Helmerich & Payne - Earnings Call - Q2 2020

Transcript

Speaker 0

Good day, everyone, and welcome to the Fiscal Second Quarter twenty twenty Earnings Conference 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. Please note today's call is being recorded. It is my pleasure to turn the call over to Director of Investor Relations, Dave Wilson.

Please go ahead.

Speaker 1

Thank you, Keith, and welcome everyone to Helmerich and Payne's conference call and webcast for the 2020. With us today are John Lindsay, President and CEO and Mark Smith, Senior Vice President and CFO. 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 the securities laws. Such statements are based upon current information and management's expectations as of this date 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 ks, 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 also will be making certain reference to non GAAP financial measures such as segment operating income and operating statistics.

You'll find the GAAP reconciliation comments and calculations in yesterday's press release. With that said, now I'll turn

Speaker 2

the call over to John Lindsay. Thank you, Dave, and good morning, everyone. The COVID-nineteen pandemic has no rivals in recent times for the dramatic and widespread impact it has unleashed on the world and our industry. Our highest priority over these past few months has remained focused on the health and safety of our employees, customers and stakeholders. I want to begin by thanking all of our employees for their efforts to protect each other and our customers by adhering to physical distancing practices to control exposures and for following all of the protocols we put in place to protect our families and each other from the virus.

Throughout our history, the company has sought to be in a position of strength both operationally and financially to face the uncertainty and inherent cyclicality of the energy industry. We have taken swift actions to maintain the health and safety of our employees and customers. We've also made difficult, measured, but necessary decisions aimed at preserving the company's long standing financial strength and its future. These timely actions have served to minimize the impact of COVID-nineteen on our operations and helped to preserve our financial position. This market has been referred to as unprecedented by many.

And during my thirty three year career at H and P, we have weathered many downturns, though this one does have unique characteristics. While the crude oil market imbalance is a global phenomenon, it has more acutely impacted The U. S. Market as a result of storage limitations subsequent to March 31. The abruptness of and the overall size of the decrease in demand for refined products such as gasoline and diesel has created an abundance of supply, which has caused refining capacity to shrink resulting in excess crude oil.

This crude oil overhang in supply has created a storage dilemma for E and P companies, limiting opportunities to market their production. And even when they can sell, the prices are very depressed. Consequently, some E and P companies have chosen to shut in production, postpone completions of drilled and uncompleted wells, and many E and Ps have stopped drilling wells entirely until the market imbalance rights itself and it once again becomes economic to resume production and drilling. It is obvious that these current circumstances hold long term negative implications for our industry. Our experience has shown us that two factors hold the key to surviving a downturn and ultimately furthering the strategic objectives of the company: first, maintaining financial strength and second, maintaining a long term view for future potential opportunities.

In this regard, we will remain focused on establishing new commercial models, expanding our digital technology offerings to customers, increasing our international presence and cost management. Liquidity is critically important in a time like this, and we are actively reducing expenses in a thoughtful and intentional manner. We are drawing on learnings from the twenty fifteen-twenty sixteen downturn to idle rigs more efficiently, and we're seeing additional innovative efforts throughout the company pay off and anticipate that this will continue. We also ended a forty eight year run of paying an increased dividend per share by announcing our intention to reduce our dividend to $0.25 per quarter beginning after our next dividend payment. Given this current environment, we are rightsizing our organization to reflect these new realities.

And Mark will discuss this in more detail during his remarks. We are also using this as an opportunity

Speaker 0

ensure our talent reflects the company's direction as well as the industry overall.

Speaker 2

His We are intentionally aligning our organization towards a performance driven approach that drives higher reliability and simplifies our customers' experience and forming a stronger partnership. As we have discussed in previous calls, we are making efforts to develop new commercial pricing models that create win win value capture for customers and enable us to earn an equitable share of the value we create with our drilling solutions. We strive to align ourselves with the customers' objective to enhance economic returns through better performance and technology. We are working hard to put this shared focus and decision making at the forefront of all of our partnerships. Such value is arguably even more pertinent in strained market conditions like we see today.

While the reduction in our rig count has adversely affected the number of rigs we currently have under performance based contracts, we expect the total of these to represent a larger percentage of our active FlexRig fleet over time. The importance of well economics is magnified under these stressed market conditions. And combining our digital technology solutions in the commercial model becomes even more appealing to some customers who recognize that wellbore quality and placement improves the lifetime value of the well. The COVID-nineteen pandemic has caused everyone to adjust to new realities such as remote office environments and in our field operations to the logistical challenge of reducing virus exposure and screening rig site crews and third party personnel. As a result, we are also seeing a new surge in interest for remote drilling and automation technologies.

