Good day, and welcome to the Helmerich & Payne Fiscal Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please note, today’s call is being recorded, and you may ask questions later during our question-and-answer session. It is now my pleasure to turn the conference over to Dave Wilson. Please go ahead.

Thank you and welcome, everyone, to Helmerich &Payne conference call and webcast for 2020. With us today are John Lindsay, President and CEO; and Mark Smith, Senior Vice President and CFO. Both John and Mark will be sharing some comments with us, after which we’ll open the call for questions. Before we begin our prepared remarks, I’ll remind everyone that this call will include forward-looking statements as defined under the securities laws. Such statements are based upon 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 actual 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’ll also be making certain reference to non-GAAP financial measures, such as segment operating income and other operating statistics. You’ll find the GAAP reconciliation comments and calculations in yesterday’s press release. With that said, I'll turn the call over now to John Lindsay.

Thank you, David. And hello, everyone. Thanks for joining us today. The unprecedented decline and volatility caused by the COVID-19 pandemic continue to reverberate throughout the industry, and we expect that ramifications will be felt for several quarters to come. I'm very proud of how our people have persevered in this time of great personal challenge and uncertainty and have kept the health and safety of fellow employees and customers, the top priority. In response to COVID and demand obstruction, H&P acted decisively to preserve operational and financial integrity, and this will enable us to capitalize on our strengths as we shape and deploy strategic objectives aimed at addressing the challenges and opportunities within the energy sector. While the near-term outlook is uncertain, we believe there is an improved future state for our industry. The oil and gas industry has always been cyclical, and H&P has many years of experience in navigating these cycles. We will work hard to continue to perform and strategically position ourselves for future success. Short term, we believe the remainder of 2020 will continue to be challenging. We don’t see surplus oil supplies dissipating or the rig count improving materially. While we are hopeful that the rig count in the US is nearing a trough level, we must leave open the possibility of further declines driven by lower oil prices or budget exhaustion for the remainder of 2020 and perhaps beyond. It appears likely that the future will include more consolidation, leading to fewer customers and competitors, as some industry players are experiencing greater levels of financial distress as the downturn lingers. On our last call, we laid out four strategic objectives that we believe will be crucial to our successful journey to the future. First, new customer-centric commercial models, second, growth of digital technology…

Thanks, John. Today, I will review our fiscal third quarter 2020 operating results, provide guidance for the fourth quarter, update full fiscal year 2020 guidance as appropriate and comment on our expense and liquidity management efforts and current financial position. As John mentioned in his remarks, during the third quarter of fiscal year 2020, we restructured our operations to reduce our scale to support current activity levels and reorganized to align with new marketing and management strategies associated with new commercial models and the deployment of digital technologies. We are moving from a product-based offering such as a rig or a separate technology package to an integrated solution-based approach by combining proprietary rig technology, automation software and digital expertise into our rig operations. Operations previously reported within the H&P Technologies segment are now managed and reported within the North America Solutions segment. Beginning with this third fiscal quarter of 2020, our operations were organized into three reportable operating business segments; North America Solutions, International Solutions and Offshore Gulf of Mexico. Now let me move on to the highlights for the recently completed third quarter. The company generated quarterly revenues of $317 million versus$634 million in the previous quarter. The quarterly decrease in revenue is a result of rig releases in the North America Solutions segment and in the International Solutions segment due to the energy demand destruction caused by the COVID-19 pandemic. Correspondingly, the total direct operating costs incurred were $207 million for the third quarter versus $419 million for the previous quarter. General and administrative expenses totaled $43 million for the third quarter, in line with our previous guidance. As a result of the many changes this quarter, we incurred a restructuring charge of $15.5 million in the third quarter. I will discuss the expected savings from this downsizing…

Thank you [Operator Instructions] We'll take our first question from Ian McPherson with Simmons. Please go ahead.

Thanks. Good morning, gentlemen. Thanks for the detail there. So we’re late July now, and it doesn’t sound like we’ve seen much new contracting re-emerge yet. So when we look at your visible quarter end or fiscal year-end expected rig count. By what time frame, do we need to see more of an uptick in contracting to get comfort in that not fading lower again into your fiscal Q1? How do you frame the upside downside on that based on the current outlook and current conversations with your customers?

