Helmerich & Payne, Inc. (HP) Earnings

Management highlights

### Overall Third Quarter Performance - Delivered strong financial and operational results, exceeding direct margin midpoint guidance across all three segments despite Middle East conflict disruption and commodity price volatility, with adjusted EBITDA coming in above the implied guidance midpoint. - Generated strong free cash flow and maintained focus on strengthening the balance sheet ahead of an anticipated multiyear industry growth cycle. ### Market and Macro Outlook - Geopolitical tension from the Middle East conflict has driven commodity price volatility, but the 12-month WTI strip remains around $70 per barrel, leading management to expect higher upstream operator planning prices for 2027 budgets versus 2026, pointing to upstream spending growth next year. - Long-term demand for oil and gas is expected to grow driven by population expansion, rising prosperity in emerging markets, and increased power demand from AI development, with energy security concerns bringing forward activity timelines earlier than previously anticipated. - Private and small independent operators have led recent U.S. Lower 48 rig count growth; larger independents have focused on adding technology to existing rigs, and all operators are expected to increase drilling to maintain or grow production in 2027. Super spec rig utilization is already at 95%, indicating a tightening market that will support margin growth. ### Operational and Commercial Developments - **North America**: Private operator demand drove 10 rig reactivations during the quarter; the company exited the quarter with 147 rigs running in the Lower 48, on track to surpass 150 rigs in Q4. The second FlexRobotics automation package was deployed for a super major customer in the Permian, demonstrating the technology's effectiveness and strengthening competitive advantage for the super spec fleet. - **Geothermal**: Three additional rigs were contracted for U.S. geothermal projects, bringing the company closer to a double-digit total rig count in this adjacent growth market, leveraging existing drilling expertise. - **Argentina Vaca Muerta**: H&P holds 25% market share with 9 currently operating rigs. Regulatory and fiscal reforms under the Milei government, combined with large infrastructure investments, have accelerated growth, with forecasts calling for >50% production growth between 2026 and 2030 supported by ~$60 billion in investment. The 10th and 11th rigs will be activated by end of August, with 3 additional rigs exported from the U.S. later this year to reach 15 total operating rigs by this time next year, with healthy long-term margins on multiyear contracts. - **Middle East**: Operational activity remained stable amid the ongoing conflict; 4 rigs were fully reactivated in Saudi Arabia by end of Q3, with the 5th starting drilling early Q4, bringing total Saudi operating rigs to 22, which will be maintained through Q4. Two suspended rigs in Bahrain have resumed operations in Q4. Management continues to see commercial momentum for 2027 despite slower reactivation timelines than planned. - **Other International**: A third rig was awarded for development in Australia's Beetaloo Basin, to be exported from the U.S. Offshore secured a multimillion-dollar 4-year contract renewal in Norway, advancing additional Gulf of Mexico opportunities that strengthen the backlog. ### Enterprise Optimization and Financial Framework - The company is launching broad enterprise optimization initiatives to simplify operations, reduce costs, and accelerate debt reduction. Goals include: reducing annual corporate costs by $40 million by end of 2027 via streamlining central functions, standardizing regional operating models, and harmonizing ERP systems; targeting >$160 million in proceeds from non-core asset monetization by end of fiscal 2027; and improving working capital and inventory management to boost free cash flow. - The top near-term financial priority is reducing net leverage to 1x net debt to EBITDA. After paying off a $400 million term loan early, management is now focused on retiring the $350 million bond due at the end of 2027, with acceleration of repayment prioritized. - Capital allocation is split into three categories during the deleveraging phase (through end of 2027): ~$250 million annual maintenance CapEx to keep existing rigs operational; $50 million annual sustaining CapEx for technology and performance upgrades; and growth CapEx that is only deployed for opportunities meeting strict return thresholds. After reaching the leverage target in 2028, additional free cash flow will be allocated to increased shareholder returns (dividends and buybacks), further balance sheet strengthening, and disciplined growth investment. The base dividend will be maintained throughout the deleveraging phase ($100 million annual spend), and H&P has paid a consistent dividend for 34 years.

Guidance

- **North America Solutions (Q4)**: Updated guidance calls for 145-151 average rigs, with direct margin between $245 million and $255 million. Full year 26 average rig count guidance was raised to 140-144 rigs, driven by stronger than expected Q3 performance and positive momentum. Management expects to maintain similar activity and margin levels in 2027 if commodity prices remain supportive. - **International Solutions (Q4)**: Guidance calls for 60-70 average rigs, with direct margin between $25 million and $45 million (the wider range reflects uncertainty from the ongoing Middle East conflict). Management still confirms confidence in achieving the annual rig guidance midpoint set at the start of the year, and remains on track to reach a quarterly direct margin run rate of at least $45 million, with Argentine growth offsetting Middle East disruptions. - **Offshore Solutions (Q4)**: Guidance calls for 30-35 average management contracts and operating rigs, with direct margin between $26 million and $30 million. Full year direct margin guidance was upgraded to $113 million to $117 million based on strong year-to-date performance. - **Full Year 26 Capital Expenditures**: CapEx is expected to remain within the prior guidance range of $270 million to $310 million, with Q3 lower spending reflecting project timing shifts not scope changes. Full year cash tax payments are now expected to be between $150 million and $180 million, an increase driven by the Utica Square sale tax impact and stronger North America performance.

