Helmerich & Payne, Inc. Q3 FY2025 Earnings Call

Good day, everyone, and welcome to today's Helmerich & Payne's fiscal third quarter earnings call. Please note, this call may be recorded. It is now my pleasure to turn the conference over to Mr. Todd Scruggs, Vice President of Finance and Treasury. Please go ahead.

Thank you, Raisa, and welcome, everyone, to Helmerich & Payne's conference call and webcast for the third quarter of fiscal year 2025. With us today on the call are John Lindsay, President and CEO; Kevin Vann, Senior Vice President and CFO; Trey Adams, Senior Vice President, Global Commercial Sales and Marketing; and Mike Lennox, Senior Vice President, Americas. Before we begin our prepared remarks, I'd like to remind everyone that this call will include forward-looking statements as defined under securities laws. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that the expectations will prove to be correct. Please refer to our filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. With that, I'll turn the call over to John.

Thank you, Todd. Hello, everyone, and thanks for joining us today. Just over two decades ago, H&P took a bold step by investing in 32 FlexRigs that were built on spec, an investment that became the bedrock of our fleet. Looking back, the market was challenging at that time and that investment was heavily scrutinized. Ultimately, that leap carried us from fourth to first in North America land drilling. Today, fresh off our most recent acquisition, familiar headwinds are upon us. Volatile oil and natural gas prices driven by tariffs, shifting supply dynamics, and geopolitical currents are once again challenging our strategic initiative. It took a few years under the spotlight of adversity, but ultimately, H&P led the industry on a path of innovation and unmatched performance. It showcased our unique safety culture, our people's deep expertise, and gave rise to the new technologies that helped transform the business as we know it today. Anchored by a clear long-term vision, we remain steadfast in executing our global strategy that will keep us at the forefront of the drilling solutions industry. Our teams are laser-focused on future growth and leveraging the advantages that H&P brings to the market. Now turning to our fiscal Q3 results. I was very pleased with our operating performance and progress made on multiple fronts. Our customer focus and hard work were evident in our industry-leading North American Solutions results, and we're gaining operating momentum in several areas around the world. We're making great progress on our debt and cost reduction goals, and our integrated team is working well together. I'm now going to turn the call over to Trey Adams, and he will provide a global sales, marketing, and commercial update on our North America Solutions, international land and offshore segment performance and outlook. Trey?

Thank you, John. Our North American Solutions segment produced another great quarter with daily margins of $19,860 per day, highlighted by sequential quarter-over-quarter improvements in expense per day. Our NAS teams continue to focus on producing differentiated outcomes for customers. The journey to becoming an outcome and customer-focused firm did not happen overnight or over a few quarters. This customer-centric focus is truly embedded in everything we do every day. We continue to advance in both performance-based agreements and in our technology journey. Both performance-based agreements and technology aid in our ability to create customer value. Our digital applications are now at all-time highs for adoption and value creation. We now have advanced applications and automation working on essentially every rig in the U.S. Lower 48 with app count growing 20% year-over-year. The drive for additional efficiencies continues along with lateral lengths and well complexity. Our customer-centric models, rig equipment, drilling expertise, technology portfolio, and our people continue to place us at the center of this continued evolution. In addition, our customers' drive for safety and performance improvements uniquely positions H&P and our approach for further share capture and customer value creation. An example of this can be seen in the Permian Basin. The Permian Basin is down 12% year-over-year in total rig count, and over that same period, our share position in the Permian Basin has grown over 3 percentage points. On the International and Offshore Solutions front, we continue to enhance relationships around the globe. We are now active in effectively all of the major basins outside of Russia and China. Our teams continue to find growth opportunities in international markets, highlighted by near-term growth in South America and other key markets. The need for capital efficiency is not unique to the U.S. shale market. Customers, large and small all over the globe need the right partner to create long-term and sustainable growth. Our distinctive capabilities, along with our broad geographical footprint, put us in a great position to grow in the U.S. and global markets. I will now turn it back over to John Lindsay.

