness and migrate toward new commercial models over time. Mark will talk in detail during his remarks about our successful endeavor to manage costs. I'm thankful for the efforts of our people making many important decisions that have improved our organizational structure. our operational costs, and improved liquidity. As part of this process, many long-standing employees have separated from H&P. These employees made great contributions to H&P over the years, and we thank them for their contributions to the company and wish them well in the future. We will continue to be diligent in improving our cost structures. However, we're We will also continue to invest in transformational digital technology solutions as well as expanding our international footprint. Also paramount is that our balance sheet remains strong. We repeat this often, but particularly as we navigate through this challenging time, it is instructive to step back and reflect on just how important decades of vigilant financial stewardship have been to the longevity and success of Helmrich & Payne. And now I'll turn the call over to Mark.

Thanks, John. Today I will review our fiscal third quarter 2020 operating results, provide guidance for the fourth quarter, update full fiscal year 2020 guidance as appropriate, and comment on our expense and liquidity management efforts and current financial position. As John mentioned in his remarks, during the third quarter of fiscal year 2020, We restructured our operations to reduce our scale to support current activity levels and reorganized to align with new marketing and management strategies associated with new commercial models and the deployment of digital technologies. We are moving from a product-based offering, such as a rig or a separate technology package, to an integrated solution-based approach by combining proprietary rig technology, automation software, and digital expertise into our rig operations. Operations previously reported within the H&P Technology segment are now managed and reported within the North America Solutions segment. Beginning with this third fiscal quarter of 2020, our operations were organized into three reportable operating business segments, North America Solutions, International Solutions, and Offshore Gulf of Mexico. Now let me move on to the highlights for the recently completed third quarter. The company generated quarterly revenues of $317 million versus $634 million in the previous quarter. The quarterly decrease in revenue is a result of rigged releases in the North America Solutions segment and in the International Solutions segment due to the energy demand destruction caused by the COVID-19 pandemic. Correspondingly, the total direct operating costs incurred were $207 million for the third quarter versus $419 million for the previous quarter. General and administrative expenses totaled $43 million for the third quarter in line with our previous guidance. As a result of the many changes this quarter, we incurred a restructuring charge of $15.5 million in the third quarter. I will discuss the expected savings from this downsizing later in my comments. Our effective tax rate for the third quarter was approximately 28% due to discrete tax benefits related to changing our deferred state income tax rate and return to provision true-ups. The benefits generated a rate higher than our statutory rate as it is being provided on a pre-tax book loss. Now let me summarize the results of the third quarter. H&P incurred a loss of 43 cents per diluted share versus a loss of $3.88 in the previous quarter. Third quarter earnings per share were negatively impacted by a net 9 cent loss per share of select items as highlighted in our press release. and this primarily pertains to the restructuring charge. Absent these select items, adjusted diluted earnings per share was a 34-cent loss in the third quarter versus an adjusted 8-cent profit during the second fiscal quarter. Capital expenditures for the third quarter of fiscal 2020 were approximately $27 million as we have continued to push out some projects and wind down or cancel other projects in light of market conditions. Turning to our three segments, beginning with the North America Solutions segment. We averaged 89 contracted rigs during the third quarter, 15 of which were idle but contracted on some form of cold or warm stack rate. Due to the ongoing COVID-19 pandemic and related demand destruction, the rig count decline was in line with our expectation of ending the quarter below 70 contracted rigs, with the vast majority of that decline occurring by June 1. We exited the third fiscal quarter with 68 contracted rigs, of which 20 were idle on rate. Revenues were sequentially lower by $292 million due to the aforementioned activity decline and the contracted but idle rig count. Included in this quarter's revenues were approximately $50 million of early termination revenue. This is a longstanding contractual margin coverage which is applied to the remainder of the canceled term. Many of these contracts originated from super spec rig upgrades during the last cycle. Further, when rigs are idle but contracted, they remain under the terms of the contract but typically pay a reduced rate while incurring reduced operating expenses. While term rigs are idle but contracted, the idle days are typically not counted against the term period in the contract. North America Solutions