Helmerich & Payne - Q1 2026

Transcript

Operator (participant)

Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press star zero, and a member of our team will be happy to help.

Good day, everyone, and welcome to the Helmerich & Payne Fiscal First 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. You may register to ask a question at any time by pressing the star and one on your telephone keypad. You may withdraw yourself from the queue by pressing star and two. Please note this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Chris Nickel, Vice President of Investor Relations.

Chris Nickel (Head of Investor Relations)

Welcome, everyone, to Helmerich & Payne's conference call and webcast for the first fiscal quarter of 2026. On today's call, John Lindsay, our CEO, will be joined by Trey Adams, President; Mike Lennox, Executive Vice President of the Western Hemisphere; and Kevin Vann, our Chief Financial Officer. Before we begin our prepared remarks, I'd like to remind everyone that this call will include forward-looking statements as defined under securities laws. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that the expectations will prove to be correct. Please refer to our filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. Reconciliations of direct margin and certain GAAP-to-non-GAAP measures can be found in our earnings release.

I also want to highlight that we will have a presentation which will support the prepared remarks from the management team and can be found on the IR website. With that, I'll turn the call over to John.

John Lindsay (CEO)

Thank you, Chris. Hello, everyone. Thank you for joining us. As always, we appreciate your interest in H&P. I'll begin with an overview of our first quarter results, and then I'll turn it over to Trey, and he will discuss the broader macro environment, current dynamics in the rig market, and several key commercial developments from the quarter, including an update on our latest technology initiative, FlexRobotics. Kevin will then walk through our financial results and provide guidance for the second quarter and full fiscal year. To wrap up, Trey will return to summarize the key takeaways before we open the line up for questions. Turning to slide 4 of the presentation, I'd like to begin by highlighting some of our key achievements for the fiscal first quarter. Execution continued to strengthen across our business, driving solid operational and financial performance.

Adjusted EBITDA exceeded expectations at $230 million, supported by resilient results in our North America Solutions and Offshore Solutions segments, as well as a stronger-than-anticipated performance in international solutions. I would note that the first quarter benefited from the timing of certain rig reactivation expenses, which will be more heavily reflected in the second quarter. Beyond the rig reactivations in Saudi Arabia, we also saw meaningful margin improvement from our FlexRigs fleet operating in the vast Jafurah Gas Field. I'm encouraged by this progress and optimistic that we will continue to see further margin expansion throughout the remainder of the year. In North America Solutions, I want to recognize the team for another quarter of strong execution. We averaged 143 rigs working, and our industry-leading technology and talented teams continued to deliver for customers, generating average margins of over $18,000 per day.

Our offshore segment also delivered another quarter of robust operational performance. This business typically operates under long-term contracts, which provides a stabilizing counterbalance to the more cyclical land drilling market. As Trey will discuss during his remarks, FlexRobotics, automated drilling, and connections represent the next step forward in rig safety and capability. I am personally very excited about this development and view it as yet another example of how H&P continues to lead the industry in rig technology and drilling innovation. Now, as this is my final earnings call as CEO for H&P, I want to take a step back for a moment and share a few reflections. I started my career at H&P 39 years ago, and while I don't have time to thank everyone that was instrumental in my career, there are many, and I am deeply grateful to all of them.

During my 12 years as CEO, we've navigated volatile cycles, shifting markets, and rapid technological change, and H&P still leads. Our long-term success depends on discipline, the skill and commitment of our people, and the company's willingness to invest through the cycles rather than just react. Durability matters. We don't chase a perfect quarter, but we would build with patience, rigor, and people who do things the right way. We build for decades of performance. Finally, I want to thank my exceptional leadership team and the many employees I've had the privilege to work with along the way for their commitment, professionalism, and support for truly living the H&P Way. I also want to thank our customers for their partnership over these many years and our shareholders for their long-term support of the company.

It's been a privilege to lead H&P, and I'm excited about the future of the company under Trey's leadership. We have a strong team, a clear strategy, and we are well-positioned for the future. So thank you all, and now it's over to you, Trey.

Trey Adams (President)

Thank you, John. I'd like to express my gratitude, both on behalf of our whole organization and personally, for your outstanding leadership, discipline, and the example you've provided, and especially for the mentorship and friendship. You've led this company with a long-term mindset, a steady hand through multiple cycles, and a deep respect for the people and values that define H&P. The strength of the company today is a direct reflection of that leadership. As I step into the role next month, I do so with a great deal of respect for what's been built and for real excitement about where we're headed. The foundation is strong: a global footprint, differentiated technology, and the H&P Way, a culture that truly differentiates us.

Building on that foundation, our focus will be on continuing to evolve, leaning into innovation, advancing our capabilities, and positioning the company to compete and create value at a global scale in what is a constantly changing energy landscape. I'm honored to take on the role of CEO and to lead the next chapter of Helmerich & Payne alongside this team. I look forward to working with our employees, customers, and shareholders as we move forward together. Turning our attention to the current macro environment on slide 6, we firmly believe that in the future, the world will require significantly more energy than it consumes today, driven by expanding population and growing prosperity in emerging markets, along with the rising power needs from AI advancements in many developed nations.

