Helmerich and Payne Inc (HP) 2020 Q4 法說會逐字稿

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

It is now my pleasure to turn today's program over to Mark Smith.

Thank you, Christy. Again, our sincere apologies to all those on the telephone, we have had technical difficulties here with our webcast portion of this conference call, although the telephonic portion is working just fine. So again, we do apologize. We appreciate your patience and your interest in H&P. In order to cure the problem, we will be posting the audio recording from this conference call within 2 hours from the conclusion. We will be restarting from the top.

We apologize again. We will conduct a full 1-hour conference call. We hope you are available to stick with us and join us as we give you our fourth quarter fiscal '20 results and look ahead to fiscal 2021.

I'd like to turn the call over now to our Investor Relations Director, Mr. David Wilson (sic) [Dave Wilson]. Dave?

All right. Thanks, Mark, and I'd like to re-welcome everybody to Helmerich & Payne's Conference Call for the Fourth Quarter and Fiscal Year Ended 2020. With us today are John Lindsay, President and CEO; Mark Smith, Senior Vice President and CFO. Both John and Mark will be sharing some prepared comments with us, after which we'll open the call for questions.

Before we begin our prepared remarks, I will 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 outcomes and results could differ materially. You can learn more about these risks in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other SEC filings. You should place no undue reliance on forward-looking statements, and we undertake no obligation to publicly update these forward-looking statements.

We will also be making references to certain 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, I'll turn the call over to John Lindsay.

Thank you, Dave, and good morning, everyone. This is yet another example that this fourth fiscal quarter is unprecedented in many ways and really challenging during the company's 100-year history. The destruction of oil demand induced by COVID is well documented. And in terms of drilling activity, our rig count hit bottom in August. Despite the challenging quarter, our strong financial position has enabled us to remain focused on our long-term strategies. Our people are developing new commercial models and innovative drilling and digital technologies that we believe will help transform the customer experience and shape the future of this business. These efforts have progressed despite this difficult environment and will serve as the foundation from which the company will build as the market continues to recover.

Our customer-centric approach is one that prioritizes, providing customized solutions by employing a combination of people, processes, rigs and automation technology to deliver more value and lower risk for our customers. This approach is distinctive in the industry. It resonates well across our customer base and with further developments on the horizon, will be a major driver of growth as activity levels improve.

Excluding our 2 idle but contracted rigs, our current U.S. FlexRig activity has improved to 80 rigs, and we expect our active rig count will exit the first quarter at approximately 90 rigs. This is almost double the number of rigs turning to the right compared to the lowest level reached in August. The Permian has led the industry rig count recovery, and H&P has earned approximately 2/3 of the incremental work in that basin.

As we anticipated, our rig count growth has exceeded that of our peers coming off at the bottom, allowing us to recoup 4 to 5 points of market share. We believe that the quality of our field leadership, our rig crews, our FlexRig fleet and our digital solutions will continue to advance this trend.

Concurrent with this increase in near term activity, we are also experiencing increased customer utilization of our performance-based contracts and our rig automation software, AutoSlide. We expect adoption of both to increase and become more prevalent in the industry. H&P's, touch of a button, autonomous drilling approach is designed to optimize drilling in the vertical, the curve and the lateral. These automated solutions include real-time automated geosteering, rotary and sliding execution and improved wellbore quality and placement. The uniqueness our automated solutions is backed by a patented, economic-driven approach, where the software not only makes optimal cost benefit decisions but also directs the rig to execute those decisions without the need of human intervention. This improves reliability, enhances value and reduces risk for our customers.

Let me give an example of the H&P value proposition autonomous directional drilling provides. When customers use AutoSlide on our FlexRig, directional drilling personnel are no longer required at the rig site. This is possible because the directional drilling decisions are being calculated using an algorithm in our patented guidance system, which can accurately process through thousands of variables in seconds, rather than relying on the manual calculations of the traditional directional driller.

The software-enabled FlexRig allows the curve to be landed more accurately and reliably, and the lateral to be placed more precisely in the shale, which results in lower drilling costs, improved production, reduce long-term maintenance costs for our customers and lower environmental impact.

Commercial models that reward performance, coupled with rig automation software that enhances value, are being adopted across the spectrum of the industry. Mark will give additional details on performance contracts, but we've been successful in expanding our customer base with a wide range of E&Ps from super majors to small private companies.

Today, H&P owns more than 1/3 of the estimated 635 super-spec rigs in the U.S. market. With many rig count forecasts ranging from 450 to 550 rigs over the next couple of years, we see significant further super-spec FlexRig market share growth and opportunities for improved pricing.

H&P continues to invest in new and diversified technologies for the long-term sustainability of the company. Recently, we have made investments in and are supporting the efforts of a few companies driving the evolution of the geothermal industry. The core of this evolution is a transition from geographically concentrated and naturally occurring hydrothermal resources to enhance geothermal systems and closed-loop systems. The technologies and techniques these companies are exploring are expected to improve project economics, leading to the ultimate scalability of geothermal as a source of energy.