Many

Speaker 3

of

Speaker 2

our customers not only see the financial advantage of demanning certain positions at the rig site, but also recognize that this trend is inevitable as these automation capabilities mature at a time when physical distancing is needed. Although the timing of a recovery is not clear, the consensus of the industry is that when it does occur, it is likely to be at a higher velocity than previous recoveries. With deep cuts to personnel, we would expect any recovery will occur without the benefit of a large portion of the industry's seasoned veterans as many will likely leave the energy industry during this latest downturn. While the near term focus is clearly on cost reduction, customers are not just reducing their human workforce, they are also asking how their organizations need to change to survive and be competitive with increasing cyclicality. And like other experience like other industries have experienced, automation and digitization of operations is common in these conversations.

Despite the rapid reduction in industry rig activity, our automation solutions such as AutoSlide have remained stable and, in fact, have seen increased activity in recent months. We believe this is driven by both the move to reduce costs and human errors, but also a move to establish more manufacturing drilling through digital technology. In previous cycles, many of these efforts have centered around visualization and analytics rather than true automation. And while this has some value, a true redefinition of the workforce roles did not occur. However, given H and P's ability to show documented field success coupled with the financial pressure and health concerns in this current environment, there are signs the logjam has been broken that has previously hindered progress toward automation at the rig.

We believe that automation is the future, and we are well positioned with digital technology offerings through the strategic acquisitions we've made in recent years. We also feel our uniform flex rig fleet gives us a unique advantage and the ability to scale automation technology effectively for our customers. Our focus internationally continues to be on actively pursuing long term growth opportunities and development of these will likely be affected by travel and operational hurdles due to COVID-nineteen. Although we expect the third quarter's results to be negatively impacted, we are encouraged about what the future holds for H and P internationally. The capabilities that allowed H and P to grow market share in The U.

S. Over the past fifteen years are some of the same capabilities that will benefit international growth in the future. Crucial to all of this is continuing to make investments that further our ESG efforts. We will continue to partner with customers to invest in areas that help lower the environmental impact of drilling for oil and gas through greenhouse gas emission reductions. Like many companies in today's environment, we continue to employ a global remote work model for office personnel and in our field operations where possible.

While instituting the remote work platform required quick action, robust technology and greater communication, we have not lost momentum. In fact, I think we're actually gaining momentum organizationally and with customers. During this time, we've digitized and automated processes to save time, money and reduce the risk of human error. Our quick actions around COVID-nineteen at our rig sites is something that many of our customers and partners are modeling in their own operations, which underscores the fact that our commitment to health and safety is always paramount. H and P's people are difference makers on a daily basis.

Our investment in the health of our organization has enabled us to remain agile at a time when the ability to adapt is one of the most critical competitive advantages a company can have. I have been very impressed by the quality of work provided by our teams during this very intense and challenging time. In closing, I mentioned earlier about our focus on cost reductions, which are critical at this time. However, just like our customers, we are also looking at our organizational structures and asking ourselves how can we streamline our operations and use technology and automation to enhance the health and growth of our business over the long term. Automation and digitization of operations is a common conversation with our customers today, and we are using this as an opportunity to innovate for the future of our business success going forward.

And now I'll turn the call over

Speaker 4

to Mark Smith. Thanks, John. Today, I will review our fiscal second quarter twenty twenty operating results, provide guidance for the third quarter, update full fiscal year 2020 guidance as appropriate and comment on our current cash management efforts and financial position. Let us start with highlights for the recently completed second quarter. The company generated quarterly revenues of $634,000,000 versus $615,000,000 in the previous quarter.

The quarterly increase in revenue is primarily due to $10,400,000 in early termination revenue and well to well notification fees as a result of rig releases in The U. S. Land segment due to the energy demand destruction caused by the COVID-nineteen pandemic as described in our press release. Total direct operating costs incurred were $419,000,000 for the second quarter versus $4.00 $1,000,000 for the previous quarter. The increase is attributable to self insurance adjustments related to prior year reserves and to cost incurred to demobilize and stack released rigs.

During the fiscal second quarter, market events triggered an analysis of our non super spec FlexRig fleet and particularly the expected future utilization of that portion of our fleet. This assessment combined with an evaluation of our intangible assets including goodwill resulted in total non cash impairment charges of approximately $563,000,000 The impairment impacted the value of the following asset classes: PP and E for less capable non super spec rigs of by $441,000,000 PP and E for excess capital equipment by 45,000,000 inventory of materials and supplies by $39,000,000 and goodwill by $38,000,000 A total of 95 rigs were impacted by the impairment of which 37 were decommissioned subsequent to the quarter end. As such, we have downsized the number of U. S. Domestic non super spec FlexRig III drilling rigs marketed to customers from 43 rigs to eight rigs in The U.

S. General and administrative expenses totaled $42,000,000 for the first quarter, a sequential decrease of $8,000,000 primarily driven by the reversal of accrued annual incentive compensation. Our Q2 effective tax rate was approximately 20% as we are now forecasting pretax book loss for the full fiscal year versus pretax book income, which is offset by local income tax in various U. S. States and international jurisdictions.