Thank you, Trey. As Trey mentioned, we are well positioned for growth around the globe. Our customer exposure and geographical footprint have never been this broad in our company's long history. While we are still absorbing some of the impact of the rig suspensions in Saudi, we are firmly committed to further growth in Saudi Arabia and in the Middle East. We believe that our foundation of the right rigs, relationships, people and approach will lead to incremental activity gains. I'm also encouraged by the progress on our KCA integration. We've adopted a deliberate phased approach, streamlining corporate back office and operational support functions while maintaining an appropriate pace at the rig level to maintain strong safety performance and deliver exceptional results to our customers. The initial phase of integrating our corporate and back office functions is nearly three-quarters of the way complete with most of the work targeted for completion in the first quarter of 2026. This focus has already unlocked meaningful cost synergies across our corporate functions. In Saudi Arabia, where we once ran two separate businesses, the merger has generated significant financial and operational gains. Our acquisition thesis is coming to life. We're leveraging a broader operational footprint and expanded customer base and our combined capabilities to differentiate H&P on the global stage. Today, we're operating over 200 land rigs globally across major oil and gas basins and another 30 or so offshore management contracts. And we continue to serve our customers through customer-centric performance contracts and advanced technology rigs backed by digital solutions that drive safety and reliability. Our financial profile remains robust, and Kevin will go into greater detail during his remarks. I would like to reference the last slide in our deck, Slide 10, as that truly captures the H&P differentiated drilling business model. And to reinforce those points, we believe our global scale and innovative solutions are differentiating in the market. And those capabilities, along with our investment-grade balance sheet, sharp focus on cost and debt reduction, and a long-standing sustainable dividend is a unique value proposition in our industry. This successful integration positions us to deliver superior value to our customers, our teams, and our shareholders. And now I'll turn the call over to Kevin.