The growth potential of unconventional geothermal energy applications represent a new opportunity for H&P to increase the utilization of its installed FlexRig asset base along with our digital technology solutions. Our leadership position as a drilling solutions provider is a natural fit for the evolving geothermal market. This is driven in part from our technology offerings that have already been utilized by some geothermal companies in Europe and our proven success in unconventional oil and gas drilling in the U.S. and internationally.

Modern geothermal drilling applications require the benefits that autonomous drilling and digital technology delivers for wellbore quality and placement.

Before turning the call over to Mark, I wanted to thank all of our teams that are fully engaged with our customers and working hard to deliver on several strategic objectives that I have described. We are encouraged by the successes, but we are also cognizant that a substantial amount of uncertainty remains in the market surrounding the impact of the pandemic. It may take several quarters to understand what the new normal activity environment will look like. That said, I continue to be impressed with our team's ability to manage through this difficult time and particularly the diligence they have demonstrated in keeping our employees and customers' health and safety top of mind.

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

Thanks, John. Today, I will review our fiscal fourth quarter and full year 2020 operating results, provide guidance for the first quarter and full fiscal year 2021 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, 2020.

The company generated quarterly revenues of $208 million versus $317 million in the previous quarter. The quarterly decrease in revenue is due to further declines in our rig count caused by the energy demand destruction associated with the COVID-19 pandemic as well as lower early termination revenues compared to the prior quarter. Correspondingly, total direct operating costs incurred were $164 million for the fourth quarter versus $207 million for the previous quarter.

General and administrative expenses totaled $33 million for the fourth quarter, lower than our previous guidance. During the fourth quarter, we closed on the sale of a portion of our real estate investment portfolio comprised of 6 industrial developments in Tulsa, Oklahoma, for $40.7 million, which had an aggregate net book value of $13.5 million. The resulting gain of $27.2 million is reported as a sale of assets on our consolidated statement operations. As mentioned in the press release, the sale of these properties was contemplated well ahead of the pandemic. However, the pandemic did delay the sale process.

Our Q4 effective tax rate was approximately 28% as we recognized an Oklahoma tax benefit related to the sale of our industrial properties and state net operating losses.

To summarize this quarter's results, H&P incurred a loss of $0.55 per diluted share versus a loss of $0.43 in the previous quarter. The fourth quarter earnings per share was positively impacted by a net $0.19 gain per share on select items, as highlighted in our press release, and this primarily pertains to the industrial portfolio real estate sale. Absent these select items, adjusted diluted loss per share of $0.74 in the fourth fiscal quarter versus an adjusted $0.34 loss during the third fiscal quarter.

For fiscal 2020 as a whole, we incurred a loss of $4.6 per diluted share. This was driven largely by the $563 million noncash impairment announced in our second quarter as well as other select items, including restructuring charges and mark-to-market losses on our legacy securities portfolio.

Collectively, these select items constituted a loss of $3.74 per diluted share, and absent these items, fiscal 2020 adjusted losses were $0.86 per diluted share.

Capital expenditures for the full fiscal 2020 totaled $141 million, below our previous guidance due to a combination of ongoing capital efficiency efforts as well as the timing of the small amount of supply chain spending that crossed into fiscal 2021. This annual total is a reduction of $145 million from our initial fiscal 2020 budget and a reduction of over $315 million from fiscal 2019 CapEx.

H&P generated $539 million in operating cash flow during fiscal 2020, representing a decrease of approximately $317 million. I will note that our cash and short-term investments balance increased by $176 million sequentially year-over-year, which I will discuss more in detail later in my remarks.

Turning now to our 3 segments, beginning with the North America Solutions segment. We averaged 65 contracted rigs during the fourth quarter, approximately 15 of which were idle, but contracted and on some form of cold or warm stack rate. I will refer to idle but contracted rigs with the acronym IBC hereafter. This contracted average was down from an average of 89 rigs in Q3.

During the fourth quarter, we bottomed at 62 rigs contracted with about 16 IBC rigs, resulting in 46 active rigs at the low activity point. We exited the fourth quarter with 69 contracted rigs, of which 11 were IBC. The exit count was slightly above our guidance expectations as demand for rigs found footing from the bottom late in the quarter.

Revenues were sequentially lower by $105 million due to the aforementioned activity decline as well as the IBC count. Included in this quarter's revenues were $12 million of early termination revenue.

North America Solutions operating expenses decreased $43 million sequentially in the fourth quarter, primarily due to reduced activity and to the proactive operating initiatives at the field level that I discussed during the third quarter call. That said, the sustained decline in rig activity during the quarter did cause per day expenses to increase on a per revenue day basis. Expenses absorbed in the field include overhead for our field management and maintenance organizations, ongoing stacking costs, consumption of on-hand, average cost inventory as we exhaust penny stock and limited reactivation costs for rigs returning to work.

