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Text: Such statements are based on current information and management's expectations as of this date, and are not guarantees of future performance.
As such, our actual 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.
We will also be making certain references to non-GAAP financial measures, such as segment operating income and operating statistics.
Reflecting on where we were at this point last year, I'm encouraged by the recovery we are currently experiencing as well as how the company has navigated through a multitude of challenges in 2020.
Last year, I said that two factors were crucial for us for continued success going forward.
First, maintaining our financial strength and second, maintaining a long-term focus for future opportunities.
I'm happy to report that the company continues to execute in both areas.
Today's mid-$60 oil price is robust compared to what we experienced over the past year.
But going forward, we anticipate a degree of permanence in the change of historic industry behaviors and norms.
Energy markets are coming back into balance, global oil demand is reviving and oil inventories are falling back to their 5-year average.
The energy industry's capital discipline, which actually began prior to the global pandemic, also remains resolute.
While this last point is uncomfortably limiting for the industry's near-term growth horizon, this is something we believe is imperative.
Focused disciplined spending that generates returns under a variety of commodity price scenarios is what the industry needs to attract and retain investors.
Back to the long-term focus and what we believe the future holds for H&P.
A natural step in capital discipline is driving the most value per capital dollar spent, not just in a 1-year budget cycle, but over the life of an investment.
This corresponds to where we believe H&P as the leading drilling solutions provider contributes the most value to our customers and is the driver behind the development of our digital technology solutions, and our new commercial models that are structured around achieving value-added outcomes.
Aligned with our strategic objectives, H&P will continue to concentrate on delivering value to the customer by leveraging software, data and FlexRig technology.
Our digitally enabled drilling operations provide automation solutions that deliver both efficiency gains and wellbore quality.
Not only do our customers experience near-term financial benefits like lower well costs and the reduction of certain downhole risks, but also improvements in areas that were historically beyond our ability to influence, but have significant economic implications over the long-term life of the well.
An important ingredient to a successful technology strategy is the integration of new commercial models, which incorporate performance metrics and eventually, wellbore quality metrics.
One example is having a tortuosity index and tying them together with financial remuneration.
New commercial models are designed to generate win-win outcomes.
The customer has a well with improved economics, and H&P is compensated for helping to create a portion of that value.
Currently, approximately 30% and of our active U.S. fleet is under some type of performance contract.
Contrasting the successful adoption of these new commercial models compared to a year ago, where we only had about 10% of our fleet on performance contracts.
Our digital technology is providing H&P and our customers another differentiating capability in delivering the best outcomes.
Let me give you a few examples.
H&P's automation technology deployed on our FlexRig is providing smoother wellbores and reduced tortuosity, which helps extend downhole tool life, deliver smoother casing runs, increase reliability and reduced well durations.
In addition, a less tortuous wellbore also saves the customer time and money during the completion phase of the well by lowering downtime events, reducing overall completion time and creating more certainty for the life of the well.
We are automating directional drilling with our AutoSlide solution, and this is driving repeatability and consistency in drilling the curve.
This enables landing the curve earlier in the zone, resulting in an additional frac stage and improved returns for the customer.
Well cost consistency achieved through automation is providing more certainty and confidence to key stakeholders, affording a clear vision and more confidence in future expansion.
I do believe that FlexRig solutions are unique in the industry and contributing to the demand for H&P as our current rig count in the U.S. is at 118 rigs, up 25% since the end of fiscal Q1.
In addition, we have approximately 35% of the public company E&P market share and about 14% of the private E&P market share.
Both are leading metrics in the U.S. We're making good progress in deploying digital technology solutions and introducing new commercial models to the industry.
All of that said, we also realize there's still a lot of work ahead.
As the demand for FlexRig solutions has increased, we find ourselves at a point where rig reactivations are becoming an increasing financial burden.
We believe the market is fast approaching an inflection point where this financial burden will have to be carried by our customers as well, either through lump sum payments or pricing over the life of the contract.