Thanks, John. Today, I will review our fiscal third quarter '25 operating results, which includes a full quarter impact from our KCAD acquisition, provide guidance for the fiscal fourth quarter, update remaining full year 2025 guidance where an update is needed and, finally, comment on our financial position. Let me start with a few highlights. The company generated quarterly revenues of just over $1 billion for the second straight quarter. Total direct operating costs were $735 million and general and administrative expenses were approximately $66 million for the quarter, which represents a reduction of $15 million from the second. I will provide some additional color on the trajectory of our cost structure and the progress we have made against our cost initiatives later in my comments. Gross capital expenditures for our second quarter were $97 million, which was down from the second quarter but in line with our expectations for the full year, and second quarter cash flow from operations was $122 million. Lastly, overall, the company generated $268 million in EBITDA versus $242 million last quarter. Turning to our three segments, beginning with North America Solutions. We averaged 147 contracted rigs during the quarter, which was down a couple of rigs as compared to the second, however, pretty much in line with our expectations and the guidance that we provided during our last earnings call. The exit rig count was 141, which declined late in the quarter due to some churn but is in line with the broader North American market conditions and consistent with our guidance during the last call. Segment direct margin was $266 million, which was right in line with last quarter but materially higher than our expectations. As Trey indicated, this outcome is a testament to our operations and sales team working side by side our customers and understanding the needed outcomes to help them achieve the results they desire. We recognize that there are factors that negatively weigh on overall market conditions such as continued uncertainty around tariffs and the possibility of lower commodity prices. However, we remain steadfastly focused on partnering with our customers to achieve the mutually successful outcomes that are required for all of us to generate acceptable returns on our investments. Our International Solutions activity ended the third fiscal quarter with 69 rigs working. As we stated in the press release, all 8 unconventional FlexRigs in Saudi Arabia have now commenced operations with margins continuing to improve as we further integrate operations with KCAD. As a whole, our International Solutions business generated direct margins of $34 million, which was up $7 million from the second quarter. Finally, to our Offshore Solutions segment, which generated $23 million in direct margins. With the inclusion of the KCAD's offshore business, we have added significant scale and geographic expansion to this segment. The business requires very little capital and generates steady cash flows from a set of blue-chip customers. We are extremely pleased with how this business is performing and the additional value being created by the team that came over with the acquisition. As we noted in the press release, we did record an impairment of a significant part of the goodwill that was recorded at the date of the closing of the acquisition. This write-down was largely driven by the drop in our equity price, which is obviously driven by several factors, including the market's interest and sentiment around the energy sector and the various subsectors within it. To be clear, we still believe that over the long term, the acquisition will provide the growth and shareholder value creation that was originally contemplated. Looking ahead to the fourth quarter of fiscal 2025 for North America Solutions, we expect to average between 138 and 144 contracted rigs or approximately flat to our exit rate. Again, we are focused on providing customer-centric solutions and believe direct margins in fiscal Q4 to range between $230 million and $250 million. The NAS team continues to exceed expectations in any given market conditions. I want to thank them for continuing to bring these amazing results that are obviously industry-leading. As we look toward the fourth quarter of fiscal '25 for international, we expect direct margins from our International Solutions to be between $22 million and $32 million. Further, we expect the average operating rig count to be between 62 and 66 contracted rigs. The guidance range includes the impact of the Saudi rig suspensions but also includes the margin improvement from the FlexRig business. Now turning to guidance for our Offshore Solutions segment. We expect to generate between $22 million and $30 million in direct margin in the fourth quarter with the 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. Collectively, those are expected to contribute between $0 and $3 million in the fourth quarter. Now let me update a few full year '25 guidance items. As I stated previously, our CapEx spend was weighted to the front half of the year and we were fully expecting it to moderate for the balance of the year, which it has. However, we are slightly revising the full year capital spend to $380 million to $395 million, therefore increasing the lower end of the guidance as the full year number crystallizes in the last couple of months of the year. Although we are not ready to give 2026 capital guidance, the number will be coming down from the 2025 levels. With the current level of rig activity and the continued savings that Mike and his team are finding to drive our maintenance cost per rig down, we expect the absolute capital spend to moderate over the '25 levels. As for depreciation, general and administrative and research and development expenses, we are not changing our guidance numbers from those estimates we provided during the second quarter earnings call. For cash taxes paid, we are lowering the top end of our guidance to $220 million. We are still assessing the impact of the recently passed Big Beautiful Bill, but we do expect that to be a material benefit for us going forward. Lastly, we are expecting $25 million in interest expense for the fourth quarter. As we stated last call, we have been aggressively seeking and capturing synergies post close of the acquisition. We also engaged in a full analysis of the necessary cost structure to support the expanded H&P business in the future. As a result of the analysis, we set a goal to reduce G&A and R&D costs by $50 million to $75 million, which was inclusive of both synergies and the absolute rightsizing of the organization to manage the business going forward. I am pleased to say that we have identified $50 million of cost savings so far, for which we expect to see the full benefit of starting in 2026. Lastly, I just want to emphasize that we are now anticipating by the end of this calendar year, we will have paid $200 million on the $400 million term loan, which is an increase to our previous expectation. And with that, I'll turn it back to the operator to open it up for questions.

Our first question comes from Doug Becker with Capital One.

John, you mentioned you're committed to further growth in Saudi Arabia and the Middle East more broadly. You have a full quarter of the KCA assets under your belt. You're laser-focused on growth. Just curious if you could provide some more color on how H&P might start to grow the international business from fiscal fourth quarter level that's been laid out.

Sure, Doug. Before I answer that, I also wanted to mention that during the opening remarks, Todd referred to Mike Lennox and Trey Adams being here. Many of you have met them, but just to clarify, they are members of my team, working diligently every day. Mike is responsible for North America Solutions and South America, while Trey manages everything commercially on a global scale. They've traveled with Kevin and me a couple of times, so while many of you know them, not everyone has. I just wanted to provide that context. Regarding growth in Saudi Arabia, there are still opportunities. A tender is expected to be released soon, and there are additional prospects for growth in the region. I believe most of this will materialize around 2026. I don’t anticipate much happening in 2025, but I do see significant opportunities for 2026. Considering our earlier remarks about the value proposition we offer and the interest from National Oil Companies and International Oil Companies for a different operating model and enhanced performance, Trey, do you have anything to add?

Yes. I'll just carry on there, John, just share that, absolutely, we're tracking a lot of opportunities coming through the region in the Middle East. What's different from where we were 6, 7, 8 months ago to where we are today is we have the right people, right assets on the ground to participate in those tenders meaningfully. And what John just described, getting the 8 FlexRigs into Saudi was a big win for us. We're going to continue to advance relationships across the region more broadly. And those conversations are deeper than what we've ever had because of the right fit rigs, right people, and the scalable operation that we have on the ground. So we're tracking quite a bit of activity. It's premature to get into some of the details associated with those tenders, but we're very active in them, and we feel very confident that our value proposition will be shown through.

