Helmerich and Payne Inc (HP) 2021 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Helmerich & Payne Fiscal Fourth Quarter Earnings Call. (Operator Instructions) Please note this call may be recorded. (Operator Instructions)

And it's now my pleasure to turn today's program over to Dave Wilson, Vice President of Investor Relations.

Thank you, Brittney, and welcome, everyone, to Helmerich & Payne's conference call and webcast for the fourth quarter and fiscal year ended 2021. With us today are John Lindsay, President and CEO; and Mark Smith, Senior Vice President and CFO; John Bell, Senior Vice President, International and Offshore Operations. John Lindsay 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 includes 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 outcomes and results could differ materially. You can learn more about these risks in our annual Form 10-K, our quarterly reports on Form 10-Q and our other SEC filings. You should not place any undue reliance on forward-looking statements, and we undertake no obligation to publicly update these forward-looking statements.

We will also be making reference to certain non-GAAP financial measures such as segment operating income and other operating statistics. You'll find the GAAP reconciliation comments and calculations in yesterday's press release.

With that said, I'll turn the call over to John Lindsay.

Thank you, Dave. Good morning, everyone, and thank you for joining us today. I'm excited to be in Abu Dhabi this week, having just participated in the ADIPEC Conference, which has provided a unique occasion to meet face-to-face with colleagues, customers and of course, our strong partner, ADNOC Drilling. Also joining Mark and me today in Abu Dhabi is John Bell, Senior Vice President, International and Offshore Operations, and he'll be available for International and ADNOC specific questions.

Before getting into our traditional discussion topics, I wanted to first mention that ADIPEC, which is a global energy conference in Abu Dhabi. And this week, there was over 150,000 attendees, 33 energy ministers and representatives from over 50 energy companies. I've been impressed with the focus on ESG and especially the discussions of the impacts on energy security for the globe.

In addition to industry leaders sharing their focus on sustainability and ESG, they were also leaders of countries from around the globe that were present to give their perspectives on the energy transition and the importance of ongoing investments to ensure a smooth transition. Dr. Sultan Al Jaber, the ADNOC Group CEO and UAE Minister of Industry and Advanced Technology gave a very compelling speech at ADIPEC's opening ceremony. He started with a reminder that energy transitions take multiple decades, and I quote rewiring the energy system is a multitrillion dollar business opportunity that is good for humanity and good for economic growth.

He also had a call to action stating what the world really needs is to hold back emissions, not progress, let us together drive that progress. Let us always keep in mind our industry must play a pivotal role in the energy transition. We have the knowledge, the skills and the people to make a difference in our world. Now that statement really resonates with me, working with our customers to reduce emissions and our collective environmental footprint is a major area of focus for us here at H&P.

The strategic alliance we signed with ADNOC is a great opportunity to deliver rig technology through the sale of 8 high-spec H&P FlexRigs as well as to make a significant $100 million investment in their initial public offering. ADNOC has a 2030 oil production target of 5 million barrels per day and a goal to achieve natural gas independence.

We believe H&P can make significant contributions towards helping ADNOC achieve those goals through this new partnership, while also providing additional opportunities for us to expand in this pivotal and growing energy region. We're delighted with the reception H&P has received this week, and we want to thank the ADNOC team for their hospitality.

Looking at the rest of our international activity. Historically, we've experienced a lag compared to the U.S., so we are expecting activity to improve in these markets in the coming quarters. A recent example is a couple of new agreements with YPF as we will put 4 rigs back to work under term contracts in Argentina during fiscal 2022. We continue to pursue other international opportunities and look forward to improving activity.

Shifting to North America Solutions. It is hard to believe that a year ago, H&P had only 80 active rig count. But today, we have 141 active FlexRigs. The response of our people and their leadership through the pandemic has been nothing short of amazing. Particularly impressive is their service attitude in responding to customers as rig demand has been recovering. Our folks are resilient and deliver on safety, efficiency and reliability for our customers each and every day.

We expected that the rig activity increases would be more measured during our fourth fiscal quarter as we realized more rapid rig churn among customers who are sticking to their disciplined spending plans. Given that, we were pleased with the 5% incremental rig count increase experienced during the quarter and are even more optimistic as we look ahead to the fourth calendar quarter, where we expect to see our rig count increase sequentially and at a higher pace as E&Ps reset their annual capital budgets.

We believe our customers will remain disciplined. And similar to 2021, the budgets for 2022 will be adhered to, but the new budgets will be reset at higher levels based on a higher commodity price environment, meaning more active rigs in 2022.

As evidenced by our rig count growth to date, we expect the rig count will have a significant increase in calendar Q4 of '21 and Q1 of 2022. As mentioned, our U.S. land rig count stands at 141 rigs today, up from 127 at September 30, our fiscal year-end. And we expect to add roughly another 10 to 15 rigs by year-end of calendar 2021.

To summarize North America Solutions, during calendar fourth quarter, we expect to add 25 to 30 rigs. To put that in perspective, this is approximately the same number of rigs we added in the preceding 9 months. Further, we are so readying several more rigs during the first fiscal quarter that we expect to commence work in the first half of January.

