Contract drilling services provider Helmerich & Payne, Inc. (HP) reported solid results for the first fiscal quarter of 2010 (ending December 31, 2009), buoyed by improving rig counts on the back of rebounding commodity prices. Earnings per share, excluding gains from non-operating items, came in at 58 cents, surpassing the Zacks Consensus Estimate of 50 cents.
 
It was the company’s third positive earnings surprise in the past 4 quarters. Keeping in mind Helmerich & Payne’s history of outperformance, estimates for the current quarter (second quarter of 2010) have been trending slightly up over the past month, with the quarterly Zacks Consensus Estimate rising by a penny. Overall, 4 out of the 16 analysts covering the stock have increased their second quarter projections during that time, while there have been no downward revisions. 
 
However, earnings and revenue comparisons (for the reported quarter) with the year-earlier period were quite ugly, severely hampered by lower rig utilization (especially in the U.S. land drilling market) amid weak demand for drilling services. Helmerich & Payne’s adjusted earnings per share slumped approximately 57.0% (from $1.35 to 58 cents), while revenues declined 35.9% to $399.8 million.
 
U.S. Land Operations
 
During the quarter, operating revenues totaled $285.1 million (71% of total revenue), down 40.0% year-over-year. Average rig revenue per operating day was $24,113, down 10.9%, while average rig margin per day decreased 12.1% to $13,030. Additionally utilization levels were substantially down to 62% (from 95% in the first quarter of 2009). As a result, segment operating income fell 52.8% from the year-earlier quarter to $91.5 million.
 
Offshore Operations
 
Helmerich & Payne’s offshore revenues were up 3.6% year-over-year to $52.3 million. Daily average rig revenue fell marginally (by 0.2%) to $52,960 but average rig margin per day improved 5.7% to $24,936. Segment operating income, at $15.1 million, increased 2.7%. Rig utilization, which was 89% in the same period of 2009, came down to 85%.
 
International Land Operations
 
International land operations recorded revenues of $59.4 million, as against $95.2 million in the previous-year quarter. Average daily rig revenue was $33,714, down 8.2%, while rig margin per day declined 14.8% year-over-year to $10,576. The segment incurred a profit of $8.4 million during the quarter, compared to $22.6 million in the first quarter of 2009. Activity levels declined significantly, falling to 44% from 98% a year ago. The company’s decision to reduce activity levels in Venezuela also contributed to the dismal international results.
 
Capital Expenditure & Balance Sheet
 
During the quarter, Helmerich & Payne spent approximately $64.8 million on capital programs. As of December 31, 2009, the company had approximately $153.1 million in cash and long-term debt of $380.0 million (debt-to-capitalization ratio of 12.1%).
 
Outlook
 
Management indicated that drilling activity is picking up, reflected by the sequential improvements in operating income and rig utilization in each of Helmerich & Payne’s markets. Clients are looking to up their spending plans in 2010 and the company, with its newest and most technologically advanced land rig fleet, is well positioned to take advantage of the rebounding market. At the same time, the company remains concerned about the large excess capacity in the sector that will weigh on dayrates and margins well into the year.
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