Helmerich & Payne, Inc. Q2 FY2025 Earnings Call

Good day, everyone, and welcome to today's H&P's Fiscal Second Quarter Earnings Call. At this time, all participants are in listen-only mode. Later, you’ll have the opportunity to ask questions during the question-and-answer session. Please note that this call is being recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Dave Wilson, Vice President of Investor Relations. Please go ahead.

Thank you, Nicki, and welcome, everyone, to H&P's conference call and webcast for the second quarter of fiscal year 2025. With us today are John Lindsay, President and CEO; and Kevin Vann, Senior Vice President and CFO. Both John and Kevin will be sharing some prepared comments with us, after which we'll open the call for questions. Before we begin our prepared remarks, I'll remind everyone that this call includes forward-looking statements as defined under the securities laws. Such statements are based upon current information and management's expectations as of this date and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict. As such, our 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. You should not place undue reliance on forward-looking statements and we undertake no obligation to publicly update these forward-looking statements. We also make reference to certain non-GAAP financial measures such as segment operating income, direct margin, adjusted EBITDA, and some other operating statistics. You'll find the GAAP reconciliation comments and calculations in yesterday's press release. With that said, I'll turn the call over to John Lindsay.

Thank you, Dave. Hello, everyone, and thanks for joining us today. With the KCAD acquisition now complete, we believe H&P is well-positioned for the future. This acquisition results in H&P having the largest active rig count in the industry and establishes the company as a global leader with the scale and capabilities needed for future expansion into the premier international markets. It's been a little more than 100 days since the transaction closed, and the integration is going well. Taking a long-term perspective, particularly considering the industry's current state, we are very well-positioned for the future. Now, we must demonstrate that we can execute on our international growth strategy; I want to assure you that is what we are focused on. I want to commend our people. Two legacy organizations have come together as one team and are delivering significant value for customers. There are some noteworthy headwinds facing the industry stemming from several factors, including OPEC+ production increases and U.S. tariff initiatives that have created global economic uncertainty. Even so, we remain bullish about the long-term outlook for oil and gas markets and believe demand will continue to increase over time. The oil and gas production decline curve continues, and the only way to maintain and grow production is by drilling more wells. H&P is the most efficient driller in the U.S., and we plan to demonstrate we can do the same in international markets. I believe that our rigs, technology, people, and commercial models drive the best outcomes for our customers, and our differentiated solutions will drive our success in the future. Next, I'll spend a few minutes reviewing each of our operating segments. Our North America Solutions segment remains resilient as our customer and operational performance focus and best-in-class execution allowed us to maintain a steady rig count and realize margins that were better than our expectations going into the quarter. Looking ahead, we expect softer oil prices will lower the industry rig count as market volatility overrides any potential incremental demand. Over 50% of our customers continue to prefer performance-based contracts, and technology solutions remain a critical component of our overall contracting strategy. Our technology solutions are focused on automating processes that were previously more manual operations. These technologies drive greater efficiency, safety, and reliability for our customers. The combination of performance-based contracts and technology solutions offer advantages for both our customers and H&P by providing a mutually beneficial value proposition. Kevin will give more details in