Earnings Call
Helmerich & Payne, Inc. (HP)
Earnings Call Transcript - HP Q1 2026
Operator, Operator
Good day, everyone, and welcome to the Helmerich & Payne Fiscal First Quarter Earnings Call. Please note, this call is being recorded. I will be standing by if you need any assistance. It is now my pleasure to turn the conference over to Mr. Kris Nicol, Vice President of Investor Relations.
Kris Nicol, Vice President of Investor Relations
Welcome, everyone, to Helmerich & Payne's conference call and webcast for the first fiscal quarter of 2026. On today's call, John Lindsay, our CEO, will be joined by Trey Adams, President; Mike Lennox, Executive Vice President of the Western Hemisphere and Kevin Vann, our Chief Financial Officer. 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. Reconciliations of direct margin and certain GAAP to non-GAAP measures can be found in our earnings release. I also want to highlight that we will have a presentation, which will support the prepared remarks from the management team and can be found on the IR website. With that, I'll turn the call over to John.
John Lindsay, CEO
Thank you, Kris. Hello, everyone. Thank you for joining us. As always, we appreciate your interest in H&P. I'll begin with an overview of our first quarter results, and then I'll turn it over to Trey, who will discuss the broader macro environment, current dynamics in the rig market and several key commercial developments from the quarter, including an update on our latest technology initiative, FlexRobotics. Kevin will then walk through our financial results and provide guidance for the second quarter and full fiscal year. To wrap up, Trey will return to summarize the key takeaways before we open the line up for questions. Turning to Slide 4 of the presentation, I'd like to begin by highlighting some of our key achievements for the fiscal first quarter. Execution continued to strengthen across our business, driving solid operational and financial performance. Adjusted EBITDA exceeded expectations at $230 million, supported by resilient results in our North America Solutions and Offshore Solutions segments as well as the stronger-than-anticipated performance in International Solutions. I would note that the first quarter benefited from the timing of certain rig reactivation expenses, which will be more heavily reflected in the second quarter. Beyond the rig reactivations in Saudi Arabia, we also saw meaningful margin improvement from our FlexRig fleet operating in the vast Jafurah gas field. I'm encouraged by this progress and optimistic that we will continue to see further margin expansion throughout the remainder of the year. In North America Solutions, I want to recognize the team for another quarter of strong execution. We averaged 143 rigs working, and our industry-leading technology and talented teams continue to deliver for customers, generating average margins of over $18,000 per day. Our offshore segment also delivered another quarter of robust operational performance. This business typically operates under long-term contracts, which provides a stabilizing counterbalance to the more cyclical land drilling market. As Trey will discuss during his remarks, FlexRobotics, automated drilling and connections, represent the next step forward in rig safety and capability. I am personally very excited about this development and view it as yet another example of how H&P continues to lead the industry in rig technology and drilling innovation. Now, as this is my final earnings call as CEO for H&P, I want to take a step back for a moment and share a few reflections. I started my career at H&P 39 years ago. And while I don't have time to thank everyone that was instrumental in my career, there are many, and I am deeply grateful to all of them. During my 12 years as CEO, we've navigated volatile cycles, shifting markets and rapid technological change, and H&P still leads. Our long-term success depends on discipline, the skill and commitment of our people and the company's willingness to invest through the cycles rather than just react. Durability matters; we don't chase a perfect quarter, but we build with patience, rigor and people who do things the right way. We build for decades of performance. Finally, I want to thank my exceptional leadership team and the many employees I've had the privilege to work with along the way. For their commitment, professionalism and support. For truly living the H&P way. I also want to thank our customers for their partnership over these many years and our shareholders for their long-term support of the company. It's been a privilege to lead H&P, and I'm excited about the future of the company under Trey's leadership. We have a strong team, a clear strategy and we are well positioned for the future. So thank you all. And now it's over to you, Trey.