This activity increase is exciting as our customers are investing in their calendar 2022 budgets. It does, however, cause near-term margin compression due to the onetime expenses incurred for reactivation. Mark will discuss the details more in a moment, and I'll add that we are pleased with the future cash generation these rigs will have post reactivation as we return to greater scale operations driving both pricing higher and leveraging our fixed costs.

Given the well-publicized challenges and what we hope is finally a post-pandemic environment, it's not surprising to see rig reactivation and field labor costs increasing. All of the super-spec rigs that are available to work today have been idle for well over a year which equates to higher start-up costs. Competition for quality people is also escalating, and we will be increasing field labor wages accordingly, and as a reminder, those cost increases are passed through to the customer.

The tightening supply of readily available rigs, coupled with these cost increases have already begun to move contract pricing upward in the market. Based upon what we are experiencing today, we expect price increases will become even more pronounced in the coming months as rig demand picks up heading into 2022.

Mark will talk about our strong balance sheet in his remarks, but I wanted to mention one of our goals was to generate free cash flow and we are encouraged that we believe that is achievable in the back half of 2022, with the rig count and revenue expectations we have. These market conditions demonstrate further potential for H&P's new commercial models and digital technology solutions.

Our digital technology solutions deliver value through improved efficiencies, reliability, lower cost and better overall outcomes. Today, approximately 35% of our FlexRigs are on performance contracts and several customers are experiencing the powerful synergies, a combination of performance contracts and digital technology can deliver. Adoption continues to improve and is driving economic returns higher, not only for our customers, but for ourselves as well.

In closing, we are encouraged heading into 2022, and fully expect that the demand for H&P's drilling solutions will continue. E&P capital discipline, rising commodity prices and a collective vision to play our crucial role in a smooth energy transition will strengthen the industry. There are still many challenges, but I'm confident that our people and solutions have the company well-positioned to deliver value for customers and shareholders in this improving environment.

And now I'll turn the call over to Mark.

Thanks, John. Today, I will review our fiscal fourth quarter and full year 2021 operating results, provide guidance for the first quarter and full fiscal year 2022 as appropriate and comment on our financial position.

Let me start with highlights for the recently completed fourth quarter and fiscal year ended September 30, 2021. The company generated quarterly revenues of $344 million versus $332 million in the previous quarter. The increase in revenue corresponds to a modest increase in our rig count during the quarter. Correspondingly, total direct operating costs incurred were $269 million for the fourth quarter versus $257 million for the previous quarter.

During the fourth quarter, we closed on 2 transactions with ADNOC Drilling. First, H&P sold 8 FlexRig land rigs, including 2 already in Abu Dhabi and 6 from the United States for delivery during 2022. Consideration received for this sale was $86.5 million and any gains above book values together with required investments to prepare and deliver the rigs will be recognized as each rig is delivered. Second, H&P made a $100 million investment in ADNOC Drilling in conjunction with its initial public offering in early October.

General and administrative expenses totaled $52 million for the fourth quarter, higher than our previous guidance due primarily to professional services fees associated with the ADNOC transactions and our ongoing cost management efforts as well as increases to the short-term incentive bonus plan accrual to reflect full fiscal year operating results.

On September 27, we issued $550 million in unsecured senior note bonds to refinance our $487 million outstanding bonds that were due in May 2025. Our new issuance came at a coupon of 2.9% and a 10-year tenure maturing in September 2031. The additional debt of about $63 million is funded the make-whole provision and accrued interest for the call of the existing bonds as well as an associated transaction costs. This made the transaction and subsequent debt extinguishment in October, liquidity neutral. Also note that the make-whole premium and accrued interest will be recognized in the first fiscal quarter 2022 concurrently with the October 27 redemption. Our Q4 effective tax rate was approximately 24%, in line with our previous guidance.

To summarize fourth quarter's results, h&P incurred a loss of $0.74 per diluted share versus a loss of $0.52 in the previous quarter. Earnings per share were negatively impacted by a net $0.12 per share loss of select items, which are primarily made up of noncash impairments for fair market value adjustments to equipment that is held for sale as highlighted in our press release. Absent these select items, adjusted diluted loss per share was $0.62 in the fourth fiscal quarter compared with an adjusted $0.57 loss during the third fiscal quarter.

For fiscal 2021 as a whole, we incurred a loss of $3.04 per diluted share. Again, this was driven largely by the noncash impairments to fair value for decommission rigs and equipment, the majority of which were previously impaired and are held for sale. Collectively, these select items constituted a loss of $0.44 per diluted share. Absent these items, fiscal 2021 adjusted losses were $2.60 per diluted share.

Capital expenditures for fiscal 2021 totaled $82 million, below our previous guidance due to the timing of supply chain spending that crossed into fiscal 2022, relative to our original guidance range of $85 million to $105 million, the variance was primarily driven by a delay in the start of planned IT infrastructure spending that we have previously discussed. Most of that planned IT spend will now be incurred in fiscal '22.