his remarks about our North America Solutions financials. Our International Solutions segment reflects the inclusion of the legacy KCA Deutag operations, and our team is working diligently to fully integrate international operations into a single cohesive business unit. We believe the combined cultures of performance, discipline, and customer focus, coupled with learnings from our North America solutions experience, including our technology and commercial models, position us for success over the long-term. During the quarter, we experienced challenges in our Saudi operations with start-up delays with the legacy H&P Flex rigs, which we believe have now been mostly resolved. The additional rig suspensions in the legacy KCA fleet were impactful as well. On the positive side, we have already started to reap the benefits of the expertise, infrastructure, and scale of the legacy KCAD operations in Saudi. It is gratifying to see the strong partnerships with customers we have in our international solutions business. In my recent visits to rigs and the countries where we operate, I am confident that in the future, H&P can grow the business. In discussions with customers, it's become evident that there is a strong demand for the operational excellence, safety, and technology solutions that H&P delivers despite near-term softening in the industry. Given the current outlook, direct margins in the international solutions segment in the third fiscal quarter will fall short of where ultimately we want to be. Our teams are working closely with our customers, and we do expect to see improvement in the results on a sequential basis as we continue to progress our integration efforts, especially in Saudi. We have a laser focus on getting this right, and Kevin will go into more details about what is driving our Q2 results and Q3 outlook. Now, looking at our offshore solutions segment, which continues to produce strong and steady cash flows. H&P's legacy offshore experience dates back more than 50 years, and the inclusion of the legacy KCAD fleet has added significant scale and geographic expansion to our offshore segment. Together, we are the largest global offshore operation and maintenance partner in the world. Our offshore solutions segment delivers drilling solutions, workovers, P&A, and rig modifications and asset management on platforms and jack-ups. ACA's first offshore contract started in 1972 in Norway. Our offshore business has low capital intensity and a blue-chip customer base that we are very familiar with. And it's encouraging to see the growth opportunities emerging again in this segment of our business. In closing, having successfully accomplished the important strategic objective of expanding internationally, particularly to achieve scale in the Middle East, we are now entering the phase of enhancing value and performance for our customers and shareholders. For our customers, this means prioritizing safety, drilling efficiency, and reliability, which in turn drive financial performance for our shareholders. The oil and gas industry has always been cyclical and likely will remain so, but H&P has always been adept at navigating these cycles and coming out stronger on the other side. Throughout our 105-year history, the company has faced many challenges in the industry and the enduring imperative is always to keep our core businesses performing well. In the upcoming quarters, we will focus on realigning our cost structures, securing value-add synergies, and reducing debt on our balance sheet. We are extremely optimistic about the future and our ability to scale in the most prolific oil and gas producing regions in the world while also acknowledging that there may be temporary growing pains. And as I said previously, now we must demonstrate that we can execute on our international growth strategy. Before turning the call over to Kevin, I want to express my gratitude for the effort our people have put forth over the past year. With the acquisition and continuing to run the day-to-day, everyone has worked very hard. The H&P organization is comprised of loyal and talented individuals whose dedication and support and focus on our customers are the key ingredients to our success, and I want to thank them. And now I'll turn the call over to Kevin.