Raymond Adams, President
Thank you, John. I'd like to express my gratitude both on behalf of our whole organization and personally for your outstanding leadership, discipline, and the example you've provided, and especially for the mentorship and friendship. You've led this company with a long-term mindset, a steady hand through multiple cycles and a deep respect for the people and values that define H&P. The strength of the company today is a direct reflection of that leadership. As I step into the role next month, I do so with a great deal of respect for what's been built and a real excitement about where we're headed. The foundation is strong: a global footprint, differentiated technology, and the H&P way, a culture that truly differentiates us. Building on that foundation, our focus will be on continuing to evolve, leaning into innovation, advancing our capabilities, and positioning the company to compete and create value at a global scale in what is a constantly changing energy landscape. I'm honored to take on the role of CEO and to lead the next chapter of Helmerich & Payne alongside this team. I look forward to working with our employees, customers, and shareholders as we move forward together. Turning our attention to the current macro environment on Slide 6. We firmly believe that in the future, the world will require significantly more energy than it consumes today, driven by expanding population and growing prosperity in emerging markets, along with the rising power needs from AI advancements in many developed nations. This dynamic supports our view that demand for oil and gas will persist and grow for many years to come, which in turn bolsters the need for our global drilling solutions. Looking at this year, the energy landscape appears cautiously positive, but uneven as various macroeconomic and geopolitical factors continue to influence the market. While these developments have raised concerns over an imminent fall in oil prices, the price rebound has not been sustained for long enough to influence a pickup in industry activity. Operators remain focused on disciplined capital deployment, conserving inventory and prioritizing returns over volume expansion. Consequently, we anticipate oil-related investment will remain soft this year with greater upside potential likely to play out beyond this year. In contrast, the outlook for gas markets is more robust. Structural growth continues, fueled by demand for LNG and surging AI-led power demand. As such, we expect 2026 global upstream investment levels to remain flattish overall, though with notable variations by region and market segment. North America is likely to remain the most restrained market in the quarter ahead. This is evident in current activity levels and the recent behaviors of both customers and competitors. We do, however, expect activity to gradually improve through the course of the year and strengthen into 2027. Internationally, the market demonstrates greater resilience, with a clear uptick in activity in the Middle East. Our recent announcements regarding reactivations in Saudi Arabia highlight this growing momentum, and we are beginning to observe broader improvements across the region. South America is also on a more positive path. In this context, our strategic priorities remain unchanged. Maintaining our focus on pricing, making selective capital investments, and positioning our business to capitalize when the market cycle strengthens. Turning to rig dynamics on Slide 7. I want to provide a brief update on the operational front. Lower 48 rig demand moderated into the end of the year, with operators adjusting activity levels to align with market conditions. North America Solutions exited the first fiscal quarter with 139 rigs, a 4% decline from the prior quarter's exit rate. For the second quarter, we expect to average between 132 and 138 active rigs and currently have 135 rigs operating as of today. Although activity has softened, we remain optimistic for the full year outlook, supported by ongoing discussions with customers. Our expectation is that conditions will gradually improve over the course of the year with a pickup in both oil- and gas-focused activity. Moving to our international operations. We continue to expect the phased reactivation of the suspended rigs in Saudi Arabia that we've been notified will return to service. We now have raised the mast on 2 rigs and anticipate completing reactivations by mid-2026. Offshore Solutions continues to perform well, reinforcing H&P's leadership in offshore operations and platform maintenance. Currently, this segment has 3 active offshore rigs and 31 management contracts backed by long-standing customer relationships, creating a steady and reliable cash flow base. Our geographic footprint positions us well for anticipated offshore investment cycles and the continued integration of our land and offshore operating models and safety practices will strengthen our performance, both over the near and long term. Turning to Slide 8, on the commercial front. We made progress in several areas during the quarter, most notably was the announcement of rig reactivations in Saudi Arabia, which commenced in November last year. This marks a turning point in activity levels in the Kingdom, and we remain hopeful that we will see further reactivations as well as the opportunity to further deploy our technology and performance capabilities over time. Our teams are working hard to redeploy these rigs in-country with a focus on customer satisfaction, safety, and operational performance. Elsewhere in our International Solutions business, we are pleased to deploy additional rigs in both Australia and Pakistan and continue to see a high level of engagement with host NOCs, IOCs, and leading OFS service firms on opportunities to expand our presence in the Middle East and North Africa. The potential reopening of Venezuela could offer meaningful growth for H&P in the medium term. We have a long and distinguished heritage of operating in the country and with the right operator, commercial framework, and returns profile in place, we can mobilize relatively quickly. Furthermore, we are excited to note that geothermal rig interest remains high, both in Europe and North America. During the quarter, we received 3 contract awards for geothermal rigs in Germany, Denmark, and the Netherlands. In January, we added another rig for a geothermal project in North America. Domestically, while the rig count remains soft, we are pleased to sign multiyear contract extensions for several of our rigs operating for key customers across the Lower 48. This strengthens our term backlog and provides greater visibility regarding activity levels and margin rates. Offshore Solutions saw continued commercial momentum during the quarter with progress on several multiyear offshore contract renewals and extensions under evolving commercial frameworks. These opportunities span multiple regions and reflect ongoing customer demand for H&P's operations, maintenance, and integrated service capabilities. While certain contracts remain subject to customer approvals and customary conditions, the company is encouraged by its potential to support long-term revenue visibility in the offshore portfolio. As I mentioned, our Offshore Solutions business is differentiated from the more cyclical parts of our portfolio, providing durability and long-term visibility, and is in an area we are actively looking to expand over time. Moving to the next slide, I would like to take this opportunity to discuss our latest advancement in rig technology. FlexRobotics, our system has been successfully deployed on 3 pads for a Super Major customer in the Permian Basin, delivering results in line or better across several operational metrics. FlexRobotics is all about the automation of routine tasks so that crews can concentrate more on performance and safety. FlexRobotics fully automates drilling, drilling connections, and tripping rig floor activities. This, in turn, helps improve safety and operational performance by helping move our rig crews out of the rig floor Red Zone. We started our journey with FlexRobotics testing in 2024 on our R&D FlexRig 918 in Tulsa to help validate the system. But now FlexRobotics is successfully deployed and operational in the Permian Basin. The FlexRobotics system is designed with 3 off-the-shelf robotic arms used in many industries, allowing for a retrofit-ready system to integrate seamlessly with any of our active rigs. We are excited about the potential to deploy more FlexRobotic systems on our rigs in the future. At the same time, customers are excited about its potential, with several inbounds on our latest innovation. As John said, H&P continues to lead in rig technology innovation. We remain dedicated to developing solutions that both enhance customer experience and deliver superior returns for our business. With that, I will now turn the call over to Kevin, who will walk you through our financial results.