At this juncture, let me summarize the results of the second quarter. H and P incurred a loss of $3.88 per diluted share versus a profit of $0.27 in the previous quarter. Second quarter earnings per share was negatively impacted by a net $3.87 loss per share of select items as highlighted in our press release. Absent these select items, adjusted earnings per share was a $01 loss in the second quarter versus an adjusted $0.13 profit during the first fiscal quarter. Capital expenditures for the 2020 were $48,000,000 as we have begun to wind down or cancel projects in light of market conditions.

Turning to our four segments beginning with The U. S. Land segment. We averaged 190 working rigs during the second quarter. As the COVID-nineteen crisis developed, rig activity quickly declined during the March and we exited the second fiscal quarter with 150 working rigs.

Revenues were $21,900,000 higher sequentially due to $10,200,000 of early termination revenues and well to well notification fees. The balance of the added revenue is partly attributable to performance contracts through the quarter and partly to demobilization fees for rigs released in the March. U. S. Land operating expenses increased in the second quarter due to two factors.

First, because of the quarter end rig releases, we incurred trucking costs for demobilizations as well as stacking costs when those rigs arrived at our various yards. Second, we increased self insurance reserves related to legacy claims, which occurred prior to 10/01/2019. These claims will remain liabilities in our operating segments until they have been resolved. As a reminder, on 10/01/2019, we elected to utilize a wholly owned insurance captive to ensure the deductibles for our workers' compensation and general liability and automotive liability insurance programs from that point forward. Looking ahead to the 2020 for U.

S. Land segment. As John said, the COVID-nineteen pandemic and the resulting economic slowdown has created excess energy supplies and a shortage of storage. Given this situation, some customers are electing to shut in production and cease well completions and or the drilling of new wells. This in turn has caused customers to continue to release rigs and we have seen more than 115 rig release notifications since early March.

We expect to end the third quarter below 70 rigs with the vast majority of that decrease happening prior to June 1. Included in our contracted rigs are approximately 10 idled rigs that are generating some margin. Also as John discussed, our performance contracts are gaining customer acceptance and even in this environment, a larger portion of our working fleet is expected to shift to new commercial models. These models are designed around a win win formula where H and P has the ability participate in the value created through reduced overall well cost and other factors customers value like wellbore placement and quality. This value can be achieved on H and P FlexRigs through the utilization of software delivered from our H and P Technologies segment.

For example, in order to hit performance targets, we may elect to utilize some or all HPT solutions while drilling a well with an H and P FlexRig. In these cases, intersegment charges for the software are incurred, which eliminate in consolidation. The combination of the FlexRig and the HPT software creates the best value solution for the customer and the best consolidated revenue and return on investment for H and P. Therefore, as we develop new commercial models such as performance contracts, we are able to utilize technology solutions and services across our segments to capture additional value. The value delivered to customers for wells drilled more efficiently and of higher quality requires different pricing discussions with our customers.

We will now begin to speak in a different way as well in our discussions with investors. Our Rig segment guidance from this point forward will be on segment margins, which which are defined as operating revenues less direct operating expenses and not on individual rig rates. We will continue to furnish per day rate information in the segment tables and press releases and public filings through the end of this current fiscal year. In The U. S.

Land segment, we expect gross margins to range between 90,000,000 to $105,000,000 with approximately $45,000,000 of that coming from early termination revenue. Our current revenue backlog from U. S. Land fleet is roughly $640,000,000 for rigs under term contract. This amount does not include approximately $50,000,000 of early terminations of which $45,000,000 is expected to be recognized during our third fiscal quarter.

Regarding our International Land segment, our International Land business averaged 17 active rigs during the second fiscal quarter, down slightly sequentially as increased activity in The Middle East offset most of the decline in Argentina. Segment gross margin was slightly up versus prior quarter as we benefited from mobilization revenue and lower start up costs. As we look toward the third quarter for fiscal twenty twenty for International, our activity in Argentina was already expected to suffer due to the local macroeconomic situation and roll off of legacy contracts. The recent oil price declines have exacerbated and accelerated the pace of that decline. Due to falling activity in Argentina and associated force majeure provisions in response to COVID-nineteen, we expect international margins to be negative with a loss between 4,000,000 to $6,000,000 Turning to our offshore operations segment, we currently have five of our eight offshore rigs contracted.

One of those five rigs recently mobilized from the shipyard to a new platform for a short ninety day contract. Offshore generated a gross margin of $400,000 during the quarter, down roughly 10,000,000 on a sequential basis, primarily due to downtime, repairs and demobilization as well as a bad debt expense incurred during the quarter. As we look toward the 2020 for our offshore segment, we expect offshore will generate between 4,000,000 to $6,000,000 of operating gross margin with offshore management contracts generating another $2,000,000 Now looking at our H and P Technologies segment. Many of our customers are seeing the benefits of wellbore quality and placement as evidenced in the seven technical papers presented by the HPT team members at the IADC SPE International Drilling Conference and Exhibition in Galveston, Texas on March 5. As John mentioned, in this environment, we are seeing more customers interested in utilizing AutoSlide given an intensified effort to demand at the wellsite.

