The slump in natural gas prices has pressured the U.S. land market, but signs are emerging that the rig count may be “nearing a leveling off point,” according to the CEO of Helmerich & Payne Inc. (H&P).
Activity between January and March in the Lower 48 was fairly solid, CEO John Lindsay said during the recent fiscal 2Q2024 conference call. The Houston-based contractor owns the largest U.S. fleet of super specs, aka walking rigs, through its FlexRig standard bearer fleet.
The North American market continues to be “somewhat choppy,” Lindsay said. The “contractual churn” in the U.S. land market “is still prevalent and pushed our rig count just below the projected exit rate late in the quarter.”
In addition to the “volatility created by a weaker natural gas market,” drilling contractors also have been impacted by the spate of mergers by exploration and production (E&P) customers. As E&Ps have consolidated, there are fewer contracts.
“Some of this natural gas volatility is reminiscent of this time last year; however, we believe the impact on our overall activity will be less this year going forward,” Lindsay said. “That said, we do expect the underlying factors causing the churn in the market currently to persist, resulting in what we expect to be a fairly stable outlook for our rig count through the third fiscal quarter.”
Reverted To Jan. 1
H&P’s U.S. land rig count now has “reverted back to a similar level to Jan. 1. That said, we are seeing signs that the rig count seems to be nearing a leveling off point.” H&P now is forecasting it will end fiscal 3Q2024 in June “with between 145 and 151 working rigs. “It is worth noting that among the various factors impacting the rig count, pricing is not one of them,” Lindsay said of H&P’s rig equipment. As April began, even with a “slight decrease in our rig count, we have been able to maintain and even accrete market share.”
Since the end of fiscal 2023, H&P’s U.S. land share has risen by two percentage points to 27.5% overall. At the same time, it has maintained a 33-34% market share of the super-spec market, he explained.
“I think if you just look at the activity set over the last several years, the super-spec segment of the market continues to grow on a percentage basis…Obviously, we've had a pullback in activity, both H&P and the general industry in general, primarily as a result of natural gas prices…
“I think the outlook is very positive. I think the ability to continue to drive efficiencies and reliability, do it in a safe fashion and leverage technologies, are really those key things that are going to be needed. That's what customers are looking for…I feel good overall about the super-spec space in the U.S…
“In terms of trying to pick the timing, as you know, that's very challenging to do…Obviously, oil prices are strong, but in the gas basins, we've had quite a bit of pullback in activity.”
Based on “conversations that we have ongoing with customers,” there are signals of activity rising in the months ahead. “There's also some high grading that is ongoing…continually as we move forward.”
Natural Gas Challenges
The H&P rig count has been in a “five-rig range since June of last year,” the CEO noted. “And again, we all know what the challenges have been with natural gas. So really, our outlook and our expectation is derived from conversations that we've had with customers and what their expectations are…
“It's very hard to forecast out much past a quarter. There's a lot of things that can happen in a short period of time. But based on what we know right now, the feedback we're getting, that's the estimate that we've put together.”
Lindsay was asked if the international customers, particularly Saudi Arabia, were putting more emphasis on their natural gas production. For example, Baker Hughes Co. CEO Lorenzo Simonelli during the company’s 1Q2024 call said the country was reallocating capital “primarily toward gas” as it worked toward net-zero emissions.
“We've read the same thing and heard similar rumors about the potential for additional tenders for unconventional gas going forward,” Lindsay said. “We're hopeful that is, in fact, the case..We will be standing by and waiting to see if that is in fact the case because we don't have any direct information on that.”
At the end of March, H&P’s fleet included 233 U.S. land rigs, 22 international land rigs and seven offshore platform rigs.
The North America Solutions (NAS) segment exited March with 152 active rigs, versus 183 in the year-ago quarter. That was below guidance of 154-159 rigs in part because of “lower natural gas prices,” Lindsay said.
The NAS segment expects to exit June with 145-151 active rigs. As of Wednesday (April 24), H&P had contracts for 150 U.S. land rigs, including 86 term and 64 spot. There also were 82 idled U.S. rigs.
“Revenue backlog from our North America Solutions fleet stands at roughly $1 billion for rigs under term contract,” Lindsay said. About 57% of the U.S. active fleet is on term contract. “Average pricing and revenue per day should remain relatively flat.”
Meanwhile, the “international operations in South America and Australia are expected to remain relatively stable over the next quarter, as well as our offshore Gulf of Mexico operations."
CFO Mark Smith said "we expect our rig count in the third fiscal quarter to average in the high-140 range, which is lower compared to the 155 rig average realized during the second fiscal quarter.”
Net income during fiscal 2Q2024 was $85 million (84 cents/share) with operating revenue of $688 million. In the year-ago quarter, profits totaled $164 million ($1.55/share) on operating revenue of $769 million.
