Helmerich & Payne, Inc. (HP) Earnings Call Transcript & Summary

Hi, everyone. I'm Sean Meakim, the oil services and equipment analyst at JPMorgan. Welcome back to the JPMorgan Energy Conference. And we're here on day 2. I'm very happy to have Helmerich & Payne CEO, John Lindsay. John, good to see you.

Yes. Great. Good to be here.

So just by way of introduction, H&P has not only been a market leader but a thought leader in the onshore drilling for the past few decades. John has been a big part of that heritage, including the industry's first AC rig, the FlexRig 3. And now as CEO, he's been leading the industry and leveraging software to enable better-performing hardware and increasingly testing new contracting models to capture more of the value that H&P's rigs create. So John, like I said, great to have you joining us. So we're here for a fireside chat.

Yes.

And maybe just to kick things off, I just think good to level set the investor base to some degree, the level of dislocation that we've had into the second quarter is unprecedented. So just maybe could you give us a little bit of an update on the land drilling market, what you're seeing here? I mean the pace of drop-off that we saw at the end of the fiscal second quarter for you into the fiscal third was pretty stark to witness. And so it'd be great just to get a sense for how things have evolved in the quarter relative to what you would have thought when we last caught up on the call.

Sure. Yes, I think it's -- I think since the call, I mean, it's tracked pretty close. Obviously, the decline -- the releases have been indiscriminate in nature, which isn't surprising. We've -- our rig count was close to 190 back in March, and we're in the 70 range now. So a huge impact. Obviously, it's had a huge impact on our people and staff and all the challenges associated with that. But the rig count is in the range that we were kind of forecasting as far as the trough. There's probably been an estimate of 200 to 300, and I think we'd probably be in the middle of that. 225 to 250, hopefully, will be the trough. We try not to call the trough, but I think that's probably in the ballpark. And the outlook continues to be a challenge. I mean the great news is oil price has more than doubled. So -- but still very challenging in the mid-$30s. I think most of the E&Ps are challenged, as you know, to make a great return at those levels. But we do think there's an opportunity to improve that in the future. I think one other point to keep in mind in that rig count is -- and we don't know what the exact number is, we know we have 10 to 15 rigs that are idle -- that are contracted but idle under some sort of a standby rate. And I know other players have as well. So I don't know whether it's 50 rigs or 60 or 70 rigs that are also out there contracted, but they're not actually turning to the right today.

That's right. And so it sounds like maybe we've seen the deceleration of the declines, particularly as we've gotten into June. And so to go to the back half of the year, it sounds like your expectation is that we're getting close to some level of stabilization. But it seems like your frac activity has been more severe in the way down or like faster way -- easier to cut crews and faster in terms of being able to impact the budget. As we go towards the back half of the year, it sounds like there's an indication from the pumpers that there will be some incremental demand. But we expect that land rigs would likely lag that. Just curious how your customer discussions have evolved, thinking about the back half of the calendar year and what your expectations could be, given improving commodity prices, but still a pretty difficult environment for E&P activity.

It really is. And at least the first time I can remember, to this degree, where you actually have production that has been shut in, get to the point where that's the best solution. But we are building DUCs, right? So I think the likelihood of the completion activity picking up before we pick up additional rigs, I think that does make sense. I do believe that our customers are going to be -- continue to be very disciplined in their approach to the budgets that they've set. I mean let's face it, there are some that have had multiple revisions, second and even maybe a third revision. So I think they're going to stick with that. Again -- but if oil price improves, I think you could have some rigs going back to work at the back half of the year, but I wouldn't consider it to be a material increase. I think it would be something -- as you think about going through the budgeting process and getting ready for 2021, maybe there's some rigs that are going back to work, most likely rigs, as I described earlier, that are already under contract but are idle. I think that probably makes the most sense.

Right. Those will be the first rigs to get called back.

Certainly.