Now that definitely sounds encouraging. Are you able to say if there's any ongoing conversations about when the suspended rigs might go back to work? Or is that still up in the air?

Doug, what I continue to hear is that the worst is behind us. We just don't know when exactly. I believe it's more of a budgeting issue at this time. We don't have anything more to share right now. The best approach for us is to consider a 2026 timeframe. Hopefully, there will be some opportunities before then. We have personnel on the ground and many positive developments happening. However, I think we just need a bit more time to see how things unfold.

Our next question comes from Grant Hynes with JPMorgan.

So you talked about performance contracts making up about 50% kind of active rigs and obviously driving outperformance in the quarter. But could you maybe highlight what types of customers have been sort of the primary adopters of this contracting and maybe where the next leg of adoption might be?

Yes, Grant, this is Mike. I'll start with it and then maybe hand it over to Trey. Regarding the performance contracts, we see involvement across all types of customers, including small privates, midsize, and large majors. We are always engaging with them, but it really begins with understanding the outcomes they want to achieve and aligning with those goals. We have experienced significant success in this area and plan to continue utilizing it moving forward.

Yes. And the only comment I would make, this is Trey, in addition to what Mike just shared is you've probably seen our performance contract percentages stay around 50% for, it's probably been 8 quarters now, and it's been relatively range bound. But I don't think that, that's totally encompassing what we're providing at a larger scale and across what I would consider the vast majority of our customer conversations today. So as Mike pointed out, every conversation we have with the customer is attributable to a goal or an outcome that they're looking to achieve. Half of those today were being remunerated on, delivering that outcome. There's the other vast majority of those that we're coming in and creating differentiated value and getting compensated differentially for that value creation. So I think that number is a bit misleading because it doesn't fully encompass the conversations that we're having every day with customers and the value that they're seeing with working and partnering with H&P.

Got you. And maybe just as a follow-up. I mean are there any pockets internationally where you're having conversations with customers about these types of contracting models just as obviously has been successful in North America?

Absolutely. We're having those conversations. They're going on today. We're putting our toe in the water in several markets today where we have those types of agreements taking shape. We have early stages of an agreement in the Middle East today that's arranged similar to what we have in the United States. And so we're seeing a lot of interest. Obviously, the IOC clients that have global scale are looking to translate what's happening in the U.S. shale abroad. And then conversations with NOCs and other smaller customers across the globe, they're very interested and want to better understand how we can partner and align. So yes, early days, but absolutely ongoing.

Our next question comes from Eddie Kim with Barclays.

So you're guiding to an average rig count in the Lower 48, about 141 rigs at the midpoint or about a 4% sequential decline, which is below the industry-wide rig count decline and a little bit less severe than what some of your peers have been telegraphing. Any thoughts you can provide on that relative outperformance in your rig count on your expectations for the fiscal 4Q? I know you highlighted some market share gains. But is it bad? Is it maybe the mix of your customer mix? Just any thoughts there?

Yes, I'll start and then again hand it over to Trey. But we've got a great customer mix, and again, we're aligned to their outcomes. We made investments for the last several years to drill these more complex, longer lateral wells. And so that's really where it's shifting to, and so we're very well positioned. And I think we've had resilience with our rig count and our margins, everything that we're doing as a result of those investments that we've made in previous years.

Got it. Great. My follow-up is just your thoughts on oil basins versus gas basins in the Lower 48. I mean your rig count has been fairly steady so far this year. But does that makeup maybe change what we've seen some oil rigs come off but about equally offset by gas rigs coming on? And just your thoughts on gas activity for the remainder of this calendar year. We've seen a steady ramp-up in gas rigs just industry-wide. Do you expect that to continue based on the conversations you're having? Or is the next move up in gas rigs really going to take place maybe in early 2026? Just your thoughts there would be great.

