Helmerich & Payne expands options, ends fiscal year with strong earnings

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TULSA – John Lindsay and Mark Smith are developing creative ways to squeeze more dollars out of the services they’re providing 10,000 feet below the earth’s surface. The Helmerich & Payne Inc. CEO and the chief financial officer told industry analysts they’re offering new technology services and pricing options to customers. Lindsay said if the contract driller doesn’t offer something new soon, then in two to three years, they won’t be able to deliver the return on investment to their shareholders.

University of Central Oklahoma energy finance professor Stuart MacDonald said H&P has a lot of bargaining power to charge differently because its rigs and services are in high demand.

As drilling oil and gas wells has become more complex, it requires a level of precision that was uncommon even a few years ago. H&P acquired technology firms Motive Drilling Services and MagVAR variation services last year, and those services have been increasingly popular among customers. One more precisely guides the drill bit through uneven rock layers miles underground. The artificial intelligence developed within the software that guides the equipment continuously improves and learns, reducing the chances of a human driller’s error.

Lindsay said the well types customers are designing and improved efficiency gains from its rig fleet and software are different than anything else they’ve seen in the industry. MacDonald said customers are designing well pads with multiple wells and the wells are closer together than in previous years, another reason why precision drilling is becoming increasingly important.

Horizontal wellbores are on average 8,000 feet long, up from 6,000 feet just three years ago. Lindsay said if that length trend continues, as he suspects it will, there will be fewer rigs overall in the U.S. that are capable of drilling 8,500- or 9,000-foot lateral wellbores. Those deeper, longer, more complex wells are also hard on the equipment, which means maintenance costs are rising.

Combining the company’s heavy-duty rig fleet and its software will ultimately improve the wellbore’s quality, Lindsay said.

“Our overall intent is to see some compensation to the value proposition we are providing,” he said. “The Flex Rigs are the most reliable rig in the fleet over time and adding on these technology (services), there is a higher level of reliability (for wellbore quality.)”

When H&P rolled out its alternating current or AC drive motors years ago, those machines performed better than the existing rigs on the market. That technology differentiation allowed the contract driller to charge customers more, Lindsay said.

“Now we’re drilling with a higher level of value and it’s harder to get paid for that as we drill faster and faster,” Lindsay said. “We have to come up with different ways to pay for that.”

MacDonald said that’s a typical conversation in any industrial organization; how to break up services and charge more for those things. When there isn’t a demand for drilling rigs, companies generally don’t charge for those extra services so they can maintain their customer base and keep their best-trained employees.

“This is a classic bargaining power technique and it tells us a lot about the state of the industry this minute,” he said.

Smith said he expects more demand for H&P’s super-spec rigs next year. MacDonald said as long as West Texas Intermediate stays above the profit breakeven price, there will be drilling in the short- and medium-term. Breakeven prices were on average $55 per barrel, according to dozens of firms interviewed for a recent energy survey the Kansas City Federal Reserve Bank published on Oct. 12. The average expected breakeven price in the next 12 months is about $72 per barrel, the survey found. WTI closed Friday at $56.46 per barrel, unchanged from Thursday’s close.

The Tulsa-based drilling contractor beat Wall Street analysts’ estimates for revenue and for earnings per share for its fourth-quarter earnings released Friday. Its overall quarterly results were positive compared to the same period in 2017.

The company reported net income for the fiscal year that ended Sept. 30 of $482.7 million, or $4.39 per diluted share, compared to net losses of $128.2 million, or $1.20 per diluted share, for the previous fiscal year.

Operating revenue for the fiscal year ending Sept. 30 totaled $2.5 billion, up nearly 39 percent from $1.8 billion for the previous fiscal year.

Operating revenue for the fourth fiscal quarter totaled $696.8 million, up nearly 31 percent from $532.3 million a year earlier. H&P beat analysts’ estimates for quarterly operating revenue by nearly $15 million. Revenue from the U.S. onshore drilling customers rose nearly 34 percent, up from $439.4 million in the same period the prior year.

Helmerich & Payne’s stock, which trades on the New York Stock Exchange under the symbol HP, closed at $62.59 per share, up 4.25 percent or $2.55 from Thursday’s close.