J. Vann, CFO
Thanks, Trey. I will start by reviewing our first quarter operating results and providing details on the performance of our operating segments. I will then spend some time walking through our capital allocation framework and conclude by outlining our guidance for the fiscal second quarter before handing it back to Trey. Let me start with highlights for the recently completed quarter on Slide 11, where we exceeded the midpoint of our direct margin guidance in all our operating regions despite the dynamic market environment. Alongside our continued operational and commercial success, we also made strong progress on the deleveraging front as we have paid off $260 million on our $400 million term loan as of the end of January, remaining significantly ahead of the debt reduction goals we laid out last year. During the quarter, the company generated revenues of $1 billion, which is the third consecutive quarter at that $1 billion mark. We generated $230 million of adjusted EBITDA, coming in ahead of expectations. This was primarily led by stronger-than-anticipated margin performance in International Solutions as a result of the lower-than-expected reactivation cost in Saudi during the quarter. The balance will now occur in the second fiscal quarter and is reflected in our 2Q international margin guidance. On EPS, we reported a net loss of $0.98 per diluted share. These results were negatively impacted by a non-cash impairment charge and some unusual non-cash items of $103 million. Absent those items, we generated a loss of $0.15 per share. Capital expenditures for the first quarter were $68 million, trending below our sequential run rate. This outcome was primarily driven by slower-than-anticipated CapEx associated with the Saudi reactivation capital deployment in International Solutions, along with timing changes in some of our North American solutions spend. In line with this, H&P free cash flow in the quarter came in strongly at $126 million. Our cash flow generation funded $25 million in base dividends in addition to the significant progress on paying down our term loan. Now turning to our 3 segments, beginning with North American Solutions on Slide 12. We averaged 143 contracted rigs during the first quarter, which was up slightly from the levels we experienced in the fiscal fourth quarter of 2025 and consistent with the activity expectations we set on the prior call. Segment direct margin for North American solutions was $239 million, which came in above the midpoint of our guidance range. This was driven by a higher rig count sequentially and our total gross margin holding in above $18,000 per day as we closed out the calendar year. This outcome is also evidence of our commitment to our customers. We benefit when they benefit via our performance-based contracts. Ultimately, our goal is to help them meet their objectives of drilling consistent and timely wells and setting them up for a clean and efficient completion and production process. Turning to International Solutions on Slide 13. The segment ended the first quarter with 59 rigs working and generated approximately $29 million in direct margins, exceeding the high end of our guidance range of $13 million to $23 million. Again, the much higher-than-anticipated margin rate is primarily driven by the timing of reactivation costs, which were anticipated to occur in the first quarter but will now happen in the second fiscal quarter. Underlying the lumpiness of our reactivation cost in Saudi Arabia, we saw continued improvement in the margin performance of our FlexRig fleet and higher-than-anticipated rig utilization in the Middle East and in Colombia. Finally, with our Offshore Solutions segment on Slide 14, we generated a direct margin of approximately $31 million during the quarter, which came in slightly ahead of the midpoint of our guidance range. We had 3 active rigs and 33 management contracts in operation during the quarter. As with prior quarters, we are excited about this business and the consistent and stable results that it delivers. As Trey said, it requires minimal capital and generates steady cash flow, which is distinctive from the cyclical and more capital-dependent nature of our onshore portfolio. Turning to Slide 15, I want to provide an update on our capital allocation framework. Our focus remains unchanged, with the top priority being continued deleveraging and maintaining our investment-grade status. In relatively short time, we've made meaningful progress to reduce our post-acquisition leverage, and we remain committed to reaching our near-term goal of paying down our term loan of $400 million ahead of schedule by mid-2026. As I mentioned earlier, we have paid down $260 million on it as of the end of January. At the end of the fiscal first quarter, we had cash and short-term investments of approximately $269 million. Including the availability under our revolving credit facility, our total liquidity is approximately $1.2 billion. Beyond the term loan repayment, we are focused on driving leverage down to around 1 turn or 1x net debt to EBITDA. We continue to evaluate our asset base to ensure capital is directed towards the highest return opportunities while simplifying the portfolio where appropriate and driving structural cost improvements across the organization. Since we closed the sale of the transaction, we have been able to reduce our SG&A by over $50 million relative to pre-merger stand-alone run rates, and we'll continue to align the cost structure with the level of activity. Further, as I stated last quarter, we are harmonizing processes and systems across our Eastern and Western Hemisphere operations. These efforts will help in the longer term with the cost-conscious