Good morning, Ian. As I – as we think about it, there’s not – there’s not a lot of activity ahead. As we said in our prepared remarks, the outlook for the rest of 2020, calendar 2020 continues to be pretty flat, I think. I think there will be some rigs going back to work during the course of the year, but it’s not going to be in a material way. And we're assuming that oil remains in a 40% range. If I think, if oil were to pull back, I think it's possible that we could we could see the rig count begin to slide again. But I think it’s really hard to see any really material improvement in rig activity between now and the end of the calendar year. Because again, budgets are set, customers are being very disciplined in their approach to their budgets. I think one possibility would be in a stronger oil price environment in calendar 2020 as we’re readying or the customers were – getting ready for their budget setting process in a stronger oil price environment, maybe you could see some activity improvements on the very end of the calendar year. But again, I think it's going to be pretty challenging, as we've said. I just don't see a lot of opportunity for a material improvement in rig count in ‘20.

Yeah. John, I appreciate that fully. I just thought maybe there would need to be a little bit more spot contracting just to kind of keep us flat or as opposed to dipping lower in the fourth quarter. You still have some term coverage in calendar fourth quarter, of course…

Right. Go ahead.

Well, my follow-up is really just the continuing migration towards performance contracting. How quickly do you think the old a la carte day rate model is falling by the wayside? And if you have a third of your fleet, one auto slide now and an increasing proportion of your contracts into integrated commercial - performance-based commercial models. What proportion of your contracts do you think go into that latter bucket as the rig count migrates higher next year? Do you think it will be the majority of your contracts by some point next year on performance metrics?

I think that's probably - I think next year is probably being a bit aggressive because the industry does have a tendency to adopt change relatively slow. At the same time, like we said, we've seen an uptick in adoption of AutoSlide and other technologies. And we've also had - for the few additional contracts we have been successful in being awarded with, most of those are some sort of a performance-base or a new type of commercial model. So there is that example. Again, as we said in our prepared remarks, combining all of these technology solutions with the FlexRig is really beneficial, and there are customers out there, both small and large that have interest in it. The question is, as you said, is, well, how quickly can we get adoption? It's really hard to say, but I do think that we're going to continue to see traction, and I think we will increase it as we go through 2021.

Thank you, John.

Thank you.

Thank you. We'll take our next question from Sean Meakim with JPMorgan. Please go ahead.

Thank you. Hi, John.

Hi, Sean.

So I appreciate all the details on how you're driving cost out of the business. That was definitely helpful. Mark noted in his prepared comments that the goal of the cost reduction program and all of your reference is to meet all of your obligations with free cash. I guess, I was just curious, at the same time as we made last call, you've now three months further into the process. How should we think about the normalized activity environment that's likely required in order for you to do so? So at current levels, not really able to do that, still in a process of taking cost out. What's the type of environment that you think is required on a normalized basis, but where you see your cost structure such that you can meet those obligations, including the dividend?

That's a great question, Sean. And if you look at the cost, we've been able to pull out, I think that as we have some time in our planning horizon, whether it's 2021 or 2022 and an add-back of rigs, depending certainly on the COVID pandemic situation and the resulting demand effects. You don't really have to add a ton of working rigs back to H&P to get to an EBITDA that will cover what I believe will still be for some time, a sustained lower maintenance CapEx level. You can just run the math on those incremental rigs. And it doesn't take the 190 that we just had, put it that way.

Right. Okay. Fair enough. And then a lot of talk on this call as has been the case for several quarters around deploying technology as a point of differentiation. I guess, I would like to get your thoughts around strategy on the medium and long-term. We've been arguing for some time that for that technology is the cost of admission that in order for you to get your hardware to work, you've got to deploy software to create some point of differentiation. But in the long run, best practices get adopted, such that it's hard to create any sustainable competitive advantages. Can you maybe just talk a little bit about how you see the efforts here with AutoSlide, among the others that you really focused on in terms of their ability to create sustained competitive advantages versus the alternative, which is that over time, they get competed away in still a fairly competitive U.S. Land drilling market?