operating expenses decreased $194 million sequentially in the third quarter, primarily due to rig releases, as well as lower costs for contracted but idled rigs. Costs also decreased due to several proactive operating initiatives at the field level. One such initiative is our use of quote-unquote penny stock. When recently released rigs are stacked, their usable materials and supplies inventory, which were previously issued and costed, or return to inventory with a penny value to be available for reissuance. Many of these consumables have shelf lives, so prioritizing their consumption in the smaller working fleet now ensures realization of their value. Since this downturn began in mid-March, penny stock has saved approximately $6 million in operating expenses. Another effort that was commenced just before the downturn is what we call, quote-unquote, the redistributizer. This supply chain project ties together our distributed warehouses into a single dispatch system for use by any field location. This effort has resulted in approximately $3 million in reduced expenditures since the end of February. Looking ahead to the fourth quarter of fiscal 2020 for North America Solutions. Since the COVID-19 pandemic and the resulting economic slowdown, we have seen more than 130 rig releases since early March 2020. Rig releases have slowed since June 1. However, the market remains uncertain. On one extreme, we expect some operators will seek further releases to reduce their costs, while operators with idle but contracted rigs may return them to work due to increased oil prices. At the other extreme, we hope to see select opportunities for incremental rigs. We expect to end the fourth fiscal quarter with 58 to 63 contracted rigs, with 10 to 15 of those on idle but contracted status generating some margin. As John discussed, our performance contracts are gaining customer acceptance. In those limited circumstances where we are having discussions about putting rigs back to work, we are leading with performance-based contracts. It is worth reiterating that the value delivered to customers for wells drilled more efficiently And, excuse me a second, as John discussed, our performance contracts are gaining customer acceptance. In those limited circumstances where we are having discussions about putting our rigs back to work, we are leading with performance-based contracts. It is worth reiterating, I'll say again, that the value delivered to customers for wells drilled more efficiently and of higher quality requires pricing models that recognize and share those benefits equitably. Accordingly, the nomenclature we were using to present our business to investors is also evolving. As a reminder, our segment guidance is now on the basis of segment margins, which are defined as operating revenue, less direct operating expenses, or gross margin, and not on individual rig rates. To facilitate this transition, we will continue to furnish per-day information in the segment tables and press releases and public filings through the end of this fiscal year. In the North America Solutions segment, We expect gross margins to range between $38 to $48 million, with approximately $12 million of that coming from early termination revenue. Our current revenue backlog for our U.S. land fleet is roughly $545 million for rigs under term contract. This amount does not include the aforementioned $12 million of early terminations expected in Q4 or the $6 million expected after the fourth quarter. Regarding our international solutions segment, our international solutions business averaged 11 active rigs during the third fiscal quarter down sequentially as most of our rig operations in Argentina ended due in part to the COVID-19 pandemic. In Argentina, we began the quarter with four leased rigs, four rigs working for an NOC, and one rig working for an IOC. The NOC rigs ended their original five-year term contracts during the quarter. Collectively, the least rigs had a small contribution to margins and were canceled during the quarter, leaving one super spec flex rig working at quarter end in Argentina. As we look toward the fourth quarter of fiscal 2020 for international, our activity in the Middle East is holding steady, with the three rigs working in Bahrain and two working in Abu Dhabi. Reduced revenue activity in Argentina, coupled with an arduous regulatory environment which prevents us from reducing costs as quickly as we would like, will lead us to incur a legacy cost structure there into the fourth quarter. This will likely cause international margins to be negative with an expected loss of between $2 million and break even. Turning to our offshore Gulf of Mexico segment, we currently have five of our eight offshore platform rigs contracted. Offshore generated a gross margin of $8.5 million during the quarter above our estimates in part due to the absence of unfavorable expenses and downtime that adversely affected the prior quarter. The previously mentioned gross margin also includes approximately $2 million of contribution from management contracts. As we look toward the fourth quarter of fiscal 2020 for the offshore segment, one rig is on a short-term contract that will conclude later in the fourth quarter. Therefore, we expect that offshore rigs will generate between $5 to $7 million of operating gross margin, with offshore management contracts contributing an additional $2 