Yes. So I think that makes a lot of sense, too. So one other point to focus in a little bit is, as I look at that pace of activity -- sorry, the pace of decline in activity you had witnessed at the end of your fiscal second quarter and then into this now fiscal third, to what extent would you -- as you said, it's been rather indiscriminate, but to what extent would you assign some of that impact to be the increase in mix towards private operators that you experienced during the last couple of years? So meaning that you're able to take meaningful market share, and as best as we can tell, a lot of that incremental share came from outside your core base of customers and, to some degree, a stronger desire by small private operators to pick up the best rigs, the best crews. And so you saw some share gains there. Do you think to some extent that's maybe created a bit of a little more whip in terms of the up and the down to your rig activity?

Yes, I don't think there's any doubt that it's had an impact. I mean we have had a greater exposure to some of the small players, but if you really look into the details of our rig count reductions, part of our growth has also been great partnerships with large independents and some of the majors. And so you've also seen a very dramatic reduction in rig count with many of those, I mean, in some cases, going from, I don't remember what the top rig count, but to kind of exaggerate, 20 to 30 rigs down to 2 or 3. And if as a provider of a drilling service, we've got half of that rig count, obviously, it's had a huge impact on our rig count. And so I think there is some relation to that and to some of the market share losses that we've had over -- a couple of percentage points over this period of time. And again, we're not overly surprised by that when you look at how that has been structured with the customers that we've been working for.

That's right. And look, to some degree, I'm parsing it kind of thin because even among the majors, the rig reductions have been really severe. So...

They really have been. And I think the other thing, too, is an impact on natural gas and oil. We've had, obviously, huge exposure to the oil basins, Permian primarily. But the gas basins have not been hurt to the same degree. They're down, but they're not down to the same degree as you've seen with the oil basins.

So one of the related topic around demand, if we think about going beyond the near-term disruptions that we're experiencing, the data suggests that the majors are by far the least likely to contract with the big 4 land drillers. And we saw a significant uptake by the private operator this past cycle. We've seen directionally, the majors are picking up more rigs from the big 4 and just using as a proxy for super-spec demand among those operators. In order to hit the production targets they want to get to in the long-term without materially adding rigs, it seems to us that clearly they need to high grade their fleet. Just curious about that secular trend and how that influences your thoughts around the next cycle beyond the near-term trough that brought there.

Yes. I don't think there's any doubt about that. From our perspective, the super-spec fleet, as you look at the types of wells we're drilling, number one, the length of the laterals continue to increase; b, if you think about how quickly these wells are being drilled, you really need organizations that have an infrastructure to be able to support that. In addition to that, there's more to just drilling the well efficiently in terms of time, days and the cost side of the equation. There's also an increasing demand for higher-quality wellbores. I really believe the game is changing. And the stakes are going to be higher. The expectations are going to be much higher coming from customers, not only on the rig side but on the technology side as well. And I think that, obviously, provides opportunities for, as you said, the top 4 or 5 largest players and then within that subset, those that are best positioned with the technology solutions.

Well, I appreciate that, and that's a good segue to my next question, which is around technology adoption in the downturn. I want to talk about technology a good amount, I think, in this discussion, but on the fiscal 2Q call, you made a point that we are at a place and time where the industry can really reimagine the workforce's role in drilling. So in other words, for my mind, that means accelerating the adoption of remote ops, automation, software-enabling hardware, et cetera. As we've discussed over the last couple of years, all these tools are ready to scale. But in the process of getting that adoption, it's been kind of 1 rig in, 1 rig out. It's a lot of in-the-trenches work on the part of H&P. Just how is customer interest changing in the last couple of months? To what extent -- as we're all speaking here on Zoom. How is that influencing those discussions? And do you see that as a catalyst towards accelerating adoption of those techniques?

