Good day everyone and welcome to the Fiscal Second Quarter 2020 Earnings Conference 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. [Operator Instructions] Please note this call maybe recorded. It is now my pleasure to turn the conference over to Director of Investor Relations David Wilson. Please go ahead.

Thank you, Keith, and welcome everyone to Helmerich & Payne's conference call and webcast for the second quarter of fiscal 2020. With us today are John Lindsay, President and CEO; and Mark Smith, Senior Vice President and CFO. John and Mark will be sharing some comments with us, after which, we will open the call for questions. Before we begin our prepared remarks, I will 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's 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 also be making certain reference to non-GAAP financial measures such as segment operating income and operating statistics. You will find the GAAP reconciliation comments and calculations in yesterday's press release. With that said, now I will turn the call over to John Lindsay.

Thank you, Dave, and good morning, everyone. The COVID-19 pandemic has no rivals in recent times for the dramatic and widespread impact it has unleashed on the world and our industry. Our highest priority over these past few months has remained focused on the health and safety of our employees, customers, and stakeholders. I want to begin by thanking all of our employees for their efforts to protect each other and our customers by adhering to physical distancing practices to control exposures and for following all of the protocols we put in place to protect our families and each other from the virus. Throughout our history, the company has sought to be in a position of strength, both operationally and financially to face the uncertainty and an inherent cyclicality of the energy industry. We have taken swift actions to maintain the health and safety of our employees and customers. We've also made difficult, measured but necessary decisions aimed at preserving the company's longstanding financial strength and its future. These timely actions have served to minimize the impact of COVID-19 on our operations and helped to preserve our financial position. This market has been referred to as unprecedented by many. And during my 33 year career at H&P, we have weathered many downturns, though this one does have unique characteristics. While the crude oil market imbalance is a global phenomenon, it has more acutely impacted the US market as a result of storage limitations subsequent to March 31. The abruptness of and the overall size of the decrease in demand for refined products such as gasoline and diesel has created an abundance of supply which has caused refining capacity to shrink, resulting in excess crude oil. This crude oil overhang in supply has created a storage dilemma for E&P companies, limiting…

Thanks, John. Today, I will review our fiscal second quarter 2020 operating results provide guidance for the third quarter, update full fiscal year 2020 guidance as appropriate and comment on our current cash management efforts and financial position. Let us start with highlights for the recently completed second quarter. The company generated quarterly revenues of $634 million versus $615 million in the previous quarter. The quarterly increase in revenue is primarily due to $10.4 million in early termination revenue and well to well notification fees as a result of rig releases in the U.S. land segment, due to the energy demand destruction caused by the COVID-19 pandemic as described in our press release. Total direct operating costs incurred were $419 million for the second quarter versus $401 million for the previous quarter. The increase is attributable to self-insurance adjustments related to prior year reserves and to cost incurred to demobilize and stack release rigs. During the fiscal second quarter, market events triggered an analysis of our non-super spec FlexRig fleet and particularly the expected future utilization of that portion of our fleet. This assessment combined with an evaluation of our intangible assets including goodwill, resulted in total non-cash impairment charges of approximately $563 million. The impairment impacted the value of the following asset classes. PP&E for less capable non-super spec rigs of by $441 million. PP&E for excess capital equipment by $45 million. Inventory of materials and supplies by $39 million. And goodwill by $38 million. A total of 95 rigs were impacted by the impairment of which 37 were decommissioned subsequent to the quarter end. As such, we have downsized the number of U.S. domestic non-super spec FlexRig, three drilling rigs marketed to customers from 43 rigs to eight rigs in the U.S. General and administrative expenses totaled $42…

Operator Instructions] We'll go first to Sean Meakim with JP Morgan. Please go ahead.

Thank you. Hi, good morning.

Thanks, Sean.

So John, maybe to start on U.S. land, you're kind of trying to parse through the guidance that you put out. It looks like in fiscal 3Q, the margins could be quite compressed, particularly when trying to account for the early terminations impact. Are there any transitory costs associated with the pace of rig drops that maybe normalize as the rig count stabilizes into fiscal 4Q? Just how should we think about U.S. land operating gross margins on some kind of normalized basis, maybe say in fiscal 4Q relative to what it looked like in fiscal 2Q?