Further, we had higher-than-expected self-insurance expenses, including numerous former employees on continued health and welfare benefits that will mostly expire towards the end of the first quarter of fiscal 2021. One comment to put these self-insurance expenses in context, our prior period self-insurance claims were generated with higher average rig activity, but some of these incurred but not reported claims are just now being developed when current operations are much smaller. While we see both positive and negative volatility in our claims expenses as we true-up the estimated liability each quarter, the percentage impact is more pronounced when our operations are smaller as they are today.

Now looking ahead to the first quarter of fiscal 2021 for North America Solutions. As I mentioned earlier, we exited Q4 fiscal 2020 with more rigs contracted and running than expected. The activity level has continued to grow as operators add rigs with oil hovering around $40 per barrel. As of today's call, we have 82 rigs contracted with only 2 IBC rigs remaining. The market remains uncertain with macro COVID demand pressures, political uncertainties and forward crude supply balances. In all the 2 situations, operators with idle but contracted rigs have put them back to work, and we are winning to select opportunities for incremental rigs.

We expect to end the first fiscal quarter of 2021 with between 88 and 93 contracted rigs, and we also expect the remaining 2 IBC rigs to return to work in late December or early January. While the decrease in IBC rigs will not increase our contracted rig count, it will be accretive to activity and margins. Almost all of these IBC rigs are on term contracts that rates entered into during the previous super-spec upgrade cycle.

As John discussed, our performance contracts are gaining customer acceptance. And of the approximately 21 rigs we have added or are expecting to add to the active H&P rig count after September 30 through December 31, just over 30% are working under performance contracts.

As we mentioned in the May and July calls, our focus on solution-based performance contracts has driven us to evolve the nomenclature we use to present our business with investors. We began this transition as we shifted our segment guidance to focus on segment margins, driven by rig and technology solutions rather than individual rig rates. We will complete this transition as we move forward into fiscal year 2021 and stop publishing per day information in the segment tables in our future press releases.

In the North America Solutions segment, we expect gross margins to range between $40 million to $50 million, with approximately $1 million of that coming from early termination revenue. This margin guidance is greater than the prior quarter in total, and further, it is not impacted in any significant way by early termination revenues. However, Q1 margins will be temporarily adversely impacted by reactivation costs as we rapidly add rigs from the recent bottom and recommissioning costs for a couple of walking rig conversions.

Our current revenue backlog from our North America Solutions fleet is roughly $554 million for rigs under term contract, but importantly this is not inclusive of any potential performance bonuses. This amount does not include the aforementioned $1 million of early termination expected in Q1.

Regarding our International Solutions segment, International Solutions business activity declining from 11 active rigs during the third fiscal quarter to 5 active rigs at fiscal year-end. This decrease is the result of rig releases in Argentina and Abu Dhabi due, in large part, to the ongoing COVID-19 pandemic.

As we look toward the first fiscal quarter of 2021 for international, our activity in Bahrain is holding a steady with the 3 rigs working, while our 2 rigs in Abu Dhabi and our entire Argentina and Columbia fleets are now idle. In Argentina, we continue to work within an arduous regulatory environment, which has prevented us from reducing labor costs to levels that are more in proportion with the rig activity potential. This will lead us to incur a legacy cost structure into at least the first quarter and will cause international margins to be negative.

In the first quarter, we expect to have a loss of between $5 million to $7 million, apart from any foreign exchange impacts. We still have a pending rig deployment in Colombia, but it has been delayed as our customer is still waiting on all the required regulatory approvals to begin work.

On the marketing front, our international business development team is seeing some bidding tendering activity in Argentina, Colombia, the Middle East and certain other markets. At this juncture, these prospects are early in the process and are not included in our forward outlook.

Finally, turning to our Offshore Gulf of Mexico segment. We have 4 of our 8 offshore platform rigs contracted. Offshore generated a gross margin of $4.6 million during the quarter, below our estimates, in part, due to unfavorable adjustments to self-insurance reserves related to a prior period claim. The previously mentioned gross margin also includes approximately $1 million of contribution from management contracts rigs.

As we look toward the first quarter of fiscal 2021 for the offshore segment, we expect that offshore rigs will generate between $5 million to $7 million of operating gross margin, with offshore management contracts contributing an additional $1 million to $2 million.

Now let me look forward to the first fiscal quarter and full fiscal year 2021 for certain consolidated and corporate items. As we discussed in our May and July calls, we implemented numerous rightsizing efforts by reducing capital expenditures, reducing North America solutions overhead, rightsizing selling, general and administrative overhead and taking similar actions in the international segment where possible. As mentioned, we are continuing to assess our international offices to appropriately calibrate for activity. In all areas, we will continue to identify cost reduction opportunities and drive efficiency in our daily work activities.

Capital expenditures for the full fiscal 2021 year are expected to range between $85 million to $105 million, which is a reduction of approximately 33% to fiscal 2020 CapEx. This capital outlay is comprised of 3 approximately equal buckets: First, maintenance CapEx to support our active rig fleet. Given current activity levels, we have sufficient capacity to minimize new maintenance CapEx expenditures for the foreseeable future. As you may recall, 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 continued to harvest components from previously impaired and decommissioned rigs to conserve capital. As such, we expect fiscal 2020 year maintenance CapEx will range between $250,000 to $400,000 per active rig in the North America Solutions segment, well below our prior year guidance of $750,000 to $1 million.

