Helmerich & Payne, Inc.

Good day, everyone, and welcome to today's Helmer & Payne's Fiscal Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing star 1 on your touch-tone phone. Please note this call is being recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn today's call over to Dave Wilson. Please go ahead.

Thank you, Ashley, and welcome everyone to Humber Companions Conference Call and Webcast for the second quarter of fiscal year 2023. With us today are John Lindsay, President and CEO, and Mark Smith, Senior Vice President and CFO. Both John 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 on 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 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, direct margin, and other operating statistics. You'll find the gap reconciliation comments and calculations in yesterday's press release. With that said, I'll turn the call over to John Lindy.

Thank you, Dave. Good morning, everyone, and thank you again for joining us today. H&P delivered another outstanding quarter and executed on several strategic objectives. On our Q2 earnings call last year, we announced a goal to achieve direct margins of 50% in our North America solution segment, as the pathway to generating an annualized return above our cost of capital. I'm pleased to report that we have achieved that margin goal with the second fiscal quarter results. Reaching this milestone enabled us to realize annualized mid-teens return on invested capital this fiscal year, which is the first time we have achieved a double-digit return since the 2014 up cycle. Our focus now turns to maintaining this progress in a challenging market environment. Our super spec flex rig utilization remains high, and we are committed to this level of financial return to maintain economically sustainable operations, which is in the best interest of all our stakeholders. Political and economic uncertainty has plagued the global crude oil market over the past few quarters, and the US natural gas market has been particularly weak due to excess supply following a relatively warm winter and offline LNG takeaway capacity, both of which should be short-term transitory issues. Still, volatility in both commodity markets seems to have fostered an atmosphere of pessimism surrounding the industry. which we believe is a short-term challenge and could reverse itself over the second half of 2023. It is during times like these that it's good to remind ourselves how critical abundant, cost-effective, and secure energy is to sustaining security and the broader global economy. We remain optimistic about the long-term energy fundamentals which favor a growing global demand for natural gas as a more environmentally friendly energy source in the future. And that will require more drilling to meet supply needs. Nonetheless, softness in natural gas pricing in the U.S. has had a dampening effect on current rig activity and is contributing to an increased level of contractual churn in the market, not only in terms of number of rigs, but also the increased idle time between contracts. portion of this softening activity can also be attributable to our customers fiscal prudence with regard to budgets and the return focus they are pursuing these factors in combination with our focus on pricing in order to preserve a return profile that aligns with our cost of capital is partially responsible for the reduction in our active rig count exiting the March quarter and and necessitates a lower reset of our forward rig count projections. As we talk with some investors, they voice concerns about a pending downturn due to idle rig capacity and the historical results related to pricing. My experience over the past two decades indicates that it isn't unusual to see rig count volatility within an upcycle. I don't ever recall an upcycle that was straight up and to the right. Additionally, super spec rig effective utilization is above 90%, which historically has created a favorable pricing environment for us. To add some color to our activity decline, a majority of it is stemming from the weakness in natural gas prices. And it's important to remember that lowering our rates would not have kept those rigs working regardless. Now, there were a handful of rigs that were released overpricing, but those were in the and there were about the same number that were released in the normal churn as customers were done with the rig line, mostly related to budgetary reasons. We expect this lowland activity to be short-term and should correct itself over time. While much of the recent turbulence in rig activity has been related to natural gas, we also remain optimistic about the longer-term fundamentals for crude oil and believe it will be a persistent driver for rig demand. With nearly 80% of the U.S. land rigs directed towards crude oil drilling and with current prices above the $70 per barrel range, our expectation is there should be strength in the oil drilling market. With the current outlook from many of our customers, we expect an improving rig count in the second half of the calendar year And like the last three years, we expect a buying season in calendar Q4. In addition to rig activity and pricing, managing costs and achieving higher levels of drilling performance also impact our ultimate returns. By investing in the FlexRig fleet, technology, people, and processes, we are able to consistently deliver the outcomes our customers desire. We continue to develop new commercial models that not only remunerate us for the value we create, but also expand collaborative efforts between H&P and its customers. This has not happened overnight. As we began developing the new commercial model construct in 2019, and today, 45% of our rigs are using some form of a performance-based contract. H&P has spent the last 20 years investing in the FlexRig fleet to drive improving well cycle performance and reliability for customers. These investments over the last five years have focused on converting the fleet to super spec capacity, which is now at 231 rigs in the US. In addition, we invested in multiple software technologies that are helping us to drive rig automation, as well as more accurately placed and higher quality wellbores. Let me provide some examples of the performance improvements and lateral length increases since 2014. The average well depth drilled by FlexRix has increased by 5,000 feet to over 20,000 feet, with the average lateral doubling to over 10,000 feet. Simultaneously, while drilling longer laterals, Working with our customers, we have also reduced well cycle times by roughly 25% from 22 days to an average of 16 days per well. These well cycle time improvements mean rigs are working more efficiently, but it also means rigs are working harder. And this translates into higher costs for expendables, maintenance, capital, and labor. Mark will discuss costs in greater detail during his remarks, but let me point out that our rig costs per day has increased from $12,500 a day in 2014 to $18,000 a day today. And that is a driver for revenues needing to be in the mid $30,000 a day range. Maintaining a focus on our fiscal plan to ensure that we can achieve sustainable returns on invested capital is what will enable H&P to remain a viable partner to future success of our customers. Now shifting to the international front, H&P's potential for longer-term growth prospects remains in focus. During the quarter, we moved our first super spec flex rig into our Middle East hub, and we have sent another to Australia. While initially small in terms of rig count, these two projects are important to our international strategy, and we believe they will open doors to more opportunities. Along those lines, we still plan to export additional super spec rigs to the Middle East during the back half of the calendar year after undergoing conversions that fit the specific needs for operations in the region. Operations in Argentina and Colombia have remained relatively steady and provided solid financial contributions. We have executed on our shareholder-focused capital allocation strategy, and since October of this fiscal year, we have returned approximately $250 million to date in capital via regular and supplemental dividends and share buybacks. Furthermore, we still have ample cash available to complete our announced dividend plans as well as conduct additional repurchases or take advantage of other investment opportunities. In closing, over the past few months, I have seen H&P working more collaboratively with customers than any time in my career. The outcomes we are jointly pursuing is economic value added productivity using new commercial models rather than just a focus on the day rate. That is due in large part to our customers realizing the near and long-term benefits of having H&P as their drilling solution partner. All of this is possible by H&P employees utilizing our rig assets and technologies to consistently deliver desired outcomes for our customers. And now I'll turn the call over to Mark.