Helmerich and Payne Inc (HP) 2024 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Helmerich & Payne's fiscal third quarter earnings and acquisition of KCA Deutag call. (Operator Instructions) And as a reminder, today's call is being recorded.

And it is now my pleasure to turn the conference over to Dave Wilson, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Connie, and welcome everyone to Helmerich & Payne's conference call and webcast to discuss the acquisition of KCA Deutag and the company's results for the third fiscal quarter of year 2024. With us today are John Lindsay, President and CEO; and Mark Smith, Senior Vice President and CFO.

The agenda for our call this morning is as follows. Both John and Mark will be sharing some brief comments on the company's third quarter results and outlook for the fourth quarter. John will then provide an overview of our transaction with KCA Deutag and the significant growth and value creation opportunities that it generates.

Then Mark will discuss the financial benefits of the acquisition and our deleveraging plan. And then finally, John will conclude our prepared remarks by discussing our approach to integration planning. And then after that, we'll open the call for questions.

Before we begin our prepared remarks, I'll remind everyone that this call will include forward-looking statements as defined under the securities laws. Such statements are based on 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 actual outcomes and results could differ materially. You can learn more about these risks on our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other SEC filings. You should not place undue reliance on forward-looking statements, and we undertake no obligation to publicly update these forward-looking statements.

We also may make reference to certain non-GAAP financial measures such as segment operating income, direct margin, operating EBITDA, free cash flow, net debt to operating EBITDA and other operating statistics. You'll find the definition and GAAP reconciliation for direct margin in yesterday's earnings release and the definitions of the other non-GAAP measures in the acquisition press release and accompanying presentation.

We posted the press release and presentation regarding the acquisition to the Investor Relations portion of the website, those documents supplement the information we'll discuss on this call and we recommend that you have a slide handy to follow along with John and Mark's comments.

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

Thank you, Dave. A good day to everyone. I appreciate you joining us on short notice. Yesterday afternoon, we announced our financial results for fiscal third quarter 2024 and this morning, we announced our acquisition of KCA Deutag.

We believe this merger with KCA is transformational and accelerates our international growth strategy and provides immediate scale in the Middle East, provides diversified earnings, offshore management contract exposure and world-class manufacturing and energy services.

But before going into any more details on the acquisition, I would like to spend a few minutes on our fiscal Q3 earnings and also allow Mark to provide the financial highlights for the quarter and outlook for fiscal Q4.

During our third fiscal quarter 2024, we delivered strong operating and financial performance, demonstrating the resilience of our strategy in the North America solutions segment. It also remains particularly notable that despite the more sizable decline in the overall industry rig count, our active rig count remained relatively stable during the quarter.

We believe this is a result of H&P's unyielding focus on providing value to our customers. From a macro perspective, two influences have become prominent in recent years and act as a governor on activity of the oil and gas industry. Oil and gas prices have always been cyclical and that used to be the predominant driver in the business.

Today, capital discipline is a driving principle. And while this has ushered in a steadier operating environment, it has also been accompanied by slower growth. That said, we believe that prioritizing return on invested capital will bring about a more positive outlook for the industry over time.

Another important influences customer consolidation and their efforts to drive efficiency and reliability. H&P's operational and contracting strategy meshes well with our customers and our win-win commercial models encourage a return focus that delivers higher earnings for our customer shareholders as well as our own.

Contractual churn remains prevalent in the US market, but our people are doing a good job of managing through this. We expect the churn to continue. And as we have seen in recent summers, we also anticipate our active rig count to be flat with perhaps a modest improvement heading into our fiscal year end.

On the international front, the company's first super-spec FlexRig arrived in Saudi Arabia, marking a major step in our strategy to increase our operational presence in the region. Activity levels in the international segment in the fourth fiscal quarter are expected to be comparable with the third fiscal quarter, with the exception of the addition of the first of those eight Saudi Arabia rigs.

Those rigs are expected to commence work during the fourth quarter once contractual acceptance procedures are completed. The preparation work for the remaining seven super-spec rigs is progressing as planned with export dates expected through the balance of the calendar year.

