Good day, everyone, and welcome to today’s Helmerich & Payne Fiscal Fourth Quarter Earnings 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] I will be sending by should you need any assistance. And it is now my pleasure to turn today’s call over to Vice President of Investor Relations, Dave Wilson, please go ahead.

Thank you, Ashley, and welcome everyone to Helmerich & Payne’s conference call and webcast for the fourth quarter and fiscal year ended 2022. 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’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 will also be making reference to certain non-GAAP financial measures such as segment, direct margins, 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 to John Lindsay.

Thank you, Dave, and good morning, everyone. I appreciate you joining us on our 2022 fiscal year end call. We’re pleased with our fourth quarter results and are optimistic about fiscal 2023. My primary things will focus on 3 areas this morning: North America Solutions pricing and margin cycle dynamics; H&P’s international opportunities; and our technology and sustainability investments. Our financial results improved substantially quarter-over-quarter as pricing increases, and better contract economics took hold across more of our FlexRig fleet. You may recall from our previous earnings calls this year, we made the point that our rig pricing needed to improve to a level that provides at least a 50% gross margin in order to achieve returns above our cost of capital. I’m encouraged to report that our leading-edge pricing levels are now delivering margins in line with that goal. These are results not seen since the 2012, 2014 upcycle. Strong demand from customers coupled with rollovers of term contracts, should help drive average pricing higher across our active fleet and we believe there is significant momentum heading into fiscal 2023. We plan to maintain a posture of fiscal discipline in our North America Solutions segment and continue to move our average rig margins toward leading-edge pricing and margins. As such, we expect our financial results for the first fiscal quarter of 2023 to follow the improving trend of the past 2 fiscal quarters. We are also seeing continued demand for our technology solutions. These solutions have and are anticipated to continue to add significant value for our customers. Many of our technology products and automation solutions are in high demand and are quickly becoming integral parts of the bid process, daily operational workflows and performance-based contracts. These solutions are contributing to H&P becoming the leading drilling solutions provider to…

Thanks, John. Today, I will review our fiscal fourth quarter and full year 2022 operating results; provide guidance for the first quarter and full fiscal year 2023 is appropriate and comment on our financial position. Let me start with highlights for the recently completed fourth quarter and fiscal year ended September 30, 2022, the company generated quarterly revenues of $631 million versus $550 million in the previous quarter. The increase in revenue relates to continued price increases in the quarter for the North America Solutions fleet. Correspondingly, total direct operating costs incurred were $412 million for the fourth quarter versus $377 million for the previous quarter. The sequential increase was driven by some structural inflation, but to a greater extent maintenance and supply expensive volatility that we typically see in North America Solutions quarter-to-quarter, which ended up being on the higher end of the range this quarter. General and administrative expenses totaled $47 million for the fourth quarter, and $182 million for fiscal 2022, which is in line with our expectations. In other income expense was a loss of approximately $9 million, which was primarily driven by a lump sum distribution for participants exiting our pension plan. Our Q4 effective income tax rate was approximately 38%, which is higher than the statutory rate of 21% primarily because of foreign income taxes and permanent book to tax differences. As we crossed the line to become profitable towards the end of the fiscal year, we accrued additional U.S. cash taxes in fiscal 2022, of which approximately $45 million remains that we plan to pay with the extended filing of our tax return in January of 2023. To summarize fourth quarter results, H&P earned a profit of $0.42 per diluted share versus $0.16 in the previous quarter. Earnings per share were negatively impacted…

Thank you. [Operator Instructions] And we’ll take our first question from Derek Podhaizer with Barclays. Please go ahead.

Hey, good morning, guys. I just wanted to first ask about the leading-edge day rates and moving the average up to that level. So maybe could you just talk to me about how long that lag is to close that gap? I think, you just got it about 30,000 of day rates for the fiscal 1Q, leading-edge sounds like it’s in the upper 30,000 or it has hit 40,000. Just maybe walk us through how you can roll the term contracts over there to reach that level and when we can see it in the financials?

Good morning. This is John. I don’t have the exact timing on that day, where Mark may have more, more color on that. But, you nailed it. That is our focus. And we are seeing the results of that quarter-over-quarter we’ll continue to move those averages both in the spot and term closer to that leading edge. And that’s really our focus, that’s where the real opportunity set is there. Mark, do you have any further color on that?

Well, our average spot is about – what they have…

Yeah, then that’s not including the day rate and revenues…

Revenue average is about 37.

Yes.