H&P generated $136 million in operating cash flow during fiscal 2021. Considering the pro forma impact of our recent debt refinancing, the collective cash and short-term investment balances decreased minimally by $7 million year-over-year due in part to working capital improvements achieved during fiscal 2021 as well as asset sales. I will discuss in more detail later in my prepared remarks.

Turning to our 3 segments, beginning with the North America Solutions segment. We averaged 124 contracted rigs during the fourth quarter, up from an average of 119 rigs in fiscal Q3. We exited the fourth fiscal quarter with 127 contracted rigs. Revenues were sequentially higher by $12 million due to the aforementioned activity increase. North America Solutions operating expenses increased $18 million sequentially in the fourth quarter, primarily due to the addition of 6 rigs as well as a higher material and supplies expense.

Throughout fiscal 2021, we prudently managed our expenses and inventory levels using previously expensed consumable inventory harvested during stacking activities in calendar 2020 rather than utilizing fully costed inventory or purchasing new inventory. As reactivity increase, our level of previously expensed inventory are what we have been referring to internally as "penny stock" has been exhausted, resulting in the issuance of higher cost inventory and the purchasing of additional inventory to replenish stock levels, replenishments go on the balance sheet.

Through fiscal 2021, we did not experience inflation in our costs. However, we are anticipating inflationary pressures moving forward, which I will touch on in a moment.

Additionally, as I will expand on later, we've had 6 rigs to work in the first half of October, the first fiscal quarter of 2022, but the reactivation costs were primarily incurred in fiscal 2021. The onetime reactivation expenses associated with all of those rigs was $6.6 million in fiscal Q4.

Now looking ahead to the first quarter of fiscal 2022 for North America Solutions. As expected, rig count growth was moderate during the fourth fiscal quarter. Publicly traded customers continue to operate within their calendar year budget plans, which are currently being reset for calendar 2022 and an oil and gas commodity environment that is significantly more robust than this time last year. Accordingly, we expect to see sizable spending increases, especially with our public company customers during the first fiscal quarter 2022.

As of today's call, we have 141 rigs contracted, and we expect to end our first fiscal quarter with between 152 and 157 working rigs with current line of sight for a few additional rigs turning to the right in early January.

In the North America Solutions segment, we expect gross margins to range between $75 million to $85 million, inclusive of the effect of about $15 million in reactivation costs. As I mentioned last quarter, there is a positive correlation between the length of time a rig has been idle and the costs required to reactivate it. Most of the costs we are reactivating -- most of the rigs we are reactivating in the first quarter have been idle for 18-plus months. Reactivation costs are mostly incurred in the quarter of startups, so the absence of such cost of future quarters is margin accretive. As John mentioned, we are expecting to achieve higher pricing in light of higher demand and tied ready-to-work super-spec supply.

I will now pause to comment on inflationary considerations ahead for fiscal 2022. We have seen increases in commodity pricing such as for steel, products reflecting upward pricing due to this pressure include capital items, such as drill pipe. Note that our upcoming capital expenditure guidance is inclusive of such pricing increases.

For margin-related expenditures, I will touch on 2 items. First, maintenance and supplies pricing is increasing across some categories such as oil-based products like lubricants and steel-based products like floorhands. Second, as John discussed, we are increasing field labor rates to respond to market conditions and assist in talent retention and attraction. Further, our contracts are structured to pass through labor price increases over a 5% threshold. Therefore, significant labor increases are margin neutral due to contractual protections.

Our margin guidance is inclusive of our expectations for inflation in the first fiscal quarter. As it relates to supply chain access to parts and materials to run our business, we are in constant communication with our suppliers and have placed advanced orders for certain higher risk categories. Our proactive approach to inventory planning, coupled with our scale and healthy vendor partner relationships, provides reasonable assurance in supply chain issues as we see them today will not materially impact our business. We will continue to engage our suppliers and partners to stay ready to adjust as developments unfold.

Subsequent to September 30, 2021, we sold 2 peripheral service lines, which provided rig move trucking and casing running tool services to a portion of our North America segment customers. These business lines were largely margin neutral to H&P having collected revenues in the fourth quarter and full fiscal year of 2021 of $10 million and $34 million, respectively.

To conclude comments on the North America segment, our current revenue backlog from our North America Solutions fleet is roughly $430 million.

Regarding our International Solutions segment, International business activity increased by one rig in Argentina to 6 active rigs during the fourth fiscal quarter. As we look to the first fiscal quarter of 2022 for International, activity in Bahrain is holding steady with the 3 rigs working, and we expect to go from 3 to 4 rigs working in Argentina as well as get the contracted Colombia rig turning to the right. Note that 3 of the YPF rigs John mentioned earlier will commence work in subsequent FY '22 quarters in Argentina.

Turning to our Offshore Gulf of Mexico segment. We continue to have 4 of our 7 offshore platform rigs contracted. Offshore generated a gross margin of $8 million during this quarter, which was within our guided range. As we look to the first quarter of fiscal 2022 for offshore, we expect that the segment will generate between $6 million to $8 million of operating gross margin.

