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Oil and gas drilling contractor Helmerich & Payne Inc. (HP - Analyst Report) reported an impressive first quarter of fiscal 2013 (three months ended Dec 31, 2012), owing to better drilling activities and innovative technological applications.

Quarterly earnings per share from continuing operations (excluding special items) came in at $1.40, beating the Zacks Consensus Estimate of $1.28. Compared with the year-ago adjusted profit, the results increased 8.5% from $1.29.

Revenue in the quarter was $844.6 million, up 15.3% from the first quarter of fiscal 2012 and also surpassed our projection of $823.0 million.

Segment Performance

U.S. Land Operations: During the quarter, operating revenues totaled $696.0 million (82.4% of total revenue), up 12.7% year over year. Average rig revenue per operating day was $28,040, up 4.4%, while average rig margin per day increased 5.7% to $15,406, on a year-over-year basis. Utilization levels dropped to 82% (from 91% in the first quarter of fiscal 2012). The segment’s operating income improved (by 4.3%) from the year-earlier quarter to $234.4 million.

Offshore Operations: Helmerich & Payne’s offshore revenues were up 13.6% year over year to $57.7 million. Daily average rig revenue increased 15.5% to $61,936, while average rig margin per day climbed 16.3% to $25,782. This aided the segment’s operating income to rise 23.0% from the prior-year quarter to $15.0 million. Quarterly rig utilization was 89%, up from 84% recorded a year ago.

International Land Operations: International land operations recorded revenues of $87.3 million, up from $60.7 million in the prior-year quarter. Average daily rig revenue was $35,511, up 14.3%, while rig margin per day was $8,400, down from $9,015 recorded in the year-ago period. With better activity, the segment generated operating profit of $9.1 million, compared with $7.9 million in the first quarter of fiscal 2012. Utilization level was 85%, up from 78% in the corresponding period, last year.

Capital Expenditure & Balance Sheet

During the first quarter of fiscal 2013, Helmerich & Payne spent $219.4 million on capital programs. As of Dec 31, 2012, the company had approximately $241.1 million in cash, while long-term debt stood at $195.0 million (debt-to-capitalization ratio of 4.7%).

Rating

The company currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

We believe Helmerich & Payne’s technologically advanced FlexRigs are the key to its success, helping to increase its count of active rigs and maintain relatively strong daily-rate margins even during times of market uncertainty. The company’s proprietary FlexRig design makes the rigs move faster than conventional rigs, drill quicker and more efficiently, and allows for a safer operating environment. As such, these are better suited for the new demands of the exploration business and, therefore, command higher dayrates and utilization than rigs from other land drillers. The company also entered into a deal with 2 exploration and production companies to build and operate three FlexRigs in the U.S.

However, the company’s operations are subject to a number of operational risks, including inclement weather, blowouts and well fires. These hazards could adversely affect Helmerich & Payne’s drilling operations and seriously damage/destroy the equipment involved, thereby reducing the company’s revenues, earnings and cash flows.

But there are certain other companies in the contract drilling service industry that are expected to perform well in the coming one to three months. These include Seadrill Partners LLC (SDLP - Snapshot Report) with a Zacks Rank #1 (Strong Buy), and Hercules Offshore Inc. (HERO - Snapshot Report) and Vantage Drilling Company (VTG - Snapshot Report) with Zacks Rank #2 (Buy).
 

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