So the delta if you think of legacy, ancillary and technology and all in our revenue per day at the spot is about 37,000 a day. Our term, as we mentioned earlier, is about 30,000 revenue per day, and I think leading edge is getting up to around 41,000 a day.

Derek, that’s why we mentioned the 65 rigs we have rolling off between now and March 31 kind of gives you an idea of that progression, how you model that into the year.

Got you. Okay, that’s helpful. I want to jump over to international, obviously, a lot of moving pieces going on. Can you walk us through you just exited about 12 rigs, you said? Where do you expect to exit fiscal 2023? Just trying to get an idea of the cadence of the rig activations between Argentina, Middle East and Australia? And then what can we expect as far as earnings and margin power in the international region, how much that’s going to contribute to total company?

Well, I think we just guided to somewhere around 13 rigs at the end of December, with the one we plan to add in Argentina. But as you move through fiscal 2023, we’ll have an eye on the 3 remaining Flex 3s in Argentina that will be upgraded to super-spec and trying to deploy those. Importantly, we also have one that’s moving to Australia, as we mentioned. And that looks to spot in the summer of 2023. And it was originally by the way, earmarked to go to the Middle East hub, but it’s been redirected for this Tamboran opportunity. And then the 6 rigs that we have mentioned that are being recommissioned and converted to walking in the second half of the year. Those are all geared towards various bid tenders. We’re participating in with an eye towards the Middle East. There are several burgeoning Gulf Coast Country unconventional plays, where those rigs can differentiate. And we’ve been working, as we have talked about is in successive quarters on these calls, we’ve been working in increasing our brand presence in the region, which was aided by our transaction in partnership with ADNOC and we’re actively participating and looking to differentiate in the unconventional plays in gas and oil, I think, it was a real focus in several of these countries currently on natural gas.

Okay. Anything on what we could expect from these rigs when they’re fully contributing on as far as a daily margin, they’re just the earnings power on these rigs?

I think the earnings power on these rigs would be the equivalent with what you’re seeing today and more. And again, that you had another year away before those 6 would actually beginning to turn to the right, so more to come. But we certainly targeted returns for these just like we do for everything in the team [ph].

Got it. Okay. I appreciate the color. Turn it back.

Thank you.

And we’ll go next to David Smith with Pickering Energy. Go ahead, please.

Hey, good morning. Thank you for taking my questions.

Good morning, David.

Good morning, David.

Just a quick follow-up on that last question about the 6 rigs you plan to export from the stacked U.S. fleet. I think you said those are targeted tenders you’re bidding on. I imagine there’s a fairly long lead time in those tenders. So we’ll be thinking about fiscal 2024 is when we could start seeing a contribution from those?

That’s correct, David.

That’s correct.

Appreciate it. And just regarding the commentary about the base and the supplemental dividend, you’re representing about two-thirds of expected cash flow, less CapEx in fiscal 2023. Is that roughly two-thirds figure indicative of your longer term thinking on returning cash via the base and supplemental dividends?

David, this is really – our 2023 plan is really just that – it’s our 2023 plan. Because that’s the – you’ve heard me say before, it’s hard to see much past a quarter in this business, and we’re forecasting out a year and making that commitment for 2023. So, our intent – our hope is that in future fiscal years, we’ll have similar if not even better, but that’s kind of we’re – this is just the 2023. Anything to add?

Yes, I just add, David is, John and I, the management team and discussions with the board, we think through several capital allocation criteria. And I’ll just kind of take through these, one is maintaining a minimum liquidity for operations, which is less than the cash we had on hand is September 30. We have a – with a view that, as we have with our conservative stewardship of the balance sheet and a view to risk management, and also positioning for optionality we prefer $200 million minimum cash balance. Second consideration in our capital allocation criteria, as we have long committed to our creditors is in our fiscal stewardship is assessing cash generation to ensure we maintain the leverage of less than 2 times, less than 2 turns. Third is, we’re opportunistic for accretive investment opportunities with as I said just a minute ago in a previous question, with mid-to-high teen returns individually and that contribute to our goals for consolidated ROIC in the same range. And fourth, opportunistic and using the evergreen 4 million share-repurchase authorization. Example of that would really be last November and December a year ago, when we believe that there was a dislocation in our share price, which led us to repurchase shares in the first quarter of fiscal 2022. And then, finally, I would say towards the end of the fiscal year and consideration of all the aforementioned if an excess cash balance remains and management and the board will consider further additional dividends. And then, as John said, then we’ll move forward and develop the fiscal 2024 budget, which would reassess forward fiscal year cash generation above CapEx at that time and above the established base dividend to work with the board to figure out the 2024 capital allocation plan.