Now let me look forward to the first fiscal quarter and full fiscal year 2022 for certain consolidated and corporate items. As we increase our rig count, capital expenditures for the full fiscal 2022 year are expected to range between $250 million to $270 million. This capital outlay is comprised of 3 buckets similar in fiscal 2021. First, maintenance CapEx to support our active rig fleet will be approximately 50% of the total FY '22 CapEx.

In fiscal 2019, we had bulk purchases in CapEx to scale up rotating componentry for a then 200-plus working super-spec FlexRig count. In addition, we harvested components from previously impaired and decommissioned rigs to conserve capital. As such, we were able to utilize resources on hand and preserve capital in 2021. But now we have reached the end of those inventories and we are needing to recommence a regular cadence of component equipment overhauls and drill pipe purchases. This, coupled with the sharp activity increase we are experiencing is driving our fiscal 2022 maintenance CapEx back into our historical range of between $750,000 to $1 million per active rig per annum in the North America Solutions segment.

Second, skidding to walking capability conversions will approximate 35% of the fiscal 2022 CapEx. Although our peers have walking rigs available in the market, select customers prefer certain rig design elements and commit to a conversion. For customers that need walking rigs, we will invest to convert certain rigs from skidding to walking pad capability in exchange for a term contract that will enable the new investment, which we currently estimate is $6.5 million to $7.5 million per conversion.

Third, corporate capital investments will be about 15% of fiscal 2022 CapEx. Over half of this bucket is comprised of modernization for data center, data and analytics platforms and enterprise IT systems, most of which has moved from fiscal 2021 to fiscal 2022, and will improve our infrastructure and cybersecurity posture. Portions of the balance of this corporate capital investment are for power solutions capital associated with ESG research and development efforts and for certain real estate matters.

As part of the ADNOC sale transaction mentioned earlier, we will deliver the 8 rigs to ADNOC throughout the year of 2022, sale proceeds of $86.5 million were received in September 2021 and are included in accrued liabilities on our balance sheet. In addition to the capital expenditures just described above, we will spend approximately $25 million in cash to prepare and deliver the rigs to ADNOC. When we incur these expenses, they, together with the net book values, which, among other assets, are classified in assets held for sale, will collectively represent the accounting basis in the rigs for the purpose of determining gains to be recognized in the upcoming quarters upon each delivery.

Depreciation for fiscal 2022 is expected to be approximately $405 million. Our general and administrative expenses for the full 2022 year are expected to be approximately $170 million, which is roughly consistent with the year just completed. Fiscal 2022 SG&A will be partly front-loaded in the first fiscal quarter due to short-term incentive compensation payments for fiscal year 2021 results and the timing of certain professional services fees. Specifically, we expect $45 million to $85 million in Q1 with the remainder spread proportionately over the final 3 quarters.

Our investment in research and development is largely focused on autonomous drilling, wellbore quality, and ESG initiatives, and we anticipate these innovation efforts to yield further enhancements and solutions offerings on our technology road map. We anticipate R&D expenditures to be approximately $25 million in fiscal '22.

We are expecting an effective income tax rate range of 18% to 24% for fiscal 2022. In addition to the U.S. statutory rate of 21%, incremental state and foreign income taxes also impact our provision. Based upon estimated fiscal 2022 operating results and CapEx, we are forecasting another decrease to our deferred tax liability. Additionally, we are expecting cash tax in the range of $5 million to $20 million.

Now looking at our financial position. Helmerich & Payne had cash and short-term investments of approximately $1.1 billion at September 30, 2021. When considering the aforementioned 2025 bond repayment and make-whole premium that occurred in October, the pro forma cash and short-term equivalents at September 30, 2021, were $570 million sequentially compared to $558 million at June 30, 2021. Including availability under our revolving credit facility, but excluding the $546 million 2025 bond extinguishment amount, our liquidity was approximately $1.3 billion, commensurate to the prior quarter.

Our debt to capital at quarter end was temporarily at 26%, given the debt overlap at the September 30 balance sheet date. Accounting for the repayment of the 2025 bonds, however, pro forma debt to capital adjusts down to 16%.

Our working capital stewardship since the March 2020 downturn resulted in cash accretion. As we look forward towards the end of fiscal '22, we do expect to consume a modest amount of cash given the onetime recommissioning expenses together with net working capital increase as our rig activity climbs. Fiscal Q1 will experience lower cash flow from operations in the following quarters due to the rig ramp-up and the seasonal cash expenditures for incentive compensation, property taxes, et cetera. We do expect to end the fiscal year with between $475 million to $525 million of cash on hand and $25 million to $75 million of net debt.

In summary, we are expecting to generate free cash flow that when combined with the modest uses of cash on hand early in the fiscal year will cover our capital expenditure plan, debt service cost and dividends in fiscal '22. The growth in rig count early in the fiscal year provides a platform for cash generation in the second half of the year that, pointing forward, fully covered our cash uses, including our dividend, and sets the stage for further cash accretion. Our balance sheet strength, liquidity level and term contract backlog provide H&P the flexibility to adapt to market conditions, take advantage of attractive opportunities and maintain our long practice of returning capital to shareholders. That concludes our prepared comments for the fourth fiscal quarter.