Second, skidding to walking capability conversions. For the customer with a want or need for walking rigs, we will invest to convert certain rigs from skidding to walking pad capability in exchange for a term contract. As opposed to competitors, our walking rig capacity is fully utilized. We have select customers who prefer certain rig design elements and are willing to enter into a contract with at least a year of term to enable that investment. We estimate walking conversions to approximate $6 million to $7 million per rig.

Third, corporate capital investments. The majority of this bucket is comprised of modernization for data center, data and analytics platforms and enterprise IT systems. Our on-site data center has elements at the life cycle renewal stage, and we are seizing the opportunity to move to both co-located data centers and cloud computing configurations that will be less capital-intensive prospectively. The data and analytics modernization focuses on a cloud-forward approach for increased capability and scalability. In the enterprise IT systems arena, we are implementing a new human capital management system to better accommodate how we manage our diversified and dispersed employee base, including all phases of the employment cycle and employee experience.

Finally, a smaller amount of corporate capital is being allocated to office build-outs as we reconfigure for new flex work arrangements with enhanced office capabilities that can facilitate smaller forward office footprints.

Depreciation for fiscal 2021 is expected to be approximately $430 million. This is approximately $50 million less than fiscal 2020, primarily due to the second quarter impairments of nonsuper-spec rigs and associated capital spares.

Our general and administrative expenses for the full fiscal 2021 year are expected to be approximately $160 million. The decrease sequentially is driven by our rightsizing efforts, as discussed in the July conference call. We believe our restructuring will enable us to achieve activity growth going forward without significant accretion of SG&A.

We are continuing our investment in research and development through the cycle as we push towards autonomous drilling. Such innovation efforts will yield the next solution offering from our technology roadmap. We expect R&D expenditures to be approximately $30 million in fiscal 2021.

The statutory U.S. federal income tax rate for our fiscal 2021 year-end is 21%. In addition to the U.S. statutory rate, we're expecting incremental state and foreign income taxes to impact our tax provision, resulting in an expected effective income tax rate range of 19% to 24%. Based upon estimated fiscal 2021 operating results and CapEx, we are projecting a decrease to our deferred tax liability with no resulting material cash tax.

Now looking at our financial position. Helmerich & Payne had cash and short-term investments of approximately $577 million at September 30, 2020, versus $492 million at June 30, 2020. Including our revolving credit facility availability, our liquidity was in excess of $1.3 billion. Our debt-to-capital at quarter end was about 13% with a positive net cash position as our cash on hand exceeds our outstanding bond. Our debt metrics continue to be best in class in measurement amongst our peer group. As a reminder, we have no debt maturing until 2025, and our credit rating remains investment grade.

Now a couple of notes on working capital. We earned cash flow from operations in the fourth quarter of approximately $93 million versus $214 million in fiscal Q3. Our trade accounts receivable at fiscal year-end was approximately $150 million with the preponderance being less than 60 days outstanding. Our inventory balances reduced $9 million sequentially from June 30 to $104 million at September 30 as we have leveraged consumables across the entirety of U.S. basins and have reduced our min-max carrying targets to reflect the new activity levels.

As mentioned in the previous call, we commenced a project to optimize our accounts payable terms and negotiate additional early payment discounts from suppliers. These efforts continue to bear fruit during the fourth quarter. We expect further benefits, but the impact will be relatively modest in comparison to what we have realized to date.

The macro environment in fiscal 2020 drove capital allocation decisions, cost management measures and the rightsizing of the company to new activity levels. These collective efforts undertaken to date, our aim at generating a free cash flow of that, when combined with the modest uses of cash on hand, we'll cover our capital expenditure plan, debt service cost and dividends in fiscal 2021. Based on our budget for 2021 fiscal year, we expect to end fiscal 2021 with cash and short-term investments of approximately $450 million to $500 million. The maintenance of our balance sheet strength and liquidity are foundational elements in our 100-year tradition of capital stewardship, and they continue to be a significant differentiator in this volatile and cyclical industry.

That concludes our prepared remarks for the fourth fiscal quarter. I want to once again say thank you to all of you on the phone call for sticking with us through our technical difficulties. We look forward to answering your questions.

Now let me turn the call over to Christy for those questions.

(Operator Instructions) We will take our first question from Ian MacPherson with Simmons.

I'll ask both the mine upfront. John, I wanted to ask if you could elaborate at all on sizing that geothermal opportunity in terms of rigs over the next couple of years. And then also for either of you, if you could just, say, maybe check my math for me. It sounds like your gross profit per U.S. land rig is going to be up quarter-on-quarter if you take out the termination revs that mostly go away. So given that and also the phasing of IBC distortions, it sounds like we have at least a temporary bottoming and positive inflection of cash margins. And I think that's correct. Do you see that as a durable bottom with some positive momentum going beyond this as you get into more spot day rates over the course of the coming fiscal? So just those 2 questions.