Yes. I think it does. We already had a fair amount of traction with our automation solution, AutoSlide, as an example, the Bit Guidance System, MagVAR survey correction. There was already some traction, but with COVID and social distancing and just this whole thought process of lessening exposure with people. And so if you can eliminate, as an example, the directional driller on a rig, that's just 1 less person you have to worry about that's coming in and off of a rig site, somebody that you don't have to worry about bringing in an exposure of virus, as an example. So I think it's a great opportunity. You've heard me say this before, downturns are tough, but one of the great things about a downturn is it does force people to look at things differently. If you're going to survive and then, ultimately, position yourself to thrive in the future, you really need to be thinking about things differently. So technology -- again, we started making our technology acquisitions in 2017, made a couple in '17, one in '18 and one in 2019. All of those have contributed to this technology road map that we're going down today. And the ability to take those technologies and then leverage them on the FlexRig software platform is huge because, again, we don't have to build out any sort of additional integration layers or anything. It's just -- we're directly communicating the algorithms in the software with the FlexRig operating system. So clearly, in order to do these things, you have to have a strong partnership with your customer. So yes, the uptake is improving, the adoption is improving. I think downturns allow that to happen. And I think it's going to continue to accelerate because we're -- quite frankly, we're seeing some great results from the solutions that we're providing.

Right. Absolutely. So just thinking about difficult demand environment getting close to trough perhaps, in terms of pricing, not that there are many rigs really trading here at the moment, but just any anecdotes of what pricing looks like and to the extent that there is such a thing, contracting rigs, how that looks. I know we've changed the reporting structure a little bit because of how you talk about the fleet. But just I was curious to get a sense of how things look in the field as we're exiting the calendar second quarter.

Well, as you alluded to, there's really -- in a traditional market, you have leading-edge pricing and you have the spot market and you have the term market. And the fact of the matter is, there isn't really a spot market out there. In most cases, our customers, E&Ps in general, are -- they're looking like everybody. They're looking at how do we conserve cash, how do we cut costs. And so there's not really any appetite out there to pick rigs up. Interestingly enough, we have put a few rigs to work over the last -- I don't know, the last month or 1.5 months or so. And those were nontraditional day-rate contracts. They were a new commercial-type, performance-based contract that includes our technology solutions combined with the FlexRig. And so they are different in nature. We've -- we talked about it on our call in April. We're not -- we don't expect to just flip the switch and completely shift away from day rate, but we do know that it's obsolete and that it needs to be changed and particularly as we're expanding and doing more with the customer related to the wellbore, related to geosteering and those sorts of things. So that's really important. At the same time, there is still a day-rate market that's out there. And I think for the most part, what we're -- at least what we're hearing, most of that has been rational pricing. But as you can imagine, there have been some irrational pricing moves in the day-rate market as well. So I think that's -- the other reason for really shifting the model is let's just -- let's not just look at one metric, let's look at multiple metrics and what drives a higher level of value for the customer. And to me, I think that's what's attractive to the customers that we're working with today.

Any sense of what you think that -- the size of that market could look like over time, the addressable market for those more value-oriented type of contracts?

So think about it -- it's a great question, tough answer. Our goal would be -- it would be a very, very high percentage, if not all at H&P over time. And you say, why is that? Well, if you think about our industry in general, there are some structural challenges. And so let's take this opportunity to figure out how we can structure and how we can do more and do better. The service sector has to make a return like our customers. So I think this whole idea of working together in partnership in creating a higher-value well for the customer makes a lot of sense. But that has to -- that can't only be a solution like it's been structured over time, where it's just the drilling group and the drilling company working together as you start thinking about leveraging more as far as the target zone. So you're involving geology -- auto geosteering, you're involving geology, you're involving completions. All of this creates, I think, a different framework for the way we ought to be thinking about the business. Again, that's the way that we're thinking about it. And again, what I'm pleased about is, we do have some customers that are interested in going down that path. Our hope would be -- to answer your question directly, our hope would be that it's a very high percentage of our overall fleet. I think we have the infrastructure to support that. We have a great dataset. I think that's the other thing that's really important here is, let's look at the data, let's utilize the data, let's be factual in the way that we leverage that data in order to create better performance.

Absolutely. So recently, John, we published a number of different scenarios of what the next cycle's normalized activity level could look like. Just curious how you think about day rate progression in that cycle. Is there any reason why you think it may be materially different, what we saw in 2016 to 2019? What we saw was pretty rational from a capital deployment perspective, and it's a pretty good market structure in land drilling compared to a lot of the other service lines in North America. Just curious how you think about what that day rate progression could look like next cycle relative to what we've just most recently experienced.