Let me now turn the call back over to Brittney for questions.

(Operator Instructions) We will take our first question from Arun Jayaram with JPMorgan Chase.

Yes. I wanted to get a little bit more color around the fiscal year '22 CapEx program. It looks like you're spending around $90 million or so on the walking system upgrades. You mentioned $6.5 million to $7.5 million type upgrades. Could you give us a sense, firstly, of the 95 idle rigs at H&P. How many of those have walking systems on them? And for the next batch of reactivations that you expect to do, how many more upgrades do you anticipate? And secondly, can you comment on the amount of reimbursements of and above your daywork margins, what kind of reimbursement you're getting for those investments in the walking systems?

Arun, on the investments. I think we're -- Dave, correct me if I'm wrong, I think we've got 1 a month. Is that right on the walking rig?

That's correct.

Yes. That is right. We're planning about -- general planning of 1 a month currently based on line of sight with customers. And that will adjust potentially up or down based on customer demand. But getting back, I think to come back to the pricing and term we're getting, I'd just let John maybe start us off with a little bit of the commentary on why customers are asking us to convert.

Yes. I mean it's interesting, Arun, because there's about 214 idle super-spec rigs in the U.S. and 124 of those are walking rigs. And so we've got significant demand and all of our walking rigs are active. And so we have significant demand for walking. So there's -- it's clear that there's more demand than just for walking. There's obviously demand for what H&P provides in terms of overall performance. So that's a key -- I think that's a key element. We are getting I think the last contract, we probably had an 18-month term contract. And I think...

$25,000 a day. Specifically to your point, Arun, we're getting term. We're shooting for 2. The typical payback on these is 3 years and commanding a premium price for doing so.

Great.

I wanted to clarify something though, Arun. I thought I heard you, and maybe I misheard, you said $190,000 -- $190 million, pardon me, on the walking rig upgrades.

No, I said $90 million. I just...

Okay. Yes, I thought it was $84 million to $90 million, but I thought you said $190 million. I misheard.

Yes. Okay. Yes, it was $90 million. And just my follow-up would be on the ADNOC rigs. Mark, $86.5 million of proceeds from that. Obviously, you also get the $100 million in investment. But can you comment on the CapEx required in fiscal year '22 to get those rigs in a condition to be sold?

Well, as I mentioned, it's about $24 million, $25 million, I think, in the prepared remarks. And it's a couple of things. It's -- there's some specific technical components that our partner wanted, one; two, we're going to be recertifying everything so that, for example, the BOP, these are the 5-year certification in the top drive leaves with 7 years, et cetera, et cetera. But there's also the transit cost, so the shipping or mobilization cost to get those rigs across the water. What I have not commented on is the net book value by rig. Obviously, the 8 have different values and 2 are already in Abu Dhabi, the 6 in the U.S., 2 of the 6 were super-spec as we have previously stated.

And we will take our next question from Derek Podhaizer with Barclays.

I wanted to talk more about the ADNOC deal. Obviously, the news just came out, so they just announced a pretty significant tender just to support the growth of the 5 million barrels per day. You talked about expanding into the region. Can you just maybe expand to us a little bit more about what you're talking about? Are these going to be more HP on rigs going in there? Can you talk about consultancy work? Just any more color you can give us on how you see yourself growing with ADNOC in this new partnership.

Yes, Derek, this is John. I'll start, and I'm going to hand it over to John Bell to give additional color. But I think in general, the strategic partnership with ADNOC is very important. But our hope is that we can continue to expand internationally both with ADNOC Drilling as well as there are some areas that make sense that the H&P operation would be there. But go ahead, John?

Yes, John, as you said, we have -- but now we're focused on just getting the rigs ready and getting the people on board to start up the rigs but also support the -- we're in the process of fine-tuning a rig and aim that framework agreement that will give us a structure we need to provide not with the support lending areas like mainland supply chain, operational efficiencies and so forth. And that's really what we're focused on. We have had discussions with them about different ways, we might approach certain countries and customers in that region that we're open to looking at that. But there's nothing that we've firmed up at this point.

I think there's a real opportunity, though, on the partnership. I mean I think this week has been a great example. We've had excellent meetings with ADNOC Drilling, and they're very excited about the future. There are some obviously different service contracts and technology opportunities that we have to explore. And again, you said you saw the announcement of 5 million barrels and they have a goal of getting to natural gas independents. A lot of that work is unconventional, and that really is a sweet spot, obviously, for H&P. And so our hope is to be able to work closely with them to help them to achieve those goals. So it's a really exciting opportunity.

That's great. So switching over to the North America side. The contract coverage has stepped up pretty significantly quarter-over-quarter. Maybe can you just talk to us about the confidence from your side and the willingness from the customer side to start locking in that pricing and term instead of keeping contracts on short term. It looks like you're now extending that out and getting more contract coverage across your total fleet. So maybe just spend some time walking us through that.