culture we have at H&P. On portfolio optimization, we continue to work diligently to streamline the portfolio and have line of sight on over $100 million of divestments. Lastly, on shareholder returns, a key element is the dividend. We view the base dividend as a core commitment to shareholders, and we remain confident in its sustainability. The dividend is well covered by cash flow, and our capital allocation decisions are structured to support it across commodity cycles. Now I want to transition to our second quarter and full-year guidance on Slide 16. Looking ahead to the second quarter of fiscal 2026 for North American Solutions, we expect our margins and operated rig count to taper down in line with the typical seasonality and ongoing softness in U.S. land activity levels. As a result, we expect direct margins in our second quarter to range between $205 million to $230 million based on an anticipated rig count of between 132 to 138 rigs in the second quarter. Importantly, as we look out to the fiscal third and fourth quarters, we do see signs of the market stabilizing and expect our rig count to pick up in the back half of the year, giving us a path to approach the midpoint of our full year rig count of 132 to 148 rigs. For international, we anticipate the rig count to average between 57 to 63 rigs in the second quarter, which includes the rigs being reactivated in Saudi. As a reminder, this outlook also includes the expectation for some lower rig counts in non-core countries where the current EBITDA contribution is minimal. When we think about core Middle East, the year-on-year trend is positive. We expect International Solutions to generate a direct margin between $12 million to $22 million. As previously mentioned, we did not incur as much reactivation costs in the first quarter as we anticipated. The balance will now fall in the second quarter, resulting in a step down in sequential margin rates. We are also experiencing some churn in Argentina, where rigs coming to the end of their term are returning to the yard to be fitted with additional technology packages before being redeployed. Despite this timing difference, we expect the direct margin in the fiscal third quarter and fourth quarter to be materially higher than the direct margin rate we achieved in the fiscal first quarter. All reactivations will be behind us, and we expect our FlexRig fleet margin to continue to improve. For offshore, we anticipate an average of 30 to 35 management contracts and operating rigs. We expect the margin rate in the fiscal second quarter to range between $20 million and $30 million. This step down is reflective of typical seasonality, lower revenue days, and the roll-off of some higher-margin rig management contracts in Angola. As we progress through the remainder of the year, we anticipate the margin rate to step back up and remain confident in the $100 million to $115 million direct margin full-year guidance we shared previously. We are also trimming our 2026 gross capital expenditure budget slightly to be between $270 million to $310 million as a result of activity levels and ongoing benefits of our optimization programs. All other full-year guidance ranges remain the same. To conclude, the timing difference of the cost associated with reactivations is creating some lumpiness in the direct margin between the first and second quarters. Beyond that, we remain optimistic about activity and direct margin progression in the third and fourth quarters and are comfortable with where external expectations lie for the full year. I will now turn it back over to Trey for some closing remarks.
Raymond Adams, President
Thank you, Kevin. Turning to Slide 18. I'd like to conclude by refocusing on our compelling investment thesis. H&P today is unrivaled in our scale, geographic diversity, and portfolio to capture rising global onshore drilling activity. We are clearly the technology leader and see a significant opportunity over time to deploy our cutting-edge technology across our global fleet. We believe we are only in the early stages of international shale development and are particularly excited about the prospects in the Middle East and North Africa. At the same time, we are embarking on a rewarding journey of enterprise optimization with several programs underway to streamline our portfolio, cost structure, and deliver on the full potential of the KCA Deutag acquisition. Our near-term commitment remains on deleveraging our balance sheet, and we are confident in repaying our term loan ahead of schedule. Beyond that, we believe we will have the financial strength and flexibility to enhance our attractive shareholder return profile and further differentiate our portfolio. Lastly, I'm proud of the way we started the year with solid first quarter results. While we face some timing and market dynamics in the second quarter, we are optimistic about activity improving through our fiscal third and fourth quarters and remain confident in the guide we set out at the start of the year. I want to thank the employees of H&P for all of their efforts and look forward to what we can achieve together this year and beyond. That concludes our prepared remarks for the quarter. And I will now turn it back to the operator for questions.
Operator, Operator
We'll take our first question from Scott Gruber with Citigroup.
Scott Gruber, Analyst
And before I ask the question, I just want to thank you, John, for all the insights over the years. It's been a real pleasure, and enjoy your next adventure.
John Lindsay, CEO
Great. Thank you very much, Scott. I appreciate it.
Scott Gruber, Analyst
Yes, indeed. And Trey, congrats on the promotion to you as well.
Raymond Adams, President
Thank you very much.