HPT generated $18,000,000 of revenue in the second fiscal quarter. We are expecting Q3 revenue for HPT to be between 4,000,000 to $7,000,000 This expected sequential decline is a direct result of rig releases both for H and P and for the industry. As our HPT and U. S. Land teams leverage successes and penetration of performance contracts as a percentage of contracted rigs, we expect continued leverage of software to drive achievement of value delivery to customers.

Now let me look forward on corporate items for the third fiscal quarter and the remainder of the fiscal year. As a result of today's energy down cycle and the outlook for the oil and business, we have undertaken a number of measures to maintain and extend H and P's financial strength. We have updated our capital allocation by reducing our future intended dividends. We have reduced our capital expenditures during this fiscal year. We are working to finalize a reorganization of our U.

S. Land operations for lower activity levels. We are assessing our international offices to appropriately calibrate for activity. And we have begun a rightsizing of our general and administrative overhead to serve the reduced scale for the near to mid term planning horizon. Let me take a few minutes to discuss each of these five areas.

And I will close by discussing our working capital and liquidity and expectations for the next quarter. First, as John mentioned and as we announced on March 31, our Board of Directors intends to reduce the size of future quarterly dividend payments by 65% from $0.71 to $0.25 per share per quarter. This reduction preserves approximately $200,000,000 of cash on an annualized basis. Second, capital expenditures for the full fiscal twenty twenty year are now expected to range between $185,000,000 to $2.00 5,000,000 which is a reduction of over $90,000,000 from our initial fiscal twenty twenty budget and a reduction of over $260,000,000 from fiscal twenty nineteen CapEx. We expended $48,000,000 in the second quarter as we reduced procurement activities and rained in projects.

Note that components from the previously mentioned decommissioned rigs will be used to the extent possible as parts in an effort to lower forward operating and capital costs for our fleet. A reminder that asset sales are primarily customer reimbursement for the replacement value of drill pipe that is damaged or lost in the hole during drilling operations. These sales offset a portion of our tubular purchases within CapEx and are expected to be between 30,000,000 to $40,000,000 this fiscal year. Third, U. S.

Land activity's precipitous drop has resulted in the aforementioned rig releases and in the unfortunate reduction of our field workforce impacting over 2,800 individuals. Therefore, we are working in the month of May to finalize the reorganization of U. S. Land fixed operational overhead with plans to reduce our number of districts from seven to four. This smaller administrative overhead structure should save approximately $50,000,000 in direct operating expenses annually, while still allowing us to serve customers throughout the existing basins where we work.

We have long owned the majority of the facilities where we operate and have our FlexRig fleet proportionally stored in those yards relative to the working rig utilization levels of this last cycle. Fourth, we have started an assessment of our international fixed operational overhead with the intention of sizing country offices to rig activity levels today and with an eye toward medium term potential market opportunities. Fifth and finally, we have begun the process of downsizing our general and administrative footprint to support a now smaller active rig business. Our current expectation for full fiscal twenty twenty general and administrative expenses is now $180,000,000 reduced in part from initial fiscal year budget because of the reversal of accrued annual incentive compensation. We are now in the process of implementing evergreen cost reductions to our G and A service structure.

Collectively, these downsizing decisions are difficult ones for the company and for our employees. Taken together, these cost reduction measures will allow us to meet the challenges of today's down cycle. These efforts are in process and we expect to complete the above outlined rightsizing across the company in the fiscal third quarter and expect to recognize a onetime restructuring charge as a result. This charge will include a cash component currently estimated at roughly $20,000,000 We will continue our investment in research and development through the cycle as we push toward autonomous drilling. We are estimating our annual effective tax rate to be in the range of 16% to 21% and do not anticipate incurring any significant additional cash tax related to the full 2020 fiscal year.

The difference in effective rate versus statutory rate is related to permanent book to tax differences as well as state and foreign income taxes. Now looking at our financial position. Helmerich and Payne had cash and short term investments of approximately $382,000,000 at March 31 versus $412,000,000 at December 3139. Including our revolving credit facility availability, our liquidity was approximately $1,130,000,000 We earned cash flows from operations in the second quarter of approximately $121,000,000 versus $112,000,000 in fiscal Q1. We expect operating income to be lower in the remaining quarters of the fiscal year.

Conversely, we expect cash flows from operations to be higher in the second half of the fiscal year as the ongoing activity decline will result in a significant amount of working capital over the next several quarters. Additionally, we have several working capital improvement initiatives that were already in place prior to the downturn that will further enhance our cash position. Our debt to capital at quarter end was 12% with a 2.5% net debt to cap, which is a continued best in class measurement amongst our peer group. We have no debt maturing until 2025 and our credit rating remains investment grade. We repurchased some shares in the second quarter as we have historically from time to time.