We estimate that industrywide, there are only a handful of idle super-spec rigs that have been active during the past nine to 12 months, particularly as longer idled rigs are put back to work, higher reactivation costs will play a larger role in contract economics going forward.
We already see a shortage of ready-to-work super-spec rigs in the market.
So there's momentum emerging in the near-term to improve FlexRig solutions' pricing and contract economics during the rest of 2021.
If commodity prices remain strong, many believe E&P budgets will likely respond positively in 2022, and that will increase the demand for incremental super-spec rigs.
Those incremental rigs will be those that have not worked in well over a year, and it will be costly to bring those rigs back into service.
Again, contract pricing and economics must be supportive of that investment.
I will not soon forget last summer's reorganization effort where we downsized corporate G&A and operational overhead in response to the pandemic.
Mark will give a more complete description of how these efforts are expanding this year.
But I wanted to underscore that our industry is structurally smaller today.
And the prospects of that trend reversing, seem very slim, especially near term.
We must respond to the changing priorities, but it doesn't mean there are no longer opportunities for H&P to innovate, to grow and to thrive in this evolving environment.
Oil and gas is still critical to the global economy, and it will remain so for many years to come.
Growing internationally is another strategic priority for H&P.
While international markets are lagging behind the U.S. recovery, we are participating in several bid opportunities in South America, the Middle East and elsewhere.
We are encouraged that several of these opportunities are unconventional resource-type plays, and we have industry-leading technology and expertise.
The process of obtaining international work has its set of challenges, and we are shifting our strategy to drive success.
We are committed to growing that part of our business and given our significant U.S. super-spec capacity, leading-edge technology offerings and financial ability, we are well positioned for many of these opportunities.
H&P has long been committed to operating in a safe and environmentally responsible manner, and we continue to invest in advancing cleaner and more efficient energy through new technologies that minimize the environmental impact of our drilling operations.
We are pleased with our ongoing partnerships with our customers to reduce GHG emissions.
Our operational and technological experience, combined with our rig design, help our customers minimize operational costs and risks and reduce the environmental impacts associated with producing oil and gas.
We are also investing in power management systems and alternative power sources.
The company recently launched our new website, and it's designed to provide greater insight into our solutions capabilities and outcomes-based results and other important disclosures.
We've included new disclosures around our CO2 emissions including rig and vehicle emission improvements we've realized over the past three years.
In the coming months, we plan to publish our HSE sustainability metrics, and other information as we continue to improve our ESG disclosures and culminating with publishing our sustainability report in 2021.
As we commented on our last call, we entered 2021 optimistically and so far, so good.
One of H&P's strengths is its ability to adapt to changing and often volatile market conditions.
Our people, our rig assets and digital technology and our financial position are the drivers behind why H&P is considered a market leader and partner of choice within the energy industry.
The industry will continue to face challenges, but I'm confident that H&P and our people are up to the task and will be successful.
Today, I will review our fiscal second quarter 2021 operating results, provide guidance for the third quarter, update remaining full fiscal year 2021 guidance as appropriate and comment on our financial position.
Let me start with highlights for the recently completed second quarter ended March 31, 2021.
The company generated quarterly revenues of $296 million versus $246 million in the previous quarter.
The quarterly increase in revenue was due to a higher rig count activity in North America Solutions as expected.
Total direct operating costs incurred were $231 million for the second quarter versus $200 million for the previous quarter.
The sequential increase is again attributable to the aforementioned additional rig count in the North America Solutions segment.
General and administrative expenses totaled $39 million for the second quarter, consistent with our expectations and with the previous quarter.
Towards the end of the second quarter, we continued our focus on operating super-spec rigs and phasing out the less capable portions of our fleet.
As a result, we developed and began executing a plan to sell 68 domestic non super-spec rigs, all within our North America Solutions segment, the majority of which were previously written down and decommissioned and/or used as capital-spared donors.
We expect most of these rigs to be sold for scrap value.