Scott Gruber, Analyst
So I want to ask about the moving parts incorporated into the fiscal 2Q guide. We got some color, which I appreciate. It sounds like the start-up costs are going to increase in 2Q as you really push forward those reactivations in Saudi. Are you able to dimension the size of those start-up costs in fiscal 2Q? And will there still be some reactivation costs continuing into fiscal 3Q? And then you mentioned the seasonal headwinds in the U.S. business. Outside of seasonality, is the underlying profit margin for the North American services business now pretty stable? Or is there still some contract roll headwind in that business? So just some color on those moving parts in the guide for 2Q and how some of those headwinds abate into the future.
Raymond Adams, President
Thank you for the question. This is Trey. I'll start, and then Kevin and Mike may provide further insights as we address this question. We noticed some fluctuations between Q1 and Q2, and I will outline the three main factors contributing to this variance shortly. I want to emphasize that we are confident in the guidance moving forward. We are optimistic about our projected activity range in North America, as Kevin mentioned earlier, and we are equally positive about our international Solutions outlook. Regarding the reactivation costs in Saudi Arabia, we initially expected these costs to occur in the first fiscal quarter, but they have now shifted to the second fiscal quarter. Some of these costs may extend into the third quarter, but the majority will take place in the second fiscal quarter and fall within our guidance. Another key factor was in our North American Solutions segment. As you are aware, we expect fewer rigs in North America, primarily due to the crude pricing at the end of calendar year 2025. The churn rates and private activities we usually observe have been more subdued as we transitioned from calendar year 2025 into our second fiscal quarter. Mike will later provide more details on our outlook for the rest of the year, which looks much stronger. Compared to a couple of years ago, private E&Ps did not ramp up their activities in the fourth quarter and first quarter as they had previously. Our public E&P customers remain fiscally disciplined and their capital return programs are firmly in place. Thus, we maintain a solid outlook as we move forward, although the start of this new year resulted in a somewhat lower guide than we initially expected in North America. The final factor contributing to the fluctuations was the offshore seasonality that Kevin mentioned earlier. We experienced some rigs transitioning from drilling to maintenance. One rig halted its operations in Africa, which is typical for the season. However, we anticipate these rigs will return to drilling and leave maintenance mode shortly. While this caused some irregularity in our quarter from the offshore segment, we remain very optimistic about our full-year guidance. The reactivations in Saudi Arabia are providing significant support, and we believe that the associated start-up expenses are largely behind us. We feel confident about our guidance in this area and also about our FlexRig margins for the remainder of FY '26. Our FlexRig margins continue to show positive trends. In North America Solutions, we are observing the anticipated activity improvements. Therefore, we maintain high confidence in our overall activity guidance in North America Solutions. Lastly, I would like to mention that optimizing our costs and expenses across the company and portfolio will be a key focus for the remainder of FY '26. Kevin mentioned this in his prepared remarks and can provide additional insights into our CapEx guidance, which we feel comfortable about. Overall, we are optimistic about the second half of FY '26 and believe that the bumps we encountered in the second quarter will smooth out. Kevin, over to you.
J. Vann, CFO
Yes, Scott. If you consider the second quarter international guidance of $12 million to $22 million, we have accounted for all the additional start-up reactivation costs affecting our margin. We're confident these will fully impact the next quarter. While I won't provide specific guidance for the third quarter, we do expect to see a significant increase in gross margin from our International Solutions segment from the second to the third quarter. Essentially, we're just shifting some costs between quarters, but we anticipate around $5 million of EBITDA per year from the reactivated rigs in Saudi. Additionally, our FlexRig performance is improving in Saudi, and we have historically expected those rigs to contribute between $20 million and $25 million to annualized EBITDA. So, the second quarter has been a bit slow—partly due to activity levels and partly as we prepare to significantly ramp up our International Solutions segment. As Trey pointed out regarding costs, we are using this time as an opportunity to carefully review our capital allocation to ensure it's directed toward the most promising projects that will deliver the greatest value quickly. Therefore, we are slightly lowering our capital guidance, but this reflects our commitment to maintaining focus.
Operator, Operator
We'll take our next question from Arun Jayaram with JPMorgan.
Arun Jayaram, Analyst
Yes. Good morning, gentlemen. Trey, I wanted to begin by discussing your vision for H&P. You mentioned that this marks a new chapter for the company as you take over for John next month. Could you share your vision for the company, particularly in terms of the international opportunities you see, especially with the growth in unconventionals and geothermal?