Ian, yes, thanks for the questions. And thanks for sticking around for 48 extra minutes. As to your second question first, yes, we do see the coming off of the bottom and the inflection point and all the drivers you just mentioned with cash flow and margin accretive going forward. I don't know if you add any other details there, you wanted to tease a part.

Really, I mean, it sounds like it's about a $5,500 implied gross margin per rig day in Q1. You have some cost relief coming after that. And does that -- do you think that's an absolute bottom, the cycle for your cash margins is essentially the question?

Well, given the macro uncertainties I ticked through, I hate to call anything in absolute, but certainly...

In the context of the free cash flow budget that you laid out, I think maybe it is, right?

I think that's correct, Ian. Absolutely.

Ian, again, on the geothermal, it is really early days. We've got several investments out there. I think what's important is that this is a new approach, and it's much different than the geothermal industry that we've all dealt with for decades, really in some respects. So I think the idea of of closed-loop type systems, utilizing horizontal drilling, being able to drill in areas that don't typically have geothermal systems, I think, will make a big difference. And so it's hard to size that at this point, but there'll be more to come on that.

We will take our next question from Kurt Hallead with RBC.

So I guess, I wanted to follow up first initially. Just, Mark, you gave some very explicit guidance of where you thought the cash was going to be at year-end 2021. So I appreciate that color commentary. So it looks like you expect to be at the midpoint of that, maybe roughly free cash flow breakeven so it seems like you're going to get some positive release from working capital throughout the course of the year, at least that's what my initial math here would show. Is that going to jive with the way you're looking at things?

I have -- well, a little bit different twist on that, Kurt, because I think we've gotten through a lot of the working capital benefits. In fact, I would expect working capital level -- working capital to flip as activity increases, but in terms of free cash flow, I shared the potential year-end range you just alluded to. There are a lot of moving parts here between activity, pricing and working capital, but if you think about the $577 million cash equivalents and short-term investments on hand, you back out the $108 million dividend, back out another -- the midpoint of our CapEx range is a $95 million, add back asset sales, which are primarily tubulars of $20 million and then the difference that you could plug there is more or less the cash flow that we'll be having from operations.

Great. I appreciate you walking through that detail. Now, John, obviously, you've -- Helmerich & Payne has developed a very strong reputation over time with delivering a good value proposition for the client base. It looks like we're clearly -- the market is shifting and underway towards shifting. And you look like you're going to be at the forefront of this value proposition, whether it's on the automated drilling software or now you're kind of teasing out some context around the geothermal market.

So I was wondering if you can give us a little bit more color around what kind of market penetration you have seen already for the AutoSlide? What you expect to potentially get over the course of the next 12 months? And then since you're already teased the geothermal dynamic and the E&Ps that is going to be quite a bit different than what historically been the case, what do you think the addressable market on the geothermal opportunity could be?

Yes. Thanks, Kurt. I'll start with AutoSlide, and the autonomous drilling platform is really powerful. You touched on it, and you picked up on this opportunity early. I might stress with we started our journey towards where we are today on automation in 2015, '16 in terms of just trying to figure out a strategy. And then of course, we made a couple of acquisitions, MOTIVE and MagVAR in 2017, and we've made 2 additional acquisitions since then. And so we're really pleased to see that it's starting to take shape in the current environment.

The AutoSlide numbers continue to grow. We're pleased with that. I think the thing to keep in mind is that AutoSlide -- the decision engine for AutoSlide is the guidance system, which was the MOTIVE product, and that's a patented process. And it's -- one of the things that's really interesting about that and important for customers is that it makes economically driven decisions. So each customer can customize the algorithm to their needs, which is really important. And so it's making -- the algorithm is making decisions on a cost-benefit basis. And it's taken 3 costs into mine with time tortuosity and proximity to the pay zone.

So as you start thinking about that, that's differentiated compared to what a lot of products, if you will, are talked about out in the marketplace. And I think the true test of that is seeing how the adoption is going. And so obviously, you have customers start with 1 rig, and we've had many customers that go from 1 to 3, 1 to 5. Recently, we've had a couple that have gone -- at least their forward plan is to go to all 6 or all 8 of the rigs that they have operating. So it's still a work in progress, and we're continuing to layer on additional capabilities with AutoSlide. We'll talk more about that in the future.

Again, on geothermal, it's really early days. But what needs to happen is you need to have these new technologies and these new ideas work out. So there is growth potential for us because these geothermal energy applications are -- would be focused on utilizing our installed FlexRig asset base, which -- again, which would be great, be great for H&P, it would be great for sustainability. So that -- again, we'll be updating more on progress on activity opportunities in the future.

And we will take our next question from Scott Gruber with Citigroup.

Just a quick follow-up on the cash flow discussion from earlier. I just wanted to unpack it a little bit more. Mark, can you provide any additional color on the working capital range that you're contemplating in your forecast for '21?

Not much more than the large amount of detail I've already unpacked, Scott.