million. Now let me look forward on corporate items for the fourth fiscal quarter and the remainder of this fiscal year. As we discussed in our April call, in response to this down cycle and the uncertain outlook for the oil and gas production business, we have undertaken a number of measures to maintain and extend H&P's financial strength. As a reminder, last quarter we, A, updated our capital allocation by reducing our future intended dividends by $200 million per annum, B, Reduced our North America solutions overhead costs by over 50 million annually see reverse the initial 2020 fiscal year budget accrual for annual incentive compensation in SG and a and an operating expense and D reduced our fiscal 2020 capex by approximately $95 million. In this just completed third quarter, we continue these rights-sizing efforts by reducing selling general administrative overhead by approximately $25 million on an annual run rate relative to our initial fiscal 2020 guidance of $200 million. These actions allow us to update our previous guidance for fiscal 2020 SG&A to less than $175 million. As mentioned last quarter, we are assessing our international offices to appropriately calibrate for activity. Specifically, we are working within the regulatory framework in Argentina to move overhead and operating costs in line with lower activity levels, as I mentioned. Capital expenditures for the full fiscal 2020 year are now expected to reduce further to a new range of between 150 to 165 million, which is a reduction from our prior quarter range of 185 to 205 million. This is a reduction of roughly 130 million from our initial fiscal 2020 budget, and a reduction of over $300 million from fiscal 2019 CapEx. We continue to work with our suppliers to realign pre-downturn purchase orders with the new realities and the current activity level. We are in the early budgeting process for fiscal year 2021, which begins October the 1st. As you may recall, in fiscal 2019, we had, quote, bulk purchases, unquote, in CapEx, to scale up rotating componentry for a then 200-plus working super spec flex rig count. Given current activity levels, we have sufficient capacity to minimize new maintenance capex expenditures. Therefore, we fully expect fiscal 2021 maintenance capex per active rig to be less than the low end of our previously guided range of $750,000 to $1 million per active rig. Further, in the same vein as the cost initiatives mentioned previously, we will also continue to harvest components from decommissioned rigs to conserve capital. These components will be utilized to the extent possible as parts and should lead to lower forward maintenance capital costs for our working fleet. The precipitous drop in drilling activity has resulted in the aforementioned rig releases And as John mentioned, the unfortunate reduction of our field and office workforce. Collectively, these downsizing decisions were difficult for the company and for our employees. Taken together, these cost reduction measures will allow us to meet the challenges of today's down cycle. As a result of these efforts, we incurred the restructuring charge of $15.5 million in the third quarter. We anticipate further restructuring costs in conjunction with our international operations in the months ahead. We are still estimating our annual effective tax rate to be in the range of 16 to 21%, and we do not anticipate incurring any significant additional cash tax related to the 2020 fiscal year. The difference in effective rate versus statutory rate is related to permanent book to tax differences, state and foreign income taxes, and the discrete tax adjustments recorded in Q3 that I mentioned earlier in this call. Now looking at our financial position. Helmer & Payne had cash and short-term investments of approximately $492 million in June 30 versus $382 million in March 31, 2020. Including our revolving credit facility availability, our liquidity was approximately $1.24 billion. We earned cash flow from operations in the third quarter of approximately $214 million versus $121 million in fiscal Q2. Please keep in mind that our accounts receivable as of June 30 included approximately $42 million of early termination revenue and approximately $51 million of income tax receivables. During the very first few days of July, we collected $24 million of early termination payments, and we expect to receive a $34 million tax refund before the end of this calendar year. Our debt to capital, a quarter end, was about 12% with a positive net cash position as our cash on hand exceeds our outstanding bond. Our debt metrics continue to be a best in class measurement amongst our peer group. We have no debt maturing until 2025 and our credit rating remains investment grade. We will continue to enhance cost management measures and right size the company to new activity levels. The efforts undertaken to date should generate sufficient cash on hand and free cash flow to cover our selling general administrative expenses, debt service costs, go forward lower maintenance capital expenditures, and recently reduced dividend. Our balance sheet strength and liquidity serve as the cornerstone upon which we have been able to endure for 100 years. They are a significant differentiator in this volatile and cyclical industry. That concludes our prepared comments for the third fiscal quarter. Now let me turn the call over to Tasha for questions.