Raymond Adams, President
Yes. Thank you. And first, I just want to take a moment to say how excited I am about the future and about where we're positioned today. John's vision has manifested and is coming to reality across the organization. The company is well founded. And our foundation is strong. If you think about where we were 14 months ago prior to the KCA Deutag acquisition, we're a truly different company today than we were then. We're the global leader in onshore drilling. We have a great base of operations offshore, the leader in platform operations and maintenance services globally, and we have an incredible customer base on which to build as we look into the future. In addition to that, if you think about the geographic diversity and talent we have at the organization today, it's just incredible. From an engineering resource, drilling expertise, our office-based employees, we just have an incredibly talented organization to build and leverage for a lot of future growth. When you think about the vision over the next 3 to 5 years, obviously, this will continue to be dynamic and very iterative as we look forward. But it's really founded on 4 key notes. The first one being international growth and expansion that you referenced. We are focused on continuing to build our Eastern Hemisphere land exposure, the Middle East and North Africa, backed by our rig reactivations in Saudi, key IOC relationships, and the transference of our models and technology from the North American business will really underpin what we believe is going to be a great growth story for the organization into the future. In addition to that, North America Solutions and maintaining and continuing our leadership position in North America will be a key focus for us. Over the last decade and a half, we've continued to accrete and grow our share position in North America. We've done that through our great people, processes, equipment, and technology portfolio. Continuing to build and expand on that will be a big focus and will be right in our front window as we look forward through '26 and beyond. Today, we've talked about in some of our prepared remarks, some of our technology innovations, continuing a leadership position in the digital and automation space, FlexRobotics; continuing that progression in the North American shale market will be very critical for us to maintain that leadership position and continue to grow share over time. A subcomponent that I will reference is offshore. It's not bullet 3, but offshore continues to be a very exciting space for us. It's a very capital-light and stable business that we look to expand and grow in '26 and beyond. Bullet 3 really is what Kevin was talking about in his prepared remarks; we'll continue to discuss this: deleveraging and maintaining our fiscal discipline at H&P. For 106 years of our company's history, we've been very fiscally rooted and founded in being good stewards of capital. We're committed to shareholder returns, and we're committed to getting our balance to 1-turn of leverage, and that will be a focus for us through the rest of this year and over the next 3 to 5 years to really maintain that fiscal discipline. The fourth bullet I'd like to discuss and really focus on here is this enterprise optimization. If you think about enterprise optimization, I'll break it into 2 pieces. One is on the field and front office focus for us. You think about the transference of the H&P business system and the H&P way outside of the North American market and into the international markets in a big way and in our offshore segments. Our customer-centric culture must be seen through everything we do, everywhere we work; driving safety excellence every single day in all of our locations, and continuing to be the performance and technology leader that we are today. But we need to see that, and we will see that come through all of our operations globally. On the back office, we're committed to being a very lean and efficient organization. We're committed to being a cost-conscious culture, as Kevin mentioned. And now leveraging our global scale and capabilities, there are ways to continue to optimize our customer delivery and everything we do as we're looking forward. Moving to international excitement. Yes, go ahead.
Arun Jayaram, Analyst
No, no, go ahead.
Raymond Adams, President
Moving to international excitement, right? We sit here today, and we're talking about the reactivations in Saudi that are going to be foundational for our Eastern Hemisphere land growth. What we haven't referenced in a big way, I think Kevin touched on it a little bit earlier, but we are adding a second rig in Australia today; we're excited about that opportunity. In addition to that, we saw a little bit of activity moderation going from Q1 to Q2 in Argentina. We expect that activity to pick back up through the second half of the year. What we're taking advantage of through that activity moderation period is we're investing in technology in Argentina. Our digital applications and fleet will allow us to create exponential value for our customers down there as we look forward. Today, as we stand here on the call, we're rolling out technology and our digital solutions in Oman for some key IOC clients. We're excited about that progression. As we stated in our prepared remarks, we believe we're in the early innings of a long and great growth story in the international market. Outside of some of the rig reactivations in Saudi, we're engaging in ongoing discussions with IOCs and NOCs in North Africa and the Middle East. Those discussions are encouraging, and we look forward to providing more material updates as the quarters progress. But it's really exciting to see kind of where we're going. I think you mentioned geothermal. Geothermal, both in Europe and North America continue to be exciting for us. We've added a second rig in the North American market. We've signed an LOI for a third rig in North America and in Europe, geothermal. We're proud to be on the most advanced extended-reach complex geothermal project in Europe today, with more activity points that are coming in the near term. And so that's really starting to gain some good momentum.
Arun Jayaram, Analyst
Great. John, I wanted to wish you the best. John, I want to wish you the best as you join Hans and George Doty in retirement?
John Lindsay, CEO
Yes. Thank you very much. I appreciate it. It's an exciting time for the company, and I'm looking forward to my next chapter as well. Thank you.
Operator, Operator
We'll take next question from Saurabh Pant with Bank of America.
Saurabh Pant, Analyst
And John, I'll echo Arun and Scott, congrats on your retirement. It's been a pleasure to hear your patient and reassuring voice over all these years. John, Thank you.
John Lindsay, CEO
You're welcome. Thank you very much. It's been a great journey.