Mark, you have…

Yes. Sean, thanks for the question. We certainly are incurring transitory costs related to stacking, but offsetting that are more cost expense cuts still coming as I just finished describing a few minutes ago. So, still a little early to have a final look at what would be two quarters from now.

Yeah. And Sean, I would just say that there's so much happening so quickly, you've seen the rig count drop. And I said in my remarks, we’er doing a great job in the field, but again it's pretty choppy right now with the amount of activity that's going on with idling rigs and managing through the costs, and then you also have the additional burden of managing with COVID-19 in the way that we're -- physical distancing with our people, and it's just a little bit different process. But as Mark said, we'll have greater clarity in the coming quarter.

Okay. Well, I appreciate you providing that context. Somewhat related but different topic, I think leveraging the HPT suite along with your super-spec rigs is obviously a way to create value for customers. Perhaps, it will be a premium in coming quarters if E&Ps are trying to stretch every CapEx dollars they have. But the remote working world for you and your customers might also be changing perceptions to agree on what can be done remotely. Do you see any of that in terms of MOTIVE and – particularly MOTIVE as potentially getting more traction and a low activity level in remote operations being more critical for customers? I'm just curious about, beyond immediate environment where everyone's scrambling to lower activity, is there -- just how you feel about – or the change to remote working in some ways make it easier for you to show value for MOTIVE in particular?

Yeah, Sean. I think we've seen that over the past several weeks. The value proposition as we've described, and we've had customers describe to us on wellbore quality and wellbore placement is there. We have this ability to de-man. We have this ability to automate directional drilling. And again, as you start thinking about having exposures, health exposures to the virus, there's another level of desire to de-man for those reasons. And so yes, we are seeing a pickup in interest. We continue to have very good meetings with customers, both large and small, and I think that's encouraging. But as you think about it, on the one hand, it's a no brainer in that you can do this in an automated fashion. You can do it at the same efficiency or even higher levels of efficiency in terms of time, but then there's the added value proposition of a higher-quality wellbore, so you're leaving behind a higher quality wellbore in working with your customer. So, as you start thinking about combining kind of holistically with the overall offering, with the rig offering and the technology offering, and then you're structuring that offering specifically to a customer's needs and desires, and there's a lot of advantages to that. So, to answer your question, yes, we’re seeing some additional interest and the challenges that we've that we faced with COVID-19 has got people talking about it in addition to the level of interest we already had.

Makes sense to me. Thanks, John.

Thank you.

We'll go next to Tommy Moll with Stephens. Please go ahead.

Good morning. And thanks for taking my questions.

Good morning, Tommy.

John, I wanted to start on customer conversations. My assumption is most rigs have been dropped recently, primarily because the customer was just making a decision to stop drilling and not because negotiating on price would have made much difference. If that's correct how far down the road do you have to look before we get to a meaningful discussion around price? And if we look back to the last downturn, I think mid-teens $1,000 per day is probably where we ended up near the bottom. And I wonder if that's a fair bogey to think about this time around, or if the market dynamic may have changed and may be different somewhat in some way?

Well, certainly with the release of rigs, and we've described it as really indiscriminate, and it wouldn't matter what the price of the rig would be. As you know, as everybody has seen, a lot of E&Ps are either cutting their rig count by, 65% -- 50%, 60%, 65%, 75%, and some have even gone to zero. And so in those cases, it doesn't really matter about the rig. But as you start thinking about and you're framing up this notion of day rate, we're making the case that the day rate model is obsolete, needs to be retired. That's the way that we're going to approach this. There's a huge value proposition that we can provide at H&P, and we're seeing that in the conversations that we're having with customers. So even in this environment that we're seeing right now, we're entering into contracts with customers that are win-win type contracts for the reasons that I stated earlier. We're doing our dead level best to align ourselves with the customer's objective to enhance the economic returns. Well, obviously they want lower costs, but they also want a better wellbore left behind. So, we're working really hard on the partnership side, our goal is to not be discussing day rates because of the obsolescence of the model, and we're going to keep working on different models with customers. And every customer is different. We don't expect to have a one model fits all. We've got an organization that's capable of adapting to that, and that's part of our restructuring, as you'll see more that were that we're doing over time is organizing ourselves for that sort of an offering to our customer.

Following on that theme, John, do you have any sense that when we do bottom and then start to recover, that the expectation may not be for what's currently perceived at the super spec rig in terms of the capabilities or might be added default assumptions about the kinds of technologies or capabilities you need to bring to the market. And in order to be competitive, any light you could shed on where we might be headed just in terms of what the market standard or the leading edge offering might look like?