No further share buybacks are contemplated at this time. Our expectations for the remainder of fiscal twenty twenty include continued declines in rig activity, most of which will occur in the third quarter. Simultaneously, we will be finalizing our cost management measures and rightsizing the company to new activity levels. These efforts should generate sufficient free cash flow to cover our selling, general and administrative expenses, our debt service costs, go forward maintenance capital expenditures and intended lower dividend while preserving and building our cash on hand. Our balance sheet strength and liquidity level serve as a cornerstone upon which we have been able to endure for one hundred years and they are a significant differentiator in this volatile and cyclical industry.

That concludes our prepared comments for the second fiscal quarter. Let me now turn the call over to Keith for questions.

Speaker 0

We'll go first to Sean Meakim with JPMorgan. Please go ahead.

Speaker 5

Thank you. Hey, good morning.

Speaker 0

Hi, Sean.

Speaker 5

So, John, maybe to start in U. S. Land, kind of trying to parse through the guidance that you put out. It looks like in fiscal 3Q, the margins could be quite compressed, particularly trying to account for the early terminations impact. Are there any transitory costs associated with the pace of the rig drops that maybe normalize as the rig count stabilizes into fiscal 4Q?

Just how should we think about U. S. Land operating gross margins on some kind of normalized basis maybe say in fiscal 4Q relative to what it looked like in fiscal 2Q?

Speaker 2

Mark, do you have a Yes.

Speaker 4

Sean, thanks for the question. We were certainly are incurring transitory costs related to stacking. But offsetting that are more cost expense cuts still coming as I just finished describing a few minutes ago. So still a little early to have a final look at what would be two quarters from now.

Speaker 2

And Sean, I would just say that there's so much happening so quickly. You've seen the rig count drop. And I said in my remarks, we're doing a great job in the field. But again, it's pretty choppy right now with the amount of activity that's going on with idling rigs and managing through the costs. And then you also have the additional burden of managing with COVID-nineteen in the way that we're physical distancing with our people, and it's just a little bit different process.

But as Mark said, we'll greater clarity in the coming quarter.

Speaker 5

Okay. Well, I appreciate you providing that context. Somewhat related but different topic, I think you know, leveraging the HPT suite along with your super spec rigs is obviously a way to create value for customers. Perhaps there'll be a premium in coming quarters if E and Ps are trying to stretch every CapEx dollar that they have. But the remote working world for you and your customers might also be changing perceptions to agree on what can be done remotely.

Do you see any of that in terms of motive and MagVar particularly motive as potentially getting more traction in a low activity level with remote operations being more critical for customers? I'm just curious about I mean beyond kind of the immediate environment where everyone's scrambling to lower activity, is there just how you feel about or the change in remote working in some ways make it easier for you to show value for motive in particular?

Speaker 2

Yes, Sean, I think that's we've seen that over the past several weeks. The value proposition, as we've described, and we've had customers describe to us on wellbore quality and wellbore placement is there. We have this ability to demand. We have this ability to automate directional drilling. And again, as you start thinking about having exposures, health exposures to the virus, there's another level of desire to demand for those reasons.

And so yes, we are we're seeing a pickup in interest. We continue to have very good meetings with customers, both large and small. And I think that's encouraging. But as you think about it, on the one hand, it's a no brainer in that you can do this in an automated fashion. You can do it at the same efficiency or even higher levels of efficiency in terms of time.

But then there's the added value proposition of a higher quality wellbore. So you're leaving behind a higher quality wellbore and working with your customers. So as you start thinking about combining kind of holistically with the overall offering, with the rig offering and the technology offering, and then you're structuring that offering specifically to a customer's needs and desires, then there's a lot of advantages to that. So to answer your question, yes, we're seeing some additional interest. And the challenges that we faced with COVID-nineteen has got people talking about it in addition to the level of interest we already had.

Speaker 5

Makes sense to me. Thanks, John.

Speaker 2

Thank you.

Speaker 0

We'll go next to Tommy Moll with Stephens. Please go ahead.

Speaker 6

Good morning and thanks for taking my questions.

Speaker 2

Good morning, Tom.

Speaker 6

John, I wanted to start on customer conversations. My assumption is most rigs have been dropped recently primarily because the customer was just making a decision to stop drilling and not because negotiating on price would have made much difference. If that's correct, how far down the road do you have to look before we get to a meaningful discussion around price? And if we look back to the last downturn, I think mid teens $1,000 per day is probably where we ended up near the bottom. And I wonder if that's a fair bogey to think about this time around or if the market dynamic may have changed and may be different in some way.

Speaker 2

Well, certainly, with the release of rigs, and we've described it as really indiscriminate, and it wouldn't matter what the price of the rig would be, As you know, as everybody has seen, a lot of E and Ps are either cutting their rig count by 6550%, 60%, 65%, 75% or and some have even gone to zero. And so in those cases, it doesn't really matter about the rig. But I as you start thinking about and you're framing up this notion of day rate, we're making the case that the day rate model is obsolete, needs to be retired. That's the way that we're going to approach this. There's a huge value proposition that we can provide at H and P, and we're seeing that in the conversations that we're having with customers.