I do appreciate all that color. And I will jump back in the queue.

All right, David. Thank you.

We will take our next question from Luke Lemoine with Piper Sandler. Please go ahead.

Hey, good morning.

Good morning, Luke.

John, if we look at your 16 reactivations this fiscal year. I imagine there’s a few things going on with incremental activity, some operators upgrading to super-spec rigs, and maybe some market share gains as well from other super-spec rig providers. Can you talk about these buckets a little more? And maybe which of these you see as the main driver?

Luke, I think, there’s – as we said, there’s several drivers, I think, you’ve heard us the 16 that the ones that we have committed are mostly large public companies, which was really has been our expectation. I think most people’s expectations as the private companies have contributed a lot of rigs, active rigs to the fleet over the last couple of years. So, we think most of that will be directed towards the larger players. We think most of that will also be in the Permian, but not all. I mean, we do have Haynesville, I think there might be an Eagle Ford. There’s some North Dakota opportunities, I think, we may even have an Oklahoma rig in there. But I think the majority of it is focused in the Permian. But going back to our discussion earlier, so much of the demand out there is being provided through this, at least in our fleet, and I have to suspect other companies are the same. It is really a function of the churn that we’re seeing quarter-over-quarter, and so a lot of that demand is satisfied there. So, as an example, if what we found is on the 16 there was more churn than expected. It could be that we wouldn’t put all 16 of those rigs out into the market, because we’re satisfying that demand through other means. So, does that answer your question?

Well, I guess – yes, partly. But maybe you talked about churn a lot, and now just to, do you think maybe it’s some of the churn in other people’s fleets that you’re gaining some market share? Or do you think these are purely incremental rigs in the large public players?

Yeah, that’s a good point. It’s a mix, we’ve had – some of these rigs are incremental, some of these rigs are replacement. But as you know, we replace another peers rig that rig then moves over and satisfies demand somewhere else, as you just start thinking about these points of demand in the market. Those are going to be satisfied in many cases from other rigs that are rolling off of one to the other. I think, two-thirds are incremental, and then the other third are replacement for what we have committed right now.

Okay. Got it. And then maybe just kind of on the overall market outlook with two-thirds of those being incremental, you have about a quarter of the overall market share. Do you think that’s kind of indicative of overall market growth or hard to say?

I think it’s really hard to say at this point. We feel like that there’ll be modest growth, obviously, from our rig count, and we would consider that to be modest. As we’ve said, probably, maybe too many times, but we’re really focused on capital discipline, and making sure than that, we don’t put a rig in the market that is an excess rig, if you will, just based on the demand criteria. We can utilize a rig that’s hot that’s rolling off from somebody else, and then we can do that. But it’s really hard to say, I mean, obviously, if you just use the math on our market share, adding 40 to 50 rigs back over the next – what 13, 14 months, I think is reasonable. But it’s just really hard – as you know, it’s really hard to call from this point.

Okay, very helpful. Thanks so much.

Thank you.

And we’ll take our next question from Arun Jayaram with JPMorgan. Please go ahead.

Good morning. You guys mentioned that about two-thirds of the 16 rigs that you plan to reactivate have been contracted. John, you mentioned that you’re looking for a minimum of 2 years in terms of commitment to put those into the field. Wondering if you could give us a sense of where pricing is for term contracts relative to the leading edge that you pegged in the low-40s.

On the term contracts, the majority of those rigs are in some sort of a performance based contract in the 2-year term contract. And our expectation would be that, again, assuming performance and that’s what we’re focused on with our customers. We’re going to be closer to that leading edge pricing with those term contracts. Again, they’re performance based, but we’ve been able to deliver on those, so we feel good about the pricing. So, in other words, we’re not putting – we’re not taking and really it’s not just with those rigs, but all rigs. We’re not entering into term contract at a discount or entering into term contract at leading-edge or close to leading-edge with the opportunity to get some additional revenue and margin based on performance and sharing in those savings.

Great. Just to follow-up, John, on the company’s international growth strategy, I think, a quarter, your CapEx this year, or fiscal year will be focused on the international side of the business. As we look forward to fiscal year 2024, can you give us – maybe frame some ranges of potential rigs that you could see deployed internationally? And as you think about participating in tender, are you participating with other service companies or talking those about the bidding dynamics particularly as we think about the Middle East?