Okay. And then just more of a kind of high-level question. And you guys have introduced a number of compelling technologies, especially AutoSlide. Internally, how are you measuring the return you're getting on your R&D investment as you start to layer on more and more investment on the rigs? And based upon the publicly available data that you released, especially given the change in the reporting structure, what should we be watching to think about the return you're getting on your R&D investment?

Well, appreciate that. And I'll let John chime in here as well. But I think one of the things to me that is most interesting about that return is what we just are observing as we speak today. So I mentioned that we are -- basically, the midpoint of our exit guidance for fiscal Q1, it's about 90 rigs. So if we exited at 69, you're adding back 21, and we'd say that over 30% of those being added back are on performance contracts.

So we are seeing an accretion of -- we're seeing an accretion in North American Solutions market share. And that's really driven by the technology that we can deploy through these performance contracts. So that's -- it's really doing our competitive position with customers and our differentiation in the marketplace to accrete market share and then as importantly, do it in a different manner through the performance contract, which allows for potential upside performance bonuses based on the KPIs, which if they are received and actually the targets are met and we are paid, that would be accretive to the backlog that's booked for those contracts.

Yes. I would add on to that, Scott, that and everybody knows this, but new technologies and adoption rates are challenging in the best of markets. And then when you consider the type of market that we've been -- that we've seen over the last several -- all through 2020, but -- that's the challenge. But what I'll leave you with is I can assure you the early days of the FlexRig were not -- it wasn't easy to see the return on invested capital that we were going to get that we ultimately did get with the FlexRig, which was a technology offering, and it was a differentiated offering. The good news with the -- with AutoSlide and our other digital solutions and software is that it is a low capital-intensive. And so we fully intend to get returns, and we'll be more transparent with that over time.

As John has said before, downturns are opportunities. And we really feel like we've hit a tipping point in the number of -- in an upturn in performance contracts and in an upturn and the actual number of deployed AutoSlides that we have working. And all of that, as I mentioned, with the potential to hit those performance targets is potentially margin accretive.

Yes. No, I understand the update seems to be really reflecting of the appetite of the technology. I think the investor base -- I just want a little more color on the margin impact, actually get through the contract rule to you guys. If there's any color that you guys could provide on how it will accrete to the margins for the segment and impact the margin profile, I think would just be helpful.

Yes. And it will be evident, and we'll see that over time.

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

In the U.S., it seems like most E&Ps are targeting some sort of production maintenance budget next year, and that's driving a lot of the recent ramp in the rig count. And I wonder as you look into calendar year 2021, how far do you think we're in that process, the process being operators ramping up it into that maintenance program? Maybe said a different way, looking beyond the on 12/31 of 2020, do you have any visibility today to further increases in the rig count above and beyond that 90 exit rate you pointed to?

Sure. We can give you some additional color on that. I think one of the things to think about with this recent increase, and it really kind of started at the beginning of our fiscal year after hitting the bottom in August. We were talking about this for several months that the budgets -- the ultimate budgets that are -- that customers and E&Ps had cut down to was after successive reductions to their budget. And I think the budget expectation was probably set in a $25 to $30 oil price environment, not with the $40 oil price environment that we've been experiencing over the last several months.

So I think with that, obviously, the really low activity levels, we weren't surprised to see the rig count beginning to grow. So we're pleased with that. Customers are remaining disciplined. We felt like all along that we would be at kind of on the leading edge of that growth once customers started getting back into the game.

One of the things I'm really excited about in this is that not only have we put most of the aisle, but contracted rigs back to work, the other half of the rigs that we put to work have been rigs that we have competed on -- in the marketplace and we've done very well. We've expanded our customer base. And I do think that like we said, we're going to close the fiscal year, we hope, at around the 90 range. And I think there is some potential. We see additional activity in January and February possible. But again, as you've heard me say over time, it's kind of hard to see out further than 90 days, but we do think we're going to have some additional increases as we get into 2021, probably mostly in the first quarter.

You said fiscal year, but I think you mean close the calendar year in '19.

I'm sorry, yes, close the calendar year. Thanks, Mark.

And my second question is on international. Some of the cost and efficiency problems in Argentina have been well-documented and obviously, that's a market that that's taken on the chin following the pandemic. Looking out over the full fiscal year of 2021, we've already seen some improvement off the bottom in Argentina industry-wide. And I wonder if you could frame for us what sort of demand levels as COVID starts to become more of a rearview mirror-type issue? What sort of demand levels you'd expect out of Argentina, maybe exiting 2021 or what we could grow into over the course of 2021?

Well, in Argentina, we have seen some interest pickup, but perhaps not as much as has been discussed in some of the industry chatter we hear because most of the rigs going back to work that we have seen or either work over rigs or rigs that are returning to work after contract suspension due to COVID-19. The aim there really might be to get quick access to a production increase compared to any new developments.

We are seeing some tendering activity take place, and these opportunities are typically a year or less in duration and have some onerous terms in compensation relative to the length of term. So while there are some opportunities in Argentina, COVID-19 is still a factor as is it the lower commodity price environment as well as currency issues and other issues related to that jurisdiction. So that's really kind of our current view on it.