This dynamic supports our view that demand for oil and gas will persist and grow for many years to come, which, in turn, bolsters the need for our global drilling solutions. Looking at this year, the energy landscape appears cautiously positive but uneven, as various macroeconomic and geopolitical factors continue to influence the market. While these developments have eased concerns over an imminent fall in oil prices at the year's outset, the price rebound has not been sustained for long enough to influence a pickup in industry activity. Operators remain focused on disciplined capital deployment, conserving inventory, and prioritizing returns over volume expansion. Consequently, we anticipate oil-related investment will remain soft this year, with greater upside potential likely to play out beyond this year. In contrast, the outlook for gas markets is more robust. Structural growth continues, fueled by demand for LNG and surging AI-led power demand.

As such, we expect 2026 global upstream investment levels to remain flattish overall, though with notable variations by region and market segment. North America is likely to remain the most restrained market in the quarter ahead. This is evident in current activity levels and the recent behaviors of both customers and competitors. We do, however, expect activity to gradually improve through the course of the year and strengthen into 2027. Internationally, the market demonstrates greater resilience, with a clear uptick in activity in the Middle East. Our recent announcements regarding reactivations in Saudi Arabia highlight this growing momentum, and we are beginning to observe broader improvements across the region. South America is also on a more positive path. In this context, our strategic priorities remain unchanged: maintaining our focus on pricing, making selective capital investments, and positioning our business to capitalize when the market cycle strengthens.

Turning to rig dynamics on slide 7, I want to provide a brief update on the operational front. Lower 48 rig demand moderated into the end of the year, with operators adjusting activity levels to align with market conditions. North America Solutions exited the first fiscal quarter with 139 rigs, a 4% decline from the prior quarter's exit rate. For the second quarter, we expect to average between 132 and 138 active rigs and currently have 135 rigs operating as of today. Although activity has softened, we remain optimistic for the full-year outlook, supported by ongoing discussions with customers. Our expectation is that conditions will gradually improve over the course of the year, with a pickup in both oil and gas-focused activity. Moving to our international operations, we continue to expect a phased reactivation of the suspended rigs in Saudi Arabia that we've been notified will return to service.

We now have raised the mast on 2 rigs and anticipate completing reactivations by mid-2026. Offshore Solutions continues to perform well, reinforcing H&P's leadership in offshore operations and platform maintenance. Currently, this segment has 3 active offshore rigs and 31 management contracts backed by longstanding customer relationships, creating a steady and reliable cash flow base. Our geographic footprint positions us well for the anticipated offshore investment cycle, and the continued integration of our land and offshore operating models and safety practices will strengthen our performance both over the near and long term. Turning to slide 8 on the commercial front, we made progress in several areas during the quarter. Most notably was the announcement of rig reactivations in Saudi Arabia, which commenced in November last year.

This marks a turning point in activity levels in the Kingdom, and we remain hopeful that we will see further reactivations as well as the opportunity to further deploy our technology and performance capabilities over time. Our teams are working hard to redeploy these rigs in-country with a focus on customer satisfaction, safety, and operational performance. Elsewhere in our international solutions business, we are pleased to deploy additional rigs in both Australia and Pakistan and continue to see a high level of engagement with host NOCs, IOCs, and leading OFS service firms on opportunities to expand our presence in the Middle East and North Africa. The potential reopening of Venezuela could offer meaningful growth for H&P in the medium term. We have a long and distinguished heritage of operating in the country, and with the right operator, commercial framework, and returns profile in place, we could mobilize relatively quickly.

Furthermore, we are excited to note that geothermal rig interest remains high both in Europe and North America. During the quarter, we received three contract awards for geothermal rigs in Germany, Denmark, and the Netherlands. In January, we added another rig for a geothermal project in North America. Domestically, while the rig count remains soft, we are pleased to sign multi-year contract extensions for several of our rigs operating for key customers across the lower 48. This strengthens our term backlog and provides greater visibility regarding activity levels and margin rates. Offshore Solutions saw continued commercial momentum during the quarter, with progress on several multi-year offshore contract renewals and extensions under evolving commercial frameworks. These opportunities span multiple regions and reflect ongoing customer demand for H&P's operations, maintenance, and integrated service capabilities.

While certain contracts remain subject to customer approvals and customary conditions, the company is encouraged by its potential to support long-term revenue visibility in the offshore portfolio. As I mentioned, our offshore solutions business is differentiated from the more cyclical parts of our portfolio, providing durability and longer-term visibility, and is in an area we are actively looking to expand over time. Moving to the next slide, I would like to take this opportunity to discuss our latest advancement in rig technology, FlexRobotics. Our system has been successfully deployed on three pads for a Super Major customer in the Permian Basin, delivering results in line or better across several operational metrics. FlexRobotics is all about the automation of routine tasks so the crews can concentrate more on performance and safety. FlexRobotics fully automates drilling, drilling connections, and tripping rig floor activities.

This, in turn, helps improve safety and operational performance by helping move our rig crews out of the rig floor Red Zone. We started our journey with FlexRobotics testing in 2024 on our R&D FlexRig 918 in Tulsa to help validate the system. But now, FlexRobotics is successfully deployed and operational in the Permian Basin. The FlexRobotics system is designed with three off-the-shelf robotic arms used in many industries, allowing for a retrofit-ready system to integrate seamlessly with any of our active rigs. We are excited about the potential to deploy more FlexRobotics systems on our rigs in the future. At the same time, customers are excited about its potential, with several inbounds on our latest innovation. As John said, H&P continues to lead in rig technology innovation. We remain dedicated to developing solutions that both enhance customer experience and deliver superior returns for our business.