We're looking forward to working with Saudi Aramco and building a long-term relationship with our new customer. And now I'm going to turn the call over to Mark to review the Q3 financial highlights.

Thanks, John. Today I will highlight fiscal third quarter 2024 operating results and it's like a guidance for the fourth quarter and remaining full fiscal year 2024 as appropriate and comment on our financial position.

Let me start with the highlights for the recently completed third fiscal quarter ended June 30, the company's revenues were up sequentially, primarily due to improved average pricing in North America. Total consolidated direct operating costs were increased, primarily attributable to expected higher sequential direct expenses in the international segment for the Saudi's start-up costs.

General and administrative expenses were approximately $67 million for the third quarter, which was higher than our expectation due to approximately $7 million of nonrecurring professional services and consulting fees related to the KCA Deutag acquisition, which was noted as a significant, as a select item in our earnings release yesterday.

Third quarter cash flow from operations was $197 million and when deducting $134 million of capital expenditures and $42 million for the base and supplemental dividends, the company generated free cash flow of approximately $21 million. I will address the company's cash position later in these remarks.

Turning to our segments, beginning with the North America Solutions segment, we averaged 150 contracted rigs during the third quarter, down from 155 in the second fiscal quarter. The exit rig count was 146, which declined late in the quarter due to churn, but remain within our guided range of between 145 and 151.

Revenues increased sequentially by $7 million, primarily due to our continual focus on sustaining contract economics for the value delivered to customers. Total segment expenses were up slightly to [19,550] per day in the third quarter compared to [19,000] per day in the previous quarter. This is within our general expectations as recent daily expenses vary quarter to quarter with the general range of [19,000] to [19,500].

Looking ahead to the fourth quarter of fiscal '24 for North America Solutions as of today's call, we have 148 rigs contracted and activity through most of the third quarter was relatively flat. As we said, as we stated last quarter, during the April call, we continue to see signs of the rig count is approaching and leveling off point, and we expect in their fourth fiscal quarter with between 147 and 153 rigs working.

Despite a decrease in total US industry rig count this calendar year, we continue to maintain and even accrete market share. We expect average pricing and revenue per day to continue to remain relatively flat. We expect costs in the fourth quarter to remain relatively flat as well.

Next to the International Solutions segment, as we look to the fourth quarter of fiscal '24, as mentioned in the press release, we expect the most international activity to remain unchanged with initial Saudi Arabia rig expected to commence operations before the end of the fiscal fourth quarter.

Note that $1 million to $3 million of Saudi recommissioning expenses slipped from the third quarter into the fourth quarter therefore, final Saudi Arabia rig recommissioning expense expected in the fiscal fourth quarter is now revised up from $5 million mentioned in the April call to $6 million to $8 million. Let me update full fiscal year guidance as appropriate.

Capital expenditures for the full fiscal year 2024 are still expected to be at the top end of our original range, around $500 million. Our total international expansion in CapEx, this fiscal 2024 is approximately $175 million, which is 35% in the fiscal '24 total expected CapEx.

We previously stated that international spend of $30 million to $35 million would be incurred in fiscal 2025. Any further organic international capital spend in 2025 would be primarily dependent on future rig tendering opportunities, which are uncertain at this time.

Depreciation for fiscal '24 is revised slightly from $45 million, down to $400 million for the full year due to completion of accelerated depreciation related to excess capital spares created via the walking rig conversion program.

Our expectations for general administrative expenses for the full fiscal year are revised up from the previous guidance range of $240 million to $250 million. This increase is due to previously mentioned, -- excuse me, professional services and consulting fees related to the KCA Deutag acquisition.

Research and development costs are revised up for fiscal 2024 from $37 million to $40 million due to a one-time expenditure in the third quarter related to rig floor automation technology.

Now looking at our financial position, H&P had cash in short-term investments of approximately $290 million at June 30, 2024 versus an equivalent $277 million at March 31. Of note, we repurchased a limited amount of shares in fiscal Q2, and we did not buy back any shares in fiscal Q3, even though per share values were below our trailing 18 months average buyback levels, at times within the quarter instead we sought to preserve cash on hand for the contemplated KCA Deutag transaction.