Segment performance

1. North America Solutions (NAS): Averaged 142 contracted rigs during the quarter, generating $241 million in direct margin, which hit the high end of guidance. Daily direct margin reached $18.7 thousand, an increase of over $1 thousand sequentially, with operating costs per day improving even while reactivating 10 rigs. This segment contributed ~79.8% of total company direct margin in the quarter. 2. International Solutions: Generated $31 million in direct margin, aligning with the high end of guidance. Strength came from the Latin America region, particularly Argentina's Vaca Muerta basin, which offset reduced conflict-related impacts in the Middle East. This segment contributed ~10.3% of total company direct margin. 3. Offshore Solutions: Generated $29 million in direct margin, coming in above the high end of guidance, driven by performance-based bonuses across the 3 active rigs and 30 operating management contracts. This segment contributed ~9.6% of total company direct margin. Total company adjusted EBITDA for the quarter was $236 million, total revenue exceeded $1 billion (up 11% sequentially), net diluted GAAP EPS was $0.74 (adjusted EPS was a $0.11 loss), gross CapEx was $70 million, and free cash flow was $98 million.

Risks & headwinds

- Ongoing geopolitical conflict in the Middle East has created commodity price volatility, delayed rig reactivation timelines in Saudi Arabia, and caused operational disruptions (including suspended operations in Iraq and Bahrain earlier in Q3), creating uncertainty around near-term segment performance. - Commodity price volatility could reduce upstream operator spending and drilling activity, particularly if prices fail to hold at current levels that support 2027 budget plans. - International expansion (including rig exports to Argentina and Australia) incurs additional transportation and modification costs relative to domestic U.S. reactivations, and long-term project execution depends on host country regulatory and fiscal stability.

Analyst Q&A

• Q: Derek Podhaizer (Piper Sandler) asked for an overview of Q4 guidance puts and takes and how management expects momentum to carry into fiscal 2027 across all three segments. /

  A: Trey Adams stated sequential 5% quarter-over-quarter EBITDA growth guidance is driven by activity growth across all segments, with North America rig count continuing to grow, Latin America driving international growth, and offshore providing stable durable performance, with constructive customer conversations supporting confidence in the outlook. Todd Scruggs added international solutions will be the fastest growing segment, and management remains confident in reaching the $45 million quarterly direct margin target, with continued sequential improvement in North America and steady performance from offshore; Q4 26 levels are a good baseline for 2027, with further improvement expected next year.

• Q: Scott Gruber (Citigroup) asked how reactivation costs and Q3 performance bonuses impacted Q3 margins and the Q4 guide, and where NAS margins could stabilize if rig count holds around 150 in early 2027. /

  A: Trey Adams noted that reactivating 10 rigs in Q3 while growing daily margins $1 thousand demonstrated the company's operational efficiency, with recent rig growth driven mostly by private E&Ps that have used hedging to lock in current prices, and expected higher 2027 budget price points from public E&Ps will drive further rig demand with super spec utilization already at 95%. Michael Lennox added that most of the Q4 margin fluctuations stem from lumpy performance-based bonuses (over 50% of rigs are on performance contracts), not large reactivation costs; the second FlexRobotics rig will start drilling this weekend, and it has already outperformed manual operations to become the customer's top performing rig in their 29-rig fleet, with 5 robotic rigs expected deployed by February.

• Q: Arun Jayaram (JPMorgan) asked how management can maintain the $300 million annual maintenance plus sustaining CapEx level as international activity grows, and what that means for long-term free cash flow. /

  A: Todd Scruggs explained that H&P already invested heavily to build a uniform, modern global fleet, so most growth can be achieved by reactivating existing rigs (including moving rigs from the U.S. to Argentina) without large new capital outlays. Near-term focus remains on debt reduction to hit the 1x net leverage target, and management will remain disciplined on spending long-term; the company's existing global platform allows growth without major new capital projects, and excess free cash flow after deleveraging will be used for sustainable shareholder returns rather than unfocused spending growth.

• Q: Saurabh Pant (Bank of America) asked for an update on Middle East operations, the timeline for the remaining 2 of 7 planned Saudi rig reactivations, and the potential for additional new rig opportunities beyond the 7. /

  A: Trey Adams stated he left a recent visit to Saudi Arabia encouraged by team performance and customer stability; 5 of the 7 rigs have been reactivated since March amid the conflict, bringing total Saudi operating rigs to 22, which will be maintained in Q4, and the remaining 2 rigs are not included in current Q4 guidance. Management is currently focused on reaching the $45 million quarterly international direct margin target with existing assets, and will update timelines for the remaining 2 rigs as they develop. The Jafurah unconventional development is a strong long-term opportunity, with H&P's 8 existing rigs well-positioned to capture growth as the basin expands, and broader regional unconventional development across the Middle East also creates additional long-term demand.

• Q: Eddie Kim (Barclays) asked for the current total geothermal rig count, the timeline to reach double digits, and how geothermal returns compare to conventional oil and gas drilling. /

  A: Trey Adams stated geothermal demand is additive to overall super spec rig demand, supporting the existing market tightness dynamic. Michael Lennox noted 6 rigs are planned for U.S. geothermal projects, with additional projects in Europe; margins are roughly in line with conventional U.S. Lower 48 oil and gas margins, and existing H&P drilling technology transfers well to hard-rock geothermal operations. The company expects to reach double-digit total geothermal rigs in the near term, but is not providing a formal fixed guidance for the count at this time.