Yes. No, I think you're spot-on, right? We've had a pullback, slight pullback in the old plays. We've seen a slight uptick in the natural gas plays, specifically the Haynesville and Marcellus, that is somewhat offset. I mean just to acknowledge it, we've had a few rigs moved from the oil plays over to the gas play. So those rigs are hot rigs that are staying working. There may be a slight continuation of that going forward. I don't think it's a drastic jump. I think it's smaller in rig count, but we expect that to continue.

I believe there is a clear global shift towards natural gas, and numerous opportunities exist in the Middle East. We can utilize our experience and technology to take advantage of the significant opportunities as more gas is being explored internationally.

Our next question comes from Derek Podhaizer with Piper Sandler.

Just sticking on the North America guide, the range of 138 to 144, like Kevin mentioned in the prepared remarks, is flat with the exit rate. Maybe could you just help us understand what brings you down to the lower end of the range versus the higher end of the range as we start thinking about next quarter? Is that a gas versus oil, commodity price-driven, basin-driven, customer-driven? Just maybe some more color around the top end and bottom end of that range.

Yes. Some of it fluctuates down. We expect to take advantage of potential high-grading opportunities as they arise, which we anticipate will happen.

Yes, I mean I would layer in and just say, I mean the largest impact to us is that there's a big commodity price shift or move, and you see some private E&P pullback. But with what we have in front of us right now. We feel pretty comfortable and confident. Even if there was a large consolidation that occurred in the next few months, we wouldn't see the impact until towards our first fiscal period or beyond. So I think we're pretty comfortable absent of a big commodity move.

Okay. Fair enough. Maybe switching over to KCA. Just, John, you mentioned the tenders, obviously, a 2026 event. But how should we think about incremental activity for H&P? I mean, would this be a pull for the legacy FlexRigs? It's great to see that all 8 are working now. I think you had 1 KCA rig working in the Jafurah, I'm not sure. But how do we think about the interplay between what would be more of the pull? Would it be some of the suspended KCA rigs being able to move into Jafurah? Or would this be a pull of the legacy HP FlexRigs that you have right now? Just trying to think about the opportunities set where you would pull that from, specifically in Jafurah?

Sure, Derek. Yes, there are additional legacy KCA rigs that are working in Jafurah, and we see more opportunities there. Generally, the rigs that will likely return to work will be gas-focused, as I mentioned earlier. Whether in Jafurah or in more conventional gas basins, we have a strong fleet to pursue those opportunities. However, I don't anticipate any of them being FlexRigs at this stage; it will all be from the legacy KCA fleet.

Our next question comes from Ati Modak with Goldman Sachs.

John, can you give us a sense of the direction we should think about in terms of the margins in North America in the context of all the conversations you're having with customers with this oil versus gas for the performance-based contracts as well versus the trajectory of the rig count, say, into '26?

Yes, I'm going to let Mike jump on that.

Yes, Ati, I think there's resilience in those margins for a few reasons. One, on the revenue side, we mentioned the performance contracts. We think, again, that's a great tool that aligns with our customers. So when they see value, we receive value as well. Our digital solutions, our technology is continuing to grow and expand on our rigs, which is helping aid in the success we've seen in drilling longer, more complex laterals. I mentioned earlier, but we've made investments in previous years in our rig fleet and specifically in automation, our engine power solutions that we have and in tubulars. That will continue to have upside with that revenue. And then on the expense side, we've been having a lot of focus, as Kevin had mentioned, just on the cost efficiency efforts. And so we're starting to bear some of those fruits now. And we're leveraging our scale, our scale domestically, our scale as a global organization. We're going to continue to do that. So I think there are staying power within those margins for North America Solutions.

I appreciate that. And then on the free cash flow cadence, you increased the paydown targets also, assuming that most of that is free cash flow. Is there any asset sale baked into that? And what's a reasonable way to expect the CapEx and free cash flow cadence of conversion going forward, let's say, into the next year? I know it's early, but any directional comments you can provide?

Yes. We're expecting to increase the term loan extinguishment from $175 million to $200 million by the end of the year, solely from organic operational cash flows without any asset sales involved. Our focus has been on both revenue and cost management, allowing us to generate higher cash flows. Our main objective right now is to create customer value while reducing our balance sheet leverage to about 1x. Although we’re not providing guidance for 2026, we anticipate being able to pay off the additional $200 million on the term loan by the third quarter of next year. Additionally, our first tranche of bonds will be due in December 2027, and we are actively planning for that as well. Our long-term goal remains to minimize our overall leverage. One of the contributing factors to this is a reduction in our capital expenditures. While I can't provide detailed projections for 2026, we have already reduced our maintenance capital spending this year to levels seen before COVID. With the expected level of rig activity for next year, we forecast a significant moderation in our overall capital expenditure.