With that, I will now turn the call over to Kevin, who will walk you through our financial results.

Kevin Vann (CFO)

Thanks, Trey. I will start by reviewing our first quarter operating results and providing details on the performance of our operating segments. I will then spend some time walking through our capital allocation framework and conclude by outlining our guidance for the fiscal second quarter before handing it back to Trey. Let me start with highlights for the recently completed quarter on slide 11, where we exceeded the midpoint of our direct margin guidance in all our operating regions despite the dynamic market environment. Alongside our continued operational and commercial success, we also made strong progress on the deleveraging front, as we have paid off $260 million on our $400 million term loan as of the end of January, remaining significantly ahead of the debt reduction goals we laid out last year.

During the quarter, the company generated revenues of $1 billion, which is the third consecutive quarter at that billion-dollar mark. We generated $230 million Adjusted EBITDA coming in ahead of expectations. This was primarily led by stronger-than-anticipated margin performance in international solutions as a result of the lower-than-expected reactivation cost in Saudi during the quarter. The balance will now occur in the second fiscal quarter and is reflected in our 2Q international margin guidance. On EPS, we reported a net loss of $0.98 per diluted share. These results were negatively impacted by a non-cash impairment charge and some unusual non-cash items of $103 million. Absent those items, we generated a loss of $0.15 per share. Capital expenditures for the first quarter were $68 million, trending below our sequential run rate.

This outcome was primarily driven by slower-than-anticipated CapEx associated with the Saudi reactivation capital deployment in International Solutions, along with timing changes in some of our North American Solutions spend. In line with this, H&P free cash flow in the quarter came in strongly at $126 million. Our cash flow generation funded $25 million in base dividends in addition to the significant progress on paying down our term loan. Now turning to our three segments, beginning with North American Solutions on slide 12, we averaged 143 contracted rigs during the first quarter, which was up slightly from the levels we experienced in the fiscal fourth quarter of 2025 and consistent with the activity expectations we set on the prior call. Segment direct margin for North American Solutions was $239 million, which came in above the midpoint of our guidance range.

This was driven by a higher rig count sequentially and our total gross margin holding in above $18,000 per day as we closed out the calendar year. This outcome is also evidence of our commitment to our customers. We benefit when they benefit via our performance-based contracts. Ultimately, our goal is to help them meet their objectives of drilling consistent and timely wells and setting them up for a clean and efficient completion and production process. Turning to international solutions on slide 13, the segment ended the first quarter with 59 rigs working and generated approximately $29 million in direct margins, exceeding the high end of our guidance range of $13 million-$23 million. Again, the much higher-than-anticipated margin rate is primarily driven by the timing of reactivation costs, which were anticipated to occur in the first quarter but will now happen in the second fiscal quarter.

Underlying the lumpiness of our reactivation costs in Saudi Arabia, we saw continued improvement in the margin performance of our FlexRig fleet and higher-than-anticipated rig utilization in the Middle East and in Colombia. Finally, with our offshore solutions segment on slide 14, we generated a direct margin of approximately $31 million during the quarter, which came in slightly ahead of the midpoint of our guidance range. We had 3 active rigs and 33 management contracts in operation during the quarter. As with prior quarters, we are excited about this business and the consistent and stable results that it delivers. As Trey said, it requires minimal capital and generates steady cash flow, which is distinctive from the cyclical and more capital-dependent nature of our onshore portfolio. Turning to slide 15, I want to provide an update on our capital allocation framework.

Our focus remains unchanged, with the top priority being continued deleveraging and maintaining our investment-grade status. In relatively short time, we've made meaningful progress to reduce our post-acquisition leverage, and we remain committed to reaching our near-term goal of paying down our term loan of $400 million ahead of schedule by mid-2026. As I mentioned earlier, we have paid down $260 million on it as of the end of January. At the end of the fiscal first quarter, we had cash and short-term investments of approximately $269 million. Including the availability under our revolving credit facility, our total liquidity is approximately $1.2 billion. Beyond the term loan repayment, we are focused on driving leverage down to around one turn or one times net debt to EBITDA.

We continue to evaluate our asset base to ensure capital is directed toward the highest return opportunities while simplifying the portfolio where appropriate and driving structural cost improvements across the organization. Since we closed the sale of the transaction, we have been able to reduce our SG&A by over $50 million relative to pre-merger standalone run rates and will continue to align the cost structure with the level of activity. Further, as I stated last quarter, we are harmonizing processes and systems across our eastern and western hemisphere operations. These efforts will help in the longer term with the cost-conscious culture we have at H&P. On portfolio optimization, we continue to work diligently to streamline the portfolio and have line of sight on over $100 million of divestments. Lastly, on shareholder returns, a key element is the dividend.

We view the base dividend as a core commitment to shareholders, and we remain confident in its sustainability. The dividend is well covered by cash flow, and our capital allocation decisions are structured to support it across commodity cycles. Now I want to transition to our second quarter and full-year guidance on slide 16. Looking ahead to the second quarter of fiscal 2026 for North American Solutions, we expect our margins and operated RIG count to taper down in line with the typical seasonality and ongoing softness in U.S. land activity levels. As a result, we expect direct margins in our second quarter to range between $205 million-$230 million based on anticipated rig count of between 132-138 rigs in the second quarter.