Thank you. At this time, if you would like to ask a question, you may do so by pressing star then 1 on your touchtone phone. You may withdraw your question at any time by pressing the pound key. Once again, that is star 1 to ask a question. We'll take our first question from Ian McPherson with Simmons. Please go ahead.

Thanks. Good morning, gentlemen. Thanks for all the detail there. So we're in late July now, and it doesn't sound like we've seen much new contracting reemerge yet. So when we look at your visible quarter end or fiscal year end expected rig count, by what timeframe do we need to see more of an uptick in contracting to get comfort in that not fading lower again into your fiscal Q1? And how do you frame the upside downside on that based on the current outlook and current conversations with your customers?

Good morning, Ian. As we think about it, there's not a lot of activity ahead. As we said in our prepared remarks, the outlook for the rest of 2020, calendar 2020, continues to be pretty flat, I think. I think there will be some rigs going back to work. during the course of the year, but it's not going to be in a material way. And we're assuming that oil remains in a 40 range. I think if oil were to pull back, I think it's possible that we could see the rig count begin to slide again. But I think it's really hard to see any really material improvement in rig activity between now and the end of the calendar year. Because, again, budgets are set. Customers are being very disciplined in their approach to their budgets. I think one possibility would be in a stronger oil price environment in calendar 20 as we're readying or the customers are getting ready for their budget setting process. In a stronger oil price environment, maybe you could see some activity improvements on the very end of the calendar year, but Again, I think it's going to be pretty challenging, as we've said. I just don't see a lot of opportunity for a material improvement in rig count in 20.

Yeah, John, I appreciate that fully. I just thought maybe there would need to be a little bit more spot contracting just to kind of keep us flatter as opposed to dipping lower in the fourth quarter. You do still have some term coverage in the calendar fourth quarter, of course.

Right.

Yeah, there will be. Go ahead. Sorry, continue, sorry. No, go ahead. Well, my follow-up is really just, you know, the continuing migration towards performance contracting. How quickly do you think the old a la carte day rate model is changing? falling by the wayside and you know if you have a third of your fleet on auto slide now and an increasing proportion of your contracts into um integrated commercial performance based commercial models how what proportion of your contracts do you think go into that latter bucket as as the rig count migrates higher next year do you think it'll be um the majority of your contracts by some point next year on performance metrics?

I think that's probably, I think next year is probably being a bit aggressive because the industry does have a tendency to adopt change relatively slow. At the same time, like we said, we've seen an uptick in adoption of AutoSlide and other technologies. And we've also had, for the few additional contracts we have been successful in being awarded with, most of those are some sort of a performance base or a new type of commercial model. So there is that example. You know, again, as we said in our prepared remarks, combining all of these technology solutions with the FlexRig is really beneficial, and there are customers out there, both small and large, that have interest in it. The question is, as you said, is, well, how quickly can we get adoption? It's really hard to say, but I do think that we're going to continue to see And I think we will increase it as we go through 2021. Thank you, John. Thank you.

Thank you. We'll take our next question from Sean Mecham with JP Morgan. Please go ahead.

Thank you. Hi, John.

Hi, Sean.

So I appreciate all the details on how you're driving costs out of the business. That was definitely helpful. You know, Mark noted in his prepared comments that the goal of the cost reduction program and all of your efforts is to meet all of your obligations with free cash. And I guess I was just curious, same comments were made last call. You've now, you know, three months further into the process. How should we think about the normalized activity environment that's likely to required in order for you to do so. So at current levels, not really able to do that, still in a process of taking costs out. What's the type of environment that you think is required on a normalized basis where you see your cost structure such that you can meet those obligations including the dividend?

That's a great question, Sean. And if you look at the costs we've been able to pull out, I think that as we have, you know, Sometime in our planning horizon, whether it's 2021 or 2022, and an ad back of rigs, depending certainly on the COVID pandemic situation and the resultant demand effects. You know, you don't really have to add a ton of working rigs back to H&P to get to an EBITDA that will cover what I believe will still be for some time a sustained lower maintenance capex level. You can just run the math on those incremental rigs, and it doesn't take the 190 that we just had, put it that way.

Right. Okay. Fair enough. And then a lot of talk on this call, as has been the case for several quarters, around deploying technology as a point of differentiation. I guess I would like to get your thoughts around strategy on the medium and long term We've been arguing for some time that technology is the cost of admission, that in order for you to get your hardware to work, you've got to deploy software to create some point of differentiation. But in the long run, best practices get adopted such that it's hard to create any sustainable competitive advantages. Can you maybe just talk a little bit about how you see the efforts here with Autoslide, among the others, that you're really focused on in terms of their ability to create sustained competitive advantages versus the alternative, which is that over time they get competed away in still a fairly competitive U.S. land drilling market.