Saurabh Pant, Analyst
I'm sure you're looking forward to slowing down a bit. But Trey, you'll now face tougher questions. So, let me ask one. I'd like to explore the international outlook, Trey or Kevin, if that's alright. I recall you mentioned this in your prepared remarks and in response to Scott's question, but how do we view profitability once all 8 FlexRigs are fully operational and with the 7 rigs we're bringing back online in Saudi? I understand activity has increased, but assuming everything else remains constant, how should we anticipate margins might develop, perhaps by the fourth fiscal quarter of this year? I'd like some insight into where things might settle.
Raymond Adams, President
Thank you. I'll begin and then pass it to Kevin for any additional insights. We're excited about the progress we're making; we currently have two masts operational for planned reactivations and a third mast ready to be raised soon. We're collaborating closely with our customer in the Kingdom to ensure these start-ups proceed smoothly. We anticipate that six out of the seven reactivations will resume before the first half of calendar year 2026. We're still determining the timing for the seventh rig due to some financial considerations regarding its reactivation. Our capital expenditures for these reactivations are included in our guidance, meaning no additional capital expenditures are planned beyond what is already incorporated into our 2026 forecasts. In Saudi Arabia, which is crucial for our growth in the Eastern Hemisphere, we are having positive discussions with our primary national oil company customer. We believe there are many opportunities as we look ahead to 2026 and 2027. While we can't disclose anything significant today, we are encouraged by these conversations, which prioritize safety and performance. Our operations team continues to drill wells safely and efficiently, and this approach is generating more opportunities for us. As for the reactivations, we expect to achieve annualized EBITDA of approximately $5 million per rig upon coming out of suspension. We anticipate that full run rate will be achieved by the fourth quarter of our fiscal year. Additionally, our FlexRig margins have been improving, and we expect them to reach full annualized run rates by the end of 2026 as well. This bodes well for our business in Saudi Arabia through the fiscal year. To provide a broader view of the international segment's direct margin, once all reactivations in Saudi are completed, we expect our International Solutions segment to reach a direct margin rate exceeding $45 million per quarter. This reflects our goal of stabilizing the run rate beyond the fiscal year 2026 as we make progress on these reactivations.
J. Vann, CFO
No, and this is Kevin. I don't really have much to add other than as Trey mentioned; getting gross margin above $45 million is a good start, but I anticipate for years to come now that number to continue to grow.
Operator, Operator
We'll move next to Eddie Kim with Barclays.
Eddie Kim, Analyst
I wanted to circle back to a comment you made about North America likely remaining the most restrained market in the quarter ahead as evidenced by recent behaviors of competitors. Are you still seeing some bad actors out there in terms of pricing? And I know you expressed confidence in maintaining your full year rig count in North America, which does imply a ramp-up as we move through the year. Does that same confidence apply to pricing as well? Or do you think that ramp-up will take a bit longer to materialize?
Michael Lennox, Executive Vice President
Eddie, I'll start. This is Mike. I appreciate the question. Yes. So let's start with the customers and kind of what we're seeing is there's kind of 2 camps out there, the ones that are just disciplined and staying true to what their plans are. And then we have the ones that are more sensitive to the commodity prices. What we saw in the quarter, and we've already rebounded essentially, as I described it, where they had pulled back kind of a wait-and-see, but they still have plans to pick up, and we're starting to see those conversations pick up. And that's why in the back half of the year, we're very optimistic about picking up. Most of those players that were obviously sensitive are your smaller E&Ps, your independents, as far as pricing, we're still holding true to the 45% to 50% direct margins that we've been on. We're not chasing market share. And really why 45% to 50% direct margins? It's what we need as an organization to continue to invest back in the organization and to achieve the outcomes that our customers are looking to achieve. Again, we're confident in our ability just to navigate the near term and we're very optimistic about the back half of the year.
Eddie Kim, Analyst
And just a quick follow-up. Do you think direct margins in North America you'll be able to hold around that $18,000 a day level for the full year? Or does that look more like an upside case based on pricing trends you're seeing right now?
Michael Lennox, Executive Vice President
Yes, in the short term, I would say it remains flat. We are trying to maintain that approximately $18,000 per day. We'll see how the latter half of the year unfolds. We believe there are opportunities there, particularly in terms of revenue. On the expense front, we are actively managing it. As Trey mentioned, by leveraging our scale, we have significant opportunities to optimize our expenses as well.
Operator, Operator
We take our next question from Derek Podhaizer with Piper Sandler.
Derek Podhaizer, Analyst
I just wanted to discuss the opportunity for FlexRobotics. I mean could you please explain the details around how much capital is required to retrofit an active rig? How many rigs do you see being upgraded to FlexRobotics? Will this be customer-funded? How should we think about the paybacks? And how meaningful could this be for your earnings over the near to medium term?