Well, there are several factors. One is, which has been talked about on reactivations. I mean we want to make certain that when we're reactivating a rig and these are $300,000, $400,000, $500,000 reactivation fees and we want to make certain that we're either getting some lump sum or we're getting some term coverage to cover that cost. But I think, in general, customers are willing to lock in. And I think part of the reason why they are is because of the efficiencies and the start-ups that our people are able to provide. I mean, it's not unusual to see historically, rigs start up and really struggle for several months. And our teams are doing a great job just starting right off the bat and in some cases, even drilling record wells right out of the box.

So there's a lot of reasons why customers are in the part willing and entering into these term contracts. Again, we're going to continue to push on pricing, it's a really tight market as it relates to super-spec availability in terms of anything being ready to go. I mean, there's really nothing ready to go right now. Everything's been idle for well over a year. Does that answer your question?

And we will take our next question from Ian MacPherson with Piper Sandler.

I wanted to ask if we could peak a little bit past fiscal Q1 towards the trajectory of your margins in U.S. because we see with the more expensive reactivations, it looks like your average reactivation cost per rig day is more than doubling in this quarter. But that should improve with time with better absorption and a deceleration of those costs. And then you have your rates being pulled up, especially by the premiums you're getting on expensive upgrades for walking rigs. So I would imagine those dynamics should point us towards a pretty good inflection in your average daily margins. I just want to get more comfortable would you see that happening in fiscal Q2? Or do you see cost pressures or other dynamics maybe pushing that out into a later point in the year?

Well, I appreciate the question, Ian. It's -- I think if I remember right, looking at consensus estimates had us adding 10 rigs in this quarter that we're giving guidance on, but we're going to be adding 3x that. And so there's a directional factor the sheer volume of reactivation expenses with that really heavy increase in activity.

To your point, coupled with the fact that as I mentioned in prepared remarks, we're also getting ready this quarter, several rigs that will actually commence work right after the turn of the calendar year. So that's kind of alluding in some extra. So on a per rig basis, I think we'll be pretty consistent at the end of the day. And as we look forward, we do expect the absence of that to be accretive. It just depends on how you do the math, but you could see anywhere from 500 to 1,000 at least per day accretion from the absence of that.

So that's -- directionally, it's looking good for potential cash accretion. But there's going to be a question mark there and that is we still expect more rig accretion in the first calendar quarter. It's just too early to have a clear line of sight through to March 31, what that volume will be. But then we expect that our customers, especially public company customers will hold the line pretty steady and maintain these new budgets from April through September of next year.

And we will take our next question from Neil Mehta with Goldman Sachs.

Yes. And I appreciate the visibility on '22 capital spending. And I know 2023 is really far away, away and it's hard to get visibility. But just how we think about that CapEx budget, which was a little higher than consensus. How much of that is onetime-ish in nature? And as you look at '23, do you get more to a maintenance type of program at which free cash flow comes through in a more powerful way. Does that make sense? And any color that you can provide on the long term as opposed to just next year?

Thanks, Neil. Great question. There are several things to consider when you consider the question. I think we're back into that, as I mentioned, historical $750,000 to $1 million per active rig range, where that might go through time, who knows for certain. But I hope it's a little bit more muted through time. We're experiencing the obvious inflation that we're including in guidance for this year related to the steel cost, et cetera. Plus, we had really, if you will, taking a holiday from operating our FlexRig Machinery Center in the last calendar year, and we're having to get back in business recertifying top drives, BOPs, especially, et cetera. So kind of a crack up of work there that might normalize a bit through time as well.

And then the big question mark is, what do our customers want to do related to walking rigs, as John and I went through a few moments ago. We've had, interestingly in the churn of rigs this year, even though rig count stayed pretty steady and modestly increased in calendar Qs 2 and 3. We had some customers that picked up skidding rigs and actually exited walking rigs while other customers quickly absorbed those walking rigs. And as has been evidenced by commitments, we're still seeing customers want our design of a walking rig and commit to those despite the availability of them in the broader market. So it's really just going to depend.

As we move towards better terms and better pricing for those commitments to get the right return on capital and the new investment, those can be easy decisions to make. So it's just going to depend. Neil, is that helpful? Well, I will add one thing. Let me just add 1 footnote that corporate CapEx will come down once we get these IT projects done that shifted from year-to-year, they're done and some of these real estate matters will be done as well.

Yes. That is helpful. As we are all trying to figure out what normalized free cash flow power is, that's good clarity. On the positive side, I want to talk about market share and your market share levels, I think it's up to 26% now, which is above historical levels. Can you just provide us your perspective on your ability to continue to maintain that market share? What are the key competitive threats that you're monitoring? And what confidence you can give to the market around your ability to sustain these type of levels?

Well, at the end, fortunately, we've had a track record coming out of downturns where we capture market share. So we fully expect that at least the management team, the company, in general, felt like we had the opportunity to do that. It's interesting over the last year, there's been about 235 net adds to the market rig-wise, and 180 of those were from private companies. So 75% of the ads were private companies. And we're the largest -- we still have the largest market share of the private company, and I think we're up to 16% of that share. But the public companies, of course, have only had 25% of that. We think it's probably going to go the other direction at least through Q4 and Q1, where we're going to see, at least based on the commitments that we have, about 60% of our commitments are public companies, so there's a little bit of shift there. And we've got about 31% of the public company market share.