So even in this environment that we're seeing right now, we're entering into contracts with customers that are win win type contracts for the reasons that I stated earlier. We're doing our dead level best to align ourselves with the customers' objective to enhance the economic returns. Well, obviously, they want to lower costs, but they also want better wellbore left behind. So we're working really hard on the partnership side. Our goal is to not be discussing dayrates because of the obsolescence of the model, and we're going to keep working on different models with customers.

And every customer is different. We don't expect to have a one model fits all. We've got an organization that's capable of adapting to that. And that's part of our restructuring. As you'll see, more that we're doing over time is organizing ourselves for that sort of an offering to our customer.

Speaker 6

Well, on that theme, John, do you have any sense that when we do bottom and then start to recover that the expectation may not be for what's currently perceived as a super spec rig in terms of the capabilities and that it might there might be added default assumptions about the kinds of technologies or capabilities you need to bring to the market in order to be competitive? Any light you could shed on where we might be headed just in terms of what the market standard or the leading edge offering might look like?

Speaker 7

Sure.

Speaker 2

Well, we have our definition of super spec. I'm sure every company does. There's a pretty wide range of capabilities even within the super spec space. So I think once the market shakes out, as in previous cycles, the best rigs, the best performing rigs, the best performing crews, Those are the rigs that are going to go back to work first. I do think that we will see a shift towards talking more about, again, the quality of the wellbore, the power of predictability that software brings that humans can't.

I mean, we see it every day in life and it exists in the oilfield as well. And so there is this great opportunity. And so I do think that the requirements will change in the future. Obviously, we're working very hard to position ourselves in that place. As I talked about, we all hate downturns.

We've weathered a lot of them. But what we can say about downturns is that it is a driver for change, and it's a great opportunity for us to take advantage and really double down on the performance type contracts and the technology offerings. We continue we're planning to continue to invest heavily there because we think that's a differentiator. So it's a long way of saying answering your question. I think it does.

I think there are some changes. And like I said earlier, every customer is a little bit different, but that's fine. We've got various offerings that we can provide for a lot of different customers.

Speaker 6

You, John. I'll turn it back.

Speaker 2

Thank you.

Speaker 0

We'll take our next question from Kurt Hallead with RBC. Please go ahead.

Speaker 8

I hope everybody is all your families are doing well and healthy.

Speaker 2

Same to you. Doing well, Kurt. Thanks. Same to you.

Speaker 9

Thank you. Appreciate that. So,

Speaker 8

I guess what I just wanted to kind of ask first here is when you take a look at the dynamics in The U. S. Market and the guidance that you provided as you go out into the next quarter. Just want to make sure I heard Mark correctly say that there's another $5,000,000,000 of early termination payments that are expected to occur during the quarter? If so, is that going to be the absolute minimum or is there a possibility for additional early termination payments that customers haven't quite alerted you to yet?

Speaker 4

The five number is correct, Curt. And it's we on one hand, when we look, we think we have sort of see a line of sight to what could be a June 1 and then also a June 30 level of activity. But on the other hand, we have no clear visibility. If you'd asked me the question three weeks ago, would have had a completely different answer. So the activity level is uncertain in some regard and therefore the early term that is associated with it would be as well.

Speaker 8

That's fair. I appreciate that. And John just maybe a follow-up for you as you kind of basically do away with the day rate model and you continue to push forward with a more win win performance based dynamic. If you were to just kind of think out loud with us on the call now and so on as you kind of look into the next cycle evolution, much incremental, I don't know, EBITDA, how much incremental value do you think that this performance based model can result in for H and P, right? If you looked at your last peak cycle EBITDA when it was a day rate driven model, you look at the next one, which would be more performance based, what kind of incremental value do you think can be derived?

Speaker 2

Curt, that's great question. I'll start with, first of all, I don't know what the number is. What I do know is that this will take some time. There's going to be a transitionary period. We'll continue to have rigs that are working on a day rate basis and customers that will want to do that.

But I do again, we're seeing evidence of it. It's very attractive to customers, this whole notion of having skin in the game and delivering higher quality wellbore. So I don't have a clear answer to that. I may turn it over to Mark, see if Mark has some additional color to add to that. But what I do believe is that we will be in a much better position going down the path that we're going with creating these new commercial models than continuing to do things the way we've always done them with an obsolete model like the day rate model.

Speaker 4

Nothing to add. But Curt, I do want to just clarify with the 5,000,000 to make sure that for others that are listening as well, we still expect to receive approximately $50,000,000 of cash payment in the third quarter. 45,000,000 of that would be recognized then and then another $5,000,000 deferred and recognized after the third quarter.

Speaker 8

That's great. Thank you for that clarification. And John, I know you don't have the specific answers on that value attribution. It's going to be interesting to see how it evolves for sure. So appreciate your stab at it.

Speaker 2

Yes. Thanks for the question. We'll keep working hard.