Well, Arun, you know the market very well in the Middle East, and these are long – these are long plays. And so, thinking about 2024, I think, really makes a lot of sense. We were recently in Abu Dhabi here a few week – 2, 3 weeks ago with ADIPEC conference and a lot of excitement there. And, of course, we’re excited about opportunities in Abu Dhabi and Saudi, Oman, other countries that that have shown some interest, and the majority of that is for unconventional resource play development. And, of course, nobody’s drilled more horizontal wells than H&P. So, I think, we have a lot to add there. So, these tenders are take a long time, you have to have a lot of patience. But again, it’s a long game, and that’s what we’re focused on. Mark, do you have anything, you would?

No, I agree, John. As you mentioned, unconventional, and I would just add maybe a footnote, Arun, as we look at these various tenders were participating in and a bonafide participation in them. And with many of these analyses, and boots on the ground, sales folks in the region there that we’ve invested in the last couple of years. We’re looking at some of these tenders with scale. So not one or two rigs, but 4, 5, 6 rigs, and that’s each and that’s why you see our investment this year is setting us up for margin generation accompanied [ph] to the company in 2024 and beyond.

Right. And maybe just a quick follow-up here is just on the frame agreement with the ADNOC Drilling, how does that work relative to the – your companies – your H&P specific opportunities, how that work in Abu Dhabi?

Well, we’ve delivered the 8 rigs that we talked about – we’ve sold. We have an agreement where we’re working with them on conventional projects. So that continues to trend. Well, we really don’t have a whole lot to more to add to that right now. But there’ll be more to come as we go through the next several quarters.

Great. Thanks a lot, John.

Thank you.

And we’ll take our next question from Waqar Syed with ATB Capital Markets. Please go ahead.

Thank you. Good morning. John, the rig needed for unconventional drilling in the Middle East. Is it the similar type of super-spec rig is 1,500 horsepower enough for that type of drilling? Or do you need to have a bigger rig? Could you maybe elaborate what type of rig that would be needed?

Yeah, good morning, Waqar. Now that’s exactly right. Really our Flex 3, both Flex 3 skid and Flex 3 walking rigs are both very well suited for the wells that we’ve looked at this point. And those rigs have performed very, very well in Abu Dhabi in the past, when we were drilling previously. I don’t think they were doing any horizontal. They were doing a lot of really long directional type wells. But now they’re very well suited for that work and, I think the national companies we’re talking to and we’re very excited about the opportunity.

Great. And then, Mark, your EBITDA margins in international business for about 1% or so, in the past, in a couple of years ago, they were as high as low 20%. Where do you think these EBITDA margins could go through this fiscal year?

Well, if you look at the fiscal year starting off with a higher rig count to begin with, I think, you’ll certainly see the year-over-year margin expansion. But I’ll just caveat that even that margin expansion is even with a bit of a drag on some of the expenses we’re incurring and setting up the Middle East and Australia, more focus on the Middle East hub. But even with that, you’re going to see margin expansion this year.

Could you quantify those expenses in the Middle East and Australia?

No. No. It’s really early days in Australia. There’s a lot of planning work that’s happening for setting up operations on the ground in the summer of 2023. I will tell you, as I mentioned earlier, that rig that’s targeted to be shipped in January, much of the work was already incurred on that in fiscal 2022. But as it relates to the Middle East hub quite a bit of work is happening. And you’ll just see that to continue be a little bit of drag on. As I said, the margin expansion for the segment is up, simply because of the number of units working and getting better and better pricing on those units. It’s just a scale thing. And we think that’ll do nothing but the grocery time. Yeah, we’ll

Yeah, Waqar that – we’re excited about that opportunity, as Mark said, and there’s a lot of experience on the ground there. Tamboran has – guys that have done a lot of work on unconventional plays in the U.S., and we’re excited to be working with them. We think it’s a great opportunity, again, it’s really early days, but it looks like an exciting play.

Absolutely. And then just final question, John, what’s your contracting strategy change, given that you now have like this capital allocation program and you’ve got this $1.94 type dividend that you’re planning for fiscal year 2023?

No. Waqar, I’m not completely following the change of contracting strategy.

Well, now, I’m just saying like you have about, let’s say, two-thirds rigs contracted right now. And that’s pretty much consistent of what you’ve had over the last 1-year or so. And, I mean, like 50% over the next 6 months. I’m just thinking that would you get a higher number of rigs on the term contracts for the subsequent 6 months going forward? Are you okay with that, despite having a high level of dividend that you’d be paying out?