Thanks John. Today, I will review our fiscal second quarter 2025 operating results, which includes a partial quarter from our expanded international and offshore businesses, resulting from the close of our KCAD acquisition in January. I will provide guidance for the fiscal third quarter, update remaining full year 2025 guidance as appropriate, and finally, comment on our financial position. Let me start with a few highlights. The company generated quarterly revenues of just over $1 billion. Total direct operating costs were $702 million, and general and administrative expenses were approximately $81 million for the quarter. Our G&A costs include the one-time charges associated with the voluntary early retirement program. Gross capital expenditures for our second quarter were $159 million, which was in line with our expectations as the program was more heavily weighted to the front half of the year. Second quarter cash flow from operations was $56 million, which was negatively impacted by significant non-recurring transaction-related one-time costs in addition to some working capital challenges with our unconventional start-up business in Saudi. However, we expect future quarters' cash flows to be more reflective of our underlying business as those costs and issues have been substantially resolved. Turning to our three segments, beginning with North America Solutions, we averaged 149 contracted rigs during the quarter, which is right in line with the rig count for the quarter. The exit rig count was 150, which was within our guided range of 146 to 152. Revenues of $600 million were essentially unchanged since the first quarter. Segment direct margin was approximately $266 million, which was a bit stronger than the first quarter. The realization uplift from performance-based contracts continued to enhance our margins and provide additional value to our customers utilizing them. This alignment of customer incentives and our performance resulted in industry-leading margins. In addition, over half of the U.S. active fleet is on a term contract. Our international solutions activity ended the second fiscal quarter with 76 rigs working with approximately $4 billion of contracted drilling backlog. In Saudi, our FlexRig unconventional start-up is nearly complete as seven rigs are currently working, and the eighth should commence operations any day. As a whole, our international solutions business generated direct margin of $27 million. As John indicated, the rig suspensions in Saudi had a large negative impact on the quarterly results. To that effect, we are aggressively reviewing and taking action to minimize our operational costs and to quickly and effectively integrate the resources, ideas, and expertise that we now share across KCAD and H&P operations. Finally, to our offshore solutions segment, which generated $26 million in direct margins. We are very pleased with the performance of our steady and stable offshore business, which has a current backlog of $2.5 billion. Much of this business was acquired through the KCAD acquisition, which included asset-light offshore management contract operations located in the North Sea, Angola, Azerbaijan, and Canada. Looking ahead to the third quarter of fiscal 2025 for North American Solutions, we expect to average between 143 and 149 contracted rigs. Revenue backlog from our North American Solutions fleet is roughly $700 million for rigs under term contracts, which is consistent with where we were at the end of the first quarter. $500 million of this total will be recognized in our fiscal year 2025 with the balance in 2026. Again, we are focused on providing customer-centric solutions and believe direct margins in fiscal Q3 to range between $235 million and $260 million. As the broader energy industry continues to face the near-term headwinds associated with commodity pricing and potential cost increases associated with tariffs, we will remain focused on providing our customers with mutually beneficial performance incentives and innovative technical solutions. As we look toward the third quarter of fiscal 2025 for international, as we mentioned in the press release, we expect direct margins from our international solutions to be between $25 million and $35 million, exclusive of any foreign exchange gains or losses. Further, we expect the average rig count to be approximately 85 to 91 contracted rigs, of which 68 to 74 are expected to be generating revenue. Again, we are managing the impacts of the rig suspensions and believe the Saudi FlexRig start-up costs are substantially behind us now. We are integrating the best possible outcomes associated with legacy KCAD operations and the unconventional start-up. This includes operations, people, processes, technology, and systems. Coming out of these near-term headwinds, we will be positioned to be a leading provider of drilling services in the Middle East. Now, turning to guidance for our Offshore Solutions segment. We expect to generate between $22 million and $29 million in direct margin in the third quarter, with average management contracts and contracted platform rigs to be around 30 to 35. Outside of our core operating segments, we do have some businesses that generate direct margin and collectively, those are expected to contribute between $2 million and $5 million in the third quarter. Now, let me update full year fiscal 2025 guidance items. As I stated earlier, our CapEx spend was weighted to the front half of the year and we fully expected to moderate now for the balance of the year. As such, we are still estimating capital expenditures for the full fiscal year to be between $360 million and $395 million. Just to remind you that last quarter, we were unable to provide a good projection for depreciation expense as the initial allocation of purchase price for KCAD had not been completed. Now that the initial assessment has been finalized, we are projecting depreciation expense to be around $595 million for the full year. For general and administrative expenses, with the addition of KCAD numbers, we still expect the full fiscal 2025 year to be approximately $280 million. As we have discussed, we are already capturing some synergies post-close of acquisition and have identified additional cost savings that will put us in excess of the original $25 million by 2026. As we get deeper into the integration, the opportunities not only for commercial opportunity expansion but for cost reduction continue to materialize. We are also evaluating broader cost reductions across the enterprise and have a line of sight on $50 million to $75 million in total 2026 run-rate savings between synergies and other permanent cost reductions. We are still projecting a fiscal year 2025 cash tax range of $190 million to $240 million, which includes the additional taxes resulting from the expanded international business. And lastly, nothing has really changed in regards to interest expense, and we are projecting around $50 million for the remainder of the fiscal year. Now, looking at our financial position. H&P had cash and short-term investments of $196 million at March 31st. With our undrawn credit facility of $950 million and the remaining cash on hand, we have adequate liquidity to not only efficiently fund the 2025 operations, but continue to generate ample cash to fund our base dividend and pay back the $400 million term loan. As a matter of fact, we are anticipating that by the end of this calendar year, we will have repaid at least $175 million on it. H&P maintains an investment-grade credit rating. We have a long history of responsibly managing our balance sheet and balancing the interest of debt and equity holders. We will continue to do so. Yes, the markets are murky right now. However, collectively, this leadership team has lived and managed through the turbulent energy markets for decades now. We won't let the grass grow under our feet watching them unfold around us. And with that, I'll turn it back to the operator to open it up for questions.