Our next question comes from Jeff LeBlanc with TPH.

I just want to see if you could provide some color on the rig churn in the North American market. And then specifically, the public data would suggest that you have been able to add a couple of rigs to new customers on a go-forward basis, and just trying to speak to that success. And you think those opportunities should continue over the balance of the year?

Sure. Well, that's why I've got these guys here to talk more about that because there is a lot of churn. Teams are doing great work in keeping rigs working. And if you have any...

Yes. Regarding churn, we are experiencing it across the board, but I would mainly attribute it to the private sector. The positive aspect is that we have managed to connect those rigs with either private clients or others looking for high-grade options.

Yes. This is Trey. I'll just comment and say our teams did a fantastic job of stringing together programs. There's a lot of short-term duration programs that are out there that are well timed, but you have to have the conversation and relationship and rapport with those clients to be well-positioned in the front of the queue to grab that opportunity. Our teams stay in front of those and do a great job. And then as you think about new clients and customers in the U.S. Lower 48, many of those relationships have been formed over the last 10 to 20 years. There's a lot of new companies, but there's a relatively constrained E&P community. And so we keep a good beat and our teams stay very focused on maintaining those key relationships. So we don't expect that to change, and we think there will be continued churn, and we felt like we're well-suited to manage it.

Our next question comes from Keith MacKey with RBC.

I apologize if this has already been addressed, but the guidance of up to 144 rigs for fiscal Q4 suggests that there may be an opportunity to add some rigs on average. If this happens, would it primarily be due to improved churn management, or do you anticipate actually adding net new rigs in the Lower 48?

Yes, I'll take that one. I think it's a combination, right? We're going to obviously have to manage churn really, really well in the near term to hit the upper end of that guide. In addition to that, right, we have opportunities out there that we're chasing, and we're continuing to stay close to. So there's some incremental adds that we baked into that higher number. Obviously, if the commodity price range holds firm, we feel comfortable that we'll be able to continue to accrete. But that's where that number comes from. It comes from great churn management and the addition of a handful of rigs that we're having conversations currently with.

Okay. Understood. And can you just talk a little bit about what you're seeing in the competitive landscape in the Lower 48? We've been hearing rig rates still in that low to mid-30 range, although there's lots of variation within that range and around that range. Can you just talk about what you're seeing as far as are you being asked to compete on price more than you normally would based on competitive bids and things like that? Or what does the landscape really look like in this environment?

Yes, I'll start. We're not immune to the industry-wide pricing pressures. But again, we're pricing our rigs based on the value that we're delivering for our customers. And so we can align with commercial performance-based contracts to align to those, and that rewards us when we perform above our peers.

And the other nugget I'll share is the market for super-spec and top-end rig performance remains pretty constrained. If you look at and filter in active rigs, inactive super-specs for the last year, super-spec utilization rates are still above 80%. If you go basin to basin, that super-spec utilization rate even climbs further from there. We feel like what we provide, and going back to Mike's comment, is differentiated. We align the value, and we're focused on our customers through every part of the conversation and equation.

I mean this has been a result of many, many years of our strategy and focusing on delivering better outcomes, leveraging technology, leveraging digital solutions. There's a huge safety component and element here in the things that we're working on. It's really a function of just the overall teams and our people being able to continue to deliver for customers, and it's been fun to be a part of.

Our next question comes from Blake McLean with Daniel Energy Partners.

There has been a lot of good discussion, and I appreciate that. Many thoughtful questions have been raised. I would like to ask a broader question about crude oil. We've talked about natural gas, and it seems people are feeling more optimistic both domestically and internationally. Could you share some insights on the customer perspective regarding crude oil? Considering the various factors and volatility we've seen over the last quarter, do you think people are generally more optimistic about the oil outlook for the second half of this year and into next year compared to a quarter ago? Any insights you can provide on customer conversations and their views on crude would be helpful.