And we will take our next question from Chase Mulvehill with Bank of America.

I guess the first question I wanted to ask was about the guidance on the North America Solutions segment. I guess margins maybe came in a little bit softer. I mean, obviously, you gave a good rig count guide, but if you think about the margin profile, maybe that's a little bit softer than someone expected. So maybe could you just help us understand whether the softer-than-expected kind of margin guidance was more of a function of kind of soft day rates? Or is it kind of elevated OpEx per day as you're looking to kind of reactivate rigs? And then when you answer that, if maybe you could speak to where you think that margin -- I don't know if you're going to talk to margin percentages or cash margin per day, but where you think that you can get margins to overtime as the horizontal rig count kind of climbs back towards 500 rigs?

Sure, a couple of thoughts there. Thanks for the question. It's -- there's a lot of -- as I mentioned in the prepared remarks, a lot of transitory costs in Q1 in reactivating 21 rigs, as just over 30% of what was the ending rig count at the end of the fiscal year. So that's a big rapid uptick, and there's a lot of cost in there related to rig reactivation and also related to, as I mentioned, commissioning a couple of walking rig conversions. As we have talked about before, we're trying to get away from per day discussions. But I will tell you there will be some margin uplift as those rigs continue to work going forward.

Okay. All right. And if I can just follow-up on kind of the rig count. This may be the last time I going to ask you on the rig count, so I'm going to take advantage of it. You talked about exiting at about 90 active rigs. If we think about historical share of the horizontal rig count, your historical share, that would put kind of the industry rig count at about 325 horizontal rigs at the end of the year. So that's adding another 60-or-so rigs through the end of the year for the industry. Does that sound reasonable for an industry rig count towards the end of the year, and you're kind of 26%, 27%, 28% market share of the horizontal rigs? And then also, when we think about adding rigs through the end of the year, do you think it's going to be more weighted towards public E&Ps or profit E&Ps?

Answering your second part first, I think it's going to be a mix. So far, we've seen a nice mix between both small private as well as our traditional customer base going back to work with the idle the contracted rigs. So it's been a nice mix on that.

And I think when you think about the rig count, I think your numbers are in line. I mean, at the end of the day, it kind of depends on what H&P's market share is. You can think of that's the knowledge that we have. And so in 90 rig count for H&P, and we have 25%, obviously, there's 360 rigs running. So we think we're going to continue to capture additional market share. You've seen several reports that show 400 to 420 rigs. I think we can get there in the second -- or the first calendar quarter to second calendar quarter of 2021. And I think as you look out a year or 2, I think it's reasonable that you could see 450 to 550 rigs working again. And why that's important is because again, back to the 630 million or so super-spec rigs and 450 to 500 rigs running, you're in that 70% to 80% utilization, where historically in our industry, you've seen pricing power. And I think the other thing to keep in mind is of that 630 rigs, not all of those rigs are created equal and are not going to be as highly sought after.

So I think that gives us some encouragement that we're going to; one, have rigs going back to work; and two, have some pricing. But back to the commercial models, and it's so easy to fall back into the day rate conversation. And what we really want to continue to focus on is new commercial models. And I want to first give a shout-out to our folks, give them a lot of credit for undertaking this challenge. It's tough to think about retiring the day rate. We've had day rates around for decades and to add new commercial models that are really more attractive and deliver higher levels of value for our customers.

So we really think that we're creating an economic surplus for our shareholders and our customers together. So we just think that there's a great opportunity for these new commercial models. Obviously, the easiest thing to do is to kind of fall back into the day rate focus and margin per day focus, but you'll be hearing more from us on that as the picture comes together.

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

Mark, your guidance of $40 million to $50 million for margins -- gross profit margins in the U.S. solutions. What are you assuming for -- what kind of benefits you're going to get from performance-based contracts in that? Is that range purely driven by activity levels, whether you end at 88 or 93 rigs? Or is there something for how the performance-based contracts can shake out?

Well, Waqar, I appreciate the question. From a GAAP perspective, if you think of backlog, and we try to do all of our work, as you know, very conservatively here at H&P. So if you think about how the the GAAP backlog calculation works as if the "base a day rate". So as a -- by way of example, if you get to the end of a well, and you have metrics tied to that well, and you get an uplift for hitting performance targets, you book that at the end of the well when it's been earned. So not in backlog. So said differently, our budgeting really focuses along a GAAP line of sight, if you will. So we do have some upside potential with margins with the growing number of performance contracts.

Then typically, these one wells taking, let's assume, ballpark number 20 days. So there will be -- presumably, there will be still a number of wells that would have been completed in the December quarter, where if you generate performance-based contracts that you could recognize that. Is that fair?

That's fair, yes. It's a small, but growing portion of the fleet. And the potential upside there, I think we'll see more of that actually through calendar of 2021 in the first fiscal quarter.

