Good day, everyone, and welcome to today’s Helmerich & Payne Fiscal Second 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] Please note this call is being recorded and I’ll be standing by should you need any assistance. It is now my pleasure to turn today’s call over to Dave Wilson. Please go ahead.

Thank you, Ashley, and welcome everyone to Helmerich & Payne’s conference call and webcast for the second quarter of fiscal year 2023. 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 securities laws. Such statements are based on current information and management’s expectations as of the state 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 operating income, direct margin 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. Good morning, everyone, and thank you again for joining us today. H&P delivered another outstanding quarter and executed on several strategic objectives. On our Q2 earnings call last year, we announced a goal to achieve direct margins of 50% in our North America Solutions segment, as the pathway to generating an annualized return of our cost of capital. I’m pleased to report we have achieved that margin goal with the second fiscal quarter results. Reaching this milestone enabled us to realize annualized mid-teens return on invested capital this fiscal year, which is the first time we have achieved a double-digit return since the 2014 upcycle. Our focus now turns to maintaining this progress in a challenging market environment. Our super-spec FlexRig utilization remains high and we are committed to this level of financial return to maintain economically sustainable operations, which is in the best interest of all our stakeholders. Political and economic uncertainty has plagued the global crude oil market over the past few quarters and the U.S. natural gas market has been particularly weak due to excess supply following a relatively warm winter and offline LNG takeaway capacity, both of which should be short-term transitory issues. Still volatility in both commodity markets seems to have fostered an atmosphere of pessimism surrounding the industry, which we believe is a short-term challenge and could reverse itself over the second half of 2023. It is during times like these that it’s good to remind ourselves how critical abundant cost effective and secure energy is to sustaining security and the broader global economy. We remain optimistic about the long-term energy fundamentals, which favor a growing global demand for natural gas as a more environmentally friendly energy source in the future and that will require more drilling to meet supply needs.…

Thanks, John. Today, I will review our fiscal second quarter 2023 operating results, provide guidance for the third quarter, update full fiscal year 2023 guidance as appropriate and comment on our financial position. Let me start with highlights for the recently completed second quarter ended March 31, 2023. The company generated quarterly revenues of $769 million versus $720 million from the previous quarter. As expected, the quarterly increase in revenue was due primarily to focused efforts to move our North America fleet pricing higher. Total direct operating costs were $450 million for the second quarter versus $429 million for the previous quarter. The sequential increase is attributable to higher average active per rig costs in North America. General and administrative expenses were approximately $53 million for the second quarter, slightly higher than expected due to miscellaneous information technology and professional services costs. During the second quarter, we recognized a gain of approximately $40 million, primarily related to the fair market value of our equity investments, which is reported as a part of gain on investment securities and our consolidated statement of operations. Our Q2 effective tax rate was approximately 24%, which is within our previously guided range. To summarize this quarter’s results, H&P earned a profit of $1.55 per diluted share versus $0.91 in the previous quarter. As highlighted in our press release, second quarter earnings per share were positively impacted by a net $0.29 cent gain per share, a select items consisting of the aforementioned gain on investment securities. Absent these select items, adjusted diluted earnings per share were $1.26 in the second fiscal quarter versus an adjusted $1.11 during the first fiscal quarter. Capital expenditures for the second quarter of fiscal 2023 were $85 million, which was $11 million less than the previous quarter CapEx. I will comment…

Certainly. [Operator Instructions] And we will take our first question from David Smith with Pickering Energy. Please go ahead.

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

Good morning, Dave.

So congratulations on getting to the 50% margin target that you set and an extra congratulations on showing the discipline leadership to keep those margins. I have kind of a two-part question. Thinking about your exit rate for your lower 48 count last December versus your projection for the June exit. I understand natural gas activity factors in there. Wanted to know if you could give us any color on the customer mix of rigs being dropped. And then secondly, if you could give us an update on what portion of your fleet is on performance based contracts and if you see that mix changing from last December to the June exit.

Sure, David. Yes, the mix on the releases of the rigs we’ve had released thus far, it’s approximately 70% are private companies. And as we – what was the second part of your question? Oh yes, performance contract. Yes, we’ve – we’re at 45% of the current working fleet has – is under some sort of a performance contract or another.

And David, this is Mark. We’ve seen those – that tick up a bit since the prior quarter, we’re around 40%, so some gradual increase up to 45% as our sales force continues to work with customers for ways to get our revenue per day to acceptable level for our return generations required, while also getting the customers the right KPIs they need to derive value on their side.