Importantly, as we look out to the fiscal third and fourth quarters, we do see signs of the market stabilizing and expect our rig count to pick up in the back half of the year, giving us a path to approach the midpoint of our full-year rig count of 132-148 rigs. For international, we anticipate the rig count to average between 57-63 rigs in the second quarter, which includes the rigs being reactivated in Saudi. As a reminder, this outlook also includes the expectation for some lower rig counts in non-core countries where the current EBITDA contribution is minimal. When we think about core Middle East, the year-on-year trend is positive. We expect international solutions to generate a direct margin between $12 million-$22 million. As previously mentioned, we did not incur as much reactivation cost in the first quarter as we anticipated.

The balance will now fall in the second quarter, resulting in the step down in sequential margin rates. We are also experiencing some churn in Argentina, where rigs coming to the end of their term are returning to the yard to be fitted with additional technology packages before being redeployed. Despite this timing difference, we expect the direct margin in the fiscal third quarter and fourth quarter to be materially higher than the direct margin rate we achieved in the fiscal first quarter. All reactivations will be behind us, and we expect our FlexRig fleet margin to continue to improve. For offshore, we anticipate an average of 30-35 management contracts and operating rigs. We expect the margin rate in the fiscal second quarter to range between $20 million and $30 million.

This step down is reflective of typical seasonality, lower revenue days, and the roll-off of some higher margin rig management contracts in Angola. As we progress through the remainder of the year, we anticipate the margin rate to step back up and remain confident in the $100 million-$115 million direct margin full-year guidance we shared previously. We are also trimming our 2026 gross capital expenditure budget slightly to be between $270 million-$310 million as a result of activity levels and ongoing benefits of our optimization programs. All other full-year guidance ranges remain the same. To conclude, the timing difference of the cost associated with reactivations is creating some lumpiness in the direct margin between the first and second quarters.

Beyond that, we remain optimistic about activity and direct margin progression in the third and fourth quarters and are comfortable with where external expectations lie for the full year. I will now turn it back over to Trey for some closing remarks.

Trey Adams (President)

Thank you, Kevin. Turning to slide 18, I'd like to conclude by refocusing on our compelling investment thesis. H&P today is unrivaled in our scale, geographic diversity, and portfolio to capture rising global onshore drilling activity. We are clearly the technology leader and see a significant opportunity over time to deploy our cutting-edge technology across our global fleet. We believe we are only in the early stages of international shale development and are particularly excited about the prospects in the Middle East and North Africa. At the same time, we are embarking on a rewarding journey of enterprise optimization, with several programs underway to streamline our portfolio, cost structure, and deliver on the full potential of the KCA Deutag acquisition. Our near-term commitment remains on deleveraging our balance sheet, and we are confident in repaying our term loan ahead of schedule.

Beyond that, we believe we will have the financial strength and flexibility to enhance our attractive shareholder return profile and further differentiate our portfolio. Lastly, I'm proud of the way we started the year with solid first quarter results. While we face some timing and market dynamics in the second quarter, we are optimistic about activity improving through our fiscal third and fourth quarters and remain confident in the guide we set out at the start of the year. I want to thank the employees of H&P for all of their efforts and look forward to what we can achieve together this year and beyond. That concludes our prepared remarks for the quarter, and I will now turn it back to the operator for questions.

Operator (participant)

Thank you. At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may withdraw your question at any time by pressing the star and two. Once again, to ask a question, please press star one on your telephone keypad. Thank you. We'll take our first question from Scott Gruber with Citigroup. Your line is open.

Scott Gruber (Managing Director and Senior Analyst)

Yes. Good morning, everyone. Before I ask the question, I just want to thank you, John, for all the insights over the years. It's been a real pleasure, and enjoy your next adventure.

John Lindsay (CEO)

Great. Thank you very much, Scott. I appreciate it.

Scott Gruber (Managing Director and Senior Analyst)

Yes, indeed. Trey, congrats on the promo to you as well.

Trey Adams (President)

Thank you very much.

Arun Jayaram (Research Analyst)

So I want to ask about the moving parts incorporated into the fiscal 2Q guide. We got some color, which I appreciate. It sounds like the startup costs are going to increase in 2Q as you really push forward those reactivations in Saudi. Are you able to dimension the size of those startup costs in fiscal 2Q and will there still be some reactivation costs continuing into fiscal 3Q? And then you mentioned the seasonal headwinds in the U.S. business. Outside of seasonality, is the underlying profit margin for the North American services business now pretty stable, or is there still some contractual headwind in that business? So just some color on those moving parts in the guide for 2Q and how some of those headwinds abate into the future.

Trey Adams (President)

Yeah. Thank you for the question. This is Trey. I'll start, and then Kevin and Mike may fill in some additional color as we go through this question. We definitely saw some lumpiness between Q1 and Q2, and we'll discuss the three primary drivers of the lumpiness between the quarters here in just a second. I will firmly commit and say that we feel good on the forward guide. We feel good about our guided activity range in North America, as Kevin stated in his prepared remarks. And we feel good about the international solutions outlook. As it relates to reactivation costs in Saudi, those costs that we anticipated occurring in the first fiscal quarter now have moved into the second fiscal quarter.

We will see some of those costs continue to move forward into the third quarter, but the vast majority of those will occur in the second fiscal quarter and within our guide. Also, the other kind of key driver was in our North America Solutions segment. As you guys are aware and as we've shown, we do expect fewer rigs in North America. This was largely driven by the end of the calendar year 2025 crude pricing. Some of the churn rates and some of the private activity that we have traditionally seen was much more moderated as we exited the calendar year 2025 and entered into our second fiscal quarter. Mike can get into some color later on the call about how we see that outlook as we progress through the year, but we feel like that's much more robust.

