Helmerich & Payne, Inc. (NYSE:HP) Q1 2015 Earnings Conference Call - Final Transcript

Jan 29, 2015 • 11:00 am ET

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Helmerich & Payne, Inc. (NYSE:HP) Q1 2015 Earnings Conference Call - Final Transcript

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Operator
Operator

Good day, ladies and gentlemen, and welcome to today's program. [Operator Instructions]. Today's conference is being recorded. And it is now my pleasure to turn the call over to Mr. Juan Pablo Tardio. Please go ahead, sir.

Executive
Juan Pablo Tardio

Thank you, and welcome everyone to Helmerich & Payne's Conference Call and Webcast corresponding to the First Quarter of Fiscal 2015. The speakers today will be John Lindsay, President and CEO; and me, Juan Pablo Tardio, Vice President and CFO.

As usual, and as defined by the US Private Securities Litigation Reform Act of 1995, all forward-looking statements made during this call are based on current expectations and assumptions that are subject to risks and uncertainties as discussed in the company's annual report on Form 10-K and quarterly reports on Form 10-Q. Company's actual results may differ materially from those indicated or implied by such forward-looking statements.

We will also be making reference to certain non-GAAP financial measures, such as segment operating income and operating statistics. You may find the GAAP reconciliation comments and calculations on the last page of today's press release.

I will now turn the call over to John Lindsay.

Executive
John W. Lindsay

Thank you, Juan Pablo, and good morning, everyone. We achieved record levels of revenue and operating income during four consecutive years as well as record revenue and operating income for the first fiscal quarter of 2015.

However, the strong quarter is overshadowed by a rapidly deteriorating energy market. When the oil markets -- with oil markets oversupplied, sluggish demand forecasts, prices at 6-year lows and without confidence that we've reached a pricing floor, great uncertainty exists for our customers. If triple-digit oil prices were unsustainably high, what isn't clear is how far the pendulum may now be swinging to price oil at unsustainable levels on the low side.

As a result, drilling activity and spot pricing has significantly declined in the US. Many industry analysts have predicted a 500 to 900 rig count reduction in US land. And since the peak of activity at the end of October 2014, recent rig counts already appear to be down by 300 to 500 rigs. This wide range depends on the rig count source and how inclusive it is of smaller rigs.

So far, however, the burden of the rig count reductions appear to have been shouldered by our competitor's legacy rig fleet. By using third-party rig counts, we estimate that approximately 58% of the sideline rigs are mechanical rigs and that approximately 27% are SCR rigs, while AC drive rigs make up approximately 15%.

We expect the downturn may also reduce the number of planned new builds for 2015. The industry will most likely deliver 100 to 120 new AC drive rigs throughout the year with an expectation that all of these rigs would be sponsored with term contracts. This total would be a much lower number and cadence than originally estimated in 2014.

Looking at past downcycles, the rig replacement cycle usually accelerates. This can be seen most recently during the peak