Michael Lennox, Executive Vice President
Derek, this is Mike again. I'll start, and then Trey probably add in. I'll just start bluntly. I think it is meaningful in the long term. There's a lot of excitement, and I'm really proud of the efforts we've made on our robotics so far. I think Trey mentioned in his earlier comments, we have a test rig that we've been testing this on for quite some time, and we're rolling it out. It's already proven. I'll talk about the rigs that's already deployed for a Super Major in the Permian. We worked very closely with them to establish goals. We weren't just going to do robotics for robotics' sake; it was going to have to perform at least at P50 level. So the average level for that operator in the Permian Basin. After 10 wells, we've drilled and completed, and we've moved the rig twice, so 2 pads, we're roughly at P40. So we're exceeding that. And really, that's a lot of hard work by our employees, our rig crews, and our customer working with us very closely as well as our vendors. It's taken some vendors interacting and setting that goal and going out and achieving it. So I'm very optimistic. The demand, the pipeline, the discussion around it, we think it's very optimistic and look forward to progressing that.
Raymond Adams, President
Yes, this is Trey. I want to address your question about pricing and commercial structures. We plan to make these investments with suitable returns in mind. We're focused on enhancing safety at the edge, and the performance improvements related to robotics will significantly benefit both us and our customers. We will apply the innovative commercial strategies we've used in other parts of our business to this area as well. However, we will ensure that our investment aligns with an acceptable returns profile. It's still in the early stages, and discussions with customers are progressing. There is strong interest and curiosity about the FlexRobotics system, and we are eager to provide more information as we advance.
Operator, Operator
We'll move next to Keith MacKey with RBC Capital Markets.
Keith MacKey, Analyst
Maybe just a question on free cash flow conversion, very strong for Q1. We have some of the pieces for how 2026 will unfold. But can you help us maybe fill in some of those gaps for how we should be thinking about free cash flow conversion for the full year?
J. Vann, CFO
Yes. I mean, obviously, without giving full year guidance, when you think about how much cash we're going to be able to generate, as I mentioned earlier, and we've talked about in some of Trey's prepared remarks, we have a clear line of sight on the paying down of the remaining $140 million of our term loan, and that's just from organic cash flow. And that should happen by the end of our third quarter or right around the end of our fiscal year third quarter. So very optimistic about that. But that tells you that how much additional free cash flow we generate. Obviously, the dividend is still of primary importance to us, and so we'll continue to pay that. But when you think about just the capital guidance that we're giving this quarter, obviously, a slight reduction, but again, just the free cash flow will continue to increase. This quarter was a little bit higher just because of the lower CapEx numbers. But again, for the full year, again, clear line of sight on being able to pay down just organically the remaining balance on the term loan. And then on top of that, we haven't really talked about it, but we've got, as we said on the call, we've got $100 million of clear visibility surrounding some portfolio optimization that we're doing coming out of the acquisition. I feel very strongly about our ability to execute and get those deals pulled across the line by the end of the year.
Operator, Operator
And we'll move next to Ati Modak with Goldman Sachs.
Ati Modak, Analyst
I guess on the rig rationalizations in the quarter, should we expect more? Can you talk about that? And can you give us any more color on what your thoughts are for the market to reduce capacity?
J. Vann, CFO
Yes, this is Kevin. I'll start by discussing the rig rationalization and the impairments we recorded this quarter. It's a complex situation, as accounting rules heavily influence impairment decisions and the accruals we must take. I'll allow Mike to provide some insights on the specific rigs that have been inactive for a while. When we assess the capital needed to bring those rigs back into operation against the ongoing efforts to manage our active rigs, it appeared to be too significant a challenge from an accounting viewpoint. Consequently, these impairments occur periodically. I'll turn it over to Mike for details on the specific rigs.
Michael Lennox, Executive Vice President
Yes, Ati. More on the details. We're talking about 30 rigs. Most of them had already been decommissioned. We had been pulling componentry, reusing that across our fleet. These rigs had not worked since COVID or prior to COVID, so they had been idle for quite some time. Some of the components that we're talking about, for example, on 42 of our rigs today, we have what I call Level 1 automation. So it's a rig floor automation that's removing people from the Red Zones on the floor. As we've put new equipment on those rigs, the equipment that we've pulled off is what we're talking about that we've been decommissioning and impairing. Another example would be, as we've upgraded our entire fleet, at least domestically, we've had to put new drillers' cabins with new technology to run our full suite of tech on those rigs. These drillers' cabins, we've used about as much as we can on them, and it's time to clean the yards and dispose of that equipment. So that's kind of the nature of what we're talking about on equipment.
Ati Modak, Analyst
And congratulations, John.
John Lindsay, CEO
Thank you. I appreciate it.
Operator, Operator
And that does conclude our question-and-answer session for today. I would now like to turn the call back to John Lindsay for any additional or closing remarks.
John Lindsay, CEO
I just want to thank everyone for joining us on the call today. It has truly been an honor to lead the company as CEO, serving our shareholders, our Board of Directors and our amazing employees. It has really been the dream of a lifetime, and I will be forever thankful. I truly believe Trey and the team will achieve great success. I have complete confidence in their ability to execute the strategy going forward. And with that, operator, you may now close the call.
Operator, Operator
Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at this time.