Speaker 0

Our next question is from Taylor Zurcher with Tudor, Pickering, Holt. Please go ahead.

Speaker 3

Hey, good morning. Thank you. Wanted to follow-up on some of these questions on the performance based model. If I remember correctly, on the last call, talked about the ideal rigs to or incremental rigs to enter into these sorts of models to be in the spot market. And as you push forward with this sort of approach moving forward, how do you protect yourself from a term contract coverage perspective as you enter into more of these contracts moving forward?

And then secondarily, I tend to think of these contracts having a lower base day rate than the leading edge sort of rate and you make it up with performance incentives. So are you protected on an apples to apples basis from an early termination perspective as you enter into these contracts?

Speaker 4

On the early term part, I'll take that and then turn it over to John. We enter into term contracts on performance and have rigs both under term and exposed to the spot market equally like we do any other traditional model. But the one thing to recognize is that this last many months, last couple of quarters as we were putting more performance contracts in place, you had an already soft market. So you're having more of the overall fleet exposed to the spot market in any case. So said differently, when we see a return of utilization whenever that point in time comes for this market to improve, would expect performance contracts, yes, to have term coverage on the way up in utilization.

Speaker 3

Okay. I'll wobble in on international. The guidance for the next quarter is fairly meaningful negative EBITDA and it sounds like the COVID-nineteen issues are a big part of that. Could you frame for us how many rigs you have working today? And the only reason I ask that is because the contract coverage in that segment is so low.

And so how many rigs are working today? And how many do you have visibility to a certain level of rig count over the next, I don't know, two or three quarters?

Speaker 4

Next quarter's International segment across all countries, we expect to have approximately 10 working.

Speaker 3

Okay. And is that going to be higher or lower beyond that? Or is it too early to say?

Speaker 4

It's simply too early to say.

Speaker 3

Great. Thanks guys. I'll turn it back.

Speaker 0

Thank you. Next The question is from Ian Macpherson with Simmons. Please go ahead.

Speaker 7

Thank you gentlemen for all the description and color in this very difficult time to predict. But staying on the international side, John, just given the change in the world looking out some distance beyond a quarter or two, do you think that the new realities that you confront make you give you more appetite for international exposure for the company over the long run or maybe more appetite to refresh and consolidate onto a more efficient footprint here domestically or to essentially keep the exposure that you have, which is a blend but with The U. S. Focus?

Speaker 2

We are definitely and of course, we've been talking about this for quite some time, and we've had quite a bit of traction in different respects in The Middle East. And obviously, with the pandemic and economy shutting down, everything's being pushed out. And I don't know if it's pushed out six months or if it's nine months or twelve months. But as I said in my prepared remarks, the quality and the values that H and P brings that helped us get to the position that we are in The U. S, I think, translate very well internationally.

And so we are definitely interested in continuing to pursue international activity. Again, Middle East, obviously, we've been very excited about Argentina. But clearly, the country is shut down. There's very little, if anything, going on there now. So it's going to take some time, but we're going to continue to invest in that capability.

That's another area that as we think about kind of doubling down on investments, that's a place that we're going to do. And but we're also, again, pleased with the opportunity set that what we've already described. We think we've got a great team that we've put together, and we're going to continue to find ways to organize ourselves to be more effective going forward. So I'd say both of those areas, we're going to continue to invest in our capabilities.

Speaker 7

Got it. And then I had a follow-up for you, Mark. Your CapEx guidance for this year, please correct me if you disagree. It strikes me that while you're cutting it pretty aggressively, it's still lagging how steep the rate of decline is and actually break down by the end of the second half of this year. Could you give us some framework to think about maintenance CapEx for the company on a realistically lower rig count?

I don't think it's close to 200, but if you could offer anything in terms of a rule of thumb there that would be helpful.

Speaker 4

Yes, Ian. Thanks for the question. You will the CapEx reductions will certainly be a little more evident I think as we move through the remaining two quarters of the fiscal year and get to the point of your question, which should be back to our previously stated range of $750,000 to $1,000,000 per active rig. We're working very quickly to wind down and right size the operations, for example, of our FlexRig machinery center here in Tulsa, which services componentry for the entire fleet. As I said in my prepared remarks, we plan to also through time utilize componentry through the decommissioned rigs.

So I don't know where within the 750,000 to $1,000,000 range will be. Hopefully, the lower part of that range for The U. S. Portion of the company, remember that also includes that range includes our international and offshore rigs as well. But yes, maintenance CapEx will be the primary and mostly well, nearly all of CapEx.

Speaker 7

Perfect. Thank you both.

Speaker 2

Thank you.

Speaker 0

And we'll take our next question from Jacob Lundberg with Credit Suisse. Please go ahead.

Speaker 10

Hey, good morning guys. Just I guess sticking on the performance based contract discussion, I'm curious if you could describe any changes you've seen in the KPIs that are going into those contracts, either actually being realized or just in the discussions with your customers?