Private E&Ps, compared to a couple of years ago, definitely didn't load the wagon in the fourth quarter and into the first quarter like they had been over the past couple of years. Our public EMP customers remain very fiscally disciplined. Their capital returns programs remain very much firm and in place. So we feel pretty robust on that guide as we go forward. But it just all kind of occurred as we started this new year with a little bit lighter of a guide than we had initially anticipated in North America. The last kind of component of some of the lumpiness was this offshore seasonality that Kevin referred to in some of his prepared remarks. We definitely had some rigs that moved from a drilling to a more maintenance mode. We had one rig that stopped working and stopped activity in Africa. That is pretty seasonal, though.

We expect those FlexRigs to go back to drilling and off of maintenance mode. So it just provided a little bit of a lump in our quarter through the offshore segment. What we are, though, is very optimistic on the full-year guide. The Saudi reactivations are putting a lot of wind in our sails. We feel like those are largely behind us, and those startup expenses are behind us. We feel good about our forward guide on those as well as our FlexRig margins throughout the rest of this FY 2026 year. Our FlexRig margins continue to trend well and are moving in the right direction. In North America Solutions, the current expectations of activity improvement are being felt and seen. So we still feel very good about our overall activity guide in North America Solutions.

Then lastly, I'll just touch on, before I turn it over to Kevin for some additional color, the optimization of costs and expenses throughout the company and portfolio will be a keen focus area throughout the rest of FY 2026. Kevin referenced in his prepared remarks and can add some additional color on our CapEx guide, but we feel comfortable about that. So overall, I think we're feeling good about the second half of FY 2026 and believe that this second quarter lumpiness will abate and resolve itself. Turn it to you, Kevin.

Kevin Vann (CFO)

Yeah. Hey, Scott. Yeah. And if you think about second quarter international guidance of $12 million-$22 million, we've got all of the additional startup reactivation costs that are hitting margin. We've got them plugged into that quarter. We're pretty confident they'll all hit next quarter. But what you're going to see without giving you third quarter guidance, you're going to see a material step up in gross margin coming out of our International Solutions segment from the second to third quarter. So again, from an international solutions perspective, it's really just kind of sliding some costs between quarters. But we still anticipate, when you think about those reactivation or those reactivated rigs in Saudi, we're anticipating a little over $5 million of EBITDA per year contribution out of those rigs.

Then on top of that, with our FlexRig performance continuing to get better in Saudi, I think what we've talked about historically has been between $20 million-$25 million for that fleet, those rigs to contribute to annualized EBITDA. So again, second quarter kind of a lull. Some of that's activity-driven. Some of it, that's just getting ready to really ramp up our international solution segment. And as Trey mentioned on cost, using all that as the opportunity from a capital perspective, really to take a long hard look in the mirror and make sure that we've got capital allocated to the best projects and the ones that are going to return the most value the quickest. And so we're lowering our capital guidance a slight touch. But again, I think that's demonstrative of just us keeping our eye on the ball.

Scott Gruber (Managing Director and Senior Analyst)

Okay. No, I appreciate all the color. I'll turn it back. Thank you.

Operator (participant)

We'll take our next question from Arun Jayaram with J.P. Morgan. Your line is open.

Arun Jayaram (Research Analyst)

Yeah. Good morning, gentlemen. Trey, I wanted to see if we could start with your vision for H&P. You talked about this being a new chapter for the company as you take over for John next month. But I was wondering if you could talk about your vision for the company, including what you see as some of the opportunities internationally, particularly as we see growth in unconventionals and geothermal.

Trey Adams (President)

Yeah. Thank you. First, I just want to take a moment to say how excited I am about the future and about where we're positioned today. John's sitting here, and his vision has been manifested and is coming to reality across the organization. The company is well-founded, and our foundation is strong. If you think about where we were 14 months ago prior to the KCA Deutag acquisition and the true form of H&P today versus where we were then, we're a truly different company and business today than we were 14 months ago. We're the global leader in onshore drilling. We have a great base of operations in offshore. The leader in platform operations and maintenance services globally and having an incredible customer base to be levered and build upon as we look into the future.

In addition to that, if you think about the geographic diversity and talent we have at the organization today, it's just incredible. From an engineering resource, drilling expertise, our office-based employees, we just have an incredibly talented organization to build and leverage for a lot of future growth. When you think about the vision over the next 3-5 years, obviously, this will continue to be dynamic and very iterative as we look forward. But it's really founded on 4 kind of key notes and nodes, if you will, right? And the first one being international growth and expansion that you referenced. We are very, very focused on continuing to build our Eastern Hemisphere land exposure, the Middle East and North Africa, backed by our rig reactivations in Saudi, key IOC relationships.

And then the transference of our models and technology from the North American business will really underpin what we believe is going to be a great growth story for the organization into the future. In addition to that, North American Solutions and maintaining and continuing our leadership position in North America will be a key focus for us. Over the last decade and a half, we've continued to accrete and grow our share position in North America. We've done that through our great people, processes, equipment, technology portfolio. Continuing to build and expand on that will be a big focus and will be right in our front window as we look forward through 2026 and beyond.