I appreciate that color. And a quick follow-up, if I may. I don’t want to be shortsighted, but thinking about capital allocation, to the extent that international growth CapEx could be discretionary. How do you kind of see the opportunity to deploy capital for international growth compared to buying back your stock at these levels? And maybe that’s just a – you can clearly do both $0.5 million left on the authorization this year.

Yes, that’s right. And I would lean toward all the above. I think we’ve got the balance sheet to both, obviously, we would love to do more internationally, as you’ve seen it grip – it’s a pretty slow growth, but we do think there’s opportunities and again, hopefully, we’ll be moving some additional assets there in the back half of this year. But we’ve talked a lot about our share buy backs and looking at it from an opportunistic perspective and there’s obviously a lot of opportunity. Anything you would add?

No.

Great. Thank you so much.

Thanks, David.

We will take our next question from Derek Podhaizer with Barclays. Please go ahead.

Hey guys, good morning. Going back to the rig decline, the exit about 20 to 25 rigs down. Do you know – is that a – is that industry rigs coming off? I know it’s your rig count, but are some of those E&Ps picking up lower price rigs or lower tier rigs? Just want to know if that’s an industry rig count drop as well or if you’re seeing some offsets with some ads from those E&Ps that you’re dropping your rigs with.

Yes. Derek, I don’t have clear insight into all the comparisons, but I’m pretty certain that on the natural gas front, those rigs are not being replaced. I mean, those rigs are being – our rigs and I’m sure other competitor rigs are being released as a result of low gas prices. And so I don’t think that’s surprising. I’m sure there are other instances where we are being replaced by a lower cost per day rig, and I think that’s really the key thing to focus on there is that it’s – it may be a lower cost per day, but it’s not a lower cost of the overall project. And fortunately, we have been able to maintain a level of pricing through the performance contract construct. Because in a traditional fashion, all you really have to negotiate with a customer with is the day rate, if that’s all you’re pricing your value on. So there’s a great opportunity in working with customers to drive additional value and creating a win-win through that performance based contract. So it’s – we’re getting a lot of traction, it’s been very positive, obviously, we do still have traditional day rate contracts and we have great performance with those customers as well. But it is a different way to approach the business.

I understood. And I know the last question, you said that 70% of those rig drops were private. Can you break out the gas versus private? Because I know at last call you talked about, I think 28 rigs being gas, half – little over half of those were on term contracts. So I would suspect those were safe. So maybe just a little color on the mix between gas versus oil rig drops.

Derek, this is Mark. We can get back with you on details there, but suffice it to say that the predominance of the privates for us we’re also weighted towards those gas basins, but we can follow up with more details.

Got it. Okay. And just sneak one more in. Given that you’ve lowered the – your activity estimates for the rest of the year, does this free up some of the equipment to potentially go over to the Middle East or even down into Australia, maybe more than you thought of – maybe not for this year, but maybe your fiscal 2024? Have you started to have conversations around maybe increasing the rig that you send over?

We really haven’t at this point, Derek, again our belief is the second half of the year, particularly Q4, we expect not the same type of response, but a similar response where it is that buying season. The difference, of course, this go around the past three years we’ve been reactivating rigs out of long-term stack. And so now we’ll be reactivating rigs that have been idled for a very short period of time, so it’ll be very low cost to reactivate those rigs and get those rigs back working. So it’s really hard to say at this point in time. I mean, it does obviously take a lot of pressure out of the supply chain, because there have been supply chain challenges, but over time, clearly, our goal would be to move more of our super spec capacity to international markets as those opportunities arise.

Great. Appreciate the color. I’ll turn it back.

We’ll take our next question from Saurabh Pant with Bank of America. Please go ahead.

Good morning.

, :

Good morning, gentlemen. Thanks for letting me in. I wanted to focus on your comments about the rig count kind of coming back up or increasing in the back half of the year. And I wanted to kind of get a little bit more color around there, but that kind of leads me to believe that the guidance that you gave for end of the calendar second quarter of 155 to 160 rigs in the U.S. kind of being a bottom is – am I thinking about that correctly? And is that the kind of conversations you’re having with your customers that they’re expected to pick up rigs in the third quarter and going into the fourth quarter calendar quarters?

I think that’s a good way to look at it, that that’s what our hope is. We are having conversations with some customers about some June opportunities. You’ve probably heard me say before, it’s difficult to see out much past a quarter but we are having some conversations, and so that leads us to believe that, that we will start picking some rigs back up. And again, hopefully that is the bottom at that point.

Okay. And just one further one from me. The rigs that you’re stacking out today, are they moving around to other basins, are you stacking them in basin with hopes that this is only a transitory event and those rigs would go back to work in those basins as we progress through the year and go into 2024.