Yeah, Sean, that's again, another good question. But I do think it's a price of admission, but I also believe that not all technologies are created equal, and you see that in other industries as well. I do think that the ability to automate more of the manual processes, you've heard me say before, replacing humans with software and making more of a science and less of an art. I don't know that there's that many players that really have that capability today, and then particularly as you start thinking about leveraging that across a much larger working fleet because the differences in the rig platforms. So there's no doubt the adoption is gaining traction, and we've had customers make comments to us that AutoSlide, they're seeing that as standard equipment and as they pick up rigs in the future, that's the technology that they're going to utilize. So I hear what you're saying. I think it's one of those that there's going to be a lot of different solutions. Obviously, we believe our solution is the best and will be stronger. At the end of the day, it's going to come down to – and again, another reason for the segment change is that in order to be successful with these technologies, you also have to be aligned very closely with the rig fleet. So rather than just having a focus on a technology and a discrete technology or discrete product, we're combining all of that together. And you've got to have a certain amount of expertise, both on the technology side and the rig side. So I know it's not a direct answer to your question. I do think that we're in a competitive position, a strong position, and we'll be able to continue to distance ourselves.

Those are all fair points. Thanks, John.

Thank you. We’ll take our next question from Tommy Moll with Stephens. Please go ahead.

Good morning, and thank you for taking my questions.

Morning, Tommy.

John, in the earlier days of AutoSlide, you framed up the opportunity that H&P was going after in terms of the potential to demand the rig site and then how that substantial spend could be split between, for example, you and your customer. As you think about other opportunities to apply technology to the drilling process, are there any big buckets that you could call out for us that maybe as of today, there's not a solution, but there's one in the pipeline. And I'm thinking about a couple of new types of technology you've rolled out auto stand and autonomous geosteering. I'd be interested for an update on those, but also more just curious about what are the big opportunities that are still out there.

Yeah. Well, you mentioned - you obviously mentioned a couple. AutoSlide, auto stand is really building further to the capability of AutoSlide. We'll be talking more about that in the future. Some of that development has slowed a little bit as a result of customers that we were partnering with that rig counts went down or almost really went to zero. So we've had to work and address, get some additional partners, which we have done and which we're making progress on. I think one of the areas that we're seeing interest in from customers, and I think that's what's most important is having customers that are willing to work with you on this because - I mean, at the end of the day, it's their well, they're wellbore. They're the one that's going to be living with that well for the next 10 or 15 years. But auto geosteering is a great example of one of the alpha and beta development modes that we have going on right now with customers. And we're making a lot of progress there. Again, it's been delayed a little bit because of the downturn. But I think in the next few quarters, we'll have a commercial offering. But that is obviously significantly different than what a drilling provider, would typically be engaged with a customer on. And so to me, it's one of those -- again, as you look at our shift to new commercial models as well as the segment and the North America solutions is that we're providing solutions to customers that are different than what historically a drilling provider would provide. So, I think we've got a lot of opportunity ahead with those. Again, we've got customers that are willing to work with us. We'll have more case studies that we'll be rolling in the coming quarters as well that I think will be helpful.

Okay. Thank you. We'll stay tuned for updates. Shifting to market share, it looks like your share of the active rigs in the lower 48, have dipped a bit in recent months. So I wondered if you could talk about some of the key drivers there. And to the extent they relate to the type of customer you have been working for that maybe adjusted activity faster than the overall market. As you peer forward toward the next cycle, do you envision your customer base evolving at all or do you think it will still look similar to like it did in the last cycle in terms of the mix of, say, public versus private and the size of the customers that you've tended to work for? Noting that you work for all of the above, but just high level, do you see your customer strategy shifting at all?

Well, Tommy, I look at our customer base at the peaks of activity in 2008 and 2014 and then again in 2019 to 2020. And we did a great job in really transitioning and broadening our customer base. I mean, we work for really every size of operator out there. And again, our team has done a great job in doing that and expanding our scope. When you look at the market share, obviously, we've all seen a lot of the rigs that's just been indiscriminate reduction in rig count, sharpest decline in modern history, but that impacts everybody. I think probably the best way to describe it as I look at what's happened on our market share and the share that we've lost. The best thing to do, I think, is to look at the rig count trackers that come out every week. There are several different, and I'm sure you've seen those. And it's really the sharp drop that we've seen is very broad, and it's across all customers. But if you look at the overall reduction, it's been about 65%. And if you look at our top 12 to 15 customers, it's more like 75% reduction in activity. And we even have a few customers that are 85% to close to 100% of their working active fleet went down and we had a 50% to 75% of that of their working fleet. So it's had a really large impact on us. I do think that as we go forward, again, I look at our customer base and we had a strong customer base in March, and we have a strong customer base today, and we're expanding our, I think, abilities and capabilities and working more closely with customers with these new models. And I just think it's going to continue to help us expand our customer base. I feel real good about that.