So our hope is that we can continue to gain share. And you say, well, why is that? And how can you continue to do that? Well, I think a lot of it is part of what I've already touched on is the ability to start up safely and efficiently and being able to really hit the ground running. We haven't talked about performance contracts this morning with the exception of our prepared remarks. But we have a lot of customers that are really interested in entering into win-win contracts. They see just like we do, that the day rate contract really isn't structured to drive outperformance. And so fortunately, we have customers that are willing to enter into those new types of contracts.

So I think that's a driver. And I just -- I look at all the work that we've put in over the last 4, 5 years organizationally and just continuing to invest in our people and our systems and processes. We're utilizing data today better than we ever have. And that helps us in terms of driving better performance. I mean at the end of the day, that's what our customers want is they want better performance. They want obviously, efficiency and reliability.

And then there's an ESG component. And again, the data set that we have today and our ability, we believe, to be able to manage ESG at a better level than what our peers are going to be able to do. So again, I think those are some things and better ahead, hopefully, we can continue to take advantage of.

We will take our next question from Scott Gruber with Citibank.

Quick follow-up on ADNOC. What's the vintage of the rigs being sold? It's just the restart CapEx and recertification could be somewhat deceiving when you're moving the rigs abroad. And then do you think there's an opportunity to sell more rigs to ADNOC down the road?

Go ahead, John.

Scott, we -- you said vintage, you're asking about rig type?

Well, rig type is the main question, but if you want to throw about your build here as well.

So Scott, just I'll jump in on the rig vintage, it varies across the 8 and there's less sort of recertification work that we're going to be doing for some of the componentry, and there's more sort of some of the technical spec work. Remember, 2 of the 8 are super-specs though. A lot of this is really the cost to get some of the 6 to Houston and get them across the Atlantic Ocean and Mediterranean and to final destinations. So...

That's the majority really of the expenses just getting it ready for International and just getting a lot there. The -- in terms of selling more rigs, we don't have plans to sell more rigs, but we do have -- we want -- we're going to continue to put rigs to work on under way, but we currently don't have any plans to sell them more.

Got you. It's only 2 that are super-specs. Sorry, I thought -- I think I heard that wrong. Obviously there was 2 that we're not super-spec, but it's only 2 that are super-spec?

Correct. The 2 that are here are not super-spec and then we're sitting to over and then the rest will be nonsuper-spec.

Understood. Understood. Okay. That makes sense. And then with respect to the rest of the International portfolio, just to confirm that the 4 rigs going to work with YPF, those would be incremental in Argentina?

Yes. There's one that's going to work this quarter. That has been planned for a bit. And then there will be one, I think, in fiscal Q2 and 2 in fiscal Q3 at this stage, that timing could be subject to change, but all -- the remaining 3 after this quarter or planned for this fiscal year. Starting to get a little bit of scale back in the block towards operations there. So that's some exciting news for the Argentina team.

Well, definitely. And just thoughts on potential incremental demand beyond what's contracted to go back to work in Argentina and Colombia. It's just after those go back, you still have a fair bit of spare capacity on the International side. So any color on additional rig adds over the course of '22?

I'll let John comment further on customer specifics, but we don't have anything definitive. However, I will tell you that we are participating in bidding activity in both Colombia and Argentina today. John?

Yes, that's right. We've seen interest pick up in both Argentina and Colombia. We've seen the big red work, in particular, be of interest in Colombia and then (inaudible) work with the gas plan that they recently put in place is resulting in some rigs going back to work in that market.

And we will take our next question from Taylor Zurcher with Tudor, Pickering.

First one, I just wanted to circle back on costs in the lower 48. I mean, clearly, some element of the cost increases its transitory with elevated reactivation costs, but a piece of that is going to stick with you on the inflationary side. So I was hoping you could help us understand if we just look on a per rig basis, where normalized costs are on a per rig basis after some of these reactivation costs temper down a bit in the back half of the year. I mean are we at $15,000, $16,000 a day or a different range on a per rig basis.

Taylor, thanks for the question. We are -- there's a lot of moving parts in here. Besides reactivation costs, we are -- there are several things to consider. There's labor cost increases that we alluded to, which will be margin neutral as we have customer protection provisions and contracts. We also have -- as we've moved away from our previously harvested inventory, the "penny stock", we've talked about in prior quarters, and we're having to pull out of fully costed inventory. There are adjustments there. I will say, though, that I don't anticipate a lot of working capital lockup for that sort of thing as we have implemented a lot of processes, policies and systems improvements so that our warehouses are live in Oracle and people across the United States can see all the warehouses. And we have put in place minmax programs to manage the amount of buying that we do.

So nonetheless, we will still see some -- a little bit of maintenance cost to go up. But maintenance is not the largest component of OpEx, as you know, labor is. So I would say I guess it's probably closer to $14,000 for all those moving parts, but we still have some time to go until we settle to the final number, I believe.