Don, this is Mark. When we finish a rig working and it starts to idle out, the customer pays for the mobilization and that goes to the yard in the district or the region where it is. And when we are idling those rigs today, those costs are really de minimis I’d say compared to what we might have done to idle a rig, for example, comparatively in 2020, because then we were doing a lot of preservation work and preparing those for a long idle period. Today, we’re putting them in the yard and having them just sit ready to roll for when they may be able to go back to work in the next three months to six months. So that on the other end, the reactivation cost is also minimal and it’s in the basin where it was and can go back to work quickly.

Yes. I just – and I’ll just add to that, and we really as you look at the basins that we’re in and our position in the basins we like the position of the rigs, we’re the number one provider in the Permian, the Eagle Ford, the Haynesville. We’ve got great positions in the other basins. So as Mark said, they’ll be there well-positioned to pick up right where they left off.

I appreciate you letting me in. Thank you.

Thank you, Don.

We will take our next question from Keith Mackey with RBC Capital Markets. Please go ahead.

Hi, good morning, and thanks for taking the questions. Just the first one on the performance based contracts, understand its 45% or 43% of the current fleet. Is there a way to quantify the benefit you get from the performance based contracts? And you talked about the footage per day increases. Is there a way to quantify exactly have you been paid commensurately for that progress relative to just what’s happened in the market?

Yes. We have – we do have some metrics around that. I think one of the ways to think about it is, as you think about just a base if you will, a base day rate and then being able to look at a performance profile that a customer wants to hit, not just drilling performance, but also wellbore placement, wellbore quality, as an example, footage in the lateral, there’s a lot of different ways customers look at what it is they’re trying to achieve. And so there’s definitely a premium and – but in some cases, ultimately what we’re doing is, we’re trying to get our rates at that mid-30s like I had mentioned that 50% gross margin, which is delivering that mid-teens ROIC. So that’s ultimately the end goal. And as I said before, rather than only negotiating on a day rate basis, and the answer is either yes or no. You’ve got some optionality on the value proposition, that, that we’re looking into. So it’s a really valuable way to create this win-win with us and our customer, because let’s face it, at the end of the day, our day rate – our total revenue on the course of drilling well isn’t a huge needle mover on the total cost of the well. The real benefits are saving days on well and improving wellbore quality placement, reliability, quality, all those things are the drivers that we’re spending a lot of time talking with our customers about.

Got it. Got it. And if we could just follow-up on your comments about getting the return on capital to exceed cost of capital, and that being roughly around where things are now in terms of rates and pricing. Can you just maybe give us a bit of commentary on sort of where you think we are in the cycle given that dynamic, our leading rates materially above your cost of capital, are they just catching up to where it should be and ultimately, what you think your – what will happen to your longer-term cost of capital given the trajectory of the industry and what that ultimately means for the rates you need to make in the current environment in the years ahead?

Yes. That’s a great question, Keith. We’re – we’ve been saying this now for a couple of quarters. We’re really not focused on that leading edge price, what we’re really focused on is getting to that, that the – all the rigs to that average that, that we’ve talked about. And obviously, it’s extremely important for us as an organization to be able to have that, that mid-teens type return. Again, we haven’t been there since 2014 and we’ve made a lot of investments in the company and our people and our rigs and technologies, and we’re doing that because we’re doing our dead [ph] level best to partner with our customers and try to deliver as much value as possible for them and with them. And so that’s what’s driving that. And again, we’ve talked about the cost side of the equation. Our costs are up over $5,000 a day since 2014. So that’s really ultimately the driver for us and obviously, let’s face it. We’ve got to have returns that are above our cost of capital or we’re not an investible company. So that’s a big part of the way we’re looking at this. We – again, I mentioned the comment that occasionally we’ll have an investor visit with us and say something along the lines of the current downturn. It’s like – well, this is not a downturn. This is a very normal part of the cycle within a longer-term upcycle you can look back at different periods over the last 20 years. And you can see that for yourself. There’s a lot of volatility in rig activity. So again, we feel good about the position, but that’s our focus. It’s focused on the returns over market share.

Okay. That’s it for me. Thanks for the color.

Thank you.

And this concludes our Q&A section. I’ll turn the call back over to John Lindsay for closing remarks.

Thank you, Ashley. And listen, thanks again for joining us today. I know there’s a lot of calls and it’s a really busy day. So thanks for joining us. We remain optimistic about the future. Really pleased with the momentum that we have as an organization. We recognize the headwinds and the challenges, but I don’t think anybody’s better positioned than H&P to perform through this cycle. As we’ve said multiple times today, we’re focused on our returns, creating returns over market share. We think we’re really well-positioned with great technology and people and solutions to really provide great outcomes for our customers. So thanks 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.