Helmerich & Payne, Inc.

Welcome everyone to Hamilton Payne's conference call and webcast for the fourth quarter and fiscal year ended 2021. With us today are John Lindsay, President and CEO, Mark and Mark Smith, Senior Vice President and CFO, and John Bell, Senior Vice President, International and Offshore Operations. John Lindsay and Mark will be sharing some comments with us, after which we'll open the call for questions. Before we begin our prepared remarks, I'll remind everyone that this call will include forward-looking statements as defined under the securities laws. Such statements are based upon current information and management's expectations as of this date and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict. As such, our 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 any 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'll find the GAAP reconciliation comments and calculations in yesterday's press release. With that said, I'll turn the call over to John Lindsay.

Thank you, Dave. Good morning, everyone, and thank you for joining us today. I'm excited to be in Abu Dhabi this week, having just participated in the ADAPAC Conference, which has provided a unique occasion to meet face-to-face with colleagues, customers, and, of course, our strong partner, ADNOC Drilling. Also joining Mark and me today in Abu Dhabi is John Bell, Senior Vice President, International and Offshore Operations, and he'll be available for international and ADNOC-specific questions. Before getting into our traditional discussion topics, I wanted to first mention that ADAPEC, which is a global energy conference in Abu Dhabi, And this week, there was over 150,000 attendees, 33 energy ministers, and representatives from over 50 energy companies. I've been impressed with the focus on ESG and especially the discussions of the impacts on energy security for the globe. In addition to industry leaders sharing their focus on sustainability and ESG, There were also leaders of countries from around the globe that were present to give their perspectives on the energy transition and the importance of ongoing investments to ensure a smooth transition. Dr. Sultan Al-Jaber, the ADNOT Group CEO and UAE Minister of Industry and Advanced Technology, gave a very compelling speech at ADAPEC's opening ceremony. He started with a reminder that energy transitions take multiple decades. And I quote, rewiring the energy system is a multi-trillion dollar business opportunity that is good for humanity and good for economic growth. He also had a call to action stating what the world really needs is to hold back emissions, not progress. Let us together drive that progress. Let us always keep in mind our industry must play a pivotal role in the energy transition. We have the knowledge, the skills, and the people to make a difference in our world. Now that statement really resonates with me. Working with our customers to reduce emissions and our collective environmental footprint is a major area of focus for us here at H&P. The strategic alliance we signed with ADNOC is a great opportunity to deliver rig technology through the sale of eight high-spec H&P FlexRigs, as well as to make a significant $100 million investment in their initial public offering. ADNOC has a 2030 oil production target of 5 million barrels per day and a goal to achieve natural gas independence. We believe H&P can make significant contributions towards helping ADNOC achieve those goals through this new partnership, while also providing additional opportunities for us to expand in this pivotal and growing energy region. We're delighted with the reception H&P has received this week and we want to thank the ADNOC team for their hospitality. Looking at the rest of our international activity, historically we've experienced a lag compared to the US, so we are expecting activity to improve in these markets in the coming quarters. A recent example is a couple of new agreements with YPF, as we will put four rigs back to work under term contracts in Argentina during fiscal 2022. We continue to pursue other international opportunities and look forward to improving activity. Shifting to North America's solutions, it is hard to believe that a year ago, H&P had only 80 active rigs running, and today we have 141 active flex rigs. The response of our people and their leadership through the pandemic has been nothing short of amazing. Particularly impressive is their service attitude in responding to customers as rig demand has been recovering. Our folks are resilient and deliver on safety, efficiency, and reliability for our customers each and every day. We expected that the rig activity increases would be more measured during our fourth fiscal quarter as we realized more rapid rig churn among customers who are sticking to their disciplined spending plans. Given that, we were pleased with the 5% incremental rig count increase experienced during the quarter and are even more optimistic as we look ahead to the fourth calendar quarter, where we expect