Yeah, Sean, that's, again, another good question. But I do think it's a – price of admission, but I also believe that not all technologies are created equal. And you see that in other industries as well. I do think that the ability to automate more of the manual processes, you've heard me say before, replacing humans with software making more of a science and less of an art. I don't know that there's that many players that really have that capability today, and then particularly as you start thinking about leveraging that across a much larger working fleet because the differences in the rig platforms. So, you know, there's no doubt the adoption is gaining momentum, traction and we've had, you know, customers make comments to us that, you know, auto slide and motive are, they're seeing that as standard equipment. And as they pick up rigs in the future, that that's the technology that they're going to, that they're going to utilize. So, um, I hear, I hear what you're saying. I think it's, it's one of those that, um, um, there's, there's going to be a lot of different solutions. Obviously we believe our solution is, uh, is, is the best and, and will, be stronger. At the end of the day, it's going to come down to, and again, another reason for the segment change is that in order to be successful with these technologies, you also have to be aligned very closely with the rig fleet. So rather than, you know, just having a focus on a technology and a discrete technology or a discrete product, we're combining all of that together. And you've got to have a certain amount of expertise, both on the technology side and the rig side. So I know it's not a direct answer to your question. I do think that we're in a competitive position, a strong position, and we'll be able to continue to distance ourselves.

Those are all fair points. Thanks, John.

Thank you. We'll take our next question from Tommy Moll with Stevens. Please go ahead.

Good morning, and thank you for taking my questions.

Morning, Tommy.

John, in the earlier days of AutoSlide, you framed up the opportunity that H&P was going after in terms of the potential to demand the rig site and then how that substantial spend could be split between, for example, you and your customer. As you think about other opportunities to apply technology to the drilling process, are there any big buckets that you could call out for us that maybe, as of today, there's not a solution but there's one in the pipeline? And I'm thinking about a couple new types of technology. You've rolled out AutoStand and autonomous geosteering. I'd be interested for an update on those, but also more just curious about what are the big opportunities that are still out there?

Yeah, well, you obviously mentioned a couple. AutoSlide, AutoStand is really building further to the capability of AutoSlide. We'll be talking more about that in the future. Some of that development has slowed a little bit as a result of customers that we were partnering with that rig counts went down or almost really went to zero. So we've had to work and address, get some additional partners, which we have done and which we're making progress on. I think one of the areas that we're seeing interest in from customers, and I think that's what's most important is having customers that are you know, willing to work with you on this because, I mean, at the end of the day, it's their well, it's their wellbore. They're the one that's going to be living with that, you know, well for the next 10 or 15 years. But auto geo-steering is a great example of one of the alpha and beta development modes that we have going on right now with customers and We're making a lot of progress there. Again, it's been delayed a little bit because of the downturn, but I think in the next few quarters we'll have a commercial offering. But that is obviously significantly different than what a drilling provider would typically be engaged with a customer on. And so to me it's one of those, again, as you look at our – shift to to new commercial models as well as um the segment and the north america's solutions is that we're providing solutions to customers that are that are different than what historically a drilling provider would uh would provide so i think i think we've got a lot of a lot of opportunity uh ahead with those again we've got customers that are willing to work with us um We'll have more case studies that we'll be rolling out in the coming quarters as well that I think will be helpful.

Okay. Thank you. We'll stay tuned for updates. Shifting to market share, it looks like your share of the active rigs in the lower 48 may have dipped a bit in recent months. So I wondered if you could talk about some of the key drivers there and to the extent they relate to the to the type of customer you have been working for that maybe adjusted activity faster than the overall market. As you peer forward toward the next cycle, do you envision your customer base evolving at all, or do you think it'll still look similar to like it did in the last cycle in terms of the mix of, say, public versus private and the size of the customers that you've tended to work for, noting that you work for all of the above, but just high level, do you see your customer strategy shifting at all?

Well, Tommy, you know, I look at our customer base at the peaks of activity in 2008 and 2014 and then again in 2019, first of 2020. And we did a great job in really transitioning and broadening our customer base. I mean, we work for, you know, really every size of operator out there. And, again, our team has done a great job in doing that and expanding our scope. You know, when you look at the market share, obviously we've all seen it. A lot of the rigs, it's just been an indiscriminate reduction in rig count, sharpest decline in modern history, but that impacts everybody. I think probably the best way to describe it as I look at what's happened on our market share and the share that we've lost, the best thing to do, I think, is to look at the rig count trackers that come out every week. There are several different, and I'm sure you've seen those, and And it's really, you know, the sharp drop that we've seen is very broad, and it's across all customers. But if you look at the overall reduction, it's been about 65%. And if you look at our top 12 to 15 customers, you know, it's more like 75% reduction in activity. And we even have a few customers that are 85 to close to 100% of their working active fleet went down, and we had, you know, 50 to 75 percent of that, of their working fleet. So it's had a really large impact on us. I do think that as we go forward, again, I look at our customer base, and, you know, we've, we had a strong customer base in March, and we have a strong customer base today, and we're expanding our I think, abilities and capabilities and working more closely with customers with these new models. And I just think it's going to continue to help us expand our customer base. I feel real good about that.

