Tulsa-based Helmerich & Payne Inc. (H&P), one of the top drilling rig contractors in North America, is moving more of its expertise overseas as North American natural gas and oil activity slows.
To that end, the oilfield services giant agreed to pay $1.97 billion to acquire KCA Deutag International Ltd. KCA is a top oilfield services operator in the Middle East, where it has about two-thirds of its operations. It also works in Africa, Europe and South America.
“This is a historic and transformative transaction for the company,” H&P CEO John Lindsay said during the recent fiscal 3Q2024 conference call. The transaction “accelerates our international expansion, particularly in the Middle East, and enhances the company’s global leadership in onshore drilling solutions.”
H&P “is well versed in the challenges brought about by crude oil and natural gas volatility,” the CEO noted. “Our experience in the industry, combined with a Middle East market poised for continued growth, should be indicative of the importance and the compelling reasons for executing on this acquisition at this time.”
The transaction is expected to expand the international land operations to 19% from 1%. Offshore operations would expand to 7% from 4%.
The necessity to build out the business is not surprising, Lindsay told analysts during the conference call. The company was “interrupted” in its pursuit of opportunities by the Covid-19 pandemic. “But even then we continued to look for international opportunities, particularly in the MIddle East.”
The United States and the Middle East, he said, “are the two most prominent oil and gas producing regions in the world. We have often said, ‘if you want to be big in the U.S., you have to be in the Permian Basin. And if you want to be big globally, you have to be in the Middle East.
“This transaction gives H&P immediate scale and core Middle East markets in a way that would be challenging to replicate organically, making H&P one of the larger rig providers in the Middle East.”
While the U.S. land market has stagnated, the Middle East “is not only resilient, but it is expected to see continued strong growth in the coming years at an estimated 9% rate annually through 2026,” Lindsay said.
The merger “provides us an opportunity to export even more rigs than what we would have been thinking about before because of the exposure that we have and the footprint and the experience that KCA Deutag has.”
CFO Mark Smith noted that H&P today has “between 70 and 80 idle super-spec rigs in the U.S.”
Steady In North America
During the fiscal third quarter, the North American Solutions (NAS) segment demonstrated “resilience,” Lindsay noted. “It also remains particularly notable that, despite the more sizable decline in the overall industry rig count, our active rig count remained relatively stable during the quarter…”
In discussing the macro outlook for the NAS business, he said “two influences” have become “prominent in recent years and act as a governor on activity of the oil and gas industry.
“Oil and gas prices have always been cyclical and that used to be the predominant driver in the business. Today, capital discipline is a driving principle. And while this has ushered in a steadier operating environment, it has also been accompanied by slower growth. That said, we believe that prioritizing return on invested capital will bring about a more positive outlook for the industry over time.”
Another influence is “customer consolidation and the efforts to drive efficiency and reliability,” Lindsay said. Exploration and production companies, particularly among Lower 48 firms, have been combining operations at a quick pace over the past year. Most of the activity has been in the Permian.
“Contractual churn remains prevalent in the U.S. market, but our people are doing a good job of managing through this,” the CEO said. “We expect the churn to continue. And as we have seen in recent summers, we also anticipate our active rig count to be flat with perhaps a modest improvement heading into our fiscal year end.”
The NAS segment averaged 150 contracted rigs during the fiscal third quarter from 155 in the second quarter, Smith noted. In the year-ago period, H&P had 166 contracted rigs working in North America.
The exit rig count was 146, which declined late in the quarter because of churn, he said. However, the count remains “within our guided range of between 145 and 151.”
H&P most recently had 148 rigs contracted in North America. “Activity through most of the third quarter was relatively flat,” Smith noted. As he noted during the fiscal 2Q2Q2024 call, “we continue to see signs the rig count is approaching a leveling off point, and we expect in their fourth fiscal quarter with between 147 and 153 rigs working.”
Even with the downturn in the total U.S. rig count this calendar year, “we continue to maintain and even accrete market share,” Smith said. “We expect average pricing and revenue per day to continue to remain relatively flat. We expect costs in the fourth quarter to remain relatively flat as well.”
Meanwhile, H&P’s first super-spec FlexRig arrived in Saudi Arabia during the quarter. It marked “a major step in our strategy to increase our operational presence in the region,” Lindsay said. “Activity levels in the international segment in the fourth fiscal quarter are expected to be comparable with the third fiscal quarter, with the exception of the addition of the first of those eight Saudi Arabia rigs.
“Those rigs are expected to commence work during the fourth quarter once contractual acceptance procedures are completed. The preparation work for the remaining seven super-spec rigs is progressing as planned with export dates expected through the balance of the calendar year.”
Net income in fiscal 3Q2024 fell to $88.7 million (89 cents/share) from year-ago profits of $95.3 million (93 cents). Operating revenue for the NAS arm dipped to $620 million from $642 million.