Yes, I'll start and then others can lean in. I think it differs from conversation with customer to customer, right? You have many of our large customers that are looking through cycles and planning through cycles, identifying the right partners who they know will be there and be foundational elements to their value creation over time. And so those customers and conversations are looking beyond the end of calendar 2025 and much further out. Obviously, with privates, those conversations are a little bit more sensitive in terms of what crude outlook you have. But the longer that crude continues to remain relatively stable and range-bound, it gives those customers comfort to keep their programs going and to bring rigs online. I think it's varied dramatically from customer archetype to customer archetype.

And I think also if you look at where the '26 curve is trading versus where it was trading, where the spot price was three months ago when we had our second-quarter earnings call, again, I think everyone's still sitting and waiting, thinking about their '26 budgets. We still have some time that will pass between now and which they formalize them. But I think just overall, it's a much more constructive environment. And having one set on the E&P side, you feel a whole lot better when crude is trading in the mid- to high 60s than when we were sub-60 three months ago.

Well, in different reports, you see on the outlook for crude production in the U.S. and does it continue to increase, does it begin to flatten out and decline? There are some predictions that production begins to decline. So a lot of variables out there.

Our next question comes from Marc Bianchi with TD Cowen.

I am interested in the margin performance in North America. It has been better than your guidance over the past few quarters. You mentioned some execution and performance contracts contributing to that. Could you explain how you developed the outlook? Is there a baseline assumption, with much of it attributed to unexpected performance contracts? Or do you adopt a more conservative stance on performance? If you exceed that, that's excellent. Please clarify the baseline expectations for fiscal fourth quarter and the factors that might affect whether it goes above or below that.

I'll begin and then pass it along. First and foremost, I want to express my gratitude to our employees. They have been executing exceptionally well. We established goals, and they have significantly outperformed those targets. I take great pride in our teams' efforts. I mentioned some cost efficiency initiatives, and while we will continue to see some benefits from those, others may vary depending on timing, which I would characterize as seasonal. I'm genuinely proud of their execution. Now, I'll hand it over to someone else who can delve into the specifics of how we structured it.

Yes, we approach this from a bottoms-up perspective. We have firm contracts and have engaged in discussions with our customers. As Trey pointed out, we are aligned with them to determine their desired outcomes. Regarding overall market sentiment, it has improved since last quarter, though we still face some challenges. The slight downward adjustment reflects our overall value proposition, which may have shifted from a day rate to a performance-based incentive. When estimating those incentives, we cannot always rely on achieving the highest end of the bonus range consistently. However, based on our calculations and anticipated margins for the fourth quarter, we consider our outlook reasonable. That said, whenever we set a target for Mike and his team, they typically find a way to exceed it, though we cannot always depend on that. Nonetheless, week after week, his team continues to deliver outstanding results.

Yes. Great to see. On the international side, one really simplistic question and then I have another broader one. But just on the rig count guide for the fiscal 4Q, what is the exit rate there just so we can kind of understand what's happening with maybe the KCA rigs that are dropping off? And then what else is happening within the portfolio?

I think 62.

Yes, 62 is the exit rate.

And I can touch on just some general activity, right? So obviously, there's a lot going on right now. If you think broadly across our international fleet, we continue to see a good amount of tender activity and opportunities in the Middle East. Over the near term, you'll see increased and improved activity in some of our other focused areas and markets, right? We have some activity increases planned in South America, and as we sit here today, we’re going to have another rig going into Australia. We're looking at growth in regions outside of the Middle East right now. I mean we're having great conversations with IOCs outside of the Middle East as well. So that is where some of that fluctuation in variability comes in that guide. What I'll reinforce is that the difference of H&P today versus where we were 6 to 8 months ago is that we're a truly global company and have a lot of opportunities that we're tracking across geographies. We're going to continue to see movement in wins in some geographies that may not hit the headlines like U.S. or the Middle East, but we're continuing to chase and find ways to accrete activity.