Thank you, John. That's all from me. Thanks, Tommy.

Thank you. We'll take our next question from Jeffrey Campbell with TUI Brothers. Please go ahead.

Good afternoon, and thanks for taking my questions. John, HP moving to a solutions model strikes me as potentially putting it into more direct competition with major service providers, which for a long time have argued that they should be paid according to increased production that they generate versus comparable averages. So I was kind of wondering two things if we accept that premise. One, I wondered if you thought that the service history of being solutions-based might actually help HP NAM solutions as it tries to move customers to the performance contracts? And B, will HP have to compete with the service providers in certain instances for credit it deserves on the wells it drills? Or will you keep any competitive solutions off of the HP rigs?

That's a good question, Jeffrey. I don't see us necessarily competing. Actually, there are a few examples where we're partnering with the major service companies, and we have over time. But I do think that we're expanding offerings, and maybe there are some examples where we would be competing head-to-head, but I can't think of any particularly right now that come to mind for me. I do think it's important that we keep working on these solutions. Clearly, the major service providers are pushing technology as well. I guess the whole industry is, and so I don't see us competing. Mark, do you have any thoughts on that? Any other questions?

Well, yeah, and I'll just, not to beat it to death here, we can talk offline, but I was specifically thinking of the Halliburton directional drilling tool that they are starting to talk about in their releases. And National Oil Barco seems to have one where they're kind of trying to play both sides of the field. They are working with human directional drillers, but they seem to be gradually automating the amount of the jobs. My other question was kind of sticking with the tech. I was wondering the extent to which you believe that the solutions in the NAM solution suite can become a draw for the international business that you hope to expand over time. Thanks.

Yes, there are some significant opportunities there. We've seen several both in South America as well as the Middle East, both NOCs and IOCs that have interest in auto slide that have, in fact, we have both DrillScan as well as MagBar working. And so I do think there's going to continue to be a pull through into international markets. And, you know, again, we believe that there's even the potential to have the technologies pull the rig solution through as well. So we do see that as an opportunity as international markets start to get more active.

We'll keep an eye on that progression. Thank you. Thank you.

Thank you. We'll take our next question from Taylor Zurcher with Tudor Pickering and Holtz. Please go ahead.

Hey, thank you and good morning. Mark or John, you talked in the prepared remarks about how your CapEx program for 2020, I think, was a bit front end loaded and you spent some extra dollars in the front end of the year for bulk purchases. And as a consequence, the maintenance CapEx levels for 2021 will be lower. And I'm curious if you could just frame for us how much longer that lower level maintenance capex, at least on a per-rig basis, is sustainable? Is the inventory there just for 2021 at these sort of activity levels, or does it extend beyond that?

Good morning. Thanks for the question. The bulk purchase activity actually happened in 2018 and primarily in fiscal 2019. super spec rigs working, and the super spec was quite different than its predecessor in that it was working a lot harder. There's a lot more strain on the various components, and there's extra equipment needed to be able to rotate componentry through the system. For example, a super spec rig had three pumps as opposed to two, et cetera, et cetera. So we had to buy bulk purchases, so to speak, to get the spares levels up. You know, we recertify much of our own equipment ourselves at our flex rig machinery center here in Tulsa, which allows us to have such significant uptime on our rigs. So we got through all of that and got scaled up for a 200-plus size rig count, as I mentioned in the prepared remarks. So now that we're down at these current levels, we could last some time with the capacity we have on hand. And that does not even count the 37 decommissioned rigs from the impairment that we discussed in April. So quite a bit, I think, of runway at these levels.

Okay, that's helpful. My follow-up is on some of these performance-based contract models. It seems like every quarter you seem to gain more customer traction, even in a declining market. And so I'm curious, as the market sort of evolves around these contract structures, at least with your customers, in recent quarters. Is there any one model that the market seems to be gravitating towards? And as a lot of your customers have gone from 10, 20, 30-plus rigs down to a really bare-bones level of activity today, have any of the KPIs in these sorts of contracts changed at all in recent quarters? And is there any way you could frame for us how to think about where the base day rate is for these sorts of contract models right now or moving forward?