Based on this quarter's results and our projections for the final quarter of the fiscal year, we are generating ample cash flow to cover for this year's capital expenditures, the base dividend this fiscal 2024 supplemental dividend plan and the share repurchases to date further, this fiscal year, we have allocated another $40 million towards various long horizon in-depth.

That concludes our prepared comments regarding the third fiscal quarter. Let me now turn the call back to John to discuss our KCA Deutag acquisition.

Thank you, Mark. As Mark said, we're going to cover the KCA Deutag transaction. We're going to begin on slide 3, so hopefully you have the presentation deck in front of you. It is a historic and exciting day for H&P. Our acquisition of KCA Deutag is transformative and establishes H&P as a global leader and onshore drilling and accelerates our international expansion, delivering on a major strategic objective for the company.

KCA Deutag has a highly complementary geographic footprint with very little overlap to H&P's existing assets and operations. This transaction is expected to be immediately accretive to both cash flow and free cash flow per share. H&P will become a larger, more diversified and more resilient company, having greater earnings visibility and cash flow generation.

We have a history of taking a thoughtful and managed approach to running and investing in the business. This acquisition continues that legacy and further strengthens the company for many years to come.

Being a financially conservative company has been a cornerstone of our approach to this business. As such, we have a clear plan to promptly delever post-close and expect to maintain our investment grade credit rating.

The company also has a long history of taking a balanced approach to capital allocation with a focus on providing sustainable shareholder returns, and this will continue into the future. As you'll hear today, KCA Deutag shares our cultural values focused on safety and well-being of employees. Sustainability and a customer centric approach. These will remain priorities and will support a seamless integration.

If you turn to slide 4, it summarizes key details of the transaction. To provide the highlights we are acquiring KCA Deutag for approximately $1.97 billion in cash. We will fund primarily with new debt, and Mark will cover the financing details in a moment.

I've already highlighted some of the key financial benefits, but it's worth reiterating the overall accretive nature of this transaction. We expect the transaction to close prior to calendar 2024 year end, subject to customary closing conditions and regulatory approvals.

Many of you may be familiar with KCA Deutag, but slide 5 is a brief introduction to KCA and what excites us most about this opportunity. Based in the UK KCA Deutag is a diverse global drilling company with a significant land drilling presence in the Middle East and additional operations in South America, Europe and Africa.

KCA has over 135 years of experience and a global network of operations supported by approximately 11,000 employees. One aspect that really excites us about this transaction is that nearly 95% of the company's total operating EBITDA in 2023 was generated from its land drilling operations in core Middle East countries and its offshore contract services operations.

So the very -- they have very concentrated resources of revenue and cash flow generation. In total, KCA's land operations generated approximately 74% of its 2023 operating EBITDA and roughly 71% of total 2023 operating EBITDA was generated by 63 rigs located in those core Middle East countries of Saudi Arabia, Oman and Kuwait, which again highlights its concentration of revenue and cash flow generation.

The company generated another 23% of operating EBITDA from its asset-light offshore management contract business. This business involves 29 offshore management contracts, primarily on platform rigs located in the North Sea, Angola, Azerbaijan and Canada. Like their land operations KCA Deutag offshore business is highly complementary to ours with very little overlap. The KCA Deutag offshore business also has a robust backlog with super major customers which provides another source of long-term earnings visibility and stability.

Finally, KCA Deutag's Kenera segment comprises manufacturing and engineering businesses, including Bentec, a well-established drilling manufacture. This business has three facilities serving the energy industry, one in Germany and then important hubs in Saudi Arabia and Oman. We believe this business represents a longer-term growth opportunity for the company, providing upside exposure to energy transition efforts in Europe.

Now turning to slide 6. This is the right transaction at the right time for H&P. Shortly after the advent of the super-spec rig in the US market and our US customers becoming more capital disciplined in their businesses. We realize the market in the US was evolving and that growth opportunities here would likely be more measured than they were in the past.

As a result, we developed a more concerted strategy to expand internationally. This was interrupted by the COVID pandemic but even then we continue to look for international opportunities, particularly in the Middle East.