to see our rig count increase sequentially and at a higher pace as E&Ps reset their annual capital budgets. We believe our customers will remain disciplined, and similar to 2021, the budgets for 2022 will be adhered to, but the new budgets will be reset at higher levels based on a higher commodity price environment meaning more active rigs in 2022. As evidenced by our rig count growth to date, we expect the rig count will have a significant increase in calendar Q4 of 21 and Q1 of 2022. As mentioned, our U.S. land rig count stands at 141 rigs today, up from 127 at September 30, our fiscal year end. And we expect to add roughly another 10 to 15 rigs by year end of calendar 2021. To summarize North America solutions, during calendar fourth quarter, we expect to add 25 to 30 rigs. To put that in perspective, this is approximately the same number of rigs we added in the preceding nine months. Further, we are also readying several more rigs during the first fiscal quarter that we expect to commence work in the first half of January. This activity increase is exciting as our customers are investing in their calendar 2022 budgets. It does, however, cause near-term margin compression due to the one-time expenses incurred for reactivation. Mark will discuss the details more in a moment, and I'll add that we are pleased with the future cash generation these rigs will have post-reactivation as we return to greater scale operations, driving both pricing higher and leveraging our fixed costs. Given the well-publicized challenges in what we hope is finally a post-pandemic environment, It's not surprising to see rig reactivation and field labor costs increasing. All of the SuperSpec rigs that are available to work today have been idle for well over a year, which equates to higher startup costs. Competition for quality people is also escalating, and we will be increasing field labor wages accordingly. And as a reminder, those cost increases are passed through to the customer. The tightening supply of readily available rigs, coupled with these cost increases, have already begun to move contract pricing upward in the market. Based upon what we are experiencing today, we expect price increases will become even more pronounced in the coming months as rig demand picks up heading into 2022. Mark will talk about our strong balance sheet in his remarks, but I wanted to mention one of our goals was to generate free cash flow And we are encouraged that we believe that is achievable in the back half of 2022 with the rig count and revenue expectations we have. These market conditions demonstrate further potential for H&P's new commercial models and digital technology solutions. Our digital technology solutions deliver value through improved efficiencies, reliability, lower costs, and better overall outcomes. Today, approximately 35% of our FlexRigs are on performance contracts, and several customers are experiencing the powerful synergies a combination of performance contracts and digital technology can deliver. Adoption continues to improve and is driving economic returns higher, not only for our customers, but for ourselves as well. In closing, we are encouraged heading into 2022. and fully expect that the demand for H&P's drilling solutions will continue. E&P capital discipline, rising commodity prices, and a collective vision to play our crucial role in a smooth energy transition will strengthen the industry. There are still many challenges, but I'm confident that our people and solutions have the company well positioned to deliver value for customers and shareholders in this improving environment. And now I'll turn the call over to Mark.

Thanks, John. Today I will review our fiscal fourth quarter and full year 2021 operating results, provide guidance for the first quarter and full fiscal year 2022 as appropriate, and comment on our financial position. Let me start with highlights for the recently completed fourth quarter and fiscal year ended September 30, 2021. The company generated quarterly revenues of $344 million versus $332 million in the previous quarter. The increase in revenue corresponds to a modest increase in our recount during the quarter. Correspondingly, total direct operating costs incurred were $269 million for the fourth quarter versus $257 million for the previous quarter. During the fourth quarter, we closed on two transactions with Ad Knock Drilling. First, H&P sold eight flex rig land rigs, including two already in Abu Dhabi and six from the United States for delivery during 2022. Consideration received for this sale was $86.5 million, and any gains above book values together with required investments to prepare and deliver the rigs will be recognized as each rig is delivered. Second, H&P made a $100 million investment in Ad Knock during drilling in conjunction with its initial public offering in early October. General and administrative expenses totaled $52 million for the fourth quarter, higher than our previous guidance due primarily to professional services fees