Can you remind me, Sean, what was your rig count? I've seen a couple out there. What does your forecast look like?

Sure. So in that -- so we've put out a -- leaving aside, let's say, for now the bull case and the bear case, we've put out a range of base cases pretty much tilting on OPEC policy. So at the low end, maybe we're talking about 550 rigs, oil prices in the low $40s, and we're generating, say, 0.5 million barrels of production growth. That's the call on shale in a market in which OPEC is more volume- versus value-focused. The other end of that spectrum would be as many as 750 rigs, and that would be generating 1 million barrels of production growth with WTI, say, in the low $50s. And so the meeting case would basically be, call it, somewhere in the middle. And so in the upper scenario, OPEC is more focused on value over volume. So that's kind of the range of base case. And so again, we can -- [ make it more streamlined at their end ]. But as you think about that type of world next cycle, does day rate progression look similar? Maybe the upper end of that would suggest that we need to see some type of incremental upgrade, capital deployed; lower end, probably not so much. The existing base of super-spec rigs seems like it'll do enough. And so that's, I think, the framework to think about how you think rates could progress.

Yes. Well, that's helpful. So I think there's probably some agreement that ballpark-ish, the super-spec fleet size is around 600, 650 rigs in U.S. land. And so when you start looking at that level of activity with all the things that we've already talked about, not having to go through it again, as you think about the complexity of the well, the challenges, the cycle times, the importance of having that sort of reliability, you would like to think that the majority of that working fleet is going to be a super-spec fleet. I mean let's face it, look at -- before COVID, we had 850 to 900 rigs running and 65%, 70% of those were super-spec. So there were still SCR and some mechanical rigs running. I find it very hard to believe that going forward, particularly as you're launching these technology solutions that you're going to have that lower end of the rig working. So from a pricing, if you just think about it historically, historically, what we've seen is once you have a rig category that has over 75% to 80% utilization, you typically have some pricing power. So I would expect there would be pricing power. But going back to the earlier point, our goal would be it not be a function of what the day rate is going to be, it's going to be a function of the value proposition that we're able to deliver for the customer. And we have some pricing model, some performance-based, some footage rate, something that is differentiating and that it creates a framework for competition other than just what the rate is. Because, again, as you begin to -- let's use wellbore tortuosity. Most people wouldn't -- there's not kind of a standard, well, here's what a good wellbore tortuosity looks like versus a bad wellbore tortuosity. That's not necessarily a metric that we're all following. But that's possible. And so as you begin to look at that and you can frame that up in the context of not only maintaining the speed, the efficiency, the reliability and the cost, but also framing up a higher level of wellbore quality and placement, let's get compensated for that as well. And so that's -- to me, that's what's really important. So as you think about -- you've got the heavy capital-intensive side of the rig business, then you have a lighter capital on the software, and combining those solutions together, creating greater value for customers and, at the same time, also creating greater value for H&P shareholders. So that's the way that we would frame it up. We see that as an opportunity. You know this business -- like I do, we have a tendency to overshoot. I would say that $15 a barrel WTI or even negative WTI, that was an overshoot to the downside. And we have a tendency to kind of overshoot on the high side. So I think there will be some opportunities for us as an industry in the future. But I think those that are going to be most successful are those that have the greater capabilities, technology solution, super-spec rig fleet and the ability to do that. One last thing on that is just, as you think about the international markets improving, I think there could potentially be a pool of super-spec rigs coming out of the U.S. going international. So that has an impact on the available fleet, of course, that we have here in the U.S. as well.

That's a very good point. So maybe just to round out that discussion around lower 48, just thinking about H&P technology, we made several acquisitions in the last couple of years, put them to good work already. Just as you think about the rest of that portfolio, what else -- what are the gaps or what else is missing to get -- or do you have enough of the tools where the rest can be done organically to get you where you're trying to go?