Sure. Well, we have our definition of super spec. I'm sure every company does. There's a pretty wide range of capabilities even within the super spec space. So, I think once the market shakes out, as in previous cycles, the best rigs, the best performing rigs, the best performing crews, those are rigs that will go back to work first. I do think that we will see a shift towards talking more about, again, the quality of the wellbore. The power of predictability that software brings that humans can't. I mean it, we see it every day in life, and it exists in the oilfield as well. And so there's there is this great opportunity. And so I do think that, that the requirements will change in the future. Obviously, we're working very hard to position ourselves in that place. As I talked about, we all hate how hate downturns. We've weathered a lot of them. But what we can say about downturns is that it is a driver for change, and it's a great opportunity for us to take advantage and really double down on the performance type contracts and the technology offerings. We are planning to continue to invest heavily there, because we think that's a differentiator. So, it's a long way of saying answering your question. I think it does. I think there are some changes. And like I said earlier, every customer is a little bit different. But that's fine. We've got various offerings that we can provide for a lot of different customers.

Thank you, John. I'll turn it back.

Thank you.

Will take our next question from Kurt Hallead with RBC. Please go ahead.

Good morning. I hope everybody, all your families are doing well and healthy.

Same to you doing well, Kurt. Thanks. Same to you.

Thank you. Appreciate that. So, yes, I guess what I just want to ask first here is when you take a look at the dynamics in the US market and the guidance that you provided, as you go out into the next quarter, just want to make sure I heard Mark correctly say that there's another $5 billion early termination payments that are expected to occur during the quarter. And if so, is that going to be the absolute minimum or is there a possibility for additional early termination payments that customers haven't quite alerted you to yet?

The five number is correct Kurt. And on one hand, when we look we think we see a line of sight to what could be a June 1 and then also a June 30 level of activity, but on the other hand we have no clear visibility. If you'd have asked me the question three weeks ago, we would have had a completely different answer. So, the activity levels is uncertain in some regard and therefore the early term that is associated with that would be as well.

Perfect, appreciate that. And John, just maybe follow-up for you as you have basically two way with the day rate model and you continue to push forward with a more win-win performance based dynamic. If you were to just think of that with us on the call now and so on as you looking into the next cycle of evolution. How much incremental, I don’t know, EBITDA, how much incremental value you think that this performance based model throughout can result in for H&P. Right, if you look at your last peak cycle EBITDA when it was a day rate driven model, you look at the next one, which would be more performance based. What kind of the incremental value do you think can be derived?

Well, Kurt that’s a great question. I’ll start with, first of all, I don’t know what the number is. What I do know is that, this will take some time. There's going to be a transitionary period. We'll continue to have rigs that are working on a day rate basis and customers that want to do that. But again, we're seeing evidence of it. It's very attractive to customers. This whole notion of having skin in the game and delivering higher quality wellbore. So I don't have a clear answer to that. I may turn over to Mark, see if Mark has some additional color to add to that. But what I do believe is that we will be in a much better position going down the path that we're going with creating these new commercial models, then continuing to do things the way we've always done them with an obsolete model, like the day rate model.

Nothing to add. But Kurt, I do want to just clarify with the five to make sure that for others that are listening as well. We still expect to receive approximately $50 million of cash payment in the third quarter, $45 million of that would be recognized and then another $5 million deferred and recognized after the third quarter.

That's great. Thank you for that clarification. And John, I know you don't have the specific answers on that value attribution, can be interesting to see how it evolves for sure. So I appreciate your stand at it.

Yeah, thanks for the question. We'll keep working hard.

Our next question is from Taylor Zurcher with Tudor Pickering & Holt. Please go ahead.

Hey, good morning. Thank you. Wanted to follow-up on some of these questions on the performance based model. If I remember correctly on the last call, you talked about the ideal rigs or incremental rigs that to enter into these sorts of models to be in the spot market. And as you push forward with this sort of approach moving forward, how do you protect yourself from a term contract coverage perspective as you enter into more of these contracts moving forward? And then secondarily, I tend to think these contracts having a lower base day rate than the leading edge sort of rate and you make it up with performance incentive. So are you protected, apples to apples basis from an early termination perspective as you enter into these contracts?