associated with the ad-hoc transactions and our ongoing cost management efforts, as well as increases to the short-term incentive bonus plan accrual to reflect full fiscal year operating results. On September 27th, we issued $550 million in unsecured senior note bonds to refinance our $487 million outstanding bonds that were due in May 2025. Our new issuance came at a coupon of 2.9% and a 10-year tenor maturing in September 2031. The additional debt of about $63 million funded the make-hold provision and accrued interest for the call of the existing bonds, as well as an associated transaction cost. This made the transaction and subsequent debt extinguishment in October liquidity neutral. Also, note that the makeable premium in accrued interest will be recognized in the first fiscal quarter 2022 concurrently with the October 27 redemption. Our key for effective tax rate was approximately 24% in line with our previous guidance. To summarize fourth quarter's results, H&P incurred a loss of $0.74 per diluted share versus a loss of $0.52 in the previous quarter. Earnings per share were negatively impacted by a net $0.12 per share loss of select items, which are primarily made up of noncash impairments for fair market value adjustments to equipment that is held for sale, as highlighted in our press release. Absent these select items, adjusted diluted loss per share was $0.62 in the fourth fiscal quarter compared with an adjusted $0.57 loss during the third fiscal quarter. For fiscal 2021 as a whole, we incurred a loss of $3.04 per diluted share. Again, this was driven largely by the noncash impairments to fair value for decommissioned raking equipment, the majority of which were previously impaired and are held for sale. Collectively, these select items constituted a loss of $0.44 per diluted share. Absent these items, fiscal 2021 adjusted losses were $2.60 per diluted share. Capital expenditures for fiscal 2021 totaled $82 million below our previous guidance due to the timing of supply chain spending that crossed into fiscal 2022. Relative to our original guidance range of $85 to $105 million, The variance was primarily driven by a delay in the start of planned IT infrastructure spending that we have previously discussed. Most of that planned IT spend will now be incurred in fiscal 22. H&P generated $136 million in operating cash flow during fiscal 2021. Considering the pro forma impact of our recent debt refinancing, the collective cash and short-term investments balances decreased minimally by $7 million year over year due in part to working capital improvements achieved during fiscal 2021, as well as asset sales. I will discuss in more detail later in my prepared remarks. Turning to our three segments, beginning with the North America Solutions segment. We averaged 124 contracted rigs during the fourth quarter, up from an average of 119 rigs in fiscal Q3. We exited the fourth fiscal quarter with 127 contracted rigs. Revenues were sequentially higher by $12 million due to the aforementioned activity increase. North America Solutions operating expenses increased $18 million sequentially in the fourth quarter, primarily due to the addition of six rigs, as well as a higher material and supplies expense. Throughout fiscal 2021, we prudently managed our expenses and inventory levels using previously expensed consumable inventory harvested during stacking activities in calendar 2020, rather than utilizing fully costed inventory or purchasing new inventory. As reactivity increased, our level of previously expensed inventory, or what we have been referring to internally as quote unquote penny stock, has been exhausted, resulting in the issuance of higher cost inventory, and the purchasing of additional inventory to replenish stock levels. Replenishments go on the balance sheet. Through fiscal 2021, we did not experience inflation in our costs. However, we are anticipating inflationary pressures moving forward, which I will touch on in a moment. Additionally, as I will expand on later, we put six rigs to work in the first half of October. the first fiscal quarter of 2022, but the reactivation costs were primarily incurred in fiscal 2021. The one-time reactivation expenses associated with all of those regs was $6.6 million in fiscal Q4. Now looking ahead to the first quarter of fiscal 2022 for North America Solutions. As expected, recount growth was moderate during the fourth fiscal quarter. Publicly traded customers continue to operate within their calendar year budget plans, which are currently being reset for calendar 2022, in an oil and gas commodity environment that is significantly more robust than this time last year. Accordingly, we expect to see sizable spending increases, especially with our public company customers, during the first fiscal quarter of 2022. As of today's call, we have 141 rigs contracted, and we expect to end our first fiscal quarter with between 152 and 157 working rigs, with current line of sight for a few additional rigs turning to the right in early January. In