Thank you. We’ll take our first question from Keith Mackey with RBC. Please go ahead, your line is open.

Hi, good morning and thanks for taking my questions. Maybe just to start out on the international. What is your sense of the Saudi market today? I know there were some suspensions this quarter. Do you think that the suspension cycle is primarily complete? Or is there likely some additional actions to be taken there?

I wish I could say for certain what the situation is, but we don't have direct insight into that. We have had some conversations, and at one point it appeared that the suspensions were behind us. However, we still lack clear insight. I wish I could provide better clarity on this. In the past, even though we weren't operating in Saudi Arabia then, the KCA employees were. If we look back to 2015 and the COVID period in 2020, there were rig suspensions at that time as well. Based on the market conditions then, the decline was significant and much different from today's environment. Nonetheless, there was still a need to reduce spending and rig count, especially in the oil markets. This indicates a history of suspensions followed by rigs returning to work. While this isn't a guarantee, we understand from Aramco that such patterns have occurred before, and eventually, rigs will resume operations. We just can't pinpoint when that will happen. Regarding additional suspensions, we've noticed one or two here and there with different contractors, but we still don't have a clear idea if they have concluded or not at this time.

Okay, fair enough. I have a follow-up regarding the international situation. You've provided Q3 guidance, indicating there may be some impact from additional suspensions, but also some legacy HP rigs coming online. Can you give us an idea of how this dynamic will affect fiscal Q4? If the full impact of the suspensions is realized in Q3, and we begin to benefit from the legacy HP rigs, then Q4 should show a significant improvement in margins for the international segment. Could you provide more insight on how we should consider these factors?

This is Kevin. I agree with your assessment. Regarding our conventional start-up operations in Saudi, we are still waiting for one rig to become operational soon. While some rigs were coming online during the third quarter, the full impact of those eight rigs operating at full capacity won't be seen until the fourth quarter. Therefore, as you mentioned, we should anticipate a significant increase in revenue contribution from those rigs by the fourth quarter, impacting our overall international EBITDA. Regarding rig suspensions, as of March 31, we were still operating five out of the 17 rigs that have been suspended so far. During the third quarter, we expect that number to decrease further. If there are no additional suspensions, we should see this trend stabilize and experience the full benefits. Additionally, the integration of the legacy KCAD operations team with the FlexRig and H&P start-up teams is beginning to take shape, which helps to reduce costs and improve operations. By the fourth quarter, we expect to not only see improvements on the FlexRig side but also better cost management and resource sharing.

Yes, I think that's really good comments, Kevin. And as you think about the delays, there's no doubt some of the delays have been in our control, but there's also been a lot of delays that have just been completely out of our control that have caused some of these later spud dates than what we were expecting. But the teams are definitely getting some momentum. And as Kevin said, I feel good about where we are and where we're heading. And again, we're all pushing very hard, as I said in my comments, to make certain that we get those rigs earning at the level that they should.

Got it. I appreciate the comments. I'll turn it back. Thanks.

Thank you.

Thank you. Our next question comes from Marc Bianchi with TD Cowen. Please go ahead, your line is open.

Hey thanks. Maybe just quickly since we're talking about the FlexRigs in Saudi. Can you refresh us on what the ultimate contribution should be from the eight rigs once we're sort of behind all these start-up costs and what the run rate ought to be?

Yes. Historically, we've indicated that the full year contribution is around $25 million. I believe that figure could increase due to some operational synergies we'll be able to utilize from the legacy KCAD team. We're already looking into ways to reduce some of the in-country overhead as well. So, while we've typically mentioned around $25 million for those eight rigs, I think that figure has the potential to rise.

Great. So Keith asked about international and the exit rate for 4Q. If we look at the other two segments for North America and offshore, we've seen averages drop in fiscal Q3, indicating that the exit rate might be even lower. Can you discuss the outlook for June in those segments concerning activity and margin, and how we should view the progress after June?

Well, Marc, I'll start with North America Solutions. We're in constant communication with our customers to understand their needs. Oil prices are lower than what we expected three months ago. There have been some announcements from customers about reducing their rigs to balance budgets. However, we believe that our partnerships remain strong, and we continue to have meaningful discussions with our customers. If commodity prices remain stable, we think we will be in a good position. The reality is, we still face uncertainty. Customers are focused on reducing the cost of their wells, and we're working closely with them to achieve this through performance-based contracts and deploying technology, which is generating significant value. What would you add?