As part of this international strategy, we've generated some organic growth, but have also been monitoring various external opportunities around the world for quite some time looking for the right fit. We believe we have found it with this KCA Deutag acquisition. In recent years, KCA has streamlined its portfolio of assets, geographically, strengthened its financial position by significantly reducing debt and enhanced its leadership in the Middle East by acquiring Saipem onshore operations.

Turning to slide 7. The US and Middle East are the two most prominent oil and gas producing regions in the world. We have often said, if you want to be big in the US, you have to be in the Permian. And if you want to be big globally. You have to be in the Middle East. This transaction gives H&P immediate scale and core Middle East markets in a way that would be challenging to replicate organically, making H&P one of the larger rig providers in the Middle East.

Moving on to slide 8, that shows the historic and projected demand for rigs in the Middle East in comparison to the historical price of Brent oil. As I've discussed, the Middle East market is not only resilient, but is expected to see continued strong growth in the coming years at an estimated 9% rate annually through 2026.

This represents another compelling reason for executing the transaction at this time. We view this transaction as more than just acquiring assets, whether we are acquiring operations with quality people and processes. We are excited about what this means for H&P's future.

And I will now turn the call over to Mark to discuss the financial benefits of this acquisition.

Thanks, John. The acquisition is a win-win. It increases our scale and it strengthens our geographic and operational mix across the US and international markets. As shown on slide 9, on a combined basis, the company would have delivered operating EBITDA of approximately $1.2 billion over the past 12 months, an increase of more than 30% from H&P on a stand-alone basis.

We will also have a much more diversified business. For example, we expect this transaction will grow our international land operations from approximately 1% on a stand-alone basis to approximately 19% on a pro forma basis on calendar year 2023 operating EBITDA.

And offshore operations are expected to grow from approximately 3% on a standalone basis to approximately 7% on a pro forma basis. So on a pro forma basis, about a quarter of the combined company's operating EBITDA will come from international and offshore operations, creating a diversification from our legacy US onshore business. As a result, the H&P will have better geographical balance in earnings and cash flow streams.

Looking at slide 10, we will also have stronger cash flow stability and visibility supported by a robust backlog of work for blue chip customers. KCA Deutag adds approximately $5.5 billion of contract backlog to H&P's $1.7 billion, approximately $3.8 billion of which is firm and approximately $1.7 billion of which is optioned. This includes work for large, well-known customers of KCA Deutag, including BP, Exxon, Mobil and Shell, as well as in NLCs in key international markets.

Moving on to slide 11, the transaction is accretive to all our key financial metrics. It is immediately accretive to cash flow and free cash flow per share and increasingly accretive thereafter with double digit free cash flow accretion expected as soon as 2025.

Furthermore, the returns for this transaction are expected to exceed cost of capital by 2026, a timeframe that is shorter than what is typical for transactions of this type. Additionally, and despite a little geographic overlap, we expect to realize approximately $25 million in run rate synergies by 2026, driven primarily by reduction in overhead and procurement savings.

We believe there are opportunities for additional synergies over time. These anticipated synergies were not a large factor when considering the strategic and economic rationale for the transaction. Including synergies we are acquiring KCA Deutag at a transaction multiple of approximately 5.4 times. This is much lower than the trading multiples of other Middle East public peer companies.

Slide 12 details our plans for a balanced, but prompt move to delever post-closing. We remain committed to a conservative balance sheet and investor returns. H&P's history of maintaining financial discipline is purposeful and twofold. One, it allows us to plan and invest for the long term, despite the volatility often seen in the crude oil and natural gas markets.

Two, it also allows us to take advantage of market opportunities, including this very transformative transaction for the KCA Deutag acquisition, we are willing to temporarily increase our leverage to take advantage of a meaningful international growth opportunity.

We expect to maintain our investment grade rating. Debt reduction will be a capital priority for one to two years post close. We also expect to refinance existing KCA Deutag debt at a lower cost of capital and we will be well-positioned to profitably reduce debt by utilizing the strong projected cash flows, prepayable term loans and newly issued bonds with staggered maturities.