Today, we've talked about and we've talked about in some of our prepared remarks, some of our technology innovations, continuing a leadership position in the digital and automation space, FlexRobotics, and continuing that progression in the North American shale market will be very critical for us to maintain that leadership position and continue to grow share over time here in North America. A subcomponent that I will reference is offshore. It's not bullet three, but offshore continues to be a very exciting space for us. It's a very capital-light and stable, very durable business that we look to expand and grow in 2026 and beyond. Bullet three really is what Kevin was talking about in his prepared remarks and will continue to discuss. That's deleveraging and maintaining our fiscal discipline at H&P.

For 106 years of our company's history, we've been very fiscally rooted and founded and very good stewards of capital. We're committed to shareholder returns, and we're committed to getting bound to one turn of leverage. That will be a focus for us through the rest of this year and over the next three to five years to really maintain that fiscal discipline. The fourth bullet I'd like to discuss and really focus on here is this enterprise optimization. If you think about enterprise optimization, I'll break it into two pieces. One is on the field and front office focus for us. You think about the transference of the H&P business system, the transference of the H&P Way outside of the North American market and into the international markets in a big way and in offshore segments.

Our customer-centric culture and being able to see that through everything we do, everywhere we work, driving safety excellence every single day, everywhere we work, and continuing to be the performance and technology leader that we are today. But we need to see that, and we will see that come through all of our operations across the globe. On the back office, we're committed to being a very lean and efficient organization. We're committed to being a very cost-conscious culture, as Kevin mentioned. And now, leveraging our global scale and capabilities, there's ways to continue to optimize our customer delivery and everything we do as we're looking forward. Moving to international excitement. Yes. Go ahead.

Arun Jayaram (Research Analyst)

No, no. Go ahead. Go ahead.

Trey Adams (President)

Okay. Okay. Moving to international excitement, right? We sit here today, and we're talking about the rig reactivations in Saudi that are going to be foundational for our Eastern Hemisphere land growth. What we haven't referenced in a big way, I think Kevin touched on it a little bit earlier, but we are adding a second rig in Australia today. Excited about that opportunity. In addition to that, we saw a little bit of activity moderation going from 1Q to 2Q in Argentina. We expect that activity to pick back up through the second half of the year. What we're taking advantage of through that activity moderation period is we're investing in technology in Argentina. So our digital applications and fleet will be able to be levered by our customers down there. That's going to create exponential value for us as we look forward in Argentina.

Today, as we stand here on the call, we're rolling out technology and our digital solutions in Oman as well for some key IOC clients. We're excited about that progression. So as we stated in prepared remarks, we believe we're in the early innings of a really long game here and a long great growth story in the international market. Outside of some of the rig reactivations in Saudi, there's continuing ongoing discussions with IOCs and NOCs in North Africa and in the Middle East. Those are great conversations. We look forward to providing more material updates as the quarters move through the year. It's really, really exciting to see kind of where we're going. I think you mentioned geothermal. Geothermal, both in Europe and North America, continue to be exciting for us. We've added a second rig in the North American market.

We've signed an LOI for a third rig in North America. And then Europe geothermal, we're proud to be over the most advanced extended-reach complex geothermal project in Europe today with more activity points that are coming in the near term. And so that's really starting to gain some good momentum.

Arun Jayaram (Research Analyst)

Great. John, I wanted to wish you the best as you join.

Trey Adams (President)

That'll be good.

Arun Jayaram (Research Analyst)

Yeah. Yeah. John, I want to wish you the best as you join Hans and George Dotson in retirement.

John Lindsay (CEO)

Yeah. Thank you very much. I appreciate it. It's an exciting time for the company, and I'm looking forward to my next chapter as well. Thank you.

Operator (participant)

We'll take our next question from Saurabh Pant with Bank of America. Your line is open.

Saurabh Pant (Equity Research Analyst)

Hi. Good morning. Thank you. John, I'll echo Arun and Scott. Congrats on your retirement. It's been a pleasure to hear your patient and reassuring voice over all these years, John. Thank you.

John Lindsay (CEO)

You're welcome. Thank you very much. It's been a great journey.

Saurabh Pant (Equity Research Analyst)

Yeah. No, I'm sure you're looking forward to slowing down a little bit. But Trey, you'll face the tougher questions now, so maybe I'll throw one at you. Maybe I want to dig in a little bit on the international outlook, Trey or Kevin, if you don't mind. I know you alluded to this a little bit in your prepared remarks and in response to Scott's question, but how should we think about profitability when all these 8 FlexRigs are done fully ramping up and the 7 rigs we are reactivating in Saudi? I know activity moves up, right? But keeping everything else steady, how should we think about where margins can go? I think, let's say, perhaps by the fourth fiscal quarter of this year, just some idea of where things might land.

Trey Adams (President)

Yeah. Thank you. I'll start and then turn it over to Kevin for additional color on anything I miss. So we're excited today. As we sit here on the call, we have two masts in the air of the planned reactivations and a third mast that's ready to be raised imminently. So we're making good progress on our rig reactivations, working closely with our customer there in the Kingdom to make sure that those startups move seamlessly and go really, really well. Overall, we expect six of those seven reactivations to resume prior to the first half of calendar year 2026. The seventh rig, we're still working on timing for rig number seven. As it relates to some of the financials around those reactivations, our CapEx for those reactivations has been built into our CapEx guide. So there's no additional CapEx that is being planned or will come out.

