For the past six months or so, the U.S. oil and gas industry has been increasing activity in fits and starts. Sure, we saw an uptick in active rigs, but most of the oil services companies would have told you it was a red herring because of the type of work it was producing.
This past quarter, though, seems to have been the change investors were hoping for, and nothing evidenced that change more than Helmerich & Payne's (HP 1.92%) most recent earnings report. Let's take a look at the land rig specialist's results and what we can expect for the rest of 2017.
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By the numbers
| Results | Q1 2017 | Q4 2016 | Q1 2016 |
|---|---|---|---|
| Revenue | $368.6 million | $331.7 million | $487.8 million |
| Operating income | ($49.1 million) | ($93.0 million) | $38.6 million |
| Earnings per share | ($0.33) | ($0.68) | $0.15 |
| Free cash flow | ($79.7 million) | ($1.4 million) | $118.8 million |
Data source: Helmerich & Payne earnings release. The most recent quarter was the first fiscal quarter 2017.
This past quarter's results were a little bit of a mixed bag when you look at them in isolation. Revenue increased sequentially and rig utilization across the entire company increased. Also, per-share losses were pared down. The thing of concern, though, was the fact that the company's rig margin and free cash flow are deteriorating. This isn't some accident or management's eye going off the ball. Rather, it is part of the recovery.
Over the past several quarters, as rigs have become idle, Helmerich & Payne was cold stacking a lot of its equipment to preserve costs. Over the past two quarters, though, we have seen a rapid pickup in rig demand. When the company announced fiscal year-end results in November, management said the average amount of active rigs in the U.S. was 95. Skip ahead one quarter, and total active rigs the day the company reported earnings was 140. That's a 47% increase in active rigs.
To get all of those cold stacked rigs back into the field, it requires some working capital. That's why this past quarter we saw a $35 million build in working capital versus a $146 million draw-down in working capital. Without that large change in working capital, the company would have easily have generated free cash flow.
The other thing to consider is that with so much idle equipment out there, it's a buyers' market for producers. They are going to be able to get more favorable terms for rigs. Perhaps as the rig market tightens, we will see a return to stronger rig margins across the board. For the time being, though, getting rigs back in the field at OK margins is better than leaving them idle.
Looking ahead
Management anticipates that it will see a 30% to 35% increase in rig revenue days for its U.S. land segment, while its offshore segment will remain flat and its international land segment will experience a 38% decline in rig revenue from early terminations of five rigs. This is a trend that has been playing out at just about every major oil services company this past quarter, so there is not much reason for alarm. Also, keep in mind that Helmerich & Payne's U.S. land segment is responsible for 71% of revenue. If that part of the business is growing, then good things are happening for the income statement.
Thanks to that large uptick in U.S. land activity, management has raised its capital expenditure guidance for the fiscal year to $350 million. Much of that will go toward getting its idle fleet ready for work or for upgrading rigs with other necessary features such as pad-walking capability or higher horsepower.
Remarks from management
CEO John Lindsay's statement in the company's press release pretty much was the explanation of the most recent numbers for the company. Basically, he wanted to point out to analysts and investors that the stalled bottom line wasn't indicative of the company's future:
The outlook has been improving in the U.S. Land drilling market, resulting in a significant increase in the Company's activity levels and market share over the last few months. Spot pricing remains low, although we continue to see some pricing improvements for high quality, high performing AC drive rigs. As reflected in the first quarter results, the rapid pace of the market recovery and our efforts to redeploy additional rigs had an impact on our daily expenses and operating income for the quarter. Although temporary in nature, we expect continued upward pressure on expenses as the ramp-up proceeds and we absorb some up-front costs reactivating more rigs, particularly rigs that were cold stacked during the early stages of the downturn.
Investor takeaway
Of all the things that were covered in Helmerich & Payne's earnings report, the one that was most encouraging was to see so many of its rigs get put back to work. A 47% increase in total active rigs in a little more than three months is a big deal for two reasons: It shows that the U.S. shale recovery is happening in earnest, and that producers are moving toward high-spec rigs like Helmerich & Payne's. In the coming quarters, investors should watch for continued increases in rig revenue days. After a few quarters of double-digit growth, don't be surprised if we start to see improving margins as well.