These assets were written down to their net realizable value of $13.1 million and were reclassified as held for sale on our balance sheet.
As a result, we recognized a noncash impairment charge of $54.3 million.
Additionally, during the second quarter, we downsized and moved our Houston FlexRig assembly facility as part of our ongoing cost management efforts.
In conjunction with this initiative, we incurred a loss on sale of assets of $18.5 million, primarily due to closing on the sale of scrap inventory and obsolete capital spares for an aggregate loss of $23 million.
This loss was offset by approximately $4.5 million in aggregate gains on asset sales, primarily related to customer reimbursement for the replacement value of drill pipe damaged or lost in drilling operations.
Our Q2 effective income tax rate was approximately 23%, which is within our previously guided range.
To summarize this quarter's results, H&P incurred a loss of $1.13 per diluted share versus a loss of $0.66 in the previous quarter.
Absent these select items, adjusted diluted loss per share was $0.60 in the second quarter versus an adjusted $0.82 loss during the first fiscal quarter.
Capital expenditures for the second quarter of fiscal 21 were $17 million below our previous implied guidance as the timing for that spending has shifted to the third and fourth quarters.
H&P generated approximately $78 million in operating cash flow during the second quarter of fiscal 21.
Turning to our three segments, beginning with the North America Solutions segment.
We have averaged 105 contracted rigs during the second quarter, up from an average of 81 rigs in fiscal Q1.
We exited the second fiscal quarter with 109 contracted rigs, which is at the high end of our guidance range as demand for rigs continue to expand from the low reached back in August of 2020.
Revenues were sequentially higher by $48 million due to the activity increase.
North America Solutions operating expenses increased $29 million sequentially in the second quarter, primarily due to the addition of 15 rigs.
We ended up reactivating 21 rigs during the quarter due to churn across basin geographies where some releases offset the total number of reactivations.
Most of the rigs released during the quarter have returned to work or are expected to return during the third fiscal quarter.
This resulted in onetime reactivation expenses of approximately $9.7 million in fiscal Q2, including a portion of expenses for the April incremental fleet additions.
Looking ahead to the third quarter of fiscal 21 for North America Solutions.
As I mentioned earlier, we exited Q2 at the high end of our expected range.
The activity level has continued to grow at a strong pace since March 31 but we expect that growth to be more moderate for the remainder of the quarter.
As of today's call, with the nine additions I discussed, we have 118 rigs contracted and turning to the right.
We expect to end the third fiscal quarter of 2021 with between 120 and 125 contracted rigs.
As of March 31, about 30% of our active rigs were working under some form of a performance contract.
As John mentioned, these new commercial solutions contracts reward H&P with incremental margin for delivering better and more consistent outcomes for the customer.
In the North America Solutions segment, we expect gross margins to range between $65 million to $75 million with no early termination revenue expected.
We will have quite a few rigs rolling off term contracts during the third quarter, with many front loaded in Q3.
We expect many of the operator programs from these rollovers to continue.
However, the rigs will reprice in conjunction with the term expirations.
As we continue to add rigs, one-time reactivation expenses continue to pressure margins, as I mentioned a moment ago, with regards to Q2.
We expect those expenses to be approximately $6 million in the third quarter.
As John mentioned, there is a strong correlation between the length of time a rig has been idle and the cost required to reactivate.
Historical experience indicates the rig stacked for nine months or longer will incur costs in excess of $400,000 to reactivate, and that figure rises as more time passes.
Keep in mind that most of our rigs were stacked back in April of 2020, some 12 months ago.
Reactivation costs are mostly incurred in the quarter of start up, so the absence of such cost of future quarters is margin accretive.
Our current revenue backlog from our North American Solutions fleet is roughly $370 million for rigs under term contract.
But importantly, this figure does not include additional margin that H&P can earn if performance contract targets are achieved.
Regarding our International Solutions segment.