Thank you, John. That's all for me.

Thanks, Tommy.

Thank you. We'll take our next question from Jeffrey Campbell with Tuohy Brothers. Please go ahead.

Good afternoon. And thanks for taking my questions. John, HP moving to a solutions model strikes me as potentially putting it into more direct competition with major service providers, which for a long time have argued that they should be paid according to increased production that they generate versus comparable averages. So I was kind of wondering two things, if we accept that premise. One, I wondered if you thought that the service history of being solutions based might actually help HP solutions as it tries to move customers to the performance contracts. And b, will you have to compete with the service providers in certain instances for credited deserves on the wells it drills? Or will you keep any competitive solutions off of the HP rigs?

Well, that's a good question, Jeffrey. I don't see us necessarily competing. Actually, there are a few examples where we're partnering with the major service companies, and we have over time. But I do think that we're expanding offerings, and maybe there are some examples where we would be competing head-to-head. But I can't think of any particularly right now that come to mind for me. I do think it's important that we keep working on these solutions. Clearly, the major service providers are pushing technology as well, I guess, the whole industry is. And so I don't see us competing. Mark, do you have any thoughts on that, any other questions?

Well. Yeah, and I'll just - not to beat it to death there, we can talk off-line. But I was specifically thinking of the Halliburton directional drilling tool that they are starting to talk about in their releases. And National Oilwell Varco seems to have one, where they're kind of trying to play both sides of the field they are working with human directional drillers, but they seem to be gradually automating the out of a job. My other question was with kind of sticking with the tech. I was wondering if you -- the extent to which you believe that the solutions and the NAM solutions can become a draw for the international business that you hope to expand overtime. Thanks.

Yes. There are some significant opportunities there. We've seen several, both in South America as well as the Middle East. Both NOCs and IOCs that have interest in auto slide that have - in fact, we have both drill scan as well as MagVAR working. And so I do think there's going to continue to be a pull-through, into international markets. And again, we believe that there's even the potential to have the technologies pull the rig solution through as well. So we do see that as an opportunity, as international markets start to get more active.

Well I will keep an eye on that progression. Thank you.

Thank you.

Thank you. We'll take our next question from Taylor Zurcher with Tudor Pickering and Holt. Please go ahead.

Thank you and good morning. Mark or John, you talked in the prepared remarks about how your CapEx program for 2020, I think, was a bit front-end loaded, and you spent some extra dollars in the front end of the year for bulk purchases. And as a consequence of maintenance CapEx levels for 2021 will be lower. And I'm curious if you could just frame for us how much longer that lower level of maintenance CapEx, at least on a per rig basis, is sustainable? Is that really the inventory there just for 2021, at these sorts of activity levels? Or is it --does it extend beyond that?

Good morning and thanks for the question. It's the bulk purchase activity actually happened in 2018 and primarily in fiscal 2019. We had 200 super-spec rigs working and the super-spec was quite different than its predecessor and that it was working a lot harder. There's a lot more strain on the various components. And there's extra equipment needed to be able to rotate componentry through the system. For example, a super-spec rig has three pumps as opposed the two, et cetera, et cetera. So we had to buy bulk purchases, so to speak, to get the spares levels up. We recertify much of our own equipment ourselves, at our FlexRig machinery center, here in Tulsa, which allows us to have such significant uptime on our rigs. So we got through all of that and got scaled up for a 200 plus-size rig count, as I mentioned in the prepared remarks. So now that we're down at these current levels, we could last some time with the capacity we have on hand. And that does not even account the 37 decommissioned rigs from the impairment that we discussed in April. So quite a bit, I think, of runway at these levels.

Okay. That's helpful. My follow-up is on the some of these performance-based contract models. It seems like every quarter, you seem to gain more customer traction even in a declining market. And so I'm curious, as the market sort of evolved around these contract structures, at least with your customers in recent quarters, is there any 1 model that the market seems to be gravitating towards? And as a lot of your customers have gone from 10, 20, 30-plus rigs down to really bare bones level of activity today, have any of the KPIs and these sorts of contracts changed at all in recent quarters? And is there any way you could frame for us how to think about where the base day rate is for these sorts of contract models right now or moving forward?