the North America Solutions segment, we expect gross margins to range between $75 to $85 million, inclusive of the effect of about $15 million in reactivation costs. As I mentioned last quarter, there is a positive correlation between the length of time a rig has been idle, and the cost required to reactivate it. Most of the costs we are reactivating, most of the rigs we are reactivating in the first quarter have been idle for 18 plus months. Reactivation costs are mostly incurred in the quarter of startups, so the absence of such cost in future quarters is margin accretive. As John mentioned, we are expecting to achieve higher pricing in light of higher demand and tight, ready-to-work super spec supply. I will now pause to comment on inflationary considerations ahead for fiscal 2022. We have seen increases in commodity pricing, such as for steel. Products reflecting upward pricing due to this pressure include capital items such as drill pipe. Note that our upcoming capital expenditure guidance is inclusive of such pricing increases. For margin-related expenditures, I will touch on two items. First, maintenance and supplies pricing is increasing across some categories, such as oil-based products like lubricants and steel-based products like fluid ends. Second, as John discussed, we are increasing field labor rates to respond to market conditions and assist in talent retention and attraction. Further, our contracts are structured to pass through labor price increases over a 5% threshold. Therefore, significant labor increases are margin neutral due to contractual protections. Our margin guidance is inclusive of our expectations for inflation in the first fiscal quarter. As it relates to supply chain access to parts and materials to run our business, we are in constant communication with our suppliers and have placed advanced orders for certain higher-risk categories. Our proactive approach to inventory planning, coupled with our scale and healthy vendor-partner relationships, provides reasonable assurance that supply chain issues as we see them today will not materially impact our business. We will continue to engage our suppliers and partners to stay ready to adjust as developments unfold. Subsequent to September 30, 2021, we sold two peripheral service lines, which provided rig move trucking and casing running tool services to a portion of our North America segment customers. These business lines were largely margin neutral to H&P, having collective revenues in the fourth quarter and full fiscal year of 2021 of $10 million and $34 million, respectively. To conclude comments on the North America segment, our current revenue backlog from our North America solutions fleet is roughly $430 million. Regarding our international solutions segment, international business activity increased by one rig in Argentina to six active rigs during the fourth fiscal quarter. As we look to the First fiscal quarter of 2022 for International, activity in Bahrain is holding steady with the three rigs working, and we expect to go from three to four rigs working in Argentina, as well as get the contracted Columbia rig turning to the right. Note that three of the YPF rigs John mentioned earlier will commence work in subsequent FY22 quarters in Argentina. Turning to our offshore Gulf of Mexico segment, we continue to have four of our seven offshore platform rigs contracted, Offshore generated a gross margin of $8 million during this quarter, which was within our guided range. As we look to the first quarter of fiscal 2022 for offshore, we expect that the segment will generate between 6 to 8 million of operating gross margin. Now, let me look forward to the first fiscal quarter and full fiscal year 2022 for certain consolidated and corporate items. As we increase our recount, capital expenditures for the full fiscal 2022 year are expected to range between $250 to $270 million. This capital outlay is comprised of three buckets similar to fiscal 2021. First, maintenance capex to support our active rig fleet will be approximately 50% of the total FY22 capex. In fiscal 2019, we had bulk purchases in capex to scale up rotating componentry for a then 200-plus working superspec flex rate count In addition, we harvested components from previously impaired and decommissioned rigs to conserve capital. As such, we were able to utilize resources on hand and preserve capital in 2021. But now we have reached the end of those inventories and we are needing to recommence a regular cadence of component equipment overhauls and drill pipe purchases. This, coupled with the sharp activity increase we are experiencing, is driving our fiscal 2022 maintenance capex back into our historical range of between $750,000 to $1 million per active rig per annum in the North America Solutions segment. Second, skidding to walking capability conversions will approximate 35% of the fiscal 2022 capex. Although our peers have walking rigs available in the market, Select customers prefer certain rig design elements and commit to a