International Solutions business activity averaged approximately four active rigs quarter-on-quarter, but we did add a fifth rig in Argentina midway through the second fiscal quarter.
Margin contribution was above expectations for the quarter, primarily due to the incremental rig commencing work in Argentina, coupled with revenue reimbursements for upgrades performed on a rig.
As we look toward the third quarter of fiscal 21 for International, our activity in Bahrain is holding steady with the three rigs working, and we have two rigs under contract in Argentina.
Also, we still have a pending rig deployment in Colombia that continues to be delayed as our customer waits unrequired regulatory approvals to begin work.
In the third quarter, we expect to have a loss of between $1 million to $3 million, apart from any foreign exchange impacts.
Turning to our Offshore Gulf of Mexico segment.
We continue to have four of our seven offshore platform rigs contracted, and we have management contracts on three customer-owned rigs, one of which is on active rate.
Offshore generated a gross margin of $6 million during the quarter, which was at the lower end of our estimates due to some unexpected downtime on one rig.
As we look toward the third quarter of fiscal 21 for Offshore segment, we expect that Offshore will generate between $6 million and $9 million of operating gross margin.
Now let me turn to the third fiscal quarter and update full fiscal year 2021 guidance as appropriate.
Capital expenditures for full fiscal 2021 year are still expected to range between $85 million to $105 million with the remaining spend distributed evenly over the last two fiscal quarters.
Our expectations for general and administrative expenses for the full fiscal year 21 have not changed and remain approximately $160 million.
We also remain comfortable with the 19% to 24% range for our estimated annual effective tax rate and do not anticipate incurring any significant cash tax in FY 21.
The difference in effective rate versus statutory rate is related to permanent book to tax differences as well as state and foreign income taxes.
Now looking at our financial position.
We had cash and short-term investments of approximately $562 million in March 31, 2021, versus $524 million at December 31, 2020.
Including our revolving credit facility availability, our liquidity was approximately $1.3 billion.
In mid-April, lenders with $680 million of commitments under our $750 million in revolving credit facility, or RCF, extended the maturity of the RCF from November of 2024 to November 2025.
No other terms of the RCF were amended in conjunction with this extension.
The remaining $70 million of commitments under the 2018 credit facility will continue to expire in November of 2024.
Our debt-to-capital at quarter end was about 14%, and our net cash position exceeds our outstanding bond.
H&P's debt metrics continue to be best-in-class measurement among our peer group that allows us to keep our focus on maximizing our long-term position.
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.
As discussed in our February earnings call, we received a $32 million tax refund, plus $3 million of interest in January.
Still included in our accounts receivable is approximately $19 million related to further tax refunds that we expect to collect in the coming quarters.
The preponderance of our trade AR continues to be less than 60 days outstanding from billing date and increased a modest $8 million sequentially.
Our inventory balance has declined for the third consecutive quarter even as our active rig count climbed.
We continue to focus our efforts on reducing out-of-pocket expenditures.
Given our current outlook for activity, we expect our cash balances at fiscal year-end to be relatively unchanged from March 31.
On one hand, rising activity drives our run rate cash generation higher, while on the other hand, in the short term, some of that higher cash generation potential was masked by reactivation expenses and working capital investments required to enable that higher activity.
We believe at these higher activity levels, our point forward quarterly operating earnings will fund our maintenance capital expenditures, debt service costs and dividends.
As John mentioned, cost control remains a high priority.
Since we last spoke on the February earnings call, we have further advanced this initiative as we seek to adjust our cost structure to what we expect to be a smaller industry scale.
This effort is one of our current strategic objectives, and we have several work streams being carried out in parallel.
One such work stream was the reduction in size and relocation of our Houston FlexRig assembly facility, which lowers go forward overhead while simultaneously increasing capabilities at that facility.
As these work streams progress, we will update you on the expected magnitude and timing of these various cost savings opportunities.
That concludes our prepared comments for the second quarter.

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compname reports q2 loss per share of $1.13.
q2 loss per share $1.13.

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