Well, we purposely are avoiding the day rate and the day rate comparison because, again, we're providing a different solution than what we have previously. I would say that probably the performance-based type contract has been most popular. But again, like we have mentioned, Every customer is different, and the things that they're targeting and that they're looking at in many cases are different. And those are the areas that we're focusing on. And then that also presents us an opportunity to begin to develop and work on other areas that maybe there's not as much of a focus on at that particular time. So, you know, every customer is a little bit different. You know, our teams are working differently. really hard and very closely with our customers to form even closer partnerships than what we've had in the past. Again, I've got to give a big shout out to the success that they've had and the way that they've been working, particularly virtually. We continue to have ongoing conversations with customers and technology reviews, and we're doing those remotely, virtually on video calls and we're able to demonstrate that technology. So it's pretty cool to see that. But I do think we're going to continue to see more adoption as we move forward, and we'll keep you posted. All right, thank you. Thank you.

Thank you. We'll take our next question from Waqar Syed with ATV Capital. Please go ahead.

Thank you for taking my question. To the extent that you can answer, when do you expect your margins to kind of bottom in the North America drilling services business?

Well, that's a good morning. That's a we would hope now, but that's a little bit of a clouded crystal ball. And some of that's going to depend on, you know, as we mentioned in prepared remarks, how we shuffle between customers keeping rigs working or moving them to idle but contracted, so they're on the lower warm or cold stack rate, for example. It's really hard to say definitively.

But you see prospects excluding... Let's say the $50 million early termination revenues, the margin may have bottomed. Is that what you're saying in this quarter, June quarter?

Again, it's just hard for us to say definitively. It's going to depend so much on what happens with the broader environment and the rig count and the mix of the rig count between active and idle, but contracted.

Okay. And then just to clarify, the international rig count for the September quarter, did you say it's going to be around six active rigs? Did I hear that correctly?

That's correct, five in the Middle East and the one super spec working in Argentina.

Argentina, okay. And then where do we go from here? What's kind of, you know, any thoughts where we could be maybe six, eight months, you know, now?

I wish I did. John's smiling as well. I think it's just a clouded crystal ball of a car. What would you say?

If I knew the answer, I wouldn't be asking you. Fair enough.

We're sure hoping 2021 is going to be better, but it's, you know, again, there's You know, tell me what oil prices, where oil prices are going to be. That would help.

Well, if oil prices, you know, for the next, let's say, 12 months are around, you know, current level, maybe 40, 45, something in that range.

Yeah, I think in that case, we have an improving rig count in 2021. It's hard to say what that would be. I mean, let's face it, we've got a budget season ahead of us. and our customers will be setting their budgets, and that's what's going to be the driver. That's really the only way that we're going to be able to figure that out.

Now, the OPEC Plus reductions have not had any impact on your Middle Eastern rig count?

No. We've been unaffected there, and as we've discussed in prior quarters, we still believe that the Middle East is a You know, following the COVID pandemic resolution through time is a great area of opportunity for homework and pain.

Right. Okay. Thanks. That's all I have.

Thank you, Akar.

Thank you. And it appears we are out of time for questions. I'd like to turn the call back to John Lindsay for closing remarks.

Okay. Thanks, Tasha. Just close up by saying as a result of COVID-19, the industry's experienced perhaps the sharpest decline in activity and most extreme oil price volatility in modern times. It is very difficult to estimate the full extent the pandemic will have on our industry, let alone the magnitude or timing of recovery. It's worth repeating that I'm very proud of our people. and their perseverance that they've had in this time of challenge and the uncertainty, and they've acted decisively to protect the safety and health of our employees, customers, and stakeholders. And when I think about safety and health of H&P employees, I will always think about Warren Hubler. Warren is our VP of HS&E and a champion for safety at H&P for 30 years. Warren will be retiring soon, and I want to thank him for his contribution. Warren's been a driving force and a passion for safety, and that has really extended past H&P. He's been a huge industry advocate for safety. He's touched many lives, and with his engaging speeches and his calls to action, his lasting legacy will be his actively carrying contributions to health, safety, and environmental stewardship in the energy industry. And, of course, he's mentored many at H&P. So please join me in congratulating Warren and sending our best wishes to him and his wife, Meg. And, Tasha, that's all that we have for today. Thanks, everybody, for joining us.

Thank you. This does conclude today's program. You may now disconnect your lines and have a wonderful day.