Speaker 2

I would say the there's more discussion. I've already said this, but I think it's a great question. And to make the point that it's not only speed and it's not only cost. It is a function of wellbore quality and wellbore placement and there's metrics that are associated with those. Wellbore tortuosity, it hasn't always been measured.

It's not necessarily easy to measure. There's not a benchmark. But there's definitely clear evidence that a less tortuous, smoother wellbore creates a lot of advantages, both during the drilling of the well as well well as back to this lifetime value of the well. So those are the sorts of KPIs that are beginning to be used today. And so what you're doing is you're benchmarking against an algorithm software, an algorithm versus a human that's doing kind of the same work.

And so it's an interesting change. And I think, again, that's where automation, I think, over time, will win the day because it does have a higher level of reliability. It's going to ultimately be lower cost, and you're going to have a better wellbore left behind. So those are some of the KPIs that are being looked at today versus if you were to ask six, nine months ago, there wasn't a lot of discussion or interest in that.

Speaker 10

That's helpful. And I guess my follow-up would be, we've touched on it earlier in the discussion, but I'm just curious given the strong balance sheet, given your liquidity position, just thinking about the opportunity set that you guys can kind of take advantage of or execute on during the downturn. You've touched on doubling down on performance based contracts as well as the technology offerings. But I'm wondering if there's anything beyond that scope that you guys are thinking about in terms of being in a good position of being able to play offense during this downturn?

Speaker 2

Well, there's further improvement. Again, as you start thinking about utilizing technology, there's also the ability to right size the organization, structure the organization to be more effective, to be lower cost, more just an overall I think there's still some opportunities as a company for us to continue to modernize. We're I'm very proud of our people and how hard they've worked to get where we are today, but we still have a lot of opportunities ahead, I think. I know that I'm not being real specific. But what I do know is going back to what you said, which is we've got strong balance sheet.

We've always got our eyes open. We're always looking for the next opportunity. And we made some great acquisitions in 2017 and 2019. And we're again, we're looking for that edge, and we've got the balance sheet and the capacity to do that. So we're going to keep our eyes open and continuing to try to figure out ways to change the industry and improve our value offering to our customers.

Speaker 10

Okay. Thank you very much. Appreciate the thoughts.

Speaker 2

Thank you.

Speaker 0

We'll take today's final question from Waqar Syed with Alterra Capital. Please go ahead.

Speaker 9

Thank you for taking my question. First of all, the issues that you're seeing with COVID-nineteen, are you seeing the same in Colombia as well? And could you maybe break down the 10 rigs that you're working on a countrywide basis? Like how many in each country?

Speaker 4

We have an equal split, Waqar, of five in South America and five in The Middle East as of today.

Speaker 9

Okay. And of the five in South America, one is in Colombia, is that right?

Speaker 4

That's correct.

Speaker 9

Okay. Have you seen any interruptions, work interruption in Columbia as well or no?

Speaker 4

The rig in Columbia has actually just gone to work. So we're but in Argentina, yes, as we talked about in prepared remarks, certainly saw an effect there.

Speaker 2

And Waqar, as you know, each country has its own challenges and their own protocols and how they're approaching. And we've got our internal H and P playbook, but we have to kind of modify that playbook, if you will, to fit within each country. We are working remotely in all of the countries in the offices. And again, where we can, for the rigs that are running, we're doing what we can remotely. Obviously, there's challenges associated with crews getting to and having to have a certain amount of quarantine time.

There's all sorts of different challenges in each country.

Speaker 9

So in Argentina, I believe on March 20, they put the whole country in lockdown and Baker Hughes rig count today shows that there were zero rigs active in Argentina. So are you getting paid for those if there's no rig working through April, are you still getting paid there? One. And number two, do you have any expectations on when activity may come back in Argentina?

Speaker 4

Those rigs were the ones I mentioned in the prepared comments that are that have a force majeure provision, Waqar.

Speaker 9

Okay.

Speaker 6

And

Speaker 4

to the second part of your question, you know, it's as we've said about all aspects of the market, it's too soon to tell when activity will return. There's not only the COVID-nineteen global issue and global oversupply, but there were issues, macroeconomic issues within the country of Argentina separately before that.

Speaker 9

Sure, yeah. Okay, great. Thank you very much. My questions have been answered. Appreciate it.

Speaker 4

Keith,

Speaker 2

I think we're at the end of our time. Before signing off, I wanted to call attention to two members of my team that have recently announced their retirement. Rob Stouter has been with H and P over thirty five years. He was our Senior VP and Chief Engineer. Wade Clark, thirty three plus years.

He was our VP one of our VPs of U. S. Land. I've been fortunate to be able to work closely with both of these gentlemen. They've made great contributions to H and P over the years.

But honestly, what I appreciate most about them are their leadership, their integrity, their desire to do the right thing, great team players. We're going to miss you both and best of luck to both of you in the future. And thank you again for listening in on our call and for the questions. And if you have additional questions, of course, reach out to Dave Wilson. Thank you, and have a great day.

Speaker 0

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