Yeah, we’re targeting in a 50% to 60% range. And that really hasn’t been driven by the dividend levels. I mean, the cash that we’re generating is – as Mark described, we should have excess cash outside of that plan. Mark, what would you add?

I would just say today, we talked about so many of them rolling over between now and the end of March, and their comment, Waqar, the average term length today is probably 10, 11 months. So, you have to just remember that by and large, those – so many of the term contracts that have existed from rollovers back from the super-spec upgrading timeframe are really in the 1-year calendar period. That’s why so much of our capital allocation plan is as a result of the customers, and they’re really adhering to their annual budgets. And so that really gives us an underpinning in our confidence for the annual supplemental plan. But, overall, where we are in this cycle, and due to that, due to not having new bills, due to not having significant investments and super-spec upgrades, and due to customers living in an annual fiscal year budget as opposed to cash flow, you see a lot of 12-month terms.

Yeah. Okay. Thank you very much.

Much different cycle, Waqar, than what we experienced previously, because obviously we’re not looking at new bills, we don’t have all that capital outlay. And as we’ve said, we’re really focused on this in margin generation, it’s a margin cycle, not really a growth cycle. So we’re excited about that.

Wonderful. Thank you very much.

Thank you.

We’ll go next on Marc Bianchi with Cowen. Please go ahead.

Hey, thanks. Mark, I think in your prepared remarks, you mentioned a $1,500 sequential benefit to margin. Was that meant for the March quarter? And then does that kind of continue in the subsequent quarters was that the message just because of how the contracts kind of roll off and reprice?

It’s actually happening for this December quarter, and then each of the next couple. But that’s exactly right, Mark, that’s what I was talking about is that rollover, when you pull the lower term out, helps the average of the remaining on term.

Okay. With the benefit in December quarter should be better than the $1,500. If I’m just trying to back into what’s implied by the 250 to 270. Is that correct?

Yeah, you’re correct. Yeah, it’s a little bit better.

Okay. The implication of this sort of leading-edge 40,000 or so. And, John, you made the comment about it, the term contract is being performance based and being able to kind of get to that 40,000. And if your costs are 16,500 [ph], then we’re getting into the 23,500 kind of margin per day. At some point, once the fleet rolls. I mean, if I just carry this out, it seems like you could be there in the beginning of March 2024. I mean, is that the right way to think about where this ultimately goes? Or are there other puts and takes that you’d call out that maybe we shouldn’t model it that way?

Well, those are the numbers. And, we are – again, we’re focused, as I said earlier on getting the averages for spot and term closer to leading-edge. What we haven’t said is, how many rigs are closer to that leading-edge? That is our focus. And so, again, the numbers are the numbers. So. Yeah.

Yeah. Okay, well, just one more for me on the walking upgrade. So just doing 6 for North America at this point? What’s the scenario where you would be doing back on that sort of one per month cadence? And what should we think about that beyond 2023? Are you going to kind of turn the whole fleet over to walking at some point? Or what’s the long-term thought on that?

Well, Marc, as you’ve heard us day before, I mean, you just look at the fleet that’s out there working today, and the lion’s share that are Flex 3 skid rigs. And you’re right, the 6 rigs, we’ve done 6 conversion to walking. But that’s really a function of customer demand. We’ve actually had more demand for FlexRigs, skid rigs, and we have walking rigs. So it’s all going to be dependent upon customer demand, the types of wells that are being drilled. It’s just really a wide range. The other 6 rigs that we are converting, those are the ones that are talking about sending to the Middle East. So we’re going to do what is in the best interest of satisfying customer demand and what’s in the best interest of shareholders. But, sure, it won’t be a conversion to the entire fleet, again, there are customers out there that all they use our Flex 3 skid rigs.

Yep. Super. Thanks so much, John. I’ll turn it back.

Thank you.

At this time, I’ll turn the call back over to John Lindsay, for any closing remarks.

Thank you, Ashley. And thanks, again, to all of you for joining us today. We know there’s a lot going on. There’s a lot of priorities that are going on out there at this time of the year. So we really appreciate your time. I’ll tell you again that of the H&P team and I’ve said it and I’ll continue to say it, we’re laser focused on delivering value to customers and shareholders. We aim to deliver value to customers through top-tier performance, safety and reliability and to our shareholders. We’re going to continue to focus on improving our rig margins and grow growth in our returns on capital. So thank you again for your time, and have a great day.

Thank you. This does conclude today’s program. Thank you for your participation. You may disconnect at any time.