Yes. If you consider the number of rigs we operated during the third quarter, it did not include the additional nine rigs that we announced were suspended back in early June. Those stopped work around July 1. To Trey's point, the guidance is not a straightforward one-for-one decrease due to those suspensions. We are actually experiencing some positive developments and successes in the various countries that Trey mentioned. There are some promising activities happening in Argentina, and Mike and his team are leading those initiatives. The discussions with customers down there are going really well.

Yes, absolutely. Maybe to expand on Argentina. We have 9 rigs operating today in Argentina. Lots of conversations, as some of you all know, as they build out the infrastructure to get the gas out of the Vaca Muerta there. We're positioned. We had 4 rigs down there, very well-suited FlexRigs that can go to work. So we're in a good position. I'd say we're early innings down there as we're adopting technology and continue to start using that down there, I think we'll have some good wind behind our sails.

Okay, that's great. Maybe just to follow on to that real quick. On the margin side, there's a lot of moving pieces with what I thought the Saudi KCA rigs were pretty good margin, and those are dropping off, but you've got these other rigs that are picking up. And then we've got the FlexRigs in Saudi where there were some start-up costs. It seems like that may be going away or in the process of going away. Should we view this sort of September quarter margin in international as a low point and it has a good chance of getting better from here? Or how does that dynamic look as we roll through the next few quarters?

Yes, this is Kevin. I wouldn't call it a low point, but I believe we're at an inflection point regarding the gross margin potential from our international business. With the rig suspensions and all the efforts that Trey mentioned earlier, we're actively pursuing opportunities globally, especially in the Middle East. We see a pathway to improving the margins from our FlexRig business in Saudi Arabia. There's a lot of positive momentum not only from the number of rigs operating there but also from our ongoing improvements. As we further integrate our operations in Saudi Arabia, we're noticing significant progress. It may take a few more quarters to reach the expected ongoing run rate that both the legacy KCAD employees and the FlexRig start-up team have been working to achieve, but we are consistently improving each quarter.

Our next question comes from David Smith with Pickering Energy Partners.

Starting with just a housekeeping question, and I wanted to make sure I understood correctly that fiscal year CapEx guidance is $380 million to $395 million, and $362 million was spent in the first 9 months of fiscal '25. That kind of implies a step down to like $25 million or $26 million at the midpoint for fiscal Q4, which makes me feel like I'm missing something obvious.

No, you're not. The capital expenditure for 2025 was heavily concentrated in the first two or three quarters. We won't be spending much on capital expenditure in North America during the fourth quarter. What will occur in the fourth quarter will mainly relate to some international activities. The decline isn't exactly proportional, as there are still some funds being spent related to the rig activity we had before the suspensions. However, this will come to a quick halt and decline during the fourth quarter. So no, you're not missing anything, but we do feel comfortable about the guidance.

Appreciate that. I want to extrapolate that through '26, even though you said '26 is coming down. I also wanted to circle back on the cost reduction targets for $50 million to $75 million. Your fiscal Q3 SG&A was basically in line with the trailing 4-quarter average before the merger closed. It was $15 million lower than last quarter with the merger closing in mid-January. I just wanted to clarify how we should think about that $50 million to maybe get into $75 million of identified cost savings relative to what's actually been achieved in the fiscal Q3 performance.

Yes. In fiscal Q3, we incurred some severance and other restructuring costs, which will be listed separately on the income statement. The run rate of $66 million reflects not only the reductions we've made and the synergies we've realized but also indicates the potential for 2026, where we've clearly identified $50 million in run rate savings that we are set to implement. We've completed all necessary decisions to start on October 1 with this $50 million run rate. There’s still more we can achieve, and we need to do additional analysis. This will likely involve a mix of synergies and cost reductions as we determine the appropriate corporate structure to support the business moving forward. While I don't want to declare success on the $50 million yet, I believe achieving somewhere between $50 million and $75 million is quite feasible based on our current outlook.

It appears that we have no further questions at this time. I'll turn the call back to John Lindsay for closing remarks.

Thank you, Raisa. Thank you again for joining us today. Again, just to reiterate, we believe our global scale and innovative solutions are differentiating in the market. We've seen examples of that. And those capabilities, we believe, will continue to expand globally along with our investment-grade balance sheet, sharp focus on cost and debt reduction, and a long-standing sustainable dividend as a unique value proposition in our industry. So again, thank you for joining us today. Thank you.

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