On the early term port. I'll take that and then turn it over to John. We enter into a term contracts on performance and have rigs both undetermined and exposed to the spot market equally like we do any other traditional model. But the one thing to recognize is that this last many months last couple of quarters as we were putting more performance contracts in place, you had an already soft market. So you're having more of the overall fleet exposed to the spot market in any case. So said differently, when we see a return of utilization whenever that point in time comes for this market to improve, I would expect performance contracts, yes, to have term coverage on the way up in utilization.

Okay. I'll wobble on international guidance for the next quarter is fairly meaningful negative EBITDA and it sounds like the COVID-19 issues are a big part of that. Could you frame for us how many rigs you have working today? And the only reason I asked that is because the contract coverage in that segment so well. And so how many rigs are working today? And how many do you have visibility to a certain level of rig count over the next I don't know, two or three quarters?

Next quarters international segment across all countries and we expect to have approximately 10 working.

Okay. And is that going to be higher or lower beyond that or is it too early to say?

It's is simply too early to say.

Okay, great. Thanks, guys.

Thank you.

The next question is from Ian Macpherson with Simmons. Please go ahead.

Thank you, gentlemen, for all the description and color in this very difficult time to predict. But staying on the international side, John, just given the change in the world looking out some distance beyond a quarter or two, do you think that the new realities that you can try to make you -- give you more appetite for international exposure for the company over the long run or maybe more appetite to refresh [ph] and consolidate on to a more efficient footprint here domestically? Or to essentially keep the exposure that you have, which is a blend but with the U.S. focus?

We are definitely and of course we've been talking about this for quite some time and we've had quite a bit of traction in different respects in the Middle East. And then obviously with the pandemic and economy shutting down, everything's being pushed out. I don't know if it's pushed out six months, or if it's nine months or 12 months. But as I said in my prepared remarks, the quality and the values that that H&P brings -- that helped us get to the position that we are in, in the U.S., I think translate very well internationally. And so we're definitely interested in continuing to pursue international activity. Again, Middle East, obviously, we've been very excited about Argentina. But clearly, the country is shut down, there's very little of anything going on there now. So it's going to take some time, but we're going to continue to invest in that capability. That's another area that as we think about kind of doubling down on investments, that's a place that we're going to do. And -- but we're also -- again, pleased with the opportunity set that what we've already described. We think, we've got a great team that we've put together. And we're going to continue to find ways to organize ourselves to be more effective going forward. So I'd say both of those areas, we're going to continue to invest in our capabilities.

Got it. And then I had a follow up for you Mark. Your CapEx guidance for this year. Please correct me, if you disagree and strike me that, while you're cutting and play aggressively, it's still lagging. How steep the rate of decline is in act of breakdown by the end of the second half of this year. Could you give us some framework to think about maintenance CapEx for the company, when realistically lower rig count. I don't think, it's close to 200, but if you could offer anything in terms of a rule of thumb there? That would be helpful.

Yes Ian. Thanks for the question. You will -- the CapEx reductions will certainly be a little more evident, I think as we move through the remaining two quarters of the fiscal year. And get to, to the point of your question, which should be back to our previously stated range of $750,000 to $1 million per active rig. So, we're working very quickly to wind down and rightsize, the operations. For example of our FlexRig machinery center here in Tulsa, which services complimentary for the entire fleet. As I said in my prepared remarks, we plan to also through time utilize complimentary through the decommissioned rigs. So I don't know where within the $750,000 to $1 million range will be. Hopefully the lower part of that range for the US portion of the company. Remember that also includes, that range includes our international and offshore eggs as well. But yes, maintenance CapEx will be the primary and mostly, nearly all of CapEx.

Perfect. Thank you both.

Thank you.

We'll take our next question from Jacob Lundberg of Credit Suisse. Please go ahead.

Hey, good morning, guys. I guess sticking on the performance based contract discussion. I'm curious if you could describe any changes you've seen in the KPIs that are going into those contracts either actually being realized or just from the discussions with your customers?

