3 Takeaways From Helmerich & Payne's Earnings

For investors who only read the earnings headlines, a ton of additional information can usually be gleaned by reading the details of the earnings report and comparing to competitors. For investors interested in the domestic land-drilling market, Helmerich & Payne (NYSE: HP  ) happens to be one of the better providers of useful numbers.

The driller had some encouraging signs on new rig orders and increasing rig revenue per day, but the numbers show more stability than growth. As with Patterson-UTI Energy (NASDAQ: PTEN  ) and Nabors Industries (NYSE: NBR  ) , the troubling sign continues to be that customers want the new rigs at the expense of idled rigs.

Building new rigs
Helmerich & Payne continues to report encouraging signs of an uptick in new orders for drilling rigs. The company announced agreements with three exploration and production companies to build and operate six new FlexRigs in the U.S. These rigs were ordered under multi-year contracts. Even more encouraging is that 13 new-build orders with customer commitments have taken place in the last 45 days.

Patterson as well expects to complete three new APEX rigs during the fourth quarter to bring the total to 11 new APEX rigs for the year. The driller already plans to complete 20 new APEX rigs in 2014 with only three of the rigs currently under long-term contracts. This scenario suggests Patterson is being more speculative than the others.

Nabors achieved an incredible 21 new-build rig contract awards with only eight for the U.S. lower 48. The international segment continues to see improved fundamentals from a better supply/demand equation.

Helmerich had 54 idle rigs during the third quarter and Patterson had 26 less rigs in operation than the previous year -- both signs that despite available rigs, they don't meet the customer needs requiring new ones.

North America land rig margin flat
The most important operating segment for Helmerich saw flat rig margins even with a slight down tick in utilization to 82%. The domestic average rig margin actually gained $6 sequentially to $15,420 per day. This gain came from an $898 increase in revenue per day and an $892 average rig expense per day.

On the flip side of the new rig orders is that Helmerich had 54 idle rigs in the domestic land market. Rig utilization dropped to 82% for the fiscal fourth quarter, down from 85% in the prior year. Customers clearly want the new rig technology provided by Helmerich & Payne, but the company would be better off if customers utilized the idle rigs.

Patterson actually saw a $480 decline in the average rig revenue per day, but lower expenses offset it. The company was able to increase the daily rig margin to $8,900 from $8,730 during the second quarter. Nabors saw generally flat domestic margins as well.

Promising international rig utilization
While the international land and offshore segments are considerably smaller for Helmerich than the domestic land-rig segment, the jump in the international rig utilization to 87% during the fourth quarter was encouraging. The increased utilization in turn led to an expansion in average rig margins. 

Considering the stagnant drilling environment in North America, Patterson spent $1.7 million to prepare for international growth opportunities. This move by Patterson appears wise based on the strong signs from Nabors.

As mentioned above, Nabors received 13 new rig orders during the third quarter on top of nine from the second quarter. In addition, the international operations also had 11 rigs renew on long-term contracts. Not surprisingly, Nabors saw a 16% increase in the average daily rig margin.

Bottom line
While Helmerich & Payne has an undeniable lead in the domestic land-drilling market, the competition is making great strides on the new rig orders front. In addition, the international market's positioning of Nabors and the aggressive move by Patterson call into question whether Helmerich is correctly aligned for the market turn. Helmerich doesn't appear to be the stock to chase at multi-year highs with competitive pressures down the road.

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