It's based into our FY 2026 assumptions as we sit here today. Beyond that, in Saudi Arabia, that being a really core and key area for us on Eastern Hemisphere growth, we're continuing to have ongoing conversations with our primary NOC customer there in the Kingdom and really think that there's plenty of opportunity as we look through 2026 and 2027. Nothing that we can comment on materially today, but a lot of encouraging conversations. It's all underpinned by safety and performance. So we have great safe startups, and our FlexRig performance has been moving in a direction that's providing a lot of tailwinds for us for incremental activity. That operations team continues to drill very safe and efficient wells. The more we do that, the more opportunities will be right there in front of us.

As the rigs come out of suspension, the 7 reactivations, we anticipate annualized EBITDA of roughly $5 million per rig. And as you alluded to, we expect that to get there into full run rate by Q4 of our fiscal year. In addition to that, we referenced on some commentary earlier that our FlexRig margins continue to improve, and we expect those rigs to get to full annualized run rate numbers by the end of FY 2026 as well. So it provides a pretty robust and well-founded business for us there in Saudi through this fiscal year. I will just hit more broadly on the international segment direct margin before turning it to Kevin to see if there's anything I missed here. Once everything is reactivated in Saudi, and it's still obviously, there's still a lot more to happen and more opportunity in front of us.

But these reactivations come online. We expect our International Solutions segment to be right around a direct margin rate exceeding $45 million per quarter. And so it's just a good testament to getting these reactivations behind us, and we can get to a very stabilized run rate as we're looking beyond FY 2026.

Kevin Vann (CFO)

Now, and this is Kevin. I don't really have much to add other than, as Trey mentioned, getting gross margin above $45 million hopefully relatively soon when I can think about the big step-up that I mentioned earlier between the second and third quarter. But even more important to that, Trey mentioned all of the potential new business and growth that we're going to see out of the Eastern Hemisphere. The acquisition of KCA Deutag basically enabled us to be in this position where now we have that footprint to continue to grow from it. $45 million is a good start, but I'm anticipating for years to come now that number to continue to grow.

Saurabh Pant (Equity Research Analyst)

Okay. No, that's super helpful, Trey. Kevin, I'll turn it back.

Operator (participant)

We'll move next to Eddie Kim with Barclays. Your line is open.

Eddie Kim (Equity Research Analyst)

Hi. Good morning. Wanted to circle back to a comment you made about North America likely remaining the most restrained market in the quarter ahead as evidenced by recent behaviors of competitors. Are you still seeing some bad actors out there in terms of pricing? I know you expressed confidence in maintaining your full-year rig count in North America, which does imply a ramp-up as we move through the year. Does that same confidence apply to pricing as well, or do you think that ramp-up will take a bit longer to materialize?

Mike Lennox (SVP of U.S. Land Operations)

Hey, Eddie. I'll start. This is Mike. Appreciate the question. Yeah. So let's start with the customers and kind of what we're seeing is there's kind of two camps out there, the ones that are just disciplined and staying true to what their plans are, and then we have the ones that are more sensitive to the commodity prices. And so what we saw in the quarter and we've already rebounded, essentially, as I describe it, where they had pulled back kind of a wait-and-see, but they still have plans to pick up. And we're starting to see those conversations pick up. And that's why in the back half of the year, we're very optimistic of picking up. Most of those players that were obviously sensitive are your smaller E&Ps, your independents. As far as pricing, we're still staying true.

We're not wavering from the 45%-50% direct margins that we've been on. We're not chasing market share. And really, why 45%-50% direct margins? It's what we need as an organization to continue to invest back in the organization and to achieve the outcomes that our customers are looking to achieve. Again, we're confident in our ability just to navigate the near term, and we're very optimistic about the back half of the year.

Eddie Kim (Equity Research Analyst)

Got it. Great. And just a quick follow-up, do you think direct margins in North America, you'll be able to hold around that $18,000 a day level for the full year, or does that look more like an upside case based on pricing trends you're seeing right now?

Mike Lennox (SVP of U.S. Land Operations)

Yeah. Kind of more short term, I'd call it flat. Yeah. We're holding and trying to hold on to that $18 roughly a day. The back half's kind of a we'll see. We do think, like I said, there's some opportunity there. And of course, that's on the revenue side. And then on the expense side, we're obviously working that. Just from what Trey had mentioned, just leveraging our scale, we have some great opportunity there, and we continue to work on our expenses as well.

Eddie Kim (Equity Research Analyst)

Understood. Great. Thanks for that caller. I'll turn it back.

Operator (participant)

We'll take our next question from Derek Podhaizer with Piper Sandler. Your line is open.

Derek Podhaizer (Director and Senior Research Analyst)

Hey. Good morning, all. I just wanted to discuss the opportunity for FlexRobotics. I mean, could you please explain the details around how much capital is required to retrofit an active rig, how many rigs you see being upgraded to FlexRobotics? Will this be customer-funded? How should we think about the paybacks, and how meaningful could this be for your earnings over the near to medium term?

Mike Lennox (SVP of U.S. Land Operations)

Hey, Derek. This is Mike again. I'll start, and then Trey probably add in. I'll just start bluntly. I think it is meaningful in the long term. There's a lot of excitement and really proud of the efforts we've made on our robotics so far. I think Trey had mentioned in his earlier comments, we have a test rig that we've been testing this on for quite some time, and we're rolling it out. It's already proven. I'll talk about the rig that's already deployed for a super major in the Permian. We work very closely with them to establish goals. We weren't just going to do robotics for robotics just for fun. It was going to have to at least perform at P50 level, so the average level for that operator in the Permian Basin.