I would say the -- there's more discussion -- I've already said this, but I think it's a great question and to make the point that it's not only speed and it's not only cost. It is a function of wellbore quality and wellbore placement. And there's metrics that are associated with those. Wellbore torture velocity, it hasn't always been measured, is not necessarily easy to measure. There's not a benchmark. But yes, there's definitely clear evidence that a less torturous, smoother wellbore creates a lot of advantages, both during the drilling of the well as well as back to this lifetime value of the well. So those are the sorts of KPIs that are beginning to be used today. And so what you're doing is you're benchmarking against, an algorithm software, an algorithm versus a human that's doing kind of the same work. And so it's an interesting change. And I think, again, that's where automation over time will win the day because it does have a higher level of reliability, it's going to ultimately be lower cost, and you're going to have a better wellbore left behind. So those are those are some of the KPIs that are being looked at today versus if you were to ask, six or nine months ago, there wasn't a lot of discussion or interest in that.

That's helpful. And I guess my follow-up would be we've touched on it earlier in the discussion, but I'm just curious, given the strong balance sheet given your liquidity position, just thinking about the opportunity set that you guys can kind of take advantage of or execute on during the downturn. You've touched on doubling down on performance based contracts, as well as the technology offerings, but wonder if there's anything, if there's anything beyond that scope that you guys are thinking about in terms of being in a good position of being able to play offense during this downtime?

Well, there's further improvement. Again, as you start thinking about utilizing technology, there's also the ability to rightsize the organization, structure the organization to be more effective, to be lower cost more just an overall more effective organization. I think there's still some opportunities as a company for us to continue to modernize. I'm very proud of our people and how hard they've worked to get where we are today, but we still have a lot of opportunities ahead, I think I know that. I'm not being real specific. But what I do know is going back to what you said, which is we've got strong balance sheet. We've always got our eyes open. We're always looking for the next opportunity. And we made some great acquisitions in 2017 and 2019. And again we're looking for that edge. And we've got the balance sheet and the capacity to do that. So we're going to keep our eyes open and continuing to try to figure out ways to change the industry and improve our value offering to our customers.

Thank you very much. Appreciate the thoughts.

Thank you.

We'll take today's final question from Waqar Syed [ph] with Altera Capital [ph]. Please go ahead.

Thank you for taking my question. First of all the issues that you're seeing with COVID-19. Are you seen the same in Colombia as well? And could you maybe break down the 10 rigs that you get working on a country by country basis? Like how many in each country?

We have an equal split Waqar of five in South America and five in the Middle East as of today.

Okay. And of the five in South America one is in Colombia, is that right?

That's correct.

Okay. And have you seen any interruptions, work interruption in Colombia as well or no?

The rig in Colombia has actually just gone to work. So we're -- but in Argentina, yes as we talked about in prepared remarks, certainly saw an effect there.

And Waqar as you know, each country has its own challenges and their own protocols and how they're approaching. And we've got our internal H&P playbook, but we have to modify that playbook if you will to fit within each country. We are working remotely in all of the countries in the offices. And again, where we can for the rigs that are running, we're doing what we can remotely. Obviously there's challenges associated with the crews getting to and having to have a certain amount of quarantine time. There's all sorts of different challenges in each country.

So in Argentina, I believe on March 20th, they put the whole country in lockdown and a Baker Hughes rig count today shows that there was zero rigs active in Argentina. So are you getting paid for those if there's no rig working through April? Are you still getting paid there? Number one. And number two, do you have any expectations on when activity may come back in Argentina?

Well, those rigs were the ones I mentioned in the prepared comments that have a force majeure provision Waqar.

Okay.

And to the second part of your question, as we've said about all aspects of the market, it's too soon to tell when activity will return. There's not only the COVID-19 and issue in global oversupply, but there were issues, macroeconomic issues within the country of Argentina separately before that.

Sure. Okay, great. Thank you very much. My questions have been answered. Appreciate it.

Thanks Waqar.

Thank you Waqar. Keith I think we're at the end of our time. Before signing off, I wanted to call attention to two members of my team that have recently announced their retirement. Rob Stouter, has been with H&P over 35 years. He was our senior VP and Chief Engineer. Wade Clark, 33 plus years. He was our VP -- one of our VPs of U.S. Land. I've been fortunate to be able to work closely with both of these gentlemen. They've made great contributions to H&P over the years. But, honestly what I appreciate most about them are their leadership, their integrity, their desire to do the right thing, great team players. We're going to miss you both and best of luck to both of you in the future. And thank you again for listening in on our call and for the questions. And if you have additional questions of course, reach out to Dave Wilson. Thank you and have a great day.

This does conclude today's program. Thank you for your participation. You may now disconnect.