Helmerich & Payne, Inc. (NYSE: HP) reported a fiscal second quarter net income of $85 million, or $0.84 per diluted share, on operating revenues of $688 million. The company maintained a steady performance in its North America Solutions segment, with 152 active rigs and an increase in direct margins. Approximately $46 million was returned to shareholders through dividends and share repurchases. Looking ahead, the company anticipates a stable rig count and is expanding its operations in the Middle East with a new contract with Saudi Aramco.
Natural Gas Market
The natural gas market has been weaker, which has contributed to contractual churn affecting Helmerich & Payne’s rig count. This volatility in the natural gas market has been a factor in creating instability, similar to conditions experienced the previous year. However, the company believes that the impact on their overall activity will be less significant this year compared to last.
Strategic initiatives Helmerich & Payne is pursuing:
- Expansion in the Middle East: The company is expanding its presence in the Middle East through a new contract with Saudi Aramco for a seven-rig tender award. This initiative marks the beginning of what is expected to be a long-term presence in the region.
- Focus on Commercial Economics and Value Delivery: In the North America Solutions segment, there is a strong emphasis on commercial economics and value delivery, which President and CEO John Lindsay describes as pivotal for creating a sustainable and investable fiscal foundation for the industry.
- Use of Performance Contracts: The company is actively using performance contracts to drive improved and more reliable outcomes, which is a key component of their strategy to enhance service quality and customer satisfaction.
- Shareholder Returns: A key strategic priority remains returning cash to shareholders, as demonstrated by the distribution of $46 million through base and supplemental dividends, as well as share repurchases during the quarter.
These initiatives are part of Helmerich & Payne’s broader strategy to enhance operational efficiency, expand its market presence, and deliver greater value to both customers and shareholders.
What is a Drilling Performance Contract
A drilling performance contract is an agreement between a drilling contractor and an oil and gas exploration and production company, in which the payment terms are based primarily on the achievement of specific performance metrics rather than just day rates or time spent drilling. These metrics might include drilling speed, the total depth reached, safety records, efficiency, or other operational targets.
The primary goal of a performance contract is to align the interests of the drilling contractor with those of the client by focusing on efficiency and outcomes. This kind of contract incentivizes the contractor to optimize their operations and use advanced technologies to meet or exceed the agreed-upon performance standards, thus potentially lowering the overall cost and increasing the efficiency of drilling projects. For the client, this can mean faster completion times, reduced non-productive time, and overall better results, which can be crucial in high-cost drilling environments.
Drilling performance contracts can include a variety of terms designed to incentivize efficiency and high performance. Here are some examples of typical terms you might find in these contracts:
- Speed and Efficiency Bonuses: Bonuses may be awarded for completing drilling ahead of schedule or achieving faster than expected drilling rates. Conversely, penalties may apply if the drilling process is slower than agreed upon.
- Cost Control Incentives: Contractors may be incentivized to keep operational costs under a certain threshold. This could involve sharing savings achieved through efficient practices or lower than budgeted expenses.
- Safety and Environmental Performance: Bonuses for maintaining an exemplary safety record, with no incidents or accidents, or for meeting stringent environmental protection standards.
- Depth and Technical Performance: Incentives linked to reaching target depths or successfully completing technically challenging sections of the drill, such as horizontal drilling through complex geological formations.
- Equipment Utilization: Rewards for optimal use of drilling equipment, minimizing downtime, and ensuring high equipment availability and reliability.
- Quality of Work: Incentives based on the quality of the drilling work, such as the precision of the wellbore, proper placement within the reservoir, and minimal casing and cementing issues.
- Completion Metrics: Performance could also be measured by the well’s production rate post-completion, where the contractor is rewarded if the well produces oil or gas at higher than expected rates.
These terms are crafted to ensure that the contractor not only focuses on finishing the job quickly but also maintains high standards of quality, safety, and environmental stewardship. Each contract will be tailored to the specific requirements and risks of the drilling project, and the terms can vary significantly based on the complexity of the work and the priorities of the hiring company.