I feel really good about the acquisitions that we made for obvious reasons. I feel like we're in a leadership position there. I think there's some metrics we can point to, to demonstrate that. But the other thing that I'm really happy about is the entrepreneurial start-up mentality that we have -- that we acquired with those companies, those leaders of those companies are still with H&P today. So we acquired great software, great algorithms, great technology, but we also acquired a skill set and expertise, if you will, that's industry-leading in each of those acquisitions. So as you think about, well, what else are you looking at, well, we are looking at other things, again, automated geosteering, as an example. Well, we feel like that we're much better positioned to develop that internally and start with a clean sheet as opposed to going out and trying to acquire someone to do that because there's challenges associated with that. We have a view of where we want to take that. So I think we're positioned very well. I'm pleased that organizationally we were able to integrate that talent and that capability into the company and then maintain them. They're still with us today. They're delivering a lot of value for the company. So again, I feel really good about that in the future that we have.

Great. And just I wanted to make sure we do touch on international. Just can we get an update maybe on Argentina and the rest of the fleet more broadly, just kind of the path forward from here given the obvious challenges?

Yes, on the call, we talked about 10 rigs active internationally, 5 of those were in Argentina. The YPF rigs have rolled off of their -- where they had original 5-year term contract, there were some extensions in there. So 4 of the rigs are on a bareboat charter-type contracts of relatively low margins. We do have a super-spec rig in country that's working. It's doing a great job. We have a great rig partnership there with a major IOC. Middle East -- so Argentina -- you mentioned Argentina. Argentina, I think, continues to be challenged for several reasons. Not exactly certain what the timing would be for getting those rigs back to work. Prior to COVID, we were working with some other IOCs on putting some of the FlexRigs back to work. But obviously, with this, things have been slowed down. So I would imagine it's probably a 2021-type event to see things, hopefully, improve there. Middle East-wise, I feel really good about our opportunity set there. Prior to COVID, we were working on some various opportunities that I thought really had a lot of potential. Well, the potential is still there, the challenge is the potential is pushed out 9, 12 months. Again, no surprise there. But if you think about international, the other bright spot for us is -- are the technology solutions. So that -- as you begin to see more horizontal wells, unconventional-type work going on internationally, you're going to see that natural uptake that could potentially be in pull-through, the technology pulling the rigs through. So as you think about AutoSlide and AutoSlide's ability to drill less tortuous well, to drill a higher-curve dogleg angle and land that -- the well in the zone and do that consistently reliably with automation, and you're creating an additional 150 feet of well, so an additional frac stage. That's a big deal. And when you start -- it's one thing to say, well, one frac stage, one well. But if you're talking about drilling hundreds, drilling more like thousands of wells, that becomes a really compelling story. So again, we're pleased with the outlook. I think international creates some additional opportunities for us in the future to diversify our overall rig portfolio and technology portfolio as well.

That makes sense. So in the time we have left, I just wanted to wrap up on balance sheet and cash flow. Cutting the dividend, obviously, a historic event for the company, but saving $200 million a year, cut CapEx again, $50 million taken out of OpEx, the free cash flow trajectory should get better in the next few quarters. But just given the environment, how do you feel about dividend coverage going forward in terms of free cash coverage as we look out, I think, for the next couple of quarters?

Well, you said it, it was something that we definitely looked at very, very closely. We had an increasing dividend for 48 years, but this was in the best interest of H&P long term. You know us, we're very financially conservative. That was in the best interest of H&P and H&P shareholders long term. So we feel -- yes, you measure once or twice and then just cut once. Well, we measured 3 times, 4 times, 5 times. We wanted to make certain we modeled just about every case we felt like was possible in terms of the down cases, and we used the 5-year outlook. So we feel good about the level of dividend that we have. We're going to generate free cash flow through the next several quarters through the horizon as we look forward. So we feel good about that. We think we made the right move there. There's a lot of things that we're doing at the company to conserve cash. We've shrunk the organization. At the same time, we've reorganized, and we think we're really better organized today to carry out the strategies that we have going forward, and we're able to do that with a G&A number that's much lower than what we've had in the past.

Right. Well, that's about the time we have. So again, John, on behalf of JPMorgan, thanks very much for joining us. I really enjoyed the discussion. Thanks, everyone, for joining. Have a great day.

Bye, bye. Sean, thank you very much. We enjoyed it.