I think, given that we're currently in May, we have a clear understanding of what April and May will look like based on our internal estimates. June is uncertain, and it would be wise to adjust our expectations for that month due to the potential impact of lower pricing and possibly higher costs related to tariff uncertainties. We believe it's prudent to moderate our guidance until the situation becomes clearer. We're collaborating with our customers to find the best solutions based on their activity levels. However, it's challenging for exploration and production companies to halt operations abruptly. We're committed to ensuring that they achieve their objectives, which in turn helps us meet ours. On the offshore side, we are pursuing new business opportunities, which we value despite the lower margins because they are stable. We have discussions ongoing with respected clients. While we may slightly lower our expectations compared to our second quarter guidance, we still see healthy activity. We are working with customers to identify areas for potential increased activity, but fluctuating oil prices will remain a factor until the situation stabilizes. We do not yet know how our contracts and new business will ultimately develop.

Okay. Thanks guys. I'll turn it back.

Thank you.

Thank you. Our next question comes from Eddie Kim with Barclays. Please go ahead, your line is open.

Hi, good morning. John, you mentioned that softer oil prices will likely lower the industry rig count in the U.S. land market. The rig count currently stands at about 570 rigs or so today. If oil prices stay at this kind of $60 a barrel level for WTI through year-end, do you think we could maybe see about 20 or 30 rigs come out of the market? Just wanted to get your thoughts, your early estimates on kind of magnitude of rig count decline if oil prices stay at current levels?

We were anticipating the OPEC+ announcement, and we have received it. Some U.S. exploration and production companies have responded, but their responses seem to be modest and on the lower side. It's challenging to determine if the rig count will fall by 20 or 30 since any estimate is just speculation. From my experience, oil prices need to maintain a certain level for a while to have a longer-term effect. If oil prices hover in the 50s for an extended period, there could be longer-term consequences. However, as we've discussed internally and in previous calls, while some people have claimed we are in a downturn, that's not the case. We're not experiencing a downturn environment, just some corrections and volatility. We were optimistic about seeing more activity on the gas side, and there are some gas projects coming up. Most of the challenges we face are in the oil markets. We don't have a specific number in mind for modeling, as it's quite difficult. Our main focus remains on our customers, our rig count, and how we sustain it, which we achieve through performance, safety, high-quality contracting, and implementing innovative technology solutions. Unfortunately, I can't provide a precise number on the rig count, and I believe it's too early to make any determinations in that regard.

Yes, understood.

If you examine the forward oil curve, it suggests that the market believes there are numerous factors that will ultimately impact spot trading in 2026. The fact that the forward oil curve is in contango indicates that much of this is influenced by short-term dynamics, yet the fundamentals suggest that demand for oil will persist and the energy industry must be prepared to supply it. Consider what Saudi Arabia has done with rig suspensions while simultaneously introducing more oil into the market; it's a somewhat conflicting message regarding how we, as a drilling company, should position ourselves to respond. Nonetheless, the market indicates that, despite oil prices being at a critical juncture that could lead to decreased activity, there remains a perception of demand, and we need to be prepared to meet that demand.

Thank you for that insight. I understand that the future is uncertain at the moment. Regarding the KCA Deutag suspensions, I may have missed something earlier. Last quarter, you mentioned that all these suspensions are for one year, with the first rig suspended in August. Do you anticipate that this rig will resume work in about three months, or is it more likely that the suspension will be extended for a few more months due to the current commodity price situation?

We don't have any indication that the first rigs will return to work in July or August. While it's possible, we aren't in discussions about that at the moment. As mentioned earlier, the suspensions reflect a pattern we've seen before, where Saudi Aramco has suspended rigs in past cycles, and those rigs eventually returned to work. The timelines for those suspensions can vary, and I didn't inquire specifically about the duration. However, there is a history of this process, suggesting that reactivations have occurred before. That's our current expectation and the best understanding we have regarding future reactivations.

Got it. Understood. Thank you very much. I'll turn it back.

Thank you. Our next question comes from David Smith with Pickering Energy Partners. Please go ahead, your line is open.

Hey good morning.

Good morning David.

I just had a quick housekeeping question. The full-year guidance for SG&A at $280 million implies a decent step down in the fiscal second half. So, I just wanted to ask how you see the fiscal Q4 exit rate for SG&A? And maybe how we should think about the future run rate with the currently contemplated synergies?