conversion. For customers that need walking rigs, we will invest to convert certain rigs from skidding to walking pad capability in exchange for a term contract that will enable the new investment, which we currently estimate is $6.5 to $7.5 million per conversion. Third, corporate capital investments will be about 15% of fiscal 2022 capbacks. Over half of this bucket is comprised of modernization for data-centered data and analytics platforms and enterprise IT systems, most of which has moved from fiscal 2021 to fiscal 2022, and will improve our infrastructure and cybersecurity posture. Portions of the balance of this corporate capital investment are for power solutions capital associated with ESG research and development efforts, and for certain real estate matters. As part of the ADNOC sale transaction mentioned earlier, we will deliver the eight rigs to ADNOC throughout the year of 2022. The sale proceeds of 86.5 million were received in September 2021 and are included in accrued liabilities on our balance sheet. In addition to the capital expenditures just described above, we will spend approximately $25 million in cash to prepare and deliver the rigs to ADNOC. When we incur these expenses, they, together with the net book values, which, among other assets, are classified in assets held for sale, will collectively represent the accounting basis in the rigs for the purpose of determining gains to be recognized in the upcoming quarters upon each delivery. Depreciation for fiscal 2022 is expected to be approximately $405 million. Our general and administrative expenses for the full 2022 year are expected to be approximately $170 million, which is roughly consistent with the year just completed. Fiscal 2022 SG&A will be partly front-loaded in the first fiscal quarter due to short-term incentive compensation payments for fiscal year 2021 results and the timing of certain professional services fees. Specifically, we expect $45 to $85 million in Q1, with the remainder spread proportionally over the final three quarters. Our investment in research and development is largely focused on autonomous drilling, wellbore quality, and ESG initiatives, and we anticipate these innovation efforts to yield further enhancements and solutions offerings on our technology roadmap. We anticipate R&D expenditures to be approximately $25 million in fiscal 2022. We are expecting an effective income tax rate range of 18% to 24% for fiscal 2022. In addition to the US statutory rate of 21%, incremental state and foreign income taxes also impact our provision. Based upon estimated fiscal 2022 operating results and CapEx, we are forecasting another decrease to our deferred tax liability. Additionally, we are expecting cash tax in the range of $5 to $20 million. Now looking at our financial position. Humber Campaign had cash and short-term investments of approximately $1.1 billion in September 30, 2021. When considering the aforementioned 2025 bond repayment and make-hold premium that occurred in October, the pro forma cash and short-term equivalents of September 30, 2021 were $570 million, sequentially compared to $558 million at June 30, 2021. including availability under our revolving credit facility, but excluding the $546 million 2025 bond extinguishment amount. Our liquidity was approximately $1.3 billion, commensurate to the prior quarter. Our debt-to-capital at quarter end was temporarily at 26%, given the debt overlap at the September 30 balance sheet date. Accounting for the repayment of the 2025 bond, however, per form of debt-to-capital adjusts down to 16%. Our working capital stewardship since the March 2020 downturn resulted in cash accretion. As we look forward towards the end of fiscal 22, we do expect to consume a modest amount of cash given the one-time recommissioning expenses together with net working capital increase as our rig activity climbs. Fiscal Q1 will experience lower cash flow from operations in the following quarters due to the rig ramp-up and the seasonal cash expenditures for incentive compensation, property taxes, et cetera. We do expect to end the fiscal year with between $475 to $525 million of cash on hand and $25 to $75 million of net debt. In summary, we are expecting to generate free cash flow that, when combined with the modest uses of cash on hand early in the fiscal year, will cover our capital expenditure plan, debt service cost, and dividends in fiscal 22. The growth in rig count early in the fiscal year provides a platform for cash generation in the second half of the year that, pointing forward, fully covers our cash uses, including our dividend, and sets the stage for further cash accretion. Our balance sheet strength, liquidity level, and term contract backlog provide H&P the flexibility to adapt to market conditions, take advantage of attractive opportunities, and maintain our long practice of returning capital to shareholders. That concludes our prepared comments for the fourth fiscal quarter. Let me now turn the call back over to Brittany for questions.