Our focus will be reducing our net debt to operating EBITDA ratio from 1.7 times at close to a long-term target of at or below 1times. Consistent with our history, we are focused on financial stewardship in the near term to realize the significant long-term benefits of this transaction.

Turning to slide 13, this transaction improves our returns while also reducing volatility, enabling us to deliver both near and long-term value creation for shareholders. We will maintain our long-standing commitment to capital allocation priority to provide shareholder returns, we will pay the fourth and final installment of the fiscal 2024 supplemental dividend that we declared on June 5, 2024. Thereafter, we do not anticipate providing a supplemental dividend during the near term deleveraging period.

We do intend to maintain the current annual base dividend of $1 per share and we expect the yield to remain competitive with industry and in the industry averages. As we work to reduce debt in the near term, we will continue to select to target select investment opportunities with strong return profiles, including further US rig export opportunities. We will also consider additional opportunistic returns to shareholders beyond the base dividend through the first couple of years following close.

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

Thanks, Mark. I'll wrap up our prepared comments today by discussing our common core values and integration plans at a high level.

If you turn to slide 14, an important aspect of our complementary businesses is our similar cultures, whether and how we serve our customers or how we keep our employees safe. Like H&P KCA Deutag has a customer centric approach that emphasizes safety, sustainability and operational and financial excellence. Together, we will build on these shared values as we look forward to welcoming KCA Deutag's talented employees to H&P, working together to provide exceptional performance and value to customers across our global markets.

Moving to slide 15, our similar cultures will ground our integration planning. We will take a measured approach, focusing on execution and continuing to support our customers. As we plan to bring our companies together, we will have a few areas of focus. These include leveraging expertise of both companies, optimizing our geographic footprint, enhancing each company's strengths and identifying opportunities to use our existing assets and operations with KCA's local knowledge.

Post-close, H&P will have three primary operating segments. North America Solutions, International Solutions, and Offshore Solutions. KCA Deutag manufacturing and engineering business Kenera falls under other on this slide, but as we mentioned previously, we believe there is an opportunity to grow this. For your modeling purposes, H&P's North America Solutions segment will remain unchanged.

Turning to slide 16, and summarizing what we are creating through this acquisition. We are excited about H&P's future with KCA Deutag. We are building on a 200 plus year legacy of combined companies with successful operations to create a leading global land driller.

We will have asset-light offshore services and strong innovation in technology and engineering. And we will continue to foster a culture that's centered on our people and communities. I firmly believe the best is yet to come.

Before we get to the Q&A, we'll wrap up today's call with the first slide that we shared in this presentation outlining the strategic rationale for the transaction on slide 17.

As you hopefully heard, KCA Deutag is a transformative and important acquisition for H&P, and we believe it offers attractive long-term benefits for the company. I want to thank all of H&P's employees for their hard work, their dedication and their commitment to excellence. You have made today's announcement possible and you will continue to drive our success in this next chapter. I look forward to welcoming the KCA Deutag team to H&P and working closely together to drive growth and deliver strong value for our shareholders, customers and partners.

Now, that concludes our prepared remarks, thank you for your attention. And we're going to be happy to answer your questions, Connie, with some of the time that we have remaining.

(Operator Instructions) Saurabh Pant.

Hi, good morning, John and Mark. Exciting transaction for sure. Let me just start with that on the KCA Deutag side, the one slide you showed on multiple, you paid 5.4 times, including synergies and the Middle East and drillers trade at a lot higher multiple. But being a US-listed company, John, Mark, right I mean any high-level views on what drives investors to better appreciate the opportunity on the Middle East side of things, right.

I totally agree with you that you're not acquiring assets. It's much more than assets. It's an organization of business you are acquiring, right, but what leads -- what drives US investors to bear appreciate and give credit for that in the way US OFS stocks trade -- versus the Middle Eastern drillers?

Yes, Saurabh, I didn't catch all of your question, broke up just a little bit. But we do feel good about where we are with the multiple and the outlook and the opportunities ahead. As we've said, this is a transformational deal for H&P and accelerates that international growth strategy that we've been talking about for really for the past five years and having that land rig access and a large concentration in the Middle East, I think, is really beneficial.