Okay. And just a quick follow-up on some of the smaller divestments you made in U.S. land, the partnership with Parker around TRS, and it sounds like you've also exited the trucking business. Can you just talk a little bit about what the benefits to HP are in terms of why you decided to ultimately exit those businesses? I know they're not core to the lower 48 business. But do you add some additional revenue margin per day to your rig business. So just curious if you could help us think about why you're exiting those businesses and what the benefits are to HP?

I'll start with a couple of the numbers things and let John expand otherwise. As we look at these, we have approximate proceeds initially that are modest $6 million to $7 million, which we'll be seeing coming out in our 10-K later today, plus the potential for more revenue sharing through time. These are very much margin neutral. So there's not a lot of accretion to our day margin. And if you think about it, they are very capital-intensive businesses. So as we focus on our capital spend through time, that was one of our considerations. And then there's a bit of the -- just the time and attention that such margin-neutral businesses can bring for the management team. John?

Yes. Taylor, it's a great question. We've had both of those services for a long, long time. And at the end of the day, if you get right down to it, we could not grow those to significant scale. We couldn't get the -- we just continue to believe year after year that we would get to scale from the customer -- from our customer base. And I think it's just probably a function of the competitive nature out there for those particular services.

But I think probably the biggest thing for us is it simplifies what we're doing. It removes some complication as you just think about it, I mean, trucking -- running trucking is very complex. And as Mark said, it's capital intensive. And there's a lot of training and risk. It's different than rigs and really kind of the same way with casing. So it just really didn't -- just didn't really fit our model. And so we hated their great both the trucking and the casing or best-in-class. There's no doubt about it. But again, it was very hard to grow it to the extent that we needed to.

And we will take our next question from Waqar Syed with ATB Capital Markets.

John, in terms of the contracted day rates comparing this quarter Q3 calendar to Q2, as you've added new rig contracts, has the contracted day rates gone up? Or if you look at maybe the forward calendar Q4, as the contracted day rate gone up sequentially? Or is it still a decline?

Well, Waqar, as you know, we're working really hard to get out of the day rate business. And obviously, we came back into it. If you were to look at it on a day rate basis and you pull out the term contracts that were entered into at an earlier date at much higher rates, then yes, the quarter-over-quarter, it is increasing. I don't know the amounts, Dave, that may be something that you can mention if you have that information. But if you combine them all together because of the rigs that are rolling off of earlier term contracts that were at much higher rates, that has a negative impact on the overall margin -- our overall margin and revenue.

So -- and just one other on the same topic. How does the contracted day rate for the 82 or so rigs that are in a contract compared to the spot day rate right now?

That's a great question, Waqar. And to see notes, let me see, hang on. But as we consider what John just said about some rigs rolling off that are signed on term in a better market than even our increasing day rate market that we have today. I think as we just alluded to with a marquee price of $25,000 per day for a walking rig conversion that we're getting back to some better pricing levels. In fact, we've had 4 existing term contracts and extending spot customers. We've been passing through rate increases. Those don't all take effect at the same time, and we're still in negotiations with some customers about what that exact rate increase will be and when it will be. But suffice it to say that we are pushing the pricing and more of that's going to be to come. Dave, any specifics on any numbers?

Yes, I'd just add, Waqar, on pricing, it's very region-specific. There's a couple of regions where the difference between the spot and the term isn't that great, but then there's other regions like in the West, where you're seeing still a disparity between the 2, a couple of thousand per day or something like that.

Okay. John, just one last question, if I may ask you. If we go back like different cycles, H&P has always had a premium margin over its competitors. However, that seems to have gone away and depending on how you treat the H&P technology contribution it doesn't feel as if right now there is a premium for embedded in the numbers. Do you think that as the cycle -- as we continue into next year that you regain that margin premium? Or is it going to be kind of more in line with where the competition is?

Yes. I think if you look at individual contracts that we win, we're winning at a premium. It's -- but obviously, these costs that we have, the reactivation costs and other costs that we're incurring have caused some challenges. I think if you go back to the 2017, 2018 -- 2018 market, we did have a premium margin at that time. So yes, I fully expect that we'll continue to have premium margins over our peers. You mentioned technology. No doubt, technology is going to play a larger role. And we're continuing to have adoption from customers. And again, we're continuing to work very hard on executing on new commercial models performance-based and KPI. We have customers that love the model and they're willing to pay for a lot of the value that we provide. So more to come. We can talk about it all day. We just have to demonstrate it, right?

And I would just put it, Waqar, that we're getting with these upticks that we're guiding to and talking about in rig activity, we're starting to get back to absorption rates with our scale, which will help with that margin accretion in historical industry-leading margin.

Brittney, I think that -- was that our last question?

That was our last question for today. I will turn the program back over to John Lindsay for any additional or closing remarks.

Okay. Thank you, Brittney. Appreciate it. Thanks again, everybody, for joining us today. And as mentioned, we're very optimistic about the future. We think, obviously, our H&P FlexRigs, our digital solutions and our best-in-class people. So we're looking forward to the future, and we'll talk to you next quarter. Thank you.

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.