Yes, I will consider the future run rate. As I mentioned earlier, we have a solid plan. Most of the synergies and ongoing cost reductions we discussed are primarily in general and administrative expenses. There will also be other savings in operating costs. Due to the tariffs and the changing supply chain situation, those savings are currently more uncertain. Once the tariff situation is clarified, we can reassess our supply chain synergies. Overall, I believe the synergies and permanent cost reductions we are discussing will range from $50 million to $75 million for the full-year fiscal 2026 run rate, primarily from lower G&A. Regarding the exit rate for G&A in the fourth quarter, I will do some calculations and get back to you on that, Dave.

Very much appreciate it. But it sounds like it's fair to say the higher synergy estimate does not include savings from lower costs on the suspended Saudi rigs.

That's correct.

Thanks David.

Thank you. We will move next with Waqar Syed with ATB Capital Markets. Please go ahead.

John, your goal is eventually to provide the same kind of operating performance on international rigs that you've been doing domestically in the U.S. market. Now, as you proceed towards that goal, do you think that the rigs that you acquired from KCA Deutag are ready for that? Or would you need to apply some capital to that, make some changes, add some technology?

Waqar, we are discussing two distinct markets with different starting points. If we reflect on the performance of FlexRig today compared to 10 or 15 years ago when we first deployed that capability, we see a clear contrast. That development largely took place in unconventional markets, while most of our international operations focus on conventional work. There are notable differences between the two. However, I believe our culture of performance and process excellence is already driving us to find ways to introduce some of our technologies to these rigs. The positive aspect is that we have customers eager to adopt technology and enhance their operations. It's a long-term endeavor and will take time, but I believe there are immediate advantages for our customers that will set us up for future growth. I hope that clarifies things.

I think the prevailing view is that we might see a net decline of about 30 to 40 rigs in the next few months. In that environment, do you anticipate some pressure on day rates in the domestic market? Additionally, could you discuss the supply and demand fundamentals for super-spec rigs? You have some interesting data in the presentation, and it would be great to hear more about that.

The super-spec market is currently very tight. While there is a larger total available super-spec fleet in the U.S., the number of active rigs is not significantly higher than the 580 you mentioned. Many rigs have been idle for over two or three years. Despite some softness in pricing, we continue to engage with our customers closely to deliver the best value for them. We believe that lowering costs is not achieved through low day rates but by utilizing the most efficient rigs, employing advanced technology, and reducing the number of days spent per well. Regarding the potential decline of 30 to 40 rigs, while it's a possibility we acknowledge, we don't currently observe that happening. There have been some announcements regarding the release of rigs as E&Ps adjust their rig counts for budgetary reasons, which is understandable. I haven't heard of anything beyond that. Kevin, do you have anything to add?

No, I think that if you look at the slide in our presentation, there is a high degree of utilization of super-spec rigs based on those available for use. I believe the current utilization rate is in the upper 80s.

Yes. So, this cycle, this one is very different than other cycles that we've had in the past in my career. And again, we've been flat activity. We at H&P have had in this range bound 145 to 155 for almost two years. And that historically hasn't happened. And so again, you've got a fleet of rigs that have been idle for some period of time that aren't going to be able to go back to work anytime soon. So, that creates the working fleet being at that 80% plus activity level, utilization level, and that historically has supported stronger pricing, if you look at it from that perspective.

Makes sense. Thank you. Appreciate the color.

Thank you.

Thank you. Our next question comes from Doug Becker with Capital One. Please go ahead, your line is open.

Thank you. John, several of the offshore drilling contractors have moved their suspended jack-ups to other markets. There definitely seems to be pockets of some strength in the Middle East. Are there prospects to relocate some of the land rigs currently in Saudi Arabia to other markets in the Middle East?

If you look at it on a longer-term basis, absolutely. If there was a situation where some of these rigs don't go back to work, then yes, there would be the opportunity to move to other neighboring countries. And in the Middle East. And we've got a nice operation in Oman. We've got a nice operation in Kuwait. There's some other potential opportunities. I mean we know it's possible. We're sure not making plans for that. But you're right, there have been offshore rigs that have left the region and have gone other places. We have that same capability.

And switching to the U.S., curious if there's potential to see the percent of performance-based contracts increase. And just the thought being that if a customer wants to see a lower headline rate in a declining activity environment, that might be a win-win situation where you can provide a lower headline rate, but still maintain your margins. Do you see a potential for that? Or just kind of think about it as the 50% level it's been?