Well, we purposely are avoiding the day rate and the day rate comparison because, again, we're providing a different solution than what we have previously. I would say that probably the performance-based type contract has been most popular. But again, like we have mentioned, every customer is different and the things that they're targeting and that they're looking at, in many cases, are different. And those are the areas that we're focusing on. And then that also presents us an opportunity to begin to develop and work on other areas that maybe there's not as much of a focus on at that particular time. So every customer is a little bit different. Our teams are working really hard and very closely with our customers to form even closer partnerships than what we've had in the past. And again, I got to give a big shout out to the success that they've had and the way that they've been working, particularly virtually. We've had we continue to have ongoing conversations with customers and technology reviews, and we're doing those remotely virtually on video calls. And we're able to demonstrate that technology. So it's pretty cool to see that. But I do think we're going to continue to see more adoption as we move forward, and we'll keep you posted.

All right. Thank you.

Thank you.

Thank you. We'll take our next question from Waqar Syed with ATB Capital. Please go ahead.

Thank you for taking my question. To the extent that you can answer, when do you expect your margins to kind of bottom in, in the North America drilling services business?

Well, that’s - Waqar, good morning, that's a - we would hope now, but that's a little bit of a clouded crystal ball, and some of that's going to depend on as we mentioned in prepared remarks, how we shuffle between customers keeping rigs working or moving them to idle but contracted, so they're on the lower warm or cold stack rate, for example, it's just - it's really hard to say definitively.

But you see good - you see prospects, excluding that say, the $50 million retermination revenues, the margin may have bottomed. Is that what you're saying in this quarter, June quarter?

Again, it's just hard for us to say definitively. It's going to depend so much on what happens with a broader environment and the rig count and the mix of the rig count between active and idle, idle but contracted.

Okay. And then just to clarify, the international rig count for the September quarter, did you say it's going to be around 6 active rigs? Did I hear that correctly?

That's correct, five in the Middle East and the one super-spec working in Argentina.

Argentina. Okay. And then where do we go from here? What's kind of -- any thoughts where it could be maybe six, eight months from now?

I wish I did. John is smiling as well. I think it's just -- it's a clouded crystal ball Waqar. What would you say?

If I knew the answer, I wouldn't be asking you.

We're sure hoping 2021 is going to be better, but it's -- again, there's -- tell me what oil prices, where oil prices are going to be, that would help.

Well, if oil prices for the next, let's say, 12 months are around current level, maybe$40, $45 something in that range?

Yes. I think in that case, we have an improving rig count in 2021. It's hard to say what that would be. I mean let's face it, we've got a budget season ahead of us, and our customers will be setting their budgets, and that's what's going to be the driver. That's really the only way that we're going to be able to figure that out.

The OPEC plus reductions have not had any impact on your Middle Eastern rig count?

No. We've been unaffected there. And as we've discussed in prior quarters, we still believe that the Middle East is following the COVID pandemic resolution through time is a great area of opportunity for Helmerich & Payne.

Thanks. That’s all I have.

Thank you, Waqar.

Thank you. And it appears we are out of time for questions. I'd like to turn the call back to John Lindsay for closing remarks.

Okay. Thanks, Tasha. I'll just close up by saying as a result of COVID-19, the industry has experienced perhaps the sharpest decline in activity and most extreme oil price volatility in modern times. It is very difficult to estimate the full extent that pandemic will have on our industry, let alone the magnitude or timing of recovery. It's worth repeating that I'm very proud of our people and the perseverance that they've had in this time of challenge and the uncertainty and have acted decisively to protect the safety and health of our employees, customers and stakeholders. And when I think about safety and health of H&P employees, I will always think about Warren Hubler. Warren is our VP of HS&E and a champion for safety at H&P for 30 years. Warren we'll be retiring soon and I want to thank him for his contribution. Warren has been a driving force and a passion for safety and that has really extended past H&P. He's been a huge industry advocate for safety. He's touched many lives and with his engaging speeches and his calls to action, his lasting legacy will be his actively carrying contributions to health, safety and environmental stewardship in the energy industry and of course, he's mentored many at H&P. So please join me in congratulating Warren and sending our best wishes to him and his wife, Meg. And Tasha, that's all that we have for today. Thanks, everybody for joining us.

Thank you. This does conclude today's program. You may now disconnect your lines, and have a wonderful day.