Yes, Saurabh, I would just add to it, it is at a premium to our current trading multiple. And how are we thinking about it? Well, we view the implied multiple favorably when we compare it to multiples of other companies and with significant Middle East presences, especially at several that have lifted in the recent couple of years, the characteristics of a lot of KCA Deutag's cash flow stream, the visibility and resiliency of the backlog I mentioned in prepared remarks tend to carry higher market valuation relative to what is seen for more US centric OFS companies with historical higher volatility within cycles.

Finally, the size of scale KCA's within the Middle East region is challenging to replicate, which quite frankly, it contributes to its attractiveness.

Right. Absolutely that makes sense. And then maybe one quick one in terms of your deleveraging target, Mark, right, you talked about are going down from 1.7 times at the close to 1 times. How should we think about the time line of that, of course, depends on the free cash flow you generate as a combined entity, right? But how are you thinking about the time line of that from this point on?

I think, Saurabh, we've always maintained that a low debt level historically, and we believe this is a near term transient increase. Debt reduction, as I said in prepared comments, will be the capital allocation priority for one to two years post-close. Our focus will be reducing from that 1.7 times EBITDA coverage at close to sort of a longer-term contract where we'd like to operate in the oilfield services, drilling a sector at one time or below.

We have very intentional plans for deleveraging. KCA is longer-term contracts, the robust backlog I just talked about in your last question, supported by that blue-chip customer base, provides a line of sight to resilient revenues and as I said, less volatility through cycles.

Right. And then just one quick unrelated follow-up, if I may on the US side, your legacy business. So it's very positive to see signs of your rig count bottoming with a slight uptick towards the end of the fiscal year.

John or Mark, can you just comment on what's driving that increase, is, that potential increase let's say, at this point? Is it more high-grading you think customers moving to H&P rigs or do you think there is an opportunity that the overall market starts to move up a little bit?

Yes, I think it's probably a combination of both. There are some high-grade opportunities as we look forward. I think there is an improved outlook fundamentally. And then of course, as we always see at the end of the year and going into the new calendar year, there's usually a reset in budgets and there's some activity improvement there.

But of course, as we've said before, it's very hard to see out that far in advance. But that's what we're seeing and hearing as we talk with our customers. But really, the real driver is our is our people and our performance and these win-win opportunities that we have with our customers.

Right. Perfect. Okay. I appreciate that. Thanks for the answers John and Mark. I'll turn it back.

Thank you.

Thanks Saurabh.

Keith Mackey, RBC.

Hi, good morning. Thanks for taking my questions. I guess the first question really is, how do you think about now like I guess first, does this change the amount of rigs you might think about moving to outside of the outside of the US, are you now pretty well set in a lot of your other jurisdictions, particularly the Middle East as you have now gained a lot much larger footprint over there?

Keith, I think this merger really provides us an opportunity to export really even more rigs than what we would have been thinking about before because of the exposure that we have and the footprint and the experience that KCA Deutag has, they have a long history of work, obviously internationally and specifically in the Middle East. So I think there's a lot of opportunities there. I sure don't see it as less opportunity I would see it as more.

Just reminding that we have between 70 and 80 idle super-spec rigs in the US.

Absolutely. Just to follow up on the free cash flow accretion, so pretty strong accretion next year. What I always seem to find is there tend to be more costs that creep in when companies acquire others, and that tends to push out some of those targets. So not saying that's going to be the case here, but can you give us some reasoning or confidence as to maybe why that won't happen and why your double digit free cash flow accretion next year is well in hand.

Yes, we have looked at this transaction from many different ways including the simple unlevered standalone business, the transaction is -- as you said, it looks to be accretive. We have double-digit cash flow accretion expected this -- as soon as next year, 2025 and transaction returns exceeding cost to capital by 2026, which transaction of this size in my experience is just a really quick result.

We feel really confident we've had a long look at this. We've had many months of due diligence. We've had a lot of access to sites. People will review of all aspects of the business and we are pretty confident. As I said, we don't have many over -- we have very little geographic overlap with our complementary businesses. But again we still do expect to have some synergies by 2026 for some reductions in overhead and from procurement improvements leveraging across the global fleet.

