Helmerich & Payne Inc. reached a definitive agreement to acquire Aberdeen-based KCA Deutag International Ltd. for $1.9725 billion cash, dramatically accelerating its international expansion. Tulsa, Oklahoma-based H&P is the most active drilling contractor in the U.S. land market, which continues to slump in contrast to the growth in international drilling, especially in the Middle East.
“Acquiring KCA Deutag gives H&P immediate scale in core Middle East markets in a way that would be challenging to replicate organically,” H&P CEO John Lindsay said in a July 24 release. “Furthermore, as there is very little geographic overlap, we view this transaction more than just acquiring assets, but rather acquiring operations with quality people.”
H&P averaged 150 active U.S. rigs and 12 active international rigs in its fiscal 3Q24, which ended June 30, and in the current quarter will activate the first of seven rigs secured with long-term contracts with Saudi Aramco. Still, H&P’s international operations have paled against rival Nabors Industries, which in Q2 averaged 84 active international rigs and 75 in the U.S.
KCA Deutag would increase H&P’s Middle East rig count from 12 to 88
KCA Deutag brings a significant land drilling presence in the Middle East, which accounted for 71% of the company’s 2023 operating EBITDA. Through the transaction, H&P will increase its Middle East rig count from 12 to 88, 71 of which are in Saudi Arabia, Oman and Kuwait. KCA Deutag also operates rigs in South America, Europe and Africa.
In addition to its land operations, KCA Deutag has offshore management contract operations in the North Sea, Angola, Azerbaijan and Canada. The asset-light business has 29 offshore platform rigs under management and a manufacturing and engineering business with three facilities serving the energy industry.
The transaction is expected to close before YE24, subject to customary conditions and regulatory approvals. H&P said the acquisition will be funded with cash on hand and new borrowings. The company has already secured a $1.975 billion bridge loan facility from Morgan Stanley Senior Funding.
The acquisition will muddy up what has been a clean balance sheet. On June 30, the company had $201 million of cash and equivalents, $550 million in senior note debt and an undrawn $750 million credit facility.
Aiming to cut debt ratio from 1.7x at closing to <1.0x in a couple of years.
In addition to the cash consideration, H&P will assume KCA Deutag’s debt, which it expects to refinance at improved terms. It expects the combined company’s net debt to operating EBITDA ratio to be 1.7x at closing. Based on H&P’s projected cash flow generation and KCA Deutag’s $5.5 billion contract backlog, the company aims to get the ratio below 1.0x in a couple of years.
To help with its debt paydown, H&P will not award a supplemental dividend in FY25 while maintaining its regular dividend. For each quarter of FY24, H&P has been paying a supplemental dividend of $0.17/share on top of a regular dividend of $0.25/share. The final FY24 quarterly dividend payment, set for August, will include the supplement.
Despite little geographic overlap, H&P expects to realize $25 million in run-rate synergies by 2026, driven primarily by overhead reduction and procurement savings. H&P will remain headquartered in Tulsa with Lindsay remaining as CEO.
The acquisition spiced up H&P’s quarterly earnings announcement. For its fiscal Q3, H&P reported $698 million in revenue, up $10 million sequentially but down $26 million YOY. Net income was $89 million in fiscal Q3, compared with $85 million in fiscal Q2 and $95 million in fiscal 3Q23. H&P predicted it would exit FY24 with 147-153 contracted rigs in North America after finishing fiscal Q3 with 146.
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