After 10 wells we've drilled and completed, we've moved the rig twice, so two pads, we're roughly at P40. So we're exceeding that. Really, that's a lot of hard work by our employees, our rig crews, our customer working with us very closely, as well as our vendors. It's taken some vendors interacting and setting that goal and going out and achieving. So very optimistic, the demand, the pipeline, the discussion around it. Yeah. We think it's very optimistic and look forward to progressing that.

Trey Adams (President)

Yeah. This is Trey. I'll just share that on your question around pricing and commercial constructs, right, we intend to make these investments with appropriate returns. Obviously, we're focused on improving safety out at the edge, and then the performance related to robotics is going to be another step change and uplift for us and for our customers.

So those creative commercial constructs that we've leveraged throughout the rest of our business will be looked at and leveraged here as well. We're not going to make this investment without an appropriate returns profile. It's still early days. The conversations are moving with customers. There's great customer interest and intrigue in the FlexRobotics system, and look forward to providing additional color as we move forward.

Derek Podhaizer (Director and Senior Research Analyst)

Thank you.

Operator (participant)

We'll move next to Keith Mackey with RBC Capital Markets. Your line is open.

Keith Mackey (Managing Director and Analyst)

Hi. Thanks. Good morning. Maybe just a question on free cash flow conversion. Very strong for Q1. We have some of the pieces for how 2026 will unfold, but can you help us maybe fill in some of those gaps for how we should be thinking about free cash flow conversion for the full year?

Trey Adams (President)

Yeah. I mean, obviously, without giving full-year guidance, when you think about how much cash we're going to be able to generate, as I mentioned earlier and we've talked about in some of Trey's prepared remarks, we have a clear line of sight on the paying down of the remaining $140 million of our term loan, and that's just from organic cash flow. And that should happen by the end of our third quarter or right around the end of our fiscal year, third quarter. So very optimistic about that. What that tells you that how much additional free cash flow obviously, the dividend is still of primary importance to us, and so we'll continue to obviously pay that. But then when you think about just the capital guidance that we're giving this quarter, obviously, a slight reduction. But again, just the free cash flow will continue to increase.

This quarter was a little bit higher just because of the lower CapEx numbers. But again, for the full year, again, clear line of sight on being able to pay down just organically the remaining balance on the term loan. And then on top of that, we haven't really talked about it, but we've got, as we said on the call, we've got $100 million of clarity around some portfolio optimization that we're doing coming out of the acquisition. Feel very strongly about our ability to execute and get those deals pulled across the line by the end of the year.

Keith Mackey (Managing Director and Analyst)

Appreciate the color. Thank you.

Operator (participant)

We'll move next to Ati Modak with Goldman Sachs. Your line is open.

Atidrip Modak (Equity Research Analyst)

Yeah. Hey. Good morning, team. I guess on the rig rationalizations in the quarter, should we expect more? Can you talk about that, and can you give us any more color on what your thoughts are for market to reduce capacity?

Kevin Vann (CFO)

Yeah. This is Kevin. I'll begin just in terms of rig rationalization and the impairments that we took for the quarter. It's very difficult. Accounting rules will drive a lot of those impairment decisions and impairment accruals that we have to take. But I'll let Mike touch a little bit on just kind of what those stem from in terms of the rigs that we've had on the sidelines for a while. And if you look at the amount of capital that was going to be necessary in order to put those rigs back to work versus the rigs that obviously, we're just continually trying to churn and get those put back into our operating system. From an accounting perspective, we looked at that as too much of a hurdle. And so as a result of it, again, these impairments happen from time to time.

But I'll let Mike touch on kind of these specific rigs.

Mike Lennox (SVP of U.S. Land Operations)

Yeah. Ati, more on the details. So we're talking about 30 rigs. Most of them had already been decommissioned. We had been pulling a componentry, reusing that across our fleet. These rigs had not worked since COVID or prior to COVID, so they had been idled for quite some time. And some of the components that we're talking about, for example, on 42 of our rigs today, we have what I call Level 1 automation. So it's a rig floor automation that's removing people from the Red Zone on the floor. So as we've put new equipment on those rigs, the equipment that we've pulled off is what we're talking about that we're decommissioning and impairing.

Another example would be, as we've upgraded our entire fleet, at least domestically, we've had to put new driller cabins with new technology to run our full suite of tech on those rigs. So these driller cabins, we've used about as much as we can on them, and it's time to clean the yards and dispose of that equipment. So that's kind of the nature of what we're talking about on equipment.

Atidrip Modak (Equity Research Analyst)

Got it. Thank you. Congratulations, John.

John Lindsay (CEO)

Thank you. I appreciate it.

Operator (participant)

That does conclude our question and answer session for today. I would now like to turn the call back to John Lindsay for any additional or closing remarks.

John Lindsay (CEO)

I just want to thank everyone for joining us on the call today. It has truly been an honor to lead the company as CEO, serving our shareholders, our board of directors, and our amazing employees. It has really been the dream of a lifetime and will be forever thankful. I truly believe Trey and team will achieve great success. I have complete confidence in their ability to execute the strategy going forward. With that, operator, you may now close the call.

Operator (participant)

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

John Lindsay (CEO)

Perfect. You got 7s + 1.