Okay. Thanks very much. I'll turn it back.

Thank you.

David Smith, Pickering Energy Partners.

Hey, good morning and congratulations on this deal.

Good morning, David. Thank you.

Thanks, David.

To comment earlier point about the KCA size and scale being tough to replicate. I know your entry into Saudi has been a long process with some real start-up costs. But following on Keith's question. How do you think about the potential international market appetite for your FlexRigs? And maybe how should we think about the pro forma company's ability to introduce your FlexRigs to other geographies. I'm assuming that, part of the hurdle is establishing that relationship.

Well, David, that's -- it's a great question. I do think that just the sheer nature of the coverage and the experience and the relationships that they have. In some cases, obviously, we don't have the same exposure. We don't have that same experience we H&P. And so I think just by definition, that opens up some opportunities.

I think the other is unconventional resource plays. I mean, I think we continue to see that as a great opportunity for international expansion. And I think this merger just creates even that much more of an opportunity for us to have that exposure to additional customers and additional countries. So I do think it provides us upside.

I appreciate it. And if I could ask a follow-up, sorry if I missed it, but did you mention what percentage of your US activity is on performance-based contracts, and I know it's early to ask, but curious if you think opportunities to take the performance contract approach outside the US.

David, we've been consistent quarter-on-quarter around 50% of the fleet as we have experience some churn for many various reasons in our customer base, including some of the E&P consolidation that's occurred. We do expect as the turn settlement activity slows and once again increase that percentage and into that, to your point, the rig that we have a little startup in Bahrain in the fourth calendar quarter, first quarter of fiscal '25 is a performance contract and it is in fact what we believed at that first farmers contract in the Gulf Coast countries.

I got it. Thank you so much.

Thanks, David.

Doug Becker, Capital One.

Thank you, and congratulations. In terms of the slide deck, I certainly were highlighting the run rate growth. I'm just curious about the growth prospects off of that base, what's contemplated in some of your accretion and return on invested capital metrics offered at 341 a run rate base.

That's a great question, David. A lot of our core here is you will note is based on 2023 EBIT, 12/21 -- 12/31/ 2023 EBITDA and the company KCA Deutag I just finished Saipem acquisition towards the back half '22 and that the Saipem acquisition actually had many various staggered closings, one of which portion of Latin America, Argentina, I believe did not occur until this year.

So there has been EBITDA growth since that 12/31/2023 number. And we believe that there is the opportunity to invest not only in some of the Asian P legacy rig exports that we just talked about with the last analyst, but we believe there are opportunities throughout KCA Deutag existing footprint for further growth related to the type of work that they do today, which is primarily conventional onshore drilling.

It certainly sounds encouraging. In the due diligence process. What was your assessment you just see them in the market? What was KCA Deutag's relationship with ramco and the general perception customers?

KCA Deutag has a has an excellent reputation. Of course, we've known of KCA, I mean as long as I've been in the business, I've known it and they've always had a great reputation.

I've actually had conversations with some of the customers that are they're big customers of theirs, and they couldn't be more happy with the relationship and the performance and the focus on safety. They agree culturally, they felt like there was some great overlap. So the early reception that we have is very positive coming from the customers, both in terms of KCA's service that they provide the customers and also a focus on technology and looking at ways of doing the business differently and better, which is a big driver for H&P.

So I think there's a really positive aspect to this. And I think there's a great opportunity through the integration and as we move forward. As I've said previously, these are great assets, but we've also just getting some amazing people and those processes and people, I think are going to really be a difference-maker. So I feel really good about it. The brand is strong and I think the combined brands together are going to be very powerful.

It makes sense. Thank you very much.

Thank you.

Marc Bianchi, TD Cowen.

Hey, thanks. Thanks for keeping us on our toes this morning.

That was our goal, We've been pretty early and we thought we would pass some of that around.