I believe we have consistently been in the 50% to 60% range for the past few years. The positive aspect for us at H&P is that we are seeing more customers choose performance-based contracts. Each customer tailors their contract differently, often involving various time elements and other key performance indicators. Ultimately, as mentioned earlier, if we can shorten the job duration, it leads to substantial cost savings. This capability is advantageous. Moreover, what our customers emphasize daily is the importance of reliability; they want consistent performance without any outlier wells. This is where our technology solutions improve our capabilities. As I mentioned, our technologies help eliminate some human factors, such as the daily supervision required in directional drilling, by using software instead of relying on a person to make steering decisions. Such improvements are significant advantages for both us and our customers, especially given the nature of our 24-hour operations. There are numerous opportunities in this area, and when these technologies are paired with performance-based contracts, they enhance reliability. We've noted that this relationship is beneficial for both us and our customers, and that’s our goal. We are investing heavily in our fleet and technologies, and like our customers, we are focused on achieving a return on those investments.

But it seems there is no reason to expect a specific increase in the stability of those contracts.

We are always striving to move in that direction. So, please don't think I'm saying it's impossible. It's just not clearly visible at the moment. While we don't foresee that happening in the near-term outlook, I wouldn't rule out the possibility entirely.

I would add that H&P has developed significant internal competency over several years of executing performance-based contracts, which definitely sets us apart. These contracts can be challenging as they involve negotiations with our customers to determine the appropriate mix of key performance indicators and other preferences. Additionally, effective administration from a back-office perspective is crucial, and we bring five years of experience in this area. I believe that experience is key.

Makes sense. Thank you.

Thank you. And we will take our last question from Jeff LeBlanc with TPH. Please go ahead, your line is open.

Good morning John and team. Thank you for taking my question. I wanted to clarify, are you saying that you're making pricing concessions today? Or are you willing to cede market share to maintain margin?

Our market share has grown, and our pricing is based on market conditions. We're engaging with customers daily. Our guidance indicates we expect both a reduction in the number of rigs and some pricing decrease due to the market. However, depending on the quarter, we may also see an increase in margins from our performance-based contracts, which can be challenging to forecast. Do you have any further questions?

No. If you look at the guidance we provided last quarter and our margins, it's constantly changing. Our sales and marketing team is always in discussions with our customers about what makes the most sense. We will continue to pursue performance-based contracts where it is beneficial for our customers. As John mentioned, it's not just about a single well; it's about a 10-well program. We need to ensure that we don't compromise the economics of the entire program because of a couple of poorly performing wells. The better option could be to use a different contract type for the other eight wells to keep costs down. Customers are focused on the overall economics of all 10 wells. While this situation is fluid, we are currently facing numerous challenges, and our sales team is collaborating with our customers since this is an industry-wide issue, not just a drilling services challenge. We need to work together with our customers as partners.

Yes, Jeff, we acknowledge that there's pressure across the entire energy value chain to reduce costs. We will continue to collaborate closely with our customers to understand their needs. It’s essential to remain customer-centric and ensure that we are assisting them in achieving their goals. This focus on customer collaboration is a key aspect of our differentiated offering. We recognize that there is significant pressure in the industry, which has been present for the past few months.

Okay. Thank you very much for the color. I'll hand the call back to the operator.

All right.

Thank you. And this will conclude our Q&A session. I will turn the call back to John Lindsay for closing remarks.

Thank you for being here today. I want to emphasize again that we view the acquisition of KCA as a significant turning point for our long-term business. The integration process has been progressing well, and I am pleased to see the enthusiasm from our customers, both International Oil Companies and National Oil Companies, with whom we are collaborating. While there are some macroeconomic challenges that we’ve acknowledged and which are affecting our progress, we remain optimistic about the energy sector in the long run. Numerous forecasts suggest that energy demand will continue to rise, and there will be countless wells that need to be drilled around the world for many years ahead. I believe we are well-positioned to capitalize on this global opportunity. As I mentioned previously, we are adopting a long-term perspective, especially in light of the current state of the industry, and we believe we are set up for future success. Furthermore, we must show that we can effectively implement our international growth strategy. That is our aim. Over the years, we have introduced new technologies and commercial models, achieving considerable success, and I want to assure you that we will maintain our focus on this effort. Thank you once again for your interest, and have a great day.