And so then to that point, in terms of your free cash flow or cash flow guidance that you provided, what are you assuming for performance? Are you assuming some performance base contract contribution in 2021 in that guidance, so that is going to be -- that may come when that happens and then you include that?

Well, Waqar, it's -- in our business in good times, it's hard to see past a quarter ahead, as you know. And where we are today, looking at that exit count for the first quarter of approximately 90 rigs. With all of the uncertainties I take through earlier, the macro, you have the ongoing COVID demand issues with energy, supply imbalances, geopolitical concerns, et cetera, et cetera. We really, for our budgeting purposes, have taken that 90 rigs in a conservative manner in which we provide stewardship over our balance sheet. We've really flatlined that for the rest of the fiscal year. We'll be updating that each quarter with our forecast as we move through time, but that's our conservative outlook today.

Okay. And then, John, in terms of international activity, you mentioned that Abu Dhabi rigs are down right now. Any thoughts -- now those are contractors or would they be coming back on sometimes that's a next year, calendar year?

No. I think those rigs in Abu Dhabi, their contracts either had early termination or we -- those contracts are closed. Those rigs are idle. We don't have any additional contract term left.

So for the international business, it is kind of this -- the guidance that you have provided for the next quarter, that is as bad as it's going to get and probably as you manage your cost, maybe the revenues don't change, but the cost could come in through the course of calendar year or next year?

I think, yes, as you move into -- as you move in through calendar '21, a couple of things. Yes, we're going to, as we mentioned in the remarks, work on costs, especially those costs related to the legacy-sized structure in Argentina. But also, as I mentioned, we are seeing quite a bit of potential revenue possibilities. Again, it's too early days to put any of those into our forward outlook, but we are participating in a number of bidding and tendering activities in the places we have rigs today and also in new jurisdictions where we do not.

Okay. No things move slowly internationally. Do you think that the best case scenario, if you add up -- pick up a couple of rigs. Is that still from a calendar perspective, second quarter or third quarter kind of possibility?

It's -- Waqar, as you know, it is so hard. I mean, with a potential second wave with COVID, I mean, international was started late, slowed down much later than the U.S. market. So it's just really hard. It's really hard to call at this stage. We don't have any indication that things are going to get better in the next couple of quarters. But obviously, we can be surprised to the upside, but we sure don't see anything right now.

(Operator Instructions) We will take our next call from Chris Voie with Wells Fargo.

So the number of term contracted rigs have come up a little bit, has there been much competitive bidding yet or is it still mostly direct negotiations? And if so, can you comment on whether those rates are dilutive to the average implied in the first quarter or if maybe they're stable quarter-over-quarter step down? And I guess the context here is that it sounds like you have confidence in leading-edge margins granted, there's a performance-based overly, we have to have an estimate for that. It sounds like you have confidence in that maybe bottoming. So just curious if there's much competitive bidding that's bagging that up?

Yes. I'll give a little color on the bidding and the term contract. I have Mark give a little more color on the whether that's dilutive or not. But several of the rigs that we recontracted were competitive bids, and we did enter into some term contract coverages, generally 6 months -- 6 to 12 months. So that's a positive. Obviously, those overall margins would be lower than historically when we were getting term contracts for -- during the super-spec upgrade process. But overall, it has been competitively bid, and we are getting some term contract. Mark, anything else to add on?

No. I mean, I would just remind you of some of those IBC rigs we have that are coming back into the active, turning to the right mode, are accretive to our current margins because they're on those legacy term contracts that were entered into during the upgrade cycle.

Right. And some of those term contracts that I mentioned that we competed for also are on a performance-based contract. So while there may be a base margin that we're looking at, there's a higher-margin that we can attain. As we work with our partners in our partnership with our customers and have -- kind of have that win-win situation.

Okay. That's helpful. And maybe shifting to performance-based contracts. Is there any shift -- now that you've got rigs going up this year, any shift in what's popular for customers or the way you guys like to structure these contracts in terms of which KPIs are involved? Just curious if there's been any shift or any more color around that?

It's really all over the board. I think that's what's important about these types of contracts is. We're having that discussion with the customer. And what's most important to the customer, and what are the things that they're wanting to achieve, and how can we work with them and help them achieve that. And so again, we're seeing performance-based KPI, based also shared savings type contracts, even some footage type contracts. So it's really just working closely with our customers and trying to be as customer-centric as we can in terms of what is it that they're wanting to accomplish.

And this does conclude our question-and-answer session for today. I will now turn our program back over to John Lindsay for any additional or closing remarks.

Thank you, Christy. And again, thanks to everyone for your patience today. I know your time is valuable, and we appreciate you hanging in there with us.

Just kind of closing out with looking back at this unprecedented and demanding 2020 fiscal year, we remain steadfast in our commitment to reshape our business and the industry during this challenging time. Our teams are doing great work to accelerate long-term strategic priorities, including driving efficiency across the company and evolving our digital technology and data platforms to deliver value-added solutions and services to our customers and partners.

So again, thank you, again, for your interest, and everybody, have a great day. Thank you.

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