Mission accomplished. The first one was on, just on kind of the asset quality here. And if I look at H&P, historically leader in kind of high end assets leader in the drive to AC rigs in North America and I look at KCA, I'm not quite as familiar with their fleet of assets looks like, but I would suspect that's not the leading edge stuff necessarily. Maybe there's some in there.

And then also may be related to it, if I look at the multiple that you've got on that slide there at 5.4 times versus the others at the those higher multiples. Is there some reason that the asset quality or something about KCA explains that difference? Or is it just the market is missing something here?

I'll let Mark hit that last point. But I think just going back to the assets and the asset quality, we really like the fleet that they have. I think even more important is the customers really like the fleet that they have.

And it's mostly a conventional drilling, of course, in the last 15 years at H&P, mostly what we've done, particularly in the US as well been unconventional, but the majority of the work they have is conventional. So they're more conventional assets, but there have been a lot of investments in those rigs and upgrades over the years, just like the business in the US.

So we feel really good about the fleet. I don't think the fleet has anything to do with the multiple variances that were talking about that.

I would totally -- excuse me, I would totally agree with that, John. If you took the approximately 70%-plus of EBITDA from the core countries and look at the active rigs in the Middle East, I think it's pretty attractive for asset value.

And from a maintenance perspective, we got very comfortable mark with a KCA Deutag assets are well maintained as I said, we spend a lot of time with this and we're able to see quite a few site visits. You could realize the level of performance of the equipment. You could not realize the level of performance that they are achieving with equipment that was not well maintained. We have certainly considers ash.

And I would say with this with this acquisition, it's more than just senior acquiring assets as John has said that it's acquiring the operations and the people that are running these rigs that will benefit us in the long term. We gain immediate scale in the core Middle East countries in a way that would be -- as I said, be challenging, not only to replicate organically, but from an any other sort of transformative transactional opportunity like this one.

And the relationships of that the KCA has, we have great relationships. They have a much larger footprint. And again, my experience with interaction with customers is that they have very good relationships and that's obviously very, very important in a service industry. And so again, we feel very good about that.

Okay. Thanks for that, guys. The other one I had was on kind of the capital intensity of the business for the KCA business. So I guess there's a looks like $300 million or plus of cash generation here for 2025 I'm looking at the bottom of slide 12, I presume you're assuming that H&P's CapEx is in that $500 million range. I know the swing factors, what happens with tenders in Saudi, but what's the combined company or what's the KCA kind of CapEx number that we should be thinking about on a recurring basis and what's reflected in this '25 number here?

A Mark, this is Dave. I think we're going to operate as two separate companies that we come out with their fiscal 2024 CapEx budget that'll be H&P only. I would kind of point you to some of the publicly available information on their website. I think the run rate for CapEx through March for KCA Deutag was about $22 million. I think last year 2023 is $124 million. So that kind of give you an idea of -- kind of their run rate and what they're seeing for CapEx.

Got it. Okay. Thanks, Dave. I'll turn it back it.

Yeah, I'll just add to that, that they're per active rig maintenance CapEx number per annum is pretty similar to our own remarks. Thanks for the questions.

And at this time, we have no further time for questions. I will now turn the call back over to John for any additional or closing remarks.

Well, thank you again for joining us on short notice. The company is going to continue to strive to execute as it always has, as a customer centric, using a customer-centric approach and a safety focus, which is really ingrained in our company culture. We are very much looking forward to joining forces with KCA Deutag, we're very excited about the future and about this opportunity and the value that we can create for our shareholders going forward.

And then finally, I wanted to mention, as most of you probably know this, but just in case you don't, this is a farewell for Mark and before we sign off, I wanted to call out our appreciation and accomplishments that Mark has had with the company.

So last earning call with H&P, we're going to miss him. A little over six years ago, he joined H&P and we started this journey together to build a strong financial team, drive financial acumen company-wide for the purpose of delivering value to shareholders and we've accomplished a whole lot together, and we appreciate your humor, and your friendship, work ethic, deep industry and financial knowledge. It's been a fantastic experience and speaking for everyone at H&P.

We want to wish you and Angela all best in retirement. Success in your next chapter. Thank care.

And this concludes today's conference. We thank you for your participation. You may disconnect at any time.